ITEM 1.     BUSINESS

BUSINESS

Overview

Ventas, Inc. (“Ventas” or the “Company”) is a healthcare real estate investment trust (“REIT”) with a geographically diverse portfolio of healthcare-related facilities. As of December 31, 2002, this portfolio consisted of 44 hospitals, 220 nursing facilities and nine other healthcare and senior housing facilities in 37 states. The Company leases these facilities to healthcare operating companies under “triple-net” or “absolute-net” leases. As of December 31, 2002, Kindred Healthcare, Inc. and its subsidiaries (collectively, “Kindred”) lease 210 of the Company’s nursing facilities and all but one of the Company’s hospitals. The Company also has investments relating to 25 healthcare and senior housing facilities located in Ohio and Maryland. The Company operates in one segment which consists of financing, owning and leasing healthcare-related and senior housing facilities. See the Consolidated Financial Statements and notes thereto, including “Note 2—Summary of Significant Accounting Policies” included in this Annual Report on Form 10-K.

The Company’s business strategy is comprised of two primary objectives: diversifying its portfolio of properties and increasing its earnings. The Company intends to diversify its portfolio by operator, facility type and reimbursement source. The Company intends to invest in or acquire additional healthcare-related and/or senior housing properties, which could include hospitals, nursing centers, assisted or independent living facilities and ancillary healthcare facilities, that are operated by qualified providers in their industries.

Portfolio of Properties

The Company conducts substantially all of its business through a wholly owned operating partnership, Ventas Realty, Limited Partnership (“Ventas Realty”) and an indirect, wholly owned limited liability company, Ventas Finance I, LLC (“Ventas Finance”). As of December 31, 2002, Ventas Finance owned 40 of the Company’s skilled nursing facilities, the Company owned two hospitals and Ventas Realty owned all of the Company’s other properties and investments.

The following information provides an overview of the Company’s portfolio of healthcare properties and investments as of December 31, 2002:

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Hospital Facilities

The Company’s hospitals generally are long-term acute care hospitals that serve medically complex, chronically ill patients. The operator of these hospitals has the capability to treat patients who suffer from multiple systemic failures or conditions such as neurological disorders, head injuries, brain stem and spinal cord trauma, cerebral vascular accidents, chemical brain injuries, central nervous system disorders, developmental anomalies and cardiopulmonary disorders. Chronic patients are often dependent on technology for continued life support, such as mechanical ventilators, total parenteral nutrition, respiration or cardiac monitors and dialysis machines. While these patients suffer from conditions which require a high level of monitoring and specialized care, they may not necessitate the continued services of an intensive care unit. Due to their severe medical conditions, these patients generally are not clinically appropriate for admission to a nursing facility or rehabilitation hospital.

The Company’s one 29 bed rehabilitation hospital provides high intensity physical, respiratory, neurological, orthopedic and other treatment protocols for patients during recovery.

Nursing Facilities

The Company’s nursing facilities generally are skilled nursing facilities. In addition to the customary services provided by skilled nursing facilities, the operators of the Company’s nursing facilities typically provide rehabilitation services, including physical, occupational and speech therapies.

Other Facilities

The Company’s eight personal care facilities serve persons with acquired or traumatic brain injury. The operator of the personal care facilities provides services including supported living services, neurorehabilitation, neurobehavioral management and vocational programs. The Company owns one assisted living facility which provides residential care for the elderly, including assistance with the daily activities of living.

Other Real Estate Investments

The Company has an investment in a mezzanine loan that is secured by (1) equity pledges in entities that own and operate 17 skilled nursing facilities and one related assisted living facility located in Ohio and Maryland, (2) liens on four additional healthcare/senior living housing properties and (3) interests in three additional properties operated by the borrower. See “—Recent Developments—THI Transaction” below.

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Certificates of Need

In addition to the diversification of lease rental revenues from the geographic diversification of the portfolio, the majority of the Company’s facilities are located in states that have certificate of need (“CON”) requirements. Some states require state approval for development and expansion of healthcare facilities and services, including findings of need for additional or expanded healthcare facilities or services. A CON, which is issued by governmental agencies with jurisdiction over healthcare facilities, is at times required for expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. The CON rules and regulations may restrict an operator’s ability to expand the Company’s properties in certain circumstances.

Dependence on Kindred

For the years ended December 31, 2002 and 2001, Kindred accounted for approximately 98.4% and 98.7% of the Company’s rental revenues, respectively. The Company’s reliance on Kindred is a result of a transaction in 1998 in which the Company was separated into two publicly held corporations (the “1998 Spin Off”). A new corporation, subsequently named Vencor, Inc. (which has since been renamed Kindred Healthcare, Inc.), was formed to operate the hospital, nursing facility and ancillary services businesses, and the Company retained substantially all of the real property which it leased to Kindred.

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In addition, as of December 31, 2002, the Company owned 920,814 shares of the outstanding common stock of Kindred (the “Kindred Common Stock”). The Company received shares of common stock in Kindred pursuant to the terms of Kindred’s plan of reorganization (the “Kindred Reorganization Plan”) under Chapter 11 of the U.S. Bankruptcy Code, as additional rent from Kindred.

Kindred Master Leases

The Company leases 43 of its hospitals and 210 of its nursing facilities to Kindred under five master lease agreements (the “Kindred Master Leases”). Four of the Kindred Master Leases are with Ventas Realty, and the fifth (the “Kindred CMBS Master Lease”), which relates to 40 skilled nursing facilities, is with Ventas Finance.

Each Kindred Master Lease is a “triple-net lease” or an “absolute-net lease” pursuant to which Kindred is required to pay all insurance, taxes, utilities, maintenance and repairs related to the properties.

Under each Kindred Master Lease, the aggregate annual rent is referred to as Base Rent (as defined in each Kindred Master Lease). The initial annual aggregate Base Rent was $180.7 million from May 1, 2001 to April 30, 2002. For the period from May 1, 2002 through April 30, 2004, Base Rent, payable all in cash, escalates on May 1 of each year at an annual rate of 3.5% over the Prior Period Base Rent (as defined in the Kindred Master Leases) if certain Kindred revenue parameters are met. Assuming such Kindred revenue parameters are met, Base Rent under the Kindred Master Leases will be $192.4 million from May 1, 2003 to April 30, 2004. See “Note 3—Revenues from Properties” and “Note 11—Transactions with Kindred” to the Consolidated Financial Statements.

Each Kindred Master Lease provides that beginning May 1, 2004, if Kindred refinances its senior secured indebtedness entered into in connection with the Kindred Reorganization Plan or takes other similar action (a “Kindred Refinancing”), the 3.5% annual escalator will be paid in cash. If a Kindred Refinancing has not occurred, then beginning on May 1, 2004 and continuing until the occurrence of a Kindred Refinancing, the Base Rent will be comprised of (a) Current Rent (as defined in the Kindred Master Leases) payable in cash which will escalate annually by an amount equal to 2% of Prior Period Base Rent, and (b) an additional annual non-cash accrued escalator amount of 1.5% of the Prior Period Base Rent.

There are several renewal bundles of properties under each Kindred Master Lease, with each bundle containing a varying number of properties. Properties are renewable only in bundles. All properties within a bundle have primary terms ranging from 10 to 15 years commencing May 1, 1998, plus renewal options totaling fifteen years.

The Company has a one time right to reset the rents under the Kindred Master Leases (the “Reset Right”), exercisable during a one-year period commencing July 19, 2006 by notice given on or after January 20, 2006 on a Kindred Master Lease by Kindred Master Lease basis, to a then fair market rental rate, for a total fee of $5.0 million payable on a pro-rata basis at the time of exercise under the applicable Kindred Master Lease. The Reset Right under the Kindred CMBS Master Lease can only be exercised in conjunction with the exercise of the Reset Right under Master Lease No. 1. The Company cannot exercise the Reset Right under the Kindred CMBS Master Lease without the prior written consent of the CMBS Lender if, as a result of such reset, the aggregate rent payable for the CMBS Properties would decrease. See “Risk Factors—Risks Arising from the Company’s Business—The Company is dependent on Kindred; Kindred’s inability or unwillingness to satisfy its obligations under its agreements with the Company could significantly harm the Company and its ability to service its indebtedness and other obligations and to make distributions to its stockholders as required to continue to quality as a REIT.”

Recent Developments

Kindred’s Increased Professional Liability Expense in Florida

On October 10, 2002, Kindred announced that it will record a substantial increase in costs related to professional liability claims, primarily claims related to skilled nursing facility operations conducted in Florida.

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The annual cash rent from the 15 Florida skilled nursing facilities the Company leases to Kindred in Florida is approximately $8.5 million, which constitutes approximately 4.6% of the total $186.0 million in annualized rent payable to the Company by Kindred. The Company believes that under the terms of its leases with Kindred, Kindred is not entitled to abandon the leased properties, reduce the rent, or receive other concessions based on the increases in professional liability costs.

On December 11, 2002, Kindred publicly announced that it had entered into a non-binding letter of intent with Senior Health Management, LLC (“Senior Health Management”) to transfer the operations of Kindred’s 18 skilled nursing facilities in Florida, including the 15 skilled nursing facilities in Florida that Kindred leases from the Company, and to sublease the Company’s 15 facilities to Senior Health Management or its designee. The announcement indicated that consummation of the proposed transaction is subject to a number of material closing conditions, including approval from Kindred’s lenders and regulatory and governmental approvals. Kindred stated that the lease payments under the proposed subleases would be equal to the lease payments under the primary leases and that Kindred will remain a primary obligor under the applicable lease with the Company.

Based on the information available to the Company, the Company believes its consent is required for the proposed sublease of the 15 skilled nursing facilities by Kindred. However, in its December 11, 2002 announcement, Kindred stated, among other things, that it has the ability to sublease 12 of the skilled nursing facilities in Florida without the Company’s consent and that the Company’s consent cannot be unreasonably withheld on the remaining 3 skilled nursing facilities in Florida. Kindred further stated that if the Company improperly interferes with the completion of the proposed transaction, it will seek appropriate legal remedies against the Company as well as damages for the continuing losses it is sustaining with respect to these facilities. The Company believes that it has the right to consent to the proposed sublease of the 15 skilled nursing facilities in Florida held by Kindred, and intends to defend vigorously any legal actions arising out of its withholding of such consent. However, there can be no assurance as to what the outcome of any such action on the part of Kindred might be or the ultimate effects it might have on the Company’s financial condition, results of operations, or the share price of the Company’s common stock.

The Company has been discussing strategic alternatives regarding the skilled nursing facilities in Florida with Kindred. The Company currently intends to work with Kindred to permit it to exit the Florida skilled nursing facility market on terms acceptable to the Company. The Company is evaluating its alternatives in the event no agreement is reached with Kindred, including the initiation of legal proceedings. However, there can be no assurance as to the outcome of the Company’s discussions with Kindred or when or if any exit by Kindred from the Florida skilled nursing facility market will occur.

