Overview

We are a real estate investment trust ("REIT") that commenced operations in 1986. We invest in healthcare and human service related facilities including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers and medical office buildings. As of June 30, 2008, we have forty-seven real estate investments or commitments located in fourteen states consisting of:

• seven hospital facilities consisting of three acute care, one behavioral healthcare, one rehabilitation and two sub-acute;

• thirty-six medical office buildings, including twenty-seven owned by various LLCs, and;

• four pre-school and childcare centers.

Forward Looking Statements and Certain Risk Factors

This report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:

• a substantial portion of our revenues are dependent upon one operator, Universal Health Services, Inc., ("UHS");

• a subsidiary of UHS is our Advisor and our officers are all employees of UHS, which may create the potential for conflicts of interest;

• lost revenues from purchase option exercises and lease expirations and renewals, loan repayments and other restructuring;

• the availability and terms of capital to fund the growth of our business;

• the outcome of known and unknown litigation, government investigations, and liabilities and other claims asserted against us or the operators of our facilities, including the government's ongoing investigation of UHS's South Texas Health Systems affiliates, which includes McAllen Medical Center, as described herein;

• our majority ownership interests in various LLCs in which we hold non-controlling equity interests;

• real estate market factors, including without limitation the supply and demand of office space and market rental rates, changes in interest rates as well as an increase in the development of medical office condominiums in certain markets;

• government regulations, including changes in the reimbursement levels under the Medicare and Medicaid program;

• the issues facing the health care industry that affect the operators of our facilities, including UHS, such as: changes in, or the ability to comply with, existing laws and government regulations; unfavorable changes in the levels and terms of reimbursement for our charges by third party payors or government programs, including Medicare or Medicaid; demographic changes; the ability to enter into managed care provider agreements on acceptable terms; an increase in uninsured and self-pay patients which unfavorably impacts the collectibility of patient accounts; decreasing in-patient admission trends; technological and pharmaceutical improvements that may increase the cost of providing, or reduce the demand for, health care; the ability to attract and retain qualified medical personnel, including physicians;

• three LLCs that own properties in California, in which we have various non-controlling equity interests, could not obtain earthquake insurance at rates which are economically beneficial in relation to the risks covered;

• competition for our operators from other REITs;

• competition from other health care providers, including physician owned facilities and other facilities owned by UHS, including, but not limited to, McAllen, Texas, the site of our largest acute care facility;

• changes in, or inadvertent violations of, tax laws and regulations and other factors than can affect REITs and our status as a REIT;

• fluctuations in the value of our common stock, and;

• other factors referenced herein or in our other filings with the Securities and Exchange Commission.

Given these uncertainties, risks and assumptions, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition, including the operating results of our lessees and the facilities leased to subsidiaries of UHS, could differ materially from those expressed in, or implied by, the forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to publicly update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except as may be required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following:

Revenue Recognition: Our revenues consist primarily of rentals received from tenants, which are comprised of minimum rent (base rentals), bonus rentals and reimbursements from tenants for their pro-rata share of expenses such as common area maintenance costs, real estate taxes and utilities.

The minimum rent for all hospital facilities is fixed over the initial term or renewal term of the respective leases. Rental income recorded by our consolidated and unconsolidated medical office buildings ("MOBs ") relating to leases in excess of one year in length, is recognized using the straight-line method under which contractual rents are recognized evenly over the lease term regardless of when payments are due. The amount of rental revenue resulting from straight-line rent adjustments is dependent on many factors including the nature and amount of any rental concessions granted to new tenants, scheduled rent increases under existing leases, as well as the acquisitions and sales of properties that have existing in-place leases with terms in excess of one year. As a result, the straight-line adjustments to rental revenue may vary from period-to-period. Bonus rents are recognized when earned based upon increases in each facility's net revenue in excess of stipulated amounts. Bonus rentals are determined and paid each quarter based upon a computation that compares the respective facility's current quarter's net revenue to the corresponding quarter in the base year. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred.

