##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

(MARK ONE)



|[X] |  | ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------
|   
|    |  | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003                                         

OR



|[  ] |  | 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                        |  | 35-216691          
|                                |  |                    
|(STATE OR OTHER JURISDICTION OF |  | (I.R.S. EMPLOYER   
|INCORPORATION OR ORGANIZATION)  |  | IDENTIFICATION NO.)

|                                                    |  |                                                    
|--------------------------------------------------- |  | ---------------------------------------------------
|3502 WOODVIEW TRACE, SUITE 210                      |  |                                                    
|INDIANAPOLIS, INDIANA 46268                         |  | (317) 860-8180                                     
|                                                    |  |                                                    
|(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE) |  | (REGISTRANTS TELEPHONE NUMBER
INCLUDING AREA CODE)



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Securities registered pursuant to Section 12(b) of the Act:

Common Shares of Beneficial Interest, par value of $.01 per share         New York Stock Exchange

Securities registered pursuant to Section 12(g) or the Act:

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 report), and (ii) has been subject to such
filing requirements for the past 90 days. Yes:
[X]  No [  ]

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. [  ]  (No delinquent filers)

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes:
[X]  No [  ]

Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $61,185,882 as of June 30, 2003 and $127,136,935 as of March 9,
2004.

As of March 9, 2004, the latest practicable date, there were 9,948,007
shares of the Registrants common stock 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, 2003, and to be delivered to stockholders in connection with the
2004 Annual Meeting of Stockholders, are incorporated by reference into Part
III.





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TABLE OF CONTENTS



|                                                                     |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                              
|                                                                     | ITEM 1. BUSINESS                                                                             
|                                                                     | ITEM 2. PROPERTIES                                                                           
|                                                                     | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                                     | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                             
|                                                                     | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|                                                                     | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                                     | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                     | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                     | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                                     | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                                                     | ITEM 9A. CONTROLS AND PROCEDURES                                                             
|PART III                                                            
|                                                                     | ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS                                                     
|                                                                     | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                                     | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                                     | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                                     | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|PART IV                                                             
|                                                                     | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURE                                                           
|INDEX TO FINANCIAL STATEMENTS                                       
|Independent Auditors Report                                        
|Consolidated Balance Sheets                                         
|Consolidated Statements of Operations                               
|Consolidated Statements of Cash Flows                               
|Consolidated Statements of Changes in Shareholders Equity (Deficit)
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          
|EXHIBIT INDEX                                                       
|EX-23.01 CONSENT OF KPMG LLP                                        
|EX-31.01 SECTION 302 CERTIFICATION OF THE CEO                       
|EX-31.02 SECTION 302 CERTIFICATION OF THE CFO                       
|EX-32.01 SECTION 906 CERTIFICATION OF THE CEO                       
|EX-32.02 SECTION 906 CERTIFICATION OF THE CFO                       



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WINDROSE MEDICAL PROPERTIES TRUST
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
INDEX PAGECAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
    
    
    1PART I
    
    
    1Item 1. Business
    
    
    1Item 2. Properties
    
    
    6Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7PART II
    
    
    8Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
    
    
    8Item 6. Selected Financial Data
    
    
    8Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 8. Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    28Item 9A. Controls and Procedures
    
    
    28PART III
    
    
    28Item 10. Trustees and Executive Officers
    
    
    28Item 11. Executive Compensation
    
    
    28Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    28Item 13. Certain Relationships and Related Transactions
    
    
    28Item 14. Principal Accountant Fees and Services
    
    
    28PART IV
    
    
    29Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    29INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-1INDEPENDENT AUDITORS REPORT
    
    
    F-2NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    F-7SIGNATUREEXHIBIT INDEX




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This Annual Report on Form 10-K (Report), including the Managements
Discussion and Analysis of Financial Condition and Results of Operation,
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
Trust 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-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 with the
proceeds of the IPO. Since then, the Company has acquired 15 additional
specialty medical properties for purchase prices aggregating $102 million. As
of December 31, 2003, the Companys net real estate investments were
approximately $162.1 million, and its portfolio consisted of 16 multi-tenant
medical office buildings, four outpatient treatment and diagnostic centers and
two 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 210, 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 as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the Securities and Exchange
Commission. The information on the Companys website is not, and shall not be
deemed to be, a part of this report or incorporated into any other filings we
make with the Securities and Exchange Commission. 1




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The Operating Partnership Windrose Medical Properties, L.P., the Companys operating partnership,
the 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,
2003, an approximate 96.5% 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 develops and
constructs new facilities for tenants on a build-to-suit basis or
multi-tenant facilities. 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 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. RECENT DEVELOPMENTS In
May 2003, the Company acquired 12 medical properties from Medical Properties of
America for $68.1 million and in August 2003 the Company purchased a medical building on
the Rush Copley Medical Center campus in Aurora, Illinois for $6.5 million The Company received net proceeds of $47.7 million after underwriters
discount and expenses from its December, 2003 secondary offering of 4,255,000
common shares of beneficial interest at a public offering price of $12 per
share. The Company contributed all of the net proceeds of the offering to the
Operating Partnership. On December 17, 2003 the Company completed the purchase of Methodist
Medical Building in Sacramento, California for $9.2 million including the
assumption of a $5.4 million secured credit facility. On December 30, 2003,
the Company purchased Elm Street Professional Plaza in Reno, Nevada for $13.0
million including the assumption of a secured credit facility of $9.8 million. Another $20.0 million of the net proceeds of the secondary offering was
used to pay down indebtedness on the Companys secured credit facility. On
January 29, 2004, the Company acquired Cooper Voorhees Medical Mall (Voorhees,
New Jersey) and Trinity West Medical Plaza. The seller of these two properties
may exercise a right to repurchase them. Cooper Voorhees Medical Mall was
purchased for $32.0 million including the assumption of $23.3 million of debt.
Trinity West Medical Mall was purchased for $7.0 million without any assumed
debt. On January 31, 2004 the Company purchased Coral Springs Surgical Center
Building in Coral Springs, Florida, for $7.5 million including the assumption
of a secured credit facility of $ 3.4 million. 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 asset class. 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
experienced senior management team, which averages over 20 years of
experience 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.
    
    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 25-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 2




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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 27 years. Since its inception, HADC has completed
over 600 projects totaling in excess of $1.7 billion of construction
costs. While the Company 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 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, it, through HADC, will develop and construct
new facilities for tenants on a build-to-suit basis or 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:  
    
    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.
    
    Utilizing primarily 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, 3




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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 will:  1)
    
    Borrow at fixed rates or on instruments that can take on the
characteristics of fixed-rate debt (including the use of interest
rate swaps)2)
    
    Have as its goal conservative debt service ratios. For the
Quarter ended December 31, 2003, Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) was 2.40 times debt service
payments. The Companys in place loan covenant requires the
Company maintain
at least a 1.8 coverage.3)
    
    Balance debt in a fashion that enhances the Companys ability
to access capital markets. 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 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 4




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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 10 of Form 8-K relating to amendments to
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 Governance/Nominations
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 200, 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, 2003, the Company had 36
employees. 5




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ITEM 2. PROPERTIES At December 31, 2003, the Company owned the following twenty-two
properties: Rentable
    
    Occupancy atProperty
    
    Type
    
    Location
    
    Square Footage
    
    December 31, 2003310 Building
    
    Medical office
    
    Nashville, TN
    
    
    48,360
    
    
    
    89
    %buildingElm Street Professional Plaza
    
    Medical office
    
    Reno, NV
    
    
    66,606
    
    
    
    100
    %buildingGateway East Medical
    
    Medical office
    
    El Paso, TX
    
    
    69,343
    (1)
    
    
    84
    %(1)Office Building
    
    building(7852 Gateway
Boulevard)Gateway East Medical
    
    Medical office
    
    El Paso, TX
    
    
    69,343
    (1)
    
    
    84
    %(1)Office Building
    
    building(7878 Gateway
Boulevard)Gateway East Medical
    
    Medical office
    
    El Paso, TX
    
    
    69,343
    (1)
    
    
    84
    %(1)Office Building
    
    building(7888 Gateway
Boulevard)Methodist Medical Building
    
    Medical office
    
    Sacramento, CA
    
    
    46,440
    
    
    
    98
    %buildingMorningside Professional
    
    Medical office
    
    Port St. Lucie, FL
    
    
    44,515
    
    
    
    86
    %Plaza
    
    buildingMount Vernon
    
    Medical office
    
    Atlanta, GA
    
    
    85,121
    
    
    
    94
    %Medical Center
    
    buildingPark Medical
    
    Medical office
    
    Charlotte, NC
    
    
    32,947
    
    
    
    94
    %Center
    
    buildingPartell Medical
    
    Medical office
    
    Las Vegas, NV
    
    
    30,626
    
    
    
    91
    %Center
    
    buildingRush-Copley
    
    Medical office
    
    Aurora, IL
    
    
    31,244
    
    
    
    100
    %Medical Office Building
    
    buildingSierra Health
    
    Outpatient
    
    Las Vegas, NV
    
    
    25,998
    
    
    
    100
    %Services (2300 W.
    
    treatment andCharleston
    
    diagnosticBoulevard)
    
    facilitySierra Health
    
    Outpatient
    
    Las Vegas, NV
    
    
    27,447
    
    
    
    100
    %Services (2316 W.
    
    treatment andCharleston
    
    diagnosticBoulevard)
    
    facility
 6




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Rentable
    
    Occupancy atProperty
    
    Type
    
    Location
    
    Square Footage
    
    December 31, 2003Sierra Health
    
    Outpatient
    
    Las Vegas, NV
    
    
    49,014
    
    
    
    100
    %Services (888 S.
    
    treatment andRancho Drive)
    
    diagnosticfacilitySierra Health
    
    Outpatient
    
    Las Vegas, NV
    
    
    58,396
    
    
    
    100
    %Services (4475 S.
    
    treatment andEastern Avenue)
    
    diagnosticfacilityStone Oak
    
    Medical office
    
    San Antonio, TX
    
    
    65,652
    (2)
    
    
    100
    %(2)Physicians Plaza I
    
    building(19016 Stone Oak
Parkway)Stone Oak
    
    Medical office
    
    San Antonio, TX
    
    
    65,652
    (2)
    
    
    100
    %(2)Physicians Plaza II
    
    building(540 Stone Oak
Parkway)Tomball Professional
    
    Medical office
    
    Tomball, TX
    
    
    53,617
    
    
    
    80
    %Atrium Building
    
    buildingUrology Center
    
    Ambulatory
    
    Ocala, FL
    
    
    19,561
    
    
    
    100
    %of Florida
    
    surgerycenter/physiciangroup clinicUrology Center of
    
    Ambulatory
    
    Germantown, TN
    
    
    33,777
    
    
    
    100
    %the South
    
    surgerycenter/physiciangroup clinicWest Pearland
    
    Medical office
    
    Pearland, TX
    
    
    20,800
    
    
    
    100
    %Professional Center
    
    buildingWinn Way
    
    Medical office
    
    Decatur, GA
    
    
    21,737
    
    
    
    78
    %building
  (1)
    
    Represents total (or weighted average) for 7852 Gateway Boulevard,
7878 Gateway Boulevard and 7888 Gateway Boulevard.(2)
    
    Represents total (or weighted average) for 19016 Stone Oak Parkway
and 540 Stone Oak Parkway. 
 ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any material litigation other than routine
litigation incidental to the Companys business, nor are such proceedings known
to be contemplated by governmental authorities. 
 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, 2003. 7




