UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended March 31, 2007

OR

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

For the transition period from                      to                     

Commission file number 001-32559

MEDICAL PROPERTIES TRUST, INC.

MARYLAND		20-0191742
(State or other jurisdiction		(I. R. S. Employer
of incorporation or organization)		Identification No.)
1000 URBAN CENTER DRIVE, SUITE 501
BIRMINGHAM, AL		35242
(Address of principal executive offices)		(Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 969-3755

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

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

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 10, 2007, the registrant had 48,968,062 shares of common stock, par value $.001, outstanding.

 

 

MEDICAL PROPERTIES TRUST, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

Table of Contents

		Page
PART I – FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2007 and December 31, 2006
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
Notes to Condensed Consolidated Financial Statements
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Controls and Procedures
PART II – OTHER INFORMATION
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
SIGNATURES
INDEX TO EXHIBITS
EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
EX-32 CERTIFICATION OF CEO & CFO
EX-99.1 CONSOLIDATED FINANCIAL STATEMENTS OF VIBRA HEALTHCARE, LLC AS OF DECEMBER 31, 2006

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

		March 31, 2007				December 31, 2006
		(Unaudited)
Assets
Real estate assets
Land, buildings and improvements, and intangible lease assets		$	440,251,031			$	437,367,722
Construction in progress			20,663,922				57,432,264
Mortgage loans			225,000,000				105,000,000
Real estate held for sale			—				63,324,381
Gross investment in real estate assets			685,914,953				663,124,367
Accumulated depreciation and amortization			(12,595,219	)			(12,056,422	)
Net investment in real estate assets			673,319,734				651,067,945
Cash and cash equivalents			31,996,738				4,102,873
Interest and rent receivable			13,592,198				11,893,513
Straight-line rent receivable			13,370,926				12,686,976
Other loans			62,252,787				45,172,830
Other assets of discontinued operations			7,595,330				6,890,919
Other assets			11,821,647				12,941,689
Total Assets		$	813,949,360			$	744,756,745
Liabilities and Stockholders’ Equity
Liabilities
Debt		$	274,167,107			$	304,961,898
Debt – real estate held for sale			—				43,165,650
Accounts payable and accrued expenses			35,676,865				30,386,858
Deferred revenue			17,244,367				14,615,609
Lease deposits and other obligations to tenants			7,768,823				6,853,759
Total liabilities			334,857,162				399,983,774
Minority interests			1,413,508				1,051,835
Stockholders’ equity
Preferred stock, $0.001 par value. Authorized 10,000,000 shares; no shares outstanding			—				—
Common stock, $0.001 par value. Authorized 100,000,000 shares; issued and outstanding - 48,915,842 shares at March 31, 2007, and 39,585,510 shares at December 31, 2006			48,916				39,586
Additional paid in capital			493,776,844				356,678,018
Distributions in excess of net income			(16,147,070	)			(12,996,468	)
Total stockholders’ equity			477,678,690				343,721,136
Total Liabilities and Stockholders’ Equity		$	813,949,360			$	744,756,745

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

		For the Three Months Ended March 31,
		2007				2006
Revenues
Rent billed		$	11,937,716			$	7,267,219
Straight-line rent			683,950				998,307
Interest income from loans			5,436,682				2,492,146
Total revenues			18,058,348				10,757,672
Expenses
Real estate depreciation and amortization			2,539,865				1,434,562
General and administrative			4,637,681				2,516,171
Total operating expenses			7,177,546				3,950,733
Operating income			10,880,802				6,806,939
Other income (expense)
Interest income			178,215				252,279
Interest expense			(5,013,234	)			—
Net other (expense) income			(4,835,019	)			252,279
Income from continuing operations			6,045,783				7,059,218
Income from discontinued operations			4,158,169				918,392
Net income		$	10,203,952			$	7,977,610
Net income per common share – basic
Income from continuing operations		$	0.14			$	0.18
Income from discontinued operations			0.10				0.02
Net income		$	0.24			$	0.20
Weighted average shares outstanding — basic			42,823,619				39,428,071
Net income per share – diluted
Income from continuing operations		$	0.14			$	0.18
Income from discontinued operations			0.10				0.02
Net income		$	0.24			$	0.20
Weighted average shares outstanding — diluted			43,070,303				39,501,723

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

		For the Three Months Ended March 31,
		2007				2006
Operating activities
Net income		$	10,203,952			$	7,977,610
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			2,672,133				1,792,462
Straight-line rent revenue			(683,950	)			(1,301,457	)
Share-based compensation			795,247				605,558
Gain on sale of real estate			(4,061,626	)			—
Other adjustments			1,193,375				3,415,461
Net cash provided by operating activities			10,119,131				12,489,634
Investing activities
Real estate acquired			(7,740,920	)			(7,003,377	)
Principal received on loans receivable			7,730,359				—
Proceeds from sale of real estate			69,801,411				—
Investment in loans receivable			(94,563,502	)			(310,000	)
Construction in progress			(9,579,186	)			(26,699,437	)
Net cash used for investing activities			(34,351,838	)			(34,012,814	)
Financing activities
Additions to debt			77,700,000				4,026,393
Payments of debt			(151,862,009	)			(29,000,000	)
Distributions paid			(10,894,247	)			(7,194,432	)
Sale of common stock			136,101,634				—
Other financing activities			1,081,194				—
Net cash provided by (used for) financing activities			52,126,572				(32,168,039	)
Increase (decrease) in cash and cash equivalents for period			27,893,865				(53,691,219	)
Cash and cash equivalents at beginning of period			4,102,873				59,115,832
Cash and cash equivalents at end of period		$	31,996,738			$	5,424,613
Interest paid, including capitalized interest of $967,303 in 2007 and $1,129,417 in 2006		$	5,351,450			$	1,419,040
Supplemental schedule of non-cash investing activities
Real estate converted to mortgage loans receivable		$	48,871,850			$	—
Construction in progress transferred to land and building			44,229,175				—
Other non-cash investing activities			1,313,765				1,898,423
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid		$	13,343,279			$	8,411,563
Other non-cash financing activities			212,935				219,775

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Organization

Medical Properties Trust, Inc., a Maryland corporation (the Company), was formed on August 27, 2003 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate. The Company’s operating partnership subsidiary, MPT Operating Partnership, L.P. (the Operating Partnership) through which it conducts all of its operations, was formed in September 2003. Through another wholly owned subsidiary, Medical Properties Trust, LLC, the Company is the sole general partner of the Operating Partnership. The Company presently owns directly all of the limited partnership interests in the Operating Partnership.

The Company’s primary business strategy is to acquire and develop real estate and improvements, primarily for long term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. The Company manages its business as a single business segment as defined in Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information.

From the time of the Company’s initial capitalization in April 2004 through completion of the follow-on offering in the first quarter of 2007, the Company has sold approximately 48.0 million shares of common stock and realized net proceeds of approximately $494.5 million. The Company has also issued $125.0 million in fixed rate term notes and $138.0 million in fixed rate exchangeable notes. At May 1, 2007, the Company has in place a $150.0 million secured revolving credit facility with an available borrowing base of approximately $85.6 million.

2. Summary of Significant Accounting Policies

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation: Property holding entities and other subsidiaries of which the Company owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest are consolidated. All inter-company balances and transactions are eliminated. For entities in which the Company owns less than 100% of the equity interest, the Company consolidates the property if it has the direct or indirect ability to make decisions about the entities’ activities based upon the terms of the respective entities’ ownership agreements. For entities in which the Company owns less than 100% and does not have the direct or indirect ability to make decisions but does exert significant influence over the entities’ activities, the Company records its ownership in the entity using the equity method of accounting.

The Company periodically evaluates all of its transactions and investments to determine if they represent variable interests in a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003) (FIN 46-R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. If the Company determines that it has a variable interest in a variable interest entity, the Company determines if it is the primary beneficiary of the variable interest entity. The Company consolidates each variable interest entity in which the Company, by virtue of its transactions with or investments in the entity, is considered to be the primary beneficiary. The Company re-evaluates its status as primary beneficiary when a variable interest entity or potential variable interest entity has a material change in its variable interests.

Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, including rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

New Accounting Pronouncements: In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109 Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 on January 1, 2007. No amounts were recorded for unrecognized tax benefits or related interest expense and penalties as a result of the implementation of FIN No. 48. The taxable periods ending December 31, 2004 through December 31, 2006 remain open to examination by the Internal Revenue Service and the tax authorities of significant jurisdictions in which the Company does business.

Reclassifications: Certain reclassifications have been made to the consolidated financial statements to conform to the 2007 consolidated financial statement presentation. These reclassifications have no impact on stockholders’ equity or net income.

3. Real Estate and Lending Activities

In January, 2007, the Company completed the sale of a general acute care hospital and attached medical office building (MOB) located in Houston, TX for cash proceeds which were used to reduce debt. The Company has retained funds sufficient to pay the minority interest holders for their investment and earnings in the MOB partnership.

In the three months ended March 31, 2007, the Company sold two hospital properties leased to one operator. In conjunction with the sales, the Company made two mortgage loans totaling $120 million on the same properties to the same operator. In addition, the Company funded the remaining contingent purchase prices aggregating $20 million related to five other hospitals leased to the same operator. These amounts, which resulted in an aggregate investment in the five hospitals of approximately $110 million, were loaned to the operator pursuant to terms similar to the related lease terms. The loans require the payment of interest only during their 15 year terms with principal due in full at maturity. Interest is paid monthly and increases each year based on the annual change in the consumer price index. The loans may be prepaid under certain specified conditions.