Real Estate Investments: We account for our property acquisitions under the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141"). Under SFAS No. 141, the purchase price of a property is allocated to the property's land, buildings and intangible assets based upon our estimates of their fair values. Depreciation is computed using the straight-line method over the useful lives of the buildings and capital improvements. The value of intangible assets is amortized as real estate amortization over the remaining lease term.

Investments in Limited Liability Companies ("LLCs"): Our consolidated financial statements include the consolidated accounts of our controlled investments and those investments that meet the criteria of a variable interest entity where we are the primary beneficiary. In accordance with the American Institute of Certified Public Accountants' Statement of Position 78-9 "Accounting for Investments in Real Estate Ventures" as amended by FASB Staff Position SOP 78-9-1 "Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5", Emerging Issues Task Force Issue (EITF) 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights" and EITF 04-5 "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights" we account for our unconsolidated investments in LLCs which we do not control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 99% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. This Interpretation, as revised ("FIN 46R"), addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. As a result of our related party relationship with UHS, and certain master lease, lease assurance or lease guarantee arrangements between UHS and various properties owned by two LLCs in which we own non-controlling ownership interests ranging from 95% to 98%, these two LLCs were considered to be variable interest entities and are therefore included in our consolidated financial statements on a consolidated basis since we are the primary beneficiary. One of these consolidated LLCs owns a medical office building which was completed and opened during the third quarter of 2008.

The other LLCs in which we hold various non-controlling ownership interests are not variable interest entities and therefore are not subject to the consolidation requirements of FIN 46R.

Federal Income Taxes: No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, and intend to continue to remain so qualified. As such, we are exempt from federal income taxes and we are required to distribute at least 90% of our real estate investment taxable income to our shareholders.

We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary income plus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax has been reflected in the financial statements as no tax was due.

Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording of provision for investment losses.

Relationship with Universal Health Services, Inc. ("UHS") - UHS is our principal tenant and through UHS of Delaware, Inc., a wholly owned subsidiary of UHS, serves as our advisor (the "Advisor") under an Advisory Agreement dated December 24, 1986 between the Advisor and us (the "Advisory Agreement"). Our officers are all employees of UHS and although as of June 30, 2008 we had no salaried employees, our officers do receive stock-based compensation from time-to-time.

Under the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees who are unaffiliated with UHS, that the Advisor's performance has been satisfactory. The Advisory Agreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement has been renewed for 2008. All transactions between us and UHS must be approved by the Independent Trustees. The Advisor is entitled to certain advisory fees for its services. See "Relationship with Universal Health Services, Inc." in Note 2 to the consolidated financial statements for additional information on the Advisory Agreement and related fees.

The combined revenues generated from the leases on the UHS hospital facilities accounted for approximately 56% and 57% of our total revenue for the three months ended June 30, 2008 and 2007, respectively, and 57% for each of the six months ended June 30, 2008 and 2007. Including 100% of the revenues generated at the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 99%, the leases on the UHS hospital facilities accounted for approximately 23% of the combined consolidated and unconsolidated revenue for each of the three months ended June 30, 2008 and 2007, and 22% and 23% for the six months ended June 30, 2008 and 2007, respectively. The leases to the hospital facilities of UHS are guaranteed by UHS and cross-defaulted with one another.

For additional disclosure related to our relationship with UHS, please refer to Note 2 to the condensed consolidated financial statements-Relationship with Universal Health Services, Inc. ("UHS") and Related Party Transactions.

Results of Operations

For the quarter ended June 30, 2008, net income was $4.2 million, or $0.35 per diluted share, as compared to $8.0 million, or $0.67 per diluted share, during the comparable prior year quarter. The decrease in net income of $3.8 million, or $0.32 per diluted share, during the second quarter of 2008, as compared to the comparable quarter of 2007, was primarily attributable to:

• an unfavorable change of $2.3 million, or $0.19 per diluted share, resulting from the gain realized during the second quarter of 2007 on the sale of a medical office building (included in income from discontinued operations);