As a result of Kindred’s October 10, 2002 announcement of its increased costs in Florida and other events, the market value of the Kindred Common Stock has declined substantially from $34.1 million as of September 30, 2002 to approximately $16.7 million as of December 31, 2002. The Company’s investment in Kindred Common Stock is classified as available for sale in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, the Kindred Common Stock is measured and reported on the Company’s balance sheet at fair value. The Company’s unrealized gains and losses on the Kindred Common Stock are reported as a component of Accumulated Other Comprehensive Income on the Company’s balance sheet.

THI Transaction

On November 4, 2002, the Company, through its wholly owned subsidiary Ventas Realty, completed a $120.0 million transaction (the “THI Transaction”) with Trans Healthcare, Inc., a privately owned long-term care and hospital company (“THI”). The THI Transaction was structured as a $53.0 million sale leaseback transaction (the “THI Sale Leaseback”) and a $67.0 million loan (the “THI Loan”), comprised of a first mortgage loan (the “THI Senior Loan”) and a mezzanine loan (the “THI Mezzanine Loan”). Following a sale of the THI Senior Loan in December 2002 (see below) the Company’s investment in THI was $70.0 million.

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As part of the THI Sale Leaseback, Ventas Realty purchased 5 properties and is leasing them back to THI under a “triple-net” master lease (the “THI Master Lease”). The properties subject to the THI Sale Leaseback are four skilled nursing facilities and one Care Campus that is comprised of one skilled nursing facility, one rehabilitation hospital, and one assisted living facility. Three of the properties are located in Maryland and two are located in Ohio. These properties contain a total of 770 beds. The THI Master Lease, which has an initial term of ten years, provides for annual base rent of $5.9 million. The THI Master Lease provides that if THI meets specified revenue parameters, annual base rent will escalate each year by the greater of (i) three percent or (ii) 50% of the consumer price index.

The THI Senior Loan, with an outstanding balance of approximately $50.0 million on December 27, 2002, is secured by 17 skilled nursing facilities and one related assisted living facility. Fourteen of these properties are located in Ohio and four are located in Maryland. These properties contain a total of 1,402 beds. The THI Senior Loan bears interest at LIBOR plus 367 basis points, inclusive of upfront fees (with a LIBOR floor of three percent). The THI Senior Loan matures in three years, and THI holds options to exercise two one-year extensions upon satisfaction of certain conditions.

The THI Mezzanine Loan, with a current principal balance of approximately $17.0 million, bears interest, inclusive of upfront fees, of 18% per annum and is secured by equity pledges in THI and certain of its subsidiaries that own and operate the 18 facilities that also collateralize the THI Senior Loan, liens on four additional healthcare/senior housing properties, and interests in three additional properties operated by THI. The THI Transaction collectively covers a total of 32 facilities: 18 skilled nursing facilities, four assisted living facilities, and one rehabilitation hospital containing 1,546 beds in Ohio; and nine skilled nursing facilities containing 1,206 beds in Maryland. Annualized interest on the THI Mezzanine Loan is expected to be approximately $3.0 million. The Company funded the transaction by drawing on its revolving credit facility under its Second Amended and Restated Credit, Security and Guaranty Agreement, dated as of April 17, 2002 (the “2002 Credit Agreement”).

Sale of THI Senior Loan

On December 27, 2002, the Company sold the THI Senior Loan to GE Capital Credit Corporation (“GECC”), generating net proceeds of $49.0 million, recognizing a small gain as a result of the sale.

Liquidity

See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments Regarding Liquidity” in this Annual Report on Form 10-K for a discussion of the Company’s 2002 Credit Agreement, Senior Notes Offering and Equity Offering.

Competition

The Company competes for real property investments with healthcare providers, other healthcare-related REITs, healthcare lenders, real estate partnerships, banks, insurance companies and other investors. Many of the Company’s competitors are significantly larger and have greater financial resources and lower cost of capital than the Company. The Company’s ability to compete successfully for real property investments will be determined by numerous factors, including the ability of the Company to identify suitable acquisition or investment targets, the ability of the Company to negotiate acceptable terms for any such acquisition, the availability and cost of capital to the Company. See “Risk Factors—Risks Arising From the Company’s Business—The Company may encounter certain risks and financing constraints when implementing its business strategy to pursue investments in, and/or acquisitions or development of, healthcare-related and/or senior housing properties” and “Note 7—Borrowing Arrangements” to the Consolidated Financial Statements.

The operators of the Company’s properties compete on a local and regional basis with other healthcare operators. The ability of the Company’s operators to compete successfully for patients at the Company’s

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facilities depends upon several factors, including the quality of care at the facility, the operational reputation of the operator, physician referral patterns, physical appearance of the facilities, other competitive systems of healthcare delivery within the community, population and demographics, and the financial condition of the operator. Private, federal and state reimbursement programs and the effect of other laws and regulations also may have a significant effect on the Company’s operators to compete successfully for patients for the properties. See “Risk Factors—Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on the Company’s tenants.”

Employees

As of December 31, 2002, the Company had 20 full-time employees and three part-time employees. The Company considers its relationship with its employees to be good.

Insurance

The Company maintains and/or requires in its leases that its tenants maintain liability and casualty insurance on its assets and operations. Under the Kindred Master Leases, Kindred is required to maintain, at its expense, certain insurance coverage related to the properties under the Kindred Master Leases and Kindred’s operations at the related facilities. See “—Dependence on Kindred—Kindred Master Leases” and “—Recent Developments—Kindred’s Increased Professional Liability Expense in Florida.” There can be no assurance that Kindred and the Company’s other tenants will maintain such insurance and any failure by Kindred or the Company’s other tenants to do so could have a material adverse effect on the business, financial condition, results of operation and liquidity of the Company and on the Company’s ability to service its indebtedness and its obligations under the United States Settlement (as defined in “Note 11—Transactions with Kindred—Settlement of United States Claims” to the Consolidated Financial Statements) and on the Company’s ability to make distributions to its stockholders as required to continue to qualify as a REIT (a “Material Adverse Effect”). The Company believes that Kindred and its other tenants are in substantial compliance with the insurance requirements contained in their respective leases with the Company.

The Company believes that the amount and coverage of its insurance protection is customary for similarly situated companies in its industry. There can be no assurance that in the future such insurance will be available at a reasonable price or that the Company will be able to maintain adequate levels of insurance coverage.

Due to the increase in the number and severity of professional liability claims against healthcare providers, the availability of professional liability insurance has been severely restricted and the premiums for such insurance coverage has increased dramatically. As a result, many healthcare operators may incur large funded and unfunded professional liability expense, which could have a material adverse effect on the liquidity, financial condition and results of operations of the healthcare providers. In addition, many healthcare providers are pursuing different organizational and corporate structures coupled with insurance programs that provide less insurance coverage. Therefore, there can be no assurance that the Company’s tenants will continue to carry the insurance coverage required under the terms of the Company’s leases, or that the Company will continue to require the same levels of insurance under its leases.

Additional Information

The Company maintains a website at www.ventasreit.com. The information on the Company’s website is not incorporated by reference in this Annual Report on Form 10-K and the Company’s web address is included as an inactive textual reference only.

The Company makes available, free of charge through its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Commission.

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GOVERNMENTAL REGULATION

Healthcare Regulation

General

The operators of the Company’s properties derive a substantial portion of their revenues from third party payors, including the Medicare and Medicaid programs. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, certain disabled persons and persons with end-stage renal disease. Medicaid is a medical assistance program jointly funded by federal and state governments and administered by each state pursuant to which benefits are available to certain indigent patients. The Medicare and Medicaid statutory framework is subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare and Medicaid. The amounts of program payments received by the Company’s operators and tenants can be changed by legislative or regulatory actions and by determinations by agents for the programs. See “—Healthcare Reform.” In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon operators by private payors are expected to continue. There can be no assurance that adequate reimbursement levels will continue to be available for services to be provided by the operators of the Company’s properties which currently are being reimbursed by Medicare, Medicaid and private payors. Significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on these operators’ liquidity, financial condition and results of operations, which could affect adversely their ability to make rental payments to the Company.

The operators of the Company’s properties are subject to other extensive federal, state and local laws and regulations including, but not limited to, laws and regulations relating to licensure, conduct of operations, ownership of facilities, addition of facilities, services, prices for services and billing for services. These laws authorize periodic inspections and investigations, and identification of deficiencies that, if not corrected, can result in sanctions that include loss of licensure to operate and loss of rights to participate in the Medicare and Medicaid programs. Regulatory agencies have substantial powers to affect the actions of operators of the Company’s properties if the agencies believe that there is an imminent threat to patient welfare, and in some states these powers can include assumption of interim control over facilities through receiverships.

Certificates of Need

Some states require state approval for development and expansion of healthcare facilities and services, including findings of need for additional or expanded healthcare facilities or services. A CON is issued by governmental agencies with jurisdiction over healthcare facilities and is at times required for expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. The CON rules and regulations may restrict an operator’s ability to expand the Company’s properties in certain circumstances.

In the event that any operator of the Company’s properties fails to make rental payments to the Company or to comply with the applicable healthcare regulations, and, in either case, such operators or their lenders fail to cure the default prior to the expiration of the applicable cure period, the ability of the Company to evict that operator and substitute another operator or operators may be materially delayed or limited by various state licensing, receivership, CON or other laws, as well as by Medicare and Medicaid change-of-ownership rules. Such delays and limitations could have a material adverse effect on the Company’s ability to collect rent, to obtain possession of leased properties, or otherwise to exercise remedies for tenant default. In addition, the Company may also incur substantial additional expenses in connection with any such licensing, receivership or change-of-ownership proceedings.

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Fraud and Abuse

Federal anti-kickback laws codified under Section 1128B(b) of the Social Security Act (the “Anti-kickback Laws”) prohibit certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs. Sanctions for violating the Anti-kickback Laws include criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as the Medicare and Medicaid programs. In the ordinary course of its business, the operators of the Company’s properties have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the United States Department of Health and Human Services (“HHS”) periodically has issued regulations that describe some of the conduct and business relationships permissible under the Anti-kickback Laws (“Safe Harbors”). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement per se illegal. Business arrangements of healthcare service providers that fail to satisfy the applicable Safe Harbor’s criteria, however, risk increased scrutiny and possible sanctions by enforcement authorities.

The Balanced Budget Act of 1997 (“Budget Act”) also provides a number of additional anti-fraud and abuse provisions. The Budget Act contains new civil monetary penalties for an operator’s violation of the Anti-kickback Laws and imposes an affirmative duty on operators to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs. The Budget Act also provides a minimum ten-year period for exclusion from participation in federal healthcare programs for operators convicted of a prior healthcare offense.

The operators of the Company’s properties also are subject to the Ethics in Patient Referral Act of 1989, commonly referred to as the Stark Law. In the absence of an applicable exception, the Stark Law prohibits referrals by physicians of Medicare and other government-program patients to providers of a broad range of designated healthcare services with which the physicians (or their immediate family members) have ownership interests or certain other financial arrangements. The Stark Law’s self-referral prohibition includes inpatient and outpatient hospital services. Many states have adopted or are considering legislative proposals similar to the federal referral prohibition, some of which extend beyond the Medicare and Medicaid programs to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. A violation of such laws and regulations could have a material adverse effect on these operators’ liquidity, financial condition and results of operations, which could affect adversely their ability to make rental payments to the Company.