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##### 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, symbol WRS. As of March 12,
2004, there were 5,331 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, 2003
    
    $
    13.20
    
    
    $
    11.70
    
    
    $
    0.22September 30, 2003
    
    $
    11.75
    
    
    $
    10.32
    
    
    $
    0.22June 30, 2003
    
    $
    10.94
    
    
    $
    9.01
    
    
    $
    0.13March 31, 2003
    
    $
    11.12
    
    
    $
    9.32
    
    
    $
    0.13December 31, 2002
    
    $
    11.69
    
    
    $
    9.85
    
    
    $
    0.13September 30, 2002
    
    $
    12.10
    
    
    $
    10.11
    
    
    
    
 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, 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 December 1, 2003, the Company declared a quarterly dividend of $0.22
per share payable on February 20, 2004, to common shareholders of record on
December 15, 2003. Following is a summary of the taxable nature of the
Companys dividends for the year ended December 31, 2003: Percent taxable as ordinary income
    
    
    25.08
    %Percent non-taxable as return of capital
    
    
    74.92
    %100.00
    %
 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. 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, 2003 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): 8




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##### Table of Contents



YEAR ENDED
    
    1/1/2002THROUGH
    
    8/16/2002
    
    YEARS ENDED DECEMBER 31,DECEMBER 31,
    
    8/15/2002
    
    THROUGH
    
    2002
    
    2001
    
    2000
    
    19992003
    
    (Predecessor)
    
    12/31/2002
    
    (Combined)
    
    (Predecessor)
    
    (Predecessor)
    
    (Predecessor)Results of Operations:Revenues:Rental Operations
    
    $
    14,029
    
    
    $
    
    
    
    $
    2,274
    
    
    $
    2,274
    
    
    $
    
    
    
    $
    
    
    
    $
    Service Operations (HADC)
    
    
    3,661
    
    
    
    4,145
    
    
    
    7,559
    
    
    
    11,704
    
    
    
    4,568
    
    
    
    4,458
    
    
    
    2,979Total Revenues
    
    
    17,690
    
    
    
    4,145
    
    
    
    9,833
    
    
    
    13,978
    
    
    
    4,568
    
    
    
    4,458
    
    
    
    2,979Net Income (Loss)
    
    $
    1,248
    
    
    $
    (1,015
    )
    
    $
    43
    
    
    $
    (972
    )
    
    $
    (51
    )
    
    $
    47
    
    
    $
    (582
    )Per Share Data (1)Net Income per Common Share:Basic and Diluted
    
    $
    0.21
    
    
    
    
    
    
    $
    0.01Weighted
Average Common Shares Outstanding
    
    
    5,808
    
    
    
    
    
    
    
    5,692Weighted
Average Common and Dilutive Potential
Common Shares
    
    
    6,169
    
    
    
    
    
    
    
    6,054Cash Dividends Declared
    
    $
    0.70
    
    
    
    
    
    
    $
    0.13Balance
Sheet Data (at December 31):Total Assets
    
    $
    187,763
    
    
    
    
    
    
    $
    75,265
    
    
    $
    75,265
    
    
    $
    1,535
    
    
    $
    1,438
    
    
    $
    1,703Total Debt
    
    $
    76,893
    
    
    
    
    
    
    $
    9,664
    
    
    $
    9,664
    
    
    $
    687
    
    
    $
    362
    
    
    $
    323Total
Liabilities (Including Minority Interest)
    
    $
    85,732
    
    
    
    
    
    
    $
    17,888
    
    
    $
    17,888
    
    
    $
    1,915
    
    
    $
    1,432
    
    
    $
    1,471Total
Shareholders / Owners Equity (Deficit)
    
    $
    102,031
    
    
    
    
    
    
    $
    57,377
    
    
    $
    57,377
    
    
    $
    (379
    )
    
    $
    6
    
    
    $
    232Total Common Shares Outstanding
    
    
    9,947
    
    
    
    
    
    
    
    5,692
    
    
    
    5,692
  (1)
    
    Per share data is presented for the period from August 16, 2002 through December 31, 2002 and for the full year of 2003. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Business Overview The Company is a self-managed real estate investment trust, or REIT. The
Company was formed in mid-2002. On August 22, 2002, the Company completed an
initial public offering of 5,691,710 common shares (the Initial Offering)
resulting in net proceeds (after underwriters discount and offering expenses)
of approximately $61.1 million. The Company received net proceeds of $47.7
million (after underwriters discounts and expenses) from its December 2003
secondary offering of 4,255,000 common shares at a public offering price of $12
per share. Proceeds of both the Initial Offering and the secondary offering
were used to acquire specialty medical properties, such as medical office
buildings, outpatient treatment and diagnostic facilities, physician group
practice clinics, ambulatory surgery centers, and specialty hospitals and
treatment centers and to repay indebtedness. The properties acquired generally
are leased to healthcare providers and physicians on long-term leases with
annual lease rate escalations. As of December 31, 2003, the Company owned 22
buildings in 14 cities in 8 states. The Company contributed all of the net proceeds of both offerings to its
Operating Partnership. As of December 31, 2003, the Company owned an
approximate 96.5% interest in the Operating Partnership. The Operating
Partnership uses a mixture of cash and debt to make its acquisitions. The Company has significantly increased the size of its real estate
portfolio and its rental operations throughout 2003 through the acquisition of
the following properties: 9




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##### Table of Contents



Acquisition
    
    RentableProperty
    
    Building Type
    
    Date
    
    Square FeetMt. Vernon
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    85,121Winn Way
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    21,737Urology Center of Florida
    
    Ambulatory Surgery Center
    
    
    5/16/2003
    
    
    
    19,561Morningside
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    44,515310 Nashville
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    48,360Stone Oak
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    65,652Tomball
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    53,617West Pearland
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    20,800Gateway
    
    Medical Office Building
    
    
    5/16/2003
    
    
    
    69,343Rush Copley
    
    Medical Office Building
    
    
    8/12/2003
    
    
    
    31,244Methodist
    
    Medical Office Building
    
    
    12/18/2003
    
    
    
    46,440Elm Street
    
    Medical Office Building
    
    
    12/30/2003
    
    
    
    66,606572,996
 Properties acquired must meet certain criteria that include (but are not
limited to) location, tenant quality, tenant mix, market appeal, purchase
price, property condition, market trend and length of leases in place.
Maintaining and increasing occupancy levels and lease renewals are critical to
ongoing return on investment expected in each property. Cost of Debt and the ratio of Debt to Equity are also critical elements
that can affect the investment return. The Company believes locking in
fixed-rate low interest debt is its first choice. Use of variable-rate debt at
low interest rates is also part of the strategy, but in order to maintain
compliance with loan covenants, the Company must limit the amount of
variable-rate debt (without an interest rate swap) to the amount outstanding on
it secured line of credit plus $10 million. 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. 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. The operations reported for
the year ended December 31, 2003 were for activities that were both new
contracts for services and the completion of contracts entered into by the
Predecessor. 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, 2003 and 2002 (square feet in thousands): RentableTotal Square Feet
    
    Percent Occupied2003
    
    2002
    
    2003
    
    2002In-service portfolio
    
    
    831
    
    
    
    258
    
    
    
    94.1
    %
    
    
    97.4
    %
 The acquisition of numerous multi-tenant medical office buildings during
year ended December 31, 2003 resulted in a change in concentration of the
companys rentable square footage from master lease properties to multi-tenant
medical office buildings. As of December 31, 2002, the Companys portfolio
consisted of five fully occupied master lease properties and only two
multi-tenant medical office buildings. Throughout 2003, the 10




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##### Table of Contents



Company
diversified the portfolio by adding fourteen (14) multi-tenant medical office
buildings and one fully
occupied master lease property. Due to the change in concentration of
building types, the occupancy percentage decreased, but there was no actual net
loss of tenants throughout the year ended December 31, 2003. 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, 2003. The table indicates rentable square footage and annualized
net effective rents (based on December 2003 monthly rental revenue) under
expiring leases (in thousands): PercentageSquare
    
    
    
    
    
    Monthly Rental
    
    of MonthlyYear of
    
    Number
    
    Footage
    
    Percentage of
    
    Revenue of
    
    RentalLease
    
    of Leases
    
    of Leases
    
    Total
    
    Expiring
    
    RevenueExpiration
    
    Expiring
    
    Expiring
    
    Square Feet
    
    Leases
    
    Expiring2004
    
    
    47
    
    
    
    103,755
    
    
    
    12.48
    %
    
    $
    156,714
    
    
    
    10.89
    %2005
    
    
    41
    
    
    
    103,188
    
    
    
    12.41
    %
    
    
    187,716
    
    
    
    13.05
    %2006
    
    
    35
    
    
    
    106,858
    
    
    
    12.86
    %
    
    
    180,553
    
    
    
    12.55
    %2007
    
    
    20
    
    
    
    59,403
    
    
    
    7.15
    %
    
    
    104,294
    
    
    
    7.25
    %2008
    
    
    13
    
    
    
    43,176
    
    
    
    5.19
    %
    
    
    88,726
    
    
    
    6.17
    %Thereafter
    
    
    28
    
    
    
    365,343
    
    
    
    43.95
    %
    
    
    720,475
    
    
    
    50.09
    %Total
    
    
    184
    
    
    
    781,723
    
    
    
    94.1
    %
    
    $
    1,438,478
    
    
    
    100.00
    %
 During the year ended December 31, 2003, the Company renewed seventeen
(17) leases for 42,000 square feet, lost five (5) leases representing 6,000
square feet, and added six (6) new leases representing 8,700 square feet. The
Company does not currently expect its renewal percentage during the year ended
December 31, 2004 to significantly differ from that experienced in the
comparable period in 2003. Acquisition and Development Activity: The Company seeks to acquire or to develop quality medical properties in
geographic areas and/or in specialities 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 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. Service Operations The Company 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 the Company 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 estimated contract percentage completion and as a result could
have a material impact on the Company net income or loss since such estimates
are based upon the estimate of work to be performed on individual contracts. During the third quarter of the Company 2003 the Company implemented a
strategy to shift HADCs primary business purpose from traditional third-party
fee-for-service contracts to managing internally developed projects for the
Company. This strategy has positioned HADC to concentrate on internally
developed projects and retain sufficient staff to maintain its third-party
fee-for-service contract activities consistent with the shift in HADCs primary
business purpose. As these self developed projects begin, a large percentage of
HADCs direct labor costs will be capitalized directly to the respective
projects under construction. 11




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##### Table of Contents



Funds From Operations (FFO) Funds from Operations (FFO) is used by industry analysts and investors
as a supplemental operating measure of an equity real estate investments trust
(REIT). Historical cost accounting for real estate assets in accordance with
GAAP implicitly assumes that the value of real estate assets diminishes
predictably over time. Since real estate values instead 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 definition differently than the Company does. 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, and other
commitments and uncertainties. The following is a reconciliation between net income and FFO for the
period August 16, 2002 through December 31, 2002 and year ended December 31,
2003: August 16,2002YEAR ENDED
    
    ThroughDecember 31, 2003
    
    December 31, 2002Net Income available to common shareholders
    
    $
    1,248,014
    
    
    $
    43,260Add back (deduct):Depreciation and Amortization
    
    
    3,327,307
    
    
    
    481,256Minority interest share of
depreciation & amortization
    
    
    (216,204
    )
    
