REGISTRATION NO. 333-121883
 

   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 2005.

 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                               AMENDMENT NO. 3 TO

 
                                   FORM S-11
               FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
                 OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
                             ---------------------
                         MEDICAL PROPERTIES TRUST, INC.
      (Exact name of registrant as specified in its governing instruments)
         1000 URBAN CENTER DRIVE, SUITE 501, BIRMINGHAM, ALABAMA 35242
                                 (205) 969-3755
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
 
                              EDWARD K. ALDAG, JR.
           CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY
                         MEDICAL PROPERTIES TRUST, INC.
         1000 URBAN CENTER DRIVE, SUITE 501, BIRMINGHAM, ALABAMA 35242
                                 (205) 969-3755
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
 
                                WITH A COPY TO:
 

                                                 
                                            THOMAS O. KOLB
                                          B.G. MINISMAN, JR.
                          BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, PC
                                              SUITE 1600
                                         420 20TH STREET NORTH
                                       BIRMINGHAM, ALABAMA 35203
                                            (205) 328-0480

 
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon
as practicable after this registration statement becomes effective.
 
     If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] ____________
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ____________
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] ____________
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
 
                        CALCULATION OF REGISTRATION FEE
 



-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
              TITLE OF SECURITIES                  PROPOSED MAXIMUM AGGREGATE
               BEING REGISTERED                        OFFERING PRICE(1)            AMOUNT OF REGISTRATION FEE(2)
-------------------------------------------------------------------------------------------------------------------
                                                                            
Common Stock, $.001 par value..................           $244,962,415                         $28,832
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------


 

(1) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
    basis of $9.64 per share, the average of the high and low prices of the
    Common Stock as quoted on the New York Stock Exchange on October 10, 2005.

(2) Previously paid.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 
The information in this prospectus is not complete and may be changed. The
selling stockholders cannot sell any of the securities described in this
prospectus until the registration statement that we have filed to cover the
securities has become effective under the rules of the Securities and Exchange
Commission. This prospectus is not an offer to sell the securities, nor is it a
solicitation of an offer to buy the securities, in any state where an offer or
sale of the securities is not permitted.
 
                                                Filed pursuant to Rule 424(b)(4)
                                                     Registration No. 333-119957
 

                 SUBJECT TO COMPLETION, DATED OCTOBER 13, 2005

 
PROSPECTUS
 
                       25,411,039 SHARES OF COMMON STOCK
 
                        (MEDICAL PROPERTIES TRUST LOGO)
 
    This prospectus relates to 25,411,039 shares of common stock of Medical
Properties Trust, Inc. that the selling stockholders named in this prospectus
may offer for resale from time to time. The registration of these shares does
not necessarily mean the selling stockholders will offer or sell all or any of
these shares of common stock. We will not receive any of the proceeds from the
sale of any shares of common stock by the selling stockholders, but will incur
expenses in connection with the offering.
 
    The selling stockholders from time to time may offer and resell the shares
held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in a
prospectus supplement that will accompany this prospectus. A prospectus
supplement also may add, update or change information contained in this
prospectus.
 

    Our common stock is listed on the New York Stock Exchange under the symbol
"MPW." The last reported sales price on October 10, 2005 was $9.70.

 
    SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR THE MOST
SIGNIFICANT RISKS RELEVANT TO AN INVESTMENT IN OUR COMMON STOCK, INCLUDING,
AMONG OTHERS:
 
    - We were formed in August 2003 and have a limited operating history; our
      management has a limited history of operating a REIT and a public company
      and may therefore have difficulty in successfully and profitably operating
      our business.
 
    - We may be unable to acquire or develop the facilities we have under letter
      of commitment or contract or facilities we have identified as potential
      candidates for acquisition or development as quickly as we expect or at
      all, which could harm our future operating results and adversely affect
      our ability to make distributions to our stockholders.
 

    - Our real estate investments are concentrated in net-leased healthcare
      facilities, making us more vulnerable economically than if our investments
      were more diversified across several industries or property types.

 

    - Our facilities and properties under development are currently leased to
      seven tenants, five of which were recently organized and have limited or
      no operating histories, and the failure of any of these tenants to meet
      its obligations to us, including payment of rent, payment of commitment
      and other fees and repayment of loans we have made or intend to make to
      them, would have a material adverse effect on our revenues and our ability
      to make distributions to our stockholders.

 
    - Development and construction risks, including delays in construction,
      exceeding original estimates and failure to obtain financing, could
      adversely affect our ability to make distributions to our stockholders.
 
    - Reductions in reimbursement from third-party payors, including Medicare
      and Medicaid, could adversely affect the profitability of our tenants and
      hinder their ability to make rent or loan payments to us.
 
    - The healthcare industry is heavily regulated and existing and new laws or
      regulations, changes to existing laws or regulations, loss of licensure or
      certification or failure to obtain licensure or certification could result
      in the inability of our tenants to make lease or loan payments to us.
 
    - Loss of our tax status as a REIT would have significant adverse
      consequences to us and the value of our common stock.
 
    - Our loans to Vibra could be recharacterized as equity, in which case our
      rental income from Vibra would not be qualifying income under the REIT
      rules and we could lose our REIT status.
 

    - Common stock eligible for future sale, including, subject to certain
      lock-up agreements which expire on January 4, 2006, up to 25,411,039
      shares of common stock that may be resold by our existing stockholders
      upon effectiveness of the resale registration statement of which this
      prospectus is a part, may result in increased selling which may have an
      adverse effect on our stock price.

                             ---------------------
 
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 

                THE DATE OF THIS PROSPECTUS IS OCTOBER   , 2005.


 
                               TABLE OF CONTENTS
 


                                            
SUMMARY......................................    1
Our Company..................................    1
Our Portfolio................................    2
Competitive Strengths........................    7
Summary Risk Factors.........................    8
Market Opportunity...........................    9
Our Target Facilities........................    9
Our Formation Transactions...................   10
Our Structure................................   11
Registration Rights and Lock-Up Agreements...   12
Selling Stockholders.........................
Restrictions on Ownership of Our Common
  Stock......................................   13
Distribution Policy..........................   13
Tax Status...................................   13
Summary Financial Information................   13
RISK FACTORS.................................   16
Risks Relating to Our Business and Growth
  Strategy...................................   16
Risks Relating to Real Estate Investments....   25
Risks Relating to the Healthcare Industry....   29
Risks Relating to Our Organization and
  Structure..................................   32
Tax Risks Associated With Our Status as a
  REIT.......................................   36
Risks Relating to an Investment in Our Common
  Stock......................................   38
A WARNING ABOUT FORWARD LOOKING STATEMENTS...   40
USE OF PROCEEDS..............................   41
CAPITALIZATION...............................   42
DISTRIBUTION POLICY..........................   43
SELECTED FINANCIAL INFORMATION...............   44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
  FINANCIAL CONDITION AND RESULTS OF
  OPERATIONS.................................   46
OUR BUSINESS.................................   56
Our Company..................................   56
Market Opportunity...........................   58
Our Target Facilities........................   60
Underwriting Process.........................   61
Asset Management.............................   62
Our Formation Transactions...................   63
Our Operating Partnership....................   64
MPT Development Services, Inc. ..............   65
Depreciation.................................   65
Our Leases...................................   65
Environmental Matters........................   66
Competition..................................   67
Healthcare Regulatory Matters................   67
Insurance....................................   72
Employees....................................   72
Legal Proceedings............................   73
OUR PORTFOLIO................................   73
Our Current Portfolio........................   73
Our Pending Acquisitions.....................   94
Our Acquisition and Development Pipeline.....   98
MANAGEMENT...................................  101
Our Directors and Executive Officers.........  101
Corporate Governance -- Board of Directors
  and Committees.............................  103
Limited Liability and Indemnification........  105
Director Compensation........................  106
Executive Compensation.......................  107
Employment Agreements........................  107
Benefit Plans................................  110
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
  PARTICIPATION..............................  112
MARKET PRICE OF OUR COMMON STOCK.............  112
PRINCIPAL STOCKHOLDERS.......................  113
SELLING STOCKHOLDERS.........................  114
REGISTRATION RIGHTS AND LOCK-UP AGREEMENTS...  125
CERTAIN RELATIONSHIPS AND RELATED
  TRANSACTIONS...............................  127
INVESTMENT POLICIES AND POLICIES WITH RESPECT
  TO CERTAIN ACTIVITIES......................  129
DESCRIPTION OF CAPITAL STOCK.................  133
Authorized Stock.............................  133
Common Stock.................................  133
Preferred Stock..............................  134
Power to Increase Authorized Stock and Issue
  Additional Shares of Our Common Stock and
  Preferred Stock............................  134
Restrictions on Ownership and Transfer.......  134
Transfer Agent and Registrar.................  136
MATERIAL PROVISIONS OF MARYLAND LAW AND OF
  OUR CHARTER AND BYLAWS.....................  137
The Board of Directors.......................  137
Business Combinations........................  137
Control Share Acquisitions...................  138
Maryland Unsolicited Takeovers Act...........  139
Amendment to Our Charter.....................  139
Dissolution of Our Company...................  139
Advance Notice of Director Nominations and
  New Business...............................  139
Indemnification and Limitation of Directors'
  and Officers' Liability....................  140
PARTNERSHIP AGREEMENT........................  142
Management of Our Operating Partnership......  142
Transferability of Interests.................  142
Capital Contribution.........................  143
Redemption Rights............................  143
Distributions................................  144
Allocations..................................  145
Term.........................................  145
Tax Matters..................................  145
UNITED STATES FEDERAL INCOME TAX
  CONSIDERATIONS.............................  146
Taxation of Our Company......................  146
Requirements for Qualification...............  147
Other Tax Consequences.......................  162
Income Taxation of the Partnerships and Their
  Partners...................................  163
PLAN OF DISTRIBUTION.........................  165
LEGAL MATTERS................................  167
EXPERTS......................................  168
WHERE YOU CAN FIND MORE INFORMATION..........  168
INDEX TO FINANCIAL STATEMENTS................  F-1



 
                                    SUMMARY
 
     The following summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus, including "Risk Factors" and
our financial statements and pro forma financial information and related notes
appearing elsewhere in this prospectus, before making a decision to invest in
our common stock. In this prospectus, unless the context suggests otherwise,
references to "MPT," "the company," "we," "us" and "our" mean Medical Properties
Trust, Inc., including our operating partnership, MPT Operating Partnership,
L.P., its general partner and our wholly-owned limited liability company,
Medical Properties Trust, LLC, as well as our other direct and indirect
subsidiaries.
 
OUR COMPANY
 

     We are a self-advised real estate company that acquires, develops and
leases healthcare facilities providing state-of-the-art healthcare services. We
lease our facilities to healthcare operators pursuant to long-term net-leases,
which require the tenant to bear most of the costs associated with the property.
From time to time, we also make loans to our tenants and other parties. We were
formed in August 2003 and completed a private placement of our common stock in
April 2004 in which we raised net proceeds of approximately $233.5 million.
Shortly after completion of our private placement, we began to acquire our
current portfolio of 14 facilities, consisting of nine facilities that are in
operation and five facilities that are under development. We acquired six
operating facilities in July and August of 2004 for an aggregate purchase price
of $127.4 million, including acquisition costs, from Care Ventures, Inc. We also
made loans of approximately $49.1 million to the new tenant of these facilities.
One of the loans has been repaid and the remaining loan has a principal balance
of approximately $41.4 million. We acquired one operating facility in February
2005 for a purchase price of $28.0 million from Prime A Investments, LLC. In
June 2005 we acquired a long-term acute care hospital for a purchase price of
$11.5 million from Covington Healthcare Properties, L.L.C. and a rehabilitation
hospital for a purchase price of $20.8 million from Vibra Healthcare, LLC.

 
     We focus on acquiring and developing rehabilitation hospitals, long-term
acute care hospitals, regional and community hospitals, women's and children's
hospitals, skilled nursing facilities and ambulatory surgery centers as well as
other specialized single-discipline and ancillary facilities. We believe that
these types of facilities will capture an increasing share of expenditures for
healthcare services. We believe that our strategy for acquisition and
development of these types of net-leased facilities, which generally require a
physician's order for patient admission, distinguishes us as a unique investment
alternative among real estate investment trusts, or REITs.
 
     We believe that the U.S. healthcare delivery system is becoming
decentralized and is evolving away from the traditional "one stop," large-scale
acute care hospital. We believe that this change is the result of a number of
trends, including increasing specialization and technological innovation within
the healthcare industry and the desire of both physicians and patients to
utilize more convenient facilities. We also believe that demographic trends in
the U.S., including, in particular, an aging population, will result in
continued growth in the demand for healthcare services, which in turn will lead
to an increasing need for a greater supply of modern healthcare facilities. In
response to these trends, we believe that healthcare operators increasingly
prefer to conserve their capital for investment in operations and new
technologies rather than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities. Given these trends and the
size, scope and growth of this dynamic industry, we believe that there are
significant opportunities to acquire and develop net-leased healthcare
facilities at attractive, risk-adjusted returns.
 
     Our management team has extensive experience in acquiring, owning,
developing, managing and leasing healthcare facilities; managing investments in
healthcare facilities; acquiring healthcare companies; and managing real estate
companies. Our management team also has substantial experience in healthcare
operations and administration, which includes many years of service in executive
positions for hospitals and other healthcare providers, as well as in physician
practice management and hospital/physician relations.
 
                                        1

 
We believe that our management's ability to combine traditional real estate
investment expertise with an understanding of healthcare operations enables us
to successfully implement our strategy.
 
     We have made an election to be taxed as a REIT under the Internal Revenue
Code, or the Code, commencing with our taxable year that began on April 6, 2004
and ended on December 31, 2004.
 
     Our principal executive offices are located at 1000 Urban Center Drive,
Suite 501, Birmingham, Alabama 35242. Our telephone number is (205) 969-3755.
Our Internet address is www.medicalpropertiestrust.com. The information on our
website does not constitute a part of this prospectus.
 
OUR PORTFOLIO
 
  OUR CURRENT PORTFOLIO OF FACILITIES
 

     Our current portfolio of facilities consists of 14 healthcare facilities,
nine of which are in operation and five of which are under development. Four
rehabilitation hospitals and two long-term acute care hospitals that are in
operation were acquired in 2004 and are leased to subsidiaries of Vibra
Healthcare, LLC, or Vibra, formerly known as Highmark Healthcare, LLC, a
recently formed specialty healthcare provider with operations in six states. We
refer to these facilities in this prospectus as the Vibra Facilities. A seventh
facility in operation, a community hospital which has an integrated medical
office building, is leased to Desert Valley Hospital, Inc., or DVH. We refer to
this facility in this prospectus as the Desert Valley Facility. Another facility
in operation, a long-term acute care hospital facility, is leased to Gulf States
Long Term Acute Care of Covington, L.L.C., or Gulf States of Covington. We refer
to this facility in this prospectus as the Covington Facility. Our ninth
facility in operation, a rehabilitation hospital, is leased to Northern
California Rehabilitation Hospital, LLC, a Vibra subsidiary. We refer to this
facility in this prospectus as the Redding Facility. All of the leases for the
hospitals currently in operation have initial terms of 15 years.

 

     Two of the facilities under development are a community hospital, which we
refer to in this prospectus as the West Houston Hospital, and an adjacent
medical office building, which we refer to in this prospectus as the West
Houston MOB, and are leased to Stealth, L.P., or Stealth, a recently organized
healthcare facility operator with no current operations. We refer to the West
Houston Hospital and the West Houston MOB together in this prospectus as the
West Houston Facilities. The initial lease term for the West Houston Hospital
began when construction commenced in July 2004 and will end 15 years after
completion of construction. The initial lease term for the West Houston MOB
began when construction commenced in July 2004 and will end 10 years after
completion of construction. We target completion of construction of the West
Houston MOB and the West Houston Hospital for October 2005. Our third facility
under development is a women's hospital with an integrated medical office
building, which we refer to in this prospectus as the Bucks County Facility, and
is leased to Bucks County Oncoplastic Institute, LLC, or BCO, a recently
organized healthcare facility operator. The initial lease term for the Bucks
County Facility will begin when construction commences and will end 15 years
after completion of construction. We target completion of construction for the
Bucks County Facility for August 2006. Our fourth facility under development is
a community hospital, which we refer to in this prospectus as the Monroe
Facility, and is leased to Monroe Hospital, LLC, or Monroe Hospital, a recently
organized healthcare facility operator. The initial lease term for the Monroe
Facility began when construction commenced in October 2005 and will end 15 years
after completion of construction. We target completion of construction for the
Monroe Facility for October 2006. With respect to our fifth facility under
development, we have entered into a ground sublease with, and an agreement to
provide a construction loan to, North Cypress Medical Center Operating Company,
Ltd., or North Cypress, a recently-organized healthcare facility operator, for
the development of a community hospital. The facility will be developed on
property in which we currently have a ground lease interest. We refer to this
facility in this prospectus as the North Cypress Facility. We expect to acquire
the land we are ground leasing after the hospital has been partially completed.
Upon completion of construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of construction and lease
the facility to the operator for a 15 year lease term. In the event we do not
purchase the facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to convert the
construction loan to a 15 year term loan secured by the facility. We anticipate
the North Cypress Facility will be completed in December 2006. The leases for
all of the facilities in our current portfolio provide for

 
                                        2

 
contractual base rent and an annual rent escalator. The leases for the Vibra
Facilities and the Bucks County Facility also provide for "percentage rent,"
which means that, in addition to base rent, we will receive periodic rent
payments based on an agreed percentage of the tenant's gross revenue.
 
     The following tables set forth information, as of June 30, 2005, regarding
our current portfolio of facilities:


Operating Facilities                                                                        2005             2006
                                                                            2004        CONTRACTUAL       CONTRACTUAL
                                                             NUMBER OF   ANNUALIZED         BASE             BASE
LOCATION                        TYPE             TENANT       BEDS(1)     BASE RENT       RENT(2)           RENT(2)
--------                  -----------------  --------------  ---------   -----------   --------------   ---------------
                                                                                      
Bowling Green,
 Kentucky...............  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              60      $ 3,916,695    $ 4,294,990       $ 4,790,118
Marlton, New
 Jersey(5)..............  Rehabilitation(6)  Vibra
                          hospital           Healthcare,
                                             LLC(4)              76        3,401,791      3,730,354         4,160,390
Victorville,
 California(7)..........  Community          Desert Valley
                          hospital/medical   Hospital, Inc.
                          office building                        83               --      2,341,004         2,856,000
New Bedford,
 Massachusetts..........  Long-term          Vibra
                          acute care         Healthcare,
                          hospital           LLC(4)              90        2,262,979      2,426,320         2,767,624
Redding,
 California(8)..........  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              88               --        950,250(9)      1,913,949(9)
 
Fresno, California......  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              62        1,914,829      2,099,773         2,341,835
Covington, Louisiana....  Long-term acute    Gulf States
                          care hospital      Long-Term
                                             Acute Care of
                                             Covington,
                                             L.L.C.              58               --        674,188         1,224,537
Thornton, Colorado......  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)             117          870,377        933,200         1,064,471
Kentfield, California...  Long-term          Vibra
                          acute care         Healthcare,
                          hospital           LLC(4)              60          783,339        858,998           958,024
                                                                ---      -----------    -----------       -----------
TOTAL...................         --                      --     694      $13,150,010    $18,309,077       $22,076,948
                                                                ===      ===========    ===========       ===========
 

Operating Facilities
                             GROSS
                            PURCHASE          LEASE
LOCATION                    PRICE(3)       EXPIRATION
--------                  ------------   ---------------
                                   
Bowling Green,
 Kentucky...............
                          $ 38,211,658      July 2019
Marlton, New
 Jersey(5)..............
                            32,267,622      July 2019
Victorville,
 California(7)..........
                            28,000,000    February 2020
New Bedford,
 Massachusetts..........
                            22,077,847     August 2019
Redding,
 California(8)..........
                            20,750,000      June 2020
Fresno, California......
                            18,681,255      July 2019
Covington, Louisiana....
                            11,500,000      June 2020
Thornton, Colorado......
                             8,491,481     August 2019
Kentfield, California...
                             7,642,332      July 2019
                          ------------
TOTAL...................  $187,622,195                --
                          ============

 
---------------
 
 (1) Based on the number of licensed beds.
 
 (2) Based on leases in place as of the date of this prospectus.
 
 (3) Includes acquisition costs.
 
 (4) The tenant in each case is a separate, wholly-owned subsidiary of Vibra
     Healthcare, LLC.
 
 (5) Our interest in this facility is held through a ground lease on the
     property. The purchase price shown for this facility does not include our
     payment obligations under the ground lease, the present value of which we
     have calculated to be $920,579. The calculation of the base rent to be
     received from Vibra for this facility takes into account the present value
     of the ground lease payments.
 
 (6) Thirty of the 76 beds are pediatric rehabilitation beds operated by HBA
     Management, Inc.
 
 (7) At any time after February 28, 2007, the tenant has the option to purchase
     the facility at a purchase price equal to the sum of (i) the purchase price
     of the facility, and (ii) that amount determined under a formula that would
     provide us an internal rate of return of 10% per year, increased by 2% of
     such percentage each year, taking into account all payments of base rent
     received by us.
 
 (8) Our interest in this facility is held in part through a ground lease on the
     property. During the term of the ground lease, the tenant will pay the
     ground lease rent directly to the ground lessor or, at our request,
     directly to us.
 
 (9) Of the $20,750,000 million purchase price for this facility, payment of
     $2.0 million is being deferred pending completion, to our satisfaction, of
     a conversion of certain beds at the facility to long-term acute care beds
     and an additional $750,000 of the purchase price is being deferred and will
     be paid out of a special reserve account to cover the cost of renovations.
     The 2005 contractual base rent and the 2006 contractual base rent are
     calculated based on a purchase price of $18.0 million.
 
                                        3

 
Facilities Under
Development



                                                                         2004           2005           2006         PROJECTED
                                                          NUMBER OF   ANNUALIZED     CONTRACTUAL    CONTRACTUAL    DEVELOPMENT
LOCATION                     TYPE             TENANT       BEDS(1)     BASE RENT      BASE RENT      BASE RENT       COST(2)
--------               -----------------  --------------  ---------   -----------    -----------    -----------    ------------
                                                                                              
Houston, Texas.......  Community          North Cypress
                       hospital           Medical Center
                                          Operating
                                          Company, Ltd.       64      $        --    $       --(3)  $       --(3)  $ 64,028,000
Houston, Texas.......  Community
                       hospital(5)        Stealth, L.P.      105(6)            --       772,196(7)   4,749,005(7)    43,099,310
Bensalem,
 Pennsylvania........  Women's            Bucks County
                       hospital/medical   Oncoplastic
                       office             Institute, LLC      30               --            --(10)  1,627,820(10)   38,000,000
                       building(9)
Bloomington,
 Indiana.............  Community          Monroe
                       Hospital(12)       Hospital LLC        32               --(13)         --(13)    954,063      35,500,000
Houston, Texas.......  Medical office
                       building(15)       Stealth, L.P.      n/a               --       503,130(7)   2,049,415(7)    20,855,119
                                                             ---      -----------    -----------    -----------    ------------
TOTAL................         --                      --     231      $        --    $1,275,326     $9,380,303     $201,482,429
                                                             ===      ===========    ===========    ===========    ============
 

 
                             LEASE
LOCATION                  EXPIRATION
--------               -----------------
                    
Houston, Texas.......
                                     (4)
Houston, Texas.......
                        October 2020(8)
Bensalem,
 Pennsylvania........
                        August 2021(11)
Bloomington,
 Indiana.............
                       October 2021(14)
Houston, Texas.......
                       October 2015(16)
TOTAL................                 --


 
---------------
 
 (1) Based on the number of proposed beds.
 
 (2) Includes acquisition costs.
 
 (3) During construction of the North Cypress Facility, interest will accrue on
     the construction loan at a rate of 10.5%. The interest accruing during the
     construction period will be added to the principal balance of the
     construction loan. In addition, during the term of the ground sublease,
     North Cypress will pay us monthly ground sublease rent in an annual amount
     equal to our ground lease rent plus 10.5% of funds advanced by us under the
     construction loan.
 
 (4) Expected to be completed in December 2006. If we purchase the facility upon
     completion of construction, we will lease it back to North Cypress for an
     initial term of 15 years.
 
 (5) Expected to be completed in October 2005.
 
 (6) Seventy-one of the 105 beds will be acute care beds operated by Stealth,
     L.P. and the remaining 34 beds will be long-term acute care beds operated
     by Triumph Southwest, L.P.
 

 (7) Based on leases in place as of the date of this prospectus, estimated total
     development costs and estimated dates of completion. Assumes completion of
     construction in October 2005 for the West Houston Hospital and for the West
     Houston MOB. Does not include rents that accrue during the construction
     period and are payable over the remaining lease term following the
     completion of construction.

 
 (8) Following completion, the lease term will extend for a period of 15 years.
     At any time during the term of the lease, the tenant has the right to
     terminate the lease and purchase the community hospital from us at a
     purchase price equal to the greater of (i) that amount determined under a
     formula which would provide us an internal rate of return of at least 18%
     or (ii) appraised value assuming the lease is still in place.
 
 (9) Expected to be completed in August 2006.
 

(10) Based on the lease in place as of the date of this prospectus, estimated
     total development costs and estimated date of completion. Assumes
     completion of construction in August 2006.

 
(11) Following completion, the lease term will extend for a period of 15 years.
 

(12) Expected to be completed in October 2006.

 

(13) Based on the lease in place as of the date of this prospectus, estimated
     total development costs and estimated date of completion. Assumes
     completion of construction in October 2006.

 

(14) Following completion, the lease term will extend for a period of 15 years.

 

(15) Expected to be completed in October 2005.

 

(16) Following completion, the lease term will extend for a period of 10 years.
     At any time during the term of the lease, the tenant has the right to
     terminate the lease and purchase the medical office building from us at a
     purchase price equal to the greater of (i) that amount determined under a
     formula which would provide us an internal rate of return of at least 18%
     or (ii) appraised value assuming the lease is still in place.

 
  OUR CURRENT LOANS AND FEES RECEIVABLE
 
     At the time we acquired the Vibra Facilities, we made a secured acquisition
loan to Vibra, the parent entity of our current tenants in those facilities, to
enable Vibra to acquire the healthcare operations at these locations. The
principal balance of this loan is approximately $41.4 million and is to be
repaid over 15 years. Payment of the acquisition loan is secured by pledges of
membership interests in Vibra and its subsidiaries. In addition, we have
obtained guaranty agreements from Brad E. Hollinger, the principal owner of
Vibra, Vibra Management, LLC and Senior Real Estate Holdings, LLC, D/B/A The
Hollinger Group, or The Hollinger Group, that obligate them to make loan
payments in the event that Vibra fails to do so. However, we do not believe that
these parties have sufficient financial resources to satisfy a material portion
of the loan obligations. Mr. Hollinger's guaranty is limited to $5.0 million,
and Vibra Management, LLC and The Hollinger Group do not have substantial
assets. Vibra pays interest on this loan at an annual rate of 10.25% with
interest only for the first three years and the principal balance amortizes over
the remaining 12 year period. The acquisition loan may be prepaid at any time
without penalty. In connection
 
                                        4

 
with the Vibra transactions, Vibra agreed to pay us commitment fees of
approximately $1.5 million. We also made secured loans totaling approximately
$6.2 million to Vibra and its subsidiaries for working capital purposes. The
commitment fees were paid, and the working capital loans were repaid, on
February 9, 2005.
 
     On June 9, 2005, in connection with our proposed acquisition of a long-term
acute care hospital located in Denham Springs, Louisiana, which we refer to as
the Denham Springs Facility, we made a loan of $6.0 million to Denham Springs
Healthcare Properties, L.L.C., $500,000 of which is to be held in escrow. The
loan accrues interest at a rate of 10.5% per year, subject to escalation, and
provides for monthly payments of interest only with a final balloon payment on
the fifteenth anniversary of the loan. The loan may be prepaid at any time
without penalty. The loan is guaranteed by Gulf States Long Term Acute Care of
Denham Springs, L.L.C., Team Rehab, L.L.C. and Gulf States Health Services, Inc.
As security for the loan, Denham Springs Healthcare Properties, L.L.C. granted
us a first mortgage on the Denham Springs Facility and assigned to us all its
right, title and interest in and to all leases associated with the Denham
Springs Facility. The loan is also cross-defaulted with the lease relating to
the Covington Facility. We have an agreement to purchase the Denham Springs
Facility for a price equal to the amount of the loan, subject to our
satisfaction with the results of our review of an environmental condition at the
property.
 
     In connection with the development of the West Houston Facilities, Stealth
has agreed to pay us a commitment fee of approximately $932,125, to be paid over
15 years following completion of the West Houston Hospital. The commitment fee
is based on a percentage of total development costs and may be adjusted upon
completion of construction of the West Houston Facilities based on actual
development costs. We have agreed to make a working capital loan to Stealth of
up to $1.62 million, to be repaid over 15 years. No funds have been borrowed by
Stealth to date under the working capital loan. The promissory notes evidencing
the loan and commitment fee provide for interest at an annual rate of 10.75% and
are unsecured, but the promissory notes are cross-defaulted with our related
facility leases with Stealth. Stealth is obligated to pay us a project
inspection fee for construction coordination services of $100,000 in the case of
the West Houston Hospital and $50,000 in the case of the adjacent West Houston
MOB. These fees are to be paid, with interest at the rate of 10.75% per year,
over a 15 year period beginning on the date that the West Houston Hospital is
completed, which we expect to be in October 2005. The obligation to pay these
fees is evidenced by promissory notes and is unsecured, but the promissory notes
are cross-defaulted with our related facility leases with Stealth. Any of the
fees or the working capital loan may be prepaid at any time without penalty,
except that a minimum prepayment of $500,000 is required for the working capital
loan.
 
     In connection with our development of the Bucks County Facility, BCO has
agreed to pay us a commitment fee of $345,000. The commitment fee is to be paid
interest only beginning with the first calendar month following the completion
of construction, with a balloon payment 15 years later. BCO is also obligated to
pay us a $75,000 construction inspection fee, which will be paid interest only
beginning with the first calendar month following the completion of
construction, with a balloon payment 15 years later. Interest on these fees is
set at 10.75% per annum. We also loaned BCO approximately $4.0 million, the loan
proceeds of which we hold in a separate account as security for repayment of the
loan and BCO's obligations under the lease. This loan is to be repaid no later
than the date BCO receives a certificate of occupancy for the Bucks County
Facility, and bears interest at the rate of 20% per annum, which interest is due
monthly. The obligation to pay these fees is unsecured and the obligation to
repay the loan is secured by the loan proceeds which we hold in a separate
account. The promissory notes evidencing the fees and the loan are cross
defaulted with our lease with BCO. These fees and loans may be prepaid at any
time without penalty.
 

     In connection with our development of the Monroe Facility, Monroe Hospital
has agreed to pay us a commitment fee of $177,500. The commitment fee is to be
paid interest only beginning with the first calendar month following the
completion of construction, with a balloon payment 15 years later. Monroe
Hospital is also obligated to pay us a $55,000 inspection fee, which will be
paid interest only beginning with the first calendar month following the
completion of construction, with a balloon payment 15 years

                                        5

 

later. Interest on these fees is set at 10.50% per annum. The obligation to pay
these fees is unsecured, but the promissory notes evidencing the fees are cross
defaulted for our lease with Monroe Hospital. Finally, in connection with the
acquisition of the land from Southern Indiana Medical Park II, LLC or SIMP II,
we loaned SIMP II $165,000 which is to be repaid no later than October 7, 2007
and bears interest at a rate of 10.50% per annum.

 

  OUR PENDING ACQUISITIONS

 

     We intend to expand our portfolio by acquiring additional net-leased
healthcare facilities that we have under contract or letter of commitment and
consider to be probable acquisitions as of the date of this prospectus, which we
refer to in this prospectus as our Pending Acquisition Facilities. Under the
terms of the contracts or letters of commitment relating to these facilities, we
expect the leases for each of these facilities to provide for contractual base
rent and an annual rent escalator. Letters of commitment constitute agreements
of the parties to consummate the acquisition transactions and enter into leases
on the terms set forth in the letters of commitment subject to the satisfaction
of certain conditions, including the execution of mutually-acceptable definitive
agreements. The following tables contain information regarding our Pending
Acquisition Facilities:

 
  Operating Facilities
 


                                                                                        YEAR ONE
                                                                           NUMBER OF   CONTRACTUAL      LOAN           LEASE
LOCATION                                      TYPE            TENANT        BEDS(1)     INTEREST       AMOUNT        EXPIRATION
--------                                   -----------   ----------------  ---------   -----------   -----------   --------------
                                                                                                 
 
Hammond, Louisiana*(2)...................  Long-term     Hammond              40       $  840,000(3) $ 8,000,000        June 2021
                                           acute care    Rehabilitation
                                           hospital      Hospital, LLC
Denham Springs, Louisiana(4).............  Long-term     Gulf States          59          630,000(5)   6,000,000     October 2020
                                           acute care    Long Term Acute
                                           hospital      Care of Denham
                                                         Springs, L.L.C.
                                                                              --       ----------    -----------
TOTAL....................................  --            --                   99       $1,470,000    $14,000,000               --
                                                                              ==       ==========    ===========

 
---------------
 
 * Under letter of commitment.
 (1) Based on the number of licensed beds.
 (2) On April 1, 2005, we entered into a letter of commitment with Hammond
     Healthcare Properties, LLC, or Hammond Properties, and Hammond
     Rehabilitation Hospital, LLC, or Hammond Hospital, pursuant to which we
     have agreed to lend Hammond Properties $8.0 million and have agreed to a
     put-call option pursuant to which, during the 90 day period commencing on
     the first anniversary of the date of the loan closing, we expect to
     purchase from Hammond Properties a long-term acute care hospital located in
     Hammond, Louisiana for a purchase price between $10.3 million and $11.0
     million. If we purchase the facility, we will lease it back to Hammond
     Hospital for an initial term of 15 years. The lease would be a net lease
     and would provide for contractual base rent and, beginning January 1, 2007,
     an annual rent escalator.
 (3) Based on one year contractual interest at the rate of 10.5% per year on the
     $8.0 million mortgage loan to Hammond Properties. We expect to exercise our
     option to purchase the Hammond Facility in 2006. For the one year period
     following our purchase of the facility, contractual base rent would equal
     $1,079,925, based on 10.5% of an estimated purchase price of $10,285,000.
 (4) On June 9, 2005, we entered into a definitive purchase, sale and loan
     agreement, pursuant to which we loaned Denham Springs Healthcare
     Properties, L.L.C. $6.0 million and agreed to purchase the Denham Springs
     Facility for a purchase price of $6.0 million, subject to our satisfaction
     with the results of our review of an environmental condition at the
     property. If we purchase the facility, the loan will be cancelled and we
     will lease the facility to Gulf States Long Term Acute Care of Denham
     Springs, L.L.C. for an initial term of 15 years. The lease would be a net
     lease and would provide for contractual base rent and, beginning on January
     1, 2006, an annual rent escalator. If we do not purchase the Denham Springs
     Facility, the $6.0 million loan would remain outstanding.
 (5) Based on one year contractual interest at the rate of 10.5% per year on the
     $6.0 million loan to Denham Springs Healthcare Properties, L.L.C. We expect
     to purchase the Denham Springs Facility during October 2005. For the one
     year period following our purchase of the facility, contractual base rent
     would equal 10.5% of the purchase price of $6.0 million, plus an annual
     rent escalator beginning on January 1, 2006.
 

  OUR ACQUISITION AND DEVELOPMENT PIPELINE

 
     We have also identified a number of opportunities to acquire or develop
additional healthcare facilities. In some cases, we are actively negotiating
agreements or letters of intent with the owners or prospective tenants. In other
instances, we have only identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot assure you that we
will complete any of these potential acquisitions or developments.
 
  OUR DEBT
 
     We employ leverage in our capital structure in amounts we determine from
time to time. At present, we intend to limit our debt to approximately 50-60% of
the aggregate cost of our facilities, although we may exceed those levels from
time to time. We expect our borrowings to be a combination of long-term,
 
                                        6

 
fixed-rate, non-recourse mortgage loans, variable-rate secured term and
revolving credit facilities, and other fixed and variable-rate short to
medium-term loans.
 

     In December 2004, we borrowed $75.0 million from Merrill Lynch Capital
under a loan agreement with a term of three years for acquisition and
development of additional facilities and other working capital needs. The loan
bears interest at one month LIBOR (3.94% at October 11, 2005) plus 300 basis
points. The loan is secured by our interests in the Vibra Facilities and
requires us to comply with certain financial covenants. We had $40.4 million
outstanding under this loan as of the date of this prospectus. We have executed
a term sheet with Merrill Lynch Capital providing for a senior secured revolving
credit facility of up to $100.0 million with a term of four years, with one
12-month extension option, to refinance the outstanding amount under our
existing loan agreement with Merrill Lynch Capital and for general corporate
purposes. If we enter into this facility, during the term of the loan we will
have the right to increase the amount available under the facility by an amount
up to $75.0 million, subject to no event of default continuing or occurring at
the time of our request to increase the amount. We cannot assure you that we
will enter into this facility on these terms or at all.

 
     We have also entered into construction loan agreements with Colonial Bank
pursuant to which we can borrow up to $43.4 million to fund construction costs
for the West Houston Facilities being developed in Houston, Texas. Each
construction loan has a term of up to 18 months and an option on our part to
convert the loan to a 30-month term loan upon completion of construction of the
West Houston Facility securing that loan. The loans are secured by mortgages on
the West Houston Facilities, as well as assignments of rents and leases on those
facilities, and require us to comply with certain financial covenants. The loans
bear interest at one month LIBOR plus 225 basis points during the construction
period and one month LIBOR plus 250 basis points thereafter. The Colonial Bank
loans are cross-defaulted. As of the date of this prospectus, we have made no
borrowings under the Colonial Bank loans.
 
COMPETITIVE STRENGTHS
 
     We believe that the following competitive strengths will enable us to
execute our business strategy successfully:
 
     - Experienced Management Team.  Our management team's experience enables us
       to offer innovative acquisition and net-lease structures that we believe
       will appeal to a variety of healthcare operators. We believe that our
       management's depth of experience in both traditional real estate
       investment and healthcare operations positions us favorably to take
       advantage of the available opportunities in the healthcare real estate
       market.
 
     - Comprehensive Underwriting Process.  Our underwriting process focuses on
       both real estate investment and healthcare operations. Our acquisition
       and development selection process includes a comprehensive analysis of a
       targeted healthcare facility's profitability, cash flow, occupancy and
       patient and payor mix, financial trends in revenues and expenses,
       barriers to competition, the need in the market for the type of
       healthcare services provided by the facility, the strength of the
       location and the underlying value of the facility, as well as the
       financial strength and experience of the tenant and the tenant's
       management team. Through our detailed underwriting of healthcare
       acquisitions, which includes an analysis of both the underlying real
       estate and ongoing or expected healthcare operations at the property, we
       expect to deliver attractive risk-adjusted returns to our stockholders.
 
     - Active Asset Management.  We actively monitor the operating results of
       our tenants by reviewing periodic financial reporting and operating data,
       as well as visiting each facility and meeting with the management of our
       tenants on a regular basis. Integral to our asset management philosophy
       is our desire to build long-term relationships with our tenants and,
       accordingly, we have developed a partnering approach which we believe
       results in the tenant viewing us as a member of its team.
 
     - Favorable Lease Terms.  We lease our facilities to healthcare operators
       pursuant to long-term net-lease agreements. A net-lease requires the
       tenant to bear most of the costs associated with the
 
                                        7

 
       property, including property taxes, utilities, insurance and maintenance.
       Our current net-leases are for terms of at least 10 years, provide for
       annual base rental increases and, in the case of the Vibra Facilities,
       percentage rent. Similarly, we anticipate that our future leases will
       generally provide for base rent with annual escalators, tenant payment of
       operating costs and, when feasible and in compliance with applicable
       healthcare laws and regulations, percentage rent.
 
     - Diversified Portfolio Strategy.  We focus on a portfolio of several
       different types of healthcare facilities in a variety of geographic
       regions. We also intend to diversify our tenant base as we acquire and
       develop additional healthcare facilities.
 
     - Access to Investment Opportunities.  We believe our network of
       relationships in both the real estate and healthcare industries provides
       us access to a large volume of potential acquisition and development
       opportunities. The net proceeds of our initial public offering will
       enhance our ability to capitalize on these and other investment
       opportunities.
 
     - Local Physician Investment.  When feasible and in compliance with
       applicable healthcare laws and regulations, we expect to offer physicians
       an opportunity to invest in the facilities that we own, thereby
       strengthening our relationship with the local physician community.
 
SUMMARY RISK FACTORS
 
     You should carefully consider the matters discussed in the section "Risk
Factors" beginning on page 17 prior to deciding whether to invest in our common
stock. Some of these risks include:
 
     - We were formed in August 2003 and have a limited operating history; our
       management has a limited history of operating a REIT and a public company
       and may therefore have difficulty in successfully and profitably
       operating our business.
 

     - We may be unable to acquire the Pending Acquisition Facilities or
       facilities we have identified as potential candidates for acquisition or
       development as quickly as we expect or at all, which could harm our
       future operating results and adversely affect our ability to make
       distributions to our stockholders.

 
     - We expect to continue to experience rapid growth and may not be able to
       adapt our management and operational systems to integrate the net-leased
       facilities we have acquired and are developing or those that we expect to
       acquire and develop without unanticipated disruption or expense.
 
     - Our real estate investments will be concentrated in net-leased healthcare
       facilities, making us more vulnerable economically than if our
       investments were more diversified across several industries or property
       types.
 

     - Failure by our tenants or other parties to whom we make loans to repay
       loans currently outstanding or loans we are obligated to make, or to pay
       us commitment and other fees that they are obligated to pay, in an
       aggregate amount of approximately $118.9 million, would have a material
       adverse effect on our revenues and our ability to make distributions to
       our stockholders.

 

     - Our facilities and properties under development are currently leased to
       only seven tenants, five of which were recently organized and have
       limited or no operating histories, and the failure of any of these
       tenants to meet its obligations to us, including payment of rent, payment
       of commitment and other fees and repayment of loans we have made or
       intend to make to them, would have a material adverse effect on our
       revenues and our ability to make distributions to our stockholders.

 
     - Development and construction risks, including delays in construction,
       exceeding original estimates and failure to obtain financing, could
       adversely affect our ability to make distributions to our stockholders.
 
     - Reductions in reimbursement from third-party payors, including Medicare
       and Medicaid, could adversely affect the profitability of our tenants and
       hinder their ability to make rent or loan payments to us.
                                        8

 
     - The healthcare industry is heavily regulated and existing and new laws or
       regulations, changes to existing laws or regulations, loss of licensure
       or certification or failure to obtain licensure or certification could
       result in the inability of our tenants to make lease or loan payments to
       us.
 

     - Our use of debt financing will subject us to significant risks, including
       foreclosure and refinancing risks and the risk that debt service
       obligations will reduce the amount of cash available for distribution to
       our stockholders. We have entered into loan agreements pursuant to which
       we may borrow up to $117.5 million, $40.1 million of which was
       outstanding as of the date of this prospectus. Our charter and other
       organizational documents do not limit the amount of debt we may incur.

 
     - Provisions of Maryland law, our charter and our bylaws may prevent or
       deter changes in management and third-party acquisition proposals that
       you may believe to be in our best interest, depress our stock price or
       cause dilution.
 
     - We depend on key personnel, the loss of any one of whom could threaten
       our ability to operate our business successfully.
 
     - Loss of our tax status as a REIT would have significant adverse
       consequences to us and the value of our common stock.
 
     - Our loans to Vibra could be recharacterized as equity, in which case our
       rental income from Vibra would not be qualifying income under the REIT
       rules and we could lose our REIT status.
 

     - Common stock eligible for future sale, including, subject to certain
       lock-up agreements which expire on January 4, 2006, up to 25,411,039
       shares that may be resold by our existing stockholders upon effectiveness
       of the resale registration statement of which this prospectus is a part,
       may result in increased selling which may have an adverse effect on our
       stock price.

 
MARKET OPPORTUNITY
 
     According to the United States Department of Commerce, Bureau of Economic
Analysis, healthcare is one of the largest industries in the U.S., and was
responsible for approximately 15.3% of U.S. gross domestic product in 2003.
Healthcare spending has consistently grown at rates greater than overall
spending growth and inflation. We expect this trend to continue. According to
the United States Department of Health and Human Services, Centers for Medicare
and Medicaid Services, or CMS, healthcare expenditures are projected to increase
by more than 7% in 2004 and 2005 to $1.8 trillion and $1.9 trillion,
respectively, and are expected to reach $3.1 trillion by 2012.
 
     To satisfy this growing demand for healthcare services, a significant
amount of new construction of healthcare facilities has been undertaken, and we
expect significant construction of additional healthcare facilities in the
future. In 2003 alone, $24.5 billion was spent on the construction of healthcare
facilities, according to CMS. This represented more than a 9% increase over the
$22.4 billion in healthcare construction spending for 2002. We believe that a
significant part of this healthcare construction spending was for the types of
facilities that we target.
 
OUR TARGET FACILITIES
 
     The market for healthcare real estate is extensive and includes real estate
owned by a variety of healthcare operators. We focus on acquiring, developing
and net leasing to healthcare operators facilities that are designed to address
what we view as the latest trends in healthcare delivery methods. These
facilities include:
 
     - Rehabilitation Hospitals:  Rehabilitation hospitals provide inpatient and
       outpatient rehabilitation services for patients recovering from multiple
       traumatic injuries, organ transplants, amputations, cardiovascular
       surgery, strokes, and complex neurological, orthopedic, and other
       conditions. In addition to Medicare certified rehabilitation beds,
       rehabilitation hospitals may also operate Medicare certified skilled
       nursing, psychiatric, long-term or acute care beds. These hospitals are
                                        9

 
       often the best medical alternative to traditional acute care hospitals
       where under the Medicare prospective payment system there is pressure to
       discharge patients after relatively short stays.
 
     - Long-term Acute Care Hospitals:  Long-term acute care hospitals focus on
       extended hospital care, generally at least 25 days, for the
       medically-complex patient. Long-term acute care hospitals have arisen
       from a need to provide care to patients in acute care settings, including
       daily physician observation and treatment, before they are able to move
       to a rehabilitation hospital or return home. These facilities are
       reimbursed in a manner more appropriate for a longer length of stay than
       is typical for an acute care hospital.
 
     - Regional and Community Hospitals:  We define regional and community
       hospitals as general medical/surgical hospitals whose practicing
       physicians generally serve a market specific area, whether urban,
       suburban or rural. We intend to limit our ownership of these facilities
       to those with market, ownership, competitive or technological
       characteristics that provide barriers to entry for potential competitors.
 
     - Women's and Children's Hospitals:  These hospitals serve the specialized
       areas of obstetrics and gynecology, other women's healthcare needs,
       neonatology and pediatrics. We anticipate substantial development of
       facilities designed to meet the needs of women and children and their
       physicians as a result of the decentralization and specialization trends
       described above.
 
     - Ambulatory Surgery Centers:  Ambulatory surgery centers are freestanding
       facilities designed to allow patients to have outpatient surgery, spend a
       short time recovering at the center, then return home to complete their
       recoveries. Ambulatory surgery centers offer a lower cost alternative to
       general hospitals for many surgical procedures in an environment that is
       more convenient for both patients and physicians. Outpatient procedures
       commonly performed include those related to gastrointestinal, general
       surgery, plastic surgery, ear, nose and throat/audiology, as well as
       orthopedics and sports medicine.
 
     - Other Single-Discipline Facilities:  The decentralization and
       specialization trends in the healthcare industry are also creating
       demands and opportunities for physicians to practice in hospital
       facilities in which the design, layout and medical equipment are
       specifically developed, and healthcare professional staff are educated,
       for medical specialties. These facilities include heart hospitals,
       ophthalmology centers, orthopedic hospitals and cancer centers.
 
     - Medical Office Buildings:  Medical office buildings are office and clinic
       facilities occupied and used by physicians and other healthcare providers
       in the provision of healthcare services to their patients. The medical
       office buildings that we target generally are or will be master-leased
       and adjacent to or integrated with our other targeted healthcare
       facilities.
 
     - Skilled Nursing Facilities.  Skilled nursing facilities are healthcare
       facilities that generally provide more comprehensive services than
       assisted living or residential care homes. They are primarily engaged in
       providing skilled nursing care for patients who require medical or
       nursing care or rehabilitation services. Typically these services involve
       managing complex and serious medical problems such as wound care, coma
       care or intravenous therapy. They offer both short and long-term care
       options for patients with serious illnesses and medical conditions.
       Skilled nursing facilities also provide rehabilitation services that are
       typically utilized on a short-term basis after hospitalization for injury
       or illness.
 
OUR FORMATION TRANSACTIONS
 
     The following is a summary of our formation transactions:
 
     - We were formed as a Maryland corporation on August 27, 2003 to succeed to
       the business of Medical Properties Trust, LLC, a Delaware limited
       liability company, which was formed by certain of our founders in
       December 2002. In connection with our formation, we issued our founders
       1,630,435 shares of our common stock in exchange for nominal cash
       consideration and the
 
                                        10

 
       membership interests of Medical Properties Trust, LLC. Upon completion of
       our private placement in April 2004, 1,108,527 shares of the 1,630,435
       shares of common stock held by our founders were redeemed for nominal
       value and they now collectively hold 1,047,088 shares of our common
       stock.
 
     - Our operating partnership, MPT Operating Partnership, L.P., was formed in
       September 2003. Our wholly-owned subsidiary, Medical Properties Trust,
       LLC, is the sole general partner of our operating partnership. We
       currently own all of the limited partnership interests in our operating
       partnership.
 
     - MPT Development Services, Inc., a Delaware corporation that we formed in
       January 2004, operates as our wholly-owned taxable REIT subsidiary.
 

     - In April 2004 we completed a private placement of 25,300,000 shares of
       common stock at an offering price of $10.00 per share. Friedman,
       Billings, Ramsey & Co., Inc., which served as a lead underwriter in our
       initial public offering, acted as the initial purchaser and sole
       placement agent. The total net proceeds to us, after deducting fees and
       expenses of the offering, were approximately $233.5 million. The net
       proceeds of our private placement, together with borrowed funds, have
       been or will be used to acquire our current portfolio of 14 facilities
       and properties under development, consisting of nine facilities that are
       in operation and five that are under development, lend funds to one of
       our tenants and to an affiliate of one of our prospective tenants, repay
       debt, pay pre-offering operating expenses and for working capital. Thus
       far we have utilized approximately $187.6 million to acquire our nine
       existing facilities, have loaned $47.6 million to Vibra to acquire the
       operations at the Vibra Facilities and for working capital purposes, $6.2
       million of which has been repaid, have funded approximately $51.3 million
       of a projected total of approximately $63.1 million of development costs
       for the West Houston Facilities, $8.8 million of a projected total of
       $38.0 million of development costs for the Bucks County Facility and $4.9
       million of a projected total of $35.5 million of development costs for
       the Monroe Facility and have advanced $9.7 million pursuant to the North
       Cypress construction loan.

 
     - On July 13, 2005, we completed an initial public offering of 12,066,823
       shares of common stock, priced at $10.50 per share. Of these shares of
       common stock, 701,823 shares were sold by selling stockholders and
       11,365,000 shares were sold by us. Friedman, Billings, Ramsey & Co., Inc.
       served as the sole book-running manager and J.P. Morgan Securities Inc.
       served as co-lead manager for the offering. Wachovia Capital Markets, LLC
       and Stifel, Nicolaus & Company, Incorporated served as co-managers for
       the offering. The underwriters exercised an option to purchase an
       additional 1,810,023 shares of common stock to cover over-allotments on
       August 5, 2005. We raised net proceeds of approximately $125.7 million
       pursuant to the offering, after deducting the underwriting discount and
       offering expenses.
 
OUR STRUCTURE
 
     We conduct our business through a traditional umbrella partnership REIT, or
UPREIT, in which our facilities are owned by our operating partnership, MPT
Operating Partnership, L.P., and limited partnerships, limited liability
companies or other subsidiaries of our operating partnership. Through our
wholly-owned limited liability company, Medical Properties Trust, LLC, we are
the sole general partner of our operating partnership and we presently own all
of the limited partnership units of our operating partnership. In the future, we
may issue limited partnership units to third parties from time to time in
connection with facility acquisitions or developments. In addition, we may sell
equity interests in subsidiaries of our operating partnership in connection with
facility acquisitions or developments.
 
                                        11

 
     MPT Development Services, Inc., our taxable REIT subsidiary, is authorized
to engage in development, management, lending, including but not limited to
acquisition and working capital loans to our tenants, and other activities that
we are unable to engage in directly under applicable REIT tax rules. The
following chart illustrates our structure upon completion of our initial public
offering:
 
                                    (CHART)
---------------
 
(1) We own and in the future expect to own interests in our facilities through
    wholly owned or majority owned subsidiaries of our operating partnership,
    MPT Operating Partnership, L.P. Our operating partnership is a limited
    partner of MPT West Houston MOB, L.P. and MPT West Houston Hospital, L.P.,
    which own, respectively, the West Houston MOB and the West Houston Hospital.
    MPT West Houston MOB, LLC and MPT West Houston Hospital, LLC, both of which
    are wholly-owned by our operating partnership, are, respectively, the
    general partners of these entities. Physicians and others associated with
    our tenant or subtenants of the West Houston MOB own approximately 24% of
    the aggregate equity interests in MPT West Houston MOB, L.P. Stealth, the
    tenant of the West Houston Hospital, owns a 6% limited partnership interest
    in MPT West Houston Hospital, L.P.
 
REGISTRATION RIGHTS AGREEMENT
 
     In connection with a registration rights agreement we entered into in April
2004 with the purchasers of common stock in our April 2004 private placement, we
agreed to file the registration statement of which this prospectus is a part.
 
LOCK-UP AGREEMENTS AND RESALE BLACKOUT PERIODS
 
     Lock-up Agreements.  All of our directors and executive officers agreed to
be bound by lock-up agreements that prohibit these holders from selling or
otherwise disposing of any of our common stock or securities convertible into
our common stock that they own or acquire until January 4, 2006, subject to
limited exceptions. Friedman, Billings, Ramsey & Co., Inc., on behalf of the
underwriters of our initial public offering, may, in its discretion, release all
or any portion of the common stock subject to the lock-up
 
                                        12

 
agreements with our directors and executive officers at any time and without
notice or stockholder approval. Friedman, Billings, Ramsey & Co., Inc. and its
affiliates are subject to a lock-up agreement that expires on October 12, 2005.
 
     Resale Blackout Periods  We will be permitted to suspend the use, from time
to time, of this prospectus (and therefore suspend sales of common stock under
this prospectus) for periods, referred to as "blackout periods," if a majority
of the independent members of our board of directors determines in good faith
that it is in our best interests to suspend the use and we provide selling
stockholders written notice of the suspension. The cumulative blackout periods
in any rolling 12-month period may not exceed an aggregate of 90 days and
furthermore may not exceed 60 days in any rolling 90-day period.
 
RESTRICTIONS ON OWNERSHIP OF OUR COMMON STOCK
 
     The Code imposes limitations on the concentration of ownership of REIT
shares. Our charter generally prohibits any stockholder from actually or
constructively owning more than 9.8% of our outstanding shares of common stock.
The ownership limitation in our charter is more restrictive than the
restrictions on ownership of our common stock imposed by the Code. Our board
may, in its sole discretion, waive this ownership limitation with respect to
particular stockholders if our board is presented with evidence satisfactory to
it that the ownership will not then or in the future jeopardize our status as a
REIT.
 
DISTRIBUTION POLICY
 
     We intend to distribute to our stockholders each year all or substantially
all of our REIT taxable income so as to avoid paying corporate income tax and
excise tax on our REIT income and to qualify for the tax benefits afforded to
REITs under the Code. The actual amount and timing of distributions, if any,
will be at the discretion of our board of directors and will depend upon our
actual results of operations and a number of other factors discussed in the
section "Distribution Policy."
 
     The table below is a summary of our distributions.
 


                                                               DISTRIBUTION PER SHARE
DECLARATION DATE      RECORD DATE       DATE OF DISTRIBUTION      OF COMMON STOCK
----------------      -----------       --------------------   ----------------------
                                                      
 August 18, 2005   September 15, 2005   September 29, 2005             $0.17
  May 19, 2005       June 20, 2005         July 14, 2005               $0.16
  March 4, 2005      March 16, 2005       April 15, 2005               $0.11
November 11, 2004  December 16, 2004     January 11, 2005              $0.11
September 2, 2004  September 16, 2004    October 11, 2004              $0.10

 
     The two distributions declared in 2004, aggregating $0.21 per share, were
comprised of approximately $0.13 per share in ordinary income and $0.08 per
share in return of capital. For federal income tax purposes, our distributions
were limited in 2004 to our tax basis earnings and profits of $0.13 per share.
Accordingly, for tax purposes, $0.08 per share of the distributions we paid in
January 2005 will be treated as a 2005 distribution; the tax character of this
amount, along with that of the April 15, 2005, July 14, 2005 and September 29,
2005 distributions, will be determined subsequent to determination of our 2005
taxable income.
 
TAX STATUS
 
     As long as we maintain our REIT status, we will generally not incur federal
income tax on our income to the extent that we distribute this income to our
stockholders. However, we will be subject to tax at normal corporate rates on
net income or capital gains not distributed to stockholders. Moreover, our
taxable REIT subsidiary will be subject to federal and state income taxation on
its taxable income.
 
SUMMARY FINANCIAL INFORMATION
 
     You should read the following pro forma and historical information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our
 
                                        13

 
historical and pro forma consolidated financial statements and related notes
thereto included elsewhere in this prospectus.
 
     The following table sets forth our summary financial and operating data on
an historical and pro forma basis. Our summary historical balance sheet
information as of December 31, 2004, and the historical statement of operations
and other data for the year ended December 31, 2004, have been derived from our
historical financial statements audited by KPMG LLP, independent registered
public accounting firm, whose report with respect thereto is included elsewhere
in this prospectus. The historical balance sheet information as of June 30, 2005
and the historical statement of operations and other data for the six months
ended June 30, 2005 have been derived from our unaudited historical balance
sheet as of June 30, 2005 and from our unaudited statement of operations for the
six months ended June 30, 2005 included elsewhere in this prospectus. The
unaudited historical financial statements include all adjustments, consisting of
normal recurring adjustments, that we consider necessary for a fair presentation
of our financial condition and results of operations as of such dates and for
such periods under accounting principles generally accepted in the U.S.
 
     The unaudited pro forma consolidated balance sheet data as of June 30, 2005
are presented as if completion of our initial public offering and completion of
our probable acquisitions had occurred on June 30, 2005.
 
     The unaudited pro forma consolidated statement of operations and other data
for the six months ended June 30, 2005 are presented as if acquisition of the
Desert Valley Facility, the Covington Facility and the Redding Facility,
completion of our initial public offering and completion of our probable
acquisitions had occurred on January 1, 2005, and our December 31, 2004
unaudited pro forma consolidated statement of operations are presented as if our
acquisition of the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility and the Redding Facility),
our making of the Vibra loans, completion of our initial public offering and
completion of our probable acquisitions had occurred on January 1, 2004. The pro
forma information does not give effect to any of our facilities under
development or probable development transactions. The pro forma information is
not necessarily indicative of what our actual financial position or results of
operations would have been as of the dates or for the periods indicated, nor
does it purport to represent our future financial position or results of
operations.
 


                                           FOR THE SIX MONTHS ENDED       FOR THE YEAR ENDED
                                                 JUNE 30, 2005             DECEMBER 31, 2004
                                           -------------------------   -------------------------
                                            PRO FORMA    HISTORICAL     PRO FORMA    HISTORICAL
                                           -----------   -----------   -----------   -----------
                                                                         
OPERATING INFORMATION:
  Revenues
     Rent income.........................  $14,629,750   $11,393,116   $27,360,679   $ 8,611,344
     Interest income from loans..........    2,329,189     2,329,189     5,037,049     2,282,115
                                           -----------   -----------   -----------   -----------
     Total revenues......................   16,958,939    13,722,305    32,397,728    10,893,459
  Operating expenses
     Depreciation and amortization.......    2,533,665     1,816,403     5,072,811     1,478,470
     General and administrative..........    3,165,877     3,165,877     5,057,284     5,057,284
     Total operating expenses............    5,699,542     4,982,280    10,902,444     7,214,601
     Operating income....................   11,259,397     8,740,025    21,495,284     3,678,858
     Net other income (expense)..........     (800,280)     (800,280)      897,491       897,491
  Net income.............................   10,459,117     7,939,745    22,392,775     4,576,349
  Net income per share, basic............         0.27          0.30          0.69          0.24
  Net income per share, diluted..........         0.26          0.30          0.69          0.24
  Weighted average shares outstanding --
     basic...............................   39,459,836    26,096,813    32,673,856    19,310,833
  Weighted average shares outstanding --
     diluted.............................   39,468,867    26,105,844    32,675,657    19,312,634

 
                                        14

 


                                                                                                AS OF
                                                           AS OF JUNE 30, 2005            DECEMBER 31, 2004
                                                   ------------------------------------   -----------------
                                                    PRO FORMA               HISTORICAL       HISTORICAL
                                                   ------------            ------------   -----------------
                                                                                 
BALANCE SHEET INFORMATION:
  Gross investment in real estate assets.........  $254,436,964            $238,151,964     $151,690,293
  Net investment in real estate..................   251,142,091             234,857,091      150,211,823
  Construction in progress.......................    50,529,769              50,529,769       24,318,098
  Cash and cash equivalents......................   141,578,197              34,357,866       97,543,677
  Loans receivable...............................    42,498,111              48,498,111       50,224,069(1)
  Total assets...................................   448,878,440             333,744,392      306,506,063
  Total debt.....................................    73,204,167              73,204,167       56,000,000
  Total liabilities..............................    94,760,052              98,946,430       73,777,619
  Total stockholders' equity.....................   351,980,888             232,660,462      231,728,444
  Total liabilities and stockholders' equity.....   448,878,440             333,744,392      306,506,063

 


                                         FOR THE SIX MONTHS ENDED        FOR THE YEAR ENDED
                                              JUNE 30, 2005               DECEMBER 31, 2004
                                        --------------------------   ---------------------------
                                         PRO FORMA     HISTORICAL     PRO FORMA     HISTORICAL
                                        -----------   ------------   -----------   -------------
                                                                       
OTHER INFORMATION:
  Funds from operations(2)............  $12,992,782   $  9,756,148   $27,465,586   $   6,054,819
  Cash Flows:
     Provided by operating
       activities.....................                   3,468,751                     9,918,898
     Used for investing activities....                 (80,265,755)                 (195,600,642)
     Provided by financing
       activities.....................                  13,611,373                   283,125,421

 
---------------
 
(1) Includes $1.5 million in commitment fees payable to us by Vibra.
 
(2) Funds from operations, or FFO, represents net income (computed in accordance
    with GAAP), excluding gains (or losses) from sales of property, plus real
    estate related depreciation and amortization (excluding amortization of loan
    origination costs) and after adjustments for unconsolidated partnerships and
    joint ventures. Management considers funds from operations a useful
    additional measure of performance for an equity REIT because it facilitates
    an understanding of the operating performance of our properties without
    giving effect to real estate depreciation and amortization, which assumes
    that the value of real estate assets diminishes predictably over time. Since
    real estate values have historically risen or fallen with market conditions,
    we believe that funds from operations provides a meaningful supplemental
    indication of our performance. We compute funds from operations in
    accordance with standards established by the Board of Governors of the
    National Association of Real Estate Investment Trusts, or NAREIT, in its
    March 1995 White Paper (as amended in November 1999 and April 2002), which
    may differ from the methodology for calculating funds from operations
    utilized by other equity REITs and, accordingly, may not be comparable to
    such other REITs. FFO does not represent amounts available for management's
    discretionary use because of needed capital replacement or expansion, debt
    service obligations, or other commitments and uncertainties, nor is it
    indicative of funds available to fund our cash needs, including our ability
    to make distributions. Funds from operations should not be considered as an
    alternative to net income (loss) (computed in accordance with GAAP) as
    indicators of our financial performance or to cash flow from operating
    activities (computed in accordance with GAAP) as an indicator of our
    liquidity.
 
   The following table presents a reconciliation of FFO to net income for the
   six months ended June 30, 2005 and for the year ended December 31, 2004 on an
   actual and pro forma basis.
 


                                                                  FOR THE SIX MONTHS            FOR THE YEAR ENDED
                                                                  ENDED JUNE 30, 2005            DECEMBER 31, 2004
                                                              ---------------------------   ---------------------------
                                                               PRO FORMA      HISTORICAL     PRO FORMA      HISTORICAL
                                                              ------------   ------------   ------------   ------------
                                                                                               
FUNDS FROM OPERATIONS:
 Net income.................................................  $10,459,117     $7,939,745    $22,392,775     $4,576,349
 Depreciation and amortization..............................    2,533,665      1,816,403      5,072,811      1,478,470
                                                              -----------     ----------    -----------     ----------
 Funds from operations......................................  $12,992,782     $9,756,148    $27,465,586     $6,054,819
                                                              ===========     ==========    ===========     ==========

 
                                        15

 
                                  RISK FACTORS
 
     An investment in our common stock involves a number of risks. Before making
an investment decision, you should carefully consider all of the risks described
below and the other information contained in this prospectus. If any of the
risks discussed in this prospectus actually occurs, our business, financial
condition and results of operations could be materially adversely affected. If
this were to occur, the value of our common stock could decline and you may lose
all or part of your investment.
 
               RISKS RELATING TO OUR BUSINESS AND GROWTH STRATEGY
 
WE WERE FORMED IN AUGUST 2003 AND HAVE A LIMITED OPERATING HISTORY; OUR
MANAGEMENT HAS A LIMITED HISTORY OF OPERATING A REIT AND A PUBLIC COMPANY AND
MAY THEREFORE HAVE DIFFICULTY IN SUCCESSFULLY AND PROFITABLY OPERATING OUR
BUSINESS.
 
     We have only recently been organized and have a limited operating history.
We are subject to the risks generally associated with the formation of any new
business, including unproven business models, untested plans, uncertain market
acceptance and competition with established businesses. Our management has
limited experience in operating a REIT and a public company. Therefore, you
should be especially cautious in drawing conclusions about the ability of our
management team to execute our business plan.
 
WE MAY NOT BE SUCCESSFUL IN DEPLOYING THE NET PROCEEDS OF OUR INITIAL PUBLIC
OFFERING FOR THEIR INTENDED USES AS QUICKLY AS WE INTEND OR AT ALL, WHICH COULD
HARM OUR CASH FLOW AND ABILITY TO MAKE DISTRIBUTIONS TO OUR STOCKHOLDERS.
 
     Upon completion of our initial public offering, we experienced a capital
infusion from the net offering proceeds, which we have used or intend to use to
develop additional net-leased facilities and to make a loan to an affiliate of
one of our prospective tenants. If we are unable to use the net proceeds in this
manner, we will have no specific designated use for a substantial portion of the
net proceeds from our initial public offering. In that case, or in the event we
allocate a portion of the net proceeds to other uses during the pendency of the
developments, you would be unable to evaluate the manner in which we invest the
net proceeds or the economic merits of the assets acquired with the proceeds. We
may not be able to invest this capital on acceptable terms or timeframes, or at
all, which may harm our cash flow and ability to make distributions to our
stockholders.
 

WE MAY BE UNABLE TO ACQUIRE OR DEVELOP THE PENDING ACQUISITION FACILITIES, WHICH
COULD HARM OUR FUTURE OPERATING RESULTS AND ADVERSELY AFFECT OUR ABILITY TO MAKE
DISTRIBUTIONS TO OUR STOCKHOLDERS.

 

     Our future success depends in large part on our ability to continue to grow
our business through the acquisition or development of additional facilities. We
cannot assure you that we will acquire or develop any of the Pending Acquisition
Facilities on the terms described, or at all, because each of these transactions
is subject to a variety of conditions, including, in the case of the facility
under contract, our satisfactory completion of due diligence and the
satisfaction of customary closing conditions, including the obtaining of any
required government approvals and consents and, in the case of the facility
under letter of commitment, execution of mutually-acceptable definitive
agreements, our satisfactory completion of due diligence, receipt of appraisals
and other third-party reports, receipt of government and third-party approvals
and consents, approval by our board of directors and other customary closing
conditions. We have incurred losses of approximately $600,000 in connection with
acquisitions that we were unable to complete, consisting primarily of legal
fees, costs of third-party reports and travel expenses. If we are unsuccessful
in completing the acquisition or development of additional facilities in the
future, we will incur similar costs without achieving corresponding revenues,
our future operating results will not meet expectations and our ability to make
distributions to our stockholders will be adversely affected.

 
                                        16

 
WE MAY NOT CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY OUR OTHER ARRANGEMENTS,
WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR
STOCKHOLDERS.
 
     We have entered into letter agreements with DVH to fund a $20.0 million
expansion of the Desert Valley Facility and with DSI to fund $50.0 million of
acquisitions and development facilities. Our funding of the expansion of the
Desert Valley Facility is subject to receipt of a development agreement from DVH
which we may not receive until February 28, 2006. DVH is not obligated to
present us with a development agreement, and, if it does not, we have no
obligation to provide funding to DVH for the expansion. If we enter into a
development agreement, we may not begin construction on the expansion for
several months after that time and the expansion could take up to approximately
one year to complete. Any acquisition or development of facilities pursuant to
the DSI commitment is subject to DSI's identification, and our approval, of
acquisition or development facilities. DSI is not required to identify
facilities for acquisition or development and, if it does not, we have no
obligation to provide funding to DSI. We have also entered into an arrangement
with DVH to purchase a hospital facility in Sherman Oaks, California for a
purchase price of approximately $20.0 million, with funding for a $5.0 million
expansion. We have also entered into an arrangement with Prime Healthcare to
acquire a hospital facility in California for an approximate amount of $25.0
million, subject to DVH's acquisition of the facility. Each of these
arrangements is subject to a number of additional conditions. Thus we may not
engage in any of these transactions in the near future, or at all, and may not
in the near future, or ever, generate any revenues from these arrangements.
 
WE MAY BE UNABLE TO ACQUIRE OR DEVELOP ANY OF THE FACILITIES WE HAVE IDENTIFIED
AS POTENTIAL CANDIDATES FOR ACQUISITION OR DEVELOPMENT, WHICH COULD HARM OUR
FUTURE OPERATING RESULTS AND ADVERSELY AFFECT OUR ABILITY TO MAKE DISTRIBUTIONS
TO OUR STOCKHOLDERS.
 
     We have identified numerous other facilities that we believe would be
suitable candidates for acquisition or development; however, we cannot assure
you that we will be successful in completing the acquisition or development of
any of these facilities. Consummation of any of these acquisitions or
developments is subject to, among other things, the willingness of the parties
to proceed with a contemplated transaction, negotiation of mutually acceptable
definitive agreements, satisfactory completion of due diligence and satisfaction
of customary closing conditions. If we are unsuccessful in completing the
acquisition or development of additional facilities in the future, our future
operating results will not meet expectations and our ability to make
distributions to our stockholders will be adversely affected.
 
WE EXPECT TO CONTINUE TO EXPERIENCE RAPID GROWTH AND MAY NOT BE ABLE TO ADAPT
OUR MANAGEMENT AND OPERATIONAL SYSTEMS TO INTEGRATE THE NET-LEASED FACILITIES WE
HAVE ACQUIRED AND ARE DEVELOPING OR THOSE THAT WE MAY ACQUIRE OR DEVELOP IN THE
FUTURE WITHOUT UNANTICIPATED DISRUPTION OR EXPENSE.
 
     We are currently experiencing a period of rapid growth. We cannot assure
you that we will be able to adapt our management, administrative, accounting and
operational systems, or hire and retain sufficient operational staff, to
integrate and manage the facilities we have acquired and are developing and
those that we may acquire or develop. Our failure to successfully integrate and
manage our current portfolio of facilities or any future acquisitions or
developments could have a material adverse effect on our results of operations
and financial condition and our ability to make distributions to our
stockholders.
 
WE MAY BE UNABLE TO ACCESS CAPITAL, WHICH WOULD SLOW OUR GROWTH.
 
     Our business plan contemplates growth through acquisitions and developments
of facilities. As a REIT, we are required to make cash distributions which
reduces our ability to fund acquisitions and developments with retained
earnings. We are dependent on acquisition financings and access to the capital
markets for cash to make investments in new facilities. Due to market or other
conditions, there will be times when we will have limited access to capital from
the equity and debt markets. During such periods, virtually all of our available
capital will be required to meet existing commitments and to reduce existing
debt. We may not be able to obtain additional equity or debt capital or dispose
of assets, on favorable terms, if at all, at the time we need additional capital
to acquire healthcare properties on a competitive
 
                                        17

 
basis or to meet our obligations. Our ability to grow through acquisitions and
developments will be limited if we are unable to obtain debt or equity
financing, which could have a material adverse effect on our results of
operations and our ability to make distributions to our stockholders.
 
DEPENDENCE ON OUR TENANTS FOR RENT MAY ADVERSELY IMPACT OUR ABILITY TO MAKE
DISTRIBUTIONS TO OUR STOCKHOLDERS.
 
     We expect to qualify as a REIT and, accordingly, as a REIT operating in the
healthcare industry, we are not permitted by current tax law to operate or
manage the businesses conducted in our facilities. Accordingly, we rely almost
exclusively on rent payments from our tenants for cash with which to make
distributions to our stockholders. We have no control over the success or
failure of these tenants' businesses. Significant adverse changes in the
operations of any facility, or the financial condition of any tenant, could have
a material adverse effect on our ability to collect rent payments and,
accordingly, on our ability to make distributions to our stockholders. Facility
management by our tenants and their compliance with state and federal healthcare
laws could have a material impact on our tenants' operating and financial
condition and, in turn, their ability to pay rent to us. Failure on the part of
a tenant to comply materially with the terms of a lease could give us the right
to terminate our lease with that tenant, repossess the applicable facility,
cross default certain other leases with that tenant and enforce the payment
obligations under the lease. However, we then would be required to find another
tenant-operator.
 
     On March 31, 2005, the leases for the Vibra Facilities were amended to
provide (i) that the testing of certain financial covenants will be deferred
until the quarter beginning July 1, 2006 and ending September 30, 2006, (ii)
that these same financial covenants will be tested on a consolidated basis for
all of the Vibra Facilities, (iii) that the reduction, based on loan principal
reductions, in the rate of percentage rent will be made on a monthly rather than
annual basis and (iv) that Vibra will escrow insurance premiums and taxes at our
request. Prior to execution of this amendment, Vibra was not in compliance with
certain of the financial covenants in all of its leases with us.
 
     The transfer of most types of healthcare facilities is highly regulated,
which may result in delays and increased costs in locating a suitable
replacement tenant. The sale or lease of these properties to entities other than
healthcare operators may be difficult due to the added cost and time of
refitting the properties. If we are unable to re-let the properties to
healthcare operators, we may be forced to sell the properties at a loss due to
the repositioning expenses likely to be incurred by non-healthcare purchasers.
Alternatively, we may be required to spend substantial amounts to adapt the
facility to other uses. There can be no assurance that we would be able to find
another tenant in a timely fashion, or at all, or that, if another tenant were
found, we would be able to enter into a new lease on favorable terms. Defaults
by our tenants under our leases may adversely affect the timing of and our
ability to make distributions to our stockholders.
 

FAILURE BY OUR TENANTS OR OTHER PARTIES TO WHOM WE MAKE LOANS TO REPAY LOANS
CURRENTLY OUTSTANDING OR LOANS WE ARE OBLIGATED TO MAKE, OR TO PAY US COMMITMENT
OR OTHER FEES THAT THEY ARE OBLIGATED TO PAY, IN AN AGGREGATE AMOUNT OF
APPROXIMATELY $118.9 MILLION, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
REVENUES AND OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR STOCKHOLDERS.

 
     In connection with the acquisition of the Vibra Facilities, our taxable
REIT subsidiary made a secured loan to Vibra of approximately $41.4 million to
acquire the operations at the Vibra Facilities. Payment of this loan is secured
by pledges of equity interests in Vibra and its subsidiaries that are tenants of
ours. All leases and other agreements between us, or our affiliates, on the one
hand, and the tenant and Mr. Hollinger, or their affiliates, on the other hand,
including leases for the Vibra Facilities, the lease for the Redding Facility
and the Vibra loan, are cross-defaulted. If Vibra defaulted on this loan, our
primary recourse would be to foreclose on the equity interests in Vibra and its
affiliates. This recourse may be impractical because of limitations imposed by
the REIT tax rules on our ability to own these interests. Failure to adhere to
these limitations could cause us to lose our REIT status. We have obtained
guaranty agreements for the Vibra loan from Mr. Hollinger, Vibra Management, LLC
and The Hollinger Group that obligate them to make loan payments in the event
that Vibra fails to do so. However, we do not
 
                                        18

 
believe that these parties have sufficient financial resources to satisfy a
material portion of the loan obligations. Mr. Hollinger's guaranty is limited to
$5.0 million and Vibra Management, LLC and The Hollinger Group do not have
substantial assets. Vibra has entered into a $17.0 million credit facility with
Merrill Lynch, and that loan is secured by an interest in Vibra's receivables.
There was approximately $10.7 million outstanding under the facility on June 30,
2005. At March 31, 2005, Vibra was not in compliance with a facility rent
coverage covenant under its Merrill Lynch credit facility. The Merrill Lynch
credit facility documents were subsequently amended to retroactively change the
rent coverage covenant from a by-facility rent coverage to a consolidated rent
coverage calculation, so that Vibra was in compliance with the amended covenant
at March 31, 2005. Our loan is subordinate to Merrill Lynch with respect to
Vibra's receivables.
 
     On June 9, 2005, in connection with our proposed acquisition of the Denham
Springs Facility, we made a loan of $6.0 million to Denham Springs Healthcare
Properties, L.L.C., $500,000 of which is to be held in escrow.
 

     We have also agreed to make a working capital loan to Stealth of up to
$1.62 million, although no amounts have been loaned to date. Stealth also owes
us commitment and other fees of approximately $1.1 million. Payment of these
fees and loan amounts is unsecured. We have also agreed to make a construction
loan to North Cypress for approximately $64.0 million to fund the construction
of a community hospital in Houston, Texas, secured by the hospital improvements,
$9.7 million of which has been loaned to North Cypress as of the date of this
prospectus. BCO owes us commitment and other fees of $420,000. BCO also owes us
approximately $4.0 million in connection with a loan we made to BCO, the loan
proceeds of which we have retained in a separate bank account as security for
BCO's loan repayment obligations and its obligations under the lease for the
Bucks County Facility. Monroe Hospital owes us commitment and other fees of
approximately $232,500, and SIMP II, the previous owner of the land on which the
Monroe Facility is being constructed, owes us $165,000. We are dependent upon
the ability of Vibra, Denham Springs Healthcare Properties, L.L.C., North
Cypress BCO, Monroe Hospital and SIMP II to repay these loans and fees, and
their failure to meet these obligations would have a material adverse effect on
our revenues and our ability to make distributions to our stockholders.

 
ACCOUNTING RULES MAY REQUIRE CONSOLIDATION OF ENTITIES IN WHICH WE INVEST AND
OTHER ADJUSTMENTS TO OUR FINANCIAL STATEMENTS.
 
     The Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 (ARB No. 51)," in January
2003, and a further interpretation of FIN 46 in December 2003 (FIN 46-R, and
collectively FIN 46). FIN 46 clarifies the application of ARB No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties, referred
to as variable interest entities. FIN 46 generally requires consolidation by the
party that has a majority of the risk and/or rewards, referred to as the primary
beneficiary. FIN 46 applies immediately to variable interest entities created
after January 31, 2003. Under certain circumstances, generally accepted
accounting principles may require us to account for loans to thinly capitalized
companies such as Vibra as equity investments. The resulting accounting
treatment of certain income and expense items may adversely affect our results
of operations, and consolidation of balance sheet amounts may adversely affect
any loan covenants.
 
THE BANKRUPTCY OR INSOLVENCY OF OUR TENANTS UNDER OUR LEASES COULD SERIOUSLY
HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION.
 

     Five of our tenants, North Cypress, Stealth, BCO, Monroe Hospital and Vibra
are, and some of our prospective tenants may be, newly organized, have limited
or no operating history and may be dependent on loans from us to acquire the
facility's operations and for initial working capital. Any bankruptcy filings by
or relating to one of our tenants could bar us from collecting pre-bankruptcy
debts from that tenant or their property, unless we receive an order permitting
us to do so from the bankruptcy court. A tenant bankruptcy could delay our
efforts to collect past due balances under our leases and loans, and could

 
                                        19

 
ultimately preclude collection of these sums. If a lease is assumed by a tenant
in bankruptcy, we expect that all pre-bankruptcy balances due under the lease
would be paid to us in full. However, if a lease is rejected by a tenant in
bankruptcy, we would have only a general unsecured claim for damages. Any
secured claims we have against our tenants may only be paid to the extent of the
value of the collateral, which may not cover any or all of our losses. Any
unsecured claim we hold against a bankrupt entity may be paid only to the extent
that funds are available and only in the same percentage as is paid to all other
holders of unsecured claims. We may recover none or substantially less than the
full value of any unsecured claims, which would harm our financial condition.
 

OUR FACILITIES AND PROPERTIES UNDER DEVELOPMENT ARE CURRENTLY LEASED TO ONLY
SEVEN TENANTS, FIVE OF WHICH WERE RECENTLY ORGANIZED AND HAVE LIMITED OR NO
OPERATING HISTORIES, AND FAILURE OF ANY OF THESE TENANTS AND THE GUARANTORS OF
THEIR LEASES TO MEET THEIR OBLIGATIONS TO US WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR REVENUES AND OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR
STOCKHOLDERS.

 

     Our existing facilities and the properties we have under development are
currently leased to Vibra, DVH, Gulf States, North Cypress, BCO, Monroe Hospital
and Stealth or their subsidiaries. If any of our tenants were to experience
financial difficulties, the tenant may not be able to pay its rent. Vibra, North
Cypress, BCO, Monroe Hospital and Stealth were recently organized, have limited
or no operating histories and Vibra was dependent on us for an aggregate amount
of $47.6 million in loans to acquire operations at the Vibra Facilities, for the
funds to purchase the Redding Facility which it sold to us at the same time that
it purchased that facility and for its initial working capital needs. As of June
30, 2005, Vibra had total assets of approximately $80.6 million (of which
approximately $29.8 million was goodwill and other intangible assets), total
liabilities of approximately $87.0 million, a deficit in owner's capital of
approximately $6.5 million, and for the six months ended June 30, 2005 had a
loss from operations of approximately $3.7 million and a net loss of
approximately $2.6 million. Stealth has provided to us unaudited financial
statements reflecting that, as of March 31, 2005, it had tangible assets of
approximately $5.8 million, including cash of approximately $4.4 million,
liabilities of approximately $269,000 and owners' equity of approximately $5.5
million. Stealth will have substantial pre-opening and start-up costs upon
completion of construction of its facilities. We cannot assure you that, should
Stealth's equity be insufficient to cover its costs, it could access additional
debt or equity financing. Each lease for the Vibra Facilities is guaranteed by
Brad E. Hollinger, chief executive officer of The Hollinger Group, Vibra, Vibra
Management, LLC and The Hollinger Group. The lease for the Redding Facility is
guaranteed by Vibra, Vibra Management, LLC and The Hollinger Group. However, we
do not believe that these parties have sufficient financial resources to satisfy
a material portion of the total lease obligations. Mr. Hollinger has not
guaranteed the Redding Facility lease and Mr. Hollinger's guaranty of the leases
for the Vibra Facilities is limited to $5.0 million, Vibra Management, LLC and
The Hollinger Group do not have substantial assets, and Vibra's assets are
substantially comprised of the operations at the Vibra Facilities and at the
Redding Facility. DVH has provided to us unaudited financial statements
reflecting that, as of March 31, 2005, it had tangible assets of approximately
$21.6 million, liabilities of approximately $17.6 million and stockholders'
equity of approximately $4.0 million, and for the three months ended March 31,
2005, had net income of approximately $4.0 million. The lease for the Desert
Valley Facility is guaranteed by Desert Valley Health System, Inc., Desert
Valley Medical Group, Inc. and Prime A Investments, LLC. Desert Valley Health
System, Inc. has provided to us audited financial statements showing that, as of
December 31, 2004, it had consolidated tangible assets of approximately $40.5
million, consolidated liabilities of approximately $31.4 million, and
consolidated tangible net worth of approximately $9.1 million and for the year
ended December 31, 2004, had consolidated net income of approximately $3.9
million. The lease for the Covington Facility is guaranteed by Gulf States and
Team Rehab, L.L.C., or Team Rehab. Gulf States has provided to us unaudited
financial statements reflecting that, as of December 31, 2004, it had tangible
assets of approximately $11.1 million, liabilities of approximately $9.3 million
and stockholders' equity of approximately $1.8 million, and for the year ended
December 31, 2004 had net income of approximately $2.0 million. Team Rehab has
provided to us unaudited financial statements reflecting that, as of December
31, 2004, it had tangible assets of approximately $21.3 million, liabilities of
approximately $9.2 million and owner's equity of approximately

 
                                        20

 

$12.1 million, and for the year ended December 31, 2004 had net income of
approximately $1.7 million. North Cypress is newly formed and has had no
significant operations to date. The ground sublease and the facility leases
related to the North Cypress Facility require that, as of the commencement date
of each lease, the tenant shall have received from its equity owners at least
$15.0 million in cash equity. Until the necessary letter of credit in an amount
equal to one year's base rent is posted, our lease for the Buck's County
Facility is guaranteed to the extent of $5.0 million by 14 guarantors. Six of
these guarantors have pledged cash, cash equivalents or marketable securities
equivalent to their maximum guaranty limits. Eight of the guarantors have
delivered financial statements which we believe reflect the necessary financial
wherewithal to satisfy their guaranty obligations. Monroe Hospital has provided
to us unaudited financial statements reflecting that, as of September 30, 2005,
it had tangible assets of $12.2 million, including cash of approximately $3.2
million, liabilities of approximately $3.4 million and owners' equity of
approximately $8.9 million. The treasurer of Monroe Hospital also certified at
closing that the equity owners of Monroe Hospital contributed to Monroe Hospital
cash or cash equivalents in a total amount of $9.75 million. Guarantors of our
leases with DVH and Gulf States may not have sufficient assets for us to recover
amounts due to us under those leases. The failure of our tenants and their
guarantors to meet their obligations to us would have a material adverse effect
on our revenues and our ability to make distributions to our stockholders.

 
OUR BUSINESS IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.
 
     We compete for development opportunities and opportunities to purchase
healthcare facilities with, among others:
 
     - private investors;
 
     - healthcare providers, including physicians;
 
     - other REITs;
 
     - real estate partnerships;
 
     - financial institutions; and
 
     - local developers.
 
     Many of these competitors have substantially greater financial and other
resources than we have and may have better relationships with lenders and
sellers. Competition for healthcare facilities from competitors, including other
REITs, may adversely affect our ability to acquire or develop healthcare
facilities and the prices we pay for those facilities. If we are unable to
acquire or develop facilities or if we pay too much for facilities, our revenue
and earnings growth and financial return could be materially adversely affected.
Certain of our facilities and additional facilities we may acquire or develop
will face competition from other nearby facilities that provide services
comparable to those offered at our facilities and additional facilities we may
acquire or develop. Some of those facilities are owned by governmental agencies
and supported by tax revenues, and others are owned by tax-exempt corporations
and may be supported to a large extent by endowments and charitable
contributions. Those types of support are not available to our facilities and
additional facilities we may acquire or develop. In addition, competing
healthcare facilities located in the areas served by our facilities and
additional facilities we may acquire or develop may provide healthcare services
that are not available at our facilities and additional facilities we may
acquire or develop. From time to time, referral sources, including physicians
and managed care organizations, may change the healthcare facilities to which
they refer patients, which could adversely affect our rental revenues.
 
OUR USE OF DEBT FINANCING WILL SUBJECT US TO SIGNIFICANT RISKS, INCLUDING
REFINANCING RISK AND THE RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION TO
OUR STOCKHOLDERS.
 
     Our charter and other organizational documents do not limit the amount of
debt we may incur. We have targeted our debt level at up to approximately 50-60%
of our aggregate facility acquisition and
 
                                        21

 

development costs. However, we may modify our target debt level at any time
without stockholder or board of director approval. We cannot assure you that our
use of financial leverage will prove to be beneficial. In December 2004 we
borrowed $75.0 million from Merrill Lynch Capital under a loan agreement. We
have also entered into construction loan agreements with Colonial Bank pursuant
to which we can borrow up to $43.4 million. As of the date of this prospectus,
we had $40.1 million of long-term debt outstanding. We have executed a term
sheet with Merrill Lynch Capital providing for a senior secured revolving credit
facility of up to $100.0 million with a term of four years, with one 12-month
extension option, to refinance the outstanding amount under our existing loan
agreement with Merrill Lynch Capital and for general corporate purposes. We will
have the right to increase the amount available under the facility by an amount
up to $75.0 million.

 
     We may borrow from other lenders in the future, or we may issue corporate
debt securities in public or private offerings. The loans from Merrill Lynch
Capital and Colonial Bank are secured by the Vibra Facilities and the West
Houston Facilities, respectively. Some of our other borrowings in the future may
be secured by additional facilities we may acquire or develop. In addition, in
connection with debt financing from Merrill Lynch Capital and Colonial Bank we
are, and in connection with other debt financing in the future we may be,
subject to covenants that may restrict our operations. We cannot assure you that
we will be able to meet our debt payment obligations or restrictive covenants
and, to the extent that we cannot, we risk the loss of some or all of our
facilities to foreclosure. In addition, debt service obligations will reduce the
amount of cash available for distribution to our stockholders.
 
     We anticipate that much of our debt will be non-amortizing and payable in
balloon payments. Therefore, we will likely need to refinance at least a portion
of that debt as it matures. There is a risk that we may not be able to refinance
then-existing debt or that the terms of any refinancing will not be as favorable
as the terms of the then-existing debt. If principal payments due at maturity
cannot be refinanced, extended or repaid with proceeds from other sources, such
as new equity capital or sales of facilities, our cash flow may not be
sufficient to repay all maturing debt in years when significant balloon payments
come due. Additionally, we may incur significant penalties if we choose to
prepay the debt.
 