For the three months ended March 31, 2007 and 2006, revenue from Vibra Healthcare, LLC accounted for 36.6% and 64.3%, respectively, of total revenue. For the three months ended March 31, 2007 and 2006, revenue from affiliates of Prime Healthcare Services, Inc. accounted for 19.6% and 18.8%, respectively, of total revenue.

4. Debt

The following is a summary of debt:

		As of March 31,								As of December 31,
		2007								2006
		Balance				Interest Rate				Balance				Interest Rate
Revolving credit facility		$	15,015,897				7.670	%		$	45,996,359				7.800	%
Senior unsecured notes — fixed rate through July and October, 2011, due July and October, 2016			125,000,000				7.333% - 7.871	%			125,000,000				7.333% -7.871	%
Exchangeable senior notes due November, 2011			134,151,210				6.125	%			133,965,539				6.125	%
		$	274,167,107							$	304,961,868

As of March 31, 2007, principal payments due for our senior unsecured and exchangeable notes were as follows:

2007		$	—
2008			—
2009			—
2010			—
2011			134,151,210
Thereafter			125,000,000
Total		$	259,151,210

5. Common Stock

In the three months ended March 31, 2007, the Company completed the sale of 12,217,900 shares of common stock at a price of $15.60 per share, less underwriting commissions. Of the 12 million shares sold, the underwriters borrowed from third parties and sold 3,000,000 shares of Company common stock in connection with forward sale agreements between the Company and affiliates of the underwriters (the “forward purchasers”). The Company expects to settle the forward sale agreements and receive proceeds, subject to certain adjustments, from the sale of those shares only upon one or more future physical settlements of the forward sale agreements on a date or dates specified by the Company by February 28, 2008. The Company may elect to settle the forward sale agreements in cash, in which case the Company may not receive any proceeds and may owe cash to the forward purchasers. Cash settlement is based on the difference between the then current forward price and the current market price of the total shares remaining to be settled under the forward sale agreements.

6. Stock Awards

The Company has adopted the Medical Properties Trust, Inc. 2004 Amended and Restated Equity Incentive Plan (the Equity Incentive Plan) which authorizes the issuance of options to purchase shares of common stock, restricted stock awards, restricted stock units, deferred stock units, stock appreciation rights and performance units. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. At March 31, 2007, the Company has 3,472,330 shares of common stock available for awards under the Equity Incentive Plan.
In the three month period ended March 31, 2007, the Compensation Committee of the Board of Directors awarded 134,000 shares of restricted stock to management and other employees of the Company. The awards vest over a five year period based on service criteria. The Company recorded non-cash expense for share based compensation of approximately $795,000 and $606,000 in the three month periods ended March 31, 2007 and 2006, respectively.

7. Discontinued Operations

In 2006, the Company terminated leases for a hospital and medical office building (“MOB”) complex and re-possessed the real estate. In January, 2007, the Company sold the hospital and MOB complex for a sales price of approximately $71.7 million and recorded a gain of approximately $4.1 million, which is reported in results from discontinued operations. During the period from the lease termination to the date of sale, the hospital was leased to and operated by a third party operator under contract to the hospital. The Company has substantially funded through loans the working capital requirements of the operator pending the operator’s collection of patient receivables from Medicare and other third party payors. The accompanying financial statements include provisions to reduce such loans to their estimated net realizable value.

The following table presents the results of discontinued operations for the three months ended March 31, 2007 and 2006:

		For the Three Months
		Ended March 31,
		2007				2006
Revenues		$	254,116			$	1,934,595
Net profit			4,158,169				918,392
Earnings per share — basic and diluted		$	0.10			$	0.02

7. Earnings Per Share

The following is a reconciliation of the weighted average shares used in net income per common share to the weighted average shares used in net income per common share – assuming dilution for the three months ended March 31, 2007 and 2006, respectively:

		For the Three Months
		Ended March 31,
		2007				2006
Weighted average number of shares issued and outstanding			42,781,098				39,404,454
Vested deferred stock units			42,521				23,617
Weighted average shares — basic			42,823,619				39,428,071
Common stock warrants and options			246,684				73,652
Weighted average shares — diluted			43,070,303				39,501,723

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

The following discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the consolidated financial statements of Medical Properties Trust, Inc. and notes thereto contained in this Form 10-Q and the financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

Forward-Looking Statements.

This report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended. Such factors include, among others, the following:

	•		National and local economic, business, real estate and other market conditions;
	•		The competitive environment in which the Company operates;
	•		The execution of the Company’s business plan;
	•		Financing risks;
	•		Acquisition and development risks;
	•		Potential environmental and other liabilities;
	•		Other factors affecting real estate industry generally or the healthcare real estate industry in particular;
	•		Our ability to attain and maintain our status as a REIT for federal and state income tax purposes;
	•		Our ability to attract and retain qualified personnel; and,
	•		Federal and state healthcare regulatory requirements.

Overview

We were incorporated under Maryland law on August 27, 2003 primarily for the purpose of investing in and owning net-leased healthcare facilities across the United States. We have operated as a real estate investment trust (“REIT”) since April 6, 2004, and accordingly, elected REIT status upon the filing in September 2005 of our calendar year 2004 Federal income tax return. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases. We also make mortgage loans to healthcare operators secured by their real estate assets. We selectively make loans to certain of our operators through our taxable REIT subsidiary, the proceeds of which are used for acquisitions and working capital.

At March 31, 2007, we owned 20 operating healthcare facilities and held five mortgage loans secured by five other properties. In addition, we were in the process of developing an additional healthcare facility that was not yet in operation. We had one acquisition loan outstanding, the proceeds of which our tenant used for the acquisition of six hospital operating companies. The 21 facilities we owned and the five facilities on which we had made mortgage loans were in ten states, had a carrying cost of approximately $685.9 million and comprised approximately 84.0% of our total assets. Our acquisition and other loans of approximately $62.3 million represented approximately 7.6% of our total assets. We do not expect such loan assets at any time to exceed 20% of our total assets.

At May 1, 2007, we had 20 employees. Over the next 12 months, we expect to add four to six additional employees as we acquire new properties and manage our existing properties and loans.

Key Factors that May Affect Our Operations

Our revenues are derived from rents we earn pursuant to the lease agreements with our tenants and from interest income from loans to our tenants and other facility owners. Our tenants operate in the healthcare industry, generally

providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our lease and loan portfolio.

Key factors that we consider in underwriting prospective tenants and in monitoring the performance of existing tenants include the following:

	•		the historical and prospective operating margins (measured by a tenant’s earnings before interest, taxes, depreciation, amortization and facility rent) of each tenant and at each facility;
	•		the ratio of our tenants’ operating earnings both to facility rent and to facility rent plus other fixed costs, including debt costs;
	•		trends in the source of our tenants’ revenue, including the relative mix of Medicare, Medicaid/MediCal, managed care, commercial insurance, and private pay patients; and
	•		the effect of evolving healthcare regulations on our tenants’ profitability.

Certain business factors, in addition to those described above that directly affect our tenants, will likely materially influence our future results of operations. These factors include:

	•		trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for their real estate assets instead of financing their real estate assets through lease structures;
	•		unforeseen changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;
	•		reductions in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants’ profitability and our lease rates, and;
	•		competition from other financing sources.

CRITICAL ACCOUNTING POLICIES

In order to prepare financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates about certain types of transactions and account balances. We believe that our estimates of the amount and timing of lease revenues, credit losses, fair values and periodic depreciation of our real estate assets, stock compensation expense, and the effects of any derivative and hedging activities will have significant effects on our financial statements. Each of these items involves estimates that require us to make subjective judgments. We rely on our experience, collect historical data and current market data, and develop relevant assumptions to arrive at what we believe to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. Our accounting estimates include the following:

Revenue Recognition. Our revenues, which are comprised largely of rental income, include rents that each tenant pays in accordance with the terms of its respective lease reported on a straight-line basis over the initial term of the lease. Since some of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenues, straight-line rent that we will only receive if the tenant makes all rent payments required through the expiration of the term of the lease.

Accordingly, our management determines, in its judgment, to what extent the straight-line rent receivable applicable to each specific tenant is collectible. We review each tenant’s straight-line rent receivable on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates, and economic conditions in the area in which the facility is located. In the event that the collectibility of straight-line rent with respect to any given tenant is in doubt, we are required to record

an increase in our allowance for uncollectible accounts or record a direct write-off of the specific rent receivable, which would have an adverse effect on our net income for the year in which the reserve is increased or the direct write-off is recorded and would decrease our total assets and stockholders’ equity. At that time, we stop accruing additional straight-line rent income.

Our development projects normally allow for us to earn what we term “construction period rent”. Construction period rent accrues to us during the construction period based on the funds which we invest in the facility. During the construction period, the unfinished facility does not generate any earnings for the lessee/operator which can be used to pay us for our funds used to build the facility. In such cases, the lessee/operator pays the accumulated construction period rent over the term of the lease beginning when the lessee/operator takes physical possession of the facility. We record the accrued construction period rent as deferred revenue during the construction period, and recognize earned revenue as the construction period rent is paid to us by the lessee/operator.

We make loans to our tenants and from time to time may make construction or mortgage loans to facility owners or other parties. We recognize interest income on loans as earned based upon the principal amount outstanding. These loans are generally secured by interests in real estate, receivables, the equity interests of a tenant, or corporate and individual guarantees and are usually cross-defaulted with their leases and/or other loans. As with straight-line rent receivables, our management must also periodically evaluate loans to determine what amounts may not be collectible. Accordingly, a provision for losses on loans receivable is recorded when it becomes probable that the loan will not be collected in full. The provision is an amount which reduces the loan to its estimated net receivable value based on a determination of the eventual amounts to be collected either from the debtor or from the collateral, if any. At that time, we discontinue recording interest income on the loan to the tenant.

