Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from              to             

Commission file number 1-12566

G & L REALTY CORP.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (310) 273-9930

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

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

None

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   x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

All voting and non-voting common equity is held by affiliates.

As of March 30, 2004, 710,199 shares of common stock of G&L Realty Corp. were outstanding.

Table of Contents

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

i

Table of Contents

PART I

General

The Company is a self-managed real estate investment trust (“REIT”) that owns, acquires, develops, manages and leases health care properties. The Company’s business currently consists of investments, made either directly or through joint ventures, in medical office buildings (“MOB”), assisted living facilities (“ALF”) and skilled nursing facilities (“SNF”). All of the Company’s assets are held by, and all of its operations are conducted through, G&L Realty Partnership, L.P. (the “Operating Partnership”) and G&L Senior Care Partnership, L.P. (the “Senior Care Partnership”) or their subsidiaries. The Company was incorporated in Maryland on September 15, 1993, and is controlled by its principal executive officers, Daniel M. Gottlieb and Steven D. Lebowitz.

Description of Business

The Company’s MOB business strategy is to acquire, develop, manage and lease a portfolio of medical office buildings. The Company currently seeks growth opportunities mainly in Southern California through acquisition and development of additional MOBs directly or through strategic joint ventures. The MOB portfolio currently consists of approximately 832,000 rentable square feet. The Company directly owns 19 high quality MOBs, an adjacent parking facility, a research and development building (which was originally an MOB that the Company converted to a research and development building when the MOB tenant vacated the building) and one office and retail facility and owns three additional MOBs through a joint venture (collectively, the “MOB Properties”). All of the MOB Properties are located in California. Several of the MOB Properties include retail space on the ground level. As of January 31, 2004, the MOB Properties were 97.7% leased.

The ALF and SNF business strategy is to capitalize on turnaround opportunities in the assisted living and skilled nursing facility industry by making selected equity investments in ALFs and SNFs. As part of this strategy, the Company frequently sells its stabilized ALFs and SNFs or obtains long-term financing guaranteed by the Department of Housing and Urban Development and retains long-term ownership of these assets. The Company directly, or through joint ventures, owns two ALFs, eight SNFs and one senior resident apartment complex (collectively, the “ALF and SNF Properties”). All of the ALFs are located in Southern California. Four of the SNFs are located in Massachusetts, one in California, one in Arizona, one in Maryland and one in Washington. The senior resident apartment complex is located in Arizona. The ALF and SNF Properties have an aggregate of 1,192 beds or units. The Company is currently under contract to acquire an existing 155-bed SNF located in Phoenix, Arizona.

The Company’s business plan is to dispose of its non-core and turnaround properties, and in implementation of that strategy, the Company sold the research and development building on March 18, 2004, and entered into a contract to sell the office and retail facility. The Company is also under contract to sell its SNF located in California, a 10,000 square foot MOB located in Tustin, and two ALFs that are owned through joint ventures.

As part of its overall business strategy, the Company develops MOBs and ALFs either directly or through joint ventures. As part of its development strategy, the Company may develop non-core assets which are sold after the assets are stabilized. The non-core assets are typically developed in connection with the development of healthcare properties. The Company has a long history of successful developments and believes that it can achieve growth through a combination of development and acquisition.

See Note 13 of the Notes to the Consolidated Financial Statements for financial information about the Company’s three main business segments: investments in (i) MOBs, (ii) ALFs and (iii) SNFs.

Financing for the Company’s development and acquisition activities may be provided through existing or new joint ventures with third parties or third-party financing in the form of secured or unsecured debt or through selective asset sales. The Company’s capacity to obtain debt financing facilitates its ability to acquire ownership interests in additional MOBs, ALFs and SNFs. The Company and its investment affiliates will likely incur additional indebtedness in connection with future acquisitions. However, notwithstanding any business policies or objectives of the Company, no assurance can be given that the Company, or its investment affiliates, will be able to make acquisitions on favorable terms or that such properties will be profitably operated.

1

Table of Contents

The Company has determined to sell certain of its properties and has, in 2003 and to date in 2004, sold or entered into contracts to sell a 9,100 square foot retail center located in Aliso Viejo, California that was developed in connection with a 40,000 square foot MOB by the Company; a 92-unit ALF located in Santa Monica, California; a 26,000 square foot MOB located in Burbank, California; an 80-unit ALF located in Tarzana, California; a 48,000 square foot research and development building located in Irwindale, California which was originally an MOB that the Company converted to a research and development building when the MOB tenant vacated the building; a 40,000 square foot office and retail center located in Coronado, California; a 10,000 square foot MOB located in Tustin, California; and, a 59-bed SNF located in Chico, California. The proceeds from these sales may be used to acquire or develop additional healthcare properties, retire debt or preferred stock, for general corporate purposes and/or to make distributions to common stockholders.

The health care industry is facing various challenges, including increased government and private payor pressure to reduce medical delivery costs. Substantially all of the Company’s tenants are in the medical profession and could be or have been adversely affected by the new Medicare prospective payment system, cost containment and other health care reform proposals. Any future proposals that limit access to medical care or reduce reimbursement for physicians’ services may also impact the ability of the Company’s tenants to pay rent. However, the Company believes that the aging population in the United States, combined with other recent trends in the health care industry, such as the performance of non-acute procedures outside of hospitals, could spur increased demand for space in full service MOBs that contain surgery centers and out-patient facilities, such as those owned by the Company.

Property Management

The Company provides a full range of management services for the operation of MOBs. The ability of the Company to manage MOBs to meet the unique needs of medical practitioners has been critical to its success. The Company has experienced lease renewal rates of approximately 79.7%, 85.9% and 83.0% for the years ended December 31, 2003, 2002 and 2001, respectively, in the MOB Properties. Developing and managing MOBs differs from developing and managing general office properties due to the special requirements of the tenants and their patients. MOBs generally have higher maintenance requirements, increased plumbing and electrical capacity requirements and are subject to expanded environmental regulations due to stringent restrictions on the disposal of medical waste. The management of MOBs also generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners. Additional important management functions include the placement of tenants within MOBs to accommodate increased space needs and managing the tenant mix at properties in order to facilitate referrals by practitioners with different specialties within the building. The Company stresses meeting these and other special demands of medical property tenants.

Tax Status

The Company believes that it has operated in such a manner as to qualify for taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1993, and the Company intends to continue to operate in such a manner. As long as the Company qualifies for taxation as a REIT under the Code, the Company generally will not be taxed at the corporate level. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.

2

Table of Contents

Employees

As of March 30, 2004, the Company employed 32 persons, 13 of whom are on-site building employees who provide maintenance services for the MOB Properties and 8 of whom are professional employees engaged in leasing, asset management and administration.

Dependence on Key Tenants

The tenant mix at the Company’s MOBs typically consist of several smaller tenancies rather than one or two large tenancies. As of December 31, 2003, with the exception of the Company’s research and development facility located in Irwindale, California which was sold on March 18, 2004, no MOB tenant accounted for more than 3% of the Company’s total revenues. Although no MOB tenant accounts for more than 3% of the Company’s total revenues, the risks associated with smaller tenants include (i) less creditworthiness, (ii) greater potential tenant turnover and (iii) increased property management needs.

The ALFs and SNFs are either leased to senior care companies or managed by senior care companies. Although all of the Company’s ALF and SNF properties are currently leased or under management contracts, finding experienced senior care managers is a time-consuming and difficult task. During 2003, revenue from the Company’s three SNFs in Hampden, Massachusetts accounted for approximately 42% of the Company’s total revenues. These three facilities are all operated by the same manager pursuant to a management agreement. Should these three facilities or any of the Company’s other ALFs or SNFs require a change in lessee or manager, the Company’s financial results could be materially impacted despite the fact that no other ALF or SNF tenant or manager accounts for more than 10% of the Company’s total revenues.

Government Regulation

Environmental Matters. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in its property. These laws impose liability without regard to whether the owner knew of, or was responsible for, the presence of any hazardous or toxic substances. The presence of such substances, or the failure to properly remediate these substances, may adversely affect the owner’s ability to borrow using the real estate as collateral and may subject the owner to material remediation costs. All of the MOB Properties and ALF and SNF Properties have been subject to Phase I environmental assessments (which involve inspection of the subject property, but no soil sampling or groundwater analysis) by independent environmental consultants. Although restricted in scope, these independent assessments revealed no material evidence of existing environmental liability, and the Company has not been notified by any governmental authority of any noncompliance by, liability for, or other claim against the Company in connection with environmental matters related to the MOB Properties or the ALF and SNF Properties. While the Company is not aware of any environmental liability that it believes would have a material adverse effect on its business, assets or results of operations, no assurance can be given that the environmental assessments revealed all potential environmental liabilities or that a prior owner did not create any material environmental condition not known to the Company or that future uses or conditions (including changes in applicable environmental laws and regulations) will not result in imposition of environmental liability.

The independent environmental assessments include selective sampling for asbestos where the age of the buildings or the types of materials warranted such sampling. Limited quantities of non-friable asbestos are present in some of the Company’s properties. Management believes that it has undertaken adequate measures to ensure that the asbestos will remain undisturbed and that it does not pose a current health risk. Management plans to continue to monitor this situation.