FAILURE TO HEDGE EFFECTIVELY AGAINST INTEREST RATE CHANGES MAY ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS AND OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR
STOCKHOLDERS.
 

     As of the date of this prospectus, we had approximately $40.1 million in
variable interest rate debt. We may seek to manage our exposure to interest rate
volatility by using interest rate hedging arrangements that involve risk,
including the risk that counterparties may fail to honor their obligations under
these arrangements, that these arrangements may not be effective in reducing our
exposure to interest rate changes and that these arrangements may result in
higher interest rates than we would otherwise have. Moreover, no hedging
activity can completely insulate us from the risks associated with changes in
interest rates. Failure to hedge effectively against interest rate changes may
materially adversely affect results of operations and our ability to make
distributions to our stockholders.

 
MOST OF OUR CURRENT TENANTS HAVE, AND PROSPECTIVE TENANTS MAY HAVE, AN OPTION TO
PURCHASE THE FACILITIES WE LEASE TO THEM WHICH COULD DISRUPT OUR OPERATIONS.
 
     Most of our current tenants have, and some prospective tenants will have,
the option to purchase the facilities we lease to them. At the expiration of
each lease for the Vibra Facilities, each tenant will have the option to
purchase the facility at a purchase price equal to the greater of (i) the
appraised value of the facility, determined assuming the lease is still in
place, or (ii) the purchase price we paid for the facility, including
acquisition costs, increased by 2.5% per year from the date of purchase. At any
time after February 28, 2007, so long as DVH, and its affiliates are not in
default under any lease with us or any of the leases with its subtenants, DVH
will have the option, upon 90 days' prior written notice, to purchase the Desert
Valley Facility at a purchase price equal to the sum of (i) the purchase price
of the facility, and (ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased by 2% of such
percentage each year, taking into account all payments of base rent received by
us. These same purchase rights also apply if we provide DVH with notice of the
exercise of our right to change management as a result of a default, provided
DVH gives us notice within five days
                                        22

 

following receipt of such notice. If during the term of the lease we receive
from the previous owner or any of its affiliates, a written offer to purchase
the Desert Valley Facility and we are willing to accept the offer, so long as
DVH and its affiliates are not in default under any lease with us or any of the
subleases with its subtenants, we must first present the offer to DVH and allow
DVH the right to purchase the facility upon the same price, terms and conditions
as set forth in the offer; however, if the offer is made after February 28,
2007, in lieu of exercising its right of first refusal, DVH may exercise its
option to purchase as provided above. So long as Gulf States is not in default
under any lease with us or in default under any sublease, Gulf States will have
the option to purchase the Covington Facility (i) at the expiration of the
initial term and each extension term of the lease, to be exercised by 60 days'
written notice prior to the expiration of the initial term and each extension
term, and (ii) within five days of written notification from us exercising our
right to terminate the engagement of the tenant's or its affiliate's management
company as the management company for the facility as a result of an event of
default under the lease. The purchase price for the Covington Facility purchase
options will be equal to the greater of (i) the appraised value of the facility
based on a 15 year lease in place, or (ii) the purchase price paid by us for the
Covington Facility, increased annually by an amount equal to the greater of (A)
2.5% per annum from the date of the lease, or (B) the rate of increase in the
CPI on each January 1. If we elect to purchase the North Cypress Facility upon
completion of construction, at the expiration of the facility lease the tenant
will have the option, so long as no event of default has occurred, to purchase
our interest in the property leased pursuant to the facility lease at a purchase
price equal to the greater of (i) the appraised value of the leased property or
(ii) the purchase price paid by us to tenant pursuant to the purchase and sale
agreement relating to the hospital improvements plus our interest in any capital
additions funded by us, as increased by the amount equal to the greater of (A)
2.5% from the date of the facility lease execution or (B) the rate of increase
in the CPI as of each January 1 which has passed during the lease term; provided
that in no event shall the purchase price be less than the fair market value of
the property leased. After the first full 12 month period after construction of
the West Houston MOB and the West Houston Hospital, respectively, as long as
Stealth is not in default under either of its leases with us or any of the
leases with its physician subtenants, it has the right to purchase the West
Houston MOB or the West Houston Hospital at a price equal to the greater of (i)
that amount determined under a formula that would provide us an internal rate of
return of at least 18% and (ii) the appraised value based on a 15 year lease in
place. Upon written notice to us within 90 days of the expiration of the
applicable lease, as long as Stealth is not in default under either of its
leases with us or any of the leases with its physician subtenants, Stealth will
have the option to purchase the West Houston MOB or the West Houston Hospital at
a price equal to the greater of (i) the total development costs (including any
capital additions funded by us, but excluding any capital additions funded by
Stealth) increased by 2.5% per year, and (ii) the appraised value based on a 15
year lease in place. The Stealth leases also provide that under certain limited
circumstances, Stealth will have the right to present us with a choice of one
out of three proposed exchange facilities to be substituted for the leased
facility. At the expiration of the lease for the Bucks County Facility, BCO will
have the option, upon 60 days prior written notice, to purchase the facility at
a purchase price equal to the greater of (i) the appraised value of the
facility, which assumes the lease remains in effect for 15 years, or (ii) the
total development costs, including any capital additions funded by us, as
increased by an amount equal to the greater of (A) 2.5% per annum from the date
of the lease, or (B) the rate of increase in the CPI on each January 1. If we do
not approve a change of control transaction involving BCO, BCO will also have
the option, exercisable for 30 days after our failure to approve the change of
control, to purchase the facility at the greater of (i) the above formula for
the end-of-lease-term purchase option or (ii) an amount that would provide us an
internal rate of return of 13%. At the expiration of the lease for the Monroe
Facility, Monroe Hospital will have the option, upon 60 days prior written
notice, to purchase the facility at a purchase price equal to the greater of (i)
the appraised value of the facility, which assumes the lease remains in effect
for 15 years, or (ii) the total development costs, including any capital
additions funded by us, as increased by an amount equal to the greater of (A)
2.5% per annum from the date of the lease, or (B) the rate of increase in the
CPI on each January 1.

 
                                        23

 
     All of our arrangements which provide or will provide tenants the option to
purchase the facilities we lease to them are subject to regulatory requirements
that such purchases be at fair market value. We cannot assure you that the
formulas we have developed for setting the purchase price will yield a fair
market value purchase price. Any purchase not at fair market value may present
risks of challenge from healthcare regulatory authorities.
 
     In the event our tenants and prospective tenants determine to purchase the
facilities they lease either during the lease term or after their expiration,
the timing of those purchases will be outside of our control and we may not be
able to re-invest the capital on as favorable terms, or at all. Any of these
purchases would disrupt our cash flow by eliminating lease payments from these
tenants. Our inability to effectively manage the turn-over of our facilities
could materially adversely affect our ability to execute our business plan and
our results of operations.
 
PROPERTY OWNED IN LIMITED LIABILITY COMPANIES AND PARTNERSHIPS IN WHICH WE ARE
NOT THE SOLE EQUITY HOLDER MAY LIMIT OUR ABILITY TO ACT EXCLUSIVELY IN OUR
INTERESTS.
 
     We own, and in the future expect to own, interests in our facilities
through wholly or majority owned subsidiaries of our operating partnership.
Stealth, L.P., the tenant of our West Houston Hospital, owns a 6% limited
partnership interest in MPT West Houston Hospital, L.P., which owns the West
Houston Hospital. Physicians and others associated with our tenant or subtenants
of the West Houston MOB own approximately 24% of the aggregate equity interests
in MPT West Houston MOB, L.P., the entity that owns our West Houston MOB. We may
offer limited liability company and limited partnership interests to tenants,
subtenants and physicians in the future. Investments in partnerships, limited
liability companies or other entities with co-owners may, under certain
circumstances, involve risks not present were a co-owner not involved, including
the possibility that partners or other co-owners might become bankrupt or fail
to fund their share of required capital contributions. Partners or other
co-owners may have economic or other business interests or goals that are
inconsistent with our business interests or goals, and may be in a position to
take actions contrary to our policies or objectives. Such investments may also
have potential risks pertaining to healthcare regulatory compliance,
particularly when partners or other co-owners are physicians, and of impasses on
major decisions, such as sales or mergers, because neither we nor our partners
or other co-owners would have full control over the partnership, limited
liability company or other entity. Disputes between us and our partners or other
co-owners may result in litigation or arbitration that would increase our
expenses and prevent our officers and directors from focusing their time and
effort on our business. Consequently, actions by or disputes with our partners
or other co-owners might result in subjecting facilities owned by the
partnership, limited liability company or other entity to additional risk. In
addition, we may in certain circumstances be liable for the actions of our
partners or other co-owners. The occurrence of any of the foregoing events could
have a material adverse effect on our results of operations and our ability to
make distributions to our stockholders.
 
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
D.C. ON SEPTEMBER 11, 2001, U.S. MILITARY ACTION AND THE PUBLIC'S REACTION TO
THE THREAT OF TERRORISM OR MILITARY ACTION COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND THE MARKET ON WHICH OUR COMMON STOCK WILL TRADE.
 
     There may be future terrorist threats or attacks against the United States
or U.S. businesses. These attacks may directly impact the value of our
facilities through damage, destruction, loss or increased security costs. Losses
due to wars or terrorist attacks may be uninsurable, or insurance may not be
available at a reasonable price. More generally, any of these events could cause
consumer confidence and spending to decrease or result in increased volatility
in the United States and worldwide financial markets and economies.
 
                                        24

 
                   RISKS RELATING TO REAL ESTATE INVESTMENTS
 
OUR REAL ESTATE INVESTMENTS ARE AND WILL CONTINUE TO BE CONCENTRATED IN
NET-LEASED HEALTHCARE FACILITIES, MAKING US MORE VULNERABLE ECONOMICALLY THAN IF
OUR INVESTMENTS WERE MORE DIVERSIFIED.
 
     We have acquired and are developing and expect to continue acquiring and
developing net-leased healthcare facilities. We are subject to risks inherent in
concentrating investments in real estate. The risks resulting from a lack of
diversification become even greater as a result of our business strategy to
invest in net-leased healthcare facilities. A downturn in the real estate
industry could materially adversely affect the value of our facilities. A
downturn in the healthcare industry could negatively affect our tenants' ability
to make lease or loan payments to us and, consequently, our ability to meet debt
service obligations or make distributions to our stockholders. These adverse
effects could be more pronounced than if we diversified our investments outside
of real estate or outside of healthcare facilities.
 
OUR NET-LEASED FACILITIES AND TARGETED NET-LEASED FACILITIES MAY NOT HAVE
EFFICIENT ALTERNATIVE USES, WHICH COULD IMPEDE OUR ABILITY TO FIND REPLACEMENT
TENANTS IN THE EVENT OF TERMINATION OR DEFAULT UNDER OUR LEASES.
 
     All of the facilities in our current portfolio are and all of the
facilities we acquire or develop in the future will be net-leased healthcare
facilities. If we or our tenants terminate the leases for these facilities or if
these tenants lose their regulatory authority to operate these facilities, we
may not be able to locate suitable replacement tenants to lease the facilities
for their specialized uses. Alternatively, we may be required to spend
substantial amounts to adapt the facilities to other uses. Any loss of revenues
or additional capital expenditures occurring as a result could have a material
adverse effect on our financial condition and results of operations and could
hinder our ability to meet debt service obligations or make distributions to our
stockholders.
 
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD SIGNIFICANTLY IMPEDE OUR ABILITY TO
RESPOND TO ADVERSE CHANGES IN THE PERFORMANCE OF OUR FACILITIES AND HARM OUR
FINANCIAL CONDITION.
 
     Real estate investments are relatively illiquid. Our ability to quickly
sell or exchange any of our facilities in response to changes in economic and
other conditions will be limited. No assurances can be given that we will
recognize full value for any facility that we are required to sell for liquidity
reasons. Our inability to respond rapidly to changes in the performance of our
investments could adversely affect our financial condition and results of
operations.
 
DEVELOPMENT AND CONSTRUCTION RISKS COULD ADVERSELY AFFECT OUR ABILITY TO MAKE
DISTRIBUTIONS TO OUR STOCKHOLDERS.
 

     We are developing a community hospital and an adjacent medical office
building in Houston, Texas, which we expect to complete in 2005, developing a
women's hospital and integrated medical office building in Bensalem,
Pennsylvania which we expect to be completed in August 2006, developing a
community hospital in Bloomington, Indiana which we expect to be completed in
October 2006 and financing the development of a community hospital in Houston,
Texas which we expect to be completed in December 2006. We expect to develop
additional facilities in the future. Our development and related construction
activities may subject us to the following risks:

 
     - we may have to compete for suitable development sites;
 
     - our ability to complete construction is dependent on there being no
       title, environmental or other legal proceedings arising during
       construction;
 
     - we may be subject to delays due to weather conditions, strikes and other
       contingencies beyond our control;
 
                                        25

 
     - we may be unable to obtain, or suffer delays in obtaining, necessary
       zoning, land-use, building, occupancy healthcare regulatory and other
       required governmental permits and authorizations, which could result in
       increased costs, delays in construction, or our abandonment of these
       projects;
 
     - we may incur construction costs for a facility which exceed our original
       estimates due to increased costs for materials or labor or other costs
       that we did not anticipate; and
 
     - we may not be able to obtain financing on favorable terms, which may
       render us unable to proceed with our development activities.
 

     We expect to fund our development projects over time. Additionally, the
time frame required for development and construction of these facilities means
that we may have to wait years for a significant cash return. Because we are
required to make cash distributions to our stockholders, if the cash flow from
operations or refinancings is not sufficient, we may be forced to borrow
additional money to fund distributions. We cannot assure you that we will
complete our current construction projects on time or within budget or that
future development projects will not be subject to delays and cost overruns.
Risks associated with our development projects may reduce anticipated rental
revenue which could affect the timing of, and our ability to make, distributions
to our stockholders.

 
OUR FACILITIES MAY NOT ACHIEVE EXPECTED RESULTS OR WE MAY BE LIMITED IN OUR
ABILITY TO FINANCE FUTURE ACQUISITIONS, WHICH MAY HARM OUR FINANCIAL CONDITION
AND OPERATING RESULTS AND OUR ABILITY TO MAKE THE DISTRIBUTIONS TO OUR
STOCKHOLDERS REQUIRED TO MAINTAIN OUR REIT STATUS.
 
     Acquisitions and developments entail risks that investments will fail to
perform in accordance with expectations and that estimates of the costs of
improvements necessary to acquire and develop facilities will prove inaccurate,
as well as general investment risks associated with any new real estate
investment. We anticipate that future acquisitions and developments will largely
be financed through externally generated funds such as borrowings under credit
facilities and other secured and unsecured debt financing and from issuances of
equity securities. Because we must distribute at least 90% of our REIT taxable
income, excluding net capital gain, each year to maintain our qualification as a
REIT, our ability to rely upon income from operations or cash flow from
operations to finance our growth and acquisition activities will be limited.
Accordingly, if we are unable to obtain funds from borrowings or the capital
markets to finance our acquisition and development activities, our ability to
grow would likely be curtailed, amounts available for distribution to
stockholders could be adversely affected and we could be required to reduce
distributions, thereby jeopardizing our ability to maintain our status as a
REIT.
 
     Newly-developed or newly-renovated facilities do not have the operating
history that would allow our management to make objective pricing decisions in
acquiring these facilities (including facilities that may be acquired from
certain of our executive officers, directors and their affiliates). The purchase
prices of these facilities will be based in part upon projections by management
as to the expected operating results of the facilities, subjecting us to risks
that these facilities may not achieve anticipated operating results or may not
achieve these results within anticipated time frames.
 
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN EXCESS OF
OUR INSURANCE COVERAGE LIMITS, WE COULD LOSE INVESTMENT CAPITAL AND ANTICIPATED
PROFITS.
 
     We have purchased general liability insurance (lessor's risk) that provides
coverage for bodily injury and property damage to third parties resulting from
our ownership of the healthcare facilities that are leased to and occupied by
our tenants. Our leases generally require our tenants to carry general
liability, professional liability, loss of earnings, all risk, and extended
coverage insurance in amounts sufficient to permit the replacement of the
facility in the event of a total loss, subject to applicable deductibles.
However, there are certain types of losses, generally of a catastrophic nature,
such as earthquakes, floods, hurricanes and acts of terrorism, that may be
uninsurable or not insurable at a price we or our tenants can afford. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it impracticable to use insurance proceeds to replace a
facility after it has been damaged or destroyed. Under such circumstances, the
insurance proceeds we receive might not be adequate to
 
                                        26

 
restore our economic position with respect to the affected facility. If any of
these or similar events occur, it may reduce our return from the facility and
the value of our investment.
 
CAPITAL EXPENDITURES FOR FACILITY RENOVATION MAY BE GREATER THAN ANTICIPATED AND
MAY ADVERSELY IMPACT RENT PAYMENTS BY OUR TENANTS AND OUR ABILITY TO MAKE
DISTRIBUTIONS TO STOCKHOLDERS.
 
     Facilities, particularly those that consist of older structures, have an
ongoing need for renovations and other capital improvements, including periodic
replacement of furniture, fixtures and equipment. Although our leases require
our tenants to be primarily responsible for the cost of such expenditures,
renovation of facilities involves certain risks, including the possibility of
environmental problems, construction cost overruns and delays, uncertainties as
to market demand or deterioration in market demand after commencement of
renovation and the emergence of unanticipated competition from other facilities.
All of these factors could adversely impact rent and loan payments by our
tenants, could have a material adverse effect on our financial condition and
results of operations and could adversely effect our ability to make
distributions to our stockholders.
 
ALL OF OUR HEALTHCARE FACILITIES ARE SUBJECT TO PROPERTY TAXES THAT MAY INCREASE
IN THE FUTURE AND ADVERSELY AFFECT OUR BUSINESS.
 
     Our facilities are subject to real and personal property taxes that may
increase as property tax rates change and as the facilities are assessed or
reassessed by taxing authorities. Our leases generally provide that the property
taxes are charged to our tenants as an expense related to the facilities that
they occupy. As the owner of the facilities, however, we are ultimately
responsible for payment of the taxes to the government. If property taxes
increase, our tenants may be unable to make the required tax payments,
ultimately requiring us to pay the taxes. If we incur these tax liabilities, our
ability to make expected distributions to our stockholders could be adversely
affected.
 
OUR PERFORMANCE AND THE PRICE OF OUR COMMON STOCK WILL BE AFFECTED BY RISKS
ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
 
     Factors that may adversely affect the economic performance and price of our
common stock include:
 
     - changes in the national, regional and local economic climate, including
       but not limited to changes in interest rates;
 
     - local conditions such as an oversupply of, or a reduction in demand for,
       rehabilitation hospitals, long-term acute care hospitals, ambulatory
       surgery centers, medical office buildings, specialty hospitals, skilled
       nursing facilities, regional and community hospitals, women's and
       children's hospitals and other single-discipline facilities.
 
     - attractiveness of our facilities to healthcare providers and other types
       of tenants; and
 
     - competition from other rehabilitation hospitals, long-term acute care
       facilities, medical office buildings, outpatient treatment facilities,
       ambulatory surgery centers and specialty hospitals, skilled nursing
       facilities, regional and community hospitals, women's and children's
       hospitals and other single-discipline facilities.
 
AS THE OWNER AND LESSOR OF REAL ESTATE, WE ARE SUBJECT TO RISKS UNDER
ENVIRONMENTAL LAWS, THE COST OF COMPLIANCE WITH WHICH AND ANY VIOLATION OF WHICH
COULD MATERIALLY ADVERSELY AFFECT US.
 
     Our operating expenses could be higher than anticipated due to the cost of
complying with existing and future environmental and occupational health and
safety laws and regulations. Various environmental laws may impose liability on
a current or prior owner or operator of real property for removal or remediation
of hazardous or toxic substances. Current or prior owners or operators may also
be liable for government fines and damages for injuries to persons, natural
resources and adjacent property. These environmental laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence or disposal of the hazardous or toxic substances. The cost of complying
with
 
                                        27

 
environmental laws could materially adversely affect amounts available for
distribution to our stockholders and could exceed the value of all of our
facilities. In addition, the presence of hazardous or toxic substances, or the
failure of our tenants to properly dispose of or remediate such substances,
including medical waste generated by physicians and our other healthcare
tenants, may adversely affect our tenants or our ability to use, sell or rent
such property or to borrow using such property as collateral which, in turn,
could reduce our revenue and our financing ability. We have obtained on all
facilities we have acquired and are developing and intend to obtain on all
future facilities we acquire Phase I environmental assessments. However, even if
the Phase I environmental assessment reports do not reveal any material
environmental contamination, it is possible that material environmental
liabilities may exist of which we are unaware.
 
     In April 2003, Stealth, which then owned the property on which the West
Houston Facilities are being constructed, arranged for a Phase I environmental
assessment to be performed. The assessor recommended further investigation based
on field screening of soil samples collected during a geotechnical
investigation. Accordingly, the tenant arranged for a Phase II environmental
soil sampling to be performed in June 2003 to assess shallow soils for the
presence of petroleum hydrocarbons and volatile organic compounds. Based on the
findings of this sampling, the tenant was advised that no further tests were
warranted and that the property was suitable for the proposed development.
 
     In April 2005, we arranged for a Phase I environmental assessment to be
performed at the Denham Springs Facility. The assessor recommended further soil
and groundwater sampling due to the property's previous use as a hospital that
involved X-ray and photochemical developing activities. Accordingly, we arranged
for a Phase II environmental soil and groundwater sampling. On May 19, 2005, we
received a Phase II report which concluded that one groundwater sample was at or
exceeded Louisiana Department of Environmental Quality (LDEQ) Numerical Acute
and Chronic Criteria standards for several metals. Concentrations of metals in
the soil samples were either below quantification limits or below LDEQ
regulatory guidelines. Based on this sampling, we were advised to present the
findings to LDEQ for review and determination. We were also advised that
additional action or investigation may be required by the agency. New sampling
and analysis was forwarded to LDEQ in July 2005 and on September 15, 2005, LDEQ
confirmed that no additional action is necessary at this time.
 
     Although the leases for our facilities generally require our tenants to
comply with laws and regulations governing their operations, including the
disposal of medical waste, and to indemnify us for certain environmental
liabilities, the scope of their obligations may be limited. We cannot assure you
that our tenants would be able to fulfill their indemnification obligations and,
therefore, any violation of environmental laws could have a material adverse
affect on us. In addition, environmental and occupational health and safety laws
constantly are evolving, and changes in laws, regulations or policies, or
changes in interpretations of the foregoing, could create liabilities where none
exists today.
 
COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT OF 1993
MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS.
 
     Under the Americans with Disabilities Act of 1993, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While our facilities are generally in
compliance with these requirements, a determination that we are not in
compliance with the Americans with Disabilities Act of 1993 could result in
imposition of fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement policies affecting
the use and operation of the facilities, including changes to building codes and
fire and life-safety codes, may occur. If we are required to make substantial
modifications at our facilities to comply with the Americans with Disabilities
Act of 1993 or other changes in governmental rules and regulations, this may
have a material adverse effect on our financial condition and results of
operations and could adversely affect our ability to make distributions to our
stockholders.
 
                                        28

 
OUR FACILITIES MAY CONTAIN OR DEVELOP HARMFUL MOLD OR SUFFER FROM OTHER AIR
QUALITY ISSUES, WHICH COULD LEAD TO LIABILITY FOR ADVERSE HEALTH EFFECTS AND
COSTS OF REMEDIATING THE PROBLEM.
 
     When excessive moisture accumulates in buildings or on building materials,
mold growth may occur, particularly if the moisture problem remains undiscovered
or is not addressed over a period of time. Some molds may produce airborne
toxins or irritants. Indoor air quality issues can also stem from inadequate
ventilation, chemical contamination from indoor or outdoor sources and other
biological contaminants such as pollen, viruses and bacteria. Indoor exposure to
airborne toxins or irritants above certain levels can be alleged to cause a
variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, the presence of significant mold or other airborne
contaminants at any of our facilities could require us to undertake a costly
remediation program to contain or remove the mold or other airborne contaminants
from the affected facilities or increase indoor ventilation. In addition, the
presence of significant mold or other airborne contaminants could expose us to
liability from our tenants, employees of our tenants and others if property
damage or health concerns arise.
 
OUR INTERESTS IN FACILITIES THROUGH GROUND LEASES EXPOSE US TO THE LOSS OF THE
FACILITY UPON BREACH OR TERMINATION OF THE GROUND LEASE AND MAY LIMIT OUR USE OF
THE FACILITY.
 
     We have acquired interests in two of our facilities, at least in part, and
one facility under development, by acquiring leasehold interests in the land on
which the facility is or the facility under development will be located rather
than an ownership interest in the property, and we may acquire additional
facilities in the future through ground leases. As lessee under ground leases,
we are exposed to the possibility of losing the property upon termination, or an
earlier breach by us, of the ground lease. Ground leases may also restrict our
use of facilities. Our current ground lease in Marlton, New Jersey limits use of
the property to operation of a 76 bed rehabilitation hospital. Our current
ground lease for the Redding Facility limits use of the property to operation of
a hospital offering the following services: skilled nursing; physical
rehabilitation; occupational therapy; speech pathology; social services;
assisted living; day health programs; long-term acute care services; psychiatric
services; geriatric clinic services; outpatient services related to the
foregoing service categories; and other post-acute services. These restrictions
and any similar future restrictions in ground leases will limit our flexibility
in renting the facility and may impede our ability to sell the property.
 
                   RISKS RELATING TO THE HEALTHCARE INDUSTRY
 
REDUCTIONS IN REIMBURSEMENT FROM THIRD-PARTY PAYORS, INCLUDING MEDICARE AND
MEDICAID, COULD ADVERSELY AFFECT THE PROFITABILITY OF OUR TENANTS AND HINDER
THEIR ABILITY TO MAKE RENT PAYMENTS TO US.
 
     Sources of revenue for our tenants and operators may include the federal
Medicare program, state Medicaid programs, private insurance carriers and health
maintenance organizations, among others. Efforts by such payors to reduce
healthcare costs will likely continue, which may result in reductions or slower
growth in reimbursement for certain services provided by some of our tenants. In
addition, the failure of any of our tenants to comply with various laws and
regulations could jeopardize their ability to continue participating in
Medicare, Medicaid and other government-sponsored payment programs.
 
     The healthcare industry continues to face various challenges, including
increased government and private payor pressure on healthcare providers to
control or reduce costs. We believe that our tenants will continue to experience
a shift in payor mix away from fee-for-service payors, resulting in an increase
in the percentage of revenues attributable to managed care payors, government
payors and general industry trends that include pressures to control healthcare
costs. Pressures to control healthcare costs and a shift away from traditional
health insurance reimbursement have resulted in an increase in the number of
patients whose healthcare coverage is provided under managed care plans, such as
health maintenance organizations and preferred provider organizations. In
addition, due to the aging of the population and the expansion of governmental
payor programs, we anticipate that there will be a marked increase in the number
of patients reliant on healthcare coverage provided by governmental payors.
These changes could
 
                                        29

 
have a material adverse effect on the financial condition of some or all of our
tenants, which could have a material adverse effect on our financial condition
and results of operations and could negatively affect our ability to make
distributions to our stockholders.
 
THE HEALTHCARE INDUSTRY IS HEAVILY REGULATED AND EXISTING AND NEW LAWS OR
REGULATIONS, CHANGES TO EXISTING LAWS OR REGULATIONS, LOSS OF LICENSURE OR
CERTIFICATION OR FAILURE TO OBTAIN LICENSURE OR CERTIFICATION COULD RESULT IN
THE INABILITY OF OUR TENANTS TO MAKE LEASE PAYMENTS TO US.
 
     The healthcare industry is highly regulated by federal, state and local
laws, and is directly affected by federal conditions of participation, state
licensing requirements, facility inspections, state and federal reimbursement
policies, regulations concerning capital and other expenditures, certification
requirements and other such laws, regulations and rules. In addition,
establishment of healthcare facilities and transfers of operations of healthcare
facilities are subject to regulatory approvals not required for establishment of
or transfers of other types of commercial operations and real estate. Sanctions
for failure to comply with these regulations and laws include, but are not
limited to, loss of or inability to obtain licensure, fines and loss of or
inability to obtain certification to participate in the Medicare and Medicaid
programs, as well as potential criminal penalties. The failure of any tenant to
comply with such laws, requirements and regulations could affect its ability to
establish or continue its operation of the facility or facilities and could
adversely affect the tenant's ability to make lease payments to us which could
have a material adverse effect on our financial condition and results of
operations and could negatively affect our ability to make distributions to our
stockholders. In addition, restrictions and delays in transferring the
operations of healthcare facilities, in obtaining new third-party payor
contracts including Medicare and Medicaid provider agreements, and in receiving
licensure and certification approval from appropriate state and federal agencies
by new tenants may affect our ability to terminate lease agreements, remove
tenants that violate lease terms, and replace existing tenants with new tenants.
Furthermore, these matters may affect new tenants ability to obtain
reimbursement for services rendered, which could adversely affect their ability
to pay rent to us and to pay principal and interest on their loans from us.
 
ADVERSE TRENDS IN HEALTHCARE PROVIDER OPERATIONS MAY NEGATIVELY AFFECT OUR LEASE
REVENUES AND OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR STOCKHOLDERS.
 
     We believe that the healthcare industry is currently experiencing:
 
     - changes in the demand for and methods of delivering healthcare services;
 
     - changes in third-party reimbursement policies;
 
     - significant unused capacity in certain areas, which has created
       substantial competition for patients among healthcare providers in those
       areas;
 
     - continuing pressure by private and governmental payors to reduce payments
       to providers of services; and
 
     - increased scrutiny by federal and state authorities of billing, referral
       and other practices.
 
     These factors may adversely affect the economic performance of some or all
of our tenants and, in turn, our revenues. Accordingly, these factors could have
a material adverse effect on our financial condition and results of operations
and could negatively affect our ability to make distributions to our
stockholders.
 
OUR TENANTS ARE SUBJECT TO FRAUD AND ABUSE LAWS, THE VIOLATION OF WHICH BY A
TENANT MAY JEOPARDIZE THE TENANT'S ABILITY TO MAKE LEASE AND LOAN PAYMENTS TO
US.
 
     The federal government and numerous state governments have passed laws and
regulations that attempt to eliminate healthcare fraud and abuse by prohibiting
business arrangements that induce patient referrals or the ordering of specific
ancillary services. In addition, the Balanced Budget Act of 1997 strengthened
the federal anti-fraud and abuse laws to provide for stiffer penalties for
violations. Violations
 
                                        30

 
of these laws may result in the imposition of criminal and civil penalties,
including possible exclusion from federal and state healthcare programs.
Imposition of any of these penalties upon any of our tenants could jeopardize
any tenant's ability to operate a facility or to make lease and loan payments,
thereby potentially adversely affecting us.
 
     In the past several years, federal and state governments have significantly
increased investigation and enforcement activity to detect and eliminate fraud
and abuse in the Medicare and Medicaid programs. In addition, legislation has
been adopted at both state and federal levels which severely restricts the
ability of physicians to refer patients to entities in which they have a
financial interest. It is anticipated that the trend toward increased
investigation and enforcement activity in the area of fraud and abuse, as well
as self-referrals, will continue in future years and could adversely affect our
prospective tenants and their operations, and in turn their ability to make
lease and loan payments to us.
 
     We cannot assure you that we will meet all the conditions for the safe
harbor for space rental in structuring lease arrangements involving facilities
in which local physicians are investors and tenants, and it is unlikely that we
will meet all conditions for the safe harbor in those instances in which
percentage rent is contemplated and we have physician investors. In addition,
federal regulations require that our tenants with purchase options pay fair
market value purchase prices for facilities in which we have physician
investment. We cannot assure you that all of our purchase options will be at
fair market value. Any purchase not at fair market value may present risks of
challenge from healthcare regulatory authorities.
 
     Vibra has accepted, and prospective tenants may accept, an assignment of
the previous operator's Medicare provider agreement. Vibra and other
new-operator tenants that take assignment of Medicare provider agreements might
be subject to federal or state regulatory, civil and criminal investigations of
the previous owner's operations and claims submissions. While we conduct due
diligence in connection with the acquisition of such facilities, these types of
issues may not be discovered prior to purchase. Adverse decisions, fines or
recoupments might negatively impact our tenants' financial condition.
 
CERTAIN OF OUR LEASE ARRANGEMENTS MAY BE SUBJECT TO FRAUD AND ABUSE OR PHYSICIAN
SELF-REFERRAL LAWS.
 
     Local physician investment in our operating partnership or our subsidiaries
that own our facilities could subject our lease arrangements to scrutiny under
fraud and abuse and physician self-referral laws. Under the federal Ethics in
Patient Referrals Act of 1989, or Stark Law, and regulations adopted thereunder,
if our lease arrangements do not satisfy the requirements of an applicable
exception, that noncompliance could adversely affect the ability of our tenants
to bill for services provided to Medicare beneficiaries pursuant to referrals
from physician investors and subject us and our tenants to fines, which could
impact their ability to make lease and loan payments to us. On March 26, 2004,
CMS issued Phase II final rules under the Stark Law, which, together with the
2001 Phase I final rules, set forth CMS' current interpretation and application
of the Stark Law prohibition on referrals of designated health services, or DHS.
These rules provide us additional guidance on application of the Stark Law
through the implementation of "bright-line" tests, including additional
regulations regarding the indirect compensation exception, but do not eliminate
the risk that our lease arrangements and business strategy of physician
investment may violate the Stark Law. Finally, the Phase II rules implemented an
18-month moratorium on physician ownership or investment in specialty hospitals
imposed by the Medicare Prescription Drug, Improvement, and Modernization Act of
2003. Although the moratorium imposed by the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 expired on June 8, 2005, a bill
introduced in the Senate essentially would make the moratorium on physician
ownership or investment in specialty hospitals permanent with limited
exceptions. If enacted, the law would have a retroactive effective date of June
8, 2005. We intend to use our good faith efforts to structure our lease
arrangements to comply with these laws; however, if we are unable to do so, this
failure may restrict our ability to permit physician investment or, where such
physicians do participate, may restrict the types of lease arrangements into
which we may enter, including our ability to enter into percentage rent
arrangements.
 
                                        31

 
STATE CERTIFICATE OF NEED LAWS MAY ADVERSELY AFFECT OUR DEVELOPMENT OF
FACILITIES AND THE OPERATIONS OF OUR TENANTS.
 
     Certain healthcare facilities in which we invest may also be subject to
state laws which require regulatory approval in the form of a certificate of
need prior to initiation of certain projects, including, but not limited to, the
establishment of new or replacement facilities, the addition of beds, the
addition or expansion of services and certain capital expenditures. State
certificate of need laws are not uniform throughout the United States and are
subject to change. We cannot predict the impact of state certificate of need
laws on our development of facilities or the operations of our tenants.
 
     In addition, certificate of need laws often materially impact the ability
of competitors to enter into the marketplace of our facilities. Finally, in
limited circumstances, loss of state licensure or certification or closure of a
facility could ultimately result in loss of authority to operate the facility
and require re-licensure or new certificate of need authorization to
re-institute operations. As a result, a portion of the value of the facility may
be related to the limitation on new competitors. In the event of a change in the
certificate of need laws, this value may markedly decrease.
 
                RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE
 
PROVISIONS OF MARYLAND LAW, OUR CHARTER AND OUR BYLAWS MAY PREVENT OR DETER
CHANGES IN MANAGEMENT AND THIRD-PARTY ACQUISITION PROPOSALS THAT YOU MAY BELIEVE
TO BE IN YOUR BEST INTEREST, DEPRESS OUR STOCK PRICE OR CAUSE DILUTION.
 
     Our charter contains ownership limitations that may restrict business
combination opportunities, inhibit change of control transactions and reduce the
value of our stock.  To qualify as a REIT under the Code, no more than 50% in
value of our outstanding stock, after taking into account options to acquire
stock, may be owned, directly or indirectly, by five or fewer persons during the
last half of each taxable year, other than our first REIT taxable year. Our
charter generally prohibits direct or indirect ownership by any person of more
than 9.8% in value or in number, whichever is more restrictive, of outstanding
shares of any class or series of our securities, including our common stock.
Generally, common stock owned by affiliated owners will be aggregated for
purposes of the ownership limitation. Any transfer of our common stock that
would violate the ownership limitation will be null and void, and the intended
transferee will acquire no rights in such stock. Instead, such common stock will
be designated as "shares-in-trust" and transferred automatically to a trust
effective on the day before the purported transfer of such stock. The
beneficiary of that trust will be one or more charitable organizations named by
us. The ownership limitation could have the effect of delaying, deterring or
preventing a change in control or other transaction in which holders of common
stock might receive a premium for their common stock over the then-current
market price or which such holders otherwise might believe to be in their best
interests. The ownership limitation provisions also may make our common stock an
unsuitable investment vehicle for any person seeking to obtain, either alone or
with others as a group, ownership of more than 9.8% of either the value or
number of the outstanding shares of our common stock. Our board of directors, in
its sole discretion, may waive or modify, subject to limitations, the ownership
limit with respect to one or more stockholders if it is satisfied that ownership
in excess of their limit will not jeopardize our status as a REIT. See
"Description of Capital Stock -- Restrictions on Ownership and Transfer."
 
     Certain provisions of Maryland law may limit the ability of a third party
to acquire control of our company.  Certain provisions of the Maryland General
Corporation Law, or the MGCL, could have the effect of inhibiting a third party
from making a proposal to acquire us or of impeding a change of control under
circumstances that otherwise could provide the holders of shares of our common
stock with the opportunity to realize a premium over the then-prevailing market
price of such shares, including:
 
     - "business combination" provisions that, subject to limitations, prohibit
       certain business combinations between us and an "interested stockholder"
       (defined generally as a person who beneficially owns 10% or more of the
       voting power of our shares or an affiliate thereof) for five years after
       the most recent date on which the stockholder becomes an interested
       stockholder, and
 
                                        32

 
       thereafter imposes special appraisal rights and special stockholder
       voting requirements on these combinations; and
 
     - "control share" provisions that provide that "control shares" of our
       company (defined as shares which, when aggregated with other shares
       controlled by the stockholder, entitle the stockholder to exercise one of
       three increasing ranges of voting power in electing directors) acquired
       in a "control share acquisition" (defined as the direct or indirect
       acquisition of ownership or control of "control shares") have no voting
       rights except to the extent approved by our stockholders by the
       affirmative vote of the holders of at least two-thirds of all the votes
       entitled to be cast on the matter, excluding all interested shares.
 
     We have opted out of these provisions of the MGCL pursuant to provisions in
our charter. However, we may, by amendment to our charter with approval of our
stockholders, opt in to the business combination and control share provisions of
the MGCL in the future.
 
     Additionally, Title 8, Subtitle 3 of the MGCL permits our board of
directors, without stockholder approval and regardless of what is currently
provided in our charter and our amended and restated bylaws, or bylaws, to
implement takeover defenses, some of which (for example, a classified board) we
do not presently have. These provisions may have the effect of inhibiting a
third party from making an acquisition proposal for our company or of delaying,
deferring or preventing a change of control of our company under circumstances
that otherwise could provide the holders of our common stock with the
opportunity to realize a premium over the then-current market price of our
common stock.
 
     Maryland law does not impose heightened standards on directors in takeover
situations. The MGCL provides that an act of a director relating to or affecting
an acquisition or potential acquisition of control of a corporation may not be
subject to a higher duty or greater scrutiny than is applied to any other act of
a director. Therefore, directors of a Maryland corporation are not required to
act in the same manner as directors of a Delaware corporation in takeover
situations.
 
     Our charter and bylaws contain provisions that may impede third-party
acquisition proposals that may be in your best interests.  Our charter and
bylaws also provide that our directors may only be removed by the affirmative
vote of the holders of two-thirds of our stock, that stockholders are required
to give us advance notice of director nominations and new business to be
conducted at our annual meetings of stockholders and that special meetings of
stockholders can only be called by our president, our board of directors or the
holders of at least 25% of stock entitled to vote at the meetings. These and
other charter and bylaw provisions may delay or prevent a change of control or
other transaction in which holders of our common stock might receive a premium
for their common stock over the then-current market price or which such holders
otherwise might believe to be in their best interests.
 
     Our board of directors may issue additional shares that may cause dilution
and could deter change of control transactions that you may believe to be in
your best interest.  Our charter authorizes our board, without stockholder
approval, to:
 
     - issue up to 10,000,000 shares of preferred stock, having preferences,
       conversion or other rights, voting powers, restrictions, limitations as
       to distribution, qualifications, or terms or conditions of redemption as
       determined by the board;
 
     - amend the charter to increase or decrease the aggregate number of shares
       of capital stock or the number of shares of stock of any class or series
       that we have the authority to issue;
 
     - cause us to issue additional authorized but unissued shares of common
       stock or preferred stock; and
 
     - classify or reclassify any unissued shares of common or preferred stock
       by setting or changing in any one or more respects, from time to time
       before the issuance of such shares, the preferences, conversion or other
       rights and other terms of such classified or reclassified shares,
       including the issuance of additional shares of common stock or preferred
       stock that have preference rights over the common stock with respect to
       dividends, liquidation, voting and other matters.
 
                                        33

 
WE DEPEND ON KEY PERSONNEL, THE LOSS OF ANY ONE OF WHOM MAY THREATEN OUR ABILITY
TO OPERATE OUR BUSINESS SUCCESSFULLY.
 
     We depend on the services of Edward K. Aldag, Jr., William G. McKenzie,
Emmett E. McLean, R. Steven Hamner and Michael G. Stewart to carry out our
business and investment strategy. If we were to lose any of these executive
officers, it may be more difficult for us to locate attractive acquisition
targets, complete our acquisitions and manage the facilities that we have
acquired or are developing. Additionally, as we expand, we will continue to need
to attract and retain additional qualified officers and employees. The loss of
the services of any of our executive officers, or our inability to recruit and
retain qualified personnel in the future, could have a material adverse effect
on our business and financial results.
 
WE MAY EXPERIENCE CONFLICTS OF INTEREST WITH OUR OFFICERS AND DIRECTORS, WHICH
COULD RESULT IN OUR OFFICERS AND DIRECTORS ACTING OTHER THAN IN OUR BEST
INTEREST.
 
     As described below, our officers and directors may have conflicts of
interest in connection with their duties to us and the limited partners of our
operating partnership and with allocation of their time between our business and
affairs and their other business interests. In addition, from time to time, we
may acquire or develop facilities in transactions involving prospective tenants
in which our directors or officers have an interest. In transactions of this
nature, there will be conflicts between our interests and the interests of the
director or officer involved, and that director or officer may be in a position
to influence the terms of those transactions.
 
     In the event we purchase properties from executive officers or directors in
exchange for units of limited partnership in our operating partnership, the
interests of those persons with the interests of the company may conflict. Where
a unitholder has unrealized gains associated with his limited partnership
interests in our operating partnership, these holders may incur adverse tax
consequences in the event of a sale or refinancing of those properties.
Therefore the interest of these executive officers or directors of our company
could be different from the interests of the company in connection with the
disposition or refinancing of a property. Conflicts of interest with our
officers and directors could result in our officers and directors acting other
than in our best interest.
 
OUR EXECUTIVE OFFICERS HAVE AGREEMENTS THAT PROVIDE THEM WITH BENEFITS IN THE
EVENT THEIR EMPLOYMENT IS TERMINATED BY US WITHOUT CAUSE, BY THE EXECUTIVE FOR
GOOD REASON, OR UNDER CERTAIN CIRCUMSTANCES FOLLOWING A CHANGE OF CONTROL
TRANSACTION THAT YOU MAY BELIEVE TO BE IN YOUR BEST INTEREST.
 
     We have entered into agreements with certain of our executive officers that
provide them with severance benefits if their employment is terminated by us
without cause, by them for good reason (which includes, among other reasons,
failure to be elected to the board for Mr. Aldag and failure to have their
agreements automatically renewed for Messrs. Aldag, McLean, Hamner, McKenzie and
Stewart), or under certain circumstances following a change of control of our
company. Certain of these benefits and the related tax indemnity could prevent
or deter a change of control of our company that might involve a premium price
for our common stock or otherwise be in the best interests of our stockholders.
 
THE VICE CHAIRMAN OF OUR BOARD OF DIRECTORS, WILLIAM G. MCKENZIE, HAS OTHER
BUSINESS INTERESTS THAT MAY HINDER HIS ABILITY TO ALLOCATE SUFFICIENT TIME TO
THE MANAGEMENT OF OUR OPERATIONS, WHICH COULD JEOPARDIZE OUR ABILITY TO EXECUTE
OUR BUSINESS PLAN.
 
     Our employment agreement with the vice chairman of our board of directors,
Mr. McKenzie, permits him to continue to own, operate and control facilities
that he owned as of the date of his employment agreement and requires that he
only provide a limited amount of his time per month to our company. In addition,
the terms of Mr. McKenzie's employment agreement permit him to compete against
us with respect to these previously owned healthcare facilities.
 
                                        34

 
ALL MANAGEMENT RIGHTS ARE VESTED IN OUR BOARD OF DIRECTORS AND OUR STOCKHOLDERS
HAVE LIMITED RIGHTS.
 
     Our board of directors is responsible for our management and strategic
business direction, and management is responsible for our day-to-day operations.
Our major policies, including our policies with respect to REIT qualification,
acquisitions and developments, leasing, financing, growth, operations, debt
limitation and distributions, are determined by our board of directors. Our
board of directors may amend or revise these and other policies from time to
time without a vote of our stockholders. Investment and operational policy
changes could adversely affect the market price of our common stock and our
ability to make distributions to our stockholders.
 
THE ABILITY OF OUR BOARD OF DIRECTORS TO REVOKE OUR REIT STATUS WITHOUT
STOCKHOLDER APPROVAL MAY CAUSE ADVERSE CONSEQUENCES TO OUR STOCKHOLDERS.
 
     Our charter provides that our board of directors may revoke or otherwise
terminate our REIT election, without the approval of our stockholders, if it
determines that it is no longer in our best interest to continue to qualify as a
REIT. If we cease to be a REIT, we would become subject to federal income tax on
our taxable income and would no longer be required to distribute most of our
taxable income to our stockholders, which may have adverse consequences on total
return to our stockholders.
 
OUR RIGHTS AND THE RIGHTS OF OUR STOCKHOLDERS TO TAKE ACTION AGAINST OUR
DIRECTORS AND OFFICERS ARE LIMITED.
 
     Maryland law provides that a director or officer has no liability in that
capacity if he or she performs his or her duties in good faith, in a manner he
or she reasonably believes to be in our best interests and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. In addition, our charter eliminates our directors' and officers'
liability to us and our stockholders for money damages except for liability
resulting from actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a final judgment and
which is material to the cause of action. Our bylaws and indemnification
agreements require us to indemnify our directors and officers for liability
resulting from actions taken by them in those capacities to the maximum extent
permitted by Maryland law. As a result, we and our stockholders may have more
limited rights against our directors and officers than might otherwise exist
under common law. In addition, we may be obligated to fund the defense costs
incurred by our directors and officers. See "Certain Provisions of Maryland Law
and of Our Charter and Bylaws -- Indemnification and Limitation of Directors'
and Officers' Liability." Directors may be removed with or without cause by the
affirmative vote of the holders of two-thirds of the votes entitled to be cast
in the election of directors.
 
OUR UPREIT STRUCTURE MAY RESULT IN CONFLICTS OF INTEREST BETWEEN OUR
STOCKHOLDERS AND THE HOLDERS OF OUR OPERATING PARTNERSHIP UNITS.
 
     We are organized as an UPREIT, which means that we hold our assets and
conduct substantially all of our operations through an operating limited
partnership, and may in the future issue limited partnership units to third
parties. Persons holding operating partnership units would have the right to
vote on certain amendments to the partnership agreement of our operating
partnership, as well as on certain other matters. Persons holding these voting
rights may exercise them in a manner that conflicts with the interests of our
stockholders. Circumstances may arise in the future, such as the sale or
refinancing of one of our facilities, when the interests of limited partners in
our operating partnership conflict with the interests of our stockholders. As
the general partner of our operating partnership, we have fiduciary duties to
the limited partners of our operating partnership that may conflict with
fiduciary duties our officers and directors owe to our stockholders. These
conflicts may result in decisions that are not in your best interest.
 
                                        35

 
THROUGH A WHOLLY-OWNED SUBSIDIARY, WE ARE THE GENERAL PARTNER OF OUR OPERATING
PARTNERSHIP AND OUR OPERATING PARTNERSHIP, THROUGH WHOLLY-OWNED SUBSIDIARIES, IS
THE GENERAL PARTNER OF OTHER SUBSIDIARIES WHICH OWN OUR FACILITIES AND, SHOULD
ANY OF THESE WHOLLY-OWNED GENERAL PARTNERS BE DISREGARDED, THEN WE OR OUR
OPERATING PARTNERSHIP COULD BECOME LIABLE FOR THE DEBTS AND OTHER OBLIGATIONS OF
OUR SUBSIDIARIES BEYOND THE AMOUNT OF OUR INVESTMENT.
 
     Through our wholly-owned subsidiary, Medical Properties Trust, LLC, we are
the sole general partner of our operating partnership, and also currently own
100% of the limited partnership interests in the operating partnership. In
addition, our operating partnership, through other wholly-owned subsidiaries, is
the general partner of other subsidiaries which own our facilities. If any of
our wholly-owned subsidiaries which act as general partner were disregarded, we
would be liable for the debts and other obligations of the subsidiaries that own
our facilities. In such event, if any of these subsidiaries were unable to pay
their debts and other obligations, we would be liable for such debts and other
obligations beyond the amount of our investment in these subsidiaries. These
obligations could include unforeseen contingent liabilities.
 
                 TAX RISKS ASSOCIATED WITH OUR STATUS AS A REIT
 
LOSS OF OUR TAX STATUS AS A REIT WOULD HAVE SIGNIFICANT ADVERSE CONSEQUENCES TO
US AND THE VALUE OF OUR COMMON STOCK.
 
     We believe that we qualify as a REIT for federal income tax purposes and
have elected to be taxed as a REIT under the federal income tax laws commencing
with our taxable year that began on April 6, 2004 and ended on December 31,
2004. Our qualification as a REIT depends on our ability to meet various
requirements concerning, among other things, the ownership of our outstanding
common stock, the nature of our assets, the sources of our income and the amount
of our distributions to our stockholders. The REIT qualification requirements
are extremely complex, and interpretations of the federal income tax laws
governing qualification as a REIT are limited. Accordingly, there is no
assurance that we will be successful in operating so as to qualify as a REIT. At
any time, new laws, regulations, interpretations or court decisions may change
the federal tax laws relating to, or the federal income tax consequences of,
qualification as a REIT. It is possible that future economic, market, legal, tax
or other considerations may cause our board of directors to revoke the REIT
election, which it may do without stockholder approval.
 
     If we lose or revoke our REIT status, we will face serious tax consequences
that will substantially reduce the funds available for distribution because:
 
     - we would not be allowed a deduction for distributions to stockholders in
       computing our taxable income; therefore we would be subject to federal
       income tax at regular corporate rates and we might need to borrow money
       or sell assets in order to pay any such tax;
 
     - we also could be subject to the federal alternative minimum tax and
       possibly increased state and local taxes; and
 
     - unless we are entitled to relief under statutory provisions, we also
       would be disqualified from taxation as a REIT for the four taxable years
       following the year during which we ceased to qualify.
 
     As a result of all these factors, a failure to achieve or a loss or
revocation of our REIT status could have a material adverse effect on our
financial condition and results of operations and would adversely affect the
value of our common stock.
 
FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAX.
 
     In order to qualify as a REIT, each year we must distribute to our
stockholders at least 90% of our REIT taxable income, excluding net capital
gain. To the extent that we satisfy the distribution requirement, but distribute
less than 100% of our taxable income, we will be subject to federal corporate
income tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our distributions in
any year are less than the sum of:
 
     - 85% of our ordinary income for that year;
 
                                        36

 
     - 95% of our capital gain net income for that year; and
 
     - 100% of our undistributed taxable income from prior years.
 
     We intend to pay out our income to our stockholders in a manner that
satisfies the distribution requirement and avoids corporate income tax and the
4% excise tax. We may be required to make distributions to stockholders at
disadvantageous times or when we do not have funds readily available for
distribution. Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt amortization payments could
require us to borrow money or sell assets to pay out enough of our taxable
income to satisfy the distribution requirement and to avoid corporate income tax
and the 4% excise tax in a particular year. In the future, we may borrow to pay
distributions to our stockholders and the limited partners of our operating
partnership. Any funds that we borrow would subject us to interest rate and
other market risks.
 
WE WILL PAY SOME TAXES AND THEREFORE MAY HAVE LESS CASH AVAILABLE FOR
DISTRIBUTION TO OUR STOCKHOLDERS.
 
     We will be required to pay some U.S. federal, state and local taxes on the
income from the operations of our taxable REIT subsidiary, MPT Development
Services, Inc. A taxable REIT subsidiary is a fully taxable corporation and may
be limited in its ability to deduct interest payments made to us. In addition,
we will be subject to a 100% penalty tax on certain amounts if the economic
arrangements among our tenants, our taxable REIT subsidiary and us are not
comparable to similar arrangements among unrelated parties. To the extent that
we are or our taxable REIT subsidiary is required to pay U.S. federal, state or
local taxes, we will have less cash available for distribution to stockholders.
 
COMPLYING WITH REIT REQUIREMENTS MAY CAUSE US TO FOREGO OTHERWISE ATTRACTIVE
OPPORTUNITIES.
 
     To qualify as a REIT for federal income tax purposes, we must continually
satisfy tests concerning, among other things, the sources of our income, the
nature and diversification of our assets, the amounts we distribute to our
stockholders and the ownership of our stock. In order to meet these tests, we
may be required to forego attractive business or investment opportunities.
Overall, no more than 20% of the value of our assets may consist of securities
of one or more taxable REIT subsidiaries, and no more than 25% of the value of
our assets may consist of securities that are not qualifying assets under the
test requiring that 75% of a REIT's assets consist of real estate and other
related assets. Further, a taxable REIT subsidiary may not directly or
indirectly operate or manage a healthcare facility. For purposes of this
definition a "healthcare facility" means a hospital, nursing facility, assisted
living facility, congregate care facility, qualified continuing care facility,
or other licensed facility which extends medical or nursing or ancillary
services to patients and which is operated by a service provider that is
eligible for participation in the Medicare program under Title XVIII of the
Social Security Act with respect to the facility. Thus, compliance with the REIT
requirements may limit our flexibility in executing our business plan.
 
OUR LOAN TO VIBRA COULD BE RECHARACTERIZED AS EQUITY, IN WHICH CASE OUR RENTAL
INCOME FROM VIBRA WOULD NOT BE QUALIFYING INCOME UNDER THE REIT RULES AND WE
COULD LOSE OUR REIT STATUS.
 
     In connection with the acquisition of the Vibra Facilities, our taxable
REIT subsidiary made a loan to Vibra in an aggregate amount of approximately
$41.4 million to acquire the operations at the Vibra Facilities. Our taxable
REIT subsidiary also made a loan of approximately $6.2 million to Vibra and its
subsidiaries for working capital purposes, which has been paid in full. The
acquisition loan bears interest at an annual rate of 10.25%. Our operating
partnership loaned the funds to our taxable REIT subsidiary to make these loans.
The loan from our operating partnership to our taxable REIT subsidiary bears
interest at an annual rate of 9.25%.
 
     The Internal Revenue Service, or IRS, may take the position that the loans
to Vibra should be treated as equity interests in Vibra rather than debt, and
that our rental income from Vibra should not be treated as qualifying income for
purposes of the REIT gross income tests. If the IRS were to successfully treat
the loans to Vibra as equity interests in Vibra, Vibra would be a "related party
tenant" with respect to our company and the rent that we receive from Vibra
would not be qualifying income for purposes of
 
                                        37

 
the REIT gross income tests. As a result, we could lose our REIT status. In
addition, if the IRS were to successfully treat the loans to Vibra as interests
held by our operating partnership rather than by our taxable REIT subsidiary and
to treat the loans as other than straight debt, we would fail the 10% asset test
with respect to such interests and, as a result, could lose our REIT status,
which would subject us to corporate level income tax and adversely affect our
ability to make distributions to our stockholders.
 
              RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK
 
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK MAY BE VOLATILE.
 
     On July 13, 2005, we completed an initial public offering of our common
stock, which is listed on the New York Stock Exchange. While there has been
significant trading in our common stock since the initial public offering, we
cannot assure you that an active trading market in our common stock will be
sustained. Even if active trading of our common stock continues, the market
price of our common stock may be highly volatile and be subject to wide
fluctuations. In addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. If the market price of our
common stock declines significantly, you may be unable to resell your shares at
or above your purchase price.
 
     We cannot assure you that the market price of our common stock will not
fluctuate or decline significantly in the future. Some of the factors that could
negatively affect our share price or result in fluctuations in the price or
trading volume of our common stock include:
 
     - actual or anticipated variations in our quarterly operating results or
       distributions;
 
     - changes in our funds from operations or earnings estimates or publication
       of research reports about us or the real estate industry;
 
     - increases in market interest rates that lead purchasers of our shares of
       common stock to demand a higher yield;
 
     - changes in market valuations of similar companies;
 
     - adverse market reaction to any increased indebtedness we incur in the
       future;
 
     - additions or departures of key management personnel;
 
     - actions by institutional stockholders;
 
     - speculation in the press or investment community; and
 
     - general market and economic conditions.
 
BROAD MARKET FLUCTUATIONS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON
STOCK.
 
     In addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many companies in industries
similar or related to ours and that have been unrelated to these companies'
operating performances. These broad market fluctuations could reduce the market
price of our common stock. Furthermore, our operating results and prospects may
be below the expectations of public market analysts and investors or may be
lower than those of companies with comparable market capitalizations, which
could lead to a material decline in the market price of our common stock.
 
                                        38

 
FUTURE SALES OF COMMON STOCK MAY HAVE ADVERSE EFFECTS ON OUR STOCK PRICE.
 
     We cannot predict the effect, if any, of future sales of common stock, or
the availability of shares for future sales, on the market price of our common
stock. Sales of substantial amounts of common stock, or the perception that
these sales could occur, may adversely affect prevailing market prices for our
common stock. We may issue from time to time additional common stock or units of
our operating partnership in connection with the acquisition of facilities and
we may grant additional demand or piggyback registration rights in connection
with these issuances. Sales of substantial amounts of common stock or the
perception that these sales could occur may adversely effect the prevailing
market price for our common stock. In addition, the sale of these shares could
impair our ability to raise capital through a sale of additional equity
securities.
 
YOU SHOULD NOT RELY ON LOCK-UP AGREEMENTS TO LIMIT THE NUMBER OF SHARES OF
COMMON STOCK SOLD INTO THE MARKET.
 
     All of our directors and executive officers are bound by lock-up agreements
that prohibit these holders from selling or otherwise disposing of any of our
common stock or securities convertible into our common stock that they own or
acquire until January 4, 2006, subject to limited exceptions. Friedman,
Billings, Ramsey & Co., Inc., on behalf of the underwriters of our initial
public offering, may, in its discretion, release all or any portion of the
common stock subject to the lock-up agreements with our directors and executive
officers, at any time and without notice or stockholder approval. There are no
present agreements between the underwriters and us or any of our executive
officers, directors or stockholders releasing them or us from these lock-up
agreements. However, we cannot predict the circumstances or timing under which
Friedman, Billings, Ramsey & Co., Inc. may waive these restrictions.
 

     Upon expiration or waiver of the restrictions under the lock-up agreements,
up to approximately 1.3 million shares of our common stock will be available for
sale into the market, subject only to applicable securities rules and
regulations, which could reduce the market price for our common stock.

 
AN INCREASE IN MARKET INTEREST RATES MAY HAVE AN ADVERSE EFFECT ON THE MARKET
PRICE OF OUR SECURITIES.
 
     One of the factors that investors may consider in deciding whether to buy
or sell our securities is our distribution rate as a percentage of our price per
share of common stock, relative to market interest rates. If market interest
rates increase, prospective investors may desire a higher distribution or
interest rate on our securities or seek securities paying higher distributions
or interest. The market price of our common stock likely will be based primarily
on the earnings that we derive from rental income with respect to our facilities
and our related distributions to stockholders, and not from the underlying
appraised value of the facilities themselves. As a result, interest rate
fluctuations and capital market conditions can affect the market price of our
common stock. In addition, rising interest rates would result in increased
interest expense on our variable-rate debt, thereby adversely affecting cash
flow and our ability to service our indebtedness and make distributions.
 
                                        39

 
                   A WARNING ABOUT FORWARD LOOKING STATEMENTS
 
     We make forward-looking statements in this prospectus that are subject to
risks and uncertainties. These forward-looking statements include information
about possible or assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives. Statements regarding the
following subjects, among others, are forward-looking by their nature:
 
     - our business strategy;
 
     - our projected operating results;
 
     - our ability to acquire or develop net-leased facilities;
 
     - availability of suitable facilities to acquire or develop;
 
     - our ability to enter into, and the terms of, our prospective leases;
 
     - our ability to use effectively the proceeds of our initial public
       offering;
 
     - our ability to obtain future financing arrangements;
 
     - estimates relating to, and our ability to pay, future distributions;
 
     - our ability to compete in the marketplace;
 
     - market trends;
 
     - projected capital expenditures; and
 
     - the impact of technology on our facilities, operations and business.
 
     The forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. If a change occurs, our business, financial condition, liquidity
and results of operations may vary materially from those expressed in our
forward-looking statements. You should carefully consider these risks before you
make an investment decision with respect to our common stock, along with, among
others, the following factors that could cause actual results to vary from our
forward-looking statements:
 
     - the factors referenced in this prospectus, including those set forth
       under the sections captioned "Risk Factors," "Management's Discussion and
       Analysis of Financial Condition and Results of Operations;" "Our
       Business" and "Our Portfolio;"
 
     - general volatility of the capital markets and the market price of our
       common stock;
 
     - changes in our business strategy;
 
     - changes in healthcare laws and regulations;
 
     - availability, terms and development of capital;
 
     - availability of qualified personnel;
 
     - changes in our industry, interest rates or the general economy; and
 
     - the degree and nature of our competition.
 
     When we use the words "believe," "expect," "may," "potential,"
"anticipate," "estimate," "plan," "will," "could," "intend" or similar
expressions, we are identifying forward-looking statements. You should not place
undue reliance on these forward-looking statements. We are not obligated to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
 
                                        40

 
                                USE OF PROCEEDS
 
     We will not receive any proceeds from the sale by the selling stockholders
of the shares of common stock offered by this prospectus.
 
                                        41

 
                                 CAPITALIZATION
 
     The following table sets forth:
 
     - our actual capitalization as of June 30, 2005; and
 
     - our pro forma capitalization, as adjusted to give effect to the sale of
       shares of common stock in our initial public offering at a public
       offering price of $10.50 per share, our payment of a distribution of
       $0.16 per share of common stock on July 14, 2005 to stockholders of
       record on June 20, 2005 and our payment of a distribution of $0.17 per
       share on September 29, 2005 to stockholders of record on September 15,
       2005.
 


                                                                         AS OF
                                                                     JUNE 30, 2005
                                                              ---------------------------
                                                                              PRO FORMA,
                                                               HISTORICAL    AS ADJUSTED
                                                              ------------   ------------
                                                                       
LONG TERM DEBT..............................................  $ 73,204,167   $ 73,204,167
MINORITY INTERESTS..........................................     2,137,500      2,137,500
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.001 par value, 10,000,000 shares
     authorized; no shares issued and outstanding...........            --             --
  Common stock, $0.001 par value, 100,000,000 shares
     authorized; 26,082,862 shares issued and outstanding at
     June 30, 2005; 39,445,885 shares issued and
     outstanding, as adjusted...............................        26,083         39,446(1)
     Additional paid in capital.............................   233,678,165    361,753,969
     Accumulated deficit....................................    (1,043,786)    (9,812,527)
                                                              ------------   ------------
       Total stockholders' equity...........................   232,660,462    351,980,888
                                                              ------------   ------------
       Total capitalization.................................  $308,002,129   $427,322,555
                                                              ============   ============

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

(1) Includes 106,000 shares of restricted common stock awarded to our founders
    on July 14, 2005 and 82,000 shares of restricted common stock awarded to our
    employees in April 2005 under our equity incentive plan. Excludes (i)
    100,000 shares of common stock issuable upon the exercise of stock options
    granted to our independent directors under our equity incentive plan,
    options for 46,664 shares of which are vested; (ii) 35,000 shares of common
    stock issued in July 2005 pursuant to the exercise of a vested warrant
    granted to an unaffiliated third party; (iii) 5,000 shares of common stock
    issuable in October 2007 and 7,500 shares of common stock issuable in March
    2008 pursuant to deferred stock units awarded under our equity incentive
    plan to our independent directors; (iv) 490,680 shares of restricted common
    stock awarded to our executive officers and directors on August 18, 2005 and
    (v) 3,891,871 shares of common stock available for future awards under our
    equity incentive plan.

 
                                        42

 
                              DISTRIBUTION POLICY
 
     We intend to make regular quarterly distributions to our stockholders so
that we distribute each year all or substantially all of our REIT taxable
income, if any, so as to avoid paying corporate level income tax and excise tax
on our REIT income and to qualify for the tax benefits accorded to REITs under
the Code. In order to maintain our status as a REIT, we must distribute to our
stockholders an amount at least equal to 90% of our REIT taxable income,
excluding net capital gain. See "United States Federal Income Tax
Considerations." The distributions will be authorized by our board of directors
and declared by us based upon a number of factors, including:
 
     - our actual results of operations;
 
     - the rent received from our tenants;
 
     - the ability of our tenants to meet their other obligations under their
       leases and their obligations under their loans from us;
 
     - debt service requirements;
 
     - capital expenditure requirements for our facilities;
 
     - our taxable income;
 
     - the annual distribution requirement under the REIT provisions of the
       Code; and
 
     - other factors that our board of directors may deem relevant.
 
     To the extent not inconsistent with maintaining our REIT status, we may
retain accumulated earnings of our taxable REIT subsidiaries in those
subsidiaries. Our ability to make distributions to our stockholders will depend
on our receipt of distributions from our operating partnership.
 
     The table below is a summary of our distributions. We cannot assure you
that we will have cash available for future quarterly distributions at these
levels, or at all. See "Risk Factors."
 


                                                             DISTRIBUTION PER SHARE
DECLARATION DATE      RECORD DATE      DATE OF DISTRIBUTION     OF COMMON STOCK
----------------      -----------      --------------------  ----------------------
                                                    
 August 18, 2005   September 15, 2005  September 29, 2005            $0.17
  May 19, 2005       June 20, 2005        July 14, 2005              $0.16
  March 4, 2005      March 16, 2005      April 15, 2005              $0.11
November 11, 2004  December 16, 2004    January 11, 2005             $0.11
September 2, 2004  September 16, 2004   October 11, 2004             $0.10

 
     The two distributions declared in 2004, aggregating $0.21 per share, were
comprised of approximately $0.13 per share in ordinary income and $0.08 per
share in return of capital. For federal income tax purposes, our distributions
were limited in 2004 to our tax basis earnings and profits of $0.13 per share.
Accordingly, for tax purposes, $0.08 per share of the distributions we paid in
January 2005 will be treated as a 2005 distribution; the tax character of this
amount, along with that of the April 15, 2005, July 14, 2005 and September 29,
2005 distributions, will be determined subsequent to determination of our 2005
taxable income.
 
                                        43

 
                         SELECTED FINANCIAL INFORMATION
 
     You should read the following pro forma and historical information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical and pro forma consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
 
     The following table sets forth our selected financial and operating data on
an historical and pro forma basis. Our selected historical balance sheet
information as of December 31, 2004, and the historical statement of operations
and other data for the year ended December 31, 2004, have been derived from our
historical financial statements audited by KPMG LLP, independent registered
public accounting firm, whose report with respect thereto is included elsewhere
in this prospectus. The historical balance sheet information as of June 30, 2005
and the historical statement of operations and other data for the six months
ended June 30, 2005 have been derived from our unaudited historical balance
sheet as of June 30, 2005 and from our unaudited statement of operations for the
six months ended June 30, 2005 included elsewhere in this prospectus. The
unaudited historical financial statements include all adjustments, consisting of
normal recurring adjustments, that we consider necessary for a fair presentation
of our financial condition and results of operations as of such dates and for
such periods under accounting principles generally accepted in the U.S.
 
     The unaudited pro forma consolidated balance sheet data as of June 30,
2005, are presented as if completion of our initial public offering and
completion of our probable acquisitions had occurred on June 30, 2005.
 
     The unaudited pro forma consolidated statement of operations and other data
for the six months ended June 30, 2005 are presented as if our acquisition of
the Desert Valley Facility, the Covington Facility and the Redding Facility,
completion of our initial public offering and completion of our probable
acquisitions had occurred on January 1, 2005, and our December 31, 2004
unaudited pro forma consolidated statement of operations are presented as if our
acquisition of the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility and the Redding Facility),
our making of the Vibra loans, completion of our initial public offering and
completion of our probable acquisitions had occurred on January 1, 2004. The pro
forma information does not give effect to any of our facilities under
development or probable development transactions. The pro forma information is
not necessarily indicative of what our actual financial position or results of
operations would have been as of the dates or for the periods indicated, nor
does it purport to represent our future financial position or results of
operations.
 


                                              FOR THE SIX MONTHS ENDED        FOR THE YEAR ENDED
                                                   JUNE 30, 2005               DECEMBER 31, 2004
                                             --------------------------    -------------------------
                                              PRO FORMA     HISTORICAL      PRO FORMA    HISTORICAL
                                             -----------    -----------    -----------   -----------
                                                                             
OPERATING INFORMATION:
  Revenues
    Rent income............................  $14,629,750    $11,393,116    $27,360,679   $ 8,611,344
    Interest income from loans.............    2,329,189      2,329,189      5,037,049     2,282,115
                                             -----------    -----------    -----------   -----------
    Total revenues.........................   16,958,939     13,722,305     32,397,728    10,893,459
  Operating expenses
    Depreciation and amortization..........    2,533,665      1,816,403      5,072,811     1,478,470
    General and administrative.............    3,165,877      3,165,877      5,057,284     5,057,284
    Total operating expenses...............    5,699,542      4,982,280     10,902,444     7,214,601
    Operating income.......................   11,259,397      8,740,025     21,495,284     3,678,858
    Net other income (expense).............     (800,280)      (800,280)       897,491       897,491
  Net income...............................   10,459,117      7,939,745     22,392,775     4,576,349
  Net income per share, basic..............         0.27           0.30           0.69          0.24
  Net income per share, diluted............         0.26           0.30           0.69          0.24
  Weighted average shares
    outstanding -- basic...................   39,459,836     26,096,813     32,673,856    19,310,833
  Weighted average shares
    outstanding -- diluted.................   39,468,867     26,105,844     32,675,657    19,312,634

 
                                        44

 


                                                                                         AS OF
                                                        AS OF JUNE 30, 2005        DECEMBER 31, 2004
                                                    ----------------------------   -----------------
                                                     PRO FORMA       HISTORICAL       HISTORICAL
                                                    ------------    ------------   -----------------
                                                                          
BALANCE SHEET INFORMATION:
  Gross investment in real estate assets..........  $254,436,964    $238,151,964     $151,690,293
  Net investment in real estate...................   251,142,091     234,857,091      150,211,823
  Construction in progress........................    50,529,769      50,529,769       24,318,098
  Cash and cash equivalents.......................   141,578,197      34,357,866       97,543,677
  Loans receivable................................    42,498,111(1)   48,498,111       50,224,069(1)
  Total assets....................................   448,878,440     333,744,392      306,506,063
  Total debt......................................    73,204,167      73,204,167       56,000,000
  Total liabilities...............................    94,760,052      98,946,430       73,777,619
  Total stockholders' equity......................   351,980,888     232,660,462      231,728,444
  Total liabilities and stockholders' equity......   448,878,440     333,744,392      306,506,063

 


                                           FOR THE SIX MONTHS ENDED        FOR THE YEAR ENDED
                                                JUNE 30, 2005               DECEMBER 31, 2004
                                          --------------------------   ---------------------------
                                           PRO FORMA     HISTORICAL     PRO FORMA     HISTORICAL
                                          -----------   ------------   -----------   -------------
                                                                         
OTHER INFORMATION:
  Funds from operations(2)..............  $12,992,782   $  9,756,148   $27,465,586   $   6,054,819
  Cash Flows:
    Provided by operating activities....                   3,468,571                     9,918,898
    Used for investing activities.......                 (80,265,755)                 (195,600,642)
    Provided by financing activities....                  13,611,373                   283,125,421

 
---------------
 
(1) Includes $1.5 million in commitment fees payable to us by Vibra.
 
(2) Funds from operations, or FFO, represents net income (computed in accordance
    with GAAP), excluding gains (or losses) from sales of property, plus real
    estate related depreciation and amortization (excluding amortization of loan
    origination costs) and after adjustments for unconsolidated partnerships and
    joint ventures. Management considers funds from operations a useful
    additional measure of performance for an equity REIT because it facilitates
    an understanding of the operating performance of our properties without
    giving effect to real estate depreciation and amortization, which assumes
    that the value of real estate assets diminishes predictably over time. Since
    real estate values have historically risen or fallen with market conditions,
    we believe that funds from operations provides a meaningful supplemental
    indication of our performance. We compute funds from operations in
    accordance with standards established by the Board of Governors of the
    National Association of Real Estate Investment Trusts, or NAREIT, in its
    March 1995 White Paper (as amended in November 1999 and April 2002), which
    may differ from the methodology for calculating funds from operations
    utilized by other equity REITs and, accordingly, may not be comparable to
    such other REITs. FFO does not represent amounts available for management's
    discretionary use because of needed capital replacement or expansion, debt
    service obligations, or other commitments and uncertainties, nor is it
    indicative of funds available to fund our cash needs, including our ability
    to make distributions. Funds from operations should not be considered as an
    alternative to net income (loss) (computed in accordance with GAAP) as
    indicators of our financial performance or to cash flow from operating
    activities (computed in accordance with GAAP) as an indicator of our
    liquidity.
 
   The following table presents a reconciliation of FFO to net income for the
   six months ended June 30, 2005 and for the year ended December 31, 2004 on an
   actual and pro forma basis.
 


                                                          FOR THE SIX MONTHS ENDED       FOR THE YEAR ENDED
                                                               JUNE 30, 2005             DECEMBER 31, 2004
                                                         --------------------------   ------------------------
                                                          PRO FORMA      HISTORICAL    PRO FORMA    HISTORICAL
                                                         -----------     ----------   -----------   ----------
                                                                                        
FUNDS FROM OPERATIONS:
  Net income...........................................  $10,459,117     $7,939,745   $22,392,775   $4,576,349
  Depreciation and amortization........................    2,533,665      1,816,403     5,072,811    1,478,470
                                                         -----------     ----------   -----------   ----------
  Funds from operations................................  $12,992,782     $9,756,148   $27,465,586   $6,054,819
                                                         ===========     ==========   ===========   ==========

 
                                        45

 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
     We were recently formed and did not commence revenue generating operations
until June 2004. Please see "Risk Factors -- Risks Relating to Our Business and
Growth Strategy" for a discussion of risks relating to our limited operating
history. The following discussion should be read in conjunction with our audited
financial statements and the related notes thereto included elsewhere in this
prospectus.
 
OVERVIEW
 
     We were incorporated under Maryland law on August 27, 2003 primarily for
the purpose of investing in and owning net-leased healthcare facilities. Our
existing tenants are, and our prospective tenants will generally be, hospital
operating companies and other healthcare providers that use substantial real
estate assets in their operations. We offer financing for these operators' real
estate through 100% lease financing and generally seek lease terms of at least
10 years with a series of shorter renewal terms at the option of our tenants; we
also intend to include annual contractual rental rate increases that in the
current market range from 1.5% to 3.0%. Our existing portfolio escalators range
from 2.0% to 2.5%. In addition to the base rent, our leases generally require
our tenants to pay all operating costs and expenses associated with the
facility.
 
     We conduct substantially all of our operations through our operating
partnership. We own all of the membership interests in the sole general partner
of our operating partnership and thereby control the operating partnership. At
present, we also own 100% of the limited partnership interests, although we may
issue units of limited partnership in exchange for interests in healthcare
facilities from time to time in the future. Sellers of healthcare facilities who
receive limited partnership units of our operating partnership in exchange for
interests in their facilities may be able to defer recognition of any gain that
would be recognized in a cash sale until such time that they redeem the
operating partnership units. Upon their election to redeem their units, we may
redeem them either for cash or shares of our common stock on a one-for-one
basis. In addition, we may sell equity interests in subsidiaries of our
operating partnership in connection with the acquisition or development of
facilities.
 

     Whenever we issue shares of our common stock for cash, we are obligated to
contribute any net proceeds we receive from the sale of the stock to our
operating partnership and our operating partnership is, in turn, obligated to
issue an equivalent number of limited partnership units to us. Our operating
partnership distributes the income it generates from its operations to us. In
turn, we expect to distribute a substantial majority of the amounts we receive
from our operating partnership to our stockholders in the form of quarterly cash
distributions. We have elected to be taxed as a REIT for federal tax purposes,
thereby generally avoiding federal and state corporate income taxes on most of
the earnings that we distribute to our stockholders.

 
     We conduct business operations in one segment. We acquire and develop
healthcare facilities and lease the facilities to healthcare operating companies
under long-term net leases. At December 31, 2004 our real estate and loan assets
comprised approximately 49% and 16%, respectively, of our total assets. We do
not expect our loan assets to exceed this level in the future. Our lending
business is important to our overall business strategy for two primary reasons:
(1) it provides opportunities to make income-earning investments that yield
attractive risk-adjusted returns in an industry in which our management has
expertise, and (2) by making debt capital available to certain qualified
operators, we believe we create for our company a competitive advantage over
other buyers of, and financing sources for, healthcare facilities.
 

     We currently own five rehabilitation hospitals and two long-term acute care
hospitals that are leased to affiliates of a single operating company, one
community hospital with an integrated medical office building leased to another
operating company and one long-term acute care hospital leased to another
operating company. We are also developing a community hospital and an adjacent
medical office building that are leased to a single operating company, a women's
hospital with an integrated medical office building that is leased to another
operating company and a community hospital that is leased to another operating
company. In addition, we have entered into a ground sublease with, and an
agreement to provide a construction loan to, a recently organized healthcare
facility operator for the development of a

 
                                        46

 
community hospital on property in which we currently have a ground lease
interest. We expect to acquire the land we are ground leasing after the hospital
has been partially completed. Upon completion of construction, subject to
certain limited conditions, we will purchase the facility for an amount equal to
the cost of construction and lease the facility to the operator. In the event we
do not purchase the facility, the ground sublease will continue and the
construction loan will become due. In that event, we expect to seek to convert
the construction loan to a 15 year term loan secured by the facility. We have
also made and in the future may make loans to our tenants to facilitate the
acquisition of healthcare businesses and for working capital and have made and
from time to time may make construction or mortgage loans to facility owners or
other parties.
 
     Our revenues are derived from rents we earn pursuant to the lease
agreements we have with our tenants and from interest income from loans we make
to our tenants and other facility owners. Our tenants operate in the healthcare
industry, generally providing medical, surgical and rehabilitative care to
patients. The capacity of our tenants to pay our rents and interest is dependent
upon their ability to conduct their operations at profitable levels. We believe
that the business environment of the industry segments in which our tenants
operate in is generally positive for efficient operators. However, our tenants'
operations are subject to economic, regulatory and market conditions that may
affect their profitability. Accordingly, we monitor certain key factors, changes
to which we believe may provide early indications of conditions that may affect
the level of risk in our lease and loan portfolio.
 
     Key factors that we consider in underwriting prospective tenants and in
monitoring the performance of existing tenants include the following:
 
     - the historical and prospective operating margins (measured by a tenant's
       earnings before interest, taxes, depreciation, amortization and facility
       rent) of each tenant and at each facility;
 
     - the ratio of our tenants' operating earnings to facility rent and to
       facility rent plus other fixed costs, including debt costs;
 
     - trends in the source of our tenants' revenue, including the relative mix
       of Medicare, Medicaid/MediCal, commercial insurance, and private pay
       patients;
 
     - the effect of evolving healthcare regulations on our tenants'
       profitability
 
     Certain business factors, in addition to those described above that
directly affect our tenants, will likely materially influence our future results
of operations. These factors include:
 
     - trends in the cost and availability of capital, including market interest
       rates, that our prospective tenants may use for their real estate assets
       instead financing their real estate assets through lease structures;
 
     - unforeseen changes in healthcare regulations that may limit the
       opportunities for physicians to participate in the ownership of
       healthcare providers and healthcare real estate;
 
     - reductions in reimbursements from Medicare, state healthcare programs and
       commercial insurance providers that may reduce our tenants' profitability
       and our lease rates; and
 
     - competition from other financing sources.
 
CRITICAL ACCOUNTING POLICIES
 
     In order to prepare financial statements in conformity with accounting
principles generally accepted in the United States, we must make estimates about
certain types of transactions and account balances. We believe that our
estimates of the amount and timing of lease revenues, credit losses, fair values
and periodic depreciation of our real estate assets, stock compensation expense,
and the effects of any derivative and hedging activities will have significant
effects on our financial statements. Each of these items involves estimates that
require us to make judgments that are subjective in nature. We intend to rely on
our experience, collect historical data and current market data, and develop
relevant assumptions in order to arrive at what we believe to be reasonable
estimates. Under different conditions or assumptions, materially different
amounts could be reported related to the accounting policies described below. In
 
                                        47

 
addition, application of these accounting policies involves the exercise of
judgments on the use of assumptions as to future uncertainties and, as a result,
actual results could materially differ from these estimates. Our accounting
estimates will include the following:
 
     Revenue Recognition.  Our revenues, which are comprised largely of rental
income, include rents that each tenant pays in accordance with the terms of its
respective lease reported on a straight-line basis over the initial term of the
lease. Since some of our leases provide for rental increases at specified
intervals, straight-line basis accounting requires us to record as an asset, and
include in revenues, unbilled rent that we will only receive if the tenant makes
all rent payments required through the expiration of the term of the lease.
Accordingly, our management must determine, in its judgment, to what extent the
unbilled rent receivable applicable to each specific tenant is collectible. We
will review each tenant's unbilled rent receivable on a quarterly basis and take
into consideration the tenant's payment history, the financial condition of the
tenant, business conditions in the industry in which the tenant operates and
economic conditions in the area in which the facility is located. In the event
that the collectibility of unbilled rent with respect to any given tenant is in
doubt, we are required to record an increase in our allowance for uncollectible
accounts or record a direct write-off of the specific rent receivable, which
would have an adverse effect on our net income for the year in which the reserve
is increased or the direct write-off is recorded and would decrease our total
assets and stockholders' equity.
 
     We make loans to our tenants and from time to time may make construction or
mortgage loans to facility owners or other parties. We recognize interest income
on loans as earned based upon the principal amount outstanding. These loans are
generally secured by interests in real estate, receivables, equity interests of
a tenant or corporate and individual guarantees. As with unbilled rent
receivables, our management must also periodically evaluate loans to determine
what amounts may not be collectible. Accordingly, a provision for losses on
loans receivable is recorded when it becomes probable that the loan will not be
collected in full. The provision is an amount which reduces the loan to its
estimated net receivable value based on a determination of the eventual amounts
to be collected either from the debtor or from the collateral, if any. At that
time, we discontinue recording interest income on the loan to the tenant.
 
     Investments in Real Estate.  We record investments in real estate at cost,
and capitalize improvements and replacements when they extend the useful life or
improve the efficiency of the asset. To the extent that we incur costs of
repairs and maintenance, we expense those costs as incurred. We compute
depreciation using the straight-line method over the estimated useful life of 40
years for buildings and improvements, five to seven years for equipment and
fixtures and the shorter of the useful life or the remaining lease term for
tenant improvements and leasehold interests.
 
     We are required to make subjective assessments as to the useful lives of
our facilities for purposes of determining the amount of depreciation expense to
record on an annual basis with respect to our investments in real estate
improvements. These assessments have a direct impact on our net income because,
if we were to shorten the expected useful lives of our investments in real
estate improvements, we would depreciate these investments over fewer years,
resulting in more depreciation expense and lower net income on an annual basis.
 
     We have adopted Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
establishes a single accounting model for the impairment or disposal of
long-lived assets including discontinued operations. SFAS No. 144 requires that
the operations related to facilities that have been sold or that we intend to
sell be presented as discontinued operations in the statement of operations for
all periods presented, and facilities we intend to sell be designated as "held
for sale" on our balance sheet.
 
     When circumstances such as adverse market conditions indicate a possible
impairment of the value of a facility, we will review the recoverability of the
facility's carrying value. The review of recoverability will be based on our
estimate of the future undiscounted cash flows, excluding interest charges,
expected to result from the facility's use and eventual disposition. Our
forecast of these cash flows will consider factors such as expected future
operating income, market and other applicable trends and residual value, as well
 
                                        48

 
as the effects of leasing demand, competition and other factors. If impairment
exists due to the inability to recover the carrying value of a facility, an
impairment loss will be recorded to the extent that the carrying value exceeds
the estimated fair value of the facility. We will be required to make subjective
assessments as to whether there are impairments in the values of our investments
in real estate.
 
     Purchase Price Allocation.  We record above-market and below-market
in-place lease values, if any, for the facilities we own which are based on the
present value (using an interest rate which reflects the risks associated with
the leases acquired) of the difference between (i) the contractual amounts to be
paid pursuant to the in-place leases and (ii) management's estimate of fair
market lease rates for the corresponding in-place leases, measured over a period
equal to the remaining non-cancelable term of the lease. We amortize any
resulting capitalized above-market lease values as a reduction of rental income
over the remaining non-cancelable terms of the respective leases. We amortize
any resulting capitalized below-market lease values (presented in the
accompanying balance sheet as value of assumed lease obligations) as an increase
to rental income over the initial term and any fixed-rate renewal periods in the
respective leases. Because our strategy to a large degree involves the
origination of long term lease arrangements at market rates, we do not expect
the above-market and below-market in-place lease values to be significant for
many of our anticipated transactions.
 
     We measure the aggregate value of other intangible assets to be acquired
based on the difference between (i) the property valued with existing in-place
leases adjusted to market rental rates and (ii) the property valued as if
vacant. Management's estimates of value are expected to be made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis include an estimate
of carrying costs during hypothetical expected lease-up periods considering
current market conditions, and costs to execute similar leases. We also consider
information obtained about each targeted facility as a result of our
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, management also includes real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, which we expect to range primarily from six to 18
months, depending on specific local market conditions. Management also estimates
costs to execute similar leases including leasing commissions, legal and other
related expenses to the extent that such costs are not already incurred in
connection with a new lease origination as part of the transaction.
 
     The total amount of other intangible assets to be acquired, if any, is
further allocated to in-place lease values and customer relationship intangible
values based on management's evaluation of the specific characteristics of each
prospective tenant's lease and our overall relationship with that tenant.
Characteristics to be considered by management in allocating these values
include the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenant's credit quality and expectations of lease renewals, including those
existing under the terms of the lease agreement, among other factors.
 
     We expect to amortize the value of in-place leases, if any, to expense over
the initial term of the respective leases, which we expect to range primarily
from 10 to 15 years. The value of customer relationship intangibles is amortized
to expense over the initial term and any renewal periods in the respective
leases, but in no event will the amortization period for intangible assets
exceed the remaining depreciable life of the building. Should a tenant terminate
its lease, the unamortized portion of the in-place lease value and customer
relationship intangibles would be charged to expense.
 
     Accounting for Derivative Financial Investments and Hedging Activities.  We
expect to account for our derivative and hedging activities, if any, using SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137 and SFAS No. 149, which requires all derivative
instruments to be carried at fair value on the balance sheet.
 
     Derivative instruments designated in a hedge relationship to mitigate
exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. We expect to formally
document all relationships between hedging instruments and hedged items, as well
as
 
                                        49

 
our risk-management objective and strategy for undertaking each hedge
transaction. We plan to review periodically the effectiveness of each hedging
transaction, which involves estimating future cash flows. Cash flow hedges, if
any, will be accounted for by recording the fair value of the derivative
instrument on the balance sheet as either an asset or liability, with a
corresponding amount recorded in other comprehensive income within stockholders'
equity. Amounts will be reclassified from other comprehensive income to the
income statement in the period or periods the hedged forecasted transaction
affects earnings. Derivative instruments designated in a hedge relationship to
mitigate exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges under SFAS No. 133. We are not currently a party to
any derivatives contracts.
 
     Variable Interest Entities.  In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. In
December 2003, the FASB issued a revision to FIN 46, which is termed FIN 46R.
FIN 46R clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements and provides guidance on the identification of
entities for which control is achieved through means other than through voting
rights and how to determine when and which business enterprise should
consolidate such an entity. This model for consolidation applies to an entity in
which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. We periodically evaluate the terms of our
relationships with our tenants and borrowers to determine whether we are
required to consolidate any tenants or borrowers.
 
     Stock Based Compensation.  We currently apply the intrinsic value method to
account for the issuance of stock options under our equity incentive plan in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. In
this regard, we anticipate that a substantial portion of our options will be
granted to individuals who are our officers or directors. Accordingly, because
the grants are expected to be at exercise prices that represent fair value of
the stock at the date of grant, we do not currently record any expense related
to the issuance of these options under the intrinsic value method. If the actual
terms vary from the expected, the impact to our compensation expense could
differ.
 
     In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock Based Compensation."
SFAS No. 123(R) establishes standards for the accounting for transactions in
which an entity exchanges it equity instruments for goods or services. The
Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R)
requires that the fair value of such equity instruments be recognized as expense
in the historical financial statements as services are performed. Prior to SFAS
No. 123(R), only certain pro forma disclosures of fair value were required. SFAS
No. 123(R) becomes effective for public companies with their first annual
reporting period that begins after June 15, 2005. For non-public companies, the
standard becomes effective for their first fiscal year beginning after December
15, 2005. We are currently evaluating the impact of SFAS No. 123(R) on our
financial position and results of operations. However, we do not expect that
SFAS No. 123(R) will have a material effect on our financial position and
results of operations. Our existing equity incentive plan allows for stock-based
awards to be in the form of options, restricted stock, restricted stock units
and deferred stock units. The impact of SFAS No. 123(R) will also be affected by
the types of stock-based awards that our board of directors chooses to grant.
 