Government investigations and enforcement of healthcare laws has increased dramatically over the past several years and is expected to continue. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which became effective January 1, 1997, greatly expanded the definition of healthcare fraud and related offenses and broadened the scope to include private healthcare plans in addition to government payors. HIPAA also greatly increased funding for the Department of Justice, the Federal Bureau of Investigation and the Office of the Inspector General to audit, investigate and prosecute suspected healthcare fraud. Private enforcement of healthcare fraud also has increased due in large part to amendments to the civil False Claims Act in 1986 that were designed to encourage private individuals to sue on behalf of the government. These whistleblower suits by private individuals, known as qui tam relators, may be filed by almost anyone, including present and former patients and nurses and other employees.

Long-Term Acute Care Hospitals

Substantially all of the Company’s hospitals are operated as long-term acute care hospitals (“LTACs”), which are hospitals that have an average length of stay greater than 25 days. In order to receive Medicare and Medicaid reimbursement, each hospital must meet the applicable conditions of participation set forth by the

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United States Department of Health and Human Services (“HHS”) relating to the type of hospital, its equipment, personnel and standard of medical care, as well as comply with state and local laws and regulations. Hospitals undergo periodic on-site certification surveys, which generally are limited if the hospital is accredited by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”) or other recognized accreditation organizations. A loss of certification could adversely affect a hospital’s ability to receive payments from Medicare and Medicaid programs, which could in turn adversely impact the operator’s ability to make rental payments under its leases with the Company. See “—Healthcare Reform.”

Skilled Nursing Facilities

The operators of the Company’s nursing facilities generally are licensed on an annual or bi-annual basis and certified annually for participation in the Medicare and Medicaid programs through various regulatory agencies which determine compliance with federal, state and local laws. These legal requirements relate to the quality of the nursing care provided, qualifications of the administrative personnel and nursing staff, the adequacy of the physical plant and equipment and continuing compliance with the laws and regulations governing the operation of nursing facilities. See “—Healthcare Reform.”

Healthcare Reform

Healthcare is one of the largest industries in the United States and continues to attract much legislative interest and public attention. In an effort to reduce federal spending on healthcare, in 1997 the federal government enacted the Budget Act, which contained extensive changes to the Medicare and Medicaid programs, including substantial reimbursement reductions for healthcare operations. For certain healthcare providers, including hospitals and skilled nursing facilities (“SNFs”), implementation of the Budget Act resulted in more drastic reimbursement reductions than had been anticipated. In addition to its impact on Medicare, the Budget Act also afforded states more flexibility in administering their Medicaid plans, including the ability to shift most Medicaid enrollees into managed care plans without first obtaining a federal waiver. Accordingly, the Medicare and Medicaid programs, including payment levels and methods, are in a state of change and are less predictable than before enactment of the Budget Act.

Medicare Reimbursement; Skilled Nursing Facilities

The Budget Act established a prospective payment system for skilled nursing facilities (“SNF PPS”). Under the SNF PPS, payment amounts are based upon classifications determined through assessments of individual Medicare patients in the skilled nursing facility, rather than on the facility’s reasonable costs. The payments received under the SNF PPS are intended generally to cover all inpatient services for Medicare patients, including routine nursing care, most capital-related costs associated with the inpatient stay, and ancillary services, such as respiratory therapy, occupational therapy, speech therapy and certain covered drugs.

Under the SNF PPS, per diem payments are made to nursing home facilities for each resident. Upon the expiration of the three-year transition period, these per diem payments were fully transitioned into the federal SNF PPS rates. During the transition period, payments were based on a blended rate that uses both a facility-specific rate and the federal rate. As a result of SNF PPS, Medicare payments to SNFs dropped by 12.5% in 1999. Although there has been some payment relief (as described below), certain of the payment relief provisions have expired and there can be no assurance that the current reimbursement levels under the SNF PPS will continue or be sufficient to permit the Company’s operators to satisfy their obligations, including payment of rent under their leases with the Company.

In response to widespread healthcare industry concern about the effects of the Budget Act, the federal government enacted the Balanced Budget Refinement Act of 1999 (“Refinement Act”) on November 29, 1999. The Refinement Act did not enact any fundamental changes in the Medicare system, but rather reversed or delayed some of the reductions in Medicare payment increases mandated by the Budget Act. It was estimated

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that in the four to five fiscal years after its enactment, the Refinement Act would return to healthcare providers approximately $16 billion of the $115 billion the Budget Act was expected to cut from increases to the Medicare program. Specific providers who received relief under the Refinement Act included SNFs, which received temporary (effective April 1, 2000 to October 1, 2000) per diem payment increases for certain high cost patients, and outpatient rehabilitation therapy providers, which received a 2-year moratorium on the annual cap on the amount of physical, occupational and speech therapy provided to a patient.

Passed in December 2000, the Benefits Improvement and Protection Act of 2000 (“BIPA”) provided a certain degree of relief from the projected impact of the Budget Act. Specifically, BIPA modified the impact of the Refinement Act on SNF PPS payment rates, as implemented by the Final Refinement Act Rule, in several important ways. First, BIPA revised the annual market basket update factor upward from “market basket—1%” to (a) “market basket” in federal fiscal year 2001, and (b) “market basket— 0.5%” in federal fiscal years 2002 and 2003. Second, BIPA temporarily increased the nursing component of the federal SNF PPS rate by 16.66%, from April 1, 2001 through September 30, 2002. Third, BIPA increased the per diem reimbursement rates for fourteen rehabilitation-related patient categories groups by 6.7%, from April 1, 2001 until such time as case-mix refinements are implemented pursuant to the Refinement Act. Finally, BIPA and the Refinement Act extended the moratorium on the annual therapy cap to December 31, 2002, although the Centers for Medicare and Medicaid Services (“CMS”) subsequently delayed implementation of the annual therapy cap until July 1, 2003.

Under the Medicare provisions of the Refinement Act and BIPA, SNFs received a 20% increase in the per diem reimbursement rates for certain medically complex patient categories and a 6.7% increase to the per diem reimbursement rates for 14 rehabilitation-related patient categories. Under applicable law, however, the 6.7% add-on for rehabilitation patients and the 20% add-on for medically complex patients is to expire when CMS implements certain refinements to the SNF PPS. On April 23, 2002, HHS indicated that CMS will not implement these refinements for federal fiscal year 2003. As a result, at this time the 6.7% increase and the 20% add-on will be retained. In addition, the President’s proposed 2003 budget acknowledges that the funding for the 6.7% increase and the 20% add-on will continue until at least the end of fiscal year 2004. However, there can be no assurance that the funding for the 6.7% increase or the 20% add-on will continue through at least the end of fiscal year 2004. The 16.66% temporary increase in the nursing component of the federal SNF PPS rate and the 4% temporary add-on for all patient categories provided under the Refinement Act and BIPA expired on September 30, 2002.

On July 31, 2002, CMS published the SNF payment rates for the 2003 federal fiscal year. Under the update, SNFs receive a 2.6% increase in Medicare payments for the 2003 federal fiscal year. According to CMS, this increase will result in nearly $400 million more in annual payments to nursing facilities. The update also incorporates HHS’s April 23, 2002 decision to leave in place for the present time the current case-mix classification. This decision will, according to CMS, result in nursing homes continuing to receive an estimated $1 billion in temporary add-on payments in the 2003 federal fiscal year.

The 2.6% increase is offset, however, by the expiration of the 16.66% temporary increase in the nursing component of the federal SNF PPS rate and the 4% temporary add-on for all patient categories discussed above. CMS states that the expiration of these two temporary add-ons will result in a decrease in SNF payments of about $1.4 billion for the 2003 federal fiscal year. According to CMS, the combined effect of the 2.6% increase under the 2003 Payment Update and the expiration of the two temporary add-ons is an estimated net decrease of $1 billion in nursing facility payments for the 2003 federal fiscal year.

Medicaid Reimbursement; Skilled Nursing Facilities

Approximately two-thirds of all nursing home residents are dependent on Medicaid. Medicaid reimbursement rates, however, typically are less than the amounts charged by the operators of the Company’s properties. Moreover, rising Medicaid costs and decreasing state revenues caused by current economic conditions have prompted an increasing number of states to consider reductions in Medicaid funding as a means of

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balancing their respective state budgets. Existing and future initiatives affecting Medicaid reimbursement may reduce utilization of (and reimbursement for) services offered by the operators of the Company’s properties.

On March 25, 1999, legislation was passed that prevents nursing facility operators that decide to withdraw from the Medicaid program from evicting or transferring patients who are residents as of the effective date of withdrawal, and who rely on Medicaid to cover their long-term care expenses. In addition, the Budget Act repealed the “Boren Amendment” federal payment standard for Medicaid payments to hospitals and nursing facilities effective October 1, 1997, giving states greater latitude in setting payment rates for these providers.

CMS also has promulgated a final regulation (“Final Regulation”) to restrict the “upper-payment limit loophole” in Medicaid. The Final Regulation revises a provision of a prior regulation published on January 12, 2001 that allowed states to make overall payments to public non-state government owned or operated hospitals of up to 150% of the estimated amount that would be paid under Medicare for the same services. Under the Final Regulation, these payments are limited to 100% of estimated Medicare payments, which is the limit for all other hospitals. The resulting effect of the Final Regulation is that states may implement rate or service cuts to providers (including SNFs) to compensate for reduced federal funding. According to CMS, the Final Regulation became effective on May 15, 2002. The Company cannot predict the impact of the Final Regulation on the Company’s tenants and operators.

In early 2003, many states announced actual or potential budget shortfalls. As a result of these budget shortfalls, many states have announced that they are implementing or considering implementing “freezes” or cuts in Medicaid rates paid to SNF providers. It is premature to assess whether significant Medicaid rate freezes or cuts will be adopted, and if so, by how many states or the impact of such action on the Company’s operators. However, severe and widespread Medicaid rate cuts or freezes could have a material adverse effect on the Company’s operators’ liquidity, financial condition and results of operations, which could affect adversely their ability to make rental payments to the Company.

Medicare Reimbursement; Long-Term Acute Care Hospitals

The Budget Act also affected the payments made to LTACs by reducing the amount of reimbursement for incentive payments established pursuant to the Tax Equity and Fiscal Responsibility Act of 1982, for capital expenditures and bad debts, and for services to certain patients transferred from an acute care hospital. In addition, the Budget Act for the first time imposed a national ceiling limitation or “national cap” on payments that may be made in each category of hospitals exempt from a prospective payment system. LTACs previously constituted one such category. The Budget Act, however, mandated the creation of a prospective payment system for LTACs (“LTAC PPS”), which became effective on October 1, 2002 for LTAC cost report periods commencing on or after October 1, 2002.

Pursuant to the Budget Act and the Medicare provisions of the Refinement Act and BIPA, LTACs are transitioning to LTAC PPS, which classifies patients into distinct diagnostic groups based on clinical characteristics and expected resource needs.

