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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

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

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

As of May 16, 2005, 710,199 shares of common stock of G&L Realty Corp. were outstanding.

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G&L REALTY CORP.

INDEX

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G&L REALTY CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes to Condensed Consolidated Financial Statements

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G&L REALTY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

See accompanying notes to Condensed Consolidated Financial Statements

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G&L REALTY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Continued…

See accompanying notes to Condensed Consolidated Financial Statements

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G&L REALTY CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Concluded.

See accompanying notes to Condensed Consolidated Financial Statements

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

G&L Realty Corp. (the “Company”) was formed as a Maryland corporation to continue the ownership, management, acquisition and development activities previously conducted by G&L Development, a California general partnership, the Company’s predecessor. All of the Company’s assets are held by, and all of its operations are conducted through, the following entities:

G&L Realty Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”)

G&L Senior Care Partnership, L.P., a Delaware limited partnership (the “Senior Care Partnership”)

G&L Medical Partnership, L.P., a Delaware limited partnership (the “Medical Partnership”)

435 North Roxbury Drive, Ltd., a California limited partnership (the “Roxbury Partnership”)

G&L Valencia, LLC, a California limited liability company (“Valencia”)

G&L Tustin, LLC, a California limited liability company (“Tustin”)

G&L Holy Cross, LLC, a California limited liability company (“Holy Cross”)

G&L Lyons, LLC, a California limited liability company (“Lyons”)

G&L Coronado (1998), LLC, a California limited liability company (“Coronado”)

G&L Tustin II, LLC, a Delaware limited liability company (“Tustin II”)

G&L Tustin III, LLC, a Delaware limited liability company (“Tustin III”)

405 Bedford, LLC, a Delaware limited liability company (“405 Bedford”)

415 Bedford, LLC, a Delaware limited liability company (“415 Bedford”)

416 Bedford, LLC, a Delaware limited liability company (“416 Bedford”)

435 Bedford, LLC, a Delaware limited liability company (“435 Bedford”)

G&L 436 Bedford, LLC, a Delaware limited liability company (“436 Bedford”)

G&L Sherman Oaks, LLC, a Delaware limited liability company (Sherman Oaks”)

G&L 4150 Regents, LLC, a Delaware limited liability company (“Regents”)

Prior to November 1, 2004, the Company also held interests in the following entities:

G&L Gardens, LLC, an Arizona limited liability company (“Maryland Gardens”)

G&L Hampden, LLC, a Delaware limited liability company (“Hampden”)

G&L Hoquiam, LLC, a California limited liability company (“Hoquiam”)

G&L Massachusetts, LLC, a Delaware limited liability company (“Massachusetts”)

G&L Aspen, LLC, a California limited liability company (“Aspen”)

G&L St. Thomas More, LLC, a Nevada limited liability company (“G&L St. Thomas More’) and successor to G&L St. Thomas More, Inc.

St. Thomas More, LLC, a Nevada limited liability company (“St. Thomas More”) and successor to St. Thomas More, Inc.

G&L Gardens – Apt., LLC, an Arizona limited liability company (“Winter Gardens”)

G&L Chestnut, LLC, a Massachusetts limited liability company (“Chestnut”)

G&L Mary Lyon, LLC, a Massachusetts limited liability company (“Mary Lyon”)

Palm Valley Senior Care, LLC, an Arizona limited liability company (“Palm Valley”)

The Company, as the sole general partner and as owner of an approximately 95% ownership interest, controls the Operating Partnership and the Senior Care Partnership. References in these consolidated financial statements to the Company include its operations, assets and liabilities including the operations, assets and liabilities of the Operating Partnership, the Senior Care Partnership, the Medical Partnership, the Roxbury Partnership (in which the Operating Partnership owns a 32.81% partnership interest and is the sole general partner), Valencia, Tustin, Holy Cross, Lyons, Coronado, Tustin II, Tustin III, 405 Bedford, 415 Bedford, 416 Bedford, 435 Bedford, 436 Bedford, Sherman Oaks and Regents and prior to November 1, 2004, Maryland Gardens, Hampden, Hoquiam, Massachusetts, Aspen, G&L St. Thomas More, St. Thomas More, Winter Gardens, Chestnut, Mary Lyon and Palm Valley (in which the Senior Care Partnership owned a 75% membership interest).

