##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K FOR ANNUAL AND TRANSACTION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES AND EXCHANGE ACT OF 1934
 (MARK ONE)
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER: 001-31375 WINDROSE MEDICAL PROPERTIES TRUST (Exact name of registrant as specified in its charter)
 MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    35-216691
(I.R.S. Employer
Identification No.)
 3502 WOODVIEW TRACE, SUITE 110, INDIANAPOLIS, IN
    
    
    46268(Address of principal executive offices)
    
    (Zip Code)
 (317) 860-8180
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares of Beneficial Interest, par value of $0.01 per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) or the Act: Title of Each Class: None: Indicate by check mark whether the Registrant (i) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes: þNo o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes: þ No o Aggregate market value of the voting stock held by non-affiliates of the Registrant: $105,550,710
as of June 30, 2004 and $163,925,175 as of February 28, 2005. As of February 28, 2005, there were 11,642,413 common shares outstanding. Documents incorporated by reference: Portions of the Registrants definitive Proxy Statement to be filed with the Securities and
Exchange Commission no later than 120 days after the Registrants fiscal year ended December 31,
2004, and to be delivered to stockholders in connection with the 2005 Annual Meeting of
Shareholders to be held on April 26, 2005, are incorporated by reference into Part III.




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2004
INDEX PAGECAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
    
    
    1PART I
    
    
    1Item 1. Business
    
    
    1Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8PART II
    
    
    9Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    9Item 6. Selected Financial Data
    
    
    10Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    34Item 9A. Controls and Procedures
    
    
    34Item 9B. Other Information
    
    
    35PART III
    
    
    35Item 10. Trustees and Executive Officers
    
    
    35Item 11. Executive Compensation
    
    
    35Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    35Item 13. Certain Relationships and Related Transactions
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    35PART IV
    
    
    35Item 15. Exhibits and Financial Statement Schedules, and Reports on Form 8-K
    
    
    35INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-8SIGNATUREEXHIBIT INDEXEX-10.23 SECURED CONSTRUCTION LOAN FACILITY 12/03/04EX-23.01  CONSENT OF KPMG LLPEX-31.04 SECTION 302 CERTIFICATION OF THE CEOEX-31.05 SECTION 302 CERTIFICATION OF THE CFOEX-31.06  SECTION 302 CERTIFICATION OF THE COOEX-32.01  SECTION 906 CERTIFICATION OF THE CEOEX-32.02  SECTION 906 CERTIFICATION OF THE CFOEX-32.03  SECTION 906 CERTIFICATION OF THE COO




---



##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K (Report), including the Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains certain information and statements that
constitute forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements can be identified by the use of
forward-looking terminology including, but not limited to, may, will, expect, should,
anticipate, target, goal, continue, project, intend, plan, believe, seek,
estimate or similar terminology. These forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual
results may differ materially and adversely from those expressed in any forward,-looking
statements. Factors that might cause or contribute to such differences include, but are not limited
to, those discussed in this Report in Item 7 under the section entitled Risk Factors and
elsewhere, and in other reports Windrose Medical Properties Trust files with the Securities and
Exchange Commission (SEC) from time to time. Windrose Medical Properties undertakes no
obligation to revise or update publicly any forward looking statement for any reason. 
 PART I 
 ITEM 1. BUSINESS OVERVIEW Windrose Medical Properties Trust (the Company) is a self administered and self-managed real
estate company, operating as a real estate investment trust (REIT) for federal income tax
purposes. The Company invests in specialty medical properties and selectively owns, acquires,
develops and manages medical facilities. The types of specialty medical properties in which the
Company seeks to invest include (but are not limited to): Medical Office Buildings.Medical office buildings are office and clinic facilities, often located
near hospitals or on hospital campuses, specifically constructed and designed for the use of
physicians and other health personnel to provide services to their patients. Medical office
buildings typically contain sole and group physician practices and may hold laboratory and other
patient services. Outpatient Treatment and Diagnostic Facilities.Outpatient treatment and diagnostic facilities
provide treatments and care not typically provided in physician offices or clinics, such as
gastrointestinal endoscopy care, oncology treatment, kidney dialysis and other similar services. Physician Group Practice Clinics.Physician group practice clinics are facilities, often located
near hospitals or on hospital campuses, that are typically single-tenant buildings leased to either
a single or multi-specialty medical practice group, including physician offices and clinics where
routine patient office visits are conducted. Ambulatory Surgery Centers.Ambulatory surgery centers operate exclusively for the purpose of
furnishing general or specialty surgical procedures not requiring an overnight stay in a hospital.
In addition to surgery facilities, ambulatory surgery centers typically include physician office
and clinic space. Specialty Hospitals and Treatment Centers.Specialty hospitals and treatment centers are hospitals
that focus and specialize in providing care for certain conditions and performing certain
procedures, such as cardiovascular and orthopedic surgery. Specialty hospitals also include
long-term acute care hospitals that provide care for patients requiring extended hospital stays and
specialized care and observation more efficiently and economically than traditional acute care
hospitals. The Company completed its initial public offering (IPO) of its common shares in August 2002, and
acquired seven specialty medical properties for approximately $62.6 million. Since then, the
Company has acquired 32 additional other specialty health-care related buildings for purchase
prices aggregating approximately $225 million. As of December 31, 2004, the Companys net real
estate investments were approximately $302.5 million, including construction-in-progress of
approximately $16.5 million, and its portfolio consisted of thirty-one (31) multi-tenant medical
office buildings, four (4) outpatient treatment and diagnostic centers and 1




---



##### Table of Contents



four (4) physician group practice clinics/ambulatory surgery centers. The Company was organized in March 2002 as a Maryland real estate investment trust with perpetual
existence. The Companys corporate offices are located at 3502 Woodview Trace, Suite 110,
Indianapolis, Indiana 46268. Our telephone number is (317) 860-8180. The Companys website
address is http://www.windrosempt.com. The Company makes available free of charge through its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as well as the definitive proxy statement and Section
16 reports on Form 3, 4 and 5. These reports are accessible under the Investor Center caption of
the Companys website and are available as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the Securities and Exchange Commission. The
information on or connected to the Companys website is not, and shall not be deemed to be, a part
of this report or incorporated into this or any other filings we make with the Securities and
Exchange Commission. The Operating Partnership Windrose Medical Properties, L.P., the Companys operating partnership, is a limited partnership
organized in May 2002 under the Virginia Revised Uniform Limited Partnership Act. The Company owns
its properties and conducts its business through the operating partnership. The Company serves as
the sole general partner of, and owned as of December 31, 2004 an approximate 97.1% interest in the
operating partnership. Hospital Affiliates Development Corporation The Companys taxable REIT subsidiary, Hospital Affiliates Development Corporation (HADC), was
incorporated in 1989 as an Indiana corporation. Its predecessor was incorporated in 1976. HADC
conducts business throughout the United States and, to a lesser extent, internationally. HADCs
primary objective is the development of specialty medical properties for the Company to own, but
HADC also provides these services for third-parties. HADC develops and constructs new
build-to-suit or multi-tenant facilities. HADC expects to earn fees from third parties by
providing services such as property development, facility planning, medical equipment planning and
implementation services, real estate brokerage, leasing services and property management. Neither
the Company nor its operating partnership can undertake material amounts of third-party development
and construction activities directly under applicable REIT tax rules. HADC pays income taxes at
regular corporate rates on its taxable income. SEGMENTS The Company is engaged in two operating segments. One Segment relates to the Companys ownership
and rental of specialty medical facilities. The other segment relates to the Companys provision,
through HADC, of various real estate services such as third party facility planning, project
management, medical equipment planning and implementation services and related activities. The
revenues generated by each segment, from external customers, from August 16, 2002 through December
31, 2004 and their predecessor for the period prior to August 16, 2002 is included in the Companys
audited financial statements included in this report in Item 8, Financial Statements and
Supplementary Data. RECENT DEVELOPMENTS The Company seeks to acquire or to develop quality medical properties in geographic areas and/or in
medical practice specialties where the demand for medical services is expected to increase over the
coming years. The Company also targets properties that are located on or near strategic hospital
campuses that are in expanding markets with high occupancy rates and competitive tenant lease
terms. The Company believes that such properties, when efficiently marketed, actively managed and
leased, provide attractive returns, significant cash flow growth potential and stable rents. On January 28, 2004, the Company completed the purchase of a $32.0 million medical office building
in Voorhees, NJ by assuming $23.1 million of mortgage debt on the property with the balance of the
purchase paid from proceeds from the Companys 2




---



##### Table of Contents



December 2003 public offering. The Company also completed the purchase of a $7.0 million medical
office building in Lewisville, TX on January 28, 2004, using proceeds from the December 2003
offering. On January 30, 2004, the Company completed the purchase of the $7.5 million medical office
building in Coral Springs, FL, by assuming $3.4 million of mortgage debt on the property with the
balance of the purchase paid from the Companys line of credit facility. On June 22, 2004, the Company completed the purchase of a $6.6 million medical office building in
Atlanta, GA by assuming $4.7 million in debt with the balance paid from the Companys line of
credit facility. Another medical office building with a value of $7.4 million, also in Atlanta was
purchased from the same seller on June 25, 2004. This purchase included the assumption of $5.1
million in debt and the balance was paid from on the Companys line of credit facility. A third and
final property of the seller was purchased on July 2, 2004 for $3.4 million, which included
assumption of debt of $2.6 million with the balance paid from the Companys line of credit. On September 7, 2004 the Company entered into an agreement in which the Company through its
development subsidiary, HADC, will construct a surgical hospital, with an attached parking deck, on
a 2.3 acre site in Houston, TX with a total development budget of $33.2 million. Scheduled for
completion in late 2005, the project will be self-developed by the Company with financing provided
by Huntington National Bank, the Companys primary lender. The Company has purchased a 51% interest
in a joint venture, which owns the land with a book value of $3.8 million, on which the hospital is
to be built, as its sole asset and the joint venture has been consolidated in the Companys
financial statements. A second project is an adjoining four-story medical office building and
parking structure on a contiguous 2.3 acre parcel with a total development budget of $23.7 million,
which is expected to be completed late in 2005. The land on which the medical office building is
to be built is owned by one of the Companys subsidiaries. The pre-development contracts have been
assigned to the Company while it completes the design and manages the development. On September 20, 2004, the Company completed the purchase of a $46.0 million medical office
building in Phoenix, Arizona. This purchase included the assumption of $32.4 million in debt with
the balance paid from the Companys line of credit facility. On October 1, 2004, the Company completed the purchase of a $4.4 million medical office building in
Pearland, TX by assuming $2.0 million in debt with the balance paid the Companys line of credit
facility. On November 17, 2004, the Company completed the purchase of a property that consists of nine
medical office buildings in Durham, NC for $14.6 million by assuming $8.3 million in debt with the
balance paid the Companys line of credit facility. On February 2, 2005 the Company completed the sale of its Port St. Lucie, FL property for $6.7
million. The Company classified this property as held for sale in the third quarter of 2004
because it had transitioned to a general purpose asset and was no longer consistent with the
Companys medical portfolio parameters. COMPETITIVE STRENGTHS The Company believes that it distinguishes itself from other owners, operators and developers of
medical real estate properties in multiple ways, including the following:  
    Unique focus on specialty medical properties providing outpatient
services.The Company is a public real estate company focusing on the ownership,
development and management of specialty medical properties, particularly those
offering outpatient care. The Company believes that recent trends in the healthcare
industry have led medical service providers to provide an increasing amount of their
services through this type of property. The Company believes that through this
focus, it can achieve a unique and attractive profile for cash flow growth and
increased portfolio value.
    Experienced management team.The Company has a deep and seasoned senior
management team, which is experienced in developing, acquiring, operating, managing
and financing specialty medical properties. The Companys management team has an
in-depth understanding of the rapid changes in the healthcare industry and the
ability to execute the Companys opportunistic strategy. 3




---



##### Table of Contents




    Broad network of relationships with healthcare providers.Through the
reputation and experience of the Companys management, the Company has developed a
broad network of relationships with healthcare providers. The Companys senior
management has a 28-year history of successfully providing planning, consulting,
development and management services to healthcare providers located throughout the
United States and in 14 foreign countries. The Company believes that it is among a
limited number of companies that have the experience and knowledge to satisfy the
complex real estate needs and demands of medical services providers, particularly
during periods of rapid change.
    Broad range of services.The Company is uniquely positioned to provide
the capital that medical services providers need to expand their practices, while at
the same time offering the professional management, design and implementation
services that their practices require on an ongoing basis. As medical services
providers divest themselves of real estate in favor of sale/leaseback arrangements,
the Company has the capability to purchase the real estate and subsequently provide
the services typically required by lessees.
    Strong development capabilities. HADC has been providing facility,
design, development, finance and management services to healthcare systems, physical
groups and third-party medical property owners for over 29 years. Since its
inception, HADC has completed over 600 projects totaling in excess of $1.7 billion of
construction costs. While HADC expects to receive fees from third parties, HADCs
primary strategy is to develop properties for ownership by the Company. BUSINESS STRATEGY The Companys primary business objectives are to prudently maximize distributable cash flow and to
enhance the value of its portfolio in order to maximize total return to its shareholders. The
Companys strategy is to capitalize on the opportunities created by the changing healthcare
environment by acquiring, selectively developing and managing specialty medical properties that
meet its investment criteria. In general, the Company will acquire or develop specialty medical
properties in desirable markets with tenants who are expected to prosper in the changing healthcare
delivery environment. The Company will focus on medical properties providing specialty medical
services, including medical office buildings, outpatient treatment and diagnostic facilities,
physical group practice clinics, ambulatory surgery centers and specialty hospitals and treatment
centers. External Growth Strategy The Company seeks to achieve its business objectives externally through:  
    Acquiring or developing assets in areas with attractive growth
characteristics.The Company seeks to acquire or to develop quality medical
properties in geographic areas and/or in specialties where the demand for medical
services is expected to increase over the coming years. The Company also targets
properties that are located on or near strategic hospital campuses, in expanding
markets with high occupancy rates and competitive tenant lease terms. The Company
believes that such properties, when efficiently marketed, actively managed and
leased, provide attractive returns, significant cash flow growth potential and stable
rents.
    Providing services through HADC.To better serve the need of the
Companys tenants, through HADC, will develop and construct new build-to-suit and
multi-tenant facilities when an acceptable level of pre-construction leasing is
achieved. While the primary objective of HADC will be the development of quality
specialty medical properties for the Companys ownership, HADC will also provide a
select amount of these services for third parties, especially those that are expected
to be a source of long-term relationships and assets. HADC expects to earn fees from
third parties by providing services such as property development, facility planning,
medical equipment planning and implementation services, real estate brokerage,
leasing services and property management. Internal Growth Strategy The Company seeks to achieve its business objectives internally through: 4




---



##### Table of Contents




    Entering into long-term leases with annual contractual rent increases.
The Company expects to generate internal growth in cash flow through leases that
contain provisions for fixed contractual rental increases or increases that are tied
to indices such as the Consumer Price Index.
    Use of net-lease structures.The Company seeks to enter long-term leases
primarily under net lease structures, where the tenant agrees to pay monthly rent and
property operating expenses (taxes, maintenance and insurance) plus, typically,
future rent increases based on stated percentage increases or increases in the
Consumer Price Index. The Company believes that long-term leases, coupled with a
tenants responsibility for property expenses, will produce a more predictable income
stream, while continuing to offer the potential for growth in rental income.
    Replacing tenants quickly at the best available market terms and lowest
possible leasing costs. The Company seeks to lease space in a timely manner at the
most favorable rates it can attract, while also reducing leasing costs. The Company
believes that through its focus on quality properties in desirable locations, coupled
with its relationships with medical services providers, it can further minimize
vacancies in its properties and lease space at the best available market terms.  
    Proactive property management to maximize tenant retention. In order to achieve
greater awareness and responsiveness to tenant needs, the Company either directly
manages its properties or provides property management through qualified and
experienced third parties. The Company believes that this emphasis on tenant needs
will lead to enhanced tenant satisfaction and retention. The Company recognizes that
the renewal of existing tenant leases, as opposed to tenant replacement, often
provides the best operating results by minimizing transaction costs and avoiding
interruptions in rental income during periods of vacancy. FINANCING STRATEGY The Company plans to build its capital structure with a balanced approach that remains conservative
and maximizes flexibility. This plan provides that the Company will seek to:  
    Borrow at fixed rates or on instruments that can take on the
characteristics of fixed-rate debt (including the use of interest rate swaps);
    Have as its goal conservative debt service ratios. The Companys current
debt service covenant in its line of credit facility requires the Company to maintain
at least a 1.8 coverage;
    Balance debt in a fashion that enhances the Companys ability to access capital markets;
    Appropriately use its line of credit facility to finance acquisitions in concert with other debt instruments; and
    Selectively access capital in efficient ways so as to deploy the funds
rapidly to income producing assets or new development. COMPETITION The Company competes for development opportunities and opportunities to purchase medical properties
with, among others, private investors, healthcare providers, (including physicians),
healthcare-related REITs, real estate partnerships, financial institutions and local developers.
Many of these competitors have substantially greater financial and other resources than the Company
has and may have better relationships with lenders and sellers. Increased competition for medical
properties from competitors, including other REITs, may adversely affect the Companys ability to
acquire specialty medical properties and the price the Company pays for properties. The Companys
properties will face competition from other nearby facilities that provide services comparable to
those offered at the Companys facilities. Some of those facilities are owned by governmental
agencies and supported by tax revenue, and others are owned by nonprofit corporations and may be
supported to a large extent by endowments and charitable contributions. Those types of support are
not available to the Companys facilities. In addition, competing healthcare facilities located in
the areas 5




---



##### Table of Contents



served by the Companys facilities may provide health services that are not available at the
Companys facilities. ENVIRONMENTAL Under various federal, state and local laws and regulations, an owner or operator of real estate
may be liable for the costs of removal or remediation of certain hazardous or toxic substances on
such property. These laws often impose such liability without regard to whether the owner knew of,
or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment a hazardous substance at a
property owned by another may be liable for the costs of removal or remediation of hazardous
substances released into the environment at that property. The costs of remediation or removal of
such substances may be substantial, and the presence of such substances, or the failure to promptly
remediate such substance, may adversely affect the owners ability to sell such real estate or to
borrow using such real estate as collateral. In connection with the ownership and operation of the
Companys properties, the Company or its lessees may be potentially liable for any such costs. The Company obtained Phase I environmental assessments on all of its existing properties. The
Phase I environmental assessments are intended to identify potential environmental contamination
for which the Companys properties may be responsible. The Phase I environmental assessments
include historical reviews of the proprieties, reviews of certain public records, preliminary
investigations of the sites and surrounding properties, screening for the presence of hazardous
substances, toxic substances and underground storage tanks, and the preparation and issuance of a
written report. The Phase I environmental assessments do not include invasive procedures, such as
soil sampling or ground water analysis. Thus, it is possible that these environmental assessments
will not reveal all environmental liabilities and there may be material environmental liabilities
of which the Company is not aware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability, or (ii) the current
environmental condition of the properties will not be affected by the condition of the properties
in the vicinity of the Companys properties (such as the presence of leaking underground storage
tanks) or by third parties unrelated to the Company or its lessees. The Company believes that its properties are in compliance in all material respects with all
federal, state and local ordinances and regulation regarding hazardous or toxic substances and
other environmental matters. The Company has not been notified by any governmental authority of
any material noncompliance, liability or claim relating to hazardous or toxic substances or other
environmental matter in connection with any of the Companys properties. CORPORATE GOVERNANCE The Company has adopted a Code of Ethics that applies to all of the Companys trustees, officers
and employees and has posted such Code of Ethics on its website at http://www.windrosempt.com. The
Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to
amendments or waivers from any provision of the Code of Ethics applicable to the Companys chief
executive officer, chief financial officer, chief accounting officer or controller by posting such
information on its internet website. The Companys Corporate Governance Guidelines, Code of Ethics, Code of Conduct and the charters of
the Audit, Compensation and Nominating & Governance Committees are available on the Companys
website, and are available in print, without charge, to any shareholder upon request by writing to
Windrose Medical Properties Trust, 3502 Woodview Trace, Suite 110, Indianapolis, Indiana 46268,
attention Investor Relations. All references to the Company in this Report on Form 10-K include the Company and those entities
owned or controlled by the Company, unless the context indicates otherwise. The Companys
headquarters and executive offices are located in Indianapolis, Indiana. In addition, the Company
and its taxable REIT subsidiary Hospital Affiliates Development Corporation (HADC) have an office
in Nashville, Tennessee. As of December 31, 2004, the Company had 45 employees. 6




---



##### Table of Contents



ITEM 2. PROPERTIES At December 31, 2004 the Company owned the following thirty-nine medical buildings: Total Rentable
    
    
    OccupancyProperty
    
    Type
    
    Location
    
    Square Feet
    
    
    Rate310 Building
    
    Medical Office
    
    Nashville, TN
    
    
    48,360
    
    
    
    90.78
    %BuildingBiltmore Medical Mall
    
    Medical Office
    
    Phoenix, AZ
    
    
    152,600
    
    
    
    99.71
    %BuildingCentral Medical Park (9 Buildings)
    
    Medical Office
    
    Durham, NC
    
    
    120,930
    
    
    
    93.74
    %BuildingCoral Springs Surgical Center
    
    Medical Office
    
    Coral Springs, FL
    
    
    43,728
    
    
    
    95.43
    %BuildingCooper Voorhees Medical Mall
    
    Medical Office
    
    Voorhees, NJ
    
    
    116,451
    
    
    
    92.00
    %BuildingElm Street Professional Plaza
    
    Medical Office
    
    Reno, NV
    
    
    66,606
    
    
    
    100.00
    %BuildingGateway East Medical Office Buildings (3 Buildings)
    
    Medical Office
    
    El Paso, TX
    
    
    69,927
    
    
    
    90.16
    %BuildingMethodist Medical Building
    
    Medical Office
    
    Sacramento, CA
    
    
    46,440
    
    
    
    100.00
    %BuildingMorningside Professional Plaza(1)
    
    Medical Office
    
    Port St. Lucie, FL
    
    
    44,515
    
    
    
    96.02
    %BuildingMount Vernon Medical Center
    
    Medical Office
    
    Atlanta, GA
    
    
    85,121
    
    
    
    84.73
    %BuildingOrthoLink  East/West Medical Center
    
    Ambulatory Surgery Center/
    
    Austell, GA
    
    
    41,402
    
    
    
    100.00
    %Physician Group ClinicOrthoLink  Gwinnett Center for Specialty Medicine I
    
    Ambulatory Surgery Center/
    
    Lawrenceville, GA
    
    
    41,161
    
    
    
    100.00
    %Physician Group ClinicOrthoLink  Gwinnett Center for Specialty Medicine II
    
    Medical Office
    
    Lawrenceville, GA
    
    
    18,462
    
    
    
    100.00
    %BuildingPark Medical Center
    
    Medical Office
    
    Charlotte, NC
    
    
    34,000
    
    
    
    93.64
    %BuildingPartell Medical Center
    
    Medical Office
    
    Las Vegas, NV
    
    
    32,118
    
    
    