    
    (29,000
    )FUNDS FROM OPERATIONS
    
    
    4,359,117
    
    
    
    495,516
 Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002 Rental Operations: Rental Income: Rental revenue for the year ended December 31, 2003 was $14.0 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. Rental Expenses and Real Estate Taxes: Rental expenses for the year ended December 31, 2003 was $1.9 million, as
compared to $0.1 million for 12




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##### Table of Contents



the year ended December 31, 2002. The increase in
rental 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 rental 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 rental 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 $3.3 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 significant 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 each of the quarters prior 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 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 a
public offering. Management believes that there will be additional cost
associated with compliance of Sarbanes Oxley Section 404 and other
corporate governance issues. Additionally, if the Company acquires additional properties,
additional staff and/or other increases to general or
administrative expenses may be required, therefore the expense level
for 2004 should be moderately higher than the levels recorded in 2003. 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 the year,
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 13




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##### Table of Contents



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
the year of 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. Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001 Rental Operations: No activity related to rental operations was reflected on the Consolidated
Statements of Operations for the years ended December 31, 2001 and 2000 as the
Company had no rental operations prior to August 16, 2002. Rental Operations revenue for the period August 16, 2002 through December
31, 2002 was $2.3 million. Rental Operations revenue is driven by income
generated from properties held for rental purposes. The amount of rental
revenue and operating expenses recognized during 2002 is entirely related to
the acquisition of the seven properties discussed above following completion of
the Initial Offering. The Urology Center of the South near Memphis, Tennessee
and the four outpatient treatment centers in Las Vegas, Nevada operated by
Sierra Health Services were acquired by the Company on August 22, 2002. The
Company purchased Partell Medical Center in Las Vegas, Nevada and Park Medical
Center in Charlotte, North Carolina on November 8, 2002 and December 1, 2002,
respectively. 2002 RENTAL OPERATIONS REVENUE (In Thousands)Property Name
    
    August
    
    September
    
    October
    
    November
    
    December
    
    TotalSierra
Health Services (4 properties)
    
    $
    95
    
    
    $
    342
    
    
    $
    342
    
    
    $
    342
    
    
    $
    342
    
    
    $
    1,463Urology Center of the South
    
    
    39
    
    
    
    150
    
    
    
    150
    
    
    
    150
    
    
    
    150
    
    
    
    639Partell Medical Center
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    46
    
    
    
    68
    
    
    
    114Park Medical Center
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    58
    
    
    
    58Total
    
    $
    134
    
    
    $
    492
    
    
    $
    492
    
    
    $
    538
    
    
    $
    618
    
    
    $
    2,274
 The leases pertaining to the four outpatient treatment centers in Las
Vegas, Nevada and the Urology Center of the South near Memphis, Tennessee are
all net leases and therefore all operating expenses are paid by the tenants in
accordance with the terms of the lease. Rental revenue is recognized on a
straight-line basis, and the buildings are depreciated using the straight-line
method over their estimated life not to exceed 40 years. Service Operations: Development and project management fees increased by $7.1 million for the
year ended December 31, 2002 as compared to the year ended December 31, 2001.
The significant increase is due to a 2002 signing of a design - build contract
by HADC on a development project in Chattanooga, Tennessee. This contract
differs from the previously used fee-for-service contracts in that all payments
are made from the client to HADC and then from HADC to the contractors.
Therefore, the increase in revenue is substantially offset by a corresponding
increase in cost of sales and project costs. The decrease in total income from service operations for the year ended
December 31, 2002 as compared to the year ended December 31, 2001 is primarily
attributable to a decline in construction activities and consulting revenue
earned by HADC. During 2002, HADCs resources devoted considerable time to
efforts connected with the Companys Initial Offering as well as potential
acquisition and development projects for the Operating Partnership. Management
of HADC is committed to rebuilding its third party consulting services practice
to ensure that HADC operations achieve acceptable levels of profitability. 14




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##### Table of Contents



General and Administrative: General and administrative expenses, including expenses at HADC, were $3.1
million for the year ended
December 31, 2002, as compared to $2.5 million for the year ended December
31, 2001. The increase is the result of the additional costs associated with
the increases in staff and other operational changes in contemplation of and
subsequent to the Initial Offering. In order to increase shareholder return,
management is focused on managing general and administrative expenses.
Management believes the Company currently has sufficient resources at the
corporate level to manage a substantial increase in the size of its portfolio.
Therefore, as rental properties are added to the portfolio, general and
administrative expenses should not grow proportionately. The following chart
shows the general and administrative expense for each of the business segments: QuarterAUGUST 16 -
    
    ENDED
    
    YEAR ENDED
    
    YEAR ENDEDSEPTEMBER 30,
    
    DECEMBER 31,
    
    DECEMBER 31,
    
    DECEMBER 31,2002
    
    2002
    
    2002
    
    2001General and administrative expenses:Corporate & Rental Operations
    
    $
    304,520
    
    
    $
    546,770
    
    
    $
    851,290
    
    
    
    N/AService Operations (HADC)
    
    $
    363,746
    
    
    $
    208,062
    
    
    $
    2,264,478
    
    
    $
    2,475,510Total:
    
    $
    668,266
    
    
    $
    754,832
    
    
    $
    3,115,768
    
    
    $
    2,475,510
 Other Income and Expenses: The increase in other expenses was primarily due to the loss recognized on
the interest rate swap instrument during the year ended December 31, 2002. The
Company currently has one interest rate swap contract that does not meet the
criteria of Statement of Financial Accounting Standards 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 (Brierbrook, L.L.C.) and the
debt related to the swap was retired at the time of the acquisition. Financial
results for the period August 16, 2002 through December 31, 2002 were impacted
by the loss on the fair value of the interest rate swap and the monthly amount
paid or received on the interest rate swap that resulted from changes in the
LIBOR interest rate. Fluctuations in the interest rate market indicated an
increase of ($231,818) in the fair value or the amount the Company would be
required to pay to retire the swap instrument. At this time the Company does
not intend to retire this swap during its life, and if not retired, then it
will expire, and the Company will not realize this loss related to changes in
the fair value of the swap. The swap expiration date is June 29, 2006. Critical Accounting Policies Impairment of Real Estate Assets: The Company utilizes the guidelines established under SFAS 144 Accounting
for the Impairment or Disposal of Long-Lived Assets 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 may not ultimately
be achieved. Acquisitions of Real Estate Assets: 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 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. 15




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##### Table of Contents



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 leases are
included in 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 intangible 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. 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. 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. 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. 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: AmountsBorrowing
    
    Maturity
    
    Interest
    
    Outstanding atDescription
    
    Capacity
    
    Date
    
    Rate
    
    December 31, 2003Syndicated Line of Credit Facility
    
    $
    70,000,000
    
    
    September 2005
    
    LIBOR + 2.00-2.25%
    
    
    
    
    NoneWorking Capital Line of Credit Facility
    
    
    4,000,000
    
    
    October 2004
    
    Prime
    
    
    
    
    None
 16




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On October 15, 2003 the Company entered into a $10 million secured
mezzanine credit facility with Huntington National Bank. The mezzanine facility
is secured by the guarantee of the Company and by a pledge of its interest in
the single purpose entity owning an individual property. The Company intends to
draw down on this facility for self-developed construction projects and
acquisitions. The line is available for draws over a 24-month period with each
draw having a two-year term. The interest on the facility ranges from 10-11%
per annum. At December 31, 2003, there were no amounts
outstanding under this facility. Equity Securities: The Company has on file with the SEC an effective shelf registration
statement that permits the Company to sell up to an additional $250 million of
common and preferred shares of beneficial interest as of January 30, 2004. 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
upon maturity. 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 2004 as short-term needs that will be funded either from the $70
million available on the Companys syndicated line of credit or the issuance of
additional equity securities under the shelf registration statement on file
with the SEC that permits the Company to sell up to an additional $250 million
of common and preferred shares of beneficial interest as of January 30, 2004. Long-Term Uses: The Company expects to meet long-term (greater than one year) liquidity
requirements such as property acquisitions, scheduled debt 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, 2003, the Company had $17.4 million of cash and cash
equivalents. Net cash provided by operating activities was $2.5 million for the
year ended December 31, 2003. 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 $46.3 million for the year ended
December 31, 2003, primarily due to the acquisition of the fifteen medical
properties discussed above. Financing Activities Net cash provided by financing activities was $53.0 million for the year
ended December 31, 2003. These proceeds were generated primarily from the
secondary common offering and the issuance of $13 million of mortgage notes,
net of $3.7 million of cash distributions to shareholders and minority
interest. 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 17




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##### Table of Contents



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 prior notice of termination prior to the expiration of the
then current term. The Company also pays this company $3,671 and $1,500 per
month for the lease of the office space where the Companys accounting
functions are performed and for human resources and employee search services,
respectively. 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. Contractual Obligations As of December 31, 2003, the Company is subject to certain contractual
payment obligations as described in the schedule below (in thousands): Payments due by PeriodContractual Obligations
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong-term debt
    
    $
    71,884
    
    
    $
    909
    
    
    $
    992
    
    
    $
    5,066
    
    
    $
    1,144
    
    
    $
    9,391
    
    
    $
    54,383Line of credit (1)
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commitment to Acquisitions (2)
    
    
    46,500
    
    
    
    46,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations(3)
    
    
    534
    
    
    
    313
    
    
    
    120
    
    
    
    60
    
    
    
    40
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    118,918
    
    
    $
    47,722
    
    
    $
    1,113
    
    
    $
    5,125
    
    
    $
    1,185
    
    
    $
    9,391
    
    
    $
    54,383
  (1)
    
    The Companys line-of-credit was extended to September
2005, balance on December 31, 2003 was zero.  (2)
    
    As of December 31, 2003, the Company had entered into
purchase contracts for a $32 million medical office
building in Voorhees, NJ, which includes assuming $23.3
million of mortgage debt on the property. Also under
contract was a $7 million medical office building in
Lewisville, TX. Additionally, a contract was in place for
a $7.5 million medical office building in Coral Springs,
FL, which includes assuming $3.4 million of mortgage debt
on the property.  (3)
    
    This item includes operating leases for office space and
equipment. 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 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. 18




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##### Table of Contents



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  
    
    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, which may result in a reduction in the amount of cash available
for distribution to our shareholders. 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. 19




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##### Table of Contents



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 4 Sierra Health
Services properties. The total area leased by Southwest Medical Associates
(160,855 square feet) comprises approximately 21.3% of our total annualized
base rental revenue as of December 31, 2003. 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, 2003, we have acquired 15 additional specialty medical
properties. 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. 20




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##### Table of Contents



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, 2003, the outstanding face value principal balance of our
indebtedness was approximately $71.9 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 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 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 and Hanson, and Mr. Lanham,
who serves as a trustee, 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, 2003,
Messrs. Klipsch, McCoin, Farrar and Lanham owned approximately 1.4%, 0.6%,
0.1%, and 0.4% 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 21




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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. Some of our trustees and executive officers have other business interests
that may hinder their ability to spend adequate time on 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. 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 (other than
our first REIT 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, 2004, 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 22




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
    
    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. 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. 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. 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. Since our initial public offering in August 2002, HADC has failed to
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 Las Vegas, Nevada,
making us vulnerable to changes in economic conditions in that particular
market. At December 31, 2003, five of our properties, representing approximately
35.9% of our annual rental revenue for the year ended December 31, 2003, are
located in Las Vegas, Nevada. 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. Our Board of Trustees and management make decisions on our behalf, and
shareholders have limited management rights. 23