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

In addition to the Subsidiaries, the Company also owns interests in various unconsolidated affiliates. Although the Company’s investment represents a significant portion of the capital of such unconsolidated affiliates and the Company exercises influence over the activities of these entities, either the affiliates are not considered variable interest entities or the Company does not have the requisite level of voting control to include the assets, liabilities and operating activities of these entities in the consolidated financial statements of the Company. The entities in which the Company has unconsolidated financial interests are as follows:

G&L Grabel, San Pedro, LLC (“San Pedro”)

Lakeview Associates, LLC (“Lakeview”)

Tustin Heritage Place, LLC (“Heritage Place”)

Paradigm Housing, LLC (“Paradigm”)

Prior to November 1, 2004, the Company also held interests in the following entities:

G&L Penasquitos, LLC (“Penasquitos”)

G&L Radius Realty, LLC (“Radius”)

Encanto Senior Care, LLC (“Encanto”)

San Pedro, Lakeview, Heritage Place, Paradigm, and prior to November 1, 2004, Penasquitos, Radius and Encanto are herein collectively referred to as the “Unconsolidated Affiliates” and individually as an “Unconsolidated Affiliate.”

The Company has decided to focus in the future on the development, ownership and operation of medical office buildings. Accordingly, on November 1, 2004, the Company spun-off all of its skilled nursing facility and assisted living facility assets to its common stockholders of record on November 1, 2004. In total, skilled nursing and assisted living assets having a net equity of $9.0 million, derived from current independent property appraisals less the existing property debt, have been spun-off to these stockholders. At the time of the spin-off, these assets were held by the Company’s consolidated subsidiary, G&L Senior Care Properties, LLC, and the spin-off was effectuated by a distribution of the Company’s membership interests in G&L Senior Care Properties, LLC. The spin-off has not been presented as discontinued operations in the financial statements due to the Company’s continuing involvement in the operations of G&L Senior Care Properties, LLC as discussed below. In addition to these skilled nursing facility and assisted living facility assets, G&L Senior Care Properties, LLC had cash of approximately $2 million, and indebtedness to the Company of $6 million as of the effective date of the spin-off. Accordingly, G&L Senior Care Properties, LLC at the time of the spin-off, had a net asset value (based on fair market valuations of its skilled nursing and assisted living facilities) of approximately $5.0 million, as compared to a carrying value of $13.1 million. The excess of the carrying value of the net assets over the fair value in the amount of $8.1 million was recognized as an impairment loss. See the Company’s Form 8-K filed on November 4, 2004 for certain pro forma information giving effect to the spin-off.

Incident to the spin-off, the Company converted G&L St. Thomas More and St. Thomas More into limited liability companies and formed G&L Senior Care Properties, LLC. The spin off consisted of the Company’s membership interests in G&L Senior Care Properties, LLC which holds the membership interests in Maryland Gardens, Hampden, Hoquiam, G&L St. Thomas More, St. Thomas More, Winter Gardens, Chestnut, Mary Lyon, Palm Valley, Penasquitos, Radius and Encanto and in the subsidiaries that served as the managing members of Maryland Gardens and Hampden. Following the spin-off, G&L Senior Care Properties, LLC is now owned and managed primarily by Daniel Gottlieb and Steven Lebowitz, the CEO and President, respectively, of the Company. Due to the substantial management overlap between the Company and G&L Senior Care Properties, LLC, the two companies have entered into a cost sharing agreement to allocate between them each year the general and administrative costs of the two companies. Under this agreement, the Company has a significant continuing involvement in the management and operations of G&L Senior Care Properties, LLC. Both the Company and G&L Senior Care Properties, LLC share the same offices, accounting and administrative personnel and key decision makers. Management estimates that, at the current time, the skilled nursing facility and the assisted care living facility assets now owned by G&L Senior Care Properties, LLC, account for approximately 65% of the general and administrative costs of the two companies.