Investments in Real Estate. We record investments in real estate at cost, and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. While our tenants are generally responsible for all operating costs at a facility, to the extent that we incur costs of repairs and maintenance, we expense those costs as incurred. We compute depreciation using the straight-line method over the estimated useful life of 40 years for buildings and improvements, three to seven years for equipment and fixtures, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We are required to make subjective assessments as to the useful lives of our facilities for purposes of determining the amount of depreciation expense to record on an annual basis with respect to our investments in real estate improvements. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate improvements, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We have adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 requires that the operations related to facilities that have been sold, or that we intend to sell, be presented as discontinued operations in the statement of operations for all periods presented, and facilities we intend to sell be designated as “held for sale” on our balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a facility, we review the recoverability of the facility’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, from the facility’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a facility, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the facility. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate.

Purchase Price Allocation. We record above-market and below-market in-place lease values, if any, for the facilities we own which are based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any resulting capitalized above-market

lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We amortize any resulting capitalized below-market lease values as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases. Because our strategy to a large degree involves the origination of long term lease arrangements at market rates at the same time we acquire the property, we do not expect the above-market and below-market in-place lease values to be significant for many of our anticipated transactions.

We measure the aggregate value of other intangible assets to be acquired based on the difference between (i) the property valued with existing leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each targeted facility as a result of our pre-acquisition due diligence, marketing, and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which we expect to range primarily from three to 18 months, depending on specific local market conditions. Management also estimates costs to execute similar leases including leasing commissions, legal costs, and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

The total amount of other intangible assets to be acquired, if any, is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each prospective tenant’s lease and our overall relationship with that tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, and expectations of lease renewals, including those existing under the terms of the lease agreement, among other factors.

We amortize the value of in-place leases to expense over the initial term of the respective leases, which range primarily from 10 to 15 years. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense.

Accounting for Derivative Financial Investments and Hedging Activities. We expect to account for our derivative and hedging activities, if any, using SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 149, which requires all derivative instruments to be carried at fair value on the balance sheet.

Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We expect to formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We plan to review periodically the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges, if any, will be accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within stockholders’ equity. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, which we expect to affect the Company primarily in the form of interest rate risk or variability of interest rates, are considered fair value hedges under SFAS No. 133. We are not currently a party to any derivatives contracts designated as cash flow hedges.

In 2006, we entered into derivative contracts as part of our offering of Exchangeable Senior Notes (the “exchangeable notes”). The contracts are generally termed “capped call” or “call spread” contracts. These contracts are financial instruments which are separate from the exchangeable notes themselves, but affect the overall potential number of shares which will be issued by us to satisfy the conversion feature in the exchangeable notes. The

exchangeable notes can be exchanged into shares of our common stock when our stock price exceeds $16.55 per share, which is the equivalent of 60.3346 shares per $1,000 note. The number of shares actually issued upon conversion will be equivalent to the amount by which our stock price exceeds $16.55 times the 60.3346 conversion rate. The “capped call” transaction allows us to effectively increase that exchange price from $16.55 to $18.94. Therefore, our shareholders will not experience dilution of their shares from any settlement or conversion of the exchangeable notes until the price of our stock exceeds $18.94 per share rather than $16.55 per share. When evaluating this transaction, we have followed the guidance in Emerging Issues Task Force (EITF) No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. EITF No. 00-19 requires that contracts such as this “capped call” which meet certain conditions must be accounted for as permanent adjustments to equity rather than periodically adjusted to their fair value as assets or liabilities. We have evaluated the terms of these contracts and recorded this “capped call” as a permanent adjustment to stockholders’ equity in 2006.

The exchangeable notes themselves also contain the conversion feature described above. SFAS No. 133 also states that certain “embedded” derivative contracts must follow the guidance of EITF No. 00-19 and be evaluated as though they also were a “freestanding” derivative contract. Embedded derivative contracts such the conversion feature in the notes should not be treated as a financial instrument separate from the note if it meets certain conditions in EITF No. 00-19. We have evaluated the conversion feature in the exchangeable notes and have determined that it should not be reported separately from the debt.

Variable Interest Entities. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. In December 2003, the FASB issued a revision to FIN 46, which is termed FIN 46(R). FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and provides guidance on the identification of entities for which control is achieved through means other than voting rights, guidance on how to determine which business enterprise should consolidate such an entity, and guidance on when it should do so. This model for consolidation applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. An entity meeting either of these two criteria is a variable interest entity, or VIE. A VIE must be consolidated by any entity which is the primary beneficiary of the VIE. If an entity is not the primary beneficiary of the VIE, the VIE is not consolidated. We periodically evaluate the terms of our relationships with our tenants and borrowers to determine whether we are the primary beneficiary and would therefore be required to consolidate any tenants or borrowers that are VIEs. Our evaluations of our transactions indicate that we have loans receivable from two entities which we classify as VIEs. However, because we are not the primary beneficiary of these VIEs, we do not consolidate these entities in our financial statements.

Stock-Based Compensation. Prior to 2006, we used the intrinsic value method to account for the issuance of stock options under our equity incentive plan in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) became effective for our annual and interim periods beginning January 1, 2006, but had no material effect on the results of our operations. During the three month period ended March 31, 2007, we recorded $795,000 of expense for share based compensation, related to grants of restricted common stock. In 2006, we also granted performance based restricted share awards. Because these awards will vest based on the Company’s performance, we must evaluate and estimate the probability of achieving those performance targets. Any changes in these estimates and probabilities must be recorded in the period when they are changed. During 2006, we awarded 105,375 shares of restricted stock which are based solely on performance criteria over the next five years. We expect that there may be additional share based awards which will vest based on the performance rather than service criteria.

LIQUIDITY AND CAPITAL RESOURCES

As of May 1, 2007, we have approximately $18.0 million in cash and cash equivalents.

From the time of our initial capitalization in April 2004 through completion of our 2007 follow-on offering, we have sold approximately 48.0 million shares of common stock and realized net proceeds of approximately

$494.5 million. We have also issued $125.0 million in fixed rate term notes and $138.0 million in fixed rate exchangeable notes. At May 1, 2007, we have in place a $150.0 million secured revolving credit facility with an available borrowing base of approximately $85.6 million (with availability on May 1, 2007, of approximately $70 million).

We have substantially used this equity and debt capital to acquire and develop healthcare real estate, fund mortgage loans and fund other loans to healthcare operators. We believe our present capitalization provides sufficient liquidity and resources to continue executing our business plan for the foreseeable future.

Short-term Liquidity Requirements: We believe that our existing cash and temporary investments, funds available under our existing loan agreements, additional financing arrangements and cash from operations will be sufficient for us to acquire at least $200 million in additional assets, provide for working capital, and make required distributions to our stockholders through the remainder of 2007. We expect that such additional financing arrangements will include various types of new debt, including long-term, fixed-rate mortgage loans, variable-rate term loans, and construction financing facilities. Generally, we believe we will be able to finance up to approximately 50-60% of the cost of our healthcare facilities; however, there is no assurance that we will be able to obtain or maintain those levels of debt on our portfolio of real estate assets on favorable terms in the future.

Long-term Liquidity Requirements: We believe that cash flow from operating activities subsequent to 2007 will be sufficient to provide adequate working capital and make required distributions to our stockholders in compliance with our requirements as a REIT. However, in order to continue acquisition and development of healthcare facilities after 2007, we will require access to more permanent external capital, including equity capital. If equity capital is not available at a price that we consider appropriate, we may increase our debt, selectively dispose of assets, utilize other forms of capital, if available, or reduce our acquisition activity.

In the first quarter of 2007, we sold 9.2 million shares of common stock and realized net proceeds of $136.1 million. Concurrently, the underwriters borrowed from third parties and sold 3 million shares of our common stock in connection with forward sale agreements between us and affiliates of the underwriters. We did not receive any proceeds from the sale of shares of our common stock by the forward purchasers. We expect to settle the forward sale agreements and receive proceeds, subject to certain adjustments, from the sale of those shares upon one or more future physical settlements of the forward sale agreements on a date or dates specified by us by February 28, 2008. The forward sale arrangements allow us to take down the proceeds as needed at a pre-determined price, but without immediately diluting our existing shares.

Results of Operations

Three months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Net income for the three months ended March 31, 2007, was $10,203,952 compared to net income of $7,977,610 for the three months ended March 31, 2006, a 27.9% increase.