Physicians generate medical waste in the normal course of their practice. The Company’s leases require the individual tenants to make arrangements for the disposal of medical waste and require all tenants to provide proof that they have contracted with a third party service to remove waste from the premises each night. The handling and disposal of this waste is the responsibility of the tenants; however, the Company remains responsible as the owner of the property. There can be no assurance that all such medical waste will be properly handled and disposed of or that the Company will not incur costs in connection with improper disposal of medical waste by its tenants.

3

Table of Contents

Healthcare Industry Regulation. Physicians and senior care operators are subject to heavy government regulation including the determination of the level of reimbursements for medical costs incurred and services provided under government programs. Changes in government regulations regarding medical reimbursements and other regulations affecting the healthcare industry can have a dramatic impact on the operations of medical practitioners or senior care operators under government programs. Both the federal government and many state governments are exploring numerous reforms concerning the healthcare industry that could have a significant impact on many healthcare-related businesses. If legislation were enacted that decreased the level of government medical reimbursements or increased the degree of regulatory oversight, thereby increasing the expenses of healthcare businesses, the Company’s tenant base could be adversely affected. This, in turn, could negatively impact the ability of the Company to make distributions.

Americans with Disabilities Act. All of the MOB Properties and ALF and SNF Properties are required to comply with the Americans with Disabilities Act (“ADA”). The ADA generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and noncompliance could result in imposition of fines by the federal government or an award of damages to private litigants. The Company believes it is in substantial compliance with the ADA and that it will not be required to make substantial capital expenditures to address the requirements of the ADA. If required changes involve a greater expenditure than the Company currently anticipates, the Company’s ability to make distributions could be adversely affected.

4

Table of Contents

The MOB Properties consist of 19 high quality MOBs directly owned by the Company, three MOBs indirectly-owned by the Company, an adjacent parking facility, a research and development building and an office and retail facility. The ALF and SNF Properties consist of two ALFs, eight SNFs and one senior resident apartment complex. As of January 31, 2004, the MOB Properties were 97.7% leased to 413 tenants and the ALF and SNF Properties were 100% leased to operators or under contracts with management companies, other than the North Valley Nursing and Rehabilitation Center in Chico, California which is closed and under contract to be sold by the Company. The Company’s MOB tenants are primarily established medical practitioners representing a cross section of medical practices.

Description of the MOB Properties and ALF and SNF Properties

MOB Properties

The Company, through its MOB operations, acquires, develops, manages and leases MOBs, a research and development building, a parking facility and two retail facilities. Developing and managing MOBs differs from developing and managing conventional office buildings due to the special requirements of physicians and their patients. Doctors now perform a variety of medical procedures in their offices, and as a result, many MOBs have become sophisticated ambulatory centers that allow for outpatient surgery and procedures. In addition, the public areas of MOBs generally have higher maintenance requirements due to heavy foot traffic generated by typically relatively short patient visits. The use of sophisticated medical equipment typically requires the MOBs to provide increased plumbing and electrical capacity and expanded environmental regulations impose more stringent restrictions on the disposal of medical waste than applicable to other commercial office buildings. The management of MOBs generally requires experience in specialized tenant improvements and higher levels of responsiveness required by medical practitioners. Additional important management functions include the placement and relocation of tenants to accommodate increased space needs and managing the tenant mix to facilitate referrals by practitioners with different specialties within the building.

ALF and SNF Properties

The Company, as part of its overall strategy, acquires, develops and leases ALFs and SNFs. The Company typically leases its ALFs and SNFs to third party senior care operators. The operation of ALFs and SNFs requires a high level of experience and expertise due to the specific needs of the residents and the complex administrative functions surrounding the admission and care of residents and the administering of government programs. The operators of ALFs and SNFs must also maintain a positive relationship with local hospitals and other medical providers in order to attract new residents. The Company considers all of the above factors when leasing its facilities to third party operators or hiring managers to operate its facilities.

5

Table of Contents

The following tables set forth certain information regarding each of the MOB Properties and ALF and SNF Properties as of January 31, 2004. All of the MOB Properties and ALF and SNF Properties are held in fee by the Company or, in the case of jointly-owned properties, by a joint venture partnership or limited liability company. Except as noted below, the Company owns 100% of each property.

MOB Properties—Summary Data

See footnotes on page 7

6

Table of Contents

ALF and SNF Properties—Summary Data

7

Table of Contents

MOB Properties

Six of the MOB Properties are located on North Bedford and North Roxbury Drives in the “Golden Triangle” area of Beverly Hills, California, near three major hospitals—Cedars Sinai Medical Center, Century City Hospital and UCLA Medical Center. The buildings feature high quality interior improvements, including rich wood paneling and brass hardware appointments, both in the common areas and in most of the doctors’ offices. These six MOB Properties include twenty-one operating rooms. The 405, 416 and 436 North Bedford Drive buildings each have emergency back-up generators. Parking for these six MOB Properties is provided in the 415 North Bedford garage and in subterranean parking at 436 North Bedford and 435 North Roxbury Drives. Each of these MOBs has copper insulated pipe with sufficient capacity for medical use, electrical systems designed for extra load requirements and extensive security systems.

405 North Bedford Drive

405 North Bedford Drive, built in 1947 and extensively remodeled in 1987, consists of approximately 45,000 rentable square feet in four stories plus a penthouse and a basement. The reinforced brick building, with ground floor retail space, features cherry wood paneled walls and brass hardware in the common areas and decorative concrete trim on the exterior.

415 North Bedford Drive

415 North Bedford Drive is a four-level parking structure with approximately 5,700 square feet of ground floor retail space for seven tenants. The parking structure contains 316 spaces and is valet operated.

416 North Bedford Drive

416 North Bedford Drive is a four-story, approximately 40,000 rentable square foot reinforced brick MOB with a basement and ground floor retail space. Built in 1946 and extensively remodeled in 1986, the building features oak paneled walls and moldings, brass hardware, tinted concrete borders on the exterior, and fourth floor skylights that provide an open, airy atmosphere in the hallway and in some of the suites.

435 North Bedford Drive

435 North Bedford Drive is a four-story, approximately 54,000 rentable square foot reinforced brick and masonry MOB with a penthouse, basement, and ground floor retail space. Built in 1950 and extensively remodeled in 1984, the building features oak molding, wall sconces and paneling in the hallways plus stained runner boards and built-in stained hardwood cabinets in some of the medical office suites.

435 North Roxbury Drive

435 North Roxbury Drive is a four-story, approximately 41,000 rentable square foot MOB with a penthouse, subterranean parking and retail space on the ground floor. The building, which was built in 1956 and extensively remodeled in 1983, features a reinforced brick and masonry exterior and raised, oak-stained paneling and molding in the hallways.

436 North Bedford Drive

436 North Bedford Drive is a three-story, approximately 74,000 rentable square foot MOB with three levels of subterranean parking. Built in 1987, the building features ground floor retail and office space surrounding a central courtyard and balconies at selected locations on the second and third floors. The exterior is clad in rose color sandstone with cast stone and granite trim. The central courtyard features a cascading waterfall sculpture and stone pavers with intricate marble and stone patterns. Cherry wood paneled walls also line the elevator lobbies on all floors and portions of the hallways.

8

Table of Contents

Sherman Oaks Medical Plaza

The Sherman Oaks Medical Plaza is a seven-story, approximately 68,000 rentable square foot MOB, constructed in 1969, that is adjacent to the Sherman Oaks Hospital and Health Center, a 156-bed hospital which includes the major burn center for the San Fernando Valley. A $1 million capital improvement program renovating the building systems and common areas of the Sherman Oaks Medical Plaza was completed in 1993. The Company also owns the adjacent air rights and three-level parking structure behind the property which provides a total of 426 parking spaces. The land beneath the parking structure is owned by Sherman Oaks Hospital which also leases 150 parking spaces in the structure.

Irwindale Building

The Irwindale Building in Irwindale, California is a two-story, approximately 48,000 square foot research and development building, constructed in 1992, on a site that provides two parking areas with a total of 244 spaces. The Company converted this building from an MOB to an R&D building in 2001. Prior to 2001, this property was 100% leased to Cigna Healthcare of California (“Cigna”). After Cigna bought out their lease, the Company converted the building to an R&D facility in order to re-lease the building to Autronics Corporation, a British-based electronics company. The lease with Autronics Corporation commenced on July 1, 2001 and expires on June 30, 2008. The lease is guaranteed by Curtiss-Wright Corporation, the parent company of Autronics Corporation. The Irwindale Building was sold by the Company on March 18, 2004.

Coronado Plaza

Coronado Plaza is a three-story, approximately 40,000 rentable square foot office and retail complex located in Coronado, California. The building is located on the beach across the street from the Hotel Del Coronado and the majority of the second and third floor suites have unobstructed ocean views. The building has subterranean parking for 96 vehicles plus street parking surrounding the entire property.