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Upon the spin-off, the Company held two promissory notes issued by G&L Senior Care Properties, LLC, a short term promissory note in the amount of $2 million and a long term promissory note in the amount of $4 million, each bearing interest at the rate of 10.75% per annum. The short term promissory note had a term of six months, interest only payable monthly, and was unsecured. This note was repaid in full by G&L Senior Care Properties, LLC on April 1, 2005. The long term promissory note has a term of 12 years, provides for flat monthly payments of interest and principal on a 25 year amortization basis, with a balloon payment of $3.3 million at the end of the term, and is secured by the interests of G&L Senior Care Properties, LLC in the various special purpose entities through which it holds its interest in its skilled nursing facility and assisted care living facility assets. As of March 31, 2005, the unpaid balance on this note was $3.98 million. The Company will continue to be a creditor of G&L Senior Care Properties, LLC for some time.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - The Company is a self-managed Real Estate Investment Trust (“REIT”) that acquires, develops, manages and leases healthcare properties. Historically, the Company’s business has consisted of investments in a variety of healthcare properties. Prior to the spin-off on November 1, 2004, the Company’s investments in healthcare properties consisted of acquisitions, made either directly or through joint ventures, in medical office buildings (“MOBs”), skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”). After the spin-off of the SNF and ALF assets on November 1, 2004, the Company’s business consisted only of MOBs.

Basis of Presentation - The accompanying condensed consolidated financial statements include the accounts of the Company and its Subsidiaries. The interests in the Roxbury Partnership, the Operating Partnership and the Senior Care Partnership that are not owned by the Company, have been reflected as minority interests in the Operating and Senior Care Partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation. Prior year amounts have been reclassified to conform to the current year’s presentation.

The information presented as of and for the three-month periods ended March 31, 2005 and 2004 has not been audited by independent accountants, but includes all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for such periods. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of results that might be expected for the full fiscal year.

Certain information and footnote disclosures normally included in annual financial statements have been omitted. The Company believes that the disclosures included in these financial statements are adequate for a fair presentation and conform to reporting requirements established by the Securities and Exchange Commission (“SEC”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in the Company’s annual report on Form 10-K as filed with the SEC.

Recent accounting pronouncements - In December 2004, the FASB issued SFAS No. 123(R), “Share Based Payments” (SFAS No. 123(R)) which replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. As such, pro forma disclosure in lieu of expensing is no longer an alternative. The new standard is effective in the first interim or annual reporting period beginning after June 15, 2005. The Company does not believe the adoption of this Statement will have a material impact on our financial statements.

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

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. 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 ending 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 and has concluded that its unconsolidated real estate joint ventures do not fall under the provisions of FIN 46-R. These investments include real estate joint ventures with assets totaling $11.6 million as of March 31, 2005.

3. BUILDINGS AND IMPROVEMENTS

Buildings and improvements consist of the following:

Rental property is recorded at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and all external costs directly related to acquisitions are capitalized.

As of December 31, 2004, the Company was under contract to sell its three-story, 47,000 square foot office and retail complex located in Coronado, California (“Coronado Plaza”). On March 24, 2005, the Company sold Coronado Plaza for $18.2 million and recognized a gain of $7.7 million from the sale. For presentation purposes, the assets and liabilities relating to this property has been included in assets held for sale and liabilities of assets held for sale, respectively, on the balance sheet as of December 31, 2004. The following table summarizes assets held for sale and liabilities of assets held for sale for Coronado Plaza as of December 31, 2004:

Assets and Liabilities of Assets Held for Sale

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

4. DEFERRED CHARGES AND OTHER ASSETS

Deferred charges and other assets consist of the following:

5. STOCKHOLDERS’ EQUITY

Distributions in excess of net income— The Company has elected to be treated, for federal income tax purposes, as a REIT. As such, the Company is required to distribute annually, in the form of distributions to its stockholders, at least 90% of its taxable income. In reporting periods in which distributions exceed net income, stockholders’ equity will be reduced by the distributions in excess of net income in such period and will be increased by the excess of net income over distributions in reporting periods in which net income exceeds distributions. For tax reporting purposes, a portion of the dividends declared represents a return of capital. The following table reconciles net income and distributions in excess of net income for the three months ended March 31, 2005 and for the year ended December 31, 2004:

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company has investments in various unconsolidated affiliates as described in Note 1. The following table provides a summary of the Company’s investment in each of these entities as of March 31, 2005. (In thousands).