A comparison of revenues for the three month periods ended March 31, 2007 and 2006, is as follows, as adjusted in 2006 for discontinued operations:

																		Year over
						% of								% of				Year
		2007				Total				2006				Total				Change
Base rents		$	11,647,181				64.5	%		$	6,583,219				61.2	%			76.9	%
Straight-line rents			683,950				3.8	%			998,307				9.3	%			(31.5	%)
Percentage rents			138,695				0.8	%			640,708				6.0	%			(78.4	%)
Contingent rents			151,840				0.8	%			43,292				0.4	%			250.7	%
Fee income			84,858				0.5	%			54,756				0.5	%			55.0	%
Interest from loans			5,351,824				29.6	%			2,437,390				22.6	%			119.6	%
Total revenue		$	18,058,348				100.0	%		$	10,757,672				100.0	%			67.9	%

Revenue of $18,058,348 in the three months ended March 31, 2007, was comprised of rents (69.9%) and interest from loans and fee income (30.1%). In the first quarter of 2007, we owned 20 rent producing properties compared to 14 in the first quarter of 2006, which accounted for the increase in base rents. While minimum guaranteed base rent increases are included in straight-line rents, any amounts in excess of these minimums are recorded as contingent rent. The sale of the Victorville and Chino facilities and the related funding of mortgage loans in the first quarter of 2007 required the reversal of previously recorded non-cash straight-line rent receivable of approximately $1.25 million. During the first quarter of 2007, we received percentage rents of approximately $139,000 from Vibra, a $502,000 decrease from the first quarter of 2006, which is related to revisions and extensions of certain leases and loans with Vibra. Interest income from loans in the quarter ended March 31, 2007 compared to the same period in 2006 increased due to origination of four additional mortgage loans totaling $185,000,000 in the third quarter of 2006 and the first quarter of 2007. Vibra accounted for 36.6% and 64.3% of our gross revenues during the three months ended March 31, 2007 and 2006, respectively, and affiliates of Prime accounted for 19.6% and 18.8% of total revenue, respectively.

We expect our revenue to continue to increase in future quarters as a result of expected acquisitions and completion of projects currently under development. We also expect that the relative portion of our revenue that is paid by Vibra will continue to decline as a result of continued tenant diversification.

Depreciation and amortization during the first quarter of 2007, was $2,539,865, compared to $1,434,562, during first quarter of 2006, a 77.1% increase. All of this increase is related to an increase in the number of rent producing properties from 14 in the first quarter of 2006 to 20 in the first quarter 2007. We expect our depreciation and amortization expense to continue to increase commensurate with our acquisition and development activity.

General and administrative expenses in the first quarters of 2007 and 2006 totaled $4,637,681, and $2,516,171, respectively, an increase of 84.3%. During the first quarter of 2007, our Board’s Compensation Committee established new criteria for annual and other compensation of executive officers to recognize our superior total return to shareholders since our July, 2005 initial public offering including total return in 2006 of approximately 69%. This resulted in total cash bonuses to our officers of approximately $2.1 million compared to zero that was recorded as expense in the first quarter of 2006. This difference represents all of the change from 2006 to 2007. Based on the Compensation Committee’s new criteria, management estimates that expense for similar items will be approximately $525,000 in each of the second through fourth quarters of 2007.

Interest paid for the quarters ended March 31, 2007 and 2006, totaled $5,351,450 and $1,419,040, respectively. Capitalized interest for the quarters ended March 31, 2007 and 2006, totaled $967,303 and $1,129,417, respectively, resulting in interest expense (which includes amortized financing costs) for the quarter ended March 31, 2007 of $5,013,234. All interest expense for the quarter ended March 31, 2006 was capitalized as cost of development projects. Interest paid increased due to larger debt balances in 2007 compared to 2006. Capitalized interest decreased due to our one development under construction of $20.7 million at March 31, 2007, compared to three developments under construction totaling $72.6 million at March 31, 2006.

Discontinued Operations

In 2006, the Company terminated leases for a hospital and medical office building (“MOB”) complex and re-possessed the real estate. In January, 2007, the Company sold the hospital and MOB complex for a sales price of approximately $71.7 million and recorded a gain of approximately $4.1 million, which is reported in results from discontinued operations. During the period from the lease termination to the date of sale, the hospital was leased to and operated by a third party operator under contract to the hospital. The Company has substantially funded through loans the working capital requirements of the operator pending the operator’s collection of patient receivables from Medicare and other third party payors. The accompanying financial statements include provisions to reduce such loans to their net realizable value.

Reconciliation of Non-GAAP Financial Measures

Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. While we believe net income available to common stockholders, as defined by generally

accepted accounting principles (GAAP), is the most appropriate measure, our management considers FFO an appropriate supplemental measure given its wide use by and relevance to investors and analysts. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assume that the value of real estate diminishes predictably over time.

As defined by the National Association of Real Estate Investment Trusts, or NAREIT, FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute FFO in accordance with the NAREIT definition. FFO should not be viewed as a substitute measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs that could materially impact our results of operations.

The following table presents a reconciliation of FFO to net income for the three months ended March 31, 2007 and 2006:

		For the Three Months Ended
		March 31,
		2007				2006
Net income		$	10,203,952			$	7,977,610
Depreciation and amortization			2,539,865				1,434,562
Gain on sale of real estate			(4,061,626	)			—
Funds from operations — FFO		$	8,682,191			$	9,412,172

Per diluted share amounts:

		For the Three Months Ended
		March 31,
		2007				2006
Net income		$	0.24			$	0.20
Depreciation and amortization			0.06				0.04
Gain on sale of real estate, net of discontinued health care operations and minority interests			(.10	)			—
Funds from operations — FFO		$	0.20			$	0.24

Distribution Policy

We have elected to be taxed as a REIT commencing with our taxable year that began on April 6, 2004 and ended on December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income, excluding net capital gain, to our stockholders.

The table below is a summary of our distributions paid or declared during the two year period ended March 31, 2007:

Declaration Date		Record Date		Date of Distribution		Distribution per Share
February 15, 2007		March 29, 2007		April 12, 2007		$	0.27
November 16, 2006		December 14, 2006		January 11, 2007		$	0.27
August 18, 2006		September 14, 2006		October 12, 2006		$	0.26
May 18, 2006		June 15, 2006		July 13, 2006		$	0.25
February 16, 2006		March 15, 2006		April 12, 2006		$	0.21
November 18, 2005		December 15, 2005		January 19, 2006		$	0.18
August 18, 2005		September 15, 2005		September 29, 2005		$	0.17
May 19, 2005		June 20, 2005		July 14, 2005		$	0.16
March 4, 2005		March 16, 2005		April 15, 2005		$	0.11

We intend to pay to our stockholders, within the time periods prescribed by the Code, all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise tax on undistributed income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

In addition to changes in interest rates, the value of our facilities will be subject to fluctuations based on changes in local and regional economic conditions and changes in the ability of our tenants to generate profits, all of which may affect our ability to refinance our debt if necessary. The changes in the value of our facilities would be reflected also by changes in “cap” rates, which is measured by the current base rent divided by the current market value of a facility.

If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $150,000 per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $150,000 per year. This assumes that the amount outstanding under our variable rate debt remains approximately $15.0 million, the balance at May 1, 2007.

We currently have no assets denominated in a foreign currency, nor do we have any assets located outside of the United States. We also have no exposure to derivative financial instruments.

Our exchangeable notes are exchangeable into 60.3346 shares of our stock for each $1,000 note. This equates to a conversion price of $16.57 per share. This conversion price adjusts based on a formula which considers increases to our dividend subsequent to the issuance of the notes in November, 2006. Our dividends declared since the notes we issued have adjusted our conversion price to $16.55 per share. Future changes to the conversion price will depend on our level of dividends which cannot be predicted at this time. Any adjustments for dividend increases until the notes are settled in 2011 will affect the price of the notes and the number of shares for which they will eventually be settled.

At the time we issued the exchangeable notes, we also entered into a capped call or call spread transaction. The effect of this transaction was to increase the conversion price from $16.57 to $18.94. As a result, our shareholders will not experience any dilution until our share price exceeds $18.94. If our share price exceeds that price, the result would be that we would issue additional shares of common stock. At a price of $20 per share, we would be required to issue an additional 434,000 shares. At $25 per share, we would be required to issue an additional two million shares.

Item 4. Controls and Procedures

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed by the company in the reports that the Company files with the SEC.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1.A. Risk Factors

There have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Commission on March 16, 2007.

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

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits

The following exhibits are filed as a part of this report:

Exhibit
Number		Description
23.1		Consent of Independent Registered Public Accounting firm
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
99.1		Consolidated Financial Statements of Vibra Healthcare, LLC as of December 31, 2006 Since Vibra Healthcare, LLC leases more than 20% of our properties under triple net leases, the financial status of Vibra may be considered relevant to investors. The most recently available financial statements for Vibra are attached as Exhibit 99.1 to this Quarterly Report on Form 10-Q. We have not participated in the preparation of Vibra’s financial statements nor do we have the right to dictate the form of any financial statements provided to us by Vibra.

SIGNATURE

Pursuant to the requirements 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.

		MEDICAL PROPERTIES TRUST, INC.
		By:		/s/ R. Steven Hamner
		R. Steven Hamner
		Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as the Registrant’s Principal Financial and Accounting Officer)
Date: May 10, 2007

INDEX TO EXHIBITS

Exhibit
Number		Description
23.1		Consent of Independent Registered Public Accounting firm
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350
99.1		Consolidated Financial Statements of Vibra Healthcare, LLC as of December 31, 2006

EXHIBIT 23.1

Consent Of Independent Registered Public Accounting Firm

To the Member
Vibra Healthcare, LLC:

We hereby consent to the incorporation by reference in the registration statements (No. 333-130337) on Form S-8 and (Nos. 333-121883, 333-140433, and 333-141100) on Form S-3 of Medical Properties Trust, Inc. of our report dated April 26, 2007, relating to the consolidated balance sheets of Vibra Healthcare, LLC and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations and changes in member’s deficit, and cash flows for the years ended December 31, 2006 and 2005 which report appears in the March 31, 2007 Quarterly Report on Form 10-Q of Medical Properties Trust, Inc.