                                        50

 
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
     The following table summarizes known material contractual obligations
associated with investing and financing activities as of December 31, 2004:
 


                                                LESS THAN        2-3         4-5        AFTER
CONTRACTUAL OBLIGATIONS                          1 YEAR         YEARS       YEARS      5 YEARS        TOTAL
-----------------------                        -----------   -----------   --------   ----------   -----------
                                                                                    
Construction contracts.......................  $32,077,264   $        --   $     --   $       --   $32,077,264
Operating lease commitments..................      275,106       685,728    712,080    2,200,532     3,873,446
Long-term debt...............................    2,566,663    53,433,337         --           --    56,000,000
                                               -----------   -----------   --------   ----------   -----------
  Total:.....................................  $34,919,033   $54,119,065   $712,080   $2,200,532   $91,950,710
                                               ===========   ===========   ========   ==========   ===========

 
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
 
     Investors and analysts following the real estate industry utilize funds
from operations, or FFO, as a supplemental performance measure. While we believe
net income available to common stockholders as defined by GAAP is the most
appropriate measure, our management considers FFO an appropriate supplemental
measure given its wide use by and relevance to investors and analysts. FFO,
reflecting the assumption that real estate asset values rise or fall with market
conditions, principally adjusts for the effects of GAAP depreciation and
amortization of real estate assets, which assume that the value of real estate
diminishes predictably over time.
 
     As defined by the National Association of Real Estate Investment Trusts, or
NAREIT, FFO represents net income (loss) (computed in accordance with GAAP),
excluding gains (losses) on sales of real estate, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. We compute FFO in accordance with the NAREIT
definition. FFO should not be viewed as a substitute measure of our company's
operating performance since it does not reflect either depreciation and
amortization costs or the level of capital expenditures and leasing costs
necessary to maintain the operating performance of our properties, which are
significant economic costs that could materially impact our results of
operations.
 
     The following table presents a reconciliation of FFO to net income for the
six months ended June 30, 2005 and for the year ended December 31, 2004 on an
actual and pro forma basis.
 


                                     FOR THE SIX MONTHS ENDED      FOR THE YEAR ENDED
                                          JUNE 30, 2005            DECEMBER 31, 2004
                                     ------------------------   ------------------------
                                      PRO FORMA    HISTORICAL    PRO FORMA    HISTORICAL
                                     -----------   ----------   -----------   ----------
                                                                  
Funds from operations:
  Net income......................   $10,459,117   $7,939,745   $22,392,775   $4,576,349
  Depreciation and amortization...     2,533,665    1,816,403     5,072,811    1,478,470
                                     -----------   ----------   -----------   ----------
  Funds from operations...........   $12,992,782   $9,756,148   $27,465,586   $6,054,819
                                     ===========   ==========   ===========   ==========

 
RESULTS OF OPERATIONS
 
     The results of our historical operations are generated substantially by
investments we have made since we completed our private offering and raised
approximately $233.0 million in common equity in the second quarter of 2004. We
are also in the process of developing additional healthcare facilities that have
not yet begun generating revenue, and we expect to acquire additional existing
healthcare facilities in the foreseeable future. Accordingly, we expect that
future results of operations will vary materially from our historical results.
 
  THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
 
     Net income for the three months ended June 30, 2005 was $4,379,811 compared
to a net loss of $1,069,892 in the three months ended June 30, 2004. We
completed our private offering of common equity early in the second quarter of
2004, prior to which we had no revenues and limited operations. At June 30, 2004
we had eight employees, no operating properties and one development property in
the early stages of
 
                                        51

 
construction. Our activities in the second quarter of 2004 were concentrated in
evaluating potential acquisitions and negotiating the purchase of properties.
Accordingly, we do not believe that comparison of 2005's second quarter to the
same quarter in 2004 provides significant relevant information about possible
future trends or results of operations.
 
     Revenue of $7,241,777 in the three months ended June 30, 2005 was comprised
of rents (85%) and fee and interest income from loans (15%). All of this revenue
was derived from properties that we acquired since July 1, 2004. During this
three month period, we received percentage rents of approximately $604,000.
These percentage rents occurred due to an increase in patient census at the
Vibra Facilities from the first quarter of 2005 to the second quarter. Also, the
Desert Valley -- Victorville facility, which we acquired on February 28, 2005,
provided a full three months of rent revenue. Interest income from loans was
affected due to Vibra paying down approximately $7.3 million of principal, Vibra
accounted for 87% of our gross revenues during this period. We intend to focus
our acquisition efforts to achieve a greater diversity of tenants in the
near-term and foreseeable future.
 
     Depreciation and amortization during in the three months ended June 30,
2005 was attributable to properties that we acquired since July 1, 2004.
 
     General and administrative expenses in the three months ended June 30,
2005, which totaled $1,415,067, were comprised primarily of compensation of
approximately $1.0 million, with the balance made up primarily of legal, office
and other administrative expenses.
 
     Other income of $358,214 in the three months ended June 30, 2005 consisted
of interest and dividends, primarily from the temporary investment of the net
proceeds of our April 2004 private placement and proceeds from debt.
 
     Interest expense in the three months ended June 30, 2005 was $831,117.
Capitalized interest of $608,378 was recorded in the three months, primarily on
the West Houston medical office building and community hospital construction
projects.
 
  SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004.
 
     Net income for the six months ended June 30, 2005 was $7,939,745 compared
to a net loss of $1,563,618 in the six months ended June 30, 2004.
 
     At June 30, 2004, we had eight employees, no operating properties and one
development property in the early stages of construction. Our activities in the
first six months of 2004 were primarily evaluating potential acquisitions and
negotiating the purchase of properties. Accordingly, we do not believe that
comparison of the first six months of 2005 to the same period in 2004 provides
significant relevant information about possible future trends or results of
operations.
 
     Revenue of $13,722,305 in the six months ended June 30, 2005 was comprised
of rents (84%) and fee and interest income from loans (16%), all of which was
derived from investments made since July 1, 2004. During this six month period,
we received percentage rents of approximately $999,000 from Vibra. Our receipt
of percentage rents is dependent upon that tenant reaching certain revenue
levels, and there is no assurance that our tenant will continue to achieve this
revenue level. Our largest tenant, Vibra, accounted for 87% of our revenues
during this period. We intend to focus our acquisition efforts to achieve a
greater diversity of tenants in the near-term and foreseeable future.
 
     Depreciation and amortization in the six months ended June 30, 2005 was
attributable to properties that we acquired since July 1, 2004.
 
     General and administrative expenses in the six months ended June 30, 2005,
which totaled $3,165,877, were comprised primarily of compensation of
approximately $1.8 million, with the balance made up primarily of legal and
other professional fees, occupancy costs for our headquarters office and other
administrative expenses.
 
                                        52

 
     Other income of $741,986 in the six months ended June 30, 2005 consisted of
interest and dividends, primarily from the temporary investment of the net
proceeds of our April 2004 private placement and proceeds from long-term debt.
 
     Interest expense in the six months ended in June 30, 2005 was $1,542,266,
net of capitalized interest. Capitalized interest of approximately $1,003,779
was recorded in the six months primarily on the West Houston medical office
building and community hospital construction projects.
 
  YEAR ENDED DECEMBER 31, 2004
 
     Net income for the year ended December 31, 2004 was $4,576,349. Revenue,
which was $10,893,459, was comprised primarily of rents (79%) and interest from
loans (21%). Interest and dividends, primarily from the temporary investment of
the net proceeds of our April 2004 private placement, totaled $930,260. We
completed our private placement of common stock in April 2004 and received
proceeds, net of offering costs and fees, of approximately $233.5 million.
Expenses during the year, which totalled $7,214,601, were comprised primarily of
compensation of $3,700,442, depreciation and amortization of $1,517,530, other
general and administrative expenses of $1,336,897 and approximately $585,345 of
costs associated with unsuccessful acquisitions. These costs, which consisted
primarily of legal fees, costs of third party reports and travel, related to a
portfolio of five facilities that were subject to a letter of intent with a
prospective operator. During the second quarter of 2004, we declined to pursue
the acquisition.
 
  INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003
 
     Our net loss for the period from inception (August 27, 2003) through
December 31, 2003 was $1,023,276. Included in this loss is approximately
$423,000 in accrued expenses that were incurred by Medical Properties Trust, LLC
prior to August 27, 2003 and assumed by us in connection with our formation.
These constitute all of the expenses of this company. We had no revenues during
this period and substantially all of the expenses that comprised our net loss
from inception through December 31, 2003 are related to start-up activities,
including business development, identification of acquisition possibilities,
legal, accounting, and consulting. We do not consider the results of our
operations in this period to be meaningful with respect to an analysis of our
expected operations.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Our principal liquidity needs are to (i) provide for normal operating
expenses, (ii) fund the costs of acquiring and developing facilities, and (iii)
make distributions to our stockholders. We believe that these needs will be
partially satisfied by cash on hand and cash flows provided by operating and
financing activities. In addition, we expect that our primary source of external
financing for the near future will be debt secured by our real estate assets and
additional offerings of equity.
 

     As of October 7, 2005, we had approximately $97.0 million in cash and
temporary liquid investments. We expect to close a $100.0 million secured
revolving credit facility which will replace our existing $75.0 million term
loan (with a present balance of approximately $40.1 million) thereby providing
us with approximately $60.0 million in additional borrowing availability. In
addition, we have approximately $43.0 million available under a
construction/term facility with a bank. We expect to use these resources over
the next 12 months for completion of development projects currently under
construction and acquisition of additional existing facilities and for
development projects.

 
                                        53

 

     As of June 30, 2005, we have definitive agreements to fund the following
development projects and acquisitions (in millions):

 



                                                              ORIGINAL               REMAINING
                                                             COMMITMENT   EXPENDED   COMMITMENT
                                                             ----------   --------   ----------
                                                                            
North Cypress community hospital...........................    $ 64.0      $ 2.1       $ 61.9
West Houston community hospital and medical office
  building.................................................      63.9       45.8         18.1
Bucks County women's hospital and medical office
  building.................................................      38.0        2.2         35.8
Monroe community hospital..................................      35.5        0.0         35.5
                                                               ------      -----       ------
Total......................................................    $201.4      $50.1       $151.3
                                                               ======      =====       ======


 

     We have letters of commitment or other arrangements to acquire or develop
additional facilities with an aggregate cost of $57.5 million. These
transactions are subject to various contingencies that must be satisfied before
definitive agreements could be executed. Accordingly, there is no assurance that
these transactions will be consummated.

 
     We intend to utilize various types of debt to finance a portion of the
costs to complete our proposed development facilities and acquire and develop
additional facilities. We expect this debt will include long-term, fixed-rate
mortgage loans, variable-rate term loans, secured revolving lines of credit and
construction financing facilities. We believe we will be able generally to
finance up to approximately 50-60% of the cost of our healthcare facilities;
however, there is no assurance that we will be able to obtain or maintain those
levels of debt on our portfolio of real estate assets on favorable terms in the
future. Our ratio of debt to stockholders' equity at June 30, 2005 was 32% as
compared to 24% at December 31, 2004.
 
  INVESTING ACTIVITIES
 
     In the first six months of 2005 we acquired three new healthcare facilities
for a total cost of $64.5 million. Our cash outlays for these properties totaled
$56.5 million, which is net of contingent payments and facility improvement
reserves. We also invested $26.4 million in our developments, primarily the West
Houston community hospital and medical office building. In addition, we made
loan advances, net of contingent payments, of $4.9 million. In February 2005,
Vibra reduced the principal amount of its loans from us by $7.7 million.
 
DISTRIBUTION POLICY
 
     We expect to qualify as a REIT for federal income tax purposes and have
elected to be taxed as a REIT commencing with our taxable year that began on
April 6, 2004 and ended on December 31, 2004. To qualify as a REIT, we must meet
a number of organizational and operational requirements, including a requirement
that we distribute at least 90% of our REIT taxable income, excluding net
capital gain, to our stockholders. It is our current intention to comply with
these requirements, elect REIT status and maintain such status going forward.
See "United States Federal Income Tax Considerations."
 
     The table below is a summary of our distributions.
 


DECLARATION DATE      RECORD DATE       DATE OF DISTRIBUTION   DISTRIBUTION PER SHARE
----------------      -----------       --------------------   ----------------------
                                                      
 August 18, 2005   September 15, 2005   September 29, 2005             $0.17
  May 19, 2005       June 20, 2005         July 14, 2005               $0.16
  March 4, 2005      March 16, 2005       April 15, 2005               $0.11
November 11, 2004  December 16, 2004     January 11, 2005              $0.11
September 2, 2004  September 16, 2004    October 11, 2004              $0.10

 
     The two distributions declared in 2004, aggregating $0.21 per share, were
comprised of approximately $0.13 per share in ordinary income and $0.08 per
share in return of capital. For federal income tax purposes, our distributions
were limited in 2004 to our tax basis earnings and profits of $0.13 per share.
Accordingly, for tax purposes, $0.08 per share of the distributions we paid in
January 2005 will be treated
 
                                        54

 
as a 2005 distribution; the tax character of this amount, along with that of the
April 15, 2005, July 14, 2005 and September 29, 2005 distributions, will be
determined subsequent to determination of our 2005 taxable income.
 
     We intend to pay to our stockholders, within the time periods prescribed by
the Code, all or substantially all of our annual taxable income, including
taxable gains from the sale of real estate and recognized gains on the sale of
securities. It is our policy to make sufficient cash distributions to
stockholders in order for us to maintain our status as a REIT under the Code and
to avoid corporate income and excise tax on undistributed income.
 
INFLATION
 
     Our leases contain provisions designed to mitigate the adverse impact of
inflation. These provisions generally increase rental rates during the terms of
the leases either at fixed rates or indexed escalations (based on the CPI or
other measures). In addition, all of our existing leases, and we intend that
most of our new leases will, require the tenant to pay the operating expenses of
the facility, including common area maintenance costs, real estate taxes and
insurance. This may reduce our exposure to increases in costs and operating
expenses resulting from inflation. However, if inflation rates exceed the
contractual rental increases, our results of operations may be adversely
affected, and inflation may also adversely impact our revenue from any leases
that do not contain escalation provisions.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Market risk includes risks that arise from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices and other
market changes that affect market sensitive instruments. In pursuing our
business plan, we expect that the primary market risk to which we will be
exposed is interest rate risk.
 
     We may be exposed to the effects of interest rate changes primarily as a
result of long-term debt used to maintain liquidity and to fund expansion of our
portfolio and operations. Our interest rate risk-management objectives will be
to limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. To achieve our objectives, we will borrow
primarily at fixed rates or variable rates with the lowest margins available
and, in some cases, with the ability to convert variable rates to fixed rates.
We may also enter into derivative financial instruments such as interest rate
swaps and caps in order to mitigate our interest rate risk on a related
financial instrument. We do not intend to enter into derivative transactions for
speculative purposes.
 
     In addition to changes in interest rates, the value of our facilities will
be subject to fluctuations based on changes in local and regional economic
conditions and changes in the ability of our tenants to generate profits, all of
which may affect our ability to refinance our debt if necessary.
 
                                        55

 
                                  OUR BUSINESS
 
OUR COMPANY
 
     We are a self-advised real estate company that acquires, develops and
leases healthcare facilities providing state-of-the-art healthcare services. We
lease our facilities to healthcare operators pursuant to long-term net-leases,
which require the tenant to bear most of the costs associated with the property.
From time to time, we also make loans to our tenants. We believe that the United
States healthcare delivery system is becoming decentralized and is evolving away
from the traditional "one stop," large-scale acute care hospital. We believe
that this change is the result of a number of trends, including increasing
specialization and technological innovation and the desire of both physicians
and patients to utilize more convenient facilities. We also believe that
demographic trends in the United States, including in particular an aging
population, will result in continued growth in the demand for healthcare
services, which in turn will lead to an increasing need for a greater supply of
modern healthcare facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their capital for
investment in operations and new technologies rather than investing in real
estate and, therefore, increasingly prefer to lease, rather than own, their
facilities. Given these trends and the size, scope and growth of this dynamic
industry, we believe there are significant opportunities to acquire and develop
net-leased healthcare facilities that are integral components of local
healthcare delivery systems.
 
     Our strategy is to lease the facilities that we acquire or develop to
experienced healthcare operators pursuant to long-term net-leases. We focus on
acquiring and developing rehabilitation hospitals, long-term acute care
hospitals, ambulatory surgery centers, cancer hospitals, women's and children's
hospitals, skilled nursing facilities and regional and community hospitals, as
well as other specialized single-discipline facilities and ancillary facilities.
We believe that these types of facilities will capture an increasing share of
expenditures for healthcare services. We believe that our strategy for
acquisition and development of these types of net-leased facilities, which
generally require a physician's order for patient admission, distinguish us as a
unique investment alternative among REITs.
 
     Our management team has extensive experience in acquiring, owning,
developing, managing and leasing healthcare facilities; managing investments in
healthcare facilities; acquiring healthcare companies; and managing real estate
companies. Our management team also has substantial experience in healthcare
operations and administration, which includes many years of service in executive
positions for hospitals and other healthcare providers, as well as in physician
practice management and hospital/physician relations. Therefore, in addition to
understanding investment characteristics and risk levels typically important to
real estate investors, our management understands the changing healthcare
delivery environment, including changes in healthcare regulations, reimbursement
methods and patient demographics, as well as the technological innovations and
other advances in healthcare delivery generally. We believe that this experience
gives us the specialized knowledge necessary to select attractively-located
net-leased facilities, underwrite our tenants, analyze facility-level operations
and understand the issues and potential problems that may affect the healthcare
industry generally and the tenant service area and facility in particular. We
believe that our management's experience in healthcare operations and real
estate management and finance will enable us to take advantage of numerous
attractive opportunities to acquire, develop and lease healthcare facilities.
 

     We completed a private placement of our common stock in April 2004 in which
we raised net proceeds of approximately $233.5 million. Shortly after completion
of our private placement, we began to acquire our current portfolio of 14
facilities, consisting of nine facilities that are in operation and five
facilities that are under development. Five of the facilities that are in
operation are rehabilitation hospitals, three are long-term acute care hospitals
and one is a community hospital with an integrated medical office building. Two
of the facilities under development are a community hospital and an adjacent
medical office building. Our third facility under development is a women's
hospital with an integrated medical office building. Our fourth facility under
development is a community hospital. With respect to our fifth facility under
development, we have entered into a ground sublease with, and an agreement to
provide a construction loan to, North Cypress for the development of a community
hospital. The facility will be

 
                                        56

 
developed on property in which we currently have a ground lease interest. We
expect to acquire the land we are ground leasing after the hospital has been
partially completed. Upon completion of construction, subject to certain limited
conditions, we will purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a 15 year lease term. In
the event we do not purchase the facility, the ground sublease will continue and
the construction loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan secured by the facility.
 
     We completed an initial public offering of our common stock in July 2005 in
which, with the overallotment option that was exercised in August 2005, we
raised net proceeds of approximately $125.7 million. With the net proceeds of
our initial public offering, along with our available cash and cash equivalents,
we intend to expand our portfolio of facilities by acquiring or developing
additional net-leased healthcare facilities.
 
     We employ leverage in our capital structure in amounts determined from time
to time by our board of directors. At present, we intend to limit our debt to
approximately 50-60% of the aggregate costs of our facilities, although we may
temporarily exceed those levels from time to time. We expect our borrowings to
be a combination of long-term, fixed-rate, non-recourse mortgage loans,
variable-rate secured term and revolving credit facilities, and other fixed and
variable-rate short to medium-term loans.
 

     In December 2004 we borrowed $75.0 million from Merrill Lynch under a loan
agreement which has a term of three years. We have used a portion of the loan
proceeds for acquisition of our current portfolio of facilities and plan to use
additional loan proceeds for acquisition and development of additional
facilities and other working capital needs. The loan bears interest at one month
LIBOR (3.94% at October 11, 2005) plus 300 basis points. We had $74.1 million
outstanding under this loan as of March 31, 2005. The loan is secured by our
interests in the Vibra Facilities. The loan with Merrill Lynch includes
financial covenants requiring us to meet an interest coverage ratio (ratio of
our earnings before interest, taxes, depreciation and amortization to interest
expense) of 2 to 1, a fixed charge coverage ratio (ratio of earnings before
interest, taxes, depreciation and amortization to the sum of total debt service,
assumed capital expenditures pertaining to the Vibra Facilities, income taxes
and preferred dividends) greater than 1.65 to 1, a net debt to total asset
valuation ratio (ratio of total net debt to the product of nine and the sum of
net income, interest expense, depreciation and amortization minus management
fees not exceeding 1% of net revenue and $300 per licensed bed per annum) not
greater than 70%, and, for each Vibra Facility, a base rent coverage ratio
(ratio of earnings of the applicable lessee of the Vibra Facility before
interest, taxes, depreciation, amortization, rent and management fees to base
rent payable by the lessee) equal to or greater than 1.25 to 1 and to maintain
minimum tangible net worth of at least $200 million. As of the date of this
prospectus, we are in compliance with all material financial covenants under our
loan with Merrill Lynch.

 
     We have executed a term sheet with Merrill Lynch Capital providing for a
senior secured revolving credit facility of up to $100.0 million with a term of
four years, with one 12-month extension option, to refinance the outstanding
amount under our existing loan agreement with Merrill Lynch Capital and for
general corporate purposes. During the term of the loan, we will have the right
to increase the amount available under the facility by an amount up to $75.0
million, subject to no event of default continuing or occurring at the time of
such increase. Merrill Lynch will syndicate that increase in the amount to be
available under the facility on a best efforts basis, and no lender will be
required to increase its commitment to facilitate the increase in the amount
available under the facility.
 
     The facility will initially be secured by our interests in the Vibra
Facilities, or the borrowing base properties. The maximum availability under the
facility will be equal to 65% of the collateral value of the borrowing base
properties. The facility will bear interest at one month LIBOR plus up to 275
basis points depending on the amount of the facility leveraged. We expect the
facility with Merrill Lynch to include financial covenants requiring us to
maintain a maximum total leverage ratio (ratio of consolidated indebtedness to
gross asset value) of 65%, a minimum consolidated fixed charge coverage ratio of
1.65 to 1 and to maintain minimum tangible net worth equal to $200.0 million
plus 75% of net proceeds from any additional equity issuances. Execution of this
credit facility is subject to Merrill Lynch's underwriting and
 
                                        57

 
credit approval and completion of acceptable legal documentation. Accordingly,
there is no assurance that we will enter into this facility on these terms, or
at all.
 
     We have also entered into construction loan agreements with Colonial Bank
pursuant to which we can borrow up to $43.4 million to fund construction costs
for our West Houston Facilities. Each construction loan has a term of 18 months
and an option on our part to convert the loan to a 30-month term loan upon
completion of construction of the West Houston Facility securing that loan. The
construction loans are secured by mortgages on the West Houston Facilities, as
well as assignments of rents and leases on those facilities. The terms of the
construction loan agreements prevent us from allowing the net operating income
of the facility used as collateral for any calendar quarter to be less than 1.25
times the principal and interest payments then due and payable under the
promissory note for the designated period until the loan is paid in full. In the
event that our net operating income falls below the minimum debt service
requirement, we must prepay a portion of the principal balance of the promissory
note so that the debt service requirement is satisfied and maintained within 10
days of our non-compliance. The construction loans bear interest at the one
month LIBOR plus 225 basis points during the construction period and one month
LIBOR plus 250 basis points thereafter. The Colonial Bank loans are
cross-defaulted. As of the date of this prospectus, we have made no borrowings
under the Colonial Bank loans.
 
     We believe that we qualify as a REIT for federal income tax purposes and
have elected to be taxed as a REIT under the federal income tax laws commencing
with our taxable year that began on April 6, 2004 and ended on December 31,
2004.
 
MARKET OPPORTUNITY
 
     According to the United States Department of Commerce, Bureau of Economic
Analysis, healthcare is one of the largest industries in the United States, and
was responsible for approximately 15.3% of United States gross domestic product
in 2003. Healthcare spending has consistently grown at rates greater than
overall spending growth and inflation. As the chart below reflects, healthcare
expenditures are projected to increase by more than 7% in 2004 and 2005 to $1.8
trillion and $1.9 trillion, respectively, and are expected to reach $3.1
trillion by 2012.
 
                                    (GRAPH)
 
                                        58

 
     We believe that the fundamental reasons for this growth in the demand for
healthcare services include the aging and growth of the United States
population, the advances in medical technology and treatments, and the increase
in life expectancy. As illustrated by the chart below, the projected compound
annual growth rate (or CAGR), from 2000 to 2030 of the population of senior
citizens is three times the rate projected for the total United States
population. This demographic trend is projected to result in an increase in the
percentage of United States citizens who are age 65 or older from 12.4% in 2000
to 19.6% in 2030.
 
                                    (GRAPH)
Source: United States Bureau of the Census
 
     To satisfy this growing demand for healthcare services, there is a
significant amount of new construction of healthcare facilities. In 2003 alone,
$24.5 billion was spent on the construction of healthcare facilities, according
to CMS. This represented more than a 9% increase over the $22.4 billion in
healthcare construction spending for 2002. The following chart reflects the
growth and expected growth in healthcare construction expenditures over the
period that began in 1990 and ends in 2012:
 
                                    (GRAPH)
 
     We believe that the United States healthcare delivery system is evolving
away from reliance on the traditional "one-stop," large-scale acute care
hospital to one that relies on specialty hospitals and healthcare facilities
that focus on single disciplines. We believe that there will be an increasing
demand for more accessible, specialized and technologically-advanced healthcare
delivery services as the population grows and ages. We own and have targeted for
acquisition and development net-leased healthcare facilities
 
                                        59

 
providing state-of-the-art healthcare services because we believe these types of
facilities represent the future of healthcare delivery.
 
     We believe that United States healthcare operators are in the early stages
of a long-term evolution from a model that favors ownership of healthcare
facilities to one that favors long-term net leasing of these facilities. We see
two primary reasons for this:
 
     - First, in our experience, financial arrangements such as bond financing
       gave non-profit healthcare providers access to inexpensive capital,
       usually at 100% of the building cost. However, budget constraints on
       local governments and tighter underwriting standards have greatly reduced
       the availability of this very inexpensive capital.
 
     - Second, in our experience, healthcare providers were reimbursed on
       cost-based reimbursement plans (calculated in part by reference to a
       provider's total cost in plant and equipment) which provided no incentive
       for healthcare providers to make efficient use of their capital. With the
       evolution of the prospective payment reimbursement system, which
       reimburses healthcare providers for specific procedures or diagnoses and
       thus rewards the most efficient providers, healthcare providers are no
       longer assured of returns on investments in non-revenue producing assets
       such as the real estate where they operate. Accordingly, in recent years,
       healthcare providers have begun to convert their owned facilities to
       long-term lease arrangements thereby accessing substantial amounts of
       previously unproductive capital to invest in high margin operations and
       assets.
 
     In summary, the following market trends have shaped our investment
strategy:
 
     - Decentralization:  We believe that healthcare services are increasingly
       delivered through smaller, more accessible facilities that are designed
       for specific treatments and medical conditions and that are located near
       physicians and their patients. Based upon our experience, more healthcare
       services are delivered in specialized facilities than in acute care
       hospitals.
 
     - Specialization:  In our experience, the percentage of physicians and
       other healthcare professionals who practice in a recognized specialty or
       subspecialty has been increasing for many years. We believe that this
       creates opportunities for development of additional specialized
       healthcare facilities as advances in technologies and recognition of new
       practice specialties result in new treatments for difficult medical
       conditions.
 
     - Convenient Patient Care:  We believe that healthcare service providers
       are increasingly seeking to provide specific services in a single
       location for the convenience of both patients and physicians. These
       single-discipline centers are primarily located in suburban areas, near
       patients and physicians, as opposed to the traditional urban hospital
       setting.
 
     - Aging Population:  We believe that demographic trends in the United
       States, including in particular an aging population, will result in
       continued growth in the demand for healthcare services, which in turn
       will lead to an increasing need for a greater supply of modern healthcare
       facilities.
 
     - Use of Capital:  We believe that healthcare operators increasingly prefer
       to conserve their capital for investment in their operations and for new
       technologies rather than investing it in real estate.
 
OUR TARGET FACILITIES
 
     The market for healthcare real estate is extensive and includes real estate
owned by a variety of healthcare operators. We focus on acquiring and developing
those net-leased facilities that are specifically designed to reflect the latest
trends in healthcare delivery methods. These facilities include:
 
     - Rehabilitation Hospitals:  Rehabilitation hospitals provide inpatient and
       outpatient rehabilitation services for patients recovering from multiple
       traumatic injuries, organ transplants, amputations, cardiovascular
       surgery, strokes, and complex neurological, orthopedic, and other
       conditions. In addition to Medicare certified rehabilitation beds,
       rehabilitation hospitals may also operate
 
                                        60

 
       Medicare certified skilled nursing, psychiatric, long-term, or acute care
       beds. These hospitals are often the best medical alternative to
       traditional acute care hospitals where under the Medicare prospective
       payment system there is pressure to discharge patients after relatively
       short stays.
 
     - Long-term Acute Care Hospitals:  Long-term acute care hospitals focus on
       extended hospital care, generally at least 25 days, for the
       medically-complex patient. Long-term acute care hospitals have arisen
       from a need to provide care to patients in acute care settings, including
       daily physician observation and treatment, before they are able to move
       to a rehabilitation hospital or return home. These facilities are
       reimbursed in a manner more appropriate for a longer length of stay than
       is typical for an acute care hospital.
 
     - Regional and Community Hospitals:  We define regional and community
       hospitals as general medical/surgical hospitals whose practicing
       physicians generally serve a market specific area, whether urban,
       suburban or rural. We intend to limit our ownership of these facilities
       to those with market, ownership, competitive and technological
       characteristics that provide barriers to entry for potential competitors.
 
     - Women's and Children's Hospitals:  These hospitals serve the specialized
       areas of obstetrics and gynecology, other women's healthcare needs,
       neonatology and pediatrics. We anticipate substantial development of
       facilities designed to meet the needs of women and children and their
       physicians as a result of the decentralization and specialization trends
       described above.
 
     - Ambulatory Surgery Centers:  Ambulatory surgery centers are freestanding
       facilities designed to allow patients to have outpatient surgery, spend a
       short time recovering at the center, then return home to complete their
       recoveries. Ambulatory surgery centers offer a lower cost alternative to
       general hospitals for many surgical procedures in an environment that is
       more convenient for both patients and physicians. Outpatient procedures
       commonly performed include those related to gastrointestinal, general
       surgery, plastic surgery, ear, nose and throat/audiology, as well as
       orthopedics and sports medicine.
 
     - Other Single-Discipline Facilities:  The decentralization and
       specialization trends in the healthcare industry are also creating
       demands and opportunities for physicians to practice in hospital
       facilities in which the design, layout and medical equipment are
       specifically developed, and healthcare professional staff are educated,
       for medical specialties. These facilities include heart hospitals,
       ophthalmology centers, orthopedic hospitals and cancer centers.
 
     - Medical Office Buildings:  Medical office buildings are office and clinic
       facilities occupied and used by physicians and other healthcare providers
       in the provision of outpatient healthcare services to their patients. The
       medical office buildings that we target generally are or will be
       master-leased and adjacent to or integrated with our other targeted
       healthcare facilities.
 
     - Skilled Nursing Facilities:  Skilled nursing facilities are healthcare
       facilities that generally provide more comprehensive services than
       assisted living or residential care homes. They are primarily engaged in
       providing skilled nursing care for patients who require medical or
       nursing care or rehabilitation services. Typically these services involve
       managing complex and serious medical problems such as wound care, coma
       care or intravenous therapy. They offer both short and long-term care
       options for patients with serious illness and medical conditions. Skilled
       nursing facilities also provide rehabilitation services that are
       typically utilized on a short-term basis after hospitalization for injury
       or illness.
 
UNDERWRITING PROCESS
 
     Our real estate and loan underwriting process focuses on healthcare
operations and real estate investment. This process is described in a written
policy that requires, among other things, completion of specific elements of due
diligence at the appropriate stages, including appraisals, engineering
evaluations and environmental assessments, all provided by qualified and
independent third parties. All of our executive officers are involved in the
acquisition and due diligence process.
 
                                        61

 
     Our acquisition and development selection process includes a comprehensive
analysis of the targeted healthcare facility's profitability, financial trends
in revenues and expenses, barriers to competition, the need in the market for
the type of healthcare services provided by the facility, the strength of the
location and the underlying value of the facility, as well as the financial
strength and experience of the prospective tenant and the tenant's management
team. We also analyze the operating history of the specific facility, including
the facility's earnings, cash flow, occupancy and patient and payor mix, in
order to evaluate its financial and operating strength.
 
     When we identify an attractive acquisition or development opportunity based
on historical operations and market conditions, we determine the financial value
of a potential long-term net-lease arrangement based on our target long-term
net-lease capitalization rates, which currently range from 9.5% to 11%, and
fixed charge coverage ratios. We compare that financial value to the replacement
costs that we estimate by consulting with major healthcare construction
contractors, engaging construction engineers or facility assessment consultants
as appropriate, and reviewing recent cost studies. In addition, our due
diligence process includes obtaining and evaluating title, environmental and
other customary third-party reports. In certain instances we have acquired or
may acquire a facility from a tenant or proposed tenant at a purchase price in
excess of what our tenant or proposed tenant recently paid or expects to pay for
that same facility. The investment committee of our board of directors has the
authority to approve acquisitions or developments of facilities that exceed
$10.0 million.
 
     We seek to build tenant relationships with healthcare operators that we
believe are positioned to prosper in the changing healthcare environment. We
seek tenant relationships with operators who, based on our financial and
operating analyses, have demonstrated the ability to manage in good and bad
economic conditions. In certain cases, we lend funds to prospective tenants to
assist them with their acquisition of the operations at the facilities that we
intend to acquire and lease to them and for initial working capital needs. See
"Our Portfolio -- Our Current Portfolio of Facilities." In these instances,
where feasible and in compliance with applicable healthcare laws and
regulations, we seek to obtain percentage rents based on the prospective
tenant's revenues in addition to our base rent. Through our detailed
underwriting of healthcare operations and real estate, we expect to deliver
attractive risk-adjusted returns to our stockholders.
 
ASSET MANAGEMENT
 
     We actively monitor our facilities, including reviewing periodic financial
reporting and operating data, as well as visiting each facility and meeting with
the management of our tenants on a regular basis. Integral to our asset
management philosophy is our desire to build long-term relationships with the
tenants and, accordingly, we have developed a partnering approach which we
believe results in the tenant viewing us as a member of its team. We understand
that in order to maximize the value of our investments, our tenants must
prosper. Therefore, we expect to work closely with our tenants throughout the
terms of our leases in order to foster a long-term working relationship and to
maximize the possibility of new business opportunities. For example, we and our
prospective tenants typically conduct due diligence in a coordinated manner and
share with each other the results of our respective due diligence
investigations. During the lease term, we conduct joint evaluations of local
facility operations and participate in discussions about strategic plans that
may ultimately require our approval pursuant to the terms of our lease
agreements. Our chief executive officer, chief financial officer and chief
operating officer also communicate frequently with their counterparts at our
tenants in order to maintain knowledge about changing regulatory and business
conditions. We believe this knowledge equips us to anticipate changes in our
tenants' operations in sufficient time to strategically and financially plan
for, rather than react to, changing conditions.
 
     In addition to our ongoing analyses of our tenants' operations, our
management team actively monitors and researches each healthcare segment in
which we own and lease facilities in order to help us recognize changing
economic, market and regulatory conditions. Our senior management is not only
involved in the underwriting of each asset upon acquisition or development, but
is also involved in the asset management process during the entire period in
which we own the facility.
 
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OUR FORMATION TRANSACTIONS
 
     The following is a summary of our formation transactions:
 
     - We were formed as a Maryland corporation on August 27, 2003 to succeed to
       the business of Medical Properties Trust, LLC, a Delaware limited
       liability company, which was formed by certain of our founders in
       December 2002. In connection with our formation, we issued our founders
       1,630,435 shares of our common stock in exchange for nominal cash
       consideration, the membership interests of Medical Properties Trust, LLC
       were transferred to us and Medical Properties Trust, LLC became our
       wholly-owned subsidiary. Upon its formation in September 2003, our
       operating partnership assumed certain obligations of Medical Properties
       Trust, LLC. Upon completion of our private placement in April 2004,
       1,108,527 shares of the 1,630,435 shares of common stock held by our
       founders were redeemed and they now collectively hold 1,047,088 shares of
       our common stock. Our founders agreed to the redemption of a portion of
       their shares of our common stock for nominal consideration primarily in
       order to facilitate the completion of our April 2004 private placement.
 
     - Our operating partnership, MPT Operating Partnership, L.P., was formed in
       September 2003. Through our wholly-owned subsidiary, Medical Properties
       Trust, LLC, we are the sole general partner of our operating partnership.
       We currently own all of the limited partnership interests in our
       operating partnership.
 
     - MPT Development Services, Inc., a Delaware corporation that we formed in
       January 2004, operates as our wholly-owned taxable REIT subsidiary.
 

     - In April 2004 we completed a private placement of 25,300,000 shares of
       common stock at an offering price of $10.00 per share. Friedman,
       Billings, Ramsey & Co., Inc. acted as the initial purchaser and sole
       placement agent. The total net proceeds to us, after deducting fees and
       expenses of the offering, were approximately $233.5 million. The net
       proceeds of our private placement, together with borrowed funds, have
       been or will be used to acquire our current portfolio of 14 facilities,
       consisting of nine facilities that are in operation and five that are
       under development, repay debt, pay pre-offering operating expenses and
       for working capital. Thus far we have utilized approximately $187.6
       million to acquire our nine existing facilities, have loaned $47.6
       million to Vibra to acquire the operations at the Vibra Facilities and
       for working capital purposes, $6.2 million of which has been repaid, have
       made a mortgage loan of $6.0 million to an affiliate of one of our
       prospective tenants, have funded $51.3 million of a projected total of
       $63.1 million of development costs for the West Houston Facilities, $8.8
       million of a projected total of $38.0 million of development costs for
       the Bucks County Facility and $4.9 million of a projected total of $35.5
       million of development costs for the Monroe Facility and have advanced
       $9.7 million pursuant to the North Cypress construction loan.

 
     - On July 13, 2005, we completed an initial public offering of 12,066,823
       shares of common stock, priced at $10.50 per share. Of these shares of
       common stock, 701,823 shares were sold by selling stockholders and
       11,365,000 shares were sold by us. Friedman, Billings, Ramsey & Co., Inc.
       served as the sole book-running manager and J.P. Morgan Securities Inc.
       served as co-lead manager for the offering. Wachovia Capital Markets, LLC
       and Stifel, Nicolaus & Company, Incorporated served as co-managers for
       the offering. The underwriters exercised an option to purchase an
       additional 1,810,023 shares of common stock to cover over-allotments on
       August 5, 2005. We raised net proceeds of approximately $125.7 million
       pursuant to the offering after deducting the underwriting discount and
       offering expenses.
 
     Edward K. Aldag, Jr., William G. McKenzie, Emmett E. McLean, R. Steven
Hamner and James P. Bennett may be considered our founders. Mr. Aldag is serving
as chairman of our board of directors and as our president and chief executive
officer. Mr. McKenzie is serving as our vice chairman of the board. Mr. McLean
is serving as our executive vice president, chief operating officer, treasurer
and assistant secretary. Mr. Hamner is serving as our executive vice president
and chief financial officer. Mr. Bennett
 
                                        63

 
formerly was an owner, officer, director of and consultant to the company's
predecessor, Medical Properties Trust, LLC, but has not been affiliated with us
since August 2003.
 
OUR OPERATING PARTNERSHIP
 
     We own our facilities and conduct substantially all of our business through
our operating partnership, MPT Operating Partnership, L.P., and its
subsidiaries. MPT Operating Partnership, L.P. is a Delaware limited partnership
organized by us in September 2003. Our wholly-owned limited liability company,
Medical Properties Trust, LLC, serves as the sole general partner of, and holds
a 1% interest in, our operating partnership. We also currently own all of the
limited partnership interests in our operating partnership, constituting a 99%
partnership interest, but may issue limited partnership units from time to time
in connection with facility acquisitions and developments. Where permitted by
applicable law, we intend to sell equity interests in subsidiaries of our
operating partnership in connection with, or subsequent to, the acquisition and
development of facilities.
 
     Holders of limited partnership units of our operating partnership, other
than us, would be entitled to redeem their partnership units for shares of our
common stock on a one-for-one basis, subject to adjustments for stock splits,
dividends, recapitalizations and similar events. At our option, in lieu of
issuing shares of common stock upon redemption of limited partnership units, we
may redeem the partnership units tendered for cash in an amount equal to the
then-current value of the shares of common stock. Holders of limited partnership
units would be entitled to receive distributions equivalent to the dividends we
pay to holders of our shares of common stock. As the sole owner of the general
partner of our operating partnership, we have the power to manage and conduct
our operating partnership's business, subject to the limitations described in
the first amended and restated agreement of limited partnership of our operating
partnership. See "Partnership Agreement."
 
     MPT Operating Partnership, L.P. is a limited partner of MPT West Houston
MOB, L.P. and MPT West Houston Hospital, L.P., which respectively own the
Houston medical office building and the Houston community hospital in our
portfolio which are under development. MPT West Houston MOB, LLC and MPT West
Houston Hospital, LLC, our wholly-owned subsidiaries, are the respective general
partners of these entities. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the aggregate equity
interests in MPT West Houston MOB, L.P. Stealth, L.P., the tenant of the Houston
community hospital under development and an entity majority-owned by physicians,
owns a 6% limited partnership interest in MPT West Houston Hospital, L.P.
 
     In general, the management and control of the limited partnerships or
limited liability companies that own our properties, such as MPT West Houston
MOB, L.P. and MPT West Houston Hospital, L.P., rests with our operating
partnership or its subsidiaries. The limited partners or other minority owners
in these entities will not participate in the management or control of the
business of the partnership or other entity. Although the partnership agreements
or limited liability company agreements for future limited partnerships or
limited liability companies may vary, our current limited partnership agreements
require approval of the limited partners holding a majority of the units in the
partnership other than the general partner and its affiliates to:
 
     - amend the partnership agreement in a manner that would:
 
        - adversely affect the financial or other rights of the limited partners
          who are not affiliates of the general partner or positively affect the
          financial rights or other rights of the general partner or reduce the
          general partner's obligations and responsibilities under the limited
          partnership agreement;
 
        - impose on the limited partners who are not affiliates of the general
          partner any obligation to make additional capital contributions to the
          partnership;
 
        - adversely affect the rights of certain limited partners without
          similarly affecting the rights of other limited partners;
 
                                        64

 
     - merge, consolidate or combine with another entity; or
 
     - determine the terms and the amount of consideration payable for any
       issuances of additional partnership units to our operating partnership,
       the general partner or any of their respective affiliates.
 
     In general, each partner or other equity owner will share in the
partnership's profits, losses and available cash flow pro rata based upon his
percentage interest in the partnership. We may hold properties we develop or
acquire in the future through structures similar to the structure through which
we hold the West Houston Facilities.
 
MPT DEVELOPMENT SERVICES, INC.
 
     MPT Development Services, Inc., our taxable REIT subsidiary, was
incorporated in January 2004 as a Delaware corporation. MPT Development
Services, Inc. is authorized to provide third-party facility planning, project
management, medical equipment planning and implementation services, medical
office building management services, lending services, including but not limited
to acquisition and working capital loans to our tenants, and other services that
neither we nor our operating partnership can undertake directly under applicable
REIT tax rules. Overall, no more than 20% of the value of our assets may consist
of securities of one or more taxable REIT subsidiaries, and no more than 25% of
the value of our assets may consist of securities that are not qualifying assets
under the test requiring that 75% of a REIT's assets consist of real estate and
other related assets. Further, a taxable REIT subsidiary may not directly or
indirectly operate or manage a healthcare facility. For purposes of this
definition a "healthcare facility" means a hospital, nursing facility, assisted
living facility, congregate care facility, qualified continuing care facility,
or other licensed facility which extends medical or nursing or ancillary
services to patients and which is operated by a service provider that is
eligible for participation in the Medicare program under Title XVIII of the
Social Security Act with respect to the facility.
 
     MPT Development Services, Inc. will pay federal, state and local income
taxes at regular corporate rates on its taxable income. MPT Development
Services, Inc. has made, and from time to time may make, loans to tenants or
prospective tenants to assist them with the acquisition of the operations at
facilities leased or to be leased to them and for initial working capital needs.
There are currently approximately $41.4 million in such loans outstanding. See
"Our Portfolio -- Our Current Portfolio of Facilities."
 
DEPRECIATION
 
     Generally, the federal tax basis for our facilities used to determine
depreciation for federal income tax purposes will be our acquisition costs for
such facilities. To the extent facilities are acquired with units of our
operating partnership or its subsidiaries, we will acquire a carryover basis in
the facilities. For federal income tax purposes, depreciation with respect to
the real property components of our facilities, other than land, generally will
be computed using the straight-line method over a useful life of 40 years, for a
depreciation rate of 2.50% per year.
 
OUR LEASES
 
     The leases for our facilities are "net" leases with terms requiring the
tenant to pay all ongoing operating and maintenance expenses of the facility,
including property, casualty, general liability and other insurance coverages,
utilities and other charges incurred in the operation of the facilities, as well
as real estate taxes, ground lease rent and the costs of capital expenditures,
repairs and maintenance. Our leases also provide that our tenants will indemnify
us for environmental liabilities. Our current leases range from 11 to 16 years
and provide for annual rent escalation and, in the case of the Vibra Facilities
and the Bucks County Facility, percentage rent. Our leases require periodic
reports and financial statements from our tenants. In addition, our leases
contain customary default, termination, and subletting and assignment
provisions. See "Our Portfolio -- Our Current Portfolio of Facilities." We
anticipate that our future leases will have similar terms, including percentage
rent where feasible and in compliance with applicable healthcare laws and
regulations.
 
                                        65

 
ENVIRONMENTAL MATTERS
 
     Under various federal, state and local environmental laws and regulations,
a current or previous owner, operator or tenant of real estate may be required
to investigate and clean up hazardous or toxic substances or petroleum product
releases or threats of releases at such property and may be held liable to a
government entity or to third parties for property damage and for investigation,
clean-up and monitoring costs incurred by such parties in connection with the
actual or threatened contamination, including substances currently unknown, that
may have been released on the real estate. These laws may impose clean-up
responsibility and liability without regard to fault, or whether or not the
owner, operator or tenant knew of or caused the presence of the contamination.
The liability under these laws may be joint and several for the full amount of
the investigation, clean-up and monitoring costs incurred or to be incurred or
actions to be undertaken, although a party held jointly and severally liable
might be able to obtain contributions from other identified, solvent,
responsible parties of their fair share toward these costs. Investigation,
clean-up and monitoring costs may be substantial and can exceed the value of the
property. The presence of contamination, or the failure to properly remediate
contamination, on a property may adversely affect the ability of the owner,
operator or tenant to sell or rent that property or to borrow funds using such
property as collateral and may adversely impact our investment in that property.
In addition, if hazardous substances are located on or released from our
properties, we could incur substantial liabilities through a private party
personal injury claim, a property damage claim by an adjacent property owner, or
claims by a governmental entity or others for other damages, such as natural
resource damages. This liability may be imposed under environmental laws or
common-law principles.
 
     Federal regulations require building owners and those exercising control
over a building's management to identify and warn, via signs and labels, of
potential hazards posed by workplace exposure to installed asbestos-containing
materials and potentially asbestos-containing materials in their building. The
regulations also set forth employee training, record keeping and due diligence
requirements pertaining to asbestos-containing materials and potentially
asbestos-containing materials. Government entities can assess significant fines
for violation of these regulations. Building owners and those exercising control
over a building's management may be subject to an increased risk of personal
injury lawsuits by workers and others exposed to asbestos-containing materials
and potentially asbestos-containing materials as a result of these regulations.
The regulations may affect the value of a building containing
asbestos-containing materials and potentially asbestos-containing materials in
which we have invested. Federal, state and local laws and regulations also
govern the removal, encapsulation, disturbance, handling and disposal of
asbestos-containing materials and potentially asbestos-containing materials when
such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws and regulations
may impose liability for improper handling or a release to the environment of
asbestos-containing materials and potentially asbestos-containing materials and
may provide for fines to, and for third parties to seek recovery from, owners or
operators of real property for personal injury or improper work exposure
associated with asbestos-containing materials and potentially
asbestos-containing materials.
 
     Prior to closing any facility acquisition, we obtain Phase I environmental
assessments in order to attempt to identify potential environmental concerns at
the facilities. These assessments will be carried out in accordance with an
appropriate level of due diligence and will generally include a physical site
inspection, a review of relevant federal, state and local environmental and
health agency database records, one or more interviews with appropriate
site-related personnel, review of the property's chain of title and review of
historic aerial photographs and other information on past uses of the property.
We may also conduct limited subsurface investigations and test for substances of
concern where the results of the Phase I environmental assessments or other
information indicates possible contamination or where our consultants recommend
such procedures.
 
     While we may purchase many of our facilities on an "as is" basis, we intend
for all of our purchase contracts to contain an environmental contingency
clause, which permits us to reject a facility because of any environmental
hazard at the facility.
 
                                        66

 
COMPETITION
 
     We compete in acquiring and developing facilities with financial
institutions, institutional pension funds, real estate developers, other REITs,
other public and private real estate companies and private real estate
investors. Among the factors adversely affecting our ability to compete are the
following:
 
     - we may have less knowledge than our competitors of certain markets in
       which we seek to purchase or develop facilities;
 
     - many of our competitors have greater financial and operational resources
       than we have; and
 
     - our competitors or other entities may determine to pursue a strategy
       similar to ours.
 
     To the extent that we experience vacancies in our facilities, we will also
face competition in leasing those facilities to prospective tenants. The actual
competition for tenants varies depending on the characteristics of each local
market. Virtually all of our facilities operate in a competitive environment,
and patients and referral sources, including physicians, may change their
preferences for a healthcare facilities from time to time.
 
HEALTHCARE REGULATORY MATTERS
 
     The following discussion describes certain material federal healthcare laws
and regulations that may affect our operations and those of our tenants.
However, the discussion does not address state healthcare laws and regulations,
except as otherwise indicated. These state laws and regulations, like the
federal healthcare laws and regulations, could affect our operations and those
of our tenants. Moreover, the discussion relating to reimbursement for
healthcare services addresses matters that are subject to frequent review and
revision by Congress and the agencies responsible for administering federal
payment programs. Consequently, predicting future reimbursement trends or
changes is inherently difficult.
 
     Ownership and operation of hospitals and other healthcare facilities are
subject, directly and indirectly, to substantial federal, state and local
government healthcare laws and regulations. Our tenants' failure to comply with
these laws and regulations could adversely affect their ability to meet their
lease obligations. Physician investment in us or in our facilities also will be
subject to such laws and regulations. We intend for all of our business
activities and operations to conform in all material respects with all
applicable laws and regulations.
 
     Anti-Kickback Statute.  42 U.S.C. sec.1320a-7b(b), or the Anti-Kickback
Statute, prohibits, among other things, the offer, payment, solicitation or
acceptance of remuneration directly or indirectly in return for referring an
individual to a provider of services for which payment may be made in whole or
in part under a federal healthcare program, including the Medicare or Medicaid
programs. Violation of the Anti-Kickback Statute is a crime and is punishable by
criminal fines of up to $25,000 per violation, five years imprisonment or both.
Violations may also result in civil sanctions, including civil penalties of up
to $50,000 per violation, exclusion from participation in federal healthcare
programs, including Medicare and Medicaid, and additional monetary penalties in
amounts treble to the underlying remuneration.
 
     The Anti-Kickback Statute defines the term "remuneration" very broadly and,
accordingly, local physician investment in our facilities could trigger scrutiny
of our lease arrangements under the Anti-Kickback Statute. In addition to
certain statutory exceptions, the Office of Inspector General of the Department
of Health and Human Services, or OIG, has issued "Safe Harbor Regulations" that
describe practices that will not be considered violations of the Anti-Kickback
Statute. These include a safe harbor for space rental arrangements which
protects payments made by a tenant to a landlord under a lease arrangement
meeting certain conditions. We intend to use our commercially reasonable efforts
to structure lease arrangements involving facilities in which local physicians
are investors and tenants so as to satisfy, or meet as closely as possible, the
conditions for the safe harbor for space rental. We cannot assure you, however,
that we will meet all the conditions for the safe harbor, and it is unlikely
that we will meet all conditions for the safe harbor in those instances in which
percentage rent is contemplated and we have physician investors. In addition,
federal regulations require that our tenants with purchase options pay fair
market value purchase prices for facilities in which we have physician
investment. We intend our lease
 
                                        67

 
agreement purchase option prices to be fair market value; however, we cannot
assure you that all of our purchase options will be at fair market value. Any
purchase not at fair market value may present risks of challenge from healthcare
regulatory authorities. The fact that a particular arrangement does not fall
within a statutory exception or safe harbor does not mean that the arrangement
violates the Anti-Kickback Statute. The statutory exception and Safe Harbor
Regulations simply provide a guaranty that qualifying arrangements will not be
prosecuted under the Anti-Kickback Statute. The implication of the Anti-
Kickback Statute could limit our ability to include local physicians as
investors or tenants or restrict the types of leases into which we may enter if
we wish to include such physicians as investors having direct or indirect
ownership interests in our facilities.
 
     Federal Physician Self-Referral Statute.  Any physicians investing in our
company or its subsidiary entities could also be subject to the Ethics in
Patient Referrals Act of 1989, or the Stark Law (codified at 42 U.S.C.
sec. 1395nn). Unless subject to an exception, the Stark Law prohibits a
physician from making a referral to an "entity" furnishing "designated health
services" paid by Medicare or Medicaid if the physician or a member of his
immediate family has a "financial relationship" with that entity. A reciprocal
prohibition bars the entity from billing Medicare or Medicaid for any services
furnished pursuant to a prohibited referral. Financial relationships are defined
very broadly to include relationships between a physician and an entity in which
the physician or the physician's family member has (i) a direct or indirect
ownership or investment interest that exists in the entity through equity, debt
or other means and includes an interest in an entity that holds a direct or
indirect ownership or investment interest in any entity providing designated
health services; or (ii) a direct or indirect compensation arrangement with the
entity.
 
     The Stark Law as originally enacted in 1989 only applied to referrals for
clinical laboratory tests reimbursable by Medicare. However, the law was amended
in 1993 and 1994 and, effective January 1, 1995, became applicable to referrals
for an expanded list of designated health services reimbursable under Medicare
or Medicaid.
 
     The Stark Law specifies a number of substantial sanctions that may be
imposed upon violators. Payment is to be denied for Medicare claims related to
designated health services referred in violation of the Stark Law. Further, any
amounts collected from individual patients or third-party payors for such
designated health services must be refunded on a timely basis. A person who
presents or causes to be presented a claim to the Medicare program in violation
of the Stark Law is also subject to civil monetary penalties of up to $15,000
per claim, civil money penalties of up to $100,000 per arrangement and possibly
even exclusion from participation in the Medicare and Medicaid programs.
 
     Final regulations applicable only to physician referrals for clinical
laboratory services were published in August 1995. A proposed rule applicable to
physician referrals for all designated health services was published in January
1998. In January 2001, CMS published the "Phase I" final rule, which finalized a
significant portion of the 1998 proposed rule. On March 26, 2004, CMS issued the
second phase of its final regulations addressing physician referrals to entities
with which they have a financial relationship (the "Phase II" rule). The Phase
II rule addresses and interprets a number of exceptions for ownership and
compensation arrangements involving physicians, including the exceptions for
space and equipment rentals and the exception for indirect compensation
arrangements. The Phase II rule also includes exceptions for physician ownership
and investment, including physician ownership of rural providers and hospitals.
The new regulation revised the hospital ownership exception to reflect the
18-month moratorium that began December 8, 2003 on physician ownership or
investment in specialty hospitals, which was enacted in Section 507 of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The
Phase II rule became effective on July 26, 2004. Although the 18-month
moratorium imposed by Section 507 of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 expired on June 8, 2005, a bill
introduced in the Senate essentially would make the moratorium permanent with
limited exceptions. If enacted, the law would have a retroactive effective date
of June 8, 2005.
 
     In those cases where physicians invest in our subsidiaries or our
facilities, we intend to fashion our lease arrangements with healthcare
providers to meet the applicable indirect compensation exceptions
 
                                        68

 
under the Stark Law, however, no assurance can be given that our leases will
satisfy these Stark Law exception requirements. Unlike the Anti-kickback Statute
Safe Harbor Regulations, a financial arrangement which implicates the Stark Law
must meet the requirements of an applicable exception to avoid a violation of
the Stark Law. This may lead to obstacles in permitting local physicians to
invest in our facilities or restrict the types of lease arrangements we may
enter into if we wish to include such physicians as investors.
 
     State Self-Referral Laws.  In addition to the Anti-Kickback Statute and the
Stark Law, state anti-kickback and self-referral laws could limit physician
ownership or investment in us, restrict the types of leases we may enter into if
such physician investment is permitted or require physician disclosure of our
ownership or financial interest to patients prior to referrals.
 
     Recent Regulatory and Legislative Developments.  Medicare Part A pays for
hospital inpatient operating and capital related costs associated with acute
care hospital inpatient stays on a prospective basis. Pursuant to this inpatient
prospective payment system, or IPPS, CMS categorizes each patient case according
to a list of diagnosis-related groups, or DRGs. Each DRG has an assigned payment
that is based upon the expected amount of hospital resources necessary to treat
a patient in that DRG. On August 12, 2005, CMS published a Final Rule for IPPS
for fiscal year 2006. The Final Rule includes a 3.7% increase in payment rates,
a number of changes to the DRGs and enhancements to the voluntary quality
reporting program. Hospitals are required to submit certain clinical data on ten
(10) quality measures in order to receive full payment for fiscal year 2006. CMS
expects aggregate payments to IPPS hospitals to increase by $3.3 billion over
the previous year.
 
     On August 1, 2003, CMS published the fiscal year 2004 Final Rule for
inpatient rehabilitation facilities, or IRFs. Under the Final Rule, all IRFs
have received an increase in their prospective payment system rate for fiscal
year 2004 due to an across the board 3.2% IRF market basket increase. On August
15, 2005, CMS published the fiscal year 2006 Final Rule for inpatient
rehabilitation facilities, or IRFs. The Final Rule adopts a number of
refinements to the IRF prospective payment system, including an across-the-board
1.9% decrease in the standard payment amount based on evidence that coding
increases instead of increases in patient acuity have led to increased payments
to IRFs. The Final Rule also includes a 3.6% market basket increase and
increases from 19.1% to 21.3% the payment rate adjustment for IRFs located in
rural areas. Further, the Final Rule reduces the outlier threshold for cases
with unusually high costs from $11,211 to $5,132. In addition, the Final Rule
contains policy changes including the adoption of new labor market area
definitions which are based on the new Core Based Statistical Areas announced by
the Office of Management and Budget, or OMB, late in 2000. These increases are
expected to benefit those tenants of ours who operate IRFs. These increases
benefit those tenants of ours who operate IRFs.
 
     On May 7, 2004, CMS issued a Final Rule to revise the classification
criterion, commonly known as the "75 percent rule," used to classify a hospital
or hospital unit as an IRF. The compliance threshold is used to distinguish an
IRF from an acute care hospital for purposes of payment under the Medicare IRF
prospective payment system. The Final Rule implements a three-year period to
analyze claims and patient assessment data to determine whether CMS will
continue to use a compliance threshold that is lower than 75% or not. For cost
reporting periods beginning on or after July 1, 2004, and before July 1, 2005,
the compliance threshold will be 50% of the IRF's total patient population. The
compliance threshold will increase to 60% of the IRF's total patient population
for cost reporting periods beginning on or after July 1, 2005 and before July 1,
2006, to 65% for cost reporting periods beginning on or after July 1, 2006 and
before July 1, 2007, and to 75% for cost reporting periods after July 1, 2007.
On July 14, 2005, Senators Rick Santorum and Ben Nelson introduced legislation
in response to the Final Rule entitled "Preserving Patient Access to Inpatient
Rehabilitation Hospitals Act of 2005." The legislation seeks to limit the scope
of the Final Rule so that additional research may be conducted on the clinical
criteria for reimbursement of IRFs. The bill would implement the compliance and
enforcement threshold at 50 percent for two years and apply retroactively to
facilities that lost their IRF status and payments on or after July 1, 2005, if
such facilities are in compliance with the 50 percent threshold. We do not know
whether the legislation will be passed.
 
                                        69

 
     On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, or the Act, which
contains sweeping changes to the federal health insurance program for the
elderly and disabled. The Act includes provisions affecting program payment for
inpatient and outpatient hospital services. In total, the Congressional Budget
Office estimates that hospitals will receive $24.8 billion over ten years in
additional funding due to the Act.
 
     Rural hospitals, which may include regional or community hospitals, one of
our targeted types of facilities, will benefit most from the reimbursement
changes in the Act. Some examples of these reimbursement changes include (i)
providing that payment for all hospitals, regardless of geographic location,
will be based on the same, higher standardized amount which was previously
available only for hospitals located in large urban areas, (ii) reducing the
labor share of the standardized amount from 71% to 62% for hospitals with an
applicable wage index of less than 1.0, (iii) giving hospitals the ability to
seek a higher wage index based on the number of hospital employees who take
employment out of the county in which the hospital is located with an employer
in a neighboring county with a higher wage index, and (iv) improving critical
access hospital program conditions of participation requirements and
reimbursement. Medicare disproportionate share hospital, or DSH, payment
adjustments for hospitals that are not large urban or large rural hospitals will
be calculated using the DSH formula for large urban hospitals, up to a 12% cap
in 2004 for all hospitals other than rural referral centers, which are not
subject to the cap. The Act provides that sole community hospitals, as defined
in 42 U.S.C. sec. 1395 ww(d)(5)(D)(iii), located in rural areas, rural hospitals
with 100 or fewer beds, and certain cancer and children's hospitals shall
receive Transitional Outpatient Payments, or TOPs, such that these facilities
will be paid as much under the Medicare outpatient prospective payment system,
or OPPS, as they were paid prior to implementation of OPPS. As of January 1,
2004 all TOPs for community mental health centers and all other hospitals were
otherwise discontinued. The "hold harmless" TOPs provided for under the Act will
continue for qualifying rural hospitals for services furnished through December
31, 2005 and for sole community hospitals for cost reporting periods beginning
on or after January 1, 2004 and ending on December 31, 2005. Hold harmless TOPs
payments continue permanently for cancer and children's hospitals.
 
     The Act also requires CMS to provide supplemental payments to acute care
hospitals that are located more than 25 road miles from another acute care
hospital and have low inpatient volumes, defined to include fewer than 800
discharges per fiscal year, effective on or after October 1, 2004. Total
supplemental payments may not exceed 25% of the otherwise applicable prospective
payment rate.
 
     Finally, the Act assures inpatient hospitals that submit certain quality
measure data a full inflation update equal to the hospital market basket
percentage increase for fiscal years 2005 through 2007. The market basket
percentage increase refers to the anticipated rate of inflation for goods and
services used by hospitals in providing services to Medicare patients. For
fiscal year 2005, the market basket percentage increase for hospitals paid under
the inpatient prospective payment system is 3.3%. For those inpatient hospitals
that do not submit such quality data, the Act provides for an update of market
basket minus 0.4 percentage points.
 
     The Act also imposed an 18 month moratorium limiting the availability of
the "whole hospital exception," or Whole Hospital Exception, under the Stark Law
for specialty hospitals and prohibited physicians investing in rural specialty
hospitals from invoking an alternative Stark Law exception for physician
ownership or investment in rural providers. The moratorium began upon enactment
of the Act and expired June 8, 2005. Under the Whole Hospital Exception, the
Stark Law permits a physician to refer a Medicare or Medicaid patient to a
hospital in which the physician has an ownership or investment interest so long
as the physician maintains staff privileges at the hospital and the physician's
ownership or investment interest is in the hospital as a whole, rather than a
subdivision of the facility. Following expiration of the moratorium, CMS issued
a statement that it will not issue provider agreements for new specialty
hospitals or authorize initial state surveys of new specialty hospitals while it
undertakes a review of its procedures for enrolling such facilities in the
Medicare program. CMS anticipates completing this review by January 2006. The
suspension on enrollment does not apply to specialty hospitals that submitted
 
                                        70

 
enrollment applications prior to June 9, 2005 or requested an advisory opinion
about the applicability of the moratorium.
 
     On May 11, 2005, Senators Charles Grassley and Max Baucus introduced a
bill, known as the Hospital Fair Competition Act of 2005 (S.1002), that if
enacted would become effective retroactively as of June 8, 2005 and essentially
make permanent the prohibition on physician referrals to specialty hospitals in
which the physician has an ownership or investment interest. Specialty hospitals
are defined to mean a hospital subject to the inpatient prospective payment
system that is located outside of Puerto Rico, which was neither in operation
nor under development as of November 18, 2003, and is primarily or exclusively
engaged in treating patients with cardiac or orthopedic conditions, undergoing
surgery or receiving any other specialized category of services that the
Secretary designates. The proposed prohibition would not apply to specialty
hospitals in operation or under development as of November 18, 2003, but would
limit additional facility expansion and investment in such "grandfathered"
specialty hospitals and would also apply to all new specialty hospitals. The
bill was referred to the Senate Committee on Finance on May 11, 2005. We cannot
predict whether the bill will be passed.
 
     Any acquisition or development of specialty hospitals must comply with the
current application and interpretation of the Stark Law and, if enacted, the
provisions of the Hospital Fair Competition Act of 2005. CMS may clarify or
modify its definition of specialty hospital, which may result in physicians who
own interests in our tenants being forced to divest their ownership. Although
the specialty hospital moratorium under the Act limited, and the proposed
Hospital Fair Competition Act of 2005 would limit physician ownership or
investment in "specialty hospitals" as defined by CMS, they not limit a
physician's ability to hold an ownership or investment interest in facilities
which may be leased to hospital operators or other healthcare providers,
assuming the lease arrangement conforms to the requirements of an applicable
exception under the Stark Law. We intend to structure all of our leases,
including leases containing percentage rent arrangements, to comply with
applicable exceptions under the Stark Law and to comply with the Anti-kickback
Statute. We believe that strong arguments can be made that percentage rent
arrangements, when structured properly, should be permissible under the Stark
Law and the Anti-kickback law; however, these laws are subject to continued
regulatory interpretation and there can be no assurance that such arrangements
will continue to be permissible. Accordingly, although we do not currently have
any percentage rent arrangements where physicians own an interest in our
facilities, we may be prohibited from entering into percentage rent arrangements
in the future where physicians own an interest in our facilities. In the event
we enter into such arrangements at some point in the future and later find the
arrangements no longer comply with the Stark Law or Anti-Kickback Statute, we or
our tenants may be subject to penalties under the statutes.
 
     The California Department of Health Services recently adopted regulations,
codified as Sections 70217, 70225 and 70455 of Title 22 of the California Code
of Regulations, or CCR, which establish minimum, specific, numerical licensed
nurse-to-patient ratios for specified units of general acute care hospitals.
These regulations are effective January 1, 2004. The minimum staffing ratios set
forth in 22 CCR 70217(a) co-exist with existing regulations requiring that
hospitals have a patient classification system in place. 22 CCR, 70053.2 and
70217. The licensed nurse-to-patient ratios constitute the minimum number of
registered nurses, licensed vocational nurses, and, in the case of psychiatric
units, licensed psychiatric technicians, who shall be assigned to direct patient
care and represent the maximum number of patients that can be assigned to one
licensed nurse at any one time. Over the past several years many hospitals have,
in response to managed care reimbursement contracts, cut costs by reducing their
licensed nursing staff. The California Legislature responded to this trend by
requiring a minimum number of licensed nurses at the bedside. Due to this new
regulatory requirement, any acute care facilities we target for acquisition or
development in California may be required to increase their licensed nursing
staff or decrease their admittance rates as a result. Governor Schwarzenegger
issued two emergency regulations in an attempt to suspend the ratios in
emergency rooms and delay for three years staffing requirements in general
medical units. However, this action was appealed and on June 7, 2005, the
Superior Court overturned the two emergency regulations. The Schwarzenegger
administration may appeal this ruling.
 
                                        71

 
     On May 7, 2004, CMS issued a Final Rule to update the annual payment rates
for the Medicare prospective payment system for services provided by long term
care hospitals. The rule increased the Medicare payment rate for long-term care
hospitals by 3.1% starting July 1, 2004. On May 6, 2005, CMS issued a Final Rule
to update the annual payment rates for 2006. Beginning July 1, 2005, the
Medicare payment rate for long-term care hospitals will increase by 3.4% for
patient discharges through June 30, 2006. Medicare expects aggregate payment to
these hospitals to increase by $169 million during the 2006 long-term care
hospital rate year compared with the 2005 rate year. Long-term care hospitals,
one of the types of facilities we are targeting, are defined generally as
hospitals that have an average Medicare inpatient length of stay greater than 25
days. In addition, the final rule contains policy changes including the adoption
of new labor market area definitions for long-term care hospitals which are
based on the new Core Based Statistical Areas announced by the Office of
Management and Budget, or OMB, late in 2000.
 
     The Balanced Budget Act of 1997, or BBA, mandated implementation of a
prospective payment system for skilled nursing facilities. Under this
prospective payment system, and for cost reporting periods beginning on or after
July 1, 1998, skilled nursing facilities are paid a prospective payment rate
adjusted for case mix and geographic variation in wages formulated to cover all
costs, including routine, ancillary and capital costs. In 1999 and 2000 the BBA
was refined to provide for, among other revisions, a 20% add-on for 12 high
acuity non-therapy Resource Utilization Grouping categories, or RUG categories,
and a 6.7% add-on for all 14 rehabilitation RUG categories. These categories may
expire when CMS releases its refinements to the current RUG payment system. On
August 4, 2005, CMS published a Final Rule updating skilled nursing facility
payment rates for fiscal year 2006. The Final Rule eliminates the temporary
add-on payments that Congress directed in the Balanced Budget Refinement Act of
1999 and introduces nine (9) new payment categories. The Final Rule also
permanently increases rates for all RUGs to reflect variations in non-therapy
ancillary costs. Further, fiscal year 2006 payment rates include a market basket
update increase of 3.1%, a slight increase over what had been anticipated in the
Proposed Rule. In addition, the Final Rule contains policy changes including the
adoption of new labor market area definitions which are based on the new Core
Based Statistical Areas announced by the Office of Management and Budget, or
OMB, late in 2000.
 
     In addition to the legislation and regulations discussed above, on January
12, 2005, the Medicare Payment Advisory Committee, or MedPAC, made extensive
recommendations to Congress and the Secretary of HHS including proposing
revisions to DRG payments to more fully capture differences in severity of
illnesses in an attempt to more equally pay for care provided at general acute
care hospitals as compared to specialty hospitals. Furthermore, MedPAC made
significant recommendations regarding paying healthcare providers relative to
their performance and to the outcomes of the care they provided. MedPAC
recommendations have historically provided strong indications regarding future
directions of both the regulatory and legislative process.
 
INSURANCE
 
     We have purchased general liability insurance (lessor's risk) that provides
coverage for bodily injury and property damage to third parties resulting from
our ownership of the healthcare facilities that are leased to and occupied by
our tenants. Our leases with tenants also require the tenants to carry general
liability, professional liability, all risks, loss of earnings and other
insurance coverages and to name us as an additional insured under these
policies. We expect that the policy specifications and insured limits will be
appropriate given the relative risk of loss, the cost of the coverage and
industry practice.
 
EMPLOYEES
 
     We employ 17 full-time employees and one part-time employee as of the date
of this prospectus. We anticipate hiring approximately five to 10 additional
full-time employees during the next 12 months, commensurate with our growth. We
believe that our relations with our employees are good. None of our employees is
a member of any union.
 
                                        72

 
LEGAL PROCEEDINGS
 
     We are not involved in any material litigation nor, to our knowledge, is
any material litigation pending or threatened against us.
 
                                 OUR PORTFOLIO
 
OUR CURRENT PORTFOLIO
 

     Our current portfolio of facilities consists of 14 healthcare facilities,
nine of which are in operation and five of which are under development. The
Vibra Facilities consist of four rehabilitation hospitals and two long-term
acute care hospitals. The Desert Valley Facility is a community hospital with an
integrated medical office building. The Covington Facility is a long-term acute
care hospital facility. The Redding Facility is a rehabilitation hospital. All
of the leases for the hospitals currently in operation have initial terms of 15
years. Two of the facilities under development are the West Houston Hospital and
the adjacent West Houston MOB that is master-leased by the tenant of the
hospital. The initial lease term for the West Houston Hospital began when
construction commenced in July 2004 and will end 15 years after completion of
construction. The initial lease term for the West Houston MOB began when
construction commenced in July 2004 and will end 10 years after completion of
construction. Construction of the West Houston MOB is projected to be completed
in August 2005 and construction of the West Houston Hospital is projected to be
completed in October 2005. Our third facility under development is the Bucks
County Facility. The initial lease term for the Bucks County Facility will begin
when construction commences and will end 15 years after completion of
construction. We target completion of construction for the Bucks County Facility
for August 2006. Our fourth facility under development is the Monroe Facility.
The initial lease term for the Monroe Facility began when construction commenced
in October 2005 and will end 15 years after completion of construction. We
target completion of construction for the Monroe Facility for October 2006. With
respect to the fifth facility under development, we have entered into a ground
sublease with, and an agreement to provide a construction loan to, North Cypress
for the development of a community hospital. The facility will be developed on
property in which we currently have a ground lease interest. We expect to
acquire the land we are ground leasing after the hospital has been partially
completed. Upon completion of construction, subject to certain limited
conditions, we will purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a 15 year lease term. In
the event we do not purchase the facility, the ground sublease will continue and
the construction loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan secured by the facility. We
anticipate the North Cypress Facility will be completed in December 2006. The
leases for all of the facilities in our current portfolio provide for
contractual base rent and an annual rent escalator. The leases for the Vibra
Facilities and the Bucks County Facility also provide for percentage rent based
on an agreed percentage of the tenants' gross revenue. The following tables set
forth information, as of June 30, 2005, regarding our current portfolio of
facilities:



Operating Facilities                                                                        2005             2006
                                                                            2004        CONTRACTUAL       CONTRACTUAL
                                                             NUMBER OF   ANNUALIZED         BASE             BASE
LOCATION                        TYPE             TENANT       BEDS(1)     BASE RENT       RENT(2)           RENT(2)
--------                  -----------------  --------------  ---------   -----------   --------------   ---------------
                                                                                      
Bowling Green,
 Kentucky...............  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              60      $ 3,916,695    $ 4,294,990       $ 4,790,118
Marlton, New
 Jersey(5)..............  Rehabilitation(6)  Vibra
                          hospital           Healthcare,
                                             LLC(4)              76        3,401,791      3,730,354         4,160,390
Victorville,
 California(7)..........  Community          Desert Valley
                          hospital/medical   Hospital, Inc.      83               --      2,341,004         2,856,000
                          office building
New Bedford,
 Massachusetts..........  Long-term          Vibra
                          acute care         Healthcare,
                          hospital           LLC(4)              90        2,262,979      2,426,320         2,767,624
 

Operating Facilities
                               GROSS
                             PURCHASE            LEASE
LOCATION                     PRICE(3)         EXPIRATION
--------                  ---------------   ---------------
                                      
Bowling Green,
 Kentucky...............
 
                           $ 38,211,658        July 2019
Marlton, New
 Jersey(5)..............
 
                             32,267,622        July 2019
Victorville,
 California(7)..........
                             28,000,000      February 2020
 
New Bedford,
 Massachusetts..........
 
                             22,077,847       August 2019

 
                                        73



Operating Facilities                                                                        2005             2006
                                                                            2004        CONTRACTUAL       CONTRACTUAL
                                                             NUMBER OF   ANNUALIZED         BASE             BASE
LOCATION                        TYPE             TENANT       BEDS(1)     BASE RENT       RENT(2)           RENT(2)
--------                  -----------------  --------------  ---------   -----------   --------------   ---------------
                                                                                      
Redding,
 California(8)..........  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              88               --        950,250(9)      1,913,949(9)
Fresno, California......  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)              62        1,914,829      2,099,773         2,341,835
Covington, Louisiana....  Long-term acute    Gulf States
                          care hospital      Long-Term
                                             Acute Care of
                                             Covington,
                                             L.L.C.              58               --        674,188         1,224,537
Thornton, Colorado......  Rehabilitation     Vibra
                          hospital           Healthcare,
                                             LLC(4)             117          870,377        933,200         1,064,471
Kentfield, California...  Long-term          Vibra
                          acute care         Healthcare,
                          hospital           LLC(4)              60          783,339        858,998           958,024
                                                                ---      -----------    -----------       -----------
TOTAL...................         --                      --     694      $13,150,010    $18,309,077       $22,076,948
                                                                ===      ===========    ===========       ===========
 

Operating Facilities
                               GROSS
                             PURCHASE            LEASE
LOCATION                     PRICE(3)         EXPIRATION
--------                  ---------------   ---------------
                                      
Redding,
 California(8)..........
                             20,750,000        June 2020
Fresno, California......
                             18,681,255        July 2019
Covington, Louisiana....
                             11,500,000        June 2020
Thornton, Colorado......
                              8,491,481       August 2019
Kentfield, California...
                              7,642,332        July 2019
                           ------------
TOTAL...................   $187,622,195                  --
                           ============

 
---------------
 
 (1) Based on the number of licensed beds.
 
 (2) Based on leases in place as of the date of this prospectus.
 
 (3) Includes acquisition costs.
 
 (4) The tenant in each case is a separate, wholly-owned subsidiary of Vibra
     Healthcare, LLC.
 
 (5) Our interest in this facility is held through a ground lease on the
     property. The purchase price shown for this facility does not include our
     payment obligations under the ground lease, the present value of which we
     have calculated to be $920,579. The calculation of the base rent to be
     received from Vibra for this facility takes into account the present value
     of the ground lease payments.
 
 (6) Thirty of the 76 beds are pediatric rehabilitation beds operated by HBA
     Management, Inc.
 
 (7) At any time after February 28, 2007, the tenant has the option to purchase
     the facility at a purchase price equal to the sum of (i) the purchase price
     of the facility, and (ii) that amount determined under a formula that would
     provide us an internal rate of return of 10% per year, increased by 2% of
     such percentage each year, taking into account all payments of base rent
     received by us.
 
 (8) Our interest in this facility is held in part through a ground lease on the
     property. During the term of the ground lease, the tenant will pay the
     ground lease rent directly to the ground lessor or, at our request,
     directly to us.
 
 (9) Of the $20,750,000 million purchase price for this facility, payment of
     $2.0 million is being deferred pending completion, to our satisfaction, of
     a conversion of certain beds at the facility to long-term acute care beds
     and an additional $750,000 of the purchase price is being deferred and will
     be paid out of a special reserve account to cover the cost of renovations.
     The 2005 contractual base rent and the 2006 contractual base rent are
     calculated based on a purchase price of $18.0 million.



Facilities Under Development
                                                                         2004                    2005
                                                          NUMBER OF   ANNUALIZED             CONTRACTUAL
LOCATION                     TYPE             TENANT       BEDS(1)     BASE RENT              BASE RENT
--------               -----------------  --------------  ---------   -----------   ------------------------------
                                                                     
Houston, Texas.......  Community          North Cypress
                       hospital           Medical Center
                                          Operating
                                          Company, Ltd.       64      $        --            $        --(3)
Houston, Texas.......  Community
                       hospital(5)        Stealth, L.P.      105(6)            --                772,196(7)
Bensalem,              Women's            Bucks County
 Pennsylvania          hospital/medical   Oncoplastic
                       office             Institute, LLC      30               --                     --(10)
                       building(9)
Bloomington,           Community          Monroe
 Indiana.............  hospital(12)       Hospital, LLC       32               --(13)                   --(13)
Houston, Texas.......  Medical office
                       building(15)       Stealth, L.P.      n/a               --                503,130(7)
                                                             ---      -----------            -----------
TOTAL................         --                      --     231      $        --            $ 1,275,326
                                                             ===      ===========            ===========
 

Facilities Under Deve
                                 2006                      PROJECTED
                              CONTRACTUAL                 DEVELOPMENT                LEASE
LOCATION                       BASE RENT                    COST(2)                EXPIRATION
--------               -------------------------   -------------------------   ------------------
                                                                      
Houston, Texas.......
                              $        --(3)             $ 64,028,000                       (4)
Houston, Texas.......
                                4,749,005(7)               43,099,310           October 2020(8)
Bensalem,
 Pennsylvania
                                1,627,820(10)              38,000,000           August 2021(11)
Bloomington,
 Indiana.............             954,063                  35,500,000           October 2021(14)
Houston, Texas.......
                                2,049,415(7)               20,855,119           October 2015(16)
                              -----------                ------------
TOTAL................         $ 9,380,303                $201,482,429                          --
                              ===========                ============


 
---------------
 
 (1) Based on the number of proposed beds.
 
 (2) Includes acquisition costs.
 
 (3) During construction of the North Cypress Facility, interest will accrue on
     the construction loan at a rate of 10.5%. The interest accruing during the
     construction period will be added to the principal balance of the
     construction loan. In addition, during the term of the ground sublease,
     North Cypress will pay us monthly ground sublease rent in an annual amount
     equal to our ground lease rent plus 10.5% of funds advanced by us under the
     construction loan.
 
 (4) Expected to be completed in December 2006. If we purchase this facility
     upon completion of construction, we will lease it back to North Cypress for
     an initial term of 15 years.
 
                                        74

 
 (5) Expected to be completed in October 2005.
 
 (6) Seventy-one of the 105 beds will be acute care beds operated by Stealth,
     L.P. and the remaining 34 beds will be long-term acute care beds operated
     by Triumph Southwest, L.P.
 

 (7) Based on leases in place as of the date of this prospectus, estimated total
     development costs and estimated dates of completion. Assumes completion of
     construction in October 2005 for the West Houston Hospital and for the West
     Houston MOB. Does not include rents that accrue during the construction
     period and are payable over the remaining lease term following the
     completion of construction.

 
 (8) Following completion, the lease term will extend for a period of 15 years.
     At any time during the term of the lease, the tenant has the right to
     terminate the lease and purchase the community hospital from us at a
     purchase price equal to the greater of (i) that amount determined under a
     formula which would provide us an internal rate of return of at least 18%
     or (ii) appraised value assuming the lease is still in place.
 
 (9) Expected to be completed in August 2006.
 
(10) Based on the lease in place as of the date of this prospectus, estimated
     total development costs and estimated date of completion. Assumes
     completion of construction in August 2006.
 
(11) Following completion, the lease term will extend for a period of 15 years.
 

(12) Expected to be completed in October 2006.

 

(13) Based on the lease in place as of the date of this prospectus, estimated
     total development costs and estimated date of completion. Assumes
     completion of construction in October 2006.

 

(14) Following completion, the lease term will extend for a period of 15 years.

 

(15) Expected to be completed in October 2005.

 

(16) Following completion, the lease term will extend for a period of 10 years.
     At any time during the term of the lease, the tenant has the right to
     terminate the lease and purchase the medical office building from us at a
     purchase price equal to the greater of (i) that amount determined under a
     formula which would provide us an internal rate of return of at least 18%
     or (ii) appraised value assuming the lease is still in place.

 
  VIBRA FACILITIES AND LOANS
 
     General.  We own or ground lease the six Vibra Facilities located in
Bowling Green, Kentucky; Marlton, New Jersey; Fresno, California; Kentfield,
California; Thornton, Colorado; and New Bedford, Massachusetts. We acquired
these facilities from Care Ventures, Inc., an unaffiliated third party, in July
and August 2004 for an aggregate purchase price of approximately $127.4 million,
including acquisition costs. The purchase price was arrived at through
arms-length negotiations with Care Ventures, Inc., based upon our analysis of
various factors. These factors included the demographics of the area in which
the facility is located, the capabilities of the tenant to operate the facility,
healthcare spending trends in the geographic area, the structural integrity of
the facility, governmental regulatory trends which may impact the services
provided by the tenant, and the financial and economic returns which we require
for making an investment. The Vibra Facilities are leased to subsidiaries of
Vibra. Our leases of the Vibra Facilities require the tenant to carry customary
insurance which is adequate to satisfy our underwriting standards.
 
     Vibra is an affiliate of The Hollinger Group. Vibra has been recently
formed and had engaged in no meaningful operations prior to entering into the
leases for the Vibra Facilities in July and August 2004. The principals of The
Hollinger Group have extensive experience in developing, acquiring, managing and
operating specialty healthcare facilities and senior care facilities. Mr.
Hollinger, the principal owner of Vibra and the founder and chief executive
officer of The Hollinger Group, has 18 years experience in all phases of senior
care and healthcare activities. For financial information respecting Vibra and
its subsidiaries, see the audited financial statements included elsewhere in
this prospectus.
 
     Vibra Loans and Fees Receivable.  At the time we acquired the Vibra
Facilities, MPT Development Services, Inc., our taxable REIT subsidiary, made a
loan of approximately $41.4 million to Vibra to acquire the operations at these
locations. We refer to this loan as the acquisition loan. The acquisition loan
accrues interest at the rate of 10.25% per year and is to be repaid over 15
years with interest only for the first three years and the principal balance
amortizing over the remaining 12 year period. The acquisition loan may be
prepaid at any time without penalty. In connection with the Vibra transactions,
Vibra agreed to pay us commitment fees of approximately $1.5 million. MPT
Development Services, Inc. also made secured loans totaling approximately $6.2
million to Vibra and its subsidiaries for working capital purposes. The
commitment fees were paid, and the working capital loans were repaid, on
February 9, 2005.
 
     As security for the acquisition loan, Vibra has pledged to us all of its
interests in each of the tenants of the Vibra Facilities, and Mr. Hollinger has
pledged to us his entire interest in Vibra. In addition, Mr. Hollinger, The
Hollinger Group and Vibra Management, LLC, another affiliate of Mr. Hollinger,
have
 
                                        75

 
guaranteed the repayment of the acquisition loan; however, The Hollinger Group
and Vibra Management, LLC do not have substantial assets and the liability of
Mr. Hollinger under his guaranty is limited to $5.0 million. See "-- Lease
Guaranties and Security."
 
     Vibra has entered into a $17.0 million credit facility with Merrill Lynch,
and that loan is secured by an interest in Vibra's receivables related to the
Vibra Facilities. There was approximately $10.7 million outstanding under the
facility on June 30, 2005. Our loan to Vibra is subordinate to Merrill Lynch
with respect to Vibra's receivables. At March 31, 2005, Vibra was not in
compliance with a facility rent coverage covenant under its Merrill Lynch credit
facility. The Merrill Lynch credit facility documents were subsequently amended
to retroactively change the rent coverage covenant from a by facility rent
coverage to a consolidated rent coverage calculation, such that Vibra was in
compliance with the amended covenant at March 31, 2005.
 
     Leases.  Each lease for the Vibra Facilities provides that, so long as the
acquisition loan is outstanding, after January 1, 2005, and beginning with the
calendar month after the month in which aggregate gross revenues for the Vibra
Facilities exceed a revenue threshold, the tenant will pay, in addition to base
rent, percentage rent in an amount equal to 2% of revenues for the preceding
month. Each calendar month thereafter during the term of each lease, the
percentage rent will be decreased pro rata based on the amount of the principal
reduction of the acquisition loan during the previous calendar month; however,
the percentage rent will not be decreased below 1% of revenues.
 
     On March 31, 2005, the leases for the Vibra Facilities were amended to
provide (i) that the testing of certain financial covenants will be deferred
until the quarter beginning July 1, 2006 and ending September 30, 2006, (ii)
that these same financial covenants will be tested on a consolidated basis for
all of the Vibra Facilities, (iii) that the reduction in the rate of percentage
rent will be made on a monthly rather than annual basis and (iv) that Vibra will
escrow insurance premiums and taxes related to the Vibra Facilities at our
request. Prior to execution of this amendment, Vibra did not meet the fixed
charge coverage ratios required by the lease agreements for the Vibra
Facilities. One covenant required that each Vibra Facility maintain a ratio of
earnings before interest expense, income tax expense, depreciation expense,
amortization expense and base rent (EBITDAR) to total debt payments plus base
rent, measured at the end of each quarter, in excess of 125%. The second
covenant required that each Vibra Facility maintain a ratio of EBITDAR to base
rent, measured at the end of each quarter, in excess of 150%. In the event that
either ratio for any Vibra Facility was below the required level for two
consecutive fiscal quarters, an event of default would have occurred.
 
     Capital Improvements.  The tenant under each lease for the Vibra Facilities
is responsible for all capital expenditures required to keep the facility in
compliance with applicable laws and regulations. Beginning on July 1, 2005, each
tenant was required to begin making quarterly deposits into a capital
improvement reserve account for the particular facility in the amount of $1,500
per bed per year, except that the first deposit will be pro-rated based on
one-half of a year. On each January 1 thereafter, the payment of $1,500 per bed
per year into the capital improvement reserve will be increased by 2.5%. All
capital expenditures made in each year during the term of the lease will be
funded first from the capital improvement reserve, and the tenant is required to
pay into its respective capital improvement reserve such funds as necessary for
all replacements and repairs.
 
     Lease and Loan Guaranties and Security.  We have obtained guaranty
agreements from Mr. Hollinger, Vibra, Vibra Management, LLC and The Hollinger
Group that obligate them to make loan and lease payments in the event that Vibra
or the tenants for the Vibra Facilities fail to do so. We believe that these
agreements are important elements of our underwriting of newly-formed healthcare
operating companies because they create incentives for their owners and
managements to successfully operate our tenants. However, we do not believe that
these parties have sufficient financial resources to satisfy a material portion
of the total lease or loan obligations. Mr. Hollinger's guaranty is limited to
$5.0 million, Vibra Management, LLC and The Hollinger Group do not have
substantial assets and Vibra's assets are substantially comprised of operations
at the Vibra Facilities. The guaranties of Vibra, Vibra Management
 
                                        76

 
and The Hollinger Group relating to the leases for the Vibra Facilities and the
Vibra loan are of equal priority with the guaranties relating to the lease for
the Redding Facility.
 