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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, 2003, there were 358,583 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, 2003, we had outstanding options
to purchase 256,500 common shares and outstanding warrants to purchase 25,000
common shares. Upon exercise of these options and warrants, 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, 2003, we owned an approximate 96.52%
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 conditions. 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;
    
    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 24




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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. Recent changes in taxation of corporate dividends may adversely affect the
value of our common shares. The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was
enacted into law on May 28, 2003, among other things, generally reduces to 15%
the maximum marginal rate of tax payable by domestic non-corporate taxpayers on
dividends received from a regular C corporation. This reduced tax rate,
however, will not apply to dividends paid to most domestic non-corporate
taxpayers by a REIT on its stock, except for certain limited amounts. Although
the earnings of a REIT that are distributed to its shareholders still generally
will be subject to less federal income taxation than earnings of a non-REIT C
corporation that are distributed to its shareholders net of corporate-level
income tax, this legislation could cause domestic non-corporate investors to
view the stock of regular C corporations as more attractive relative to the
stock of a REIT than was the case prior to the enactment of the legislation,
because the dividends from regular C corporations will generally be taxed at a
lower rate while dividends from REITs will generally be taxed at the same rate
as the individuals other ordinary income. We cannot predict what effect, if
any, the enactment of this legislation may have on the value of the stock of
REITs in general or on our common shares in particular, either in terms of
price or relative to other investments. 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 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. 25




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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.
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;
    
    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 26




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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 two 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. 
 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, 2003, total outstanding debt of the Company was
approximately $76.9 million. The current outstanding debt balances relate to
mortgages assumed through the property acquisitions. 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, 2003 of $4 million. A one percentage point fluctuation in
market interest rates would have had a $15,452 impact on net earnings in 2003.
On September 30, 2002, the Company entered into a $25 million secured credit
facility with Huntington National Bank based in Columbus, Ohio. On December 31,
2003, the Company amended its secured credit facility, increasing the funds
available under the facility to $70 million from $25 million and extended the
maturity date to September 2005. Borrowing availability under the amended
facility is dependent upon the collateral pool securing the facility. Five
banks are participating in the credit facility. Huntington National Bank of
Columbus, Ohio is the lead arranger and administrative agent. The credit
facility bears interest at variable rates of LIBOR plus 2.00-2.25% depending on
the Companys leverage ratio. This line of credit contains covenants that
require, among other things, the maintenance of certain financial ratios. At
December 31, 2003, the amount outstanding on the line of credit was $ 0. The Company has one interest rate swap contract that does not meet the
criteria of Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 27




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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. During the year
ended December 31, 2003, the Company recognized a gain of $142,155 from this
interest rate swap contract. The fair value of the interest rate swap at
December 31, 2003 was a $537,969 liability. 
 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 The Company carried out an evaluation, with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Companys disclosure controls
and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic Securities and Exchange Commission filings. There has been no change in the Companys internal control over financial
reporting during the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 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 21, 2003. 
 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 21, 2004. 
 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 21, 2004. 
 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 21, 2004. 
 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 21, 2004. 28




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (a)
    
    THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K:  1.
    
    CONSOLIDATED FINANCIAL STATEMENTS PageIndex to Financial statements
    
    
    F-1Independent Auditors Report
    
    
    F-2Consolidated Balance Sheets, December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations, Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Cash Flows, Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Shareholders Equity (Deficit), Years
Ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
  2.
    
    CONSOLIDATED FINANCIAL STATEMENT SCHEDULESSchedule III  Real Estate and Accumulated Depreciation3.
    
    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.*10.04
    

Contribution Agreement dated May 23, 2002 among Windrose International, LLC, Med
Properties Management Group, LLC, Hospital Affiliates Development Corporation, Med
Properties Asset Group LLC, Fred S. Klipsch, O.B. McCoin, Robin Barksdale, Charles
Lanham, Frederick L. Farrar, Mike Klipsch, Steve Klipsch, Windrose Medical
Properties, L.P. and Windrose Medical Properties Trust.*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
    
    Subordinated Promissory Note dated September 28, 2001 from Windrose International L.L.C. to Fred Klipsch.*10.11
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose
International, L.L.C. to Klipsch Audio, Inc.*10.12
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to Robin P. Barksdale.*10.13
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
 29




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTIONFrederick L. Farrar.*10.14
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to Fred S. Klipsch.*10.15
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates
Development Corporation to Athena Development.*10.16
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International L.L.C. to Charles Lanham.*10.17
    
    Promissory Note payable by Alliance Design Group to Hospital Affiliates Development Corporation.*10.18
    
    Secured Revolving Credit Agreement, dated September 27, 2002, by and between Windrose
Medical Properties, L.P. and The Huntington National Bank.*10.19
    
    Credit Note, dated September 27, 2002, from Windrose Medical Properties, L.P. to The
Huntington National Bank.*10.20
    
    Purchase and Sale Agreement, dated November 19, 2003, by and between
Cooper Holding, L.L.C. and Windrose Medical Properties, L.P.***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.****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.****
 *
    
    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.
  (b)
    
    REPORTS ON FORM 8-KForm 8-K filed on November 6, 2003, to report as an Item 7 and Item 12,
the issuance of press releaseForm 8-K filed on December 11, 2003, to report as an Item 5 and Item 7,
the issuance of a press release and the filing of Combined Statement of
Revenue in Excess of Certain Operating Expenses and Pro Forma Condensed
Financial Statements (Unaudited) relating to purchase agreements entered
into for five specialty medical properties.(c)
    
    EXHIBITSThe 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.(d)
    
    FINANCIAL STATEMENT SCHEDULEThe 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)(1) of this Form 10-K, and is incorporated herein by
reference. 30




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##### Table of Contents



SIGNATURE 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 PROPERTIES
TRUST (Registrant)Date: March 15, 2004
    
    
    By:
    /S/ FRED S. KLIPSCHFRED S. KLIPSCHCHAIRMAN, CHIEF EXECUTIVE OFFICER, AND TRUSTEE(PRINCIPAL EXECUTIVE OFFICER)By:
    /S/ DOUG HANSONDOUG 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

         
FRED S. KLIPSCH
    
    Chairman, Chief Executive
Officer, and Trustee
(Principal Executive Officer)
    
    March 15, 2004/s/ FREDERICK L. FARRAR

         
FREDERICK L. FARRAR
    
    President, Chief Operating
Officer and Treasurer
    
    March 15, 2004/s/ BAIN J. FARRIS

         
BAIN J. FARRIS
    
    Trustee
    
    March 15, 2004/s/ STEPHEN GOLDSMITH
         
STEPHEN GOLDSMITH
    
    Trustee
    
    March 15, 2004/s/ BRUCE M. JACOBSON

         
BRUCE M. JACOBSON
    
    Trustee
    
    March 15, 2004/s/ CHARLES E. LANHAM

         
CHARLES E. LANHAM
    
    Trustee
    
    March 15, 2004/s/ DAVID L. MARAMAN

         
DAVID L. MARAMAN
    
    Trustee
    
    March 15, 2004/s/ NORMAN ZAHLER
         
NORMAN ZAHLER
    
    Trustee
    
    March 15, 2004
 31




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##### Table of Contents



FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS PAGEIndependent Auditors Report
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity (Deficit)
for the Years Ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



Independent Auditors Report The Board of Trustees and Shareholders
Windrose Medical Properties Trust: We have audited the accompanying consolidated balance sheets of Windrose
Medical Properties Trust and Subsidiaries (see Note 1) as of December 31, 2003
and 2002, 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, 2003, and the consolidated statements of cash flows and
shareholders equity (deficit) for each of the years in the three-year period
ended December 31, 2003. 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 the consolidated financial statements and the
financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, 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, 2003, and their cash flows for each of
the years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. 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. KPMG LLP
Indianapolis, Indiana
March 4, 2004 F-2




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##### Table of Contents



WINDROSE MEDICAL
PROPERTIES TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2003
    
    2002ASSETSREAL ESTATE INVESTMENTS:Land
    
    $
    17,191,625
    
    
    $
    8,455,937Buildings and Tenant Improvements
    
    
    141,027,244
    
    
    
    52,630,420Acquired Lease Intangibles
    
    
    7,762,641
    
    
    
    2,959,623165,981,510
    
    
    
    64,045,980Accumulated Depreciation
    
    
    (2,740,281
    )
    
    
    (407,018
    )Accumulated Lease Intangible Amortization
    
    
    (1,135,887
    )
    
    
    (74,238
    )NET REAL ESTATE INVESTMENTS
    
    
    162,105,342
    
    
    
    63,564,724Cash and Cash Equivalents
    
    
    17,386,791
    
    
    
    8,237,588Receivables on Construction and Consulting Contracts
    
    
    400,970
    
    
    
    730,900Receivables from Tenants
    
    
    511,531
    
    
    
    133,995Straight-line Rent Receivable
    
    
    1,356,520
    
    
    
    294,026Revenue Earned in Excess of Billings
    
    
    
    
    
    
    1,268,785Deferred
Financing Fees, Net or Accumulated Amortization of
$193,207 and $27,783
    
    
    1,207,457
    
    
    
    282,060Escrow Deposits & Other Assets
    
    
    4,923,902
    
    
    
    752,809TOTAL ASSETS
    
    $
    187,892,513
    
    
    $
    75,264,887LIABILITIES AND SHAREHOLDERS EQUITYSecured Debt
    
    
    76,893,444
    
    
    
    9,664,113Billings in Excess of Revenues Earned
    
    
    152,151
    
    
    
    404,268Accounts Payable and Accrued Expenses
    
    
    2,213,317
    
    
    
    1,039,314Consulting and Construction Payables
    
    
    106,096
    
    
    
    1,357,243Dividends Payable to Shareholders
    
    
    1,252,176
    
    
    
    739,923Tenant Security Deposits and Prepaid Rents
    
    
    742,252
    
    
    
    175,281Accumulated Loss on Interest Rate Swap
    
    
    537,969
    
    
    
    680,125TOTAL LIABILITIES
    
    
    81,897,405
    
    
    
    14,060,267Minority Interest
    
    
    3,837,499
    
    
    
    3,827,456SHAREHOLDERS EQUITYCommon
Shares or Beneficial Interest ($.01 par value); 100,000,000 Shares Authorized,
9,946,710 and 5,691,710 Issued and Outstanding
    
    
    99,467
    
    
    
    56,917Additional Paid In Capital
    
    
    105,490,989
    
    
    
    58,016,910Distributions in Excess of Net Income
    
    
    (3,432,847
    )
    
    
    (696,663
    )TOTAL SHAREHOLDERS EQUITY
    
    
    102,157,609
    
    
    
    57,377,164TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    187,892,513
    
    
    $
    75,264,887
 See Accompanying Notes to Consolidated Financial Statements F-3




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##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES
Consolidated Statements of Operations Years EndedYear Ended December 31,
    
    January 1, 2002Through
    
    August 16, 2002Through
    
    December 31,2003
    
    August 15, 2002
    
    December 31, 2002
    
    2002
    
    2001(Company)
    
    (Predecessor)
    
    (Company)
    
    (Combined)
    
    (Predecessor)RENTAL OPERATIONS:Rental revenues
    
    $
    14,029,245
    
    
    $
    
    
    