    79.53
    %BuildingRush Copley Medical Office Building
    
    Medical Office
    
    Aurora, IL
    
    
    31,244
    
    
    
    100.00
    %BuildingSierra Health Services (4 Buildings)
    
    Outpatient Treatment and
    
    Las Vegas, NV
    
    
    160,855
    
    
    
    100.00
    %Diagnostic FacilityStone Oak Physicians Plaza (2 Buildings)
    
    Medical Office
    
    San Antonio, TX
    
    
    65,652
    
    
    
    100.00
    %BuildingTomball Professional Atrium Building
    
    Medical Office
    
    Tomball, TX
    
    
    53,617
    
    
    
    74.69
    %BuildingTrinity West Medical Plaza
    
    Medical Office
    
    Lewisville, TX
    
    
    40,686
    
    
    
    100.00
    %BuildingUrology Center of Florida
    
    Ambulatory Surgery Center/
    
    Ocala, FL
    
    
    19,561
    
    
    
    100.00
    %Physician Group ClinicUrology Center of the South
    
    Ambulatory Surgery Center/
    
    Germantown, TN
    
    
    33,777
    
    
    
    100.00
    %Physician Group ClinicWest Pearland Professional Center I
    
    Medical Office
    
    Pearland, TX
    
    
    20,800
    
    
    
    100.00
    %BuildingWest Pearland Professional Center II
    
    Medical Office
    
    Pearland, TX
    
    
    19,126
    
    
    
    100.00
    %BuildingWinn Way
    
    Medical Office
    
    Decatur, GA
    
    
    21,737
    
    
    
    96.39
    %BuildingTOTAL PORTFOLIO
    
    
    
    
    
    
    1,428,876
    
    
    
    95.20
    %
   (1)
    
    Morningside was sold on February 2, 2005 
 ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any pending or threatened litigation that, if resolved against the
Company, would have a material adverse effect on the Companys financial condition or results of
operations. 7




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended
December 31, 2004. 8




---



##### Table of Contents



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On August 16, 2002, the Companys common shares became listed and initiated trading on the New York
Stock Exchange. Our common shares are listed in the New York Stock Exchange under the symbol
WRS. As of February 9, 2005, there were 8,254 shareholders of record. The following table sets
forth the closing high and low sales prices of our common shares for the periods indicated and the
dividend declared per share during each such period: Quarter Ended
    
    High
    
    
    Low
    
    
    DividendDecember 31, 2004
    
    $
    14.65
    
    
    $
    12.98
    
    
    $
    0.225September 30, 2004
    
    
    13.32
    
    
    
    10.96
    
    
    
    0.220June 30, 2004
    
    
    12.57
    
    
    
    10.45
    
    
    
    0.220March 31, 2004
    
    
    12.87
    
    
    
    12.25
    
    
    
    0.220December 31, 2003
    
    
    13.20
    
    
    
    11.70
    
    
    
    0.220September 30, 2003
    
    
    11.75
    
    
    
    10.32
    
    
    
    0.220June 30, 2003
    
    
    10.94
    
    
    
    9.01
    
    
    
    0.130March 31, 2003
    
    
    11.12
    
    
    
    9.32
    
    
    
    0.130
 To maintain its status as a REIT for federal income tax purposes, the Company is required to
distribute substantially all of its taxable income, which may differ materially from its income
calculated in accordance with generally accepted accounting principles, to its shareholders each
year. In order to satisfy this requirement, the Company intends to declare regular quarterly
dividends. Distributions will be authorized by the Board of Trustees and declared by the Company based
upon a number of factors, including the amount of funds from operations, the Companys financial
condition, debt service requirements, capital expenditure requirements for the Companys
properties, the Companys taxable income, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code and other factors the Companys trustees deem relevant.
The Companys ability to make distributions to its shareholders depends on its receipt of
distributions from its operating partnership and lease payments from the lessees of its properties. On February 16, 2005, the Company declared a quarterly dividend of $0.225 per share payable on
March 15, 2005, to common shareholders of record on February 28, 2005. Following is a summary of
the taxable nature of the Companys dividends for the year ended December 31, 2004: Percent taxable as ordinary income
    
    
    48.4
    %Percent non-taxable as return of capital
    
    
    51.6
    %100.0
    %
 The level of quarterly dividends is based on a number of factors and should not be deemed
indicative of taxable income for the quarter in which declared or future quarters or of income
calculated in accordance with generally accepted accounting principles. In addition, the Company
cannot provide any assurance as to the amount or timing of future distributions. During 2004, the Company issued 10,458 common shares upon the redemption of limited partnership
units of the Operating Partnership held by persons who received units in private placements in
earlier periods in exchange for their interests in entities that owned real estate. The common
shares were issued without registration under the Securities Act of 1933 in reliance on Section
4(2) of that Act. In addition, the Company awarded 18,300 restricted common shares and options to
purchase 129,000 common shares under the Windrose Medical Properties Trust 2002 Stock Incentive
Plan pursuant to exemptions from registration provided in Section 4(2) of the Securities Act of
1933. The restricted common shares granted to board members vest on the first anniversary on the
grant date and 9




---



##### Table of Contents



restricted common shares granted to employees vest over 3 years (1/3 on each anniversary) , and the
options to purchase common shares were issued at an exercise price of $12. All options to employees vest at the rate of 20% per year commencing on the grant date except for
options to purchase 28,534 and 6,534 common shares issued to Messrs. Klipsch and Farrar,
respectively, on August 16, 2002, 50% of which vested on the grant date and 50% of which vested on
the first anniversary of the grant date. Also excluded from the 20% per year vesting are options to
purchase 21,466 common shares issued to both Messrs. Klipsch and Farrar on August 16, 2002, 8,333
of which vested on the grant date, 8,333 of which vested on the first anniversary of the grant
date, and 1,600 of which vest in each of the next three years. Also excluded for the 20% per year
vesting are options to purchase 50,000 common shares issued to Messrs. Klipsch and Farrar on August
5, 2003 of which 50% vested on the date of grant and 50% vest on the first anniversary of the grant
date. Also excluded from the 20% per year vesting are options to purchase 50,000 common shares
issued to Messrs. Klipsch and Farrar on August 1, 2004 of which 50% vested on the date of grant and
50% vest on the first anniversary of the grant date. The information required by Item 201(d) of Regulation S-K is included under Item 12 of this report. 
 ITEM 6. SELECTED FINANCIAL DATA The Company is engaged in two operating segments: the ownership and rental of specialty medical
facilities Rental Operations, and the providing of various real estate services such as third
party facility planning, project management, medical equipment planning and implementation services
and related activities (Service Operations). The Companys Service Operations are conducted
through its taxable REIT subsidiary, HADC. The Companys reportable segments offer different
products or services and are managed separately because each requires different operating
strategies and management expertise. The following sets forth selected consolidated financial and operating information on a historical
basis for the Company from August 16, 2002 through December 31, 2004 and its predecessor for the
period prior to August 16, 2002. The following information should be read in conjunction with Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operations and Item
8, Financial Statements and Supplementary Data included in this Form 10-K (in thousands, except
per share amounts): YEAR
    
    
    YEAR
    
    
    8/16/2002
    
    
    1/1/2002ENDED
    
    
    ENDED
    
    
    THROUGH
    
    
    THROUGHDECEMBER 31,
    
    
    DECEMBER 31,
    
    
    12/31/2002
    
    
    8/15/2002
    
    
    20022004
    
    
    2003
    
    
    (Company)
    
    
    (Predecessor)
    
    
    (Combined)Results of Operations:Revenues:Rental operations
    
    $
    30,074
    
    
    $
    13,653
    
    
    $
    2,274
    
    
    $
    
    
    
    $
    2,274Service operations (HADC)
    
    
    1,849
    
    
    
    3,661
    
    
    
    7,559
    
    
    
    4,145
    
    
    
    11,704Total revenues
    
    
    31,923
    
    
    
    17,690
    
    
    
    9,833
    
    
    
    4,145
    
    
    
    13,978Net income (loss)
    
    $
    4,053
    
    
    $
    1,248
    
    
    $
    43
    
    
    $
    (1,015
    )
    
    $
    (972
    )Per Share Data:Net Income per common share (basic and diluted):Continuing operations
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    Discontinued operations
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    
    
    
    $
    
    
    
    $
    Weighted average common shares outstanding
    
    
    10,370
    
    
    
    5,808
    
    
    
    5,692
    
    
    
    
    
    
    
    Weighted average common and dilutive potential common shares
    
    
    10,740
    
    
    
    6,169
    
    
    
    6,054
    
    
    
    
    
    
    
    Cash dividends declared
    
    $
    0.885
    
    
    $
    0.70
    
    
    $
    0.13
    
    
    $
    
    
    
    $
    Balance Sheet Data (at December 31):Total assets
    
    $
    324,330
    
    
    $
    187,893
    
    
    $
    75,265
    
    
    $
    
    
    
    $
    75,265Total debt
    
    $
    187,134
    
    
    $
    76,893
    
    
    $
    9,664
    
    
    $
    
    
    
    $
    9,664Total liabilities (including minority interest)
    
    $
    204,924
    
    
    $
    85,735
    
    
    $
    17,888
    
    
    $
    
    
    
    $
    17,888Total shareholders/owners equity
    
    $
    119,406
    
    
    $
    102,158
    
    
    $
    57,377
    
    
    $
    
    
    
    $
    57,377Total common shares outstanding
    
    
    11,639
    
    
    
    9,947
    
    
    
    5,692
    
    
    
    
    
    
    
    5,692
 10




---



##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Item 1, Business, Item 6, Selected Operating and Financial Data
and Item 8, Financial Statements and Supplementary Data of this Report. This discussion and
analysis highlights selected information in this document and may not contain all of the
information that is important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources and critical accounting estimates which
have an impact on our financial condition and results of operations, you should read this entire
Report. Forward-looking Statements Certain statements contained in this Report may not be based on historical facts and are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements may be identified by reference to a future period(s) or by use of forward-looking
terminology, such as anticipate, believe, estimate, expect, foresee, may, might,
will, intend, could, would or plan, or future or conditional verb tenses, and variations
or negatives of such terms. These forward-looking statements include, without limitation, those
relating to Windrose Medical Properties Trusts (the Company) in-house property management,
engaging third party managers, growth of operating results, growth of cash flow, value of
portfolio, dividends, capital improvements, debt strategy, growth of occupancy rates, acquisition
and development of medical properties, net income, third party fees for HADCs service projects,
general and administrative expenses, critical accounting policies, reserves for doubtful accounts,
source of funds, liquidity and liquidity needs, shelf registration statement and impact of
fluctuating interest rates. We caution you not to place undue reliance on the forward-looking
statements contained in this Report, in that actual results could differ materially from those
indicated in such forward-looking statements due to a variety of factors. These factors include,
but are not limited to, those generally understood to affect the financial results of companies in
the real estate industry, financing plans, the impact of competition, anticipated trends in our
business, other risk factors described in -Risk Factors below and other factors detailed from
time to time in the companys press releases and filing with the Securities and Exchange
Commission. We undertake no obligation to update these forward-looking statements to reflect
events or circumstances that occur after the date of this Report. Business Overview The Company is a self-administered and self-managed real estate investment trust organized in the
state of Maryland in March 2002. The Company is taxed as a REIT under the Internal Revenue Code. As
of December 31, 2004, the Company owned thirty-nine buildings consisting of 1,428,876 rentable
square feet which included four (4) outpatient treatment diagnostic centers, four (4) ambulatory
surgery centers/physician group practice clinics and thirty-one (31) medical office buildings in 23
cities and 10 states. The Companys operating results are dependent on maintaining and improving
the following key elements:  
    occupancy in the properties;
    acquiring additional quality properties;
    the desirability of the space
    steady tenant relationships; and
    rental rates at each location The Company believes a meaningful in-house property management capability is important to each of
these items. The services of in-house property management include leasing, construction,
maintenance and other tenant related services. In addition, we expect to utilize third party
managers in geographic locations where the rentable square footage owned does not justify
self-management. The Company has significantly increased the size of its real estate portfolio and its rental
operations throughout 2004 through the acquisition of the following properties: 11




---



##### Table of Contents



RentableAcquisition
    
    
    SquareProperty
    
    Building Type
    
    Date
    
    
    FeetCooper Voorhees Medical Mall
    
    Medical Office Building
    
    
    1/28/2004
    
    
    
    116,451Trinity West Medical Plaza
    
    Medical Office Building
    
    
    1/28/2004
    
    
    
    40,686Coral Springs Surgical Center
    
    Medical Office Building
    
    
    1/30/2004
    
    
    
    43,728OrthoLink  East/West Medical Center
    
    Ambulatory Surgery Center
    
    
    6/22/2004
    
    
    
    41,402OrthoLink  Gwinnett Center for Specialty Medicine I
    
    Ambulatory Surgery Center
    
    
    6/25/2004
    
    
    
    41,161OrthoLink  Gwinnett Center for Specialty Medicine II
    
    Medical Office Building
    
    
    7/2/2004
    
    
    
    18,462Biltmore Medical Mall
    
    Medical Office Building
    
    
    9/20/2004
    
    
    
    152,600West Pearland Professional Center II
    
    Medical Office Building
    
    
    10/1/2004
    
    
    
    19,126Central Medical Park (9 Buildings)
    
    Medical Office Building
    
    
    11/17/2004
    
    
    
    120,930Total
    
    
    
    
    
    
    
    
    594,546
 The Companys strategy for growth of its operating results also includes selective development and
acquisition of additional rental properties. In order to make these additional selective
developments and/or acquisitions, the Company will utilize various criteria that include, but are
not limited to, location, tenant mix, market appeal, purchase price, property condition, market
trend, and length of in-place leases. Cost of debt and the ratio of debt to equity are also critical elements that can affect the
investment return. To the extent practical, the Company seeks to lock in low fixed-rate interest
debt. Use of variable-rate debt at low interest rates is also part of the Companys strategy, but
in order to maintain compliance with loan covenants, the Company must limit the amount of
variable-rate debt (other than variable rate debt which has effectively been fixed by utilizing an
interest rate swap) to the amount outstanding on its secured line of credit facility from time to
time plus $10 million. Debt amortization and maturities are also important considerations in the
Companys use of debt. The Company also conducts third party facility planning, project management, medical equipment
planning and implementation services and related activities (service operations) through Hospital
Affiliates Development Corporation HADC, a wholly-owned taxable REIT subsidiary of the operating
partnership. The net assets and operations of the service operations acquired in connection with
the Companys initial public offering were designated as the predecessor (the Predecessor) for
accounting purposes. Therefore, the Company maintained carry-over basis for the accounting of the
purchase of these assets. Accordingly, the results of operations for the year ended December 31,
2002 comprise those of the combined entities of the Company and the Predecessor from August 16,
2002 through December 31, 2002. All periods prior to August 16, 2002 include only the operations of
the Predecessor. Rental Operations The Companys operating results depend primarily upon rental income from its specialty medical
properties (Rental Operations). The following highlights the areas of Rental Operations that the
Company considers critical for future revenue growth: Occupancy Analysis The ability to maintain occupancy rates is a principal driver of the Companys results of
operations. The following table sets forth information regarding the Companys in-service portfolio
of rental properties as of December 31, 2004, 2003 and 2002 (square feet in thousands): Total RentableSquare Feet
    
    
    Percent Occupied2004
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    20021,429
    
    
    831
    
    
    
    258
    
    
    
    95.2
    %
    
    
    94.1
    %
    
    
    97.4
    %
 As of December 31, 2003, the Companys portfolio consisted of six (6) fully-occupied net lease
buildings and sixteen (16) multi-tenant medical office buildings. In 2004, the Company increased
the portfolio by adding one (1) fully-occupied net lease building and 12




---



##### Table of Contents



sixteen (16) multi-tenant medical office buildings. Lease Expiration and Renewals The Companys ability to maintain and grow its occupancy rates primarily depends upon its
continuing ability to re-lease expiring space. The following table reflects the Companys
in-service lease expiration schedule as of December 31, 2004. The table indicates rentable square
footage and annualized net effective rents (based on annualized December 2004 monthly rental
revenue) under expiring leases: Lease Expiration Analysis by Year
(As of December 31, 2004) PercentageSquare
    
    
    
    
    
    
    Annual Rental
    
    
    of AnnualYear of
    
    Number
    
    
    Footage
    
    
    Percentage of
    
    
    Revenue of
    
    
    RentalLease
    
    of Leases
    
    
    of Leases
    
    
    Total
    
    
    Expiring
    
    
    RevenueExpiration
    
    Expiring
    
    
    Expiring
    
    
    Square Feet
    
    
    Leases
    
    
    Expiring2005
    
    
    60
    
    
    
    145,855
    
    
    
    10.21
    %
    
    $
    3,455,111
    
    
    
    9.60
    %2006
    
    
    39
    
    
    
    149,342
    
    
    
    10.45
    %
    
    
    3,539,045
    
    
    
    9.83
    %2007
    
    
    51
    
    
    
    236,108
    
    
    
    16.52
    %
    
    
    6,618,917
    
    
    
    18.39
    %2008
    
    
    40
    
    
    
    196,072
    
    
    
    13.72
    %
    
    
    6,168,869
    
    
    
    17.14
    %2009
    
    
    32
    
    
    
    103,020
    
    
    
    7.21
    %
    
    
    2,800,863
    
    
    
    7.78
    %Thereafter
    
    
    60
    
    
    
    529,943
    
    
    
    37.09
    %
    
    
    13,416,906
    
    
    
    37.26
    %Total
    
    
    282
    
    
    
    1,360,340
    
    
    
    95.20
    %
    
    $
    35,999,711
    
    
    
    100.00
    %
 During the year ended December 31, 2004, the Company renewed twenty (20) leases for 67,901 square
feet, twelve (12) leases were vacated, representing 31,415 square feet, and added fifteen (15) new
leases representing 33,274 square feet. Acquisition and Development Activity The Company seeks to acquire or to develop quality medical properties in geographic areas and/or in
medical practice specialties where the demand for medical services is expected to increase over the
coming years. The Company also targets properties that are located on or near strategic hospital
campuses that are in expanding markets with high occupancy rates and competitive tenant lease
terms. The Company believes that such properties, when efficiently marketed, actively managed and
leased, provide attractive returns, significant cash flow growth potential and stable rents. On January 28, 2004, the Company completed the purchase of a $32.0 million medical office building
in Voorhees, NJ by assuming $23.1 million of mortgage debt on the property with the balance of the
purchase paid from proceeds from the Companys December 2003 public offering. The Company also
completed the purchase of a $7.0 million medical office building in Lewisville, TX on January 28,
2004, using proceeds from the December 2003 offering. On January 30, 2004, the Company completed the purchase of the $7.5 million medical office building
in Coral Springs, FL, by assuming $3.4 million of mortgage debt on the property with the balance of
the purchase paid from the Companys line of credit facility. On June 22, 2004, the Company completed the purchase of a $6.6 million medical office building in
Atlanta, GA by assuming $4.7 million in debt with the balance paid from the Companys line of
credit facility. Another medical office building with a value of $7.4 million, also in Atlanta was
purchased from the same seller on June 25, 2004. This purchase included the assumption of $5.1
million in debt with the balance paid from on the Companys line of credit facility. A third and
final property of the seller was purchased on July 2, 2004 for $3.4 million, which included
assumption of debt of $2.6 million with the balance paid from the Companys line of credit. 13




---



##### Table of Contents



On September 7, 2004 the Company entered into an agreement in which the Company through its
development subsidiary, HADC, will construct a surgical hospital, with an attached parking deck, on
a 2.3 acre site in Houston, TX with a total development budget of $33.2 million. The project will
be self-developed by the Company with financing provided by Huntington National Bank, the Companys
primary lender. The Company has purchased a 51% interest in a joint venture, which owns as its sole
asset, the land on which the hospital is to be built. The book value of this asset is $3.8
million, and the joint venture has been consolidated in the Companys financial statements. A
second project is an adjoining four-story medical office building and parking structure on a
contiguous 2.3 acre parcel with a total development budget of $23.7 million, which is expected to
be completed later this year. The land on which the medical office building is to be built is
owned by one of the Companys subsidiaries. The pre-development contracts have been assigned to
the Company while it completes the design and manages the development. On September 20, 2004, the Company completed the purchase of Biltmore Medical Mall, a $46.0 million
medical office building in Phoenix, Arizona. This purchase included the assumption of $32.4
million in debt with the balance paid from the Companys line of credit facility. On October 1, 2004, the Company completed the purchase of a $4.4 million medical office building in
Pearland, TX by assuming $2.0 million in debt with the balance
paid from the Companys line of credit
facility. On November 17, 2004, the Company completed the purchase of a property that consists of nine
medical office buildings in Durham, NC for $14.6 million by assuming $8.3 million in debt with the
balance paid the Companys line of credit facility. On February 2, 2005 the Company completed the sale of its Port St. Lucie, FL property for $6.7
million. The Company classified this property as held for sale in the third quarter of 2004
because it had transitioned to a general purpose asset and was no longer consistent with the
Companys medical portfolio parameters. On February 28, 2005,
the Company completed the purchase of two medical office
buildings in Suwanee, Georgia for $9.82 million by securing a mortgage in the amount of
$6.27 million with the balance paid from the
Companys
line of credit. The acquisitions include Johns Creek Phase II
purchased for $5.4 million, and Johns Creek Phase III
purchased for $4.4 million.
A third property in this development, Johns Creek Phase I, is under contract for $5.5 million and is expected to close separately upon receiving final
lender approval on the assumed debt. These properties are located within one mile of the future Johns Creek Emory Hospital and within eight miles
of the Northside Baptist Medical Center. Service Operations The Companys Service Operations are conducted through HADC. HADC recognizes contract
revenues using the percentage of completion method, whereby the percentage complete is based on
hours incurred in relation to total estimated hours to be incurred. Costs associated with obtaining
contracts are expensed as incurred. Any change in the estimated total hours to be incurred on a
contract could have a material impact on the HADCs estimated contract percentage completion and as
a result could have a material impact on the HADCs net income or loss since such estimates are
based upon the estimate of work to be performed on individual contracts. Funds From Operations (FFO) Funds from Operations (FFO) is used by industry analysts and investors as a supplemental
operating measure of an equity REIT. Historical cost accounting for real estate assets in
accordance with generally accepted accounting principles, or GAAP, implicitly assumes that the
value of real estate assets diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies that use historical cost
accounting to be insufficient by themselves. The Company believes that FFO is helpful in understanding the Companys operating performance in
that FFO excludes depreciation and amortization expense on real estate assets. The Company believes
that GAAP historical cost depreciation of real estate assets is generally not correlated with
changes in the value of those assets, whose value does not diminish predictably over time, as
historical cost depreciation implies. FFO should not be considered as an alternative to cash flows
from operating, investing and financing activities as a measure of liquidity. The Companys
calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and,
accordingly, may not be comparable to such other REITs. The White Paper on FFO approved by the
Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT) in April
2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from sales of properties, plus real estate related depreciation and amortization and after
comparable adjustments for the Companys portion of these items related to unconsolidated entities
and joint ventures. The Company computes FFO in accordance with standards established by NAREIT which may not be
comparable to FFO reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT 14