     Each lease for the Vibra Facilities is cross-defaulted with all other
leases and other agreements between us, or our affiliates, on the one hand, and
the tenant and Mr. Hollinger, or their affiliates, on the other hand, including
the lease for the Redding Facility and the Vibra loan. In addition, Vibra has
pledged to us all of its interests in each of the tenants, and Mr. Hollinger has
pledged to us his interest in Vibra. As security for the leases for the Vibra
Facilities, each of the tenants for the Vibra Facilities has granted us a
security interest in all personal property, other than receivables, located at
the Vibra Facilities. The management fees that the tenants for the Vibra
Facilities pay to Vibra Management, LLC are subordinated to the rents payable to
us under the leases for the Vibra Facilities.
 
     We have included the audited and unaudited consolidated financial
statements for Vibra Healthcare, LLC as of and for the year ended December 31,
2004 and as of and for the six months ended June 30, 2005. We believe that the
financial statements of Vibra Healthcare, LLC are the most meaningful financial
information respecting the ability of Vibra to make the lease and loan payments
which it is obligated to make to us. We do not believe that historical financial
information on the Vibra Facilities prior to our acquisition of those facilities
would be meaningful because the facilities had three different owners in the
year prior to our acquisition. Also during that time, the owners did not lease
those facilities to lessees but operated the facilities themselves, and the
facilities were not operated in the same manner as they are currently being
operated. We also believe that the financial statements of the guarantors
provide limited financial information due to the limited resources which those
guarantors possess. We do not believe the financial statements of the Vibra
guarantors other than Vibra would be helpful to prospective investors.
Therefore, we have provided the financial statements of Vibra Healthcare, LLC,
which includes consolidated financial information on the actual lessees of the
Vibra Facilities and the parent entity, which is one of the guarantors of the
leases and the borrower under the Vibra loan.
 
     Purchase Option.  At the expiration of each lease for the Vibra Facilities,
each tenant will have the option to purchase the facility at a purchase price
equal to the greater of (i) the appraised value of the facility, determined
assuming the lease is still in place, or (ii) the purchase price we paid for the
facility, including acquisition costs, increased by 2.5% per annum from the date
of purchase.
 
     Depreciation and Real Estate Taxes.  The following table sets forth
information, as of December 31, 2004, regarding the depreciation and real estate
taxes for the Vibra Facilities:
 


                                                                 DEPRECIATION
                            FEDERAL TAX BASIS       --------------------------------------   2004 REAL ESTATE
                         ------------------------   ANNUAL                                   -----------------
                            LAND       BUILDINGS     RATE       METHOD       LIFE IN YEARS     TAXES     RATE
                         ----------   -----------   ------   -------------   -------------   ---------   -----
                                                                                    
Bowling Green, KY......  $3,070,000   $35,141,658    2.5%    Straight-line        40         $ 24,750    0.07%
Thornton, CO...........   2,130,000     6,361,481    2.5%    Straight-line        40          186,188    2.18%
Fresno, CA.............   1,550,000    17,131,255    2.5%    Straight-line        40          102,359    0.61%
Kentfield, CA..........   2,520,000     5,122,332    2.5%    Straight-line        40           91,201    1.28%
Marlton, NJ............          --    32,267,622    2.5%    Straight-line        40          321,903    1.00%
New Bedford, NJ........   1,400,000    20,677,847    2.5%    Straight-line        40          251,476    1.14%

 
  BOWLING GREEN, KENTUCKY
 
     General.  This facility, licensed for 60 beds, is an approximately 62,500
gross square foot rehabilitation hospital located in Bowling Green, Kentucky,
which is approximately 60 miles from Nashville, Tennessee. Construction of the
facility was completed in 1992. We acquired a fee simple interest in this
facility on July 1, 2004 for a purchase price of approximately $38.2 million
including acquisition costs.
 
     Lease.  This facility is 100% leased to 1300 Campbell Lane Operating
Company, LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15-year
net-lease with the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance. The tenant has
three
 
                                        77

 
options to renew for five years each. Beginning on July 1, 2005, the per annum
base rent is equal to 12.23% of the purchase price, including acquisition costs.
On January 1, 2006 and on each January 1 thereafter, the base rent will be
increased by 2.5%.
 
  MARLTON, NEW JERSEY
 
     General.  This facility, licensed for 76 beds, is an approximately 89,139
gross square foot rehabilitation hospital located in Marlton, New Jersey, which
is approximately 15 miles from Philadelphia, Pennsylvania. Construction of the
facility was completed in 1994. We acquired a ground lease interest in this
facility on July 1, 2004 for a purchase price of approximately $32.3 million
including acquisition costs. We ground lease the property on which the facility
is located from Virtua West Jersey Health System, a New Jersey non-profit
corporation, pursuant to a ground lease dated July 15, 1993. The initial term of
the ground lease expires in 2030. We have the right to renew the ground lease
for an additional term of 35 years upon the satisfaction of certain conditions
as set forth in the ground lease.
 
     Lease.  This facility is 100% leased to 92 Brick Road Operating Company,
LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15 year net-lease with
the tenant responsible for all costs of the facility, including, but not limited
to, taxes, utilities, insurance and maintenance. The tenant has three options to
renew for five years each. Beginning on July 1, 2005, the per annum base rent is
equal to 12.23% of the purchase price, including acquisition costs. On January
1, 2006 and on each January 1 thereafter, the base rent will be increased by
2.5%.
 
     HBA Management, Inc., or HBA, has subleased the entire third floor of the
hospital facility, approximately 26,896 square feet, for the operation of a
30-bed pediatric comprehensive rehabilitation unit and related office use,
together with certain fixtures, furnishings and equipment located in the
subleased premises. The current term of the sublease expires on August 31, 2013.
HBA has the option to extend the sublease term for two additional terms of five
years each. Base annual rent due under the sublease through September 30, 2005
is approximately $1,112,980 per annum, with adjustments annually thereafter. In
addition to base annual rent, HBA is required to pay its proportionate share of
all reimbursable expenses.
 
  FRESNO, CALIFORNIA
 
     General.  This facility, licensed for 62 beds, is an approximately 78,258
gross square foot rehabilitation hospital located in Fresno, California.
Construction of the facility was completed in 1990. We acquired a fee simple
interest in this facility on July 1, 2004 for approximately $18.7 million
including acquisition costs.
 
     Lease.  This facility is 100% leased to 7173 North Sharon Avenue Operating
Company, LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15 year
net-lease with the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance. The tenant has
three options to renew for five years each. Beginning on July 1, 2005, the per
annum base rent is equal to 12.23% of the purchase price, including acquisition
costs. On January 1, 2006 and on each January 1 thereafter, the base rent will
be increased by 2.5%.
 
  THORNTON, COLORADO
 
     General.  This facility is an approximately 141,388 gross square foot
rehabilitation hospital located in Thornton, Colorado, which is approximately 10
miles from Denver, Colorado. The facility is licensed for 70 rehabilitation
beds, 24 long-term care beds and 23 psychiatric beds. Construction of the
original facility was completed in 1962 with additions completed as recently as
1975. We acquired a fee simple interest in this facility on August 17, 2004 for
a purchase price of approximately $8.5 million including acquisition costs.
 
     Lease.  This facility is 100% leased to 8451 Pearl Street Operating
Company, LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15 year
net-lease with the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance. The tenant has
three options to
 
                                        78

 
renew for five years each. Beginning on August 17, 2005, the per annum base rent
is equal to 12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the base rent will be
increased by 2.5%.
 
  NEW BEDFORD, MASSACHUSETTS
 
     General.  This facility, licensed for 90 beds, is an approximately 70,657
gross square foot long-term acute care hospital located in New Bedford,
Massachusetts, which is approximately 45 miles from Boston, Massachusetts.
Construction of the original facility was completed in 1942 with additions
completed as recently as 1995. We acquired a fee simple interest in this
facility on August 17, 2004 for a purchase price of approximately $22.0 million
including acquisition costs.
 
     Lease.  This facility is 100% leased to 4499 Acushnet Avenue Operating
Company, LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15 year
net-lease with the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance. The tenant has
three options to renew for five years each. Beginning on August 17, 2005, the
per annum base rent is equal to 12.23% of the purchase price, including
acquisition costs. On January 1, 2006 and on each January 1 thereafter, the base
rent will be increased by 2.5%.
 
  KENTFIELD, CALIFORNIA
 
     General.  This facility, licensed for 60 beds, is an approximately 43,500
gross square foot long-term acute care hospital located in Kentfield,
California, which is approximately 15 miles from San Francisco, California.
Construction of the facility was completed in 1963 with the last renovations in
1988. We acquired a fee simple interest in this facility on July 1, 2004 for a
purchase price of approximately $7.6 million including acquisition costs.
 
     Lease.  This facility is 100% leased to 1125 Sir Francis Drake Boulevard
Operating Company, LLC, a wholly-owned subsidiary of Vibra, pursuant to a 15
year net-lease with the tenant responsible for all costs of the facility,
including, but not limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning on July 1,
2005, the per annum base rent is equal to 12.23% of the purchase price,
including acquisition costs. On January 1, 2006 and on each January 1
thereafter, the base rent will be increased by 2.5%.
 
REDDING FACILITY
 
     General.  On June 30, 2005, Ocadian Care Centers, LLC, or Ocadian, assigned
a long-term ground lease for land located in Redding, California to Northern
California Rehabilitation Hospital, LLC, a subsidiary of Vibra. On the same
date, Ocadian sold the facility located on the land, which we refer to in this
prospectus as the Redding Facility, to the Vibra subsidiary, subject to the
ground lease. Also on June 30, 2005, the Vibra subsidiary assigned this ground
lease interest to us and we purchased the Redding Facility. On the same date, we
subleased the land and leased the Redding Facility back to the Vibra subsidiary.
The term of the ground lease expires on November 16, 2075. See "Lease" below for
more detail. The Vibra subsidiary has subleased the operations and the right to
occupy the Redding Facility back to Ocadian during a transition term until the
Vibra subsidiary obtains certain healthcare licenses necessary to operate the
Redding Facility. The Vibra subsidiary will manage the facility on behalf of
Ocadian during this transition term. Upon receipt of the healthcare licenses,
the sublease and management agreement between the Vibra subsidiary and Ocadian
will terminate. The Vibra subsidiary expects this sublease and management
arrangement to continue for about 30 to 60 days from the date of this
prospectus.
 
     The Redding Facility contains approximately 70,000 square feet of space and
is currently licensed for a total of 88 beds including 14 acute care beds, 24
rehabilitation beds and 50 skilled nursing beds. The Vibra subsidiary intends to
convert a portion of the Redding Facility's licensed skilled nursing, general
acute care and rehabilitation beds to long-term acute care beds.
 
                                        79

 
     Our purchase price for assignment of the ground lease interest and for the
Redding Facility was $20,750,000 million; however, payment of $2.0 million of
the purchase price is being deferred pending completion, to our satisfaction, of
the conversion of certain beds to long-term acute care beds, and an additional
$750,000 of the purchase price is being deferred and will be paid out of a
special reserve account to pay for renovations. The Vibra subsidiary used and
will use the proceeds from the concurrent sale and assignment to us to acquire
the Redding Facility and the operations at the facility, upgrade equipment, make
certain renovations, convert certain beds to long-term acute care beds and for
working capital. The purchase price for the Redding Facility was arrived at
through arms-length negotiations based upon our analysis of various factors,
including the demographics of the area in which the facility is located, the
capability of the tenant to operate the facility, healthcare spending trends in
the geographic area, the structural integrity of the facility, governmental
regulatory trends which may impact the services provided by the tenant, and the
financial and economic returns which we require for making an investment.
 
     The Redding Facility is owned by MPT of Redding, LLC. Currently, our
operating partnership owns all of the membership interests in this limited
liability company; however, we have agreed, subject to applicable healthcare
regulations, to offer up to 20% of the interests in the limited liability
company to local physicians and other persons.
 
     Lease.  The Redding Facility is 100% leased to Northern California
Rehabilitation Hospital, LLC, a Vibra subsidiary, for a 15-year term, with three
options to renew for five years each. The lease is a net-lease with the tenant
responsible for all costs of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. Currently, the annual base rent is equal
to 10.5% per year of the purchase price actually paid. On each January 1,
beginning on January 1, 2006, the base rent will be increased by an amount equal
to the greater of (A) 2.5% per year of the prior year's base rent, or (B) the
percentage by which the CPI on January 1 shall have increased over the CPI in
effect on the then just previous January 1. The lease requires the tenant to pay
an annual inspection fee of $5,000. The annual inspection fee will increase by
2.5% each January 1 during the lease term. The lease also requires the tenant to
carry customary insurance which is adequate to satisfy our underwriting
standards.
 
     Reserve for Extraordinary Repairs.  Beginning on January 1, 2006, the
tenant will be required to make deposits into a reserve account equal to $1,500
per bed, increasing on each subsequent January 1 by the greater of 2.5% or the
increase in CPI for the previous year. Any amounts drawn from the reserve would
be replenished 1/12th of the amount drawn per month, until completely
replenished.
 
     Lease Guaranty and Security.  The lease is guaranteed by Vibra, Vibra
Management, LLC and The Hollinger Group, and is cross-defaulted with all other
leases and other agreements between us, or our affiliates, on the one hand, and
the tenant and Mr. Hollinger, or their affiliates, on the other hand, including
the leases for the Vibra Facilities and the Vibra loan. The guaranties of Vibra,
Vibra Management and The Hollinger Group of the lease for the Redding Facility
are of equal priority with the guaranties relating to the leases for the Vibra
Facilities and the Vibra loan. We believe that these agreements are important
elements of our underwriting of newly-formed healthcare operating companies
because they create incentives for their owners and managements to successfully
operate our tenants. However, we do not believe that these parties have
sufficient financial resources to satisfy a material portion of the total lease
obligations. We have included the audited and unaudited consolidated financial
statements for Vibra Healthcare, LLC as of and for the year ended December 31,
2004 and as of and for the six months ended June 30, 2005, respectively.
 
     In addition, as security for the lease, the tenant has granted us a
security interest in all personal property other than receivables, and subject
to the prior lien of any purchase money lender, with respect to tangible
personal property, located at and to be located at the facility, and an
assignment of rents and leases. The tenant has also made a cash deposit with us
in an amount equal to three months' base rent under the lease.
 
     Commitment Fee.  We received a commitment fee equal to 0.5% of the purchase
price.
 
                                        80

 
     Depreciation and Real Estate Taxes.  The following table sets forth
information, as of June 30, 2005, regarding the depreciation and real estate
taxes for the Redding Facility:
 


                                 FEDERAL TAX BASIS           DEPRECIATION                      2004 REAL ESTATE
                                -------------------   ---------------------------     LIFE     ----------------
                                LAND     BUILDINGS    ANNUAL RATE      METHOD       IN YEARS    TAXES     RATE
                                -----   -----------   -----------   -------------   --------   --------   -----
                                                                                     
Redding, California...........  $ --    $20,750,000       2.5%      Straight-line      40      $49,681     1.1%

 
DESERT VALLEY FACILITY
 
     General.  On February 28, 2005, we acquired a fee simple interest in the
Desert Valley Facility located in Victorville, California, which is
approximately 75 miles from Los Angeles, California. The approximately 122,140
square foot community hospital facility, built in 1994, is licensed for 83 beds
and has an integrated medical office building comprising approximately 50,000
square feet. We acquired the facility from Prime A Investments, LLC, an
unaffiliated third party, for a purchase price of approximately $28.0 million.
The purchase price was determined through arms-length negotiations with Prime A
Investments, LLC based upon our analysis of various factors. These factors
included the demographics of the area in which the facility is located, the
capability of the tenant to operate the facility, healthcare spending trends in
the geographic area, the structural integrity of the facility, governmental
regulatory trends which may impact the services provided by the tenant, and the
financial and economic returns which we require for making an investment.
 
     Lease.  This facility is 100% leased to DVH, an affiliate of Prime A
Investments, LLC. The principals of DVH have experience in developing,
acquiring, managing and operating acute care hospital facilities. The lease is a
15 year net-lease with the tenant responsible for all costs of the facility,
including, but not limited to, taxes, utilities, insurance and maintenance. DVH
has three options to renew for five years each. Currently, the annual base rent
is equal to 10% of the purchase price, or the annual rate of $2.8 million. On
January 1, 2006, and on each January 1 thereafter, the base rent will be
increased by an amount equal to the greater of (i) 2% per year of the prior
year's base rent or (ii) the percentage by which the CPI as published by the
United States Department of Labor, Bureau of Labor Statistics on January 1 shall
have increased over the CPI figure in effect on the immediately preceding
January 1, annualized based on the highest annual rate effective during the
preceding year if the previous year's base rent is for a partial year. The lease
requires DVH to carry customary insurance which is adequate to satisfy our
underwriting standards.
 
     DVH has subleased approximately 40,110 square feet of space in the medical
office portion of the facility to its affiliate, Desert Valley Medical Group,
Inc., or DVMG, for office use. The DVMG lease requires DVMG to pay rent of
$50,138 per month, to be adjusted commencing on January 1, 2006 by changes in
the CPI. The DVMG sublease expires on December 31, 2011. DVH has also subleased
approximately 500 square feet of space in the facility to Network
Pharmaceuticals, Inc. for the operation of a pharmacy. The pharmacy sublease
requires the tenant to pay rent of $2,000 per month. The pharmacy sublease
currently expires on May 15, 2007, subject to the pharmacy's option to renew for
a term of 10 years.
 
     Lease Guaranties and Security.  The Desert Valley lease is guaranteed by
Prime A Investments, L.L.C., Desert Valley Health System, Inc. and Desert Valley
Medical Group, Inc. The guaranty is an absolute and irrevocable guaranty. The
lease is cross-defaulted with any other leases between us or any of our
affiliates and DVH, any guarantor and any of their affiliates. In addition, as
security for the lease, DVH has granted us a security interest in all personal
property, other than receivables, located at the Desert Valley Facility, subject
to purchase money liens on equipment. Desert Valley Hospital, Inc. has provided
to us unaudited financial statements reflecting that, as of March 31, 2005, it
had tangible assets of approximately $21.6 million, liabilities of approximately
$17.6 million and stockholders' equity of approximately $4.0 million, and for
the three months ended March 31, 2005, had net income of approximately $4.0
million.
 
     Desert Valley Health System, Inc., the parent of DVH and a guarantor of the
lease, has provided to us audited financial statements showing that, as of
December 31, 2004, it had consolidated tangible assets
 
                                        81

 
of approximately $40.5 million, consolidated liabilities of approximately $31.4
million, and consolidated tangible net worth of approximately $9.1 million and
for the year ended December 31, 2004, had consolidated net income of
approximately $3.9 million.
 
     Reserve for Extraordinary Repairs.  DVH is responsible for all maintenance
and repairs and all extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as required under the
lease. DVH is required to make quarterly deposits into a reserve account in the
amount of $2,500 per bed per year. Beginning on January 1, 2006 and on each
January 1 thereafter, the payment of $2,500 per bed per year into the
improvement reserve will be increased by 2%. All extraordinary repair
expenditures made in each year during the term of the lease are to be funded
first from the reserve, and DVH is to pay into the reserve such funds as
necessary for all extraordinary repairs.
 
     Purchase Options.  At any time after February 28, 2007, so long as DVH and
its affiliates are not in default under any lease with us or any of the leases
with its subtenants, DVH will have the option, upon 90 days' prior written
notice, to purchase the facility at a purchase price equal to the sum of (i) the
purchase price of the facility, and (ii) that amount determined under a formula
that would provide us an internal rate of return of 10% per year, increased by
2% of such percentage each year, taking into account all payments of base rent
received by us. These same purchase rights also apply if we provide DVH with
notice of the exercise of our right to change management as a result of a
default, provided DVH gives us notice within five days following receipt of such
notice. If during the term of the lease we receive from the previous owner or
any of its affiliates a written offer to purchase the Desert Valley Facility and
we are willing to accept the offer, so long as DVH and its affiliates are not in
default under any lease with us or any of the subleases with its subtenants, we
must first present the offer to DVH and allow DVH the right to purchase the
facility upon the same price, terms and conditions as set forth in the offer;
however, if the offer is made after February 28, 2007, in lieu of exercising its
right of first refusal, DVH may exercise its option to purchase as provided
above.
 
     Depreciation and Real Estate Taxes.  The following table sets forth
information, as of December 31, 2004, regarding the depreciation and real estate
taxes for the Desert Valley Facility:
 


                            FEDERAL TAX BASIS              DEPRECIATION                      2004 REAL ESTATE
                         ------------------------   ---------------------------     LIFE     -----------------
                            LAND       BUILDINGS    ANNUAL RATE      METHOD       IN YEARS     TAXES     RATE
                         ----------   -----------   -----------   -------------   --------   ---------   -----
                                                                                    
Victorville,
  California...........  $2,000,000   $26,000,000       2.5%      Straight-line      40      $289,905    1.07%

 
     Facility Expansion.  We have also entered into a letter agreement with DVH
pursuant to which, subject to certain conditions, we have agreed to fund up to
$20.0 million for the purpose of expanding our Desert Valley Facility. Subject
to DVH providing us a development agreement, which it is not obligated to do, we
have agreed to begin funding and DVH has agreed to begin drawing funds before
February 28, 2006, in accordance with a disbursement schedule to be provided in
the development agreement at the time of the first draw. Upon receipt and
approval of the development agreement, DVH is obligated to pay us a fee in cash
equal to 0.5% of the maximum amount that can be funded. This fee will be
adjusted following the full and final funding of the expansion to a sum equal to
0.5% of the actual amount funded. Except for any adjustments to the fee that may
result from funding less than the maximum amount, the fee is non-refundable. If
DVH fails to provide a development agreement to us by February 28, 2006, we will
have no further liability or obligation to provide the funding. The $20.0
million expansion amount will be treated as a capital addition under the lease
and, accordingly, as such expansion costs are funded, the annual rent payable
under the lease will increase by an amount equal to the then-current lease rate
multiplied by the amount of expansion cost incurred. Such additional rent will
continue to be payable for the remaining term of the lease. For purposes of the
repurchase options contained in the lease, the purchase price will be increased
by the total cost of the addition. DVH is not obligated to present us with a
development agreement, and, if it does not, we have no obligation to provide
funding to DVH for the expansion. We will not generate any revenues from this
transaction unless and until we and DVH execute a definitive development
agreement and DVH begins drawing the committed funds.
 
                                        82

 
COVINGTON, LOUISIANA
 
     General.  On June 9, 2005, we acquired a fee simple interest in a long-term
acute care facility located in Covington, Louisiana, which is approximately 35
miles from New Orleans, Louisiana. The purchase agreement also provided for us
to make a $6.0 million loan to Denham Springs Healthcare Properties, L.L.C., as
well as our prospective purchase of a long-term acute facility in Denham
Springs, Louisiana. We acquired the facility in Covington, Louisiana, which we
refer to as the Covington Facility, from Covington Healthcare Properties,
L.L.C., an unaffiliated third party. The Covington Facility contains
approximately 43,250 square feet of space and is licensed for 58 beds.
 
     The purchase price for the Covington Facility was $11.5 million. This
purchase price was arrived at through arms-length negotiations based upon our
analysis of various factors. These factors included the demographics of the area
in which the facility is located, the capability of the tenant to operate the
facility, healthcare spending trends in the geographic area, the structural
integrity of the facility, governmental regulatory trends which may impact the
services provided by the tenant, and the financial and economic returns which we
require for making an investment.
 
     The Covington Facility is owned by MPT of Covington, L.L.C. Currently, our
operating partnership owns all of the membership interests in this limited
liability company; however, we have agreed that, subject to applicable
healthcare regulations, we will offer up to 30% of the equity interests in this
limited liability company to local physicians.
 
     Lease.  The Covington Facility is 100% leased to Gulf States Long Term
Acute Care of Covington, L.L.C. for a 15-year term, with three options to renew
for five years each. The lease is a net-lease with the tenant responsible for
all costs of the facility, including, but not limited to, taxes, utilities,
insurance, maintenance and capital improvements. Currently, the annual base rent
is equal to 10.5% of the purchase price plus any costs and charges that may be
capitalized. On each January 1, the base rent will increase by an amount equal
to the greater of (A) 2.5% per year of the prior year's base rent, or (B) the
percentage by which the CPI for November shall have increased over the CPI in
effect for the then just previous November; provided, however, on January 1,
2006, the adjustment shall be prorated. The lease requires the tenant to carry
customary insurance which is adequate to satisfy our underwriting standards.
 
     Lease Guaranty and Security.  The lease is guaranteed by Gulf States and
Team Rehab. The lease is cross-defaulted with our loan agreement with Denham
Springs Healthcare Properties, L.L.C. and will be cross-defaulted with our lease
of the Denham Springs Facility if we purchase that facility. In addition, as
security for the lease, the tenant has granted us a security interest in all
personal property, other than receivables and operating licenses, located and to
be located at the facility. Pursuant to the lease, the tenant has obtained and
delivered to us an unconditional and irrevocable letter of credit, naming us
beneficiary, in an amount equal to $598,500. At such time as the operations in
the facility have generated EBITDAR coverage of at least two times the base rent
for eight consecutive fiscal quarters, the letter of credit may be reduced to an
amount equal to three months of the base rent then in effect. If, however, after
satisfying the conditions necessary to reduce the letter of credit to three
months' base rent, EBITDAR coverage subsequently drops below two times base rent
for two consecutive fiscal quarters, the amount of the letter of credit is to be
increased to six months' base rent.
 
     Gulf States has provided to us unaudited financial statements reflecting
that, as of December 31, 2004, it had tangible assets of approximately $11.1
million, liabilities of approximately $9.3 million and stockholders' equity of
approximately $1.8 million, and for the year ended December 31, 2004 had net
income of approximately $2.0 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of December 31, 2004, it had tangible
assets of approximately $21.3 million, liabilities of approximately $9.2 million
and owner's equity of approximately $12.1 million, and for the year ended
December 31, 2004 had net income of approximately $1.7 million.
 
     The lease requires that, as of the commencement date of the lease and at
all times during the lease term, the tenant and its affiliates, Team Rehab, Gulf
States and Gulf States of Denham Springs, L.L.C., will maintain an aggregate net
worth of $9.0 million.
 
                                        83

 
     Repair and Replacement Reserve.  The tenant is responsible for all
maintenance, repairs and capital improvements at the facility. To secure this
obligation, the tenant has deposited with us $34,000 in a regular reserve
account. In addition, the tenant has deposited with us $150,247 in a special
reserve account for immediate repairs, which repairs are to be undertaken as
soon as practicable. In the event amounts in the regular reserve are utilized,
the tenant must replenish the reserve to the $34,000 level.
 
     Purchase Options.  The lease provides that so long as the tenant is not in
default under the lease, our lease for the Denham Springs Facility, if we
purchase that facility, or any sublease, and no event has occurred which with
the giving of notice or the passage of time or both would constitute such a
default, the tenant will have the option to purchase the facility (i) at the
expiration of the initial term and each extension term of the lease, to be
exercised by 60 days' written notice prior to the expiration of the initial term
and each extension term, and (ii) within five days of written notification from
us exercising our right to terminate the engagement of the tenant's or its
affiliate's management company as the management company for the facility as a
result of an event of default under the lease. The purchase price for those
options shall be equal to the greater of (i) the appraised value of the
facility, assuming the lease remains in effect for 15 years and not taking into
account any purchase options contained therein, or (ii) the purchase price paid
by us for the facility, increased annually by an amount equal to the greater of
(A) 2.5% per year from the date of the lease, or (B) the rate of increase in the
CPI on each January 1.
 
     Commitment Fee.  We received a commitment fee at the closing of the
purchase of the Covington Facility of $90,000.
 
     Depreciation and Real Estate Taxes.  The following table sets forth
information, as of December 31, 2004, regarding the depreciation and real estate
taxes for the Covington Facility:
 


                             FEDERAL TAX BASIS             DEPRECIATION                      2004 REAL ESTATE
                           ----------------------   ---------------------------     LIFE     ----------------
                             LAND      BUILDINGS    ANNUAL RATE      METHOD       IN YEARS    TAXES     RATE
                           --------   -----------   -----------   -------------   --------   --------   -----
                                                                                   
Covington, Louisiana.....  $821,429   $10,678,571       2.5%      Straight-line      40      $36,625    0.32%

 
DENHAM SPRINGS LOAN
 
     Loan.  On June 9, 2005 we made a loan of $6.0 million to Denham Springs
Healthcare Properties, L.L.C., $500,000 of which is to be held in escrow until
the resolution of certain environmental issues related to the facility. The loan
accrues interest at a rate of 10.5% per year, adjusted each January 1 by an
amount equal to the greater of (i) 2.5% or (ii) the percentage by which the CPI
increases from November to November, provided that the increase in CPI for 2005
is to be prorated. The loan is to be repaid over 15 years with interest only
during the 15 years and a balloon payment due and payable at the expiration of
the 15 years. The loan may be prepaid at any time without penalty.
 
     Loan Guaranty and Security.  The loan is guaranteed by Gulf States Long
Term Acute Care of Denham Springs, L.L.C., Team Rehab, L.L.C. and Gulf States.
As security for the loan, Denham Springs Healthcare Properties, L.L.C. granted
us a first mortgage on the facility and assigned to us all its right, title and
interest in and to all leases associated with the facility. The loan is also
cross-defaulted with the lease for the Covington Facility.
 
     Lease.  As a condition to the loan, Denham Springs Healthcare Properties,
L.L.C., the owner of the facility, terminated its existing lease with Gulf
States Long Term Acute Care of Denham Springs, L.L.C. and entered into a new
15-year net-lease with Gulf States Long Term Acute Care of Denham Springs,
L.L.C., with three options to renew for five years each. Under the lease, the
tenant is responsible for all costs of the facility, including, but not limited
to, taxes, utilities, insurance, maintenance and capital improvements. Beginning
on June 9, 2005, the annual base rent is equal to 10.5% of the purchase price,
including any costs or charges that may be capitalized. The lease provides that
on each January 1 during the term of the lease, the base rent will be increased
by an amount equal to the greater of (i) 2.5% per annum of the prior year's base
rent, or (ii) the percentage by which the CPI on November 1 shall have increased
over the CPI figure in effect on the then just previous November 1, provided
that the CPI adjustment for 2005 is to be prorated. The loan agreement among us,
Denham Springs Healthcare
 
                                        84

 
Properties, L.L.C. and Gulf States Long Term Acute Care of Denham Springs,
L.L.C. entitles us to receive all reports and other correspondence under this
lease during the loan term.
 
     Repair and Replacement Reserve.  The lease provides that the tenant, on the
commencement date of the lease, is required to deposit $56,000 into a reserve
account, as security for the tenant's obligation to make certain repairs under
the lease. The tenant is also required under the lease to make a deposit of
$398,590 into a special reserve account for use in making certain immediate
repairs to the facility, which are to be made as soon as practicable. Under the
lease, the landlord and tenant both acknowledge that we are holding both
deposits in connection with our loan.
 
     Sale/Leaseback.  The purchase agreement provides that, upon favorable
resolution of the environmental issues described below, we will purchase the
facility for a purchase price of $6.0 million, which will be paid, in whole or
in part, by delivering the note evidencing the loan marked "paid-in-full" and
releasing to Denham Springs Healthcare Properties, L.L.C. the remaining balance
of all funds escrowed under the loan. We expect to enter into a lease with
substantially the same terms as the lease for the Covington Facility with Gulf
States Long Term Acute Care of Denham Springs, L.L.C at closing.
 
     In April 2005, we arranged for a Phase I environmental assessment to be
performed at the Denham Springs Facility. The assessor recommended further soil
and groundwater sampling due to the property's previous use as a hospital that
involved X-ray and photochemical developing activities. Accordingly, we arranged
for a Phase II environmental soil and groundwater sampling. On May 19, 2005, we
received a Phase II report which concluded that one groundwater sample was at or
exceeded Louisiana Department of Environmental Quality (LDEQ) Numerical Acute
and Chronic Criteria standards for several metals. Concentrations of metals in
the soil samples were either below quantification limits or below LDEQ
regulatory guidelines. Based on this sampling, we were advised to present the
findings to LDEQ for review and determination. New sampling and analysis was
forwarded to LDEQ in July 2005 and on September 15, 2005, LDEQ confirmed that no
additional action is necessary at this time.
 
     Commitment Fee.  We received a commitment fee at closing in the amount of
$60,000.
 
NORTH CYPRESS FACILITY
 
     General.  On June 13, 2005, we closed a series of transactions, effective
as of June 1, 2005, with North Cypress, an unaffiliated third party, pursuant to
which North Cypress is to develop a community hospital in Houston, Texas. We
ground lease two parcels of land, the hospital tract and the parking area tract,
from the owners of those tracts pursuant to two separate ground leases. Also, we
and the owner of the hospital tract entered into a purchase and sale agreement
pursuant to which we can acquire the hospital tract for approximately $4.7
million. We then subleased the hospital tract and the parking area tract to
North Cypress, which sublease requires North Cypress to construct the hospital
improvements. We refer to this sublease as the ground sublease. The ground
sublease has a term of 99 years. We agreed to make a construction loan, secured
by the hospital improvements, to North Cypress for approximately $64.0 million,
the amount necessary for construction of the improvements, with interest at
10.5% per annum, which interest is deferred and added to the principal balance
of the loan during the construction period, and for a term ending upon
completion of construction. Subject to certain limited conditions, we will
purchase from and lease to North Cypress the hospital improvements upon
completion pursuant to a second purchase and sale agreement and a
post-construction lease. In the event we do not purchase the improvements upon
completion of construction, the ground sublease will continue and the
construction loan will become due. In that event, we expect to seek to convert
the construction loan to a 15 year term loan with interest at 10.5% per annum,
secured by a mortgage on the hospital improvements. If we purchase the
improvements, the ground sublease will terminate and be replaced with the
post-construction lease, which is a lease of the hospital tract, the land, the
hospital improvements and a sublease of the parking area tract. We refer to this
lease as the facility lease.
 
     Commitment Fee.  In connection with the transaction, North Cypress paid us
a commitment fee in the amount of $640,280, $100,000 of which was paid in cash
and $540,280 of which was added to the principal balance of the construction
loan.
 
                                        85

 
     Leases.  We entered into two ground leases, one for the hospital tract and
one for a parking area tract, with the current owners of that land. We then
ground subleased the two tracts to North Cypress. If we purchase the hospital
tract, the ground lease for the hospital tract will terminate. If we purchase
the hospital improvements at the end of the construction term, the ground
sublease will terminate and be replaced by the facility lease which will have a
term of 15 years with three options to renew for five years each. The ground
sublease and the facility lease are each a net-lease with the tenant responsible
for all costs of the facility, including, but not limited to, all rent and other
costs and expenses due and payable under the ground lease, taxes, utilities,
insurance, maintenance and capital improvements. Rent pursuant to the ground
sublease during the construction period is a monthly amount equal to the sum of
(A) the product of (i) 10.5% multiplied by (ii) the total amount of funds
disbursed under the construction loan as of the date this payment is due divided
by 12 plus (B) the sum of all rents paid under the ground leases. Subsequent to
the completion of construction of the hospital improvements, base rent under the
ground sublease will be an amount equal to 10.5% multiplied by the total amount
of funds disbursed under the construction loan plus the sum of all rents paid
pursuant to the ground leases. The facility lease requires the tenant to pay
monthly rent in an annual amount equal to 10.5% multiplied by the total amount
of the funds disbursed under the construction loan plus the sum of all rents
paid pursuant to the ground leases. On January 1, 2006, and on each January 1
thereafter, the base rent will increase by an amount equal to the greater of (A)
2.5% per year of the prior year's base rent, excluding the ground lease rent
component, or (B) the percentage by which the CPI on January 1 shall have
increased over the CPI figure in effect on the then just previous January 1. The
leases require the tenant to carry customary insurance which is adequate to
satisfy our underwriting standards. The facility lease requires the tenant to
pay us, commencing on the commencement date of the facility lease and on each
January 1 during the term thereof, an amount equal to $7,500 to cover the cost
of the physical inspections of the facility, which fee will, on each January 1,
be increased by 2.5% per annum. In addition to this ongoing inspection fee, the
MPT lender is entitled to receive an inspection fee of $75,000 to cover the
lender's inspection costs during the construction period.
 
     Capital Improvement Reserve.  The ground sublease and the facility lease
require the tenant, beginning on the date that construction of the facility has
been completed, to make annual deposits into a reserve account in the amount of
$2,500 per bed per year. These leases also provide that on each January 1
thereafter, the payment of $2,500 per bed per year into the capital improvement
reserve will be increased by 2.5%.
 
     Capital Contributions and Net Worth Covenant.  The ground sublease and the
facility lease require that, as of the commencement date of each lease, the
tenant shall have received from its equity owners at least $15.0 million in cash
equity. So long as tenant maintains the consolidated net worth required under
each lease, such cash equity may be used for acquisition, pre-opening and
operating expenses of the facility and shall not be distributed to tenant's
equity owners. The ground sublease and the facility sublease contain net worth
covenants which tenant must satisfy.
 
     Security.  The tenant must deliver to us upon execution of the ground
sublease a security deposit in the approximate amount of $6.7 million. The
security deposit can be cash or a letter of credit. At the execution of the
facility lease the security deposit amount shall be equal to 10.5% times the
total development costs of the hospital improvements. At the time that the
operations from the facility have sustained EBITDAR coverage of at least two
times the then current base rent for two consecutive fiscal years, the amount of
the security deposit can be reduced by one half.
 
     Management.  North Cypress is newly formed and has had no significant
operations to date. North Cypress has executed a contract with Surgical
Development Partners, LLC, a hospital management company, to manage the
day-to-day operations of the hospital, including staffing, scheduling, billing
and collections, governmental compliance and relations, and other functions.
Surgical Development Partners, LLC has made a substantial equity investment in
North Cypress. We have the right to require North Cypress to replace the
management company under certain conditions.
 
                                        86

 
     Purchase Options.  Pursuant to the terms of the facility lease, so long as
no event of default has occurred, at the expiration of the facility lease the
tenant will have the option to purchase our interest in the property leased
pursuant to the facility lease at a purchase price equal to the greater of (i)
the fair market value of the leased property or (ii) the purchase price paid by
us to tenant pursuant to the purchase and sale agreement relating to the
hospital improvements plus our interest in any capital additions funded by us,
as increased by the amount equal to the greater of (A) 2.5% from the date of the
facility lease execution or (B) the rate of increase in the CPI as of each
January 1 which has passed during the lease term; provided no event shall the
purchase price be less than the fair market value of the property leased.
 
     Sale Proceeds Distributions or Syndication.  The facility lease also
provides that if during the term of the facility lease we sell our interest in
the property, then the net sales proceeds from the sales shall be distributed as
follows: (A) to us in the amount equal to the purchase price paid by us to the
tenant pursuant to the purchase and sale agreement relating to the hospital
improvements plus an amount which will provide us with an internal rate of
return of 15% and (B) the balance of the net proceeds shall be divided equally
between us and the tenant. In addition, subject to applicable healthcare
regulations, we will offer to tenant and any physician which owns an interest in
tenant the opportunity to purchase up to an aggregate 49% of the limited
partnership interest in MPT of North Cypress, L.P., our subsidiary that owns the
property. The right to purchase is applicable during the period which is not
less than six months or more than nine months subsequent to the commencement
date of the facility lease. The price for the limited partnership interest shall
be determined on the basis of the historical cost of our assets.
 
WEST HOUSTON FACILITIES
 
     General.  In June 2004, we entered into agreements with Stealth and GPMV to
develop the West Houston Hospital and the adjacent West Houston MOB in Houston,
Texas. We have engaged GPMV to develop the 105 bed, 121,884 gross square foot
West Houston Hospital. Seventy-one beds will be acute care beds to be operated
by Stealth and 34 will be long-term acute care beds to be operated by Triumph
Southwest, L.P., or Triumph, a tenant of Stealth. We have engaged a third-party
developer to develop the adjacent 120,000 gross square foot West Houston MOB on
the property. Pursuant to the agreements with Stealth and GPMV, we have formed
two Delaware limited partnerships, MPT West Houston Hospital, L.P., or the
hospital limited partnership, which will own the West Houston Hospital, and MPT
West Houston MOB, L.P., or the MOB limited partnership, which will own the
adjoining West Houston MOB. Stealth will be required to maintain insurance that
is adequate to satisfy our underwriting standards.
 
     West Houston GP, L.P., an affiliate of GPMV, holds a 25% general
partnership interest in Stealth. The limited partners of Stealth, which
currently hold a 75% interest, consist of 85 physicians. The sole business of
Stealth is the operation of the West Houston Hospital offering multi-specialty
services and the West Houston MOB. Because those facilities are still in the
construction phase, Stealth has had no meaningful operations to date. Our
operating partnership owns an approximate 94% limited partnership interest in
the hospital limited partnership and Stealth owns an approximate 6% limited
partnership interest. MPT West Houston Hospital, LLC, a wholly-owned limited
liability company of our operating partnership, owns the 0.1% general
partnership interest in the hospital limited partnership. Currently, our
operating partnership owns approximately 76% of the limited partnership
interests in the MOB limited partnership and MPT West Houston MOB, LLC, a
wholly-owned subsidiary of our operating partnership, owns the 0.1% general
partnership interest. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the aggregate equity
interests in the MOB limited partnership.
 
     The hospital limited partnership and MOB limited partnership each own a fee
simple interest in the undeveloped land on which the facilities are being
constructed, as well as adjacent undeveloped land. In addition, Stealth has an
option, exercisable until November 2010, to reacquire approximately 14.5 acres
of land owned by the hospital limited partnership, which land is located
adjacent to the land on which the facilities are being constructed. The option
price for this parcel is equal to the original cost, plus any amounts
subsequently paid by us with respect to this parcel. Stealth also has a right of
first offer,
 
                                        87

 
exercisable until November 2010, to purchase this parcel should we determine to
sell it to a third party. In consideration for Stealth's agreement to limit the
term of the foregoing option and right of first offer, we have agreed to pay
Stealth up to $3.5 million, upon its request and in $500,000 increments. Any
additional amounts paid will be included in total development costs and will
increase the rental payable to us accordingly. We have no further obligation to
honor any payment requests after August 31, 2006.
 
     In connection with the development of the West Houston Facilities, we are
entitled to a commitment fee of approximately $932,125. This fee is to be paid
15 years from the date of completion of the hospital facility, with interest
thereon at the rate of 10.75% per year, and is unsecured but is cross-defaulted
with the leases we have with Stealth at the West Houston Facilities. Stealth is
to commence making monthly interest payments beginning the first month after
completion of the West Houston Hospital.
 
     In addition, MPT Development Services, Inc., our taxable REIT subsidiary,
has agreed to make a working capital loan to Stealth in an amount up to $1.62
million. To date, no funds have been drawn by Stealth. This loan is to be repaid
15 years from the date of completion of the West Houston Hospital, with interest
at the rate of 10.75% per year, and is unsecured but cross-defaulted with the
leases we have with Stealth at the West Houston Facilities. The loans are not
guaranteed. The leases contain certain debt coverage ratio and other financial
covenants, the default of which would constitute a default under the loans.
Stealth is obligated to commence making monthly interest payments beginning the
first month after completion of the West Houston Hospital. Either the fee or the
working capital loan may be prepaid at any time without penalty, except that a
minimum prepayment of $500,000 is required for the working capital loan.
 
     If either we or Stealth determine in good faith, after consultation with
healthcare counsel, that healthcare law prohibitions or restrictions require the
physician-limited partners to divest their ownership interests in Stealth, we
have agreed to issue up to $6 million of limited partnership interests in the
hospital limited partnership to Stealth to be used as part of the consideration
to completely redeem the physician-limited partners' ownership interests in
Stealth. We have agreed to lend Stealth the $6 million to purchase the limited
partnership interests in the hospital limited partnership, which loan would
accrue interest at the rate of not less than 10.75% per year, and would be paid
over 10 years. If this transaction is necessary, we do not expect it to occur
prior to the end of the second quarter of 2005.
 
     Development Agreements.  The hospital limited partnership has agreed to pay
GPMV a development fee of approximately $700,000, a construction management fee
not to exceed $200,000, and a contingent funds fee of approximately $450,000.
The MOB limited partnership has agreed to pay the developer of the West Houston
MOB a development fee of approximately $550,000, a construction management fee
of $300,000, and a contingent funds fee of approximately $350,000. Upon the
completion of the development of the facilities, we will obtain independent
as-built appraisals of the facilities.
 
     Stealth is obligated to pay MPT Development Services, Inc., our taxable
REIT subsidiary, a project inspection fee for construction coordination services
of $100,000 in the case of the West Houston Hospital and $50,000 in the case of
the adjacent West Houston MOB. These fees are to be paid, with interest at the
rate of 10.75% per year, over a 15 year period beginning on the date that the
West Houston Hospital is completed. The total development costs for the
facilities, including acquisition cost, development services fee, commitment
fee, project management fee, and construction costs, are estimated to be $42.6
million for the hospital facility and $20.5 million for the medical office
building. Construction, which commenced in July 2004, is expected to be
completed in October 2005 for the West Houston Hospital and for the adjacent
West Houston MOB. During the construction period, we will advance funds pursuant
to requests made in accordance with the terms of the development agreements
between us and the developers. We have agreed to fund 100% of the total
development costs for the West Houston Hospital and the adjacent West Houston
MOB. Our agreement with Stealth provides that $17,006,803 of this funding will
be in the form of an equity contribution for the West Houston Hospital, with the
remaining funding being in the form of debt, and for the adjoining West Houston
MOB, our agreement with Stealth provides that $5.0 million of the funding will
be in the form of an equity contribution or subordinated debt, with the
 
                                        88

 
remaining funding being in the form of debt. If we obtain third-party
construction financing, the debt portion of the development costs will be
provided by the third-party lender.
 
     Leases.  We are leasing the facilities to Stealth during the construction
phase with rent accruing until the completion dates and the accrued rent to be
paid over the remaining lease term once the facilities are completed. Following
the completion dates, the lease term will extend for a period of 15 years for
the West Houston Hospital and 10 years for the West Houston MOB. Stealth will
have three options to renew each lease for a period of five years each. On
January 1, 2006 and on each January 1 thereafter, the base rent for the West
Houston Hospital will increase 2.5% and the base rent for the West Houston MOB
will increase 2.0%. The leases are net-leases with Stealth responsible for all
costs and expenses associated with the operation, maintenance and repair of the
facilities. Triumph has subleased an entire floor of the West Houston Hospital
in order to operate 34 long-term acute care beds. The sublease is for a term of
180 months following the completion of the construction of the West Houston
Hospital. The sublease grants to Triumph options to extend the term of the
sublease for three additional periods of five years each. The sublease requires
Triumph to pay rent in an amount equal to 12% of all rent and other charges
payable by Stealth to us under our lease with Stealth, with certain exclusions.
The sublease provides that Stealth's obligations under the sublease are
conditioned upon the execution of a guaranty by Triumph HealthCare of Texas,
L.L.C. and Triumph HealthCare, L.L.P. The sublease grants Stealth the right to
relocate Triumph to a new facility to be constructed adjacent to and attached to
the West Houston Hospital. In order to exercise the relocation right, Stealth
must give Triumph at least 270 days' notice prior to the date of such
relocation. Triumph must vacate the subleased premises on or before the
relocation date specified in the notice from Stealth, which cannot be earlier
than 270 days after the date of the relocation notice.
 
     Triumph has subleased 9,726 square feet of net rentable area in the West
Houston MOB for use as a medical office exclusively for the practice of
medicine, the operation of a medical office and the provision of related
administrative services, or medical related use. The sublease is for a term of
120 months following the earlier of the date of final completion of the
leasehold improvements, or the date on which Triumph commences business in the
subleased premises. The sublease grants to Triumph options to extend the term of
the sublease for four additional periods of five years each. The sublease
requires Triumph to pay annual base rent for years one through ten calculated at
$20 per net rentable square foot. Beginning on the first anniversary of the
lease and on each anniversary date thereafter, base rent is increased to an
amount equal to 1.02 times or 102% of the base rent payable in the previous
year. The lease also requires Triumph to pay its pro rata share of annual
operating expenses, taxes and insurance relating to the West Houston MOB. The
sublease provides that Stealth's obligations under the sublease are conditioned
upon the execution of a guaranty by Triumph HealthCare of Texas, L.L.C. and
Triumph HealthCare, L.L.P. The West Houston MOB sublease with Triumph also runs
concurrently with Stealth's lease with us. In the event our lease with Stealth
is terminated, the sublease on the hospital with Triumph is also terminated.
 
     Purchase Option.  After the first full 12 month period after construction
of each of the West Houston Facilities is completed, as long as Stealth is not
in default under either of its leases with us or any of the leases with its
physician subtenants, Stealth has the right to purchase the West Houston MOB and
the West Houston Hospital at a purchase price equal to the greater of (i) that
amount determined under a formula that would provide us an internal rate of
return of at least 18% or (ii) the appraised value based on a 15 year lease in
place. To arrive at the appraised value, each of the parties chooses an
appraiser. If the appraisals obtained are not materially different, (meaning a
10% or more variance), 50% of the sum of each appraised value is used as the
option price. If the two appraisals are materially different, then the two
appraisers appoint a third appraiser and the appraiser's valuation which differs
greatest from the other two appraisers is excluded and 50% of the sum of the two
remaining determinations is used as the option price. The costs of the appraisal
process are borne equally by the parties. Upon written notice to us within 90
days of the expiration of the applicable lease, as long as Stealth is not in
default under either of its leases with us or any of the leases with its
physician subtenants, Stealth will have the option to purchase the West Houston
MOB or the West Houston Hospital at a price equal to the greater of (i) the
total development costs (including any capital additions funded by us, but
excluding any capital additions funded by Stealth) increased by 2.5% per year,
or (ii) the
 
                                        89

 
appraised value based on a 15 year lease in place. To arrive at the appraised
value, each of the parties chooses an appraiser. If the appraisals obtained are
not materially different, (meaning a 10% or more variance), 50% of the sum of
each appraised value is used as the option price. If the two appraisals are
materially different, then the two appraisers appoint a third appraiser and the
appraiser's valuation which differs greatest from the other two appraisers is
excluded and 50% of the sum of the two remaining determinations is used as the
option price. The costs of the appraisal process are borne equally by the
parties.
 
     The leases also provide that under certain limited circumstances, the
tenant will have the right to present us with a choice of one out of three
proposed exchange facilities to be substituted for the leased facility. The
tenant will have the right to propose substitute facilities, if not in default,
at any time prior to the expiration of the term, if (i) in the good faith
judgment of the tenant the facility becomes uneconomic or unsuitable for its
primary intended use, (ii) there is an eviction or interference caused by any
claim of paramount title, or (iii) if for other prudent business reasons, the
tenant desires to terminate the lease. The tenant will have the obligation to
substitute facilities if it has discontinued use of the facility for a period in
excess of one year, and we have not exercised our right to terminate the lease.
Each proposed substitution facility must: (i) provide us with an annual return
on our equity in such facility, or yield, substantially equivalent to our yield
from the original facility (ii) provide us with rent with a substantially
equivalent yield taking into account any cash adjustment paid or received by us
and any other relevant factors, and (iii) have a fair market value in an amount
equal to the fair market value of the original facility, taking into account any
cash adjustment paid or received by us. If we elect to consummate the exchange,
the existing lease would terminate and the parties would enter into a new lease
for the substituted facility. If we elect not to proceed with the exchange, the
tenant would have the right to terminate the lease and purchase the leased
facility for appraised value, determined assuming the lease is still in place.
 
     Right of First Offer to Purchase.  At any time during the term of the
applicable lease for either of the West Houston Facilities, as long as Stealth
is not in default under either of its leases with us or any of the leases with
its physician subtenants, we are required to notify Stealth if we intend to sell
either facility to a third party. If Stealth wishes to offer to purchase the
facility, it must notify us in writing within 15 days, setting forth the terms
and conditions of the proposed purchase. If we accept Stealth's offer, Stealth
must close the purchase within 45 days of the date of our acceptance.
 
     Security.  The leases for the West Houston Facilities are cross-defaulted
and are guaranteed by West Houston G.P., L.P. and West Houston Joint Ventures,
Inc., affiliates of Stealth. To secure its performance of its lease obligations
under the West Houston Hospital lease, Stealth has obtained a certificate of
deposit in the amount of $1,905,234, of which we are the beneficiary. The
sublease between Stealth and Triumph requires Triumph to obtain a certificate of
deposit in the amount of $400,000 to secure the performance of its obligations
under its sublease with Stealth. However, subject to execution of definitive
agreements, we, Stealth and Triumph have agreed that Triumph shall obtain and
deliver to us a $400,000 letter of credit, in lieu of the certificate of
deposit, to be held by us. The sublease has been assigned to us as collateral
security for Stealth's performance under its lease. Under the lease and the
sublease, each of Stealth and Triumph, respectively, are required to give us a
security interest in these certificates of deposit and to enter into control
agreements with us and the issuing banks which provide that the banks will
follow our instructions regarding the certificates of deposit. Once the West
Houston Hospital commences operations, Stealth is required to substitute a
letter of credit in the amount of $1,905,234 in place of the $1,905,234
certificate of deposit; and on May 1, 2005, the sublease required that Triumph
substitute a letter of credit in the amount of $1.0 million in place of the
$400,000 certificate of deposit. Triumph has not yet made this substitution. The
lease further provides that the Stealth letter of credit may be released in two
increments of 50% of the total amount of the letter of credit over a 2 year
period following the date on which Stealth generates a total rent (excluding
additional charges) coverage from EBITDAR of at least 200% for 12 consecutive
months.
 
     Stealth has provided to us unaudited financial statements reflecting that,
as of March 31, 2005, it had tangible assets of approximately $5.8 million,
including cash of approximately $4.4 million, liabilities of approximately
$269,000 and owners' equity of approximately $5.5 million. Neither of the
guarantors has any substantial assets, other than its interest in Stealth.
 
                                        90

 
     Capital Improvements.  Stealth is responsible for all capital expenditures
required to keep the West Houston Facilities in compliance with applicable laws
and regulations. Beginning on January 1, 2005, Stealth will make monthly
deposits into a capital improvement reserve in the amount of $3,000 per year in
the case of the West Houston MOB and $2,500 per bed per annum in the case of the
West Houston Hospital. On each January 1 thereafter, the payment into the
capital improvement reserve will be increased by 2.0% in the case of the West
Houston MOB and by 2.25% in the case of the West Houston Hospital. All capital
expenditures made in each year during the term of the lease will be funded first
from the capital improvement reserve, and the tenant will pay into its
respective capital improvement reserve such funds as necessary for all
replacements and repairs.
 
     Depreciation and Real Estate Taxes.  The following table sets forth
information, as of December 31, 2004, regarding the estimated depreciation and
real estate taxes for the Houston Facilities:
 


                                ESTIMATED                        DEPRECIATION                    ESTIMATED
                            FEDERAL TAX BASIS       --------------------------------------   2005 REAL ESTATE
                         ------------------------   ANNUAL                                   -----------------
                            LAND       BUILDINGS     RATE       METHOD       LIFE IN YEARS     TAXES      RATE
                         ----------   -----------   ------   -------------   -------------   ----------   ----
                                                                                     
West Houston
  Hospital.............  $8,400,000   $34,200,000    2.5%    Straight-line        40         $1,324,860   3.11%
West Houston MOB.......   1,800,000    18,700,000    2.5     Straight-line        40            637,550   3.11

 
BENSALEM, PENNSYLVANIA
 
     General.  On September 16, 2005, we acquired a fee simple interest in 15
acres of land located in Bucks County, Pennsylvania, which is approximately 15
miles from Philadelphia, Pennsylvania, for a purchase price of approximately
$5.4 million pursuant to an agreement with Glenview Corporate Center Limited
Partnership. On the same date, we entered into an agreement with Bucks County
Oncoplastic Institute, LLC, or BCO, and DSI Facility Development, LLC, or the
developer, each an unaffiliated third party, to develop a women's hospital
facility with an integrated medical office building on the land. The total
development costs to develop the facility, including the cost of the land, are
estimated at approximately $38.0 million. To date, including the acquisition
costs of the land, we have incurred approximately $8.8 million of the total
development costs.
 
     Lease.  We have formed a Delaware limited partnership, MPT of Bucks County,
L.P., to own the facility. We have entered into a lease with BCO for both the
land and the improvements. The lease will extend for the construction term and
15 years thereafter with BCO having two five-year renewal options and a third
option to renew the lease until August 15, 2035. The lease is a net-lease with
BCO responsible for all costs of the facility, including, but not limited to,
taxes, utilities, insurance and maintenance. The lease will require BCO to pay
monthly rent in a per annum amount equal to 10.75% multiplied by the total
amount of the funds disbursed under the development agreement. The lease
provides that on January 1, 2007, and on each January 1 thereafter, the base
rent will be increased by an amount equal to the greater of (A) 2.5% per annum
of the prior year's base rent, or (B) the percentage by which the CPI has
increased over the CPI figure in effect on the previous January 1. The lease
further provides that, upon completion of construction, and beginning with the
calendar month after the completion date, BCO will pay, in addition to base
rent, percentage rent in an amount equal to 1.75% of revenues for the preceding
month. The lease also requires BCO to carry customary insurance which is
adequate to satisfy our underwriting standards. The lease requires BCO to pay us
on January 1, 2006 an amount equal to $7,500 to cover the cost of the physical
inspections of the facility, which fee will, beginning on January 1, 2007, and
continuing on each January 1 thereafter, be increased by 2.5% per annum. In
addition to the inspection fee, the total development costs also include a fee
equal to $75,000 to cover our inspection of the facility during the construction
period. We loaned BCO the funds for this fee, which loan bears interest at a
rate of 10.75%.
 
     Capital Improvement Reserve.  The lease requires BCO to be responsible for
all maintenance and repairs and all extraordinary repairs required to keep the
facility in compliance with all applicable laws and regulations and as required
under the lease. The lease will also require BCO, beginning on the completion of
construction of the facility, to make annual deposits into a reserve account in
the amount of $2,500 per
 
                                        91

 
bed per year. The lease provides that beginning on the first January 1 after the
completion of construction, the payment of $2,500 per bed per year into the
improvement reserve will be increased by 2.5%. The lease provides that all
extraordinary repair expenditures made in each year during the term of the lease
will be funded first from the reserve, and that BCO will pay into the reserve
such funds as necessary for all extraordinary repairs.
 
     Development Agreements.  We have agreed to pay DSI Facility Development,
LLC, an affiliate of BCO, a developer fee of $515,000, a construction management
fee of $687,500 and a developer bonus based upon the cost savings if the
facility is completed for less than the estimated total development costs.
 
     Security.  As security for the lease, BCO has granted us a security
interest in all personal property, other than receivables, located and to be
located at the facility, which security interest is subject to any lien of any
purchase money equipment lender. The lease requires BCO to obtain and deliver to
us an unconditional and irrevocable letter of credit from a bank acceptable to
us, naming us beneficiary thereunder, in an amount equal to one year's base rent
under the lease. BCO substituted a cash deposit for the letter of credit, which
we will continue to hold until a certificate of occupancy is issued, and we
loaned BCO the funds for this cash deposit, which loan bears interest at the
rate of 20% per annum. At the time the letter of credit is delivered, we will
retain the cash deposit and it shall be applied toward the promissory note. As a
condition to closing and as a continuing covenant under the lease, BCO is
required to achieve a tangible net worth of $5.0 million, which may be satisfied
by an equity injection, operating earnings or approved line of credit. Until BCO
satisfies such covenant, our lease for the Buck's County Facility is guaranteed
to the extent of $5.0 million by 14 guarantors. Six of these guarantors have
pledged cash, cash equivalents or marketable securities equivalent to their
maximum guaranty limits. Eight of the guarantors have delivered financial
statements which we believe reflect the necessary financial wherewithal to
satisfy their guaranty obligations. The lease will be cross-defaulted to any
other lease or agreement between the parties. BCO is newly formed and has had no
significant operations to date.
 
     Purchase Options.  The lease provides that so long as BCO is not in default
under any lease with us or any of the leases with its subtenants, at the
expiration of the lease BCO will have the option, upon 60 days prior written
notice, to purchase the facility at a purchase price equal to the greater of (i)
the appraised value of the facility, which assumes the lease remains in effect
for 15 years, or (ii) the total development costs, including any capital
additions funded by us, as increased by an amount equal to the greater of (A)
2.5% per annum from the date of the lease, or (B) the rate of increase in the
CPI on each January 1. If we do not approve a change of control transaction
involving BCO, BCO shall also have the option, exercisable for 30 days after our
failure to approve the change of control, to purchase the facility at the
greater of (i) the above formula for the end-of-lease-term purchase option or
(ii) an amount that would provide us an internal rate of return of 13%.
 
     Commitment Fee.  At closing, BCO executed a promissory note in favor of us
for the $345,000 commitment fee, which note bears interest at a rate of 10.75%
and is payable interest only with a balloon payment approximately 15 years
following completion of construction.
 

BLOOMINGTON, INDIANA

 

     General.  On October 7, 2005, we purchased 12 acres of land in Bloomington,
Indiana, which is approximately 50 miles from Indianapolis, Indiana, from SIMP
II. As an accommodation to SIMP II, we also agreed to hold title to an
additional 34 acres to be retransferred to SIMP II for nominal consideration
upon the approval of the subdivision of the land. We also entered into funding
and development agreements with Monroe Hospital, LLC, or Monroe Hospital, and
Monroe Hospital Development, LLC, or Monroe Development, an affiliate of
Surgical Development Partners, LLC, to develop a community hospital on the 12
acre parcel. The total development costs to develop the facility, including the
cost of the land, will be approximately $35.5 million. To date, including the
acquisition costs of the land, we have incurred approximately $4.9 million of
the total development costs. We also loaned SIMP II $165,000 which is to be
repaid no later than October 7, 2007 and bears interest at a rate of 10.50% per
annum until paid.

 
                                        92

 

     Lease.  We have formed a Delaware limited liability company, MPT of
Bloomington, LLC, to own the facility. We are leasing 100% of the land and all
improvements to be constructed thereon to Monroe Hospital for the construction
period. Following construction, the lease will continue for a term of 15 years
with three options to renew for five years each. The lease is a net-lease with
the tenant responsible for all costs of the facility, including, but not limited
to, taxes, utilities, insurance, maintenance and capital improvements. The lease
requires the tenant to pay monthly rent in a per annum amount equal to 10.50%
multiplied by the purchase price of the land and the total amount of the funds
disbursed under the funding and development agreements. During the construction
period, the rent will be deferred and will be paid after the construction period
over the 15 year lease term. On January 1, 2007, and on each January 1
thereafter, the base rent will be increased by an amount equal to the greater of
(A) 2.5% per annum of the prior year's base rent, or (B) the percentage by which
the CPI on January 1 shall have increased over the CPI figure in effect on the
then just previous January 1. The lease also requires the tenant to carry
customary insurance which is adequate to satisfy our underwriting standards. The
lease requires the tenant to pay, on the commencement date and on each January 1
thereafter, an amount equal to $5,000 to cover the cost of the physical
inspections of the facility, which fee will, beginning on January 1, 2006, and
continuing on each January 1 thereafter, be increased by 2.5% per annum. In
addition, to the inspection fee, we are entitled to a fee equal to $50,000 to
cover our inspection of the facility during the construction period. We loaned
Monroe Hospital the $55,000 for these inspection fees, which loan bears interest
at a rate of 10.5% per annum, is payable interest only following the completion
date and matures 15 years thereafter.

 

     Repair and Replacement Reserve.  The lease requires Monroe Hospital to be
responsible for all maintenance and repairs and all extraordinary repairs
required to keep the facility in compliance with all applicable laws and
regulations and as required under the lease. The lease also requires that the
tenant, beginning on the completion of construction of the facility, to make
annual deposits into a reserve account in the amount of $2,500 per bed per year.
The lease also provides that beginning on the first January 1 after the
completion of construction, and on each January 1 thereafter, the payment of
$2,500 per bed per year into the improvement reserve will be increased by 2.5%.

 

     Development Agreements.  We have agreed to pay Monroe Development a
developer fee of $750,000 and an additional fee of $250,000 for
post-construction services.

 

     Security.  As security for the lease, Monroe Hospital has granted us a
security interest in all personal property, other than receivables, located and
to be located at the facility. As further security for the Lease, Monroe
Hospital has caused its wholly owned subsidiary, Monroe Hospital Outpatient ASC,
LLC to grant us a security interest in all its personal property, other than
receivables, located or to be located at the facility. The tenant also obtained
and delivered to us an unconditional and irrevocable letter of credit from a
bank acceptable to us, naming us beneficiary thereunder in an amount equal to
one year's base rent under the lease. Monroe Hospital is newly formed and has
had no significant operations to date. As a condition to closing, Monroe
Hospital was required to achieve, and as a continuing covenant under the lease
Monroe Hospital is required to maintain, a tangible net worth of $6.0 million.
Monroe Hospital has provided to us unaudited financial statements reflecting
that, as of September 30, 2005, it had tangible assets of $12.2 million,
including cash of approximately $3.2 million, liabilities of approximately $3.4
million and owners' equity of approximately $8.9 million. The treasurer of
Monroe Hospital also certified at closing that the equity owners of Monroe
Hospital contributed to Monroe Hospital cash or cash equivalents in a total
amount of $9.75 million.

 

     Management Agreement.  Monroe Hospital has executed a contract with
Surgical Development Partners, LLC, a hospital management company, to manage the
day-to-day operations of the hospital, including staffing, scheduling, billing
and collections, governmental compliance and relations, and other functions.
Surgical Development Partners, LLC made a $3.0 million cash equity investment in
Monroe Hospital. We have the right to require Monroe Hospital to replace the
management company under certain conditions.

 

     Purchase Options.  The lease provides that so long as Monroe Hospital is
not in default under any lease with us or any of the leases with its subtenants,
at the expiration of the lease Monroe Hospital will

 
                                        93

 

have the option, upon 60 days prior written notice, to purchase the facility at
a purchase price equal to the greater of (i) the appraised value of the
facility, which assumes the lease remains in effect for 15 years, or (ii) the
total development costs, including any capital additions funded by us, as
increased by an amount equal to the greater of (A) 2.5% per annum from the date
of the lease, or (B) the rate of increase in the CPI on each January 1.

 

     Commitment Fee.  At closing, Monroe Hospital executed a promissory note in
favor of us for $177,500 commitment fee, which note bears interest at a rate of
10.5% and is payable interest only with a balloon payment approximately 15 years
following completion of construction.

 

OUR PENDING ACQUISITIONS

 

     We intend to expand our portfolio by acquiring our Pending Acquisition
Facilities, which we consider to be probable acquisitions or developments as of
the date of this prospectus, under the terms of the contact or letter of
commitment relating to these facilities. The leases for each of these facilities
will provide for contractual base rent and an annual rent escalator. Letters of
commitment constitute agreements of the parties to consummate the acquisition
transactions and enter into leases on the terms set forth in the letters of
commitment subject to the satisfaction of certain conditions, including the
execution of mutually-acceptable definitive agreements. The following tables
contain information regarding our Pending Acquisition Facilities as of the date
of this prospectus:

 
  Operating Facilities
 


                                                                                         YEAR ONE
                                                                            NUMBER OF   CONTRACTUAL      LOAN           LEASE
LOCATION                                       TYPE            TENANT        BEDS(1)     INTEREST       AMOUNT       EXPIRATION
--------                                    -----------   ----------------  ---------   -----------   -----------   -------------
                                                                                                  
 
Hammond, Louisiana*(2)....................  Long-term     Hammond              40       $  840,000(3) $ 8,000,000       June 2021
                                            acute care    Rehabilitation
                                            hospital      Hospital, LLC
Denham Springs, Louisiana(4)..............  Long-term     Gulf States          59          630,000(5)   6,000,000    October 2020
                                            acute care    Long Term Acute
                                            hospital      Care of Denham
                                                          Springs, L.L.C.
                                                                               --       ----------    -----------
TOTAL.....................................  --            --                   99       $1,470,000    $14,000,000              --
                                                                               ==       ==========    ===========

 
---------------
 
 * Under letter of commitment.
 (1) Based on the number of licensed beds.
 (2) On April 1, 2005, we entered into a letter of commitment with Hammond
     Healthcare Properties, LLC, or Hammond Properties, and Hammond
     Rehabilitation Hospital, LLC, or Hammond Hospital, pursuant to which we
     have agreed to lend Hammond Properties $8.0 million and have agreed to a
     put-call option pursuant to which, during the 90 day period commencing on
     the first anniversary of the date of the loan closing, we expect to
     purchase from Hammond Properties a long-term acute care hospital located in
     Hammond, Louisiana for a purchase price between $10.3 million and $11.0
     million. If we purchase the facility, we will lease it back to Hammond
     Hospital for an initial term of 15 years. The lease would be a net lease
     and would provide for contractual base rent and, beginning January 1, 2007,
     an annual rent escalator.
 (3) Based on one year contractual interest at the rate of 10.5% per year on the
     $8.0 million mortgage loan to Hammond Properties. We expect to exercise our
     option to purchase the Hammond Facility in 2006. For the one year period
     following our purchase of the facility, contractual base rent would equal
     $1,079,925, based on 10.5% of an estimated purchase price of $10,285,000.
 (4) On June 9, 2005, we entered into a definitive purchase, sale and loan
     agreement, pursuant to which we loaned Denham Springs Healthcare
     Properties, L.L.C. $6.0 million and agreed to purchase the Denham Springs
     Facility for a purchase price of $6.0 million, subject to our satisfaction
     with the results of our review of an environmental condition at the
     property of certain conditions. If we purchase the facility, the loan will
     be cancelled and we will lease the facility to Gulf States Long Term Acute
     Care of Denham Springs, L.L.C. for an initial term of 15 years. The lease
     would be a net lease and would provide for contractual base rent and,
     beginning on January 1, 2006, an annual rent escalator. If we do not
     purchase the Denham Springs Facility, the $6.0 million loan would remain
     outstanding.
 (5) Based on one year contractual interest at the rate of 10.5% per year on the
     $6.0 million loan to Denham Springs Healthcare Properties, L.L.C. We expect
     to purchase the Denham Springs Facility during October 2005. For the one
     year period following our purchase of the facility, contractual base rent
     would equal 10.5% of the purchase price of $6.0 million, plus an annual
     rent escalator beginning on January 1, 2006.
 

DENHAM SPRINGS, LOUISIANA

 
     General.  On June 9, 2005, we entered into a definitive purchase, sale and
loan agreement, or purchase agreement, relating to the acquisition of the
Covington Facility and the making of a $6.0 million loan to Denham Springs
Healthcare Properties, L.L.C., an unrelated third party. The purchase agreement
also provides for the purchase and leaseback of the Denham Springs Facility, for
a purchase price of $6.0 million and on substantially the same terms as applied
to our purchase of the Covington Facility. Our purchase of the Denham Springs
Facility is subject to the favorable resolution of the environmental issues
discussed above. The Denham Springs Facility is located in Denham Springs,
Louisiana, which is approximately 10 miles from Baton Rouge, Louisiana. The
Denham Springs Facility contains approximately 36,000 square feet of space and
is licensed for 59 beds.
 
                                        94

 
     The purchase price for the Denham Springs Facility was arrived at through
arms-length negotiations based upon our analysis of various factors, including
the demographics of the area in which the facility is located, the capability of
the tenant to operate the facility, healthcare spending trends in the geographic
area, the structural integrity of the facility, governmental regulatory trends
which may impact the services provided by the tenant, and the financial and
economic returns which we require for making an investment.
 
     We have formed a Delaware limited liability company, MPT of Denham Springs,
L.L.C., which made the $6.0 million loan and, upon closing of the prospective
purchase, would own the Denham Springs Facility. Our operating partnership
currently owns all of the membership interests in this liability company;
however, at some point following closing of the prospective purchase, we have
agreed, subject to applicable healthcare regulations, to offer up to 30% of the
interests in this limited liability company to local physicians.
 
     Lease.  At the time we purchase the Denham Springs Facility, we will lease
100% of the facility to Gulf States Long Term Acute Care of Denham Springs,
L.L.C. for a 15-year term, with three options to renew for five years each. The
lease will be a net-lease with the tenant responsible for all costs of the
facility, including, but not limited to, taxes, utilities, insurance,
maintenance and capital improvements. The lease will require the tenant to pay
base rent in an amount equal to 10.5% per annum of the purchase price plus any
costs and charges that may be capitalized. On each January 1, the base rent will
be increased by an amount equal to the greater of (A) 2.5% per annum of the
prior year's base rent, or (B) the percentage by which the CPI on November 1
shall have increased over the CPI in effect on the immediately preceding
November 1; provided, however, on January 1, 2006, the adjustment shall be
prorated. The lease will also require the tenant to carry customary insurance
which is adequate to satisfy our underwriting standards.
 
     Guaranty, Security.  We expect the lease to be guaranteed by Gulf States
and Team Rehab. As security for the lease, the tenant will grant us a security
interest in all personal property, other than receivables and operating
licenses, located and to be located at the facility. The lease will be cross-
defaulted with the lease for the Covington facility. We expect the lease will
also require the tenant to obtain and deliver to us an unconditional and
irrevocable letter of credit from a bank acceptable to us, naming us beneficiary
thereunder, in an amount equal to $315,000, and will provide that at such time
as the operations in the facility have generated EBITDAR coverage of at least
two times the base rent for eight consecutive fiscal quarters, the letter of
credit may be reduced to an amount equal to three months of the base rent then
in effect. If, however, after satisfying the conditions necessary to reduce the
letter of credit to three months' base rent, EBITDAR coverage subsequently drops
below two times base rent for two consecutive fiscal quarters, the letter of
credit will be increased to six months' base rent. Currently, we have a $315,000
letter of credit from Hibernia Bank that secures our $6.0 million loan to Denham
Springs Healthcare Properties, L.L.C. Upon purchase of the Denham Springs
Facility, this letter of credit will be changed to secure the obligations of
Gulf States Long Term Acute Care of Denham Springs, L.L.C. under the lease.
 
     Gulf States has provided to us unaudited financial statements reflecting
that, as of December 31, 2004, it had tangible assets of approximately $11.1
million, liabilities of approximately $9.3 million and stockholders' equity of
approximately $1.8 million, and for the year ended December 31, 2004 had net
income of approximately $2.0 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of December 31, 2004, it had tangible
assets of approximately $21.3 million, liabilities of approximately $9.2 million
and owner's equity of approximately $12.1 million, and for the year ended
December 31, 2004 had net income of approximately $1.7 million.
 
     The lease for the Denham Springs Facility will require that, as of the
commencement date of the lease and at all times during the lease, the tenant and
its affiliates, Team Rehab, Gulf States and Gulf States Long Term Acute Care of
Covington, L.L.C., will maintain an aggregate net worth of $9.0 million.
 
     Repair and Replacement Reserve.  The tenant will be responsible for all
repairs, maintenance and capital improvements to the facility. To secure this
obligation, the tenant will deposit with us the sum of $56,000 in a regular
reserve account and the sum of $398,590 in a special reserve account for
immediate
                                        95

 
repairs. Currently, we are holding these amounts in connection with our $6.0
million loan to Denham Springs Healthcare Properties, L.L.C. Upon purchase of
the Denham Springs Facility, these amounts will be held by us to secure the
tenant's repair obligations under the lease. In the event amounts in the regular
reserve are utilized, the tenant will be required to replenish the reserve to
restore it to the $56,000 level.
 
     Purchase Options.  The lease will provide that so long as the tenant is not
in default, and no event has occurred which with the giving of notice or the
passage of time or both would constitute a default under the lease, the lease
for the Covington Facility, or any sublease, the tenant will have the option to
purchase the facility (i) at the expiration of the initial term and each
extension term of the lease, to be exercised by 60 days' written notice prior to
the expiration of the initial term and each extension term, and (ii) within five
days of written notification from us exercising our right to terminate the
engagement of the tenant's or its affiliate's management company as the
management company for the facility as a result of an event of default under the
lease. The option purchase price shall be equal to the greater of (i) the
appraised value of the facility, assuming the lease remains in effect for 15
years and not taking into account any purchase options contained therein, or
(ii) the purchase price paid by us for the facility, increased annually by an
amount equal to the greater of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
 
  HAMMOND, LOUISIANA
 
     General.  On April 1, 2005, we entered into a letter of commitment with
Hammond Healthcare Properties, LLC, the current owner of the property, or
Hammond Properties, and Hammond Rehabilitation Hospital, LLC, the current tenant
of the property, or Hammond Hospital, both unaffiliated third parties, to
provide a mortgage loan to Hammond Properties and enter into a put-call option
arrangement relating to our purchase of the facility from Hammond Properties and
our leaseback of the facility to Hammond Hospital or its affiliates.
 
     The facility is a long-term acute care hospital located in Hammond,
Louisiana, which is approximately 45 miles from New Orleans, Louisiana. The
facility contains approximately 23,835 square feet of space and is licensed for
40 beds.
 
     The letter of commitment provides that, under the mortgage loan
transaction, we will lend to Hammond Properties the sum of $8.0 million, which
will bear interest at the rate of 10.5% per year and be payable interest only on
a monthly basis with a balloon payment due and payable at the expiration of the
put-call option period described below or, if the put-call option is exercised,
at closing of our purchase of the facility. The letter of commitment provides
that the loan will be secured by a first mortgage on the facility and by the
other collateral and guaranteed as described below.
 
     The letter of commitment provides that, at the time of the mortgage loan
closing, we will enter into a put-call option agreement with Hammond Properties
providing that either party will have the option, exercisable within 90 days
following the one year anniversary of the loan closing, to cause the purchase
and sale of the facility, subject to applicable conditions, for a purchase price
of the greater of (i) $10,285,714 or (ii) the quotient determined by dividing
the annual rental payments by .105 (but not to exceed $11.0 million). The
purchase price was arrived at through arm's-length negotiations based upon our
analysis of various factors, including the demographics of the area in which the
facility is located, the capability of the tenant to operate the facility,
healthcare spending in the geographic area, the structural integrity of the
facility, governmental regulatory trends which may impact the services provided
by the facility, and the financial and economic returns which we require for
making an investment.
 
     If the put-call option is exercised, we will form a Delaware limited
liability company, MPT of Hammond, LLC, which will own the facility. Initially,
our operating partnership will own all of the membership interests in this
limited liability company; however, the letter of commitment provides that, at
some point following closing, we have agreed, subject to applicable healthcare
regulations, to offer up to 30% of the interests in this limited liability
company to local physicians.
 
     Lease.  The letter of commitment provides that, if the put-call option is
exercised, we will lease 100% of the facility to Hammond Hospital or its
affiliate for a 15-year term, with three options to renew for five years each.
The letter of commitment provides that the lease will be a net-lease with the
tenant
                                        96

 
responsible for all costs of the facility, including, but not limited to, taxes,
utilities, insurance, maintenance and capital improvements. The letter of
commitment provides that the lease will require the tenant to pay base rent in
an amount equal to 10.50% per annum of the purchase price plus any costs and
charges that may be capitalized, which base rent will be payable in monthly
installments. The letter of commitment provides that, on each January 1
beginning January 1, 2007, the base rent will be increased by an amount equal to
the greater of (A) 2.5% per annum of the prior year's base rent, or (B) the
percentage by which the CPI on January 1 shall have increased over the CPI
figure in effect on the then just previous January 1. The letter of commitment
provides that the lease will require the tenant to carry customary insurance
which is adequate to satisfy our underwriting standards.
 
     Repair and Replacement Reserve.  The letter of commitment provides that the
tenant, commencing on the date we purchase the facility, will make annual
deposits into a reserve account. We expect that the lease will provide that on
each January 1 following the date we purchase the facility, the payment into the
reserve account will be increased, and that all extraordinary repair
expenditures made in each year during the term of the lease will be funded first
from the reserve, and the tenant will pay into the reserve such funds as
necessary for all extraordinary repairs.
 
     Security.  The letter of commitment provides that, as security for the
mortgage loan and the lease, Hammond Properties or the tenant, as the case may
be, will grant us a security interest in all personal property, other than
receivables, located and to be located at the facility. The letter of commitment
requires Hammond Properties and the tenant to obtain and deliver to us an
unconditional and irrevocable letter of credit from a bank acceptable to us,
naming us beneficiary thereunder, in an amount equal to six months' debt service
or base rent under the lease, as the case may be, and that at such time as the
operations in the facility have generated EBITDAR coverage of at least two times
the base rent for eight consecutive fiscal quarters, the letter of credit may be
reduced to an amount equal to three months of the base rent then in effect. If,
however, after satisfying the conditions necessary to reduce the letter of
credit to three months' base rent, EBITDAR coverage subsequently drops below two
times base rent for two consecutive fiscal quarters, the letter of credit will
be increased to six months' base rent. The letter of commitment provides that
the lease will be cross-defaulted with any other lease or agreement between the
parties. The letter of commitment provides that the loan and lease will be
jointly and severally guaranteed by Hammond Properties, certain affiliates of
Hammond Properties and Gulf States Health Services, Inc. For information about
the financial condition of Gulf States Health Services, Inc., see the
description of the Covington and Denham Springs facilities above.
 
     Purchase Options.  The letter of commitment provides that the lease will
provide that so long as the tenant is not in default, and no event has occurred
which with the giving of notice or the passage of time or both would constitute
a default under its (and its affiliates) leases with us or any of our affiliates
or any of the leases with its subtenants, the tenant will have the option to
purchase the facility at the expiration of the initial term and each extension
term of the lease. The letter of commitment provides that the purchase price
shall be equal to the greater of (i) the appraised value of the facility,
assuming the lease remains in effect for 15 years and not taking into account
any purchase options contained therein, or (ii) the purchase price paid by us
for the facility, increased annually by an amount equal to the greater of (A)
2.5% per annum from the date of the lease, or (B) the rate of increase in the
CPI on each January 1. The parties will agree upon the notice and closing
periods applicable to these purchase options.
 
     Net Worth Covenant.  The letter of commitment provides that the loan and
lease documents will require that, as of the loan closing and throughout the
loan and lease terms, Hammond Properties, Hammond Hospital and Gulf States
Health Services, Inc. must maintain an aggregate tangible net worth in an amount
to be mutually agreed upon with us.
 

     Commitment Fee.  The letter of commitment provides that we will be entitled
to a commitment fee at the closing of the loan equal to $80,000, $25,000 of
which has already been paid. The letter of commitment further provides that we
will be entitled to a commitment fee at the closing of the sale transaction
equal to 1% of the purchase price, less the amount of all commitment fees
previously paid.

 

     We cannot assure you that we will acquire or develop any of the Pending
Acquisition Facilities on the terms described in this prospectus or at all,
because each of these transactions is subject to a variety of

                                        97

 

conditions, including, in the case of the Pending Acquisition Facility under
contract, our satisfactory completion of due diligence, receipt of apprisals and
other third party reports, obtaining of government and third party approvals and
consents, as well as other customary closing conditions, and, in the case of the
transaction under letter of commitment, negotiation and execution of
mutually-acceptable definitive agreements, our satisfactory completion of due
diligence, receipt of appraisals that support the purchase price set forth in
the commitment letter and other third party reports, obtaining of government and
third party approvals and consents, approval by our board of directors, and in
certain cases the acquisition of the property on which the facility is to be
constructed from the current owner, as well as satisfaction of customary closing
conditions.

 
OUR ACQUISITION AND DEVELOPMENT PIPELINE
 
     We have also entered into the following arrangements which, because of the
various contingencies that must be satisfied before these transactions can be
completed, we do not consider to be probable acquisitions or developments as of
the date of this prospectus.
 
 DIVERSIFIED SPECIALTY INSTITUTES, INC. ACQUISITION AND DEVELOPMENT FUNDING
 
     General.  On March 3, 2005, we entered into a letter agreement with
Diversified Specialty Institutes, Inc., or DSI. An affiliate of DSI is the
proposed tenant of the women's hospital and medical office building in Bensalem,
Pennsylvania that we have contracted with to develop and leaseback. The letter
agreement provides that, subject to DSI identifying facilities for acquisition
or development, which it is not required to do, and subject to certain other
conditions set forth in the letter agreement, we have agreed to make available
to DSI or its affiliates acquisition and development funding in the total amount
of $50.0 million to be used to finance the potential future acquisition or
development of healthcare facilities, in each case subject to our due diligence
and approval. The arrangement will remain outstanding until March 2, 2006, and
be available to finance any acquisition facility or development facility that is
subject to definitive agreements as of March 2, 2006, notwithstanding that the
closing or completion of the acquisition facility or development facility may
not have occurred as of March 2, 2006. We have agreed that the definitive
documents relating to the arrangement must close by October 31, 2005.
 
     DSI is not required to identify facilities for acquisition or development
and, if it does not, we have no obligation to provide funding to DSI. If funds
are drawn from the arrangement to fund an acquisition or development facility,
as applicable, we expect to enter into definitive documents with DSI. With
respect to any development facility, we expect to enter into a development
agreement with a developer, which may be an affiliate of DSI, to develop the
development facility.
 
     Commitment Fee.  The letter agreement provides that we are entitled to a
fee equal to 1% of the aggregate purchase price or development costs of any
facilities we acquire pursuant to this arrangement, $100,000 of which was paid
when the letter agreement was signed. The remainder of the fee will be due and
payable at the closing of future projects, with the fee on each project being
equal to 1% of that project's purchase price. We have agreed to give DSI a
credit on future payments of fees for the $100,000 paid at the execution of the
letter agreement.
 
     Lease.  We expect to form a Delaware limited liability company or a limited
partnership to own each facility acquired or developed pursuant to the
commitment. The letter of commitment provides that, at the time of our purchase
of any acquisition or development facility, we intend to lease back to the
applicable tenant 100% of the land and all improvements, including improvements
to be constructed in the case of a development facility, for a 15-year term,
with three options to renew for five years each, so long as the options are
exercised at least six months prior to the expiration of the lease or the
applicable extended term. The letter of commitment provides that each lease will
be a net-lease with the tenant responsible for all costs of the facility,
including, but not limited to, taxes, utilities, insurance and maintenance.
 
     For each development facility, the letter agreement provides that the
tenant will pay monthly rent during the construction period in a per year amount
equal to 10.75% multiplied by the total amount of the funds disbursed under the
development agreement. The letter agreement also provides that the lease
relating to a development facility to require the tenant to pay, following the
completion of construction of the facility, base rent in an amount equal to
10.75% per year of the total development costs, payable in
                                        98

 
monthly installments. For an acquisition facility, we expect the lease to
require the tenant to pay us base rent equal to 10.75% of the purchase price of
the facility. The letter agreement provides that each lease will provide that
commencing on the first January 1 following the commencement of the lease with
respect to an acquisition facility, and on the first January 1 following the
construction completion date with respect to a development facility, and on each
January 1 thereafter, the base rent will be increased by an amount equal to the
greater of (A) 2.5% per year of the prior year's base rent, or (B) the
percentage by which the CPI on January 1 has increased over the CPI figure in
effect on the then just previous January 1. The letter of commitment also
provides that each lease for an acquisition facility and a development facility
will require the tenant to carry customary insurance which is adequate to
satisfy our underwriting standards.
 
     The letter agreement provides that each lease will require the tenant to
pay us on the commencement date of the lease an amount equal to $7,500 to cover
the cost of the physical inspections of the facility. The letter agreement also
provides that this inspection fee will increase at the rate of 2.5% per year
starting on the first January 1 following the commencement date of the lease, in
the case of an acquisition facility, or the completion date, in the case of a
development facility. In addition to the inspection fee, we also expect the
tenant to pay us a fee equal to $75,000 per development facility to cover our
inspection of the development facility during the construction period.
 
     Capital Improvement Reserve.  The letter agreement provides that each lease
will require, commencing on the date that construction has been completed with
respect to a development facility, or on the date of commencement of the lease
with respect to an acquisition facility, the tenant to make annual deposits into
a reserve account in the amount of $2,500 per bed per year. The letter agreement
also provides that each lease is expected to provide that on each January 1
thereafter, the payment of $2,500 per bed per year into the improvement reserve
will be increased by 2.5%. We expect that the lease will require all
extraordinary repair expenditures made in each year during the term of the lease
will be funded first from the reserve, and the tenant will pay into the reserve
such funds as necessary for all extraordinary repairs.
 
     Security.  The letter agreement provides that, as security for each lease,
the tenant will grant us a security interest in all personal property, other
than receivables, located and to be located at the facility. The letter
agreement provides that each lease will be cross-defaulted with any other leases
between the tenant, or its affiliates, and us, or our affiliates. The letter
agreement provides that each lease will require the tenant to obtain and deliver
to us an unconditional and irrevocable letter of credit from a bank acceptable
to us, naming us beneficiary thereunder, in an amount equal to one year's base
rent under the lease.
 
     The letter agreement provides that each lease will require that, as of the
commencement date of the lease, the tenant to have a tangible net worth of no
less than $5.0 million in cash equity or shall have access to a working capital
line of no less than $5.0 million that is personally guaranteed by Dr.
Tannenbaum and such other persons as may be approved by us.
 
     Purchase Options.  The letter agreement provides that each lease will
provide that so long as tenant is not in default, and no event has occurred
which with the giving of notice or the passage of time or both would constitute
a default under its, and its affiliates, leases with us or any of our affiliates
or any of the leases with its subtenants, at the expiration of the initial term
of the lease, and at the expiration of each extended term thereafter, upon at
least 60 days' prior written notice, tenant will have the option to purchase the
facility at a purchase price equal to the greater of (i) the appraised value of
the facility, or, in the case of a development facility (ii) the total
development costs (including any capital additions funded by us), as increased
by an amount equal to the greater of (A) 2.5% per year from the date of the
lease, or (B) the rate of increase in the CPI on each January 1, or, in the case
of an acquisition facility, (ii) the amount of (A) the purchase price paid for
the facility, including costs of third party reports, legal fees and all other
acquisition costs.
 
  ADDITIONAL ARRANGEMENTS
 
     On May 3, 2005 we entered into an arrangement with Prime Healthcare
Services, LLC or Prime Healthcare, an affiliate of DVH, to purchase a hospital
facility in California for a purchase price of
 
                                        99

 
$25.0 million, subject to adjustment based on an appraisal that we intend to
obtain. The transaction is subject to Prime Healthcare's acquisition of the
facility from the current owner and a number of other conditions. Prime
Healthcare has not yet entered into an agreement or letter of intent to purchase
the facility from the current owner and we cannot assure you that it will be
able to acquire the facility. If we purchase the facility from Prime Healthcare,
we will lease it back to an affiliate of Prime Healthcare for a term of 15 years
with three renewal options of five years each. The lease will require the tenant
to pay base rent in an amount equal to 10% of the purchase price, which rent
shall increase each year by the greater of 2.0% or the increase in CPI from the
prior year. The letter of commitment provides that, as security for the tenant's
obligations under the lease, DHV, Desert Valley Hospital, Inc. and Desert Valley
Medical Group, Inc. will guaranty the lease and the tenant will grant us a
security interest in all of its personal property except accounts receivable. We
have been paid a fee of $150,000 as consideration for entering into this
arrangement. The lease will be cross-defaulted with all other leases and other
agreements between us or our affiliates, on the one hand, and the tenant or its
affiliates, on the other hand.
 