/s/ Parente Randolph, LLC

Harrisburg, Pennsylvania
May 9, 2007

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TORULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Edward K. Aldag, Jr., certify that:

1)		I have reviewed this quarterly report on Form 10-Q of Medical Properties Trust, Inc.
2)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)		disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007		/s/ Edward K. Aldag, Jr.
		Edward K. Aldag, Jr.
		Chairman, President and
		Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, R. Steven Hamner, certify that:

	1)		I have reviewed this quarterly report on Form 10-Q of Medical Properties Trust, Inc.
	2)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	3)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	4)		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a.		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b.		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c.		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d.		disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5)

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

	a.		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2007		/s/ R. Steven Hamner
		R. Steven Hamner
		Executive Vice President and
		Chief Financial Officer

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report on Form 10-Q of Medical Properties Trust, Inc. (the “Company”) for the quarter ended March 31, 2007 (the “Report”), each of the undersigned, Edward K. Aldag, Jr. and R. Steven Hamner, certifies, pursuant to Section 18 U.S.C. Section 1350, that:

	1.		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
	2.		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 10, 2007		/s/ Edward K. Aldag, Jr.
		Edward K. Aldag, Jr.
		Chairman, President and
		Chief Executive Officer
		/s/ R. Steven Hamner
		R. Steven Hamner
		Executive Vice President and
		Chief Financial Officer

EXHIBIT 99.1

Vibra Healthcare, LLC
And Subsidiaries

Consolidated Financial Statements
For The Years Ended
December 31, 2006 And 2005
&
Independent Auditors’ Report

Table of Contents

		Page
Independent Auditors’ Report			2
Consolidated Financial Statements:
Balance Sheet			3
Statement Of Operations And Changes In Member’s Deficit			4
Statement of Cash Flows			5
Notes to Financial Statements			6

Independent Auditors’ Report

Sole Member
Vibra Healthcare, LLC:

We have audited the accompanying consolidated balance sheet of Vibra Healthcare, LLC and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations and changes in member’s deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 also 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 Vibra Healthcare, LLC and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Harrisburg, Pennsylvania
April 26, 2007

Vibra Healthcare, LLC and Subsidiaries
Consolidated Balance Sheet
December 31, 2006 and 2005

		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	6,326,031			$	3,018,829
Patient accounts receivable, net of allowance for doubtful collections of $2,433,000 in 2006 and $1,689,000 in 2005			32,721,494				22,751,868
Third party settlements receivable			—				575,658
Prepaid insurance			2,882,509				1,969,240
Other current assets			3,018,630				964,268
Total current assets			44,948,664				29,279,863
Restricted investment			100,000				100,000
Property and equipment, net			26,117,659				17,638,222
Goodwill			22,629,663				22,629,663
Intangible assets			5,140,000				5,140,000
Deposits			317,547				4,028,604
Deferred financing and lease costs, net			1,980,230				1,970,073
Total assets		$	101,233,763			$	80,786,425
Liabilities, Non-Controlling Interest, and Member’s Deficit
Current liabilities:
Current maturities of long-term debt		$	1,271,993			$	58,377
Current maturities of obligations under capital leases			692,957				471,548
Accounts payable			8,787,760				5,080,042
Accounts payable – affiliates			617,715				233,977
Accrued liabilities			10,780,357				6,260,283
Accrued insurance claims			1,331,694				1,054,202
Total current liabilities			23,482,476				13,158,429
Accrued insurance claims			2,855,000				2,470,507
Deferred rent			8,853,660				6,501,674
Deferred development fees			783,121				—
Long-term debt			62,169,433				51,572,156
Obligations under capital leases			20,008,640				17,860,209
Total liabilities			118,152,330				91,562,975
Non-controlling interest of Post Acute Medical, LLC			2,007,687				—
Member’s deficit			(18,926,254	)			(10,776,550	)
Total liabilities, non-controlling interest, and member’s deficit		$	101,233,763			$	80,786,425

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

Vibra Healthcare, LLC and Subsidiaries
Consolidated Statement of Operations and Changes in Member’s Deficit
For the Years Ended December 31, 2006 and 2005

		2006				2005
Revenue:
Net patient service revenue		$	148,929,519			$	129,334,067
Expenses:
Cost of services			108,315,085				90,828,708
General and administrative			16,945,685				15,708,954
Rent expense			22,319,443				21,149,624
Interest expense			7,811,293				6,056,709
Management fee – affiliates			3,235,591				2,636,886
Depreciation and amortization			2,464,664				1,384,821
Provision for bad debts			1,333,829				912,469
Total expenses			162,425,590				138,678,171
Loss from operations			(13,496,071	)			(9,344,104	)
Non-operating revenue			3,096,002				2,382,254
Consolidated net loss before extraordinary gain			(10,400,069	)			(6,961,850	)
Extraordinary gain from Post Acute Medical, LLC acquisition (Note 2)			4,758,052				—
Consolidated net loss			(5,642,017	)			(6,961,850	)
Non-controlling interest in net loss and extraordinary gain of Post Acute Medical, LLC			(2,257,687	)			—
Net loss			(7,899,704	)			(6,961,850	)
Member’s deficit – beginning			(10,776,550	)			(3,814,700	)
Distribution to non-controlling member of Post Acute Medical, LLC			(250,000	)			—
Member’s deficit – ending		$	(18,926,254	)		$	(10,776,550	)

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

Vibra Healthcare, LLC and Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended December 31, 2006 and 2005

		2006				2005
Operating activities:
Net loss		$	(7,899,704	)		$	(6,961,850	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,464,664				1,384,821
Provision for bad debts			1,333,829				912,469
Extraordinary gain			(4,758,052	)			—
Non-controlling interest in net loss and extraordinary gain of Post Acute Medical, LLC			2,257,687				—
Changes in operating assets and liabilities, net of effects from acquisition of business:
Patient accts. receivable including third party settlements			(4,093,663	)			(7,211,018	)
Prepaids and other current assets			(2,527,468	)			(1,596,402	)
Deposits			(57,808	)			1,304,283
Accounts payable			3,713,976				(90,470	)
Accrued liabilities			1,374,476				3,956,184
Deferred rent			2,351,986				4,041,366
Net cash used in operating activities			(5,840,077	)			(4,260,617	)
Investing activities:
Purchases of property and equipment			(9,231,419	)			(1,162,556	)
Cash received from (used in) business acquisitions			3,868,818				(284,292	)
Net asset settlement from seller			—				2,516,951
Purchase of restricted investment			—				(100,000	)
Net cash (used in) provided by investing activities			(5,362,601	)			970,103
Financing activities:
Borrowings from revolving credit facility			146,687,673				115,535,779
Repayment of revolving credit facility			(143,471,254	)			(105,541,745	)
Borrowings from long-term debt			10,524,525				99,000
Borrowings from capital leases			2,000,000				2,181,898
Cash received from development fees			783,121				—
Repayment of capital leases			(944,303	)			(207,648	)
Distribution to members of Post Acute Medical, LLC			(500,000	)			—
Payment of financing costs			(408,696	)			(277,242	)
Repayment of long-term debt			(161,186	)			(7,761,471	)
Net cash provided by financing activities			14,509,880				4,028,571
Net increase in cash and cash equivalents			3,307,202				738,057
Cash and cash equivalents – beginning			3,018,829				2,280,772
Cash and cash equivalents – ending		$	6,326,031			$	3,018,829
Supplemental cash flow information:
Cash paid for interest		$	7,794,626			$	6,056,709
Supplemental disclosure of non-cash investing and financing activities:
Lease deposit applied to MPT note		$	3,768,865			$	—
Note issued relating to Post Acute Medical, LLC acquisition		$	2,000,000			$	—
Building and equipment acquisition funded by MPT capital lease		$	1,018,853			$	14,270,000
Equipment purchases funded by capital lease		$	295,290			$	539,405
License acquisition funded by MPT capital lease		$	—			$	880,000
Business acquisition adjustment of goodwill		$	—			$	636,318
Lease deposit funded by MPT capital lease and note		$	—			$	472,500
Financing costs funded by various long-term debt		$	—			$	352,627

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

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Vibra Healthcare, LLC (“Vibra” and the “Company”) was formed May 14, 2004, and operates independent rehabilitation hospitals (“IRF”) and long-term acute care hospitals (“LTACH”) located throughout the United States. Vibra, a Delaware limited liability company (“LLC”), has an infinite life. The member’s liability is limited to the capital contribution. Vibra’s wholly-owned subsidiaries consist of:

SUBSIDIARIES		LOCATION
92 Brick Road Operating Company LLC		Marlton, NJ
1300 Campbell Lane Operating Company LLC		Bowling Green, KY
7173 North Sharon Avenue Operating Company LLC		Fresno, CA
1125 Sir Francis Drake Boulevard Operating Company LLC		Kentfield, CA
4499 Acushnet Avenue Operating Company LLC		New Bedford, MA
8451 Pearl Street Operating Company LLC		Thornton, CO
Northern California Rehabilitation Hospital, LLC		Redding, CA
Vibra Specialty Hospital of Dallas, LLC		Dallas, TX
Vibra Specialty Hospital of Portland, LLC		Portland, OR
Kentfield THCI Holding Company, LLC		Kentfield, CA

The Company provides long-term acute care hospital services and inpatient acute rehabilitative hospital care at its hospitals. Patients in the Company’s LTACHs typically suffer from serious and often complex medical conditions that require a high degree of care. Patients in the Company’s IRFs typically suffer from debilitating injuries including traumatic brain and spinal cord injuries, and require rehabilitation care in the form of physical, psychological, social and vocational rehabilitation services. The Company also operates eleven outpatient clinics affiliated with six of its nine hospitals.