Once fully transitioned to LTAC PPS, LTACs will no longer be reimbursed on a reasonable cost basis that reflects costs incurred, but rather on a predetermined rate. Under LTAC PPS, payment for a Medicare beneficiary is made at a predetermined, per discharge amount for each of 510 patient categories, adjusted for differences in area wage levels. LTAC PPS includes payment for all inpatient operating and capital costs of furnishing covered services (including routine and ancillary services), but not certain pass through costs, which include bad debts, direct medical education, and blood clotting factors. Unlike the prospective payment system for inpatient acute care hospitals, LTAC PPS makes no adjustments for geographic reclassification, disproportionate share of low-income patients, rural location, or indirect medical education.

Updates to the prospective payment rates for each federal fiscal year will be published annually. For LTACs that have filed cost reports before October 1, 2002, a 5-year phase-in period has been implemented to gradually

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transition such LTACs from cost-based reimbursement to 100 percent federal prospective payment under LTAC PPS. At the beginning of any cost reporting period during the phase-in, such LTACs may exercise a one-time, non-revocable election to transition fully to LTAC PPS rate.

According to CMS, LTAC PPS is required by law to be “budget neutral,” which means that total payments under LTAC PPS must equal the amount that would have been paid if the system had not been implemented. The Company is currently analyzing the effects of the final LTAC PPS rule and cannot predict the impact of LTAC PPS on the Company’s tenants and operators. The Company believes that LTAC PPS will impact Kindred no sooner than September 1, 2003.

Nursing Home Quality Initiative

In 2002 HHS launched the Nursing Home Quality Initiative program. This program, which is designed to provide consumers with comparative information about nursing home quality measures, rates nursing homes on various quality of care indicators. If the operators of the Company’s properties are unable to achieve quality of care ratings that are comparable or superior to those of their competitors, patients may choose alternate facilities, which could cause operating revenues to decline. In the event the financial condition or operating revenues of these operators adversely affected, the operators’ ability to make rental payments to the Company could be adversely affected, which, in turn, could have a Material Adverse Effect on the Company.

There can be no assurance that future healthcare legislation or changes in the administration or implementation of governmental healthcare reimbursement programs will not have a material adverse effect on the liquidity, financial condition or results of operations of the Company’s operators and tenants which could have a material adverse effect on their ability to make rental payments to the Company which, in turn, could have a Material Adverse Effect on the Company.

Environmental Regulation

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property from which there is a release or threatened release of hazardous or toxic substances or an entity that arranges for the disposal or treatment of hazardous or toxic substances at a disposal site may be held jointly and severally liable for the cost of removal or remediation of certain hazardous or toxic substances that could be located on, in or under such property or other affected property. Such laws and regulations often impose liability whether or not the owner, operator or otherwise responsible party knew of, or caused the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial, and the liability of a responsible party as to any property is generally not limited under such laws and regulations and could exceed the property’s value and the aggregate assets of the liable party. The presence of these substances or failure to remediate such substances properly also may adversely affect the owner’s ability to sell or rent the property, or to borrow using the property as collateral. In connection with the ownership and leasing of the Company’s properties, the Company could be liable for these costs as well as certain other costs, including governmental fines and injuries to person or properties or natural resources. In addition, owners and operators of real property are liable for the costs of complying with environmental, health, and safety laws, ordinances and regulations and can be subjected to penalties for failure to comply. Such ongoing compliance costs and penalties for non-compliance can be substantial. Changes to existing or the adoption of new environmental, health, and safety laws, ordinances, and regulations could substantially increase an owner’s or operator’s environmental, health, and safety compliance costs and/or associated liabilities. Environmental, health, and safety laws, ordinances, and regulations potentially affecting the Company address a wide variety of topics, including, but not limited to, asbestos, polychlorinated biphenyls (“PCBs”), fuel oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes. The Company is generally indemnified by the current operators of its properties for contamination caused by such operators. Under the Kindred Master Leases, Kindred has agreed to indemnify the Company against any environmental claims (including penalties and clean-up costs) resulting from any condition arising in, on or

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under, or relating to, the leased properties at any time on or after the commencement date of the lease term for the applicable leased property. Kindred also has agreed to indemnify the Company against any environmental claim (including penalties and clean up costs) resulting from any condition permitted to deteriorate, on or after the commencement date of the lease term for the applicable leased property (including as a result of migration from adjacent properties not owned or operated by the Company or any of its affiliates other than Kindred and its direct affiliates). There can be no assurance that Kindred or another operator will have the financial capability or the willingness to satisfy any such environmental claims. See “Risk Factors—Risks Arising from the Company’s Business—The Company is dependent on Kindred; Kindred’s inability or unwillingness to satisfy its obligations under its agreements with the Company could significantly harm the Company and its ability to service its indebtedness and other obligations and to make distributions to its stockholders as required to continue to qualify as a REIT.” If Kindred or another operator is unable or unwilling to satisfy such claims, the Company may be required to satisfy the claims. The Company has agreed to indemnify Kindred against any environmental claims (including penalties and clean-up costs) resulting from any condition arising on or under, or relating to, the leased properties at any time before the commencement date of the lease term for the applicable leased property.

See “Risk Factors—If any of the Company’s properties are found to be contaminated, or if the Company becomes involved in any environmental disputes, the Company could incur substantial liabilities and costs.”

The Company did not make any material capital expenditures in connection with such environmental, health, and safety laws, ordinances, and regulations in 2002 and does not expect that it will have to make any such material capital expenditures during 2003.

FEDERAL INCOME TAX CONSIDERATIONS

The discussion of “Federal Income Tax Considerations” set forth herein is not exhaustive of all possible tax considerations and is not tax advice. Moreover, this summary does not deal with all tax aspects that might be relevant to a particular stockholder in light of such stockholder’s circumstances, nor does it deal with particular types of stockholders that are subject to special treatment under the Internal Revenue Code of 1986, as amended (the “Code”), such as insurance companies, financial institutions and broker-dealers. The Code provisions governing the federal income tax treatment of REITs are highly technical and complex, and this summary is qualified in its entirety by the applicable Code provisions, rules and Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. The following discussion is based on current law, which could be changed at any time, possibly retroactively.

Federal Income Taxation of the Company

The Company elected REIT status beginning with the year ended December 31, 1999. Beginning with the 1999 tax year, the Company believes that it has satisfied the requirements to qualify as a REIT. The Company intends to continue to qualify as a REIT for federal income tax purposes for the year ended December 31, 2003 and subsequent years. If the Company continues to qualify for taxation as a REIT, it generally will not be subject to federal corporate income tax on net income that it currently distributes to stockholders. This treatment substantially eliminates the “double taxation” (i.e., taxation at both the corporate and stockholder levels) that generally results from investment in a corporation.

Notwithstanding its qualification as a REIT, the Company will be subject to federal income tax on any undistributed taxable income, including undistributed net capital gains at regular corporate rates. In addition, the Company will be subject to a 4% excise tax if it does not satisfy specific REIT distribution requirements. See “—Requirements for Qualification—Annual Distribution Requirements.” The Company may be subject to the “alternative minimum tax” on its undistributed items of tax preference. If the Company has (i) net income from the sale or other disposition of “foreclosure property” (see below) that is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, it will be subject to

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tax at the highest corporate rate on such income. See “—Requirements for Qualification—Asset Tests.” In addition, if the Company has net income from “prohibited transactions” (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax.

The Company may also be subject to “Built-in Gains Tax” on any appreciated asset that it owns or acquires that was previously owned by a C corporation (i.e., a corporation generally subject to full corporate level tax). The Company owns appreciated assets that it held on January 1, 1999, the effective date of its REIT election. These assets are subject to the Built-in Gain Tax rules because the Company was a taxable C corporation prior to January 1, 1999. If the Company disposes of any of these assets and the Company recognizes gain on the disposition of such asset during the 10-year period (the “Recognition Period”), then, the Company generally will be subject to regular corporate income tax on the gain equal to the lower of (a) the recognized gain at the time of the disposition or (b) the Built-in Gain in that asset as of January 1, 1999. The total amount of gain on which the Company can be taxed under the Built-in Gain Rules is limited to its net built-in gain at the time it became a REIT, i.e., the excess of the aggregate fair market value of its assets at the time it became a REIT over the adjusted tax bases of those assets at that time. Some but not all of such capital gains realized would be offset by the amount of any available capital loss carryforwards (which expire December 31, 2003). In connection with the sale of any assets, all or a portion of such gain could be treated as ordinary income instead of capital gain and be subject to taxation and/or the minimum REIT distribution requirements.

See “—Requirements for Qualification” below for other circumstances in which the Company may be required to pay federal taxes.

Requirements for Qualification

To continue to qualify as a REIT, the Company must continue to meet the requirements discussed below, relating to the Company’s organization, sources of income, nature of assets and distributions of income to stockholders.

Organizational Requirements

The Code defines a REIT as a corporation, trust or association (i) that is managed by one or more directors or trustees; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year (the “100 Shareholder Rule”); (vi) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the “5/50 Rule”); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service (“IRS”) that must be met in order to elect and to maintain REIT status; (viii) that uses a calendar year for federal income tax purposes; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets.

The Company believes that it has satisfied the organizational requirements and believes it will continue to do so in the future. In order to prevent a concentration of ownership of the Company’s stock that would cause the Company to fail the 5/50 Rule or the 100 Shareholder Rule, the Company has placed certain restrictions on the transfer of its shares that are intended to prevent further concentration of share ownership. However, such restrictions may not prevent the Company from failing to meet these requirements, and thereby failing to qualify as a REIT.

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In addition, to qualify as a REIT, a corporation may not have (as of the end of the taxable year) any earnings and profits that were accumulated in periods before it elected REIT status. The Company believes that at December 31, 1999 it did not have any accumulated earnings and profits that are attributable to periods during which the Company was not a REIT, although the IRS would be entitled to challenge that determination.

Gross Income Tests

To continue to qualify as a REIT, the Company must satisfy two annual gross income requirements. First, at least 75% of the Company’s gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including pledges of equity interest in certain entities holding real property and also including “rents from real property” (defined below)) and, in certain circumstances, interest on certain types of temporary investment income. Second, at least 95% of the Company’s gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property or temporary investments, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. To qualify as rents from real property for the purpose of satisfying the gross income tests, rental payments must generally be received from unrelated persons and not be based on the net income of the tenant. Also, the rent attributable to personal property must not exceed 15% of the total rent. Further, the Company generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an “independent contractor” who is adequately compensated and from whom the Company derives no income (a demimimis exception is allowed for noncustomary services provided by the Company if the annual value of does not exceed 1% of the gross income derived from the property).

Amounts received from a tenant will not qualify as “rents from real property” if the Company, or an owner of 10% or more of the Company, directly or constructively is deemed to own 10% or more of the ownership interests in the tenant (a “Related Party Tenant”).

The Company does not believe that it has, and does not anticipate that it will in the future, (i) charged/charge rent that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of receipts or sales consistent with the rule described above), (ii) derived/derive rent attributable to personal property leased in connection with real property that exceeds 15% of the total rents, (iii) derived/derive rent attributable to a Related Party Tenant, or (iv) provided/provide any noncustomary services to tenants other than through qualifying independent contractors, except as permitted by the 1% de minimis exception or to the extent that the amount of resulting nonqualifying income would not cause the Company to fail to satisfy the 95% and 75% gross income tests. The Company believes it has been and will continue to be in compliance with the gross income tests. However, there can be no assurance that the Company is or will continue to be in compliance with the gross income tests.