    $
    2,274,130
    
    
    $
    2,274,130
    
    
    $
    Operating expenses:Property taxes
    
    
    801,453
    
    
    
    
    
    
    
    61,402
    
    
    
    61,402
    
    
    
    Property operating expenses
    
    
    1,915,710
    
    
    
    
    
    
    
    101,949
    
    
    
    101,949
    
    
    
    Depreciation and amortization
    
    
    3,327,307
    
    
    
    
    
    
    
    481,256
    
    
    
    481,256
    
    
    
    Total operating expenses
    
    
    6,044,470
    
    
    
    
    
    
    
    644,607
    
    
    
    644,607
    
    
    
    Income from rental operations
    
    
    7,984,775
    
    
    
    
    
    
    
    1,629,523
    
    
    
    1,629,523
    
    
    
    SERVICE OPERATIONS (HADC):Revenues:Development and project management fees
    
    
    3,660,696
    
    
    
    4,145,468
    
    
    
    7,559,007
    
    
    
    11,704,475
    
    
    
    4,568,284Expenses:Cost of sales and project costs
    
    
    3,295,590
    
    
    
    3,541,826
    
    
    
    7,535,403
    
    
    
    11,077,229
    
    
    
    1,782,881General and administrative expenses
    
    
    824,452
    
    
    
    1,692,670
    
    
    
    571,808
    
    
    
    2,264,478
    
    
    
    2,475,510Income (loss) from service operations
    
    
    (459,346
    )
    
    
    (1,089,028
    )
    
    
    (548,204
    )
    
    
    (1,637,232
    )
    
    
    309,893GENERAL AND ADMINISTRATIVE EXPENSES:Corporate and rental operations
    
    
    2,693,805
    
    
    
    
    
    
    
    851,290
    
    
    
    851,290
    
    
    
    Operating income (loss)
    
    
    4,831,624
    
    
    
    (1,089,028
    )
    
    
    230,029
    
    
    
    (858,999
    )
    
    
    309,893OTHER INCOME (EXPENSES):Interest income
    
    
    28,547
    
    
    
    
    
    
    
    67,563
    
    
    
    67,563
    
    
    
    Interest (expense)
    
    
    (3,330,700
    )
    
    
    (22,169
    )
    
    
    (219,017
    )
    
    
    (241,186
    )
    
    
    (22,115
    )Gain (loss) on interest rate swap
    
    
    142,155
    
    
    
    
    
    
    
    (231,818
    )
    
    
    (231,818
    )
    
    
    (Loss) on abandoned due diligence costs
    
    
    (208,922
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income (expense)
    
    
    (249,581
    )
    
    
    (30,404
    )
    
    
    (49,635
    )
    
    
    (80,039
    )
    
    
    (18,148
    )Total other income (expense)
    
    
    (3,618,501
    )
    
    
    (52,573
    )
    
    
    (432,907
    )
    
    
    (485,480
    )
    
    
    (40,263
    )Income (loss) before income taxes
    
    
    1,213,123
    
    
    
    (1,141,601
    )
    
    
    (202,878
    )
    
    
    (1,344,479
    )
    
    
    269,630Income tax (expense) benefit
    
    
    144,069
    
    
    
    126,000
    
    
    
    255,141
    
    
    
    381,141
    
    
    
    (321,000
    )Income (loss) before minority interest
    
    
    1,357,192
    
    
    
    (1,015,601
    )
    
    
    52,263
    
    
    
    (963,338
    )
    
    
    (51,370
    )Minority interest in income of common unit holders and
other subsidiaries
    
    
    (109,178
    )
    
    
    
    
    
    
    (9,003
    )
    
    
    (9,003
    )
    
    
    Net income (loss) available for common shareholders
    
    $
    1,248,014
    
    
    $
    (1,015,601
    )
    
    $
    43,260
    
    
    $
    (972,341
    )
    
    $
    (51,370
    )Net income per common share:Basic and diluted
    
    $
    0.21
    
    
    
    
    
    
    $
    0.01Weighted average number of common shares
outstanding
    
    
    5,808,298
    
    
    
    
    
    
    
    5,691,710Weighted average number of common and
dilutive potential common shares
    
    
    6,169,137
    
    
    
    
    
    
    
    6,054,031
 See Accompanying Notes to Consolidated Financial Statements F-4




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##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIES:NET INCOME (LOSS)
    
    $
    1,248,014
    
    
    $
    (972,341
    )
    
    $
    (51,370
    )ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:Depreciation and amortization
    
    
    3,327,306
    
    
    
    481,256
    
    
    
    46,082Rental income associated with above/(below) market leases
    
    
    70,468
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (144,069
    )
    
    
    (381,141
    )
    

    
    327,000(Gain) loss on interest rate swap
    
    
    (142,155
    )
    
    
    231,818
    
    
    
    Amortization of deferred financing fees
    
    
    165,424
    
    
    
    27,783
    
    
    
    Amortization of fair value of debt adjustment
    
    
    (468,752
    )
    
    
    (7,885
    )
    
    
    Minority interest in earnings
    
    
    109,178
    
    
    
    9,003
    
    
    
    Increase (decrease) in cash due to changes in:Construction receivables/payables, net
    
    
    (921,217
    )
    
    
    1,380,099
    
    
    
    (287,697
    )Straight line rent receivable
    
    
    (1,062,494
    )
    
    
    (294,026
    )
    
    
    Receivables from tenants
    
    
    (377,536
    )
    
    
    
    
    
    
    Revenue earned in excess of billings
    
    
    1,268,785
    
    
    
    (1,059,768
    )
    
    
    (141,881
    )Due from affiliates
    
    
    
    
    
    
    219,000
    
    
    
    (19,000
    )Billings in excess of revenues earned
    
    
    (252,117
    )
    
    
    (40,155
    )
    
    
    (307,420
    )Other accrued revenue and expenses
    
    
    (371,386
    )
    
    
    84,255
    
    
    
    353,861NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    2,449,449
    
    
    
    (322,102
    )
    
    
    (80,425
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (569,703
    )
    
    
    (140,840
    )
    
    
    (14,236
    )Deposits on potential acquisitions
    
    
    (523,237
    )
    
    
    
    
    
    
    Acquisition of real estate investments
    
    
    (44,665,616
    )
    
    
    (51,460,997
    )
    
    
    Other deferred leasing costs
    
    
    (23,029
    )
    
    
    
    
    
    
    Other deferred costs and other assets
    
    
    (512,627
    )
    
    
    
    
    
    
    Acquisition of Minority Interest
    
    
    (26,700
    )
    
    
    
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (46,320,912
    )
    
    
    (51,601,837
    )
    
    
    (14,236
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on indebtedness
    
    
    (3,450,575
    )
    
    
    (4,018
    )
    
    
    Draws on line of credit
    
    
    28,232,634
    
    
    
    
    
    
    
    199,899Paydowns on line of credit
    
    
    (28,232,634
    )
    
    
    (498,133
    )
    
    
    Net Payments on Notes Payable to Owners
    
    
    
    
    
    
    (188,660
    )
    
    
    Proceeds from mortgage debt
    
    
    13,000,000
    
    
    
    
    
    
    
    125,000Cash distributions to shareholders
    
    
    (3,471,945
    )
    
    
    
    
    
    
    Cash distributions to minority interest
    
    
    (268,128
    )
    
    
    
    
    
    
    Distributions to owners
    
    
    
    
    
    
    (86,503
    )
    
    
    (333,600
    )Deferred Financing Costs
    
    
    (1,090,821
    )
    
    
    (309,843
    )
    
    
    Proceeds from Issuance of Common Shares, net
    
    
    48,302,135
    
    
    
    61,133,394
    
    
    
    NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    53,020,666
    
    
    
    60,046,237
    
    
    
    (8,701
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    9,149,203
    
    
    
    8,122,298
    
    
    
    (103,362
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    8,237,588
    
    
    
    115,290
    
    
    
    218,652CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    17,386,791
    
    
    $
    8,237,588
    
    
    $
    115,290SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid
    
    $
    3,125,122
    
    
    $
    226,884
    
    
    $
    35,565Income taxes paid
    
    
    
    
    
    
    
    
    
    
    9,810Net liabilities (including secured debt) assumed in
acquisition of real estate investments
    
    
    59,415,114
    
    
    
    10,861,000
    
    
    
    Offering costs included in accounts payable
    
    
    586,994
    
    
    
    
    
    
    
    Issuance of partnership units for real estate investments
    
    
    
    
    
    
    1,723,000
    
    
    
    Reallocation of minority interest
    
    
    198,512
    
    
    
    
    
    
    
    
 See Accompanying Notes to Consolidated Financial Statements F-5




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##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity (Deficit) ADDITIONAL
    
    DISTRIBUTIONS
    
    MEMBERS
    
    TOTALCOMMON STOCK
    
    PAID-IN
    
    IN EXCESS OF
    
    EQUITY
    
    SHAREHOLDERSSHARES
    
    AMOUNT
    
    CAPITAL
    
    NET INCOME
    
    (DEFICIT)
    
    EQUITY (DEFICIT)BALANCES AT December 31, 2000
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,672
    
    
    $
    5,672Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,370
    )
    
    
    (51,370
    )Distribution to owners
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333,600
    )
    
    
    (333,600
    )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
    )
    
    $
    
    
    
    $
    102,157,609
 See Accompanying Notes to Consolidated Financial Statements F-6




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##### Table of Contents



WINDROSE MEDICAL PROPERTIES TRUST AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company The Company was organized in the state of Maryland in March, 2002 as a
real estate investment trust. The Company is taxed as a real estate investment
trust (REIT) under the Internal Revenue Code. The Company was formed to
invest in specialty medical properties and to capitalize on the experience and
expertise of its management team in selectively acquiring, planning, developing
and managing medical facilities. On August 15, 2002, the Companys Registration
Statement on Form S-11 was declared effective. The Company had no operations
prior to August 16, 2002. The Company received net proceeds of $61.1 million after underwriters
discounts and expenses from its August, 2002 initial public offering of
5,691,710 common shares at a public offering price of $12 per share (the
Initial Offering). The Company contributed all of the net proceeds of the
Initial Offering to Windrose Medical Properties, L.P. (the Operating
Partnership) for the sole general partnership interest of approximately 94.0%.
The Operating Partnership utilized approximately $47.4 million of the proceeds
from the Initial Offering and the issuance of limited partnership interests to
complete the purchases of four outpatient treatment centers in Las Vegas,
Nevada on August 23, 2002, and the Urology Center of the South near Memphis,
Tennessee on August 22, 2002. On November 8, 2002, the Company purchased
Partell Medical Center (Partell) in Las Vegas, Nevada for $7.2 million,
including $5 million of assumed debt. The Company acquired Park Medical Center
(Park) in Charlotte, North Carolina on December 1, 2002, for $5.65 million,
including $3.89 million of assumed debt. On May 16, 2003, the Company acquired
9 medical properties, including 2 properties with multiple-buildings (a total
of 12 buildings) (the MPA Properties) from Medical Properties of America for
$68.1 million, including approximately $38 million of assumed debt from
multiple lenders. The Company paid the $30 million balance of the purchase
price with a combination of available cash and borrowings under a $25 million
secured credit facility. On August 12, 2003, the Company purchased a medical
building on the Rush Copley Medical Center campus (Rush Copley) for $6.5
million by placing a $4 million debt facility that is secured by a first
mortgage on the property with the balance of the purchase coming from a draw on
the line of credit facility. The Company received net proceeds of $47.7 million after underwriters
discount and expenses from its December 2003 offering of 4,255,000 common
shares of beneficial interest at a public offering price of $12 per share. The
Company contributed all of the net proceeds of the offering to the Operating
Partnership. As of December 31, 2003, the Companys ownership interest in the
Operating Partnership is approximately 96.5%. The Operating Partnership utilized approximately $ 7.1 million of the
proceeds of the December 2003 offering to fund a portion of the purchase price
of two properties. Another $20 million of the net proceeds was used to pay
down indebtedness on its secured credit facility. The Company completed the
purchase of Methodist Medical Building in Sacramento, California for $9.2
million including the assumption of a $5.4 million secured credit facility. On
December 30, 2003, the Company purchased Elm Street Professional Plaza in Reno,
Nevada for $13 million including the assumption of a secured credit facility of
$9.8 million. 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 controlled
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 F-7