     On July 26, 2005, we entered into a letter of commitment with DVH to
purchase a hospital facility located in Sherman Oaks, California for a purchase
price of $20.0 million, subject to adjustment based on an appraisal of the
facility. The letter of commitment also provides that we will make available to
DVH $5.0 million for expansion of the facility. The transaction is subject to
DVH's acquisition of the facility from the current owner. If we purchase the
facility, we will lease it back to DVH, or an affiliate of DVH, for a period of
15 years with three five-year renewal options. The lease will require the tenant
to pay base rent in an amount equal to 10.5% of the purchase price, which rent
shall be increased to include, on a pro rated basis, 10.5% of any amounts
financed by us for the expansion of the facility. The rent shall also increase
annually by the greater of 2.0% or the increase in CPI from the prior year. The
letter of commitment provides that, as security for the tenant's obligations
under the lease, DVH, Desert Valley Hospital, Inc. and Desert Valley Medical
Group, Inc. will guaranty the lease and the tenant will grant us a security
interest in all its personal property, except for accounts receivable. The lease
will also be cross-defaulted with all other leases and other agreements between
us or our affiliates, on one hand, and the lessee or its affiliates on the other
hand. As consideration for entering into this arrangement, DVH has paid us a
commitment fee of $100,000. The letter of commitment provides that DVH will pay
us an additional $25,000 commitment fee upon the execution of a development
agreement in connection with the expansion of the facility.
 
     We cannot assure you that we will acquire or develop any of the facilities
in our acquisition and development pipeline on the terms described in this
prospectus or at all, because each of these transactions is subject to a variety
of conditions, including negotiation and execution of mutually-acceptable
definitive agreements, our satisfactory completion of due diligence, receipt of
appraisals that support the purchase price set forth in the letter agreements
and other third party reports, obtaining of government and third party approvals
and consents, approval by our board of directors, and in certain cases our
proposed tenants' acquisition of the facility from the current owner, as well as
satisfaction of customary closing conditions.
 
     We have also identified a number of opportunities to acquire or develop
additional healthcare facilities. In some cases, we are actively negotiating
agreements or letters of intent with the owners or prospective tenants. In other
instances, we have only identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot assure you that we
will complete any of these potential acquisitions or developments.
 
                                       100

 
                                   MANAGEMENT
 
OUR DIRECTORS AND EXECUTIVE OFFICERS
 

     Our business and affairs are managed under the direction of our board of
directors, which consists of eight members, three of whom are members of our
senior management team and five of whom our board of directors has determined to
be independent in accordance with the listing standards established by the New
York Stock Exchange, or NYSE. Each director is elected to serve until the next
annual meeting of stockholders and until his successor is elected and qualified.
The current terms of our present directors will expire at our 2006 annual
meeting of stockholders. The following table sets forth certain information
regarding our executive officers and directors:

 


NAME                                        AGE                    POSITION
----                                        ---                    --------
                                            
Edward K. Aldag, Jr. .....................  41    Chairman of the Board, President and Chief
                                                  Executive Officer
R. Steven Hamner..........................  48    Director, Executive Vice President and
                                                  Chief Financial Officer
William G. McKenzie.......................  47    Vice Chairman of the Board
Emmett E. McLean..........................  50    Executive Vice President, Chief Operating
                                                  Officer, Treasurer and Assistant Secretary
Michael G. Stewart........................  50    Executive Vice President, General Counsel
                                                  and Secretary
Virginia A. Clarke........................  46    Director
G. Steven Dawson..........................  47    Director
Bryan L. Goolsby..........................  54    Director
Robert E. Holmes, Ph.D. ..................  63    Director*
L. Glenn Orr, Jr. ........................  65    Director

 
------------------------
 
*    Mr. Holmes has been designated as our lead independent director.
 
     The following is a summary of certain biographical information concerning
our directors and executive officers:
 
     Edward K. Aldag, Jr. is one of our founders and has served as our president
and chief executive officer since August 2003, and as chairman of the board
since March 2004. Mr. Aldag served as our vice chairman of the board from August
2003 until March 2004 and as our secretary from August 2003 until March 2005.
Prior to that, Mr. Aldag served as an executive officer and director with our
predecessor from its inception in August 2002 until August 2003. From 1986 to
2001, Mr. Aldag managed two private real estate companies, Guilford Capital
Corporation and Guilford Medical Properties, Inc., that had aggregate assets
valued at more than $500 million. Mr. Aldag played an integral role in the
formation of investor groups, structuring the financing, and closing the
transactions. Guilford Medical Properties, Inc. owned numerous rehabilitation
hospitals across the country and net-leased them to four different national
healthcare providers. Mr. Aldag served as president and a member of the board of
directors of Guilford Medical Properties, Inc. from its inception until selling
his interest in the company in 2001. Mr. Aldag was the president and a member of
the board of directors of Guilford Capital Corporation from 1998 to 2001 and
from 1990 to 1998 served as executive vice president, chief operating officer
and a member of the board of directors. Mr. Aldag received his B.S. in Commerce
& Business from the University of Alabama with a major in corporate finance.
 
     R. Steven Hamner is one of our founders and has served as our executive
vice president and chief financial officer since September 2003 and as a
director since February 2005. In August and September 2003, Mr. Hamner served as
our executive vice president and chief accounting officer. From October 2001
through March 2004, he was the managing director of Transaction Analysis LLC, a
company that provided interim and project-oriented accounting and consulting
services to commercial real estate owners
 
                                       101

 
and their advisors. From June 1998 to September 2001, he was vice president and
chief financial officer of United Investors Realty Trust, a publicly-traded
REIT. For the 10 years prior to becoming an officer of United Investors Realty
Trust, he was employed by the accounting and consulting firm of Ernst & Young
LLP and its predecessors. Mr. Hamner received a B.S. in Accounting from
Louisiana State University. Mr. Hamner is a certified public accountant.
 
     William G. McKenzie is one of our founders and has served as the vice
chairman of our board of directors since September 2003. Mr. McKenzie has served
as a director since our formation and served as the executive chairman of our
board of directors in August and September 2003. From May 2003 to August 2003,
he was an executive officer and director of our predecessor. From 1998 to the
present, Mr. McKenzie has served as president, chief executive officer and a
board member of Gilliard Health Services, Inc., a privately-held owner and
operator of acute care hospitals. From 1996 to 1998, he was executive vice
president and chief operating officer of the Mississippi Hospital
Association/Diversified Services, Inc. and the Health Insurance Exchange, a
mutual company and HMO. From 1994 to 1996, Mr. McKenzie was senior vice
president of Managed Care and executive vice president of Physician Solutions,
Inc., a subsidiary of Vaughan HealthCare, a private healthcare company in
Alabama. From 1981 to 1994, Mr. McKenzie was hospital administrator and chief
financial officer and held other management positions with several private acute
care organizations. Mr. McKenzie received a Masters of Science in Health
Administration from the University of Colorado and a B.S. in Business
Administration from Troy State University. He has served in numerous capacities
with the Alabama Hospital Association.
 
     Emmett E. McLean is one of our founders and has served as our executive
vice president, chief operating officer and treasurer since September 2003. Mr.
McLean has served as assistant secretary since April 2004. In August and
September 2003, Mr. McLean also served as our chief financial officer. Mr.
McLean was one of our directors from September 2003 until April 2004. From June
to September, 2003, Mr. McLean served as executive vice president, chief
financial officer, and treasurer and board member of our predecessor. From 2000
to 2003, Mr. McLean was a private investor and, for part of that period, served
as a consultant to a privately held company. From 1995 to 2000, Mr. McLean
served as senior vice president -- development, secretary, treasurer and a board
member of PsychPartners, L.L.C., a healthcare services and practice management
company. From 1992 to 1994, he was senior vice president, chief financial
officer and secretary of Diagnostic Health Corporation, a healthcare services
company. From 1984 to 1992, he worked for Dean Witter Reynolds, Inc., now Morgan
Stanley, and Smith Barney, now Citigroup, in the corporate finance departments
of their respective investment banking businesses. From 1977 to 1982, Mr. McLean
worked as a commercial banker for SunTrust Banks, Inc. Mr. McLean received an
MBA from the University of Virginia and a B.A. in Economics from The University
of North Carolina.
 
     Michael G. Stewart has served as our general counsel since October 2004 and
as our executive vice president and secretary since March 2005. Prior to October
2004, Mr. Stewart worked as a private investor, healthcare consultant and
novelist. He advised physician and surgery groups on emerging healthcare issues
for four years before publishing three novels. From 1993 until 1995, he served
as vice president and general counsel of Complete Health Services, Inc., a
managed care company, and its successor corporation, United Healthcare of the
South, a division of United Healthcare, Inc. (NYSE: UNH). Mr. Stewart was
engaged in the private practice of law between 1988 and 1993. Mr. Stewart holds
a J.D. degree from Cumberland School of Law of Samford University and a B.S. in
Business Administration from Auburn University.
 
     Virginia A. Clarke has served as a member of our board of directors since
February 2005. Ms. Clarke has been a search consultant in the global executive
search firm of Spencer Stuart & Associates since 1997. Ms. Clarke was with DHR
International, an executive search firm, during 1996. Prior to that, Ms. Clarke
spent 10 years in the real estate investment management business with La Salle
Partners and Prudential Real Estate Investors, where her activities included
asset management, portfolio management, capital raising and client service, and
two years with First National Bank of Chicago. Ms. Clarke is a member of the
Pension Real Estate Association. Ms. Clarke graduated from the University of
California at
 
                                       102

 
Davis and received a master's degree in management from the J.L. Kellogg
Graduate School of Management at Northwestern University.
 
     G. Steven Dawson has served as a member of our board of directors since
April 2004. He is currently a private investor and serves on the boards of five
other real estate investment trusts in addition to his service for us, as
follows: American Campus Communities (NYSE: ACC), AmREIT, Inc. (AMEX: AMY),
Desert Capital REIT (a non-listed public mortgage company), Sunset Financial
Resource, Inc. (NYSE: SFO), and Trustreet Properties, Inc. (NYSE: TSY). Mr.
Dawson is chairman of the audit committees for each of these companies except
Sunset Financial Resource, Inc. and Trustreet Properties, Inc. From July 1990 to
September 2003, he was chief financial officer and senior vice president-finance
of Camden Property Trust (NYSE: CPT) and its predecessors, a REIT engaged in the
development, ownership, management, financing and sale of multi-family
properties throughout the southern United States. Mr. Dawson is involved in
various charitable, non-profit and educational organizations, including serving
on the board of His Grace Foundation, a charity providing services to the
families of children in the Bone Marrow Transplant Unit of Texas Children's
Hospital, and as a member of the Real Estate Roundtable at the Mays Graduate
School of Business at Texas A&M University. Mr. Dawson received a degree in
business from Texas A&M University.
 
     Bryan L. Goolsby has served as a member of our board of directors since
February 2005. Mr. Goolsby is the managing partner of the law firm Locke Liddell
& Sapp LLP. Mr. Goolsby is an associate board member of the Board of Governors
of the National Association of Real Estate Investment Trusts. He is also a
member of the National Multi-Family Housing Association and the Pension Real
Estate Association, and an associate board member of the Edwin L. Cox School of
Business at Southern Methodist University. He serves as a director of Desert
Capital REIT, Inc. and AmREIT, Inc. Mr. Goolsby received a J.D. degree from the
University of Texas, and is a Certified Public Accountant.
 
     Robert E. Holmes, Ph.D., has served as a member of our board of directors
since April 2004. Mr. Holmes, our lead independent director, is the Dean and
Professor of Management of the School of Business at the University of Alabama
at Birmingham, positions he has held since 1999. From 1995 to 1999, he was Dean
of the Olin Graduate School of Business at Babson College in Wellesley,
Massachusetts. Prior to that, he was Dean of the James Madison University
College of Business in Harrisonburg, Virginia for 12 years. He is the author of
more than 20 scholarly publications, is past president of the Southern Business
Administration Association, and is actively involved in the International
Association for Management Education. Mr. Holmes received a bachelor's degree
from the University of Texas at Austin, an MBA from University of North Texas,
and received his Ph.D. from the University of Arkansas with an emphasis on
management strategy.
 
     L. Glenn Orr, Jr. has served as a member of our board of directors since
February 2005. Mr. Orr has been president and chief executive officer of The Orr
Group, which provides investment banking and consulting services for
middle-market companies, since 1995. Prior to that, he was chairman of the board
of directors, president and chief executive officer of Southern National
Corporation from 1990 until its merger with Branch Banking & Trust in 1995. Mr.
Orr is member of the board of directors, chairman of the governance/compensation
committee and a member of the executive committee of Highwoods Properties, Inc.
(NYSE: HIW). He is also a member of the boards of directors of General Parts,
Inc., Village Tavern, Inc. and Broyhill Management Fund, Inc. Mr. Orr previously
served as president and chief executive officer of Forsyth Bank and Trust Co.,
president of Community Bank in Greenville, South Carolina and president of the
North Carolina Bankers Association. He is a trustee of Wake Forest University.
 
CORPORATE GOVERNANCE -- BOARD OF DIRECTORS AND COMMITTEES
 
     Our board of directors has adopted a code of ethics and business conduct
relating to the conduct of our business by our employees, officers and
directors, and has also adopted corporate governance guidelines to assist the
board of directors in the administration of its duties. Our corporate governance
guidelines and the listing standards of the NYSE require that a majority of the
members of our board of directors be
 
                                       103

 
independent. Board members are recommended for nomination by our ethics,
nominating and corporate governance committee. Nominations must satisfy the
standards established by that committee for membership on our board of
directors.
 
     Our directors generally meet quarterly or more frequently if necessary. The
directors are regularly kept informed about our business at meetings of the
board of directors and its committees and through supplemental reports and
communications. Our independent directors meet regularly in executive sessions
without the presence of any corporate officers. Mr. Holmes has been selected by
the board of directors to serve as lead independent director and in that
capacity presides at meetings of the non-management directors, coordinates the
preparation for meetings of the board of directors with our chief executive
officer, and serves as the liaison between the board of directors and our chief
executive officer.
 
     Our board of directors has established audit, compensation, ethics,
nominating and corporate governance and investment committees, the principal
functions and membership of which are briefly described below. The charters of
the audit, compensation and ethics, nominating and corporate governance
committees, along with our code of ethics and business conduct and our corporate
governance guidelines, are available on our website at
www.medicalpropertiestrust.com. Information on our website should not be
considered a part of this prospectus.
 
     In February 2005, we expanded the size of our board of directors from seven
to 11 directors and elected four new directors, Messrs. Goolsby, Hamner and Orr
and Ms. Clarke. In connection with the election of these new directors, our
board reconstituted our audit, compensation and ethics, nominating and corporate
governance committees and established the investment committee of our board. On
April 6, 2005, three of our independent directors who had become members of our
board in April 2004 resigned as directors.
 
  AUDIT COMMITTEE
 
     Our board of directors has established an audit committee, which is
comprised of three independent directors, Messrs. Dawson and Orr and Ms. Clarke.
Mr. Dawson serves as the chairperson of the audit committee and also serves on
the audit committees of three other public companies. Our board of directors has
determined that Mr. Dawson's service on the audit committees of other public
companies does not impair his ability to serve on our audit committee. The audit
committee oversees (i) our accounting and financial reporting processes; (ii)
the integrity and audits of our financial statements; (iii) our compliance with
legal and regulatory requirements; (iv) the qualifications and independence of
our independent auditors; and (v) the performance of our internal and
independent auditors. The audit committee also:
 
     - has sole authority to appoint or replace our independent auditors;
 
     - has sole authority to approve in advance all audit and non-audit services
       by our independent auditors;
 
     - monitors compliance of our employees with our standards of business
       conduct and conflict of interest policies; and
 
     - meets at least quarterly with our senior executive officers, internal
       audit staff and our independent auditors in separate executive sessions.
 
     The specific functions and responsibilities of the audit committee are set
forth in the audit committee's charter. Our board of directors has determined
that each of the members of the audit committee is financially literate, as such
term is interpreted by our board of directors. In addition, our board of
directors has determined that Mr. Dawson qualifies as an "audit committee
financial expert" under the current SEC regulations. Our management has primary
responsibility for the financial statements and internal control over financial
reporting. The audit committee engages an independent registered public
accounting firm to conduct an annual audit of the Company's financial statements
in accordance with the standards of the Public Company Accounting Oversight
Board.
 
                                       104

 
  COMPENSATION COMMITTEE
 
     Our board of directors has established a compensation committee, which is
comprised of three independent directors, Messrs. Dawson, Goolsby and Orr. Mr.
Orr serves as the chairperson of the compensation committee. The principal
functions of the compensation committee are to:
 
     - evaluate the performance of our executive officers;
 
     - review and approve the compensation for our executive officers;
 
     - review and make recommendation to the board with respect to our incentive
       compensation plans and equity-based plans; and
 
     - administer our equity incentive plan.
 
     The compensation committee also reviews and approves corporate goals and
objectives relevant to the chief executive officer's compensation, evaluates the
chief executive officer's performance in light of those goals and objectives,
and establishes the chief executive officer's compensation levels based on its
evaluation. The compensation committee has the authority to retain and terminate
any compensation consultant to be used to assist in the evaluation of the
compensation of the chief executive officer or any other executive officer or
director. The specific functions and responsibilities of the compensation
committee are set forth in more detail in the compensation committee's charter.
 
  ETHICS, NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
 
     Our board of directors has established an ethics, nominating and corporate
governance committee. Membership of the committee is comprised of three
independent directors, Messrs. Dawson, Goolsby and Holmes. Mr. Holmes serves as
the chairperson of this committee. The ethics, nominating and corporate
governance committee is responsible for, among other things, recommending the
nomination of qualified individuals to become directors, recommending the
composition of committees of our board, periodically reviewing the board's
performance and effectiveness as a body, recommending proposed changes to the
board of directors, and periodically reviewing our corporate governance
guidelines and policies. The specific functions and duties of the ethics,
nominating and corporate governance committee are set forth in the committee's
charter.
 
  INVESTMENT COMMITTEE
 
     Our board of directors has established an investment committee. Membership
of the committee is comprised of all of our current directors. Mr. Aldag serves
as the chairperson of this committee. The investment committee is authorized to,
among other things, consider and take action with respect to all acquisitions,
developments and leasing of healthcare facilities in which our aggregate
investment will exceed $10.0 million.
 
  VACANCIES ON OUR BOARD OF DIRECTORS
 
     Any director may resign at any time and may be removed with or without
cause by the stockholders upon the affirmative vote of the holders of at least
two-thirds of all of our common stock outstanding and entitled to vote generally
for the election of directors. Unless filled by a vote of the stockholders in
the event a director is removed as permitted by Maryland law, a vacancy created
by death, resignation, removal, adjudicated incompetence or other incapacity of
a director may be filled by a vote of a majority of the remaining directors
although less than a quorum. Vacancies created by an increase in the number of
directors must be filled by a vote of majority of the entire board.
 
LIMITED LIABILITY AND INDEMNIFICATION
 
     The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholder for money damages except for liability resulting
from actual receipt of an improper benefit or profit in money, property or
services or active and
 
                                       105

 
deliberate dishonesty established by a final judgment as being material to the
cause of action. Our charter limits the personal liability of our directors and
officers for money damages to the fullest extent permitted under Maryland law.
 
     The MGCL requires a corporation, unless its charter provides otherwise,
which our charter does not, to indemnify a director or officer who has been
successful on the merits or otherwise, in the defense of any proceeding to which
he or she is made a party by reason of his or her service in that capacity. See
"Certain Provisions of Maryland Law and of Our Charter and
Bylaws -- Indemnification and Limitation of Directors' and Officers' Liability."
 
     We maintain a directors and officers liability insurance policy. We have
also entered into indemnification agreements with each of our directors and
executive officers, which we refer to in this context as indemnitees. The
indemnification agreements provide that we will, to the fullest extent permitted
by Maryland law, indemnify and defend each indemnitee against all losses and
expenses incurred as a result of his current or past service as our director or
officer, or incurred by reason of the fact that, while he was our director or
officer, he was serving at our request as a director, officer, partners,
trustee, employee or agent of a corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan. We have agreed to pay expenses
incurred by an indemnitee before the final disposition of a claim provided that
he provides us with a written affirmation that he has met the standard of
conduct required for indemnification and a written undertaking to repay the
amount we pay or reimburse if it is ultimately determined that he has not met
the standard of conduct required for indemnification. We are to pay expenses
within 20 days of receiving the indemnitee's written request for such an
advance. Indemnitees are entitled to select counsel to defend against
indemnifiable claims.
 
     The general effect to investors of any arrangement under which any person
who controls us or any of our directors, officers or agents is insured or
indemnified against liability is a potential reduction in distributions to our
stockholders resulting from our payment of premiums associated with liability
insurance and payment of indemnifiable expenses and losses.
 
     The SEC takes the position that indemnification against liabilities arising
under the Securities Act is against public policy and unenforceable. As a
result, indemnification of our directors and officers may not be allowed for
liabilities arising from or out of a violation of state or federal securities
laws.
 
DIRECTOR COMPENSATION
 
     As compensation for serving on our board of directors, each of our
independent directors receives an annual fee of $20,000 and an additional $1,000
for each board of directors meeting attended. In addition, each independent
director is paid $1,000 for attendance at each meeting of a committee on which
he serves. Committee chairmen receive an additional $5,000 per year except that
the audit committee chairman receives an additional $10,000 per year. In
addition, we reimburse our directors for their reasonable out-of-pocket expenses
incurred in attending board of directors and committee meetings. Directors who
are also officers or employees of our company receive no additional compensation
for their service as directors. At the time of each annual meeting of our
stockholders following his or her election to the board of directors, each
independent director will receive 2,000 shares of our common stock, restricted
as to transfer for three years, or a comparable number of deferred stock units.
Our compensation committee may change the compensation of our independent
directors in its discretion.
 
     Upon joining our board of directors, each independent director received a
non-qualified option to purchase 20,000 shares of our common stock with an
exercise price of $10.00 per share. One-third of these options vested upon
grant. One-half of the remaining options will vest on each of the first and
second anniversaries of the date of grant. In addition to this option to
purchase stock, each of our independent directors has been awarded 2,500
deferred stock units, which represent the right to receive 2,500 shares of
common stock at no cost in October 2007 for Messrs. Dawson and Holmes and 2,500
shares of common stock at no cost in March 2008 for Ms. Clarke and Messrs.
Goolsby and Orr.
 
                                       106

 
EXECUTIVE COMPENSATION
 
     The following table sets forth the compensation paid or earned by our chief
executive officer and our other executive officers for 2003 and 2004:
 


                                                                                 OTHER ANNUAL    ALL OTHER
NAME AND POSITION                                 YEAR    SALARY       BONUS     COMPENSATION   COMPENSATION
-----------------                                 ----   --------     --------   ------------   ------------
                                                                                 
Edward K. Aldag, Jr. ...........................  2004   $350,000     $350,000     $50,462(1)     $30,769(2)
  Chairman, Chief Executive                       2003    145,833(3)   145,833      10,492(4)       9,249(5)
  Officer and President
Emmett E. McLean................................  2004   $250,000     $250,000     $24,385(6)     $15,385(2)
  Executive Vice President,                       2003    104,167(3)   104,167          --         10,896(7)
  Chief Operating Officer, Treasurer and
  Assistant Secretary
R. Steven Hamner................................  2004   $250,000     $250,000     $24,385(6)     $15,385(2)
  Executive Vice President                        2003    104,167(3)   104,167          --          5,918(8)
  and Chief Financial Officer
William G. McKenzie.............................  2004   $175,000     $175,000     $    --        $    --
  Vice Chairman of the Board                      2003     72,917(3)    72,917          --             --
Michael G. Stewart..............................  2004   $ 43,527(9)  $ 42,188     $ 1,700(10)
  Executive Vice President,                       2003         --           --          --             --
  Secretary and General Counsel

 
---------------
 
 (1) Represents a $12,000 automobile allowance and $25,000 payable to Mr. Aldag
     to reimburse him for the cost of tax preparation and financial planning
     services and $13,462 to reimburse Mr. Aldag for his tax liabilities
     associated with such payment.
 
 (2) Represents reimbursement for life insurance premiums of $20,000 for Mr.
     Aldag and $10,000 for each of Messrs. McLean and Hamner and reimbursement
     of $10,769 for Mr. Aldag and $5,385 for each of Messrs. McLean and Hamner
     for tax liabilities associated with such premium reimbursements, but does
     not include any matching contributions under the 401(k) plan that we expect
     to adopt in 2004.
 
 (3) For the partial year period from our inception in August 2003 until
     December 31, 2003.
 
 (4) Represents a $7,000 automobile allowance and $3,492 payable to Mr. Aldag to
     reimburse him for the cost of tax preparation and financial planning
     services.
 
 (5) Represents reimbursement for life insurance premiums of $9,249.
 
 (6) Represents a $9,000 automobile allowance and $10,000 for the named
     executive officers to reimburse them for the cost of tax preparation
     services and $5,385 for the named executive officers to reimburse them for
     their tax liabilities associated with such tax preparation cost
     reimbursement.
 
 (7) Represents reimbursement for life insurance premiums of $10,896.
 
 (8) Represents reimbursement for life insurance premiums of $5,918.
 
 (9) For the partial year period from October 25, 2004, Mr. Stewart's date of
     hire, to December 31, 2004. Had Mr. Stewart been employed for the full year
     2004, he would have been entitled to a base salary of $225,000 during 2004.
     Mr. Stewart's employment agreement was amended effective April 28, 2005.
     The amended employment agreement provides for an annual base salary of
     $250,000.
 
(10) Represents automobile allowance.
 
EMPLOYMENT AGREEMENTS
 
     We have employment agreements with each of the named executive officers.
These employment agreements provide the following annual base salaries: Edward
K. Aldag, Jr., $350,000; Emmett E. McLean, $250,000; R. Steven Hamner, $250,000;
Michael G. Stewart, $250,000; and William G. McKenzie, $175,000. The base
salaries for Messrs. Aldag, McLean and Hamner were increased by 5% effective
January 1, 2005. On each January 1 hereafter, each of the executive officers is
to receive a minimum increase in his base salary equal to the increase in the
Consumer Price Index. These agreements provide that the executive officers,
other than Mr. McKenzie, agree to devote substantially all of their business
time to our operation. The employment agreement for each of the named executive
officers is for a three year term which is automatically extended at the end of
each year within such term for an additional one year period, unless either
party gives notice of non-renewal as provided in the agreement. These employment
agreements permit us to terminate each executive's employment with appropriate
notice for or without "cause." "Cause" is generally defined to mean:
 
     - conviction of, or the entry of a plea of guilty or nolo contendere to, a
       felony (excluding any felony relating to the negligent operation of a
       motor vehicle or a conviction or plea of guilty or nolo contendere
       arising under a statutory provision imposing per se criminal liability
       due to the position
 
                                       107

 
       held by the executive with us, provided the act or omission of the
       executive or officer with respect to such matter was not taken or omitted
       to be taken in contravention of any applicable policy or directive of the
       board of directors);
 
     - a willful breach of the executive's duty of loyalty which is materially
       detrimental to us;
 
     - a willful failure to perform or adhere to explicitly stated duties that
       are consistent with the executive's employment agreement, or the
       reasonable and customary guidelines of employment or reasonable and
       customary corporate governance guidelines or policies, including, without
       limitation, the business code of ethics adopted by the board of
       directors, or the failure to follow the lawful directives of the board of
       directors provided such directives are consistent with the terms of the
       executive's employment agreement, which continues for a period of 30 days
       after written notice to the executive; and
 
     - gross negligence or willful misconduct in the performance of the
       executive's duties.
 
     Each of the named executive officers has the right under his employment
agreement to resign for "good reason." The following constitute good reason
under the employment agreements: (i) the employment agreement is not
automatically renewed by the company; (ii) the termination of certain incentive
compensation programs; (iii) the termination or diminution of certain employee
benefit plans, programs or material fringe benefits (other than for Mr.
McKenzie); (iv) the relocation of our principal office outside of a 100 mile
radius of Birmingham, Alabama (in the case of Mr. Aldag); or (v) our breach of
the employment agreement which continues uncured for 30 days. In addition, in
the case of Mr. Aldag, the following constitute good reason: (i) his removal
from the board of directors without cause or his failure to be nominated or
elected to the board of directors; or (ii) any material reduction in duties,
responsibilities or reporting requirements, or the assignment of any duties,
responsibilities or reporting requirements that are inconsistent with his
positions with us.
 
     The executive employment agreements provide a monthly car allowance of
$1,000 for Mr. Aldag and $750 for each of Messrs. McLean, Hamner and Stewart.
Messrs. Aldag, McLean, Hamner and Stewart are also reimbursed for the cost of
tax preparation and financial planning services, up to $25,000 annually for Mr.
Aldag and $10,000 annually for each of Messrs. McLean, Hamner and Stewart. We
also reimburse each executive for the income tax he incurs on the receipt of
these tax preparation and financial planning services. In addition, the
employment agreements provide for annual paid vacation of six weeks for Mr.
Aldag and three weeks for Messrs. McLean, Hamner and Stewart and various other
customary benefits. The employment agreements also provide that Mr. Aldag will
receive up to $20,000 per year in reimbursement for life insurance premiums,
which amount is to increase annually based on the increase in the CPI for such
year, and that Messrs. McLean, Hamner and Stewart will receive up to $10,000 per
year in reimbursement for life insurance premiums which amount is to increase
annually based on the increase in the CPI for such year. We also reimburse each
executive for the income tax he incurs on the receipt of these premium
reimbursements.
 
     We have the right to obtain a key man life insurance policy for the benefit
of the company on the life of each of our executives with a death benefit equal
to the death benefit of such executive's whole life policy.
 
     The employment agreements referred to above provide that the executive
officers are eligible to receive the same benefits, including medical insurance
coverage and retirement plan benefits in a 401(k) plan to the same extent as
other similarly situated employees, and such other benefits as are commensurate
with their position. Participation in employee benefit plans is subject to the
terms of said benefit plans as in effect from time to time.
 
     If the named executive officer's employment ends for any reason, we will
pay accrued salary, bonuses and incentive payments already determined, and other
existing obligations. In addition, if we terminate the named executive officer's
employment without cause or if any of them terminates his employment for good
reason, we will be obligated to pay (i) a lump sum payment of severance equal to
the sum of (x) the product of three and the sum of the salary in effect at the
time of termination plus the average cash bonus
 
                                       108

 
(or the highest cash bonus, in the case of Mr. Aldag) paid to such executive
during the preceding three years, grossed up for taxes in the case of Mr. Aldag,
and (y) the incentive bonus prorated for the year in which the termination
occurred, (ii) other than for Mr. McKenzie, the cost of the executive's
continued participation in the company's benefit and welfare plans (other than
the 401(k) plan) for a three year period (or for a five year period in the case
of Mr. Aldag), and (iii) certain other benefits as provided for in the
employment agreement. Additionally, in the event of a termination by us for any
reason other than cause or by the executive for good reason, all of the options
and restricted stock granted to the executive will become fully vested, and the
executive will have whatever period remains under the options in which to
exercise all vested options.
 
     In the event of a termination of the employment of our executives as a
result of death, then in addition to the accrued salary, bonus and incentive
payments due to them, they shall become fully vested in their options and
restricted stock, and their respective beneficiaries will have whatever period
remains under the options to exercise such options. In addition, the executives
would be entitled to their prorated incentive bonuses.
 
     In the event the employment of our executives ends as a result of a
termination by us for cause or by the executives without good reason, then in
addition to the accrued salary, bonuses and incentive payments due to them, the
executives would be entitled to exercise their vested stock options pursuant to
the terms of the grant, but all other unvested options and restricted stock
would be forfeited.
 
     Upon a change of control, the named executive officers will become fully
vested in their options and restricted stock and will have whatever period
remains under the option in which to exercise their options. In addition, if any
executive's employment is terminated by us for cause or by the executive without
good reason in connection with a change of control, the executive will be
entitled to receive an amount equal to the largest cash compensation paid to the
executive for any twelve month period during his tenure multiplied by three. In
general terms, a change of control occurs:
 
     - if a person, entity or affiliated group (with certain exceptions)
       acquires more than 50% of our then-outstanding voting securities;
 
     - if we merge into or complete a share exchange, consolidation or other
       business combination transaction with another entity unless the holders
       of our voting stock immediately prior to the merger have at least 50% of
       the combined voting power of the securities in the merged entity or its
       parent; or
 
     - upon the liquidation, dissolution, sale or disposition of all or
       substantially all of our assets such that after that transaction the
       holders of our voting stock immediately prior to the transaction own less
       than 50% of the voting securities of the acquiror or its parent.
 
     If payments become due as a result of a change in control and the excise
tax imposed by Code Section 4999 applies, the terms of the employment agreements
require us to gross up the amount payable to the executive by the amount of this
excise tax plus the amount of income and other taxes due as a result of the
gross up payment.
 
     For an 18 month period after termination of an executive's employment for
any reason other than (i) termination by us without cause or (ii) termination by
the executive for good reason, each of the executives under these employment
agreements has agreed not to compete with us by working with or investing in,
subject to certain limited exceptions, any enterprise engaged in a business
substantially similar to our business as it was conducted during the period of
the executive's employment with us.
 
     The employment agreements provide that these named executive officers are
eligible to participate in our equity incentive plan, as described in the
section below titled "Equity Incentive Plan." The employment agreements also
provide that the named executive officers are eligible to receive annual bonuses
under our bonus policy. See "Annual Incentive Bonus Policy."
 
                                       109

 
BENEFIT PLANS
 
  ANNUAL INCENTIVE BONUS POLICY
 
     Our compensation committee has adopted an incentive bonus policy for 2005.
This policy provides that our executive officers will receive cash bonuses of
not less than 40% nor more than 100% of their base salaries for 2005 if certain
targets or objectives are met. At the election of the executive officer, any
portion of the bonus for 2005 may be taken in our common stock. Our compensation
committee will reevaluate the incentive bonus policy for our executive officers
on an annual basis, subject to those provisions in our executive officers'
employment agreements that provide that the executives will receive not less
than 40% nor more than 100% of their base salaries under the policy. In
addition, the compensation committee may approve any additional bonus awards to
any executive officer.
 
  401(K) PLAN
 
     Our board of directors has approved the adoption of a Section 401(k) plan
covering our eligible employees. The plan will be a safe harbor plan providing
that each participant must complete one year of service before becoming eligible
for profit sharing contributions, we will match each dollar, dollar for dollar
for the first 3%, then 50% for each dollar of the next 2%, of each participant's
salary, participants' elective contributions and safe harbor contributions will
be fully vested when made, and profit sharing contributions will vest over six
years.
 
  EQUITY INCENTIVE PLAN
 

     We have adopted the Amended and Restated Medical Properties Trust, Inc.
2004 Equity Incentive Plan, or equity incentive plan, for the purpose of
attracting and retaining directors, executive officers and other key employees
and consultants, including officers and employees of our operating partnership.
The equity incentive plan provides that the aggregate number of shares of common
stock as to which awards can be made pursuant to the equity incentive plan is
4,691,180. On April 25, 2005, our compensation committee awarded 82,000 shares
of restricted stock to Mr. Stewart and certain non-management employees. The
shares awarded to the non-management employees will vest 20% per year over five
years beginning on July 7, 2006, provided they remain our employees. On October
6, 2004, our compensation committee awarded 106,000 shares of restricted stock
to Messrs. Aldag, Hamner, McKenzie and McLean effective July 14, 2005. The
shares granted to Messrs. Aldag, Hamner, McKenzie, McLean and Stewart vest at a
rate of 8.33% per quarter beginning on September 30, 2005, so long as each
executive officer remains an employee of ours. In addition, upon a change in
control or if any of these executive officers is terminated for certain reasons,
the shares will vest 100%. On August 18, 2005, our compensation committee
awarded 490,680 shares of restricted stock to our executive officers and members
of our board of directors. These shares vest at a rate of 8.33% per quarter
beginning on September 30, 2005, so long as each executive officer remains an
employee of ours and each director remains a member of our board of directors.
In addition, upon a change in control or if any of the executive officers is
terminated for certain reasons, or a director dies or becomes permanently
disabled, the shares will vest 100%. On October 12, 2005, our compensation
committee awarded 10,000 deferred stock units to our independent directors. As
of the date of this prospectus, there remain 3,891,871 shares available for
awards under the equity incentive plan.

 
     Awards.  The equity incentive plan authorizes the issuance of options to
purchase shares of common stock, restricted stock awards, restricted stock
units, deferred stock units, stock appreciation rights and performance units.
The equity incentive plan contains an award limit on the maximum number of
shares of common stock that may be awarded to an individual in any fiscal year
of 300,000 shares.
 
     Vesting.  Our compensation committee will determine the vesting of options
and restricted stock and restricted stock units granted under the equity
incentive plan, subject to any different vesting provisions agreed upon in a
participant's employment agreement. In addition, our compensation committee will
establish a standard vesting schedule for options, restricted stock and
restricted stock units subject to any different vesting schedule which is agreed
upon in a participant's employment or award agreement.
                                       110

 
     Options.  Each option granted pursuant to the equity incentive plan is
designated at the time of grant as either an option intended to qualify as an
incentive stock option under Section 422 of the Code, referred to as a qualified
incentive option, or as an option that is not intended to so qualify, referred
to as a non-qualified option. The equity incentive plan authorizes our
compensation committee to grant incentive stock options for common stock in an
amount and at an exercise price to be determined by it, provided that the price
cannot be less than 100% of the fair market value of the common stock on the
date on which the option is granted. If an incentive stock option is granted to
a 10% stockholder, additional requirements will apply to the option. The
exercise price of non-qualified options will be equal to 100% of the fair market
value of common stock on the date the option is granted unless otherwise
determined by our compensation committee. The exercise price for any option is
generally payable in cash or, in certain circumstances, by the surrender, at the
fair market value on the date on which the option is exercised, of shares of our
common stock having a value equal to the exercise price. The equity incentive
plan provides that exercise may be delayed or prohibited if it would adversely
affect our status as a REIT. In addition, the equity incentive plan permits
optionholders to exercise their options prior to the date on which the options
will vest, subject to Committee action. In such case, the optionholder will,
upon payment for the shares, receive restricted stock having vesting terms on
transferability that are identical to the vesting terms under the original
option and subject to repurchase by us while the restrictions on vesting are in
effect.
 
     In connection with certain extraordinary events, the compensation committee
may make adjustments in the aggregate number and kind of shares of capital stock
reserved for issuance, the number and kind of shares of capital stock covered by
outstanding awards and the exercise prices specified therein as may be
determined to be appropriate.
 
     Restricted Stock.  The equity incentive plan also provides for the grant of
restricted stock awards. A restricted stock award is an award of shares of
common stock that is subject to restrictions on transferability and other
restrictions, if any, as our compensation committee may impose at the date of
grant. Shares of restricted common stock are subject to vesting as our
compensation committee may approve or as may otherwise be agreed upon in a
participant's employment or other award agreement. The restrictions may lapse
separately or in combination at the times and under the circumstances, including
without limitation, a specified period of employment or the satisfaction of
pre-established criteria, in installments or otherwise, as our compensation
committee may determine. Except to the extent restricted under the award
agreement, a participant granted shares of restricted stock will have all of the
rights of a stockholder, including, without limitation, the right to vote and
the right to receive dividends on the restricted stock.
 
     Restricted Stock Units and Deferred Stock Units.  Under the equity
incentive plan, the compensation committee may award restricted stock units and
deferred stock units, each for the duration that it determines in its
discretion. Each restricted stock unit and each deferred stock unit is
equivalent in value to one share of common stock and entitles the participant
receiving the award to receive one share of common stock for each restricted
stock unit at the end of the vesting period applicable to such restricted stock
unit and for each deferred stock unit at the end of the deferral period.
Participants are not required to pay any additional consideration in connection
with the settlement of restricted stock units or deferred stock units. A holder
of restricted stock units or deferred stock units has no voting rights, right to
receive cash distributions or other rights as a stockholder until shares of
common stock are issued to the holder in settlement of the stock units. However,
participants holding restricted stock units or deferred stock units will be
entitled to receive dividend equivalents with respect to any payment of cash
dividends on an equivalent number of shares of common stock. Such dividend
equivalents will be credited in the form of additional stock units.
 
     Performance Units.  The equity incentive plan also provides for the grant
of performance shares and performance units. Holders of performance units will
be entitled to receive payment in cash or shares of our common stock (or in some
combination of cash and shares) if the performance goals established by the
compensation committee are achieved or the awards otherwise vest. Each
performance unit will have an initial value established by the compensation
committee. The compensation committee will set
 
                                       111

 
performance objectives, and such performance objectives may be based upon the
achievement of company-wide, divisional or individual goals.
 
     Stock Appreciation Rights.  The equity incentive plan also authorizes our
compensation committee to grant stock appreciation rights. Stock appreciation
rights are awards that give the recipient the right to receive an amount equal
to (1) the number of shares exercised under the right, multiplied by (2) the
amount by which our stock price exceeds the exercise price. Payment may be in
cash, in shares of our common stock with equivalent value, or in some
combination, as determined by the administrator. The compensation committee will
determine the exercise price, vesting schedule and other terms and conditions of
stock appreciation rights; however, stock appreciation rights expire under the
same rules that apply to stock options.
 
     Administration of the Plan.  The equity incentive plan is administered by
our compensation committee. Mr. Aldag is to make recommendations to the
compensation committee as to which consultants, employees, and executive
officers, other than himself, will be eligible to participate, subject to
compensation committee review and approval. The compensation committee, in its
absolute discretion, will determine the effect of all matters and questions
relating to an employee's termination of employment, subject to the
participant's employment agreement.
 
          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     There are no compensation committee interlocks and none of our employees
participates on the compensation committee.
 
                        MARKET PRICE OF OUR COMMON STOCK
 
     Our common stock is listed on the NYSE under the symbol "MPW." The
following table shows the high and low sales prices for our common stock since
our common stock became eligible for trading on the NYSE:
 



                                                              HIGH SALES     LOW SALES
                                                                 PRICE         PRICE
                                                              -----------   -----------
                                                                      
July 8, 2005 to September 30, 2005..........................    $11.20         $9.62
October 1, 2005 to October 10, 2005.........................    $10.09         $9.15


 
     Before our common stock was listed on the New York Stock Exchange, shares
of our common stock were eligible for trading in the Private Offering, Resales
and Trading through Automated Linkages Market of the National Association of
Securities Dealers, Inc., or the PORTAL Market. Individuals and institutions
that sold shares of our common stock before our common stock was listed on the
New York Stock Exchange were not obligated to report their sales to the PORTAL
Market. Therefore, the last sales price that was reported on the PORTAL Market
may not have been reflective of sales of our common stock that occurred and were
not reported. The table below reflects the high and low prices for trades of our
shares on the PORTAL Market known to us for each of the periods indicated.
 


                                                              HIGH SALES     LOW SALES
                                                                 PRICE         PRICE
                                                              -----------   -----------
                                                                      
April 6, 2004 to June 30, 2004..............................    $10.50        $10.00
July 1, 2004 to September 30, 2005..........................     10.00         10.00
October 1, 2004 to December 31, 2004........................     10.25         10.00
January 1, 2005 to March 31, 2005...........................     10.25         10.00
April 1, 2005 to May 25, 2005...............................     10.25         10.00

 
                                       112

 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth the beneficial ownership of our common stock
as of August 31, 2005 by (i) each of our directors, (ii) each of our executive
officers, (iii) all of our directors and executive officers as a group and (iv)
each person known to us who is the beneficial owner of more than 5% of our
common stock. The SEC has defined "beneficial" ownership of a security to mean
the possession, directly or indirectly, of voting power or investment power. A
stockholder is also deemed to be, as of any date, the beneficial owner of all
securities that such stockholder has the right to acquire within 60 days after
that date through (a) the exercise of any option, warrant or right, (b) the
conversion of a security, (c) the power to revoke a trust, discretionary account
or similar arrangement, or (d) the automatic termination of a trust,
discretionary account or similar arrangement. Each beneficial owner named in the
table has the sole voting and investment power with respect to all of the shares
of our common stock shown as beneficially owned by such person, except as
otherwise set forth in the notes to the table. Unless otherwise indicated, the
address of each named beneficial owner is Medical Properties Trust, Inc., 1000
Urban Center Drive, Suite 501, Birmingham, Alabama, 35242.
 



                                                                             PERCENTAGE OF
                                                        NUMBER OF SHARES     ALL SHARES OF
NAME OF BENEFICIAL OWNER                               BENEFICIALLY OWNED   COMMON STOCK(1)
------------------------                               ------------------   ---------------
                                                                      
Edward K. Aldag, Jr..................................        499,022(2)           1.25%
R. Steven Hamner.....................................        199,022(3)              *
William G. McKenzie..................................        150,022(4)              *
Emmett E. McLean.....................................        199,022(5)              *
Michael G. Stewart...................................         50,000(6)              *
Virginia A. Clarke...................................         24,166(7)              *
G. Steven Dawson.....................................         50,833(8)              *
Bryan L. Goolsby.....................................         24,166(7)              *
Robert E. Holmes, Ph.D. .............................         31,833(8)              *
L. Glenn Orr, Jr. ...................................         24,166(7)              *
  All executive officers and directors as a group (10
     persons)........................................      1,300,752(9)           3.25%
Friedman Billings Ramsey Group, Inc..................      2,842,959(10)          7.11%
1001 Nineteenth St. North
Arlington, Virginia 22209
Jeffrey L. Feinberg..................................      2,399,300(11)          6.00%
c/o JLF Asset Management, L.L.C.
2775 Via de la Valle, Suite 204
Del Mar, CA 92014


 
---------------
 
 * Represents less than 1% of the number of shares of common stock outstanding.
 
 (1) Based on 39,969,065 shares of common stock outstanding as of August 31,
     2005. Shares of common stock that are deemed to be beneficially owned by a
     stockholder within 60 days after August 31, 2005 are deemed outstanding for
     purposes of computing such stockholder's percentage ownership but are not
     deemed outstanding for the purpose of computing the percentage ownership of
     any other stockholder.
 
 (2) Includes 217,805 shares of restricted common stock.
 
 (3) Includes 125,218 shares of restricted common stock.
 
 (4) Includes 52,342 shares of restricted common stock.
 
 (5) Includes 93,815 shares of restricted common stock.
 
 (6) Includes 50,000 shares of restricted common stock.
 

 (7) Includes 6,666 shares of common stock issuable upon exercise of a vested
     stock option and 17,500 shares of restricted common stock.

 

 (8) Includes 13,333 shares of common stock issuable upon exercise of a vested
     stock option and 17,500 shares of restricted common stock.

 
 (9) See notes (1)-(8) above.
 
(10) Includes 1,795,571 shares of common stock owned directly by Friedman,
     Billings, Ramsey Group, Inc., the parent company of Friedman, Billings,
     Ramsey & Co., Inc., 52,388 shares owned directly by Friedman, Billings,
     Ramsey & Co., Inc. and 995,000 shares held by various investment funds over
     which Friedman, Billings, Ramsey Group, Inc., through a wholly-owned
     indirect subsidiary, exercises shared investment and voting power.
 
(11) Based on a Schedule 13G filed on July 25, 2005. Includes shares of common
     stock held by Jeffrey L. Feinberg, individually, JLF Partners I., L.P., JLF
     Partners II, L.P. and JLF Offshore Fund, Ltd. to which JLF Asset
     Management, L.L.C. serves as the management company and/or investment
     manager. Jeffrey L. Feinberg is the managing member of JLF Asset
     Management, L.L.C. Jeffrey L. Feinberg and JLF Asset Management, L.L.C.
     share investment and voting power over these shares of common stock.
 
                                       113

 
     The 521,908 shares of our common stock held by our founders that were
issued in connection with our formation, which excludes the 36,000 shares in the
aggregate that they purchased in our April 2004 private placement, vested on
July 7, 2005.
 
                              SELLING STOCKHOLDERS
 
     The following table sets forth the beneficial ownership of our common stock
by the selling stockholders as of June 30, 2005 and the number of shares that
may be offered for resale by this prospectus. The percentages of all shares of
common stock beneficially owned before and after resale of the shares of common
stock by the selling stockholders is based on 39,969,065 shares of common stock
outstanding as of August 31, 2005. The SEC has defined "beneficial" ownership of
a security to mean the possession, directly or indirectly, of voting power
and/or investment power. A stockholder is also deemed to be, as of any date, the
beneficial owner of all securities that the stockholder has the right to acquire
within 60 days after that date through (a) the exercise of any option, warrant
or right, (b) the conversion of a security, (c) the power to revoke a trust,
discretionary account or similar arrangement, or (d) the automatic termination
of a trust, discretionary account or similar arrangement. Except as otherwise
noted, the beneficial owners named in the table have sole voting and investment
power with respect to all shares of our common stock shown as beneficially owned
by them, subject to community property laws, where applicable.
 
     The selling stockholders may offer all, a portion or none of the shares
owned by them and covered by this prospectus. In preparing the table below, we
have assumed that the selling stockholders will sell all of the common stock
covered by this prospectus. Shares of common stock may also be sold by donees,
pledgees or other transferees or successors in interest of the selling
stockholders. Except as described below, to our knowledge, none of the selling
stockholders has had a material relationship with us or any of our affiliates
within the past three years.
 
     Any selling stockholder that is identified as a broker-dealer will be
deemed to be an "underwriter" within the meaning of Section 2(11) of the
Securities Act, unless such selling stockholder obtained the stock as
compensation for services. In addition, any affiliate of a broker-dealer will be
deemed to be an "underwriter" within the meaning of Section 2(11) of the
Securities Act, unless such selling stockholder purchased in the ordinary course
of business and, at the time of its purchase of the stock to be resold, did not
have any agreements or understandings, directly or indirectly, with any person
to distribute the stock. As a result, any profits on the sale of the common
stock by selling stockholders who are deemed to be "underwriters" and any
discounts, commissions or concessions received by any such broker-dealers who
are deemed to be "underwriters" will be deemed to be underwriting discounts and
commissions under the Securities Act. Selling stockholders who are deemed to be
"underwriters" will be subject to prospectus delivery requirements of the
Securities Act and to certain statutory liabilities, including, but not limited
to, those under Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
Unaffiliated(3)
3M(4)..............................      265,225         265,225             *                 0           *
Aetna Services, Inc. Small Cap
  Equity(5)........................       25,800          25,800             *                 0           *
AG Arb Partners, L.P.(6)(7)........       88,000          88,000             *                 0           *
AG CNG Fund, L.P.(6)(7)............       45,000          45,000             *                 0           *
AG Funds, L.P.(6)(7)...............       50,000          50,000             *                 0           *
AG MM, L.P.(6)(7)..................       28,000          28,000             *                 0           *


 
                                       114

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
AG Princess, L.P.(6)(7)............       22,000          22,000             *                 0           *
AG Super Fund, L.P.(6)(7)..........      275,000         275,000             *                 0           *
Allan Rothstein....................        5,000           5,000             *                 0           *
Atlas Capital(8)...................      150,000         150,000             *                 0           *
Anita U. Schorsch(6)...............        1,000           1,000             *                 0           *
Alpha US Sub Fund I, LLC(10).......        8,254           8,254             *                 0           *
Anthony Bruno and Kathleen Bruno
  JTWROS...........................        1,000           1,000             *                 0           *
Anthony V. Bruno and Christina S.
  Bruno JTWROS.....................        1,000           1,000             *                 0           *
Arkansas Teachers Retirement
  System(5)........................       45,000          45,000             *                 0           *
Augustus V.L. Brokaw III TTEE
  Augustus V.L. Brokaw III
  Revocable Trust Dated
  10/14/1993(13)...................        1,300           1,300             *                 0           *
Australian Retirement
  Fund -- Global Small Companies
  Portfolio(9).....................       42,300          42,300             *                 0           *
Axia Offshore Parters, Ltd.(10)....       31,874          31,874             *                 0           *
Axia Partners, L.P.(10)............       16,460          16,460             *                 0           *
Axia Partners Qualified,
  L.P.(10).........................       66,412          66,412             *                 0           *
Bel Air Opportunistic Fund,
  L.P.(11).........................       40,000          40,000             *                 0           *
Bert Fingerhut Roth IRA(12)........        5,000           5,000             *                 0           *
Bill Ham(13).......................       20,000          20,000             *                 0           *
Bill Ham -- IRA Rollover(13).......        8,000           8,000             *                 0           *
Black Foundation(13)...............        1,800           1,800             *                 0           *
Bonnie Paley Minzer Revocable
  Trust(14)........................        1,000           1,000             *                 0           *
Brian C. Porter(15)................          334             334             *                 0           *
Brunswick Master Trust(4)..........       33,150          33,150             *                 0           *
Burke F. Hayes(15).................          334             334             *                 0           *
Caroline Hicks Roth IRA(16)........        2,500           2,500             *                 0           *
Carrhae & Co.(19)..................       36,250          36,250             *                 0           *
Case Western Reserve
  University(9)....................       16,200          16,200             *                 0           *
Central States Southeast &
  Southwest Areas Pension
  Fund(19).........................       57,250          57,250             *                 0           *
Charles Affron and Mirella Affron
  JTWROS...........................        1,000           1,000             *                 0           *
Charles F. Wedel...................        2,000           2,000             *                 0           *
Clearpond & Co.(18)................      525,500         525,500           1.3%                0           *
Connection Machine Services,
  Inc.(11).........................        4,000           4,000             *                 0           *
Continental Casualty
  Company(6)(20)...................      100,000         100,000             *                 0           *
Cotran Investments, Ltd.(21).......       50,000          50,000             *                 0           *
Cynthia Rothstein..................        5,000           5,000             *                 0           *


 
                                       115

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
Daniel W. Huthwaite & Constance R.
  Huthwaite........................        2,250           2,250             *                 0           *
David M. Golush....................        4,600           4,600             *                 0           *
David A. Todd(13)..................        5,200           5,200             *                 0           *
Delaware Dividend Income Fund, a
  Series of Delaware Group Equity
  Funds(6)(17).....................       19,700          19,700             *                 0           *
Delaware Investments Dividend and
  Income Fund, Inc.(6)(17).........       35,000          35,000             *                 0           *
Delaware Investments Global
  Dividend and Income Fund,
  Inc.(6)(17)......................        9,400           9,400             *                 0           *
Dennis M. Langley..................       50,000          50,000             *                 0           *
DNB NOR Globalspar (I)(22).........      172,105         172,105             *                 0           *
DNB NOR Globalspar (II)(22)........      481,895         481,895           1.2%                0           *
Donald P. and Jean M. McDougall....        2,250           2,250             *                 0           *
Dorothy S. Rasplicka...............        2,450           2,450             *                 0           *
Douglas Woloshin...................        2,000           2,000             *                 0           *
Emergency Services Superannuation
  Board -- Global Smaller Companies
  Portfolio(9).....................       29,300          29,300             *                 0           *
Emerson Electric(4)................       45,500          45,500             *                 0           *
Emily L. Todd(13)..................        6,500           6,500             *                 0           *
Endeavor Capital Offshore Fund,
  Ltd.(18).........................      180,700         180,700             *                 0           *
Endeavor Capital Partners,
  L.P.(18).........................       60,700          60,700             *                 0           *
Endeavor Capital Partners II,
  L.P.(18).........................       12,300          12,300             *                 0           *
Eric J. Gaaserud(15)...............          334             334             *                 0           *
Evan L. Julber.....................       14,900          14,900             *                 0           *
Evelyn Berry Spousal Rollover
  IRA(19)..........................        1,525           1,525             *                 0           *
First Financial Fund, Inc.(9)......      419,500         419,500           1.0%                0           *
Francesca V. Ozdoba Pension &
  Profit Sharing Plan(23)..........        1,000           1,000             *                 0           *
Francis and Cynthia O'Connor(15)...        7,214           7,214             *                 0           *
Fred G. Neuwirth...................        2,500           2,500             *                 0           *
Friedman, Billings, Ramsey & Co.,
  Inc.(24).........................       52,388          52,388             *                 0           *
FBR Ashton Income Fund, LLC(25)....       50,000          50,000             *                 0           *
FBR Ashton Limited
  Partnership(25)..................      500,000         500,000          1.25%                0           *
FBR Ashton Special Situations Fund,
  L.P.(25).........................      445,000         445,000          1.11%                0           *
Friedman Billings Ramsey Group,
  Inc.(25).........................    1,795,571       1,795,571           4.5%                0           *
Frorer Partners, L.P.(26)..........       25,000          25,000             *                 0           *
GLG Partners (Financials
  Fund)(27)........................      290,000         220,000             *            70,000           *


 
                                       116

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
GMI Investment Trust(4)............       47,075          47,075             *                 0           *
Goldman Sachs Asset Management
  Foundation(19)...................        3,175           3,175             *                 0           *
Goldman Sachs Asset Management,
  L.P.(9)..........................      112,000         112,000             *                 0           *
Goldman Sachs JB Were Investment
  Management Pty., Ltd.(9).........        3,000           3,000             *                 0           *
Greenlight Capital, L.P.(28).......      165,600         165,600             *                 0           *
Greenlight Capital Offshore,
  Ltd.(28).........................      598,000         598,000           1.5%                0           *
Greenlight Capital Qualified,
  L.P.(28).........................      469,600         469,600           1.2%                0           *
Greenlight Reinsurance, Ltd.(28)...      185,000         185,000             *                 0           *
Guggenheim Portfolio Company III,
  LLC(6)(18).......................       33,100          33,100             *                 0           *
Henry Ripp IRA(29).................        2,000           2,000             *                 0           *
Hillel & Elaine Weinberger.........       10,000          10,000             *                 0           *
Indiana State Teachers Retirement
  Fund(5)..........................       41,900          41,900             *                 0           *
Iprofile -- US Equity Pool(5)......        1,500           1,500             *                 0           *
Institutional Benchmarks Master
  Fund, Ltd.(30) ..................        3,562           3,562             *                 0           *
Invesco Perpetual Asset
  Management(31)...................      220,000         220,000             *                 0           *
Investors of America, L.P.(32).....      301,400         301,400             *                 0           *
J&S Black F.L.P.(13)...............        5,900           5,900             *                 0           *
J. Rock Tonkel, Jr.(15)............        1,666           1,666             *                 0           *
JB Were Global Small Companies
  Fund(9)..........................      203,500         203,500             *                 0           *
Jack Sear Revocable Trust(33)......        1,000           1,000             *                 0           *
Jack Barish........................        5,000           5,000             *                 0           *
James V. Kimsey....................       10,000          10,000             *                 0           *
James Locke and Susan Locke Tenants
  by their Entirety................        8,000           8,000             *                 0           *
James C. Neuhauser(15).............        1,666           1,666                               0           *
Jay Rasplicka......................        5,450           5,450             *                 0           *
Jean C. Brokaw Revocable Trust
  Dated 10/14/1993(13).............        1,300           1,300             *                 0           *
Jed Hart...........................        2,500           2,500             *                 0           *
Jeffrey & Stacey Feinberg(34)......      354,000         354,000             *                 0           *
Jeffrey C. Kahn....................          500             500             *                 0           *
Jeffry L. Lacy(13).................        1,800           1,800             *                 0           *
Jody Irwin, Separate
  Property(13).....................        2,600           2,600             *                 0           *
JLF Partners I, L.P.(34)...........      697,901         697,901           1.7%                0           *
JLF Partners II, L.P.(34)..........       45,279          45,279             *                 0           *
JLF Offshore Deferred
  Account(34)......................      300,000         300,000             *                 0           *


 
                                       117

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
JLF Offshore Fund, Ltd.(34)........    1,002,120       1,002,120           2.5%                0
John A. Hartford Foundation
  Inc.(19).........................       11,250          11,250             *                 0           *
John A. Johnston & Robin L.
  Johnston.........................        1,000           1,000             *                 0           *
AG Sav & Inv Plan FBO Jed A.
  Hart(7)..........................        2,500           2,500             *                 0           *
John Black, IRA Rollover(13).......        3,800           3,800             *                 0           *
John William Edgemond..............        3,000           3,000             *                 0           *
John F. Syburg.....................        1,000           1,000             *                 0           *
Judith S. Roth.....................        5,000           5,000             *                 0           *
John M. Weaver.....................        3,000           3,000             *                 0           *
Julian E. Gillespie and Heather A.
  Gillespie(15)....................        4,000           4,000             *                 0           *
Kayne Anderson REIT Fund,
  L.P.(6)(35)......................      125,000         125,000             *                 0           *
Kristin Junkin IRA(36).............        1,500           1,500             *                 0           *
Lawrence Chimerine.................          400             400             *                 0           *
LG&E Energy Corp.(5)...............       12,300          12,300             *                 0           *
Liebro Partners LLC(37)............        3,000           3,000             *                 0           *
Louis Scowcroft Peery Charitable
  Foundation(13)...................        1,800           1,800             *                 0           *
Loyola University Endowment(4).....       11,870          11,870             *                 0           *
Loyola University Retirement(4)....       11,750          11,750             *                 0           *
Lucie Wray Todd(13)................       10,000          10,000             *                 0           *
Lupa Family Partners, L.P.(38).....       38,910          38,910             *                 0           *
Lyxor/Third Point Fund
  Limited(39)......................      109,128         109,128             *                 0           *
M&M Arbitrage LLC(30)..............       19,973          19,973             *                 0           *
M&M Arbitrage Fund II, LLC(30).....       21,520          21,520             *                 0           *
M&M Arbitrage Offshore Ltd.(30) ...       53,122          53,122             *                 0           *
Magnolia Charitable Trust, Emily L.
  Todd and David A. Todd,
  TTEEs(13)........................        4,300           4,300             *                 0           *
Marcy A. Newberger Revocable
  Trust(40)........................        2,250           2,250             *                 0           *
Mary L.G. Theroux, Trustee Mary
  L.G. Theroux Charitable Remainder
  Unitrust 5-14-96(13).............        6,200           6,200             *                 0           *
Mary L.G. Theroux, TTEE of the Mary
  L.G. Theroux Revocable Living
  Trust U/A 9/30/68(13)............        4,800           4,800             *                 0           *
Maritime Life Discovery Fund(9)....       40,600          40,600             *                 0           *
Mark Bruno and Martha Bruno
  JTWROS...........................        1,000           1,000             *                 0           *
Mark J. Roach......................        1,000           1,000             *                 0           *
Martin Hirschhorn..................       10,000          10,000             *                 0           *


 
                                       118

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
Massachusetts Pension Reserves
  Investment Management Board REIT
  Portfolio(9).....................      103,900         103,900             *                 0           *
Mavian, LLC(19)....................          575             575             *                 0           *
Mercury Real Estate Advisors
  LLC(41)..........................       34,000          34,000             *                 0           *
Miami University Endowment(19).....        1,675           1,675             *                 0           *
Miami University Foundation(19)....        2,000           2,000             *                 0           *
Michael A. Claggett, IRA
  Rollover(13).....................        1,000           1,000             *                 0           *
Michael C. Bruno...................        5,000           5,000             *                 0           *
Millennium Partners, L.P.(6)(42)...    2,200,000       1,500,000           5.5%          700,000         1.8%
Murray Gorin.......................        5,000           5,000             *                 0           *
Munder Micro-Cap Equity
  Fund(6)(43)......................      190,600         190,600             *                 0           *
Munder Real Estate Equity
  Investment Fund(6)(43)...........      104,400         104,400             *                 0           *
Mutual of America Institutional
  Funds, Inc. All American
  Fund(6)(44)......................        3,940           3,940             *                 0           *
Mutual of America Institutional
  Funds, Inc. Aggressive Equity
  Fund(6)(44)......................        5,740           5,740             *                 0           *
Mutual of America Investment
  Corporation All American
  Fund(6)(44)......................       34,720          34,720             *                 0           *
Mutual of America Investment
  Corporation Aggressive Equity
  Fund(6)(44)......................      130,600         130,600             *                 0           *
NCR Pension Trust-REIT Concentrated
  Sector Portfolio(9)..............       45,400          45,400             *                 0           *
Neese Family Equity Investments
  Ltd.(19).........................        2,250           2,250             *                 0           *
Nutmeg Partners, L.P.(6)(7)........       60,000          60,000             *                 0           *
Optimix Investment Management
  Limited(9).......................       17,000          17,000             *                 0           *
Pacific Credit Corp.(11)...........        8,000           8,000             *                 0           *
Pennant Offshore Partners
  Ltd.(45).........................      374,850         374,850             *                 0           *
Pennant Onshore Partners,
  L.P.(45).........................       80,080          80,080             *                 0           *
Pennant Onshore Qualified,
  L.P.(45).........................      245,070         245,070             *                 0           *
Peter A. Gallagher.................        2,250           2,250             *                 0           *
Peter A. Kirsch....................          300             300             *                 0           *
Phillip Caplan(15).................        3,667           3,667             *                 0           *
PHS Bay Colony Fund, L.P.(6)(7)....       22,000          22,000             *                 0           *
PHS Patriot Fund, L.P.(6)(7).......       10,000          10,000             *                 0           *
Pinnacle Oil Company(46)...........       10,000          10,000             *                 0           *
Pitney Bowes Pension Plan(5).......       16,700          16,700             *                 0           *
Producer-Writers Guild(4)..........       16,350          16,350             *                 0           *


 
                                       119

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
Prudential Real Estate Securities
  Fund(9)..........................       36,100          36,100             *                 0           *
Public Employees' Retirement System
  of Mississippi-REIT
  Portfolio(9).....................       33,500          33,500             *                 0           *
PWB Value Partners, L.P.(47).......      387,666         387,666             *                 0           *
Quota Rabbico N.V.(38).............       48,424          48,424             *                 0           *
Ralph Pasture Pension Plan(48).....        2,000           2,000             *                 0           *
Raytheon Master Pension Trust--Real
  Estate Hedged Portfolio(9).......       60,500          60,500             *                 0           *
The Real Estate Investment Trust
  Series(6)(17)....................      849,735         425,935           2.1%          423,800           1%
The Real Estate Investment Trust
  Portfolio(6)(17).................      587,165         293,865           1.5%          293,300           *
The Real Estate Investment Trust II
  Portfolio(6)(17).................       66,800          33,900             *            32,900           *
Realty Enterprise Fund
  LLC(6)(49).......................       30,000          30,000             *                 0           *
Retail Employees Superannuation
  Trust(9).........................       55,100          55,100             *                 0           *
Retirement Plan for Hospital
  Employees(5).....................       10,000          10,000             *                 0           *
Richard Feinberg...................        7,500           7,500             *                 0           *
Robeco Boston Partners All Cap
  Value Fund(4)....................        2,225           2,225             *                 0           *
Robeco Boston Partners Small Cap II
  Value Fund(4)....................      195,900          87,500             *           108,400           *
Robert Feinberg....................        5,000           5,000             *                 0           *
Richard A. Kraemer & Gail G.
  Kraemer -- TIC...................       10,000          10,000             *                 0           *
Richard J. Hendrix(15).............        5,333           5,333             *                 0           *
Ron Clarke, IRA Rollover(13).......          500             500             *                 0           *
Royal Capital Management/Seneca
  Capital Managed Account(50)......        7,900           7,900             *                 0           *
Royal Capital Value Fund,
  Ltd.(50) ........................      220,700         220,700             *                 0           *
Royal Capital Value Fund, LP(50)...       52,200          52,200             *                 0           *
Royal Capital Value Fund (QP),
  LP(50)...........................      504,200         504,200           1.3%                0           *
SAC Strategic Investments,
  LLC(18)..........................       73,200          73,200             *                 0           *
Sarah P. Fleischer Family Trust No.
  1(51)............................        2,500           2,500             *                 0           *
Satellite Fund I, L.P.(52) ........        1,770           1,770             *                 0           *
Satellite Fund II, L.P.(52) .......       23,230          23,230             *                 0           *
Savannah ILA(4)....................       14,375          14,375             *                 0           *
SCCM Financial Inc.(53) ...........        3,000           3,000             *                 0           *
SEI Institutional Trust Small Cap
  Fund(9)..........................       55,500          55,500             *                 0           *


 
                                       120

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
SEI Institutional Investments Trust
  Small Cap Fund(9)................      128,000         128,000             *                 0           *
SEI Institutional Managed Trust
  Real Estate Fund(9)..............       11,400          11,400             *                 0           *
SEI Institutional Managed Trust
  Small Cap Growth Fund(9).........      169,000         169,000             *                 0           *
SEI Institutional Managed Trust
  Small Cap Value Fund(9)..........       39,400          39,400             *                 0           *
SEI US Small Companies Fund(9).....       14,700          14,700             *                 0           *
Seligman Global Fund Series, Inc.-
  Global Smaller Companies
  Fund(9)..........................       73,200          73,200             *                 0           *
Sisters of St. Joseph
  Carondelet(4)....................        6,675           6,675             *                 0           *
Small Capitalization Equity
  Fund(5)..........................        9,000           9,000             *                 0           *
Small Capitalization Equity Fund
  Collective Trust(5)..............       41,600          41,600             *                 0           *
Steven H. Goldberg(15).............        2,214           2,214             *                 0           *
Steven Rothstein...................        5,000           5,000             *                 0           *
Steven Vartan......................          500             500             *                 0           *
SVS Asset Management, LLC(19)......        1,275           1,275             *                 0           *
TALVEST Global Small Cap Fund(9)...       24,400          24,400             *                 0           *
Telstra Super Pty LTD-Super Global
  Smaller Companies(9).............       35,600          35,600             *                 0           *
Terrebonne Investors (Bermuda)
  L.P.(9)..........................       21,300          21,300             *                 0           *
Terrebonne Partners, L.P.(9).......       18,600          18,600             *                 0           *
Texas County and District
  Retirement System-REIT(9)........      182,300         182,300             *                 0           *
The Church Pension Fund -- Real
  Estate Securities Portfolio(9)...       30,900          30,900             *                 0           *
Third Point Partners, L.P.(39).....      174,945         174,945             *                 0           *
Third Point Ultra, Ltd.(39)........       48,634          48,634             *                 0           *
Third Point Offshore Fund
  Ltd.(39).........................      357,208         357,208             *                 0           *
Third Point Resources Ltd.(39).....       32,320          32,320             *                 0           *
Third Point Resources L.P.(39).....       27,765          27,765             *                 0           *
Thomas B. Parsons..................        1,000           1,000             *                 0           *
Timothy B. Matz and Jane F. Matz
  JTWROS(6)........................        5,000           5,000             *                 0           *
Timothy P. O'Brien(15).............        3,334           3,334             *                 0           *
Thomas D. & Elizabeth G. Eckert....       20,000          20,000             *                 0           *
Tombstone Limited
  Partnership(54)..................       20,000          20,000             *                 0           *
United Capital Management,
  Inc.(55) ........................       20,000          20,000             *                 0           *
University of Delaware(9)..........       18,600          18,600             *                 0           *
University of Richmond
  Endowment(4).....................       14,725          14,725             *                 0           *


 
                                       121

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
University of Southern California
  Endowment(4).....................       32,375          32,375             *                 0           *
Vantagepoint Aggressive
  Opportunities Fund(9)............      176,000         176,000             *                 0           *
Verizon Investment Management
  Corp.(4).........................      174,955         172,555             *             2,400           *
Vestal Venture Capital(56).........       63,000          63,000             *                 0           *
Wellington Management Portfolios
  (Dublin)-Global Smaller Companies
  Equity(9)........................       36,000          36,000             *                 0           *
Wichita Retirement Systems(5)......        9,900           9,900             *                 0           *
Wildlife Conservation Society(4)...        8,150           8,150             *                 0           *
William A. Hazel Revocable
  Trust(57)........................        4,500           4,500             *                 0           *
William & Flora Hewlette
  Foundation-Real Estate Securities
  Portfolio(9).....................       23,800          23,800             *                 0           *
William S. McLeod BSSC Master Def.
  Contrib. P/S Plan(53)............        2,000           2,000             *                 0           *
Wray & Todd Interests, Ltd.(13)....       15,000          15,000             *                 0           *
WTC-CIF Real Asset Portfolio(9)....       49,200          49,200             *                 0           *
WTC-CTF Real Asset Portfolio(9)....      153,600         153,600             *                 0           *
Y&H Soda Foundation(19)............        5,475           5,475             *                 0           *
Yaupon Fund LTD(59)................        5,042           5,042             *                 0           *
Yaupon Partners LP(59).............       19,958          19,958             *                 0           *
York Capital Management,
  L.P.(60).........................       24,452          24,452             *                 0           *
York Credit Opportunities Fund,
  L.P.(60).........................       90,000          90,000             *                 0           *
York Investment Limited(60)........      195,548         195,548             *                 0           *
SUBTOTAL:..........................   21,929,632      20,298,832            54%        1,630,800           4%
Affiliated Stockholders............
Charles Carpenter and Laura L.
  Pitts(61)........................        2,000           2,000             *                 0           *
Edward K. Aldag, Jr.(62)...........      499,022         281,217             *           217,805           *
Emmett E. McLean(63)...............      199,022         105,207             *            93,815           *
G. Steven Dawson(64)...............       50,833          20,000             *            30,833           *
Keith T. Ghezzi(65)................        5,000           5,000             *                 0           *
Michael G. Stewart(66).............       50,000          30,000             *            20,000           *
Patricia W. Green(67)..............        1,000           1,000             *                 0           *
Richard S. Hamner -- IRA
  Rollover(68).....................        2,000           2,000             *                 0           *
R. Steven and Glenda R. Hamner
  JTWROS(68).......................      199,022          71,804             *           127,218           *


 
                                       122

 



                                                        MAXIMUM                         BENEFICIAL OWNERSHIP
                                                       NUMBER OF      PERCENTAGE OF    AFTER RESALE OF SHARES
                                      NUMBER OF        SHARES OF      ALL SHARES OF      OF COMMON STOCK(1)
                                      SHARES OF      COMMON STOCK     COMMON STOCK    -------------------------
                                     COMMON STOCK   OFFERED BY THIS   BENEFICIALLY     NUMBER OF
                                     BENEFICIALLY   PROSPECTUS FOR    OWNED BEFORE     SHARES OF
SELLING STOCKHOLDER                     OWNED           RESALE          RESALE(2)     COMMON STOCK   PERCENTAGE
-------------------                  ------------   ---------------   -------------   ------------   ----------
                                                                                      
Robert E. Holmes, PhD.(64).........       31,833           1,000             *            30,833           *
William G. McKenzie(69)............      150,022          97,680             *            52,342           *
SUBTOTAL:..........................    1,189,754         616,908           1.5%          572,846        1.43%
Other Selling Stockholders(70).....          (70)      4,495,299           8.3%                0           *
TOTAL:.............................   23,119,386      25,411,039          57.8%        2,203,646         5.5%


 
---------------
 
  *  Holdings represent less than 1% of all shares of common stock outstanding.
 
 (1) Assumes that each named selling stockholder sells all of the shares of our
     common stock that it holds that are covered by this prospectus and neither
     acquires nor disposes of any other shares of common stock, or right to
     purchase other shares of common stock subsequent to the date as of which it
     provided information to us regarding its holdings. Because the selling
     stockholders are not obligated to sell all or any portion of the shares of
     our common stock shown as offered by them, we cannot estimate the actual
     number of shares of our common stock that will be held by any selling
     stockholder upon completion of this offering.
 
 (2) Based on 39,969,065 shares of common stock outstanding as of August 31,
     2005.
 
 (3) Except as otherwise indicated in Note 14, holders of our shares of common
     stock that are unaffiliated with us were subject to lock-up agreements that
     expired on September 6, 2005.
 

 (4) This selling stockholder represented to us that Boston Partners Asset
     Management, LLC serves as its investment adviser, and that Harry Rosenbluth
     and David Dabora exercise voting and investment power over these shares.

 

 (5) This selling stockholder represented to us that ING Investment Management
     Co. has sole voting power and sole investment power over the shares of
     common stock held by this stockholder, and that William E. Bartol is a Vice
     President of ING Investment Management Co., and in that role exercises
     voting and investment power over the shares of common stock held by this
     stockholder.

 

 (6) This selling stockholder is an affiliate of a broker-dealer. The selling
     stockholder represented that it purchased the shares in the ordinary course
     of business and, at the time of purchase of the shares to be resold, the
     selling stockholder did not have any agreement or understandings, directly,
     or indirectly, with any person to distribute the shares.

 

 (7) This selling stockholder represented to us that Angelo, Gordon & Co., L.P.
     serves as its investment manager, and that John M. Angelo and Michael L.
     Gordon, as Partners of Angelo, Gordon & Co., L.P. have voting and
     investment authority over these shares.

 

 (8) This selling stockholder represented to us that Atlas Capital Management,
     L.P. is the general partner of Atlas Capital (QP) L.P. Atlas Capital, LP.
     and Atlas Capital Offshore Fund, Ltd. are the general partners of Atlas
     Capital Master Fund, L.P. The shares of common stock held by Atlas Capital
     (QP) L.P. and Atlas Capital Master Fund, L.P. are being presented on a
     group basis. Robert Alpert exercises voting and investment power over these
     shares.

 

 (9) This selling stockholder represented to us that Wellington Management
     Company, LLP is an investment adviser registered under the Investment
     Advisers Act of 1940, as amended ("Wellington"), and that in its capacity
     as an investment adviser, Wellington is deemed to share beneficial
     ownership over the shares of common stock held by this stockholder.

 

(10) This selling stockholder represented to us that Axia Capital Management
     serves as its investment manager, and that Raymond Garea, as Chief
     Executive Officer of Axia Capital Management, has voting and investment
     authority over these shares.

 

(11) This selling stockholder represented to us that Bel Air Investment Advisors
     LLC has sole voting power and sole investment power with respect to the
     shares of common stock held by this stockholder, and that Michael Powers is
     a Portfolio Manager of Bel Air Investment Advisors LLC, and in that role
     exercises voting and investment power over the shares of common stock held
     by this stockholder.

 

(12) This selling stockholder represented to us that Bert Fingerhut has voting
     and investment authority over these shares.

 

(13) This selling stockholder represented to us that Roger E. King, President of
     King Investment Advisors, Inc. is the investment advisor for this
     stockholder and has voting power over the shares of common stock held by
     this stockholder.

 

(14) This selling stockholder represented to us that Bonnie Paley Minzer has
     voting and investment authority over these shares.

 

(15) This selling stockholder is an employee of Friedman, Billings, Ramsey &
     Co., Inc., a broker-dealer. The selling stockholder represented to us that
     it obtained the shares in the ordinary course of business and, at the time
     of purchase of the shares to be resold, the selling stockholder did not
     have any agreement or understandings, directly, or indirectly, with any
     person to distribute the shares. Friedman, Billings, Ramsey & Co., Inc.
     served as the initial purchaser and placement agent for our April 2004
     private placement. In addition, Friedman, Billings, Ramsey & Co., Inc.
     served as the sole book-running manager of our initial public offering.

 

(16) This selling stockholder represented to us that Caroline Hicks has voting
     and investment authority over these shares.

 

(17) This selling stockholder represented to us that Damon Andres has investment
     discretion and voting authority over these shares.

 

(18) This selling stockholder represented to us that Endeavour Capital Advisors
     has investment discretion over the shares of common stock held by this
     stockholder, and that Laurence Austin and Mitchell Katz exercise voting and
     investment power over the shares of common stock held by this stockholder.

 
                                       123

 

(19) This selling stockholder represented to us that Wasatch Advisors has sole
     voting power and sole investment power over the shares of common stock held
     by this stockholder, and that John Mazanec is a Portfolio Manager of
     Wasatch Advisors, and in that role exercises voting and investment power
     over the shares of commons stock held by this stockholder.

 

(20) This selling stockholder represented to us that Dennis Hemme has voting and
     investment authority over these shares.

 

(21) This selling stockholder represented to us that Camille Cotran has voting
     and investment authority over these shares.

 

(22) This selling stockholder represented to us that Oyvind Birkeland has voting
     authority over these shares, and that Espen Lundstrom and Kjell Morten
     Hamre have investment authority over these shares.

 

(23) This selling stockholder represented to us that Francesca V. Ozdoba has
     voting and investment authority over these shares.

 

(24) This selling stockholder is a registered broker-dealer, and received these
     shares as compensation for financial advisory services. Friedman, Billings,
     Ramsey & Co., Inc. served as the initial purchaser and placement agent for
     our April 2004 private placement. In addition, Friedman, Billings, Ramsey &
     Co., Inc. served as the sole book-running manager of our initial public
     offering. Friedman, Billings, Ramsey & Co., Inc. is subject to a lock-up
     agreement that expires on October 12, 2005. Eric Billings is the Chairman
     and Chief Executive Officer of Friedman, Billings, Ramsey & Co., and in
     that role exercises voting and investment power over the shares of common
     stock held by this stockholder.

 

(25) This selling stockholder is an affiliate of a broker-dealer. The selling
     stockholder represented to us that it purchased the shares in the ordinary
     course of business and, at the time of purchase of the shares to be resold,
     the selling stockholder did not have any agreement or understandings,
     directly or indirectly, with any person to distribute the shares. Eric
     Billings is the Chairman and Chief Executive Officer of Friedman Billings
     Ramsey Group, Inc., and in that role exercises voting and investment power
     over the shares of common stock held by this stockholder.

 

(26) This selling stockholder represented to us that Peter Frorer is the general
     partner of Frorer Partners, L.P., and has sole voting power and sole
     investment power with respect to the shares of common stock held by Frorer
     Partners, L.P.

 

(27) This selling stockholder represented to us that Robert Murphy has voting
     and investment authority over these shares.

 

(28) This selling stockholder represented to us that Greenlight Capital, Inc.
     serves as its investment manager, and that David Einhorn, as President of
     Greenlight Capital, Inc., has voting and investment authority over these
     shares.

 

(29) This selling stockholder represented to us that Henry Ripp has voting and
     investment authority over these shares.

 

(30) This selling stockholder represented to us that sole voting and investment
     power is held by Mangan & McColl Partners, LLC, and that John F. Mangan,
     Jr. role exercises voting and investment power over the shares of common
     stock held by this stockholder.

 

(31) This selling stockholder represented to us that Ian Brady has voting and
investment authority over these shares.

 

(32) This selling stockholder represented to us that James Dierberg has voting
and investment authority over these shares.

 

(33) This selling stockholder represented to us that Jack Sear has voting and
     investment authority over these shares.

 

(34) This selling stockholder represented to us that JLF Asset Management,
     L.L.C. serves as the management company and/or investment manager to JLF
     Partners I, L.P., JLF Partners II, L.P. JLF Offshore Deferred Account and
     JLF Offshore Fund, Ltd. Jeffrey L. Feinberg is the managing member of JLF
     Asset Management, L.L.C., and has voting and investment authority over
     these shares.

 

(35) This selling stockholder represented to us that Richard Kayne has voting
     and investment authority over these shares.

 

(36) This selling stockholder represented to us that Kristen Junkin has voting
     and investment authority over these shares.

 

(37) This selling stockholder represented to us that Ronald Liebowitz has voting
     and investment authority over these shares.

 

(38) This selling stockholder represented to us that Blavin & Company, Inc. has
     sole voting power and sole investment power over the shares of common stock
     held by this stockholder. Paul Blavin is the Chief Executive Officer of
     Blavin & Company, Inc., and in that role exercises voting and investment
     power over the shares of common stock held by this stockholder.

 

(39) This selling stockholder represented to us that Third Point LLC is the
     investment manager for Third Point Partners, L.P., Third Point Ultra, Ltd.,
     Third Point Offshore Fund Ltd., Third Point Resources Ltd., Third Point
     Resources, L.P. and Lyxor/ Third Point Fund Limited. Daniel S. Loeb is the
     Managing Member of Third Point LLC, and in that role exercises voting and
     investment power over the shares of common stock held by this stockholder.

 

(40) This selling stockholder represented to us that Marcy A. Newberger has
     voting and investment authority over these shares.

 

(41) This selling stockholder represented to us that David R. Jarvis and Malcolm
     F. MacLean have voting and investment authority over these shares.

 

(42) This selling stockholder represented to us that the 2,200,000 shares of
     common stock beneficially owned by this stockholder includes 700,000 shares
     of common stock held by its affiliate, Millenco, L.P. The general partner
     of this stockholder is Millennium Management, L.L.C., a Delaware limited
     liability company ("Millennium Management"). Millennium Management may be
     deemed to have voting control and investment discretion over securities
     owned by this stockholder. Israel A. Englander is the managing member of
     Millennium Management, and exercises voting and investment authority over
     these shares, and may be deemed to be the beneficial owner of any shares
     deemed to be owned by Millennium Management. This stockholder has advised
     us that the foregoing should not be construed as an admission by either
     Millennium Management or Mr. Englander as to beneficial ownership of the
     shares of common stock owned by this stockholder.

 

(43) This selling stockholder represented to us that Munder Capital Management,
     an affiliate of Comerica Securities, Inc., is the investment adviser to
     Munder Real Estate Equity Investment Fund and Munder Micro-Cap Equity Fund.
     The Munder Capital Management Proxy Committee exercises voting and
     investment authority over these shares. The Munder Capital Management Proxy
     Committee consists of the following members: Mary Ann Shumaker
     (non-voting), Andrea Leistra, Debbie Leich, Thomas Mudie and Stephen
     Shenkenberg (non-voting).

 

(44) This selling stockholder represented to us that Stephen Rich has voting and
     investment authority over these shares.

 

(45) This selling stockholder represented to us that Pennant Capital Management,
     LLC serves as the management company to Pennant Onshore Partners, L.P.,
     Pennant Offshore Partners, Ltd, and Pennant Onshore Qualified, L.P. Alan
     Fournier is the Managing Member of Pennant Capital Management, and in that
     role exercises voting and investment power over the shares of common stock
     held by this stockholder.

 

(46) This selling stockholder represented to us that Guy Dove has voting and
     investment authority over these shares.

 

(47) This selling stockholder represented to us that Michael Spalter has voting
     and investment authority over these shares.

 
                                       124

 

(48) This selling stockholder represented to us that Ralph Pasture has voting
     and investment authority over these shares.

 

(49) This selling stockholder represented to us that John Wells has voting and
     investment authority over these shares.

 

(50) This selling stockholder represented to us that Yale M. Fergang has voting
     and investment authority over these shares.

 

(51) This selling stockholder represented to us that James S. Fleischer has
     voting and investment authority over these shares.

 

(52) This selling stockholder represented to us that the General Partner of each
     of Satellite Fund I, L.P. and Satellite Fund II, L.P. is Satellite
     Advisors, L.L.C. ("Advisors"). The senior members of Advisors are Lief
     Rosenblatt, Gabriel Nechamkin and Mark Sonnino, each have voting and
     investment authority over the shares held by this selling stockholder. Each
     of Advisors and Messrs. Rosenblatt, Nechamkin and Sonnino disclaim
     beneficial ownership of these shares..

 

(53) This selling stockholder represented to us that Robert Slayton has voting
     and investment authority over these shares.

 

(54) This selling stockholder represented to us that Nathan Brand has voting and
     investment authority over these shares.

 

(55) This selling stockholder represented to us that James A. Lustig has voting
     and investment authority over these shares.

 

(56) This selling stockholder represented to us that Allan R. Lyons has voting
     and investment authority over these shares.

 

(57) This selling stockholder represented to us that William A. Hazel has voting
     and investment authority over these shares.

 

(58) This selling stockholder represented to us that William S. McLeod has
     voting and investment authority over these shares.

 

(59) This selling stockholder represented to us that Robert Lietzow has voting
     and investment authority over these shares.

 

(60) This selling stockholder represented to us that James G. Dinen has voting
     and investment authority over these shares.

 

(61) Mr. Pitts was a member of our board of directors from April 2004 until
     April 2005.

 

(62) Mr. Aldag is our Chairman, President and Chief Executive Officer.

 

(63) Mr. McLean is our Executive Vice President, Chief Financial Officer and
     Treasurer.

 

(64) Mr. Dawson and Mr. Holmes are members of our board of directors.

 

(65) Dr. Ghezzi was a member of our board of directors from March 2004 until
     April 2005.

 

(66) Mr. Stewart is our Executive Vice President, General Counsel and Secretary.

 

(67) Joseph V. Green, the spouse of this stockholder, was a member of our board
     of directors from April 2004 until April 2005.

 

(68) Mr. Hamner is our Executive Vice President and Chief Financial Officer and
     a member of our board of directors.

 

(69) Mr. McKenzie is our Vice Chairman of the Board of Directors.

 

(70) The number of shares of common stock included in these columns represents
     shares of common stock owned by stockholders who have not yet been
     specifically identified. Only those selling stockholders specifically
     identified above may sell their shares pursuant to this prospectus.
     Information concerning other stockholders who wish to become selling
     stockholders will be set forth in post-effective amendments to the
     registration statement of which this prospectus forms a part from time to
     time, if and when required.

 
                   REGISTRATION RIGHTS AND LOCK-UP AGREEMENTS
 
REGISTRATION RIGHTS AGREEMENT
 
     At the time of our April 2004 private placement, we entered into a
registration rights agreement with Friedman, Billings, Ramsey & Co., Inc. and
various holders of our common stock. The summary of the registration rights
agreement is subject to and qualified in its entirety by reference to the
registration rights agreement, a copy of which is filed as an exhibit to the
registration statement of which this prospectus is a part. See "Where You Can
Find More Information."
 
     Piggy-Back Rights.  Under the terms of the registration rights agreement,
if we proposed to file a registration statement providing for the initial public
offering of shares of our common stock, the holders of our common stock
purchased in the April 2004 private placement had a right to include their
shares in that registration statement and participate in the initial public
offering, subject to certain limitations. Pursuant to the registration statement
relating to our initial public offering, we registered, and purchasers in our
April 2004 private placement sold, 701,823 shares of our common stock held by
them.
 
     Demand Rights.  Pursuant to the registration rights agreement, we also
agreed for the benefit of the holders of shares of common stock sold in our
April 2004 private placement or issued to Friedman, Billings, Ramsey & Co., Inc.
in connection with our April 2004 private placement, that we would, at our
expense, file with the SEC the resale registration statement of which this
prospectus is a part registering 24,859,131 shares of our common stock issued in
connection with our April 2004 private placement. Pursuant to the registration
rights agreement, we are required to pay most expenses in connection with the
registration of the shares of common stock purchased in the April 2004 private
placement. In addition, we will reimburse selling stockholders in an aggregate
amount of up to $50,000, for the fees and expenses of one counsel and one
accounting firm, as selected by Friedman, Billings, Ramsey & Co., Inc. for the
selling stockholders to review this registration statement. Each selling
stockholder participating in this offering will bear a proportionate share based
on the total number of shares of common stock sold in this offering of all
 
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discounts and commissions payable to the underwriters, all transfer taxes and
transfer fees and any other expense of the selling stockholders not allocated to
us in the registration rights agreement.
 