---



##### Table of Contents



definition differently than the Company. FFO does not represent cash generated from operating
activities determined in accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Companys financial performance
or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the
Companys liquidity, nor is it indicative of funds available to fund the Companys cash needs,
including its ability to make cash distributions. FFO may include funds that may not be available
for managements discretionary use due to functional requirements to conserve funds for capital
expenditures and property acquisitions, covenants in debt documents, and other commitments and
uncertainties. The following is reconciliation between net income and FFO for the period August 16, 2002 through
December 31, 2002 and the years ended December 31, 2003 and 2004: August 16, 2002December 31,
    
    
    December 31,
    
    
    through2004
    
    
    2003
    
    
    December 31, 2002Net Income available to common
shareholders
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    43,260Add back (deduct):Depreciation and Amortization
    
    
    6,790,121
    
    
    
    3,327,307
    
    
    
    481,256Minority interest share of
depreciation & amortization
    
    
    (247,077
    )
    
    
    (216,204
    )
    
    
    (29,000
    )FUNDS FROM OPERATIONS
    
    $
    10,595,890
    
    
    $
    4,359,117
    
    
    $
    495,516
 Note:Numbers presented in schedule above include results from discontinued operations Critical Accounting Policies Impairment of Real Estate Assets: The Company utilizes the guidelines established under the Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), to
determine if impairment conditions exist. Under SFAS 144, the Company compares the expected
undiscounted cash flows of each property in its portfolio to the net carrying value to determine if
there are any indications of impairment of a property. The review of anticipated cash flows
involves subjective assumptions of estimated occupancy and rental rates and ultimate residual
value. In addition to reviewing anticipated cash flows, the Company assesses other factors such as
changes in business climate and legal factors that may affect the ultimate value of the property.
These assumptions are subjective and ultimately may not be achieved. Acquisitions of Real Estate Assets: In accordance with SFAS 141, Business Combinations, the Company allocates the purchase price of
acquired properties to net tangible and identified intangible assets based on their respective fair
values. The allocation to tangible assets (building and land) is based upon managements
determination of the value of the property as if it were vacant using discounted cash flow models
similar to those used by independent appraisers. Factors considered by management include an
estimate of carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar leases. The remaining purchase price is allocated among
three categories of intangible assets consisting of the above or below market component of in-place
leases, the value of in-place leases and the value of customer relationships. The value allocable to the above or below market component of the acquired in-place lease is
determined based upon the present value (using a discount rate which reflects the risks associated
with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant
to the lease over its remaining term, and (ii) managements estimate of the amounts that would be
paid using fair market rates over the remaining term of the lease. The amounts allocated to above
market leases are included in acquired 15




---



##### Table of Contents



lease intangibles, and below market leases are included in liabilities in the balance sheet and are
amortized to rental income over the remaining terms of the respective leases. Valuation of Receivables: The Company reviews each account receivable for collectibility and provides an allowance for
doubtful accounts as specific accounts receivable are deemed uncollectible. Currently, the Company
has reserved $101,215 for doubtful accounts. Revenue and Cost Recognition: Contract revenues are recognized using the percentage of completion method based on the efforts
expended, whereby the percentage complete is based on hours incurred in relation to total estimated
hours to be incurred. Costs associated with obtaining contracts are expensed as incurred. Any
change in the estimated total hours to be incurred on a contract could have a material impact on
the Companys estimated contract percentage completion and as a result could have a material impact
on the Companys net income or loss since such estimates are based upon the estimate of work to be
performed on individual contracts. Costs clearly associated with the development and construction
of Company owned real estate projects are capitalized as a cost of that project. Audit Committee Review: With regards to critical accounting policies, management has discussed the following with the Audit
Committee:  
    Criteria for identifying and selecting;
    methodology in applying; and
    impact on the financial statements. The Audit Committee has reviewed the critical accounting policies identified by the Company. Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003 Rental Operations from Continuing Operations Rental Income: Rental revenue for the year ended December 31, 2004 was $30.1 million, as compared to $13.7 million
for the year ended December 31, 2003. The increase in rental revenue is reflective of the property
acquisitions completed in 2004, along with the full year of ownership of the assets held at the end
of 2003. There was no material change in occupancy percentage with respect to rental revenue. Property Operating Expenses and Real Estate Taxes: Property operating expenses increased by $4.0 million for the year ended December 31, 2004 as
compared to the year ended December 31, 2003. The increase in rental expenses is primarily due to
the acquisitions completed in 2004. Real estate tax expense for the year ended December 31, 2004 was $2.6 million, as compared to $0.8
million for the year ended December 31, 2003. The increase in real estate tax expenses are
reflective of the acquisitions completed in 2004, along with the full year of ownership of the
assets held at the end of 2003. There was no material change in real estate tax expenses for
properties held in both 2003 and 2004. Depreciation and Amortization: Depreciation and amortization expense for the year ended December 31, 2004 was $6.7 million, as
compared to $3.2 million for the year ended December 31, 2003. This increase is mainly because of
an increase of overall assets through multiple acquisitions occurring in 2004 and a full year of
expense in 2004 for properties acquired in 2003. The Company did not incur a material amount of 16




---



##### Table of Contents



tenant improvements, capital expenditures, or lease commissions value in 2004 other than its real
estate acquisitions. Service Operations Development and project management fees decreased in 2004 to $1.8 million compared to $3.7 million
in 2003 because of the design-build contract started in 2002 and completed in 2003. The project
management fee associated with this design-build development contract differs from the more
common fee-for-service contracts in that all payments are made from the client to HADC and then
from HADC to the contractors. Therefore, the revenues reflected are higher, but these increased
fees are offset by corresponding increased costs of sales and project costs. The increase of $0.6 million in income from service operations for the year ended December 31,
2004, as compared to the year ended December 31, 2003, is attributable to HADC reducing ongoing
expenses, increased activities on the internal development projects and the realization of a
contingent/deferred lease commission on a third party managed contract. HADC expense decreased as
a result of change in organizational structure. During 2003 HADC became focused on meeting the
development needs of the REIT, resulting in a decrease of $0.4 million in general and
administrative expenses. While the lease commission is a non recurring event at the level reported
in 2004, the internally developed projects are continuing in 2005. General and Administrative Expense General and administrative expenses, at the corporate level, increased by $0.6 million for the year
ended December 31, 2004 as compared to the year ended December 31, 2003. The increase between the
two years is mostly due to additional expenses associated with the growth of the Company, and
additional costs associated with compliance with Sarbanes-Oxley Section 404. Additionally, as the
Company acquires additional properties and/or additional staff, general or administrative expenses
may increase. Other Income and Expense Interest expense increased by $4.9 million for the year ended December 31, 2004 as compared to the
year ended December 31, 2003. The interest expense increased because of increased borrowings which
resulted from the Companys acquisition of 17 buildings in 2004. The Company utilizes a mix of
fixed and variable-rate debt. As of December 31, 2004, the face-value balance of fixed rate debt
was $130.9 million, secured variable rate swapped to fixed rate debt was $22.6 million and the
balance of variable-rate debt was $29.4 million.  
    The Company assumed $81.5 million of debt as part of property acquisitions in 2004.  
    The $25.4 million balance on the Companys lines of credit as of December 31, 2004 was
due to borrowings used to fund acquisitions and for working capital purposes.  
    During 2004, the Company repaid $1.7 million as scheduled amortization of principal on
mortgages. Discontinued Operations The Company decided in the third quarter of 2004 that Morningside Plaza, in Port St. Lucie, FL
(Morningside) which was acquired in May, 2003, no longer fits the Companys medical portfolio
parameters, and as a result, this property was classified as held-for-sale at December 31, 2004.
The operations of Morningside are therefore reported as discontinued operations at December 31,
2004. As a result, the Company ceased depreciation and reclassified net income from operations, net
of minority interest, of $402,255 and $142,085 as net income from discontinued operations for the
years ended December 31, 2004 and 2003, respectively. On February 2, 2005, the Company completed
the sale of the Morningside property for $6.7 million. Proceeds from this sale will be used to
reduce borrowings on the Companys line of credit and for other short term capital needs. Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002 Rental Operations 17




---



##### Table of Contents



Rental Income: Rental revenue for the year ended December 31, 2003 was $13.7 million, as compared to $2.3 million
for the year ended December 31, 2002. The increase in rental revenue is reflective of the property
acquisitions completed in 2003, along with the full year of ownership of the assets held at the end
of 2002. There was no material change in occupancy percentage with respect to rental revenue. Property Operating Expenses and Real Estate Taxes: Property Operating expenses for the year ended December 31, 2003 was $1.9 million, as compared to
$0.1 million for the year ended December 31, 2002. The increase in property operating expenses is
reflective of the acquisitions completed in 2003, along with the full year of ownership of the
assets held at the end of 2002. There was no material change in the level of property operating
expenses for properties held in both 2002 and 2003. Real estate tax expense for the year ended December 31, 2003 was $0.8 million, as compared to $0.06
million for the year ended December 31, 2002. The increase in real estate tax expenses are
reflective of the acquisitions completed in 2003, along with the full year of ownership of the
assets held at the end of 2002. There was no material change in the level of real estate tax
expenses for properties held in both 2002 and 2003. Depreciation and Amortization: Depreciation and amortization expense for the year ended December 31, 2003 was $3.2 million, as
compared to $0.5 million for the year ended December 31, 2002, mainly because of an increase of
overall assets through multiple acquisitions occurring in 2003 and a full year of expense in 2003
compared to a partial year of expense in 2002 for the seven properties acquired after the initial
offering in 2002. The Company did not incur a material amount of tenant improvements, capital
expenditures, or lease commissions as related to gross real estate asset value in 2003. Included in the Depreciation and Amortization expense for 2003 was the effect of Statement of
Financial Accounting Standards No. 141, Business Combinations(SFAS 141), on acquisitions. This
accounting pronouncement requires the allocation of a portion of a propertys purchase price to
intangible assets for leases acquired and in-place at the closing date of the acquisition. These
intangible assets are amortized over the remaining life of the leases (ranging from 0-18 years) as
compared to the building basis portion of the acquisition, which is depreciated over 40 years. The
amortization associated with the acquired lease intangible assets recorded on 2003 acquisitions
totaled $0.7 million. Service Operations: Development and project management fees decreased significantly in 2003 to $3.7 million compared to
$11.7 million in 2002 because the project management fee reported for 2002 contained a
design-build development contract for a project in Chattanooga, Tennessee. This contract differs
from the more common fee-for-service contracts in that all payments are made from the client to
HADC and then from HADC to the contractors. Therefore, the changes in revenues are offset by
corresponding changes in costs of sales and project costs. The decrease in total loss from service operations for the year ended December 31, 2003 of $0.5
million, as compared to the year ended December 31, 2002 of $1.6 million, is primarily attributable
to an increase in the third party services completed as well as reductions of expenses associated
with restructuring of HADC in order to position it to provide services that are of greater direct
benefit to the Company. A result of this restructuring is that both project costs and general and
administrative expenses were lower in the third and fourth quarter as compared to each of the prior
quarters and in the year 2002. General and Administrative Expense: General and administrative expenses, including the expenses at HADC, were $3.5 million for the year
ended December 31, 2003, as compared to $3.1 million for the year ended December 31, 2002. The
increase between the two years is mostly due to having a full 18




---



##### Table of Contents



year of the additional costs associated with being a public company in the 2003 year end totals,
while 2002 had four and one half months of these expenses plus the increased expenses in
anticipation of an initial public offering. Other Income and Expense: Interest expense for the year ended December 31, 2003 was $3.3 million, as compared to $0.2 million
for the year ended December 31, 2002. Although the Company benefited from significantly lower
interest rates during 2003, interest expense increased because of increased borrowings during the
year. The increased borrowings reflected the funding of the Companys acquisitions during the year,
along with the debt assumed in conjunction with those acquisitions.  
    The Company utilizes a mix of fixed and variable rate pieces of debt. As of December
31, 2003, the face-value balance of fixed rate debt was $67.9 million, while the balance of
variable rate debt was $4.0 million. Of the total debt in place during 2003, fixed rate debt
represented from 66% to 100% of total debt and variable rate debt represented between 34% to
0% throughout the year.  
    In addition to $53.5 million of debt assumed as part of the 2003 property acquisitions,
the Company obtained two pieces of new debt during 2003. On May 28, 2003, the Company
obtained a $9.0 million fixed rate mortgage on the Las Vegas, Nevada Property at 4475 S.
Eastern. The mortgage has a fixed interest rate of 5% and a maturity date of April 10, 2008.
On August 12, 2003, the Company obtained a $4 million variable rate loan on the Rush Copley
property in Aurora, Illinois. The mortgage has a variable interest rate of LIBOR + 1.6% and
the maturity date of August 12, 2006.  
    The Company retired $3.1 million of debt in August 2003, related to the variable rate
mortgage debt assumed during the acquisition of the 310 25th Avenue property. Discontinued Operations: The Company decided in the third quarter of 2004 that Morningside Plaza, in Port St. Lucie, FL
(Morningside) which was acquired in May, 2003, no longer fits the Companys medical portfolio
parameters, and as a result, this property was classified as held-for-sale at December 31, 2004.
The operations of Morningside are therefore reported as discontinued operations for the year ended
December 31, 2003. As a result, the Company classified net income from operations, net of minority
interest, of $142,085 as net income from discontinued operations for the year ended December 31,
2003. On February 2, 2005, the Company completed the sale of the Morningside property for $6.7
million Liquidity and Capital Resources Sources of Liquidity: Rental Operations: The Company believes that its principal source of liquidity, cash flows from Rental Operations,
provides a stable source of cash to fund operational expenses. The Company believes that this
cash-based revenue stream is substantially aligned with revenue recognition (except for periodic
straight-line rental income accruals) as cash receipts from the leasing of rental properties are
generally received in advance of, or in a short time following, the actual revenue recognition. The
Company is subject to risks of decreased occupancy through market conditions as well as tenant
defaults and bankruptcies, and potential reduction in rental rates upon renewal or re-letting of
properties, which would result in reduced cash flow from operations. Secured Credit Facilities: The Company has the following lines of credit available: 19




---



##### Table of Contents



AmountsBorrowing
    
    
    Maturity
    
    Interest
    
    Outstanding atDescription
    
    Capacity
    
    
    Date
    
    Rate
    
    December 31, 2004Syndicated Line of Credit Facility
    
    $
    70,000,000
    
    
    September 2005
    
    Libor +2.0-2.5%
    
    $
    23,426,838Working Capital Line of Credit Facility
    
    
    4,000,000
    
    
    October 2005
    
    Prime - 0.75%
    
    
    2,008,443
 The Company expects to renew the syndicated line of credit facility when it comes due. A subsidiary of the Company has a $24 million construction loan, structured as a secured
construction draw note, for the development of a hospital in Houston, TX. In addition, a second
subsidiary of the Company has an $18 million construction loan for the development of a
professional office building (POB) in Houston, TX. These projects are being developed by the
Companys taxable REIT subsidiary and will continue to be owned (the POB could have partial
minority physician ownership) by subsidiaries of the Company upon completion of construction. The
two construction loans are guaranteed by the Company and secured by a deed of trust on the subject
real estate and improvements. With a maximum term of 24 months, the loans require payment of
interest only, which is calculated using the outstanding balance at Prime plus 1% for the hospital
and Prime plus .25% for the POB, with principal due at maturity. There were no outstanding
balances on these loans as of December 31, 2004. In addition to the construction loans for the hospital and POB, the aforementioned subsidiaries of
the Company have also obtained mezzanine loans of $5 million for the development of the hospital
and $1.5 million for the development of the POB. Terms require the mezzanine loans to be funded
prior to any construction loan disbursements. Both loans have a maximum term of 24 months and a
fixed interest rate of 11%. The outstanding mezzanine loan balances for the hospital and POB as of
December 31, 2004 were $5 million and $844,000, respectively. The maturity dates of the mezzanine and construction loans for the hospital are August 31, 2006 and
September 1, 2006, respectively. The maturity dates of the mezzanine and construction loans for
the POB are both set at December 1, 2006. Equity Securities: In September 2004, the Company issued 1,500,000 common shares at $12.80 per share raising
approximately $18 million in net proceeds after underwriting discounts and other offering expenses.
The proceeds were used to pay down the borrowings on the line of credit. On October 13, 2004, the
underwriters exercised a portion of their over-allotment option to purchase 162,000 common shares
at the public offering price of $12.80. As a result, the Company received additional net proceeds
of $1.96 million. The Company has on file with the SEC an effective shelf registration statement that permits the
Company to sell up to $250 million of common and preferred shares of beneficial interest, of which
$21.3 million has been sold. From time-to-time, the Company expects to issue additional securities
under this registration statement to fund development and acquisition of additional rental
properties and to fund the repayment of the credit facilities and other long-term debt. Uses of Liquidity Short-Term Uses: The Company has considered its short-term (one year or less) liquidity needs and currently expects
that its estimated cash flows from operations and other expected liquidity sources will be adequate
to meet these needs. The Company believes that its principal short-term liquidity needs are to fund
normal recurring expenses, debt service requirements and the minimum distribution required to
maintain the Companys REIT qualification under the Internal Revenue Code. The Company anticipates
that these needs will be met with cash flows provided by operating activities. The Company has also
considered capital improvements, property acquisitions and development projects planned for fiscal
2005 as short-term needs that will be funded either from the $46.6 million available on the
Companys syndicated line of credit or by using the proceeds realized through the sale of
Morningside. Long-Term Uses: The Company expects to meet long-term (greater than one year) liquidity requirements such as
property acquisitions, scheduled debt 20




---



##### Table of Contents



maturities, major renovations, expansions and other nonrecurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional equity securities. The
Company will acquire or develop additional properties only as suitable opportunities arise that
meet the Companys acquisition criteria and only if satisfactory financing arrangements are
available. Historical Cash Flows Operating Activities On December 31, 2004, the Company had $9.0 million of cash and cash equivalents. Net cash provided
by operating activities was $9.8 million for the year ended December 31, 2004. Cash flows from
operating activities provide the cash necessary to meet normal, operational requirements. The
receipt of rental income from rental operations continues to provide the primary source of revenues
and operating cash flows for the Company. Investing Activities Investing activities are one of the primary uses of the Companys liquidity. Development and
acquisition activity is necessary to generate additional rental revenues and provide cash flows for
operational requirements. Net cash used in investing activities was $58.3 million, for the year
ended December 31, 2004, primarily due to the acquisition of the 17 medical properties and the
commencement of a development project by HADC. Financing Activities Net cash provided by financing activities was $40.1 million for the year ended December 31, 2004
primarily from draws on the syndicated line of credit facility and the Companys September 2004
equity offering. Related Party and Other Transactions In the normal course of business and, in managements opinion, at terms comparable to those
available from unrelated third parties, the Company has engaged in transactions with certain
affiliates from time to time. The Company has an overhead sharing agreement with a company in which executive officers of the
Company have an ownership interest to provide the Company office space and certain office support
staff services in return for monthly payments of $17,500. The term of the agreement is for one year
and renews automatically for an additional year unless either party provides 90 days notice of
termination prior to the expiration of the then current term. The Company also pays this company
$5,031 per month for the lease of the office space where the Companys accounting functions,
acquisition process, and property/asset management are performed. The Company also pays $3,000 per
month to this company for human resources and employee search services. The Company also
occasionally uses a private jet partially owned by this company. This use is usually for capital
raise and acquisition activities. The Company pays an hourly rate for its use of the jet that the
Company believes is a standard market rate, but does not pay any leases, time share expenses or
other fixed costs of the affiliated company. During 2004, the employees of the Company also participated in a healthcare plan that was for the
benefit of the employees of the company described above. The participation was at competitive or
market rates. The employees of the Company have now joined a Group Plan separate from the
affiliated company. HADC provides property management to a property that is not owned by the Company, but in which
executive officers of the Company have a minority ownership interest. This property pays a market
rate for this management service. HADC also uses the services of National Healthcare Associates
(NHA), which is owned by the fiancée of the President of HADC. NHA performs consultant work such
as market analysis and feasibility studies. This work is competitively bid, and contract approval
from the Companys Chief Executive Officer or Chief Operating Officer is required. Off Balance Sheet Arrangements The Company does not have any relationships with unconsolidated entities or financial partnerships
such as special purpose entities, which are generally established for the purpose of facilitating
off-balance sheet arrangements or other specific purposes. 21




---



##### Table of Contents



Contractual Obligations As of December 31, 2004, the Company is subject to certain contractual payment obligations as
described in the schedule below (in thousands): Payments Due by PeriodContractual Obligations
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong-term debt (1)
    
    $
    212,458
    
    
    $
    12,197
    
    
    $
    37,874
    
    
    $
    10,620
    
    
    $
    19,650
    
    
    $
    34,092
    
    
    $
    98,025Line of credit
    
    
    25,504
    
    
    
    25,504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mezzanine Debt
    
    
    6,938
    
    
    
    643
    
    
    
    6,295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations (2)
    
    
    7,990
    
    
    
    439
    
    
    
    315
    
    
    
    289
    
    
    
    271
    
    
    
    256
    
    
    
    6,420Other Contractual Obligations (3)
    
    
    286
    
    
    
    286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    253,176
    
    
    $
    39,069
    
    
    $
    44,484
    
    
    $
    10,909
    
    
    $
    19,921
    
    
    $
    34,348
    
    
    $
    104,445
   (1)
    
    This item includes principal and interest.(2)
    
    This item includes leases for land, office space and equipment.(3)
    
    This item includes agreements for human resources services, investor relations services and
the overhead sharing agreement. Recent Accounting Pronouncements In December 2004, The Financial Accounting Standards Board (FASB) issued a revised SFAS No. 123
Share-Based Payment (SFAS 123 (R)). This Statement is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation and implementation guidance. SFAS 123 (R) requires and entity to
measure the cost of employee services received in exchange for an award of equity instruments
(e.g., stock options, stock grants) based on the grant-date fair value of the award. That cost
will be recognized over the period during which an employee is required to provide service in
exchange for the award  the requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees do not render the
requisite service. SFAS 123 (R) eliminates the alternative use of Opinion No. 25s intrinsic value
method of accounting that was provided in the original SFAS 123. Under Opinion No. 25, issuing
stock options to employees generally resulted in recognition of no compensation cost. The
Statement is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. SFAS 123 (R) applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that date. The cumulative
effect of initially applying this Statement, if any, is recognized as of the required effective
date. As of the required effective date, entities that use the fair-value-based method for either
recognition or disclosure under SFAS 123 will apply this Statement using a modified version of
prospective application. Under that transition method, compensation cost is recognized on or after
the required effective date for the portion of outstanding awards for which requisite service has
not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123
for either recognition or pro forma disclosures. For periods before the required effective date,
those entities may elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods by SFAS 123. The Company currently accounts for stock-based
compensation under the recognition and measurement principles of Opinion No. 25. Upon adoption of
SFAS 123 (R), The Company results of operations will reflect increased compensation form
stock-based payments consistent with the pro forma results currently disclosed under SFAS 123 in
Note 2 of the Notes to Consolidated Financial Statements. Risk Factors There are certain risk factors associated with an investment in common shares issued by the
Company. Risks and uncertainties and other factors described below could have a material adverse
effect on the Companys business, financial condition, results of operations and share price and
could also cause the Companys future business, financial condition and results of operations to
differ materially from the results contemplated by any forward-looking statement it may make
herein, in any other document it files with the Securities and Exchange Commission, or in any press
release or other written or oral statement it may make. Risks Relating to the Healthcare Industry 22