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

Following is a summary of the condensed financial information of each of the unconsolidated affiliates as of and for the three months ended March 31, 2005. (In thousands).

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

7. SEGMENT INFORMATION

Prior to November 1, 2004, the Company’s business consisted of the following segments:

After the spin-off of the SNF and ALF assets on November 1, 2004, the Company has one reportable segment – MOBs.

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

The table on the following page reconciles the Company’s income and expense activity for the three months ended March 31, 2004.

2004 Reconciliation of Reportable Segment Information

For the three months ended March 31, 2004

8. COMMITMENTS AND CONTINGENCIES

Neither the Company, the Operating Partnership, the Senior Care Partnership, the Roxbury Partnership, Valencia, Lyons, Coronado, Tustin II, Tustin III, 405 Bedford, 415 Bedford, 416 Bedford, 435 Bedford, 436 Bedford, Sherman Oaks, Regents, the Unconsolidated Affiliates nor any of the assets within their portfolios of MOBs, parking facilities, and retail space (the “Properties”) is currently a party to any material litigation.

The Company was the guarantor on a $513,602 letter of credit issued by U.S. Bank National Association (“U.S. Bank”) in favor of Fannie Mae c/o Greystone Servicing Corporation under which the Company’s maximum liability is approximately $410,000. In December 1999, the Company purchased $1.3 million of subordinated bonds secured by an apartment complex located in Tulsa, Oklahoma. At the time, a letter of credit for $513,602 was issued by the Bank of Oklahoma in favor of the issuer of the subordinated bonds in order 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. The Company guaranteed $250,000 of this letter of credit. In December 2003, June 2004 and December 2004, the borrower defaulted on the semi-annual interest payment to the holders of the subordinated bonds. In July 2004, the letter of credit issued by the Bank of Oklahoma was called upon and the Company was required to fund the $250,000 that it had guaranteed. Subsequently, a new letter of credit was issued by U.S. Bank. The Company’s partners in this investment are in the process of restructuring the management and operation of the property in order to make it profitable once again. As part of the restructuring, the letter of credit was called upon in March 2005 and the Company was required to make a payment of $410,000. The Company recorded a reserve of $410,000 on its balance sheet as of December 31, 2004 related to its maximum liability with respect to the letter of credit against which the March 2005 payment was applied.

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G&L REALTY CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

(Unaudited)

9. RELATED PARTY TRANSACTIONS

On October 29, 2001, the Company completed a merger with G & L Acquisition, LLC, a Maryland limited liability company 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.

As part of the Merger, the Operating Partnership loaned $5.2 million to Messrs. Gottlieb and Lebowitz to fund a $3.5 million tender offer for the Company’s Series A and Series B Preferred Stock and to repay $1.7 million of personal debt. Each of the $2.6 million loans to Messrs. Gottlieb and Lebowitz are for a term of ten years, due on October 31, 2011, bear interest at an annual rate of Libor plus 7.5% and require monthly interest only payments. Messrs. Gottlieb and Lebowitz have the option to accrue any and all interest payments, which shall then be added to the principal balance of the notes. As of March 31, 2005, the outstanding principal balance on the notes was $5.1 million. For purposes of presentation in these consolidated financial statements, the $5.1 million balance has been reflected on the balance sheet as a deduction to stockholders’ equity.

On November 1, 2004, the Company spun-off all of its skilled nursing facility and assisted living facility assets to its common stockholders of record on November 1, 2004. Messrs. Gottlieb and Lebowitz are the sole common stockholders of the Company. In total, skilled nursing and assisted living assets having a net equity of $9.0 million, derived from current independent property appraisals less the existing property debt, have been distributed as a dividend to these stockholders. This transaction is described in greater detail in Footnote 1 above.

During the first quarter of 2005, general and administrative costs totaling $368,651 were billed to G&L Senior Care Properties, LLC pursuant to the cost sharing agreement between the two companies discussed in Footnote 1 above, which is included in reimbursements from related party. As of March 31, 2005, G&L Senior Care Properties, LLC owed the Company $116,098 related to these allocated general and administrative costs. This amount is recorded under tenant rent and reimbursements receivable on the balance sheet as of March 31, 2005 and was paid by G&L Senior Care Properties, LLC to the Company in April 2005.