     In addition, we agreed to use our reasonable best efforts to cause this
resale registration statement to become effective under the Securities Act as
promptly as practicable after the filing and to maintain this resale
registration statement continuously effective under the Securities Act until the
first to occur of (1) such time as all of the shares of common stock covered by
this resale registration statement have been sold pursuant to the registration
statement or pursuant to Rule 144 (or any successor or analogous rule) under the
Securities Act, (2) such time as all of the common stock not held by affiliates
of us, and covered by this resale registration statement, are eligible for sale
pursuant to Rule 144(k) (or any successor or analogous rule) under the
Securities Act, (3) such time as the shares of common stock have been otherwise
transferred, new certificates for them not bearing a legend restricting further
transfer have been delivered by us and subsequent public distribution of such
shares does not require registration, or (4) the second annual anniversary of
the initial effective date of this resale registration statement.
 
     Notwithstanding the foregoing, we will be permitted, under limited
circumstances, to suspend the use, from time to time, of this prospectus, and
therefore suspend sales under the registration statement, for certain periods,
referred to as "blackout periods," if a majority of the independent directors of
our board, in good faith, determines that we are in compliance with the terms of
the registration rights agreement, that it is in our best interest to suspend
the use of the registration statement, and:
 
     - that the offer or sale of any registrable shares would materially impede,
       delay or interfere with any material proposed acquisition, merger, tender
       offer, business combination, corporate reorganization, consolidation or
       similar material transaction;
 
     - after the advice of counsel, sale of the registrable shares would require
       disclosure of non-public material information not otherwise required to
       be disclosed under applicable law; and
 
     - disclosure would have a material adverse effect on us or on our ability
       to close the applicable transaction.
 
     In addition, we may effect a blackout if a majority of independent
directors of our board, in good faith, determines that we are in compliance with
the terms of the registration rights agreement, that it is in our best interest
to suspend the use of the registration statement, and, after advice of counsel,
that it is required by law, rule or regulation to supplement the registration
statement or file a post-effective amendment for the purposes of:
 
     - including in the registration statement any prospectus required under
       Section 10(a)(3) of the Securities Act;
 
     - reflecting any facts or events arising after the effective date of the
       registration statement that represents a fundamental change in
       information set forth therein; or
 
     - including any material information with respect to the plan of
       distribution or change to the plan of distribution not set forth therein.
 
     The cumulative blackout periods in any 12 month period commencing on the
closing of the offering may not exceed an aggregate of 90 days and furthermore
may not exceed 60 days in any 90 day period. We may not institute a blackout
period more than three times in any 12 month period. Upon the occurrence of any
blackout period, we are to use our reasonable best efforts to take all action
necessary to promptly permit resumed use of the registration statement.
 
     If, among other matters, we fail to maintain the effectiveness of this
resale registration statement, or, if our board of directors suspends the
effectiveness of the resale registration statement in excess of the permitted
blackout periods described above, the holders of registrable shares (other than
our affiliates) will be entitled to receive liquidated damages from us for the
period during which such failures or excess suspensions are continuing. The
liquidated damages will accrue daily during the first 90 days of any such period
at a rate of $0.25 per registrable share per year and will escalate by $0.25 per
registrable share per year at the end of each 90 day period within any such
period up to a maximum rate of $1.00 per
 
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registrable share per year. The liquidated damages will be payable quarterly, in
arrears within ten days after the end of each applicable quarter.
 
     In connection with the registration of the shares sold in the April 2004
private placement, we agreed to use our reasonable best efforts to list our
common stock on the NYSE or the Nasdaq National Market and thereafter to
maintain the listing.
 
LOCK-UP AGREEMENTS
 

     All of our directors and executive officers agreed to be bound by lock-up
agreements that prohibit these holders from selling or otherwise disposing of
any of our common stock or securities convertible into our common stock that
they own or acquire until January 4, 2006, subject to limited exceptions.
Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters of our
initial public offering, may, in its discretion, release all or any portion of
the common stock subject to the lock-up agreements with our directors and
executive officers, at any time and without notice or stockholder approval.

 
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
OUR FORMATION
 
     We were formed as a Maryland corporation on August 27, 2003 to succeed to
the business of Medical Properties Trust, LLC, a Delaware limited liability
company, which was formed by certain of our founders in December 2002. In
connection with our formation, we issued our founders 1,630,435 shares of our
common stock in exchange for nominal cash consideration and the membership
interests of Medical Properties Trust, LLC. Upon completion of our private
placement in April 2004, 1,108,527 shares of the 1,630,435 shares of common
stock held by our founders were redeemed for nominal value and they now
collectively hold 557,908 shares of our common stock, including shares purchased
in our April 2004 private placement.
 
     James P. Bennett was formerly an owner, officer, director and consultant of
the company's predecessor, Medical Properties Trust, LLC, but has not been
affiliated with us since August 2003. Our predecessor had a consulting agreement
with Mr. Bennett pursuant to which he was to be paid a monthly consulting fee,
certain fringe benefits and, under certain circumstances, a fee based upon the
completion of specified acquisition transactions. We believe we owe Mr. Bennett
$411,238. Mr. Bennett disputes this amount and has notified us that he believes
he is entitled to be paid consulting fees of approximately $1.6 million. On
August 26, 2005, Mr. Bennett filed a lawsuit against us, certain of our
directors, Friedman, Billings, Ramsey & Co., Inc. and KPMG LLP in the Circuit
Court of Jefferson County, Alabama, alleging, among other things, breach of
contract and tortious interference with a contract or business relationship, and
demanding compensatory and punitive damages in an unspecified amount. We intend
to vigorously defend against this lawsuit.
 
     From time to time, we may acquire or develop facilities in transactions
involving prospective tenants in which our directors or executive officers have
an interest. In accordance with our written conflicts of interest policy, we do
not intend to engage in these transactions without the approval of a majority of
our disinterested directors.
 
OUR STRUCTURE
 
     Conflicts of interest could arise in the future as a result of the
relationships between us and our affiliates, on the one hand, and our operating
partnership or any limited partner thereof, on the other. Our directors and
officers have duties to our company and our stockholders under applicable
Maryland law in connection with their management of our company. At the same
time, we, through our wholly owned subsidiary, have fiduciary duties, as a
general partner, to our operating partnership and to the limited partners under
Delaware law in connection with the management of our operating partnership. Our
duties, through our wholly owned subsidiary, as a general partner to our
operating partnership and its partners may come into conflict with the duties of
our directors and officers to our company and our stockholders. The partnership
agreement of our operating partnership requires us to resolve such conflicts in
favor of our stockholders.
 
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     Pursuant to Maryland law, a contract or other transaction between us and a
director or between us and any other corporation or other entity in which any of
our directors is a director or has a material financial interest is not void or
voidable solely on the grounds of such common directorship or interest, the
presence of such director at the meeting at which the contract or transaction is
authorized, approved or ratified or the counting of the director's vote in favor
thereof. However, such transaction will not be void or voidable only if:
 
     - the material facts relating to the common directorship or interest and as
       to the transaction are disclosed to our board of directors or a committee
       of our board, and our board or committee authorizes, approves or ratifies
       the transaction or contract by the affirmative vote of a majority of
       disinterested directors, even if the disinterested directors constitute
       less than a quorum;
 
     - the material facts relating to the common directorship or interest and as
       to the transaction are disclosed to our stockholders entitled to vote
       thereon, and the transaction is authorized, approved or ratified by a
       majority of the votes cast by the stockholders entitled to vote (other
       than the votes of shares owned of record or beneficially by the
       interested director); or
 
     - the transaction or contract is fair and reasonable to us at the time it
       is authorized, ratified or approved.
 
     Furthermore, under Delaware law, where our operating partnership is formed,
we, acting through the general partner, have a fiduciary duty to our operating
partnership and, consequently, such transactions are also subject to the duties
of care and loyalty that we, as a general partner, owe to limited partners in
our operating partnership (to the extent such duties have not been eliminated
pursuant to the terms of the partnership agreement). Where appropriate, in the
judgment of the disinterested directors, our board of directors may obtain a
fairness opinion, or engage independent counsel to represent the interests of
non-affiliated security holders, although our board of directors will have no
obligation to do so.
 
RELATIONSHIP WITH ONE OF THE UNDERWRITERS OF OUR INITIAL PUBLIC OFFERING
 
     On November 13, 2003, we entered into an engagement letter agreement with
Friedman, Billings, Ramsey & Co., Inc., one of the underwriters of our initial
public offering. The engagement letter gives Friedman, Billings, Ramsey & Co.,
Inc. the right to serve in the following capacities until April 2006:
 
     - as our financial advisor with respect to any future mergers, acquisitions
       or other business combinations;
 
     - as the sole book running and lead underwriter or sole placement agent in
       connection with any public or private offering of equity or any public
       offering of debt securities; and
 
     - as our agent in connection with the exercise of our warrants or options,
       other than warrants or options held by management or by Friedman,
       Billings, Ramsey & Co., Inc.
 
     On March 31, 2004, we entered into a Purchase/Placement Agreement with
Friedman, Billings, Ramsey & Co., Inc., pursuant to which Friedman, Billings,
Ramsey & Co., Inc. acted as initial purchaser and sole placement agent for our
April 2004 private placement and received aggregate initial purchaser discounts
and placement fees of $17.7 million. In addition, we issued 260,954 shares of
our common stock to Friedman, Billings, Ramsey & Co., Inc. as payment for
financial advisory services. As of July 15, 2005, Friedman Billings Ramsey
Group, Inc., an affiliate of Friedman, Billings, Ramsey & Co., Inc.,
beneficially owned, directly or indirectly through affiliates, 2,868,857 shares
of our common stock or approximately 7.62% of our outstanding common stock. We
have an account with Friedman, Billings, Ramsey & Co., Inc. through which we
managed approximately $141.7 million of our cash and cash equivalents as of July
15, 2005.
 
OTHER RELATIONSHIPS
 
     In December 2004 and January 2005, the law firm of Locke, Liddell & Sapp
LLP, of which Mr. Goolsby is a partner, provided certain legal services to our
Ethics, Nominating and Corporate Governance Committee.
 
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                        INVESTMENT POLICIES AND POLICIES
                       WITH RESPECT TO CERTAIN ACTIVITIES
 
     The following is a discussion of our investment policies and our policies
with respect to certain other activities, including financing matters and
conflicts of interest. These policies may be amended or revised from time to
time at the discretion of our board of directors, without a vote of our
stockholders. Any change to any of these policies by our board of directors,
however, would be made only after a thorough review and analysis of that change,
in light of then-existing business and other circumstances, and then only if, in
the exercise of its business judgment, our board of directors believes that it
is advisable to do so in our and our stockholders' best interests. We cannot
assure you that our investment objectives will be attained.
 
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE
 
     We conduct our investment activities through our operating partnership and
other subsidiaries. Our policy is to acquire or develop assets primarily for
current income generation. In general, our investment strategy consists of the
following elements:
 
     - Integral Healthcare Real Estate:  We acquire and develop net-leased
       healthcare facilities providing state-of-the-art healthcare services. In
       our experience, healthcare service providers, including physicians and
       hospital operating companies, choose to remain in an established location
       for relatively long periods since changing the location of their physical
       facilities does not assure that other critical components of the
       healthcare delivery system, such as laboratory support, access to
       specialized equipment, patient referral sources, nursing and other
       professional support, and patient convenience, will continue to be
       available at the same level of quality and efficiency. Consequently, we
       believe market conditions will remain favorable for long-term net-leased
       healthcare facilities, and we do not presently expect high levels of
       tenant turnover. Moreover, we believe that our partnering approach will
       afford us the opportunity to play an integral role in the strategic
       planning process for the financing of replacement facilities and the
       development of alternative uses for existing facilities.
 
     - Net-lease Strategy:  Our healthcare facilities are leased to healthcare
       operators pursuant to long-term net-lease agreements under which our
       tenants are responsible for virtually all costs of occupancy, including
       property taxes, utilities, insurance and maintenance. We believe an
       important investment consideration is that our leases to healthcare
       operators provide a means for us to participate in the anticipated growth
       of the healthcare sector of the United States economy. Our leases
       generally provide for either contractual annual rent increases ranging
       from 1.0% to 3.0% and, where feasible and in compliance with applicable
       healthcare laws and regulations, percentage rent. We expect that such
       rental rate adjustments will provide us with significant internal growth.
 

     - Diversified Investment Strategy:  Our facilities and the Pending
       Acquisition Facilities are diversified geographically, by service type
       within the healthcare industry and by types of operator. We have invested
       and intend to invest in a portfolio of net-leased healthcare facilities
       providing state-of-the-art healthcare services. Our facilities and
       Pending Acquisition Facilities include new and established facilities,
       both small and large facilities, including rehabilitation hospitals,
       long-term acute care hospitals, ambulatory surgical centers, regional and
       community hospitals, medical office buildings, skilled nursing facilities
       and specialized single-discipline facilities. Our facilities are and we
       expect will continue to be located across the country. In addition, our
       tenants and prospective tenants are diversified across many healthcare
       service areas. Because of the expected diversity of our facilities in
       terms of facility type, geographic location and tenant, we believe that
       our financial performance is less likely to be materially affected by
       changes in reimbursement or payment rates by private or public insurers
       or by changes in local or regional economies.

 
     - Financing Strategy:  We intend to employ leverage in our capital
       structure in amounts we determine from time to time. At present, we
       intend to limit our debt to approximately 50-60% of the aggregate costs
       of our facilities, although we may temporarily exceed that level from
       time to
 
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       time. We expect our borrowings to be a combination of long-term,
       fixed-rate, non-recourse mortgage loans, variable-rate secured term and
       revolving credit facilities, and other fixed and variable-rate short to
       medium-term loans.
 
     There are no limitations on the amount or percentage of our total assets
that may be invested in any one facility. Additionally, no limits have been set
on the concentration of investments in any one location or facility type or with
any one tenant. Our current policy requires the approval of the investment
committee of our board of directors for acquisitions or developments of
facilities which exceed $10.0 million.
 
     We believe that adherence to the investment strategy outlined above will
allow us to achieve the following objectives:
 
     - increase in our stock value through increases in the cash flows and
       values of our facilities;
 
     - achievement of long-term capital appreciation, and preservation and
       protection of the value of our interest in our facilities; and
 
     - providing regular cash distributions to our stockholders, a portion of
       which may constitute a nontaxable return of capital because it will
       exceed our current and accumulated earnings and profits, as well as
       providing growth in distributions over time.
 
INVESTMENTS IN SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL
ESTATE ACTIVITIES AND OTHER ISSUERS
 
     Generally speaking, we do not expect to engage in any significant
investment activities with other entities, although we may consider joint
venture investments with other investors or with healthcare service providers.
We may also invest in the securities of other issuers in connection with
acquisitions of indirect interests in facilities (normally general or limited
partnership interests in special purpose partnerships owning facilities). We may
in the future acquire some, all or substantially all of the securities or assets
of other REITs or similar entities where that investment would be consistent
with our investment policies and the REIT qualification requirements. There are
no limitations on the amount or percentage of our total assets that may be
invested in any one issuer, other than those imposed by the gross income and
asset tests that we must satisfy to qualify as a REIT. However, we do not
anticipate investing in other issuers of securities for the purpose of
exercising control or acquiring any investments primarily for sale in the
ordinary course of business or holding any investments with a view to making
short-term profits from their sale. In any event, we do not intend that our
investments in securities will require us to register as an "investment company"
under the Investment Company Act, and we intend to divest securities before any
registration would be required.
 
     We do not intend to engage in trading, underwriting, agency distribution or
sales of securities of other issuers.
 
DISPOSITIONS
 
     Although we have no current plans to dispose of any of our facilities, we
will consider doing so, subject to REIT qualification rules and prohibited
transaction tax, if our management determines that a sale of a facility would be
in our best interests based on the price being offered for the facility, the
operating performance of the facility, the tax consequences of the sale and
other factors and circumstances surrounding the proposed sale. In addition, our
tenants have, and we expect that some or all of our prospective tenants will
have, the option to acquire the facilities at the end of or, in some cases,
during the lease term.
 
FINANCING POLICIES
 
     We intend to employ leverage in our capital structure in amounts we
determine from time to time. At present, we intend to limit our debt to
approximately 50-60% of the aggregate costs of our facilities,
 
                                       130

 
although we may temporarily exceed those levels from time to time. We expect our
borrowings to be a combination of long-term, fixed-rate, non-recourse mortgage
loans, variable-rate secured term and revolving credit facilities, and other
fixed and variable-rate short to medium-term loans. Our board of directors
considers a number of factors when evaluating our level of indebtedness and when
making decisions regarding the incurrence of indebtedness, including the
purchase price of facilities to be acquired, the estimated market value of our
facilities and the ability of particular facilities, and our company as a whole,
to generate cash flow to cover expected debt service.
 
     Any of this indebtedness may be unsecured or may be secured by mortgages or
other interests in our facilities, and may be recourse, non-recourse or
cross-collateralized and, if recourse, that recourse may include our general
assets and, if non-recourse, may be limited to the particular facility to which
the indebtedness relates. In addition, we may invest in facilities subject to
existing loans secured by mortgages or similar liens on the facilities, or may
refinance facilities acquired on a leveraged basis. We may use the proceeds from
any borrowings for working capital, to purchase additional interests in
partnerships or joint ventures in which we participate, to refinance existing
indebtedness or to finance acquisitions, expansion, redevelopment of existing
facilities or development of new facilities. We may also incur indebtedness for
other purposes when, in the opinion of our board of directors, it is advisable
to do so. In addition, we may need to borrow to meet the taxable income
distribution requirements under the Code if we do not have sufficient cash
available to meet those distribution requirements.
 
LENDING POLICIES
 
     We do not have a policy limiting our ability to make loans to persons other
than our executive officers. We may consider offering purchase money financing
in connection with the sale of facilities where the provision of that financing
will increase the value to be received by us for the facility sold. We may make
loans to joint ventures in which we may participate in the future. Although we
do not intend to engage in significant lending activities in the future, we have
and may in the future make acquisition and working capital loans to prospective
tenants as well as mortgage loans to other facility owners and other parties.
See "Summary -- Loans and Fees Receivable."
 
EQUITY CAPITAL POLICIES
 
     Subject to applicable law, our board of directors has the authority,
without further stockholder approval, to issue additional shares of authorized
common stock and preferred stock or otherwise raise capital, including through
the issuance of senior securities, in any manner and on the terms and for the
consideration it deems appropriate, including in exchange for property. Existing
stockholders will have no preemptive right to additional shares issued in any
offering, and any offering might cause a dilution of investment. We may in the
future issue common stock in connection with acquisitions. We also may issue
limited partnership units in our operating partnership or equity interests in
other subsidiaries in connection with acquisitions of facilities or otherwise.
 
     Our board of directors may authorize the issuance of preferred stock with
terms and conditions that could have the effect of delaying, deterring or
preventing a transaction or a change in control in us that might involve a
premium price for holders of our common stock or otherwise might be in their
best interests. Additionally, any shares of preferred stock could have dividend,
voting, liquidation and other rights and preferences that are senior to those of
our common stock.
 
     We may, under certain circumstances, purchase our common stock in the open
market or in private transactions with our stockholders, if those purchases are
approved by our board of directors. Our board of directors has no present
intention of causing us to repurchase any shares, and any action would only be
taken in conformity with applicable federal and state laws and the applicable
requirements for qualifying as a REIT.
 
     In the future we may institute a dividend reinvestment plan, which would
allow our stockholders to acquire additional common stock by automatically
reinvesting their cash distributions. Shares would be acquired pursuant to the
plan at a price equal to the then prevailing market price, without payment of
 
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brokerage commissions or service charges. Stockholders who do not participate in
the plan will continue to receive cash distributions as declared and paid.
 
CODE OF ETHICS AND CONFLICT OF INTEREST POLICY
 
     We have adopted written policies that are intended to minimize actual or
potential conflicts of interest. However, we cannot assure you that these
policies will be successful in eliminating the influence of these conflicts. Our
code of ethics and business conduct, or code of ethics, requires our directors,
officers and employees to conduct themselves in a manner that avoids even the
appearance of a conflict of interest, and to discuss any transaction or
relationship that reasonably could be expected to give rise to a conflict of
interest with our code of ethics contact person. Our code of ethics also
addresses insider trading, company funds and property, corporate opportunities
and fair dealing.
 
     In addition, we have adopted a policy that requires that all contracts and
transactions between us, our operating partnership or any of our subsidiaries,
on the one hand, and any of our directors or executive officers or any entity in
which such director or executive officer is a director or has a material
financial interest, on the other hand, must be approved by the affirmative vote
of a majority of our disinterested directors.
 
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                          DESCRIPTION OF CAPITAL STOCK
 
     The following summary of the material provisions of our capital stock is
subject to and qualified in its entirety by reference to the Maryland general
corporation law, or MGCL, and our charter and bylaws. Copies of our charter and
bylaws are filed as exhibits to the registration statement of which this
prospectus is a part. We recommend that you review these documents. See "Where
You Can Find More Information."
 
AUTHORIZED STOCK
 
     Our charter authorizes us to issue up to 100,000,000 shares of common
stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share. As of the date of this prospectus, we have 39,969,065
shares of common stock issued and outstanding and no shares of preferred stock
issued and outstanding. Our charter authorizes our board of directors to
increase the aggregate number of authorized shares or the number of shares of
any class or series without stockholder approval. Under Maryland law,
stockholders generally are not liable for the corporation's debts or
obligations.
 
COMMON STOCK
 
     All shares of our common stock offered hereby will be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of any other
class or series of stock and to the provisions of our charter regarding the
restrictions on transfer of stock, holders of shares of our common stock are
entitled to receive dividends on such stock when, as and if authorized by our
board of directors out of funds legally available therefor and declared by us
and to share ratably in the assets of our company legally available for
distribution to our stockholders in the event of our liquidation, dissolution or
winding up after payment of or adequate provision for all known debts and
liabilities of our company, including the preferential rights on dissolution of
any class or classes of preferred stock.
 
     Subject to the provisions of our charter regarding the restrictions on
transfer of stock, each outstanding share of our common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of directors and, except as provided with respect to any other
class or series of stock, the holders of such shares will possess the exclusive
voting power. There is no cumulative voting in the election of our board of
directors. Our directors are elected by a plurality of the votes cast at a
meeting of stockholders at which a quorum is present.
 
     Holders of shares of our common stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have no preemptive
rights to subscribe for any securities of our company. Subject to the provisions
of our charter regarding the restrictions on transfer of stock, shares of our
common stock will have equal dividend, liquidation and other rights.
 
     Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, consolidate, sell all or substantially all of its assets, engage
in a share exchange or engage in similar transactions outside the ordinary
course of business unless approved by the corporation's board of directors and
by the affirmative vote of stockholders holding at least two-thirds of the
shares entitled to vote on the matter unless a lesser percentage (but not less
than a majority of all of the votes entitled to be cast on the matter) is set
forth in the corporation's charter. Our charter does not provide for a lesser
percentage for these matters. However, Maryland law permits a corporation to
transfer all or substantially all of its assets without the approval of the
stockholders of the corporation to one or more persons if all of the equity
interests of the person or persons are owned, directly or indirectly, by the
corporation. Because operating assets may be held by a corporation's
subsidiaries, as in our situation, this may mean that a subsidiary of a
corporation can transfer all of its assets without a vote of the corporation's
stockholders.
 
     Our charter authorizes our board of directors to reclassify any unissued
shares of our common stock into other classes or series of classes of stock and
to establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
 
                                       133

 
PREFERRED STOCK
 
     Our charter authorizes our board of directors to classify any unissued
shares of preferred stock and to reclassify any previously classified but
unissued shares of any series. Prior to issuance of shares of each series, our
board of directors is required by the MGCL and our charter to set the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and
conditions of redemption for each such series. Thus, our board of directors
could authorize the issuance of shares of preferred stock with terms and
conditions which could have the effect of delaying, deferring or preventing a
change of control transaction that might involve a premium price for holders of
our common stock or which holders might believe to otherwise be in their best
interest. As of the date hereof, no shares of preferred stock are outstanding,
and we have no current plans to issue any preferred stock.
 
POWER TO INCREASE AUTHORIZED STOCK AND ISSUE ADDITIONAL SHARES OF OUR COMMON
STOCK AND PREFERRED STOCK
 
     We believe that the power of our board of directors, without stockholder
approval, to increase the number of authorized shares of stock, issue additional
authorized but unissued shares of our common stock or preferred stock and to
classify or reclassify unissued shares of our common stock or preferred stock
and thereafter to cause us to issue such classified or reclassified shares of
stock will provide us with flexibility in structuring possible future financings
and acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the common stock, will be available for issuance
without further action by our stockholders, unless stockholder consent is
required by applicable law or the rules of any national securities exchange or
automated quotation system on which our securities may be listed or traded.
 
RESTRICTIONS ON OWNERSHIP AND TRANSFER
 
     In order for us to qualify as a REIT under the Code, not more than 50% of
the value of the outstanding shares of our stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be a REIT has been made by us). In addition, if
we, or one or more owners (actually or constructively) of 10% or more of our
stock, actually or constructively owns 10% or more of a tenant of ours (or a
tenant of any partnership in which we are a partner), the rent received by us
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. Our
stock must also be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be a REIT has
been made by us).
 
     Our charter contains restrictions on the ownership and transfer of our
capital stock that are intended to assist us in complying with these
requirements and continuing to qualify as a REIT. The relevant sections of our
charter provide that, effective upon completion of our initial public offering
and subject to the exceptions described below, no person or persons acting as a
group may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than (i) 9.8% of the number or value, whichever is more
restrictive, of the outstanding shares of our common stock or (ii) 9.8% of the
number or value, whichever is more restrictive, of the issued and outstanding
preferred or other shares of any class or series of our stock. We refer to this
restriction as the "ownership limit." The ownership limitation in our charter is
more restrictive than the restrictions on ownership of our common stock imposed
by the Code.
 
     The ownership attribution rules under the Code are complex and may cause
stock owned actually or constructively by a group of related individuals or
entities to be owned constructively by one individual or entity. As a result,
the acquisition of less than 9.8% of our common stock (or the acquisition of an
interest in an entity that owns, actually or constructively, our common stock)
by an individual or entity could nevertheless cause that individual or entity,
or another individual or entity, to own constructively in excess of 9.8% of our
outstanding common stock and thereby subject the common stock to the ownership
limit.
 
                                       134

 
     Our board of directors may, in its sole discretion, waive the ownership
limit with respect to one or more stockholders if it determines that such
ownership will not jeopardize our status as a REIT (for example, by causing any
tenant of ours to be considered a "related party tenant" for purposes of the
REIT qualification rules).
 
     As a condition of our waiver, our board of directors may require an opinion
of counsel or IRS ruling satisfactory to our board of directors and
representations or undertakings from the applicant with respect to preserving
our REIT status.
 
     In connection with the waiver of the ownership limit or at any other time,
our board of directors may decrease the ownership limit for all other persons
and entities; provided, however, that the decreased ownership limit will not be
effective for any person or entity whose percentage ownership in our capital
stock is in excess of such decreased ownership limit until such time as such
person or entity's percentage of our capital stock equals or falls below the
decreased ownership limit, but any further acquisition of our capital stock in
excess of such percentage ownership of our capital stock will be in violation of
the ownership limit. Additionally, the new ownership limit may not allow five or
fewer "individuals" (as defined for purposes of the REIT ownership restrictions
under the Code) to beneficially own more than 49.5% of the value of our
outstanding capital stock.
 
     Our charter generally prohibits:
 
     - any person from actually or constructively owning shares of our capital
       stock that would result in us being "closely held" under Section 856(h)
       of the Code; and
 
     - any person from transferring shares of our capital stock if such transfer
       would result in shares of our stock being beneficially owned by fewer
       than 100 persons (determined without reference to any rules of
       attribution).
 
     Any person who acquires or attempts or intends to acquire beneficial or
constructive ownership of shares of our common stock that will or may violate
any of the foregoing restrictions on transferability and ownership will be
required to give notice immediately to us and provide us with such other
information as we may request in order to determine the effect of such transfer
on our status as a REIT. The foregoing provisions on transferability and
ownership will not apply if our board of directors determines that it is no
longer in our best interests to attempt to qualify, or to continue to qualify,
as a REIT.
 
     Pursuant to our charter, if any purported transfer of our capital stock or
any other event would otherwise result in any person violating the ownership
limits or the other restrictions in our charter, then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee or owner (collectively referred to hereinafter as the "purported
owner") as to that number of shares in excess of the ownership limit (rounded up
to the nearest whole share). The number of shares in excess of the ownership
limit will be automatically transferred to, and held by, a trust for the
exclusive benefit of one or more charitable organizations selected by us. The
trustee of the trust will be designated by us and must be unaffiliated with us
and with any purported owner. The automatic transfer will be effective as of the
close of business on the business day prior to the date of the violative
transfer or other event that results in a transfer to the trust. Any dividend or
other distribution paid to the purported owner, prior to our discovery that the
shares had been automatically transferred to a trust as described above, must be
repaid to the trustee upon demand for distribution to the beneficiary of the
trust and all dividends and other distributions paid by us with respect to such
"excess" shares prior to the sale by the trustee of such shares shall be paid to
the trustee for the beneficiary. If the transfer to the trust as described above
is not automatically effective, for any reason, to prevent violation of the
applicable ownership limit, then our charter provides that the transfer of the
excess shares will be void. Subject to Maryland law, effective as of the date
that such excess shares have been transferred to the trust, the trustee shall
have the authority (at the trustee's sole discretion and subject to applicable
law) (i) to rescind as void any vote cast by a purported owner prior to our
discovery that such shares have been transferred to the trust and (ii) to recast
such vote in accordance with the desires of the trustee acting for the benefit
of the beneficiary of
 
                                       135

 
the trust, provided that if we have already taken irreversible action, then the
trustee shall not have the authority to rescind and recast such vote.
 
     Shares of our capital stock transferred to the trustee are deemed offered
for sale to us, or our designee, at a price per share equal to the lesser of (i)
the price paid by the purported owner for the shares (or, if the event which
resulted in the transfer to the trust did not involve a purchase of such shares
of our capital stock at market price, the market price on the day of the event
which resulted in the transfer of such shares of our capital stock to the trust)
and (ii) the market price on the date we, or our designee, accepts such offer.
We have the right to accept such offer until the trustee has sold the shares of
our capital stock held in the trust pursuant to the provisions discussed below.
Upon a sale to us, the interest of the charitable beneficiary in the shares sold
terminates and the trustee must distribute the net proceeds of the sale to the
purported owner and any dividends or other distributions held by the trustee
with respect to such capital stock will be paid to the charitable beneficiary.
 
     If we do not buy the shares, the trustee must, within 20 days of receiving
notice from us of the transfer of shares to the trust, sell the shares to a
person or entity designated by the trustee who could own the shares without
violating the ownership limits. After that, the trustee must distribute to the
purported owner an amount equal to the lesser of (i) the net price paid by the
purported owner for the shares (or, if the event which resulted in the transfer
to the trust did not involve a purchase of such shares at market price, the
market price on the day of the event which resulted in the transfer of such
shares of our capital stock to the trust) and (ii) the net sales proceeds
received by the trust for the shares. Any proceeds in excess of the amount
distributable to the purported owner will be distributed to the beneficiary.
 
     All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage as provided in the regulations
promulgated under the Code) of the lesser of the number or value of the shares
of our outstanding capital stock must give written notice to us within 30 days
after the end of each calendar year. In addition, each stockholder will, upon
demand, be required to disclose to us in writing such information with respect
to the direct, indirect and constructive ownership of shares of our stock as our
board of directors deems reasonably necessary to comply with the provisions of
the Code applicable to a REIT, to comply with the requirements or any taxing
authority or governmental agency or to determine any such compliance.
 
     All certificates representing shares of our capital stock will bear a
legend referring to the restrictions described above.
 
     These ownership limits could delay, defer or prevent a transaction or a
change of control of our company that might involve a premium price over the
then prevailing market price for the holders of some, or a majority, of our
outstanding shares of common stock or which such holders might believe to be
otherwise in their best interest.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Co.
 
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                   MATERIAL PROVISIONS OF MARYLAND LAW AND OF
                             OUR CHARTER AND BYLAWS
 
     The following is a summary of certain provisions of Maryland law and of our
charter and bylaws. For a complete description, we refer you to the applicable
Maryland laws and to our charter and bylaws, copies of which are exhibits to the
registration statement of which this prospectus is a part. See "Where You Can
Find More Information."
 
THE BOARD OF DIRECTORS
 
     Our charter and bylaws provide that the number of our directors is to be
established by our board of directors but may not be fewer than one nor more
than 15. Currently, our board is comprised of eight directors. Any vacancy,
other than one resulting from an increase in the number of directors, may be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, though less than a quorum.
Any vacancy resulting from an increase in the number of our directors must be
filled by a majority of the entire board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors
and until his successor shall be elected and qualified.
 

     Pursuant to our charter, each member of our board of directors is elected
until the next annual meeting of stockholders and until his successor is
elected, with the current members' terms expiring at the annual meeting of
stockholders to be held in 2006. Holders of shares of our common stock have no
right to cumulative voting in the election of directors. Consequently, at each
annual meeting of stockholders, all of the members of our board of directors
will stand for election and our directors will be elected by a plurality of
votes cast. Directors may be removed with or without cause by the affirmative
vote of two-thirds of the votes entitled to be cast in the election of
directors.

 
BUSINESS COMBINATIONS
 
     Maryland law prohibits "business combinations" between a Maryland
corporation and an interested stockholder or an affiliate of an interested
stockholder for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange, or, in circumstances specified
in the statute, certain transfers of assets, certain stock issuances and
reclassifications. Maryland law defines an interested stockholder as:
 
     - any person who beneficially owns 10% or more of the voting power of the
       corporation's voting stock; or
 
     - an affiliate or associate of the corporation who, at any time within the
       two-year period prior to the date in question, was the beneficial owner
       of 10% or more of the voting power of the then-outstanding voting stock
       of the corporation.
 
     A person is not an interested stockholder if the board of directors
approves in advance the transaction by which the person otherwise would have
become an interested stockholder. However, in approving the transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board of directors.
 
     After the five year prohibition, any business combination between a
corporation and an interested stockholder generally must be recommended by the
board of directors and approved by the affirmative vote of at least:
 
     - 80% of the votes entitled to be cast by holders of the then outstanding
       shares of voting stock; and
 
     - two-thirds of the votes entitled to be cast by holders of the voting
       stock other than shares held by the interested stockholder with whom or
       with whose affiliate the business combination is to be effected or shares
       held by an affiliate or associate of the interested stockholder.
 
                                       137

 
     These super-majority vote requirements do not apply if stockholders receive
a minimum price, as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid by the
interested stockholder for its shares.
 
     The statute permits various exemptions from its provisions, including
business combinations that are approved by the board of directors before the
time that the interested stockholder becomes an interested stockholder.
 
     As permitted by Maryland law, our charter includes a provision excluding
our company from these provisions of the MGCL and, consequently, the five-year
prohibition and the super-majority vote requirements will not apply to business
combinations between us and any interested stockholder of ours unless we later
amend our charter, with stockholder approval, to modify or eliminate this
exclusion provision. We believe that our ownership restrictions will
substantially reduce the risk that a stockholder would become an "interested
stockholder" within the meaning of the Maryland business combination statute.
There can be no assurance, however, that we will not opt into the business
combination provisions of the MGCL at a future date.
 
CONTROL SHARE ACQUISITIONS
 
     The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved at a special meeting by the affirmative vote of two-thirds of the votes
entitled to be cast on the matter. Shares owned by the acquiror or by officers
or directors who are our employees are excluded from shares entitled to vote on
the matter. "Control shares" are voting shares which, if aggregated with all
other shares previously acquired by the acquirer or in respect of which the
acquirer is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-tenth or more but less than one-third, (ii) one-third or more but
less than a majority, or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
 
     A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions, including an undertaking to pay expenses,
may compel a corporation's board of directors to call a special meeting of
stockholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the corporation may itself
present the question at any stockholders meeting.
 
     If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by Maryland law,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares, except those for which voting rights have
previously been approved, for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquirer or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquirer becomes entitled to vote a majority of the shares entitled to vote,
then all other stockholders are entitled to demand and receive fair value for
their stock, or provided for in the "dissenters" rights provisions of the MGCL
may exercise appraisal rights. The fair value of the shares as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquirer in the control share acquisition.
 
     The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
 
                                       138

 
     Our charter contains a provision exempting from the control share
acquisition statute any and all acquisitions by any person of our stock. There
can be no assurance that we will not opt into the control share acquisition
provisions of the MGCL in the future.
 
MARYLAND UNSOLICITED TAKEOVERS ACT
 
     Maryland law also permits Maryland corporations that are subject to the
Exchange Act and have at least three outside directors to elect by resolution of
the board of directors or by provision in its charter or bylaws to be subject to
some corporate governance provisions that may be inconsistent with the
corporation's charter and bylaws. Under the applicable statute, a board of
directors may classify itself without the vote of stockholders. A board of
directors classified in that manner cannot be altered by amendment to the
charter of the corporation. Further, the board of directors may, by electing
into applicable statutory provisions and notwithstanding the charter or bylaws:
 
     - provide that a special meeting of the stockholders will be called only at
       the request of stockholders entitled to cast at least a majority of the
       votes entitled to be cast at the meeting;
 
     - reserve for itself the right to fix the number of directors;
 
     - provide that a director may be removed only by the vote of the holders of
       two-thirds of the stock entitled to vote;
 
     - retain for itself sole authority to fill vacancies created by the death,
       removal or resignation of a director; and
 
     - provide that all vacancies on the board of directors may be filled only
       by the affirmative vote of a majority of the remaining directors, in
       office, even if the remaining directors do not constitute a quorum for
       the remainder of the full term of the class of directors in which the
       vacancy occurred.
 
     A board of directors may implement all or any of these provisions without
amending the charter or bylaws and without stockholder approval. A corporation
may be prohibited by its charter or by resolution of its board of directors from
electing any of the provisions of the statute. We are not prohibited from
implementing any or all of these provisions. While certain of these provisions
are already addressed by our charter and bylaws, the law would permit our board
of directors to override further changes to the charter or bylaws. If
implemented, these provisions could discourage offers to acquire our stock and
could increase the difficulty of completing an offer.
 
AMENDMENT TO OUR CHARTER
 
     Our charter may be amended only if declared advisable by the board of
directors and approved by the affirmative vote of the holders of at least
two-thirds of all of the votes entitled to be cast on the matter, except that
our board of directors is able, without stockholder approval, to amend our
charter to change our corporate name or the name or designation or par value of
any class or series of stock.
 
DISSOLUTION OF OUR COMPANY
 
     A voluntary dissolution of our company must be declared advisable by a
majority of the entire board of directors and approved by the affirmative vote
of the holders of at least two-thirds of all of the votes entitled to be cast on
the matter.
 
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
 
     Our bylaws provide that:
 
     - with respect to an annual meeting of stockholders, the only business to
       be considered and the only proposals to be acted upon will be those
       properly brought before the annual meeting:
 
      - pursuant to our notice of the meeting;
 
                                       139

 
      - by, or at the direction of, a majority of our board of directors; or
 
      - by a stockholder who is entitled to vote at the meeting and has complied
        with the advance notice procedures set forth in our bylaws;
 
     - with respect to special meetings of stockholders, only the business
       specified in our company's notice of meeting may be brought before the
       meeting of stockholders unless otherwise provided by law; and
 
     - nominations of persons for election to our board of directors at any
       annual or special meeting of stockholders may be made only:
 
      - by, or at the direction of, our board of directors; or
 
      - by a stockholder who is entitled to vote at the meeting and has complied
        with the advance notice provisions set forth in our bylaws.
 
     Generally, under our bylaws, a stockholder seeking to nominate a director
or bring other business before our annual meeting of stockholders must deliver a
notice to our secretary not later than the close of business on the 90th day nor
earlier than the close of business on the 120th day prior to the first
anniversary of the date of mailing of the notice to stockholders for the prior
year's annual meeting. For a stockholder seeking to nominate a candidate for our
board of directors, the notice must describe various matters regarding the
nominee, including name, address, occupation and number of shares of common
stock held, and other specified matters. For a stockholder seeking to propose
other business, the notice must include a description of the proposed business,
the reasons for the proposal and other specified matters.
 
INDEMNIFICATION AND LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
 
     The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by a final
judgment as being material to the cause of action. Our charter limits the
personal liability of our directors and officers for monetary damages to the
fullest extent permitted under current Maryland law, and our charter and bylaws
provide that a director or officer shall be indemnified to the fullest extent
required or permitted by Maryland law from and against any claim or liability to
which such director or officer may become subject by reason of his or her status
as a director or officer of our company. Maryland law allows directors and
officers to be indemnified against judgments, penalties, fines, settlements, and
expenses actually incurred in connection with any proceeding to which they may
be made a party by reason of their service on those or other capacities unless
the following can be established:
 
     - the act or omission of the director or officer was material to the cause
       of action adjudicated in the proceeding and was committed in bad faith or
       was the result of active and deliberate dishonesty;
 
     - the director or officer actually received an improper personal benefit in
       money, property or services; or
 
     - with respect to any criminal proceeding, the director or officer had
       reasonable cause to believe his or her act or omission was unlawful.
 
     The MGCL requires a corporation (unless its charter provides otherwise,
which our charter does not) to indemnify a director or officer who has been
successful on the merits or otherwise, in the defense of any claim to which he
or she is made a party by reason of his or her service in that capacity.
 
     However, under the MGCL, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In
 
                                       140

 
addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of:
 
     - a written affirmation by the director or officer of his or her good faith
       belief that he or she has met the standard of conduct necessary for
       indemnification by the corporation; and
 
     - a written undertaking by the director or on the director's behalf to
       repay the amount paid or reimbursed by the corporation if it is
       ultimately determined that the director did not meet the standard of
       conduct.
 
     Our charter authorizes us to obligate ourselves to indemnify and our bylaws
do obligate us, to the fullest extent permitted by Maryland law in effect from
time to time, to indemnify and, without requiring a preliminary determination of
the ultimate entitlement to indemnification, pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to:
 
     - any present or former director or officer who is made a party to the
       proceeding by reason of his or her service in that capacity; or
 
     - any individual who, while a director or officer of our company and at our
       request, serves or has served another corporation, real estate investment
       trust, partnership, joint venture, trust, employee benefit plan or any
       other enterprise as a director, officer, partner or trustee of such
       corporation, real estate investment trust, partnership, joint venture,
       trust, employee benefit plan or other enterprise and who is made a party
       to the proceeding by reason of his or her service in that capacity.
 
     Our charter and bylaws also permit us to indemnify and advance expenses to
any person who served a predecessor of ours in any of the capacities described
above.
 
     Our stockholders have no personal liability for indemnification payments or
other obligations under any indemnification agreements or arrangements. However,
indemnification could reduce the legal remedies available to us and our
stockholders against the indemnified individuals.
 
     This provision for indemnification of our directors and officers does not
limit a stockholder's ability to obtain injunctive relief or other equitable
remedies for a violation of a director's or an officer's duties to us or to our
stockholders, although these equitable remedies may not be effective in some
circumstances.
 
     In addition to any indemnification to which our directors and officers are
entitled pursuant to our charter and bylaws and the MGCL, our charter and bylaws
provide that, with the approval of our board of directors, we may indemnify
other employees and agents to the fullest extent permitted under Maryland law,
whether they are serving us or, at our request, any other entity.
 
     We have entered into indemnification agreements with each of our directors
and executive officers, and we maintain a directors and officers liability
insurance policy. See "Management -- Limited Liability and Indemnification."
 
     Insofar as the foregoing provisions permit indemnification of directors,
officers or persons controlling us for liability arising under the Securities
Act, we have been informed that, in the opinion of the SEC, this indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
 
                                       141

 
                             PARTNERSHIP AGREEMENT
 
     The following is a summary of the material terms of the first amended and
restated agreement of limited partnership of our operating partnership. This
summary is subject to and qualified in its entirety by reference to the first
amended and restated agreement of limited partnership of our operating
partnership, a copy of which is an exhibit to the registration statement of
which this prospectus is a part. See "Where You Can Find More Information."
 
MANAGEMENT OF OUR OPERATING PARTNERSHIP
 
     MPT Operating Partnership, L.P., our operating partnership, was organized
as a Delaware limited partnership on September 10, 2003. The initial partnership
agreement was entered into on that date and amended and restated on March 1,
2004. Pursuant to the partnership agreement, as the owner of the sole general
partner of the operating partnership, Medical Properties Trust, LLC, we have,
subject to certain protective rights of limited partners described below, full,
exclusive and complete responsibility and discretion in the management and
control of the operating partnership. We have the power to cause the operating
partnership to enter into certain major transactions, including acquisitions,
dispositions, refinancings and selection of tenants, and to cause changes in the
operating partnership's line of business and distribution policies. However, any
amendment to the partnership agreement that would affect the redemption rights
of the limited partners or otherwise adversely affect the rights of the limited
partners requires the consent of limited partners, other than us, holding more
than 50% of the units of our operating partnership held by such partners.
 
TRANSFERABILITY OF INTERESTS
 
     We may not voluntarily withdraw from the operating partnership or transfer
or assign our interest in the operating partnership or engage in any merger,
consolidation or other combination, or sale of substantially all of our assets,
in a transaction which results in a change of control of our company unless:
 
     - we receive the consent of limited partners holding more than 50% of the
       partnership interests of the limited partners, other than those held by
       our company or its subsidiaries;
 
     - as a result of such transaction, all limited partners will have the right
       to receive for each partnership unit an amount of cash, securities or
       other property equal in value to the greatest amount of cash, securities
       or other property paid in the transaction to a holder of one share of our
       common stock, provided that if, in connection with the transaction, a
       purchase, tender or exchange offer shall have been made to and accepted
       by the holders of more than 50% of the outstanding shares of our common
       stock, each holder of partnership units shall be given the option to
       exchange its partnership units for the greatest amount of cash,
       securities or other property that a limited partner would have received
       had it (i) exercised its redemption right (described below) and (ii)
       sold, tendered or exchanged pursuant to the offer shares of our common
       stock received upon exercise of the redemption right immediately prior to
       the expiration of the offer; or
 
     - we are the surviving entity in the transaction and either (i) our
       stockholders do not receive cash, securities or other property in the
       transaction or (ii) all limited partners receive for each partnership
       unit an amount of cash, securities or other property having a value that
       is no less than the greatest amount of cash, securities or other property
       received in the transaction by our stockholders.
 
     We also may merge with or into or consolidate with another entity if
immediately after such merger or consolidation (i) substantially all of the
assets of the successor or surviving entity, other than partnership units held
by us, are contributed, directly or indirectly, to the partnership as a capital
contribution in exchange for partnership units with a fair market value equal to
the value of the assets so contributed as determined by the survivor in good
faith and (ii) the survivor expressly agrees to assume all of our obligations
under the partnership agreement and the partnership agreement shall be amended
after any such merger or consolidation so as to arrive at a new method of
calculating the amounts payable upon
 
                                       142

 
exercise of the redemption right that approximates the existing method for such
calculation as closely as reasonably possible.
 
     We also may (i) transfer all or any portion of our general partnership
interest to (A) a wholly-owned subsidiary or (B) a parent company, and following
such transfer may withdraw as general partner and (ii) engage in a transaction
required by law or by the rules of any national securities exchange or automated
quotation system on which our securities may be listed or traded.
 
CAPITAL CONTRIBUTION
 
     We contributed to our operating partnership substantially all the net
proceeds of our April 2004 private placement as a capital contribution in
exchange for units of the operating partnership. The partnership agreement
provides that if the operating partnership requires additional funds at any time
in excess of funds available to the operating partnership from borrowing or
capital contributions, we may borrow such funds from a financial institution or
other lender and lend such funds to the operating partnership on the same terms
and conditions as are applicable to our borrowing of such funds. Under the
partnership agreement, we are obligated to contribute the proceeds of any
offering of shares of our company's stock as additional capital to the operating
partnership. We are authorized to cause the operating partnership to issue
partnership interests for less than fair market value if we have concluded in
good faith that such issuance is in both the operating partnership's and our
best interests. If we contribute additional capital to the operating
partnership, we will receive additional partnership units and our percentage
interest will be increased on a proportionate basis based upon the amount of
such additional capital contributions and the value of the operating partnership
at the time of such contributions. Conversely, the percentage interests of the
limited partners will be decreased on a proportionate basis in the event of
additional capital contributions by us. In addition, if we contribute additional
capital to the operating partnership, we will revalue the property of the
operating partnership to its fair market value, as determined by us, and the
capital accounts of the partners will be adjusted to reflect the manner in which
the unrealized gain or loss inherent in such property, that has not been
reflected in the capital accounts previously, would be allocated among the
partners under the terms of the partnership agreement if there were a taxable
disposition of such property for its fair market value, as determined by us, on
the date of the revaluation. The operating partnership may issue preferred
partnership interests, in connection with acquisitions of property or otherwise,
which could have priority over common partnership interests with respect to
distributions from the operating partnership, including the partnership
interests that our wholly-owned subsidiary owns as general partner.
 
REDEMPTION RIGHTS
 
     Pursuant to Section 8.04 of the partnership agreement, the limited
partners, other than us, will receive redemption rights, which will enable them
to cause the operating partnership to redeem their limited partnership units in
exchange for cash or, at our option, shares of our common stock on a one-for-one
basis, subject to adjustment for stock splits, dividends, recapitalization and
similar events. Currently, we own 100% of the issued limited partnership units
of our operating partnership. Under Section 8.04 of our partnership agreement,
holders of limited partnership units will be prohibited from exercising their
redemption rights for 12 months after they are issued, unless this waiting
period is waived or shortened by our board of directors. Notwithstanding the
foregoing, a limited partner will not be entitled to exercise its redemption
rights if the delivery of common stock to the redeeming limited partner would:
 
     - result in any person owning, directly or indirectly, common stock in
       excess of the stock ownership limit in our charter;
 
     - result in our shares of stock being owned by fewer than 100 persons
       (determined without reference to any rules of attribution);
 
     - result in our being "closely held" within the meaning of Section 856(h)
       of the Code;
 
                                       143

 
     - cause us to own, actually or constructively, 10% or more of the ownership
       interests in a tenant of our or the partnership's real property, within
       the meaning of Section 856(d)(2)(B) of the Code; or
 
     - cause the acquisition of common stock by such redeeming limited partner
       to be "integrated" with any other distribution of common stock for
       purposes of complying with the registration provisions of the Securities
       Act.
 
     We may, in our sole and absolute discretion, waive any of these
restrictions.
 
     With respect to the partnership units issuable in connection with the
acquisition or development of our facilities, the redemption rights may be
exercised by the limited partners at any time after the first anniversary of our
acquisition of these facilities; provided, however, unless we otherwise agree:
 
     - a limited partner may not exercise the redemption right for fewer than
       1,000 partnership units or, if such limited partner holds fewer than
       1,000 partnership units, the limited partner must redeem all of the
       partnership units held by such limited partner;
 
     - a limited partner may not exercise the redemption right for more than the
       number of partnership units that would, upon redemption, result in such
       limited partner or any other person owning, directly or indirectly,
       common stock in excess of the ownership limitation in our charter; and
 
     - a limited partner may not exercise the redemption right more than two
       times annually.
 
     We currently hold all the outstanding interests in our operating
partnership and, accordingly, there are currently no units of our operating
partnership subject to being redeemed in exchange for shares of our common
stock. The number of shares of common stock issuable upon exercise of the
redemption rights will be adjusted to account for stock splits, mergers,
consolidations or similar pro rata stock transactions.
 
     The partnership agreement requires that the operating partnership be
operated in a manner that enables us to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code (other than any federal income tax liability associated with
our retained capital gains) and to ensure that the partnership will not be
classified as a "publicly traded partnership" taxable as a corporation under
Section 7704 of the Code.
 
     In addition to the administrative and operating costs and expenses incurred
by the operating partnership, the operating partnership generally will pay all
of our administrative costs and expenses, including:
 
     - all expenses relating to our continuity of existence;
 
     - all expenses relating to offerings and registration of securities;
 
     - all expenses associated with the preparation and filing of any of our
       periodic reports under federal, state or local laws or regulations;
 
     - all expenses associated with our compliance with laws, rules and
       regulations promulgated by any regulatory body; and
 
     - all of our other operating or administrative costs incurred in the
       ordinary course of business on behalf of the operating partnership.
 
DISTRIBUTIONS
 
     The partnership agreement provides that the operating partnership will
distribute cash from operations, including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the operating partnership's property in
connection with the liquidation of the operating partnership, at such time and
in such amounts as determined by us in our sole discretion, to us and the
limited partners in accordance with their respective percentage interests in the
operating partnership.
 
     Upon liquidation of the operating partnership, after payment of, or
adequate provision for, debts and obligations of the partnership, including any
partner loans, any remaining assets of the partnership will be
 
                                       144

 
distributed to us and the limited partners with positive capital accounts in
accordance with their respective positive capital account balances.
 
ALLOCATIONS
 
     Profits and losses of the partnership, including depreciation and
amortization deductions, for each fiscal year generally are allocated to us and
the limited partners in accordance with the respective percentage interests in
the partnership. All of the foregoing allocations are subject to compliance with
the provisions of Sections 704(b) and 704(c) of the Code and Treasury
regulations promulgated thereunder. The operating partnership expects to use the
"traditional method" under Section 704(c) of the Code for allocating items with
respect to contributed property acquired in connection with the offering for
which the fair market value differs from the adjusted tax basis at the time of
contribution.
 
TERM
 
     The operating partnership will have perpetual existence, or until sooner
dissolved upon:
 
     - our bankruptcy, dissolution, removal or withdrawal, unless the limited
       partners elect to continue the partnership;
 
     - the passage of 90 days after the sale or other disposition of all or
       substantially all the assets of the partnership; or
 
     - an election by us in our capacity as the owner of the sole general
       partner of the operating partnership.
 
TAX MATTERS
 
     Pursuant to the partnership agreement, the general partner is the tax
matters partner of the operating partnership. Accordingly, through our ownership
of the general partner of the operating partnership, we have authority to handle
tax audits and to make tax elections under the Code on behalf of the operating
partnership.
 
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                UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
 
     This section summarizes the current material federal income tax
consequences to our company and to our stockholders generally resulting from the
treatment of our company as a REIT. Because this section is a general summary,
it does not address all of the potential tax issues that may be relevant to you
in light of your particular circumstances. Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C., or Baker Donelson, has acted as our counsel, has reviewed this
summary, and is of the opinion that the discussion contained herein fairly
summarizes the federal income tax consequences that are material to a holder of
shares of our common stock. The discussion does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
that are subject to special treatment under the federal income tax laws, such as
insurance companies, tax-exempt organizations (except to the limited extent
discussed in "-- Taxation of Tax-Exempt Stockholders"), financial institutions
or broker-dealers, and non-United States individuals and foreign corporations
(except to the limited extent discussed in "-- Taxation of Non-United States
Stockholders").
 
     The statements in this section and the opinion of Baker Donelson, referred
to as the Tax Opinion, are based on the current federal income tax laws
governing qualification as a REIT. We cannot assure you that new laws,
interpretations of law or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
You should be aware that opinions of counsel are not binding on the IRS, and no
assurance can be given that the IRS will not challenge the conclusions set forth
in those opinions.
 
     This section is not a substitute for careful tax planning. We urge you to
consult your own tax advisors regarding the specific federal state, local,
foreign and other tax consequences to you, in light of your own particular
circumstances, of the purchase, ownership and disposition of shares of our
common stock, our election to be taxed as a REIT and the effect of potential
changes in applicable tax laws.
 
TAXATION OF OUR COMPANY
 
     We were previously taxed as a subchapter S corporation. We revoked our
subchapter S election on April 6, 2004 and we have elected to be taxed as a REIT
under Sections 856 through 860 of the Code, commencing with our taxable year
that began on April 6, 2004 and ended on December 31, 2004. Our counsel has
opined that, for federal income tax purposes, we are and have been organized in
conformity with the requirements for qualification to be taxed as a REIT under
the Code commencing with our initial short taxable year ended December 31, 2004,
and that our current and proposed method of operations as described in this
prospectus and as represented to our counsel by us satisfies currently, and will
enable us to continue to satisfy in the future, the requirements for such
qualification and taxation as a REIT under the Code for future taxable years.
This opinion, however, is based upon factual assumptions and representations
made by us.
 
     We believe that our proposed future method of operation will enable us to
continue to qualify as a REIT. However, no assurances can be given that our
beliefs or expectations will be fulfilled, as such qualification and taxation as
a REIT depends upon our ability to meet, for each taxable year, various tests
imposed under the Code as discussed below. Those qualification tests involve the
percentage of income that we earn from specified sources, the percentage of our
assets that falls within specified categories, the diversity of our stock
ownership, and the percentage of our earnings that we distribute. Baker Donelson
will not review our compliance with those tests on a continuing basis.
Accordingly, with respect to our current and future taxable years, no assurance
can be given that the actual results of our operation will satisfy such
requirements. For a discussion of the tax consequences of our failure to
maintain our qualification as a REIT, see "-- Failure to Qualify."
 
     The sections of the Code relating to qualification and operation as a REIT,
and the federal income taxation of a REIT and its stockholders, are highly
technical and complex. The following discussion sets forth only the material
aspects of those sections. This summary is qualified in its entirety by the
applicable Code provisions and the related rules and regulations.
 
                                       146

 
     We generally will not be subject to federal income tax on the taxable
income that we distribute to our stockholders. The benefit of that tax treatment
is that it avoids the "double taxation," or taxation at both the corporate and
stockholder levels, that generally results from owning stock in a corporation.
However, we will be subject to federal tax in the following circumstances:
 
     - We are subject to the corporate federal income tax on taxable income,
       including net capital gain, that we do not distribute to stockholders
       during, or within a specified time period after, the calendar year in
       which the income is earned.
 
     - We are subject to the corporate "alternative minimum tax" on any items of
       tax preference that we do not distribute or allocate to stockholders.
 
     - We are subject to tax, at the highest corporate rate, on:
 
        - net income from the sale or other disposition of property acquired
          through foreclosure ("foreclosure property") that we hold primarily
          for sale to customers in the ordinary course of business, and
 
        - other non-qualifying income from foreclosure property.
 
     - We are subject to a 100% tax on net income from sales or other
       dispositions of property, other than foreclosure property, that we hold
       primarily for sale to customers in the ordinary course of business.
 
     - If we fail to satisfy the 75% gross income test or the 95% gross income
       test, as described below under "-- Requirements for
       Qualification -- Gross Income Tests," but nonetheless continue to qualify
       as a REIT because we meet other requirements, we will be subject to a
       100% tax on:
 
        - the greater of (i) the amount by which we fail the 75% test, or (ii)
          the excess of 90% (95% for taxable years beginning on and after
          January 1, 2005) of our gross income over the amount of gross income
          attributable to sources that qualify under the 95% test, multiplied by
 
        - a fraction intended to reflect our profitability.
 
     - If we fail to distribute during a calendar year at least the sum of: (i)
       85% of our REIT ordinary income for the year, (ii) 95% of our REIT
       capital gain net income for the year, and (iii) any undistributed taxable
       income from earlier periods, then we will be subject to a 4% excise tax
       on the excess of the required distribution over the amount we actually
       distributed.
 
     - If we fail to satisfy one or more requirements for REIT qualification
       during a taxable year beginning on or after January 1, 2005, other than a
       gross income test or an asset test, we will be required to pay a penalty
       of $50,000 for each such failure.
 
     - We may elect to retain and pay income tax on our net long-term capital
       gain. In that case, a United States stockholder would be taxed on its
       proportionate share of our undistributed long-term capital gain (to the
       extent that we make a timely designation of such gain to the stockholder)
       and would receive a credit or refund for its proportionate share of the
       tax we paid.
 
     - We may be subject to a 100% excise tax on certain transactions with a
       taxable REIT subsidiary that are not conducted at arm's-length.
 
     - If we acquire any asset from a "C corporation" (that is, a corporation
       generally subject to the full corporate-level tax) in a transaction in
       which the basis of the asset in our hands is determined by reference to
       the basis of the asset in the hands of the C corporation, and we
       recognize gain on the disposition of the asset during the 10 year period
       beginning on the date that we acquired the asset, then the asset's
       "built-in" gain will be subject to tax at the highest regular corporate
       rate.
 
REQUIREMENTS FOR QUALIFICATION
 
     To continue to qualify as a REIT, we must meet various (i) organizational
requirements, (ii) gross income tests, (iii) asset tests, and (iv) annual
distribution requirements.
 
                                       147

 
     Organizational Requirements.  A REIT is a corporation, trust or association
that meets each of the following requirements:
 
          (1) it is managed by one or more trustees or directors;
 
          (2) its beneficial ownership is evidenced by transferable stock, or by
     transferable certificates of beneficial interest;
 
          (3) it would be taxable as a domestic corporation, but for its
     election to be taxed as a REIT under Sections 856 through 860 of the Code;
 
          (4) it is neither a financial institution nor an insurance company
     subject to special provisions of the federal income tax laws;
 
          (5) at least 100 persons are beneficial owners of its stock or
     ownership certificates (determined without reference to any rules of
     attribution);
 
          (6) not more than 50% in value of its outstanding stock or ownership
     certificates is owned, directly or indirectly, by five or fewer
     individuals, which the federal income tax laws define to include certain
     entities, during the last half of any taxable year; and
 
          (7) it elects to be a REIT, or has made such election for a previous
     taxable year, and satisfies all relevant filing and other administrative
     requirements established by the IRS that must be met to elect and maintain
     REIT status.
 
     We must meet requirements one through four during our entire taxable year
and must meet requirement five during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
If we comply with all the requirements for ascertaining information concerning
the ownership of our outstanding stock in a taxable year and have no reason to
know that we violated requirement six, we will be deemed to have satisfied
requirement six for that taxable year. We do not have to satisfy requirements
five and six for our taxable year ending December 31, 2004. After the issuance
of common stock pursuant to our April 2004 private placement we had issued
common stock with enough diversity of ownership to satisfy requirements five and
six as set forth above. Our charter provides for restrictions regarding the
ownership and transfer of our shares of common stock so that we should continue
to satisfy these requirements. The provisions of our charter restricting the
ownership and transfer of our shares of common stock are described in
"Description of Capital Stock -- Restrictions on Ownership and Transfer."
 
     For purposes of determining stock ownership under requirement six, an
"individual" generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An "individual," however,
generally does not include a trust that is a qualified employee pension or
profit sharing trust under the federal income tax laws, and beneficiaries of
such a trust will be treated as holding our shares in proportion to their
actuarial interests in the trust for purposes of requirement six.
 
     A corporation that is a "qualified REIT subsidiary," or QRS, is not treated
as a corporation separate from its parent REIT. All assets, liabilities, and
items of income, deduction and credit of a QRS are treated as assets,
liabilities, and items of income, deduction and credit of the REIT. A QRS is a
corporation, all of the capital stock of which is owned by the REIT. Thus, in
applying the requirements described herein, any QRS that we own will be ignored,
and all assets, liabilities, and items of income, deduction and credit of such
subsidiary will be treated as our assets, liabilities, and items of income,
deduction and credit.
 
     An unincorporated domestic entity, such as a partnership, that has a single
owner, generally is not treated as an entity separate from its parent for
federal income tax purposes. An unincorporated domestic entity with two or more
owners is generally treated as a partnership for federal income tax purposes. In
the case of a REIT that is a partner in a partnership that has other partners,
the REIT is treated as owning its proportionate share of the assets of the
partnership and as earning its allocable share of the gross income
 
                                       148

 
of the partnership for purposes of the applicable REIT qualification tests.
Thus, our proportionate share of the assets, liabilities and items of income of
our operating partnership and any other partnership, joint venture, or limited
liability company that is treated as a partnership for federal income tax
purposes in which we acquire an interest, directly or indirectly, is treated as
our assets and gross income for purposes of applying the various REIT
qualification requirements.
 
     A REIT is permitted to own up to 100% of the stock of one or more "taxable
REIT subsidiaries." A taxable REIT subsidiary is a fully taxable corporation
that may earn income that would not be qualifying income if earned directly by
the parent REIT. The subsidiary and the REIT must jointly file an election with
the IRS to treat the subsidiary as a taxable REIT subsidiary. A taxable REIT
subsidiary will pay income tax at regular corporate rates on any income that it
earns. In addition, the taxable REIT subsidiary rules limit the deductibility of
interest paid or accrued by a taxable REIT subsidiary to its parent REIT to
assure that the taxable REIT subsidiary is subject to an appropriate level of
corporate taxation. Further, the rules impose a 100% excise tax on certain types
of transactions between a taxable REIT subsidiary and its parent REIT or the
REIT's tenants that are not conducted on an arm's-length basis. We may engage in
activities indirectly through a taxable REIT subsidiary as necessary or
convenient to avoid obtaining the benefit of income or services that would
jeopardize our REIT status if we engaged in the activities directly. In
particular, we would likely engage in activities through a taxable REIT
subsidiary if we wished to provide services to unrelated parties which might
produce income that does not qualify under the gross income tests described
below. We might also dispose of an unwanted asset through a taxable REIT
subsidiary as necessary or convenient to avoid the 100% tax on income from
prohibited transactions. See description below under "Prohibited Transactions."
A taxable REIT subsidiary may not operate or manage a healthcare facility. For
purposes of this definition a "healthcare facility" means a hospital, nursing
facility, assisted living facility, congregate care facility, qualified
continuing care facility, or other licensed facility which extends medical or
nursing or ancillary services to patients and which is operated by a service
provider which is eligible for participation in the Medicare program under Title
XVIII of the Social Security Act with respect to such facility. We have formed
and made a taxable REIT subsidiary election with respect to MPT Development
Services, Inc., a Delaware corporation formed in January 2004. We may form or
acquire one or more additional taxable REIT subsidiaries in the future. See
"Federal Income Tax Considerations -- Income Taxation of the Partnerships and
the Partners -- Taxable REIT Subsidiaries."
 
     Gross Income Tests.  We must satisfy two gross income tests annually to
maintain our qualification as a REIT. First, at least 75% of our gross income
for each taxable year must consist of defined types of income that we derive,
directly or indirectly, from investments relating to real property or mortgages
on real property or qualified temporary investment income. Qualifying income for
purposes of that 75% gross income test generally includes:
 
     - rents from real property;
 
     - interest on debt secured by mortgages on real property, or on interests
       in real property;
 
     - dividends or other distributions on, and gain from the sale of, shares in
       other REITs;
 
     - gain from the sale of real estate assets;
 
     - income derived from the temporary investment of new capital that is
       attributable to the issuance of our shares of common stock or a public
       offering of our debt with a maturity date of at least five years and that
       we receive during the one year period beginning on the date on which we
       received such new capital; and
 
     - gross income from foreclosure property.
 
     Second, in general, at least 95% of our gross income for each taxable year
must consist of income that is qualifying income for purposes of the 75% gross
income test, other types of interest and dividends, gain from the sale or
disposition of stock or securities, income from certain hedging instruments or
any combination of these. Gross income from our sale of property that we hold
primarily for sale to customers
 
                                       149

 
in the ordinary course of business is excluded from both the numerator and the
denominator in both income tests. In addition, for taxable years beginning on
and after January 1, 2005, income and gain from "hedging transactions" that we
enter into to hedge indebtedness incurred or to be incurred to acquire or carry
real estate assets and that are clearly and timely identified as such also will
be excluded from both the numerator and the denominator for purposes of the 95%
gross income test (but not the 75% gross income test). The following paragraphs
discuss the specific application of the gross income tests to us.
 
     Rents from Real Property.  Rent that we receive from our real property will
qualify as "rents from real property," which is qualifying income for purposes
of the 75% and 95% gross income tests, only if the following conditions are met.
 
     First, the rent must not be based in whole or in part on the income or
profits of any person. Participating rent, however, will qualify as "rents from
real property" if it is based on percentages of receipts or sales and the
percentages:
 
     - are fixed at the time the leases are entered into;
 
     - are not renegotiated during the term of the leases in a manner that has
       the effect of basing rent on income or profits; and
 
     - conform with normal business practice.
 
     More generally, the rent will not qualify as "rents from real property" if,
considering the relevant lease and all the surrounding circumstances, the
arrangement does not conform with normal business practice, but is in reality
used as a means of basing the rent on income or profits. We have represented to
Baker Donelson that we intend to set and accept rents which are fixed dollar
amounts or a fixed percentage of gross revenue, and not determined to any extent
by reference to any person's income or profits, in compliance with the rules
above.
 
     Second, we must not own, actually or constructively, 10% or more of the
stock or the assets or net profits of any tenant, referred to as a related party
tenant, other than a taxable REIT subsidiary. Failure to adhere to this
limitation would cause the rental income from the related party tenant to not be
treated as qualifying income for purposes of the REIT gross income tests. The
constructive ownership rules generally provide that, if 10% or more in value of
our stock is owned, directly or indirectly, by or for any person, we are
considered as owning the stock owned, directly or indirectly, by or for such
person. We do not own any stock or any assets or net profits of any tenant
directly. In addition, our charter prohibits transfers of our shares that would
cause us to own, actually or constructively, 10% or more of the ownership
interests in a tenant. We should not own, actually or constructively, 10% or
more of any tenant other than a taxable REIT subsidiary. We have represented to
counsel that we will not rent any facility to a related-party tenant. However,
because the constructive ownership rules are broad and it is not possible to
monitor continually direct and indirect transfers of our shares, no absolute
assurance can be given that such transfers or other events of which we have no
knowledge will not cause us to own constructively 10% or more of a tenant other
than a taxable REIT subsidiary at some future date. MPT Development Services,
Inc., our taxable REIT subsidiary, has made loans to Vibra Healthcare, LLC, the
parent entity of our tenants, in an aggregate amount of approximately $41.4
million to acquire the operations at certain facilities. MPT Development
Services, Inc. also made a loan of approximately $6.2 million to Vibra and its
subsidiaries for working capital purposes which was repaid in February 2005. We
believe that the loans to Vibra will be treated as debt rather than equity
interests in Vibra, and that our rental income from Vibra will be treated as
qualifying income for purposes of the REIT gross income tests. However, there
can be no assurance that the IRS will not take a contrary position. If the IRS
were to successfully treat the loans to Vibra as equity interests in Vibra,
Vibra would be a related party tenant with respect to our company, the rent that
we receive from Vibra would not be qualifying income for purposes of the REIT
gross income tests, and we could lose our REIT status. However, as stated above,
we believe that the loans to Vibra will be treated as debt rather than equity
interests in Vibra.
 
     As described above, we currently own 100% of the stock of MPT Development
Services, Inc., a taxable REIT subsidiary, and may in the future own up to 100%
of the stock of one or more additional
 
                                       150

 
taxable REIT subsidiaries. Under an exception to the related-party tenant rule
described in the preceding paragraph, rent that we receive from a taxable REIT
subsidiary will qualify as "rents from real property" as long as (i) the taxable
REIT subsidiary is a qualifying taxable REIT subsidiary (among other things, it
does not operate or manage a healthcare facility), (ii) at least 90% of the
leased space in the facility is leased to persons other than taxable REIT
subsidiaries and related party tenants, and (iii) the amount paid by the taxable
REIT subsidiary to rent space at the facility is substantially comparable to
rents paid by other tenants of the facility for comparable space. If in the
future we receive rent from a taxable REIT subsidiary, we will seek to comply
with this exception.
 
     Third, the rent attributable to the personal property leased in connection
with a lease of real property must not be greater than 15% of the total rent
received under the lease. The rent attributable to personal property under a
lease is the amount that bears the same ratio to total rent under the lease for
the taxable year as the average of the fair market values of the leased personal
property at the beginning and at the end of the taxable year bears to the
average of the aggregate fair market values of both the real and personal
property covered by the lease at the beginning and at the end of such taxable
year (the "personal property ratio"). With respect to each of our leases, we
believe that the personal property ratio generally will be less than 15%. Where
that is not, or may in the future not be, the case, we believe that any income
attributable to personal property will not jeopardize our ability to qualify as
a REIT. There can be no assurance, however, that the IRS would not challenge our
calculation of a personal property ratio, or that a court would not uphold such
assertion. If such a challenge were successfully asserted, we could fail to
satisfy the 75% or 95% gross income test and thus lose our REIT status.
 
     Fourth, we cannot furnish or render noncustomary services to the tenants of
our facilities, or manage or operate our facilities, other than through an
independent contractor who is adequately compensated and from whom we do not
derive or receive any income. However, we need not provide services through an
"independent contractor," but instead may provide services directly to our
tenants, if the services are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not considered to be
provided for the tenants' convenience. In addition, we may provide a minimal
amount of "noncustomary" services to the tenants of a facility, other than
through an independent contractor, as long as our income from the services does
not exceed 1% of our income from the related facility. Finally, we may own up to
100% of the stock of one or more taxable REIT subsidiaries, which may provide
noncustomary services to our tenants without tainting our rents from the related
facilities. We do not intend to perform any services other than customary ones
for our tenants, other than services provided through independent contractors or
taxable REIT subsidiaries. We have represented to Baker Donelson that we will
not perform noncustomary services which would jeopardize our REIT status.
 
     Finally, in order for the rent payable under the leases of our properties
to constitute "rents from real property," the leases must be respected as true
leases for federal income tax purposes and not treated as service contracts,
joint ventures, financing arrangements, or another type of arrangement. We
generally treat our leases with respect to our properties as true leases for
federal income tax purposes. We believe that our lease of the Desert Valley
Facility is a true lease; however, because of the nature of the lessee's
purchase option thereunder, there can be no assurance that the IRS would not
consider this lease a financing arrangement instead of a true lease for federal
income tax purposes. In that case, our income from the lease of the Desert
Valley Facility would be interest income rather than rent and would be
qualifying income for purposes of the 75% gross income test to the extent that
our "loan" does not exceed the fair market value of the real estate assets
associated with the Desert Valley Facility. All of the interest income from our
loan would be qualifying income for purposes of the 95% gross income test. We
believe that the characterization of the Desert Valley Facility lease as a
financing arrangement would not adversely affect our ability to qualify as a
REIT.
 
     If a portion of the rent we receive from a facility does not qualify as
"rents from real property" because the rent attributable to personal property
exceeds 15% of the total rent for a taxable year, the portion of the rent
attributable to personal property will not be qualifying income for purposes of
either the 75% or 95% gross income test. If rent attributable to personal
property, plus any other income that is nonqualifying income for purposes of the
95% gross income test, during a taxable year exceeds 5% of our
 
                                       151

 
gross income during the year, we would lose our REIT status. By contrast, in the
following circumstances, none of the rent from a lease of a facility would
qualify as "rents from real property": (i) the rent is considered based on the
income or profits of the tenant; (ii) the tenant is a related party tenant or
fails to qualify for the exception to the related-party tenant rule for
qualifying taxable REIT subsidiaries; or (iii) we furnish more than a de minimis
amount of noncustomary services to the tenants of the facility, or manage or
operate the facility, other than through a qualifying independent contractor or
a taxable REIT subsidiary. In any of these circumstances, we could lose our REIT
status because we would be unable to satisfy either the 75% or 95% gross income
test.
 
     Tenants may be required to pay, besides base rent, reimbursements for
certain amounts we are obligated to pay to third parties (such as a tenant's
proportionate share of a facility's operational or capital expenses), penalties
for nonpayment or late payment of rent or additions to rent. These and other
similar payments should qualify as "rents from real property."
 
     Interest.  The term "interest" generally does not include any amount
received or accrued, directly or indirectly, if the determination of the amount
depends in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely because it is based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from a loan that is
based upon the residual cash proceeds from the sale of the property securing the
loan constitutes a "shared appreciation provision," income attributable to such
participation feature will be treated as gain from the sale of the secured
property.
 
     Fee Income.  We may receive various fees in connection with our operations.
The fees will be qualifying income for purposes of both the 75% and 95% gross
income tests if they are received in consideration for entering into an
agreement to make a loan secured by real property and the fees are not
determined by income and profits. Other fees are not qualifying income for
purposes of either gross income test. Any fees earned by MPT Development
Services, Inc., our taxable REIT subsidiary, will not be included for proposes
of the gross income tests. We anticipate that MPT Development Services, Inc.
will receive most of the management fees, inspection fees, and construction fees
in connection with our operations.
 
     Prohibited Transactions.  A REIT will incur a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure
property, that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. We believe that none of our assets will be held
primarily for sale to customers and that a sale of any of our assets will not be
in the ordinary course of our business. Whether a REIT holds an asset "primarily
for sale to customers in the ordinary course of a trade or business" depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular asset. Nevertheless, we will attempt to comply
with the terms of safe-harbor provisions in the federal income tax laws
prescribing when an asset sale will not be characterized as a prohibited
transaction. We cannot assure you, however, that we can comply with the
safe-harbor provisions or that we will avoid owning property that may be
characterized as property that we hold "primarily for sale to customers in the
ordinary course of a trade or business." We may form or acquire a taxable REIT
subsidiary to hold and dispose of those facilities we conclude may not fall
within the safe-harbor provisions.
 
     Foreclosure Property.  We will be subject to tax at the maximum corporate
rate on any income from foreclosure property, other than income that otherwise
would be qualifying income for purposes of the 75% gross income test, less
expenses directly connected with the production of that income. However, gross
income from foreclosure property will qualify under the 75% and 95% gross income
tests. Foreclosure property is any real property, including interests in real
property, and any personal property incident to such real property acquired by a
REIT as the result of the REIT's having bid on the property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law after actual or imminent default on a lease of the property or
on indebtedness secured by the property, or a "Repossession Action." Property
acquired by a Repossession Action will not be considered "foreclosure property"
if (i) the REIT held or acquired the property subject to a lease or securing
 
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indebtedness for sale to customers in the ordinary course of business or (ii)
the lease or loan was acquired or entered into with intent to take Repossession
Action or in circumstances where the REIT had reason to know a default would
occur. The determination of such intent or reason to know must be based on all
relevant facts and circumstances. In no case will property be considered
"foreclosure property" unless the REIT makes a proper election to treat the
property as foreclosure property.
 
     Foreclosure property includes any qualified healthcare property acquired by
a REIT as a result of a termination of a lease of such property (other than a
termination by reason of a default, or the imminence of a default, on the
lease). A "qualified healthcare property" means any real property, including
interests in real property, and any personal property incident to such real
property which is a healthcare facility or is necessary or incidental to the use
of a healthcare facility. For this purpose, a healthcare facility means a
hospital, nursing facility, assisted living facility, congregate care facility,
qualified continuing care facility, or other licensed facility which extends
medical or nursing or ancillary services to patients and which, immediately
before the termination, expiration, default, or breach of the lease secured by
such facility, was operated by a provider of such services which was eligible
for participation in the Medicare program under Title XVIII of the Social
Security Act with respect to such facility.
 
     However, a REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor of the
mortgagor. Property generally ceases to be foreclosure property at the end of
the third taxable year following the taxable year in which the REIT acquired the
property (or, in the case of a qualified healthcare property which becomes
foreclosure property because it is acquired by a REIT as a result of the
termination of a lease of such property, at the end of the second taxable year
following the taxable year in which the REIT acquired such property) or longer
if an extension is granted by the Secretary of the Treasury. This period (as
extended, if applicable) terminates, and foreclosure property ceases to be
foreclosure property on the first day:
 
     - on which a lease is entered into for the property that, by its terms,
       will give rise to income that does not qualify for purposes of the 75%
       gross income test, or any amount is received or accrued, directly or
       indirectly, pursuant to a lease entered into on or after such day that
       will give rise to income that does not qualify for purposes of the 75%
       gross income test;
 
     - on which any construction takes place on the property, other than
       completion of a building or any other improvement, where more than 10% of
       the construction was completed before default became imminent; or
 
     - which is more than 90 days after the day on which the REIT acquired the
       property and the property is used in a trade or business which is
       conducted by the REIT, other than through an independent contractor from
       whom the REIT itself does not derive or receive any income. For this
       purpose, in the case of a qualified healthcare property, income derived
       or received from an independent contractor will be disregarded to the
       extent such income is attributable to (i) a lease of property in effect
       on the date the REIT acquired the qualified healthcare property (without
       regard to its renewal after such date so long as such renewal is pursuant
       to the terms of such lease as in effect on such date) or (ii) any lease
       of property entered into after such date if, on such date, a lease of
       such property from the REIT was in effect and, under the terms of the new
       lease, the REIT receives a substantially similar or lesser benefit in
       comparison to the prior lease.
 
     Hedging Transactions.  From time to time, we may enter into hedging
transactions with respect to one or more of our assets or liabilities. Our
hedging activities may include entering into interest rate swaps, caps, and
floors, options to purchase such items, and futures and forward contracts. For
taxable years beginning prior to January 1, 2005, any periodic income or gain
from the disposition of any financial instrument for these or similar
transactions to hedge indebtedness we incur to acquire or carry "real estate
assets" should be qualifying income for purposes of the 95% gross income test,
but not the 75% gross income test. For taxable years beginning on and after
January 1, 2005, income and gain from "hedging transactions" will be excluded
from gross income for purposes of the 95% gross income test (but not the 75%
gross income test). For those taxable years, a "hedging transaction" will mean
any transaction entered
 
                                       153

 
into in the normal course of our trade or business primarily to manage the risk
of interest rate or price changes, or currency fluctuations with respect to
borrowings made or to be made, or ordinary obligations incurred or to be
incurred, to acquire or carry real estate assets. We will be required to clearly
identify any such hedging transaction before the close of the day on which it
was acquired, originated, or entered into. Since the financial markets
continually introduce new and innovative instruments related to risk-sharing or
trading, it is not entirely clear which such instruments will generate income
which will be considered qualifying income for purposes of the gross income
tests. We intend to structure any hedging or similar transactions so as not to
jeopardize our status as a REIT.
 
     Failure to Satisfy Gross Income Tests.  If we fail to satisfy one or both
of the gross income tests for our 2004 taxable year, we nevertheless may qualify
as a REIT for that year if we qualify for relief under certain provisions of the
federal income tax laws. Those relief provisions generally will be available if:
 
     - our failure to meet these tests is due to reasonable cause and not to
       willful neglect;
 
     - we attach a schedule of the sources of our income to our tax return; and
 
     - any incorrect information on the schedule is not due to fraud with intent
       to evade tax.
 
     For taxable years beginning on and after January 1, 2005, those relief
provisions will be available if:
 
     - our failure to meet those tests is due to reasonable cause and not to
       willful neglect, and
 
     - following our identification of such failure for any taxable year, a
       schedule of the sources of our income is filed in accordance with
       regulations prescribed by the Secretary of the Treasury.
 
     We cannot with certainty predict whether any failure to meet these tests
will qualify for the relief provisions. As discussed above in "-- Taxation of
Our Company," even if the relief provisions apply, we would incur a 100% tax on
the gross income attributable to the greater of the amounts by which we fail the
75% and 95% gross income tests, multiplied by a fraction intended to reflect our
profitability.
 
     Asset Tests.  To maintain our qualification as a REIT, we also must satisfy
the following asset tests at the end of each quarter of each taxable year.
 
     First, at least 75% of the value of our total assets must consist of:
 
     - cash or cash items, including certain receivables;
 
     - government securities;
 
     - real estate assets, which includes interest in real property, leaseholds,
       options to acquire real property or leaseholds, interests in mortgages on
       real property and shares (or transferable certificates of beneficial
       interest) in other REITs;
 
     - stock in other REITs; and
 
     - investments in stock or debt instruments attributable to the temporary
       investment (i.e., for a period not exceeding 12 months) of new capital
       that we raise through equity offerings or offerings of debt with at least
       a five year term.
 
With respect to investments not included in the 75% asset class, we may not hold
securities of any one issuer (other than a taxable REIT subsidiary) that exceed
5% of the value of our total assets; nor may we hold securities of any one
issuer (other than a taxable REIT subsidiary) that represent more than 10% of
the voting power of all outstanding voting securities of such issuer, or more
than 10% of the value of all outstanding securities of such issuer.
 
     In addition, we may not hold securities of one or more taxable REIT
subsidiaries that represent in the aggregate more than 20% of the value of our
total assets, irrespective of whether such securities may also be included in
the 75% asset class (e.g., a mortgage loan issued to a taxable REIT subsidiary).
Furthermore, no more than 25% of our total assets may be represented by
securities that are not included
 
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in the 75% asset class, but this requirement will necessarily be satisfied if
the 75% asset class requirement is satisfied.
 
     For purposes of the 5% and 10% asset tests, the term "securities" does not
include stock in another REIT, equity or debt securities of a qualified REIT
subsidiary or taxable REIT subsidiary, mortgage loans that constitute real
estate assets, or equity interests in a partnership. The term "securities,"
however, generally includes debt securities issued by a partnership or another
REIT, except that for purposes of the 10% value test, the term "securities" does
not include:
 
     - "Straight debt," defined as a written unconditional promise to pay on
       demand or on a specified date a sum certain in money if (i) the debt is
       not convertible, directly or indirectly, into stock, and (ii) the
       interest rate and interest payment dates are not contingent on profits,
       the borrower's discretion, or similar factors. "Straight debt" securities
       do not include any securities issued by a partnership or a corporation in
       which we or any controlled TRS (i.e., a TRS in which we own directly or
       indirectly more than 50% of the voting power or value of the stock) holds
       non-"straight debt" securities that have an aggregate value of more than
       1% of the issuer's outstanding securities. However, "straight debt"
       securities include debt subject to the following contingencies:
 
      - a contingency relating to the time of payment of interest or principal,
        as long as either (i) there is no change to the effective yield of the
        debt obligation, other than a change to the annual yield that does not
        exceed the greater of 0.25% or 5% of the annual yield, or (ii) neither
        the aggregate issue price nor the aggregate face amount of the issuer's
        debt obligations held by us exceeds $1 million and no more than 12
        months of unaccrued interest on the debt obligations can be required to
        be prepaid; and
 
      - a contingency relating to the time or amount of payment upon a default
        or prepayment of a debt obligation, as long as the contingency is
        consistent with customary commercial practice;
 
     - Any loan to an individual or an estate;
 
     - Any "section 467 rental agreement," other than an agreement with a
       related party tenant;
 
     - Any obligation to pay "rents from real property";
 
     - Any security issued by a state or any political subdivision thereof, the
       District of Columbia, a foreign government of any political subdivision
       thereof, or the Commonwealth of Puerto Rico, but only if the
       determination of any payment thereunder does not depend in whole or in
       part on the profits of any entity not described in this paragraph or
       payments on any obligation issued by an entity not described in this
       paragraph;
 
     - Any security issued by a REIT;
 
     - Any debt instrument of an entity treated as a partnership for federal
       income tax purposes to the extent of our interest as a partner in the
       partnership;
 
     - Any debt instrument of an entity treated as a partnership for federal
       income tax purposes not described in the preceding bullet points if at
       least 75% of the partnership's gross income, excluding income from
       prohibited transactions, is qualifying income for purposes of the 75%
       gross income test described above in "-- Requirements for
       Qualification -- Income Tests."
 
For purposes of the 10% value test, our proportionate share of the assets of a
partnership is our proportionate interest in any securities issued by the
partnership, without regard to securities described in the last two bullet
points above.
 
     In connection with the acquisition of the facilities in our current
portfolio, MPT Development Services, Inc., our taxable REIT subsidiary, has made
loans to Vibra Healthcare, LLC, the parent entity of our tenants, in an
aggregate amount of approximately $41.4 million to acquire the operations at
those facilities. MPT Development Services, Inc. also made a loan of
approximately $6.2 million to Vibra and its subsidiaries for working capital
purposes which was repaid in February 2005. Those loans bear interest at
 
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an annual rate of 10.25%. Our operating partnership loaned the funds to MPT
Development Services, Inc. to make these loans. The loans from our operating
partnership to MPT Development Services, Inc. bear interest at an annual rate of
9.25%.
 
     Baker Donelson is of the opinion that the loans to Vibra will be treated as
debt rather than equity interests in Vibra, and that our rental income from
Vibra will be treated as qualifying income for purposes of the REIT gross income
tests. However, there can be no assurance that the IRS will not take a contrary
position. If the IRS were to successfully treat the loans to Vibra as equity
interests in Vibra, Vibra would be a "related party tenant" with respect to our
company and the rent that we receive from Vibra would not be qualifying income
for purposes of the REIT gross income tests. As a result, we could lose our REIT
status. In addition, if the IRS were to successfully treat the loans to Vibra as
interests held by our operating partnership rather than by MPT Development
Services, Inc. and to treat the loans as other than straight debt, we would fail
the 10% asset test with respect to such interests and, as a result, could lose
our REIT status. Baker Donelson is of the opinion that the loans to Vibra will
be treated as straight debt for federal income tax purposes.
 
     We will monitor the status of our assets for purposes of the various asset
tests and will manage our portfolio in order to comply at all times with such
tests. If we fail to satisfy the asset tests at the end of a calendar quarter,
we will not lose our REIT status if:
 
     - we satisfied the asset tests at the end of the preceding calendar
       quarter; and
 
     - the discrepancy between the value of our assets and the asset test
       requirements arose from changes in the market values of our assets and
       was not wholly or partly caused by the acquisition of one or more
       non-qualifying assets.
 
     If we did not satisfy the condition described in the second item, above, we
still could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.
 
     In the event that, at the end of any calendar quarter in a taxable year
beginning on or after January 1, 2005, we violate the 5% or 10% test described
above, we will not lose our REIT status if (1) the failure is de minimis (up to
the lesser of 1% of our assets or $10 million) and (2) we dispose of assets or
otherwise comply with the asset tests within six months after the last day of
the quarter in which we identified the failure of the asset test. In the event
of a more than de minimis failure of the 5% or 10% tests, or a failure of the
other assets test, at the end of any calendar quarter in a taxable year
beginning on or after January 1, 2005, as long as the failure was due to
reasonable cause and not to willful neglect, we will not lose our REIT status if
we (1) dispose of assets or otherwise comply with the asset tests within six
months after the last day of the quarter in which we identified the failure of
the asset test and (2) pay a tax equal to the greater of $50,000 or 35% of the
net income from the nonqualifying assets during the period in which we failed to
satisfy the asset tests.
 