Holy Cross Medical Plaza

The Holy Cross Medical Plaza is situated on approximately 2.6 acres of the 15-acre campus of Holy Cross Medical Plaza, a 316-bed hospital. The campus also includes the Villa de la Santa Cruz SNF, another MOB, a magnetic resonance imaging center, and an outpatient diagnostic center. Built in 1985, the Holy Cross Medical Plaza is a three-story, approximately 72,000 square foot MOB occupied primarily by medical and dental practitioners. A two-story parking structure and an open asphalt-paved lot can accommodate a total of 333 vehicles. The surrounding site is landscaped with grass, trees, shrubs and planter boxes.

Lyons Avenue Medical Building

The Lyons Avenue Medical Building is a two-story, approximately 49,000 rentable square foot MOB located in Valencia, California only ½ mile from the Henry Mayo Newhall Memorial Hospital. The building has subterranean parking and a two-story atrium entry. The building’s excellent market position provides first class medical space for those doctors that do not need an association with the hospital.

Tustin—MOB I

The 14591 Newport Avenue building in Tustin, California is a two-story, approximately 18,000 rentable square foot MOB that was constructed in 1969 on a 1.2-acre site. The site is landscaped with grass lawns, shrubs, and trees and includes an asphalt-paved parking lot with approximately 105 parking spaces, representing a parking ratio of 5.8 parking spaces per 1,000 square feet of building area.

9

Table of Contents

Tustin—MOB II

The 14642 Newport Avenue building in Tustin, California is a four-story, approximately 49,000 rentable square foot MOB, developed in 1985, that features a surgery center with three operating rooms, a pharmacy, and an industrial clinic on the first floor. Medical offices are located on all of the other floors.

Regents Medical Center

The Regents Medical Center is a three-story, approximately 67,000 rentable square foot MOB situated on approximately 2.6 acres in the University Town Center area of San Diego, near the University of California, San Diego. The building, which was constructed in 1989, has ground level retail spaces, two upper floors of medical offices, and subterranean and ground level parking that can accommodate a total of 285 vehicles.

San Pedro Medical Plaza

The San Pedro Medical Plaza in San Pedro, California is an approximately 59,000 rentable square foot complex consisting of three MOBs. The buildings are located across the street from the San Pedro Peninsula Hospital and are situated on 7.85 acres incorporating a 383 space surface parking lot.

1095 Irvine Boulevard

The 1095 Irvine Boulevard building in Tustin, California consists of approximately 10,000 rentable square feet and was redeveloped in 1995 as a primary health care center for physicians who are part of the St. Joseph Hospital of Orange health care network. The property is leased to St. Joseph Hospital, Inc. under a net lease with a 15-year term, which began in August 1995, and provides for annual cost of living rent escalations limited to 3%. The lease provides for monthly rent of $19,000 and expires on July 31, 2010.

Santa Clarita Valley Medical Center

The Santa Clarita Valley Medical Center in Valencia, California is an approximately 42,000 square foot complex consisting of four one-story MOBs and one two-story MOB. The buildings are located on the Henry Mayo Newhall Memorial Hospital Campus, the only regional hospital in the area. The campus includes a 241-bed medical center and another MOB. An adjacent parking lot can accommodate up to 435 vehicles.

Santa Clarita Valley Medical Center, Bldg F

Building F at the Santa Clarita Valley Medical Center is a two-story, approximately 44,000 square foot MOB built by the Company in 1999. The building is located on the Henry Mayo Newhall Memorial Hospital Campus and is adjacent to the other five MOBs owned by the Company on the Hospital Campus. Building F is the premier medical office building in the Santa Clarita Valley area.

Santa Clarita Valley Foundation Building

The Foundation Building is a one-story, approximately 8,000 square foot MOB that is located on the Henry Mayo Newhall Memorial Hospital Campus and is currently 100% leased to the Henry Mayo Newhall Hospital Foundation. On June 9, 2003, the Company purchased approximately 10 acres of land from the Henry Mayo Newhall Hospital for $3.9 million. As part of the purchase, the Company acquired the Foundation Building and approximately 4 acres of vacant land along with the approximately 6 acres of land that the Company had been leasing for $264,000 from the Henry Mayo Newhall Memorial Hospital. The Santa Clarita Valley Medical Center MOBs are located on the 6 acres of the land that were previously leased from the Henry Mayo Newhall Memorial Hospital.

10

Table of Contents

ALF and SNF Properties

Southern California Properties

The Arbors at Rancho Penasquitos

The Arbors at Rancho Penasquitos is a 92-unit, approximately 52,000 square foot, three-story ALF located in Rancho Penasquitos, California. The building was originally built in 1988 as a Ramada Hotel. In 1998, the Company, in joint venture with Parsons House, LLC, purchased the property and converted it into The Arbors at Rancho Penasquitos. The facility opened in March 1999 and now holds a prestigious CARF accreditation given for high quality of care. The facility contains a 38-unit Alzheimer’s care wing that includes a private garden and activities room. The remaining 54 units are for assisted living residents. Each unit contains approximately 360 square feet and includes a small kitchenette. The facility contains a kitchen, dining room, activity room and a lounge. The 2.07-acre property also has a parking lot that can accommodate up to 114 cars. The Arbors is located in an excellent market area of San Diego County and sustained 100% occupancy during most of 2003.

Prestige Assisted Living at Yorba Linda

Prestige Assisted Living at Yorba Linda is a two story, 80-unit, approximately 50,000 square foot ALF located in Yorba Linda, California. Construction began on the facility in October 1999 and was completed in the first quarter of 2002. The facility houses a 16-unit Alzheimer’s care wing with the remaining 64 units for assisted living residents.

The facility experienced a successful lease-up and as of January 31, 2004 was over 90% occupied. The facility features a full service restaurant style dining room, community room, TV lounges, movie theater and beauty parlor. The property is conveniently located in an upscale area of Orange County.

Arizona Properties

Maryland Gardens

Maryland Gardens is a 98-bed SNF located in Phoenix. The facility specialized in behavioral and Alzheimer’s care. The facility is situated on approximately 1.84 acres and consists of a 60-bed SNF and a 38-unit Alzheimers unit. The facility is leased to Senior Management Resources II, LLC, a Phoenix, Arizona-based operator of SNFs. Through its special behavioral programs, Maryland Gardens has provided the Phoenix area with a unique service for which there is high demand. The behavioral SNF is typically 100% occupied with a waiting list.

Maryland Gardens II

Maryland Gardens II is a 20-unit, approximately 30,000 square foot apartment complex acquired by the Company in May 1998. The building is located on a 1.0-acre lot adjacent to the Maryland Gardens SNF. The building, named the Winter Gardens Apartments, currently consists of residential tenants. The property also includes a 1.0-acre vacant parcel of land and a duplex building.

Maryland Properties

St. Thomas More Nursing and Rehabilitation Center is a 220-bed SNF located in Hyattsville, Maryland, a suburb of the Washington, D.C. metropolitan area. The facility lies on a 7 acre campus which includes a chapel built by the Arch Diocese of Washington, D.C. in 1956. The facility’s primary focus is on providing aggressive rehabilitation services to assist residents in achieving their maximal level of functioning. The facility hosts a state of the art inpatient/outpatient hemodialysis unit on site, which serves both short-term and long-term residents. This unique ability provides a continuity of care to those short-term residents when they return to their homes.

Through its caring staff and their commitment to quality, the facility achieved “Accreditation with Full Standards Compliance” from the Joint Commission on Accreditation of Healthcare Organizations. The facility is managed by Neiswanger Management Services, LLC, a Maryland based operator.

11

Table of Contents

Massachusetts Properties

Hampden Properties

G&L Hampden, LLC, a wholly owned subsidiary of the Company, acquired three nursing home properties in Massachusetts on October 28, 1997 from Hampden Nursing Homes, Inc. (“HNH”), a nonprofit corporation. Lenox Healthcare, Inc. (“Lenox”) managed the three facilities from October 1998 through December 1999. In November 1999, Lenox filed for bankruptcy protection. The Company immediately moved to replace Lenox as the manager of the nursing homes. In January 2000, the Company received the bankruptcy court’s permission to replace Lenox as the manager and a new management firm, a subsidiary of Roush & Associates (“Roush”), was immediately retained. Since acquiring the properties from HNH, HNH had held the licenses necessary to operate the facilities. In March 2000, the Company successfully transferred the licenses to G&L Massachusetts, LLC, a subsidiary of the Operating Partnership.

Riverdale Gardens

Riverdale Gardens Nursing Home, located in West Springfield, Massachusetts, is a 168-bed nursing facility currently licensed for 84 skilled care and 84 intermediate care beds with 16 private and 76 double occupancy rooms. Constructed in various stages between 1957 and 1975, the property consists of a single story 54,451 square foot building on approximately 3.85 acres as well as a 3,366 square foot single family residence on an adjacent 30,000 square foot lot.

Chestnut Hill

Chestnut Hill Nursing Home, located in East Longmeadow, Massachusetts, is a 123 bed nursing home consisting of 82 skilled nursing and 41 intermediate care beds with 15 private and 54 double occupancy rooms. The facility is a 49,198 square foot single story building constructed in 1984 on approximately 11.9 acres of land.