During the first quarter of 2005, the Company paid S. Craig Tompkins, a member of the Board of Directors, $26,000 for legal and consulting services. These fees were in addition to the regular fees paid to the members of the Board of Directors. In January 2005, the Company paid Mr. Tompkins $250,000 for legal services performed on behalf of the Company and its board of directors in connection with the stockholder litigation that was settled during 2004 which was accrued at December 31, 2004.

10. ACQUISITIONS, DISPOSITIONS AND FINANCINGS

On March 23, 2005, the Company refinanced the Holy Cross Medical Plaza, a 72,000 square foot MOB located in Mission Hills, California with a new $17.8 million loan from Countrywide Commercial Real Estate Finance, Inc. The Company received net proceeds of $9.7 million from the refinancing after repayment of the existing $7.1 million mortgage loan, prepayment penalties and closing costs. The new loan is for ten years but is interest only for two years and bears interest at a fixed rate of 5.71% per annum.

On March 24, 2005, the Company sold Coronado Plaza, a 47,000 square foot office and retail center located in Coronado, California for $18.2 million. The buyer assumed the existing mortgage loan of $13.6 million and the Company received net proceeds of $4.4 million after all closing costs. The Company recognized a gain of $7.7 million.

11. SUBSEQUENT EVENTS

On April 7, 2005, the Company refinanced three MOBs owned by San Pedro, a joint venture in which the Company owns a 50% interest, with a new $7.7 million loan from Countrywide Commercial Real Estate Finance, Inc. The Company received net proceeds of $2.4 million from the refinancing after repayment of the existing $4.6 million mortgage loan, prepayment penalties and closing costs. The new loan is for ten years but is interest only for two years and bears interest at a fixed rate of 5.64% per annum.

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The following discussion should be read in conjunction with the Company’s Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the Company’s 2004 Annual Report on Form 10-K as previously filed with the SEC.

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, interest rate movements, the availability of financing, changes in tax laws and regulations affecting REITs, 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 Quarterly Report on Form 10-Q and the Company’s 2004 Annual Report on Form 10-K as previously filed with the SEC.

Recent Developments

On November 1, 2004, the Company spun-off all of its skilled nursing facility and assisted living facility assets to its common stockholders of record on November 1, 2004. Messrs. Gottlieb and Lebowitz are the sole common stockholders of the Company. In total, skilled nursing and assisted living assets having a net equity of $9.03 million, derived from current independent property appraisals less the existing property debt, have been spun-off to these stockholders. At the time of the spin-off, these assets were held by the Company’s consolidated subsidiary, G&L Senior Care Properties, LLC, and the spin-off was effectuated by a distribution of the Company’s membership interests in G&L Senior Care Properties, LLC. In addition to these skilled nursing facility and assisted living facility assets, G&L Senior Care Properties, LLC had cash of approximately $2 million, and indebtedness to the Company of $6 million as of the effective date of the spin-off. Accordingly, G&L Senior Care Properties, LLC at the time of the spin-off, had a net asset value (based on fair market valuations of its skilled nursing and assisted living facilities) of approximately $5.0 million.

Following the spin-off, G&L Senior Care Properties, LLC is now owned and managed primarily by Daniel Gottlieb and Steven Lebowitz, the CEO and President, respectively, of the Company. Due to the substantial management overlap between the Company and G&L Senior Care Properties, LLC, the two companies have entered into a cost sharing agreement to allocate between them each year the general and administrative costs of the two companies. Management estimates that, at the current time, the skilled nursing facility and the assisted care living facility assets now owned by G&L Senior Care Properties, LLC, account for approximately 65% of the general and administrative costs of the two companies.

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Upon the spin-off, the Company held two promissory notes issued by G&L Senior Care Properties, LLC, a short term promissory note in the amount of $2 million and a long term promissory note in the amount of $4 million, each bearing interest at the rate of 10.75% per annum. The short term promissory note had a term of six months, interest only payable monthly, and was unsecured. This note was paid in full on April 1, 2005. The long term promissory note has a term of 12 years, provides for flat monthly payments of interest and principal on a 25 year amortization basis, with a balloon payment of $3.3 million at the end of the term, and is secured by the interests of G&L Senior Care Properties, LLC in the various special purpose entities through which it holds its interest in its skilled nursing facility and assisted care living facility assets. As of March 31, 2005, the unpaid balance on this note was $3.98 million. The Company will continue to be a creditor of G&L Senior Care Properties, LLC for some time.