---



##### Table of Contents



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 away from fee-for-service payors resulting in an
increase in the percentage of revenues attributable to managed care payors. Pressures to control
healthcare costs and a shift away from traditional health insurance reimbursement to managed care
plans 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. These changes could have a material adverse effect on the financial condition of
some or all of our tenants, which could negatively affect our ability to make distributions to our
shareholders. The healthcare industry is heavily regulated, and new laws or regulations, changes to existing
laws or regulations, loss of licensure or failure to obtain licensure could result in the
inability of our tenants to make lease payments to us. The healthcare industry is heavily regulated by federal, state and local governmental bodies. Our
tenants generally will be subject to laws and regulations covering, among other things, licensure,
certification for participation in government programs and relationships with physicians and other
referral sources. Changes in these laws and regulations could negatively affect the ability of our
tenants to make lease payments to us and our ability to make distributions to our shareholders. Many of our medical properties and their tenants may require a license or certificate of need to
operate. Failure to obtain a license or certificate of need, or loss of a required license would
prevent a facility from operating in the manner intended by the tenants. These events could
materially adversely affect the facility operators ability to make rent payments to us. State and
local laws also may regulate expansion, including the addition of new beds or services or
acquisition of medical equipment, and the construction of healthcare facilities, by requiring a
certificate of need or other similar approval. Our real estate investments are concentrated in specialty medical properties, making us more
vulnerable economically than if our investments were diversified. As a REIT, we invest primarily in real estate. Within the real estate industry, we primarily
acquire or selectively develop and own specialty medical properties. We are subject to risks
inherent in concentrating investments in real estate. These risks resulting from a lack of
diversification become even greater as a result of our business strategy to invest primarily in
specialty medical properties. A downturn in the real estate industry could significantly adversely
affect the value of our properties. A downturn in the healthcare industry could negatively affect
our tenants ability to make lease payments to us and our ability to make distributions to our
shareholders. These adverse effects could be more pronounced than if we diversified our investments
outside of real estate or outside of specialty medical properties. Adverse trends in healthcare provider operations may negatively affect our lease revenues and our
ability to make distributions to our shareholders. 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 23




---



##### Table of Contents




    increased scrutiny of billing, referral and other practices by federal and state authorities. These factors may adversely affect the economic performance of some or all of our tenants and, in
turn, our lease revenues and our ability to make distributions to our shareholders. Our lessees are subject to fraud and abuse laws, the violation of which by a lessee may jeopardize
the tenants ability to make rent 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 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 one of our tenants could jeopardize the tenants ability to operate a facility or to
make rent payments, thereby potentially adversely affecting us. Our lease arrangements with certain
tenants may also be subject to these fraud and abuse laws. Risks Relating to Our Business, Growth Strategy and Organizational Structure We may be unable to acquire or may be delayed in acquiring specialty medical properties Our inability to acquire, or delays in acquiring, properties may adversely impact our ability to
make distributions to our shareholders. In addition, if we do not complete acquisitions as
expected, an offering of equity securities will have a significant dilutive impact on our common
shares until we are able to efficiently deploy the proceeds of the offering. Dependence on our tenants for rent may adversely impact our ability to make distributions to our
shareholders. 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 exclusively on rent
payments from our tenants for cash with which to make distributions to shareholders. We have no
control over the success or failure of our tenants businesses. Reductions in the net operating
income of our tenants may adversely affect the ability of our tenants to make rent payments to us
and thus our ability to make anticipated distributions to our shareholders. Failure on the part of
a tenant to comply materially with the terms of a lease would give us the right to terminate our
lease with that tenant, repossess the applicable property and enforce the payment obligations under
the lease. However, we then would be required to find another tenant. There can be no assurance
that we would be able to find another tenant or that, if another tenant were found, we would be
able to enter into a lease on favorable terms. We rely disproportionately on one tenant for our rental income. Southwest Medical Associates, Inc.,
a wholly-owned subsidiary of Sierra Health Services, Inc., leases 100% of the rentable square
footage in our four Sierra Health Services properties. The total area leased by Southwest Medical
Associates (160,855 square feet) comprises approximately 10.51% of our total annualized base rental
revenue as of December 31, 2004. Significant adverse changes in the operations of any property, or
the operations or financial condition of any tenant, particularly Southwest Medical Associates,
could have a material adverse effect on our ability to collect rent payments and, accordingly, on
our ability to make distributions to our shareholders. We do not know if our lessees will renew their existing leases, and if they do not, we may be
unable to lease the properties on as favorable terms or at all. We cannot predict whether existing leases of our properties will be renewed at the end of their
lease terms, which expire at various times through 2022. If these leases are not renewed, we would
be required to find other tenants for those properties. There can be no assurance that we would be
able to enter into leases with new tenants on terms as favorable to us as the current leases or
that we would be able to lease those properties at all. Failure to properly manage our rapid growth could distract our management or increase our
expenses. We have experienced rapid growth and development in a relatively short period of time and expect to
continue to experience rapid growth in the future. Following the completion of our initial public
offering in August 2002, we acquired seven specialty medical properties with the proceeds of the
offering. As of December 31, 2004, we have acquired an additional thirty-two additional specialty 24




---



##### Table of Contents



medical buildings. Our rapid growth has resulted in increased levels of responsibility for our
management. Future property acquisitions could place significant additional demands on, and require
us to expand, our management, resources and personnel. Our failure to manage any such rapid growth
effectively could harm our business and, in particular, our financial condition, results of
operations and cash flows, which could negatively affect our ability to make distributions to our
shareholders. In particular, we could have difficulty assimilating acquired properties and
integrating their operations into our organization. Failure to effectively integrate newly acquired
properties could disrupt our ongoing business, distract our management and employees and increase
our expenses. Our rapid growth could also increase our capital requirements, which may require us
to issue potentially dilutive equity securities and incur additional debt. Certain of our properties may not have efficient alternative uses. Some of our properties, such as our ambulatory surgery centers, are specialized medical facilities.
If we or our tenants terminate the leases for these properties or our tenants lose their regulatory
authority to operate such properties, we may not be able to locate suitable replacement tenants to
lease the properties for their specialized uses. Alternatively, we may be required to spend
substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional
capital expenditures occurring as a result could hinder our ability to make distributions to our
shareholders. Our business is highly competitive and we may be unable to compete successfully. We will compete for development opportunities and opportunities to purchase medical properties
with, among others:  
    private investors;
    healthcare providers, including physicians;
    healthcare-related 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. We intend to adhere to our acquisition
strategy and criteria. However, increased competition for medical properties from competitors,
including other REITs, may adversely affect our ability to acquire specialty medical properties and
the price we pay for properties. If we are unable to acquire properties or if we pay too much for
properties, our revenue and earnings growth could be adversely affected. Our properties face
competition from other nearby facilities that provide services comparable to those offered at our
facilities. Some of those facilities are owned by governmental agencies and supported by tax
revenues, and others are owned by nonprofit corporations and may be supported to a large extent by
endowments and charitable contributions. Those types of support are not available to our
facilities. In addition, competing healthcare facilities located in the areas served by our
facilities may provide health services that are not available at our facilities. From time to time,
referral sources, including physicians and managed care organizations, may change their lists of
healthcare facilities to which they refer patients, which could adversely affect our rental
revenues. Our use of debt financing subjects us to significant risks, including refinancing risk and the
risk of insufficient cash available for distribution. Our Declaration of Trust and other organizational documents do not limit the amount of debt we may
incur. Debt, whether with recourse to us generally or only with respect to a particular property,
creates risks. For example, variable rate debt can reduce the cash available for distribution to
shareholders in periods of rising interest rates. We intend to incur debt only when we believe it
will enhance our risk-adjusted returns. However, we cannot assure you that our use of financial
leverage will prove to be beneficial. At December 31, 2004, the outstanding face value principal
balance of our indebtedness was approximately $183.0 million. We may borrow additional amounts in
the future, or we may issue corporate debt securities in public or private offerings. Some of these
additional borrowings may be secured by our properties. In addition, in connection with
debt-financing, we are subject to covenants that restrict our operations. There can be no assurance
that we will be able to meet our debt service obligations or comply with the 25




---



##### Table of Contents



restrictive covenants and, to the extent that we cannot, we risk the loss of some or all of our
properties to foreclosure. We anticipate that our debt will be a blend of long-term amortizing debt and variable rate
non-amortizing debt, both payable in substantial balloon payments upon maturity. Therefore, we will
likely need to refinance at least a portion of our outstanding debt as it matures. There is a risk
that we may not be able to refinance existing debt or that the terms of any refinancing will not be
as favorable as the terms of the 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 properties, our cash flow may not be sufficient to repay all maturing debt in years when
significant balloon payments come due. Additionally, under the terms of much of the debt that we
have assumed, we may incur significant yield maintenance penalties if we choose to prepay the debt. Conflicts of interest could result in an executive officer or a trustee acting other than in our
best interest. As described further below, our executive officers and trustees have conflicts of interest
resulting from:  
    the formation transactions at the time of our initial public offering;
    their duties to our shareholders and the limited partners of our operating partnership; and
    allocation of their time between our business and affairs and their other business interests. Conflicts of interest resulting from the formation transactions may lead to decisions that are not
in our best interest.Three of our executive officers, Messrs. Klipsch, McCoin and Farrar, one of
whom also serves as a trustee (Mr. Klipsch), and one trustee emeritus who is not an executive
officer (Mr. Lanham) owned, directly or indirectly, 88.4% of the equity interests in Windrose
International, LLC. At the time of completion of our initial public offering, we acquired certain
assets and liabilities of Windrose International, including the stock of HADC, in exchange for an
aggregate of 218,750 units of partnership interest in our operating partnership. Additionally, four
of our executive officers, Messrs. Klipsch, McCoin, Batts, Hanson, and Mr. Lanham, who serves as a
trustee emeritus, owned approximately 45% of the Class A limited liability company interests in
Brierbrook Partners. We acquired the Class A limited liability company interests in Brierbrook
Partners owned by these officers and trustees in exchange for an aggregate of 72,582 units of
partnership interest in our formation transactions. As of December 31, 2004, Messrs. Klipsch,
McCoin, Farrar and Lanham owned approximately 1.2%, 0.5%, 0.1%, and 0.3% of the equity interests in
our operating partnership, respectively. The terms and conditions of these purchases were not
negotiated in arms length transactions. Additionally, our trustees and executive officers have
unrealized gains associated with their interests in these assets, and, as a result, any sale of
these assets or refinancing or prepayment of principal on the indebtedness assumed by us in
purchasing these assets may cause adverse tax consequences to some of our trustees and executive
officers. These individuals may not be supportive of the disposition or refinancing of these
properties when it might otherwise be the optimal time for us to do so. Our trustees may have conflicting duties.Our trustees may have conflicting duties because, in
their capacities as our trustees, they have a duty to us, and in our capacity as general partner of
our operating partnership, they have a fiduciary duty to the limited partners of our operating
partnership. Conflicts may arise when interests of our shareholders and the limited partners of our
operating partnership diverge, particularly in circumstances in which there may be an adverse tax
consequence to the limited partners, such as upon the sale of assets or the repayment of
indebtedness. The partnership agreement of our operating partnership contains a provision requiring
the general partner to resolve, to the extent possible, in favor of our shareholders, any matters
in which there is a conflict between the rights of the limited partners of the operating
partnership and the rights of our shareholders. It may not always be possible, however, for a
resolution to be reached which favors our shareholders. Other activites may crate conflict of time available to be spent on the Companys Business.
Although Messrs. Klipsch and Farrar are primarily focused on management of the Company, as a result
of management of other business interests, they may find it difficult to allocate the time
necessary to manage our business. Mr. Klipsch, Chairman of our Board of Trustees and our Chief
Executive Officer, also serves as the Chairman of the Board of Directors of Klipsch Audio, Inc. Mr.
Farrar, our President and Chief Operating Officer, also serves as Executive Vice President of
Klipsch Audio, Inc. Although Messrs. Klipsch and Farrar devote substantially all of their time to
managing our company, as a result of their management obligations with this other company, Messrs.
Klipsch and Farrar may find it difficult to allocate their time between this other company and us.
If Messrs. Klipsch and Farrar do not allocate sufficient time to the management of our operations,
it could jeopardize our ability to execute our business plan. Provisions of Maryland law, our Declaration of Trust and our Bylaws may deter changes in

management and third party acquisition proposals or cause dilution. 26




---



##### Table of Contents



Our ownership limitations may restrict business combination opportunities.To qualify as a REIT
under the Internal Revenue Code, no more than 50% of our outstanding shares of beneficial interest
may be owned, directly or indirectly, by five or fewer persons during the last half of each taxable
year. To preserve our REIT qualification, our Declaration of Trust generally prohibits direct or
indirect ownership by any person of more than 9.9% of the number of outstanding shares of any class
of our securities, including our common shares. Generally, common shares owned by affiliated owners
will be aggregated for purposes of the ownership limitation. Any transfer of our common shares that
would violate the ownership limitation will be null and void, and the intended transferee will
acquire no rights in such shares. Instead, such common shares will be designated as
shares-in-trust and transferred automatically to a trust effective on the day before the
purported transfer of such shares. The beneficiary of a 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 shares might receive
a premium for their common shares 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 shares an unsuitable investment vehicle for any person seeking to obtain, either
alone or with others as a group, ownership of more than 9.9% in value of our shares. The Declaration of Trust contains a provision that creates staggered terms for our Board of
Trustees.Our Board of Trustees is divided into three classes. The current terms of our Class I,
Class II and Class III trustees will expire at the annual meeting of shareholders in 2006, 2007 and
2005, respectively. Upon the expiration of their current terms, trustees of each class are elected
to serve for three-year terms and until their successors are duly elected and qualify. Each year
one class of trustees will be elected by the shareholders at the annual meeting of shareholders.
Moreover, such trustees generally may not be removed as trustees until the end of their terms
except by the affirmative vote of two-thirds of the votes entitled to be cast in the election of
trustees. The staggered terms of trustees may delay, defer or prevent a tender offer, a change in
control or other transaction in which holders of common shares might receive a premium for their
common shares over the then-current market price or which such holders otherwise might believe to
be in their best interests. The Maryland Business Combination Act may discourage a third party from acquiring us.Under the
Maryland General Corporation Law, as amended (MGCL), as applicable to REITs, certain business
combinations (including certain issuances of equity securities) between a Maryland REIT and any
person who beneficially owns ten percent or more of the voting power of the trusts shares, or an
affiliate thereof, are prohibited for five years after the most recent date on which the person or
affiliate acquired at least ten percent of the voting power of the trusts shares. Thereafter, any
business combination must be approved by two super-majority shareholder votes unless, among other
conditions, the trusts common shareholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as previously paid by
the interested shareholder for its common shares. These provisions could delay, deter or prevent a
change of control or other transaction in which holders of our common shares might receive a
premium for their common shares above the then-current market price or which such shareholders
otherwise might believe to be in their best interests. Our Board of Trustees may issue additional shares that may cause dilution.Our Declaration of Trust
authorizes the Board of Trustees, without shareholder approval, to:  
    amend the Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of beneficial interest of any class or series
that we have the authority to issue;
    cause us to issue additional authorized but unissued common shares or preferred shares;
and
    classify or reclassify any unissued common or preferred shares and to set the
preferences, rights and other terms of such classified or reclassified shares, including the
issuance of additional common shares or preferred shares that have preference rights over
the common shares with respect to dividends, liquidation, voting and other matters. Future issuances of equity securities may cause our shareholders to experience further
dilution. Our Board of Trustees may issue preferred shares with terms that may discourage a third party from
acquiring us.Although our Board of Trustees has no present intention to do so, it could establish
one or more series of preferred shares that could, depending on the terms of such series, delay,
deter or prevent a change in control or other transaction in which holders of our common shares
might receive a premium for their common shares over the then-current market price or which such
holders otherwise might believe to be in their best interests. 27




---



##### Table of Contents



Our Declaration of Trust and Bylaws also contain other provisions that may delay, defer or prevent
a change of control or other transaction in which holders of our common shares might receive a
premium for their common shares over the then-current market price or which such holders otherwise
might believe to be in their best interests. Two of our executive officers have agreements that provide them with benefits in the event their
employment is terminated following a change in control of our company, which could deter a change
in control that could be beneficial to our shareholders. We have entered into agreements with Messrs. Klipsch and Farrar, Chairman of our Board of Trustees
and Chief Executive Officer and President and Chief Operating Officer, respectively, which provide
them with severance benefits if their employment ends under certain circumstances following a
change in control of our company. In addition we entered into employment agreements with Messrs.
Klipsch and Farrar that provide additional severance benefits if their employment ends under
certain circumstances following a change in control of our company or if they are terminated other
than for cause. These benefits and related tax indemnity could prevent or deter a change in
control of the company that might involve a premium price for our common shares or otherwise be in
the best interests of our shareholders. We have limited operating history as a REIT and may not be able to successfully and profitably
operate our business. We completed our initial public offering in August 2002. Although our executive officers and some
of our trustees have experience in developing, financing and purchasing medical properties, they
have limited experience operating a REIT and, other than our Chairman, have limited experience in
managing a publicly owned company. While HADC generated a profit in 2004, since our initial public offering in August 2002, HADC has
failed to consistently generate income sufficient to cover its expenses. To the extent that
operating losses at HADC continue, or increase, the operating results of our company will be
negatively affected, our cash flows will be reduced, and we will have less cash available for
distribution to our shareholders. Our Board of Trustees may change our investment and operational policies without a vote of our
common shareholders. Our major policies, including our policies with respect to acquisitions, financing, growth,
operations, debt limitation and distributions, are determined by the Board of Trustees. The Board
of Trustees may amend or revise these and other policies from time to time without a vote of the
holders of the common shares. Investment and operational policy changes could adversely affect the
market price of our common shares and our ability to make distributions to our shareholders. A significant number of our properties are located in 4 geographic locations, making us vulnerable
to changes in economic conditions in that particular market. At December 31, 2004, we owned properties in four geographic locations in which each of the total
of the properties in each of these geographic locations represented over 10% our annualized rental
revenue for the year ended December 31, 2004. Five of our properties are located in Las Vegas,
Nevada and represented 12.87% of our total annualized revenue as of December 31, 2004. One of our
properties is located in Phoenix, Arizona and represented 15.55% of our annualized rental revenue
for the year ended December 31, 2004. Another five properties representing approximately 14.23% of
our annualized rental revenue for the year ended December 31, 2004 are located in the Atlanta area
in Georgia and one other property located in Voorhees, New Jersey represents 10.48% of our
annualized rental revenue for the year ended December 31, 2004. As a result, localized adverse
events or conditions, such as an economic recession or overbuilding in the local real estate
market, could have a significant adverse effect on the operations of our properties, and ultimately
on the amounts available for distribution to shareholders. We depend on key personnel, the loss of which may threaten our ability to operate our business
successfully. We depend on the services of our existing senior management to carry out our business and
investment strategies. If we were to lose any of our senior executive officers, particularly
Messrs. Klipsch or Farrar, it may be more difficult to locate attractive acquisition targets or
manage the properties that we acquire. Additionally, as we expand, we will continue to need to
attract and retain qualified additional senior management. The loss of the services of any of our
senior management personnel, or our inability to recruit and retain qualified personnel in the
future, could have an adverse effect on our business and financial results. 28




---



##### Table of Contents



Our Board of Trustees and management make decisions on our behalf, and shareholders have limited
management rights. Common shareholders have no right or power to take part in our management except through the
exercise of voting rights on certain specified matters. The Board of Trustees is responsible for
our management and strategic business direction, and management is responsible for our day-to-day
operations. Certain policies of our Board of Trustees may not be consistent with the immediate best
interests of shareholders. Shares available for future sale may have an adverse effect on the price of our common shares. Sales of a substantial number of our common shares, or the perception that such sales could occur,
could adversely affect prevailing market prices of our common shares. As of December 31, 2004,
there were 348,145 outstanding operating partnership units held by limited partners that are
redeemable, at the election of the holder, for cash, or, at our election, for our common shares.
Upon the redemption of operating partnership units, any common shares received therefore may be
sold in the public market pursuant to a shelf registration statement that we have filed on behalf
of the limited partners of our operating partnership, or pursuant to any available exemption from
registration. In addition, as of December 31, 2004, we had outstanding options to purchase 376,800.
Upon exercise of these options, the common shares received therefore may be sold in the public
market pursuant to a registration statement or pursuant to an available exemption from
registration. We are the general partner of our operating partnership and may become liable for the debts and
other obligations of this partnership beyond the amount of our investment. We are the general partner of our operating partnership, Windrose Medical Properties, L.P., and, as
of December 31, 2004, we owned an approximate 97.1% interest in the operating partnership. As
general partner, we are liable for the partnerships debts and other obligations. If the
partnership is unable to pay its debts and other obligations, as general partner we will be liable
for such debts and other obligations beyond the amount of our investment in the partnership. These
obligations could include unforeseen contingent liabilities. The market value of our common shares could decrease based on our performance, and market
perception and condition and rising interest rates. The market value of our common shares may be based primarily upon the markets perception of our
growth potential and current and future cash dividends, and may be secondarily based upon the real
estate market value of our underlying assets. The market price of our common shares is influenced
by the dividend on our common shares relative to market interest rates. Rising interest rates may
lead potential buyers of our common shares to expect a higher dividend rate, which would adversely
affect the market price of our common shares. In addition, rising interest rates would result in
increased interest expense on variable rate debt, thereby adversely affecting cash flow and our
ability to service our indebtedness and pay dividends. Tax-Related Risks Loss of our tax status as a REIT would have significant adverse consequences to us and the value
of our common shares. We have operated and intend to continue operating in a manner that will allow us to maintain our
REIT status for federal income tax purposes under the Internal Revenue Code, which will depend on
our ability to meet various requirements concerning, among other things, the ownership of our
outstanding common shares, the nature of our assets, the sources of our income and the amount of
our distributions to our shareholders. The REIT qualification requirements are extremely complex,
and interpretations of the federal income tax laws governing qualification as a REIT are limited.
Accordingly, we cannot be certain that we will continue to be successful in operating so as to
maintain our REIT status. At any time, new laws, 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 the Board
of Trustees to revoke the REIT election, which it may do without shareholder approval. If we lose or revoke our REIT status, we will face serious tax consequences that will substantially
reduce the funds available for distribution to you because:  
    we would not be allowed a deduction for distributions to shareholders in computing our
taxable income; 29




---



##### Table of Contents




    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. In addition, if we fail to qualify as a REIT, all distributions to shareholders would be subject to
tax as dividend income to the extent of our current and accumulated earnings and profits, we would
not be required to make distributions to shareholders and corporate distributees might be eligible
for the dividends received deduction. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to
expand our business and raise capital, and would adversely affect the value of our common shares. Failure to make required distributions would subject us to tax. In order to qualify as a REIT, each year we must distribute to our shareholders at least 90% of our
taxable income, other than any 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% non-deductible
excise tax on the amount, if any, by which our distributions in any year are less than the sum of:  
    85% of our REIT ordinary income for that year;
    95% of our REIT capital gain net income for that year; and
    100% of our undistributed taxable income from prior years. We have paid out and intend to continue paying out our income to our shareholders in a manner
intended to satisfy the distribution requirement and to avoid corporate income tax and the 4%
non-deductible excise tax. 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 shareholders and the limited partners of our operating
partnership. Any funds that we borrow would subject us to interest rate and other market risks. Risks Relating to Real Estate Investments Illiquidity of real estate investments could significantly impede our ability to respond to
adverse changes in the performance of our properties and harm our financial condition. Real estate investments are relatively illiquid. Our ability to quickly sell or exchange any of our
medical properties 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 property 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. Our acquisitions and development properties may under perform forecasted results or we may be
limited in our ability to finance future acquisitions, which may harm our financial condition and
operating results, and we may not be able to make the distributions required to maintain our REIT
status. We intend to pursue acquisitions of additional properties and to selectively develop new
properties. Acquisitions and development entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements necessary to develop
and acquire properties will prove inaccurate, as well as general investment risks associated with
any new real estate investment. We anticipate that acquisitions and development 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 30




---



##### Table of Contents



must distribute at least 90% of our REIT taxable income 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 could be curtailed, amounts available for distribution to shareholders could be
adversely affected and we could be required to reduce distributions. Properties with limited operating history may not achieve forecasted results, which could hinder
our ability to make distributions to our shareholders. Newly-developed or newly-renovated properties do not have the operating history that would allow
our management to make objective pricing decisions in acquiring these properties. The purchase
prices of these properties are based upon projections by management as to the expected operating
results of such properties, subjecting us to risks that such properties 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 maintain or require our tenants to maintain comprehensive insurance on each of our properties.
Insurance coverages on a property include liability and fire insurance and extended coverage
insurance in amounts sufficient to permit the replacement of the property 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 can afford or deem prudent. Inflation, changes in
building codes and ordinances, environmental considerations and other factors also might make it
impracticable to use insurance proceeds to replace a property after it has been damaged or
destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to
restore our economic position with respect to the affected property. If any of these or similar
events occur, it may reduce our return from the property and the value of our investment. Capital expenditures for property renovation may be greater than forecasted and may adversely
impact rent payments by our tenants and our ability to make distributions to shareholders. Properties, 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. Under the terms of our multi-tenant property leases, we generally are obligated to
pay the cost of expenditures for items that are necessary for the continued operation of our
properties and that are classified under generally accepted accounting principles as capital items.
If these capital expenditures exceed our estimates, the additional costs could have an adverse
effect on amounts available for distribution to shareholders. In addition, we may acquire
properties in the future that require significant renovation. Renovation of properties 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 properties. All of our medical properties are subject to property taxes that may increase in the future and
adversely affect our business. Our properties are subject to real and personal property taxes that may increase as property tax
rates change and as the properties are assessed or reassessed by taxing authorities. Our leases
generally provide that the property taxes are charged to the tenants as an expense related to the
properties that they occupy. As the owner of the properties, 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 distributions to our shareholders could be adversely affected. Our financial performance and the price of our common shares will be affected by risks associated
with the real estate industry. Factors that may adversely affect the economic performance and value of our operations include:  
    changes in the national, regional and local economic climate;
    local conditions such as an oversupply of, or a reduction in demand for, medical office
space, outpatient treatment and diagnostic facilities, physician practice group clinics,
ambulatory surgery centers and specialty hospitals and treatment centers; 31




---



##### Table of Contents




    attractiveness of our properties to physicians and other types of tenants; and
    competition from other medical office buildings, outpatient treatment facilities,
physician practice group clinics, ambulatory surgery centers and specialty hospitals and
treatment centers. As the owner and lessor of real estate, we are subject to risks under environmental laws,
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 environmental laws could materially adversely affect amounts
available for distribution to our shareholders and could exceed the value of all of our properties.
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 Phase I environmental assessments on all of our
properties to date and intend to do so with respect to any future properties we acquire. However,
even if the Phase I environmental assessment reports do not reveal any material environmental
contamination, it is nonetheless possible that material environmental liabilities may exist of
which we are unaware. Although the leases covering our properties generally require the 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. In
addition, environmental and occupational health and safety laws are constantly evolving, and
changes in laws, regulations or policies, or changes in interpretations of the foregoing, could
create liabilities where none exist today. Costs associated with complying with the Americans with Disabilities Act 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 we believe that
our properties are substantially in compliance with these requirements, a determination that we are
not in compliance with the Americans with Disabilities Act 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 properties, including
changes to building codes and fire and life-safety codes, may occur. If we were required to make
substantial modifications at the properties to comply with the Americans with Disabilities Act or
other changes in governmental rules and regulations, our ability to make expected distributions to
our shareholders could be adversely affected. Our ownership of properties through ground leases exposes us to the loss of such properties upon
breach or termination of the ground leases. We have acquired an interest in certain of our properties by acquiring a leasehold interest in the
property on which the building is located, and we may acquire additional properties in the future
through the purchase of interests in ground leases. As lessee under ground leases, we would be
exposed to the possibility of losing the property upon termination, or an earlier breach by us, of
the ground lease. Risks related to Development Development and construction risks could adversely affect our profitability. We currently are developing properties and intend to continue developing new properties in the
future. Our renovation, redevelopment, development and related construction activities may subject
us to the following risks:  
    we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use,
building, occupancy and other required governmental permits and authorizations, which could
result in increased costs or our abandonment of these projects; 32




---



##### Table of Contents




    we may incur construction costs for property that exceed our original estimates due to
increased costs for materials or labor or other costs that we did not anticipate;
    we may not be able to obtain financing on favorable terms, which may render us unable to
proceed with our development activities;
    we may be unable to complete construction and lease-up of a property on schedule, which could
result in increased debt service expense or construction costs. Additionally, the time frame required for development, construction and lease-up of these
properties means that we may have to wait years for significant cash returns. Because we are
required to make cash distributions to our shareholders, if the cash flow from operations or
refinancing is not sufficient, we may be forced to borrow additional money to fund such
distributions.
Newly developed and acquired properties may not produce the cash flow that we expect, which could
adversely affect our overall financial performance. In deciding whether to acquire or develop a particular property, we make assumptions regarding the
expected future performance of that property. In particular, we estimate the return on our
investment based on expected occupancy and rental rates. If our financial projections with respect
to a new property are inaccurate, and the property is unable to achieve the expected occupancy and
rental rates, it may fail to perform as we expected in analyzing our investment. Our estimate of
the costs of repositioning or redeveloping an acquired property may prove to be inaccurate, which
may result in our failure to meet our profitability goals. Additionally, we may acquire new
properties not fully leased, and the cash flow from existing operations may be insufficient to pay
the operating expenses and debt service associated with that property. Any of these factors could
result in our overpayment for a property and could adversely affect the amount of our distributions
to shareholders. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from adverse changes in market prices, interest
rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk
to which the Company is exposed is interest rate risk. Interest rates are sensitive to many
factors, including governmental monetary and tax policies, domestic and international economic and
political considerations and other factors that are beyond the Companys control. The Companys
future income, cash flows and fair values relevant to financial instruments are dependent upon
prevalent market interest rates. The Companys interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing
costs. As of December 31, 2004, the face value of the total outstanding mortgage debt of the Company was
approximately $151.7 million. The current outstanding debt balances relate to mortgages assumed or
incurred through the property acquisitions and borrowings under the Companys line of credit
facilities. The fair value of this debt approximates its carrying value. Included in the total
debt related to mortgages is a variable-rate mortgage which had a principal balance outstanding at
December 31, 2004 of approximately $4 million. The Company has a $70 million secured credit
facility which is available for working capital and acquisition purposes. Borrowing availability
under the facility is dependent upon the collateral pool securing the facility. Five banks are
participating in the credit facility with Huntington National Bank as the lead arranger and
administrative agent. The credit facility bears interest at variable rates of LIBOR plus 2.0-2.5%
depending on the Companys leverage ratio. This line of credit contains covenants that require,
among other things, the maintenance of certain financial ratios. The amount outstanding at December
31, 2004 was $23.4 million. The credit facility matures in September 2005. The Company has a $4
million secured credit facility with Union Planters Bank, secured by the first mortgage on the 310
25th Avenue medical office building located in Nashville, Tennessee. This loan was renewed, for a
term of one year, on October 1, 2004, and has a variable interest rate of prime minus 0.75%. The
amount outstanding at December 31, 2004 was approximately $2 million. A one percentage point
fluctuation in market interest rates would have had an approximate $177,000 impact on net earnings
in 2004. The Company has one interest rate swap contract that does not meet the criteria of Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) to qualify for hedge accounting. SFAS 133 requires that unrealized gains
and losses on derivatives not qualifying as hedge accounting be recognized currently in earnings.
The interest rate swap was acquired in connection with the acquisition of the Urology Center of the
South and the debt related to the swap was retired at the time of the acquisition. At the time the
associated debt was retired, the breakage fee for the swap was $448,307 and 33




---



##### Table of Contents



the Company recorded this amount as a liability. During the period August 16, 2002, the Company
recognized a loss of $231,818, and for the years ended December 31, 2003 and 2004, the Company
recognized a gain of $142,155 and $307,797. This interest rate swap was paid-off on March 4, 2005
at a price of approximately $162,000 resulting in an additional gain during the first quarter of
2005 of $68,000. By retiring the swap, the Company will avoid the approximately 17 remaining
months of interest cost, which the Company has been paying to the financial institution. The
payment made for the month of February, 2005 was $15,458 The Company has one interest rate swap contract that meets the criteria of SFAS No. 133 to qualify
for hedge accounting. In February 2004, the Company entered into a $23 million interest rate swap
contract as a hedge to effectively fix the rate on a secured loan assumed with the acquisition of a
medical office building in Voorhees, NJ. The fair value of the swap was an asset of $153,323 as of
December 31, 2004, and was recorded in the balance sheet as an offset to the interest rate swap
liability. The swap qualified for hedge accounting under SFAS 133; therefore, changes in fair
value were recorded in other comprehensive income. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related financial information and supplementary data required to be
filed hereunder are indexed under Item 15 of this Report and are incorporated herein by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures, as defined in
Exchange Act Rule 13a-15(e). Based upon that evaluation, the Companys Chief Executive Officer,
Chief Operating Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules
and forms. Managements Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rule 13a-15(f) for the Company. The Companys internal
control system was designed to provide reasonable assurance to the Companys management and board
of trustees regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Management has assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004, based on the criteria for effective internal control described
in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on its assessment, management concluded that the Companys
internal control over financial reporting was effective as of December 31, 2004. Our managements assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting
firm, as stated in their report which is included in Item 15. Changes in Internal Control over Financial Reporting There were no changes in the Companys internal controls over financial reporting that occurred
during the quarter ended December 31, 2004, that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial 34




---



##### Table of Contents



reporting. 
 ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS Incorporated herein by reference from the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission with respect to its Annual Meeting of Shareholders to be held on
April 26, 2005. 
 ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission with respect to its Annual Meeting of Shareholders to be held on
April 26, 2005. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission with respect to its Annual Meeting of Shareholders to be held on
April 26, 2005. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission with respect to its Annual Meeting of Shareholders to be held on
April 26, 2005. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated herein by reference from the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission with respect to its Annual Meeting of Shareholders to be held on
April 26, 2005. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K: 1. CONSOLIDATED FINANCIAL STATEMENTS 35




---



##### Table of Contents



PageIndex to Financial statements
    
    F-1Reports of Independent Registered Public Accounting Firm
    
    F-2Consolidated Statements of Operations, Years Ended December 31, 2004, 2003, 2002, and the period
January 1, 2002 through August 15, 2002 and the period August 16, 2002 through December 31, 2002
    
    F-3Consolidated Balance Sheets, December 31, 2004 and 2003
    
    F-4Consolidated Statements of Cash Flows, Years Ended December 31, 2004, 2003 and 2002
    
    F-5Consolidated Statements of Shareholders Equity (Deficit), Years
Ended December 31, 2004, 2003 and 2002
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 
 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Schedule III  Real Estate and Accumulated Depreciation 3. EXHIBITS The following exhibits are filed with this Form 10-K or incorporated herein by reference to the
listed documents previously filed with the Securities and Exchange Commission. EXHIBITNUMBER
    
    DESCRIPTION3.01
    
    Registrants Articles of Incorporation.*3.02
    
    Registrants Bylaws.*4.01
    
    Form of Common Share Certificate.*4.02
    
    Form of Warrant.**10.01
    
    Amended and Restated Agreement of Limited Partnership of Windrose Medical
Properties, L.P.*10.02
    
    Windrose Medical Properties Trust 2002 Stock Incentive Plan.*10.03
    
    Overhead Sharing Agreement between Windrose Medical Properties, L.P. and Klipsch
Audio, Inc.*10.05
    
    Promissory Note dated August 2, 1999 from Park Medical Associates General
Partnership to General Electric Capital Corporation.*10.06
    
    Loan Agreement dated August 2, 1999 between General Electric Capital Corporation and
Park Medical Associates General Partnership.*10.07
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing
from Park Medical Associates General Partnership to Charles T. Marshall (Trustee) for the
benefit of General Electric Capital Corporation.*10.08
    
    Form of Change in Control Severance Agreement between Windrose Medical Properties,
L.P. and Fred S. Klipsch.*10.09
    
    Form of Change in Control Severance Agreement between Windrose Medical Properties,
L.P. and Frederick L. Farrar.*10.10
    
    Employment Agreement between Windrose Medical Properties Trust, Windrose Medical
Properties, L.P. and Fred S. Klipsch, dated February 21, 2005.*****10.11
    
    Employment Agreement between Windrose Medical Properties Trust, Windrose Medical
Properties, L.P. and Frederick L. Farrar, dated February 21, 2005.*****10.12
    
    Subordinated Promissory Note dated September 28, 2001 from Windrose International
L.L.C. to Fred Klipsch.*
 36




---



##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.13
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International, L.L.C. to
Klipsch Audio, Inc.*10.14
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Robin P. Barksdale.*10.15
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Frederick L. Farrar.*10.16
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Fred S. Klipsch.*10.17
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Athena Development.*10.18
    
    Subordinated Promissory Note dated
May 11, 2002 from Windrose International, L.L.C. to
Charles Lanham.*10.19
    
    Promissory Note payable by Alliance Design Group to Hospital Affiliates Development
Corporation.*10.20
    
    Secured Revolving Credit Agreement, dated September 27, 2002, by and between Windrose
Medical Properties, L.P. and The Huntington National Bank.*10.21
    
    Credit Note, dated September 27, 2002, from Windrose Medical Properties, L.P. to The
Huntington National Bank.*10.22
    
    Secured Construction Loan Facility with Huntington National Bank, dated as of September 10, 2004.*****10.23
    
    Secured Construction Loan Facility with Huntington National Bank, dated as of December 3, 2004.****21.01
    
    List of Subsidiaries of the Registrant.**23.01
    
    Consent of KPMG LLP.****31.01
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.****31.02
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.****31.03
    
    Certification of Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.****32.01
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****32.02
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****32.03
    
    Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****
   *
    
    Previously filed as an exhibit to the Companys Registration Statement on Form
S-11, as amended, Registration No. 333-89186, and incorporated
by reference herein.**
    
    Previously filed as an exhibit to the Companys Registration Statement on Form S-3,
Registration No. 333-108659, and incorporated by reference herein.***
    
    Previously filed as an exhibit to the Companys Registration Statement on Form S-11,
as amended, Registration No. 333-110612, and incorporated by reference herein.****
    
    Filed herewith.*****
    
    Previously filed as an exhibit to the Companys Current Report on Form 8-K, dated February
22, 2005 and incorporated by reference herein.******
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, and incorporated by reference herein. (b) EXHIBITS 37




---



##### Table of Contents



The exhibits required to be filed with this Form 10-K pursuant to Item 601 of regulation
S-K are listed under Exhibits in Part IV, Item 15(a)(3) of this Form 10-K, and are
incorporated herein by reference. (c) FINANCIAL STATEMENT SCHEDULE The Financial Statement Schedule required to be filed with this Form 10-K is listed under
Consolidated Financial Statement Schedules in Part IV, Item 15(a)(2) of this Form 10-K,
and is incorporated herein by reference. 38




---



##### Table of Contents



SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED. WINDROSE MEDICAL PROPERTIESTRUST (Registrant)Date: March 14, 2004By:
    
    /S/ FRED S. KLIPSCHFRED S. KLIPSCHCHAIRMAN, CHIEF EXECUTIVE OFFICER, AND TRUSTEE(PRINCIPAL EXECUTIVE OFFICER)By:
    
    /S/ C. DOUGLAS HANSONC. DOUGLAS HANSONVICE PRESIDENT AND CHIEF FINANCIAL OFFICER(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED. SIGNATURE
    
    TITLE
    
    DATE/s/ FRED S. KLIPSCH
    
    Chairman, Chief Executive
Officer, and Trustee
    
    March 14, 2004(Principal Executive Officer)FRED S. KLIPSCH/s/ FREDERICK L. FARRAR
    
    President, Chief Operating Officer and Treasurer
    
    March 14, 2004FREDERICK L. FARRAR/s/ BRYAN MILLS
    
    Trustee
    
    March 14, 2004BRYAN MILLS/s/ STEPHEN GOLDSMITH
    
    Trustee
    
    March 14, 2004STEPHEN GOLDSMITH/s/ BRUCE M. JACOBSON
    
    Trustee
    
    March 14, 2004BRUCE M. JACOBSON/s/ JEAN L. WOJTOWICZ
    
    Trustee
    
    March 14, 2004JEAN L. WOJTOWICZ/s/ DAVID L. MARAMAN
    
    Trustee
    
    March 14, 2004DAVID L. MARAMAN/s/ DARRELL E. ZINK, JR
    
    Trustee
    
    March 14, 2004DARRELL E. ZINK, JR.
 39




---



##### Table of Contents



FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGEReports of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, 2002, and the period
January 1, 2002 through August 15, 2002 and the period August 16, 2002 through December 31, 2002
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Changes in Shareholders Equity (Deficit)
for the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders of Windrose Medical Properties Trust We have audited the consolidated balance sheets of Windrose Medical Properties Trust and
Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations for the period January 1, 2002 through August 15, 2002, the period August 16, 2002
through December 31, 2002 and for each of the years in the three-year period ended December 31,
2004, and the consolidated statements of cash flows and shareholders equity (deficit) for each of
the years in the three-year period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement schedule III. These
consolidated financial statements and the financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement 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 audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Windrose Medical Properties Trust and Subsidiaries as
of December 31, 2004 and 2003, and the results of their operations for the period January 1, 2002
through August 15, 2002, the period August 16, 2002 through December 31, 2002 and for each of the
years in the three-year period ended December 31, 2004, and their cash flows for each of the years
in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule III, 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. We have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Windrose Medical Properties Trust and Subsidiaries internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 9, 2005, expressed an unqualified opinion on
managements assessment of, and the effective operation of internal control over financial
reporting. /s/ KPMG LLP
Indianapolis, Indiana
March 9, 2005 F-2




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders of Windrose Medical Properties Trust We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Windrose Medical Properties Trust and Subsidiaries
maintained effective internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Windrose Medical Properties Trust and
Subsidiaries management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and opinion on the
effectiveness of the Companys internal control over financial reporting 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Windrose Medical Properties Trust and Subsidiaries
maintained effective internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Windrose Medical Properties Trust and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Windrose Medical Properties Trust and
Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, for the period January 1, 2002 through August 15, 2002, the period August 16, 2002
through December 31, 2002 and for each of the years in the three-year period ended December 31,
2004, and the consolidated statements of cash flows and shareholders equity (deficit) for each of
the years in the three-year period ended December 31, 2004, and related financial statement
schedule III, and our report dated March 9, 2005, expressed an unqualified opinion on those
consolidated financial statements. /s/ KPMG LLP
Indianapolis, Indiana
March 9, 2005 F-3




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES 
 Consolidated Balance Sheets
 As of December 31, 2004 and December 31, 2003
 December 31,
    
    
    December 31,2004
    
    
    2003ASSETSREAL ESTATE INVESTMENTS:Land and Land Improvements
    
    $
    24,356,089
    
    
    $
    17,191,625Buildings and Tenant Improvements
    
    
    254,411,057
    
    
    
    141,027,244Construction in Progress
    
    
    16,452,974
    
    
    
    463,071Acquired Lease Intangibles
    
    
    12,914,079
    
    
    
    7,762,641Gross Real Estate Investments
    
    
    308,134,199
    
    
    
    166,444,581Accumulated Depreciation
    
    
    (7,634,900
    )
    
    
    (2,740,281
    )Accumulated Lease Intangible Amortization
    
    
    (2,906,478
    )
    
    
    (1,135,887
    )Accumulated Depreciation and Amortization
    
    
    (10,541,378
    )
    
    
    (3,876,168
    )Net Real Estate Investments Held for Sale
    
    
    4,891,700
    
    
    
    NET REAL ESTATE INVESTMENTS
    
    
    302,484,521
    
    
    
    162,568,413Cash and Cash Equivalents
    
    
    9,012,746
    
    
    
    17,386,791Prepaid Expenses
    
    
    464,262
    
    
    
    391,413Receivables on Construction and Consulting Contracts
    
    
    245,078
    
    
    
    400,970Receivables from Tenants, Net of Allowance of $101,215 and $0
    
    
    1,492,456
    
    
    
    511,531Revenues in Excess of Billing
    
    
    2,489
    
    
    
    Straight-line Rent Receivable
    
    
    2,872,881
    
    
    
    1,356,520Deferred Financing Fees, Net of Accumulated Amortization of
$929,193 and $193,207
    
    
    1,401,682
    
    
    
    1,207,457Escrow Deposits and Other Assets
    
    
    6,354,278
    
    
    
    4,069,418TOTAL ASSETS
    
    $
    324,330,393
    
    
    $
    187,892,513LIABILITIES AND SHAREHOLDERS EQUITYSecured Debt
    
    $
    187,133,521
    
    
    $
    76,893,444Billings in Excess of Revenues Earned
    
    
    91,389
    
    
    
    152,151Accounts Payable and Accrued Expenses
    
    
    4,982,137
    
    
    
    2,213,317Consulting and Construction Payables
    
    
    2,174,287
    
    
    
    106,096Dividends Payable to Shareholders
    
    
    
    
    
    
    1,252,176Tenant Security Deposits and Prepaid Rents
    
    
    3,919,673
    
    
    
    742,252Other Liabilities
    
    
    1,008,404
    
    
    
    537,969TOTAL LIABILITIES
    
    
    199,309,411
    
    
    
    81,897,405Minority Interest
    
    
    5,615,379
    
    
    
    3,837,499SHAREHOLDERS EQUITYCommon Shares of Beneficial Interest ($.01 par value); 100,000,000 Shares Authorized,
11,638,513 and 9,946,710 Issued and Outstanding
    
    
    116,385
    
    
    
    99,467Additional Paid In Capital
    
    
    125,658,593
    
    
    
    105,490,989Accumulated Other Comprehensive Income
    
    
    153,323
    
    
    