Business Risk and Uncertainties

Vibra’s acquisitions and associated start-up and restructuring costs, including renovations necessary to obtain and modify licenses and reconfigure operations at certain facilities, were primarily funded by various lease agreements with Medical Properties Trust, Inc. (MPT) along with proceeds from long-term debt (Notes 2, 6, 8, and 9). Accordingly, Vibra has total long-term debt of $63.4 million and obligations under capital leases of $20.7 million as of December 31, 2006 and minimum future obligations due under operating leases of $23.4 million in 2007. In addition, Vibra incurred consolidated net losses before extraordinary gain of $10.4 million in 2006 and $7.0 million in 2005, and has a member’s deficit of $18.9 million at December 31, 2006.

In 2006, Vibra’s consolidated net loss before extraordinary gain of $10.4 million included budgeted, non-cash items for depreciation and amortization of $2.5 million and deferred rent of $2.4 million. Also, as part of its growth strategy, Vibra incurred acquisition and start-up costs for LTACHs in Portland, OR of $0.8 million and in Dallas, TX of $2.1 million and incurred an ongoing net loss with the reconfiguration of its existing facility in Redding, CA of $1.9 million.

In order to qualify for Medicare reimbursement as a new LTACH, a hospital must establish an average patient length of stay in excess of 25 days for a six-month demonstration period. During this period, the hospital is reimbursed as an acute care hospital, which results in substantial losses.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

The LTACH in Dallas began its six-month demonstration period in January 2007. Management expects the LTACH in Dallas to qualify for LTACH Medicare reimbursement in August 2007, achieve break even status (unaudited) by the end of 2007, and generate monthly net income of $265,000 (unaudited) by the summer of 2008. Management expects the LTACH in Portland to begin its six-month demonstration period in May 2007, achieve break even status (unaudited) by the spring of 2008, and generate monthly net income of $230,000 (unaudited) by the fall of 2008. Vibra obtained two working capital loans from MPT totaling $8.6 million to fund losses during this demonstration period and to acquire necessary equipment. At December 31, 2006, Vibra had drawn $2.7 million on these loans.

When Vibra acquired the Redding hospital on June 30, 2005, the configuration of the hospital was 24 IRF beds and 50 SNF beds. The Redding hospital was acquired with the intention of reconfiguring the hospital to contain 54 LTACH beds to meet demand in the market. In January 2006, Vibra successfully converted the 24 IRF beds to LTACH. In March 2007, under a $2.7 million renovation plan funded by MPT under the lease agreement, 30 of the SNF beds were also converted to LTACH. Management expects the Redding hospital to generate monthly net income of $195,000 (unaudited) by the summer of 2007. Losses during this 21 month transition and two demonstration periods were funded by $2.2 million in cash received under the MPT lease at the 2005 closing and $2 million funded under the MPT lease agreement in April 2006.

Also in 2006, Vibra secured financing of $16 million and acquired the real estate of its Kentfield LTACH from MPT with an initial draw on this financing for $7.6 million. In addition to a reduction in minimum future obligations due under operating leases, MPT agreed to apply security deposits of $3.8 million towards repayment of long-term debt and agreed to reduce percentage rents. The results of this transaction will result in interest and rent savings of approximately $2,500,000 (unaudited) in 2007 as compared to 2006. In January 2007, Vibra completed the remaining financing of $8.4 million (Note 13) and the proceeds were used to further reduce long-term debt and pay transaction costs.

As a result of Vibra’s transactions and activities in 2006 and through March 2007, management expects a substantial reduction in net losses in 2007.

In 2007, Vibra management’s plans include a budget with a net loss of $6.1 million (unaudited). This loss includes non-cash items for depreciation and amortization of $2.9 million (unaudited) and deferred rent of $1.7 million (unaudited), continued start-up costs for the LTACHs in Portland of $1.6 million (unaudited) and in Dallas of $1.4 million (unaudited), and an ongoing net loss with the reconfiguration of the Redding hospital of $0.6 million (unaudited) through March 2007.

Management believes it has adequate working capital, $21.5 million at December 31, 2006, and financing in place to fund these transactions and activities in 2007.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Vibra, its wholly owned subsidiaries, and effective December 1, 2006, in accordance with Financial Accounting Standards Board Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46R”), Post Acute Medical, LLC (“Post Acute”) a variable interest entity (the “VIE”). Vibra has no ownership in the VIE; however, control exists through common ownership and Vibra’s guarantee of Post Acute’s lease agreements. All intercompany transactions and balances have been eliminated in consolidation.

At December 31, 2006, and for the period December 1, 2006, to December 31, 2006, the VIE had assets of $11,002,000, liabilities of $6,986,000, a net loss of $(243,000), and an extraordinary gain of $4,758,000.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost which approximates market.

Patient Accounts Receivable

Patient accounts receivable are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management’s assessment of individual accounts. The allowance for doubtful collections is estimated based upon a periodic review of the accounts receivable aging, payor classifications, and application of historical write-off percentages.

Inventories

Inventories of pharmaceuticals, pharmaceutical supplies, and medical supplies are stated at the lower of cost or market value. Cost is determined on a first-in, first-out basis. These inventories totaled $953,707 and $530,849 at December 31, 2006 and 2005, respectively, and are included in other current assets in the accompanying consolidated balance sheet.

Restricted Investment

The restricted investment consists of a five year certificate of deposit with a local bank pledged as collateral for a letter of credit benefiting the California Department of Health Services (“CDHS”). CDHS can draw on the letter of credit to reimburse any Medicaid overpayments.

Property and Equipment

Property and equipment are stated at cost net of accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives of the assets or the term of the lease, as appropriate. The general range of useful lives is as follows:

Buildings		30 years
Building under capital lease		Lesser of 15 years or remaining lease term
Leasehold improvements		Lesser of 15 years or remaining lease term
Furniture and equipment		2-7 years

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No 144), the Company reviews the realizability of long-lived assets whenever events or circumstances occur which indicate recorded costs may not be recoverable.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

Intangible Assets

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer subject to periodic amortization but are instead reviewed annually or more frequently if impairment indicators arise. The review requires the Company to estimate the fair value of its identified reporting units and compare those estimates against the related carrying values. Identifiable assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. For each of the reporting units, the estimated fair value is determined using multiples of earnings before interest, income taxes, depreciation, amortization and rents (EBITDAR) from current transaction information.

Management has allocated the intangible assets between identifiable intangibles and goodwill. Intangible assets, other than goodwill, consist of values assigned to certificates of need (“CONs”) and licenses. The useful life of each class of intangible assets is as follows:

Goodwill		Indefinite
Certificates of Need/Licenses		Indefinite

Deferred Financing and Lease Costs

Costs and fees incurred in connection with the MPT acquisition note and leases and the Merrill Lynch loans have been deferred and are being amortized over the term of the loans and leases using the straight-line method, which approximates the effective interest method. Amortization expense was $398,539 in 2006 and $203,220 in 2005.

Insurance Risk Programs

Under the Company’s insurance programs, the Company is liable for a portion of its losses. The Company estimates its liability for losses based on historical trends that will be incurred in a respective accounting period and accrues that estimated liability. These programs are monitored quarterly and estimates are revised as necessary to take into account additional information. The Company has accrued $4,186,694 and $3,524,709 related to these programs at December 31, 2006 and 2005, respectively.

Deferred Rent

The excess of straight line rent expense over rent paid is credited to deferred rent on a monthly basis. At December 31, 2006 and 2005, rent expense exceeded rent paid on a cumulative basis by $8,853,660 and $6,501,674, respectively.

Deferred Development Fees

Cash received from development fees related to acquisitions are being deferred and will be amortized over lease terms as a reduction of rent expense. At December 31, 2006, deferred development fees amounted to $783,121.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

Revenue Recognition

Net patient service revenue consists primarily of charges to patients and are recognized as services are rendered. Net patient service revenue is reported net of provisions for contractual adjustments from third-party payors and patients. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The differences between the estimated program reimbursement rates and the standard billing rates are accounted for as contractual adjustments, which are deducted from gross revenues to arrive at net patient service revenue. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Patient accounts receivable resulting from such payment arrangements are recorded net of contractual allowances.

A significant portion of the Company’s net patient service revenue is generated directly from the Medicare and Medicaid programs. As a provider of services to these programs, the Company is subject to extensive regulations. The inability of a hospital to comply with regulations can result in changes in that hospital’s net patient service revenue generated from these programs. The following table shows the percentage of the Company’s patient service receivables at December 31 from Medicare and Medicaid.

		2006				2005
Medicare			69	%			52	%
Medicaid			15	%			26	%

The following table represents the Company’s net patient service revenues from the Medicare and Medicaid programs as a percentage of total consolidated net patient service revenue:

		2006				2005
Medicare			66	%			66	%
Medicaid			11	%			12	%

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and patient accounts receivables. The Company deposits its cash with large banks. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare and Medicaid represent the Company’s primary concentration of credit risk. Cash and cash equivalent balances on deposit with any one financial institution are insured to $100,000.

Fair Value of Financial Instruments

The Company has various assets and liabilities that are considered financial instruments. The Company estimates that the carrying value of its current assets, current liabilities and long-term debt approximates their fair value.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

Income Taxes

Vibra, its subsidiaries, and Post Acute have elected to be a LLC for federal and state income tax purposes. In lieu of corporate income taxes, the member of a LLC is taxed on its proportionate share of the Company’s taxable income or loss. Therefore, no provision or liability for federal or state income taxes has been provided for in the consolidated balance sheet or consolidated statement of operations and changes in member’s deficit.