Critical Accounting Policies

Revenue recognition. 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. 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 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 the first quarter of 2005 or in 2004.

Results of Operations

Comparison of the Three Month Period Ended March 31, 2005 versus the Three Month Period Ended March 31, 2004.

Total revenues decreased by $6.4 million, or 46%, from $14 million in the first quarter of 2004, to $7.6 million for the same period in 2005. The decrease was due to a $6.7 million decrease in patient revenues along with a $0.3 million decrease in rental revenue offset by a $0.4 million increase in other reimbursements and a $0.2 million increase in interest income.

Patient revenues decreased by $6.7 million, or 100%, from $6.7 million in the first quarter of 2004, to $0 for the same period in 2005. On April 1, 2004, the licenses to operate the three SNFs owned by the Company in Hampden, Massachusetts were transferred to the manager of the facilities. Upon the transfer of these licenses, the Company no longer reflects the assets, liabilities, revenues and expenses related to the operations of these three SNFs in its consolidated financial statements. As of April 1, 2004 and through the

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date of the spin-off on November 1, 2004, the Company recorded rental income per the terms of the leases it entered into with the new owners of the operating licenses. The Company’s other skilled nursing and assisted living facilities had triple net leases in place prior to April 1, 2004.

Rents, tenant reimbursements, reimbursements from related party and parking revenues increased by $0.1 million, or 1%, from $7.0 million in the first quarter of 2004, to $7.1 million for the same period in 2005. Reimbursements from related party increased $0.4 million due to amounts billed to G&L Senior Care Properties, LLC under the cost sharing agreement discussed above under Recent Developments. The cost sharing agreement calls for the Company to be reimbursed by G&L Senior Care Properties, LLC for approximately 65% of the Company’s general and administrative expenses. During the first quarter of 2005, the Company billed $0.4 million to G&L Senior Care Properties, LLC pursuant to the cost sharing agreement. Rental revenue increased an additional $0.2 million due to the scheduled rent increases pursuant to the Company’s MOB leases. These increases were offset by a $0.4 million decrease in rental revenue as a result of the spin-off of the Company’s skilled nursing facility and assisted living facility assets on November 1, 2004. After the spin-off, the Company no longer has any ownership in those assets, and thus does not recognize any rental revenue related to those facilities.

Interest and loan fee income increased by $0.2 million, or 100%, from $0.2 million in the first quarter of 2004 to $0.4 million for the same period in 2005. The main reason for the increase was due to interest earned on two promissory notes from G&L Senior Care Properties, LLC. After the spin-off of the Company’s skilled nursing and assisted living facility assets on November 1, 2004, the Company held two promissory notes issued by G&L Senior Care Properties, LLC, a $2 million short term, unsecured promissory note and a $4 million, long term, secured promissory note, both bearing interest at the rate of 10.75% per annum. The $2 million promissory note was repaid in full on April 1, 2005. A portion of the increase in interest income was also due to interest earned on the Company’s cash on hand which was higher than in the first quarter of 2004.

Total expenses decreased by $6.4 million, or 49%, from $13.1 million for the first quarter of 2004, to $6.7 million for the same period in 2005. The decrease was due to a decrease in skilled nursing operation costs of $6.2 million, a decrease in property operations of $0.1 million and a decrease in depreciation and amortization expense of $0.4 million. These decreases were offset by an increase in interest expense of $0.3 million.

Skilled nursing operations decreased by $6.2 million, or 100%, from $6.2 million in the first quarter of 2004, to $0 for the same period in 2005. On April 1, 2004, the licenses to operate the three SNFs owned by the Company in Hampden, Massachusetts were transferred to the manager of the facilities. Upon the transfer of these licenses, the Company no longer reflects the assets, liabilities, revenues and expenses related to the operations of these three SNFs in its consolidated financial statements.