If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless continue to qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions generally will be available if the Company’s failure to meet such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its return and any incorrect information on the schedules was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. Even if these relief provisions were to apply, a 100% tax would be imposed with respect to the excess net income.

Asset Tests

At the close of each quarter of its taxable year, the Company must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of the Company’s total assets must be represented by cash or cash

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items (including certain receivables), government securities, “real estate assets” or, in cases where the Company raises new capital through stock or long-term (maturity of at least five years) debt offerings, temporary investments in stock or debt instruments during the one-year period following the Company’s receipt of such capital (the “75% asset test”). The term “real estate asset” includes interests in real property, interests in mortgages on real property to the extent the mortgage balance does not exceed the value of the associated real property, and shares of other REITs. For purposes of the 75% asset test, the term “interest in real property” includes an interest in land and improvements thereon, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures), a leasehold in real property and an option to acquire real property (or a leasehold in real property). Second, of the investments not included in the 75% asset class, the value of any one issuer’s debt and equity securities owned by the Company (other than the Company’s interest in any entity classified as a partnership for federal income tax purposes, the stock of a Taxable REIT Subsidiary (as defined below) or the stock of a qualified REIT subsidiary) may not exceed 5% of the value of the Company’s total assets (the “5% asset test”), and the Company may not own more than 10% of any one issuer’s outstanding voting securities or 10% of the value of any one issuer’s outstanding securities, subject to limited “safe harbor” exceptions for certain straight debt obligations (except for the Company’s ownership interest in an entity that is disregarded for federal income tax purposes, that is classified as a partnership for federal income tax purposes or that is the stock of a qualified REIT subsidiary) (the “10% securities test”). In addition, no more than 20% of the value of the Company’s assets can be represented by securities of Taxable REIT Subsidiaries.

If the Company should fail to satisfy the asset tests at the end of a calendar quarter except for its first calendar quarter, such a failure would not cause it to fail to qualify as a REIT or to lose its REIT status if (i) it satisfied all of the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of the Company’s assets and the asset test requirements arose from changes in the market values of its assets and was not wholly or partly caused by an acquisition of nonqualifying assets. If the condition described in clause (ii) of the preceding sentence were not satisfied, the Company still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. The Company intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests and to take such other actions as may be required to comply with those tests.

The Company believes it has been and will continue to be in compliance with the 10% securities test and the 5% asset test. There can be no assurance the Company is or will continue to be in compliance with either of these tests. If the Company failed to satisfy either of these tests, the Company would lose its REIT status. If the Company lost its status as a REIT, it would have a Material Adverse Effect on the Company.

Related Party Tenant

The Company leases substantially all of its properties to Kindred and Kindred is the primary source of the Company’s rental revenues. Under the Kindred Reorganization Plan, Ventas Realty received 1,498,500 shares of Kindred Common Stock on the Kindred Effective Date. Under the Code, if the Company owns 10% or more of any class of Kindred’s issued and outstanding voting securities or 10% or more of the value of any class of Kindred’s issued and outstanding securities (previously defined as the “10% securities test”), Kindred would be a Related Party Tenant. As a Related Party Tenant, the Company’s rental revenue from Kindred would not qualify as “rents from real property” and the Company would lose its REIT status because it likely would not be able to satisfy either the 75% or the 95% gross income test. The Company’s loss of REIT status would have a Material Adverse Effect on the Company.

Since the Kindred Effective Date, Ventas Realty has disposed of 577,686 shares of its Kindred Common Stock. As of December 31, 2002, the Company owned 920,814 shares of Kindred Common Stock or not more than 5.2% of the 17,648,857 issued and outstanding shares of Kindred. Based upon applicable tax authorities and decisions and advice from the IRS, the Company believes that for purposes of the 10% securities test, its ownership percentage in Kindred has been and will continue to be less than 9.99%.

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A number of safeguards are in place to reduce the risk of the Company’s violation of the 10% securities test as a result of its ownership of Kindred common stock. While the Company believes that these safeguards are adequate, there can be no assurances that such safeguards will be adequate to prevent the Company from violating the 10% securities test. If the Company should ever violate the 10% securities test, the Company would lose its status as a REIT which would have a Material Adverse Effect on the Company.

Foreclosure Property

The foreclosure property rules permit the Company (by the Company’s election) to foreclose or repossess properties without being disqualified as a result of receiving income that does not qualify under the gross income tests; however, a corporate tax is imposed upon net income from “foreclosure property” that is not otherwise “good REIT” income. Detailed rules specify the calculation of the tax. The after tax amount increases the amount the REIT must distribute each year.

“Foreclosure property” includes any real property and any personal property incident to such real property acquired by bid at foreclosure or by agreement or process of law after there was a default or a default was imminent on the leased property. However, for qualified healthcare properties, the Company is permitted to terminate leases other than by reason of default or imminent default. During a 90-day grace period, the Company may operate the foreclosed property without an “independent contractor” or qualifying lessee. The 90-day grace period will begin on the date the Company acquires possession of the property.

To maintain foreclosure property treatment after the 90 day grace period, the Company must cause the property to be managed by an “independent contractor” (from whom the Company derives or receives no income) or lease the property pursuant to a lease qualifying as a true lease for income tax purposes to an unrelated third party. Ownership of the tenant must not be attributed to the Company in violation of the related tenant rule of Section 856(d)(2)(B) (relating to 10% or more owned tenants). If the property is leased to a third party under a true lease, the foreclosure property rules are not then relevant.

Foreclosure property treatment will end on the first day on which the REIT enters into a lease of the property that will give rise to income that is not good rental income under Section 856(c)(3). In addition, foreclosure property treatment will end if any construction takes place on the property (other than completion of a building, or other improvement more than 10 percent complete before default became imminent). Foreclosure property treatment is available for an initial period of three years and may be extended up to six years. Foreclosure property treatment for qualified healthcare property is available for an initial period of two years and may be extended up to six years.

Taxable REIT Subsidiaries

The Company is permitted to own up to 100% of a “taxable REIT subsidiary” or a “TRS”. Tax legislation implemented TRS Rules to allow REITs to have greater flexibility in engaging in activities, which previously had been prohibited by REIT rules. TRSs are corporations subject to tax as a regular “C” corporation. Generally, a taxable REIT subsidiary can own assets that cannot be owned by a REIT and can perform otherwise impermissible tenant services (excluding the direct or indirect operation or management of a lodging or healthcare facility) which would otherwise disqualify the REIT’s rental income under the REIT income tests. In enacting the taxable REIT subsidiary rules, Congress intended that the arrangements between a REIT and its taxable REIT subsidiaries be structured to ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. As a result, there are certain limits on the ability of a taxable REIT subsidiary to deduct interest payments made to the Company. In addition, the Company will be obligated to pay a 100% penalty tax on some payments that it receives or on certain expenses deducted by the taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s tenants and the taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties.

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On March 26, 2002, the Company formed a taxable REIT subsidiary, Ventas Capital Corporation, a Delaware corporation. On November 8, 2002, the Company formed another taxable REIT subsidiary, Ventas TRS, LLC, a Delaware limited liability company. Both companies are owned 100% by Ventas Realty Limited Partnership. As of December 31, 2002, neither Ventas Capital Corporation nor Ventas TRS, LLC owns any assets of the Company.

Annual Distribution Requirements

In order to be taxed as a REIT, the Company is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (i) the sum of (A) 90% of the Company’s “REIT taxable income” (computed without regard to the dividends paid deduction and its net capital gain) and (B) 90% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 90%, but less than 100%, of its “REIT taxable income,” as adjusted, it will be subject to tax on the undistributed amount at regular capital gains and ordinary corporate tax rates except to the extent of net operating loss or capital loss carryforwards. If any taxes are paid in connection with the Built-In Gain Rules, these taxes will be deductible in computing REIT taxable income. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than long-term capital gain the Company elects to retain and treat as having been distributed to stockholders), and (iii) any undistributed taxable income from prior periods, the Company will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed.

The Company believes it has satisfied the annual distribution requirements for the year of its REIT election and each year thereafter. However, there can be no assurance that the Company has satisfied the distribution requirements for the year of its REIT election and subsequent years. Although the Company intends to continue meeting the annual distribution requirements to qualify as a REIT for federal income tax purposes for the year ended December 31, 2003 and subsequent years, it is possible that economic, market, legal, tax or other considerations may limit the Company’s ability to meet such requirements. As a result, if it were not able to meet the annual distribution requirement, it would fail to qualify as a REIT.

Annual Record Keeping Requirements

In its first taxable year in which it qualifies as a REIT and thereafter, the Company is required to maintain certain records and request on an annual basis certain information from its stockholders designed to disclose the actual ownership of its outstanding shares. The Company believes that it has complied with these requirements for all REIT tax years. The Company will be subject to a penalty of $25,000 ($50,000 for intentional violations) for any year in which it does not comply with the rules.

Failure to Continue to Qualify

If the Company’s election to be taxed as a REIT is revoked or terminated (e.g., due to a failure to meet the REIT qualification tests), the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates except to the extent of net operating loss and capital loss carryforwards. Distributions to stockholders will not be deductible by the Company, nor will they be required to be made. To the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate stockholders may be eligible for the dividends received deduction. In addition, the Company would be prohibited from re-electing REIT status for the four taxable years following the year during which the Company ceased to qualify as a REIT, unless certain relief provisions of the Code applied. It is impossible to predict whether the Company would be entitled to such statutory relief.

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Taxation of U.S. Stockholders

As used herein, the term “U.S. Stockholder” means a holder of the Company’s Common Stock that for U.S. federal income tax purposes is (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate whose income from sources without the United States is includible in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States or (iv) any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust.

As long as the Company qualifies as a REIT, distributions made to the Company’s taxable U.S. Stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by such U.S. Stockholders as ordinary income and will not be eligible for the dividends received deduction generally available to corporations. Distributions that are designated as capital gain dividends will be taxed as a capital gain (to the extent such distributions do not exceed the Company’s actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its shares. The tax rates applicable to such capital gains are discussed below. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder’s shares, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder’s shares, such distributions will be included in income as capital gains assuming the shares are capital assets in the hands of the stockholder. The tax rate applicable to such capital gain will depend on the stockholder’s holding period for the shares. In addition, any distribution declared by the Company in October, November or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by the Company during January of the following calendar year.

If the Company should become a closely held REIT, any person owning at least 10% (by vote or value) of the Company is required to accelerate the recognition of year-end dividends attributable to the Company, for purposes of such person’s estimated tax payments. A closely held REIT is defined as one in which at least 50% (by vote or value) is owned by five or fewer persons. Attribution rules apply to determine ownership.