2. ACQUISITIONS

In July and August 2004, Vibra entered into agreements with Medical Properties Trust, Inc. (MPT) to acquire the operations of six specialty hospitals. MPT, a healthcare real estate investment trust based in Birmingham, Alabama, acquired the real estate for approximately $127.4 million and assigned to Vibra its rights to acquire the operations of the hospitals from Care One Realty (Care) of Hackensack, New Jersey for approximately $38.1 million net of cash acquired and $7.5 million of liabilities assumed which was financed by MPT. The assignment of the LLC interests to Vibra transferred the operations, assets and liabilities of each LLC. The purchase price of the operations has been allocated to net assets acquired, and liabilities assumed based on appraisals. The excess of the amount of purchase price over the net asset value, including identifiable intangible assets, was allocated to goodwill. The purchase price was negotiated based on management’s evaluation of future operational performance of the hospitals as a group under Vibra. The results of operations of the hospitals acquired have been included in the Company’s consolidated financial statements since the date of acquisition. The following table summarizes the acquisition date and other relevant information regarding each hospital:

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

Information with respect to the businesses acquired in these transactions is as follows:

Notes issued, net of cash acquired		$	38,093,842
Liabilities assumed			7,477,988
			45,571,830
Fair value of assets acquired:
Patient accounts receivable			(13,640,825	)
Property and equipment			(2,749,840	)
CONs/Licenses			(4,260,000	)
Other			(410,869	)
Cost in excess of fair value of net assets acquired (goodwill) at December 31, 2004			24,510,296
Adjustment of fair value of acquired accounts receivable			636,318
Post closing working capital adjustment received from Seller in December 2005			(2,516,951	)
Cost in excess of fair value of net assets acquired (goodwill) at December 31, 2005		$	22,629,663

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

On June 30, 2005, under the terms of a purchase agreement, Vibra acquired the building, equipment, inventory and license of an 88 bed specialty hospital in Redding, California, for $15.4 million. Simultaneously with the closing of the acquisition, Vibra entered into an agreement with MPT for the sale of the building associated with this hospital to MPT and leased it back from MPT under an $18 million capital lease. At the acquisition date, the hospital operated with 24 IRF beds and 54 skilled nursing beds. The hospital is also licensed for 14 acute care beds that are currently not in service. On January 1, 2006, Vibra converted the 24 IRF beds to LTACH, and in April 2006 drew an additional $2 million under the lease under a LTACH conversion provision. In November 2006, Vibra began renovations to convert 34 of the SNF beds to 32 LTACH beds. The renovations are being funded by MPT under the lease at an expected cost of $2.7 million. The converted beds were opened as a LTACH in March 2007.

The purchase price of the operations has been allocated to net assets acquired, and liabilities assumed based on an appraisal. The land on which the hospital is built is subject to a land lease, which Vibra assumed from the seller. The purchase price was negotiated based on management’s evaluation of future operational performance of the hospital under Vibra. The results of operations of the hospital acquired have been included in the Company’s consolidated financial statements since the date of acquisition.

Information with respect to the business acquired in this transaction is as follows:

Capital lease		$	18,000,000
Cash paid by Vibra for the building			185,316
Cash paid by Vibra for the inventory			98,976
			18,284,292
Less other assets arising from the transaction:
Cash to Vibra			(2,181,898	)
Lease deposit funded			(472,500	)
Deferred financing costs			(195,602	)
Fair value of assets acquired		$	15,434,292
Fair value of assets acquired:
Building		$	14,087,816
Furniture and equipment			367,500
Licenses			880,000
Inventory			98,976
		$	15,434.292

Vibra Specialty Hospital of Portland

On August 24, 2006, under the terms of an Asset Purchase Agreement, Vibra acquired the land, building, equipment and certificate of need (“CON”) of a former hospital facility in Portland, Oregon for $13 million. The facility has a CON to operate a hospital facility, but had recently ceased operations and surrendered its hospital license. Vibra will convert this facility to a LTACH. Vibra is in the process of making renovations to this facility. Vibra will be applying for a license from the Oregon Department of Human Services to operate the facility as a hospital with 39 licensed hospital beds and the ability to expand to 80 licensed hospital beds, and will apply for participation in the Medicare program as a LTACH. Simultaneously with the closing of this acquisition, Vibra entered into an agreement with MPT for the sale of the land and building associated with this facility to MPT and leased it back from MPT under a $14 million operating lease. The renovations and rent expense during the renovation period are being funded by MPT under the lease. The purchase price was negotiated based on management’s evaluation of the expected future operational performance of the hospital under Vibra. Vibra also negotiated a $4.0 million term loan with MPT for the purchase of additional equipment, and to provide working capital during the start-up period.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

Vibra Specialty Hospital of Dallas

On September 5, 2006, under the terms of a Purchase Agreement, Vibra acquired the land, building, equipment, inventory and licenses of a newly constructed 60 bed specialty hospital in Dallas, Texas, for $15.5 million. This hospital has received its license to operate from the Texas Department of Health, and recently received its certification to participate in the Medicare program. Vibra is in the process of certifying this hospital as a LTACH. Simultaneous with the closing of this acquisition, Vibra entered into an agreement with MPT for the sale of the land and building associated with this hospital to MPT and leased it back from MPT under a $15.4 million operating lease. The purchase price was negotiated based on management’s evaluation of expected future operational performance of the hospital under Vibra. Vibra also negotiated a $4.6 million term loan with MPT for the purchase of equipment and to provide working capital during the start-up period.

Post Acute Medical, LLC

On December 1, 2006, under the terms of a purchase agreement, Post Acute Medical, LLC (an entity 50% owned under common ownership as Vibra) acquired the operations of the Warm Springs Rehabilitation Foundation, Inc. of San Antonio, Texas (“WSRF”). In addition, Post Acute Medical, LLC acquired certain assets and assumed certain liabilities of WSRF. The following table summarizes the relevant information regarding each hospital:

Location		Type				Beds
San Antonio, TX		IRF					65	(1)
Luling, TX		LTACH					42	(2)
Victoria, TX		LTACH					26

The transaction was financed with a $30 million lease of the land and buildings from MPT that closed simultaneously with the purchase, and a $2 million note from the seller. The lease is accounted for as an operating lease. The purchase price of the operations was allocated to net assets acquired and liabilities assumed based on valuation studies and is subject to purchase price adjustments. The purchase price was negotiated based on management’s evaluation of future operational performance of the hospitals as a group. Vibra has guaranteed the lease payments of Post Acute to MPT in exchange for an annual guarantee fee of $300,000. Post Acute has been determined to be a VIE of Vibra. As a result, the results of operations of Post Acute are included in Vibra’s consolidated financials since the acquisition date.

Information with respect to the business acquired in the transaction is as follows:

Liabilities assumed		$	4,185,063
Seller note			2,000,000
Cash acquired			(3,868,818	)
			2,316,245
Fair value of assets acquired:
Accounts receivable			(6,634,134	)
Prepaids and other current assets			(440,163	)
Extraordinary gain		$	4,758,052

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

		December 31, 2006
		Direct Ownership				Under Capital Leases				Total
Land & improvement		$	1,995,791			$	—			$	1,995,791
Building			5,209,883				14,620,366				19,830,249
Leasehold improvements			1,033,854				337,702				1,371,556
Furniture and equipment			5,484,276				937,801				6,422,077
			13,723,804				15,895,869				29,619,673
Less: accumulated depreciation and amortization			1,873,116				1,628,898				3,502,014
Total		$	11,850,688			$	14,266,971			$	26,117,659

		December 31, 2005
		Direct Ownership				Under Capital Leases				Total
Building		$	47,873			$	14,087,816			$	14,135,689
Leasehold improvements			576,507				—				576,507
Furniture and equipment			3,868,005				493,909				4,361,914
			4,492,385				14,581,725				19,074,110
Less: accumulated depreciation and amortization			931,561				504,327				1,435,888
Total		$	3,560,824			$	14,077,398			$	17,638,222

Depreciation expense was $2,066,125 in 2006 and $1,181,601 in 2005.

At December 31, 2006, the Company is committed for approximately $6.6 million under contracts for completion of various projects.

4. DEPOSITS

The facility lease agreements with MPT require deposits equal to three months rent. The funds are on deposit with MPT in non-interest bearing accounts. Deposits consist of the following:

		December 31,
		2006				2005
MPT lease deposits		$	—			$	3,768,865
Other deposits			317,547				259,739
Total		$	317,547			$	4,028,604

On August 31, 2006, the MPT lease deposits were applied to the balance of the MPT hospital acquisition notes payable.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted SFAS No. 142. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not subject to periodic amortization but are instead reviewed annually as of December 31, or more frequently, if impairment indicators arise. These reviews require the Company to estimate the fair value of its identified reporting units and compare those estimates against the related carrying values. The following table summarizes intangible assets:

		December 31,
		2006				2005
Goodwill		$	22,629,663			$	22,629,663
CONs/Licenses		$	5,140,000			$	5,140,000

The CONs/Licenses have not been amortized as they have indefinite lives.