Mary Lyon

Mary Lyon Nursing Home, located in Hampden, Massachusetts, occupies a 28,940 square foot building situated on 3.7 acres and was originally constructed in 1959 and renovated in 1986. The facility is licensed for 100 beds of which 40 are skilled nursing and 60 are intermediate care beds with ten private rooms, 39 double occupancy rooms and three quadruple occupancy rooms.

Ring East Nursing Home

Ring East Nursing Home, located in Springfield, Massachusetts, occupies an approximately 58,000 square foot building, was constructed in 1987 and opened in 1988. The facility is licensed for 120 beds and residents include both short-stay post-acute patients as well as long-term care residents.

Washington Property

Pacific Care Center

Pacific Care Center is a 112-bed SNF located in Hoquiam within three miles of the only acute care hospital in the market area. A new manager was hired in August 2003 and the facility has recently experienced high occupancy and strong state inspection survey results.

Leases

MOB Properties

As of January 31, 2004, the MOB Properties were approximately 97.7% leased. New leases and extensions are normally granted for a minimum of three to five years and provide for annual rent increases. Office tenants generally have gross leases whereby rents may be adjusted for a tenant’s proportionate share of any increases in the cost of

12

Table of Contents

operating the building. However, the Company has recently been leasing office space with provisions for the tenants to pay all utility costs directly. Most retail tenants have net leases and pay their share of all operating expenses including property taxes and insurance. The following is a lease expiration table setting forth the number, square feet and associated annual rent for those leases expiring in future years.

MOB Properties—Lease Expirations

The Company has generally enjoyed strong lease renewals, achieving a weighted average renewal rate of approximately 79.7% on MOB leases that expired during 2003. Although there can be no assurance that this renewal level will be maintained, the Company believes this high renewal rate is due in part to the tendency of medical practitioners to continue to practice in the same space over a number of years. Also, the Company’s tenants frequently invest large sums of money in equipment and fixtures for their offices. Furthermore, relocating a doctor’s office can be disruptive to the patients who are familiar with the doctor’s office location.

Senior Care Loans

From 1995 through 1999, the Company was in the business of originating loans secured by healthcare properties. Since 1999, the Company has made no secured loans and has exited the business of originating loans. As of December 31, 2003, the Company had seven loans outstanding that total approximately $4.2 million before reserves of $3.5 million. Management believes that $3.5 million is appropriate in relation to the status of the loans in the Company’s portfolio as of March 30, 2004.

Notes Receivable from Stockholders

The Company has two unsecured promissory notes totaling $5.24 million to Daniel M. Gottlieb and Steven D. Lebowitz, the Company’s chief executive officer and president, respectively, and the owners of 100% of the Company’s outstanding common stock. As of December 31, 2003, all accrued interest had been paid and the outstanding principal balance on the notes was $5.11 million.

Insurance

The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to the MOB Properties and certain ALF and SNF Properties. There are certain types of losses that may either be uninsurable or not economically insurable; moreover, there can be no assurance that policies maintained by the Company will be adequate in the event of a loss. The Company carries earthquake and flood insurance for coverage of losses up to $35 million on the MOB Properties and certain ALF and SNF Properties located in California and Arizona, which amount represents approximately 25% of the net book value of these properties. This

13

Table of Contents

coverage is subject to a 10% deductible up to the amount of insured loss. The ALF and SNF Properties located in Washington and Massachusetts do not carry earthquake or flood insurance. Twenty-eight of the 36 properties directly or indirectly owned by the Company are located in Southern California, which has a history of seismic activity, including the 1994 Northridge earthquake that damaged the Holy Cross Medical Plaza property. Two ALF and SNF Properties owned by the Company are located in Phoenix, Arizona, in an area with a history of flood activity. Where the Company does not directly insure against casualty or liability, the Company requires the lessees or operators of its ALF and SNF Properties to maintain such insurance and name the Company and its subsidiaries as additional insured with full rights of a direct beneficiary in the event of loss. Should an uninsured loss occur, the Company could lose its investment in, and anticipated earnings and cash flow from, a property.

There is no material pending litigation to which the Company or its consolidated or unconsolidated subsidiaries is a defendant or to which any of their properties is subject other than routine litigation arising in the ordinary course of business, most, if not all, of which is expected to be covered by insurance, except as discussed below.

There are a number of common stockholder class actions pending against the Company and its directors that arose out of the proposal by Daniel M. Gottlieb, the Chief Executive Officer of the Company, and Steven D. Lebowitz, the President of the Company, to acquire all of the outstanding shares of the Company’s common stock not then owned by them. The first suit, Lukoff v. G & L Realty Corp. et al., case number BC 241251, was filed in the Superior Court for the State of California, County of Los Angeles, on December 4, 2000. A second suit, Abrons v. G & L Realty Corp. et al., case number 24-C-00-006109, was filed in the Circuit Court for Baltimore City, Maryland, on December 14, 2000. This suit was voluntarily dismissed without prejudice on June 7, 2001, and re-filed in the Superior Court for the State of California, County of Los Angeles, case number BC 251479, on May 31, 2001. Morse v. G & L Realty Corp. et al., case number 221719-V, was filed in the Circuit Court for Montgomery County, Maryland, on May 17, 2001. Another suit, Harbor Finance Partners v. Daniel M. Gottlieb et al., case number BC 251593, was filed in the Superior Court for the State of California, County of Los Angeles, on June 1, 2001. All these actions assert claims for breach of fiduciary duty and seek compensatory damages and other relief. The Lukoff, Abrons and Harbor Finance actions have been consolidated for all purposes, with Lukoff designated as the lead action. No trial date has been set. The Morse action has been stayed pending the conclusion of the California class actions.

In addition, a group of four former common stockholders of the Company filed an individual suit against the Company and its directors arising from the same conduct alleged in the putative class actions. This suit, Lyle Weisman, et al. v. G & L Realty Corp., et al., case number BC 271401, filed in the Superior Court of California, County of Los Angeles, on April 4, 2002, asserts claims for breach of fiduciary duty and fraud against the director defendants The third amended complaint also asserts a claim for unjust enrichment against Messrs. Gottlieb and Lebowitz and a claim for unfair competition under Business and Professions Code sections 17200 et seq. against Messrs. Gottlieb and Lebowitz and the Company. The Weisman plaintiffs have also attempted to plead claims for alleged intentional interference with prospective business advantage based on interference with the Weisman plaintiffs’ purported efforts to acquire the Company. However, the Court has dismissed the Weisman plaintiffs’ interference claims on the basis of the pleadings without leave to amend.

On January 17, 2003, the Company and Messrs. Gottlieb and Lebowitz jointly filed a cross-complaint against the Weisman plaintiffs alleging that their acquisition proposals were made with no real intent to acquire the Company, but simply to disrupt the Company’s existing merger agreement with Messrs. Gottlieb and Lebowitz. The cross-complaint asserts causes of action for, among other things, intentional interference with contract, intentional interference with prospective economic advantage, and fraud. The Weisman suit has been consolidated with the Lukoff class actions for purposes of discovery. No trial date has been set in this action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

14

Table of Contents

PART II

Until October 29, 2001, the Company’s Common Stock was listed on the New York Stock Exchange under the symbol GLR. On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company, substantially on the terms provided for in the Agreement of Plan and Merger, dated as of May 10, 2001, as amended, by and between the Company and G & L Acquisition, LLC (the “Merger”). G & L Acquisition, LLC is owned by Daniel M. Gottlieb and Steven D. Lebowitz, Chief Executive Officer and President, respectively, of the Company. Upon completion of the Merger, each outstanding share of the Company’s Common Stock, other than a portion of the shares held by Messrs. Gottlieb and Lebowitz, was converted into the right to receive $13.00 in cash, without interest. After completion of the Merger, the Company’s Common Stock was delisted from the New York Stock Exchange. There is no established public trading market for the Company’s common stock. As of March 30, 2004, the Company had two holders of its Common Stock.

During 2003 and 2002, the Company paid common stock dividends of $0.8 million in the second quarter of 2003, $4.5 million in the fourth quarter of 2003 and $0.5 million in the fourth quarter of 2002.

The Company also paid monthly dividends to holders of the Company’s Series A (GLRPRA) and Series B (GLRPRB) Preferred Stock on the fifteenth day of each month. Dividends are paid monthly at the rate of $2.56 and $2.45 per annum on shares of the Company’s Series A and Series B Preferred Stock, respectively. Distributions on the Company’s Series A and Series B Preferred Stock are senior to all classes of the Company’s Common Stock. Subsequent to the Merger, the Company’s Series A and Series B Preferred Stock is still outstanding and traded on the New York Stock Exchange.

15

Table of Contents

The following table sets forth consolidated selected financial and operating information for the Company for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999. The following information should be read in conjunction with all of the financial statements and notes thereto included in this Form 10-K. This data also should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The consolidated selected financial and operating data as of December 31, 2003, 2002, 2001, 2000 and 1999 and for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from audited financial statements.