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##### Table of Contents



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 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. 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 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 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
    
    Expense2004
    
    
    1,371,3732005
    
    
    916,3522006
    
    
    694,1472007
    
    
    514,6872008
    
    
    418,052
 F-8




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##### Table of Contents



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 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. There was no adjustment to either the weighted average shares outstanding
or the reported amounts of income for the effects of outstanding stock options
in computing diluted earning per share because the unexercised stock options
were anti-dilutive. 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 would
also be added back to the 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 F-9




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##### Table of Contents



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 year ended December 31, 2003
and the period August 16, 2002 through December 31, 2002: For the Year
    
    August 16, 2002Ended
    
    throughDecember 31,
    
    December 31,2003
    
    2002Net Income
    
    $
    1,248,014
    
    
    $
    43,260Book/Tax Differences
    
    
    (248,757
    )
    
    
    347,587Adjusted taxable income subject
to 90% dividend requirement
    
    $
    999,257
    
    
    $
    390,847
 The Companys dividends paid deduction is summarized below: For the Year
    
    August 16, 2002Ended
    
    throughDecember 31,
    
    December 31,2003
    
    2002Dividends Declared
    
    $
    3,984,198
    
    
    $
    739,923Less: Return of capital
    
    
    (2,984,941
    )
    
    
    (349,076
    )Total dividends paid
deduction attributable to
adjusted taxable income
    
    $
    999,257
    
    
    $
    390,847
 A summary of the tax characterization of the dividends paid per common
share for the year ended December 31, 2003 and the period August 16, 2002
through December 31, 2002 follows: 2003
    
    2002Total dividends declared per share
    
    $
    .70
    
    
    $
    .13Ordinary income
    
    
    25.08
    %
    
    
    52.82
    %Return of Capital
    
    
    74.92
    %
    
    
    47.18
    %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 F-10




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##### Table of Contents



compensation expense is reflected in net income 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 consistent with SFAS Statement No. 123,
the Companys net income and net income per share for year ended December 31,
2003 and the period August 16, 2002 through December 31, 2002 would have been
reduced to the pro forma amounts indicated below: For the Year
    
    August 16, 2002ended
    
    ThroughDecember 31, 2003
    
    December 31, 2002Net income as reported
    
    
    1,248,014
    
    
    
    43,260Deduct: Total stock based compensation
expense determined under fair value
method for all awards
    
    
    (174,668
    )
    
    
    (164,032
    )Pro forma net income (loss)
    
    
    1,073,346
    
    
    
    (120,772
    )Basic and diluted net income (loss) per shareAs reported
    
    
    .21
    
    
    
    .01Pro forma
    
    
    .18
    
    
    
    (.02
    )
 The fair values of the options were determined using the Black-Scholes
option-pricing model with the following assumptions: August 16, 2002For the year ended
    
    ThroughDecember 31, 2003
    
    December 31, 2002Dividend yield
    
    
    8.00
    %
    
    
    8.00
    %Volatility
    
    
    42.47
    %
    
    
    42.47
    %Risk-free interest rate of options
granted on 8/16/2002 with expected
life of five years
    
    
    
    
    
    
    3.25
    %Risk-free interest rate of options
granted on 8/16/2002 with expected
life of seven years
    
    
    
    
    
    
    3.82
    %Risk-free interest rate of options
granted on 12/19/2002 with expected
life of seven years
    
    
    
    
    
    
    3.65
    %Risk-free interest rate of options
granted on 3/19/2003 with expected
life of seven years
    
    
    3.52
    %
    
    
    Risk-free interest rate of options
granted on 8/5/2003 with expected
life of seven years
    
    
    3.84
    %
    
    
    Expected life of options with one year
vesting period
    
    
    N/A
    
    
    5 yearsExpected life of options with four year
vesting period
    
    7 years
    
    7 yearsWeighted-average fair value per share of
Options granted
    
    $
    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 F-11




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##### Table of Contents



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. 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 7 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 financial statements have been reclassified to
conform with the 2003 presentation. 3. DERIVATIVE INSTRUMENTS The Company has one interest rate swap contract that does not meet the
criteria of Statement of Financial Accounting Standards 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. The assumed accumulated loss on the
interest rate swap on the acquisition date was $448,307 and during the period
from August 16, 2002 through December 31, 2002 the Company recognized a loss of
$231,818 and for the year ended December 31, 2003, the Company recognized a
gain of $142,155, from this interest rate swap contract. 4. 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 prior notice of termination prior to the expiration of the then current
term. The Company also pays this company $3,671 and $1,500 per month for the
lease of the office space where the Companys accounting functions are
performed and for human resources and employee search services, respectively. 5. ACCOUNTS RECEIVABLE, REVENUE EARNED IN EXCESS OF BILLINGS AND BILLINGS IN
EXCESS OF REVENUES    EARNED


At December 31, 2003, 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 31,2003
    
    2002Costs Incurred on Uncompleted Contracts
    
    $
    1,631,360
    
    
    $
    9,540,530Estimated Earnings
    
    
    784,306
    
    
    
    1,606,5252,415,666
    
    
    
    11,147,055Less Billings to Date
    
    
    2,567,817
    
    
    
    10,282,538$
    (152,151
    )
    
    $
    864,517


F-12



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##### Table of Contents



Contracts in progress at December 31, 2003 and 2002 are included in the
balance sheets under the following captions: DECEMBER 31,2003
    
    2002Revenue Earned in Excess of Billings
    
    $
    
    
    
    $
    1,268,785Billings in Excess of Revenue Earned
    
    
    (152,151
    )
    
    
    (404,268
    )$
    (152,151
    )
    
    $
    864,517
 6. CONCENTRATION OF CREDIT RISK Five of the Companys twenty-two properties 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 twenty-five properties. These four properties have a cost basis of
approximately $39.3 million at December 31, 2003 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, health insurance, and
workers compensation insurance. Financial information as of December 31, 2003 and December 31, 2002 and
for the years ended December 31, 2003, 2002 and 2001 of Sierra Health Services,
Inc. and subsidiaries as filed with the Securities and Exchange Commission on
Form 10-K may be found at the SECs website www.sec.gov. 7. LONG TERM DEBT On September 30, 2002, the Company entered into a $25 million secured
credit facility with Huntington National Bank based in Columbus, Ohio which is
available for working capital and acquisition purposes. On December 31, 2003,
the Company amended its secured credit facility, increasing the funds available
under the facility to $70 million from $25 million and extended the maturity
date to September 2005. Borrowing availability under the amended facility is
dependent upon the collateral pool securing the facility. Five banks are
participating in the credit facility with Huntington National Bank of Columbus,
Ohio as the lead arranger and administrative agent. The credit facility bears
interest at variable rates of LIBOR plus 2.00-2.25% depending on the Companys
leverage ratio. This line of credit contains covenants that require, among
other things, the maintenance of certain financial ratios. There were no amounts outstanding at 12/31/03. On October 1, 2003 the Company entered into a $4 million variable rate
line of credit with Union Planters Bank, secured by the first mortgage on the
310 25th Avenue medical office building located in Nashville, Tennessee. The
mortgage has a variable interest rate of prime and a maturity date of October
1, 2004. There were no amounts outstanding
at 12/31/03. On October 15, 2003 the Company entered into a $10 million secured
mezzanine credit facility with Huntington National Bank. The mezzanine facility
is secured by the guarantee of the Company and by a pledge of its interest in
the single purpose entity owning an individual property. The Company intends to
draw down on this facility for self-developed construction projects and
acquisitions. The line is available for draws over a 24-month period with each
draw having a two-year term. The interest on the facility ranges from 10-11%
per annum. There were no amounts outstanding at 12/31/03. F-13




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##### Table of Contents



The following is a summary of the outstanding mortgage debt, excluding the
line of credit, as of December 31, Outstanding at
    
    Outstanding atDecember 31, 2003
    
    December 31, 2002Fixed rate secured debt, including unamortized balance of debt premium,
monthly payments of $35,726, including interest at
7.62%, maturity date of September 30, 2011 (secured by Partell)
    
    $
    5,362,022
    
    
    $
    5,467,642Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $26,666, including interest at
7.97%, maturity date of February 28, 2010 (secured by Park)
    
    
    4,105,290
    
    
    
    4,196,471Fixed rate secured debt, including unamortized balance of debt premium,
monthly payments of $114,461, including interest at
8.24%, maturity date of July 1, 2010 (secured by Mt Vernon)
    
    
    16,683,291
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $51,143, including interest at
7.52%, maturity date of February 1, 2011 (secured by Stone Oak)
    
    
    7,763,439
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $23,074, including interest at
7.50%, maturity date of March 1, 2011 (secured by Tomball)
    
    
    3,512,534
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $19,009, including interest at
7.57%, maturity date of February 1, 2011 (secured by Pearland)
    
    
    2,877,646
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $10,447, including interest at
8.88%, maturity date of August 1, 2009 (secured by Winn Way)
    
    
    1,445,006
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $46,429, including interest at
8.39%, maturity date of December 1, 2009 (secured by Gateway)
    
    
    6,636,432
    
    
    
    Variable rate secured debt, monthly payments are interest only
based on interest of LIBOR + 1.6% (2.78% at December 31, 2003),
Maturity date of August 2006 (secured by Rush Copley)
    
    
    4,000,000
    
    
    
    Fixed rate secured debt, monthly payments of $48,314, including interest at
5.00%, maturity date of April 1, 2008 (secured by 4475 Sierra)
    
    
    8,923,668
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $37,232, including interest at
7.15%, maturity date of December 1, 2011 (secured by Sacramento)
    
    
    5,769,950
    
    
    
    Fixed rate secured debt, including unamortized balance of debt
premium, monthly payments of $75,217, including interest at
6.74%, maturity date of December 1, 2011 (secured by Elm Street)
    
    
    9,814,167
    
    
    
    Total
    
    $
    76,893,444
    
    
    $
    9,664,113
 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 the fixed-rate debt at the date of acquisition was based
on a market interest rate of 6.0% for all properties except for Partell and
Park, which were based on market interest rates of 6.1% and 6.5%, respectively.
The current unamortized total of debt premiums on all loans as of December 31,
2003 and 2002 is $5,009,386 and $777,481, respectively. The total unpaid
principal as of December 31, 2003 is $71,884,058. F-14




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##### Table of Contents



At December 31, 2003, scheduled amortization and maturities of
indebtedness for the next five years and thereafter follows: Year
    