Depreciation and amortization expense decreased $0.4 million, or 33%, from $1.2 million in the first quarter of 2004, to $0.8 million for the same period in 2005. This decrease was due to the spin-off of the Company’s skilled nursing facility and assisted living facility assets on November 1, 2004. The Company recorded $0.4 million of depreciation and amortization expense related to its skilled nursing and assisted living facilities in the first quarter of 2004. After the spin-off, the Company no longer has any ownership in those assets, and thus does not record any depreciation or amortization expense related to those facilities.

Interest expense increased $0.3 million, or 11%, from $2.7 million for the first quarter of 2004, to $3.0 million for the same period in 2005. The primary reason for the increase was the $0.8 million of pre-payment fees and the write-off of deferred loan fees incurred in the first quarter of 2005 relating to the early repayment of a mortgage loan secured by an MOB located in Mission Hills, California. On March 23, 2005, the Company refinanced the existing loan on this MOB, the Holy Cross Medical Plaza, with a new $17.8 million loan from Countrywide Commercial Real Estate Finance, Inc. In connection with the early repayment of the existing loan, the Company paid a prepayment penalty and wrote off loan fees totaling $0.8 million. This increase was offset by a $0.5 million decrease in interest expense due to the spin-off of the Company’s skilled nursing facility and assisted living facility assets on November 1, 2004.

Equity in earnings of unconsolidated affiliates increased $0.1 million from the first quarter of 2004 compared to the same period in 2005. This increase was mainly due to the spin-off of the Company’s skilled

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nursing facility and assisted living facility assets on November 1, 2004. During the first quarter of 2004, the Company realized losses totaling $0.1 million related to its investments in unconsolidated entities which owned skilled nursing or assisting living facilities. Subsequent to the spin-off, the Company no longer has any ownership interest in those entities and thus does not recognize and income or loss related to those facilities.

Total income from discontinued operations increased $7 million from $0.8 million for the first quarter of 2004 to $7.8 million for the same period in 2005. The main reason for this increase was the sale of Coronado Plaza, an office and retail center located in Coronado, California for $18.2 million on March 24, 2005. The Company recognized a gain of $7.7 million in connection with the sale. This gain was offset by a $0.3 million gain from the sale of the Company’s membership interest in a joint venture that owned an ALF located in Tarzana, California in January 2004 along with a $0.3 million gain from sale of a research and development building located in Irwindale, California in March 2004 and $0.2 million of additional net income from the operations of these two properties during the first quarter of 2004 as compared to the operations of Coronado Plaza during the first quarter of 2005.

Liquidity and Capital Resources

As of March 31, 2005, the Company had approximately $13.0 million of cash on hand. The Company obtains its liquidity from multiple internal and external sources. Internally, funds are derived from the operation of its MOB properties. The Company’s MOB properties contain approximately 737,000 rentable square feet and, as of March 31, 2005, were approximately 97.6% leased to over 400 tenants with lease terms typically ranging from three to ten years.

The Company’s principal external sources of capital consist of various secured loans and selective asset sales. As of March 31, 2005, the Company had secured loans outstanding of approximately $154.3 million. During 2004, the Company obtained a $3 million secured line of credit that is secured by a first deed of trust on land owned by the Company in Santa Clarita, California. As of March 31, 2005, the Company had no outstanding borrowings under the line of credit. The Company has also been selling some of its assets which has provided additional liquidity. During the first quarter of 2005, the Company received net proceeds of $4.4 million from the sale of an office and retail center located in Coronado, California. The Company has reserved these funds for new acquisitions, future stock dividends and for general corporate purposes. The Company’s 2005 asset sales as well as its refinancings are discussed below.

On March 23, 2005, the Company refinanced the Holy Cross Medical Plaza, a 72,000 square foot MOB located in Mission Hills, California with a new $17.8 million loan from Countrywide Commercial Real Estate Finance, Inc. The Company received net proceeds of $9.7 million from the refinancing after repayment of the existing $7.1 million mortgage loan, prepayment penalties and closing costs. The new loan is for ten years but is interest only for two years and bears interest at a fixed rate of 5.71% per annum.