16

Table of Contents

17

Table of Contents

The following discussion should be read in conjunction with the Consolidated Selected Financial Data and the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other comparable terminology. Any one factor or combination of factors could cause the Company’s actual operating performance or financial results to differ substantially from those anticipated by management. Factors influencing the Company’s operating performance and financial results include, but are not limited to, changes in the general economy, the supply of, and demand for, healthcare related real estate in markets in which the Company has investments, the availability of financing, governmental regulations concerning, but not limited to, new construction and development, the creditworthiness of tenants and borrowers, environmental issues, healthcare services and government participation in the financing thereof, and other risks and unforeseen circumstances affecting the Company’s investments which may be discussed elsewhere in this Annual Report on Form 10-K.

Critical Accounting Policies

Revenue recognition. The majority of the Company’s revenues results from rents from operating leases. Base rental income is recognized on a straight-line basis over the term of the lease regardless of when payments are due. Certain leases include rent concessions and escalation clauses creating an effective rent that is included in unbilled rent receivable. The remaining source of the Company’s revenue is from patient revenue derived from its operation of three SNFs located in Massachusetts. Patient revenue is reported at the estimated net realizable amount from patients, third party payors and others for services rendered, net of contractual adjustments.

Allowances for doubtful accounts, notes and bonds receivable. Tenant rents and reimbursements receivable, unbilled rent receivable and mortgage loans and bonds receivable are carried net of the allowances for doubtful accounts, notes and bonds receivable. Management’s determination of the adequacy of these allowances requires significant judgments and estimates. Tenant rents and reimbursements receivable consist of amounts due for contractual lease payments and reimbursements for common area maintenance, property taxes, insurance and other expenses due from tenants. Management regularly reviews its tenant receivables and adjusts the allowance based on specific identification, in management’s opinion, of an individual tenant’s ability to pay its obligations under the terms of its lease. Unbilled rent receivable consists of the cumulative straight-line rental income recorded to date that exceeds the actual amounts billed to date under the Company’s lease agreements. Based on historical loss experience, management has typically maintained a reserve for unbilled rent receivable equal to 10% to 20% of the unbilled rent receivable balance. Mortgage loans and bonds receivable consist of the Company’s investment in loans secured by real property along with certain unsecured notes. Management regularly evaluates its loan portfolio and adjusts the allowance based on the specific identification, in management’s opinion, of a borrower’s ability to pay its obligations under the terms of the loan.

Long-lived assets. The Company’s assets consist mainly of investments in real property. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that an asset’s book value exceeds the undiscounted expected future cash flows to be derived from that asset. Whenever undiscounted expected future cash flows are less than the book value, the asset will be reduced to estimated fair value and an impairment loss will be recognized. The Company recorded no impairment losses in 2003, 2002 and 2001.

Results of Operations

Comparison of the Year Ended December 31, 2003 Versus the Year Ended December 31, 2002

Total revenues increased by $2.0 million, or 4%, from $55.2 million for the year ended December 31, 2002, to $57.2 million for the same period in 2003. The increase was due to an increase in patient revenues of $1.8 million and an increase in other income of $1.2 million. These increases were offset by a $1.7 million decrease in interest and loan fee income.

18

Table of Contents

Patient revenues relating to the skilled nursing facilities located in Hampden, Massachusetts, which are operated by the Company, increased by $1.8 million, or 8%, from $24.3 million for the year ended December 31, 2002, to $26.1 million for the same period in 2003. This increase was mainly due to increased occupancy and a higher percentage of Medicare patients for which the government pays a higher reimbursement rate. Although patient revenues increased 8% over 2002, higher operating expenses reduced the total income from operations produced by the Company’s skilled nursing facilities located in Hampden, Massachusetts in the year 2003 by $0.7 million.

Rents, tenant reimbursements and parking revenues increased by $0.6 million, or 2%, from a combined total of $27.1 million for the year ended December 31, 2002, to $27.7 million in 2003. Increased occupancy and rental rates along with tenants reimbursing the Company for a greater share of building operating expenses per the terms of their lease agreements at the Company’s MOB properties accounted for a $1.1 million increase in rental revenue, tenant reimbursement and parking revenues. This increase was offset by a decrease in rental revenue of $0.5 million due to a lease amendment at one of the Company’s SNFs. Due to continuing operating losses at the Company’s SNF located in Hoquiam, Washington, the Company is not receiving any rental revenue from this facility as it had in 2002. In August 2003, the Company hired a new operator to manage this SNF and the facility has begun to stabilize. The Company expects this SNF to start producing a profit in 2004.

Interest and loan fee income decreased $1.7 million from $2.5 million for the year ended December 31, 2002 to $0.8 million in 2003. This decrease was due to the non-recurrence in 2003 of fees associated with the early repayment in 2002 of the Company’s two notes receivable related to a SNF located in Hyattsville, Maryland.

Other income increased $1.2 million, or 79%, from $1.4 million for the year ended December 31, 2002 to $2.6 million for the same period in 2003. This increase is due to the collection of $1.0 million related to a $4.6 million loan made by the Company in 1997 to Aspen Paso Robles, Inc. (“Aspen”) for the purchase of three SNFs located in Northern California. The loan has been in default since December 1999 and has been fully reserved by the Company.

Interest expense increased $11.5 million, or 85%, from $13.6 million for the year ended December 31, 2002, to $25.1 million for the same period in 2003. Interest expense increased by $13.2 million from 2002 to 2003 due to prepayment penalties and the write-off of deferred loan fees relating to the early repayment of five individual loans totaling $101.3 million. Interest expense also increased an additional $0.2 million due to a new $4.3 million loan secured by a SNF located in Phoenix, Arizona that was obtained in December 2002. These increases were offset by decreases in interest expense totaling $1.9 million. A decrease in interest expense on the Company’s variable rate mortgages due to lower interest rates accounted for $1.3 million of the total decrease. The remaining $0.6 million decrease was due to the decline in the fair market value of the Company’s LIBOR interest rate cap. The Company recognized a $0.3 million loss related to the decline in the fair market value of its LIBOR interest rate cap during 2003 compared to a $0.9 million loss in 2002. The value of the LIBOR interest rate cap fluctuates based upon current prevailing market interest rates. For the years ended December 31, 2001 and 2002, the Company recognized a $0.5 million gain and a $0.9 million loss, respectively, on the fair market value of its LIBOR interest rate cap, thus, the net effect on earnings since the Company’s purchase of this financial instrument has been a $0.7 million loss. In October 2003, the Company sold the LIBOR interest rate cap for $0.2 million

General and administrative costs increased $1.3 million, or 39%, from $3.3 million for the year ended December 31, 2002, to $4.6 million for the same period in 2003. This increase was attributed to an increase in corporate staffing costs as well as additional legal costs.

Provisions for doubtful accounts, notes and bonds receivable decreased by $0.6 million, or 60%, from $1.6 million for the year ended December 31, 2002, to $1.0 million for the same period in 2003. This decrease is the result of a decrease in reserves associated with the Company’s SNF located in Hoquiam, Washington.

Equity in earnings of unconsolidated affiliates increased $3.9 million for the year ended December 31, 2003 compared to the same period in 2002. This increase was partially due to the sale of a 23,000 square foot MOB located in Aliso Viejo, California in which the Company held a 50% interest. The Company recognized a gain of approximately

19

Table of Contents

$1.3 million as a result of this sale. In addition, another joint venture, in which the Company also held a 50% interest, sold an ALF located in Omaha, Nebraska. The Company recognized a gain of approximately $2.6 million as a result of the sale.

Gains from sale of discontinued operations increased $5.0 million, or 217%, from $2.3 million for the year ended December 31, 2002, to $7.3 million for the same period in 2003. The Company recognized net gains from discontinued operations in the amount of $7.3 million during 2003 due to the sale of two of its MOB properties and one of its ALFs. The sale, in October 2003, of a one-story, 9,100 square foot retail facility located in Aliso Viejo, California accounted for a gain of $0.8 million, while the sale, in December 2003, of a two-story, 26,000 square foot MOB located in Burbank, California accounted for a gain of $1.4 million. In addition, in December 2003, the Company sold its membership interest in a joint venture that owned a 92-unit ALF located in Santa Monica, California for $6 million and recognized a net gain on sale of $5.1 million. The Company recognized a net gain from discontinued operations in the amount of $2.3 million for the year ended December 31, 2002. The sale, in January 2002, of a 183-bed hospital located in Tustin, California to Pacific Health Corporation, the operator of the hospital, accounted for a gain of $2.4 million. This gain was offset by a loss of $0.1 million due to the sale, in May 2002, of a SNF located in Paso Robles, California.

Comparison of the Year Ended December 31, 2002 Versus the Year Ended December 31, 2001

Total revenues increased by $5.4 million, or 11%, from $49.8 million for the year ended December 31, 2001, to $55.2 million for the same period in 2002. The increase was due to an increase in rental revenues and tenant reimbursements of $2.9 million and an increase in patient revenues of $3.2 million. These increases were offset by a $0.3 million decrease in interest and loan fee income as well as a $0.4 million decrease in other income.

Patient revenues relating to the skilled nursing facilities located in Hampden, Massachusetts, which are operated by the Company, increased by $3.2 million, or 15%, from $21.1 million for the year ended December 31, 2001, to $24.3 million for the same period in 2002. This increase was due to increased occupancy and higher patient reimbursement rates.