     Distribution Requirements.  Each taxable year, we must distribute
dividends, other than capital gain dividends and deemed distributions of
retained capital gain, to our stockholders in an aggregate amount not less than:
 
     - the sum of:
 
        -  90% of our "REIT taxable income," computed without regard to the
           dividends-paid deduction or our net capital gain or loss, and
 
        -  90% of our after-tax net income, if any, from foreclosure property,
 
     - minus
 
        -  the sum of certain items of non-cash income.
 
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     We must pay such distributions in the taxable year to which they relate, or
in the following taxable year if we declare the distribution before we timely
file our federal income tax return for the year and pay the distribution on or
before the first regular dividend payment date after such declaration.
 
     We will pay federal income tax on taxable income, including net capital
gain, that we do not distribute to stockholders. In addition, we will incur a 4%
nondeductible excise tax on the excess of a specified required distribution over
amounts we actually distribute if we distribute an amount less than the required
distribution during a calendar year, or by the end of January following the
calendar year in the case of distributions with declaration and record dates
falling in the last three months of the calendar year. The required distribution
must not be less than the sum of:
 
     - 85% of our REIT ordinary income for the year;
 
     - 95% of our REIT capital gain income for the year; and
 
     - any undistributed taxable income from prior periods.
 
     We may elect to retain and pay income tax on the net long-term capital gain
we receive in a taxable year. See " -- Taxation of Taxable United States
Stockholders." If we so elect, we will be treated as having distributed any such
retained amount for purposes of the 4% excise tax described above. We intend to
make timely distributions sufficient to satisfy the annual distribution
requirements and to avoid corporate income tax and the 4% excise tax.
 
     It is possible that, from time to time, we may experience timing
differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of that income and deduction of such
expenses in arriving at our REIT taxable income. For example, we may not deduct
recognized capital losses from our "REIT taxable income." Further, it is
possible that, from time to time, we may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds our allocable
share of cash attributable to that sale. As a result of the foregoing, we may
have less cash than is necessary to distribute all of our taxable income and
thereby avoid corporate income tax and the excise tax imposed on certain
undistributed income. In such a situation, we may need to borrow funds or issue
additional shares of common or preferred stock.
 
     Under certain circumstances, we may be able to correct a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to our
stockholders in a later year. We may include such deficiency dividends in our
deduction for dividends paid for the earlier year. Although we may be able to
avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest based upon the amount of any deduction we take for
deficiency dividends.
 
     Recordkeeping Requirements.  We must maintain certain records in order to
qualify as a REIT. In addition, to avoid paying a penalty, we must request on an
annual basis information from our stockholders designed to disclose the actual
ownership of our shares of outstanding capital stock. We intend to comply with
these requirements.
 
     Failure to Qualify.  If we failed to qualify as a REIT in any taxable year
and no relief provision applied, we would have the following consequences. We
would be subject to federal income tax and any applicable alternative minimum
tax at rates applicable to regular C corporations on our taxable income,
determined without reduction for amounts distributed to stockholders. We would
not be required to make any distributions to stockholders, and any distributions
to stockholders would be taxable as ordinary income to the extent of our current
and accumulated earnings and profits. Corporate stockholders could be eligible
for a dividends-received deduction if certain conditions are satisfied. Unless
we qualified for relief under specific statutory provisions, we would not be
permitted to elect taxation as a REIT for the four taxable years following the
year during which we ceased to qualify as a REIT.
 
     For taxable years beginning on and after January 1, 2005, if we fail to
satisfy one or more requirements for REIT qualification, other than the gross
income tests and the asset tests, we could avoid disqualification if the failure
is due to reasonable cause and not to willful neglect and we pay a penalty of
 
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$50,000 for each such failure. In addition, there are relief provisions for a
failure of the gross income tests and asset tests, as described above in
"-- Income Tests" and "-- Asset Tests."
 
     Taxation of Taxable United States Stockholders.  As long as we qualify as a
REIT, a taxable "United States stockholder" will be required to take into
account as ordinary income distributions made out of our current or accumulated
earnings and profits that we do not designate as capital gain dividends or
retained long-term capital gain. A United States stockholder will not qualify
for the dividends-received deduction generally available to corporations. The
term "United States stockholder" means a holder of shares of common stock that,
for United States federal income tax purposes, is:
 
     - a citizen or resident of the United States;
 
     - a corporation or partnership (including an entity treated as a
       corporation or partnership for United States federal income tax purposes)
       created or organized under the laws of the United States or of a
       political subdivision of the United States;
 
     - an estate whose income is subject to United States federal income
       taxation regardless of its source; or
 
     - any trust if (i) a United States court is able to exercise primary
       supervision over the administration of such trust and one or more United
       States persons have the authority to control all substantial decisions of
       the trust or (ii) it has a valid election in place to be treated as a
       United States person.
 
     Distributions paid to a United States stockholder generally will not
qualify for the new 15% tax rate for "qualified dividend income." The Jobs and
Growth Tax Relief Reconciliation Act of 2003 reduced the maximum tax rate for
qualified dividend income from 38.6% to 15% for tax years through 2008. Without
future congressional action, the maximum tax rate on qualified dividend income
will move to 35% in 2009 and 39.6% in 2011. Qualified dividend income generally
includes dividends paid by domestic C corporations and certain qualified foreign
corporations to most United States noncorporate stockholders. Because we are not
generally subject to federal income tax on the portion of our REIT taxable
income distributed to our stockholders, our dividends generally will not be
eligible for the new 15% rate on qualified dividend income. As a result, our
ordinary REIT dividends will continue to be taxed at the higher tax rate
applicable to ordinary income. Currently, the highest marginal individual income
tax rate on ordinary income is 35%. However, the 15% tax rate for qualified
dividend income will apply to our ordinary REIT dividends, if any, that are (i)
attributable to dividends received by us from non-REIT corporations, such as our
taxable REIT subsidiary, and (ii) attributable to income upon which we have paid
corporate income tax (e.g., to the extent that we distribute less than 100% of
our taxable income). In general, to qualify for the reduced tax rate on
qualified dividend income, a stockholder must hold our common stock for more
than 60 days during the 120-day period beginning on the date that is 60 days
before the date on which our common stock becomes ex-dividend.
 
     Distributions to a United States stockholder which we designate as capital
gain dividends will generally be treated as long-term capital gain, without
regard to the period for which the United States stockholder has held its common
stock. We generally will designate our capital gain dividends as either 15%, 20%
or 25% rate distributions. A corporate United States stockholder, however, may
be required to treat up to 20% of certain capital gain dividends as ordinary
income.
 
     We may elect to retain and pay income tax on the net long-term capital gain
that we receive in a taxable year. In that case, a United States stockholder
would be taxed on its proportionate share of our undistributed long-term capital
gain. The United States stockholder would receive a credit or refund for its
proportionate share of the tax we paid. The United States stockholder would
increase the basis in its shares of common stock by the amount of its
proportionate share of our undistributed long-term capital gain, minus its share
of the tax we paid.
 
     A United States stockholder will not incur tax on a distribution in excess
of our current and accumulated earnings and profits if the distribution does not
exceed the adjusted basis of the United States stockholder's shares. Instead,
the distribution will reduce the adjusted basis of the shares, and any
 
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amount in excess of both our current and accumulated earnings and profits and
the adjusted basis will be treated as capital gain, long-term if the shares have
been held for more than one year, provided the shares are a capital asset in the
hands of the United States stockholder. In addition, any distribution we declare
in October, November, or December of any year that is payable to a United States
stockholder of record on a specified date in any of those months will be treated
as paid by us and received by the United States stockholder on December 31 of
the year, provided we actually pay the distribution during January of the
following calendar year.
 
     Stockholders may not include in their individual income tax returns any of
our net operating losses or capital losses. Instead, these losses are generally
carried over by us for potential offset against our future income. Taxable
distributions from us and gain from the disposition of shares of common stock
will not be treated as passive activity income; stockholders generally will not
be able to apply any "passive activity losses," such as losses from certain
types of limited partnerships in which the stockholder is a limited partner,
against such income. In addition, taxable distributions from us and gain from
the disposition of common stock generally will be treated as investment income
for purposes of the investment interest limitations. We will notify stockholders
after the close of our taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain.
 
     Taxation of United States Stockholders on the Disposition of Shares of
Common Stock.  In general, a United States stockholder who is not a dealer in
securities must treat any gain or loss realized upon a taxable disposition of
our shares of common stock as long-term capital gain or loss if the United
States stockholder has held the stocks for more than one year, and otherwise as
short-term capital gain or loss. However, a United States stockholder must treat
any loss upon a sale or exchange of common stock held for six months or less as
a long-term capital loss to the extent of capital gain dividends and any other
actual or deemed distributions from us which the United States stockholder
treats as long-term capital gain. All or a portion of any loss that a United
States stockholder realizes upon a taxable disposition of common stock may be
disallowed if the United States stockholder purchases other shares of our common
stock within 30 days before or after the disposition.
 
     Capital Gains and Losses.  The tax-rate differential between capital gain
and ordinary income for non-corporate taxpayers may be significant. A taxpayer
generally must hold a capital asset for more than one year for gain or loss
derived from its sale or exchange to be treated as long-term capital gain or
loss. The highest marginal individual income tax rate is currently 35%. The
maximum tax rate on long-term capital gain applicable to individuals is 15% for
sales and exchanges of assets held for more than one year and occurring on or
after May 6, 2003 through December 31, 2008. The maximum tax rate on long-term
capital gain from the sale or exchange of "section 1250 property" (i.e.,
generally, depreciable real property) is 25% to the extent the gain would have
been treated as ordinary income if the property were "section 1245 property"
(i.e., generally, depreciable personal property). We generally may designate
whether a distribution we designate as capital gain dividends (and any retained
capital gain that we are deemed to distribute) is taxable to non-corporate
stockholders at a 15% or 25% rate.
 
     The characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. A non-corporate taxpayer may deduct
capital losses not offset by capital gains against its ordinary income only up
to a maximum of $3,000 annually. A non-corporate taxpayer may carry unused
capital losses forward indefinitely. A corporate taxpayer must pay tax on its
net capital gain at corporate ordinary-income rates. A corporate taxpayer may
deduct capital losses only to the extent of capital gains, with unused losses
carried back three years and forward five years.
 
     Information Reporting Requirements and Backup Withholding.  We will report
to our stockholders and to the IRS the amount of distributions we pay during
each calendar year and the amount of tax we withhold, if any. A stockholder may
be subject to backup withholding at a rate of up to 28% with respect to
distributions unless the holder:
 
     - is a corporation or comes within certain other exempt categories and when
       required, demonstrates this fact; or
 
                                       159

 
     - provides a taxpayer identification number, certifies as to no loss of
       exemption from backup withholding, and otherwise complies with the
       applicable requirements of the backup withholding rules.
 
     A stockholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, we may be required to withhold a portion of
capital gain distributions to any stockholders who fail to certify their
non-foreign status to us. For a discussion of the backup withholding rules as
applied to non-United States stockholders, see "Taxation of Non-United States
Stockholders."
 
     Taxation of Tax-Exempt Stockholders.  Tax-exempt entities, including
qualified employee pension and profit sharing trusts and individual retirement
accounts, referred to as pension trusts, generally are exempt from federal
income taxation. However, they are subject to taxation on their "unrelated
business taxable income." While many investments in real estate generate
unrelated business taxable income, the IRS has issued a ruling that dividend
distributions from a REIT to an exempt employee pension trust do not constitute
unrelated business taxable income so long as the exempt employee pension trust
does not otherwise use the shares of the REIT in an unrelated trade or business
of the pension trust. Based on that ruling, amounts we distribute to tax-exempt
stockholders generally should not constitute unrelated business taxable income.
However, if a tax-exempt stockholder were to finance its acquisition of common
stock with debt, a portion of the income it received from us would constitute
unrelated business taxable income pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group legal services
plans that are exempt from taxation under special provisions of the federal
income tax laws are subject to different unrelated business taxable income
rules, which generally will require them to characterize distributions they
receive from us as unrelated business taxable income. Finally, in certain
circumstances, a qualified employee pension or profit-sharing trust that owns
more than 10% of our shares of common stock must treat a percentage of the
dividends it receives from us as unrelated business taxable income. The
percentage is equal to the gross income we derive from an unrelated trade or
business, determined as if we were a pension trust, divided by our total gross
income for the year in which we pay the dividends. This rule applies to a
pension trust holding more than 10% of our shares only if:
 
     - the percentage of our dividends which the tax-exempt trust must treat as
       unrelated business taxable income is at least 5%;
 
     - we qualify as a REIT by reason of the modification of the rule requiring
       that no more than 50% of our shares of common stock be owned by five or
       fewer individuals, which modification allows the beneficiaries of the
       pension trust to be treated as holding shares in proportion to their
       actual interests in the pension trust; and
 
     - either of the following applies:
 
        - one pension trust owns more than 25% of the value of our shares of
          common stock; or
 
        - a group of pension trusts individually holding more than 10% of the
          value of our shares of common stock collectively owns more than 50% of
          the value of our shares of common stock.
 
     Taxation of Non-United States Stockholders.  The rules governing United
States federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders are complex.
This section is only a summary of such rules. We urge non-United States
stockholders to consult their own tax advisors to determine the impact of
federal, state, and local income tax laws on ownership of shares of common
stock, including any reporting requirements.
 
     A non-United States stockholder that receives a distribution which (i) is
not attributable to gain from our sale or exchange of "United States real
property interests" (defined below) and (ii) we do not designate a capital gain
dividend (or retained capital gain) will recognize ordinary income to the extent
of our current or accumulated earnings and profits. A withholding tax equal to
30% of the gross amount of
 
                                       160

 
the distribution ordinarily will apply unless an applicable tax treaty reduces
or eliminates the tax. However, a non-United States stockholder generally will
be subject to federal income tax at graduated rates on any distribution treated
as effectively connected with the non-United States stockholder's conduct of a
United States trade or business, in the same manner as United States
stockholders are taxed on distributions. A corporate non-United States
stockholder may, in addition, be subject to the 30% branch profits tax. We plan
to withhold United States income tax at the rate of 30% on the gross amount of
any distribution paid to a non-United States stockholder unless:
 
     - a lower treaty rate applies and the non-United States stockholder files
       an IRS Form W-8BEN evidencing eligibility for that reduced rate with us;
       or
 
     - the non-United States stockholder files an IRS Form W-8ECI with us
       claiming that the distribution is effectively connected income.
 
     A non-United States stockholder will not incur tax on a distribution in
excess of our current and accumulated earnings and profits if the excess portion
of the distribution does not exceed the adjusted basis of the stockholder's
shares of common stock. Instead, the excess portion of the distribution will
reduce the adjusted basis of the shares. A non-United States stockholder will be
subject to tax on a distribution that exceeds both our current and accumulated
earnings and profits and the adjusted basis of its shares, if the non-United
States stockholder otherwise would be subject to tax on gain from the sale or
disposition of shares of common stock, as described below. Because we generally
cannot determine at the time we make a distribution whether or not the
distribution will exceed our current and accumulated earnings and profits, we
normally will withhold tax on the entire amount of any distribution at the same
rate as we would withhold on a dividend. However, a non-United States
stockholder may obtain a refund of amounts we withhold if we later determine
that a distribution in fact exceeded our current and accumulated earnings and
profits.
 
     We must withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. We will, therefore, withhold at a rate of 10%
on any portion of a distribution not subject to withholding at a rate of 30%.
 
     For any year in which we qualify as a REIT, a non-United States stockholder
will incur tax on distributions attributable to gain from our sale or exchange
of "United States real property interests" under the "FIRPTA" provisions of the
Code. The term "United States real property interests" includes interests in
real property and stocks in corporations at least 50% of whose assets consist of
interests in real property. Under the FIRPTA rules, a non-United States
stockholder is taxed on distributions attributable to gain from sales of United
States real property interests as if the gain were effectively connected with
the conduct of a United States business of the non-United States stockholder. A
non-United States stockholder thus would be taxed on such a distribution at the
normal capital gain rates applicable to United States stockholders, subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of a nonresident alien individual. A non-United States corporate
stockholder not entitled to treaty relief or exemption also may be subject to
the 30% branch profits tax on such a distribution. We must withhold 35% of any
distribution that we could designate as a capital gain dividend. A non-United
States stockholder may receive a credit against our tax liability for the amount
we withhold.
 
     For taxable years beginning on and after January 1, 2005, for non-U.S.
stockholders of our publicly-traded shares, capital gain distributions that are
attributable to our sale of real property will not be subject to FIRPTA and
therefore will be treated as ordinary dividends rather than as gain from the
sale of a United States real property interest, as long as the non-U.S.
stockholder did not own more than 5% of the class of our stock on which the
distributions are made during the taxable year. As a result, non-U.S.
stockholders generally would be subject to withholding tax on such capital gain
distributions in the same manner as they are subject to withholding tax on
ordinary dividends.
 
     A non-United States stockholder generally will not incur tax under FIRPTA
with respect to gain on a sale of shares of common stock as long as, at all
times, non-United States persons hold, directly or indirectly, less than 50% in
value of the outstanding common stock. We cannot assure you that this test
 
                                       161

 
will be met. In addition, a non-United States stockholder that owned, actually
or constructively, 5% or less of the outstanding common stock at all times
during a specified testing period will not incur tax under FIRPTA on gain from a
sale of common stock if the stock is "regularly traded" on an established
securities market. Any gain subject to tax under FIRPTA will be treated in the
same manner as it would be in the hands of United States stockholders subject to
alternative minimum tax, but under a special alternative minimum tax in the case
of nonresident alien individuals.
 
     A non-United States stockholder generally will incur tax on gain from the
sale of common stock not subject to FIRPTA if:
 
     - the gain is effectively connected with the conduct of the non-United
       States stockholder's United States trade or business, in which case the
       non-United States stockholder will be subject to the same treatment as
       United States stockholders with respect to the gain; or
 
     - the non-United States stockholder is a nonresident alien individual who
       was present in the United States for 183 days or more during the taxable
       year and has a "tax home" in the United States, in which case the
       non-United States stockholder will incur a 30% tax on capital gains.
 
OTHER TAX CONSEQUENCES
 
     Tax Aspects of Our Investments in the Operating Partnership.  The following
discussion summarizes certain federal income tax considerations applicable to
our direct or indirect investment in our operating partnership and any
subsidiary partnerships or limited liability companies we form or acquire, each
individually referred to as a Partnership and, collectively, as Partnerships.
The following discussion does not cover state or local tax laws or any federal
tax laws other than income tax laws.
 
     Classification as Partnerships.  We are entitled to include in our income
our distributive share of each Partnership's income and to deduct our
distributive share of each Partnership's losses only if such Partnership is
classified for federal income tax purposes as a partnership (or an entity that
is disregarded for federal income tax purposes if the entity has only one owner
or member), rather than as a corporation or an association taxable as a
corporation. An organization with at least two owners or members will be
classified as a partnership, rather than as a corporation, for federal income
tax purposes if it:
 
     - is treated as a partnership under the Treasury regulations relating to
       entity classification (the "check-the-box regulations"); and
 
     - is not a "publicly traded" partnership.
 
     Under the check-the-box regulations, an unincorporated entity with at least
two owners or members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity does not make an
election, it generally will be treated as a partnership for federal income tax
purposes. We intend that each Partnership will be classified as a partnership
for federal income tax purposes (or else a disregarded entity where there are
not at least two separate beneficial owners).
 
     A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or a substantial equivalent). A publicly traded partnership is generally
treated as a corporation for federal income tax purposes, but will not be so
treated for any taxable year for which at least 90% of the partnership's gross
income consists of specified passive income, including real property rents,
gains from the sale or other disposition of real property, interest, and
dividends (the "90% passive income exception").
 
     Treasury regulations, referred to as PTP regulations, provide limited safe
harbors from treatment as a publicly traded partnership. Pursuant to one of
those safe harbors, or private placement exclusion, interests in a partnership
will not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act, and (ii) the partnership does not have more than 100 partners at
any time during the partnership's taxable year. For the determination of the
number of partners in a partnership, a person owning an interest in a
partnership, grantor trust, or S corporation that owns an interest in the
partnership is treated as a partner in the partnership only if (i) substantially
all of the value
 
                                       162

 
of the owner's interest in the entity is attributable to the entity's direct or
indirect interest in the partnership and (ii) a principal purpose of the use of
the entity is to permit the partnership to satisfy the 100-partner limitation.
Each Partnership should qualify for the private placement exclusion.
 
     We have not requested, and do not intend to request, a ruling from the
Internal Revenue Service that the Partnerships will be classified as
partnerships for federal income tax purposes. If for any reason a Partnership
were taxable as a corporation, rather than as a partnership, for federal income
tax purposes, we likely would not be able to qualify as a REIT. See
"-- Requirements for Qualification -- Income Tests" and " -- Requirements for
Qualification -- Asset Tests." In addition, any change in a Partnership's status
for tax purposes might be treated as a taxable event, in which case we might
incur tax liability without any related cash distribution. See "-- Requirements
for Qualification -- Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate rates on its net
income, and distributions to its partners would constitute dividends that would
not be deductible in computing such Partnership's taxable income.
 
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
 
     Partners, Not the Partnerships, Subject to Tax.  A partnership is not a
taxable entity for federal income tax purposes. We will therefore take into
account our allocable share of each Partnership's income, gains, losses,
deductions, and credits for each taxable year of the Partnership ending with or
within our taxable year, even if we receive no distribution from the Partnership
for that year or a distribution less than our share of taxable income.
Similarly, even if we receive a distribution, it may not be taxable if the
distribution does not exceed our adjusted tax basis in our interest in the
Partnership.
 
     Partnership Allocations.  Although a partnership agreement generally will
determine the allocation of income and losses among partners, allocations will
be disregarded for tax purposes if they do not comply with the provisions of the
federal income tax laws governing partnership allocations. If an allocation is
not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Partnership's allocations of taxable income, gain,
and loss are intended to comply with the requirements of the federal income tax
laws governing partnership allocations.
 
     Tax Allocations With Respect to Contributed Properties.  Income, gain,
loss, and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. Similar rules apply with
respect to property revalued on the books of a partnership. The amount of such
unrealized gain or unrealized loss, referred to as built-in gain or built-in
loss, is generally equal to the difference between the fair market value of the
contributed or revalued property at the time of contribution or revaluation and
the adjusted tax basis of such property at that time, referred to as a book-tax
difference. Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. The United States Treasury Department has issued regulations
requiring partnerships to use a "reasonable method" for allocating items with
respect to which there is a book-tax difference and outlining several reasonable
allocation methods. Our operating partnership generally intends to use the
traditional method for allocating items with respect to which there is a
book-tax difference.
 
     Basis in Partnership Interest.  Our adjusted tax basis in any partnership
interest we own generally will be:
 
     - the amount of cash and the basis of any other property we contribute to
       the partnership;
 
     - increased by our allocable share of the partnership's income (including
       tax-exempt income) and our allocable share of indebtedness of the
       partnership; and
 
                                       163

 
     - reduced, but not below zero, by our allocable share of the partnership's
       loss, the amount of cash and the basis of property distributed to us, and
       constructive distributions resulting from a reduction in our share of
       indebtedness of the partnership.
 
     Loss allocated to us in excess of our basis in a partnership interest will
not be taken into account until we again have basis sufficient to absorb the
loss. A reduction of our share of partnership indebtedness will be treated as a
constructive cash distribution to us, and will reduce our adjusted tax basis.
Distributions, including constructive distributions, in excess of the basis of
our partnership interest will constitute taxable income to us. Such
distributions and constructive distributions normally will be characterized as
long-term capital gain.
 
     Depreciation Deductions Available to Partnerships.  The initial tax basis
of property is the amount of cash and the basis of property given as
consideration for the property. A partnership in which we are a partner
generally will depreciate property for federal income tax purposes under the
modified accelerated cost recovery system of depreciation, referred to as MACRS.
Under MACRS, the partnership generally will depreciate furnishings and equipment
over a seven year recovery period using a 200% declining balance method and a
half-year convention. If, however, the partnership places more than 40% of its
furnishings and equipment in service during the last three months of a taxable
year, a mid-quarter depreciation convention must be used for the furnishings and
equipment placed in service during that year. Under MACRS, the partnership
generally will depreciate buildings and improvements over a 39 year recovery
period using a straight line method and a mid-month convention. The operating
partnership's initial basis in properties acquired in exchange for units of the
operating partnership should be the same as the transferor's basis in such
properties on the date of acquisition by the partnership. Although the law is
not entirely clear, the partnership generally will depreciate such property for
federal income tax purposes over the same remaining useful lives and under the
same methods used by the transferors. The partnership's tax depreciation
deductions will be allocated among the partners in accordance with their
respective interests in the partnership, except to the extent that the
partnership is required under the federal income tax laws governing partnership
allocations to use a method for allocating tax depreciation deductions
attributable to contributed or revalued properties that results in our receiving
a disproportionate share of such deductions.
 
     Under recently enacted legislation, a first-year bonus depreciation of 50%
may be available for certain tenant improvements. In addition, certain qualified
leasehold improvement property placed in service before January 1, 2006 will be
depreciated over a 15-year recovery period using a straight method and a
half-year convention.
 
     Sale of a Partnership's Property.  Generally, any gain realized by a
Partnership on the sale of property held for more than one year will be
long-term capital gain, except for any portion of the gain treated as
depreciation or cost recovery recapture. Any gain or loss recognized by a
Partnership on the disposition of contributed or revalued properties will be
allocated first to the partners who contributed the properties or who were
partners at the time of revaluation, to the extent of their built-in gain or
loss on those properties for federal income tax purposes. The partners' built-in
gain or loss on contributed or revalued properties is the difference between the
partners' proportionate share of the book value of those properties and the
partners' tax basis allocable to those properties at the time of the
contribution or revaluation. Any remaining gain or loss recognized by the
Partnership on the disposition of contributed or revalued properties, and any
gain or loss recognized by the Partnership on the disposition of other
properties, will be allocated among the partners in accordance with their
percentage interests in the Partnership.
 
     Our share of any Partnership gain from the sale of inventory or other
property held primarily for sale to customers in the ordinary course of the
Partnership's trade or business will be treated as income from a prohibited
transaction subject to a 100% tax. Income from a prohibited transaction may have
an adverse effect on our ability to satisfy the gross income tests for REIT
status. See "-- Requirements for Qualification -- Income Tests." We do not
presently intend to acquire or hold, or to allow any Partnership
 
                                       164

 
to acquire or hold, any property that is likely to be treated as inventory or
property held primarily for sale to customers in the ordinary course of our, or
the Partnership's, trade or business.
 
     Taxable REIT Subsidiaries.  As described above, we have formed and have
made a timely election to treat MPT Development Services, Inc. as a taxable REIT
subsidiary and may form or acquire additional taxable REIT subsidiaries in the
future. A taxable REIT subsidiary may provide services to our tenants and engage
in activities unrelated to our tenants, such as third-party management,
development, and other independent business activities.
 
     We and any corporate subsidiary in which we own stock must make an election
for the subsidiary to be treated as a taxable REIT subsidiary. If a taxable REIT
subsidiary directly or indirectly owns shares of a corporation with more than
35% of the value or voting power of all outstanding shares of the corporation,
the corporation will automatically also be treated as a taxable REIT subsidiary.
Overall, no more than 20% of the value of our assets may consist of securities
of one or more taxable REIT subsidiaries, irrespective of whether such
securities may also qualify under the 75% assets test, and no more than 25% of
the value of our assets may consist of the securities that are not qualifying
assets under the 75% test, including, among other things, certain securities of
a taxable REIT subsidiary, such as stock or non-mortgage debt.
 
     Rent we receive from our taxable REIT subsidiaries will qualify as "rents
from real property" as long as at least 90% of the leased space in the property
is leased to persons other than taxable REIT subsidiaries and related party
tenants, and the amount paid by the taxable REIT subsidiary to rent space at the
property is substantially comparable to rents paid by other tenants of the
property for comparable space. The taxable REIT subsidiary rules limit the
deductibility of interest paid or accrued by a taxable REIT subsidiary to us to
assure that the taxable REIT subsidiary is subject to an appropriate level of
corporate taxation. Further, the rules impose a 100% excise tax on certain types
of transactions between a taxable REIT subsidiary and us or our tenants that are
not conducted on an arm's-length basis.
 
     A taxable REIT subsidiary may not directly or indirectly operate or manage
a healthcare facility. For purposes of this definition a "healthcare facility"
means a hospital, nursing facility, assisted living facility, congregate care
facility, qualified continuing care facility, or other licensed facility which
extends medical or nursing or ancillary services to patients and which is
operated by a service provider which is eligible for participation in the
Medicare program under Title XVIII of the Social Security Act with respect to
such facility.
 
     State and Local Taxes.  We and our stockholders may be subject to taxation
by various states and localities, including those in which we or a stockholder
transacts business, owns property or resides. The state and local tax treatment
may differ from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in our common stock.
 
                              PLAN OF DISTRIBUTION
 
     We are registering the resale of the shares of common stock offered by this
prospectus in accordance with the terms of a registration rights agreement that
we entered into with the selling stockholders in connection with our April 2004
private placement. We are also registering the resale of 521,908 shares of
common stock held by our founders, and 30,000 shares of restricted common stock
held by one of our executive officers who is not one of our founders. The
registration of these shares, however, does not necessarily mean that any of the
shares will be offered or sold by the selling stockholders or their respective
donees, pledgees or other transferees or successors in interest. We will not
receive any proceeds from the sale of the common stock offered by this
prospectus.
 
     The sale of the shares of common stock by any selling stockholder,
including any donee, pledgee or other transferee who receives shares from a
selling stockholder, may be effected from time to time by selling them directly
to purchasers or to or through broker-dealers. In connection with any sale, a
broker-dealer may act as agent for the selling stockholder or may purchase from
the selling stockholder all or a
 
                                       165

 
portion of the shares as principal. These sales may be made on the NYSE or other
exchanges on which our common stock is then traded, in the over-the-counter
market or in private transactions.
 
     The shares may be sold in one or more transactions at:
 
     - fixed prices;
 
     - prevailing market prices at the time of sale;
 
     - prices related to the prevailing market prices; or
 
     - otherwise negotiated prices.
 
     The shares of common stock may be sold in one or more of the following
transactions:
 
     - ordinary brokerage transactions and transactions in which a broker-dealer
       solicits purchasers;
 
     - block trades (which may involve crosses or transactions in which the same
       broker acts as an agent on both sides of the trade) in which a
       broker-dealer may sell all or a portion of such shares as agent but may
       position and resell all or a portion of the block as principal to
       facilitate the transaction;
 
     - purchases by a broker-dealer as principal and resale by the broker-dealer
       for its own account pursuant to this prospectus;
 
     - a special offering, an exchange distribution or a secondary distribution
       in accordance with applicable rules promulgated by the National
       Association of Securities Dealers, Inc. or stock exchange rules;
 
     - sales "at the market" to or through a market maker or into an existing
       trading market, on an exchange or otherwise, for the shares;
 
     - sales in other ways not involving market makers or established trading
       markets, including privately-negotiated direct sales to purchasers;
 
     - any other legal method; and
 
     - any combination of these methods.
 
     In effecting sales, broker-dealers engaged by a selling stockholder may
arrange for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the selling stockholder in the form of
commissions, discounts or concessions. Broker-dealers may also receive
compensation from purchasers of the shares for whom they act as agents or to
whom they sell as principals or both. Compensation as to a particular
broker-dealer may be in excess of customary commissions and will be in amounts
to be negotiated.
 
     The distribution of the shares of common stock also may be effected from
time to time in one or more underwritten transactions. Any underwritten offering
may be on a "best efforts" or a "firm commitment" basis. In connection with any
underwritten offering, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders or
from purchasers of the shares. Underwriters may sell the shares to or through
dealers, and dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents.
 
     The selling stockholders have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there any
underwriter or coordinating broker-dealer acting in connection with any proposed
sale of shares by the selling stockholders. We will file a supplement to this
prospectus, if required, under Rule 424(b) under the Securities Act upon being
notified by the selling stockholders that any material arrangement has been
entered into with a broker-dealer for the sale of shares through a block
 
                                       166

 
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer. This supplement will disclose:
 
     - the name of the selling stockholders and of participating brokers and
       dealers;
 
     - the number of shares involved;
 
     - the price at which the shares are to be sold;
 
     - the commissions paid or the discounts or concessions allowed to the
       broker-dealers, where applicable;
 
     - that the broker-dealers did not conduct any investigation to verify the
       information set out or incorporated by reference in this prospectus; and
 
     - other facts material to the transaction.
 
     The selling stockholders and any underwriters, or brokers-dealers or agents
that participate in the distribution of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the shares by them and any discounts, commissions or concessions
received by any underwriters, dealers, or agents may be deemed to be
underwriting compensation under the Securities Act. Because the selling
stockholders may be deemed to be "underwriters" under the Securities Act, the
selling stockholders will be subject to the prospectus delivery requirements of
the Securities Act. The selling stockholders and any other person participating
in a distribution will be subject to the applicable provisions of the Exchange
Act and its rules and regulations. For example, the anti-manipulative provisions
of Regulation M may limit the ability of the selling stockholders or others to
engage in stabilizing and other market making activities.
 
     We may be required to file a post-effective amendment to the registration
statement of which this prospectus is a part in order to include the names of
additional selling stockholders or make other required updates to this
prospectus. During the time required for filing, notice will be delivered to the
selling stockholders that sales of common stock covered by this prospectus will
not be permitted.
 
     From time to time, the selling stockholders may pledge their shares of
common stock pursuant to the margin provisions of their customer agreements with
their brokers. Upon default by a selling stockholder, the broker may offer and
sell such pledged shares from time to time. Upon a sale of the shares, the
selling stockholders intend to comply with the prospectus delivery requirements
under the Securities Act by delivering a prospectus to each purchaser in the
transaction. We intend to file any amendments or other necessary documents in
compliance with the Securities Act that may be required in the event the selling
stockholders default under any customer agreement with brokers.
 
     In order to comply with the securities laws of certain states, if
applicable, the shares of common stock may be sold only through registered or
licensed broker-dealers. We have agreed to pay all expenses incident to the
offering and sale of the shares, other than commissions, discounts and fees of
underwriters, broker-dealers or agents. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages, actions, liabilities,
costs and expenses, including liabilities under the Securities Act.
 
     The selling stockholders have agreed to indemnify us, our officers and
directors and each person who controls (within the meaning of the Securities
Act) or is controlled by us, against any losses, claims, damages, liabilities
and expenses arising under the securities laws in connection with this offering
with respect to written information furnished to us by the selling stockholders.
 
                                 LEGAL MATTERS
 
     The validity of the common stock and certain tax matters, including REIT
qualification and debt characterization, will be passed upon for us by Baker,
Donelson, Bearman, Caldwell & Berkowitz, P.C. The summary of legal matters
contained in the section of this prospectus under the heading "United States
Federal Income Tax Considerations" is based on the opinion of Baker Donelson.
 
                                       167

 
                                    EXPERTS
 
     Our consolidated financial statements and the accompanying financial
statement schedule as of December 31, 2004, and 2003, and for the year ended
December 31, 2004 and for the period from inception (August 27, 2003) through
December 31, 2003, included herein, have been audited by KPMG LLP, independent
registered public accounting firm, as stated in their report included herein.
 
     The consolidated financial statements of Vibra as of December 31, 2004 and
for the period from inception (May 14, 2004) through December 31, 2004 included
herein have been audited by Parente Randolph, LLC, independent registered public
accounting firm, as stated in their report included herein.
 
     The independent registered public accounting firms have not examined,
compiled or otherwise applied procedures to any financial forecast, projection
or anticipated results presented herein and, accordingly, do not express an
opinion or any other form of assurance on such.
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
     We have filed with the Securities and Exchange Commission a registration
statement on Form S-11, including exhibits, schedules and amendments filed with,
or incorporated by reference in, this registration statement, under the
Securities Act with respect to the shares of our common stock to be sold in this
offering. This prospectus does not contain all of the information set forth in
the registration statement and exhibits and schedules to the registration
statement. For further information with respect to our company and the shares of
our common stock to be sold in this offering, reference is made to the
registration statement, including the exhibits to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to in, or incorporated by reference in, this prospectus
are not necessarily complete and, where that contract is an exhibit to the
registration statement, each statement is qualified in all respects by the
exhibit to which the reference relates. Copies of the registration statement,
including the exhibits and schedules to the registration statement, may be
examined without charge at the public reference room of the Securities and
Exchange Commission, 100 F Street, N.E., Room 1580, Washington, DC 20549.
Information about the operation of the public reference room may be obtained by
calling the Securities and Exchange Commission at 1-800-SEC-0300. Copies of all
or a portion of the registration statement can be obtained from the public
reference room of the Securities and Exchange Commission upon payment of
prescribed fees. Our Securities and Exchange Commission filings, including our
registration statement, are also available to you on the Securities and Exchange
Commission's website, www.sec.gov.
 
     We are subject to the information and reporting requirements of the
Securities Exchange Act, and will file periodic reports, proxy statements and
will make available to our stockholders annual reports containing audited
financial information for each year, and quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial information.
 
                                       168

 
                         INDEX TO FINANCIAL STATEMENTS
 

                                                           
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
  Medical Properties Trust, Inc. and Subsidiaries
  Unaudited Pro Forma Consolidated Balance Sheet as of June
     30, 2005...............................................   F-3
  Unaudited Pro Forma Consolidated Statement of Operations
     for the Six Months Ended June 30, 2005.................   F-4
  Unaudited Pro Forma Consolidated Statement of Operations
     for the Year Ended December 31, 2004...................   F-5
  Notes to Unaudited Pro Forma Consolidated Financial
     Statements.............................................   F-6

 
HISTORICAL FINANCIAL INFORMATION
Medical Properties Trust, Inc. and Subsidiaries
  Consolidated Balance Sheets as of June 30, 2005 and
     December 31, 2004......................................  F-14
  Consolidated Statements of Operations for the Three Months
     Ended March 31, 2005 and March 31, 2004 and the Six
     Months Ended June 30, 2005 and 2004....................  F-15
  Consolidated Statements of Cash Flows for the Six Months
     Ended June 30, 2005 and March 31, 2004.................  F-16
  Notes to Consolidated Financial Statements................  F-17
  Report of Independent Registered Public Accounting Firm...  F-22
  Consolidated Balance Sheets as of December 31, 2004 and
     December 31, 2003......................................  F-23
  Consolidated Statements of Operations for the Year Ended
     December 31, 2004 and for the Period from Inception
     (August 27, 2003) through December 31, 2003............  F-24
  Consolidated Statements of Cash Flows for the Year Ended
     December 31, 2004 and for the Period from Inception
     (August 27, 2003) through December 31, 2003............  F-25
  Consolidated Statements of Stockholders' Equity (Deficit)
     for the Year Ended December 31, 2004 and for the Period
     from Inception (August 27, 2003) through December 31,
     2003...................................................  F-26
  Notes to Consolidated Financial Statements................  F-27
Schedule III -- Real Estate and Accumulated Depreciation....  F-38
Vibra Healthcare, LLC (formerly Highmark Healthcare, LLC)
  Consolidated Balance Sheet as of June 30, 2005 and
     December 31, 2004......................................  F-39
  Consolidated Statements of Operations and Changes in
     Partners' Deficit for the Three Months Ended March 31,
     2005 and the Six Months Ended June 30, 2005............  F-40
  Consolidated Statement of Cash Flows for the Six Months
     Ended June 30, 2005....................................  F-41
  Notes to Consolidated Financial Statements................  F-42
  Report of Independent Registered Public Accounting Firm...  F-54
  Consolidated Balance Sheet as of December 31, 2004........  F-55
  Consolidated Statements of Operations and Changes in
     Partner's Capital for the Period from Inception (May
     14, 2004) through December 31, 2004....................  F-56
  Consolidated Statement of Cash Flows for the Period from
     Inception (May 14, 2004) through December 31, 2004.....  F-57
  Notes to Consolidated Financial Statements................  F-58

 
                                       F-1

 
             UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
 
     The following unaudited pro forma consolidated financial information sets
forth:
 
     - the historical financial information derived from our audited
       consolidated financial statements for the year ended December 31, 2004
       and the six months ended June 30, 2005 as adjusted to:
 
      - give effect to acquisition of our facilities acquired and leased to
        Vibra, Desert Valley and Gulf States as if we owned them from the
        inception of each period presented;
 
      - give effect to our loans made to Vibra;
 
      - give effect to our probable acquisitions;
 
      - give effect to our initial public offering; and
 
     - our pro forma, unaudited consolidated balance sheet as of June 30, 2005
       as adjusted for the effect of dividends, to give effect to our initial
       portfolio, our probable acquisitions and our initial public offering.
 
     This section contains forward-looking statements, which are projections of
future performance and the assumptions upon which the forward-looking statements
are based. Our actual results could differ materially from those expressed in
our forward-looking statements as a result of various risks, including those set
forth in "Risk Factors" and elsewhere in this prospectus. You should read the
information below along with all other financial information and analysis
presented in this prospectus, including the sections captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical financial statements and related notes.
 
     The unaudited pro forma consolidated financial information is presented for
informational purposes only. We do not expect that this information will reflect
our future results of operations or financial position. The unaudited pro forma
adjustments and eliminations are based on available information and upon
assumptions that we believe are reasonable. The unaudited pro forma financial
information assumes that the above described transactions were completed as of
June 30, 2005, for purposes of the unaudited pro forma consolidated balance
sheet and as of the first day of the period presented for purposes of the
unaudited pro forma consolidated statements of operations.
 
                                       F-2

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                 Unaudited Pro Forma Consolidated Balance Sheet
                                 June 30, 2005


                                                                                                                 PROBABLE
                                                                                                               ACQUISITION
                                                    DIVIDENDS                              PRO FORMA           TRANSACTIONS
                                                   DECLARED IN                             EFFECT OF           ------------
                                                     MAY AND       JULY 13, 2005           COMPLETED           GULF STATES
                                    HISTORICAL     AUGUST 2005          IPO               TRANSACTIONS            HEALTH
                                   ------------   -------------    -------------          ------------         ------------
                                                                                                
ASSETS
  Real estate assets
    Land.........................  $ 13,491,429   $         --     $         --           $ 13,491,429         $  1,163,214(3)
    Buildings and improvements...   166,572,054             --               --            166,572,054           14,492,378(3)
    Construction in progress.....    50,529,769                                             50,529,769                   --
    Intangible lease assets......     7,558,712             --               --              7,558,712              629,408(3)
                                   ------------   ------------     ------------           ------------         ------------
      Gross investment in real
         estate assets...........   238,151,964             --               --            238,151,964           16,285,000
    Accumulated depreciation and
      amortization...............    (3,294,873)            --               --             (3,294,873)                  --
                                   ------------   ------------     ------------           ------------         ------------
      Net investment in real
         estate assets...........   234,857,091             --               --            234,857,091           16,285,000
  Cash and cash equivalents......    34,357,866    (10,981,119)(1)  128,486,450(2)         151,863,197          (10,285,000)(3)
  Interest and rent receivable...     1,195,299             --               --              1,195,299                   --
  Unbilled rent receivable.......     7,458,980             --               --              7,458,980                   --
  Loans..........................    48,498,111             --               --             48,498,111           (6,000,000)(3)
  Other assets...................     7,377,045             --       (2,371,283)(2)          5,005,762                   --
                                   ------------   ------------     ------------           ------------         ------------
      TOTAL ASSETS...............  $333,744,392   $(10,981,119)    $126,115,167           $448,878,440         $         --
                                   ============   ============     ============           ============         ============
LIABILITIES AND STOCKHOLDERS'
  EQUITY
  Liabilities
    Long-term debt...............  $ 73,204,167   $         --     $         --           $ 73,204,167         $         --
    Accounts payable and accrued
      expenses...................    11,596,030     (4,186,378)(1)                           7,409,652
    Deferred revenue.............     6,418,038             --               --              6,418,038                   --
    Lease deposits...............     7,728,195             --               --              7,728,195                   --
                                   ------------   ------------     ------------           ------------         ------------
      Total liabilities..........    98,946,430     (4,186,378)              --             94,760,052                   --
  Minority interest..............     2,137,500             --               --              2,137,500                   --
  Stockholders' equity
    Preferred stock,.............            --             --               --                     --                   --
    Common stock,................        26,083             --           13,363(2)(4)           39,446                   --
    Additional paid in capital...   233,678,165             --      128,075,804(2)(4)      361,753,969                   --
    Accumulated deficit..........    (1,043,786)    (6,794,741)(1)   (1,974,000)(4)         (9,812,527)                  --
                                   ------------   ------------     ------------           ------------         ------------
      Total stockholders'
         equity..................   232,660,462     (6,794,741)     126,115,167            351,980,888                   --
                                   ------------   ------------     ------------           ------------         ------------
      TOTAL LIABILITIES AND
         STOCKHOLDERS' EQUITY....  $333,744,392   $(10,981,119)    $126,115,167           $448,878,440         $         --
                                   ============   ============     ============           ============         ============
 

 
                                     COMPANY
                                    PRO FORMA
                                   ------------
                                
ASSETS
  Real estate assets
    Land.........................  $ 14,654,643
    Buildings and improvements...   181,064,432
    Construction in progress.....    50,529,769
    Intangible lease assets......     8,188,120
                                   ------------
      Gross investment in real
         estate assets...........   254,436,964
    Accumulated depreciation and
      amortization...............    (3,294,873)
                                   ------------
      Net investment in real
         estate assets...........   251,142,091
  Cash and cash equivalents......   141,578,197
  Interest and rent receivable...     1,195,299
  Unbilled rent receivable.......     7,458,980
  Loans..........................    42,498,111
  Other assets...................     5,005,762
                                   ------------
      TOTAL ASSETS...............  $448,878,440
                                   ============
LIABILITIES AND STOCKHOLDERS'
  EQUITY
  Liabilities
    Long-term debt...............  $ 73,204,167
    Accounts payable and accrued
      expenses...................     7,409,652
    Deferred revenue.............     6,418,038
    Lease deposits...............     7,728,195
                                   ------------
      Total liabilities..........    94,760,052
  Minority interest..............     2,137,500
  Stockholders' equity
    Preferred stock,.............            --
    Common stock,................        39,446
    Additional paid in capital...   361,753,969
    Accumulated deficit..........    (9,812,527)
                                   ------------
      Total stockholders'
         equity..................   351,980,888
                                   ------------
      TOTAL LIABILITIES AND
         STOCKHOLDERS' EQUITY....  $448,878,440
                                   ============

 
See accompanying notes to unaudited pro forma consolidated financial statements.
                                       F-3

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
            Unaudited Pro Forma Consolidated Statement of Operations
                     For the Six Months Ended June 30, 2005
 


                                                                                                         PROBABLE
                                                        COMPLETED ACQUISITION                          ACQUISITION
                                                             TRANSACTIONS                              TRANSACTIONS
                                                 ------------------------------------    PRO FORMA     ------------
                                                   DESERT        GULF                    EFFECT OF         GULF
                                                   VALLEY-      STATES-      VIBRA-      COMPLETED        STATES        COMPANY
                                   HISTORICAL    VICTORVILLE   COVINGTON    REDDING     TRANSACTIONS      HEALTH       PRO FORMA
                                   -----------   -----------   ---------   ----------   ------------   ------------   -----------
                                                                                                 
REVENUES
  Rent income....................  $11,393,116    $534,430(5)  $555,667(6) $1,124,461(7) $13,607,674    $1,022,076(8) $14,629,750
  Interest income from loans.....    2,329,189          --           --            --     2,329,189             --      2,329,189
                                   -----------    --------     --------    ----------   -----------     ----------    -----------
    Total revenues...............   13,722,305     534,430      555,667     1,124,461    15,936,863      1,022,076     16,958,939
EXPENSES
  Depreciation and
    amortization.................    1,816,403     115,315(5)   125,261(6)    274,550(7)   2,331,529       202,136(8)   2,533,665
  Property expenses..............       60,726          --           --            --        60,726             --         60,726
  General and administrative.....    3,105,151          --           --            --     3,105,151             --      3,105,151
                                   -----------    --------     --------    ----------   -----------     ----------    -----------
    Total operating expenses.....    4,982,280     115,315      125,261       274,550     5,497,406        202,136      5,699,542
                                   -----------    --------     --------    ----------   -----------     ----------    -----------
        Operating income.........    8,740,025     419,115      430,406       849,911    10,439,457        819,940     11,259,397
OTHER INCOME (EXPENSE)
  Interest income................      741,986          --           --            --       741,986             --        741,986
  Interest expense...............   (1,542,266)         --           --            --    (1,542,266)            --     (1,542,266)
                                   -----------    --------     --------    ----------   -----------     ----------    -----------
    Net other expense............     (800,280)         --           --            --      (800,280)            --       (800,280)
                                   -----------    --------     --------    ----------   -----------     ----------    -----------
      NET INCOME.................  $ 7,939,745    $419,115     $430,406    $  849,911   $ 9,639,177     $  819,940    $10,459,117
                                   ===========    ========     ========    ==========   ===========     ==========    ===========
      NET INCOME PER
        SHARE -- BASIC...........  $      0.30                                                                        $      0.27
      NET INCOME PER
        SHARE -- DILUTED.........  $      0.30                                                                        $      0.26
      WEIGHTED AVERAGE SHARES
        OUTSTANDING -- BASIC.....   26,096,813                                                                         39,459,836(9)
      WEIGHTED AVERAGE SHARES
        OUTSTANDING -- DILUTED...   26,105,844                                                                         39,468,867(9)

 
See accompanying notes to unaudited pro forma consolidated financial statements.
                                       F-4

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
            Unaudited Pro Forma Consolidated Statement of Operations
                      For the Year Ended December 31, 2004


 
                                                            COMPLETED ACQUISITION TRANSACTIONS
                                           ---------------------------------------------------------------------
                                                VIBRA        DESERT VALLEY-     GULF STATES-         VIBRA-
                             HISTORICAL      FACILITIES        VICTORVILLE        COVINGTON          REDDING
                             -----------   ---------------   ---------------   ---------------   ---------------
                                                                                  
REVENUES
  Rent income..............  $ 8,611,344     $ 9,774,139(10)   $3,228,104(11)    $1,443,520(12)    $2,259,422(13))
  Interest income from
    loans..................    2,282,115       2,754,934(10)           --                --                --
                             -----------     -----------       ----------        ----------        ----------
    Total revenues.........   10,893,459      12,529,073        3,228,104         1,443,520         2,259,422
EXPENSES
  Depreciation and
    amortization...........    1,478,470       1,660,526(10)      691,894(11)       285,484(12)       552,166(13)
  Property expenses........       93,502          93,502(10)           --                --                --
  General and
    administrative.........    5,057,284              --               --                --                --
  Costs of terminated
    acquisitions...........      585,345              --               --                --                --
                             -----------     -----------       ----------        ----------        ----------
    Total operating
      expense..............    7,214,601       1,754,028          691,894           285,484           552,166
                             -----------     -----------       ----------        ----------        ----------
      Operating income.....    3,678,858      10,775,045        2,536,210         1,158,036         1,707,256
OTHER INCOME (EXPENSE)
  Interest income..........      930,260              --               --                --                --
  Interest expense.........      (32,769)             --               --                --                --
                             -----------     -----------       ----------        ----------        ----------
    Net other income.......      897,491              --               --                --                --
                             -----------     -----------       ----------        ----------        ----------
      NET INCOME...........  $ 4,576,349     $10,775,045       $2,536,210        $1,158,036        $1,707,256
                             ===========     ===========       ==========        ==========        ==========
      NET INCOME PER
        SHARE -- BASIC.....  $      0.24
      NET INCOME PER
        SHARE -- DILUTED...  $      0.24
      WEIGHTED AVERAGE
        SHARES
     OUTSTANDING -- BASIC..   19,310,833
      WEIGHTED AVERAGE
        SHARES
        OUTSTANDING --
        DILUTED............   19,312,634
 

                                               PROBABLE
                                              ACQUISITION
                              PRO FORMA      TRANSACTIONS
                              EFFECT OF     ---------------
                              COMPLETED       GULF STATES         COMPANY
                             TRANSACTIONS       HEALTH           PRO FORMA
                             ------------   ---------------   ---------------
                                                     
REVENUES
  Rent income..............  $25,316,529      $2,044,150(14)    $27,360,679
  Interest income from
    loans..................    5,037,049              --          5,037,049
                             -----------      ----------        -----------
    Total revenues.........   30,353,578       2,044,150         32,397,728
EXPENSES
  Depreciation and
    amortization...........    4,668,540         404,271(14)      5,072,811
  Property expenses........      187,004              --            187,004
  General and
    administrative.........    5,057,284              --          5,057,284
  Costs of terminated
    acquisitions...........      585,345              --            585,345
                             -----------      ----------        -----------
    Total operating
      expense..............   10,498,173         404,271         10,902,444
                             -----------      ----------        -----------
      Operating income.....   19,855,405       1,639,879         21,495,284
OTHER INCOME (EXPENSE)
  Interest income..........      930,260              --            930,260
  Interest expense.........      (32,769)             --            (32,769)
                             -----------      ----------        -----------
    Net other income.......      897,491              --            897,491
                             -----------      ----------        -----------
      NET INCOME...........  $20,752,896      $1,639,879        $22,392,775
                             ===========      ==========        ===========
      NET INCOME PER
        SHARE -- BASIC.....                                     $      0.69
      NET INCOME PER
        SHARE -- DILUTED...                                     $      0.69
      WEIGHTED AVERAGE
        SHARES
     OUTSTANDING -- BASIC..                                      32,673,856(15)
      WEIGHTED AVERAGE
        SHARES
        OUTSTANDING --
        DILUTED............                                      32,675,657(15)

 
See accompanying notes to unaudited pro forma consolidated financial statements.
                                       F-5

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
         NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
ADJUSTMENTS FOR UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30,
2005
 
     (1) Record the $0.16 per share distribution declared and accrued in May
2005, and paid in July 2005, and the $0.17 per share distribution declared in
August 2005, payable in September 2005.
 

                                                                     
Shares of common stock outstanding at June 30,
  2005 and August, 2005.........................   26,082,862    39,292,885
Restricted shares issued to employees in April
  2005..........................................       82,000       676,180
                                                  -----------   -----------
Total shares....................................   26,164,862    39,969,065
Cash distribution per share.....................  $      0.16   $      0.17
                                                  -----------   -----------
Total cash distribution.........................  $ 4,186,378   $ 6,794,741   $10,981,119
                                                  ===========   ===========   ===========

 
     (2) Records the issuance of 13,175,023 common shares at a public offering
price of $10.50 per share less underwriting commission and other expenses,
calculated as follows:
 

                                                           
Number of Shares Offered....................................    13,175,023
Price per Share.............................................  $      10.50
                                                              ------------
Gross Proceeds..............................................  $138,337,742
Less: Underwriting discounts, commissions and other
  transaction costs.........................................    (9,851,292)
                                                              ------------
Net proceeds from offering..................................  $128,486,450
                                                              ============
Common stock at par value...................................  $     13,175
Additional paid in capital..................................   128,473,275
                                                              ------------
Less: Deferred offering costs incurred through June 30,
  2005......................................................    (2,371,283)
                                                              ------------
Net proceeds after deducting offering costs.................  $126,115,167
                                                              ============

 
     (3) Probable Acquisition: Records the acquisition of two Gulf States Health
facilities as though we acquired them on June 30, 2005. The Company has not
closed on the acquisition of these facilities, but the Company believes that the
acquisitions are probable.
 


                                                      COST               TOTAL FOR GULF STATES
                                          ----------------------------      HEALTH PROBABLE
                                          DENHAM SPRINGS     HAMMOND         ACQUISITIONS
                                          --------------   -----------   ---------------------
                                                                
Land...................................     $  428,571     $   734,643        $ 1,163,214
Building...............................      5,339,532       9,152,846         14,492,378
Intangible lease assets................        231,897         397,511            629,408
                                            ----------     -----------        -----------
Total cost.............................     $6,000,000     $10,285,000        $16,285,000
                                            ==========     ===========        ===========

 
                                       F-6

 
     (4) Records compensation expense related to restricted stock awards for
106,000 shares made to senior management upon completion of our initial public
offering and for 82,000 shares made to other employees on April 25, 2005,
calculated by multiplying the number of shares awarded times the price per share
of common stock in our initial public offering:
 

                                                           
Shares of common stock awarded..............................     188,000
Price per share of common stock in our initial public
  offering..................................................  $    10.50
                                                              ----------
Total value of shares awarded...............................  $1,974,000
                                                              ==========
Common stock at par value...................................  $      188
Additional paid in capital..................................   1,973,812
                                                              ----------
Pro forma adjustment to accumulated deficit.................  $1,974,000
                                                              ==========

 
     No adjustment for this is shown in the accompanying pro forma statement of
operations since the impact is non-recurring as defined in Regulation S-X
210.11-02(b)(5).
 
ADJUSTMENTS FOR UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 2005:
 
     (5) Completed Acquisition: Records six months of rent income for the Desert
Valley -- Victorville facility as though we owned it from January 1, 2005, to
June 30, 2005. This facility was acquired on February 28, 2005. Rent income is
based on the straight-line rent (as required by SFAS No. 13) in the lease
agreements between the Company and the lessee. Pro forma rent income for the
Desert Valley -- Victorville for the six months ended June 30, 2005 consists of
the following:
 


                                                                 RENT
                                                              -----------
                                                           
Annual rent income..........................................  $ 3,228,104
Rent income for six months of the first year................    1,614,052
Historical rent for the period February 28 - June 30,
  2005......................................................   (1,079,622)
                                                              -----------
Pro forma rent income.......................................  $   534,430
                                                              ===========

 
     Depreciation of buildings (straight line using a 40 year life) and
amortization of intangible lease assets (straight line using a fifteen year
life) for the six months ended June 30, 2005 as though the properties were
occupied on January 1, 2005.
 


                                                                              HISTORICAL
                                                                           DEPRECIATION AND
                                          ANNUAL        DEPRECIATION AND   AMORTIZATION FOR      PRO FORMA
                                     DEPRECIATION AND   AMORTIZATION FOR    FEBRUARY 28 -     DEPRECIATION AND
                          COST         AMORTIZATION        SIX MONTHS       JUNE 30, 2005       AMORTIZATION
                       -----------   ----------------   ----------------   ----------------   ----------------
                                                                               
Land.................  $ 2,000,000       $     --           $     --           $     --           $     --
Buildings............   24,994,553        624,864            312,432            208,288            104,144
Intangible lease
  assets.............    1,005,447         67,030             33,515             22,344             11,171
                       -----------       --------           --------           --------           --------
                       $28,000,000       $691,894           $345,947           $230,632           $115,315
                       ===========       ========           ========           ========           ========

 
     (6) Completed Acquisition: Records six months of rent income for the Gulf
States -- Covington facility as though we owned it from January 1, 2005, to June
30, 2005. Rent income is based on the straight-line rent (as required by SFAS
No. 13) in the lease agreements between the Company and the
 
                                       F-7

 
lessee. Pro forma rent income for the facility for the six months ended June 30,
2005 consists of the following:
 


                                                                 RENT
                                                              ----------
                                                           
Annual rent income..........................................  $1,252,210
Rent income for six months of the first year................  $  626,105
Historical rent from June 10 to June 30, 2005...............     (70,438)
                                                              ----------
Additional pro forma rent income............................  $  555,667
                                                              ==========

 
     Depreciation of the building (straight line using a 40-year life) and
amortization of the intangible lease assets (straight-line using a 15 year life)
for the six months ended June 30, 2005 as though the property was occupied on
January 1, 2005.
 


                                                                              HISTORICAL
                                                                           DEPRECIATION AND      ADDITIONAL
                                          ANNUAL        DEPRECIATION AND   AMORTIZATION FOR      PRO FORMA
                                     DEPRECIATION AND   AMORTIZATION FOR   JUNE 9-JUNE 30,    DEPRECIATION AND
                          COST         AMORTIZATION        SIX MONTHS            2005           AMORTIZATION
                       -----------   ----------------   ----------------   ----------------   ----------------
                                                                               
Land.................  $   821,429       $     --           $     --           $    --            $     --
Buildings............   10,234,101        255,853            127,927            14,220             113,707
Intangible lease
  assets.............      444,470         29,631             14,816             3,262              11,554
                       -----------       --------           --------           -------            --------
                       $11,500,000       $285,484           $142,743           $17,482            $125,261
                       ===========       ========           ========           =======            ========

 
     (7) Completed Acquisition: Records six months of rent income for the
Vibra -- Redding facility as though we owned it from January 1, 2005, to June
30, 2005. Rent income is based on the straight-line rent (as required by SFAS
No. 13) in the lease agreements between the Company and the lessee. Pro forma
rent income for the facility for the six months ended June 30, 2005 consists of
the following:
 


 
                                                           
Annual rent income..........................................  $2,259,422
Rent income for six months of the first year................  $1,129,711
Historical rent for the one day of June 30, 2005............      (5,250)
                                                              ----------
Additional pro forma rent income............................  $1,124,461
                                                              ==========

 
     Depreciation of buildings (straight line using a 40 year life) and
amortization of intangible lease assets (straight line using a fifteen year
life) for the three months ended June 30, 2005 as though the property was
occupied on January 1, 2005.
 


                                                                              HISTORICAL
                                          ANNUAL        DEPRECIATION AND   DEPRECIATION AND      PRO FORMA
                                     DEPRECIATION AND   AMORTIZATION FOR   AMORTIZATION FOR   DEPRECIATION AND
                          COST         AMORTIZATION        SIX MONTHS       JUNE 30, 2005       AMORTIZATION
                       -----------   ----------------   ----------------   ----------------   ----------------
                                                                               
Land.................  $        --       $     --           $     --           $    --            $     --
Buildings............   19,948,022        498,701            249,351             1,386             247,965
Intangible lease
  assets.............      801,978         53,465             26,733               148              26,585
                                         --------           --------           -------            --------
                                         $552,166           $276,084           $ 1,534            $274,550
                                         ========           ========           =======            ========

 
     (8) Probable Acquisition: Records six months of rent income for the two
Gulf States Health facilities as though we owned them from January 1, 2005, to
June 30, 2005. Rent income is based on the straight-line rent (as required by
SFAS No. 13) in the lease agreements between the Company and the lessee. Pro
 
                                       F-8

 
forma rent income for the two Gulf States Health facilities for the six months
ended June 30, 2005 consists of the following:
 


                                                            ANNUAL RENT   SIX MONTHS RENT
                                                            -----------   ---------------
                                                                    
Gulf States -- Denham Springs.............................  $  753,141      $  376,571
Gulf States -- Hammond....................................   1,291,009         645,505
                                                            ----------      ----------
                                                            $2,044,150      $1,022,076
                                                            ==========      ==========

 
     Depreciation of buildings (straight line using a 40 year life) and
amortization of intangibles (straight-line using a 15 year life) for the six
months ended June 30, 2005 as though the properties were occupied on January 1,
2005.
 


                                              COST
                                    ------------------------        ANNUAL        DEPRECIATION AND
                                      DENHAM                   DEPRECIATION AND   AMORTIZATION FOR
                                     SPRINGS       HAMMOND       AMORTIZATION        SIX MONTHS
                                    ----------   -----------   ----------------   ----------------
                                                                      
Land..............................  $  428,571   $   734,643       $     --           $     --
Buildings.........................   5,339,532     9,152,846        362,310            181,155
Intangible lease assets...........     231,897       397,511         41,961             20,981
                                    ----------   -----------       --------           --------
                                    $6,000,000   $10,285,000       $404,271           $202,136
                                    ==========   ===========       ========           ========

 
     (9) Pro forma weighted average shares outstanding, basic and diluted, are
calculated as follows:
 


                                                                BASIC       DILUTED
                                                              ----------   ----------
                                                                     
Historical..................................................  26,096,813   26,105,844
Effect of our initial public offering.......................  13,175,023   13,175,023
Restricted shares awarded to management and employees.......     188,000      188,000
                                                              ----------   ----------
Pro forma weighted average shares...........................  39,459,836   39,468,867
                                                              ==========   ==========

 
     The shares issued in our initial public offering and the restricted shares
awarded to management and employees are shown as though they were issued on
January 1, 2005.
 
                                       F-9

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
         NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
ADJUSTMENTS FOR UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2004:
 
     (10) Completed Acquisition: Records year of rent income for the six Vibra
initial property purchases as though we owned them from January 1, 2004, to
December 31, 2004. Rent income is based on the monthly straight-line rent (as
required by SFAS No. 13) for each property. Rent income from the Vibra
properties is as follows:
 


                                                               ANNUAL RENT
                                                               -----------
                                                            
Bowling Green...............................................   $ 5,471,964
Fresno......................................................     2,675,182
Kentfield...................................................     1,094,393
Marlton.....................................................     4,752,598
New Bedford.................................................     3,171,528
Denver......................................................     1,219,818
                                                               -----------
  TOTAL.....................................................    18,385,483
Historical rent income for July 1 - December 31, 2004.......     8,611,344
                                                               -----------
Pro forma rent income.......................................   $ 9,774,139
                                                               ===========

 
     Records interest income from loans to Vibra entities as though the loans
were made on January 1, 2004 and interest income was earned for the year ended
December 31, 2004, at the stated rate of 10.25%.
 


                                                                          ANNUAL INTEREST
                                                               LOANS          INCOME
                                                            -----------   ---------------
                                                                    
Bowling Green............................................   $11,771,389     $1,206,567
Fresno...................................................     6,561,308        672,534
Kentfield................................................     5,422,387        555,795
Marlton..................................................    11,203,366      1,148,345
New Bedford..............................................     8,361,930        857,098
Denver...................................................     5,821,564        596,710
                                                            -----------     ----------
  TOTAL..................................................   $49,141,944      5,037,049
                                                            ===========
Historical interest income for July 1 - December 31,
  2004...................................................                    2,282,115
                                                                            ----------
Pro forma interest income................................                   $2,754,934
                                                                            ==========

 
                                       F-10

 
     Depreciation of buildings (straight line using a 40 year life) and
amortization of intangible lease assets (straight line using a fifteen year
life) for the year ended December 31, 2004 as though the properties were
acquired on January 1, 2004.
 


                                                                                   TOTAL
                                                   ANNUAL         ANNUAL      DEPRECIATION AND
                                                DEPRECIATION   AMORTIZATION     AMORTIZATION
                                                ------------   ------------   ----------------
                                                                     
Bowling Green................................    $  839,268      $104,736        $  944,004
Fresno.......................................       409,080        51,204           460,284
Kentfield....................................       119,124        23,808           142,932
Marlton......................................       772,572        90,972           863,544
New Bedford..................................       494,304        60,384           554,688
Denver.......................................       150,324        23,220           173,544
                                                 ----------      --------        ----------
  TOTAL......................................     2,784,672       354,324         3,138,996
Historical depreciation and amortization for
  July 1 - December 31, 2004.................     1,311,757       166,713         1,478,470
                                                 ----------      --------        ----------
Pro forma depreciation and amortization......    $1,472,915      $187,611        $1,660,526
                                                 ==========      ========        ==========

 
     Property expenses consist primarily of payments for the ground lease at
Marlton for the year ended December 31, 2004.
 
     (11) Completed Acquisition: Records one year of rent income for the Desert
Valley -- Victorville facility as though we owned it from January 1, 2004, to
December 31, 2004. Rent income is based on the straight-line rent (as required
by SFAS No. 13) in the lease agreements between the Company and the lessee. Pro
forma rent income for the Desert Valley -- Victorville for the year ended
December 31, 2004 consists of the following:
 


                                                               ANNUAL RENT
                                                               -----------
                                                            
Desert Valley -- Victorville................................   $3,228,104

 
     Depreciation of buildings (straight line using a 40 year life) and
amortization of intangible lease assets (straight line using a fifteen year
life) for the year ended December 31, 2004 as though the properties were
occupied on January 1, 2004.
 


                                                                              ANNUAL
                                                                         DEPRECIATION AND
                                                              COST         AMORTIZATION
                                                           -----------   ----------------
                                                                   
Land.....................................................  $ 2,000,000       $     --
Buildings................................................   24,994,553        624,864
Intangible lease assets..................................    1,005,447         67,030
                                                           -----------       --------
                                                           $28,000,000       $691,894
                                                           ===========       ========

 
     (12) Completed Acquisition: Records one year of rent income for the Gulf
States -- Covington facility as though we owned it from January 1, 2004, to
December 31, 2004. Rent income is based on the straight-line rent (as required
by SFAS No. 13) in the lease agreements between the Company and the lessee. Pro
forma rent income for the facility for the year ended December 31, 2004 consists
of the following:
 


                                                               ANNUAL RENT
                                                               -----------
                                                            
Gulf States -- Covington....................................   $1,443,520

 
                                       F-11

 
     Depreciation of the building (straight line using a 40 year life) and
amortization of the intangible lease asset (straight-line using a fifteen year
life) for the year ended December 31, 2004 as though the properties were
acquired on January 1, 2004.
 


                                                                              ANNUAL
                                                                         DEPRECIATION AND
                                                              COST         AMORTIZATION
                                                           -----------   ----------------
                                                                   
Land.....................................................  $   821,429       $     --
Buildings................................................   10,234,101        255,853
Intangible lease assets..................................      444,470         29,631
                                                           -----------       --------
                                                           $11,500,000       $285,484
                                                           ===========       ========

 
     (13) Completed Acquisition: Records one year of rent income for the
Vibra -- Redding facility as though we owned it from January 1, 2004, to
December 31, 2004. Rent income is based on the straight-line rent (as required
by SFAS No. 13) in the lease agreements between the Company and the lessee. Pro
forma rent income for the facility for the year ended December 31, 2004 consists
of the following:
 


                                                               ANNUAL RENT
                                                               -----------
                                                            
Vibra -- Redding                                               $2,259,422

 
     Depreciation of the building (straight line using a 40 year life) and
amortization of the intangible lease asset (straight-line using a fifteen year
life) for the year ended December 31, 2004 as though the properties were
acquired on January 1, 2004.
 


                                                                              ANNUAL
                                                                         DEPRECIATION AND
                                                              COST         AMORTIZATION
                                                           -----------   ----------------
                                                                   
Buildings................................................  $19,948,022       $498,701
Intangible lease assets..................................      801,978         53,465
                                                           -----------       --------
                                                           $20,750,000       $552,166
                                                           ===========       ========

 
     (14) Probable Acquisition: Records one year of rent income for the three
Gulf States Health facilities as though we owned them from January 1, 2004, to
December 31, 2004. Rent income is based on the straight-line rent (as required
by SFAS No. 13) in the lease agreement between the Company and the lessee. Pro
forma rent income for the Gulf States Health facilities for the year ended
December 31, 2004 consists of the following:
 


                                                              ANNUAL RENT
                                                              -----------
                                                           
Gulf States -- Denham Springs...............................  $  753,141
Gulf States -- Hammond......................................   1,291,009
                                                              ----------
                                                              $2,044,150
                                                              ==========

 
     Depreciation of buildings (straight-line using a 40 year life) and
amortization of intangible lease assets (straight-line using a fifteen year
life) for the year ended December 31, 2004 as though the properties were
occupied on January 1, 2004.
 


                                                        COST                     ANNUAL
                                            -----------------------------   DEPRECIATION AND
                                            DENHAM SPRINGS     HAMMOND        AMORTIZATION
                                            --------------   ------------   ----------------
                                                                   
Land.....................................     $  428,571     $   734,643        $     --
Buildings................................      5,339,532       9,152,846         362,310
Intangible lease assets..................        231,897         397,511          41,961
                                              ----------     -----------        --------
                                              $6,000,000     $10,285,000        $404,271
                                              ==========     ===========        ========

 
                                       F-12

 
     (15) Pro forma weighted average shares outstanding, basic and diluted, are
calculated as follows:
 


                                                                BASIC       DILUTED
                                                              ----------   ----------
                                                                     
Historical..................................................  19,310,833   19,312,634
Effect of our initial public offering.......................  13,175,023   13,175,023
Restricted shares awarded to management and employees.......     188,000      188,000
                                                              ----------   ----------
Pro forma weighted average shares...........................  32,673,856   32,675,657
                                                              ==========   ==========

 
     The shares issued in our initial public offering and the restricted shares
     awarded to management and employees are shown as though they were issued on
     January 1, 2004.
 
     Staff Accounting Bulletin (SAB) Topic 1.B.3 requires that basic and diluted
earnings per share should be calculated based on the pro forma effect of shares
assumed to be issued when dividends are paid in excess of earnings. As of June
30, 2005, cumulative net income for 2004 and the six months ended June 30, 2005,
totaled $12,516,094. Cumulative distributions, including the distributions
declared May 20, 2005, and August 18, 2005, totaled $19,327,636, resulting in
excess distributions during the period of $6,811,542. The pro forma weighted
average shares in our unaudited consolidated statement of operations for the six
months ended June 30, 2005, assume the issuance of 648,718 shares at an offering
price of $10.50 per share, or proceeds of $6,811,542 to pay these distributions
in excess of net income. See unaudited Note 13 at page F-36 for related pro
forma presentation.
 
                                       F-13

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                          Consolidated Balance Sheets
                      June 30, 2005 and December 31, 2004
 


                                                              JUNE 30, 2005   DECEMBER 31, 2004
                                                              -------------   -----------------
                                                               (UNAUDITED)
                                                                        
                           ASSETS
Real estate assets
  Land......................................................  $ 13,491,429      $ 10,670,000
  Buildings and improvements................................   166,572,054       111,387,232
  Construction in progress..................................    50,529,769        24,318,098
  Intangible lease assets...................................     7,558,712         5,314,963
                                                              ------------      ------------
     Gross investment in real estate assets.................   238,151,964       151,690,293
  Accumulated depreciation..................................    (2,927,987)       (1,311,757)
  Accumulated amortization..................................      (366,886)         (166,713)
                                                              ------------      ------------
     Net investment in real estate assets...................   234,857,091       150,211,823
Cash and cash equivalents...................................    34,357,866        97,543,677
Interest and rent receivable................................     1,195,299           419,776
Unbilled rent receivable....................................     7,458,980         3,206,853
Loans.......................................................    48,498,111        50,224,069
Other assets................................................     7,377,045         4,899,865
                                                              ------------      ------------
TOTAL ASSETS................................................  $333,744,392      $306,506,063
                                                              ============      ============
 
            LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
  Debt......................................................  $ 73,204,167      $ 56,000,000
  Accounts payable and accrued expenses.....................    11,596,030        10,903,025
  Deferred revenue..........................................     6,418,038         3,578,229
  Lease deposit.............................................     7,728,195         3,296,365
                                                              ------------      ------------
     Total liabilities......................................    98,946,430        73,777,619
Minority interests..........................................     2,137,500         1,000,000
Stockholders' equity
  Preferred stock, $0.001 par value. Authorized 10,000,000
     shares; no shares outstanding..........................            --                --
  Common stock, $0.001 par value. Authorized 100,000,000
     shares; issued and outstanding -- 26,082,862 shares at
     June 30, 2005 and December 31, 2004....................        26,083            26,083
  Additional paid in capital................................   233,678,165       233,626,690
  Accumulated deficit.......................................    (1,043,786)       (1,924,329)
                                                              ------------      ------------
     Total stockholders' equity.............................   232,660,462       231,728,444
                                                              ------------      ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................  $333,744,392      $306,506,063
                                                              ============      ============

 
          See accompanying notes to consolidated financial statements.
                                       F-14

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Operations
                                  (Unaudited)
 


                                           FOR THE THREE MONTHS ENDED    FOR THE SIX MONTHS ENDED
                                           ---------------------------   -------------------------
                                             JUNE 30,       JUNE 30,      JUNE 30,      JUNE 30,
                                               2005           2004          2005          2004
                                           ------------   ------------   -----------   -----------
                                                                           
REVENUES
  Rent billed............................  $ 4,692,328    $        --    $ 8,615,377   $        --
  Unbilled rent..........................    1,432,298             --      2,777,739            --
  Interest income from loans.............    1,117,151             --      2,329,189            --
                                           -----------    -----------    -----------   -----------
     Total revenues......................    7,241,777             --     13,722,305            --
EXPENSES
  Real estate depreciation and
     amortization........................      973,996             --      1,816,403            --
  General and administrative.............    1,415,067      1,212,457      3,165,877     1,697,961
  Costs of terminated acquisitions.......           --        336,724             --       336,724
                                           -----------    -----------    -----------   -----------
     Total operating expenses............    2,389,063      1,549,181      4,982,280     2,034,685
                                           -----------    -----------    -----------   -----------
       Operating income (loss)...........    4,852,714     (1,549,181)     8,740,025    (2,034,685)
OTHER INCOME (EXPENSE)
  Interest income........................      358,214        479,289        741,986       479,289
  Interest expense.......................     (831,117)            --     (1,542,266)       (8,222)
                                           -----------    -----------    -----------   -----------
     Net other (expense) income..........     (472,903)       479,289       (800,280)      471,067
                                           -----------    -----------    -----------   -----------
       NET INCOME (LOSS).................  $ 4,379,811    $(1,069,892)   $ 7,939,745   $(1,563,618)
                                           ===========    ===========    ===========   ===========
       NET INCOME (LOSS) PER SHARE,
          BASIC..........................  $      0.17    $     (0.04)   $      0.30   $     (0.13)
       WEIGHTED AVERAGE SHARES
          OUTSTANDING -- BASIC...........   26,096,021     24,397,524     26,096,813    12,459,716
       NET INCOME (LOSS) PER SHARE,
          DILUTED........................  $      0.17    $     (0.04)   $      0.30   $     (0.13)
       WEIGHTED AVERAGE SHARES
          OUTSTANDING -- DILUTED.........   26,110,119     24,399,813     26,105,844    12,460,860

 
          See accompanying notes to consolidated financial statements.
                                       F-15

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Cash Flows
                                  (Unaudited)
 


                                                                FOR THE SIX MONTHS ENDED
                                                              -----------------------------
                                                              JUNE 30, 2005   JUNE 30, 2004
                                                              -------------   -------------
                                                                        
OPERATING ACTIVITIES
  Net income (loss).........................................  $  7,939,745    $ (1,563,618)
    Adjustments to reconcile net income (loss) to net cash
     provided by (used for) operating activities
      Depreciation and amortization.........................     1,886,454           1,784
      Amortization of deferred financing costs..............       449,762              --
      Unbilled rent revenue.................................    (2,777,739)             --
      Share based payments..................................       122,766              --
      Other adjustments.....................................      (129,768)             --
    Increase in:
      Interest and rent receivable..........................      (775,523)             --
      Other assets..........................................    (1,088,749)       (235,463)
    Increase (decrease) in:
      Accounts payable and accrued expenses.................    (3,493,372)        125,268
      Deferred revenue......................................     1,264,502              --
      Lease deposits........................................        70,493              --
                                                              ------------    ------------
  Net cash provided by (used for) operating activities......     3,468,571      (1,672,029)
INVESTING ACTIVITIES
    Real estate acquired....................................   (56,513,944)             --
    Principal received on loans receivable..................     7,725,958              --
    Investment in loans receivable..........................    (4,934,772)             --
    Construction in progress................................   (26,420,931)    (21,427,781)
    Equipment acquired......................................      (122,066)       (137,006)
                                                              ------------    ------------
  Net cash used for investing activities....................   (80,265,755)    (21,564,787)
FINANCING ACTIVITIES
    Addition to debt........................................    19,000,000              --
    Proceeds from loan payable..............................            --         200,000
    Payment of loan payable.................................            --        (300,000)
    Payments of debt........................................    (1,795,833)             --
    Deferred financing and offering costs...................    (1,786,178)             --
    Payments for deferred stock units.......................       (75,000)             --
    Distributions paid......................................    (2,869,116)             --
    Proceeds from sale of common shares, net of offering
     costs..................................................            --     233,738,967
    Sale of partnership units...............................     1,137,500              --
                                                              ------------    ------------
  Net cash provided by financing activities.................    13,611,373     233,638,967
                                                              ------------    ------------
  Increase in cash and cash equivalents for period..........   (63,185,811)    210,402,151
    Cash and cash equivalents at beginning of period........    97,543,677         100,000
                                                              ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $ 34,357,866    $210,502,151
                                                              ============    ============
Interest paid, net of capitalized interest of $1,003,779 in
  2005......................................................  $  2,096,283    $         --
Supplemental schedule of non-cash investing activities:
  Unbilled rent receivables recorded as deferred revenue....  $  1,474,387              --
  Additions to real estate and loans receivable recorded as
    lease and loan deposits.................................     8,773,312              --
  Additions to real estate and loans receivable recorded as
    deferred revenue........................................       389,309              --
Supplemental schedule of non-cash financing activities:
  Additions to stockholders equity from share based
    payments................................................  $    126,475    $         --
  Distributions declared, unpaid............................     4,186,377              --

 
          See accompanying notes to consolidated financial statements.
                                       F-16

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
                                  (UNAUDITED)
 
1.  ORGANIZATION
 
     Medical Properties Trust, Inc., a Maryland corporation (the Company), was
formed on August 27, 2003 under the General Corporation Law of Maryland for the
purpose of engaging in the business of investing in and owning commercial real
estate. The Company's operating partnership subsidiary, MPT Operating
Partnership, L.P. (the Operating Partnership), was formed in September 2003.
Through another wholly owned subsidiary, Medical Properties Trust, LLC, the
Company is the sole general partner of the Operating Partnership. The Company
owns directly all of the limited partnership interests in the Operating
Partnership.
 
     The Company succeeded to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed in December 2002. On the
day of formation, the Company issued 1,630,435 shares of common stock, and the
membership interests of Medical Properties Trust, LLC were transferred to the
Company. Medical Properties Trust, LLC had no assets, but had incurred
liabilities for costs and expenses related to acquisition due diligence, a
planned offering of common stock, consulting fees and office overhead in an
aggregate amount of approximately $423,000, which was assumed by the Operating
Partnership.
 
     The Company's primary business strategy is to acquire and develop real
estate and improvements, primarily for long term lease to providers of
healthcare services such as operators of general acute care hospitals, inpatient
physical rehabilitation hospitals, long-term acute care hospitals, surgery
centers, centers for treatment of specific conditions such as cardiac,
pulmonary, cancer, and neurological hospitals, and other healthcare-oriented
facilities. The Company considers this to be a single business segment as
defined in Statement of Financial Accounting Standard (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related Information.
 
     On April 6, 2004, the Company completed the sale of 25.6 million shares of
common stock in a private placement to qualified institutional buyers and
accredited investors. The Company received $233.5 million after deducting
offering costs. The proceeds are being used to purchase properties, to pay debt
and accrued expenses and for working capital and general corporate purposes.
 
     On July 13, 2005, the Company completed the sale of 11,365,000 shares of
common stock in an initial public offering (IPO) at a price of $10.50 per share.
On August 5, 2005, the underwriters purchased an additional 1,810,023 shares at
the same offering price, less an underwriting commission of seven percent and
expenses pursuant to their over-allotment option. (See Note 7).
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Use of Estimates:  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
     Principles of Consolidation:  Property holding entities and other
subsidiaries of which the Company owns 100% of the equity or has a controlling
financial interest evidenced by ownership of a majority voting interest are
consolidated. All inter-company balances and transactions are eliminated. For
entities in which the Company owns less than 100% of the equity interest, the
Company consolidates the property if it has the direct or indirect ability to
make decisions about the entities' activities based upon the terms of the
respective entities' ownership agreements. For entities in which the Company
owns less than 100% and
 
                                       F-17

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 -- (CONTINUED)
 
does not have the direct or indirect ability to make decisions but does exert
significant influence over the entities' activities, the Company records its
ownership in the entity using the equity method of accounting.
 
     The Company periodically evaluates all of its transactions and investments
to determine if they represent variable interests in a variable interest entity
as defined by FASB Interpretation No. 46 (revised December 2003) (FIN 46-R).
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements. If the Company
determines that it has a variable interest in a variable interest entity, the
Company determines if it is the primary beneficiary of the variable interest
entity. The Company consolidates each variable interest entity in which the
Company, by virtue of its transactions with or investments in the entity, is
considered to be the primary beneficiary. The Company re-evaluates its status as
primary beneficiary when a variable interest entity or potential variable
interest entity has a material change in its variable interests.
 
     Unaudited Interim Consolidated Financial Statements:  The accompanying
unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
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 three month and six
month periods ended June 30, 2005, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005.
 
3.  REAL ESTATE AND LENDING ACTIVITIES
 
     In February 2005, Vibra Healthcare, LLC (Vibra) repaid $7.8 million of
principal and interest on its loans from the Company. The payments left a $41.4
million loan payable to the Company by Vibra. The Company has no commitments to
make additional loans to Vibra.
 
     In February 2005, the Company purchased a general acute care hospital
(Victorville) for $28.0 million. The purchase price was paid from loan proceeds
and from the proceeds of the Company's private placement. Upon closing the
purchase of the hospital, the Company and the seller entered into a 15 year
lease of the hospital back to the seller, with renewal options for three
additional five year terms.
 
     In June 2005, the Company completed two transactions with the owner of two
long-term acute care hospitals. In one transaction, the Company purchased a
long-term acute care hospital (Covington) for $11.5 million. The purchase price
was paid from loan proceeds and from the proceeds of the Company's private
placement. Upon closing the purchase of Covington, the Company and the seller
entered into a 15 year lease of the hospital back to the seller, with renewal
options for three additional five year terms. In a second transaction, in
connection with our proposed acquisition of another long-term acute care
hospital (Denham Springs) from the same owner, the Company made a 15 year,
interest only mortgage loan of $6.0 million, $500,000 of which is being held in
escrow pending the resolution of certain environmental issues regarding the
facility. If these environmental issues are resolved to the Company's
satisfaction, the escrowed funds will be released and the Company will proceed
to acquire Denham Springs. The loan accrues interest at a rate of 10.5% per
year, subject to escalation, and provides for monthly payments of interest only.
 
     In June 2005, the Company purchased a rehabilitation hospital
(Vibra-Redding) for $20.75 million from Vibra. The purchase price was paid from
loan proceeds and from the proceeds of the Company's private placement. Upon
closing the purchase of Vibra-Redding, the Company and Vibra entered into a 15
year lease of the hospital back to Vibra, with renewal options for three
additional five year terms. The lease is cross-defaulted with the Company's
other Vibra loan and leases. The Company has withheld
 
                                       F-18

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 -- (CONTINUED)
 
$2.75 million of the purchase price contingent on conversion of the facility to
a long-term acute care hospital and other facility improvements which the
Company expects the lessee to make during the next 12 months. If the conversion
and improvements are not made, the Company has no obligation to pay the withheld
amounts.
 
     In June 2005, the Company closed on a loan with a local operator to fund
the construction and development of a community hospital (North Cypress). The
total loan commitment is approximately $64.0 million. The Company has the option
to purchase North Cypress at the end of construction at which time the Company
will enter into a 15 year lease with the operator. During the construction
phase, the Company also plans to purchase the land, currently being subleased by
the Company, on which North Cypress is being built. The Company has advanced
approximately $1.9 million to the operator at June 30, 2005, for construction of
the facility. The Company has included this transaction in construction in
progress in its consolidated balance sheet at June 30, 2005.
 
     The Company has recorded the following assets from the acquisitions of
Victorville, Covington and Vibra-Redding:
 

                                                           
Land........................................................  $ 2,821,429
Buildings...................................................   55,184,822
Intangible lease assets.....................................    2,243,749
                                                              -----------
                                                              $60,250,000
                                                              ===========

 
4.  DEBT
 
     At June 30, 2005, the Company had outstanding borrowings of approximately
$73.2 million pursuant to a term loan agreement. The loan agreement requires
monthly payments based on a 20 year amortization schedule and interest at the
one month London Interbank Offered Rate (LIBOR) plus 300 basis points (6.56% at
June 30, 2005). The loan is secured by six Vibra facilities, which have a book
value of $125.9 million, and requires the Company to meet financial coverage,
ratio and total debt covenants typical of such loans. On August 4, 2005, the
Company prepaid $31.9 million of principal on the term loan.
 
     Maturities of debt at June 30, 2005, for each successive twelve month
period are as follows:
 

                                                           
2006........................................................  $ 3,750,000
2007........................................................    3,750,000
2008........................................................   65,704,167
                                                              -----------
                                                              $73,204,167
                                                              ===========

 
     The Company has signed a term sheet with the same lender for a $100 million
revolving credit facility to replace the existing loan.
 
5.  STOCK AWARDS
 
     In February 2005, the Company awarded 7,500 deferred stock units valued at
$10.00 per share to three new independent directors elected to the Company's
board. The total value of $75,000 was recorded as additional paid-in-capital in
the consolidated balance sheet and an expense in the consolidated income
statement on the date of the awards. The Company also awarded 60,000 stock
options to the new directors, of which one-third vested immediately, one-third
vest one year from the date of grant, and one-third vest two years from the date
of grant. The Company follows APB No. 25 and related Interpretations
 
                                       F-19

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 -- (CONTINUED)
 
in accounting for stock options. In accordance with APB No. 25, no compensation
expense has been recorded for stock options.
 
     In April 2005, the Company awarded to employees 82,000 shares of restricted
common stock valued at $10.00 per share. Fifty-two thousand of these shares vest
over a period of five years beginning one year from the date of the Company's
IPO (July 7, 2005). Thirty thousand of these shares vest quarterly over a three
year period beginning September 30, 2005. The Company is recording compensation
expense over the vesting period.
 
6.  EARNINGS PER SHARE
 
     The following is a reconciliation of the weighted average shares used in
net income per common share to the weighted average shares used in net income
per common share -- assuming dilution for the six months ended June 2005 and
2004, respectively:
 


                                        FOR THE THREE MONTHS       FOR THE SIX MONTHS
                                           ENDED JUNE 30,            ENDED JUNE 30,
                                       -----------------------   -----------------------
                                          2005         2004         2005         2004
                                       ----------   ----------   ----------   ----------
                                                                  
Historical weighted average shares
Weighted average number of shares
  issued and outstanding.............  26,082,862   24,397,524   26,082,862   12,459,716
Vested deferred stock units..........      13,159           --       13,951           --
                                       ----------   ----------   ----------   ----------
Weighted average shares -- basic.....  26,096,021   24,397,524   26,096,813   12,459,716
Common stock warrants and options....      14,098        2,289        9,031        1,144
                                       ----------   ----------   ----------   ----------
Weighted average shares -- diluted...  26,110,119   24,399,813   26,105,844   12,460,860
                                       ==========   ==========   ==========   ==========

 
     Staff Accounting Bulletin (SAB) Topic 1.B.3 requires that basic and diluted
earnings per share must be calculated based on the pro forma effect of shares
assumed to be issued in an initial public offering when dividends are paid in
excess of earnings. As of June 30, 2005, cumulative net income for 2004 and the
six months ended June 30, 2005, totaled $12,516,094. Cumulative distributions,
including the distributions declared May 20, 2005, and August 18, 2005, totaled
$19,327,636, resulting in excess distributions during this period of $6,811,542.
The pro forma weighted average shares in the table below assumes the issuance of
648,718 shares at an offering price of $10.50 per share, or proceeds of
$6,811,542, to pay these distributions in excess of net income.
 


                                                                BASIC       DILUTED
                                                              ----------   ----------
                                                                     
Pro forma weighted average shares for the six months ended
  June 30, 2005:
  Historical from above.....................................  26,096,813   26,105,844
  Pro forma effect of assumed additional shares.............     648,718      648,718
                                                              ----------   ----------
  Pro forma weighted average shares.........................  26,745,531   26,754,562
                                                              ==========   ==========
Pro forma earnings per share................................  $     0.30   $     0.30
                                                              ==========   ==========

 
     The pro forma effect of this excess distribution of $6,811,542 on the June
30, 2005 consolidated balance sheet would be to reduce cash and cash equivalents
to a balance of $90,732,135 and to increase the accumulated deficit to a balance
of $8,735,871.
 
                                       F-20

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 -- (CONTINUED)
 
7.  INITIAL PUBLIC OFFERING AND ISSUANCE OF COMMON STOCK
 
     On July 13, 2005, the Company completed the sale of 11,365,000 shares of
common stock in its IPO at a price of $10.50 per share, less underwriters'
discount and expenses. On August 5, 2005, the underwriters exercised their
option to purchase an additional 1,810,023 shares at the same offering price,
less underwriters' discount and expenses. Our proceeds from the IPO and exercise
of the over-allotment option, before deducting offering costs of $2.4 million at
June 30, 2005, are as follows:
 


 
                                                           
Gross proceeds..............................................  $138,337,742
Underwriters' discount......................................    (9,683,642)
Expenses....................................................      (167,650)
                                                              ------------
Net proceeds................................................  $128,486,450
                                                              ============

 
8.  COMMITMENTS AND CONTINGENCIES
 
     The Company entered into two ground leases for its North Cypress
development project. Under the ground lease covering the larger tract of land,
the Company has the right to purchase the land during the construction phase.
The Company currently intends to exercise its purchase rights. Under the ground
lease covering the smaller tract of land, the Company can terminate the lease
when certain specified improvements are made to the larger land tract. The
Company currently intends to make such improvements during the construction
phase of the project. The ground leases are for 99 years and require payments of
approximately $502,000 during each of the first five years of the leases. The
Company is subleasing the land to the tenant in an amount and for a term equal
to the lease payments which the Company makes to the owners of the land.
However, collection of the sublease rent is being deferred until completion of
construction at which time the tenant will begin making all previously deferred
sublease payments.
 
     Upon the acquisition of the Vibra-Redding facility, the Company assumed a
ground lease with a remaining term of approximately 70 years. The Company's
lease of the facility to Vibra requires that Vibra make all ground lease
payments to the ground lessor. The ground lease payments are approximately
$21,000 per year, escalating at four percent per year for the remaining term of
the ground lease.
 
                                       F-21

 
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Medical Properties Trust, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Medical
Properties Trust, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the year ended December 31, 2004 and for the
period from inception (August 27, 2003) to December 31, 2003. In connection with
our audits of the consolidated financial statements, we have also audited the
accompanying financial statement Schedule III. These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
 
     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medical
Properties Trust, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for the year ended December
31, 2004 and for the period from inception (August 27, 2003) to December 31,
2003 in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
 
                                            /s/ KPMG LLP
 
Birmingham, Alabama
March 16, 2005
 
                                       F-22

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                          Consolidated Balance Sheets
                    December 31, 2004 and December 31, 2003
 


                                                              DECEMBER 31, 2004   DECEMBER 31, 2003
                                                              -----------------   -----------------
                                                                            
                           ASSETS
Real estate assets
  Land......................................................    $ 10,670,000         $        --
  Buildings and improvements................................     111,387,232                  --
  Construction in progress..................................      24,318,098             166,301
  Intangible lease assets...................................       5,314,963                  --
                                                                ------------         -----------
     Gross investment in real estate assets.................     151,690,293             166,301
  Accumulated depreciation..................................      (1,311,757)                 --
  Accumulated amortization..................................        (166,713)                 --
                                                                ------------         -----------
     Net investment in real estate assets...................     150,211,823             166,301
Cash and cash equivalents...................................      97,543,677             100,000
Interest receivable.........................................         419,776                  --
Unbilled rent receivable....................................       3,206,853                  --
Loans receivable............................................      50,224,069                  --
Other assets................................................       4,899,865             201,832
                                                                ------------         -----------
TOTAL ASSETS................................................    $306,506,063         $   468,133
                                                                ============         ===========
 
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
  Long-term debt............................................    $ 56,000,000         $        --
  Accounts payable and accrued expenses.....................      10,903,025           1,389,779
  Deferred revenue..........................................       3,578,229                  --
  Lease deposit.............................................       3,296,365                  --
  Loan payable..............................................              --             100,000
                                                                ------------         -----------
     Total liabilities......................................      73,777,619           1,489,779
Minority interest...........................................       1,000,000                  --
Stockholders' equity (deficit)
  Preferred stock, $0.001 par value. Authorized 10,000,000
     shares; no shares outstanding..........................              --                  --
  Common stock, $0.001 par value. Authorized 100,000,000
     shares; issued and outstanding  -- 26,082,862 shares at
     December 31, 2004 and 1,630,435 shares at December 31,
     2003...................................................          26,083               1,630
  Additional paid in capital................................     233,626,690                  --
  Accumulated deficit.......................................      (1,924,329)         (1,023,276)
                                                                ------------         -----------
     Total stockholders' equity (deficit)...................     231,728,444          (1,021,646)
                                                                ------------         -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........    $306,506,063         $   468,133
                                                                ============         ===========

 
          See accompanying notes to consolidated financial statements.
                                       F-23

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Operations
                    For The Year Ended December 31, 2004 and
       Period from Inception (August 27, 2003) through December 31, 2003
 


                                                             YEAR ENDED      PERIOD FROM INCEPTION
                                                            DECEMBER 31,       (AUGUST 27, 2003)
                                                                2004       THROUGH DECEMBER 31, 2003
                                                            ------------   -------------------------
                                                                     
REVENUES
  Rent billed.............................................  $ 6,162,278           $        --
  Unbilled rent...........................................    2,449,066                    --
  Interest income from loans..............................    2,282,115                    --
                                                            -----------           -----------
     Total revenues.......................................   10,893,459                    --
EXPENSES
  Real estate depreciation................................    1,311,757                    --
  Amortization of intangible lease assets.................      166,713                    --
  Other property expenses.................................       93,502                    --
  General and administrative..............................    5,057,284               992,418
  Costs of terminated acquisitions........................      585,345                30,858
                                                            -----------           -----------
     Total operating expenses.............................    7,214,601             1,023,276
                                                            -----------           -----------
       Operating income (loss)............................    3,678,858            (1,023,276)
OTHER INCOME (EXPENSE)
  Interest income.........................................      930,260                    --
  Interest expense........................................      (32,769)                   --
                                                            -----------           -----------
     Net other income.....................................      897,491                    --
                                                            -----------           -----------
       NET INCOME (LOSS)..................................  $ 4,576,349           $(1,023,276)
                                                            ===========           ===========
       NET INCOME (LOSS) PER SHARE, BASIC.................  $      0.24           $     (0.63)
       WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC.........   19,310,833             1,630,435
       NET INCOME (LOSS) PER SHARE, DILUTED...............  $      0.24           $     (0.63)
       WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED.......   19,312,634             1,630,435

 
          See accompanying notes to consolidated financial statements.
                                       F-24

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                     Consolidated Statements of Cash Flows
                    For The Year Ended December 31, 2004 and
       Period from Inception (August 27, 2003) through December 31, 2003
 


                                                                                    PERIOD FROM INCEPTION
                                                                 YEAR ENDED       (AUGUST 27, 2003) THROUGH
                                                              DECEMBER 31, 2004       DECEMBER 31, 2003
                                                              -----------------   --------------------------
                                                                            
OPERATING ACTIVITIES
  Net income (loss).........................................    $   4,576,349            $(1,023,276)
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities
      Depreciation and amortization.........................        1,517,530                     --
      Unbilled rent revenue.................................       (2,449,066)                    --
      Warrant issued to lender..............................           24,500                     --
      Deferred stock units issued to directors..............          125,000                     --
    Increase in:
      Interest receivable...................................         (419,776)                    --
      Other assets..........................................         (309,769)                    --
    Increase in:
      Accounts payable and accrued expenses.................        6,644,130              1,391,409
      Deferred revenue......................................          210,000                     --
                                                                -------------            -----------
  Net cash provided by operating activities.................        9,918,898                368,133
INVESTING ACTIVITIES
    Real estate acquired....................................     (127,372,195)                    --
    Loans receivable........................................      (44,317,263)                    --
    Construction in progress................................      (23,151,797)              (166,301)
    Equipment acquired......................................         (759,387)                    --
                                                                -------------            -----------
  Net cash used for investing activities....................     (195,600,642)              (166,301)
FINANCING ACTIVITIES
    Addition to long-term debt..............................       56,000,000                     --
    Proceeds from loan payable..............................          200,000                100,000
    Payment of loan payable.................................         (300,000)                    --
    Deferred financing costs................................       (3,869,767)              (201,832)
    Distributions paid......................................       (2,608,286)                    --
    Sale of common stock, net of offering costs.............      233,703,474                     --
                                                                -------------            -----------
  Net cash provided by (used for) financing activities......      283,125,421               (101,832)
                                                                -------------            -----------
  Increase in cash and cash equivalents for period..........       97,443,677                100,000
    Cash at beginning of period.............................          100,000                     --
                                                                -------------            -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................    $  97,543,677            $   100,000
                                                                =============            ===========
Supplemental schedule of non-cash investing activities:
  Additions to unbilled rent receivables recorded as
    deferred revenue........................................    $     757,787            $        --
  Additions to loans receivable recorded as lease deposits
    and deferred revenue....................................        5,906,807                     --
Supplemental schedule of non-cash financing activities:
    Minority interest granted for contribution of land to
      development project...................................        1,000,000                     --
    Distributions declared, not paid........................        2,869,116                     --
    Deferred offering costs charged to proceeds from sale of
      common stock..........................................          201,832                     --
    Additional paid in capital from deferred stock units
      issued to directors...................................          125,000                     --
    Conversion of accounts payable and accrued expenses to
      common stock..........................................               --                  1,630
Interest expense paid.......................................           32,769                     --

 
          See accompanying notes to consolidated financial statements.
                                       F-25

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
           Consolidated Statements of Stockholders' Equity (Deficit)
                      For the Year Ended December 31, 2004
     and Period from Inception (August 27, 2003) through December 31, 2003
 


                                PREFERRED                COMMON                                               TOTAL
                            ------------------   ----------------------   ADDITIONAL PAID   ACCUMULATED   STOCKHOLDERS'
                            SHARES   PAR VALUE     SHARES     PAR VALUE     IN CAPITAL        DEFICIT        EQUITY
                            ------   ---------   ----------   ---------   ---------------   -----------   -------------
                                                                                     
BALANCE AT INCEPTION
  (AUGUST 27, 2003).......     --      $  --             --    $    --     $         --     $        --   $         --
  Issuance of common
    stock.................     --         --      1,630,435      1,630               --              --          1,630
  Net loss................     --         --             --         --               --      (1,023,276)    (1,023,276)
                             ----      -----     ----------    -------     ------------     -----------   ------------
BALANCE AT DECEMBER 31,
  2003....................     --         --      1,630,435      1,630               --      (1,023,276)    (1,021,646)
  Redemption of founders'
    shares................     --         --     (1,108,527)    (1,108)           1,108              --             --
  Issuance of common stock
    in private placement
    (net of offering
    costs)................     --         --     25,560,954     25,561      233,476,082              --    233,501,643
  Value of warrants
    issued................     --         --             --         --           24,500              --         24,500
  Deferred stock units
    issued to directors...     --         --             --         --          125,000              --        125,000
  Distributions declared
    ($.21 per common
    share)................     --         --             --         --               --      (5,477,402)    (5,477,402)
  Net income..............     --         --             --         --               --       4,576,349      4,576,349
                             ----      -----     ----------    -------     ------------     -----------   ------------
BALANCE AT DECEMBER 31,
  2004....................     --      $  --     26,082,862    $26,083     $233,626,690     $(1,924,329)  $231,728,444
                             ====      =====     ==========    =======     ============     ===========   ============

 
          See accompanying notes to consolidated financial statements.
                                       F-26

 
                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
       PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003
 
1.  ORGANIZATION
 
     Medical Properties Trust, Inc., a Maryland corporation (the Company), was
formed on August 27, 2003 under the General Corporation Law of Maryland for the
purpose of engaging in the business of investing in and owning commercial real
estate. The Company's operating partnership subsidiary, MPT Operating
Partnership, L.P. (the Operating Partnership), was formed in September 2003.
Through another wholly owned subsidiary, Medical Properties Trust, LLC, the
Company is the sole general partner of the Operating Partnership. The Company
presently owns directly all of the limited partnership interests in the
Operating Partnership.
 
     The Company succeeded to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed in December 2002. On the
day of formation, the Company issued 1,630,435 shares of common stock, and the
membership interests of Medical Properties Trust, LLC were transferred to the
Company. Medical Properties Trust, LLC had no assets, but had incurred
liabilities for costs and expenses related to acquisition due diligence, a
planned offering of common stock, consulting fees and office overhead in an
aggregate amount of approximately $423,000, which was assumed by the Operating
Partnership and has been included in the accompanying consolidated statement of
operations.
 
     The Company's primary business strategy is to acquire and develop real
estate and improvements, primarily for long term lease to providers of
healthcare services such as operators of inpatient physical rehabilitation
hospitals, long-term acute care hospitals, surgery centers, centers for
treatment of specific conditions such as cardiac, pulmonary, cancer, and
neurological hospitals, and other healthcare-oriented facilities. The Company
considers this to be a single business segment as defined in Statement of
Financial Accounting Standard (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information.
 
     On April 6, 2004, the Company completed the sale of 25.6 million shares of
common stock in a private placement to qualified institutional buyers and
accredited investors. The Company received $233.5 million after deducting
offering costs. The proceeds are being used to purchase properties, to pay debt
and accrued expenses and for working capital and general corporate purposes.
 
     The Company has filed with the Securities and Exchange Commission (SEC) a
Form S-11 registration statement for an Initial Public Offering (IPO) of common
stock. The Company has not determined the number of shares nor price per share
to be offered in the IPO.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Use of Estimates:  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
     Principles of Consolidation:  Property holding entities and other
subsidiaries of which the Company owns 100% of the equity or has a controlling
financial interest evidenced by ownership of a majority voting interest are
consolidated. All inter-company balances and transactions are eliminated. For
entities in which the Company owns less than 100% of the equity interest, the
Company consolidates the property if it has the direct or indirect ability to
make decisions about the entities' activities based upon the terms of the
respective entities' ownership agreements. For entities in which the Company
owns less than 100% and does not have the direct or indirect ability to make
decisions but does exert significant influence over the entities' activities,
the Company records its ownership in the entity using the equity method of
accounting.
                                       F-27

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
     The Company periodically evaluates all of its transactions and investments
to determine if they represent variable interests in a variable interest entity
as defined by FASB Interpretation No. 46 (revised December 2003) (FIN 46-R),
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial Statements. If the Company
determines that it has a variable interest in a variable interest entity, the
Company determines if it is the primary beneficiary of the variable interest
entity. The Company consolidates each variable interest entity in which the
Company, by virtue of its transactions with or investments in the entity, is
considered to be the primary beneficiary. The Company re-evaluates its status as
primary beneficiary when a variable interest entity or potential variable
interest entity has a material change in its variable interests.
 
     Cash and Cash Equivalents:  Certificates of deposit and short-term
investments with remaining maturities of three months or less when acquired and
money-market mutual funds are considered cash equivalents.
 
     Deferred Costs:  Costs incurred prior to the completion of offerings of
stock or other capital instruments that directly relate to the offering are
deferred and netted against proceeds received from the offering. Costs incurred
in connection with anticipated financings and refinancing of debt are
capitalized as deferred financing costs in other assets and amortized over the
lives of the related loans as an addition to interest expense to produce a
constant effective yield on the loan (interest method). Costs that are
specifically identifiable with, and incurred prior to the completion of,
probable acquisitions are deferred and capitalized upon closing. The Company
begins deferring costs when the Company and the seller have executed a letter of
intent (LOI), commitment letter or similar document for the purchase of the
property by the Company. Deferred acquisition costs are expensed when management
determines that the acquisition is no longer probable. Leasing commissions and
other leasing costs directly attributable to tenant leases are capitalized as
deferred leasing costs and amortized on the straight-line method over the terms
of the related lease agreements. Costs identifiable with loans made to lessees
are recognized as a reduction in interest income over the life of the loan by
the interest method.
 
     Revenue Recognition:  The Company receives income from operating leases
based on the fixed, minimum required rents (base rent) and from additional rent
based on a percentage of tenant revenues once the tenant's revenue has exceeded
an annual threshold (percentage rent). Rent revenue is recorded on the
straight-line method over the terms of the related lease agreements for new
leases and the remaining terms of existing leases for acquired properties. The
straight-line method records the periodic average amount of rent earned over the
term of a lease, taking into account contractual rent increases over the lease
term. The straight-line method has the effect of recording more rent revenue
from a lease than a tenant is required to pay during the first half of the lease
term. During the last half of a lease term, this effect reverses with less rent
revenue recorded than a tenant is required to pay. Rent revenue as recorded on
the straight-line method in the consolidated statement of operations is shown as
two amounts. Billed rent revenue is the amount of rent actually billed to the
customer each period as required by the lease. Unbilled rent revenue is the
difference between rent revenue earned based on the straight-line method and the
amount recorded as billed rent revenue. These differences between rental
revenues earned and amounts due per the respective lease agreements are charged,
as applicable, to unbilled rent receivable. Percentage rents are recognized in
the period in which revenue thresholds are met. Rental payments received prior
to their recognition as income are classified as rent received in advance.
 
     Fees received from development and leasing services for lessees are
initially recorded as deferred revenue and recognized as income over the initial
term of an operating lease to produce a constant effective yield on the lease
(interest method). Fees from lending services are recorded as deferred revenue
and recognized as income over the life of the loan using the interest method.
 
                                       F-28

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
     Acquired Real Estate Purchase Price Allocation:  The Company allocates the
purchase price of acquired properties to net tangible and identified intangible
assets acquired based on their fair values in accordance with the provisions of
SFAS No. 141, Business Combinations. In making estimates of fair values for
purposes of allocating purchase prices, the Company utilizes a number of
sources, including independent appraisals that may be obtained in connection
with the acquisition or financing of the respective property and other market
data. The Company also considers information obtained about each property as a
result of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
 
     The Company records above-market and below-market in-place lease values, if
any, for its facilities which are based on the present value (using an interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease. The Company amortizes any resulting
capitalized above-market lease values as a reduction of rental income over the
remaining non-cancelable terms of the respective leases. The Company amortizes
any resulting capitalized below-market lease values as an increase to rental
income over the initial term and any fixed-rate renewal periods in the
respective leases. Because the Company's strategy largely involves the
origination of long term lease arrangements at market rates, management does not
expect the above-market and below-market in-place lease values to be significant
for many anticipated transactions.
 
     The Company measures the aggregate value of other intangible assets to be
acquired based on the difference between (i) the property valued with existing
in-place leases adjusted to market rental rates and (ii) the property valued as
if vacant. Management's estimates of value are expected to be made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis include an estimate
of carrying costs during hypothetical expected lease-up periods considering
current market conditions, and costs to execute similar leases. Management also
considers information obtained about each targeted facility as a result of
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired. In estimating
carrying costs, management also includes real estate taxes, insurance and other
operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, which are expected to range primarily from three to
eighteen months, depending on specific local market conditions. Management also
estimates costs to execute similar leases including leasing commissions, legal
and other related expenses to the extent that such costs are not already
incurred in connection with a new lease origination as part of the transaction.
 
     The total amount of other intangible assets to be acquired, if any, is
further allocated to in-place lease values and customer relationship intangible
values based on management's evaluation of the specific characteristics of each
prospective tenant's lease and our overall relationship with that tenant.
Characteristics to be considered by management in allocating these values
include the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenant's credit quality and expectations of lease renewals, including those
existing under the terms of the lease agreement, among other factors.
 
     The Company amortizes the value of in-place leases, if any, to expense over
the initial term of the respective leases, which range primarily from 10 to 15
years. The value of customer relationship intangibles is amortized to expense
over the initial term and any renewal periods in the respective leases, but in
no event will the amortization period for intangible assets exceed the remaining
depreciable life of the
 
                                       F-29

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
building. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value and customer relationship intangibles would be charged to
expense.
 
     Real Estate and Depreciation:  Depreciation is calculated on the
straight-line method over the estimated useful lives of the related assets, as
follows:
 

                                                 
Buildings and improvements.......................   40 years
Tenant origination costs.........................   Remaining terms of the related leases
Tenant improvements..............................   Term of related leases
Furniture and equipment..........................   3-7 years

 
     Real estate is carried at depreciated cost. Expenditures for ordinary
maintenance and repairs are expensed to operations as incurred. Significant
renovations and improvements which improve and/or extend the useful life of the
asset are capitalized and depreciated over their estimated useful lives. In
accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of the Company records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets, including an estimated liquidation
amount, during the expected holding periods are less than the carrying amounts
of those assets. Impairment losses are measured as the difference between
carrying value and fair value of assets. For assets held for sale, impairment is
measured as the difference between carrying value and fair value, less cost of
disposal. Fair value is based on estimated cash flows discounted at a
risk-adjusted rate of interest.
 
     Construction in progress includes the cost of land, the cost of
construction of buildings, improvements and equipment and costs for design and
engineering. Other costs, such as interest, legal, property taxes and corporate
project supervision, which can be directly associated with the project during
construction, are also included in construction in progress.
 
     Loans Receivable:  Real estate related loans consist of working capital
loans and long-term loans. Interest income on loans is recognized as earned
based upon the principal amount outstanding. The working capital and long-term
loans are generally secured by interests in receivables and corporate and
individual guaranties.
 
     Losses from Rent Receivables and Loans Receivable:  A provision for losses
on rent receivables and loans receivable is recorded when it becomes probable
that the loan will not be collected in full. The provision is an amount which
reduces the rent or loan to its estimated net realizable value based on a
determination of the eventual amounts to be collected either from the debtor or
from the collateral, if any. At that time, the Company discontinues recording
interest income on the loan or rent receivable from the tenant.
 
     Net Income (Loss) Per Share:  The Company reports earnings per share
pursuant to SFAS No. 128, Earnings Per Share. Basic net income (loss) per share
is computed by dividing the net income (loss) to common stockholders by the
weighted average number of common shares and potential common stock outstanding
during the period. Diluted net income (loss) per share is computed by dividing
the net income (loss) available to common shareholders by the weighted average
number of common shares outstanding during the period, adjusted for the assumed
conversion of all potentially dilutive outstanding share options.
 
     Income Taxes:  For the period from January 1, 2004 through April 5, 2004,
the Company has elected Sub-chapter S status for income tax purposes, at which
time the Company filed its final tax returns as a Sub-chapter S company. Since
April 6, 2004, the Company has conducted its business as a real estate
investment trust (REIT) under Sections 856 through 860 of the Internal Revenue
Code of 1986, as
 
                                       F-30

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
amended (the Code). The Company will file its initial tax return as a REIT for
the period from April 6, 2004, through December 31, 2004, at which time it must
formally make an election to be taxed as a REIT. To qualify as a REIT, the
Company must meet certain organizational and operational requirements, including
a requirement to currently distribute to shareholders at least 90% of its
ordinary taxable income. As a REIT, the Company generally will not be subject to
federal income tax on taxable income that it distributes to its shareholders. If
the Company fails to qualify as a REIT in any taxable year, it will then be
subject to federal income taxes on its taxable income at regular corporate rates
and will not be permitted to qualify for treatment as a REIT for federal income
tax purposes for four years following the year during which qualification is
lost, unless the Internal Revenue Service grants the Company relief under
certain statutory provisions. Such an event could materially adversely affect
the Company's net income and net cash available for distribution to
shareholders. However, the Company believes that it will be organized and
operate in such a manner as to qualify for treatment as a REIT and intends to
operate in the foreseeable future in such a manner so that the Company will
remain qualified as a REIT for federal income tax purposes.
 
     The Company's financial statements include the operations of a taxable REIT
subsidiary, MPT Development Services, Inc. (MDS) that is not entitled to a
dividends paid deduction and is subject to federal, state and local income
taxes. MDS is authorized to provide property development, leasing and management
services for third-party owned properties and makes loans to lessees and
operators.
 
     Stock-Based Compensation:  The Company currently sponsors a stock option
and restricted stock award plan that was established in 2004. The Company
accounts for its stock option plan under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and related interpretations. Under APB No. 25,
no expense is recorded for options which are exercisable at the price of the
Company's stock at the date the options are granted. Deferred compensation on
restricted stock relates to the issuance of restricted stock to employees and
directors of the Company. Deferred compensation is amortized to compensation
expense based on the passage of time and certain performance criteria.
 
     Fair Value of Financial Instruments:  The Company has various assets and
liabilities that are considered financial instruments. The Company estimates
that the carrying value of cash and cash equivalents, interest receivable and
accounts payable and accrued expenses approximates their fair values. The fair
value of unbilled rent receivable has been estimated based on expected payment
dates and discounted at a rate which the Company considers appropriate for such
assets considering their credit quality and maturity. The fair value of loans
receivable is estimated based on the present value of future payments,
discounted at a rate which the Company considers appropriate for such assets
considering their credit quality and maturity. The Company estimates that the
carrying value of the Company's long term debt should approximate fair value
because the debt is variable rate and adjusts daily with changes in the
underlying interest rate index.
 
     Reclassifications:  Certain reclassifications have been made to the 2003
consolidated financial statements to conform to the 2004 consolidated financial
statement presentation. These reclassifications have no impact on shareholders'
equity or net income.
 
     New Accounting Pronouncements:  The following is a summary of recently
issued accounting pronouncements which have been issued but not yet adopted by
the Company and which could have a material effect on the Company's financial
position and results of operations.
 
     In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123(R),
Accounting for Stock Based
 
                                       F-31

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
Compensation. SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro-forma disclosures of fair
value were required. SFAS No. 123(R) becomes effective for public companies with
their first annual reporting period that begins after June 15, 2005. For
non-public companies, the standard becomes effective for their first fiscal year
beginning after December 15, 2005. The Company does not expect SFAS No. 123(R)
to have a material effect on its financial position or the results of its
operations.
 
3.  PROPERTY ACQUISITIONS AND LOANS
 
     On July 1, 2004, the Company purchased four rehabilitation facilities at a
price of $96.8 million, which were then leased to a new operator of the
facilities, Vibra Healthcare, LLC and its operating subsidiaries (collectively,
Vibra). The Company also made loans of $33.3 million to Vibra. On August 18,
2004, the Company purchased two additional rehabilitation facilities for $30.6
million, which were then leased to Vibra, and made additional loans to Vibra of
$13.8 million. The Company made an additional $2 million loan to Vibra on
October 1, 2004. Loans totaling $42.9 million accrue interest at the rate of
10.25% per year and are to be paid over 15 years with interest only for the
first three years and the principal balance amortizing over the remaining 12
year period. Loans totaling $6.2 million accrue interest at the rate of 10.25%
per year. Vibra will pay fees of $1.5 million to the Company for transacting the
leases and loans. The Company has determined that Vibra is a variable interest
entity as defined by FIN 46-R. The Company has also determined that it is not
the primary beneficiary of Vibra and, therefore, has not consolidated Vibra in
the Company's consolidated financial statements. For the year ended December 31,
2004, Vibra has been the only tenant which is required to make payments under
operating leases and loans from the Company.
 
     The Company recorded intangible lease assets of $5,314,963 representing the
estimated value of the Vibra leases which were entered into at the date the
Company acquired the facilities. The Company recorded amortization expense of
$166,713 and expects to recognize amortization expense of $354,324 in each of
the next five years.
 
     As security for the loans, each of the Vibra tenants and Vibra have granted
the Company a security interest in their respective rights to receive payments,
directly or indirectly, for any goods or services provided to any persons or
entities; any records or data related to those rights; and all cash and non-cash
proceeds resulting from those rights. As additional security, Vibra has pledged
to the Company all of its interests in each of the tenants. One individual is
the majority owner of Vibra, The Hollinger Group and Vibra Management, LLC. The
owner of Vibra has pledged his interest in Vibra to secure the loans. In
addition, The Hollinger Group and Vibra Management have guaranteed the loans.
The owner of Vibra has also provided a $5 million personal guarantee.
 
4.  LONG-TERM DEBT AND LOAN PAYABLE
 
     In 2003, the Company entered into a loan agreement which provided for
maximum borrowings of $300,000 if certain conditions were met by the Company.
Borrowings under the agreement ($100,000 at December 31, 2003) accrued interest
at 20% per annum and were due upon the earlier of (i) the third business day
following the funding of the Company's private placement or (ii) March 29, 2004.
During the first three months of 2004, the Company increased its borrowings on
the loan to $300,000, which was paid
 
                                       F-32

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
in full in April 2004. Contemporaneous with the private placement, the Company
issued to the lender a warrant to purchase up to 35,000 shares of the Company's
common stock at a price per share equal to 93% of the price at which the
Company's shares were offered to investors in the private placement. The warrant
has been recorded in the consolidated balance sheet using the intrinsic value
method as an addition to Additional Paid-in Capital and as additional interest
expense at a value of $.70 per warrant ($10.00 per share private placement price
less $9.30 exercise price per warrant) or a total of $24,500. The Company
considers any differences which would result between the intrinsic method and
another fair value method to not be material to the Company's financial
position, results of its operations or changes in its cash flows.
 
     In December 2004, the Company received $56 million as part of a $75
million, three year term loan. In February 2005, the Company received the
remaining $19 million of this loan. The loan requires monthly payments based on
a 20 year amortization schedule and interest at the one month London Interbank
Offered Rate (LIBOR) plus 300 basis points, which results in an interest rate of
5.42% at December 31, 2004. The loan is secured by the six Vibra facilities,
which have a book value of $125.9 million, and requires the Company to meet
financial coverage, ratio and total debt covenants typical of such loans.
 
     In December 2004, the Company closed a $43 million loan with a bank to
finance the construction of the Company's medical office building and community
hospital development project in Houston, Texas. The loan carries a construction
period term of eighteen months, with the option to convert the loan into a
thirty month term loan thereafter with a twenty-five year amortization. The loan
requires interest payments only during the initial eighteen month term, and
principal and interest payments during the optional thirty month term. The loan
is secured by mortgages on the development property. The loan bears interest at
a rate of one month LIBOR plus 225 basis points (4.67% at December 31, 2004)
during the construction period and one month LIBOR plus 250 basis points (4.92%
at December 31, 2004) during the thirty month optional period. The Company has
paid a commitment fee of one per-cent for the construction loan with an
additional .25% per-cent fee due if the Company exercises the term loan option.
Proceeds may be drawn down by periodically presenting to the lender
documentation of construction and development costs incurred. The Company has
not drawn down any proceeds from this loan as of December 31, 2004.
 
     Maturities of long-term debt at December 31, 2004, are as follows:
 

                                                            
2005........................................................   $ 2,566,663
2006........................................................     2,799,996
2007........................................................    50,633,341
                                                               -----------
                                                               $56,000,000
                                                               ===========

 
5.  COMMITMENTS AND CONTINGENCIES
 
     In June 2004, the Company began construction of a hospital and medical
office building with an expected total cost of $63.4 million. The Company plans
to fund this project with a combination of its own and borrowed funds. At
December 31, 2004, the Company has funded $24.2 million of the cost which has
been financed with funds from the April 6, 2004 private placement. The remaining
commitment for construction and development contracts at December 31, 2004,
totals $32.1 million.
 
                                       F-33

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
     Fixed minimum payments due under operating leases with non-cancellable
terms of more than one year at December 31, 2004 are as follows:
 

                                                            
2005........................................................   $  275,106
2006........................................................      339,570
2007........................................................      346,158
2008........................................................      352,746
2009........................................................      359,334
Thereafter..................................................    2,133,005
                                                               ----------
                                                               $3,805,919
                                                               ==========

 
     A former consultant to the Company has made a claim for 2003 and 2004
consulting compensation under the terms of a now terminated consulting agreement
with the Company. The Company disputes this claim and has made an offer of
settlement based on the terms of the consulting agreement. The Company has made
provision for the amount (which the Company has determined is not material to
the consolidated financial statements) that it estimates is owed to the former
consultant.
 
6.  EQUITY INCENTIVE PLAN AND OTHER STOCK AWARDS
 
     The Company has adopted the Medical Properties Trust, Inc. 2004 Amended and
Restated Equity Incentive Plan (the Equity Incentive Plan) which authorizes the
issuance of options to purchase shares of common stock, restricted stock awards,
restricted stock units, deferred stock units, stock appreciation rights and
performance units. The Company has reserved 791,180 shares of common stock for
awards under the Equity Incentive Plan. The Equity Incentive Plan contains a
limit of 300,000 shares as the maximum number of shares of common stock that may
be awarded to an individual in any fiscal year.
 
     Upon their election to the board in April, 2004, each of our original
independent directors was awarded options to acquire 20,000 shares of our common
stock. These options have an exercise price of $10 per option, vested one-third
upon grant and the remainder will vest one-half on each of the first and second
anniversaries of the date of grant, and expire ten years from the date of grant.
The Company has determined that the exercise price of these options is equal to
the fair value of the common stock because the options were granted immediately
following the private placement of its common stock in April, 2004. Accordingly,
the options have no intrinsic value as that term is used in SFAS No. 123,
Accounting for Stock-Based Compensation. No other options have been granted.
 


                                                               SHARES    EXERCISE PRICE
                                                              --------   --------------
                                                                   
Outstanding at January 1, 2004..............................        --           --
Granted.....................................................   100,000       $10.00
Exercised...................................................        --           --
Forfeited...................................................        --           --
                                                              --------       ------
Outstanding at December 31, 2004............................   100,000       $10.00
                                                              ========       ======
Options exercisable at December 31, 2004....................    33,333       $10.00
Weighted-average grant-date fair value of options granted...  $   1.21

 
                                       F-34

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
     Options exercisable at December 31, 2004, are as follows:
 


                   OPTIONS       OPTIONS        AVERAGE REMAINING
EXERCISE PRICE   OUTSTANDING   EXERCISABLE   CONTRACTUAL LIFE (YEARS)
--------------   -----------   -----------   ------------------------
                                    
    $10.00         100,000       33,333                9.6

 
     The Company follows APB No. 25 and related Interpretations in accounting
for the Plan. In accordance with APB 25, no compensation expense has been
recognized for stock options. Had compensation expense for the Company's stock
option plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the methods prescribed in SFAS No. 123,
the Company's net income and income per share for the year ended December 31,
2004, would have been decreased by $67,000 and would have had no per share
effect, respectively.
 
     In addition to these options to purchase common stock, each independent
director was awarded 2,500 deferred stock units in October, 2004, valued by the
Company at $10 per unit, which represent the right to receive 2,500 shares of
common stock in October, 2007. Beginning in 2005, each independent director will
receive 2,000 shares of restricted common stock annually, which will be
restricted as to transfer for three years. The Company has recognized expense in
the amount of $125,000 for the deferred stock units awarded to its' independent
directors in 2004. The Company has also allocated 114,500 shares of restricted
stock to be awarded to employees upon completion of its IPO.
 
     The Company uses the Black-Scholes pricing model to calculate the fair
values of the options awarded, which are included in the pro forma amounts
above. The following assumptions were used to derive the fair values: an option
term of four to six years; no estimated volatility; a weighted average risk-
free rate of return of 3.63%; and a dividend yield of 1.00% for 2004.
 
7.  LEASING OPERATIONS
 
     For the properties purchased in July and August, 2004 (see Note 3), minimum
rental payments due in future periods under operating leases which have
non-cancelable terms extending beyond one year at December 31, 2004, are as
follows:
 

                                                            
2005........................................................   $ 14,343,635
2006........................................................     16,082,461
2007........................................................     16,484,523
2008........................................................     16,896,636
2009........................................................     17,319,052
Thereafter..................................................    188,238,038
                                                               ------------
                                                               $269,364,345
                                                               ============

 
     The leases are with tenants engaged in medical operations in California
(two facilities), Colorado, Kentucky, Massachusetts, and New Jersey. Each of the
six lease agreements are for an initial term of 15 years with options for the
tenant to renew for three periods of five years each. Lease payments are
calculated based on the total acquisition cost (aggregating approximately
$127,000,000) and an initial lease rate of 10.25%; the rate increases to 12.23%
on the first anniversary of lease commencement and upon each January 1
thereafter escalates at a rate of 2.5%. At such time that the tenants' aggregate
net revenue exceeds a certain level, the leases further provide that the tenants
will pay additional rent of between 1% and 2% of total net revenue. All of the
leases are cross-defaulted.
 
                                       F-35

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
     In addition, the Company is funding the acquisition and development costs
for a community hospital and adjacent medical office building in Houston, Texas
on land that is leased to the operator/tenant. During the development and
construction period, the tenant is charged rent (construction period rent) based
on the lease rates (which average 10.4%) and the amount funded, which aggregated
$16,225,907 at December 31, 2004. The Company has recorded $757,787 of
construction period rent as unbilled rent receivable and as deferred revenue as
of December 31, 2004. Upon completion of development and occupancy by the
tenant, the fixed lease term (15 and 10 years for the hospital and medical
office building, respectively) will commence and any accrued construction period
rent will be paid, with interest calculated at the lease rate, over the term of
the respective lease. Upon occupancy, the Company will begin recognizing as rent
revenue, using the straight-line method, all construction period rent recorded
during the construction period. The Company expects to complete the construction
of the hospital and the medical office building in October 2005 and August 2005,
respectively.
 
8.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 


                                         DECEMBER 31, 2004          DECEMBER 31, 2003
                                     -------------------------   -----------------------
                                     BOOK VALUE    FAIR VALUE    BOOK VALUE   FAIR VALUE
                                     -----------   -----------   ----------   ----------
                                                                  
Cash and cash equivalents..........  $97,543,677   $97,543,677   $  100,000   $  100,000
Interest receivable................      419,776       419,776           --           --
Unbilled rent receivable...........    3,206,853     1,679,450           --           --
Loans..............................   50,224,069    50,646,695      100,000      100,000
Long-term debt.....................   56,000,000    56,000,000           --           --
Accounts payable and accrued
  expenses.........................   10,903,025    10,903,025    1,389,779    1,389,779

 
9.  INCOME TAXES
 
     The following table reconciles the Company's net income as reported in its
consolidated statement of operations prepared in accordance with generally
accepted accounting principles with its taxable income under the REIT income tax
regulations for the year ended December 31, 2004:
 

                                                            
Net income as reported......................................   $ 4,576,349
Less: Net income of the taxable REIT subsidiary.............       (63,905)
                                                               -----------
Net income from REIT operations.............................     4,512,444
Unbilled rent receivable....................................    (2,449,066)
GAAP depreciation and amortization in excess of tax
  depreciation..............................................       198,266
Expenses deductible in future tax periods...................     2,434,535
Other.......................................................       289,759
                                                               -----------
Taxable income subject to REIT distribution requirements....   $ 4,985,938
                                                               ===========

 
     The Company paid distributions of $2,608,286 ($.10 per share) on October
10, 2004, and $2,869,115 ($.11 per share) on January 11, 2005. All of the
October distribution and $755,546 of the January 2005, distribution will be
subject to federal incomes taxes by the Company's stockholders in 2004. The
remainder of the January, 2005, distribution will be subject to federal income
taxes by the Company's stockholders in 2005. All of the distributions are
taxable to the Company's shareholders at ordinary income federal tax rates.
 
                                       F-36

                MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    FOR THE YEAR ENDED DECEMBER 31, 2004 AND
PERIOD FROM INCEPTION (AUGUST 27, 2003) THROUGH DECEMBER 31, 2003 -- (CONTINUED)
 
10.  SUBSEQUENT EVENTS
 
     On February 9, 2005, Vibra made a $7.8 million payment of principal and
interest on its transaction fee and working capital loans from the Company. The
payments left a $41.4 million loan payable to the Company by Vibra. The Company
has no commitments to make additional loans to Vibra.
 
     In February, 2005, the Company purchased a community hospital for $28
million. The purchase price was paid from loan proceeds and from the proceeds of
the Company's private placement. Upon closing the purchase of the hospital, the
Company and the seller entered into a fifteen year lease of the hospital back to
the seller, with renewal options for three additional five year terms.
 
11.  EARNINGS PER SHARE
 
     The following is a reconciliation of the weighted average shares used in
net income (loss) per common share to the weighted average shares used in net
income (loss) per common share -- assuming dilution for the year ended December
31, 2004, and for the period from Inception (August 27, 2003) through December
31, 2003, respectively:
 


                                                                 2004        2003
                                                              ----------   ---------
                                                                     
Weighted average number of shares issued and outstanding....  19,308,511   1,630,435
Vested deferred stock units.................................       2,322          --
                                                              ----------   ---------
Weighted average shares -- basic............................  19,310,833   1,630,435
Common stock warrants.......................................       1,801          --
                                                              ----------   ---------
Weighted average shares -- diluted..........................  19,312,634   1,630,435
                                                              ==========   =========

 
12.  RELATED PARTIES
 
     The Company's lead underwriter for its IPO and private placement is the
largest stockholder, including shares owned directly and indirectly through
funds it manages. In connection with services provided for its managing and
underwriting of the private placement, the underwriter received approximately
261,000 shares of the Company's common stock. The Company also manages its cash
and cash equivalents (approximately $96.1 million at December 31, 2004) through
the underwriter.
 
13.  PRO FORMA EARNINGS PER SHARE (UNAUDITED)
 
     Staff Accounting Bulletin (SAB) Topic 1.B.3 requires that basic and diluted
earnings per share must be calculated based on the pro forma effect of shares
assumed to be issued in an initial public offering when dividends are paid in
excess of earnings. As of June 30, 2005, cumulative net income for 2004 and the
six months ended June 30, 2005, totaled $12,516,094. Cumulative distributions,
including the distributions declared May 20, 2005, and August 18, 2005 totaled
$19,327,636, resulting in excess distributions during this period of $6,811,542.
The pro forma weighted average shares in the table below assumes the issuance of
648,718 shares at an offering price of $10.50 per share, or proceeds of
$6,811,542 to pay these distributions in excess of net income.
 


                                                                BASIC       DILUTED
                                                              ----------   ----------
                                                                     
Pro forma weighted average shares for the year ended
  December 31, 2004:
  Historical from above.....................................  19,310,833   19,312,634
  Pro forma effect of assumed additional shares.............     648,718      648,718
                                                              ----------   ----------
  Pro forma weighted average shares.........................  19,959,551   19,961,352
                                                              ==========   ==========
Pro forma earnings per share................................  $     0.23   $     0.23
                                                              ==========   ==========

 
                                       F-37

 
            SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
 
                    DECEMBER 31, 2004 AND DECEMBER 31, 2003
 


                                                                                              ADDITIONS SUBSEQUENT TO
                                                                   INITIAL COSTS                    ACQUISITION
                                                            ---------------------------    ------------------------------
LOCATION                            TYPE OF PROPERTY           LAND         BUILDINGS      IMPROVEMENTS    CARRYING COSTS
--------                         -----------------------    -----------    ------------    ------------    --------------
                                                                                            
Bowling Green, KY..............  Rehabilitation hospital    $ 3,070,000    $ 33,570,541       $  --            $  --
Thornton, CO...................  Rehabilitation hospital      2,130,000       6,013,142          --               --
Fresno, CA.....................  Rehabilitation hospital      1,550,000      16,363,153          --               --
Kentfield, CA..................  Long term acute care         2,520,000       4,765,176          --               --
                                 hospital
Marlton, NJ....................  Rehabilitation hospital             --      30,903,051          --               --
New Bedford, NJ................  Long term acute care         1,400,000      19,772,169          --               --
                                 hospital
                                                            -----------    ------------       -----
                                 TOTAL                      $10,670,000    $111,387,232       $  --            $  --
                                                            ===========    ============       =====



                                            COST AT DECEMBER 31, 2004
                                    ------------------------------------------   ACCUMULATED         DATE OF            DATE
             LOCATION                  LAND       BUILDINGS(1)       TOTAL       DEPRECIATION     CONSTRUCTION        ACQUIRED
             --------               -----------   -------------   ------------   ------------   -----------------  ---------------
                                                                                                 
Bowling Green, KY.................  $ 3,070,000   $ 33,570,541    $ 36,640,541    $  419,634          1992            July 1, 2004
Thornton, CO......................    2,130,000      6,013,142       8,143,142        56,371       1962, 1975      August 17, 2004
Fresno, CA........................    1,550,000     16,363,153      17,913,153       204,540          1990            July 1, 2004
Kentfield, CA.....................    2,520,000      4,765,176       7,285,176        59,562          1963            July 1, 2004
Marlton, NJ.......................           --     30,903,051      30,903,051       386,286          1994            July 1, 2004
New Bedford, NJ...................    1,400,000     19,772,169      21,172,169       185,364    1962, 1975, 1992   August 17, 2004
                                    -----------   ------------    ------------    ----------
TOTAL                               $10,670,000   $111,387,232    $122,057,232    $1,311,757
                                    ===========   ============    ============    ==========
 

 
                                    DEPRECIABLE
             LOCATION               LIFE (YEARS)
             --------               ------------
                                 
Bowling Green, KY.................       40
Thornton, CO......................       40
Fresno, CA........................       40
Kentfield, CA.....................       40
Marlton, NJ.......................       40
New Bedford, NJ...................       40
TOTAL

 


                                                            DECEMBER 31, 2004   DECEMBER 31, 2003
                                                            -----------------   -----------------
                                                                          
                COST
                  Balance at beginning of period..........    $         --          $     --
                    Additions during the period
                      Acquisitions........................     122,057,232                --
                                                              ------------          --------
                  Balance at end of period................    $122,057,232          $     --
                                                              ============          ========

 


                                                             DECEMBER 31, 2004    DECEMBER 31, 2003
                                                             ------------------   -----------------
                                                                            
                ACCUMULATED DEPRECIATION
                  Balance at beginning of period..........      $         --          $     --
                    Additions during the period
                      Depreciation........................         1,311,757                --
                                                                ------------          --------
                  Balance at end of period................      $  1,311,757          $     --
                                                                ============          ========

 
---------------
 
(1) The gross cost for Federal income tax purposes is $116,702,195.
 
                                       F-38

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                           Consolidated Balance Sheet
           June 30, 2005 (Unaudited) and December 31, 2004 (Audited)
 


                                                              JUNE 30, 2005   DECEMBER 31, 2004
                                                              -------------   -----------------
                                                               (UNAUDITED)        (AUDITED)
                                                                        
                           ASSETS
Current assets:
  Cash and cash equivalents.................................   $ 4,304,350       $ 2,280,772
  Patient accounts receivable, net of allowance for doubtful
     collections of $431,900 at June 30, 2005 and $302,988
     at December 31, 2004...................................    21,858,179        17,319,154
  Third party settlements receivable........................            --           346,141
  Prepaid insurance.........................................       116,416           719,480
  Deposit for workers' compensation claims..................            --         1,375,000
  Other current assets......................................       730,609           518,650
                                                               -----------       -----------
     Total current assets...................................    27,009,554        22,559,197
Restricted investment.......................................       100,000                --
Property and equipment, net.................................    17,479,679         2,662,546
Goodwill....................................................    24,650,800        24,510,296
Intangible assets...........................................     5,140,000         4,260,000
Deposits....................................................     4,260,427         3,485,387
Deferred financing and lease costs..........................     1,912,030         1,543,424
                                                               -----------       -----------
     Total assets...........................................   $80,552,490       $59,020,850
                                                               ===========       ===========

 
             LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
  Current maturities of long-term debt......................   $    56,459       $        --
  Current maturities of obligations under capital leases....       354,808                --
  Accounts payable..........................................     4,341,706         5,142,345
  Accounts payable -- related parties.......................       201,771           262,144
  Accrued liabilities.......................................     4,611,516         4,387,292
  Accrued insurance claims..................................     2,424,958         1,441,516
                                                               -----------       -----------
     Total current liabilities..............................    11,991,218        11,233,297
Deferred rent...............................................     5,077,798         2,460,308
Long-term debt..............................................    52,135,372        49,141,945
Long-term obligations under capital leases..................    17,808,365                --
                                                               -----------       -----------
Total liabilities...........................................    87,012,753        62,835,550
Partners' deficit...........................................    (6,460,263)       (3,814,700)
                                                               -----------       -----------
     Total liabilities and partners' deficit................   $80,552,490       $59,020,850
                                                               ===========       ===========

 
     The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-39

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
     Consolidated Statement of Operations and Changes in Partners' Deficit
          For the Three and Six Months Ended June 30, 2005 (Unaudited)
 


                                                             THREE MONTHS ENDED   SIX MONTHS ENDED
                                                                JUNE 30,2005       JUNE 30, 2005
                                                             ------------------   ----------------
                                                                (UNAUDITED)         (UNAUDITED)
                                                                            
REVENUE:
  Net patient service revenue..............................     $30,588,335         $59,916,423
                                                                -----------         -----------
EXPENSES:
  Cost of services.........................................      21,491,176          41,558,235
  General and administrative...............................       3,669,721           7,024,370
  Rent expense.............................................       5,342,554          10,464,137
  Interest expense.........................................       1,294,943           2,558,299
  Management fee - Vibra Management, LLC...................         657,466           1,244,059
  Depreciation and amortization............................         220,682             414,975
  Bad debt expense.........................................         178,431             345,664
                                                                -----------         -----------
     Total expenses........................................      32,854,973          63,609,739
                                                                -----------         -----------
       Loss from operations................................      (2,266,638)         (3,693,316)
  Non-operating revenue....................................         514,293           1,047,753
                                                                -----------         -----------
       Net loss............................................      (1,752,345)         (2,645,563)
Partners' deficit -- beginning.............................      (4,707,918)         (3,814,700)
                                                                -----------         -----------
Partners' deficit -- ending................................     $(6,460,263)        $(6,460,263)
                                                                ===========         ===========

 
     The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-40

 
                     VIBRA HEALTHCARE LLC AND SUBSIDIARIES
 
                      Consolidated Statement of Cash Flows
                 For Six Months Ended June 30, 2005 (Unaudited)
 

                                                            
Operating activities:
  Net loss..................................................   $(2,645,563)
     Adjustments to reconcile net loss to net cash used in
      operating activities:
       Depreciation and amortization........................       414,975
       Provision for bad debts..............................       345,664
Changes in operating assets and liabilities, net of effects
  from acquisition of business:
       Patient accounts receivable including third party
        settlements.........................................    (4,679,052)
       Prepaids and other current assets....................       490,081
       Deposits.............................................     1,072,460
       Accounts payable.....................................      (861,010)
       Accrued liabilities..................................     1,207,666
       Deferred rent........................................     2,617,490
                                                               -----------
Net cash used in operating activities.......................    (2,037,289)
                                                               -----------
Investing activities:
       Purchase of restricted investment....................      (100,000)
       Purchases of property and equipment..................      (505,408)
       Assets acquired in business acquisition..............      (284,292)
                                                               -----------
Net cash used in investing activities.......................      (889,700)
                                                               -----------
Financing activities:
       Borrowings under revolving credit facility...........    50,591,077
       Repayments of revolving credit facility..............   (40,066,178)
       Borrowings under capital leases......................     2,181,898
       Repayment of capital leases..........................       (11,988)
       Borrowings under other long-term debt................        99,000
       Repayment of long-term debt..........................    (7,731,041)
       Payment of deferred financing costs..................      (112,201)
                                                               -----------
Net cash provided by financing activities...................     4,950,567
                                                               -----------
Net increase in cash and cash equivalents...................     2,023,578
Cash and cash equivalents -- beginning......................     2,280,772
                                                               -----------
Cash and cash equivalents -- ending.........................   $ 4,304,350
                                                               ===========
Supplemental cash flow information:
       Cash paid for interest...............................   $ 2,558,299
                                                               ===========
Non-cash transactions:
       Deferred financing costs funded by revolving credit
        facility and MPT capital lease......................   $   352,627
                                                               ===========
       Business acquisition adjustment of goodwill..........   $   140,504
                                                               ===========
       Building and equipment acquisition funded by MPT
        capital lease.......................................   $14,270,000
                                                               ===========
       License acquisition funded by MPT capital lease......   $   880,000
                                                               ===========
       Lease deposit funded by MPT capital lease............   $   472,500
                                                               ===========
       Equipment purchases funded by capital leases.........   $   175,161
                                                               ===========

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-41

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  ORGANIZATION
 
     Vibra Healthcare, LLC ("Vibra" and the "Company") was formed May 14, 2004,
and commenced operations with the acquisition of its subsidiaries consisting of
four independent rehabilitation hospitals ("IRF") and two long-term acute care
hospitals ("LTACH") located throughout the United States on July 1, 2004 and
August 17, 2004, respectively. On June 30, 2005, Vibra acquired an IRF with the
intention of converting the beds to LTACH by January 1, 2006. Vibra, a Delaware
limited liability company ("LLC"), has an infinite life. The members' liability
is limited to the capital contribution. Vibra was previously named Highmark
Healthcare LLC until a name change in December 2004. Vibra's wholly-owned
subsidiaries consist of:
 


SUBSIDIARIES                                                      LOCATION
------------                                                  -----------------
                                                           
92 Brick Road Operating Company LLC.........................  Marlton, NJ
4499 Acushnet Avenue Operating Company LLC..................  New Bedford, MA
1300 Campbell Lane Operating Company LLC....................  Bowling Green, KY
8451 Pearl Street Operating Company LLC.....................  Denver, CO
7173 North Sharon Avenue Operating Company LLC..............  Fresno, CA
1125 Sir Francis Drake Boulevard Operating Company LLC......  Kentfield, CA
Northern California Rehabilitation Hospital, LLC............  Redding, CA

 
     The Company provides long-term acute care hospital services and inpatient
acute rehabilitative hospital care at its hospitals. Patients in the Company's
LTACHs typically suffer from serious and often complex medical conditions that
require a high degree of care. Patients in the Company's IRFs typically suffer
from debilitating injuries including traumatic brain and spinal cord injuries,
and require rehabilitation care in the form of physical, psychological, social
and vocational rehabilitation services. The Company also operates eleven
outpatient clinics affiliated with six of its seven hospitals.
 
  PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries controlled through majority membership
interests in limited liability companies. All significant intercompany balances
and transactions are eliminated in consolidation.
 
  USE OF ESTIMATES
 
     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
  CASH AND CASH EQUIVALENTS
 
     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost which approximates market.
 
                                       F-42

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
  PATIENT ACCOUNTS RECEIVABLE
 
     Patient accounts receivable are reported at net realizable value. Accounts
are written off when they are determined to be uncollectible based upon
management's assessment of individual accounts. The allowance for doubtful
collections is estimated based upon a periodic review of the accounts receivable
aging, payor classifications and application of historical write-off
percentages.
 
  INVENTORIES
 
     Inventories of pharmaceuticals and pharmaceutical supplies are stated at
the lower of cost or market value. Cost is determined on a first-in, first-out
basis. These inventories totaled $549,195 at June 30, 2005, and are included in
other current assets in the accompanying consolidated balance sheet.
 
  RESTRICTED INVESTMENT
 
     The restricted investment consists of a five year certificate of deposit
with a local bank pledged as collateral for a letter of credit benefiting the
California Department of Health Services ("CDHS"). CDHS can draw on the letter
of credit to reimburse any medicaid overpayments.
 
  PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost net of accumulated depreciation.
Depreciation and amortization are computed using the straight-line method over
the lesser of the estimated useful lives of the assets or the term of the lease,
as appropriate. The general range of useful lives is as follows:
 

                                            
Building under capital lease.................  Lesser of 15 years or remaining lease term
Leasehold improvements.......................  Lesser of 15 years or remaining lease term
Furniture and equipment......................  2-7 years

 
     In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No 144),
the Company reviews the realizability of long-lived assets whenever events or
circumstances occur which indicate recorded costs may not be recoverable.
 
  INTANGIBLE ASSETS
 
     The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and
other intangible assets with indefinite lives are no longer subject to periodic
amortization but are instead reviewed annually or more frequently if impairment
indicators arise. These reviews require the Company to estimate the fair value
of its identified reporting units and compare those estimates against the
related carrying values. Identifiable assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective fair values. For each of the reporting units,
the estimated net realizable value is determined using current transaction
information and the present value of future cash flows of the units.
 
     Management has allocated the intangible assets between identifiable
intangibles and goodwill. Intangible assets, other than goodwill, consist of
values assigned to certificates of need ("CONs") and licenses. The useful life
of each class of intangible assets is as follows:
 

                                                            
Goodwill....................................................   Indefinite
Certificates of Need/Licenses...............................   Indefinite

 
                                       F-43

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
  DEFERRED FINANCING AND LEASE COSTS
 
     Costs and fees incurred in connection with the MPT acquisition note and
leases and the Merrill Lynch revolving credit facility have been deferred and
are being amortized over the term of the loans and leases using the
straight-line method, which approximates the effective interest method.
Amortization expense was $54,713 and $96,223 for the three and six months ended
June 30, 2005, respectively.
 
  INSURANCE RISK PROGRAMS
 
     Under the Company's insurance programs, the Company is liable for a portion
of its losses. The Company estimates its liability for losses based on
historical trends that will be incurred in a respective accounting period and
accrues that estimated liability. These programs are monitored quarterly and
estimates are revised as necessary to take into account additional information.
The Company has accrued $2,424,958 related to these programs at June 30, 2005. A
deposit for workers' compensation claims of $1,375,000 at December 31, 2004,
consisted of cash provided to Vibra's insurance carrier to fund workers'
compensation claims. In February 2005, Vibra used $1,375,000 of its borrowing
base on the Merrill Lynch loan to collateralize a letter of credit for the
claims and the cash deposit was refunded.
 
  DEFERRED RENT
 
     The excess of straight line rent expense over rent paid is credited to
deferred rent on a monthly basis. At June 30, 2005, rent expense exceeded rent
paid by $5,077,798.
 
  REVENUE RECOGNITION
 
     Net patient service revenue consists primarily of charges to patients and
are recognized as services are rendered. Net patient service revenue is reported
net of provisions for contractual allowances from third-party payors and
patients. The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. The
differences between the estimated program reimbursement rates and the standard
billing rates are accounted for as contractual adjustments, which are deducted
from gross revenues to arrive at net patient service revenues. Payment
arrangements include prospectively determined rates per discharge, reimbursed
costs, discounted charges and per diem payments. Retroactive adjustments are
accrued on an estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are determined. Patient
accounts receivable resulting from such payment arrangements are recorded net of
contractual allowances.
 
     A significant portion of the Company's net patient service revenues are
generated directly from the Medicare and Medicaid programs. Approximately 53%
and 27% of the Company's gross patient accounts receivable at June 30, 2005, are
from Medicare and Medicaid, respectively. As a provider of services to these
programs, the Company is subject to extensive regulations. The inability of a
hospital to comply with regulations can result in changes in that hospital's net
patient service revenues generated from these programs.
 
     The following table represents the Company's net patient service revenues
from the Medicare and Medicaid programs as a percentage of total consolidated
net patient service revenues:
 


                                                             THREE MONTHS       SIX MONTHS
                                                                 ENDED            ENDED
                                                             JUNE 30, 2005    JUNE 30, 2005
                                                             -------------   ----------------
                                                                       
Medicare...................................................       65%               65%
Medicaid...................................................       12%               13%

 
                                       F-44

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
  CONCENTRATION OF CREDIT RISK
 
     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash balances and patient accounts
receivables. The Company deposits its cash with large banks. The Company grants
unsecured credit to its patients, most of whom reside in the service area of the
Company's facilities and are insured under third-party payor agreements. Because
of the geographic diversity of the Company's facilities and non-governmental
third-party payors, Medicare and Medicaid represent the Company's primary
concentration of credit risk.
 
  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company has various assets and liabilities that are considered
financial instruments. The Company estimates that the carrying value of its
current assets, current liabilities and long-term debt approximates their fair
value.
 
  INCOME TAXES
 
     Vibra and its subsidiaries have elected to be a LLC for federal and state
income tax purposes. In lieu of corporate income taxes, the member of a LLC is
taxed on their proportionate share of the Company's taxable income or loss.
Therefore, no provision or liability for federal or state income taxes has been
provided for in the consolidated balance sheet or consolidated statement of
operations.
 
  UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
     The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. 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
three and six months ended June 30, 2005, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005.
 
2.  ACQUISITIONS
 
  YEAR ENDED DECEMBER 31, 2004
 
     In July and August 2004, Vibra entered into agreements with Medical
Properties Trust, Inc. (MPT) to acquire the operations of six specialty
hospitals. MPT, a healthcare real estate investment trust based in Birmingham,
Alabama, acquired the real estate for approximately $127.4 million and assigned
to Vibra its rights to acquire the operations of the hospitals from Care One
Realty of Hackensack, New Jersey for approximately $38.1 million net of cash
acquired and $7.5 million of liabilities assumed which was financed by MPT. The
assignment of the LLC interests to Vibra transferred the operations, assets and
liabilities of each LLC. The purchase price of the operations may be adjusted
either upward or downward pursuant to a post-closing working capital adjustment
with the seller. The purchase price of the operations has been allocated to net
assets acquired, and liabilities assumed based on valuation studies subject to
purchase price adjustments. The excess of the amount of purchase price over the
net asset value, including identifiable intangible assets, was allocated to
goodwill. The purchase price was negotiated based on management's evaluation of
future operational performance of the hospitals as a group under Vibra. The
results of operations of the hospitals acquired have been included in the
Company's consolidated financial
 
                                       F-45

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
statements since the date of acquisition. The following table summarizes the
acquisition date and other relevant information regarding each hospital:
 


LOCATION                                           TYPE    BEDS     ACQUISITION DATE
--------                                           -----   ----     ----------------
                                                           
Marlton, NJ......................................   IRF     46(1)    July 1, 2004
Bowling Green, KY................................   IRF     60       July 1, 2004
Fresno, CA.......................................   IRF     62       July 1, 2004
Kentfield, CA....................................  LTACH    60       July 1, 2004
New Bedford, MA..................................  LTACH    90      August 17, 2004
Thornton, CO.....................................   IRF    117(2)   August 17, 2004

 
---------------
 
(1) Vibra subleases a floor of the Marlton building to an unaffiliated provider
    which operates 30 pediatric rehabilitation beds which are in addition to the
    46 beds operated by Vibra.
 
(2) Includes beds licensed as skilled nursing and beds licensed as psychiatric.
 
     Information with respect to the businesses acquired in these transactions
is as follows:
 

                                                           
Notes issued, net of cash acquired..........................  $ 38,093,842
Liabilities assumed.........................................     7,477,988
                                                              ------------
                                                                45,571,830
Fair value of assets acquired:
  Accounts receivable.......................................   (13,640,825)
  Property and equipment....................................    (2,749,840)
  CONs/Licenses.............................................    (4,260,000)
  Other.....................................................      (410,869)
                                                              ------------
Cost in excess of fair value of net assets acquired
  (goodwill) at December 31, 2004...........................  $ 24,510,296
                                                              ============

 
     Based on an analysis of pre-acquisition accounts receivable at June 30,
2005, the Company estimated the fair value of the acquired accounts receivable
required a downward adjustment of $140,504. This adjustment increased the
goodwill recorded at June 30, 2005 to $24,650,800.
 
  SIX MONTHS ENDED JUNE 30, 2005
 
     On June 30, 2005, under the terms of a purchase agreement, Vibra acquired
the building, equipment, inventory and license of an 88 bed specialty hospital
in Redding, California, for $15.43 million. The hospital currently operates with
24 IRF beds and 54 skilled nursing beds. The hospital is also licensed for 14
acute care beds that are currently not in service. Vibra is in the process of
converting approximately 26 of the skilled nursing beds and all of the IRF beds
to LTACH beds. Under the purchase agreement, Vibra subleased the operations and
the right to occupy the Redding facility back to the seller during a transition
term, until Vibra obtains certain healthcare licenses necessary to operate the
hospital. In the interim, Vibra is managing the hospital on behalf of the seller
during this transition term. The terms of the management agreement provide that
revenues and expenses during the transition term accrue to Vibra. Management
expects the transition term to last approximately 120 days. Simultaneously with
the closing of the acquisition, Vibra entered into an agreement with MPT for the
sale of the building associated with this hospital to MPT and leased it back
from MPT under an $18 million capital lease. An additional $2.75 million can be
drawn under the lease agreement upon the completion of certain building
renovations and the LTACH conversion. The purchase price of the operations has
been allocated to net assets acquired, and liabilities assumed based on
valuation studies. The land on which the hospital is built is subject to a land
lease, which Vibra assumed from the seller. Vibra is in the process of obtaining
a third party appraisal of the land lease to determine if any value should be
assigned to the lease in the purchase
                                       F-46

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
accounting. Therefore, the allocation of the purchase price is subject to
refinement. The purchase price was negotiated based on management's evaluation
of future operational performance of the hospital under Vibra. The results of
operations of the hospital acquired have been included in the Company's
consolidated financial statements since the date of acquisition.
 
     Information with respect to the business acquired in this transaction is as
follows:
 

                                                            
Capital lease...............................................   $18,000,000
Cash paid by Vibra for the building.........................       185,316
Cash paid by Vibra for the inventory........................        98,976
                                                               -----------
                                                               $18,284,292
Less other assets arising from transaction:
  Cash to Vibra.............................................    (2,181,898)
  Lease deposit funded......................................      (472,500)
  Deferred financing costs..................................      (195,602)
                                                               -----------
Fair value of assets acquired...............................   $15,434,292
                                                               ===========
Fair value of assets acquired:
  Building..................................................   $14,087,816
  Furniture and equipment...................................       367,500
  Licenses..................................................       880,000
  Inventory.................................................        98,976
                                                               -----------
                                                               $15,434,292
                                                               ===========

 
3.  PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following:
 


                                                               JUNE 30, 2005
                                                 -----------------------------------------
                                                   DIRECT         UNDER
                                                 OWNERSHIP    CAPITAL LEASES      TOTAL
                                                 ----------   --------------   -----------
                                                                      
Building.......................................  $       --    $14,087,816     $14,087,816
Leasehold improvements.........................      92,834             --          92,834
Furniture and equipment........................   3,697,813        175,161       3,872,974
                                                 ----------    -----------     -----------
                                                  3,790,647     14,262,977      18,053,624
Less: accumulated depreciation and
  amortization.................................     565,262          8,683         573,945
                                                 ----------    -----------     -----------
Total..........................................  $3,225,385    $14,254,294     $17,479,679
                                                 ==========    ===========     ===========

 
     Depreciation expense was $165,969 and $318,752 for the three and six months
ended June 30, 2005, respectively.
 
                                       F-47

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
4.  DEPOSITS
 
     The facility lease agreements with MPT require deposits equal to three
months rent. The funds are on deposit with MPT in non-interest bearing accounts.
Deposits consist of the following:
 


                                                              JUNE 30, 2005
                                                              -------------
                                                           
MPT lease deposits..........................................   $3,768,865
Other deposits..............................................      491,562
                                                               ----------
Total.......................................................   $4,260,427
                                                               ==========

 
5.  INTANGIBLE ASSETS
 
     The Company adopted SFAS No. 142. Under SFAS No. 142, goodwill and other
intangible assets with indefinite lives are not subject to periodic amortization
but are instead reviewed annually as of June 30, or more frequently if
impairment indicators arise. These reviews require the Company to estimate the
fair value of its identified reporting units and compare those estimates against
the related carrying values. For each of the reporting units, the estimated net
realizable value is determined using current transaction information and the
present value of future cash flows of the units. The following table summarizes
intangible assets:
 


                                                               JUNE 30, 2005
                                                               -------------
                                                            
Goodwill....................................................    $24,650,800
                                                                ===========
CONs/Licenses...............................................    $ 5,140,000
                                                                ===========

 
     The CONs/Licenses have not been amortized as they have indefinite lives.
 
6.  LONG-TERM DEBT
 
     The components of long-term debt are shown in the following table:
 


                                                               JUNE 30, 2005
                                                               -------------
                                                            
MPT 10.25% hospital acquisition note........................    $41,415,988
Merrill Lynch $17 million revolving credit facility.........     10,681,924
Other.......................................................         93,919
                                                                -----------
                                                                $52,191,831
Less: current maturities....................................         56,459
                                                                -----------
                                                                $52,135,372
                                                                ===========

 
     At December 31, 2004, MPT had advanced $49,141,945 to Vibra under four
notes for the hospital acquisition and working capital. Three notes for working
capital and transaction fees totaling $7,725,957 were interest only, with a
balloon payment due on March 31, 2005. Vibra may prepay the notes at any time
without penalty.
 
     The hospital acquisition note is interest only through June 2007, and then
amortized over the next 12 years with a final maturity in 2019. Substantially
all of the assets of Vibra and its subsidiaries, as well as Vibra's membership
interests in its subsidiaries, secure the MPT note. In addition the majority
member of Vibra, an affiliated company owned by the majority member and Vibra
Management, LLC have jointly and severally guaranteed the notes payable to MPT,
although the obligation of the majority member is
 
                                       F-48

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
limited to $5 million and his membership interest in Vibra. A default in any of
the MPT lease terms will also constitute a default under the notes.
 
     The revolving credit facility has a balloon maturity on February 8, 2008.
Interest is payable monthly at the rate of 30 day LIBOR plus 3% (6.33% as of
June 30, 2005). The loan is secured by a first position in the Company's
accounts receivable through an intercreditor agreement with MPT. Up to $17
million can be borrowed based on a formula of qualifying accounts receivable. A
portion of the proceeds were used to pay off $7,725,957 in working capital and
transaction fee notes to MPT which had a maturity of March 31, 2005. The Company
is subject to various financial and non-financial covenants under the credit
facility. A default in any of the MPT note and lease terms will also constitute
a default under the credit facility. At March 31, 2005, Vibra was not in
compliance with a facility rent coverage covenant. The Merrill Lynch credit
facility documents were amended for no consideration in June 2005 to
retroactively change the rent coverage covenant from a by facility rent coverage
to a consolidated rent coverage calculation. At June 30, 2005, the Company met
the amended covenant. The maximum facility was increased from $14 million to $17
million in the June 2005 amendment.
 
     Other long-term debt consists of a bank loan for equipment, furniture and
fixtures. The equipment purchased is pledged as collateral for the loan. The
loan is payable in monthly installments of $5,000 plus interest at a fixed rate
of 6.7%.
 
     Maturities of long-term debt for the next five years are as follows:
 


JUNE 30
-------                                                       (IN THOUSANDS)
                                                           
2006........................................................   $    56,459
2007........................................................        37,460
2008........................................................    12,533,614
2009........................................................     2,050,664
2010........................................................     2,271,018
Thereafter..................................................    35,242,616
                                                               -----------
                                                               $52,191,831
                                                               ===========

 
7.  RELATED PARTY TRANSACTIONS
 
     The Company has entered into agreements with Vibra Management, LLC (a
company affiliated through common ownership) to provide management services to
each hospital. The services include information system support, legal counsel,
accounting/tax, human resources, program development, quality management and
marketing oversight. The agreements call for a management fee equal to 2% of net
patient service revenue, and are for an initial term of five years with
automatic one-year renewals. Management fee expense amounted to $657,466 and
$1,244.059 for the three and six months ended June 30, 2005, respectively. At
June 30, 2005, $201,771 was payable to Vibra Management, LLC and is included
accounts payable -- related party in the accompanying consolidated balance
sheet.
 
     The spouse of the majority member of the Company provided legal consulting
services to the Company on the hospital acquisition and on various operational
licensing and financing matters. During the period from inception through
December 31, 2004, legal consulting services from this person totaled $176,187,
of which $98,137 was payable at December 31, 2004. The balance was paid during
the six months ended June 30, 2005, and no additional services were provided.
 
                                       F-49

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
8.  OPERATING LEASES
 
     Vibra entered into triple-net long-term real estate operating leases with
MPT at each of the six hospitals leased from MPT in 2004. Each lease is for an
initial term of 15 years and contains renewal options at Vibra's option for
three additional five-year terms. The base rate at commencement is calculated at
10.25% of MPT's adjusted purchase price of the real estate ("APP"). The base
rate increases to 12.23% of APP effective July 1, 2005. Beginning January 1,
2006, and each January 1, thereafter, the base rate increases by an inflator of
2.5% (i.e. base rate becomes 12.54% of APP on January 1, 2006).
 
     Each lease also contains a percentage rent provision ("Percentage Rent").
Beginning January 1, 2005, if the aggregate monthly net patient service revenues
of the six hospitals exceed an annualized net patient service revenue run rate
of $110,000,000, additional rent equal to 2% of monthly net patient service
revenue is triggered. The percentage rent is payable within ten days after the
end of the applicable quarter. The percentage rent declines from 2% to 1% on a
pro rata basis as Vibra repays the $41.416 million in notes to MPT. Percentage
rents totaling $1,016,590 are included in rent expense in the accompanying
consolidated statement of operations, representing the percentage rents due for
the six months ended June 30, 2005. Vibra has the option to purchase the leased
property at the end of the lease term, including any extension periods, for the
greater of the fair market value of the leased property, or the purchase price
increased by 2.5% per annum from the commencement date.
 
     Commencing on July 1, 2005, Vibra must make quarterly deposits to a capital
improvement reserve at the rate of $375 per quarter per bed, or $652,500 on an
annual basis, for all hospitals leased from MPT. The reserve may be used to fund
capital improvements and repairs as agreed to by the parties.
 
     Beginning with the quarter ending September 30, 2006, the MPT leases will
be subject to various financial covenants including limitations on total debt to
100% of the total capitalization of the guarantors (as defined) or 4.5 times the
12 month total EBITDAR (as defined) of the guarantors whichever is greater,
coverage ratios of 125% of debt service and 150% of rent (as defined), and
maintenance of average daily patient census. A default in any of the loan terms
will also constitute a default under the leases. All of the MPT leases are cross
defaulted.
 
     Vibra has also entered into operating leases for six outpatient clinics
which expire on various dates through 2011. The Redding hospital land is leased
from a prior owner under a triple net lease that expires in November 2075. The
lease has monthly payments of $1,483. The lease payments increase annually by 4%
each November until lease expiration.
 
     Minimum future lease obligations on the operating leases are as follows (in
thousands):
 


                                     MPT RENT     OUTPATIENT    REDDING
JUNE 30                             OBLIGATION     CLINICS     LAND LEASE      TOTAL
-------                            ------------   ----------   ----------   ------------
                                                                
2006.............................  $ 15,809,861   $  415,104   $   18,205   $ 16,243,170
2007.............................    16,283,492      389,774       18,933     16,692,199
2008.............................    16,690,580      296,468       19,690     17,006,738
2009.............................    17,107,844      241,272       20,478     17,369,594
2010.............................    17,535,540      241,272       21,297     17,798,109
Thereafter.......................   179,677,678      180,954    7,872,041    187,730,673
                                   ------------   ----------   ----------   ------------
                                   $263,104,995   $1,764,844   $7,970,644   $272,840,483
                                   ============   ==========   ==========   ============

 
     Substantially, all of the assets of Vibra and its subsidiaries, as well as
Vibra's membership interests in its subsidiaries, secure the MPT leases. In
addition the majority member of Vibra, an affiliated Company owned by the
majority member, and Vibra Management, LLC have jointly and severally guaranteed
the
 
                                       F-50

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
leases to MPT, although the obligation of the majority member is limited to $5
million and his membership interest in Vibra.
 
     The Company has sublet a floor of its Marlton, NJ hospital to an
independent pediatric rehabilitation provider. Three other hospitals have
entered into numerous sublease arrangements. These subleases generated rental
income of $433,883 and $822,268 for the three and six months ended June 30,
2005, respectively, which is included in non-operating revenue in the
accompanying consolidated statement of operations. The following table
summarizes amounts due under sub leases (in thousands):
 


JUNE 30
-------
                                                           
2006........................................................  $1,131,762
2007........................................................   1,157,227
2008........................................................   1,183,265
2009........................................................   1,209,888
2010........................................................   1,237,111
Thereafter..................................................   3,991,679
                                                              ----------
                                                              $9,910,932
                                                              ==========

 
9.  OBLIGATIONS UNDER CAPITAL LEASES
 
     On June 30, 2005, Vibra entered into a triple-net real estate lease with
MPT on the Redding, California property. The lease is for an initial term of 15
years and contains renewal options at Vibra's option for three additional five
year terms. The initial lease base rate is 10.5% of MPT's APP. Beginning January
1, 2006, and each January 1 thereafter, the base rate increases by the greater
of 2.5% (to 10.76%) or by the increase in the consumer price index from the
previous adjustment date. An additional $2.75 million can be drawn under the
lease agreement upon the completion of certain building renovations and the
conversion of the operations to a LTACH.
 
     The Redding lease does not contain a purchase option or percentage rent
provisions. Commencing January 1, 2006, Vibra must make quarterly deposits to a
capital improvement reserve at the rate of $375 per bed per quarter, or $132,000
on an annual basis.
 
     Beginning with the quarter ending September 30, 2006, the Redding lease is
subject to a covenant limiting total debt to 100% of the total capitalization of
the guarantors (as defined) or 4.5 times the 12 month total EBITDAR (as defined)
of the guarantors whichever is greater. Redding is also subject to the following
financial covenants relating to EBITDAR coverage:
 


                                                         FIXED CHARGE        LEASE PAYMENT
12 MONTH PERIOD ENDING                                 COVERAGE REQUIRED   COVERAGE REQUIRED
----------------------                                 -----------------   -----------------
                                                                     
June 30, 2006........................................         40%                 50%
September 30, 2006...................................         40%                 50%
December 31, 2006....................................         40%                 50%
March 31, 2007.......................................         60%                 75%
June 30, 2007........................................        100%                120%
September 30, 2007 and thereafter....................        125%                150%

 
     Other capital leases consist of equipment financing. The equipment is
pledged as collateral for the lease.
 
                                       F-51

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
     The following schedule summarizes the future minimum lease payments under
capital leases together with the net minimum lease payments:
 


                                                 MPT REDDING
JUNE 30                                             LEASE        OTHER        TOTAL
-------                                         -------------   --------   ------------
                                                                  
2006..........................................  $  1,913,625    $ 63,262   $  1,976,887
2007..........................................     1,961,466      53,318      2,014,784
2008..........................................     2,010,502      30,852      2,041,354
2009..........................................     2,060,765      29,992      2,090,757
2010..........................................     2,112,284      27,493      2,139,777
Thereafter....................................    24,256,341          --     24,256,341
                                                ------------    --------   ------------
Total minimum lease payments..................    34,314,983     204,917     34,519,900
Less amount representing interest (imputed
  rate 9%)....................................   (16,315,740)    (40,987)   (16,356,727)
                                                ------------    --------   ------------
Present value of net minimum lease payments...  $ 17,999,243    $163,930   $ 18,163,173
                                                ============    ========   ============

 
     Substantially, all of the assets of Vibra and its subsidiaries, as well as
Vibra's membership interests in its subsidiaries, secure the MPT leases. In
addition the majority member of Vibra, an affiliated Company owned by the
majority member, and Vibra Management, LLC have jointly and severally guaranteed
the leases to MPT, although the obligation of the majority member is limited to
$5 million and his membership interest in Vibra.
 
10.  COMMITMENTS AND CONTINGENCIES
 
  LITIGATION
 
     The Company is subject to legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated
(including claims against the hospitals under prior ownership). In the opinion
of management, the outcome of these actions will not have a material effect on
consolidated financial position or results of operations of the Company.
 
  CALIFORNIA MEDICAID
 
     The Company has recently fulfilled change of ownership requirements imposed
by Medi-Cal, the California Medicaid administrator that date back to the prior
owners' acquisition of the California hospitals. Accounts receivable at June 30,
2005, include $1,619,037 due from Medi-Cal, including $657,000 prior to the
acquisition. The Company is in the process of submitting bills for services
provided from July 2003 to present and expects payment within nine months.
 
  CALIFORNIA SEISMIC UPGRADE
 
     For earthquake protection California requires hospitals to receive an
approved Structural Performance Category 2 (SPC-2) by January 1, 2008, to
maintain its license. Hospitals may request a five year implementation
extension. The Fresno and Redding, CA hospitals are expected to meet the SPC-2
standard by January 1, 2008, with capital outlays that are not material to the
consolidated financial statements. The Kentfield, CA hospital has received a
five year extension to meet the requirement. Management is in preliminary
consultations with consulting architects and engineers to develop a plan for
Kentfield to meet the requirements. The capital outlay required to meet the
standards at Kentfield cannot be determined at this time.
 
                                       F-52

                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) -- (CONTINUED)
 
11.  RETIREMENT SAVINGS PLAN
 
     In November 2004, the Company began sponsorship of a defined contribution
retirement savings plan for substantially all of its employees. Employees may
elect to defer up to 15% of their salary. The Company matches 25% of the first
3% of compensation employees contribute to the plan. The employees vest in the
employer contributions over a five-year period beginning on the employee's hire
date. The expense incurred by the Company related to this plan was $58,092 and
$87,962 for the three and six months ended June 30, 2005, respectively.
 
12.  SEGMENT INFORMATION
 
     SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers.
 
     The Company's segments consist of (i) IRFs and (ii) LTACHs. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance of the
segments based on loss from operations.
 
     The following table summarizes selected financial data for the Company's
reportable segments:
 


                                          FOR THE SIX MONTHS ENDED JUNE 30, 2005
                                    ---------------------------------------------------
                                        IRF          LTACH        OTHER        TOTAL
                                    -----------   -----------   ---------   -----------
                                                                
Net patient service revenue.......  $27,964,866   $31,951,557   $      --   $59,916,423
Net loss from operations..........   (2,881,538)     (573,389)   (238,389)   (3,693,316)
Interest expense..................    1,497,427     1,060,872          --     2,558,299
Depreciation and amortization.....      193,568       174,822      46,585       414,975
Deferred rent.....................    3,666,428     1,411,370          --     5,077,798
Total assets......................   50,589,942    29,089,970     872,578    80,552,490
Purchases of property and
  equipment.......................      129,427       370,980       5,001       505,408
Goodwill..........................   16,409,877     8,240,923          --    24,650,800

 


                                         FOR THE THREE MONTHS ENDED JUNE 30, 2005
                                    ---------------------------------------------------
                                        IRF          LTACH        OTHER        TOTAL
                                    -----------   -----------   ---------   -----------
                                                                
Net patient service revenue.......  $14,141,942   $16,446,393   $      --   $30,588,335
Net loss from operations..........   (1,728,535)     (383,980)   (154,123)   (2,266,638)
Interest expense..................      752,429       542,514          --     1,294,943
Depreciation and amortization.....       98,220        92,387      30,075       220,682

 
13.  SUBSEQUENT EVENT
 
     On September 23, 2005, Merrill Lynch and Vibra amended their loan agreement
for no consideration. The amendment excludes the Redding capital lease from the
definition of leased assets in the agreement.
 
                                       F-53

 
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Member
Vibra Healthcare, LLC
 
     We have audited the accompanying consolidated balance sheet of Vibra
Healthcare, LLC and subsidiaries (the "Company") as of December 31, 2004, and
the related consolidated statements of operations, changes in partner's capital,
and cash flows for the period from inception (May 14, 2004) through December 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
     We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vibra
Healthcare, LLC and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the period from inception (May 14,
2004) through December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
 
                                          /s/ Parente Randolph, LLC
 
Harrisburg, Pennsylvania
March 8, 2005, except Note 11,
as to which the date is March 31, 2005
 
                                       F-54

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                           Consolidated Balance Sheet
                               December 31, 2004
 

                                                            
                           ASSETS
Current assets:
  Cash and cash equivalents.................................   $ 2,280,772
  Patient accounts receivable, net of allowance for doubtful
     collections of $302,988................................    17,319,154
  Third party settlements receivable........................       346,141
  Prepaid insurance.........................................       719,480
  Deposit for workers' compensation claims..................     1,375,000
  Other current assets......................................       518,650
                                                               -----------
     Total current assets...................................    22,559,197
Property and equipment, net.................................     2,662,546
Goodwill....................................................    24,510,296
Intangible assets...........................................     4,260,000
Deposits....................................................     3,485,387
Deferred financing and lease costs..........................     1,543,424
                                                               -----------
     Total assets...........................................   $59,020,850
                                                               ===========

 
             LIABILITIES AND PARTNER'S CAPITAL
Current liabilities:
  Accounts payable..........................................   $ 5,142,345
  Accounts payable -- related parties.......................       262,144
  Accrued liabilities.......................................     4,387,292
  Accrued insurance claims..................................     1,441,516
                                                               -----------
     Total current liabilities..............................    11,233,297
Deferred rent...............................................     2,460,308
Long-term debt, net of current maturities...................    49,141,945
                                                               -----------
Total liabilities...........................................    62,835,550
                                                               -----------
Partner's capital...........................................    (3,814,700)
                                                               -----------
     Total liabilities and partner's capital................   $59,020,850
                                                               ===========

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-55

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
     Consolidated Statements of Operations and Changes in Partner's Capital
     For the Period from Inception (May 14, 2004) through December 31, 2004
 

                                                            
REVENUE:
  Net patient service revenue...............................   $48,266,019
                                                               -----------
EXPENSES:
  Cost of services..........................................    34,528,924
  General and administrative................................     5,631,229
  Rent expense..............................................     8,859,233
  Interest expense..........................................     2,293,402
  Management fee -- Vibra Management, LLC...................       982,668
  Depreciation and amortization.............................       302,194
  Bad debt expense..........................................       776,780
                                                               -----------
     Total expenses.........................................    53,374,430
                                                               -----------
       Loss from operations.................................    (5,108,411)
  Non-operating revenue.....................................     1,293,711
                                                               -----------
       Net loss.............................................    (3,814,700)
  Partner's capital -- beginning............................            --
                                                               -----------
  Partner's capital -- ending...............................   ($3,814,700)
                                                               -----------

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-56

 
                     VIBRA HEALTHCARE LLC AND SUBSIDIARIES
 
                      Consolidated Statement of Cash Flows
     For the Period from Inception (May 14, 2004) through December 31, 2004
 

                                                            
Operating activities:
  Net loss..................................................   $(3,814,700)
     Adjustments to reconcile net loss to net cash used in
      operating activities:
       Depreciation and amortization........................       302,194
       Provision for bad debts..............................       776,780
Changes in operating assets and liabilities, net of effects
  from acquisition of business:
       Accounts receivable including third party
        settlements.........................................    (4,801,250)
       Prepaids and other current assets....................    (2,257,611)
       Deposits.............................................      (133,671)
       Accounts payable.....................................     1,884,531
       Accounts payable -- related party....................       262,144
       Accrued liabilities..................................     1,608,634
       Deferred rent........................................     2,460,308
                                                               -----------
Net cash used in operating activities.......................    (3,712,641)
                                                               -----------
Investing activities:
       Purchases of property and equipment..................      (167,900)
       Cash acquired in business acquisition................       201,280
                                                               -----------
Net cash provided by investing activities...................        33,380
                                                               -----------
Financing activities:
       Proceeds of notes payable............................     6,050,458
       Payment of deferred financing costs..................       (90,425)
                                                               -----------
Net cash provided by financing activities...................     5,960,033
                                                               -----------
Net increase in cash and cash equivalents...................     2,280,772
Cash and cash equivalents -- beginning......................            --
                                                               -----------
Cash and cash equivalents -- ending.........................   $ 2,280,772
                                                               ===========
Supplemental cash flow information:
       Cash paid for interest...............................   $ 2,293,402
                                                               ===========
Non-cash transactions:
       Notes issued relating to acquisition.................   $38,093,842
                                                               ===========
       Lease deposits funded by notes payable...............   $ 3,296,365
                                                               ===========
       Deferred financing costs funded by notes payable.....   $ 1,500,000
                                                               ===========

 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       F-57

 
                     VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         PERIOD FROM INCEPTION (MAY 14, 2004) THROUGH DECEMBER 31, 2004
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Organization:  Vibra Healthcare LLC ("Vibra" and the "Company") was formed
May 14, 2004, and commenced operations with the acquisition of its subsidiaries
consisting of four independent rehabilitation hospitals ("IRF") and two
long-term acute care hospitals ("LTACH") located throughout the United States on
July 1, 2004, and August 17, 2004. Vibra, a Delaware limited liability company
("LLC"), is a single member LLC with an infinite life. The members liability is
limited to the capital contribution. Vibra was previously named Highmark
Healthcare LLC until a name change in December 2004. Vibra's wholly-owned
subsidiaries consist of:
 


SUBSIDIARIES                                                       LOCATION
------------                                                   -----------------
                                                            
92 Brick Road Operating Company LLC.........................   Marlton, NJ
4499 Acushnet Avenue Operating Company LLC..................   New Bedford, MA
1300 Campbell Lane Operating Company LLC....................   Bowling Green, KY
8451 Pearl Street Operating Company LLC.....................   Denver, CO
7173 North Sharon Avenue Operating Company LLC..............   Fresno, CA
1125 Sir Francis Drake Boulevard Operating Company LLC......   Kentfield, CA

 
     The Company provides long-term acute care hospital services and inpatient
acute rehabilitative hospital care at its hospitals. Patients in the Company's
LTACHs typically suffer from serious and often complex medical conditions that
require a high degree of care. Patients in the Company's IRFs typically suffer
from debilitating injuries including traumatic brain and spinal cord injuries,
and require rehabilitation care in the form of physical, psychological, social
and vocational rehabilitation services. The Company also operates ten outpatient
clinics affiliated with five of its six hospitals.
 
     Principles of Consolidation:  The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries controlled through
sole membership interests in limited liability companies. All significant
intercompany balances and transactions are eliminated in consolidation.
 
     Use of Estimates:  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affe