    Amount2004
    
    $
    908,5032005
    
    
    992,2872006
    
    
    5,065,5192007
    
    
    1,144,2872008
    
    
    9,390,741Thereafter
    
    
    54,382,722$
    71,884,059
 8. 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, 2003, 2002, and 2001: December 31,2003
    
    2002
    
    2001Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    (5,520
    )State
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    
    (6,000
    )Deferred:Federal
    
    
    (126,060
    )
    
    
    (333,498
    )
    
    
    286,125State
    
    
    (18,009
    )
    
    
    (47,643
    )
    
    
    40,875(144,069
    )
    
    
    (381,141
    )
    
    
    327,000Net tax expense
(benefit)
    
    $
    (144,069
    )
    
    $
    (381,141
    )
    
    $
    321,000
 Differences in income taxes at the statutory rate and the Companys actual
provision for 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 and 2001 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, 2003 and 2002 consists of the
following components: December 31,2003
    
    2002Deferred tax asset
    
    $
    517,557
    
    
    $
    326,167Less Valuation Allowance
    
    
    (114,000
    )
    
    
    Total Deferred Tax Asset
    
    
    403,557
    
    
    
    326,167Deferred tax liability
    
    
    (106,099
    )
    
    
    (172,778
    )Net deferred tax asset
    
    $
    297,458
    
    
    $
    153,389
 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. F-15




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##### Table of Contents



In assessing the realizability 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, 2003, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $1,239,000 which are
available to offset future federal and state taxable income, if any, through
2023. 9. 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. 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. Up to 800,000 common shares are available for issuance under the stock
plan. On the effective date of our initial public offering, options for an
aggregate of 116,000 common shares were granted to our executive officers (two
individuals, who were granted 12,000 options, have since left the Company and
forfeited their options), and options for 2,000 common shares were granted to
each of our non-employee trustees (Messrs. Lanham, Jacobson, Maraman, Farris,
Tobias and Zahler). On December 19, 2002, options for an aggregate of 11,500
common shares were granted to certain executive officers. On March 19, 2003,
options for 6,000 common shares were granted to Mr. Sweet, one of our executive
officers. On August 5, 2003, options for an aggregate of 111,000 common shares
were granted to our executive officers and options for 2,000 common shares were
granted to each of our non-employee trustees (Messrs. Lanham, Jacobson,
Maraman, Farris, and Zahler). On October 23, 2003, Mr Goldsmith, upon joining
the Board was granted an option to purchase 2,000 common shares. All options 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. At December 31, 2003 and 2002 options fully vested and
exercisable amounted to 145,000 and 54,900, respectively, with a weighted
average exercise price of $12. There were a total of 256,500 and 139,500 options outstanding at December
31, 2003 and 2002, respectively, with a weighted average exercise price of $12.
12,000 options were forfeited as of December 31, 2003. 10. 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, 2003 and the period August 16,
2002 through December 31, 2002 amounted to $32,267 and $10,881, respectively. 11. LEASING F-16




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##### Table of Contents



The following table displays the Companys portfolio of in-service leases, which contain escalation provisions and 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. At December 31, 2003,
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: 2004
    
    $
    17,042,7422005
    
    
    14,603,1532006
    
    
    12,583,4532007
    
    
    11,521,3472008
    
    
    10,765,656Thereafter
    
    
    69,918,604
 12. 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 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. Non segment assets to reconcile to total assets consist of corporate
assets including cash, deferred financing costs and other assets. The Company assesses and measures segment operating results based on
industry performance measures 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. Interest expense and
other non property specific revenues and expenses are not allocated to
individual segments in determining the Companys performance measure. The revenues and FFO for each of the reportable segments for the
three-years ended December 31, 2003 and the assets for each of the reportable
segments as of December 31, 2003 and December 31, 2002, are summarized as
follows: YEARS ENDED DECEMBER 31,2003
    
    2002
    
    2001(Company)
    
    (Combined)
    
    (Predecessor)REVENUESRental Operations:Rental Income
    
    $
    14,029,245
    
    
    
    2,274,130
    
    
    
    Service Operations:Development and Project
Management Fees
    
    
    3,660,696
    
    
    
    11,704,475
    
    
    
    4,568,284Consolidated Revenue
    
    $
    17,689,941
    
    
    $
    13,978,605
    
    
    $
    4,568,284
 F-17




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##### Table of Contents



YEARS ENDED DECEMBER 31,2003
    
    2002
    
    2001(Company)
    
    (Combined)
    
    (Predecessor)FUNDS FROM OPERATIONRental Operations
    
    
    11,312,082
    
    
    
    1,986,416
    
    
    
    Service Operations
    
    
    (459,346
    )
    
    
    627,246
    
    
    
    2,785,403Total Segment FFO
    
    
    10,852,736
    
    
    
    2,613,662
    
    
    
    2,785,403Non Segment FFO:Interest Income (Expense), net
    
    
    (3,302,153
    )
    
    
    (49,260
    )
    
    
    (22,115
    )General and Administrative
Expenses
    
    
    (2,693,805
    )
    
    
    (3,115,768
    )
    
    
    (2,475,510
    )Other Expenses
    
    
    (249,581
    )
    
    
    (80,039
    )
    
    
    (18,148
    )Loss on abandoned Due Diligence Costs
    
    
    (208,922
    )
    
    
    
    
    
    
    Interest Rate Swap
    
    
    142,155
    
    
    
    (231,818
    )
    
    
    Income Tax Benefit
    
    
    144,069
    
    
    
    381,141
    
    
    
    (321,000
    )Minority Interest in Net Income
    
    
    (109,178
    )
    
    
    (9,003
    )
    
    
    Minority Interest Share of Depreciation
and Amortization
    
    
    (216,204
    )
    
    
    
    
    
    
    Consolidated FFO
    
    
    4,359,117
    
    
    
    (491,085
    )
    
    
    (51,370
    )Depreciation and Amortization
    
    
    (3,327,307
    )
    
    
    (481,256
    )
    
    
    Minority Interest Share of Depreciation
and Amortization
    
    
    216,204
    
    
    
    
    
    
    
    Net Income Available for Common
Shareholders
    
    
    1,248,014
    
    
    
    (972,341
    )
    
    
    (51,370
    )
 DECEMBER 31,
    
    DECEMBER 31,2003
    
    2002ASSETSRental Operations
    
    $
    167,052,368
    
    
    $
    64,486,193Service Operations (HADC)
    
    
    1,112,039
    
    
    
    2,229,152Total Segment Assets
    
    
    168,164,407
    
    
    
    66,715,345Non Segment Assets
    
    
    19,728,106
    
    
    
    8,549,542Consolidated Assets
    
    $
    187,892,513
    
    
    $
    75,264,887
 13. SUBSEQUENT EVENTS Acquisition of Medical Office Building in Voorhees, New Jersey: On January 28, 2004, the Company completed the purchase of the $32.0
million medical office building in Voorhees, NJ, by assuming $23.3 million of
mortgage debt on the property with the balance of the purchase coming from
proceeds from the common share offering completed on December 22, 2003. Acquisition of Medical Office Building in Lewisville, Texas: On January 28, 2004, the Company completed the purchase of the $7.0
million medical office building in Lewisville, TX, using proceeds from the
common share offering completed on December 22, 2003. The seller of the two properties mentioned above owns additional specialty
medical properties. If such seller offers the Company the opportunity prior to
July 1, 2004 to purchase other of its specialty medical properties for an
aggregate purchase price of between $100 million and $110 million (based on the
properties net operating income) and we fail to purchase such properties, such
seller will have an option to repurchase the two properties, between the second
and third anniversary of our purchase, at the purchase price we paid for such
properties. So long as the seller of the properties retains the repurchase
option, we may not sell the properties, take any material action with respect
to existing tenant leases, enter into any long-term service contracts or
encumber the properties in any way that would restrict the Companys ability to
resell the properties to the seller unencumbered. Acquisition of Medical Office Building in Coral Springs, Florida: 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 coming from a
draw on the line of credit facility. F-18




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##### Table of Contents



SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited) 2003
    
    2002Period August 16,Quarter Ended
    
    Quarter Ended
    
    Quarter Ended
    
    Quarter Ended
    
    Quarter Ended
    
    throughDecember 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,Corporate and Rental OperationsRevenues
    
    $
    4,655,397
    
    
    $
    4,368,071
    
    
    $
    3,095,232
    
    
    $
    1,910,545
    
    
    $
    1,648,638
    
    
    $
    625,492General and Administrative Expense
    
    
    697,821
    
    
    
    667,094
    
    
    
    674,045
    
    
    
    654,845
    
    
    
    546,770
    
    
    
    304,520Income from Corporate and Rental Operations
    
    
    475,566
    
    
    
    657,766
    
    
    
    339,273
    
    
    
    356,315
    
    
    
    401,461
    
    
    
    (62,385
    )Service Operations (HADC)Revenues
    
    
    448,774
    
    
    
    387,176
    
    
    
    760,685
    
    
    
    2,064,061
    
    
    
    5,237,664
    
    
    
    2,321,343General and Administrative Expense
    
    
    56,281
    
    
    
    142,576
    
    
    
    215,916
    
    
    
    409,679
    
    
    
    208,063
    
    
    
    363,746Income (Loss) from Service Operations (HADC)
    
    
    (33,356
    )
    
    
    (67,746
    )
    
    
    (234,617
    )
    
    
    (311,627
    )
    
    
    (496,250
    )
    
    
    (51,954
    )Consolidated Net Income (Loss) Available for Common Shares
    
    $
    450,108
    
    
    $
    554,914
    
    
    $
    98,429
    
    
    $
    144,563
    
    
    $
    136,045
    
    
    $
    (92,784
    )Basic and Diluted Income (Loss) Per Common Share
    
    $
    0.07
    
    
    $
    0.10
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    (0.02
    )Weighted Average Common Shares
    
    
    6,154,259
    
    
    
    5,691,710
    
    
    
    5,691,710
    
    
    
    5,691,710
    
    
    
    5,691,710
    
    
    
    5,691,710
 F-19




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##### Table of Contents



SCHEDULE III WINDROSE MEDICAL PROPERTIES TRUST
REAL ESTATE AND ACCUMULATED
DEPRECIATION
DECEMBER 31, 2003
(IN THOUSANDS) Cost
    
    Gross Book Value 12/31/2003Initial Cost
    Capitalized
    
    Land /Geographical
    
    Building
    
    
    
    
    
    
    
    Subsequent to
    
    LandDevelopment
    
    Location
    
    Type
    
    Encumbrance
    
    Land
    
    Building
    
    Acquisition
    
    Improvement
    
    Buildings / TI
    
    Total310 Building
    
    Nashville, TN
    
    Medical Office
    
    $
    
    
    
    $
    591
    
    
    $
    5,246
    
    
    $
    
    
    
    $
    591
    
    
    $
    5,246
    
    
    $
    5,837BuildingElm Street Professional Plaza
    
    Reno, NV
    
    Medical Office
    
    
    9,750
    
    
    
    1,297
    
    
    
    10,739
    
    
    
    
    
    
    
    1,297
    
    
    
    10,739
    
    
    
    12,036BuildingGateway East Medical Office Building
    
    El Paso, TX
    
    Medical OfficeBuilding
    
    
    5,917
    
    
    
    796
    
    
    
    7,627
    
    
    
    
    
    
    
    796
    
    
    
    7,627
    
    
    
    8,423(7852 Gateway Boulevard)(7878 Gateway Boulevard)
(7888 Gateway Boulevard)Methodist Medical Building
    