Rents, tenant reimbursements and parking revenues increased by $2.9 million, or 12%, from a combined total of $24.2 million for the year ended December 31, 2001, to $27.1 million in 2002. The January 2002 acquisition of a SNF in Hyattsville, Maryland accounted for $1.5 million of this increase while increased occupancy and rental rates per the terms of its lease agreements at the Company’s MOB properties accounted for an additional $1.4 million increase in rental revenue.

Interest and loan fee income decreased $0.3 million from $2.8 million for the year ended December 31, 2001 to $2.5 million in 2002. This decrease was due to a $0.5 million decrease in the fair market value of the LIBOR interest rate cap associated with the $35 million loan with GMAC. This decrease was offset by a $0.2 million increase in interest and loan fee income due to fees associated with the early repayment of the Company’s two notes receivable related to a SNF located in Hyattsville, Maryland.

Interest expense increased $3.4 million, or 33%, from $10.2 million for the year ended December 31, 2001 to $13.6 million in 2002. Most of this increase, $3.0 million, was due to the interest expense associated with the Company’s $35 million loan with GMAC that was obtained in October 2001 in order to repurchase the Company’s outstanding common stock. An additional $1.0 million of the increase was due to the decline in the fair market value of the LIBOR interest rate cap associated with the $35 million loan. These increases were offset by a $0.6 million decrease in interest expense on the Company’s variable rate mortgages due to lower interest rates. While the Company recognized a $1.0 million loss related to the decline in the fair market value of its LIBOR interest rate cap, the value of the LIBOR interest rate cap fluctuates based upon current prevailing market interest rates. For the year ended December 31, 2001, the Company recognized a $0.5 million gain on the fair market value of its LIBOR interest rate cap, thus, the net effect on earnings since the Company’s purchase of this financial instrument has been a $0.5 million loss.

Provisions for doubtful accounts, notes and bonds receivable increased by $0.6 million, or 60%, from $1.0 million for the year ended December 31, 2001, to $1.6 million for the same period in 2002. This increase is the result of the Company’s concern about the collectibility of its rents receivables related to its SNF located in Hoquiam, Washington as well as its ALF located in Tarzana, California.

20

Table of Contents

Income from assets held for sale decreased $3.3 million from a gain of $2.3 million for the year ended December 31, 2001 to a loss of $1.0 million for the same period in 2002. The main reason for this decrease was a $2.6 million decrease in lease termination income. The Company recognized lease termination income in the amount of $2.6 million during 2001 related to the settlement of a lawsuit for delinquent rent, future rent and other amounts owed under a lease at the Company’s MOB located in Irwindale, California. The Company sued the tenant, which had been in default on their rent since December 1999, to recover the delinquent rent payments as well as all future rent through the end of the lease which expired on November 30, 2004. In January 2001, the Company received a settlement in the amount of $4.1 million. At the time of the settlement the total delinquent rent was approximately $1.5 million.

The Company recognized a net gain from discontinued operations in the amount of $2.3 million during the year ended December 31, 2002. The sale, in January 2002, of a 183-bed hospital located in Tustin, California to Pacific Health Corporation, the operator of the hospital, accounted for a gain of $2.4 million. This gain was offset by a loss of $0.1 million due to the sale, in May 2002, of a SNF located in Paso Robles, California.

Liquidity and Capital Resources

As of December 31, 2003, the Company had $12 million of cash on hand. As of March 30, 2004, cash on hand had increased to approximately $16 million. The Company obtains its liquidity from multiple internal and external sources. Internally, funds are derived from the operation of its MOBs, SNFs and ALFs. The MOB Properties produced net income of approximately $3.2 million before minority interests for the year ended December 31, 2003. The $3.2 million includes $13.2 million of prepayment penalties and deferred loan fee write offs from the Company’s 2003 refinancings along with $2.3 million of gains from asset sales and a $1.2 million gain on sale of assets in unconsolidated affiliates. The MOB Properties contain approximately 832,000 rentable square feet and, as of January 31, 2004, were approximately 97.7% leased to over 400 tenants with lease terms typically ranging from three to ten years.

The ALFs produced approximately $5.5 million of net income for the year ended December 31, 2003 including a gain on the sale of $5.1 million of the Company’s membership interest in a joint venture that owned an ALF located in Santa Monica, California and a $2.6 million gain on sale of assets in unconsolidated affiliates. The ALFs are leased to operators who manage the facilities for the Company. All of the leases are for five years or less with non-credit tenants.

The SNFs produced a net loss of approximately $1.2 million for the year ended December 31, 2003. All of the SNFs, with the exception of the three SNFs located in Hampden, Massachusetts where the Company holds the operating licenses and has entered into a management agreement with a local operator and also the North Valley Nursing and Rehabilitation Center which is closed, are leased to operators who manage the facilities for the Company. In the event that the operators of the ALFs and SNFs are unable to effectively operate the facilities, the ability of the operators to make rental payments to the Company may become impaired and the Company may need to commit additional capital to the facilities in order to keep them operating. If any of these operators experience financial difficulty, the financial position of the Company and the ability of the Company to make expected distributions would likely be adversely affected.

The Company’s principal external sources of capital consist of various secured loans and selective asset sales. As of December 31, 2003, the Company had secured loans outstanding of approximately $196.3 million. The Company has also been selling some of its assets in order to provide additional liquidity. During 2003, the Company used the net proceeds from four new 10-year loans totaling $47.0 million and three new 7-year loans totaling $59.5 million to repay the outstanding balance of $31.7 million on the Company’s $35.0 million loan obtained in October 2001 in order to repurchase the Company’s outstanding common stock. These new loans are individually secured by five of the Company’s MOB properties located in Beverly Hills, California, an MOB located in Sherman Oaks, California and an MOB located in La Jolla, California. The Company’s 2003 refinancings and asset sales are discussed below.

21

Table of Contents

On February 23, 2003, a joint venture, in which the Company held a 50% interest, sold a 23,000 square foot MOB located in Aliso Viejo, California for $7.3 million. The Company received net proceeds of $1.2 million from the sale.

On February 28, 2003, another joint venture in which the Company held a 50% interest, sold an ALF located in Omaha, Nebraska for $11.1 million. The Company received net proceeds of $1.8 million from the sale.

Also on February 28, 2003, the Company refinanced an MOB located in Beverly Hills, California for $8.2 million. The loan proceeds were used to repay the existing loan of $7.2 million along with other costs associated with the loan. The new loan bears interest at a fixed rate of 5.55% per annum and is due on February 1, 2013.

On May 22, 2003, the Company refinanced a loan secured by an MOB located in Valencia, California with an $8.6 million loan. The loan proceeds were used to repay the existing $4.6 million as well as other financing costs. The new loan has a ten year term and bears interest at a fixed rate of 5.48% per annum.

On June 3, 2003, the Company refinanced a loan secured by four of its MOBs located in Beverly Hills, California with four new loans totaling $47.0 million. The proceeds were used to repay the existing $26.2 million loan as well as $14.9 million against the outstanding balance of the Company’s $35 million loan obtained from GMAC in October 2001. The new loans have ten year terms and bear interest at a fixed rate of 5.68% per annum.

On June 9, 2003, the Company purchased a parcel of land in Valencia, California on which six of its MOBs are located and an adjacent parcel of land on which an 8,000 square foot building is situated. The Henry Mayo Newhall Memorial Hospital is leasing this building for $10,634 per month. The total purchase price was $3.9 million. The Company had previously been leasing this land from the Henry Mayo Newhall Memorial Hospital for $22,000 per month.

On September 30, 2003, the Company refinanced a loan secured by MOBs located in Beverly Hills, Sherman Oaks and La Jolla, California as well as a research and development facility located in Irwindale, California with three new loans totaling $59.5 million. The loan proceeds were used to repay the remaining balance on the old loan of $31.5 million and to repay the outstanding balance of $16.8 million on the Company’s $35 million loan with GMAC. The new loans bear interest at a fixed rate of 5.34% per annum and are due on October 1, 2010. The remaining net proceeds from these transactions were used to purchase a parcel of land in Valencia, California and for working capital.

On October 15, 2003, the Company sold its one-story, 9,100 square foot retail facility located in Aliso Viejo, California for $2.86 million. The Company received net proceeds of $0.9 million from the sale and recognized a net gain of $0.8 million. The existing mortgage balance of $1.34 million was assumed by the buyer.

On December 2, 2003, the Company sold its membership interest in a joint venture that owned a 92-unit ALF located in Santa Monica, California for $6.0 million and recognized a net gain on sale of $5.1 million. The existing mortgage balance of $11.1 million was assumed by the buyer.

On December 31, 2003, the Company sold its two-story, 26,000 square foot MOB located in Burbank, California for $6.6 million. The Company received net proceeds of $3.2 million from the sale and recognized a net gain of $1.4 million. The existing mortgage balance of $2.9 million was assumed by the buyer.