• an unfavorable change of $939,000, or $0.08 per diluted share, resulting from the gain recognized during the second quarter of 2007 in connection with the previously disclosed Chalmette Medical Center ("Chalmette") asset exchange and substitution transaction;

• an unfavorable change of $187,000, or $0.02 per diluted share, resulting from increased depreciation expense: (i) recorded by certain of our unconsolidated LLCs in connection with newly constructed medical office buildings which were opened during the fourth quarter of 2007, and;
(ii) resulting from the replacement assets received from UHS in connection with the Chalmette asset exchange and substitution transaction, and;

• an unfavorable change of $329,000, or $.03 per diluted share, resulting from the recording of the following by two of our unconsolidated LLCs that own MOBs in Las Vegas, Nevada: (i) reserves established for certain tenant receivables in connection with leases which are in default resulting from the licensure revocation and closure of physician-owned gastroenterology and endoscopy clinics, and; (ii) higher than anticipated building maintenance and repairs expense.

For the six month period ended June 30, 2008, net income was $8.3 million, or $0.70 per diluted share, as compared to $13.8 million, or $1.16 per diluted share, during the comparable six month period of 2007. The decrease in net income of $5.5 million, or $0.46 per diluted share, during the six month period of 2008, as compared to the comparable six month period of 2007, was primarily attributable to:

• an unfavorable change of $2.3 million, or $0.19 per diluted share, resulting from the gain realized during the six month period of 2007 on the sale of a medical office building (included in income from discontinued operations);

• an unfavorable change of $1.7 million, or $0.15 per diluted share, resulting from the gain recognized during the six month period of 2007 in connection with the Chalmette asset exchange and substitution transaction;

• an unfavorable change of $516,000, or $0.04 per diluted share, resulting from increased depreciation expense: (i) recorded by certain our unconsolidated LLCs in connection with newly constructed medical office buildings which were opened during the fourth quarter of 2007, and;
(ii) resulting from the replacement assets received from UHS in connection with the Chalmette asset exchange and substitution transaction;

• an unfavorable change of $329,000, or $.03 per diluted share, resulting from the recording of the tenant receivable reserves and maintenance expenses by two of our unconsolidated LLCs that own MOBs in Las Vegas, Nevada, as discussed above;

• an unfavorable change of $252,000, or $0.02 per diluted share, resulting from the gain recorded during the six month period of 2007 in connection with the sale of real property by a LLC in which we had an 80% non-controlling equity interest, and;

• other combined net unfavorable changes of $370,000, or $0.03 per diluted share, including the additional interest expense, as discussed below.

Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled $919,000 and $783,000 for the three month periods ended June 30, 2008 and 2007, respectively, and $1.8 million and $1.6 million for the six month periods ended June 30, 2008 and 2007, respectively. A portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as tenant reimbursement revenue in our condensed consolidated statements of income.

Interest expense, net of interest income, increased $84,000 and $242,000 during the three and six months ended June 30, 2008, as compared to the comparable prior year periods, respectively, due primarily to an increase in our average outstanding borrowings, partially offset by a decrease in our average borrowing rate.

During the three months ended June 30, 2008 and 2007, we recorded equity in income of unconsolidated LLCs of $429,000 and $701,000, respectively. The $272,000 decrease during the three month period of 2008, as compared to the comparable 2007 period,

was primarily due to $329,000 of reserves/expenses recorded by two of our unconsolidated LLCs that own MOBs in Las Vegas, Nevada, related to: (i) the reserves established for certain tenant receivables in connection with leases which are in default resulting from the licensure revocation and closure of physician-owned gastroenterology and endoscopy clinics, and; (ii) higher than anticipated building maintenance and repairs expense,

During the six month periods ended June 30, 2008 and 2007, we recorded equity in income of unconsolidated LLCs of $1.0 million and $1.6 million, respectively. The $607,000 decrease during the six month period of 2008, as compared to the comparable 2007 period, was primarily due to the $329,000 of reserves/expenses recorded by two LLCs during the second quarter of 2008, as mentioned above, and a gain of $252,000 realized during the six months ended June 30, 2007 on the sale of real property by a LLC.