    Sacramento, CA
    
    Medical Office
    
    
    5,407
    
    
    
    0
    
    
    
    9,225
    
    
    
    
    
    
    
    0
    
    
    
    9,225
    
    
    
    9,225(8120 Timberlake Way)
    
    
    
    BuildingMorningside Professional Plaza
    
    Port St. Lucie, FL
    
    Medical Office
    
    
    (1
    )
    
    
    499
    
    
    
    4,333
    
    
    
    
    
    
    
    499
    
    
    
    4,333
    
    
    
    4,832BuildingMount Vernon Medical Center
    
    Atlanta, GA
    
    Medical Office
    
    
    14,853
    
    
    
    2,229
    
    
    
    21,585
    
    
    
    
    
    
    
    2,229
    
    
    
    21,585
    
    
    
    23,814BuildingPark Medical Center
    
    Charlotte, NC
    
    Medical Office
    
    
    3,854
    
    
    
    559
    
    
    
    5,223
    
    
    
    20
    
    
    
    559
    
    
    
    5,243
    
    
    
    5,802(10512 Park Road)
    
    
    
    BuildingPartell Medical Center
    
    Las Vegas, NV
    
    Medical Office
    
    
    4,940
    
    
    
    1,333
    
    
    
    6,318
    
    
    
    
    
    
    
    1,333
    
    
    
    6,318
    
    
    
    7,651(2870 S. Maryland Pkwy)
    
    
    
    BuildingRush-Copley Medical Office Building
    
    Aurora, IL
    
    Medical OfficeBuilding
    
    
    4,000
    
    
    
    661
    
    
    
    5,226
    
    
    
    
    
    
    
    661
    
    
    
    5,226
    
    
    
    5,887Sierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    (1
    )
    
    
    1,834
    
    
    
    11,110
    
    
    
    
    
    
    
    1,834
    
    
    
    11,110
    
    
    
    12,944(2300-2316 W. Charleston Blvd.)
    
    
    
    Treatment andDiagnosticFacilitySierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    8,924
    
    
    
    1,747
    
    
    
    12,147
    
    
    
    
    
    
    
    1,747
    
    
    
    12,147
    
    
    
    13,894(4475 S. Eastern Sierra)
    
    
    
    Treatment andDiagnosticFacilitySierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    (1
    )
    
    
    343
    
    
    
    10,207
    
    
    
    
    
    
    
    343
    
    
    
    10,207
    
    
    
    10,550(888 S. Rancho Sierra)
    
    
    
    Treatment andDiagnosticFacilityStone Oak Physicians Plaza
    
    San Antonio, TX
    
    Medical Office
    
    
    7,113
    
    
    
    1,103
    
    
    
    10,512
    
    
    
    
    
    
    
    1,103
    
    
    
    10,512
    
    
    
    11,615(Plaza I 19016 Stone Oak Parkway)
    
    
    
    Building(Plaza II 540 Stone Oak Parkway)Tomball Professional Atrium Building
    
    Tomball, TX
    
    Medical OfficeBuilding
    
    
    3,220
    
    
    
    513
    
    
    
    4,403
    
    
    
    
    
    
    
    513
    
    
    
    4,403
    
    
    
    4,916Urology Center of Florida
    
    Ocala, FL
    
    Ambulatory
    
    
    (1
    )
    
    
    486
    
    
    
    4,212
    
    
    
    
    
    
    
    486
    
    
    
    4,212
    
    
    
    4,698Surgery Center /Physician GroupClinicUrology
Center of the South(1325 Wolf Park Drive)
    
    Germantown, TN
    
    Ambulatory
    
    
    (1
    )
    
    
    2,640
    
    
    
    7,625
    
    
    
    212
    
    
    
    2,640
    
    
    
    7,837
    
    
    
    10,477Surgery Center /Physician GroupClinicWest Pearland Professional Center
    
    Pearland, TX
    
    Medical Office
    
    
    2,631
    
    
    
    381
    
    
    
    3,637
    
    
    
    
    
    
    
    381
    
    
    
    3,637
    
    
    
    4,018BuildingWinn Way
    
    Decatur, GA
    
    Medical Office
    
    
    1,275
    
    
    
    180
    
    
    
    1,419
    
    
    
    
    
    
    
    180
    
    
    
    1,419
    
    
    
    1,599BuildingTotals
    
    
    
    
    
    $
    71,884
    
    
    $
    17,192
    
    
    $
    140,794
    
    
    $
    232
    
    
    $
    17,192
    
    
    $
    141,026
    
    
    $
    158,218
   F-20




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##### Table of Contents



[Continued from above table, first column(s) repeated] Geographical
    
    Building
    
    Accumulated
    
    Year
    
    Year
    
    DepreciableDevelopment
    
    Location
    
    Type
    
    Depreciation
    
    Constructed
    
    Acquired
    
    Life310 Building
    
    Nashville, TN
    
    Medical Office
    
    $
    81
    
    
    
    1986
    
    
    
    2003
    
    
    
    40BuildingElm Street Professional Plaza
    
    Reno, NV
    
    Medical Office
    
    
    1
    
    
    
    1991
    
    
    
    2003
    
    
    
    40BuildingGateway East Medical Office Building
    
    El Paso, TX
    
    Medical Office
    
    
    114
    
    
    
    1982
    
    
    
    2003
    
    
    
    40(7852 Gateway Boulevard)
    
    
    
    Building(7878 Gateway Boulevard)
(7888 Gateway Boulevard)Methodist Medical Building
    
    Sacramento, CA
    
    Medical Office
    
    
    8
    
    
    
    1990
    
    
    
    2003
    
    
    
    40(8120 Timberlake Way)
    
    
    
    BuildingMorningside Professional Plaza
    
    Port St. Lucie, FL
    
    Medical Office
    
    
    69
    
    
    
    1994/1998
    
    
    
    2003
    
    
    
    40BuildingMount Vernon Medical Center
    
    Atlanta, GA
    
    Medical Office
    
    
    318
    
    
    
    1992
    
    
    
    2003
    
    
    
    40BuildingPark Medical Center
    
    Charlotte, NC
    
    Medical Office
    
    
    145
    
    
    
    1988
    
    
    
    2002
    
    
    
    40(10512 Park Road)
    
    
    
    BuildingPartell Medical Center
    
    Las Vegas, NV
    
    Medical Office
    
    
    184
    
    
    
    1991
    
    
    
    2002
    
    
    
    40(2870 S. Maryland Pkwy)
    
    
    
    BuildingRush-Copley Medical Office Building
    
    Aurora, IL
    
    Medical Office
    
    
    52
    
    
    
    1996
    
    
    
    2003
    
    
    
    40BuildingSierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    380
    
    
    
    1982/1985/1998
    
    
    
    2002
    
    
    
    40(2300-2316 W. Charleston Blvd.)
    
    
    
    Treatment andDiagnosticFacilitySierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    416
    
    
    
    1982/1985/1998
    
    
    
    2002
    
    
    
    40(4475 S. Eastern Sierra)
    
    
    
    Treatment andDiagnosticFacilitySierra Health Services
    
    Las Vegas, NV
    
    Outpatient
    
    
    349
    
    
    
    1982/1985/1998
    
    
    
    2002
    
    
    
    40(888 S. Rancho Sierra)
    
    
    
    Treatment andDiagnosticFacilityStone Oak Physicians Plaza
    
    San Antonio, TX
    
    Medical Office
    
    
    157
    
    
    
    1999/2000
    
    
    
    2003
    
    
    
    40(Plaza I 19016 Stone Oak Parkway)
    
    
    
    Building(Plaza II 540 Stone Oak Parkway)Tomball Professional Atrium Building
    
    Tomball, TX
    
    Medical Office
    
    
    68
    
    
    
    1982
    
    
    
    2003
    
    
    
    40BuildingUrology Center of Florida
    
    Ocala, FL
    
    Ambulatory
    
    
    66
    
    
    
    1991
    
    
    
    2003
    
    
    
    40Surgery Center /Physician GroupClinicUrology Center of the South
    
    Germantown, TN
    
    Ambulatory
    
    
    256
    
    
    
    2002
    
    
    
    2002
    
    
    
    40(1325 Wolf Park Drive)
    
    
    
    Surgery Center /Physician GroupClinicWest Pearland Professional Center
    
    Pearland, TX
    
    Medical Office
    
    
    54
    
    
    
    2000
    
    
    
    2003
    
    
    
    40BuildingWinn Way
    
    Decatur, GA
    
    Medical Office
    
    
    22
    
    
    
    1971/1998
    
    
    
    2003
    
    
    
    40BuildingTotals
    
    
    
    
    
    $
    2,740
 (1) On December 30, 2003, the Company increased its syndicated line
of credit, led by Huntington National Bank in Columbus, Ohio, to $70
million. This facility is secured by first mortgages on three of the
companys four outpatient treatment centers in Las Vegas, Nevada, the
Urology Center of the South in Memphis, Tennessee, Morningside
Professional Plaza in Port St. Lucie, Florida, and the Urology Center
of Florida in Ocala, Florida. F-21




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##### Table of Contents



Real Estate Asset Value and Accumulated DepreciationGross Real Estate Asset
    
    Accumulated Depreciation2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    
    
    
    
    2001Balance at beginning of year:
    
    $
    61,086,357
    
    
    $
    
    
    
    $
    
    
    
    $
    407,018
    
    
    $
    
    
    
    
    
    
    
    $
    Acquisitions
    
    
    97,132,512
    
    
    
    61,086,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation/Amortization Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,333,263
    
    
    
    407,018
    
    
    
    
    
    
    
    Balance at end of year
    
    $
    158,218,869
    
    
    $
    61,086,357
    
    
    $
    
    
    
    $
    2,740,281
    
    
    $
    407,018
    
    
    
    
    
    
    $
    
 F-22




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##### 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.*10.04
    
    Contribution Agreement dated May 23, 2002 among Windrose International, LLC, Med
Properties Management Group, LLC, Hospital Affiliates Development Corporation, Med
Properties Asset Group LLC, Fred S. Klipsch, O.B. McCoin, Robin Barksdale, Charles
Lanham, Frederick L. Farrar, Mike Klipsch, Steve Klipsch, Windrose Medical
Properties, L.P. and Windrose Medical Properties Trust.*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
    
    Subordinated Promissory Note dated September 28, 2001 from Windrose International L.L.C.
to Fred Klipsch.*10.11
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International, L.L.C. to
Klipsch Audio, Inc.*10.12
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Robin P. Barksdale.*10.13
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Frederick L. Farrar.*10.14
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Fred S. Klipsch.*10.15
    
    Promissory Note dated May 1, 1999 from Hospital Affiliates Development Corporation to
Athena Development.*10.16
    
    Subordinated Promissory Note dated May 11, 2002 from Windrose International L.L.C. to
Charles Lanham.*10.17
    
    Promissory Note payable by Alliance Design Group to Hospital Affiliates Development
Corporation.*10.18
    
    Secured Revolving Credit Agreement, dated September 27, 2002, by and between Windrose
Medical Properties, L.P. and The Huntington National Bank.*10.19
    
    Credit Note, dated September 27, 2002, from Windrose Medical Properties, L.P. to The
Huntington National Bank.*10.20
    
    Purchase and Sale Agreement, dated November 19, 2003, by and between Cooper Holding, L.L.C. and Windrose Medical Properties, L.P.***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.****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.****
 *
    
    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.




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##### Table of Contents



**
    
    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.