    Deferred Stock Compensation
    
    
    (207,356
    )
    
    
    Distributions in Excess of Net Income
    
    
    (6,315,352
    )
    
    
    (3,432,847
    )TOTAL SHAREHOLDERS EQUITY
    
    
    119,405,593
    
    
    
    102,157,609TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    324,330,383
    
    
    $
    187,892,513
 See Accompanying Notes to Consolidated Financial Statements F-4




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES 
 Consolidated Statements of Operations
 January 1, 2002
    
    
    August 16, 2002Year Ended December 31,
    
    
    Year Ended December 31,
    
    
    Through
    
    
    Through
    
    
    Year Ended December 31,2004
    
    
    2003
    
    
    August 15, 2002
    
    
    December 31, 2002
    
    
    2002(Company)
    
    
    (Company)
    
    
    (Predecessor)
    
    
    (Company)
    
    
    (Combined)RENTAL OPERATIONS:Rental revenues
    
    $
    30,074,202
    
    
    $
    13,652,932
    
    
    $
    
    
    
    $
    2,274,130
    
    
    $
    2,274,130Operating expenses:Property taxes
    
    
    2,629,976
    
    
    
    751,351
    
    
    
    
    
    
    
    61,402
    
    
    
    61,402Property operating expenses
    
    
    5,822,627
    
    
    
    1,858,254
    
    
    
    
    
    
    
    101,949
    
    
    
    101,949Depreciation and amortization
    
    
    6,673,235
    
    
    
    3,233,674
    
    
    
    
    
    
    
    481,256
    
    
    
    481,256Total operating expenses
    
    
    15,125,838
    
    
    
    5,843,279
    
    
    
    
    
    
    
    644,607
    
    
    
    644,607Income from rental operations
    
    
    14,948,364
    
    
    
    7,809,653
    
    
    
    
    
    
    
    1,629,523
    
    
    
    1,629,523SERVICE OPERATIONS (HADC):Revenues:Development and project management fees
    
    
    1,848,691
    
    
    
    3,660,696
    
    
    
    4,145,468
    
    
    
    7,559,007
    
    
    
    11,704,475Expenses:Cost of sales and project costs
    
    
    1,279,028
    
    
    
    3,295,590
    
    
    
    3,541,826
    
    
    
    7,535,403
    
    
    
    11,077,229General and administrative expenses
    
    
    430,011
    
    
    
    824,452
    
    
    
    1,692,670
    
    
    
    571,808
    
    
    
    2,264,478Income (loss) from service operations
    
    
    139,652
    
    
    
    (459,346
    )
    
    
    (1,089,028
    )
    
    
    (548,204
    )
    
    
    (1,637,232
    )GENERAL AND ADMINISTRATIVE EXPENSES:Corporate and rental operations
    
    
    3,275,897
    
    
    
    2,693,805
    
    
    
    
    
    
    
    851,290
    
    
    
    851,290Operating income (loss)
    
    
    11,812,119
    
    
    
    4,656,502
    
    
    
    (1,089,028
    )
    
    
    230,029
    
    
    
    (858,999
    )OTHER INCOME (EXPENSES):Interest income
    
    
    29,611
    
    
    
    28,547
    
    
    
    
    
    
    
    67,563
    
    
    
    67,563Interest (expense)
    
    
    (8,166,721
    )
    
    
    (3,306,484
    )
    
    
    (22,169
    )
    
    
    (219,017
    )
    
    
    (241,186
    )Gain (loss) on interest rate swap
    
    
    307,797
    
    
    
    142,155
    
    
    
    
    
    
    
    (231,818
    )
    
    
    (231,818
    )(Loss) on abandoned due diligence costs
    
    
    
    
    
    
    (208,922
    )
    
    
    
    
    
    
    
    
    
    
    Other income (expense)
    
    
    (128,941
    )
    
    
    (249,582
    )
    
    
    (30,404
    )
    
    
    (49,635
    )
    
    
    (80,039
    )Total other income (expense)
    
    
    (7,958,254
    )
    
    
    (3,594,286
    )
    
    
    (52,573
    )
    
    
    (432,907
    )
    
    
    (485,480
    )Income (loss) before income taxes
    
    
    3,853,865
    
    
    
    1,062,216
    
    
    
    (1,141,601
    )
    
    
    (202,878
    )
    
    
    (1,344,479
    )Income tax (expense) benefit
    
    
    (55,861
    )
    
    
    144,069
    
    
    
    126,000
    
    
    
    255,141
    
    
    
    381,141Income (loss) before minority interest
    
    
    3,798,004
    
    
    
    1,206,285
    
    
    
    (1,015,601
    )
    
    
    52,263
    
    
    
    (963,338
    )Minority interest in income of common unit holders and
other subsidiaries
    
    
    (147,413
    )
    
    
    (100,356
    )
    
    
    
    
    
    
    (9,003
    )
    
    
    (9,003
    )Net Income from continuing operations
    
    
    3,650,591
    
    
    
    1,105,929
    
    
    
    (1,015,601
    )
    
    
    43,260
    
    
    
    (972,341
    )Net Income from Discontinued Operations, net of minority interest
    
    
    402,255
    
    
    
    142,085
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) available for common shareholders
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    (1,015,601
    )
    
    $
    43,260
    
    
    $
    (972,341
    )Net income from continuing operations per common share:Basic and diluted
    
    $
    0.35
    
    
    $
    0.19
    
    
    
    
    
    
    $
    0.01Net income from discontinued operations per common share:Basic and diluted
    
    
    0.04
    
    
    
    0.02
    
    
    
    
    
    
    
    Net income per common share:Basic and diluted
    
    $
    0.39
    
    
    $
    0.21
    
    
    
    
    
    
    $
    0.01Weighted average number of common shares
outstanding
    
    
    10,369,521
    
    
    
    5,808,298
    
    
    
    
    
    
    
    5,691,710Weighted average number of common and
dilutive potential common shares
    
    
    10,739,689
    
    
    
    6,169,137
    
    
    
    
    
    
    
    6,054,031
 See Accompanying Notes to Consolidated Financial Statements F-5




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME (LOSS)
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    (972,341
    )ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:Depreciation and amortization
    
    
    6,790,119
    
    
    
    3,327,306
    
    
    
    481,256Rental income associated with above (below) market leases
    
    
    94,124
    
    
    
    70,468
    
    
    
    Deferred income taxes
    
    
    55,861
    
    
    
    (144,069
    )
    
    
    (381,141
    )Deferred compensation expense
    
    
    22,390
    
    
    
    
    
    
    
    (Gain) loss on interest rate swap
    
    
    (307,797
    )
    
    
    (142,155
    )
    
    
    231,818Amortization of deferred financing fees
    
    
    674,259
    
    
    
    165,424
    
    
    
    27,783Amortization of fair value of debt adjustment
    
    
    (772,759
    )
    
    
    (468,752
    )
    
    
    (7,885
    )Minority interest in earnings
    
    
    161,259
    
    
    
    109,178
    
    
    
    9,003Increase (decrease) in cash due to changes in:
    
    
    
    
    
    
    
    
    
    
    Construction receivables (payables), net
    
    
    76,274
    
    
    
    (921,217
    )
    
    
    1,380,099Straight line rent receivable
    
    
    (1,586,491
    )
    
    
    (1,062,494
    )
    
    
    (294,026
    )Receivables from tenants
    
    
    (980,925
    )
    
    
    (377,536
    )
    
    
    Revenue earned in excess of billings
    
    
    (2,489
    )
    
    
    1,268,785
    
    
    
    (1,059,768
    )Due from affiliates
    
    
    
    
    
    
    
    
    
    
    219,000Billings in excess of revenues earned
    
    
    (60,762
    )
    
    
    (252,117
    )
    
    
    (40,155
    )Other accrued revenue and expenses
    
    
    1,572,891
    
    
    
    (371,386
    )
    
    
    84,255NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    9,788,800
    
    
    
    2,449,449
    
    
    
    (322,102
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,715,359
    )
    
    
    (569,703
    )
    
    
    (140,840
    )Deposits on potential acquisitions
    
    
    (208,843
    )
    
    
    (523,237
    )
    
    
    Acquisition of real estate investments
    
    
    (46,945,575
    )
    
    
    (44,665,616
    )
    
    
    (51,460,997
    )Development Projects
    
    
    (8,889,042
    )
    
    
    
    
    
    
    Other deferred leasing costs
    
    
    (114,812
    )
    
    
    (23,029
    )
    
    
    Other deferred costs and other assets
    
    
    (438,048
    )
    
    
    (512,627
    )
    
    
    Acquisition of Minority Interest
    
    
    
    
    
    
    (26,700
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (58,311,679
    )
    
    
    (46,320,912
    )
    
    
    (51,601,837
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on indebtedness
    
    
    (1,703,331
    )
    
    
    (3,450,575
    )
    
    
    (4,018
    )Draws on line of credit
    
    
    43,669,794
    
    
    
    28,232,634
    
    
    
    Paydowns on line of credit
    
    
    (18,234,513
    )
    
    
    (28,232,634
    )
    
    
    (498,133
    )Net Payments on Notes Payable to Owners
    
    
    
    
    
    
    
    
    
    
    (188,660
    )Proceeds from Mezzanine Debt
    
    
    5,844,000
    
    
    
    
    
    
    
    Proceeds from mortgage debt
    
    
    
    
    
    
    13,000,000
    
    
    
    Cash distributions to shareholders
    
    
    (8,187,528
    )
    
    
    (3,471,945
    )
    
    
    Cash distributions to minority interest
    
    
    (327,015
    )
    
    
    (268,128
    )
    
    
    Distributions to owners
    
    
    
    
    
    
    
    
    
    
    (86,503
    )Deferred Financing Costs
    
    
    (932,322
    )
    
    
    (1,090,821
    )
    
    
    (309,843
    )Proceeds from Issuance of Common Shares, net
    
    
    20,019,749
    
    
    
    48,302,135
    
    
    
    61,133,394NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    40,148,834
    
    
    
    53,020,666
    
    
    
    60,046,237NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (8,374,045
    )
    
    
    9,149,203
    
    
    
    8,122,298CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    17,386,791
    
    
    
    8,237,588
    
    
    
    115,290CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    9,012,746
    
    
    $
    17,386,791
    
    
    $
    8,237,588SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid, net of capitalized interest of $63,253 in 2004
    
    $
    7,267,748
    
    
    $
    3,125,122
    
    
    $
    226,884Net liabilities (including secured debt) assumed in
acquisition of real estate investments
    
    
    82,038,618
    
    
    
    59,415,114
    
    
    
    10,861,000Offering costs included in accounts payable
    
    
    
    
    
    
    586,994
    
    
    
    Issuance of partnership units for real estate investments
    
    
    
    
    
    
    
    
    
    
    1,723,000Reallocation of minority interest
    
    
    229,529
    
    
    
    198,512
    
    
    
    Minority interest share of joint venture acquisition
    
    
    1,885,514
    
    
    
    
    
    
    
    Conversion of units to common shares
    
    
    164,556
    
    
    
    
    
    
    
    
 See Accompanying Notes to Consolidated Financial Statements F-6




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES 
 Consolidated Statements of Changes in Shareholders Equity (Deficit)
 ADDITIONAL
    
    
    DISTRIBUTIONS
    
    
    OTHER
    
    
    DEFERRED
    
    
    MEMBERS
    
    
    TOTALCOMMON STOCK
    
    
    PAID-IN
    
    
    IN EXCESS OF
    
    
    COMPREHENSIVE
    
    
    STOCK
    
    
    EQUITY
    
    
    SHAREHOLDERS'SHARES
    
    
    AMOUNT
    
    
    CAPITAL
    
    
    NET INCOME
    
    
    INCOME
    
    
    COMPENSATION
    
    
    (DEFICIT)
    
    
    EQUITY (DEFICIT)BALANCES AT December 31, 2001
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (379,298
    )
    
    $
    (379,298
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,015,601
    )
    
    
    (1,015,601
    )Distribution to owners
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86,503
    )
    
    
    (86,503
    )BALANCES AT August 15, 2002
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,481,402
    )
    
    $
    (1,481,402
    )Issuance of Common Stock, Net of
Underwriting Discount
    
    
    5,691,710
    
    
    
    56,917
    
    
    
    62,779,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,836,346Offering Costs
    
    
    
    
    
    
    
    
    
    
    (1,702,952
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,702,952
    )Adjustment Required to Reflect
Predecessor Basis
    
    
    
    
    
    
    
    
    
    
    (3,059,567
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,481,402
    
    
    
    (1,578,165
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,260Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (739,923
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (739,923
    )BALANCES AT DECEMBER 31, 2002
    
    
    5,691,710
    
    
    $
    56,917
    
    
    $
    58,016,910
    
    
    $
    (696,663
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    57,377,164Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,248,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,248,014Reallocation of Minority Interest
    
    
    
    
    
    
    
    
    
    
    (198,512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (198,512
    )Issuance of Common Stock, net of
underwriting Discount
    
    
    4,255,000
    
    
    
    42,550
    
    
    
    48,379,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,421,900Offering Costs
    

    
    
    
    
    
    
    
    
    
    (706,759
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (706,759
    )Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,984,198
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,984,198
    )BALANCES AT DECEMBER 31, 2003
    
    
    9,946,710
    
    
    $
    99,467
    
    
    $
    105,490,989
    
    
    $
    (3,432,847
    )
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    102,157,609Comprehensive Income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,052,847
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,052,847Gain on Interest Rate Swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,323
    
    
    
    
    
    
    
    
    
    
    
    153,323Comprehensive income available for
common shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,206,170Reallocation of Minority Interest
    
    
    
    
    
    
    
    
    
    
    (229,529
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (229,529
    )Issuance of Common Stock, net of
underwriting Discount
    
    
    1,662,000
    
    
    
    16,620
    
    
    
    20,140,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,156,736Dividend Reinvestment
    
    
    395
    
    
    
    4
    
    
    
    4,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,038Conversion of units to Common Shares
    
    
    11,708
    
    
    
    117
    
    
    
    164,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,556Deferred Stock Compensation
    
    
    17,700
    
    
    
    177
    
    
    
    229,569
    
    
    
    
    
    
    
    
    
    
    
    (207,356
    )
    
    
    
    
    
    
    22,390Offering Costs
    
    
    
    
    
    
    
    
    
    
    (141,025
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,025
    )Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,935,352
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,935,352
    )BALANCES AT DECEMBER 31, 2004
    
    
    11,638,513
    
    
    $
    116,385
    
    
    $
    125,658,593
    
    
    $
    (6,315,352
    )
    
    $
    153,323
    
    
    $
    (207,356
    )
    
    $
    
    
    
    $
    119,405,593
 See Accompanying Notes to Consolidated Financial Statements F-7




---



##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company The Company was formed to acquire, selectively develop and manage specialty medical properties,
such as medical office buildings, outpatient treatment diagnostic facilities, physician group
practice clinics, ambulatory surgery centers, specialty hospitals, and other healthcare related
specialty properties. The Company had no operations prior to its initial public offering on August
16, 2002. The Companys rental operations are conducted through Windrose Medical Properties L. P.
(the Operating Partnership). The Company is the general partner of the Operating Partnership and
owns approximately 97.1% of the Operating Partnership as of December 31, 2004. The condensed
consolidated financial statements include the accounts of the Company, the Operating Partnership
and its majority-owned subsidiaries. The Company also conducts service operations through Hospital Affiliates Development Corporation
(HADC), a wholly-owned taxable REIT subsidiary of the Operating Partnership. The net assets and
operations of the service operations acquired in connection with the Initial Offering were
designated as the predecessor (the Predecessor) for accounting purposes. The Company maintained
carry-over basis for the accounting of the purchase of these assets. Accordingly, all periods prior
to August 16, 2002 include only the operations of the Predecessor. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its controlled
subsidiaries. The equity interests in these subsidiaries not owned by the Company are reflected as
minority interests in the consolidated financial statements. All significant intercompany balances
and transactions have been eliminated in the consolidated financial statements. REAL ESTATE INVESTMENTS Real Estate Investments to be held and used are stated at the lower of cost less accumulated
depreciation or fair value if impairment is identified. Real estate investments to be disposed of
are reported at the lower of their carrying amount or fair value less the cost of sale. Buildings
are depreciated using the straight-line method over their estimated life not to exceed 40 years.
Tenant Improvements are depreciated using the straight-line method over the term of the related
lease. All direct and indirect costs, including interest and real estate taxes clearly associated with the
development, construction or expansion of real estate investments are capitalized as a cost of the
property. All external costs associated with the acquisition of real estate investments are
capitalized as a cost of the property. We analyze our investments in joint ventures under Financial Accounting Standards Board
Interpretation No. 46 (R), Consolidation of Variable Interest Entities to determine if the joint
venture is considered a variable interest entity and would require consolidation. The Company evaluates its real estate investments to be held and used upon occurrence of
significant changes in the operations, but
not less than annually, to assess whether any impairment indications are present that affect the
recovery of the recorded value by comparing the sum of expected future cash flows (on an
undiscounted basis) from a rental property over its anticipated holding period to the historical
net cost basis. If any real estate investment is considered impaired, a loss is provided to reduce
the carrying value of the property to its estimated fair value. In accordance with Statement of Financial Accounting Standard No. 141, Business Combinations
(SFAS 141), the Company allocates the purchase price of acquired properties to net tangible and
identified intangible assets based on their respective fair values. The allocation to tangible
assets (building and land) is based upon managements determination of the value of the property as
if it were vacant using discounted cash flow models similar to those used by independent
appraisers. Factors considered by management F-8




---



##### Table of Contents



include an estimate of carrying costs during the
expected lease-up periods considering current market conditions and costs to execute similar
leases. The remaining purchase price is allocated among three categories of intangible assets
consisting of the above or below market component of in-place leases, the value of in-place leases
and the value of customer relationships. The value allocable to the above or below market component of the acquired in-place lease is
determined based upon the present value (using a discount rate which reflects the risks associated
with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant
to the lease over its remaining term, and (ii) managements estimate of the amounts that would be
paid using fair market rates over the remaining term of the lease. The amounts allocated to above
market leases are included in acquired lease intangibles and below market lease are included in
other liabilities in the balance sheet and are amortized to rental income over the remaining terms
of the respective leases. The total amount of other intangible assets acquired is further allocated to in-place lease values
and customer relationship values based on managements evaluation of the specific characteristics
of each tenants lease and the Companys overall relationship with that respective tenant.
Characteristics considered by management in allocating these values include the nature and extent
of the Companys 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, among
other factors. The following table shows the estimated aggregate amortization expense for acquired lease
intangibles for each of the next five years: Lease Intangible Amortization Year
    
    Expense2005
    
    
    1,723,4252006
    
    
    1,436,2962007
    
    
    1,121,7642008
    
    
    828,5412009
    
    
    560,695
 CASH EQUIVALENTS Highly liquid investments with maturity of three months or less when purchased are classified
as cash equivalents. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company reviews each account receivable for collectibility and provides an allowance for
doubtful accounts as specific accounts receivable are deemed uncollectible. DEFERRED COSTS Costs incurred in connection with obtaining financing are amortized to interest expense on the
straight-line method over the term
of the related loan. Costs associated with the leasing of real estate investments are
amortized over the term of the related lease. Unamortized costs are charged to expense upon the
early termination of the lease or upon early payment of the financing. RENTAL OPERATIONS Rental income from leases with scheduled rental increases during their terms is recognized on a
straight-line basis. SERVICE OPERATIONS Contract revenues are recognized using the percentage of completion method based on the efforts
expended, whereby the percentage complete is based on hours incurred in relation to total estimated
hours to be incurred. Costs associated with obtaining contracts are F-9




---



##### Table of Contents



expensed as incurred. The
Company does not combine contracts for purposes of recognizing revenue and, generally, does not
segment contracts. Customers are billed based on the terms included in the contracts, which are
generally upon delivery of certain products or information, or achievement of certain milestones
defined in the contracts. When billed, such amounts are recorded as accounts receivable. Revenue
earned in excess of billings represents revenue related to services completed but not billed, and
billings in excess of revenue earned represent billings in advance of services performed. Contract costs include labor costs and those indirect costs related to contract performance, such
as indirect labor and supplies. Losses on contracts are recognized in the period such losses are
determined. Changes in job performance, job conditions, and estimated profitability, including
those arising from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the revisions are
determined. Leasing commissions are recorded as income at the time the services are provided unless future
contingencies exist, in which case the income is recorded when the contingency is resolved. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing net income available for common shares by
the weighted average number of common shares outstanding for the period. Diluted net income per
share is computed by dividing the sum of net income available for common shares and minority
interest in earnings of unitholders, by the sum of the weighted average number of common shares and
units outstanding and dilutive potential common shares for the period. The following table reconciles the components of basic and diluted net income per common share for
the years ended December 31, 2004, 2003 and 2002: August 16, 2002December 31,
    
    
    December 31,
    
    
    Through2004
    
    
    2003
    
    
    December 31, 2002Basic net income available for common shares
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    43,260Minority interest in earnings of common unitholders
    
    
    161,259
    
    
    
    109,178
    
    
    
    9,003Diluted net income available for common shares
    
    $
    4,214,105
    
    
    $
    1,357,192
    
    
    $
    52,263Weighted average number of common shares outstanding
    
    
    10,369,521
    
    
    
    5,808,298
    
    
    
    5,691,710Weighted average partnership units outstanding
    
    
    358,343
    
    
    
    360,839
    
    
    
    362,321Dilutive shares for stock based compensation plan
    
    
    11,825
    
    
    
    
    
    
    
    Weighted aveage number of common shares and dilutive potential shares
    
    
    10,739,689
    
    
    
    6,169,137
    
    
    
    6,054,031
 The outstanding limited partners units in the Operating partnership included in the diluted
earnings per share calculation have no effect on the earnings per share amounts since the minority
interests share of income is also added back to net income. FEDERAL INCOME TAXES The Company is taxed as a real estate investment trust (REIT) under the Internal Revenue Code. To
qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it
currently distribute at least 90% of its taxable income to its shareholders. Management intends to
continue to adhere to these requirements and to maintain the Companys REIT status. As a REIT, the
Company is entitled to a tax deduction for some or all of the dividends it pays to shareholders.
Accordingly, the Company generally will not be subject to federal income taxes as long as it
distributes an amount equal to or in excess of its taxable income currently distributed to its
shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income taxes and may not be able to qualify as a REIT for four subsequent taxable years. REIT qualification reduces, but does not eliminate, the amount of state and local taxes paid by the
Company. In addition, the Companys financial statements include the operations of a taxable REIT
subsidiary that is not entitled to a dividends paid deduction and is subject to corporate federal,
state, and local income taxes. As a REIT, the Company may also be subject to certain federal excise
taxes if it engages in certain types of transactions. The following table reconciles the Companys net income to its taxable income before the dividends
paid deduction for the years F-10




---



##### Table of Contents



ended December 31, 2004 and 2003 and for the period August 16, 2002
through December 31, 2002: For the Year
    
    
    For the Year
    
    
    August 16, 2002Ended
    
    
    Ended
    
    
    throughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Net Income
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    43,260Book/Tax Differences
    
    
    (696,336
    )
    
    
    (248,757
    )
    