6. LONG-TERM DEBT

The components of long-term debt are shown in the following table:

		December 31,
		2006				2005
MPT 10.25% hospital acquisition notes		$	37,647,123			$	41,415,988
Merrill Lynch $23 million revolving credit facility			13,367,478				10,151,059
Merrill Lynch $16 million term loan			7,642,332				—
MPT $4.6 million term loan – Dallas			2,738,943				—
MPT $4.0 million term loan – Portland			—				—
WSRF note			2,000,000				—
Other			45,550				63,486
			63,441,426				51,630,533
Less: current maturities			1,271,993				58,377
		$	62,169,433			$	51,572,156

The hospital acquisition notes are interest only through June 2007, and then amortized over the next 12 years with a final maturity in 2019. Substantially all of the assets of Vibra and its subsidiaries, as well as Vibra’s membership interests in its subsidiaries, secure the MPT note. In addition the member of Vibra, an affiliated company owned by the member and Vibra Management, LLC have jointly and severally guaranteed the notes payable to MPT, although the obligation of the member is limited to $5 million and his membership interest in Vibra. A default in any of the MPT lease terms will also constitute a default under the notes. On August 31, 2006, the MPT lease deposits of $3,768,865 were applied to the balance of the MPT hospital acquisition notes payable.

The revolving credit facility has a balloon maturity on February 8, 2008. Interest is payable monthly at the rate of 30 day LIBOR plus 3% (8.32% at December 31, 2006). The loan is secured by a first position in the Company’s accounts receivable through an intercreditor agreement with MPT. Up to $23 million can be borrowed based on a formula of qualifying accounts receivable. A portion of the proceeds were used to pay off $7,725,957 in working capital and transaction fee notes to MPT which had a maturity of March 31, 2005. The Company is subject to various financial and non-financial covenants under the credit facility. A default in any of the MPT note and lease terms will also constitute a default under the credit facility.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

On August 31, 2006, Vibra acquired the real estate of its Kentfield LTACH from MPT for $7,642,332. The real estate acquisition was funded with a $16 million term loan from Merrill Lynch. The term loan has a five-year maturity and bears interest at prime + 1.5% (9.75% at December 31, 2006). Interest only is payable on the loan for the first six months of the term. Beginning in March 2007, principal is payable in equal monthly amounts using a 15 year amortization schedule. The term loan is secured by a mortgage lien against the Kentfield LTACH real estate. It is guaranteed by Vibra and other Vibra entities who are borrowers under the revolver credit facility agreement between such Vibra entities and Merrill Lynch. An event of default under the term loan credit agreement, after the expiration of applicable grace and cure periods, is an event of default under such revolver credit facility agreement. Kentfield THCI Holding Company, LLC (owner of the Kentfield LTACH real estate) has guaranteed the obligations from Vibra and other Vibra entities to Merrill Lynch under the revolver credit facility agreement. A default under this revolver credit facility agreement, after the expiration of applicable grace and cure periods, is an event of default under the term loan credit agreement between Kentfield THCI Holding Company, LLC and Merrill Lynch. This guaranty is secured by a second mortgage lien against the Kentfield LTACH real estate.

The MPT term loans for Dallas and Portland are for five year terms and bear interest at the greater of 10.5% or the one-month U.S. Treasury obligation plus 5.5% (10.5% at December 31, 2006). Each loan is payable interest only for the first 18 months with the principal amortized over the final 42 months of the loan term. The loans are secured by (a) a security interest in Vibra’s equipment and other personal property (other than accounts receivable) at the Portland and Dallas facilities; (b) the guaranty of Vibra and Senior Real Estate Holdings LLC and Vibra Management, LLC (affiliates of Vibra); and (c) the pledge of Vibra’s ownership interest in the respective LLC operators of the Portland and Dallas facilities.

The WSRF note is interest only at 10% with a balloon maturity on November 30, 2011. Interest is payable quarterly. The note is subordinate to the MPT lease payments.

Other long-term debt consists of computer hardware and software loans. The equipment purchased is pledged as collateral for the loans. The loans are payable in monthly installments of $9,467 including interest.

Maturities of long-term debt for the next five years are as follows:

December 31		(in thousands)
2007		$	1,271,993
2008			16,230,821
2009			3,216,494
2010			3,509,424
2011			5,517,135
Thereafter			33,695,559
		$	63,441,426

7. RELATED PARTY TRANSACTIONS

The Company has entered into agreements with Vibra Management, LLC and Lone Star Healthcare, LLC (companies affiliated through common ownership) to provide management services to each hospital. The services include information system support, legal counsel, accounting/tax, human resources, program development, quality management and marketing oversight. The agreements call for a management fee equal to 2% to 3% of net patient service revenue, and are for an initial term of five years with automatic one-year renewals. Management fee expenses amounted to $3,235,591 in 2006 and $2,636,886 in 2005. Management fees payable were $617,715 and $233,977 at December 31, 2006 and 2005, respectively. These amounts are included in accounts payable – related party in the accompanying consolidated balance sheet.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

The spouse of the member of the Company provided legal consulting services to the Company on the hospital acquisition and on various operational licensing and financing matters. In 2006, legal consulting services from this person totaled $34,200.

8. OPERATING LEASES

2004 Leases

Vibra entered into triple-net long-term real estate operating leases with MPT at each of the six hospitals leased from MPT in 2004. Each lease is for an initial term of 15 years and contains renewal options at Vibra’s option for three additional five-year terms. The base rate at commencement is calculated at 10.25% of MPT’s adjusted purchase price of the real estate (“APP”). The base rate increases to 12.23% of APP effective July 1, 2005. Beginning January 1, 2006, and each January 1, thereafter, the base rate increases by an inflator of 2.5% (i.e. base rate becomes 12.85% of APP on January 1, 2007).

Each lease also contains a percentage rent provision (“Percentage Rent”). Beginning January 1, 2005, if the aggregate monthly net patient service revenues of the six hospitals exceed an annualized net patient service revenue run rate of $110,000,000, additional rent equal to 2% of monthly net patient service revenue is triggered. The percentage rent is payable within ten days after the end of the applicable quarter. The percentage rent declines from 2% to 1% on a pro rata basis as Vibra repays the $41.416 million in notes to MPT. Percentage rents totaling $2,398,924 in 2006 and $2,277,447 in 2005 are included in rent expense in the accompanying consolidated statement of operations. Vibra has the option to purchase the leased property at the end of the lease term, including any extension periods, for the greater of the fair market value of the leased property, or the purchase price increased by 2.5% per annum from the commencement date. On August 31, 2006, Vibra purchased the Kentfield LTACH real estate from MPT for $7,642,332 and financed it under a term loan from Merrill Lynch.

Commencing on July 1, 2005, Vibra must make quarterly deposits to a capital improvement reserve at the rate of $375 per quarter per bed, or $652,500 on an annual basis, for all hospitals leased from MPT. The reserve may be used to fund capital improvements and repairs as agreed to by the parties. To date, Vibra’s expenditures for capital improvements have exceeded the deposit requirements and no deposits have been made.

Beginning with the quarter ending September 30, 2006, the MPT leases will be subject to various financial covenants including limitations on total debt to 100% of the total capitalization of the guarantors (as defined) or 4.5 times the 12 month total EBITDAR (as defined) of the guarantors whichever is greater, coverage ratios of 125% of debt service and 150% of rent (as defined), and maintenance of average daily patient census. A default in any of the loan terms will also constitute a default under the leases. All of the MPT leases are cross defaulted.

2006 Leases – Portland and Dallas

In August and September 2006, Vibra entered into two triple-net long-term real estate operating leases with MPT relating to the acquisition of LTACHs under development in Dallas, Texas, and Portland, Oregon. Each lease is for an initial term of 15 years and contains renewal provisions at Vibra’s option for three additional five year terms. The base rate at commencement is calculated at 10.50% of MPT’s APP. Beginning January 1, 2008, and each January 1 thereafter, the base rate increases by an inflator of the greater of 2.5% or the increase in the consumer price index.

Beginning January 1, 2008, Vibra must make an annual deposit to a capital improvement reserve in the amount of $1,500 per bed. The reserve may be used to fund capital improvements and repairs as agreed to by the parties.

VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2006 and 2005

The leases are subject to the following financial covenants related to EBITDAR coverage:

Dallas		Fixed Charge Coverage				Rent Coverage
3 months ended September 30, 2007			0	%			N/A
6 months ended December 31, 2007			30	%			75	%
9 months ended March 31, 2008			75	%			102	%
12 months ended June 30, 2008			100	%			150	%
12 months ended September 30, 2008 and thereafter			135	%			200	%

Portland		Fixed Charge Coverage				Rent Coverage
3 months ended March 31, 2008			0	%			N/A
6 months ended June 30, 2008			30	%			50	%
9 months ended September 30, 2008			70	%			100	%
12 months ended December 31, 2008			100	%			140	%
12 months ended March 31, 2009 and thereafter			135	%			200	%

The Portland LTACH required renovations before opening for patients. This renovation project is being funded by MPT under the lease at a cost of $5.6 million. During the renovation period, the rent expense is being added to the lease base. The project is on schedule for completion in Spring 2007.

2006 Leases – Post Acute

On December 1, 2006, Post Acute entered into three triple-net long-term real estate operating leases with MPT relating to the WSRF asset acquisition. Each lease is for an initial term of 15 years and contains renewal provisions at Post Acute’s option for three additional five year terms. The base rate at commencement is calculated at 10.5% of MPT’s APP. Beginning January 1, 2008, the base rate increases by an inflator of the greater of 2.5% or the increase in the consumer price index.

Beginning January 1, 2008, Post Acute must make an annual deposit to a capital improvement reserve in the amount of $2,000 per bed. The reserve may be used to fund capital improvements and repairs as agreed to by the parties.

The leases are subject to the following financial covenants related to combined EBITDAR coverage:

		Fixed Charge Coverage				Rent Coverage
6 months ended June 30, 2007			50	%			75	%
9 months ended September 30, 2007			75	%			100	%
12 months ended December 31, 2007			100	%			125	%
12 months ended March 31, 2008 and thereafter			125	%			150	%