The Company may elect to treat all or a part of its undistributed net capital gain as if it had been distributed to its stockholders (including for purposes of the 4% excise tax discussed above under “Requirements for Qualification—Annual Distribution Requirements”). If the Company should make such an election, the Company’s stockholders would be required to include in their income as long-term capital gain their proportionate share of the Company’s undistributed net capital gain, as designated by the Company. Each such stockholder would be deemed to have paid its proportionate share of the income tax imposed on the Company with respect to such undistributed net capital gain, and this amount would be credited or refunded to the stockholder. In addition, the tax basis of the stockholder’s shares would be increased by its proportionate share of undistributed net capital gains included in its income, less its proportionate share of the income tax imposed on the Company with respect to such gains.

Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Instead, such losses would be carried over by the Company for potential offset against its future income (subject to certain limitations). Taxable distributions from the Company and gain from the disposition of the Common Stock will not be treated as passive activity income and, therefore, stockholders generally will not be able to apply any “passive activity losses” (such as losses from certain types of limited partnerships in which the stockholder is a limited partner) against such income. In addition, taxable distributions from the Company generally will be treated as investment income for purposes of the investment interest limitations. Capital gains from the disposition of the shares (or distributions treated as such) will be treated as investment income only if

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the stockholder so elects, in which case such capital gains will be taxed at ordinary income rates. The Company will notify stockholders after the close of the Company’s taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain.

In general, any gain or loss realized upon a taxable disposition of the Common Stock by a stockholder who is not a dealer in securities will be treated as capital gain or loss. Lower marginal tax rates for individuals may apply in the case of capital gains, depending on the holding period of the shares that are sold. However, any loss upon a sale or exchange of shares by a stockholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by such stockholder as long-term capital gain. All or a portion of any loss realized upon a taxable disposition of shares may be disallowed if other shares are purchased within 30 days before or after the disposition.

For non-corporate taxpayers, the tax rate differential between capital gain and ordinary income may be significant. The highest marginal individual income tax rate applicable to ordinary income is 38.6% for 2002. Any capital gain generally will be taxed to a non-corporate taxpayer at a maximum rate of 20% with respect to capital assets held for more than one year. The tax rates applicable to ordinary income apply to gain attributable to the sale or exchange of capital assets held for one year or less. In the case of capital gain attributable to the sale or exchange of certain real property held for more than one year, an amount of such gain equal to the amount of all prior depreciation deductions not otherwise required to be taxed as ordinary depreciation recapture income will be taxed at a maximum rate of 25%. With respect to distributions designated by a REIT as capital gain dividends (including deemed distributions of retained capital gains), the REIT also may designate (subject to certain limits) whether the dividend is taxable to non-corporate stockholders as a 20% rate gain distribution or an unrecaptured depreciation distribution taxed at a 25% rate.

The characterization of income as capital or ordinary may affect the deductibility of capital losses. Capital losses not offset by capital gains may be deducted against a non-corporate taxpayer’s ordinary income only up to a maximum annual amount of $3,000. Non-corporate taxpayers may carry forward their unused capital losses. All net capital gain of a corporate taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.

Treatment of Tax-Exempt Stockholders

Tax-exempt organizations, including qualified employee pension and profit sharing trusts and individual retirement accounts (collectively, “Exempt Organizations”), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income (UBTI). While many investments in real estate generate UBTI, the IRS has issued a published ruling that dividend distributions by a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, and subject to the exceptions discussed below, amounts distributed by the Company to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the Common Stock with debt, a portion of its income from the Company will constitute UBTI pursuant to the “debt-financed property” rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of Section 501(c) of the Code are subject to different UBTI rules, which generally will require them to characterize distributions from the Company as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of the Company’s stock is required to treat a percentage of the dividends from the Company as UBTI (the “UBTI Percentage”). The UBTI Percentage is the gross income, less related direct expenses, derived by the Company from an unrelated trade or business (determined as if the Company were a pension trust) divided by the gross income, less related direct expenses, of the Company for the year in which the dividends are paid. The UBTI rule applies to a pension trust holding more than 10% of

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the Company’s stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a REIT by reason of the modification of the 5/50 Rule that allows the beneficiaries of the pension trust to be treated as holding shares of the Company in proportion to their actuarial interests in the pension trust and (iii) either (A) one pension trust owns more than 25% of the value of the Company’s stock or (B) a group of pension trusts individually holding more than 10% of the value of the Company’s stock collectively own more than 50% of the value of the Company’s stock.

Special Tax Considerations for Non-U.S. Stockholders

The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign stockholders (collectively, “Non-U.S. Stockholders”) are complex, and no attempt will be made herein to provide more than a summary of such rules. Non-U.S. stockholders should consult with their own tax advisors to determine the impact of federal, state and local income tax laws with regard to their ownership of the Common Stock, including any reporting requirements.

For purposes of this discussion, the term “Non-U.S. Stockholder” does not include any foreign stockholder whose investment in the Company’s stock is “effectively connected” with the conduct of a trade or business in the United States. Such a foreign stockholder, in general, will be subject to United States federal income tax with respect to its investment in the Company’s stock in the same manner as a U.S. Stockholder is taxed (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In addition, a foreign corporation receiving income that is treated as effectively connected with a U.S. trade or business also may be subject to an additional 30% “branch profits tax,” unless an applicable tax treaty provides a lower rate or an exemption. Certain certification requirements must be satisfied in order for effectively connected income to be exempt from withholding.

Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by the Company of U.S. real property interests and are not designated by the Company as capital gain dividends (or deemed distributions of retained capital gains) will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. Distributions in excess of current and accumulated earnings and profits of the Company will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder’s shares, but rather will reduce the adjusted basis of such shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder’s shares, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of its shares, as described below.

For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from sales or exchanges by the Company of U.S. real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the normal capital gain rates applicable to U.S. Stockholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA also may be subject to 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to treaty relief or exemption.

Unless a reduced rate of withholding applies under an applicable tax treaty, the Company generally will withhold from distributions to Non-U.S. Stockholders, and remit to the IRS, 30% of all distributions out of current or accumulated earnings and profits, subject to the application of FIRPTA withholding rules discussed below. In addition, the Company is required to withhold 10% of any distribution in excess of its current and accumulated earnings and profits. Because the Company generally cannot determine at the time a distribution is

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made whether or not it will be in excess of earnings and profits, the Company intends to withhold 30% of the entire amount of any distribution (other than distributions subject to the 35% withholding discussed below). Generally, however, a Non-U.S. Stockholder will be entitled to a refund from the IRS to the extent an amount is withheld from a distribution that exceeds the amount of U.S. tax owed by such Non-U.S. Stockholder.

Under FIRPTA, the Company is required to withhold 35% of any distribution that is designated as a capital gain dividend or which could be designated as a capital gain dividend. Thus, if the Company designates previously made distributions as capital gain dividends, subsequent distributions (up to the amount of such prior distributions) will be treated as capital gain dividends for purposes of FIRPTA withholding.

Under Regulations that are currently in effect, dividends paid to an address in a country outside the United States generally are presumed to be paid to a resident of such country for purposes of determining the applicability of withholding discussed above and the applicability of a tax treaty rate. Regulations issued in October 1997, however, provide that a Non-U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate must satisfy certain certification and other requirements. Such Regulations generally will be effective for distributions made after December 31, 2000.

For so long as the Common Stock continues to be regularly traded on an established securities market, the sale of such stock by any Non-U.S. Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below) generally will not be subject to United States federal income tax (unless the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for more than 182 days during the taxable year of the sale and certain other conditions apply, in which case such gain will be subject to a 30% tax on a gross basis). A “Five Percent Non-U.S. Stockholder” is a Non-U.S. Stockholder who, at some time during the five-year period preceding such sale or disposition, beneficially owned (including under certain attribution rules) more than 5% of the total fair market value of the Common Stock (as outstanding from time to time) or owned shares of another class of stock of the Company that represented value greater than 5% of the Common Stock (measured at the time such shares were acquired).

In general, the sale or other taxable disposition of the Common Stock by a Five Percent Non-U.S. Stockholder (as defined below) also will not be subject to United States federal income tax if the Company is a “domestically controlled REIT.” A REIT is a “domestically controlled REIT” if, at all times during the five-year period preceding the relevant testing date, less than 50% in value of its shares is held directly or indirectly by Non-U.S. Stockholders (taking into account those persons required to include the Company’s dividends in income for United States federal income tax purposes). Although the Company believes that it currently qualifies as a “domestically controlled REIT,” because the Common Stock is publicly traded, no assurance can be given that the Company will qualify as a domestically controlled REIT at any time in the future. If the Company does not constitute a domestically controlled REIT, a Five Percent Non-U.S. Stockholder will be taxable in the same manner as a U.S. Stockholder with respect to gain on the sale of the Common Stock (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals).

Information Reporting Requirements and Backup Withholding Tax

The Company will report to its U.S. Stockholders and to the IRS the amount of distributions paid during each calendar year and distributions required to be treated as so paid during a calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a stockholder may be subject to backup withholding at the applicable rate (30% beginning January 1, 2002) with respect to distributions paid unless such holder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. A stockholder who does not provide the Company with its correct taxpayer identification number also may be subject to penalties imposed by the IRS. In addition, the Company may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status to the Company.

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U.S. Stockholders should consult their own tax advisors regarding their qualifications for an exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a U.S. Stockholder will be allowed as a credit against the U.S. Stockholder’s United States federal income tax liability and may entitle the U.S. Stockholder to a refund, provided that the required information is furnished to the IRS.

Backup withholding tax and information reporting generally will not apply to distributions paid to Non-U.S. Stockholders outside the United States that are treated as (i) dividends subject to the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital gain dividends or (iii) distributions attributable to gain from the sale or exchange by the Company of U.S. real property interests. As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of the Common Stock by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of the Common Stock by a foreign office of a broker that (i) is a United States person, (ii) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or (iii) is a “controlled foreign corporation” for United States tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Stockholder and certain other conditions are satisfied, or the stockholder otherwise establishes an exemption. Payment to or through a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding and information reporting unless the stockholder certifies under penalties of perjury that the stockholder is a Non-U.S. Stockholder or otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for a refund with the IRS.

The final Regulations issued by the Treasury Department in 1997, as corrected in 2000 and 2001 became effective January 1, 2001. In addition, the Treasury Department issued Temporary Regulations in January 2002, which together with the final Regulations govern the withholding of tax and information reporting for certain amounts paid to non-resident alien individuals and foreign corporations. Stockholders should consult their tax advisors concerning the impact, if any, of these new Regulations on their ownership of shares of the Common Stock.

Other Tax Considerations

The Company and its stockholders may be subject to state and local tax in states and localities in which they do business or own property. The tax treatment of the Company and the stockholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, stockholders should consult their own tax advisors regarding the effect of state and local tax laws on their ownership of shares of the Common Stock.

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RISK FACTORS

The Company’s business, operations and financial condition are subject to various risks. This section does not describe all risks applicable to the Company, its industry or its business, and it is intended only as a summary of certain material factors. If any of the following risks actually occur, the Company could be materially and adversely affected.

The Company has grouped these risk factors into three general categories:

Risks Arising from the Company’s Business

The Company is dependent on Kindred; Kindred’s inability or unwillingness to satisfy its obligations under its agreements with the Company could significantly harm the Company and its ability to service its indebtedness and other obligations and to make distributions to its stockholders as required to continue to qualify as a REIT.

The Company is dependent on Kindred in a number of ways:

Although Kindred emerged from bankruptcy on April 20, 2001, there can be no assurance that Kindred will have sufficient assets, income and access to financing and insurance coverage to enable it to satisfy its obligations under its agreements with the Company. In addition, any failure by Kindred to effectively conduct its operations could have a material adverse effect on its business reputation or on its ability to enlist and maintain patients in its facilities. Any inability or unwillingness on the part of Kindred to satisfy its obligations under its agreements with the Company could have a Material Adverse Effect on the Company. See “Business–Dependence on Kindred.”

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The Company may be unable to find another lessee or operator for its properties if it has to replace Kindred or its other operators.

The Company may have to find another lessee/operator for the properties covered by one or more of the Kindred Master Leases or its other operators upon the expiration of the terms of the applicable lease or upon a default by Kindred or its other operators. During any period that the Company is attempting to locate one or more lessee/operators there could be a decrease or cessation of rental payments by Kindred or its other operators. There can be no assurance that the Company will be able to locate another suitable lessee/operator or, if the Company is successful in locating such an operator, that the rental payments from the new operator would not be significantly less than the existing rental payments. The Company’s ability to locate another suitable lessee/operator and/or evict the existing operator or operators may be materially delayed or limited by various state licensing, receivership, CON or other laws, as well as by Medicare and Medicaid change-of-ownership rules. Such delays and limitations could have a Material Adverse Effect on the Company and/or materially delay or impact the Company’s ability to collect rent, to obtain possession of leased properties, or otherwise to exercise remedies for tenant default. In addition, the Company may also incur substantial additional expenses in connection with any such licensing, receivership or change-of-ownership proceedings.

The Company may encounter certain risks when implementing its business strategy to pursue investments in, and/or acquisitions or development of, healthcare-related and/or senior housing properties.

The Company intends to pursue investments in, and/or acquisitions or development of, additional healthcare-related or other properties, subject to the contractual restrictions contained in the indentures (as defined under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior Notes Offering”) and the 2002 Credit Agreement. Acquisitions of and investments in such properties entail general investment risks associated with any real estate investments, including risks that investments will fail to perform in accordance with expectations, the estimates of the cost of improvements necessary for acquired properties will prove inaccurate, and the inability of the lessee/operator to meet performance expectations. The Company does not presently contemplate any development projects, although if it were to pursue new development projects, such projects would be subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the incurrence of development costs in connection with projects that are not pursued to completion. In addition, the Company may borrow to finance any investments in, and/or acquisition or development of, healthcare-related or other properties, which would increase its leverage.

The Company may acquire independent living facilities, specialty hospitals and other healthcare-related properties not currently in the Company’s portfolio and the Company has less experience evaluating and monitoring such properties.

The Company may compete for acquisition or investment opportunities with entities that have substantially greater financial resources than it has. The Company’s ability to compete successfully for such opportunities is affected by many factors, including its cost of obtaining debt and equity capital at rates comparable to or better than its competitors. Competition generally may reduce the number of suitable acquisition or investment opportunities available to the Company and increase the bargaining power of property owners seeking to sell, thereby impeding its acquisitions, investment or development activities. See “Business—Competition.”

Even if the Company is successful at identifying and competing for acquisition or investment opportunities, such opportunities involve a number of risks, including diversion of management’s attention, the risk that the value of the properties the Company acquires or invests in could decrease substantially after such acquisition or investment and the risk that the Company will not be able to accurately assess the value of properties that are not of the type it currently owns, some or all of which could have a Material Adverse Effect on the Company.

Additionally, if the Company is successful in implementing its business strategy to pursue investments in, and/or acquisitions or development of, healthcare-related and/or senior housing properties, the Company may

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have numerous operators of its properties. Historically, substantially all of the Company’s properties have been operated by a single operator, Kindred. There can be no assurance that the Company would have the capabilities to successfully monitor and manage a portfolio of properties with multiple operators.

The Company is subject to the risks associated with investment in a single industry: the heavily regulated healthcare industry.

All of the Company’s investments are in properties used in the healthcare industry; therefore the Company is exposed to risks associated with the healthcare industry in particular. The healthcare industry is highly regulated and changes in government regulation have in the past had material adverse consequences on the industry in general, which may not even have been contemplated by lawmakers and regulators. There can be no assurance that future changes in government regulation of healthcare will not have a material adverse effect on the healthcare industry, including its lessees. Moreover, the Company’s ability to invest in non-healthcare non-senior housing related properties is restricted by the terms of the 2002 Credit Agreement. See “Governmental Regulation—Healthcare Regulation.”

The Company’s tenants, including Kindred, may be adversely affected by increasing healthcare regulation and enforcement.

The Company believes that the regulatory environment surrounding the long-term care industry has intensified both in the amount and type of regulations and in the efforts to enforce those regulations. This is particularly true for large for-profit, multi-facility providers like Kindred.

The extensive federal, state and local laws and regulations affecting the healthcare industry include, but are not limited to, laws and regulations relating to licensure, conduct of operations, ownership of facilities, addition of facilities and equipment, allowable costs, services, prices for services, quality of care, patient rights, fraudulent or abusive behavior, and financial and other arrangements which may be entered into by healthcare providers. Federal and state governments have intensified enforcement policies, resulting in a significant increase in the number of inspections, citations of regulatory deficiencies and other regulatory sanctions, including terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, civil monetary penalties and even criminal penalties. See “Governmental Regulation—Healthcare Regulation.” If Kindred and the Company’s other tenants and operators fail to comply with the extensive laws, regulations and other requirements applicable to their businesses, they could become ineligible to receive reimbursement from governmental and private third-party payor programs, suffer civil and/or criminal penalties and/or be required to make significant changes to their operations. Kindred and the Company’s other tenants also could be forced to expend considerable resources responding to an investigation or other enforcement action under applicable laws or regulations. In addition, as part of the settlement agreement Kindred entered into with the federal government, it agreed to comply with the terms of a corporate integrity agreement. Kindred could incur additional expenses in complying with the corporate integrity agreement, and its failure to comply with the corporate integrity agreement could have a material adverse effect on Kindred’s results of operations, financial condition and its ability to make rental payments to the Company, which, in turn, could have a Material Adverse Effect on the Company.

The Company is unable to predict the future course of federal, state and local regulation or legislation, including the Medicare and Medicaid statutes and regulations. Changes in the regulatory framework could have a material adverse effect on Kindred and the Company’s other operators, which, in turn, could have a Material Adverse Effect on the Company.

Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on the Company’s tenants.

Kindred and the Company’s other tenants and operators rely on reimbursement from third-party payors, including the Medicare and Medicaid programs, for substantially all of their revenues. See “Governmental

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Regulation—Healthcare Regulation.” There continue to be various federal and state legislative and regulatory proposals to implement cost-containment measures that limit payments to healthcare providers. In addition, private third-party payors have continued their efforts to control healthcare costs. There can be no assurance that adequate reimbursement levels will be available for services to be provided by Kindred and other tenants which are currently being reimbursed by Medicare, Medicaid or private payors. Significant limits by governmental and private third-party payors on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on the liquidity, financial condition and results of operations of Kindred and the Company’s other operators and other tenants, which, in turn, could have a Material Adverse Effect on the Company.

There also continues to be state legislative proposals that would impose more limitations on government and private payments to providers of healthcare services such as Kindred. Many states have enacted or are considering enacting measures that are designed to reduce their Medicaid expenditures and to make certain changes to private healthcare insurance. Some states also are considering regulatory changes that include a moratorium on the designation of additional LTACs. There are a number of legislative proposals currently under consideration, including cost caps and the establishment of Medicaid prospective payment systems for nursing centers.

There continue to be various federal and state legislative and regulatory proposals to implement cost-containment measures that limit payments to healthcare providers. In addition, private third-party payors have continued their efforts to control healthcare costs. There can be no assurance that adequate reimbursement levels will be available for services to be provided by Kindred and other tenants which are currently being reimbursed by Medicare, Medicaid or private payors. Significant limits by governmental and private third-party payors on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on the liquidity, financial condition and results of operations of Kindred and the Company’s other operators and other tenants, which, in turn, could have a Material Adverse Effect. See “Governmental Regulation—Healthcare Regulation.”

Significant legal actions, particularly in the State of Florida, could subject Kindred and the Company’s other operators to increased operating costs and substantial uninsured liabilities, which could materially and adversely affect Kindred’s and the Company’s other operators’ liquidity, financial condition and results of operation.

Kindred and the Company’s other operators have experienced substantial increases in both the number and size of patient care liability claims in recent years. In addition to large compensatory claims, plaintiffs’ attorneys increasingly are seeking significant punitive damages and attorneys’ fees. In the State of Florida, where Kindred operates 15 of the Company’s skilled nursing facilities and six of the Company’s hospitals, general liability and professional liability costs for nursing centers have increased substantially and become increasingly difficult to estimate. Kindred has announced its intention to withdraw from the Florida SNF market and to sublease its interests to a third party. The Company and Kindred are currently not in agreement as to the terms, if any, on which Kindred may undertake such a sublease. See “Business—Recent Developments—Kindred’s Increased Professional Liability Expense in Florida.”

Due to the increase in the number and severity of professional liability claims against healthcare providers, the availability of professional liability insurance has been severely restricted and the premiums on such insurance coverage have increased dramatically. As a result, Kindred’s and the Company’s other operators’ insurance coverage might not cover all claims against them or continue to be available to them at a reasonable cost. If Kindred or the Company’s other operators are unable to maintain adequate insurance coverage or are required to pay punitive damages, they may be exposed to substantial liabilities.

Kindred insures its professional liability risks in part through a wholly-owned, limited purpose insurance company. The limited purpose insurance company insures initial losses up to specified coverage levels per

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occurrence with no aggregate coverage limit. Coverage for losses in excess of those per occurrence levels is maintained through unaffiliated commercial insurance carriers up to an aggregate limit. The limited purpose insurance company then insures all claims in excess of the aggregate limit for the unaffiliated commercial insurance carriers. Kindred maintains general liability insurance and professional malpractice liability insurance in amounts and with deductibles which Kindred management has indicated that it believes are sufficient for its operations.

Operators that insure their professional liability risks through their own captive limited purpose entities generally estimate the future cost of professional liability through actuarial studies which rely primarily on historical data. However, due to the increase in the number and severity of professional claims against healthcare providers, these actuarial studies may underestimate the future cost of claims and there can be no assurance that such operators’ reserves for future claims will be adequate to cover the actual cost of such claims. If the actual cost of such claims are significantly higher than the operators’ reserves, it could have a material adverse effect on the liquidity, financial condition and results of operation of the operator and their ability to make rental payments to the Company, which in turn, could have a Material Adverse Effect on the Company.

A downgrade of the Company’s credit ratings may have a material adverse effect.