    
    347,587Adjustable taxable income subject to 90% dividend
requirement
    
    $
    3,356,510
    
    
    $
    999,257
    
    
    $
    390,847
 The Companys dividends paid deduction is summarized below: For the Year
    
    
    For the Year
    
    
    August 16, 2002Ended
    
    
    Ended
    
    
    throughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Dividends Declared
    
    $
    6,935,352
    
    
    $
    3,984,198
    
    
    $
    739,923Less: Return of capital
    
    
    (3,578,842
    )
    
    
    (2,984,941
    )
    
    
    (349,076
    )Total dividends paid deduction attributable to adjusted
taxable income
    
    $
    3,356,510
    
    
    $
    999,257
    
    
    $
    390,847
 A summary of the tax characterization of the dividends paid per common share for the year
ended December 31, 2004 and 2003 and for the period August 16, 2002 through December 31, 2002
follows: 2004
    
    
    2003
    
    
    2002Total dividends declared per share
    
    $
    0.66
    
    
    $
    0.70
    
    
    $
    0.13Ordinary income
    
    
    48.40
    %
    
    
    25.08
    %
    
    
    52.82
    %Return of capital
    
    
    51.60
    %
    
    
    74.92
    %
    
    
    47.18
    %100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
 Income taxes for the taxable REIT subsidiary are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect in the years in which the temporary differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company assesses the realizability of deferred tax assets and considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. STOCK BASED COMPENSATION The Company applies the recognition and measurement provisions of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for its stock option
plan. Accordingly, no compensation expense is reflected in net income related to stock options as
all options granted had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. If compensation cost for the Companys fixed stock
option plan had been determined F-11




---



##### Table of Contents



consistent with SFAS No. 123 Accounting for Stock Based
Compensation, the Companys net income and net income per share for the years ended December 31,
2004 and 2003 and for the period August 16, 2002 through December 31, 2002 would have been reduced
to the pro forma amounts indicated below: For the Year
    
    
    For the Year
    
    
    August 16,2002Ended
    
    
    Ended
    
    
    ThroughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    43,260Deduct: Total stock based compensation expense determined
under the          fair value method for all awards
    
    
    (137,396
    )
    
    
    (174,668
    )
    
    
    (164,032
    )Pro forma net income (loss) per share
    
    $
    3,915,450
    
    
    $
    1,073,346
    
    
    $
    (120,772
    )As reported
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.01Pro forma
    
    $
    0.38
    
    
    $
    0.18
    
    
    $
    (0.02
    )
 The fair values of the options were determined using the Black-Scholes option-pricing model
with the following assumptions: For the Year
    
    
    For the Year
    
    
    August 16,2002Ended
    
    
    Ended
    
    
    ThroughDecember 31,
    
    
    December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2002Dividend yield
    
    
    8
    %
    
    
    8
    %
    
    
    8
    %Volatility
    
    
    22.26
    %
    
    
    42.47
    %
    
    
    42.47
    %Risk-free
interest rate of options
granted on 8/16/02 with expected life of five years
    
    
    
    
    
    
    
    
    
    
    3.25
    %Risk-free
interest rate of options
granted on 8/16/02 with expected life of seven years
    
    
    
    
    
    
    
    
    
    
    3.82
    %Risk-free
interest rate of options
granted on 12/19/02 with expected life of seven years
    
    
    
    
    
    
    
    
    
    
    3.65
    %Risk-free
interest rate of options
granted on 3/19/03 with expected life of seven years
    
    
    
    
    
    
    3.52
    %
    
    
    Risk-free
interest rate of options
granted on 8/5/03 with expected life of seven years
    
    
    
    
    
    
    3.84
    %
    
    
    Risk-free
interest rate of options
granted on 7/27/04 with expected life of seven years
    
    
    4.19
    %
    
    
    
    
    
    
    Expected life of options with one year vesting period
    
    5 years
    
    
    
    N/A
    
    
    5 yearsExpected life of options with four year vesting period
    
    7 years
    
    
    7 years
    
    
    7 yearsWeighted-average fair value per share of options granted
    
    $
    1.79
    
    
    $
    2.21
    
    
    $
    2.33
 DERIVATIVE FINANCIAL INSTRUMENTS The Company complies with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and No. 138. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair market value. Gains or losses resulting
from changes in the value of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company will use derivative financial
instruments such as interest rate swaps to mitigate its interest rate risk. SFAS 133 requires that the changes in fair value of derivatives
that qualify as cash flow hedges be recognized in other comprehensive income while the ineffective
portion of the derivatives change in fair market value be recognized immediately in earnings. F-12




---



##### Table of Contents



FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Companys financial instruments are generally calculated as the present
value of estimated future cash flows using a discount rate commensurate with the risks involved.
The fair value approximates the carrying value for all financial instruments including
indebtedness, which is discussed in Footnote 8 to the Consolidated Financial Statements. USE OF ESTIMATES The preparation of the consolidated financial statements requires management of the Company to
make a number of estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 2002 and 2003 financial statements have been reclassified to conform with
the 2004 presentation. 3. DERIVATIVE INSTRUMENTS The Company has one interest rate swap contract that does not meet the criteria of Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) to qualify for hedge accounting. SFAS 133 requires that unrealized gains
and losses on derivatives not qualifying as hedge accounting be recognized currently in earnings.
The interest rate swap was acquired in connection with the acquisition of the Urology Center of the
South and the debt related to the swap was retired at the time of the acquisition. At the time the
associated debt was retired, the breakage fee for the swap was $448,307 and the Company recorded
this amount as a liability. During the period August 16, 2002, the Company recognized a loss of
$231,818, and for the years ended December 31, 2003 and 2004, the Company recognized a gain of
$142,155 and 307,797. This interest rate swap was paid-off on March 4, 2005 at a price of
approximately $162,000 resulting in an additional gain during the first quarter of 2005 of $68,000.
By retiring the swap, the Company will avoid the approximately 17 remaining months of interest
cost, which the Company has been paying to the financial institution. The payment made for the
month of February, 2005 was $15,458. The Company has one interest rate swap contract that meets the criteria of SFAS No. 133 to qualify
for hedge accounting. In February 2004, the Company entered into a $23 million interest rate swap
contract as a hedge to effectively fix the rate on a secured loan assumed with the acquisition of a
medical office building in Voorhees, NJ. The fair value of the swap was an asset of $153,323 as of
December 31, 2004, and was recorded in the balance sheet as an offset to the interest rate swap
liability. The swap qualified for hedge accounting under SFAS 133; therefore, changes in fair
value were recorded in other comprehensive income. 4. DISCONTINUED OPERATIONS The Company utilizes the guidelines established under the Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
SFAS 144 requires the Company to report in discontinued operations the results of operations of a
property which has either been disposed or is classified as held-for-sale, unless certain
conditions are met. The Company has classified operations of one building as discontinued operations at December 31,
2004. As a result, the Company ceased depreciation and classified net income from operations, net
of minority interest, of $402,255 and $142,085 as net income from discontinued operations for the
years ended December 31, 2004 and 2003, respectively. As of December 31, 2004, the Company had one building classified as held-for-sale. The following
table illustrates the major classes of assets and operations affected by the building identified as
held-for-sale at December 31, 2004: F-13




---



##### Table of Contents



Year Ended December 31,2004
    
    
    2003Statement of Operations:Revenues
    
    $
    766,359
    
    
    $
    376,313Expenses:Operating
    
    
    233,374
    
    
    
    107,557Interest
    
    
    
    
    
    
    24,216Depreciation and Amortization
    
    
    116,884
    
    
    
    93,633Operating Income
    
    
    416,101
    
    
    
    150,907Minority Interest expense -operating and
other income
    
    
    13,846
    
    
    
    8,822Income from discontinued Operations
    
    $
    402,255
    
    
    $
    142,085
 December 31, 2004Balance Sheet:Real estate investments, net
    
    $
    4,891,700Other Assets
    
    
    484,058Total Assets
    
    $
    5,375,758Accrued expenses
    
    $
    72,632Other Liabilities
    
    
    164,463Equity
    
    
    5,138,663Total Liabilities and Equity
    
    $
    5,375,758
 5. RELATED PARTIES AND OTHER TRANSACTIONS In the normal course of business and, in managements opinion, at terms comparable to those
available from unrelated third parties, the Company has engaged in transactions with certain
affiliates from time to time. The Company has an overhead sharing agreement with a company in which executive officers of the
Company have an ownership interest to provide the Company office space and certain office support
staff services in return for monthly payments of $17,500. The term of the agreement is for one year
and renews automatically for an additional year unless either party provides 90 days notice of
termination prior to the expiration of the then current term. The Company also pays this company
$5,031 per month for the lease of the office space where the Companys accounting functions,
acquisition process, and property/asset management are performed. The Company also pays $3,000 per
month to this company for human resources and employee search services. The Company also
occasionally uses a private jet partially owned by this company. This use is usually for capital
raise and acquisitions activities. The Company pays an hourly rate for its use of the jet that
the Company believes is a standard market rate, but does not include leases, time share expenses or
other fixed costs of the affiliated company. During 2004, the employees of the Company also participated in a healthcare plan that was for the
benefit of the employees of the company described above. The participation was at competitive or
market rates. The employees of the Company have now joined a Group Plan separate from the
affiliated company. HADC provides property management to a property that is, not owned by the Company, but in which
executive officers of the Company have a minority ownership position. This property pays a market
rate for this management service. HADC also uses the services of National Healthcare Associates
(NHA) which is owned by the fiancée of the President of HADC. NHA performs consultant work such as
market analysis and feasibility studies. This work is competitively bid and contract approval from
the Companys Chief Executive Officer or Chief Operating Officer is required. F-14




---



##### Table of Contents



6. ACCOUNTS RECEIVABLE,
REVENUE EARNED IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF REVENUES EARNED At December 31, 2004, the estimated period to complete contracts in process ranges from one month
to three years, and the Company expects to collect substantially all related accounts receivable
and revenue earned in excess of billings within this time period. The following summarizes
contracts in process at: DECEMBER 31,2004
    
    
    2003
    
    
    2002Costs incurred on Uncompleted Contracts
    
    $
    770,208
    
    
    $
    1,631,360
    
    
    $
    9,540,530Estimated Earnings
    
    
    268,566
    
    
    
    784,306
    
    
    
    1,606,5251,038,774
    
    
    
    2,415,666
    
    
    
    11,147,055Less Billings to Date
    
    
    1,127,674
    
    
    
    2,567,817
    
    
    
    10,282,538$
    (88,900
    )
    
    $
    (152,151
    )
    
    $
    864,517
 Contracts in progress at December 31, 2004, 2003 and 2002 are included in the balance sheets under
the following captions: DECEMBER 31,2004
    
    
    2003
    
    
    2002Receivables on Construction and Consulting Contracts
    
    $
    2,489
    
    
    $
    
    
    
    $
    1,268,785Billings in Excess of Revenue Earned
    
    
    (91,389
    )
    
    
    (152,151
    )
    
    
    (404,268
    )$
    (88,900
    )
    
    $
    (152,151
    )
    
    $
    864,517
 7. CONCENTRATION OF CREDIT RISK Five of the Companys thirty-nine buildings are located in Las Vegas, Nevada. As a result,
localized adverse events or conditions, such as economic recession or overbuilding in the local
real estate market, could have a significant adverse effect on the operations of these properties,
and ultimately on the amounts available for distribution to shareholders. Sierra Health Services, Inc. is the lease guarantor for four of the Companys thirty-nine
buildings. These four buildings have a cost basis of approximately $39.3 million and the leases
generate approximately $4.1 million of yearly revenue. Established in 1984, Sierra is a publicly
held, diversified, managed care holding company based in Las Vegas, Nevada, with operations
primarily in managed care and health insurance. On September 20, 2004, the Company acquired a Class A multi-tenant medical office building in
Phoenix, Arizona for $46.0 million, which as of December 31, 2004 represents 15.55% of annualized
rental revenue for the year ended December 31, 2004. This four-story property, built in 1998,
consists of 152,600 rentable square feet and is currently 99.7% occupied. The largest tenant,
occupying 30.1% of the building, or 46,000 rentable square feet, is Biltmore Surgery Center, Inc.,
a wholly-owned subsidiary of IASIS Healthcare® Corporation, that operates Biltmore Surgical &
Recovery Care Center. IASIS Healthcare owns and operates medium-size acute care hospitals in urban
and suburban markets. Other significant tenants in the property include Biltmore Orthopedic
Surgeons, L.L.C. (30,000 rentable square feet or 19.7% of the building) and The Orthopedic Clinic
Association, P.C. (19,185 rentable square feet or 12.6% of the building). 8. INDEBTEDNESS The Company has a $70 million secured credit facility which is available for working capital and
acquisition purposes. Borrowing F-15




---



##### Table of Contents



availability under the facility is dependent upon the collateral
pool securing the facility. Five banks are participating in the credit facility with Huntington
National Bank as the lead arranger and administrative agent. The credit facility bears interest at
variable rates of LIBOR plus 2.0-2.5% (weighted average interest of 4.60% at December 31, 2004)
depending on the Companys leverage ratio. This line of credit contains covenants that require,
among other things, the maintenance of certain financial ratios. The amount outstanding at December
31, 2004 was $23.4 million. The credit facility matures in September 2005. The Company has a $4 million secured credit facility with Union Planters Bank, secured by the first
mortgage on the 310 25th Avenue medical office building located in Nashville, Tennessee. This loan
was renewed, for a term of one year, on October 1, 2004, and has a variable interest rate of prime
minus 0.75% (4.50% at December 31,2004). The amount outstanding at December 31, 2004 was $2
million. A subsidiary of the Company has a $24 million construction loan, structured as a secured
construction draw note, for the development of a hospital in Houston, TX. In addition, a second
subsidiary of the Company has an $18 million construction loan for the development of a
professional office building (POB) in Houston, TX. These projects are being developed by the
Companys taxable REIT subsidiary and will continue to be owned by subsidiaries of the Company upon
completion of construction. The two construction loans are guaranteed by the Company and secured
by a deed of trust on the subject real estate and improvements. With a maximum term of 24 months,
the loans require payment of interest only, which is calculated using the outstanding balance at
Prime plus 1% for the hospital and Prime plus .25% for the POB, with principal due at maturity.
There were no outstanding balances on these loans as of December 31, 2004. In addition to the construction loans for the hospital and POB, the aforementioned subsidiaries of
the Company have also obtained mezzanine loans of $5 million for the development of the hospital
and $1.5 million for the development of the POB. Terms require the mezzanine loans to be funded
prior to any construction loan disbursements. Both loans have a maximum term of 24 months and a
fixed interest rate of 11%. The outstanding mezzanine loan balances for the hospital and POB as of
December 31, 2004 were $5 million and $844,000, respectively. The following is a summary of the outstanding mortgage debt, excluding the facilities mentioned
above, as of December 31, 2004
    
    
    2003Fixed rate secured debt, weighted average interest of 6.90 % at December 31, 2004
and 7.34% at December 31, 2003, maturity dates ranging from 2008 to 2027
    
    $
    129,236,085
    
    
    $
    72,893,444Variable rate secured debt, interest rate of 5.38% at December 31, 2004, maturity
date of 2006
    
    
    22,618,155
    
    
    
    Variable rate secured debt, interest rate of 3.82% at December 31, 2004, and 2.78%
at December 31, 2003, maturity date of 2006
    
    
    4,000,000
    
    
    
    4,000,000$
    155,854,240
    
    
    $
    76,893,444
 Included in the amounts shown as outstanding are debt premiums added to the principal amounts
outstanding and amortized over the life of the loans. The fair value assigned to fixed-rate debt at
the date of acquisition was based on market interest rates ranging from 5.85% to 6.90%. The current
unamortized total of debt premiums on all loans as of December 31, 2004 is $4,167,697. The total
unpaid principal as of December 31, 2004 was $151,686,543. At December 31, 2004, scheduled amortization and maturities of indebtedness for the next five years
and thereafter follows: F-16




---



##### Table of Contents



Total ScheduledYear of Maturity
    
    Payments2005
    
    $
    27,928,7882006
    
    
    34,022,6812007
    
    
    2,247,6822008
    
    
    11,694,7552009
    
    
    27,163,054Thereafter
    
    
    79,908,865$
    182,965,824
 The Company expects to renew the syndicated line of credit facility, which has a balance
outstanding of $23.4 million at December 31, 2004, when it comes due in September 2005. 9. INCOME TAXES Income taxes are provided for the tax effects of transactions reported by the Operating
partnerships wholly-owned taxable REIT subsidiary, HADC. The components of the provision for income taxes are as follows for the years ended December 31,
2004, 2003, and 2002: December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    48,878
    
    
    
    (126,060
    )
    
    
    (333,498
    )State
    
    
    6,983
    
    
    
    (18,009
    )
    
    
    (47,643
    )55,861
    
    
    
    (144,069
    )
    
    
    (381,141
    )Net tax expense
(benefit)
    
    $
    55,861
    
    
    $
    (144,069
    )
    
    $
    (381,141
    )
 Differences in income taxes at the statutory rate and the Companys actual provision for 2004 and
2003 result primarily from the Companys dividends paid deductions as a REIT and the establishment
of a deferred tax asset valuation allowance. Differences in income taxes at the statutory rate and
actual provision for 2002 relate primarily to a wholly-owned limited liability subsidiary of the
Predecessor, which was not subject to tax. The net deferred tax asset at December 31, 2004 and 2003 consists of the following components: F-17




---



##### Table of Contents



December 31,2004
    
    
    2003Deferred tax asset
    
    $
    408,735
    
    
    $
    517,557Less Valuation Allowance
    
    
    (114,000
    )
    
    
    (114,000
    )Total Deferred Tax Asset
    
    
    294,735
    
    
    
    403,557Deferred tax liability
    
    
    (53,138
    )
    
    
    (106,099
    )Net deferred tax asset
    
    $
    241,597
    
    
    $
    297,458
 The deferred tax asset primarily consists of a net operating loss carry forward. The deferred tax
liability is the result of a cash to accrual adjustment, which is being phased in over four years,
as HADC was a cash basis tax payor until January 1, 2002. In assessing the potential use of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
believes that it is more likely than not that the net deferred tax asset will be realized. At December 31, 2004, the Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $939,520 which are available to offset future federal and state
taxable income, if any, through 2023. 10. STOCK BASED COMPENSATION The Company has established a stock plan for the purpose of attracting and retaining our executive
officers, employees, trustees and other persons and entities that provide services to us. The stock
plan authorizes the issuance of options to purchase common shares and the grant of stock awards,
performance shares, stock appreciation rights and incentive awards. Our officers and employees and
those of our operating partnership and other subsidiaries are eligible to participate in the stock
plan. Our trustees and other persons and entities that provide services to us are also eligible to
participate in the stock plan. Up to 800,000 common shares are available for issuance under the
stock plan. Administration of the stock plan is carried out by the Compensation Committee of the Board of
Trustees. The Compensation Committee may delegate its authority under the stock plan to one or more
officers but it may not delegate its authority with respect to awards to individuals subject to
Section 16 of the Exchange Act. As used in this summary, the term administrator means the
Compensation Committee or its delegate. A summary of the status of the Companys stock option plans as of December 31, 2004, 2003 and 2002
and changes during the years ended on those dates follows: F-18




---



##### Table of Contents



2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of year
    
    
    256,500
    
    
    $
    12.00
    
    
    
    139,500
    
    
    $
    12.00
    
    
    
    
    
    
    $
    12.00Granted
    
    
    129,000
    
    
    
    12.00
    
    
    
    129,000
    
    
    
    12.00
    
    
    
    139,500
    
    
    
    12.00Exercised
    
    
    
    
    
    
    12.00
    
    
    
    
    
    
    
    12.00
    
    
    
    
    
    
    
    12.00Forfeited
    
    
    (8,700
    )
    
    
    12.00
    
    
    
    (12,000
    )
    
    
    12.00
    
    
    
    
    
    
    
    12.00Outstanding, end of year
    
    
    376,800
    
    
    $
    12.00
    
    
    
    256,500
    
    
    $
    12.00
    
    
    
    139,500
    
    
    $
    12.00Options exercisable,
end of year
    
    
    223,000
    
    
    
    
    
    
    
    145,000
    
    
    
    
    
    
    
    54,900Weighted-average fair value of
options granted during the year
    
    $
    1.79
    
    
    
    
    
    
    $
    2.21
    
    
    
    
    
    
    $
    2.33
 The stock options outstanding at December 31, 2004 had a weighted average remaining
contractual life of 6.48 years. All options to employees vest at the rate of 20% per year commencing on the grant date except for
options to purchase 28,534 and 6,534 common shares issued to Messrs. Klipsch and Farrar,
respectively, on August 16, 2002, 50% of which vested on the grant date and 50% of which vested on
the first anniversary of the grant date. Also excluded from the 20% per year vesting are options to
purchase 21,466 common shares issued to both Messrs. Klipsch and Farrar on August 16, 2002, 8,333
of which vested on the grant date, 8,333 of which vested on the first anniversary of the grant
date, and 1,600 of which vest in each of the next three years. Also excluded for the 20% per year
vesting are options to purchase 50,000 common shares issued to Messrs. Klipsch and Farrar on August
5, 2003 of which 50% vested on the date of grant and 50% vest on the first anniversary of the grant
date. Also excluded from the 20% per year vesting are options to purchase 50,000 common shares
issued to Messrs. Klipsch and Farrar on August 1, 2004 of which 50% vested on the date of grant and
50% vest on the first anniversary of the grant date. Options to trustees vest at the rate of 50% per year commencing on the first anniversary of the
grant date except for options to purchase 8,000 shares issued to trustees on August 16, 2002 which
were 100% vested on the grant date. On October 1, 2004, the Company granted 18,300 restricted common shares to employees and board
members. The shares for board members vest on the first anniversary of the date of grant while the
shares for employees vest over three years (1/3 on each anniversary) provided that they remain in
the continuous full-time employ of the Company. In the interim restricted shareholders will
receive dividends on the shares. Upon vesting, shares will be certificated. One board member
forfeited 300 common shares due to resignation therefore there were 18,000 restricted common shares
at December 31, 2004. At December 31, 2004, no restricted shares were vested. The amount of
compensation cost was based upon the fair market value of the shares at date of grant and is
amortized on a straight-line basis over the vesting period. The compensation cost that was charged
against income for this plan was $22,930 for 2004. 11. RETIREMENT PLAN The Company has a 40l(k) retirement plan. New employees must be employed for six consecutive
months before becoming eligible for semiannual enrollment. The Company contributes a matching
contribution equal to 50% of employee contributions. The maximum amount of matching contributions
paid by the Company is 3% of the employees salary which vests 20% per year. Total contributions
for the year ended December 31, 2004 and 2003 amounted to $23,702 and $32,267, respectively. 12. LEASING The following table displays the Companys portfolio of in-service leases, which contain escalation
provisions requiring tenants to pay pro rata share of operating expenses. The leases typically
include renewal options and all are classified and accounted for as operating leases. F-19




---



##### Table of Contents



At December 31, 2004, future minimum rentals to be received during the next five years (and
thereafter) under existing non-cancelable leases, excluding tenants current pro rata share of
operating expenses, are as follows: 2005
    
    $
    28,802,8642006
    
    
    26,804,3152007
    
    
    23,884,6542008
    
    
    19,076,9562009
    
    
    13,861,408Thereafter
    
    
    74,801,912$
    187,232,109
 13. SEGMENT REPORTING The Company is engaged in two operating segments: the ownership and rental of specialty medical
facilities (Rental Operations), and the providing of various real estate services such as third
party facility planning, project management, medical equipment planning and implementation services
and related activities (Service Operations). The Companys reportable segments offer different
products or services and are managed separately because each requires different operating
strategies and management expertise. To reconcile to total assets, non-segment assets consist of corporate assets including cash,
deferred financing costs and other assets. The Company assesses and measures segment operating results based on an industry performance
measure referred to as Funds From Operations (FFO). The National Association of Real Estate
Investment Trusts defines FFO as net income or loss, excluding gains or losses from sales of
depreciated operating property, plus operating property depreciation and amortization and
adjustments for minority interest and unconsolidated companies on the same basis. FFO is not a
measure of operating results or cash flows from operating activities as measured by generally
accepted accounting principles, is not necessarily indicative of cash available to fund cash needs
and should not be considered an alternative to cash flows as a measure of liquidity. The Company
believes that FFO is helpful in understanding the Companys operating performance in that FFO
excludes depreciation and amortization expense on real estate assets. The Company believes that
GAAP historical cost depreciation of real estate assets is generally not correlated with changes in
the value of those assets, whose value does not diminish predictably over time, as historical cost
depreciation implies. The revenues and FFO for each of the reportable segments for the years ended
2004, 2003 and 2002, and the assets for each of the reportable segments as of December 31, 2004 and
2003, and the reconciliation of consolidated FFO to net income available for common shareholders,
are summarized as follows: REVENUES FOR
SEGMENTS YEARS ENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002(Company)
    
    
    (Company)
    
    
    (Combined)REVENUESRental Operations:Rental Income
    
    $
    30,074,202
    
    
    $
    13,652,932
    
    
    $
    2,274,130Service Operations:Development and Project
Management Fees
    
    
    1,848,691
    
    
    
    3,660,696
    
    
    
    11,704,475Consolidated Revenue from
Continuing Operations
    
    
    31,922,893
    
    
    
    17,313,628
    
    
    
    13,978,605Discontinued Operations
    
    
    766,359
    
    
    
    376,313
    
    
    
    Consolidated Revenue
    
    $
    32,689,252
    
    
    $
    17,689,941
    
    
    $
    13,978,605
 F-20




---



##### Table of Contents



FFO FOR SEGMENTS YEARS ENDED DECEMBER 312004
    
    
    2003
    
    
    2002(Company)
    
    
    (Company)
    
    
    (Combined)FUNDS FROM OPERATIONSRental Operations
    
    $
    22,154,586
    
    
    $
    11,312,082
    
    
    $
    1,986,416Service Operations
    
    
    139,652
    
    
    
    (459,346
    )
    
    
    627,246Total Segment FFO
    
    
    22,294,238
    
    
    
    10,852,736
    
    
    
    2,613,662Non Segment FFO:Interest Income (Expense), net
    
    
    (8,137,110
    )
    
    
    (3,302,153
    )
    
    
    (49,260
    )General and Administrative Expenses
    
    
    (3,275,897
    )
    
    
    (2,693,805
    )
    
    
    (3,115,768
    )Other Expenses
    
    
    (128,941
    )
    
    
    (249,581
    )
    
    
    (80,039
    )Loss on abandoned Due Diligence
    
    
    
    
    
    
    (208,922
    )
    
    
    Interest Rate Swap
    
    
    307,797
    
    
    
    142,155
    
    
    
    (231,818
    )Income Tax Benefit
    
    
    (55,861
    )
    
    
    144,069
    
    
    
    381,141Minority Interest in Net Income
    
    
    (161,259
    )
    
    
    (109,178
    )
    
    
    (9,003
    )Minority Interest Share of Depreciation
and Amortization
    
    
    (247,077
    )
    
    
    (216,204
    )
    
    
    Consolidated FFO
    
    
    10,595,890
    
    
    
    4,359,117
    
    
    
    (491,085
    )Depreciation and Amortization
    
    
    (6,790,121
    )
    
    
    (3,327,307
    )
    
    
    (481,256
    )Minority Interest Share of Depreciation
and Amortization
    
    
    247,077
    
    
    
    216,204
    
    
    
    Net Income Available for Common
Shareholders
    
    $
    4,052,846
    
    
    $
    1,248,014
    
    
    $
    (972,341
    )
 ASSETS FOR
SEGMENTS December 31,
    
    
    December 31,2004
    
    
    2003AssetsRental Operations
    
    $
    312,524,255
    
    
    $
    167,515,439Service Operations
    
    
    991,294
    
    
    
    1,112,039Total Segment Assets
    
    
    313,515,549
    
    
    
    168,627,478Non-Segment Assets
    
    
    10,814,834
    
    
    
    19,265,035Consolidated Assets
    
    $
    324,330,383
    
    
    $
    187,892,513
 F-21




---



##### Table of Contents



14. SUBSEQUENT EVENTS On February 2, 2005, the Company completed the sale of its Port St Lucie property, Morningside
Plaza, which was classified as held-for-sale as of December 31, 2004 for $6.65 million. On February 28, 2005, the Company completed the purchase of a $9.82 million medical office building
in Suwanee, Georgia by securing a mortgage in the amount of $6.27 million with the balance being
paid from a draw on the Companys line of credit. F-22




---



##### Table of Contents



SELECTED QUARTERLY FINANCIAL INFORMATION
(Unaudited) Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedDecember
    
    
    September
    
    
    June
    
    
    March
    
    
    December
    
    
    September
    
    
    June
    
    
    March31,
2004
    
    

30,
2004
    
    

30,
2004
    
    

31,
2004
    
    

31,
2003
    
    

30,
2003
    
    

30,
2003
    
    

31,
2003Corporate and Rental Operations:Revenues
    
    $
    9,359,371
    
    
    $
    7,548,596
    
    
    $
    6,836,228
    
    
    $
    6,330,006
    
    
    $
    4,522,538
    
    
    $
    4,191,200
    
    
    $
    3,028,648
    
    
    $
    1,910,545General and administrative expense
    
    
    970,926
    
    
    
    838,746
    
    
    
    765,431
    
    
    
    700,793
    
    
    
    697,821
    
    
    
    667,094
    
    
    
    674,045
    
    
    
    654,845Income from corporate and rental operations
    
    
    1,319,243
    
    
    
    942,012
    
    
    
    1,121,671
    
    
    
    809,146
    
    
    
    475,566
    
    
    
    657,766
    
    
    
    339,273
    
    
    
    356,315Service Operations (HADC):Revenues
    
    
    617,013
    
    
    
    246,481
    
    
    
    464,955
    
    
    
    520,242
    
    
    
    448,774
    
    
    
    387,176
    
    
    
    760,685
    
    
    
    2,064,061General and administrative expense
    
    
    183,744
    
    
    
    35,548
    
    
    
    121,701
    
    
    
    89,018
    
    
    
    56,281
    
    
    
    142,576
    
    
    
    215,916
    
    
    
    409,679Income (Loss) from service operations
    
    
    68,462
    
    
    
    51,929
    
    
    
    (16,937
    )
    
    
    (19,663
    )
    
    
    (33,356
    )
    
    
    (67,746
    )
    
    
    (234,617
    )
    
    
    (311,627
    )Consolidated net income (loss) available for
common shares
    
    $
    1,279,880
    
    
    $
    909,323
    
    
    $
    1,082,648
    
    
    $
    780,996
    
    
    $
    450,108
    
    
    $
    554,914
    
    
    $
    98,429
    
    
    $
    144,563Basic and diluted income (loss) per common share
    
    $
    0.11
    
    
    $
    0.09
    
    
    $
    0.11
    
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.02
    
    
    $
    0.03Weighted average common shares
    
    
    11,608,147
    
    
    
    9,964,562
    
    
    
    9,948,106
    
    
    
    9,948,049
    
    
    
    6,154,259
    
    
    
    5,691,710
    
    
    
    5,691,710
    
    
    
    5,691,710
 F-23




---



##### Table of Contents



SCHEDULE III WINDROSE MEDICAL PROPERTIES TRUST
REAL ESTATE AND ACCUMULATED
DEPRECIATION
DECEMBER 31, 2004
(IN THOUSANDS) CostCapitalized
    
    
    Gross Book Value 12/31/2004Subsequent
    
    
    Land /Geographical
    
    
    Building
    
    
    
    
    
    
    Initial Cost
    
    
    to
    
    
    Land
    
    
    Buildings /Development
    
    Location
    
    
    Type
    
    
    Encumbrance
    
    
    Land
    
    
    Building
    
    
    Acquisition
    
    
    Improvements
    
    
    TI
    
    
    Total310 Building
    
    Nashville, TN
    
    Medical Office
    
    $
    
    
    
    $
    591
    
    
    $
    5,246
    
    
    $
    138
    
    
    $
    591
    
    
    $
    5,384
    
    
    $
    5,975BuildingBiltmore Medical Mall
    
    Phoenix, AZ
    
    Medical Office
    
    
    32,302
    
    
    
    
    
    
    
    42,566
    
    
    
    64
    
    
    
    
    
    
    
    42,630
    
    
    
    42,630BuildingCentral Medical Park (9 Buildings)
    
    Durham, NC
    
    Medical Office
    
    
    8,271
    
    
    
    1,504
    
    
    
    12,215
    
    
    
    38
    
    
    
    1,504
    
    
    
    12,253
    
    
    
    13,757BuildingCoral Springs Surgical Center
    
    Coral Springs, FL
    
    Medical Office
    
    
    3,338
    
    
    
    762
    
    
    
    6,888
    
    
    
    41
    
    
    
    762
    
    
    
    6,929
    
    
    
    7,691BuildingCooper Voorhees Medical Mall
    
    Voorhees, NJ
    
    Medical Office
    
    
    22,618
    
    
    
    3,217
    
    
    
    28,603
    
    
    
    (2
    )
    
    
    3,217
    
    
    
    28,601
    
    
    
    31,818BuildingElm Street Professional Plaza
    
    Reno, NV
    
    Medical Office
    
    
    9,376
    
    
    
    1,296
    
    
    
    10,974
    
    
    
    406
    
    
    
    1,296
    
    
    
    11,380
    
    
    
    12,676BuildingGateway East Medical Office Buildings (3 Buildings)
    
    El Paso, TX
    
    Medical Office
    
    
    5,866
    
    
    
    796
    
    
    
    7,627
    
    
    
    126
    
    
    
    796
    
    
    
    7,753
    
    
    
    8,549BuildingMethodist Medical Building
    
    Sacramento, CA
    
    Medical Office
    
    
    5,356
    
    
    
    
    
    
    
    9,225
    
    
    
    51
    
    
    
    
    
    
    
    9,276
    
    
    
    9,276BuildingMorningside Professional Plaza
    
    Port St. Lucie, FL
    
    Medical Office
    
    
    
    
    
    
    499
    
    
    
    4,333
    
    
    
    78
    
    
    
    499
    
    
    
    4,411
    
    
    
    4,910BuildingMount Vernon Medical Center
    
    Atlanta, GA
    
    Medical Office
    
    
    14,729
    
    
    
    2,229
    
    
    
    21,585
    
    
    
    48
    
    
    
    2,229
    
    
    
    21,633
    
    
    
    23,862BuildingOrthoLink  East/West Medical Center
    
    Austell, GA
    
    Ambulatory Surgery Center/
    
    
    4,662
    
    
    
    658
    
    
    
    5,958
    
    
    
    21
    
    
    
    658
    
    
    
    5,979
    
    
    
    6,637Physician Group ClinicOrthoLink  Guinnett Center for Specialty Medicine I
    
    Lawrenceville, GA
    
    Ambulatory Surgery Center/
    
    
    5,031
    
    
    
    743
    
    
    
    6,326
    
    
    
    14
    
    
    
    743
    
    
    
    6,340
    
    
    
    7,083Physician Group ClinicOrthoLink  Guinnett Center for Specialty Medicine II
    
    Lawrenceville, GA
    
    Medical Office
    
    
    2,582
    
    
    
    342
    
    
    
    2,815
    
    
    
    10
    
    
    
    342
    
    
    
    2,825
    
    
    
    3,167BuildingPark Medical Center
    
    Charlotte, NC
    
    Medical Office
    
    
    3,820
    
    
    
    559
    
    
    
    5,223
    
    
    
    45
    
    
    
    559
    
    
    
    5,268
    
    
    
    5,827BuildingPartell Medical Center
    
    Las Vegas, NV
    
    Medical Office
    
    
    4,897
    
    
    
    1,333
    
    
    
    6,318
    
    
    
    38
    
    
    
    1,333
    
    
    
    6,356
    
    
    
    7,689BuildingRush Copley Medical Office Building
    
    Aurora, IL
    
    Medical Office
    
    
    4,000
    
    
    
    661
    
    
    
    5,226
    
    
    
    
    
    
    
    661
    
    
    
    5,226
    
    
    
    5,887BuildingSierra Health Services (4 Buildings)
    
    Las Vegas, NV
    
    Outpatient Treatment and
    
    
    8,798
    
    
    
    3,924
    
    
    
    33,464
    
    
    
    10
    
    
    
    3,924
    
    
    
    33,474
    
    
    
    37,398Diagnostic FacilityStone Oak Physicians Plaza (2 Buildings)
    
    San Antonio, TX
    
    Medical Office
    
    
    7,046
    
    
    
    1,103
    
    
    
    10,512
    
    
    
    12
    
    
    
    1,103
    
    
    
    10,524
    
    
    
    11,627BuildingTomball Professional Atrium Building
    
    Tomball, TX
    
    Medical Office
    
    
    3,189
    
    
    
    513
    
    
    
    4,403
    
    
    
    213
    
    
    
    513
    
    
    
    4,616
    
    
    
    5,129BuildingTrinity West Medical Plaza
    
    Lewisville, TX
    
    Medical Office
    
    
    
    
    
    
    
    
    
    
    7,021
    
    
    
    2
    
    
    
    
    
    
    
    7,023
    
    
    
    7,023BuildingUrology Center of Florida
    
    Ocala, FL
    
    Ambulatory Surgery Center/
    
    
    
    
    
    
    486
    
    
    
    4,212
    
    
    
    
    
    
    
    486
    
    
    
    4,212
    
    
    
    4,698Physician Group ClinicUrology Center of the South
    
    Germantown, TN
    
    Ambulatory Surgery Center/
    
    
    
    
    
    
    2,640
    
    
    
    7,625
    
    
    
    222
    
    
    
    2,640
    
    
    
    7,847
    
    
    
    10,487Physician Group ClinicWest Pearland Professional Center I
    
    Pearland, TX
    
    Medical Office
    
    
    2,607
    
    
    
    381
    
    
    
    3,637
    
    
    
    1
    
    
    
    381
    
    
    
    3,638
    
    
    
    4,019BuildingWest Pearland Professional Center II
    
    Pearland, TX
    
    Medical Office
    
    
    1,934
    
    
    
    438
    
    
    
    3,804
    
    
    
    
    
    
    
    438
    
    
    
    3,804
    
    
    
    4,242BuildingWinn Way
    
    Decatur, GA
    
    Medical Office
    
    
    1,265
    
    
    
    180
    
    
    
    1,419
    
    
    
    21
    
    
    
    180
    
    
    
    1,440
    
    
    
    1,620BuildingTOTAL PORTFOLIO
    
    
    
    
    
    
    
    
    
    $
    151,687
    
    
    $
    24,855
    
    
    $
    257,225
    
    
    $
    1,597
    
    
    $
    24,855
    
    
    $
    258,822
    
    
    $
    283,677
 F-24




---



##### Table of Contents



SCHEDLUE
IIIWINDROSE MEDICAL PROPERTIES TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2004
(DOLLARS IN THOUSANDS) YearAccumulated
    
    
    Constructed/
    
    Year
    
    DepreciableDevelopment
    
    Depreciation
    
    
    Renovated
    
    Acquired
    
    Life310 Building
    
    $
    213
    
    
    1986
    
    2003
    
    40 YearsBiltmore Medical Mall
    
    
    296
    
    
    1998
    
    2004
    
    40 YearsCentral Medical Park (9 Buildings)
    
    
    36
    
    
    1980-1998
    
    2004
    
    40 YearsCoral Springs Surgical Center
    
    
    159
    
    
    1993
    
    2004
    
    40 YearsCooper Voorhees Medical Mall
    
    
    654
    
    
    1997
    
    2004
    
    40 YearsElm Street Professional Plaza
    
    
    276
    
    
    1991
    
    2003
    
    40 YearsGateway East Medical Office Buildings (3 Buildings)
    
    
    303
    
    
    1982
    
    2003
    
    40 YearsMethodist Medical Building
    
    
    239
    
    
    1990
    
    2003
    
    40 YearsMorningside Professional Plaza
    
    
    142
    
    
    1994/1998
    
    2003
    
    40 YearsMount Vernon Medical Center
    
    
    853
    
    
    1992
    
    2003
    
    40 YearsOrthoLink - East/West Medical Center
    
    
    73
    
    
    1999
    
    2004
    
    40 YearsOrthoLink - Guinnett Center for Specialty Medicine I
    
    
    81
    
    
    2001
    
    2004
    
    40 YearsOrthoLink - Guinnett Center for Specialty Medicine II
    
    
    35
    
    
    2002
    
    2004
    
    40 YearsPark Medical Center
    
    
    273
    
    
    1988
    
    2002
    
    40 YearsPartell Medical Center
    
    
    339
    
    
    1991
    
    2002
    
    40 YearsRush Copley Medical Office Building
    
    
    184
    
    
    1996
    
    2003
    
    40 YearsSierra Health Services (4 Buildings)
    
    
    1,973
    
    
    1982/1985/1998
    
    2002
    
    40 YearsStone Oak Physicians Plaza (2 Buildings)
    
    
    418
    
    
    1999/2000
    
    2003
    
    40 YearsTomball Professional Atrium Building
    
    
    179
    
    
    1982
    
    2003
    
    40 YearsTrinity West Medical Plaza
    
    
    161
    
    
    1997
    
    2004
    
    40 YearsUrology Center of Florida
    
    
    172
    
    
    1991
    
    2003
    
    40 YearsUrology Center of the South
    
    
    456
    
    
    2002
    
    2002
    
    40 YearsWest Pearland Professional Center I
    
    
    144
    
    
    2000
    
    2003
    
    40 YearsWest Pearland Professional Center II
    
    
    24
    
    
    2002
    
    2004
    
    40 YearsWinn Way
    
    
    58
    
    
    1971/1998
    
    2003
    
    40 YearsTOTAL PORTFOLIO
    
    $
    7,741
 F-25




---



##### Table of Contents



Gross Real Estate Asset
    
    
    Accumulated Depreciation2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    158,218,869
    
    
    $
    61,086,357
    
    
    $
    
    
    
    $
    2,740,281
    
    
    $
    407,018
    
    
    $
    Acquisitions
    
    
    125,458,256
    
    
    
    97,132,512
    
    
    
    61,086,357
    
    
    
    
    
    
    
    
    
    
    
    Depreciation/Amortization
Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,001,051
    
    
    
    2,333,263
    
    
    
    407,018Balance at end of year
    
    $
    283,677,125
    
    
    $
    158,218,869
    
    
    $
    61,086,357
    
    
    $
    7,741,332
    
    
    $
    2,740,281
    
    
    $
    407,018
 F-26




---



##### Table of Contents



EXHIBIT INDEX EXHIBITNUMBER
    
    EXHIBIT TITLE3.01
    
    Registrants Articles of Incorporation.*3.02
    
    Registrants Bylaws.*4.03
    
    Form of Common Share Certificate.*4.04
    
    Form of Warrant.**10.01
    
    Amended and Restated Agreement of Limited Partnership of Windrose Medical
Properties, L.P.*10.02
    
    Windrose Medical Properties Trust 2002 Stock Incentive Plan.*+10.03
    
    Overhead Sharing Agreement between Windrose Medical Properties, L.P. and Klipsch
Audio, Inc.*10.05
    
    Promissory Note dated August 2, 1999 from Park Medical Associates General
Partnership to General Electric Capital Corporation.*10.06
    
    Loan Agreement dated August 2, 1999 between General Electric Capital Corporation and
Park Medical Associates General Partnership.*10.07
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing
from Park Medical Associates General Partnership to Charles T. Marshall (Trustee) for the
benefit of General Electric Capital Corporation.*10.08
    
    Form of Change in Control Severance Agreement between Windrose Medical Properties,
L.P. and Fred S. Klipsch.*+10.09
    
    Form of Change in Control Severance Agreement between Windrose Medical Properties,
L.P. and Frederick L. Farrar.*+10.10
    
    Employment Agreement between Windrose Medical Properties Trust, Windrose Medical
Properties L.P. and Fred S. Klipsch, dated February 21, 2005.***** +10.11
    
    Employment Agreement between Windrose Medical Properties Trust, Windrose Medical
Properties L.P. and Frederick L. Farrar, dated February 21, 2005.*****+10.12
    
    Subordinated Promissory Note dated September 28, 2001 from Windrose International L.L.C.
to Fred Klipsch.*10.13
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International, L.L.C. to
Klipsch Audio, Inc.*10.14
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Robin P. Barksdale.*10.15
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Frederick L. Farrar.*+10.16
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Fred S. Klipsch.*+10.17
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Athena Development.*10.18
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International L.L.C. to
Charles Lanham.*10.19
    
    Promissory Note payable by Alliance Design Group to Hospital Affiliates Development
Corporation.*10.20
    
    Secured Revolving Credit Agreement, dated September 27, 2002, by and between Windrose
Medical Properties, L.P. and The Huntington National Bank.*10.21
    
    Credit Note, dated September 27, 2002, from Windrose Medical Properties, L.P. to The
Huntington National Bank.*10.22
    
    Secured Construction Loan Facility with Huntington National Bank, dated as of September 10, 2004.*****10.23
    
    Secured Construction Loan Facility with Huntington National Bank, dated as of December 3, 2004.****21.01
    
    List of Subsidiaries of the Registrant.**23.01
    
    Consent of KPMG LLP.****31.04
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of




---



##### Table of Contents



EXHIBITNUMBER
    
    EXHIBIT TITLE2002.****31.05
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.****31.06
    
    Certification of Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.****32.01
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****32.02
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****32.03
    
    Certification of Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.****
   *
    
    Previously filed as an exhibit to the Companys Registration Statement on Form
S-11, as amended, Registration No. 333-89186, and incorporated by reference herein.**
    
    Previously filed as an exhibit to the Companys Registration Statement on Form S-3, Registration
No. 333-108659, and incorporated by reference herein.***
    
    Previously filed as an exhibit to the Companys Registration Statement on Form S-11,
as amended, Registration No. 333-110612, and incorporated by reference herein.****
    
    Filed herewith.*****
    
    Previously filed as an exhibit to the Companys Current Report on Form 8-K, dated February
22, 2005 and incorporated by reference herein.******
    
    Previously filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, and incorporated by reference herein.+
    
    Management contract or compensatory plan arrangement.