Funds from operations ("FFO"), is a widely recognized measure of REIT performance. Although FFO is a non-GAAP financial measure, we believe that information regarding FFO is helpful to shareholders and potential investors. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. To facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income, determined in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) as an alternative to cash flow from operating activities determined in accordance with GAAP; (iii) as a measure of our liquidity; (iv) nor is FFO an indicator of funds available for our cash needs, including our ability to make cash distributions to shareholders.

Below is a reconciliation of our reported net income to FFO for the three and six month periods ended June 30, 2008 and 2007 (in thousands):

                                                       Three Months Ended         Six Months Ended
                                                            June 30,                  June 30,
                                                        2008         2007         2008        2007
Net income                                           $    4,159    $  7,971     $   8,317   $ 13,782
Plus: Depreciation and amortization expense:
Consolidated investments                                  1,429       1,215         2,817      2,490
Unconsolidated affiliates                                 1,863       1,440         3,650      2,790
Less: Gain on sale of real property - discontinued
operations                                                   -       (2,270 )          -      (2,270 )
Gain on LLC's sale of real property                          -           -             -        (252 )
Gain on asset exchange and substitution agreement
with UHS-Chalmette                                           -         (939 )          -      (1,728 )

Funds from operations (FFO)                          $    7,451    $  7,417     $  14,784   $ 14,812

Liquidity and Capital Resources

Net cash provided by operating activities

Net cash provided by operating activities was $10.5 million and $11.4 million for the six month periods ended June 30, 2008 and 2007, respectively.

The $822,000 net decrease was attributable to:

• an unfavorable change of $869,000 due to a decrease in net income plus or minus the adjustments to reconcile net income to net cash provided by operating activities (depreciation and amortization, gain on sale of property, gain on sale of property by a LLC and replacement property recovered from UHS-Chalmette);

• an unfavorable change of $1.1 million in rent receivable primarily resulting from the timing of base rental payments by UHS;

• a favorable change of $723,000 in accrued expenses and other liabilities resulting primarily from the exercise and settlement of accrued dividend rights by certain of our officers and a trustee during the second quarter of 2007;

• a favorable change of $265,000 in tenant reserves, escrows, deposits and prepaid rents, and;

• $125,000 of other net favorable changes.

The $869,000 unfavorable change in net income plus or minus the adjustments to reconcile net income to net cash provided by operating activities was primarily due to: (i) an increase of $242,000 in interest expense, resulting primarily from increased

borrowings; (ii) a decrease of $355,000 in our equity in income of LLCs (excluding the gain on sale of real property by a LLC during the six months ended June 30, 2007) primarily due to increased depreciation and amortization expense recorded by certain unconsolidated LLCs resulting from newly constructed MOBs which were opened throughout 2007, as well as unanticipated building maintenance and repair expenditures combined with tenant receivable reserves recorded by two unconsolidated LLCs located in Las Vegas, Nevada, and;
(iii) $272,000 of other unfavorable changes.

Net cash (used in) provided by investing activities

Net cash (used in) provided by investing activities was ($11.4 million) during the six months ended June 30, 2008 as compared to $7.5 million during the six months ended June 30, 2007.

During the six month period ended June 30, 2008, we funded $1.7 million of equity investments, funded $1.6 million of advances to LLCs, spent $2.3 million on capital additions consisting primarily of construction costs related to a new MOB in Pamdale California, spent $4.7 million on the acquisition of real property and advanced $4.0 million to our third-party partners, as discussed below. Also during the six-month period ended June 30, 2008, we received:
(i) $1.3 million related to debt refinancing by LLCs, and; (ii) $1.5 million of cash distributions in excess of income from our unconsolidated LLCs.

During the first six months of 2008, we advanced $4.0 million to our third-party partners in a certain LLC in connection with a $4.0 million loan agreement. This loan is a non-amortizing loan with interest paid on a quarterly basis. The interest rate on this loan will be: (i) 4.25% plus LIBOR, or; (ii) if information to determine LIBOR is not available, three hundred seventy-five . . .