The Company has a Ba3 senior debt rating from Moody’s Investors Service and a BB- corporate credit rating from Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. In October 2002, Moody’s placed the Company’s credit ratings, including those of Ventas Realty and its other rated subsidiaries under review for possible downgrade. Factors that may influence a rating agency’s determination of its credit rating include, but are not limited to, the Company’s success in raising sufficient equity capital, its capital structure, its level of indebtedness and pending or future changes in the regulatory framework applicable to its tenants or its industry. Any downgrade of the Company’s credit ratings could make it more difficult or more expensive for the Company to incur additional indebtedness and adversely affect the value of its common stock. There can be no assurance that the Company’s credit ratings will not be downgraded in the future.

Kindred and the Company’s other operators may be sued under a federal whistleblower statute.

Kindred and the Company’s other operators may be sued under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry. See “Government Regulation—Healthcare Regulation.” These lawsuits can involve significant monetary damages and award bounties to private plaintiffs who successfully bring these suits. If any such lawsuits were to be brought against Kindred and the Company’s other operators, such suits combined with increased operating costs and substantial uninsured liabilities could have a Material Adverse Effect on the liquidity, financial condition and results of operation of Kindred and the Company’s other operators and their ability to make rental payments to the Company, which, in turn, could have a Material Adverse Effect.

If any of the Company’s properties are found to be contaminated, or if the Company becomes involved in any environmental disputes, the Company could incur substantial liabilities and costs.

Under federal and state environmental laws and regulations, a current or former owner of real property may be liable for costs related to the investigation, removal and remediation of hazardous or toxic substances or petroleum that are released from or are present at or under, or that are disposed of in connection with such property. Owners of real property may also face other environmental liabilities, including government fines and penalties imposed by regulatory authorities and damages for injuries to persons, property or natural resources. Environmental laws and regulations often impose liability without regard to whether the owner was aware of, or was responsible for, the presence, release or disposal of hazardous or toxic substances or petroleum. In certain circumstances, environmental liability may result from the activities of a current or former operator of the property. While the Company is generally indemnified by the current operators of the Company’s properties for contamination caused by such operators, such indemnities may not adequately cover all environmental costs. “Government Regulation—Environmental Regulation.”

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Risks Arising from the Company’s Capital Structure

The Company is highly leveraged.

As of December 31, 2002, the Company had approximately $707.7 million of indebtedness, approximately an additional $44.0 million of obligations under the United States Settlement, and approximately $185.3 million in additional borrowings available under the Company’s credit facility. The Indentures permit the Company to incur substantial additional debt, and the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness may have the following consequences:

The Company may be unable to raise additional capital necessary to implement its business plan and to meet the Company’s debt payments and obligations under the United States Settlement.

In order to implement the Company’s business plan and to meet its debt payments and obligations under the United States Settlement, the Company may need to raise additional capital. The Company’s ability to incur additional indebtedness is restricted by the terms of the Indentures and the 2002 Credit Agreement. In addition, adverse economic conditions could cause the terms on which the Company can obtain additional borrowings to become unfavorable. In such circumstances, the Company may be required to raise additional equity in the capital markets or liquidate one or more investments in properties at times that may not permit realization of the maximum return on the investments and that could result in adverse tax consequences to the Company. In addition, certain healthcare regulations may constrain the Company’s ability to sell assets. There can be no assurance that the Company will be able to meet its debt service obligations or its obligations under the United States Settlement and the failure to do so could have a Material Adverse Effect on the Company.

The Company hedges floating-rate debt with interest rate swaps and may record charges associated with the termination or change in value of these interest-swaps.

The Company has interest rate swaps that hedge interest payment obligations on floating-rate debt. The Company periodically assess its interest rate swaps in relation to its outstanding balances of floating-rate debt, and based on such assessments may terminate portions of its swaps or enter into additional swaps. Termination of swaps with accrued losses, or changes in the value of swaps as a result of falling interest rates, would result in changes to the Company’s earnings and net worth, which could be significant.

Risks Arising from the Company’s Status as a REIT

Loss of the Company’s status as a REIT would have significant adverse consequences to the Company and the value of its common stock.

If the Company loses its status as a REIT, it will face serious tax consequences that will substantially reduce the funds available for distribution to its stockholders for each of the years involved because:

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In addition, if the Company fails to qualify as a REIT, all distributions to stockholders would be subject to tax as ordinary income (but corporate distributees may be eligible for the dividends received deduction) to the extent of its current and accumulated earnings and profits, and the Company will not be required to make distributions to stockholders.

As a result of all these factors, the Company’s failure to qualify as a REIT also could impair its ability to implement its business strategy and would adversely affect the value of the Company’s common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company’s control may affect its ability to remain qualified as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions may adversely affect the Company’s investors or its ability to remain qualified as a REIT for tax purposes. Although the Company believes that it qualifies as a REIT, there can be no assurance that it will continue to qualify or remain qualified as a REIT for tax purposes.

See “Federal Income Tax Considerations—Federal Income Taxation of the Company” and “—Requirements for Qualification.”

The 90% distribution requirement will decrease the Company’s liquidity and may limit its ability to engage in otherwise beneficial transactions.

To comply with the 90% distribution requirement applicable to REITs and to avoid the nondeductible excise tax, the Company must make distributions to its stockholders. See “Federal Income Tax Considerations—Federal Income Taxation of the Company—Requirements for Qualification as a REIT—Distribution Requirements for REIT Qualification.” The terms of the Indentures permit the Company to make annual distributions to its stockholders in an amount equal to the minimum amount necessary to maintain its REIT status so long as its ratio of Debt to Adjusted Total Assets (as defined in the Indentures) does not exceed 60% and to make additional distributions if the Company passes certain other financial tests.

Although the Company anticipates that it generally will have sufficient cash or liquid assets to enable it to satisfy the REIT distribution requirement, it is possible that from time to time the Company may not have sufficient cash or other liquid assets to meet the 90% distribution requirement or to distribute such greater amount as may be necessary to avoid income and excise taxation. This may be due to the timing differences between the actual receipt of income and actual payment of deductible expenses on the one hand and the inclusion of that income and deduction of those expenses in arriving at its taxable income. In addition, nondeductible expenses such as principal amortization or repayments or capital expenditures in excess of noncash deductions may also cause the Company to fail to have sufficient cash or liquid assets to enable it to satisfy the 90% distribution requirement.

These distributions may limit the Company’s ability to rely upon rental payments from its properties or subsequently acquired properties to finance investments, acquisitions or new developments.

In the event that timing differences or other cash needs occur, the Company may find it necessary to borrow funds, issue additional equity securities (although there can be no assurance that it will be able to do so), pay taxable stock dividends, if possible, distribute other property or securities (including Kindred Common Stock) or

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engage in a transaction intended to enable the Company to meet the REIT distribution requirements. This may require the Company to raise additional capital to meet its obligations; however, see “Risk Factors—Risks Arising from the Company’s Capital Structure—the Company may be unable to raise additional capital necessary to implement its business plan and to meet its debt payments and its obligations under the United States Settlement.” The terms of the Indentures and the 2002 Credit Agreement restrict the Company’s ability to engage in some of these transactions.

The Company may still be subject to corporate level taxes.

Following the Company’s REIT election, the Company is considered to be a former C corporation for income tax purposes. Therefore, potentially, the Company remains subject to corporate level taxes for any asset dispositions occurring between January 1, 1999 and December 31, 2008. The IRS is currently reviewing the Company’s federal tax returns for tax years ended December 31, 1997 and 1998 and may also review its federal tax returns for subsequent years. On January 16, 2003, the Company agreed to a revised IRS Revenue Agent’s report quantifying the examination findings in connection with the 1997 and 1998 income tax periods. This report concluded that, pending final review by the Joint Committee of Taxation, the Company does not owe any additional taxes, and is entitled to an additional refund of $1.2 million, for the period in question. If received, this $1.2 million would be deposited into a joint tax escrow account between the Company and Kindred. The revised report is under review by the Joint Committee of Taxation. Until the review of the Joint Committee of Taxation is final, however, there can be no assurance as to the ultimate outcome of these matters or whether that outcome will have a Material Adverse Effect on the Company.

If there are any resulting tax liabilities for the tax years ended December 31, 1997 and 1998, the Company intends to use the net operating loss (“NOL”) carryforwards, if any (including the NOL carryforwards that were utilized to offset its federal income tax liability for 1999 and 2000), to satisfy those tax liabilities. If the tax liabilities exceed the amount of NOL carryforwards, then the Company will use the escrowed amounts under the Tax Refund Escrow Agreement with Kindred (“Tax Refund Escrow Agreement”) to satisfy the remaining tax liabilities. As of December 31, 2002, $29 million was escrowed under the Tax Refund Escrow Agreement. To the extent that NOL carryforwards and escrowed amounts are not sufficient to satisfy the tax liabilities, Kindred has indemnified the Company for specific tax liabilities and Kindred has assumed these obligations. There can be no assurance that the NOL carryforwards and the escrowed amounts will be sufficient to satisfy these liabilities, that Kindred has any obligation to indemnify the Company for particular tax liabilities, that Kindred will have sufficient financial means to enable it to satisfy its indemnity obligations under the Tax Refund Escrow Agreement or that Kindred will continue to honor its indemnification obligations.

The Company may jeopardize its REIT status if it violates the 10% securities test or the 5% asset test because of the value of the Kindred common stock.

The Company leases substantially all of its properties to Kindred and Kindred is the primary source of the Company’s rental income. Under Kindred’s plan of reorganization, the Company received 1,498,500 shares of Kindred common stock on April 20, 2001 as future rent. As of December 31, 2002 the Company owned 920,814 shares of Kindred Common Stock. If the Company violated or violates the 10% securities test described under the heading “Business—Federal Income Taxation Considerations,” Kindred would be a related party tenant and consequently, the rents from Kindred would not qualify as “rents from real property” under the tax code. As a result, the Company would lose its REIT status because it likely would not be able to satisfy either the 75% or the 95% gross income test also described under the heading “Business—Federal Income Taxation Considerations.”

In addition, if the Company’s shares of Kindred common stock exceed 10% of the voting power or value of Kindred’s outstanding stock or if the value of its shares of Kindred common stock exceeds 5% of the value of its total assets at the end of the quarter in which the Company received the Kindred Common Stock or at the end of any subsequent quarter (except where such excess in subsequent quarters is caused by value fluctuations of the

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Company’s various investments and not by the acquisition or disposition of assets), the Company would violate the 10% securities test or the 5% asset test. Consequently, the Company would lose its REIT status unless it cured the violation in a timely manner under the applicable provisions of the Code. There can be no assurance that relief for such a violation would be available. See “Business—Federal Income Taxation Considerations.”

President Bush’s proposed tax cut could adversely affect the price of the Company’s common stock.

President Bush has proposed a tax reduction package that would, among other things, reduce the double taxation of non-REIT corporate dividends. If the double taxation of corporate dividends were to be eliminated or reduced, certain of the relative tax advantages of being a REIT would be eliminated or reduced, which may have an adverse affect on the price of the Company’s common stock. This adverse affect may take place prior to the adoption of any tax cut based on the market’s perception of the likelihood of implementation of such a provision.