In the first quarter of 2004, the Company obtained a $3 million secured line of credit from US Bank. The line of credit is secured by a first deed of trust on land owned by the Company in Santa Clarita. As of March 30, 2004, the Company had not borrowed any money under the line of credit.

On January 26, 2004, the Company sold its membership interest in a joint venture that owned an 80-unit ALF located in Tarzana, California for $1.7 million in cash and recognized a net gain on sale of $0.4 million. The existing mortgage balance of $8.2 million along with an unsecured note payable of $0.5 million were assumed by the buyer.

On March 18, 2004, the Company sold its two-story, 48,000 square foot research and development building located in Irwindale, California for $8.85 million and received net proceeds of $8.5 million. The Company recognized a gain on sale of $0.9 million.

22

Table of Contents

All of the net proceeds from the 2003 debt refinancings and asset sales that have not been used as described above are being held by the Company for new acquisitions, future common stock dividends and for general corporate purposes.

The Company is also in the process of entering into a joint venture with respect to its 220-bed SNF in Maryland. The Company intends to contribute its 100% interest in the property to the joint venture for a 75% interest in the joint venture and the joint venture partner will contribute $1 million in cash for its 25% interest. The Company expects the joint venture to close in the second quarter of 2004.

As of March 30, 2004, the Company was under contract to sell a total of three properties. The properties include a three-story, 40,000 square foot office and retail complex located in Coronado, California; a 59-bed nursing and rehabilitation center in Chico, California and a 10,000 square foot MOB located in Tustin, California. The Company plans to use the net proceeds from these sales for new acquisitions, future common stock dividends and for general corporate purposes.

The Company paid monthly dividends of $0.6 million to holders of the Company’s Preferred Stock on the fifteenth day of each month during 2003 to holders of record on the first day of each month. In addition, the Company distributed $5.3 million in dividends to holders of the Company’s Common Stock during 2003.

While the Company is highly leveraged, the Company expects to continue meeting its short-term liquidity requirements through its working capital and cash flow provided by operations. Through its debt refinancings in 2003, the Company reduced its average interest rate on its long-term, fixed rate debt from 7.52% as of December 31, 2002 to 5.98% as of December 31, 2003. The Company also expects to maintain stockholder distributions in accordance with REIT requirements, although no assurances can be given that the current level of distributions will be maintained. Long-term liquidity requirements such as refinancing mortgages, financing acquisitions and financing capital improvements will be accomplished through long-term borrowings, the sale of assets and joint venture arrangements.

Sources and Uses of Funds

The Company’s net cash from operating activities decreased $4.8 million, or 123%, from net cash provided of $3.9 million for the year ended December 31, 2002 to net cash used of $0.9 million for the same period in 2003. The decrease is due primarily to the $11.2 million of prepayment penalties that the Company incurred with respect to its mortgage refinancings in 2003. The prepayment penalties are included in interest expense and deducted from operating cash flow in 2003.

Net cash from investing activities increased $10.9 million, or 94%, from $11.6 million for the year ended December 31, 2002 to $22.5 million for the same period in 2003. The increase was primarily due to an increase in proceeds from the sale of real estate assets of $20.9 million from $5.1 million in 2002 to $26.0 million in 2003. During 2003, the Company sold a 9,100 square foot retail center, a 92-unit ALF and a 26,000 square foot MOB compared with 2002 when the Company sold a 183-bed hospital and a vacant SNF. This increase was partially offset by a $9.3 million decrease in principal payments received from notes and bonds receivable and a $4.0 million increase in purchases of real estate assets.

Net cash flows used in financing activities decreased $3.2 million, or 20% from $15.2 million for the twelve months ended December 31, 2002, to $12.0 million for the same period in 2003. The decrease was due primarily to an increase in net proceeds from the issuance and repayment of notes payable of $10.7 million offset by a $5.0 million increase in distributions to stockholders and limited partners in consolidated joint ventures, a $1.3 million increase in the payment of loan fees and a $1.3 million decrease in the decrease in restricted cash. During 2003, the Company received proceeds from notes payable of $123.9 million and repaid $121.7 million of notes payable for net cash provided by notes payable of $2.2 million. During 2002, the Company received proceeds from notes payable of $14.5 million and repaid $23.0 million of notes payable for net cash deficit of $8.5 million. In 2002, a portion of the Company’s cash provided from investing activities was used to repay notes payable.

23

Table of Contents

Off- Balance Sheet Arrangements

The Company is the guarantor on a $250,000 letter of credit in favor of NVHF Affiliates, LLC (“NVHF”), a non-profit low-income apartment owner. In December 1999, the Company purchased $1.3 million of subordinated bonds issued by NVHF for the acquisition of an apartment complex located in Tulsa, Oklahoma. In order to facilitate the acquisition of the property, the Company agreed to guarantee a letter of credit issued by the Bank of Oklahoma. The letter of credit was established to pay the interest payments on the secured debt of the property in the event the cash flow of the property was insufficient to meet such payments. To date, the letter of credit has not been accessed. However, NVHF has defaulted on the December 2003 semi-annual interest payment to the holders of the subordinated B-bonds and the Company anticipates the letter of credit will be called upon by NVHF in order to make future interest payments on the secured debt. It appears probable that the Company will be required to fund its guaranty under the letter of credit. The Company’s maximum liability under the guarantee is $250,000 and the Company has accrued this amount as a liability on its balance sheet as of December 31, 2003.

The Company is a guarantor on a $6.3 million mortgage loan secured by an ALF that is owned by a joint venture in which the Company owns a 50% interest. A corporate guaranty on a short-term mortgage loan is a usual and customary requirement by lenders in the industry. The Company’s joint venture partner is also a guarantor on the loan. The individual owners of the Company’s joint venture partner have also personally guaranteed the loan. The Company’s maximum liability under the guarantee is $6.3 million although the Company does not anticipate having to pay anything under this guarantee. The Company has recorded no liability on its balance sheet related to this guarantee as of December 31, 2003.

As of December 31, 2003, the Company had investments in five unconsolidated joint ventures totaling $5.1 million. All of the unconsolidated joint ventures were formed for the purpose of acquiring and owning real estate assets. Per the terms of the joint venture agreements, the Company could be required to advance additional funds to these joint ventures if the operating activities of the joint ventures are insufficient to satisfy the obligations of the joint ventures. Any additional funds advanced to the joint ventures are treated as additional equity contributions and are recorded as an investment in unconsolidated affiliates on the Company’s balance sheet.

Contractual Obligations

As of December 31, 2003, the Company had the following contractual obligations outstanding:

24

Table of Contents

Debt Structure

As of December 31, 2003, the Company had twenty-one loans totaling $196.3 million. The terms of these loans are described below.

On April 22, 1998, the Company borrowed $9.4 million from Tokai Bank of California (“Tokai”) at a fixed rate of 7.05%. On June 1, 1998, the Company began making monthly principal and interest payments on the loans of approximately $68,000 (25-year amortization). These notes, which will have a balance at maturity of $7.5 million, are due on April 1, 2008. The notes consist of two individual first deeds of trust and are not cross-collateralized. The Holy Cross Medical Plaza and the St. Joseph’s Tustin Medical Plaza have been pledged as security for these loans. As of December 31, 2003 the outstanding balance on this loan was $8.5 million.

On August 6, 1998, the Company acquired a 110-bed skilled nursing facility in Hoquiam, Washington for $3.3 million. The Company borrowed $2.5 million of the purchase price from GMAC at a fixed rate of 7.49%. On October 1, 1998, the Company began making monthly principal and interest payments of approximately $18,000 (25-year amortization). This note, which will have a balance at maturity of $2.0 million, is due on September 1, 2008. The Pacific Care Center has been pledged as security for this note. As of December 31, 2003, the unpaid balance on this note was $2.3 million.

On December 31, 1998, the Company acquired a 40,000 square foot office and retail complex in Coronado, California for $9.5 million. Of this amount, the Company borrowed $7.5 million from GMAC at a fixed rate of 6.90%. On February 10, 1999, the Company began making monthly principal and interest payments of approximately $50,000 (25-year amortization). This note, which will have a balance at maturity of $6.4 million, is due on December 11, 2008. The Coronado Plaza has been pledged as security for this note. The unpaid balance on this note was $7.1 million as of December 31, 2003.

On July 2, 1999, the Company obtained a $10 million long-term loan secured by its six building portfolio of MOBs located at the Henry Mayo Newhall Hospital campus in Valencia, California. The Company used $5.0 million of the total proceeds to repay a short-term loan secured by these buildings. The loan, which is due on July 1, 2009, bears an interest rate of 6.85% and had an unpaid balance of $9.0 million as of December 31, 2003.

On September 30, 1999, the Company obtained a $13.92 million loan from GMAC Commercial Mortgage Corp. (“GMAC”) secured by the Hampden Properties and repaid the existing $6.0 million Nomura loan. The loan originally bore interest at LIBOR plus 2.75% and required monthly principal and interest payments of approximately $122,000. In March 2003, the loan, which is secured by three SNFs located in Massachusetts, was extended until January 1, 2004. Pursuant to the terms of the extension, the interest rate was increased to LIBOR plus 4.0% per annum. In February 2004, the loan was extended until July 1, 2004 with the option to extend for an additional six months to January 1, 2005. All other terms remained the same. As of December 31, 2003 the outstanding balance on this loan was $12.9 million. On March 10, 2004, the Company made a principal payment of $3.6 million to GMAC on this loan in order to obtain the release of collateral of two of the three properties which secure the loan.

On July 14, 2000, the Company obtained a $2.0 million line of credit secured by the accounts receivable at the Company’s three SNFs located in Massachusetts. The line of credit is guaranteed by the Company. In May 2002, the line of credit was increased to $3.5 million. The line of credit bears interest at prime plus 2.0% and is due on May 1, 2005. The unpaid balance on this line of credit was $2.2 million as of December 31, 2003.

On August 17, 2001, the Company obtained a loan in the amount of $7.2 million from Deutsche Bank AG secured by two of its properties located in Tustin, California. The proceeds were used to repay an existing $5.1 million first deed of trust. The loan bears interest at 7.51% and is due in August 2011. As of December 31, 2003, the unpaid balance on this note was $7.1 million.

On January 9, 2002, the Company purchased a SNF located in Hyattsville, Maryland for $14.9 million which included the assumption of a new $11.9 million loan bearing interest at 7.05% per annum. The loan, which is secured by the SNF, requires monthly principal and interest payments of approximately $85,000 (25-year amortization) and is due on January 1, 2027. As of December 31, 2003, the unpaid balance on the existing loan was $11.6 million.

25

Table of Contents

On May 17, 2002, the Company refinanced its ALF located in Tarzana, California with a new $8.3 million HUD loan. The net proceeds were used to repay the existing first mortgage of $5.5 million along with a second mortgage and unsecured note totaling $1.7 million. The Company incurred a prepayment penalty of approximately $0.7 million in connection with the early repayment of the first mortgage. The new loan, which required monthly principal and interest payments of approximately $53,000 (35-year amortization), bore interest at 6.95% per annum and was due on May 17, 2037. As of December 31, 2003, the unpaid balance on this loan was $8.2 million. In connection with this loan, the Company also obtained a $0.5 million unsecured loan. As of December 31, 2003, the unpaid balance on this loan was $0.5 million. In January 2004, the Company sold its membership interest in the joint venture that owns the ALF for $1.7 million. The combined outstanding loan balances of $8.7 million were assumed by the buyer.

On December 5, 2002, the Company obtained a loan in the amount of $4.3 million from GMAC secured by its 98-bed SNF located in Phoenix, Arizona. The loan, which requires monthly principal and interest payments of approximately $27,000, bears interest at LIBOR plus 4.5% and is due on July 1, 2005. As of December 31, 2003, the unpaid balance on this note was $4.2 million.

On February 28, 2003, the Company refinanced its 435 N. Roxbury Drive MOB with a new $8.2 million loan from Morgan Stanley Dean Witter Mortgage Capital, Inc. The Company used the loan proceeds to repay the remaining balance on the old loan of $7.2 million along with a prepayment penalty of $144,000. The new loan bears interest at a fixed rate of 5.55% and is due on February 1, 2013. The new loan requires monthly principal and interest payments of $47,000 (30-year amortization). As of December 31, 2003 the outstanding balance on this loan was $8.1 million.

On May 22, 2003, the Company refinanced its 49,000 square foot MOB located in Valencia, California with a new $8.6 million loan from Morgan Stanley Dean Witter Mortgage Capital, Inc. The Company used the loan proceeds to repay the remaining balance on the old loan of $4.6 million along with a prepayment penalty of $231,000. The new loan bears interest at a fixed rate of 5.48% per annum and is due on June 1, 2013. The Company used a portion of the net refinancing proceeds to purchase a parcel of land in Valencia, California. As of December 31, 2003, the unpaid balance on this new loan was $8.6 million.

On June 3, 2003, the Company refinanced a mortgage loan that was secured by three of its MOBs and an adjacent parking garage located in Beverly Hills with four individual loans totaling $47.0 million with GMAC. The Company used the proceeds to repay the remaining balance on the old loan of $26.2 million along with a prepayment penalty of $4.05 million. The new loans bear interest at a fixed rate of 5.69% per annum and are due on July 1, 2013. The Company used the remaining loan proceeds of $14.9 million to reduce the balance on its $35 million loan obtained from GMAC in October 2001 and incurred an additional prepayment penalty of $0.3 million. The combined outstanding balance on the four loans was approximately $46.8 million as of December 31, 2003.

On September 30, 2003, the Company refinanced a mortgage loan that was secured by three of its MOBs and its research and development facility with three separate loans totaling $59.5 million with Morgan Stanley Mortgage Capital, Inc. The new loans are secured by the Sherman Oaks Medical Plaza, the Regents Medical Center and the 436 North Bedford Drive MOB. The Company used the proceeds to repay the remaining balance on the old loan of $31.5 million along with a prepayment penalty of $6.1 million. The new loans bear interest at a fixed rate of 5.34% per annum and are due on October 1, 2010. The Company used the remaining loan proceeds to repay the outstanding balance of $16.8 million on its $35 million loan obtained from GMAC in October 2001 and incurred an additional prepayment penalty of $0.3 million. As of December 31, 2003, the combined outstanding balance on the three loans was approximately $59.4 million.

Financing Policies

To the extent that the Board of Directors of the Company decides to seek additional funding, the Company may raise such capital using various means, including retention of internally generated funds (subject to the distribution requirements in the Code with respect to REITs), existing working capital and possibly the issuance of additional debt (secured or unsecured), the participation in joint venture arrangements or any combination of the above. It is anticipated that borrowings will continue to be made through the Operating Partnership and Senior Care Partnership

26

Table of Contents

or other entities, although the Company may also incur indebtedness that may be re-borrowed by the Operating Partnership or the Senior Care Partnership on the same terms and conditions as are applicable to the Company’s borrowing of such funds. Except as required pursuant to existing financing agreements, the Company has not established any limit on the number or amount of mortgages or unsecured debt that may be placed on any single property or on its portfolio as a whole.

The Board of Directors of the Company also has the authority to cause the Operating Partnership or the Senior Care Partnership to issue additional Units in any manner (and subject to certain limitations in the Partnership Agreement on such terms and for such consideration) as it deems appropriate and may also decide to seek financing for the purposes of managing the Company’s balance sheet by adjusting the Company’s existing capitalization. The refinancing of the Company’s balance sheet may entail the issuance and/or retirement of debt, equity or hybrid securities.

Inflation

The majority of the Company’s leases are long-term leases designed to mitigate the adverse effect of inflation. Approximately 40% of the Company’s leases contain provisions that call for annual rent increases equal to the increase in the Consumer Price Index and the majority of the remaining leases allow for specific annual rent increases. Furthermore, many of the Company’s leases require tenants to pay a pro rata share of building operating expenses, including real estate taxes, insurance and common area maintenance. The effect of such provisions is to reduce the Company’s exposure to increases in costs and operating expenses resulting from inflation.

New Accounting Pronouncements

On January 1, 2003, the Company adopted the provisions of SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). The most significant provisions of this statement relate to the rescission of Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On January 1, 2003, the Company adopted the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition.

On January 1, 2003, the Company adopted the initial recognition and measurement provisions of Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. The adoption of the provisions of this interpretation did not have a material effect on the Company’s results of operations or financial condition.

In December 2003, the FASB issued FASB Interpretation No. 46-R, “Consolidation of Variable Interest Entities-an Interpretation of ARB No. 51” (“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 (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies

27

Table of Contents

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. The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003. For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after March 15, 2004. The Company has completed an evaluation of all of its investments and other interests in entities that may be deemed VIEs under the provisions of FIN 46-R. These investments include real estate joint ventures with assets totaling $32 million as of December 31, 2003. The Company believes that its real estate joint ventures do not fall under the provisions of FIN 46-R and will not be consolidated, however, it is still evaluating the provisions of FIN 46-R and cannot make a definitive conclusion until it completes the evaluation.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS 149 are generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on the Company’s results of operations or financial condition

Non-GAAP Supplemental Financial Measure

Industry analysts generally consider funds from operations (“FFO”) to be an appropriate measure of the performance of a REIT. The Company calculates FFO as defined by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO is calculated to include the minority interests’ share of income from the Operating Partnership and Senior Care Partnership since the Operating Partnership and Senior Care Partnership’s net income is allocated proportionately among all owners of Operating Partnership and Senior Care Partnership units. The combined number of Operating Partnership and Senior Care Partnership units held by the Company is identical to the number of outstanding shares of the Company’s Common Stock, and owners of Operating Partnership and Senior Care Partnership units may, at their discretion, convert their units into shares of Common Stock on a one-for-one basis.

28

Table of Contents

The Company believes that, in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with the Company’s net income as presented in the Selected Financial Data and Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K and the additional data presented below. The table on the following page presents an analysis of FFO and additional data for each of the four quarters and the year ended December 31, 2003 for the Operating Partnership:

G&L REALTY CORP.

FUNDS FROM OPERATIONS

FOR THE FOUR QUARTERS AND YEAR ENDED DECEMBER 31, 2003