On March 24, 2005, the Company sold Coronado Plaza, a 47,000 square foot office and retail center located in Coronado, California for $18.2 million. The buyer assumed the existing mortgage loan of $13.6 million and the Company received net proceeds of $4.4 million after all closing costs. The Company recognized a gain of $7.7 million.

On April 7, 2005, the Company refinanced three MOBs owned by San Pedro, a joint venture in which the Company owns a 50% interest, with a new $7.7 million loan from Countrywide Commercial Real Estate Finance, Inc. The Company received net proceeds of $2.4 million from the refinancing after repayment of the existing $4.6 million mortgage loan, prepayment penalties and closing costs. The new loan is for ten years but is interest only for two years and bears interest at a fixed rate of 5.64% per annum.

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 the first quarter of 2005 to holders of record on the first day of each month. On March 31, 2005, the Company distributed $10.0 million to holders of the Company’s Common Stock.

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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 and its line of credit. 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 provided by operating activities decreased $0.9 million from $2.1 million for the three months ended March 30, 2004 to $1.2 million for the same period in 2005. The decrease is due to a decrease in depreciation and amortization of $0.4 million, an increase in net gains from sale of discontinued operations of $7.1 million and a $0.8 million decrease in the change in accounts payable and other liabilities. These decreases were offset by a $7.1 million increase in net income and a $0.4 million decrease in prepaid expenses and other assets.

Net cash from investing activities decreased $5.2 million from $8.3 million for the three months ended March 31, 2004 to $3.1 million for the same period in 2005. The decrease was primarily due to an $5.4 million decrease in sales of real estate assets and a $0.7 million increase in restricted cash offset by a $0.5 million decrease in construction in progress, a $0.2 million decrease in pre-acquisition costs and a $0.2 million decrease in investments in notes and bonds receivable.

Net cash flows used in financing activities decreased by approximately $4.6 million from $6.4 million for the three months ended March 31, 2004, to $1.8 million for the same period in 2005. The decrease was due to a a $17.8 million increase in notes payable proceeds offset by a $3.1 million increase in the repayment of notes payable, a $9.9 million increase in distributions to stockholders and a $0.2 million increase in payments of deferred loan costs.

Off-Balance Sheet Arrangements

The Company was the guarantor on a $513,602 letter of credit issued by U.S. Bank National Association (“U.S. Bank”) in favor of Fannie Mae c/o Greystone Servicing Corporation under which the Company’s maximum liability was approximately $410,000. In December 1999, the Company purchased $1.3 million of subordinated bonds secured by an apartment complex located in Tulsa, Oklahoma. At the time, a letter of credit for $513,602 was issued by the Bank of Oklahoma in favor of the issuer of the subordinated bonds in order 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. The Company guaranteed $250,000 of this letter of credit. In December 2003, June 2004 and December 2004, the borrower defaulted on the semi-annual interest payment to the holders of the subordinated bonds, including those held by the Company. The subordinated bonds owned by the Company are fully-reserved for on the Company’s balance sheet. In July 2004, the letter of credit issued by the Bank of Oklahoma was called upon and the Company was required to fund the $250,000 that it had guaranteed. Subsequently, the current letter of credit was issued by U.S. Bank. The Company’s partners in this investment are in the process of restructuring the management and operation of the property in order to make it profitable once again. As part of the restructuring, the letter of credit was called upon in March 2005 and the Company was required to make a payment of $410,000. The Company recorded a reserve of $410,000 on its balance sheet as of December 31, 2004 related to its maximum liability with respect to the letter of credit against which the March 2005 payment was applied.

As of March 31, 2005, the Company had investments in three unconsolidated joint ventures totaling $2.5 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.

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Contractual Obligations

On March 23, 2005, the Company refinanced the Holy Cross Medical Plaza with a new $17.8 million loan from Countrywide Commercial Real Estate Finance, Inc. The new loan is for ten years but is interest only for two years and bears interest at a fixed rate of 5.71% per annum. On March 24, 2005, the Company sold the Coronado Plaza for $18.2 million. The buyer assumed the existing mortgage loan of $13.6 million relieving the Company of any future obligations under this obligation. There were no other material changes in the first quarter of 2005 compared to the Company’s contractual obligations as of December 31, 2004. As of March 31, 2005, the Company had the following contractual obligations outstanding: