AMERICAN HEALTH PROPERTIES INC, 10-K405, 1996-04-01

AMERICAN HEALTH PROPERTIES INC
10-K405, 1996-04-01
REAL ESTATE INVESTMENT TRUSTS

Previous: NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/, NT 10-K, 1996-04-01

Next: ML EQ REAL ESTATE PORTFOLIO L P, 10-K405, 1996-04-01

<PAGE> 1

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-9381

AMERICAN HEALTH PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 95-4084878
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (ZIP CODE)
ENGLEWOOD, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 796-9793

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK NEW YORK STOCK EXCHANGE
PSYCHIATRIC GROUP DEPOSITARY SHARES NASDAQ
NATIONAL MARKET SYSTEM
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of March 11, 1996 there were outstanding (i) 23,446,973 shares of
American Health Properties, Inc. common stock, $.01 par value, and (ii)
2,084,282 Psychiatric Group Depositary Shares, each representing one-tenth of
one share of American Health Properties, Inc. Psychiatric Group Preferred Stock,
$.01 par value. The aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
such date was approximately $579,400,000. For the purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.

Documents Incorporated by Reference: Items 10, 11 and 12 of Part III are
incorporated by reference from the definitive proxy statement of American Health
Properties, Inc., to be filed within 120 days after December 31, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 13
Item 3. Legal Proceedings............................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......................... 13
PART II
Item 5. Market for Registrant's Voting Stock and Related Stockholder Matters......... 13
Item 6. Selected Financial Data...................................................... 15
Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations........................................................ 17
Management's Discussion and Analysis of Core Group Combined Financial
Condition and Results of Operations.......................................... 23
Management's Discussion and Analysis of Psychiatric Group Combined Financial
Condition and Results of Operations.......................................... 27
Item 8. Financial Statements and Supplementary Data.................................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 32
Item 11. Executive Compensation....................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 32
Item 13. Certain Relationships and Related Transactions............................... 32
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K........... 32
</TABLE>

i
<PAGE> 3

PART I

ITEM 1. BUSINESS.

American Health Properties, Inc. (the "Company," which term refers to the
Company and its subsidiaries unless the context otherwise requires) is a
self-administered real estate investment trust ("REIT") that commenced
operations in 1987. The Company has investments in health care facilities that
are operated by qualified third party health care providers, as well as a
medical office building.

In July 1995, the Company sought to separate the economic attributes of its
core portfolio of investments (the "Core Group") and its portfolio of
psychiatric hospital investments (the "Psychiatric Group") into two distinct
portfolios, with two distinct classes of publicly-traded shares intended to
represent those portfolios. On July 25, 1995, the Company distributed one
Psychiatric Group Depositary Share (the "Depositary Shares") for every ten
shares of the Company's common stock, $.01 par value (the "Common Stock"), held
of record on July 14, 1995, each such Depositary Share representing a one-tenth
interest in one share of the Company's Psychiatric Group Preferred Stock, $.01
par value (the "Psychiatric Group Stock"). The assets, liabilities and expenses
of the Company have been allocated between the two portfolios, and dividends and
other payouts or distributions with respect to the Common Stock and the
Psychiatric Group Stock are expected to be primarily a function of the
individual financial performance of the Core Group and the Psychiatric Group.
Accordingly, the Company has separated its business and properties into two
distinct business units: (a) the Core Group, which includes the Company's acute
care and rehabilitation hospitals, long-term care facilities, assisted living
facilities, Alzheimer's facility and a medical office building, and (b) the
Psychiatric Group, which includes all of the Company's investments in
psychiatric hospitals. However, the change in the capital structure of the
Company effected by the issuance of the Psychiatric Group Stock does not affect
the legal title to assets or responsibility for liabilities of the Company, and
each holder of the Company's Common Stock or Depositary Shares is a holder of an
issue of capital stock of the entire Company and is subject to risks associated
with an investment in the Company and all of its businesses, assets and
liabilities.

The Company's principal executive office is located at 6400 South Fiddler's
Green Circle, Suite 1800, Englewood, Colorado 80111, and its telephone number at
such address is (303) 796-9793.

THE CORE GROUP

The Core Group's current portfolio of investments consists of 14 acute care
hospitals, three rehabilitation hospitals, four long-term care facilities, four
assisted living facilities (of which three facilities are under construction),
one Alzheimer's care facility and a medical office building. As of December 31,
1995, the net book value of the Core Group's assets was $536.2 million. Of the
Core Group's real estate assets at that date, 87% in net book value represented
the acute care segment, and 1%, 1%, 3%, 2% and 6% represented the Alzheimer's
care segment, assisted living segment, long-term care segment, the medical
office building and rehabilitation segment, respectively. In addition, at
December 31, 1995, the Core Group had funded $4.7 million out of a total
commitment of $16.0 million related to three assisted living facilities under
construction. As of December 31, 1995, all of the Core Group's real estate
assets were held in fee.

The Core Group's facilities are diversified geographically across 15
states, are distributed among large and small population centers, and are
operated by 12 experienced management companies. These operators include the
following companies or their subsidiaries: Columbia/HCA Healthcare Corporation,
Dynamic Health, Inc., Horizon/CMS Healthcare Corporation, HealthSouth
Corporation, Paracelsus Healthcare Corporation, Quorum Health Group, Inc.,
Signature Health Care Corporation, Emeritus Corporation, CDM/WestMar,
Diversified Health Services, Shannon Health Systems and Tenet Healthcare
Corporation. Facilities operated by Tenet represented 53% of the Core Group's
total revenues for the twelve months ended December 31, 1995.

Approximately 72% of the Core Group's property revenues for the twelve
months ended December 31, 1995 were secured by corporate guarantees of these
operating companies or their subsidiaries. Also, as of December 31, 1995,
letters of credit from commercial banks and cash deposits aggregating $14
million were

1
<PAGE> 4

available to the Core Group as security for lease financings. Leases for 14 of
the Core Group's facilities, representing 71% of the Core Group's property
revenues for the twelve months ended December 31, 1995, contain cross-default
provisions.

THE CORE GROUP FACILITIES

The Company's 27 Core Group facilities consist of 14 acute care hospitals
(the "Acute Care Hospitals"), three rehabilitation hospitals (the
"Rehabilitation Hospitals"), four long-term care facilities (the "Long-Term Care
Facilities"), four assisted living facilities (of which three are under
construction) (the "Assisted Living Facilities"), one Alzheimer's Care Facility,
and a medical office building (together, the "Core Group Facilities"). All of
these Core Group facilities are owned by the Company.

Acute Care Hospitals. The Acute Care Hospitals provide a wide range of
services, which may include fully-equipped operating and recovery rooms,
obstetrics, radiology, intensive care, open-heart surgery and coronary care,
neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing
units, oncology, clinical laboratories, respiratory therapy, physical therapy,
nuclear medicine, rehabilitation services and outpatient services.

Rehabilitation Hospitals. The Rehabilitation Hospitals provide acute
rehabilitation care on a multidisciplinary, physician-directed basis to severely
disabled patients. In addition to general medical rehabilitation programs, the
Rehabilitation Hospitals offer a number of specialty programs, including
pulmonary, ventilator, neurobehavioral, brain injury and pain programs. Each of
the Rehabilitation Hospitals is operated pursuant to a joint venture between a
publicly-held, national rehabilitation hospital operator and a local health care
provider.

Long-Term Care Facilities. The Long-Term Care Facilities are skilled
nursing centers that provide a broad range of health care services, including
skilled nursing care, subacute care, rehabilitation therapy and other
specialized services to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home.

Assisted Living Facilities. The Assisted Living Facilities currently
provide or will provide upon completion a special combination of housing,
supportive services, personalized assistance and health care services designed
to respond to the individual needs of the elderly and other persons who require
help with activities of daily living. These services are available 24 hours a
day to meet both scheduled and unscheduled needs in a way that promotes maximum
dignity and independence for each resident.

Alzheimer's Care Facility. The Alzheimer's Care Facility was developed in
consultation with leading medical experts in the treatment of Alzheimer's
disease and dementia. This facility has a strong health care orientation rather
than the more customary residential care orientation.

Medical Office Building. The Company owns a 60,000 square-foot medical
office building located in Murrieta, California known as Walsh Medical Arts
Center. The medical office building is located across the street from Sharp
Healthcare Murrieta, a developing medical campus that includes 49 acute care
beds and 42 skilled nursing beds operated by Sharp Healthcare system of San
Diego.

2
<PAGE> 5

The following is a listing of the Core Group portfolio of investments as of
March 1, 1996. Unless otherwise indicated, all Core Group Facilities listed are
owned by the Company.

CORE GROUP FACILITIES

<TABLE>
<CAPTION>
YEAR
ACQUIRED/ TOTAL ANNUAL BASE INITIAL TERM
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) RENT(2) OF LEASE(3)
- ------------------------ ---------------------------------- --------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACUTE CARE HOSPITALS
Chesterfield General Dynamic Health, Inc. 1995 $ 11,407 $ 1,238 2005
Hospital
Cheraw, South Carolina
Cleveland Regional Dynamic Health, Inc. 1994 8,300 812 2003
Medical Center
Cleveland, Texas
Concho Valley Regional Shannon Health Systems 1991 16,452 1,478 2001
Hospital
San Angelo, Texas
Desert Valley Quorum Health Group, Inc.(4) 1994 24,000 2,654 2004
Hospital(4)
Victorville,
California
Elmwood Medical Center Paracelsus Healthcare Corporation 1990 42,823 5,451 2004
Jefferson, Louisiana
Frye Regional Medical Tenet Healthcare Corporation(5) 1987 45,449 5,265 1999
Center
Hickory, North
Carolina
Halstead Hospital Paracelsus Healthcare Corporation 1993 14,250 1,600 2003
Halstead, Kansas(6)
Irvine Medical Center Tenet Healthcare Corporation(5) 1991 75,000 10,057 2004
Irvine, California
Kendall Regional Medical Columbia/HCA Healthcare 1987 69,012 7,884 1999
Center Corporation
Miami, Florida
Lucy Lee Hospital Tenet Healthcare Corporation(5) 1987 23,566 2,731 1999
Poplar Bluff, Missouri
Marlboro Park Hospital Dynamic Health, Inc. 1995 7,793 845 2005
Bennettsville, South
Carolina
North Fulton Medical Tenet Healthcare Corporation(5) 1987 46,191 5,471 1999
Center
Roswell, Georgia
Palm Beach Gardens Tenet Healthcare Corporation(5) 1987 45,648 5,283 1999
Medical Center
Palm Beach Gardens,
Florida
Tarzana Regional Medical Tenet Healthcare Corporation(5) 1987 73,700 8,308 2004
Center
Tarzana, California
------------- -----------
Total Acute Care $ 503,591 $59,077
Hospitals
============ ===========
ALZHEIMER'S CARE
FACILITY
Pine Haven Alzheimer's Diversified Health Services 1995 $ 3,700 $ 353 2005
Care Center
Houston, Texas ============ ===========
ASSISTED LIVING
FACILITIES
Cambria Lodge(7) Emeritus Corporation 1995 $ 5,209 $ 547 2006
El Paso, Texas
Garrison Creek Lodge(7) Emeritus Corporation 1995 5,608 589 2006
Walla Walla,
Washington
Sherwood Lodge(7) Emeritus Corporation 1995 5,143 540 2006
Odessa, Texas
Summer Wind Residence Emeritus Corporation 1995 3,000 315 2005
Boise, Idaho
------------- -----------
Total Assisted $ 18,960 $ 1,991
Living Facilities
============ ===========
LONG-TERM CARE
FACILITIES
Arkansas Manor Signature Health Care Corporation 1995 $ 4,066 $ 406 2005
Denver, Colorado
</TABLE>

3
<PAGE> 6

- ---------------
(1) Reflects gross investment less write-downs, except for facilities under
construction, for which the Company's total investment commitment is
reflected.

(2) Reflects contract rate of annual base rent received or to be received upon
completion of construction.

(3) Each lease provides the lessee with renewal options to extend the term of
the lease beyond the primary term.

(4) Quorum is the operator and Desert Valley Hospital, Inc. is the lessee.

(5) These facilities are leased by subsidiaries of American Medical
International, Inc. ("AMI"), which became a wholly owned subsidiary of Tenet
Healthcare Corporation pursuant to a merger between AMI and National Medical
Enterprises.

(6) The Company's investment in Halstead Hospital was consummated on June 30,
1993 by the acquisition of ten year industrial revenue bonds secured by the
hospital, which the Company expects to exchange for ownership of the
hospital at the end of the ten year term.

(7) Currently under construction.

See the Notes to the Consolidated Financial Statements, the Notes to the
Core Group Combined Financial Statements and Schedule III -- Real Estate and
Accumulated Depreciation included in this Annual Report on Form 10-K for
additional information regarding the Core Group Facilities and for the carrying
value and accumulated depreciation of the Core Group Facilities.

THE PSYCHIATRIC GROUP

The Psychiatric Group's portfolio of psychiatric hospital investments
consists of three psychiatric hospitals owned by the Company and two mortgage
loans secured by psychiatric hospitals (the "Psychiatric Hospitals"). As of
December 31, 1995, the net book value of the Psychiatric Group assets was $64.6
million. Of the Psychiatric Group's real estate assets at that date, 36% in net
book value were held in fee and 64% in net book value were held as mortgages.

4
<PAGE> 7

The Psychiatric Hospitals provide a wide range of inpatient and outpatient
care for children, adolescents and adults, including specialized care relating
to eating disorders, substance abuse and psychiatric illness. Fundamental
changes in the psychiatric industry in recent years have reduced the operating
cash flow at the Psychiatric Hospitals. These changes have had and will likely
continue to have an adverse effect on the results of operations of the
Psychiatric Hospital operators and borrowers. As a result, certain of the
Psychiatric Hospital operators have had, and may continue to have, difficulty
meeting their payment obligations to the Psychiatric Group. See "Management's
Discussion and Analysis of Psychiatric Group Combined Financial Condition and
Results of Operations -- Operating Results -- Future Operating Results" included
elsewhere herein.

The following is a listing of the current Psychiatric Group portfolio of
investments as of March 1, 1996. Unless otherwise indicated, all Psychiatric
Hospitals listed are owned by the Company.

PSYCHIATRIC GROUP HOSPITALS

<TABLE>
<CAPTION>
YEAR ANNUAL BASE INITIAL TERM
ACQUIRED/ TOTAL RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
- ------------------------ -------------------------- --------- ------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Four Winds Psychiatric Four Winds, Inc. 1988 $27,600 $ 3,700 2002
Hospital(4)
Katonah, New York
Four Winds Psychiatric FW of Saratoga, Inc. 1989 18,201 2,264 1999
Hospital(4)
Saratoga Springs,
New York
Less: Mortgage note N/A N/A (7,950) N/A N/A
receivable impairment
reserve
The Manors(5) Quorum Health Group, Inc. 1990 6,523 600 2000
Tarpon Springs,
Florida
The Retreat(5) Quorum Health Group, Inc. 1990 11,934 1,100 2000
Sunrise, Florida
Rock Creek Center DHP, L.P. 1989 6,505 1,000 1997
Lemont, Illinois
---------- ---------
Total Psychiatric Hospitals $62,813 $ 8,664
========== =========
</TABLE>

- ---------------
(1) Reflects gross investment less write-downs.

(2) Reflects contract rate of annual base rent or interest.

(3) Each lease and mortgage provides the lessee or borrower with renewal options
to extend the term of the lease or mortgage beyond the primary term.

(4) Investment held in the form of a mortgage rather than owned by the Company.

(5) Quorum is the operator of these facilities. The Anclote Psychiatric
Hospital, Ltd. is the lessee of The Manors and The Retreat Psychiatric
Hospital, Ltd. is the lessee of The Retreat.

See the Notes to the Consolidated Financial Statements, the Notes to the
Psychiatric Group Combined Financial Statements and Schedule III -- Real Estate
and Accumulated Depreciation included in this Annual Report on Form 10-K for
additional information regarding the leased Psychiatric Hospitals and the
mortgage loans and for the carrying value and accumulated depreciation of the
Psychiatric Hospitals.

LEASES AND MORTGAGE LOANS

The Company owns the 14 Acute Care Hospitals, the three Rehabilitation
Hospitals, three of the Psychiatric Hospitals, the four Long-Term Care
Facilities, the four Assisted Living Facilities (of which three facilities are
under construction), the Alzheimer's Care Facility and a medical office
building, which are collectively referred to herein as the "Leased Properties"
or individually as a "Leased Property."

5
<PAGE> 8

The leases for the Leased Properties provide for base rental rates that
generally range from 9.0% to 13.4% per annum of the acquisition price less
write-downs of the related Leased Property. Rental rates vary by lease, taking
into consideration many factors, including, but not limited to, credit of the
lessee, operating performance of the Leased Property, interest rates, and
location, type and physical condition of the Leased Property. The leases provide
for additional rents that are generally based upon a percentage of increased
revenues over specified base period revenues of the related Leased Properties.

The obligations under the leases are generally guaranteed by the parent
corporation of the lessee, if the lessee is a subsidiary, or have some other
form of credit enhancement such as a letter of credit or a security deposit.
Certain of the Company's leases are with subsidiaries of the operators described
above and are non-recourse to such operators. Approximately 62% of the Company's
property revenues for the twelve months ended December 31, 1995 were secured by
corporate guarantees. Also, as of December 31, 1995, letters of credit from
commercial banks and cash deposits aggregating $14 million were available to the
Company as security for lease and construction development obligations.

The leases are on a triple "net" basis, and the lessee is responsible
thereunder, in addition to the base and additional rents, for all additional
charges, including every fine, penalty, interest and cost that may be levied for
non-payment or late payment thereof, for taxes, assessments, levies, fees, water
and sewer rents and charges, all governmental charges with respect to the Leased
Property and all utility and other charges incurred in the operation of the
Leased Property. Each lessee is required, at its expense, to maintain the Leased
Property in good order and repair. The Company is not required to repair,
rebuild or maintain the Leased Properties.

Core Group Facilities

Acute Care Hospitals. The Acute Care Hospital leases provide for a fixed
term of from ten to 17 years and one or more renewal options of from five to ten
years each. In addition to monthly base rent, all of the Acute Care Hospital
leases provide for the quarterly payment of additional rent in an amount equal
to (i) a specified percentage of the amount by which the Gross Revenues (as
defined) attributable to the Leased Property for the year exceeded the Gross
Revenues derived from such Leased Property during a specified base year ("Excess
Gross Revenues") up to a designated dollar amount (the "Transition Amount").
Should the Transition Amount be reached in any year, additional rent is equal to
a reduced percentage of the Excess Gross Revenues for the remainder of such
year.

Pursuant to the terms of the Acute Care Hospital leases, the Company has
the right to approve capital expenditures (only in excess of $2 million for
certain leases), the option to fund certain capital expenditures under some of
the leases and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rent provisions of leases are amended when such capital expenditures
are funded to reflect the Company's increased investment.

Six of the Acute Care Hospitals are operated by subsidiaries of AMI, a
subsidiary of Tenet Healthcare Corporation, under long-term leases with the
Company, which comprised 53% of the Core Group's 1995 total revenues. AMI has
guaranteed certain obligations of its subsidiaries under such leases and each
such lease is cross-defaulted to the other AMI leases. Five of the AMI leases
grant to AMI the option, exercisable on not less than six months nor more than
24 months notice, to purchase the Leased Property upon the expiration of any
term of the lease at the Fair Market Value of the Leased Property at the
expiration of said term. The expiration of the initial terms of such leases are
shown in the table above. For purposes of the second preceding sentence, "Fair
Market Value" means the price that a willing buyer not compelled to buy would
pay to a willing seller not compelled to sell for such property at the
applicable expiration less the portion of such price attributable to capital
additions paid for by AMI. The determination of such price will take into
account (i) that the applicable lease is assumed not to be in effect on the
Leased Property and (ii) that the seller of such Leased Property must pay for
title insurance and closing costs.

Five of the other Acute Care Hospital leases generally provide the lessee
with an option to purchase the property at the end of the term of the lease at
the greater of fair market value or Total Investment Cost (as defined). Two of
the leases provide the lessee with a purchase option during the term of the
lease at a

6
<PAGE> 9

predetermined purchase price designed to provide the Company a favorable total
return on its investment. Two of the leases provide the lessee with a purchase
option during the term of the lease at the greater of fair market value or Total
Investment Cost (as defined).

Two of the Acute Care Hospitals are operated by subsidiaries of Paracelsus
Healthcare Corporation ("Paracelsus") under long-term leases with the Company,
which comprised 9% of the Core Group's 1995 total revenues. The leases for the
two Acute Care Hospitals operated by Paracelsus contain reciprocal cross-default
provisions.

Rehabilitation Hospitals. The Rehabilitation Hospital leases provide for
an initial term of ten years and three renewal periods of five years each,
except in the case of the MountainView Regional Rehabilitation Hospital lease,
which provides for two renewal periods of ten years each and a third renewal
period of up to fifteen years. In addition to monthly base rent, the
Rehabilitation Hospital leases provide for the quarterly payment of additional
rent in an amount equal to a specified percentage of Excess Gross Revenues. The
Rehabilitation Hospital leases each grant to the operator the option to purchase
the Rehabilitation Hospital upon expiration of any term of the lease at the
greater of the Fair Market Value of or the Company's cost basis in the
Rehabilitation Hospital at the expiration of said term. One of the
Rehabilitation Hospital leases grants an interim purchase option exercisable at
the end of the fifth year of the lease at a purchase price equal to the greater
of the fair market value of the facility based on the income approach or the
Company's cost basis in the facility.

Long-Term Care Facilities. The Long-Term Care Facility leases provide for
an initial term of ten years and three renewal periods of ten years each. Each
of the four Long-Term Care Facilities is operated by an affiliate of Signature
Health Care Corporation ("Signature") and all of the facilities are
cross-defaulted. Additionally, the obligations under each lease are guaranteed
by Signature and an affiliate of Signature. The leases provide for a monthly
base rent plus additional rent payable quarterly in an amount equal to the sum
of (i) additional rent for the immediately preceding year and (ii) an amount
equal to a specified percentage of the sum of base rent and additional rent
payable for the immediately preceding year. Each of the Long-Term Care Facility
leases provides the tenant with an option to purchase the property at the end of
the fixed term or the end of any extended term at the greater of fair market
value or the Total Investment Cost (as defined), provided that the option to
purchase the property is simultaneously exercised on each of the four Long-Term
Care Facilities. The leases also provide the tenant with a right of first
refusal to purchase the property on the same terms and conditions as received by
and acceptable to the Company.

Assisted Living Facilities. The Assisted Living Facility leases provide
for a ten year initial term with six renewal periods of five years each. The
Company is currently providing construction financing for three of the Assisted
Living Facilities and will enter into ten-year operating leases with operator of
the Assisted Living Facilities, Emeritus Corporation ("Emeritus"), for each of
the facilities upon completion. All of the properties leased to Emeritus are
cross-defaulted. The Assisted Living Facility leases provide for monthly base
rent plus additional rent payable quarterly in an amount equal to the sum of (i)
the additional rent for the immediately preceding year and (ii) an amount equal
to a specified percentage of the sum of base rent and additional rent payable
for the immediately preceding year. The leases provide the tenant with the
option to purchase the property at the end of the fixed term or at the end of
any extended term at the greater of (i) fair market value minus the tenant's
share of the Appreciation Amount (as defined) less the fair market value of any
improvements funded by the tenant or (ii) the Company's Total Investment (as
defined).

Alzheimer's Care Facility. The Alzheimer's Care Facility lease provides
for a ten year initial term with three renewal periods of ten years each. The
Alzheimer's Care Facility lease provides for monthly base rent plus additional
rent payable quarterly in an amount equal to the sum of (i) additional rent for
the immediately preceding year and (ii) an amount equal to a specified
percentage of the sum of base rent and additional rent payable for the
immediately preceding year. The leases provide the tenant with the option to
purchase the property at the end of the fixed term or at the end of any extended
term at a purchase price equal to the greater of the fair market value or Total
Investment Cost (as defined).

Medical Office Building. The medical office building is master-leased for
an eight-year remaining term to a partnership consisting of 22 physicians who
are the primary tenants of the building.

7
<PAGE> 10

Psychiatric Group Facilities

Psychiatric Hospitals. The leases for two of the owned Psychiatric
Hospitals provide for an initial term expiring in 2000 with three renewal
periods for ten years each. The lease for the third owned Psychiatric Hospital
has an initial term expiring in 1997 with one renewal period for five years and
two renewal periods for ten years each. In addition to monthly base rent, the
leases provide for the quarterly payment of additional rent in an amount equal
to a specified percentage of Excess Gross Revenues.

The Company has made mortgage loans to two of the Psychiatric Hospitals.
The two mortgage loans are secured by first mortgages and security interests in
the two separate Psychiatric Hospitals. The two mortgage loans have an initial
term of ten years with two optional ten-year extension terms. Pursuant to the
terms of the mortgage loans, the Company may receive additional interest each
year in an amount equal to a specified percentage of Excess Gross Revenues. See
also "Management's Discussion and Analysis of Psychiatric Group Combined
Financial Condition and Results of Operations -- Operating Results -- Future
Operating Results" and Notes to the Psychiatric Group Combined Financial
Statements included elsewhere herein.

COMPETITION

The Company competes with health care providers, real estate partnerships,
other real estate investment trusts and other investors, including insurance
companies and banks, generally in the acquisition, leasing and financing of
health care facilities.

Management of the Company believes that the Facilities in which it has
invested are providers of high quality health care services in their respective
markets. The operators of the Facilities compete on a local and regional basis
with other operators of comparable facilities. They compete with independent
operators as well as managers of multiple facilities, some of which are
substantially larger and have greater resources than the operators of the
Facilities. Some of these competing facilities are operated for profit while
others are owned by governmental agencies or tax-exempt, not-for-profit
organizations. The Company believes that the Facilities compete favorably with
other hospitals based upon many factors, including the services and specialties
offered, quality of management, ease of access, reputation and the ability to
attract competent physicians and maintain strong physician relationships.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Facilities, the Company may be potentially liable for such costs.

The Company conducts Phase I environmental assessments on properties it
acquires, which assessments are intended to discover information regarding, and
to evaluate the environmental condition of, the surveyed properties and
surrounding properties. The Phase I assessments typically include a historical
review, a public records review, a preliminary investigation of the site and
surrounding properties, screening for the presence of asbestos, polychlorinated
biphenyls and underground storage tanks and the preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
In each case where Phase I assessments resulted in specific recommendations for
remedial actions, the Company's management has taken action with respect to the
issues raised.

The Phase I assessments obtained by the Company have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. Nevertheless,
it is possible that these assessments do not reveal all environmental
liabilities or that there are material environmental liabilities of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability
or

8
<PAGE> 11

(ii) the current environmental condition of the Facilities will not be affected
by tenants and occupants of the Facilities, by the condition of properties in
the vicinity of the Facilities (such as the presence of underground storage
tanks) or by third parties unrelated to the Company.

The Company believes that the Facilities are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority and is not otherwise aware of any material noncompliance,
liability or claim relating to hazardous or toxic substances in connection with
any of its present or former properties.

GOVERNMENT REGULATIONS AND PAYOR ARRANGEMENTS

Each of the Facilities is a health care related facility and the amount of
additional rent or additional interest, if any, which is based on the lessee's
or mortgagor's gross revenue, and the ability of the operators of the Facilities
to meet their payment obligations to the Company, are subject to changes in the
reimbursement policies of federal, state and local governments. In addition, the
acquisition or construction of a health care facility is generally subject to
state and local regulatory approval.

The operators of most of the Facilities derive a substantial percentage of
their total revenues from federal and state health care programs such as
Medicare and Medicaid and from other third party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators are also subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third party payors or
an operator's failure to maintain its certification under the Medicare or
Medicaid programs could adversely affect revenues to the Facilities.

In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses and the requirement that all businesses offer
health insurance to their employees. In addition, Congress is considering
various proposals relating to the Medicare and Medicaid programs, including a
proposal to offer medical savings accounts in lieu of Medicare coverage and a
proposal to abandon the current Medicaid funding system in favor of federal
block grants to states. The proposals adopted and under consideration by
Congress are designed to reduce federal government spending on the Medicare and
Medicaid programs. Accordingly, these proposed legislative changes could
adversely affect revenues to the Facilities.

Acute Care Hospitals. Acute care hospitals are subject to extensive
federal, state and local legislation and regulation. Acute care hospitals
undergo periodic inspections regarding standards of medical care, equipment and
hygiene as a condition of licensure. In certain states the construction,
acquisition or lease of an acute care hospital may be subject to certificate of
need review. Various licenses and permits also are required for narcotics,
laboratories, pharmacies, radioactive materials and certain equipment. Each
facility eligible for accreditation is accredited by the Joint Commission on
Accreditation of Health Care Organizations. Accreditation is required for
participation in government-sponsored provider programs, such as Medicare and
Medicaid.

Acute care hospitals are subject to and comply with various forms of
utilization review. In addition, under the Medicare program, each state must
have a Professional Review Organization to carry out a federally-mandated system
of review of Medicare patient admission, treatment and discharge. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each acute care hospital, and are reviewed by each acute care
hospital's local governing board and quality-assurance personnel. New
regulations governing the control of disposal of hazardous wastes may increase
the costs of operating acute care facilities.

9
<PAGE> 12

The lessees and mortgagors of the Facilities, which provide acute care
hospital services, receive payments for patient care from the federal Medicare
program for elderly and disabled patients. Medicaid and other state programs for
medically indigent patients, private insurance carriers, employers, Blue Cross
or Blue Shield plans, health maintenance organizations, preferred provider
organizations and directly from patients.

Medicare payments for most inpatient hospital services provided by acute
care general hospitals are made under a "prospective payment system" ("PPS")
under which a hospital is paid a prospectively determined rate per discharge.
The PPS payment rate includes reimbursement for capital related costs. These
rates vary according to a patient classification system that is based on
clinical, diagnostic and other factors. Acute care hospitals are reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports and audits thereof by the Medicare
fiscal intermediary. In general, payments made by Medicare are less than
established charges for such services. Medicare payments may be delayed due to
audits by Medicare fiscal intermediaries conducted under federal government
regulations.

Medicaid payments for acute care hospitals will vary from state to state.
These payments may be based on a percentage of reasonable cost, a fixed rate per
discharge, a capitated payment, or other payment arrangements. If a state
selects a cost-based reimbursement methodology, acute care hospitals are
reimbursed at a tentative rate with final settlement determined after submission
of annual cost reports and audits thereof by Medicaid. In general, payments made
by Medicaid are less than established charges for such services. Additionally,
Medicaid payments may be delayed due to state budget deficits and audits by
Medicaid fiscal intermediaries conducted under federal government regulations.

Blue Cross and Blue Shield payments in different states and areas are based
on cost, a per diem, or other negotiated rates and may also be subject to
payment delay. Payments from health maintenance organizations and preferred
provider organizations generally are negotiated, either at a discount from
charges or on a per capita, risk-sharing basis with stop-loss provisions for
high severity cases. In more developed markets such as California and Florida,
the Company's hospitals are now entering into risk-sharing, or capitated,
arrangements. These arrangements reimburse the hospital based on a fixed fee per
participant in a managed care plan with the hospital assuming the costs of
services provided, regardless of the level of utilization. If utilization is
higher than anticipated and/or costs are not effectively controlled, such
arrangements could produce low or negative operating margins.

Rehabilitation Hospitals. Rehabilitation hospitals are also subject to
extensive federal, state and local legislation and regulation. Rehabilitation
hospitals are subject to periodic inspections and licensure requirements and
construction, acquisition or lease of such hospitals may be subject to
certificate of need review. Outpatient rehabilitation services and free-standing
inpatient rehabilitation facilities are generally reimbursed under the same
payment arrangement as acute care hospitals, except as noted below. Medicare
payments for inpatient rehabilitative services are based on reasonable operating
cost, subject to a per discharge limitation. If a facility operates below the
cost per discharge limitation, it will qualify for a bonus payment. If a
facility operates above the cost per discharge limitation, it will be reimbursed
solely to the extent of the limitation. Defined capital costs and outpatient
services related to Medicare beneficiaries are reimbursed based on reasonable
cost. All Medicare inpatient and outpatient services are reimbursed at a
tentative rate with final settlement determined after submission of annual cost
reports and audits thereof by the Medicare fiscal intermediary. In general,
payments made by Medicare are less than established charges for such services.
Additionally, Medicare payments may be delayed due to audits by Medicare fiscal
intermediaries under federal government regulations.

Long-Term Care Facilities. Long-term care facilities are also subject to
extensive federal, state and local legislation and regulation. Construction,
acquisition or lease of long-term care facilities may also be subject to
certificate of need review. Long-term care facilities are subject to licensure
requirements, and are surveyed on a regular basis to determine whether such
facilities are in compliance with the requirements for participation in the
Medicare and Medicaid programs. Medicare provides coverage for beneficiaries who
require skilled nursing and certain related medical services, such as physical,
occupational and speech therapy, pharmaceuticals, medical supplies and
ancillary, diagnostic and other necessary services of the type provided by
skilled nursing facilities. Medicare benefits are not available for patients
requiring intermediate and

10
<PAGE> 13

custodial levels of care. In general, Medicare payments for skilled nursing
services are based on the lesser of actual allowable routine, ancillary and
capital costs or charges. All Medicare inpatient services are reimbursed at a
tentative rate with final settlement determined after submission of annual cost
reports and audits thereof by the Medicare fiscal intermediary. Although
Medicaid programs vary from state to state, reimbursement rates are typically
determined by the state from cost reports filed annually by each facility, on a
prospective or retrospective basis. Under most state Medicaid programs,
individual facilities are reimbursed on a prospective rate system, subject to
retroactive adjustment. Under a prospective system, per diem rates are
established based upon certain historical costs of providing services during the
prior year, adjusted to reflect factors such as inflation and any additional
services required to be performed. Providers must accept reimbursement from
Medicaid as payment in full for the services rendered.

Assisted Living Facilities. Assisted living facilities are subject to
state and local legislation and regulation. Assisted living facilities are not
currently regulated by the federal government. Assisted living facilities are
subject to licensure requirements, and are surveyed on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in the Medicaid program in the states where assisted living
facilities are eligible for Medicaid reimbursement. The operator of the
Company's Assisted Living Facilities targets the private pay sector of the
assisted living services market, and does not target Medicaid patients for
admission to its facilities. Private pay patients utilize private insurance
sources for payment or use their income and savings to pay for care in assisted
living facilities.

Alzheimer's Care Facility. Alzheimer's care facilities are classified as
long-term care facilities and are reimbursed under the same payment arrangements
as long-term care facilities to the extent that the operator elects to
participate in the Medicare and Medicaid programs.

Psychiatric Hospitals. In addition to the licensing, certificate of need
and Medicare/Medicaid rules and regulations, there are a number of specific
federal and state laws affecting psychiatric hospitals, such as the regulation
of civil commitments of patients, admitting procedures, and disclosure of
information regarding patients being treated for chemical dependency. Many
states have adopted a "patient's bill of rights" which sets forth standards
governing the treatment of patients of psychiatric hospitals, such as using the
least restrictive treatment method, allowing patient access to telephone and
mail, allowing a patient to see a lawyer, and requiring the patient to be
treated with dignity. The lessees and mortgagors of the Psychiatric Hospitals
receive payments for patient care from the federal Medicare program for elderly
and disabled patients, Medicaid and other state programs for medically indigent
patients, private insurance carriers, employers, Blue Cross or Blue Shield
plans, health maintenance organizations, preferred provider organizations and
directly from patients.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------------------- ---- -----------------------------------
<S> <C> <C>
Walter J. McNerney................. 70 Chairman of the Board of Directors
Joseph P. Sullivan................. 53 President and Chief Executive
Officer
Michael J. McGee................... 40 Senior Vice President, Chief
Financial Officer, Treasurer and
Secretary
C. Gregory Schonert................ 40 Senior Vice President and Chief
Development Officer
</TABLE>

WALTER J. MCNERNEY -- Mr. McNerney has been Chairman of the Board since
February 1988 and served as Chief Executive Officer of the Company from February
1988 to May 15, 1992 and from January 15, 1993 to February 11, 1993. He is also
Herman Smith Professor of Health Policy, J.L. Kellogg Graduate School of
Management, Northwestern University since 1982 and was managing partner of
Walter J. McNerney and Associates, a management consulting firm in the health
field during 1982-1992. He is a director of The Stanley Works, Nellcor
Incorporated, Value Health, Inc., Medicus Systems, Inc., Hanger Orthopedic,
Inc., Osteotech, Inc. and Ventritex, Inc. Mr. McNerney was elected a director of
the Company in January 1987.

11
<PAGE> 14

JOSEPH P. SULLIVAN -- Mr. Sullivan was elected President and Chief
Executive Officer of the Company and a member of the Board of Directors
effective February 11, 1993. Prior to that, Mr. Sullivan spent 20 years with
Goldman, Sachs & Co. where he had overall investment banking responsibility for
numerous companies in the health care field.

MICHAEL J. MCGEE -- Mr. McGee has been Senior Vice President and Chief
Financial Officer and Secretary of the Company since January 1996, has served as
Treasurer of the Company since August 1995 and has served as Controller of the
Company since November 1989. Mr. McGee was a certified public accountant with
Arthur Andersen LLP from 1977 to November 1989.

C. GREGORY SCHONERT -- Mr. Schonert has been Senior Vice President and
Chief Development Officer of the Company since April 1988. Prior to that Mr.
Schonert was Assistance Administrator of Marketing and Planning at St. Joseph's
Hospital, Houston, Texas from February 1987. From September 1985 until February
1987, Mr. Schonert was a Manager in the Corporate Development Department of AMI.

Each executive officer is elected by the Board of Directors at its first
meeting after each annual meeting of the shareholders and serves until such time
as his successor is elected.

RECENT EVENTS

The Company continues to be in active dialogue with the operator of the two
New York Four Winds psychiatric facilities regarding the operator's desire to
create an integrated behavioral health care delivery system in lower and upper
New York State. Such a system likely will include these hospitals as the base
for delivery systems in their respective markets and is intended to address the
potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Company is supportive of the operator's strategy and has agreed in
principle to release certain of its security interests in the operator's
short-term assets on a staged basis to permit the operator to obtain the capital
required to develop this system.

The Company has received information from the owner of the two Florida
psychiatric hospitals regarding wide-ranging objections by several large
insurance companies and other payors with respect to claims presented for
services rendered. There also have been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the state generally, and at these two hospitals. There
have been legislative hearings in Florida on these issues, and the Company
believes that regulatory investigations are being conducted. In addition, the
owner has informed the Company that the hospitals are experiencing operational
and cash flow difficulties that have negatively impacted their ability to fund
their rental and interest obligations to the Company as they become due.
Although one of such facilities has made all of its required rental and interest
payments in 1996 through March, the other facility has not made its required
rental and interest payments for February or March of 1996 totaling $133,000.

At the beginning of 1996, the owner of the Florida hospitals retained the
Intensive Resource Division of Quorum Health Resources, Inc. ("Quorum"), a
subsidiary of Quorum Health Group, Inc., to operate both hospitals on a contract
basis. The Company is in active dialogue with the owner of the two Florida
hospitals and Quorum regarding the revised plans for the hospitals for 1996 and
beyond. The owner has requested that the Company consider an adjustment or
deferral in the current lease and interest payments and other aspects of their
agreements with the Company while the owner and Quorum carry out certain
restructuring and restaffing of the hospitals. The Company and its financial
advisors currently are evaluating the revised plans and the proposed adjustments
to the hospitals' existing obligations to the Company and it is likely that some
relief will be granted. Although the extent and duration of any rent and
interest relief that may be granted has not been determined, any such
modification of terms would have an adverse impact on the Company's Psychiatric
Group results of operations and cash flow. The dividend on the Depositary Shares
is determined quarterly based upon the Psychiatric Group's operating results
each quarter. It is likely that any adjustment to either of the two Florida
hospitals' rent and interest obligations and any failure of such hospitals to
make required rental and interest payments would have a negative impact on the
quarterly dividend payment on the Depositary Shares.

12
<PAGE> 15

The Company has been informed by the operator of Rock Creek Center ("RCC")
in Lemont, Illinois that recent payor reimbursement issues may have an adverse
impact on the cash flows of RCC. The operator remains current on its rental and
interest obligations to the Company through March 1996. The Company has an
active dialogue with the operator regarding the payor reimbursement issues and
the potential impact of such issues on the operator's near-term cash flows and
financial and operational plans for the remainder of 1996 and beyond.

In September 1995, the Company retained an investment banking firm for an
initial one-year period to provide a broad range of financial advisory services
to the Psychiatric Group. These services include supplemental monitoring of the
performance of individual assets, assistance in potential sales or
restructurings of particular investments and continuing assessments of available
strategic alternatives for the portfolio.

ITEM 2. PROPERTIES.

See "Item 1. Business" for a description of properties owned by the Company
or subject to mortgages held by the Company.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any litigation currently threatened against the
Company or its properties, other than routine litigation arising in the ordinary
course of business that, if determined adversely, would not have a material
adverse effect on the Company.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S VOTING STOCK AND RELATED STOCKHOLDER MATTERS.

The Common Stock of American Health Properties, Inc. is traded on the New
York Stock Exchange ("NYSE") under the trading symbol "AHE." The Psychiatric
Group Depositary Shares of American Health Properties, Inc. are traded on the
NASDAQ National Market System ("NASDAQ") under the trading symbol "AHEPZ." The
table below shows the reported high and low sales prices (i) for the Company's
Common Stock as reported by the NYSE Composite Tape for the last two fiscal
years and the cash dividends declared per share with respect to such periods,
and (ii) for the Company's Psychiatric Group Depositary

13
<PAGE> 16

Shares as reported by NASDAQ for the last fiscal year and the cash dividends
declared per share with respect to such period.

<TABLE>
<CAPTION>
PSYCHIATRIC GROUP
COMMON STOCK DEPOSITARY SHARES
--------------------------- ---------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
------------------------------- ---- ---- --------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
1995
4th............................ $21 3/4 $19 3/4 $ .5050 $17 $12 3/8 $ .80
3rd(1)......................... 23 1/4 20 1/4 .4950 21 15 1/2 .80
2nd(1)......................... 22 1/8 19 5/8 .4950 N/A N/A .80
1st............................ 22 1/8 19 3/8 .5750 N/A N/A N/A
1994
4th............................ $23 3/8 $18 1/2 $ .5750 N/A N/A N/A
3rd............................ 24 5/8 22 .5750 N/A N/A N/A
2nd............................ 27 24 .5750 N/A N/A N/A
1st............................ 27 1/4 24 5/8 .5750 N/A N/A N/A
</TABLE>

- ---------------
(1) On July 25, 1995, the Company made a distribution of one Depositary Share
for every ten shares of Common Stock held of record on July 14, 1995, each
such Depositary Share representing a one-tenth interest in one share of
Psychiatric Group Stock. On July 11, 1995, the Company declared dividends
totaling $.5750 for the second quarter of 1995, comprised of a dividend of
$.4950 to be paid on the Common Stock and a dividend of $.08 to be paid on
each one-hundredth of a share of Psychiatric Group Stock, which is
equivalent to $.80 per Depositary Share. The high and low sales prices of
the Common Stock for the periods subsequent to July 25, 1995 reflect the
value of the Common Stock after the Distribution.

As of March 11, 1996, the reported high and low sales prices (i) for the
Company's Common Stock for 1996 were $23 7/8 and $21 1/2, respectively, and (ii)
for the Company's Psychiatric Group Depositary Shares for 1996 were $17 1/2 and
$14 1/4, respectively. As of March 11, 1996, there were approximately (i) 4,525
holders of record and 23,446,973 shares outstanding of the Company's Common
Stock, and (ii) 3,970 holders of record and 2,084,282 shares outstanding of the
Company's Psychiatric Group Depositary Shares.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds from the disposition of Psychiatric Group assets after the
repayment of Psychiatric Group indebtedness ("PG Excess Proceeds"). Dividends or
other distributions paid out of PG Excess Proceeds will be available only for
the Psychiatric Group Stock and will be limited to $30 million in the aggregate
and $15 million in any calendar year.

The Company expects that quarterly dividends on the Common Stock and the
Psychiatric Group Stock in the future will be based primarily upon the funds
from operations attributable to the Core Group and the Psychiatric Group,
respectively. Specifically, the Company expects to maintain the Common Stock
dividend payout ratio at less than 90% of annual funds from operations
attributable to the Core Group and the Psychiatric Group Stock dividend payout
ratio (excluding distributions out of PG Excess Proceeds) at less than 95% of
annual funds from operations attributable to the Psychiatric Group.

In addition, the Company expects to use the net proceeds from the
disposition of the Psychiatric Group assets initially to repay then outstanding
inter-Group loans or other debt owed by the Psychiatric Group and then to
distribute all remaining net proceeds, if any, to holders of Psychiatric Group
Stock by dividend, tender offer, open market or privately negotiated repurchases
or otherwise (in cash, or in Common Stock valued at a ten trading day average
market value prior to the time of the distribution).

The payment of dividends on the Common Stock and the Psychiatric Group
Stock will also be dependent in part upon the financial condition of the Company
as a whole.

14
<PAGE> 17

The Company expects the aggregate annual dividends paid on the Common Stock
and the Psychiatric Group Stock to be at least sufficient to cause the Company
to maintain its status as a REIT. In order to permit the Company to qualify as a
REIT, the Company must distribute to stockholders at least 95% of its annual
REIT taxable income (which essentially is its net ordinary income, excluding
capital gains). Generally, as a result of non-cash items, primarily
depreciation, cash dividends have exceeded and may continue to exceed the
Company's REIT taxable income and to that extent represent a return of capital.

Dividends on the Common Stock and the Psychiatric Group Stock will be
limited to the available dividend amount attributable to the Core Group and the
Psychiatric Group, respectively. The available dividend amount is similar to the
amount that would be legally available under Delaware law for the payment of
dividends by the Core Group or the Psychiatric Group, as the case may be, if
such Group were a separate Delaware corporation. There can be no assurance that
there will be an available dividend amount with respect to either Group. As of
December 31, 1995, the available dividend amount attributable to the Core Group
and the Psychiatric Group as of that date was at least $304.7 million and $48.1
million, respectively. All dividends on Common Stock will be deemed to be out of
the Core Group's funds and all dividends on Psychiatric Group Stock will be
deemed to be out of the Psychiatric Group's funds.

Dividends on the Common Stock and Psychiatric Group Stock will be further
limited to the amount of funds of the Company legally available under Delaware
law for the payment of dividends by the Company on its capital stock. As of
December 31, 1995, the funds of the Company legally available for the payment of
dividends would have been at least $352.8 million. Payments of dividends on
either the Common Stock or the Psychiatric Group Stock will decrease the amount
of funds legally available for the payment of dividends on both the Common Stock
and the Psychiatric Group Stock.

ITEM 6. SELECTED FINANCIAL DATA.

Set forth below for the years ended December 31, 1995, 1994, 1993, 1992 and
1991 is (a) selected consolidated financial data with respect to the Company,
(b) selected combined financial data for the Core Group, and (c) selected
combined financial data for the Psychiatric Group. The selected financial data
should be read in conjunction with the Consolidated, Core Group Combined and
Psychiatric Group Combined Financial Statements and accompanying Notes included
elsewhere herein.

<TABLE>
<CAPTION>
CONSOLIDATED
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues............................ $ 91,230 $ 87,027 $ 81,523 $ 82,079 $ 80,129
Net income (loss)(1)(2)............. $ 42,381 $ 9,693 $ 50,987 $ (6,317) $ 33,753
Cash flows from operating
activities........................ $ 57,471 $ 54,984 $ 45,884 $ 43,486 $ 46,805
Dividends declared.................. $ 50,769 $ 47,982 $ 44,766 $ 45,747 $ 43,243
Total assets........................ $586,316 $579,503 $614,453 $566,394 $630,511
Total debt.......................... $207,378 $245,663 $245,423 $286,859 $301,176
Stockholders' equity................ $353,060 $307,501 $343,303 $255,349 $303,069
</TABLE>

15
<PAGE> 18

<TABLE>
<CAPTION>
CORE GROUP
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues............................ $ 82,913 $ 75,680 $ 73,036 $ 75,962 $ 69,845
Net income(1)....................... $ 36,107 $ 32,548 $ 48,616 $ 36,194 $ 25,987
Net income per common share(1)(3)... $ 1.69 $ 1.56 $ 2.58 $ 2.10 $ 1.61
Weighted average shares common
outstanding(3).................... 21,405 20,856 18,843 17,247 16,168
Cash flows from operating
activities........................ $ 50,413 $ 46,258 $ 41,276 $ 38,799 $ 38,572
Dividends declared.................. $ 44,095 $ 39,303 $ 38,078 $ 40,936 $ 34,935
Dividends declared per common
share(3).......................... $ 1.99 $ 1.88 $ 1.91 $ 2.36 $ 2.12
Total assets........................ $536,199 $528,686 $532,461 $522,127 $538,725
Total attributed debt............... $207,378 $245,663 $245,423 $286,859 $301,176
Total attributed equity............. $304,947 $259,199 $263,832 $213,230 $214,512
</TABLE>

<TABLE>
<CAPTION>
PSYCHIATRIC GROUP
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues............................ $ 10,346 $ 15,388 $ 15,317 $ 15,163 $ 19,434
Net income (loss)(2)................ $ 6,274 $(22,855) $ 2,371 $(42,511) $ 7,766
Net income (loss) per depositary
share(2)(3)....................... $ 3.00 $ (10.96) $ 1.26 $ (24.64) $ 4.80
Weighted average depositary shares
outstanding(3).................... 2,091 2,086 1,884 1,725 1,617
Cash flows from operating
activities........................ $ 7,058 $ 8,726 $ 4,608 $ 4,687 $ 8,233
Dividends declared.................. $ 6,674 $ 8,679 $ 6,688 $ 4,811 $ 8,308
Dividends declared per depositary
share(3).......................... $ 3.20 $ 4.16 $ 3.36 $ 2.78 $ 5.03
Total assets........................ $ 64,555 $ 80,245 $116,820 $116,188 $161,032
Total attributed debt............... $ 14,438 $ 29,428 $ 34,828 $ 71,921 $ 69,246
Total attributed equity............. $ 48,113 $ 48,302 $ 79,471 $ 42,119 $ 88,557
</TABLE>

- ---------------
(1) Includes gain of $19,742,000 and $11,064,000 in 1993 and 1992, respectively,
on the sale of properties or partnership interests therein.

(2) Includes write-downs of $30,000,000 in 1994 and $45,000,000 in 1992 relating
to investments in psychiatric properties.

(3) For purposes of computing per share and weighted average data for periods
prior to the July 25, 1995 distribution of the Depositary Shares, the number
of shares of Common Stock are assumed to be the same as the corresponding
number of shares of the Common Stock outstanding prior to July 25, 1995,
while the number of Depositary Shares are assumed to be one-tenth of the
corresponding number of shares of the Common Stock outstanding prior to July
25, 1995.

16
<PAGE> 19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes. For discussions of
the financial condition and results of operations of the Core Group and the
Psychiatric Group, see the management's discussion and analysis of financial
condition and results of operations of the Core Group and the Psychiatric Group
included elsewhere herein.

Distribution of Psychiatric Group Depositary Shares. On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care, assisted living and
Alzheimer's care facilities and a medical office building (the Core Group) into
two distinct portfolios, with two distinct classes of publicly-traded shares
intended to represent those portfolios. In connection with the Distribution, the
Company specifically assigned or, if not directly assigned, allocated its
assets, liabilities and stockholders' equity, and its revenues, expenses and
cash flow items, between the Core Group and Psychiatric Group. The Psychiatric
Group Depositary Shares are intended to reflect the separate financial
performance of the Psychiatric Group. The Company's common stock (the Core Group
Common Stock) is intended to reflect the separate financial performance of the
Core Group. However, the change in the capital structure of the Company effected
by the Distribution does not affect the respective legal title to assets or
responsibility for liabilities of the Company, and each holder of Core Group
Common Stock or Psychiatric Group Depositary Shares is a holder of an issue of
capital stock of the entire Company and is subject to the risks associated with
an investment in the Company and all of its businesses, assets and liabilities.

OPERATING RESULTS

1995 Compared to 1994

In 1995, the Company reported net income of $42,381,000 compared with net
income of $9,693,000 in 1994. Net income in 1994 reflects a write-down of
psychiatric real estate investments of $30,000,000 as a result of accelerating
negative trends in the psychiatric industry, and net income in 1995 reflects a
reduction in income due to the sale of three psychiatric properties and the
lease restructurings of two psychiatric investments subsequent to September
1994. Net income in 1995 included a $2,652,000 premium from the prepayment of a
mortgage loan while net income in 1994 included $710,000 of fee income related
to the prepayment of a construction loan. Net income for 1995 and 1994 reflect
costs related to the Distribution of $300,000 and $1,450,000, respectively. (See
the Consolidated Statements of Operations for the comparative gross and per
share amounts of net income or loss attributable to the Core Group Common Stock
and the Psychiatric Group Depositary Shares.)

Rental income was $67,793,000 in 1995, an increase of $61,000 from
$67,732,000 in 1994. This net increase was primarily attributable to rental
income from new properties acquired and various capital additions subsequent to
the first quarter of 1994, which was partially offset by a reduction in rental
income due to the sale of three psychiatric properties and the lease
restructurings of two psychiatric investments. These factors, combined with
lower depreciation expense on psychiatric properties written down in June 1994,
resulted in a net increase in depreciation and amortization of $274,000 to
$14,377,000 in 1995 compared with 1994.

Mortgage interest income increased $945,000 to $6,732,000 in 1995 from
$5,787,000 in 1994. This increase was primarily attributable to the conversion
of a construction loan on a hospital located in Austin, Texas to a mortgage loan
during the third quarter of 1995. In October 1995, the Company received $29.15
million as proceeds from the payoff of this mortgage loan, which represented
$26.5 million in principal and a $2.65 million prepayment premium.

17
<PAGE> 20

Additional rental and interest income was $11,125,000 in 1995, an increase
of $1,619,000 or 17% from $9,506,000 in 1994. This positive variation was
attributable to increased additional rent from six of the Company's original
acute care properties and more recently purchased properties generating
additional rent for the first time in 1995.

Other interest income increased $1,578,000 to $5,580,000 in 1995 from
$4,002,000 in 1994. Other interest income in 1995 included a $2.65 million
premium from the prepayment of a mortgage loan in October 1995. Other interest
income in 1994 included $710,000 of fee income related to the prepayment of a
construction loan in February 1994. The remaining net decrease in other interest
income during 1995 resulted from a lower average construction loan balance, a
lower average balance of short-term investments and a lower average balance of
borrowings outstanding under revolving credit facilities provided to psychiatric
hospital operators, which was partially offset by a higher average balance of
direct financing leases.

Interest expense was $27,057,000 in 1995, an increase of $956,000 or 4%
from $26,101,000 in 1994. Interest expense increased as a result of higher
average bank loan borrowings during 1995 and a reduction in capitalized interest
in 1995 compared to 1994. This was partially offset by a reduction in interest
expense on senior notes payable as a result of a $24 million maturity in May
1995.

General and administrative expenses increased to $6,839,000 in 1995 from
$5,376,000 in 1994. In the second quarter of 1994, the Company reversed $750,000
of a corporate relocation accrual recorded in the fourth quarter of 1993 after
the Company decided to maintain its headquarters in Denver, Colorado. The
remaining net increase in 1995 was primarily attributable to increased
compensation and benefits expense and costs incurred related to financial
advisory services provided to the Psychiatric Group by an investment banking
firm.

In 1994, $1,450,000 was accrued for the cost of the planned Distribution.
The $300,000 of targeted stock issuance costs in 1995 was an additional accrual
made in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflect higher legal and accounting
fees and printing and shipping costs as a result of the extended filing period.

1994 Compared to 1993

In 1994, the Company reported net income of $9,693,000 compared with net
income of $50,987,000 in 1993. Several significant items impacted net income in
both 1994 and 1993. Net income in 1994 reflected a write-down of psychiatric
hospital investments of $30,000,000 as a result of accelerating negative trends
in the psychiatric industry. In 1994, $1,450,000 was accrued for the cost of the
planned issuance of the Psychiatric Group Depositary Shares. Net income in 1993
included a gain of $19,742,000 on the sale of an acute care property in March
1993. Litigation costs were $2,234,000 in 1993 as a result of the defense and
settlement of a shareholder class action lawsuit against the Company. (See the
Consolidated Statements of Operations for the comparative gross and per share
amounts of net income or loss attributable to the Core Group Common Stock and
the Psychiatric Group Depositary Shares.)

Rental income was $67,732,000 in 1994, an increase of $3,177,000 or 5% from
$64,555,000 in 1993. This net increase is primarily attributable to rental
income from new properties acquired and various capital additions subsequent to
the first quarter of 1993 partially offset by a reduction in rental income due
to the previously mentioned property sale in March 1993.

Additional rental and interest income was $9,506,000 in 1994, an increase
of $172,000 or 2% from $9,334,000 in 1993. This increase is attributable to
increased additional rent from six of the Company's original acute care
properties and more recently purchased properties generating additional rent for
the first time in 1994. This increase is net of the loss of additional rent due
to the previously mentioned property sale.

Other interest income increased $2,055,000 to $4,002,000 in 1994 from
$1,947,000 in 1993. This increase resulted from higher average balances of
construction loans, other notes receivable and direct financing leases in 1994
compared with 1993. In addition, 1994 included the recognition of $710,000 of
fee income related to the prepayment of a construction loan in February 1994.

18
<PAGE> 21

Interest expense was $26,101,000 in 1994, a decrease of $1,168,000 or 4%
from $27,269,000 in 1993. An equity offering in July 1993 resulted in lower
average short-term borrowings during 1994 compared with 1993. A higher level of
construction in progress during 1994 compared with 1993 resulted in an increase
in capitalized interest. In addition, the Company prepaid mortgage notes payable
of $14.4 million in February 1994.

General and administrative expenses decreased to $5,376,000 in 1994 from
$6,437,000 in 1993. The decrease for 1994 was attributable to the reversal of
$750,000 of a corporate relocation accrual recorded in the fourth quarter of
1993, after the Company decided to maintain its headquarters in Denver,
Colorado. This was partially offset by higher expense from the Company's stock
incentive plans and increased shareholder reporting and distribution costs in
1994.

Future Operating Results

The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.

The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed to both Houses of Congress. These plans
have generally included revisions and limits on federal programs providing
Medicaid reimbursement to state health care programs and potentially would have
an adverse impact on the level of funds available in the future to health care
facilities. The Company's Board and management are monitoring potential changes
closely. The Company believes that these potential changes may pose risks for
certain institutions that are unwilling or unable to respond. At the same time,
the Company believes that this changing health care environment will provide the
Core Group with new opportunities for investment.

The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per capita
basis to a defined group of covered parties). Furthermore, federal, state and
third-party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors also are continuing
aggressively to enforce compliance with program requirements and to pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength. As a result of
the foregoing, the revenues and margins may decrease at the Company's hospitals.

19
<PAGE> 22

controlled facilities will continue to be an integral part of local and regional
health care delivery systems. The Company also believes that certain acute care
hospitals will need to reconfigure or expand existing facilities or to affiliate
themselves with other providers so as to become part of comprehensive and
cost-effective health care systems. Such systems likely will include lower cost
treatment settings, such as ambulatory care clinics, outpatient surgery centers,
skilled nursing facilities and medical office buildings. In general, the Core
Group facilities are part of local or regional health care delivery systems or
are in the process of becoming integrated into such systems.

The Company's future operating results could be affected by the operating
performance of the Company's lessees and borrowers. The rental and interest
obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Company's
portfolio are generally further supported by one or more credit enhancements
that take the form of cross-default provisions, letters of credit, corporate and
personal guarantees, security interests in cash reserve funds, accounts
receivable or other personal property and requirements to maintain specified
financial ratios.

Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. In addition, such institutions have
extended the length of time for making payments, resulting in increases in
accounts receivable. The wider use of psychotropic drugs also has resulted in
significant declines in the average length of stay. Although the operators of
the psychiatric hospitals are responding by developing lower cost outpatient and
day-patient programs, increasing case management and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes. As a result, certain of the
psychiatric hospital operators have had difficulty meeting their payment
obligations to the Company on a timely basis and there can be no assurance that
psychiatric hospital operators will be able to meet their payment obligations in
the future. Should this situation occur, it would negatively impact the cash
flow of the Company's Psychiatric Group and the dividend payments to the holders
of Psychiatric Group Depositary Shares.

The Company currently is providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of March
20, 1996, outstanding borrowings under such agreements totaled $4,475,000, and
the Company has committed to fund an additional $1,225,000 of borrowings upon
request, subject to certain conditions. These borrowings, which are secured by
accounts receivable and certain personal property and which contain events of
default that would be triggered by defaults under the lease relating to the
relevant psychiatric hospital, are the primary source of financing for these
operators' operating and capital needs. These psychiatric hospitals have, from
time to time, been unable to generate sufficient cash flow for working capital
and the development of new programs. In certain cases, these psychiatric
hospitals have not been able to pay down the outstanding borrowings under the
revolving credit agreements provided by the Company or to secure replacement
financing from third-party lenders. To the extent the psychiatric hospitals have
increased working capital needs in the future, the Psychiatric Group may be the
only source of such financing. In the event the Company's Board of Directors
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital operator, it may cause the Core Group to
make revolving inter-Group loans to the Psychiatric Group to fund such financing
(to the extent consistent with its then-existing policies), although the
Company's Board of Directors is under no obligation to do so.

The fundamental ongoing changes in the psychiatric industry and the
resulting impact on operator financial performance have resulted in the
restructuring of psychiatric operator payment obligations and significant
psychiatric investment write-downs, the most recent of which occurred during
1994 when the Company recorded a $30,000,000 write-down of its investments in
the psychiatric hospitals. Although management believes that the recorded
investments in the psychiatric hospitals are realizable, if the psychiatric
operators are unable to successfully adapt to the fundamental ongoing changes in
the psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the

20
<PAGE> 23

Company may be required to further restructure payment obligations or make
additional write-downs of the value of its investments in the psychiatric
hospitals. The Company does not intend to make further investments in the
psychiatric sector, and over time, may sell, restructure or seek other means to
reduce its investments in the psychiatric sector. The Company has sold three of
its psychiatric properties since September 1994 and restructured the terms of
its two Florida psychiatric hospital investments in March 1995. The Psychiatric
Group Depositary Shares were distributed in July 1995 in an effort to
effectively separate the economic attributes of the Company's psychiatric
investments (the Psychiatric Group) from its core investments in acute care and
rehabilitation hospitals, long-term care, assisted living and Alzheimer's care
facilities and a medical office building (the Core Group). In September 1995,
the Company retained an investment banking firm for an initial one-year period
to provide a broad range of financial advisory services to the Psychiatric
Group. These services include supplemental monitoring of the performance of
individual assets, assistance in potential sales or restructurings of particular
investments and continuing assessments of available strategic alternatives for
the portfolio.

Subsequent to the restructuring of the obligations of The Retreat and The
Manors discussed above, the Company has become aware of additional operational
and cash flow difficulties which have negatively impacted these hospitals'
ability to fund their rental and interest obligations to the Company as they
become due. Although The Retreat has made all required payments in 1996 through
March, The Manors has not made its required rental and interest payments for
February and March 1996. It is likely that some relief will be granted by the
Company, although the extent and duration of such relief has not been
determined. Additionally, although the operator of Rock Creek Center in Lemont,
Illinois is current on all of its rental and interest obligations to the
Company, the Company has become aware of payor reimbursement issues which may
have an adverse impact on the cash flows of the hospital. The Company has active
dialogues with the operators of these hospitals regarding the operators' plans
to address these financial and operational issues. Any modification of terms
covering the rental or interest obligations of these properties would have an
adverse impact on the Company's Psychiatric Group results of operations and cash
flows, as well as the quarterly dividend payment on Psychiatric Group Depositary
Shares.

Additional rental income and interest income from the Company's existing
investments will be affected by changes in the revenues of the underlying
business operations upon which such income is based. The Company's acute care
investments accounted for 88% of net additional rental and interest income for
the year ended December 31, 1995, while rehabilitation and psychiatric
investments each accounted for 6%. Historically, a substantial portion of the
Company's additional rental and interest income has been attributable to six of
the Company's original acute care properties (the Original Properties). With the
significant revenue growth at a majority of the Original Properties in recent
years, four properties had reached the additional rent transition point at the
end of 1995 and it is anticipated that other properties may do so over the next
few years. The Company's revenue participation rate for the six Original
Properties declines from 5% to 1% when the additional rent transition point is
reached. At December 31, 1995, the amount of potential additional rent at the 5%
revenue participation rate for the six Original Properties was approximately
$2.1 million per annum.

The future operating results of the Company will be affected by additional
factors including the amount, timing and yield of additional real estate
investments and the competition for such investments. Operating results also
will be affected by the availability and terms of the Company's future equity
and debt financing. The Company's financing strategy includes the objective to
reduce its cost of capital over time and enhance its financial flexibility to
facilitate future growth. The Company believes that the distribution of the
Psychiatric Group Depositary Shares will facilitate achievement of this
objective.

21
<PAGE> 24

The Company's senior debt carries an implied investment grade rating from
two rating agencies. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's but the outlook was revised to negative
from stable. Duff & Phelps Credit Rating Co. assigned an initial implied senior
debt rating of BBB- in November 1994.

LIQUIDITY AND CAPITAL RESOURCES

As of March 20, 1996, the Company had commitments of $8.2 million to fund
construction obligations and capital expenditures over approximately the next
six months. Aggregate unfunded commitments under revolving credit agreements
provided to psychiatric hospital operators totaled $1.2 million as of March 20,
1996.

The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company received $29.15 million as
proceeds from the payoff of its interest in a mortgage loan and completed an
offering of 2,500,000 additional shares of Core Group Common Stock resulting in
net proceeds of $50.3 million. Proceeds from the mortgage loan payoff and equity
offering were used to pay off the outstanding balance under the Company's bank
credit facility. In December 1995, the Company closed on a new $150 million
unsecured revolving credit facility which matures on December 27, 1998. As of
March 20, 1996, the Company had $1 million of outstanding borrowings under its
revolving credit facility. The Company's total indebtedness as of March 20, 1996
was $208.4 million. The Company will utilize its revolving credit facility to
fund its commitments and future acquisitions. The Company may incur additional
indebtedness or refinance existing indebtedness if the Company determines that
opportunities to pursue such transactions would be attractive. The Company
currently believes it has sufficient capital to meet its commitments and that
its cash flow and liquidity will continue to be sufficient to fund current
operations and to provide for the payment of dividends to stockholders in
compliance with the applicable sections of the Internal Revenue Code governing
real estate investment trusts.

22
<PAGE> 25

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP COMBINED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a discussion of the combined financial condition and results
of operations of the Core Group which should be read in conjunction with (a) the
combined financial statements and accompanying notes of the Core Group and (b)
management's discussion and analysis of financial condition and results of
operations and the financial statements and accompanying notes of the Company
and the Psychiatric Group included elsewhere herein.

OPERATING RESULTS

1995 Compared to 1994

In 1995, the Core Group reported net income of $36,107,000, or $1.69 per
share compared with net income of $32,548,000, or $1.56 per share in 1994. Net
income in 1995 included a premium of $2,652,000, or $.12 per share, from the
prepayment of a mortgage loan while net income in 1994 included fee income of
$710,000, or $.03 per share, related to the prepayment of a construction loan.

Rental income was $64,740,000 in 1995, an increase of $4,985,000 or 8% from
$59,755,000 in 1994. This increase was primarily attributable to rental income
from new properties acquired and various capital additions subsequent to the
first quarter of 1994. These property additions also resulted in an increase in
depreciation and amortization of $1,273,000 to $13,575,000 in 1995 compared with
1994.

Mortgage interest income in 1995 was $845,000 compared to $0 in 1994. This
increase was attributable to the conversion of a construction loan on a hospital
located in Austin, Texas to a mortgage loan during the third quarter of 1995. In
October 1995, the Core Group received $29.15 million as proceeds from the payoff
of this mortgage loan, which represented $26.5 million in principal and a $2.65
million prepayment premium.

Additional rental income was $10,405,000 in 1995, an increase of $1,497,000
or 17% from $8,908,000 in 1994. This positive variation was attributable to
increased additional rent from six of the Core Group's original acute care
properties and more recently purchased properties generating additional rent for
the first time.

Other interest income increased $1,918,000 to $4,894,000 in 1995 from
$2,976,000 in 1994. Other interest income in 1995 included a $2.65 million
premium from the prepayment of a mortgage loan in October 1995. Other interest
income in 1994 included $710,000 of fee income related to the prepayment of a
construction loan in February 1994. The remaining net decrease in other interest
income during 1995 resulted from a lower average construction loan balance and a
lower average balance of short-term investments, which was partially offset by a
higher average balance of direct financing leases.

Interest income on inter-Group loans to the Psychiatric Group was
$2,029,000 in 1995, a decrease of $2,012,000 or 50% from $4,041,000 in 1994.
This decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group, which was primarily attributable to $15,150,000 of repayments
by the Psychiatric Group from the proceeds of asset sales and the paydown of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators.

General and administrative expenses increased to $5,898,000 in 1995 from
$4,425,000 in 1994. This variation was attributable to an increase in the
Company's consolidated general and administrative expenses which are allocated
between the Core Group and Psychiatric Group primarily based on revenues, and an
increase in Core Group revenues relative to the Company's consolidated revenues.
In the second quarter of 1994, the Company reversed $750,000 of a corporate
relocation accrual recorded in the fourth quarter of 1993 after the Company
decided to maintain its headquarters in Denver, Colorado. The remaining net
increase in the Company's consolidated general and administrative expenses in
1995 was primarily attributable to increased compensation and benefits expense.

23
<PAGE> 26

1994 Compared to 1993

In 1994, the Core Group reported net income of $32,548,000, or $1.56 per
share compared with net income of $48,616,000, or $2.58 per share in 1993. Net
income in 1993 included a gain of $19,742,000, or $1.05 per share, on the sale
of an acute care property in March 1993.

Rental income was $59,755,000 in 1994, an increase of $3,532,000 or 6% from
$56,223,000 in 1993. This net increase is primarily attributable to rental
income from new properties acquired and various capital additions partially
offset by a reduction in rental income due to the previously mentioned property
sale in March 1993.

Additional rental income was $8,908,000 in 1994, an increase of $234,000 or
3% from $8,674,000 in 1993. This increase is attributable to increased
additional rent from six of the Core Group's original acute care properties and
more recently purchased properties generating additional rent for the first time
in 1994. This increase is net of the loss of additional rent due to the
previously mentioned property sale.

Other interest income increased $1,667,000 to $2,976,000 in 1994 from
$1,309,000 in 1993. This increase resulted from higher average balances of
construction loans and direct financing leases in 1994 compared with 1993. In
addition, 1994 included the recognition of $710,000 of fee income related to the
prepayment of a construction loan in February 1994.

Interest income on inter-Group loans to the Psychiatric Group decreased to
$4,041,000 in 1994 from $6,830,000 in 1993. This decrease reflects a lower
average balance outstanding on loans to the Psychiatric Group following the
attribution of equity to the Psychiatric Group in connection with an equity
offering by the Company in July 1993.

Depreciation and amortization increased $887,000 to $12,302,000 in 1994
compared with 1993 due to newly acquired properties and capital additions during
1994.

Interest expense was $26,101,000 in 1994, a decrease of $1,168,000 or 4%
from $27,269,000 in 1993. The previously mentioned equity offering resulted in
lower average short-term borrowings during 1994 compared with 1993. A higher
level of construction in progress during 1994 compared with 1993 resulted in an
increase in capitalized interest. In addition, the Core Group prepaid mortgage
notes payable of $14.4 million in February 1994.

General and administrative expenses decreased to $4,425,000 in 1994 from
$5,227,000 in 1993. This variation is attributable to a decrease in the
Company's general and administrative expenses which are allocated between the
Core Group and Psychiatric Group primarily based on revenues. The Company's
decrease in consolidated general and administrative expenses for 1994 was
attributable to the reversal of $750,000 of a corporate relocation accrual
recorded in the fourth quarter of 1993, after the Company decided to maintain
its headquarters in Denver, Colorado. This was partially offset by higher
expense from the Company's stock incentive plans and increased shareholder
reporting and distribution costs in 1994.

Future Operating Results

24
<PAGE> 27

and improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed to both Houses of Congress. These plans
have generally included revisions and limits on federal programs providing
Medicaid reimbursement to state health care programs and potentially would have
an adverse impact on the level of funds available in the future to health care
facilities. The Company's Board and management are monitoring potential changes
closely. The Company believes that these potential changes may pose risks for
certain institutions that are unwilling or unable to respond. At the same time,
the Company believes that this changing health care environment will provide the
Core Group with new opportunities for investment.

Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local and
regional basis and that well-managed, high-quality, cost-controlled facilities
will continue to be an integral part of local and regional health care delivery
systems. The Company also believes that certain acute care hospitals will need
to reconfigure or expand existing facilities or to affiliate themselves with
other providers so as to become part of comprehensive and cost-effective health
care systems. Such systems likely will include lower cost treatment settings,
such as ambulatory care clinics, outpatient surgery centers, skilled nursing
facilities and medical office buildings. In general, the Core Group facilities
are part of local or regional health care delivery systems or are in the process
of becoming integrated into such systems.

The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of operations,
financial condition or borrowing costs could affect the results of operations,
financial condition or borrowing costs of the Core Group. Fundamental changes in
the psychiatric industry continue to negatively impact the facility-specific
operating cash flow at the Psychiatric Group's properties. Accordingly, the Core
Group's financial statements should be read in conjunction with the financial
statements of the Psychiatric Group and the Company's consolidated financial
statements.

Additional rental income from the Core Group's existing investments will be
affected by changes in the revenues of the underlying business operations upon
which such income is based. The Core Group's acute care investments accounted
for 94% of net additional rental income for the year ended December 31, 1995,
while rehabilitation investments accounted for 6%. Historically, a substantial
portion of the Core Group's additional rental income has been attributable to
six of the Core Group's original acute care properties (the Original
Properties). With the significant revenue growth at a majority of the Original
Properties in recent years, four properties had reached the additional rent
transition point at the end of 1995 and it is anticipated that other

25
<PAGE> 28

properties may do so over the next few years. The Core Group's revenue
participation rate for the six Original Properties declines from 5% to 1% when
the additional rent transition point is reached. At December 31, 1995, the
amount of potential additional rent at the 5% revenue participation rate for the
six Original Properties was approximately $2.1 million per annum.

The future operating results of the Core Group will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy includes the
objective to reduce its cost of capital over time and enhance its financial
flexibility to facilitate future growth. The Company believes that the
distribution of the Psychiatric Group Depositary Shares will facilitate
achievement of this objective.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1995, the Core Group had $5,263,000 outstanding under
its revolving inter-Group loan to the Psychiatric Group. Under management
policies currently in effect, the Core Group may provide the Psychiatric Group
with revolving inter-Group loans of up to $8,750,000. In addition, as of
December 31, 1995, the Core Group had $9,175,000 in fixed rate inter-Group loans
to the Psychiatric Group.

As of March 20, 1996, the Core Group had commitments of $8.2 million to
fund construction obligations and capital expenditures over approximately the
next six months.

The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company's Core Group received $29.15
million as proceeds from the payoff of its interest in a mortgage loan and
completed an offering of 2,500,000 additional shares of Core Group Common Stock
resulting in net proceeds of $50.3 million. Proceeds from the mortgage loan
payoff and equity offering were used to pay off the outstanding balance under
the Company's bank credit facility. In December 1995, the Company closed on a
new $150 million unsecured revolving credit facility which matures on December
27, 1998. As of March 20, 1996, the Company had $1 million of outstanding
borrowings under its revolving credit facility. The Company's total indebtedness
as of March 20, 1996 was $208.4 million. The Company will utilize its revolving
credit facility to fund its Core Group commitments and future acquisitions. The
Company may incur additional indebtedness or refinance existing indebtedness if
the Company determines that opportunities to pursue such transactions would be
attractive. The Company currently believes it has sufficient capital to meet its
commitments and that its cash flow and liquidity will continue to be sufficient
to fund current operations and to provide for the payment of dividends to
stockholders in compliance with the applicable sections of the Internal Revenue
Code governing real estate investment trusts.

26
<PAGE> 29

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a discussion of the combined financial condition and results
of operations of the Psychiatric Group which should be read in conjunction with
(a) the combined financial statements and accompanying notes of the Psychiatric
Group and (b) management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying notes of the
Company and the Core Group included elsewhere herein.

OPERATING RESULTS

1995 Compared to 1994

In 1995, the Psychiatric Group reported net income of $6,274,000, or $3.00
per share compared with a net loss of ($22,855,000) or ($10.96) per share in
1994. The net loss in 1994 reflects a write-down of psychiatric real estate
investments of $30,000,000, or $14.38 per share as a result of accelerating
negative trends in the psychiatric industry. Net income for 1995 and 1994
reflect costs related to the Distribution of $300,000, or $.14 per share, and
$1,450,000, or $.70 per share, respectively. Net income in 1995 reflects a
reduction in income due to the sale of three psychiatric properties and the
lease restructurings of two psychiatric investments subsequent to September
1994.

Rental income was $3,053,000 in 1995, a decrease of $4,924,000 or 62% from
$7,977,000 in 1994. This decrease was primarily attributable to a reduction in
rental income due to the sale of three psychiatric properties and the lease
restructurings of two psychiatric investments. The property sales, together with
lower depreciation expense on psychiatric properties written down in June 1994,
resulted in a decrease in depreciation and amortization of $999,000 to $802,000
in 1995 compared with 1994.

Additional rental and interest income was $720,000 in 1995, an increase of
$122,000 from $598,000 in 1994. This positive variation was attributable to an
increase in the facility revenues upon which such additional rent and interest
is based.

Other interest income decreased $340,000 to $686,000 in 1995 from
$1,026,000 in 1994. This decrease was primarily attributable to lower average
borrowings under revolving credit agreements provided to psychiatric hospital
operators as a result of the sale of two psychiatric properties and the lease
restructurings of two psychiatric investments.

Interest expense on inter-Group loans from the Core Group was $2,029,000 in
1995, a decrease of $2,012,000 or 50% from $4,041,000 in 1994. This decrease
reflects a lower average balance outstanding on loans from the Core Group, which
was primarily attributable to $15,150,000 of repayments to the Core Group from
the proceeds of the previously mentioned property sales and restructurings.

General and administrative expenses decreased to $941,000 in 1995 from
$951,000 in 1994. The Company's consolidated general and administrative expenses
are allocated between the Core Group and Psychiatric Group primarily based on
revenues, however significant costs directly related to either Group are
specifically charged to the applicable Group. Although costs allocated to the
Psychiatric Group based on revenues decreased, the Psychiatric Group was
specifically charged for $225,000 of costs related to financial advisory
services provided to the Psychiatric Group by an investment banking firm.

In 1994, $1,450,000 was accrued for the cost of the planned Distribution.
The $300,000 of targeted stock issuance costs was an additional accrual made in
the second quarter of 1995 to reflect the increased costs of the Distribution.
The increased costs primarily reflect higher legal and accounting fees and
printing and shipping costs as a result of the extended filing period.

1994 Compared to 1993

In 1994, the Psychiatric Group reported a net loss of ($22,855,000), or
($10.96) per share compared with net income of $2,371,000, or $1.26 per share in
1993.

27
<PAGE> 30

The net loss in 1994 and net income in 1993 were impacted by several
significant items. The net loss in 1994 reflected a write-down of psychiatric
hospital investments of $30,000,000, or $14.38 per share, as a result of
accelerating negative trends in the psychiatric industry. In 1994, $1,450,000,
or $.70 per share, was accrued for the cost of the planned issuance of the
Psychiatric Group Depositary Shares. Litigation costs were $2,234,000, or $1.19
per share, in 1993 as a result of the defense and settlement of a shareholder
class action lawsuit against the Company.

Rental income was $7,977,000 in 1994, a decrease of $355,000 or 4% from
$8,332,000 in 1993. This decrease is attributable to a reduction in rental
income due to the sale of a property in October 1994. The property was sold at
net book value.

Additional rental and interest income was $598,000 in 1994, a decrease of
$62,000 or 9% from $660,000 in 1993. This decrease is attributable to a decline
in the psychiatric hospitals' revenues due to negative industry trends.

Other interest income increased $388,000 to $1,026,000 in 1994 from
$638,000 in 1993. This increase resulted from higher average balances of other
notes receivable in 1994 compared with 1993.

Depreciation and amortization decreased $871,000 to $1,801,000 in 1994
compared with 1993 primarily as a result of lower depreciation expense
subsequent to the aforementioned write-down of psychiatric hospital investments.

Interest expense on inter-Group loans from the Core Group was $4,041,000 in
1994, a decrease of $2,789,000 or 41% from $6,830,000 in 1993. This decrease
reflects a lower average balance outstanding on loans from the Core Group
following the attribution of equity to the Psychiatric Group in connection with
an equity offering by the Company in July 1993.

General and administrative expenses decreased to $951,000 in 1994 from
$1,210,000 in 1993. This variation is attributable to a decrease in consolidated
general and administrative expenses which are allocated between the Core Group
and the Psychiatric Group primarily based on revenues. The Company's decrease in
consolidated general and administrative expenses for 1994 was attributable to
the reversal of $750,000 of a corporate relocation accrual recorded in the
fourth quarter of 1993, after the Company decided to maintain its headquarters
in Denver, Colorado. This was partially offset by higher expense from the
Company's stock incentive plans and increased shareholder reporting and
distribution costs in 1994.

Future Operating Results

28
<PAGE> 31

Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. In addition, such institutions have
extended the length of time for making payments, resulting in increases in
accounts receivable. The wider use of psychotropic drugs also has resulted in
significant declines in the average length of stay. Although the operators of
the psychiatric hospitals are responding by developing lower cost outpatient and
daypatient programs, increasing case management and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes. As a result, certain of the
Psychiatric Group hospital operators have had difficulty meeting their payment
obligations to the Psychiatric Group on a timely basis and there can be no
assurance that Psychiatric Group operators will be able to meet their payment
obligations in the future. Should this situation occur, it would negatively
impact the cash flow of the Psychiatric Group and its dividend payments to the
holders of Psychiatric Group Depositary Shares.

The Psychiatric Group currently is providing financing under revolving
credit agreements to the operators of three of its psychiatric hospitals. As of
March 20, 1996, outstanding borrowings under such agreements totaled $4,475,000,
and the Psychiatric Group has committed to fund an additional $1,225,000 of
borrowings upon request, subject to certain conditions. These borrowings, which
are secured by accounts receivable and certain personal property and which
contain events of default that would be triggered by defaults under the lease
relating to the relevant psychiatric hospital, are the primary source of
financing for these operators' operating and capital needs. These psychiatric
hospitals have, from time to time, been unable to generate sufficient cash flow
for working capital and the development of new programs. In certain cases, these
psychiatric hospitals have not been able to pay down the outstanding borrowings
under the revolving credit agreements provided by the Psychiatric Group or to
secure replacement financing from third-party lenders. To the extent the
psychiatric hospitals have increased working capital needs in the future, the
Psychiatric Group may be the only source of such financing. In the event the
Company's Board of Directors determines that it is appropriate to provide
additional working capital financing to a psychiatric hospital operator, it may
cause the Core Group to make revolving inter-Group loans to the Psychiatric
Group to fund such financing (to the extent consistent with its then-existing
policies), although the Company's Board of Directors is under no obligation to
do so.

The fundamental ongoing changes in the psychiatric industry and the
resulting impact on operator financial performance have resulted in the
restructuring of operator payment obligations and significant investment
write-downs, the most recent of which occurred during 1994 when the Psychiatric
Group recorded a $30,000,000 write-down of its investments in the psychiatric
hospitals. Although management believes that

29
<PAGE> 32

the recorded investments in the psychiatric hospitals are realizable, if the
psychiatric operators are unable to successfully adapt to the fundamental
ongoing changes in the psychiatric industry and consistently mitigate the
negative impact of such changes on their financial performance, the Psychiatric
Group may be required to further restructure payment obligations or make
additional write-downs of the value of its investments in the psychiatric
hospitals. The Psychiatric Group does not intend to make further investments,
and over time, may sell, restructure or seek other means to reduce its
investments. The Psychiatric Group sold its psychiatric property in Torrance,
California in October 1994 for $5,772,000 in cash (at net book value), sold two
of its psychiatric properties in Massachusetts in February 1995 for $13,825,000
in cash (at net book value) and restructured the terms of its two Florida
psychiatric hospital investments in March 1995. The Psychiatric Group Depositary
Shares were distributed in July 1995 in an effort to effectively separate the
economic attributes of the Company's psychiatric investments (the Psychiatric
Group) from its core investments in acute care and rehabilitation hospitals,
long-term care, assisted living and Alzheimer's care facilities and a medical
office building (the Core Group). In September 1995, the Company retained an
investment banking firm for an initial one-year period to provide a broad range
of financial advisory services to the Psychiatric Group. These services include
supplemental monitoring of the performance of individual assets, assistance in
potential sales or restructurings of particular investments and continuing
assessments of available strategic alternatives for the portfolio. The cost of
these services are specifically charged to the operating results of the
Psychiatric Group.

The Psychiatric Group has received information from the owner of the two
Florida psychiatric hospitals regarding wide-ranging objections by several large
insurance companies and other payors with respect to claims presented for
services rendered. There also have been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the state generally, and at these two hospitals. There
have been legislative hearings in Florida on these issues, and the Psychiatric
Group believes that regulatory investigations are being conducted. In addition,
the owner has informed the Psychiatric Group that the hospitals are experiencing
operational and cash flow difficulties which have negatively impacted their
ability to fund their rental and interest obligations to the Psychiatric Group
as they become due. Although The Retreat has made all of its required rental and
interest payments in 1996 through March, The Manors has not made its required
rental and interest payments for February or March of 1996. The net book values
of the Psychiatric Group's investment in The Manors and The Retreat, including
advances under existing revolving credit agreements, as of December 31, 1995
totaled $7,386,000 and $10,024,000, respectively. Quarterly base rent and
interest obligations of The Manors and The Retreat total approximately $200,000
and $285,000 ($.10 and $.14 per Psychiatric Group Depositary Share),
respectively.

At the beginning of 1996, the owner retained the Intensive Resource
Division of Quorum Health Resources, Inc. (Quorum), a subsidiary of Quorum
Health Group, Inc., to operate both hospitals on a contract basis. The
Psychiatric Group has an active dialogue with the owner of the two hospitals and
Quorum regarding the revised plans for the hospitals for 1996 and beyond. The
owner has requested that the Psychiatric Group consider an adjustment or
deferral in the current lease and interest payments and other aspects of their
agreements with the Psychiatric Group while the owner and Quorum carry out
certain restructuring and restaffing of the hospitals. The Psychiatric Group and
its financial advisors currently are evaluating the revised plans and the
proposed adjustments to the hospitals' existing obligations to the Psychiatric
Group and it is likely that some relief will be granted. Although the extent and
duration of any rent and interest relief which may be granted has not been
determined, any such modification of terms would have an adverse impact on the
Psychiatric Group's results of operations and cash flow. The Psychiatric Group's
dividend is determined quarterly based upon each quarter's operating results. It
is likely that any adjustment to either of the two Florida hospitals' rent and
interest obligations would have a negative impact on the Psychiatric Group's
quarterly dividend payment.

The Psychiatric Group has been informed by the operator of Rock Creek
Center (RCC) in Lemont, Illinois that recent payor reimbursement issues may have
an adverse impact on the cash flows of the facility. The operator remains
current on its rental and interest obligations to the Psychiatric Group through
March 1996. The Psychiatric Group has an active dialogue with the operator
regarding the payor reimbursement

30
<PAGE> 33

issues and the potential impact of such issues on the operator's near-term cash
flows and financial and operational plans for the remainder of 1996 and beyond.

The Psychiatric Group has an active dialogue with the operator of the two
New York Four Winds facilities regarding the operator's desire to create an
integrated behavioral health care delivery system in lower and upper New York
State. Such a system likely will include these hospitals as the base for
delivery systems in their respective markets and is intended to address the
potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Psychiatric Group is supportive of the operator's strategy and has
agreed in principle to release certain of its security interests in the
operator's short-term assets on a staged basis to permit the operator to obtain
the capital required to develop this system.

LIQUIDITY AND CAPITAL RESOURCES

As of March 20, 1996, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to psychiatric hospital
operators of $1.2 million.

At December 31, 1995, the Psychiatric Group had $5,263,000 and $9,175,000
outstanding under its revolving inter-Group loan from the Core Group and its
fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric
Group is required to use the net proceeds from the disposition of Psychiatric
Group assets to pay down its outstanding revolving inter-Group loan (to the
extent of the psychiatric hospital operator borrowings under revolving credit
agreements associated with the asset or assets sold) with any excess used to pay
down the balance outstanding under the fixed rate inter-Group loan. The
Psychiatric Group reduced the combined balance of the revolving inter-Group and
fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995 with
proceeds from such asset sales and operator borrowing paydowns. The Company's
Board of Directors has established certain management policies relating to the
Psychiatric Group's inter-Group loans from the Core Group. Under the policies
currently in effect, which may be modified or rescinded in the sole discretion
of the Company's Board of Directors, the aggregate revolving inter-Group loans
owed to the Core Group by the Psychiatric Group are limited to a maximum of
$8,750,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar with any permanent repayment in the future of borrowings under
revolving credit agreements provided to Psychiatric Group hospital operators. In
addition, the limit on the aggregate revolving inter-Group loans will not be
reduced below $5,000,000, and except for such revolving inter-Group loans, no
additional fixed rate or other inter-Group loans will be advanced to the
Psychiatric Group by the Core Group. The Psychiatric Group has no third-party
sources of additional financing and, as a result, will be dependent on the Core
Group for all such financing. Although the Core Group may make this financing
available, there is no obligation of the Company's Board of Directors to cause
the Core Group to provide funds to the Psychiatric Group if the Board of
Directors determines that it is in the Company's best interest not to do so.

The Psychiatric Group does not expect to make any additional acquisitions
or capital investments except to the extent of existing unfunded commitments
under revolving credit agreements provided to facility operators. Future
dividend payments will be determined quarterly and will be primarily dependent
upon the financial performance of the Psychiatric Group. The Psychiatric Group
expects to distribute a substantial portion of its funds from operations and net
proceeds from asset dispositions, after payments of inter-Group loan
obligations, to holders of Psychiatric Group Depositary Shares. In general, the
Psychiatric Group will not retain any significant amount of its cash flow, and
as discussed above, its sources of financing and liquidity will be limited.

31
<PAGE> 34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company's consolidated balance sheets as of December 31, 1995 and 1994
and its consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1995, 1994 and 1993, together with a
report of Arthur Andersen LLP, independent public accountants, are included
elsewhere herein. The Core Group's and the Psychiatric Group's combined balance
sheets as of December 31, 1995 and 1994, and their combined statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1995, 1994 and 1993, together with reports of Arthur Andersen LLP, independent
public accountants, also are included elsewhere herein. See "Index to Financial
Statements."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's proxy statement for its May
23, 1996 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1995. See "Item 1.
Business -- Executive Officers of the Company" for a description of the
Executive Officers of the Company.

ITEM 11. EXECUTIVE COMPENSATION.

There is hereby incorporated by reference the information to appear under
the caption "Compensation of Directors and Executive Officers" in the Company's
proxy statement for its May 23, 1996 Annual Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1995.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

There is hereby incorporated by reference the information to appear under
the caption "Principal Shareholders of the Company" in the Company's proxy
statement for its May 23, 1996 Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1995.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.

(A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

The financial statements and schedule listed in the accompanying index to
the consolidated, Core Group combined and Psychiatric Group combined financial
statements, are filed as part of this Annual Report on Form 10-K.

32
<PAGE> 35

(a)(3) EXHIBITS.

<TABLE>
<C> <C> <S>
3.1 -- Certificate of Incorporation, as amended to date, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (No. 33-61895), effective October
17, 1995, and incorporated herein by reference.
3.2 -- Amended and Restated Bylaws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
4.1 -- Rights Agreement dated as of April 10, 1990, filed as Exhibit 2 to the
Company's Registration Statement on Form 8-A dated April 20, 1990, and
incorporated herein by reference.
4.2 -- Form of Note Agreement between the Company and various institutional investors,
dated as of May 1, 1989, for the Company's $5,000,000 11.33% Series A Notes due
May 30, 1996 and $120,000,000 11.44% Series B Notes due May 30, 1999, filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-11 (No.
33-29387), effective August 4, 1989, and incorporated herein by reference.
4.3 -- Form of Note Agreement between the Company and various institutional investors,
dated as of September 1, 1990, for the Company's $100,000,000 10.41% Senior
Notes due September 15, 2000, filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, and incorporated
herein by reference.
4.4 -- Certificate of Designations of Psychiatric Group Preferred Stock, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 14, 1995, and incorporated herein
by reference.
10.1 -- American Health Properties, Inc. 1988 Stock Option Plan, filed as Exhibit 28 to
the Company's Registration Statement on Form S-8 (No. 33-25781), filed with the
Securities and Exchange Commission on November 28, 1988, and incorporated
herein by reference.
10.2 -- American Health Properties, Inc. 1990 Stock Incentive Plan, filed as Exhibit B
to the Company's Proxy Statement for its 1990 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission on May 7, 1990, and
incorporated herein by reference.
10.3 -- Employment Agreements between the Company and Joseph P. Sullivan, C. Gregory
Schonert and Michael J. McGee, filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and incorporated
herein by reference.
10.4 -- American Health Properties, Inc. 1994 Stock Incentive Plan, filed as Appendix A
to the Company's Proxy Statements for its 1994 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission on April 8, 1994, and
incorporated herein by reference.
10.5 -- American Health Properties, Inc. Nonqualified Stock Option Plan for Nonemployee
Directors, filed as Appendix B to the Company's Proxy Statement for its 1994
Annual Meeting of Shareholders filed with the Securities and Exchange
Commission on April 8, 1994, and incorporated herein by reference.
10.6 -- Credit Agreement dated as of December 27, 1995 among American Health
Properties, Inc., the financial institutions listed therein, Banque Paribas as
Co-Agent, First Union Bank of North Carolina as Co-Agent, NationsBank of Texas,
N.A. as Co-Agent and Wells Fargo Bank, N.A. as Arranger, Agent and Facing Bank,
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities Exchange Commission on January 5, 1996, and incorporated herein
by reference.
*21 -- List of subsidiaries of the Company
*23 -- Consent of Independent Public Accountants
*24 -- Powers of Attorney (included in signature page at page 24)
*27 -- Financial Data Schedule
*99.1 -- Four Winds, Inc. Financial Highlights
</TABLE>

- ---------------
* Filed herewith

33
<PAGE> 36

(b) REPORTS ON FORM 8-K.

On October 11, 1995, the Company filed a Current Report on Form 8-K
pertaining to the receipt of proceeds from the sale of its interest in a
mortgage loan.

On October 17, 1995, the Company filed a Current Report on Form 8-K for the
purpose of reporting selected financial information (statements of operations,
funds from operations, net income (loss) per share, funds from operations per
share, dividends per share, average shares outstanding, total assets, total debt
and total shareholders' equity) with respect to the consolidated Company, Core
Group and Psychiatric Group for the three and nine months ended September 30,
1995 and 1994.

On October 18, 1995, the Company filed a Current Report on Form 8-K that
contained as exhibits the Underwriting Agreement and Terms Agreement for the
Company's public offering of 2,500,000 shares of Core Group Common Stock on
October 17, 1995.

34
<PAGE> 37

AMERICAN HEALTH PROPERTIES, INC.

INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of independent public accountants............................................ 36
Consolidated balance sheets at December 31, 1995 and 1994........................... 37
For the years ended December 31, 1995, 1994 and 1993:
Consolidated statements of operations............................................ 38
Consolidated statements of stockholders' equity.................................. 39
Consolidated statements of cash flows............................................ 40
Notes to consolidated financial statements.......................................... 41
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Report of independent public accountants............................................ 53
III -- Real Estate and Accumulated Depreciation..................................... 54
CORE GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants............................................ 56
Combined balance sheets at December 31, 1995 and 1994............................... 57
For the years ended December 31, 1995, 1994 and 1993:
Combined statements of operations................................................ 58
Combined statements of stockholders' equity...................................... 59
Combined statements of cash flows................................................ 60
Notes to combined financial statements.............................................. 61
PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS:
Report of independent public accountants............................................ 71
Combined balance sheets at December 31, 1995 and 1994............................... 72
For the years ended December 31, 1995, 1994 and 1993:
Combined statements of operations................................................ 73
Combined statements of stockholders' equity...................................... 74
Combined statements of cash flows................................................ 75
Notes to combined financial statements.............................................. 76
</TABLE>

35
<PAGE> 38

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying consolidated balance sheets of American
Health Properties, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Health Properties,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 25, 1996.

36
<PAGE> 39

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements......................................... $ 534,023 $ 503,047
Accumulated depreciation........................................... (82,435) (70,617)
--------- ---------
451,588 432,430
Land............................................................... 61,853 62,948
Construction in progress........................................... 6,016 --
--------- ---------
519,457 495,378
Mortgage notes receivable, net....................................... 37,851 37,875
Construction loan.................................................... -- 21,383
Other notes receivable............................................... 4,915 9,428
Direct financing leases.............................................. 6,230 3,816
Cash and short-term investments...................................... 7,571 1,838
Receivables.......................................................... 7,141 6,974
Deferred financing costs and other assets............................ 3,151 2,811
--------- ---------
$ 586,316 $ 579,503
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable................................................... $ -- $ 14,500
Subordinated convertible bonds payable............................... 6,378 6,163
Senior notes payable................................................. 201,000 225,000
Accounts payable and accrued liabilities............................. 7,957 9,668
Dividends payable.................................................... 13,506 11,989
Deferred income...................................................... 4,415 4,682
--------- ---------
233,256 272,002
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized; 208 and no
shares issued and outstanding................................... 2 --
Common stock $.01 par value; 100,000 shares authorized; 23,443 and
20,851 shares issued and outstanding............................ 234 209
Additional paid-in capital......................................... 480,703 426,783
Cumulative net income.............................................. 212,312 169,931
Cumulative dividends............................................... (340,191) (289,422)
--------- ---------
353,060 307,501
--------- ---------
$ 586,316 $ 579,503
========= =========
</TABLE>

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

37
<PAGE> 40

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income............................................ $67,793 $ 67,732 $64,555
Mortgage interest income................................. 6,732 5,787 5,687
Additional rental and interest income.................... 11,125 9,506 9,334
Other interest income.................................... 5,580 4,002 1,947
------- -------- -------
91,230 87,027 81,523
------- -------- -------
EXPENSES
Depreciation and amortization............................ 14,377 14,103 14,087
Interest expense......................................... 27,057 26,101 27,269
General and administrative............................... 6,839 5,376 6,437
Targeted stock issuance costs............................ 300 1,450 --
Litigation costs......................................... -- -- 2,234
Write-down of real estate investments.................... -- 30,000 --
------- -------- -------
48,573 77,030 50,027
Minority interest.......................................... 276 304 251
------- -------- -------
Income before gain on sale of property..................... 42,381 9,693 31,245
Gain on sale of property................................... -- -- 19,742
------- -------- -------
NET INCOME................................................. $42,381 $ 9,693 $50,987
======= ======== =======
ATTRIBUTABLE TO --
CORE GROUP COMMON STOCK
Net income............................................ $36,107 $ 32,548 $48,616
Net income per share.................................. $ 1.69 $ 1.56 $ 2.58
Weighted average shares outstanding................... 21,405 20,856 18,843
Dividends declared per share.......................... $ 1.99 $ 1.88 $ 1.91
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss)..................................... $ 6,274 $(22,855) $ 2,371
Net income (loss) per share........................... $ 3.00 $ (10.96) $ 1.26
Weighted average shares outstanding................... 2,091 2,086 1,884
Dividends declared per share.......................... $ 3.20 $ 4.16 $ 3.36
</TABLE>

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

38
<PAGE> 41

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN CUMULATIVE CUMULATIVE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL NET INCOME DIVIDENDS EQUITY
------ ------ ------ ------ ---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992..... -- $ -- 17,260 $173 $342,599 $109,251 $(196,674) $ 255,349
Public offering of additional
shares........................ -- -- 3,450 35 80,806 -- -- 80,841
Stock incentives, net........... -- -- 25 -- 399 -- -- 399
Exercise of stock options....... -- -- 20 -- 493 -- -- 493
Net income...................... -- -- -- -- -- 50,987 -- 50,987
Dividends....................... -- -- -- -- -- -- (44,766) (44,766)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1993..... -- -- 20,755 208 424,297 160,238 (241,440) 343,303
Stock incentives, net........... -- -- 6 -- 524 -- -- 524
Exercise of stock options....... -- -- 90 1 1,962 -- -- 1,963
Net income...................... -- -- -- -- -- 9,693 -- 9,693
Dividends....................... -- -- -- -- -- -- (47,982) (47,982)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1994..... -- -- 20,851 209 426,783 169,931 (289,422) 307,501
Public offering of additional
shares........................ -- -- 2,500 25 50,292 -- -- 50,317
Stock incentives, net........... -- -- 15 -- 1,916 -- -- 1,916
Exercise of stock options....... -- -- 77 -- 1,732 -- -- 1,732
Distribution of Psychiatric
Group Preferred Stock......... 208 2 -- -- (20) -- -- (18)
Net income...................... -- -- -- -- -- 42,381 -- 42,381
Dividends....................... -- -- -- -- -- -- (50,769) (50,769)
--- ---- ------ ---- -------- -------- --------- --------
BALANCES AT DECEMBER 31, 1995..... 208 $ 2 23,443 $234 $480,703 $212,312 $(340,191) $ 353,060
=== ==== ====== ==== ======== ======== ========= ========
</TABLE>

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

39
<PAGE> 42

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 42,381 $ 9,693 $ 50,987
Depreciation, amortization and other non-cash items...... 16,584 16,041 15,414
Deferred income.......................................... (340) 269 (412)
Write-down of real estate investments.................... -- 30,000 --
Gain on sale of property................................. -- -- (19,742)
Change in receivables and other assets................... (636) (383) 109
Change in accounts payable and accrued liabilities....... (518) (636) (472)
-------- -------- --------
57,471 54,984 45,884
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties... (49,333) (40,142) (28,502)
Proceeds from sale of properties......................... 10,825 5,772 41,940
Principal payments on mortage notes receivable........... 26,543 -- --
Construction loan fundings............................... (5,136) (23,180) (15,039)
Construction loan paid................................... -- 16,836 --
Other notes receivable................................... 4,513 (830) (2,548)
Direct financing leases.................................. (2,414) (1,013) (2,803)
Administrative capital expenditures...................... (96) (183) (44)
-------- -------- --------
(15,098) (42,740) (6,996)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable.............. (14,500) 14,500 (40,500)
Principal payments on senior notes payable............... (24,000) -- --
Principal payments on mortgage notes payable............. -- (14,468) (1,137)
Financing costs paid..................................... (919) (248) (1,371)
Proceeds from sale of stock.............................. 50,317 -- 80,841
Proceeds from exercise of stock options.................. 1,732 1,963 493
Cash paid in lieu of fractional shares................... (18) -- --
Dividends paid........................................... (49,252) (47,823) (42,436)
-------- -------- --------
(36,640) (46,076) (4,110)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... 5,733 (33,832) 34,778
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 1,838 35,670 892
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 7,571 $ 1,838 $ 35,670
======== ======== ========
</TABLE>

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

40
<PAGE> 43

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THE COMPANY

American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care, assisted living and Alzheimer's care facilities and a medical
office building.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and all subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The financial statements of the Core Group and the Psychiatric Group also are
included elsewhere herein. For purposes of computing per share data for periods
prior to the actual Distribution, the number of shares of Core Group Common
Stock are assumed to be the same as the corresponding number of shares of the
Company's common stock prior to the Distribution, while the number of
Psychiatric Group Depositary Shares are assumed to be one-tenth of the
corresponding number of shares of the Company's common stock prior to the
Distribution.

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

41
<PAGE> 44

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

eventual disposition, and requires that measurement of such impairment loss
should be based on the fair value of the asset. Long-lived assets to be disposed
of must be reported at the lower of carrying amount or fair value less cost to
sell. SFAS 121 is effective in fiscal 1996. Management believes that adoption of
SFAS 121 will not have a material impact on the accompanying consolidated
financial statements.

Real Estate Properties. The Company accounts for its property leases as
operating leases. The Company records properties at cost and allocates the cost
between land and buildings and improvements based on independent appraisals.
Depreciation of properties is recorded on a straight-line basis over the
estimated useful lives of the buildings and improvements (21 to 42 years).

Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases and mortgages are deferred and
amortized at a constant effective rate over the remaining initial term of the
related leases and mortgage notes receivable.

Deferred Costs. Deferred financing costs are amortized over the term of
the related debt at a constant effective rate.

Federal Income Taxes. The Company intends at all times to operate so as to
qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code. As
such, the Company will not be subject to federal income tax.

Qualification as a REIT under Sections 856 to 860 of the Internal Revenue
Code applies to the Company as a whole, rather than the Core Group or
Psychiatric Group individually. Dividends paid by the Company on its Core Group
Common Stock and Psychiatric Group Depositary Shares must be sufficient in the
aggregate for the Company to meet the minimum distribution requirements of the
Internal Revenue Code. The Company's earnings and profits as a whole, without
reference to the Core Group or Psychiatric Group individually, is used to
determine the taxable character of dividends paid to holders of its Core Group
Common Stock and Psychiatric Group Depositary Shares.

Earnings and profits, which determine the taxable character of dividends
paid to stockholders, differ from net income for financial reporting purposes
due primarily to timing differences in the recognition of fee income, real
estate property write-downs, mortgage note impairment reserves and various
accruals and differences between the estimated useful lives used to compute
depreciation for financial statement purposes and a 40-year life used in
determining earnings and profits. The cost basis of the Company's real estate
properties is generally the same for financial reporting and earnings and
profits purposes, except for properties written down for financial reporting
purposes and properties for which the previous owner's basis is required to be
carried forward for tax purposes.

Cash and Short-Term Investments. Cash and short-term investments consist
of cash and all highly liquid investments with an original maturity date of less
than three months and are stated at cost which approximates fair value.

42
<PAGE> 45

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REAL ESTATE PROPERTIES

The following table summarizes the Company's investment in health care real
estate properties as of December 31, 1995:

<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Acute care general properties:
Chesterfield General Hospital Cheraw, South Carolina........ $ 720 10,687 $ 237 $ 11,170
Cleveland Regional Medical Center Cleveland, Texas.......... 300 8,000 593 7,707
Concho Valley Regional Hospital San Angelo, Texas........... 255 16,197 1,724 14,728
Desert Valley Hospital Victorville, California.............. 1,755 22,245 718 23,282
Elmwood Medical Center Jefferson, Louisiana................. 4,412 38,411 5,429 37,394
Frye Regional Medical Center Hickory, North Carolina........ 1,247 44,202 9,738 35,711
Halstead Hospital Halstead, Kansas.......................... 80 14,170 1,181 13,069
Irvine Medical Center Irvine, California.................... 17,987 57,013 6,711 68,289
Kendall Regional Medical Center Miami, Florida.............. 4,163 64,849 13,750 55,262
Lucy Lee Hospital Poplar Bluff, Missouri.................... 404 23,162 4,747 18,819
Marlboro Park Hospital Bennettsville, South Carolina........ 640 7,153 159 7,634
North Fulton Medical Center Roswell, Georgia................ 4,149 42,042 7,114 39,077
Palm Beach Gardens Medical Center Palm Beach Gardens,
Florida................................................... 4,024 41,624 9,145 36,503
Tarzana Regional Medical Center Tarzana, California......... 12,421 61,279 13,202 60,498
------- ------- ------- --------
52,557 451,034 74,448 429,143
------- ------- ------- --------
Alzheimer's care property:
Pine Haven Alzheimer's Care Facility Houston, Texas......... 225 3,420 7 3,638
------- ------- ------- --------
Assisted living property:
Summer Wind Residence Boise, Idaho.......................... 110 2,890 24 2,976
------- ------- ------- --------
Long-term care properties:
Arkansas Manor Nursing Home Denver, Colorado................ 154 3,912 79 3,987
Cornerstone Care Center Lakewood, Colorado.................. 125 4,731 73 4,783
Douglas Manor Douglas, Arizona.............................. 175 2,446 30 2,591
Safford Care Center Safford, Arizona........................ 100 4,834 58 4,876
------- ------- ------- --------
554 15,923 240 16,237
------- ------- ------- --------
Medical office building:
Walsh Medical Arts Plaza Murrieta, California............... 285 8,515 373 8,427
------- ------- ------- --------
Psychiatric properties:
The Manors Tarpon Springs, Florida.......................... 1,457 5,066 812 5,711
The Retreat Sunrise, Florida................................ 3,325 8,609 2,210 9,724
Rock Creek Center Lemont, Illinois.......................... 440 6,065 922 5,583
------- ------- ------- --------
5,222 19,740 3,944 21,018
------- ------- ------- --------
Rehabilitation properties:
HCA Wesley Rehabilitation Hospital Wichita, Kansas.......... 1,938 12,659 1,200 13,397
Mountain View Regional Rehabilitation Hospital Morgantown,
West Virginia............................................. -- 11,718 1,285 10,433
Northwest Arkansas Rehabilitation Hospital Fayetteville,
Arkansas.................................................. 962 8,124 914 8,172
------- ------- ------- --------
2,900 32,501 3,399 32,002
------- ------- ------- --------
$61,853 534,023 $82,435 $513,441
======= ======= ======= ========
</TABLE>

43
<PAGE> 46

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1995, the Company had the following construction in
progress:

<TABLE>
<CAPTION>
FUNDED
TO REMAINING
DATE COMMITMENT
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Cambria Lodge (a)
El Paso, Texas........................................................ $1,741 $ 3,468
Desert Valley Hospital (capital addition)
Victorville, California............................................... 1,288 1,512
Garrison Creek Lodge (a)
Seattle, Washington................................................... 2,313 3,295
Sherwood Place (a)
Odessa, Texas......................................................... 674 4,469
------ -------
$6,016 $ 12,744
====== =======
</TABLE>

- ---------------
(a) The Company will own the real property of these 80-bed assisted living
facilities upon completion of construction.

Fundamental ongoing changes in the psychiatric industry and the resulting
impact on operator financial performance have resulted in the restructuring of
psychiatric operator payment obligations and significant psychiatric investment
write-downs, the most recent of which occurred during 1994 when the Company
recorded a $30,000,000 write-down of its investments in psychiatric hospitals.
Of the $30,000,000 write-down, $22,050,000 related to the Company's investments
in psychiatric hospital properties and $7,950,000 was established as a mortgage
note impairment reserve. Although management believes that the recorded
investments in the psychiatric hospitals are realizable, if the psychiatric
operators are unable to successfully adapt to the fundamental ongoing changes in
the psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Company may be required to further
restructure payment obligations or make additional write-downs of the value of
its investments in the psychiatric hospitals. The Company does not intend to
make further investments in the psychiatric sector, and over time, may sell,
restructure or seek other means to reduce its investments in the psychiatric
sector. The Company has sold three of its psychiatric properties since September
1994. The Company also restructured the terms of its two Florida psychiatric
hospital investments in March 1995. Pursuant to the restructuring, the annual
minimum rental obligation of The Retreat psychiatric hospital in Sunrise,
Florida was reduced from $2,359,000 to $1,100,000, and the annual minimum rental
obligation of The Manors psychiatric hospital in Tarpon Springs, Florida was
reduced from $855,000 to $600,000.

44
<PAGE> 47

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is generally based on the increase in annual gross revenues of the related
hospital as specified in the lease agreements.

The Company has the right to approve capital expenditures at all
properties, the option to fund certain capital expenditures and, in certain
situations, is obligated to fund approved capital expenditures on terms
comparable to the original investment. The Company has committed to fund
approximately $1,512,000 of capital expenditures pursuant to these rights and
obligations. The base and additional rent provisions of the leases are amended
when such capital expenditures are funded to reflect the Company's increased
investment.

Six of the Company's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare
Corporation. The six leases are covered by cross-default provisions and the
lease obligations are unconditionally guaranteed by AMI. In 1995, income from
these leases accounted for 49% of the Company's total revenues.

Future minimum annual rentals under the Company's noncancellable operating
leases for calendar years 1996 through 2000 and thereafter are approximately
$69,400,000, $69,400,000, $68,400,000, $45,500,000, $41,300,000 and
$119,100,000, respectively.

MORTGAGE NOTES RECEIVABLE

Four Winds Hospital -- Saratoga $18,201,000. The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Saratoga Springs, New York. The note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42%. Interest was payable monthly for the first six years, and thereafter,
principal and interest payments of $194,000 are payable monthly.

Four Winds Hospital -- Katonah $27,600,000. The Company has a mortgage
note receivable secured by a first mortgage and security interest in the real
property of Four Winds Hospital in Katonah (Westchester County), New York (the
Four Winds Note). At June 30, 1992, the Company recorded a $33,600,000 write-
down on the original $61,200,000 Four Winds Note which reduced the Company's
recorded investment in the Four Winds Note to its present amount of $27,600,000.

At the end of 1992, a formal restructuring of the Four Winds Note was
completed, pursuant to which monthly interest payments were $3,400,000 in the
first year, increase $100,000 annually in each of the succeeding six years and
remain at $4,000,000 per year through maturity. The restructured note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is November 30, 2002. Base interest received and
recognized by the Company on the Four Winds Note in 1995, 1994 and 1993 was
$3,608,000, $3,508,000 and $3,408,000, respectively. Annual base interest of
approximately $7,600,000 would have been recorded in each of those years had the
Four Winds Note performed in accordance with its original terms.

In June 1994, in view of negative trends that caused declining cash flows
at a number of the psychiatric hospitals, the Company recorded a $30,000,000
write-down of its investments in psychiatric hospitals. In connection with a
review of Four Winds Hospital -- Saratoga and Four Winds Hospital -- Katonah, as
well as uncertainties surrounding possible changes in Medicaid reimbursement and
potential impact of increasing managed care in the State of New York, $7,950,000
of the $30,000,000 write-down was recorded as a mortgage note impairment
reserve. The Company records interest on such mortgage notes as interest
payments are received.

45
<PAGE> 48

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has an active dialogue with the operator of the two Four Winds
psychiatric hospitals regarding the operator's desire to create an integrated
behavioral health care delivery system in lower and upper New York State. Such a
system likely will include these hospitals as the base for delivery systems in
their respective markets and is intended to address the potential negative
consequences of the expected changes in Medicaid reimbursement and the increase
in managed care penetration in the State of New York. The Company is supportive
of the operator's strategy and has agreed in principle to release certain of its
security interests in the operator's short-term assets on a staged basis to
permit the operator to obtain the capital required to develop this system.

Pursuant to the terms of the mortgage notes receivable, the Company may
receive additional interest each year based on the increase in annual operating
revenues of the related psychiatric facility. The Company may provide permanent
financing for capital additions at the facilities.

The carrying amount of mortgage notes receivable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit risk.

OTHER NOTES RECEIVABLE

The Company provides financing at variable rates to certain psychiatric
hospital operators under revolving credit agreements. The aggregate commitment
under these credit agreements is $5,700,000 as of December 31, 1995. Borrowings
under the credit agreements are subject to compliance with various covenants and
may not exceed a specified percentage of the operators' net accounts receivable.
Borrowings under the credit agreements are secured by accounts receivable and
other personal property of the operators. As of December 31, 1995, $4,475,000
was outstanding under revolving credit agreements at a weighted average interest
rate of 11.5%. The weighted average amount of borrowings under revolving credit
agreements outstanding during 1995 was $5,066,000 at a weighted average interest
rate of 11.9% with a maximum of $8,800,000 outstanding during the year.

In connection with the Four Winds Note restructuring, the $950,000 balance
outstanding under a revolving credit agreement was converted to a five-year
amortizing term note. The note bears interest at an annual rate of 10.5%, and
requires monthly principal and interest payments of $21,000 through maturity on
December 1, 1997. As of December 31, 1995, the outstanding balance of this note
was $440,000.

The Company's pricing and terms of variable-rate financing and commitments
provided to certain psychiatric hospital operators and a term note are
indicative of current rates and credit risk, and therefore, the carrying amount
of these financial instruments is a reasonable estimate of fair value.

DIRECT FINANCING LEASES

In connection with certain of its investments in health care properties,
the Company also has provided equipment leasing for terms of five to seven years
which are classified as direct financing leases. As of December 31, 1995, the
Company's aggregate net investment in these direct financing leases was
$6,230,000, represented by total minimum lease payments receivable of $7,607,000
less unearned income of $1,377,000. Future minimum annual lease payments under
these leases for calendar years 1996 through 2000 and thereafter are
approximately $2,009,000, $2,020,000, $1,687,000, $1,255,000, $618,000 and
$18,000, respectively.

DEBT

Bank Loans Payable. The Company has a $150 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 27, 1998 and
bears an annual facility fee of 20 to 37.5 basis points. This agreement provides
for interest on outstanding borrowings at either LIBOR plus a margin of 37.5 to
150 basis points or the prime rate plus, in certain circumstances, a margin of
25 to 50 basis points. The

46
<PAGE> 49

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

margin on LIBOR or prime rate borrowings and the annual facility fee are
dependent upon various conditions, including the Company's debt ratings and the
level of borrowings outstanding. Currently, the Company is able to borrow at
either LIBOR plus 87.5 basis points or the prime rate, and the annual facility
fee is 25 basis points.

The duration of borrowings under the Company's unsecured revolving credit
agreement are generally less than 90 days at variable pricing indicative of
current short-term borrowing rates. Accordingly, carrying amount is a reasonable
estimate of fair value.

Senior Notes Payable. The Company's two issues of unsecured senior notes
(the Senior Notes) were sold pursuant to private placements with institutional
investors.

In May 1989, the Company sold $5 million of 11.33% Series A Senior Notes
and $120 million of 11.40% Series B Senior Notes. As provided under the terms of
the note agreement, the interest rates on these notes were automatically
adjusted to 11.38% on Series A and 11.45% on Series B effective as of October
25, 1989, concurrent with the downgrading of AMI's publicly-rated unsecured
senior debt obligations. In the event that such AMI debt obligations are
subsequently upgraded to an investment grade rating, the interest rates on the
Series A and Series B Senior Notes automatically will readjust to 11.33% and
11.40%, respectively. Interest is payable quarterly in arrears. The Series A
Senior Notes mature May 31, 1996, and the remaining $96 million of Series B
Senior Notes require annual principal payments of $24 million on May 31, 1996
through maturity on May 31, 1999.

In September 1990, the Company sold $100 million of 10.41% Senior Notes.
Interest is payable semi-annually in arrears. The Senior Notes require annual
principal payments of $20 million on September 15, 1996 through maturity on
September 15, 2000.

An estimate of rates currently available to the Company for debt with
similar terms was used to determine the fair value of the Company's senior notes
payable. As of December 31, 1995 and 1994, the estimated fair value of senior
notes payable was $215 million and $231 million, respectively. Substantial make-
whole premiums are required if the senior notes are paid off prior to
contractual maturity.

Subordinated Convertible Bonds Payable. The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription in 1990.

The Swiss Bonds have a coupon rate of 8 1/2% and are convertible at the
option of the holder at any time until July 9, 2000 into shares of the Company's
common stock at a conversion price of $23.45 per share and a fixed exchange rate
of Sfr. 1.41 per U.S. $1.00. In 1995, 1994 and 1993, no conversions of Swiss
Bonds were made. Final redemption of the 1,491 remaining Swiss Bonds will be
made in U.S. dollars of $7,455,000 on July 19, 2000 provided additional
conversions or redemption have not occurred earlier. The conversion price of the
Swiss Bonds was adjusted in accordance with the indenture to reflect the
Distribution.

Interest on outstanding Swiss Bonds is payable annually in arrears in Swiss
francs in July. Accrued and accreted interest is not paid on Swiss Bonds
converted into common stock.

The Company has reserved approximately 225,000 unissued shares of common
stock for potential future Swiss Bond conversions.

47
<PAGE> 50

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of the Company's subordinated convertible bonds payable is
based on the quoted market price of the bonds as traded in Switzerland. As of
December 31, 1995 and 1994, the estimated fair value of subordinated convertible
bonds payable was $6,573,000 and $5,894,000, respectively.

Debt Covenants. Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.

Annual Maturities. The aggregate amount of annual maturities of the
Company's debt for calendar years 1996 through 2000 is $49,000,000, $44,000,000,
$44,000,000, $44,000,000 and $27,455,000, respectively.

Interest. Interest capitalized on construction in progress was $198,000,
$883,000 and $577,000 in 1995, 1994 and 1993, respectively. Interest paid, net
of interest capitalized, in 1995, 1994 and 1993 was $26,232,000, $24,924,000 and
$26,686,000, respectively.

PENSION PLANS

The Company has a defined contribution pension plan covering all of its
employees. Pension expense in 1995, 1994 and 1993 was $238,000, $207,000 and
$202,000, respectively.

The following table sets forth the amounts recognized in the Company's
financial statements:

Actuarial present value of benefit obligations:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- ---------
<S> <C> <C>
Vested benefit obligation....................................... $721,000 $ 580,000
-------- ---------
Accumulated benefit obligation.................................. 737,000 580,000
-------- ---------
Projected benefit obligation.................................... 762,000 596,000
Unrecognized prior service cost................................. (56,000) (106,000)
Unrecognized net gain........................................... 65,000 144,000
-------- ---------
Pension liability............................................... $771,000 $ 634,000
======== =========
</TABLE>

Net pension cost included the following components:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current service cost................................... $ 80,000 $ 70,000 $ 99,000
Interest cost.......................................... 50,000 39,000 43,000
Amortization of prior service cost..................... 49,000 49,000 49,000
Amortization of net gain............................... (18,000) (9,000) --
-------- -------- --------
Net periodic pension cost.............................. $161,000 $149,000 $191,000
======== ======== ========
</TABLE>

A discount rate of 7.0% and 8.5% for 1995 and 1994, respectively, and a 10.0%
increase in annual base director fees once every five years were used in
determining the actuarial present value of the projected benefit obligation.

48
<PAGE> 51

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK INCENTIVE PLANS

The following is a summary of stock incentives activity:

<TABLE>
<CAPTION>
CORE GROUP COMMON STOCK PSYCHIATRIC GROUP DEPOSITARY SHARES
---------------------------------------------------- -----------------------------------------------------
STOCK OPTIONS STOCK OPTIONS
---------------------------- DEFERRED ----------------------------- DEFERRED
NUMBER OF EXERCISE AND DER RESTRICTED NUMBER OF EXERCISE AND DER RESTRICTED
SHARES PRICE SHARES STOCK SHARES PRICE SHARES STOCK
--------- ---------------- -------- ---------- ---------- ---------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1992..... 521,070 $18.00 to $35.25 1,636 32,554
Granted/accumulated... 204,596 $23.50 to $27.75 7,562 25,164
Exercised/restrictions
lapsed.............. (20,000) $23.50 to $25.75 -- (13,834)
Expired/canceled....... (17,500) $27.75 to $35.25 -- --
------- ------- -------
December 31, 1993...... 688,166 $18.00 to $35.25 9,198 43,884
Granted/accumulated... 174,964 $26.00 to $27.13 18,658 5,807
Exercised/restrictions
lapsed.............. (90,000) $18.13 to $25.75 -- (16,750)
Expired/canceled....... (20,000) $27.13 to $35.25 -- --
------- ------- -------
December 31, 1994...... 753,130 $18.00 to $35.25 27,856 32,941 -- -- --
Granted/accumulated .. 183,537 $20.63 to $21.23 37,885 14,859 -- 1,668 --
Adjustment for
Distribution........ -- $16.37 to $32.06 -- -- 93,668 $16.31 to $31.94 5,718 4,777
Exercised/restrictions
lapsed.............. (77,547) $18.76 to $26.60 (13,922) (16,112) -- -- (1,610)
Expired/canceled....... (142,190) $18.76 to $25.24 (5,594) (12,639) (21,974) $18.69 to $26.50 (2,179) (1,263)
------- ------- ------- ------- ------ ------
December 31, 1995...... 716,930 $16.37 to $32.06 46,225 19,049 71,694 $16.31 to $31.94 5,207 1,904
======= ======= ======= ======= ====== ======
</TABLE>

The Company's stock incentive plans provide for the issuance of up to
2,600,000 shares of stock to directors and key employees of the Company. There
were 1,293,896 shares available to grant further stock incentives at December
31, 1995. Pursuant to the terms of the Company's stock incentive plans, stock
options, restricted stock, deferred shares and dividend equivalent rights (DERs)
were adjusted to reflect the Distribution.

Restrictions on shares of restricted stock lapse each year following the
date of award with respect to one-sixth, one-fifth, one-quarter or one-half of
the total number of shares awarded, as the case may be. Expense is determined
based on the market value at the date of award and is recognized over the period
such restrictions lapse. Expense recorded in 1995, 1994 and 1993 related to
restricted stock awards was $277,000, $367,000 and $399,000, respectively.

The exercise price of stock options is equal to the fair market value of
the shares on the dates the options were granted. Stock options granted to
directors become exercisable immediately or over two years and stock options
granted to key employees become exercisable over two to four years. At December
31, 1995, options to purchase 536,815 shares of Core Group Common Stock were
exercisable at prices of $16.37 to $32.06 and options to purchase 53,683 shares
of Psychiatric Group Depositary Shares were exercisable at prices of $16.31 to
$31.94. Stock options terminate ten years from the date of grant.

DERs have been granted in tandem with some of the stock options granted to
key employees. At each dividend declaration date, a calculation is made to
determine the number of shares that could be acquired if dividends were paid on
shares under option and accumulated DER shares, and such number of shares are
accumulated for the benefit of option holders for a period of five years from
the date of the option grant. Upon exercise or expiration of the related option,
each option holder is entitled to receive additional shares equivalent to the
accumulated number of related DER shares. Expense related to the DER shares is
equal to the equivalent amount of dividends used to determine the number of DER
shares. Expense recorded in 1995, 1994 and 1993 related to DER shares was
$715,000, $577,000 and $255,000, respectively. Directors may elect

49
<PAGE> 52

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to receive payment of their annual Board fees on a deferred basis in the form of
stock of the Company. These deferred shares, and related accumulated DER shares,
are issued to the director making such an election at the end of each three-year
deferral period. At December 31, 1995, substantially all deferred and DER shares
were issuable upon exercise of the related vested options or otherwise
unrestricted.

PREFERRED STOCK PURCHASE RIGHTS PLAN

On April 20, 1990, the Company distributed to shareholders one preferred
stock purchase right (each a Right) for each outstanding share of common stock.
Under certain conditions, each Right may be exercised to purchase one
one-hundredth of a share of preferred stock, Series A, par value $.01 per share
(the Series A Preferred Shares), of the Company at a price of $45. The Company's
Psychiatric Group Depositary Shares do not include the Rights or entitle holders
thereof to receive the Rights, which are applicable only to the Company's Core
Group Common Stock. The total number of Rights currently issued or issuable,
including Rights issuable in connection with common stock which may be issued
under the Company's stock incentive plans and upon the conversion of the
Company's outstanding Swiss Bonds, is approximately 25,726,000. Approximately
257,000 Series A Preferred Shares could be purchased upon the exercise of all
Rights currently issued or issuable. The number of Rights outstanding and Series
A Preferred Shares issuable upon exercise, as well as the Series A Preferred
Share purchase price, are subject to customary antidilution adjustments.

The Rights are evidenced by the certificates for shares of common stock,
and in general are not transferable apart from the common stock or exercisable
until after a party has acquired beneficial ownership of, or made a tender offer
for, 10% or more of the outstanding common stock of the Company (an Acquiring
Person), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding common
stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of common stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.

The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company also
may exchange the Rights at a ratio of one share of common stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of common stock by any party.

Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the common stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the common stock and (c) a payment in connection
with a business combination (in which shares of common stock are exchanged)
equal to 100 times the amount per share paid on the common stock.

DIVIDENDS

A quarterly dividend of $.505 per share for Core Group Common Stock, or
approximately $11,838,000, was declared by the Board of Directors on January 24,
1996, payable on February 23, 1996 to shareholders of record on February 9,
1996. A quarterly dividend of $.80 per share for Psychiatric Group Depositary
Shares, or approximately $1,668,000, was declared by the Board of Directors on
January 24, 1996, payable on February 23, 1996 to shareholders of record on
February 9, 1996. The aggregate dividends of $13,506,000 have been reflected as
dividends payable in the accompanying consolidated financial statements as of
December 31,

50
<PAGE> 53

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1995. Dividends of $2.14 per share paid on Core Group Common Stock during the
year ended December 31, 1995 are characterized as $1.67 of ordinary income and
$.47 of return of capital for tax purposes. Dividends of $1.60 per share paid on
Psychiatric Group Depositary Shares during the year ended December 31, 1995 are
characterized as $1.25 of ordinary income and $.35 of return of capital for tax
purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

LEGAL PROCEEDINGS

In August 1992, a shareholder class action lawsuit was filed against the
Company and certain directors and officers of the Company in the Federal
District Court in Denver, Colorado, alleging that among other things, the
defendants knowingly or recklessly disseminated false and misleading information
regarding the performance and creditworthiness of two of the Psychiatric Group's
mortgage loan investments. On May 28, 1993, the Company reached an agreement
with the plaintiffs, the other defendants to the lawsuit and its insurance
carrier regarding settlement and dismissal of the case with prejudice. The
Company contributed $2,615,000 to the settlement in 1993. The Company's total
costs related to this matter were $3,020,000 including the Company's settlement
contribution, legal fees and other expenses. Of this amount, $786,000 was
accrued in the fourth quarter of 1992, and the remaining $2,234,000 was charged
against income in 1993. The settlement became effective upon approval by the
court in December 1993.

51
<PAGE> 54

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1995
Consolidated --
Revenues........................... $21,731 $21,973 $22,405 $25,121 $91,230
Net income......................... 9,667 9,545(1) 9,884 13,285(2) 42,381
Attributable to --
Core Group Common Stock
Revenues........................ $19,575 $19,966 $20,304 $23,068 $82,913
Net income...................... 7,976 8,206 8,235 11,690(2) 36,107
Net income per share............ .38 .39 .39 .51 1.69
Psychiatric Group Depositary Shares
Revenues........................ $ 2,891 $ 2,441 $ 2,534 $ 2,480 $10,346
Net income...................... 1,691 1,339(1) 1,649 1,595 6,274
Net income per share............ .81 .64 .79 .76 3.00
1994
Consolidated --
Revenues........................... $21,553 $21,653 $21,774 $22,047 $87,027
Net income (loss).................. 9,784 (19,256)(3) 10,395 8,770(1) 9,693
Attributable to --
Core Group Common Stock
Revenues........................ $18,752 $18,721 $18,770 $19,437 $75,680
Net income...................... 7,924 8,638 7,919 8,067 32,548
Net income per share............ .38 .41 .38 .39 1.56
Psychiatric Group Depositary Shares
Revenues........................ $ 3,836 $ 3,974 $ 4,051 $ 3,527 $15,388
Net income (loss)............... 1,860 (27,894)(3) 2,476 703(1) (22,855)
Net income (loss) per share..... .89 (13.37) 1.19 .34 (10.96)
</TABLE>

- ---------------

(1) The second quarter of 1995 and the fourth quarter of 1994 include costs
related to the Distribution of $300,000 and $1,450,000, respectively.
(2) Includes a premium of $2,652,000 received in connection with the prepayment
of a mortgage note receivable.
(3) Includes a write-down of $30,000,000 relating to investments in psychiatric
properties.

52
<PAGE> 55

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in this Annual Report on Form
10-K, and have issued our report thereon dated March 25, 1996. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 25, 1996.

53
<PAGE> 56

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION

AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS
CARRYING
AMOUNT
INITIAL COST TO AT
DECEMBER
31,
COMPANY 1995(a)
---------------------- -------
BUILDINGS SUBSEQUENT
LICENSED AND CAPITAL
DESCRIPTION & LOCATION BEDS LAND IMPROVEMENTS IMPROVEMENTS LAND
- ------------------------------------------------------------- -------- ------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
Acute care general properties:
Cheraw, South Carolina....................................... 66 $ 720 $ 10,687 $ -- $ 720
Cleveland, Texas............................................. 104 300 8,000 -- 300
San Angelo, Texas............................................ 171 165 15,867 420 255
Victorville, California...................................... 77 1,755 22,245 -- 1,755
Jefferson, Louisiana......................................... 135 3,012 32,138 7,673 4,412
Hickory, North Carolina...................................... 275 1,247 38,753 5,449 1,247
Halstead, Kansas............................................. 190 80 14,170 -- 80
Irvine, California........................................... 177 17,987 57,013 -- 17,987
Miami, Florida............................................... 412 4,163 55,837 9,012 4,163
Poplar Bluff, Missouri....................................... 201 404 19,596 3,566 404
Bennettsville, South Carolina................................ 60 640 7,153 -- 640
Roswell, Georgia............................................. 167 4,149 20,851 21,191 4,149
Palm Beach Gardens, Florida.................................. 204 4,024 40,976 648 4,024
Tarzana, California.......................................... 233 11,921 43,079 18,700 12,421
------- -------- ------- -------
50,567 386,365 66,659 52,557
------- -------- ------- -------
Alzheimer's care property:
Houston, Texas............................................... 96 225 3,420 -- 225
------- -------- ------- -------
Assisted living property:
Boise, Idaho................................................. 60 110 2,890 -- 110
------- -------- ------- -------
Long-term care properties:
Denver, Colorado............................................. 120 154 3,912 -- 154
Lakewood, Colorado........................................... 144 125 4,731 -- 125
Douglas, Arizona............................................. 64 175 2,446 -- 175
Safford, Arizona............................................. 128 100 4,834 -- 100
------- -------- ------- -------
554 15,923 -- 554
------- -------- ------- -------
Medical office building:
Murrieta, California......................................... n/a 285 8,515 -- 285
------- -------- ------- -------
Psychiatric properties:
Tarpon Springs, Florida...................................... 130 1,457 2,904 2,162 1,457
Sunrise, Florida............................................. 100 3,325 15,209 -- 3,325
Lemont, Illinois............................................. 60 440 8,372 -- 440
------- -------- ------- -------
5,222 26,485 2,162 5,222
------- -------- ------- -------
Rehabilitation properties:
Wichita, Kansas.............................................. 60 1,938 12,659 -- 1,938
Morgantown, West Virginia.................................... 80 -- 10,084 1,634 --
Fayetteville, Arkansas....................................... 60 962 8,124 -- 962
------- -------- ------- -------
2,900 30,867 1,634 2,900
------- -------- ------- -------
$59,863 $474,465 $ 70,455 $61,853
======= ======== ======= =======

<CAPTION>
GROSS
CARRYING AMOUNT AT
DECEMBER 31, 1995(a)
-----------------------
BUILDINGS
AND ACCUMULATED DATE OF DATE
DESCRIPTION & LOCATION IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION(b) ACQUIRED
- ------------------------------------------------------------- ------------ -------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C>
Acute care general properties:
Cheraw, South Carolina....................................... $ 10,687 $ 11,407 $ 237 1982-1993 05/02/95
Cleveland, Texas............................................. 8,000 8,300 593 1968-1986 01/03/94
San Angelo, Texas............................................ 16,197 16,452 1,724 1960-1991 09/30/91
Victorville, California...................................... 22,245 24,000 718 1994 09/20/94
Jefferson, Louisiana......................................... 38,411 42,823 5,429 1987-1992 05/11/90
Hickory, North Carolina...................................... 44,202 45,449 9,738 1974-1993 02/27/87
Halstead, Kansas............................................. 14,170 14,250 1,181 1976 06/30/93
Irvine, California........................................... 57,013 75,000 6,711 1990 04/23/91
Miami, Florida............................................... 64,849 69,012 13,750 1973-1994 02/27/87
Poplar Bluff, Missouri....................................... 23,162 23,566 4,747 1980-1995 02/27/87
Bennettsville, South Carolina................................ 7,153 7,793 159 1984-1993 05/02/95
Roswell, Georgia............................................. 42,042 46,191 7,114 1983-1993 02/27/87
Palm Beach Gardens, Florida.................................. 41,624 45,648 9,145 1964-1992 02/27/87
Tarzana, California.......................................... 61,279 73,700 13,202 1973-1994 02/27/87
-------- -------- -------
451,034 503,591 74,448
-------- -------- -------
Alzheimer's care property:
Houston, Texas............................................... 3,420 3,645 7 1995 12/21/95
-------- -------- -------
Assisted living property:
Boise, Idaho................................................. 2,890 3,000 24 1994 09/01/95
-------- -------- -------
Long-term care properties:
Denver, Colorado............................................. 3,912 4,066 79 1971 06/13/95
Lakewood, Colorado........................................... 4,731 4,856 73 1970-1974 06/13/95
Douglas, Arizona............................................. 2,446 2,621 30 1982 07/28/95
Safford, Arizona............................................. 4,834 4,934 58 1982 07/28/95
-------- -------- -------
15,923 16,477 240
-------- -------- -------
Medical office building:
Murrieta, California......................................... 8,515 8,800 373 1991 04/01/94
-------- -------- -------
Psychiatric properties:
Tarpon Springs, Florida...................................... 5,066 6,523 812 1928-1993 08/15/90
Sunrise, Florida............................................. 8,609 11,934(d) 2,210 1988 08/15/90
Lemont, Illinois............................................. 6,065 6,505(c)(d) 922 1989 12/31/92
-------- -------- -------
19,740 24,962 3,944
-------- -------- -------
Rehabilitation properties:
Wichita, Kansas.............................................. 12,659 14,597 1,200 1992 03/16/92
Morgantown, West Virginia.................................... 11,718 11,718 1,285 1991-1994 02/25/91
Fayetteville, Arkansas....................................... 8,124 9,086 914 1991 07/01/91
-------- -------- -------
32,501 35,401 3,399
-------- -------- -------
$534,023 $595,876 $82,435
======== ======== =======

DEPRECIABLE
DESCRIPTION & LOCATION LIFE
- ------------------------------------------------------------- -----------
Acute care general properties:
Cheraw, South Carolina....................................... 30 years
Cleveland, Texas............................................. 27 years
San Angelo, Texas............................................ 40 years
Victorville, California...................................... 40 years
Jefferson, Louisiana......................................... 40 years
Hickory, North Carolina...................................... 38 years
Halstead, Kansas............................................. 30 years
Irvine, California........................................... 40 years
Miami, Florida............................................... 38 years
Poplar Bluff, Missouri....................................... 40 years
Bennettsville, South Carolina................................ 30 years
Roswell, Georgia............................................. 42 years
Palm Beach Gardens, Florida.................................. 40 years
Tarzana, California.......................................... 34 years

Alzheimer's care property:
Houston, Texas............................................... 40 years

Assisted living property:
Boise, Idaho................................................. 40 years

Long-term care properties:
Denver, Colorado............................................. 27 years
Lakewood, Colorado........................................... 35 years
Douglas, Arizona............................................. 34 years
Safford, Arizona............................................. 35 years

Medical office building:
Murrieta, California......................................... 40 years

Psychiatric properties:
Tarpon Springs, Florida...................................... 25 years
Sunrise, Florida............................................. 25 years
Lemont, Illinois............................................. 25 years

Rehabilitation properties:
Wichita, Kansas.............................................. 40 years
Morgantown, West Virginia.................................... 40 years
Fayetteville, Arkansas....................................... 40 years

</TABLE>

- ---------------

(a) The cost basis of the properties for Federal income tax purposes is the same
as the gross carrying amount; except for those properties for which a
write-down was recorded in 1994 and the property in Cheraw, South Carolina
for which the previous owner's basis of $3.7 million is required to be
carried forward. For Federal income tax purposes, the gross carrying amount
for the Halstead, Kansas facility is classified as an investment in an
Industrial Revenue Bond and is not depreciated.

(b) Most properties have had improvements since their initial construction. The
range of dates reflects the construction date of the original structures
through the latest date of improvements.

(c) This property was conveyed to the Company in December 1992 in connection
with the restructuring and forgiveness of a mortgage note receivable. The
$21.4 million mortgage note receivable had been written down in June 1992 to
$10 million. Subsequent recovery of a $1.1 million interest reserve fund
from the mortgagee reduced the Company's recorded investment in the note to
$8.8 million (net of unamortized fees) which became the Company's basis in
the property upon its conveyance. The property was written down by $3
million in 1994 to its current gross carrying amount of $6.5 million.

(d) In view of negative trends that caused declining cash flow at these
psychiatric hospitals, the Company recorded a write-down of its investment
in each of these properties in 1994. The write-downs by property were:
Sunrise, Florida $6.6 million and Lemont, Illinois $2.3 million, net.

54
<PAGE> 57

SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)

AMERICAN HEALTH PROPERTIES, INC.
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION ACTIVITY:

<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
ACCUMULATED ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION COST DEPRECIATION
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year... $565,995 $70,617 $543,093 $58,157 $536,845 $47,829
Acquisitions................... 39,370 n/a 30,020 n/a 14,250 n/a
Cost of Real Estate Sold....... (13,435) (2,433) (7,309) (1,537) (26,000) (3,642)
Construction Projects
Completed.................... 3,645 n/a 15,000 n/a n/a n/a
Capital Improvements........... 301 n/a 7,241 n/a 17,998 n/a
Write-Down of Real Estate
Investments.................. n/a n/a (22,050) n/a -- n/a
Depreciation................... n/a 14,251 n/a 13,997 n/a 13,970
-------- ------- -------- ------- -------- -------
Balance at End of Year......... $595,876 $82,435 $565,995 $70,617 $543,093 $58,157
======== ======= ======== ======= ======== =======
</TABLE>

55
<PAGE> 58

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying combined balance sheets of the Core Group
(a business unit of American Health Properties, Inc.) as of December 31, 1995
and 1994, and the related combined statements of operations, total attributed
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the management of
American Health Properties, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Core Group as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 25, 1996.

56
<PAGE> 59

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements........................................... $514,283 $473,908
Accumulated depreciation............................................. (78,491) (65,042)
-------- --------
435,792 408,866
Land................................................................. 56,631 54,383
Construction in progress............................................. 6,016 --
-------- --------
498,439 463,249
Construction loan...................................................... -- 21,383
Direct financing leases................................................ 6,230 3,816
Revolving inter-Group loan to Psychiatric Group........................ 5,263 9,428
Fixed rate inter-Group loan to Psychiatric Group....................... 9,175 20,000
Cash and short-term investments........................................ 7,571 1,838
Receivables............................................................ 6,520 6,179
Deferred financing costs and other assets.............................. 3,001 2,793
-------- --------
$536,199 $528,686
======== ========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable..................................................... $ -- $ 14,500
Subordinated convertible bonds payable................................. 6,378 6,163
Senior notes payable................................................... 201,000 225,000
Accounts payable and accrued liabilities............................... 7,806 9,480
Dividends payable...................................................... 11,838 10,112
Deferred income........................................................ 4,230 4,232
-------- --------
231,252 269,487
-------- --------
Commitments and contingencies
Total attributed Core Group equity..................................... 304,947 259,199
-------- --------
$536,199 $528,686
======== ========
</TABLE>

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

57
<PAGE> 60

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income........................................... $64,740 $59,755 $56,223
Mortgage interest income................................ 845 -- --
Additional rental income................................ 10,405 8,908 8,674
Other interest income................................... 4,894 2,976 1,309
Interest income on inter-Group loans to Psychiatric
Group................................................ 2,029 4,041 6,830
------- ------- -------
82,913 75,680 73,036
------- ------- -------
EXPENSES
Depreciation and amortization........................... 13,575 12,302 11,415
Interest expense........................................ 27,057 26,101 27,269
General and administrative.............................. 5,898 4,425 5,227
------- ------- -------
46,530 42,828 43,911
Minority interest......................................... 276 304 251
------- ------- -------
Income before gain on sale of property.................... 36,107 32,548 28,874
Gain on sale of property.................................. -- -- 19,742
------- ------- -------
NET INCOME................................................ $36,107 $32,548 $48,616
======= ======= =======
NET INCOME PER COMMON SHARE............................... $ 1.69 $ 1.56 $ 2.58
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................ 21,405 20,856 18,843
======= ======= =======
DIVIDENDS DECLARED PER COMMON SHARE....................... $ 1.99 $ 1.88 $ 1.91
======= ======= =======
</TABLE>

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

58
<PAGE> 61

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR.............................. $259,199 $263,832 $213,230
Public offering of additional shares..................... 50,317 -- 39,341
Stock incentives, net.................................... 1,687 431 324
Exercise of stock options................................ 1,732 1,691 399
Net income............................................... 36,107 32,548 48,616
Dividends................................................ (44,095) (39,303) (38,078)
-------- -------- --------
BALANCES AT END OF YEAR.................................... $304,947 $259,199 $263,832
======== ======== ========
</TABLE>

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

59
<PAGE> 62

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

CORE GROUP COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 36,107 $ 32,548 $ 48,616
Depreciation, amortization and other non-cash items...... 15,717 14,175 12,667
Deferred income.......................................... (305) 344 (312)
Gain on sale of property................................. -- -- (19,742)
Change in receivables and other assets................... (625) (214) 224
Change in accounts payable and accrued liabilities....... (481) (595) (177)
-------- -------- --------
50,413 46,258 41,276
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties... (48,640) (40,142) (27,861)
Proceeds from sale of property........................... -- -- 41,940
Principal payment on mortgage note receivable............ 26,519 -- --
Construction loan fundings............................... (5,136) (23,180) (15,039)
Construction loan paid................................... -- 16,836 --
Direct financing leases.................................. (2,414) (1,013) (2,803)
Paydowns (fundings) on revolving inter-Group loan to
Psychiatric Group..................................... 4,001 (672) (4,501)
Paydowns on fixed rate inter-Group loan to Psychiatric
Group................................................. 10,825 6,044 41,594
Administrative capital expenditures...................... (96) (183) (44)
-------- -------- --------
(14,941) (42,310) 33,286
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable.............. (14,500) 14,500 (40,500)
Principal payments on senior notes payable............... (24,000) -- --
Principal payments on mortgage notes payable............. -- (14,468) (1,137)
Financing costs paid..................................... (919) (248) (1,371)
Proceeds from sale of stock.............................. 50,317 -- 39,341
Proceeds from exercise of stock options.................. 1,732 1,691 399
Dividends paid........................................... (42,369) (39,255) (36,516)
-------- -------- --------
(29,739) (37,780) (39,784)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... 5,733 (33,832) 34,778
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... 1,838 35,670 892
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ 7,571 $ 1,838 $ 35,670
======== ======== ========
</TABLE>

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

60
<PAGE> 63

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS

THE COMPANY

Distribution of Psychiatric Group Depositary Shares. On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care, assisted living and
Alzheimer's care facilities and a medical office building (the Core Group) into
two distinct portfolios, with two distinct classes of publicly-traded shares
intended to represent those portfolios. In connection with the Distribution, the
Company specifically assigned or, if not directly assigned, allocated its
assets, liabilities and stockholders' equity, and its revenues, expenses and
cash flow items, between the Core Group and Psychiatric Group, as more fully
described below. The Psychiatric Group Depositary Shares are intended to reflect
the separate financial performance of the Psychiatric Group. The Company's
common stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. The financial statements of the Core Group include
the financial position, results of operations and cash flows of the Company's
core investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building,
an allocated portion of the Company's general and administrative expense, all
corporate assets and liabilities and related transactions associated with the
ongoing operations of the Company which are not separately identified with
either operating group, an attributed amount of inter-Group loans receivable
from the Psychiatric Group and an attributed amount of the Company's
stockholders' equity. For purposes of computing per share data for periods prior
to the actual Distribution, the number of shares of Core Group Common Stock are
assumed to be the same as the corresponding number of shares of the Company's
common stock prior to the Distribution. The Core Group financial statements are
prepared using the amounts included in the Company's consolidated financial
statements.

Although the financial statements of the Core Group and the Psychiatric
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.

Each holder of Core Group Common Stock or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs can affect the results of operations,
financial condition, cash flows or borrowing costs of the other Group. Net
losses of either Group, as well as dividends and distributions on, and
repurchases of, Core Group Common Stock or Psychiatric Group Depositary Shares
will reduce the funds of the Company legally available for dividends on both the
Core Group Common Stock and Psychiatric Group Depositary Shares. Furthermore,
fundamental

61
<PAGE> 64

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

changes in the psychiatric industry continue to negatively impact the
facility-specific operating cash flow at the Psychiatric Group hospitals.
Accordingly, the Core Group's financial statements should be read in conjunction
with the Company's consolidated financial statements and the financial
statements of the Psychiatric Group.

These financial statements include the accounts of the Core Group business.
The Core Group and the Psychiatric Group financial statements, taken together,
comprise all of the accounts included in the Company's consolidated financial
statements.

New Accounting Standard. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(SFAS 121). SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS 121 requires the recognition of
an impairment loss on long-lived assets to be held and used if the carrying
amount of an asset is less than the estimated future undiscounted cash flows
expected to result from the use of the asset and its eventual disposition, and
requires that measurement of such impairment loss should be based on the fair
value of the asset. Long-lived assets to be disposed of must be reported at the
lower of carrying amount or fair value less cost to sell. SFAS 121 is effective
in fiscal 1996. Management believes that adoption of SFAS 121 will not have a
material impact on the accompanying Core Group combined financial statements.

Real Estate Properties. The Core Group accounts for its property leases as
operating leases. The Core Group records properties at cost and allocates the
cost between land and buildings and improvements based on independent
appraisals. Depreciation of Core Group real estate properties is recorded on a
straight-line basis over the estimated useful lives of the buildings and
improvements (27 to 42 years).

Deferred Income. Fees received, net of related direct costs, associated
with the origination or amendment of leases are deferred and amortized at a
constant effective rate over the remaining initial term of the related leases.

Deferred Costs. Deferred financing costs are amortized over the term of
the related debt at a constant effective rate.

62
<PAGE> 65

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

differences between the estimated useful lives used to compute depreciation for
financial statement purposes and a 40-year life used in determining earnings and
profits. The cost basis of the Company's real estate properties is generally the
same for financial reporting and earnings and profits purposes, except for
properties written down for financial reporting purposes and properties for
which the previous owner's basis is required to be carried forward for tax
purposes.

CORPORATE ACTIVITIES, INTER-GROUP LOANS, THIRD-PARTY DEBT AND EQUITY

Financial Activities. As a matter of policy, the Company manages all
financial activities on a centralized, consolidated basis. Such financial
activities include the investment of surplus cash; the issuance and repayment of
all short-term and long-term debt; and the issuance of common and preferred
stock. These activities are then attributed to the Core Group and the
Psychiatric Group in the manner described herein.

Historical Debt and Equity Transactions. All third-party debt
($207,378,000 and $245,663,000 at December 31, 1995 and 1994, respectively) has
been attributed to the Core Group in the financial statements set forth herein.
However, the Psychiatric Group was attributed (a) fixed rate inter-Group loans
owing to the Core Group at December 31, 1994 of $20,000,000, an amount
determined by the Board to be appropriate in relation to the assets and expected
cash flow of the Psychiatric Group and its cash requirements and (b) revolving
inter-Group loans owing to the Core Group at December 31, 1994 of $9,428,000, an
amount equal to the outstanding borrowings owed to the Psychiatric Group from
psychiatric hospital operators under revolving credit agreements at that date.
As a result of such attributed inter-Group loans, and in light of the carrying
value of each Group's assets and its other liabilities at December 31, 1994, the
equity attributed to the Core Group at that date was $259,199,000 and the equity
attributed to the Psychiatric Group at that date was $48,302,000.

Historically, the Psychiatric Group was attributed inter-Group loans owing
to the Core Group from the date of the first Psychiatric Group asset purchase in
1988 to December 31, 1994 in amounts equal to the Psychiatric Group's net cash
requirements not otherwise covered by the proceeds of equity issuances
attributed to the Psychiatric Group. All such inter-Group loans were initially
designated as floating rate loans (with an interest rate equal to the prevailing
prime rate plus 2%), but portions of such inter-Group loans were re-designated
as fixed rate loans in amounts that correspond to designated portions of
third-party fixed rate senior debt issued by the Company from time to time (with
an interest rate equal to that borne by third-party fixed rate senior debt plus
2%). Proceeds of equity issuances after 1988 were attributed to the Psychiatric
Group in amounts determined to be appropriate in relation to the assets and
expected cash flow of the Psychiatric Group, its cash requirements and its
inter-Group debt at the time of such issuances; proceeds attributed to the
Psychiatric Group were deemed to correspondingly reduce inter-Group debt. In
general, dividends paid by the Company were attributed to the Core Group and the
Psychiatric Group on the basis of their respective contributions to funds from
operations, excluding expenses associated with litigation, relocation, issuance
of Psychiatric Group Depositary Shares and termination of purchase commitments
which were not considered to be routine costs of ongoing operations.

Third-Party Debt. All of the Company's third-party debt has been
attributed to the Core Group. This debt and its relevant terms are summarized in
the following paragraphs.

Bank loans payable. The Company has a $150 million unsecured revolving
credit agreement with a syndicate of banks that matures on December 27, 1998 and
bears an annual facility fee of 20 to 37.5 basis points. This agreement provides
for interest on outstanding borrowings at either LIBOR plus a margin of 37.5 to
150 basis points or the prime rate plus, in certain circumstances, a margin of
25 to 50 basis points. The

63
<PAGE> 66

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

margin on LIBOR and prime rate borrowings and the annual facility fee are
dependent upon various conditions, including the Company's debt ratings and the
level of borrowings outstanding. Currently, the Company is able to borrow at
either LIBOR plus 87.5 basis points or the prime rate, and the annual facility
fee is 25 basis points.

The weighted average amount of borrowings under bank credit agreements
outstanding during 1995, 1994 and 1993 was $27,467,000, $5,404,000 and
$11,227,000 at weighted average interest rates of 7.5%, 6.9% and 4.7%,
respectively. The maximum amount outstanding under bank credit agreements in
1995, 1994 and 1993 was $73,000,000, $20,500,000 and $44,500,000, respectively.
As of December 31, 1995, the Company had no outstanding balance under its bank
credit agreement. The duration of borrowings under the Company's unsecured
revolving credit agreement are generally less than 90 days at variable pricing
indicative of current short-term borrowing rates. Accordingly, carrying amount
is a reasonable estimate of fair value.

Senior notes payable. The Company's two issues of unsecured senior notes
(the Senior Notes) were sold pursuant to private placements with institutional
investors.

Subordinated convertible bonds payable. The Company's Convertible Dual
Currency Subordinated Bonds (the Swiss Bonds) were sold in Switzerland pursuant
to public subscription in 1990.

Interest on outstanding Swiss Bonds is payable annually in arrears in Swiss
francs in July. Accrued and accreted interest is not paid on Swiss Bonds
converted into common stock.

The Company has reserved approximately 225,000 unissued shares of common
stock for potential future Swiss Bond conversions.

64
<PAGE> 67

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Debt covenants. Covenants and restrictions in the Company's various debt
agreements include limitations on secured borrowings, restrictions covering the
use of proceeds from asset sales and payments of dividends and requirements
relating to the maintenance of specified financial covenants, including those
relating to minimum tangible net worth, fixed charge coverage and ratios of
liabilities to minimum tangible net worth and asset values.

Annual maturities. The aggregate amount of annual maturities of the
Company's debt for calendar years 1996 through 2000 is $49,000,000, $44,000,000,
$44,000,000, $44,000,000 and $27,455,000, respectively.

Inter-Group Loans. The weighted average outstanding amount of revolving
inter-Group loans owed by the Psychiatric Group to the Core Group during 1995,
1994 and 1993 was $5,497,000, $9,106,000 and $6,533,000 at weighted average
interest rates of 10.82%, 9.15% and 8.0%, respectively.

The weighted average outstanding amount of fixed rate inter-Group loans
owed by the Psychiatric Group to the Core Group during 1995, 1994 and 1993 was
$10,979,000, $24,706,000 and $48,570,000 at a weighted average interest rate of
13% for all three years. There were no new fixed rate loans made to the
Psychiatric Group during these three years. Paydowns were received from the
proceeds of equity transactions prior to 1995 attributed to the Psychiatric
Group and the net proceeds from sales of Psychiatric Group real estate
investments in 1995 and 1994.

Repayment of inter-Group loans by the Psychiatric Group is dependent upon
the amount and timing of sales of the Psychiatric Group's assets and paydowns
received by the Psychiatric Group on borrowings provided to psychiatric hospital
operators under revolving credit agreements. In the first quarter of 1995, the
Core Group received $4,325,000 of revolving inter-Group loan repayments and
$10,825,000 of fixed rate inter-Group loan repayments from the Psychiatric Group
as a result of such operator borrowing paydowns and asset sales.

The Company's Board has established certain management policies relating to
the Core Group's inter-Group loans to the Psychiatric Group. Under the policies
currently in effect, which may be modified or rescinded in the sole discretion
of the Company's Board, the aggregate revolving inter-Group loans owed by the
Psychiatric Group to the Core Group are limited to a maximum of $8,750,000 at
any one time outstanding, which limit is to be reduced dollar-for-dollar with
any permanent repayment in the future of borrowings under revolving credit
agreements provided to Psychiatric Group hospital operators. In addition, the
limit on the aggregate revolving inter-Group loans will not be reduced below
$5,000,000, and except for such revolving inter-Group loans, no additional fixed
rate or other inter-Group loans will be advanced by the Core Group to the
Psychiatric Group.

If the Psychiatric Group sells any assets out of the ordinary course, the
net proceeds from such sales (after transaction costs and reserves for
contingencies) will be applied, first, to repay revolving inter-Group loans owed
by the Psychiatric Group to the Core Group to the extent of outstanding
borrowings provided to psychiatric hospital operators under revolving credit
agreements associated with the asset or assets sold, second, to repay the
outstanding fixed rate inter-Group loans owed by the Psychiatric Group to the
Core Group (until repaid in full), and third, to repay other revolving
inter-Group loans owed by the Psychiatric Group to the Core Group (until repaid
in full), before any remaining net proceeds from such sales may be used to make
distributions to holders of Psychiatric Group Depositary Shares.

65
<PAGE> 68

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

Group up to the limitations mentioned previously to cover future cash needs of
the Psychiatric Group (including, without limitation, to fund dividends in a
manner consistent with the dividend policy then applicable to the Psychiatric
Group Depositary Shares).

Fixed rate inter-Group loans owed by the Psychiatric Group to the Core
Group are unsecured, bear interest at a fixed rate of approximately 13% per
annum (which is equal to the original weighted average interest rate on the
Company's fixed rate senior debt issues plus 2%), and are prepayable without
premium at any time, at the option of the Board.

Revolving inter-Group loans owed by the Psychiatric Group to the Core Group
are unsecured, bear interest at a floating rate equal to the prevailing prime
rate plus 2% (10.5% at December 31, 1995) and are prepayable without premium at
any time, at the option of the Board.

The carrying amounts of the inter-Group loans owed to the Core Group by the
Psychiatric Group are a reasonable estimate of fair value, as the pricing and
terms of the loans are indicative of current rates and credit risk.

Cash received by the Psychiatric Group in excess of required repayments of
inter-Group loans owed by the Psychiatric Group may, at the option of the
Company's Board, be advanced to the Core Group as revolving inter-Group loans
(to the extent such cash can be used beneficially by the Core Group), or
otherwise be invested on behalf of the Psychiatric Group. Revolving inter-Group
loans owed by the Core Group to the Psychiatric Group bear interest at a
floating rate equal to the weighted average interest rate borne by the Company's
revolving debt (or, for periods in which there is no such revolving debt
outstanding, the interest rate at which the Company could borrow on a revolving
basis), and are prepayable without premium at any time, at the option of the
Board.

Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so.

Equity Transactions Subsequent to the Distribution. Subsequent to the
Distribution, the proceeds of Core Group Common Stock issuances as well as cash
required to fund Core Group Common Stock dividends or repurchases are attributed
solely to the Core Group and the proceeds of Psychiatric Group Depositary Share
issuances (e.g., upon exercise of management stock options) as well as cash
required to fund Psychiatric Group Depositary Share dividends or repurchases are
attributed solely to the Psychiatric Group.

General and Administrative Expenses. General and administrative expenses
of the Company that cannot be directly attributed to either Group have been
allocated to the Core Group and the Psychiatric Group on the basis of their
respective contributions to revenues (excluding inter-Group revenues and
revenues from investment dispositions), provided that at no time will such
expenses allocated to either Group be less than $250,000. The Company's general
and administrative expenses consist primarily of employment and related
benefits, professional services, shareholder reporting, franchise taxes, travel
and other related corporate activity.

66
<PAGE> 69

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

REAL ESTATE PROPERTIES

The following table summarizes the Core Group's investment in health care
real estate properties as of December 31, 1995:

<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------- ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Acute care general properties:
Chesterfield General Hospital Cheraw, South Carolina........ $ 720 10,687 $ 237 $ 11,170
Cleveland Regional Medical Center Cleveland, Texas.......... 300 8,000 593 7,707
Concho Valley Regional Hospital San Angelo, Texas........... 255 16,197 1,724 14,728
Desert Valley Hospital Victorville, California.............. 1,755 22,245 718 23,282
Elmwood Medical Center Jefferson, Louisiana................. 4,412 38,411 5,429 37,394
Frye Regional Medical Center Hickory, North Carolina........ 1,247 44,202 9,738 35,711
Halstead Hospital Halstead, Kansas.......................... 80 14,170 1,181 13,069
Irvine Medical Center Irvine, California.................... 17,987 57,013 6,711 68,289
Kendall Regional Medical Center Miami, Florida.............. 4,163 64,849 13,750 55,262
Lucy Lee Hospital Poplar Bluff, Missouri.................... 404 23,162 4,747 18,819
Marlboro Park Hospital Bennettsville, South Carolina........ 640 7,153 159 7,634
North Fulton Medical Center Roswell, Georgia................ 4,149 42,042 7,114 39,077
Palm Beach Gardens Medical Center Palm Beach Gardens,
Florida................................................... 4,024 41,624 9,145 36,503
Tarzana Regional Medical Center Tarzana, California......... 12,421 61,279 13,202 60,498
------- ------- ------- --------
52,557 451,034 74,448 429,143
------- ------- ------- --------
Alzheimer's care property:
Pine Haven Alzheimer's Care Facility Houston, Texas......... 225 3,420 7 3,638
------- ------- ------- --------
Assisted living property:
Summer Wind Residence Boise, Idaho.......................... 110 2,890 24 2,976
------- ------- ------- --------
Long-term care properties:
Arkansas Manor Nursing Home Denver, Colorado................ 154 3,912 79 3,987
Cornerstone Care Center Lakewood, Colorado.................. 125 4,731 73 4,783
Douglas Manor Douglas, Arizona.............................. 175 2,446 30 2,591
Safford Care Center Safford, Arizona........................ 100 4,834 58 4,876
------- ------- ------- --------
554 15,923 240 16,237
------- ------- ------- --------
Medical office building:
Walsh Medical Arts Plaza Murrieta, California............... 285 8,515 373 8,427
------- ------- ------- --------
Rehabilitation properties:
HCA Wesley Rehabilitation Hospital Wichita, Kansas.......... 1,938 12,659 1,200 13,397
Mountain View Regional Rehabilitation Hospital Morgantown,
West Virginia............................................. -- 11,718 1,285 10,433
Northwest Arkansas Rehabilitation Hospital
Fayetteville, Arkansas.................................... 962 8,124 914 8,172
------- ------- ------- --------
2,900 32,501 3,399 32,002
------- ------- ------- --------
$56,631 514,283 $78,491 $492,423
======= ======= ======= ========
</TABLE>

67
<PAGE> 70

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1995, the Core Group had the following construction in
progress:

<TABLE>
<CAPTION>
FUNDED
TO REMAINING
DATE COMMITMENT
------ ----------
(IN THOUSANDS)
<S> <C> <C>
Cambria Lodge(a)
El Paso, Texas....................................................... $1,741 $ 3,468
Desert Valley Hospital (capital addition)
Victorville, California.............................................. 1,288 1,512
Garrison Creek Lodge(a)
Seattle, Washington.................................................. 2,313 3,295
Sherwood Place(a)
Odessa, Texas........................................................ 674 4,469
------ -------
$6,016 $ 12,744
====== =======
</TABLE>

- ---------------
(a) The Core Group will own the real property of these 80-bed assisted living
facilities upon completion of construction.

The Core Group's properties are leased under "net" leases pursuant to which
the lessees are responsible for all maintenance, repairs, taxes, and insurance
of the leased properties. The leases provide for the payment of minimum base
rent and additional rent during the fixed term and any renewal terms. Additional
rent is generally based on the increase in annual gross revenues of the related
hospital as specified in the lease agreements.

The Core Group has the right to approve capital expenditures at all
properties, the option to fund certain capital expenditures and, in certain
situations, is obligated to fund approved capital expenditures on terms
comparable to the original investment. The Core Group has committed to fund
approximately $1,512,000 of capital expenditures pursuant to these rights and
obligations. The base and additional rent provisions of the leases are amended
when such capital expenditures are funded to reflect the Core Group's increased
investment.

Six of the Core Group's acute care properties are leased to subsidiaries of
American Medical International, Inc. (AMI), a subsidiary of Tenet Healthcare
Corporation. The six leases are covered by cross-default provisions and the
lease obligations are unconditionally guaranteed by AMI. In 1995, income from
these leases accounted for 53% of the Core Group's total revenues.

Future minimum annual rentals under the Core Group's noncancellable
operating leases for calendar years 1996 through 2000 and thereafter are
approximately $66,700,000, $66,700,000, $66,700,000, $43,800,000, $40,200,000
and $119,100,000, respectively.

DIRECT FINANCING LEASES

In connection with certain of its investments in health care properties,
the Core Group also has provided equipment leasing for terms of five to seven
years which are classified as direct financing leases. As of December 31, 1995,
the Core Group's aggregate net investment in these direct financing leases was
$6,230,000, represented by total minimum lease payments receivable of $7,607,000
less unearned income of $1,377,000. Future minimum annual lease payments under
these leases for calendar years 1996 through 2000 and thereafter are
approximately $2,009,000, $2,020,000, $1,687,000, $1,255,000, $618,000 and
$18,000, respectively.

68
<PAGE> 71

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

PENSION PLANS

The Company has a defined contribution pension plan covering all of its
employees. Consolidated pension expense of the Company in 1995, 1994 and 1993
was $238,000, $207,000 and $202,000, respectively.

The Company has an unfunded defined benefit pension plan covering
non-employee members of its Board of Directors upon completion of sixty months
of membership on the Board. The benefits, limited to ten years, are based on
years of service and the annual base director fee in effect as of the date a
director ceases to be a member of the Board. The consolidated accrued pension
liability of the Company was $771,000 and $634,000 as of December 31, 1995 and
1994, respectively. Consolidated net periodic pension cost of the Company in
1995, 1994 and 1993 was $161,000, $149,000 and $191,000, respectively. The Notes
to the Consolidated Financial Statements of the Company should be read for
further details regarding this plan.

A portion of the cost of the Company's pension plans has been allocated to
the Core Group under the general and administrative expense allocation
methodology described previously.

STOCK INCENTIVE PLANS

The Company's stock incentive plans provide for the issuance of shares of
the Company's stock to directors and key employees as stock incentives. Pursuant
to the terms of the Company's stock incentive plans, stock options, restricted
stock, deferred shares and dividend equivalent rights (DERs) were adjusted to
reflect the Distribution. The Notes to the Consolidated Financial Statements of
the Company should be read for further details regarding the Company's stock
incentive plans. The Company's consolidated cost of its stock incentive plans is
allocated to the Core Group under the general and administrative expense
allocation methodology described previously.

PREFERRED STOCK PURCHASE RIGHTS PLAN

The Company has a preferred stock purchase rights plan which provides for
the distribution of one preferred stock purchase right (each a Right) to
shareholders for each outstanding share of common stock. Under certain
conditions, each Right may be exercised to purchase one one-hundredth of a share
of preferred stock, Series A, par value $.01 per share (the Series A Preferred
Shares), of the Company at a price of $45. The Company's Psychiatric Group
Depositary Shares do not include the Rights or entitle holders thereof to
receive the Rights, which are applicable only to the Company's Core Group Common
Stock. The Notes to the Consolidated Financial Statements of the Company should
be read for further details regarding the Company's preferred stock purchase
rights plan.

DIVIDENDS

A quarterly dividend of $.505 per share for Core Group Common Stock, or
approximately $11,838,000, was declared by the Board of Directors on January 24,
1996, payable on February 23, 1996 to shareholders of record on February 9,
1996. This dividend has been reflected as dividends payable in the accompanying
financial statements as of December 31, 1995. Dividends of $2.14 per share paid
on Core Group Common Stock during the year ended December 31, 1995 are
characterized as $1.67 of ordinary income and $.47 of return of capital for tax
purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

69
<PAGE> 72

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CORE GROUP COMBINED FINANCIAL STATEMENTS--(CONTINUED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

- ---------------

(1) Includes a premium of $2,652,000 received in connection with the prepayment
of a mortgage note receivable.

70
<PAGE> 73

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American Health Properties, Inc.:

We have audited the accompanying combined balance sheets of the Psychiatric
Group (a business unit of American Health Properties, Inc.) as of December 31,
1995 and 1994, and the related combined statements of operations, total
attributed equity and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
management of American Health Properties, Inc. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Psychiatric Group as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 25, 1996.

71
<PAGE> 74

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate properties
Buildings and improvements......................................... $ 19,740 $ 29,139
Accumulated depreciation........................................... (3,944) (5,575)
--------- ---------
15,796 23,564
Land............................................................... 5,222 8,565
--------- ---------
21,018 32,129
Mortgage notes receivable, net....................................... 37,851 37,875
Other notes receivable............................................... 4,915 9,428
Receivables.......................................................... 621 795
Other assets......................................................... 150 18
--------- ---------
$ 64,555 $ 80,245
========= =========
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving inter-Group loan from Core Group........................... $ 5,263 $ 9,428
Fixed rate inter-Group loan from Core Group.......................... 9,175 20,000
Accounts payable and accrued liabilities............................. 151 188
Dividends payable.................................................... 1,668 1,877
Deferred income...................................................... 185 450
--------- ---------
16,442 31,943
--------- ---------
Commitments and contingencies
Total attributed Psychiatric Group equity............................ 48,113 48,302
--------- ---------
$ 64,555 $ 80,245
========= =========
</TABLE>

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

72
<PAGE> 75

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES
Rental income.......................................... $ 3,053 $ 7,977 $ 8,332
Mortgage interest income............................... 5,887 5,787 5,687
Additional rental and interest income.................. 720 598 660
Other interest income.................................. 686 1,026 638
------- -------- -------
10,346 15,388 15,317
------- -------- -------
EXPENSES
Depreciation and amortization.......................... 802 1,801 2,672
Interest expense on inter-Group loans from Core
Group............................................... 2,029 4,041 6,830
General and administrative............................. 941 951 1,210
Targeted stock issuance costs.......................... 300 1,450 --
Litigation costs....................................... -- -- 2,234
Write-down of real estate investments.................. -- 30,000 --
------- -------- -------
4,072 38,243 12,946
------- -------- -------
NET INCOME (LOSS)........................................ $ 6,274 $(22,855) $ 2,371
======= ======== =======
NET INCOME (LOSS) PER DEPOSITARY SHARE................... $ 3.00 $ (10.96) $ 1.26
======= ======== =======
WEIGHTED AVERAGE DEPOSITARY SHARES OUTSTANDING........... 2,091 2,086 1,884
======= ======== =======
DIVIDENDS DECLARED PER DEPOSITARY SHARE.................. $ 3.20 $ 4.16 $ 3.36
======= ======== =======
</TABLE>

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

73
<PAGE> 76

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF TOTAL ATTRIBUTED EQUITY

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCES AT BEGINNING OF YEAR.............................. $ 48,302 $ 79,471 $ 42,119
Public offering of additional shares..................... -- -- 41,500
Stock incentives, net.................................... 229 93 75
Exercise of stock options................................ -- 272 94
Distribution of Psychiatric Group Preferred Stock........ (18) -- --
Net income (loss)........................................ 6,274 (22,855) 2,371
Dividends................................................ (6,674) (8,679) (6,688)
-------- -------- --------
BALANCES AT END OF YEAR.................................... $ 48,113 $ 48,302 $ 79,471
======== ======== ========
</TABLE>

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

74
<PAGE> 77

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

PSYCHIATRIC GROUP COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 6,274 $(22,855) $ 2,371
Depreciation, amortization and other non-cash items...... 867 1,866 2,747
Deferred income.......................................... (35) (75) (100)
Write-down of real estate investments.................... -- 30,000 --
Change in receivables and other assets................... (11) (169) (115)
Change in accounts payable and accrued liabilities....... (37) (41) (295)
-------- -------- --------
7,058 8,726 4,608
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties... (693) -- (641)
Proceeds from sale of properties......................... 10,825 5,772 --
Principal payments on mortage notes receivable........... 24 -- --
Other notes receivable................................... 4,513 (830) (2,548)
-------- -------- --------
14,669 4,942 (3,189)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving inter-Group loan from
Core Group............................................ (4,001) 672 4,501
Payments on fixed rate inter-Group loan from Core
Group................................................. (10,825) (6,044) (41,594)
Proceeds from sale of stock.............................. -- -- 41,500
Proceeds from exercise of stock options.................. -- 272 94
Cash paid in lieu of fractional shares................... (18) -- --
Dividends paid........................................... (6,883) (8,568) (5,920)
-------- -------- --------
(21,727) (13,668) (1,419)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS..... -- -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF YEAR......... -- -- --
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS, END OF YEAR............... $ -- $ -- $ --
======== ======== ========
</TABLE>

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

75
<PAGE> 78

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS

THE COMPANY

Distribution of Psychiatric Group Depositary Shares. On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock held
of record at the close of business on July 14, 1995. Each Psychiatric Group
Depositary Share represents one-tenth of a share of Psychiatric Group Preferred
Stock, a new series of preferred stock, par value $0.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its investments
in acute care and rehabilitation hospitals, long-term care, assisted living and
Alzheimer's care facilities and a medical office building (the Core Group) into
two distinct portfolios, with two distinct classes of publicly-traded shares
intended to represent those portfolios. In connection with the Distribution, the
Company specifically assigned or, if not directly assigned, allocated its
assets, liabilities and stockholders' equity, and its revenues, expenses and
cash flow items, between the Psychiatric Group and Core Group, as more fully
described below. The Psychiatric Group Depositary Shares are intended to reflect
the separate financial performance of the Psychiatric Group. The Company's
common stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. The financial statements of the Psychiatric Group
include the financial position, results of operations and cash flows of the
Company's psychiatric hospital investments, an allocated portion of the
Company's general and administrative expense, an attributed amount of
inter-Group debt payable to the Core Group and an attributed amount of the
Company's stockholders' equity. For purposes of computing per share data for
periods prior to the actual Distribution, the number of Psychiatric Group
Depositary Shares are assumed to be one-tenth of the corresponding number of
shares of the Company's common stock prior to the Distribution. The Psychiatric
Group financial statements are prepared using the amounts included in the
Company's consolidated financial statements.

Although the financial statements of the Psychiatric Group and the Core
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow of
the Company attributed to each such Group, such attribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.

Each holder of Psychiatric Group Depositary Shares or Core Group Common
Stock is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs can affect the results of operations,
financial condition, cash flows or borrowing costs of the other Group. In
addition, net losses of either Group, as well as dividends and distributions on,
and repurchases of, Psychiatric Group Depositary Shares or Core Group Common
Stock will reduce the funds of the Company legally available for dividends on
both the Psychiatric Group Depositary Shares and Core Group Common Stock.
Accordingly, the Psychiatric Group's financial statements should be read in
conjunction with the Company's consolidated financial statements and the
financial statements of the Core Group.

76
<PAGE> 79

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

These financial statements include the accounts of the Psychiatric Group
business. The Psychiatric Group and the Core Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.

Real Estate Properties. The Psychiatric Group accounts for its property
leases as operating leases. The Psychiatric Group records properties at cost and
allocates the cost between land and buildings and improvements based on
independent appraisals. Depreciation of Psychiatric Group real estate properties
is recorded on a straight-line basis over 21 years, the estimated useful lives
of the buildings and improvements.

77
<PAGE> 80

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

CORPORATE ACTIVITIES, INTER-GROUP LOANS, THIRD-PARTY DEBT AND EQUITY

Third-party Debt. All of the Company's third-party debt has been
attributed to the Core Group; however, the Psychiatric Group, together with the
Core Group, is subject to all of the terms, restrictions and covenants relating
to such third-party debt. These include limitations on secured borrowings,
restrictions covering the use of proceeds from asset sales and payments of
dividends and requirements relating to the maintenance of specified financial
covenants, including those relating to minimum tangible net worth, fixed charge
coverage and ratios of liabilities to minimum tangible net worth and asset
values. The third-party debt attributed to the Core Group at December 31, 1995
includes $201,000,000 of unsecured senior notes payable and $6,378,000 of
subordinated convertible bonds payable. The aggregate amount of annual
maturities of the Company's third-party debt for calendar years 1996 through
2000 is $49,000,000, $44,000,000, $44,000,000, $44,000,000 and $27,455,000,
respectively.

78
<PAGE> 81

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

average interest rate of 13% for all three years. There were no new fixed rate
loans made to the Psychiatric Group during these three years. Paydowns were
funded with the proceeds of equity transactions prior to 1995 attributed to the
Psychiatric Group and the net proceeds from sales of Psychiatric Group real
estate investments in 1995 and 1994.

Repayment of inter-Group loans by the Psychiatric Group is dependent upon
the amount and timing of sales of the Psychiatric Group's assets and paydowns
received by the Psychiatric Group on borrowings provided to psychiatric hospital
operators under revolving credit agreements. In the first quarter of 1995, the
Psychiatric Group made $4,325,000 of revolving inter-Group loan repayments and
$10,825,000 of fixed rate inter-Group loan repayments to the Core Group as a
result of such operator borrowing paydowns and asset sales.

The Company's Board has established certain policies relating to the Core
Group's inter-Group loans to the Psychiatric Group. Under the policies currently
in effect, which may be modified or rescinded in the sole discretion of the
Company's Board, the aggregate revolving inter-Group loans owed by the
Psychiatric Group to the Core Group are limited to a maximum of $8,750,000 at
any one time outstanding, which limit is to be reduced dollar-for-dollar with
any permanent repayment in the future of borrowings under revolving credit
agreements provided to Psychiatric Group hospital operators. In addition, the
limit on the aggregate revolving inter-Group loans will not be reduced below
$5,000,000, and except for such revolving inter-Group loans, no additional fixed
rate or other inter-Group loans will be advanced by the Core Group to the
Psychiatric Group.

Excess cash received by the Psychiatric Group (other than net proceeds from
asset sales) will be applied to reduce revolving inter-Group loans owed by the
Psychiatric Group to the Core Group (until repaid in full), subject to the
ability of the Psychiatric Group, at the option of the Board, to re-borrow cash
from the Core Group up to the limitations mentioned previously to cover future
cash needs of the Psychiatric Group (including, without limitation, to fund
dividends in a manner consistent with the dividend policy then applicable to the
Psychiatric Group Depositary Shares).

Fixed rate inter-Group loans owed by the Psychiatric Group to the Core
Group are unsecured, bear interest at a fixed rate of approximately 13% per
annum (which is equal to the original weighted average interest rate on the
Company's fixed rate senior debt issues plus 2%) and are prepayable without
premium at any time, at the option of the Board.

The carrying amounts of the inter-Group loans owed by the Psychiatric Group
to the Core Group are a reasonable estimate of fair value, as the pricing and
terms of the loans are indicative of current rates and credit risk.

79
<PAGE> 82

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

be invested on behalf of the Psychiatric Group. Revolving inter-Group loans owed
by the Core Group to the Psychiatric Group bear interest at a floating rate
equal to the weighted average interest rate borne by the Company's revolving
debt (or, for periods in which there is no such revolving debt outstanding, the
interest rate at which the Company could borrow on a revolving basis), and are
prepayable without premium at any time, at the option of the Board.

Equity Transactions Subsequent to the Distribution. Subsequent to the
Distribution, the proceeds of Core Group Common Stock issuances as well as cash
required to fund Core Group Common Stock dividends or repurchases are attributed
solely to the Core Group, and the proceeds of Psychiatric Group Depositary Share
issuances (e.g., upon exercise of management stock options) as well as cash
required to fund Psychiatric Group Depositary Share dividends or repurchases are
attributed solely to the Psychiatric Group.

General and Administrative Expenses. General and administrative expenses
of the Company that cannot be directly attributed to either Group have been
allocated to the Psychiatric Group and the Core Group on the basis of their
respective contributions to revenues (excluding inter-Group revenues and
revenues from investment dispositions), provided that at no time will such
expenses allocated to either Group be less than $250,000. All general and
administrative expenses allocated to the Psychiatric Group are paid currently,
regardless of when such expenses are paid to third parties by the Company. As
such, the Psychiatric Group financial statements do not reflect any liabilities
for such allocated general and administrative expenses. The Company's general
and administrative expenses consist primarily of employment and related
benefits, professional services, shareholder reporting, franchise taxes, travel
and other related corporate activity.

PSYCHIATRIC BUSINESS

Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group
hospitals. Institutions responsible for providing insurance coverage to patients
who use inpatient psychiatric treatment services have directed efforts toward
decreasing their payments for such services, thereby reducing hospital operating
revenue. Some cost-cutting measures used by such institutions include decreasing
the inpatient length of stay, intensively reviewing utilization, directing
patients from inpatient care to outpatient care and negotiating reduced
reimbursement rates for services. In addition, such institutions have extended
the length of time for making payments, resulting in increases in accounts
receivable. The wider use of psychotropic drugs also has resulted in significant
declines in the average length of stay. Although the operators of the
Psychiatric Group hospitals are responding by developing lower cost outpatient
and daypatient programs, increasing case management and reducing operating
costs, their efforts are generally not consistently mitigating the negative
impact of these fundamental psychiatric industry changes. As a result, certain
of the Psychiatric Group hospital operators have had difficulty meeting their
payment obligations to the Psychiatric Group on a timely basis and there can be
no assurance that Psychiatric Group operators will be able to meet their payment
obligations in the future. Should this situation occur, it would negatively
impact the cash flow of the Psychiatric Group and its dividend payments to the
holders of Psychiatric Group Depositary Shares.

The Psychiatric Group has provided working capital financing under
revolving credit agreements to the operators of three of its psychiatric
hospitals. As of December 31, 1995, outstanding borrowings under such agreements
totaled $4,475,000, and the Psychiatric Group has committed to fund an
additional $1,225,000 of borrowings upon request, subject to certain conditions.
These borrowings, which are secured by accounts receivable and certain personal
property and which contain events of default that would be triggered by defaults
under the lease or mortgage loan relating to the relevant psychiatric hospital,
are the primary source of financing for these operators' operating and capital
needs. These psychiatric hospitals have, from time to time, been unable to
generate sufficient cash flow for working capital and the development of new
programs.

80
<PAGE> 83

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In certain cases, these psychiatric hospitals have not been able to pay down the
outstanding borrowings under the revolving credit agreements provided by the
Psychiatric Group or to secure replacement loans from third-party lenders. To
the extent the psychiatric hospitals have increased working capital needs in the
future, the Psychiatric Group may be the only source of such financing. In the
event the Company's Board of Directors determines that it is appropriate to
provide additional working capital financing to a psychiatric hospital operator,
it may cause the Core Group to make revolving inter-Group loans to the
Psychiatric Group to fund such financing (to the extent consistent with its
then-existing policies), although the Company's Board of Directors is under no
obligation to do so.

As more fully discussed under "Real Estate Properties" and "Mortgage Notes
Receivable", the fundamental ongoing changes in the psychiatric industry and the
resulting impact on operator financial performance have resulted in the
restructuring of operator payment obligations and significant investment
write-downs, the most recent of which occurred during 1994 when the Psychiatric
Group recorded a $30,000,000 write-down of its investments in the psychiatric
hospitals. Of the $30,000,000 write-down, $22,050,000 related to the Psychiatric
Group's investments in psychiatric hospital properties and $7,950,000 was
established as a mortgage note impairment reserve. Although management believes
that the recorded investments in the psychiatric hospitals are realizable, if
the psychiatric operators are unable to successfully adapt to the fundamental
ongoing changes in the psychiatric industry and consistently mitigate the
negative impact of such changes on their financial performance, the Psychiatric
Group may be required to further restructure payment obligations or make
additional write-downs of the value of its investments in the psychiatric
hospitals. The Psychiatric Group has sold three of its investments and does not
intend to make further investments. Over time, the Psychiatric Group may sell,
restructure or seek other means to further reduce its investments. The
Psychiatric Group expects to use the net proceeds of any sales of Psychiatric
Group investments (after transaction costs and reserves for contingencies) to
repay then outstanding inter-Group loans or other debt owed by the Psychiatric
Group and to distribute all remaining net proceeds, if any, in cash or common
stock to holders of Psychiatric Group Depositary Shares.

REAL ESTATE PROPERTIES

The following table summarizes the Psychiatric Group's investment in health
care real estate properties as of December 31, 1995:

<TABLE>
<CAPTION>
BUILDINGS AND ACCUMULATED NET
LAND IMPROVEMENTS DEPRECIATION BOOK VALUE
------ ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Psychiatric properties:
The Manors
Tarpon Springs, Florida................ $1,457 $ 5,066 $ 812 $ 5,711
The Retreat
Sunrise, Florida....................... 3,325 8,609 2,210 9,724
Rock Creek Center
Lemont, Illinois....................... 440 6,065 922 5,583
------ ------------- ----------- ----------
$5,222 $19,740 $ 3,944 $ 21,018
====== ========== ========= ========
</TABLE>

The total revenues, including interest income from other notes receivable,
from each of the above psychiatric hospitals, excluding The Manors, were in
excess of 10% of total Psychiatric Group revenues in 1995.

In February 1995, the Psychiatric Group sold its Westwood and Pembroke
psychiatric hospital investments to a third party. The cash proceeds of
$13,825,000 represented payment for the $10,825,000 net book value of the real
property and repayment of the $3,000,000 balance outstanding under a revolving
credit

81
<PAGE> 84

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

agreement provided by the Psychiatric Group. The Psychiatric Group applied
$10,825,000 of the cash proceeds to pay down its fixed rate inter-Group loan
from the Core Group and applied $3,000,000 of the cash proceeds to pay down its
revolving inter-Group loan from the Core Group. The Psychiatric Group's total
revenues from these two investments were $412,000 and $3,000,000 in 1995 and
1994, respectively.

In March 1995, the Psychiatric Group restructured the terms of its two
Florida psychiatric hospital investments. Pursuant to the restructuring, which
was effective January 1, 1995, the annual minimum rental obligation of The
Retreat psychiatric hospital in Sunrise, Florida was reduced from $2,359,000 to
$1,100,000, and the annual minimum rental obligation of The Manors psychiatric
hospital in Tarpon Springs, Florida was reduced from $855,000 to $600,000. As
part of the restructuring, The Retreat used an existing $1,000,000 lease reserve
fund to pay down outstanding borrowings under a revolving credit agreement
provided by the Psychiatric Group, and the maximum amount available for
borrowing under the credit agreement was reduced from $2,250,000 to $1,000,000.
The Manors used an existing $325,000 lease reserve fund to pay down outstanding
borrowings under a $2,000,000 revolving credit agreement provided by the
Psychiatric Group. The payments received by the Psychiatric Group were used to
pay down its revolving inter-Group loan from the Core Group.

82
<PAGE> 85

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

1996. The Psychiatric Group has an active dialogue with the operator regarding
the payor reimbursement issues and the potential impact of such issues on the
operator's near-term cash flows and financial and operational plans for the
remainder of 1996 and beyond.

In October 1994, the Psychiatric Group sold its Torrance, California
psychiatric property to a third party for its net book value of $5,772,000 in
cash.

The Psychiatric Group's properties are leased under "net" leases pursuant
to which the lessees are responsible for all maintenance, repairs, taxes, and
insurance of the leased properties. The leases provide for the payment of
minimum base rent and additional rent during the fixed term and any renewal
terms. Additional rent is generally based on the increase in annual gross
revenues of the related hospital as specified in the lease agreements.

The Psychiatric Group has the right to approve capital expenditures at all
properties and the option to fund certain capital expenditures on terms
comparable to the original investment. The base and additional rent provisions
of the leases are amended when such capital expenditures are funded to reflect
the Psychiatric Group's increased investment.

Future minimum annual rentals under the Psychiatric Group's noncancellable
operating leases for calendar years 1996 through 2000 are approximately
$2,700,000, $2,700,000, $1,700,000, $1,700,000 and $1,100,000, respectively.
These amounts do not reflect any reductions or deferrals which may be granted to
the Manors or The Retreat as discussed above.

MORTGAGE NOTES RECEIVABLE

Four Winds Hospital -- Saratoga $18,201,000. The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Saratoga Springs, New York. The note
has an initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is June 30, 1999. The interest rate on the note is
12.42%. Interest was payable monthly for the first six years, and thereafter,
principal and interest payments of $194,000 are payable monthly.

Four Winds Hospital -- Katonah $27,600,000. The Psychiatric Group has a
mortgage note receivable secured by a first mortgage and security interest in
the real property of Four Winds Hospital in Katonah (Westchester County), New
York (the Four Winds Note). At June 30, 1992, the Psychiatric Group recorded a
$33,600,000 write-down on the original $61,200,000 Four Winds Note which reduced
the Psychiatric Group's recorded investment in the Four Winds Note to its
present amount of $27,600,000.

At the end of 1992, a formal restructuring of the Four Winds Note was
completed, pursuant to which monthly interest payments were $3,400,000 in the
first year, increase $100,000 annually in each of the succeeding six years and
remain at $4,000,000 per year through maturity. The restructured note has an
initial term of ten years with two optional ten-year extension terms. The
initial term maturity date is November 30, 2002. Base interest received and
recognized by the Psychiatric Group on the Four Winds Note in 1995, 1994 and
1993 was $3,608,000, $3,508,000 and $3,408,000, respectively. Annual base
interest of approximately $7,600,000 would have been recorded in each of those
years had the Four Winds Note performed in accordance with its original terms.

In June 1994, in view of negative trends that caused declining cash flows
at a number of the psychiatric hospitals, the Psychiatric Group recorded a
$30,000,000 write-down of its investments in psychiatric hospitals. In
connection with a review of Four Winds Hospital -- Saratoga and Four Winds
Hospital -- Katonah, as well as uncertainties surrounding possible changes in
Medicaid reimbursement and potential impact of increasing managed care in the
State of New York, $7,950,000 of the $30,000,000 write-down was recorded as a
mortgage note impairment reserve. The Psychiatric Group records interest on such
mortgage notes as interest payments are received.

83
<PAGE> 86

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The Psychiatric Group has an active dialogue with the operator of the two
Four Winds hospitals regarding the operator's desire to create an integrated
behavioral health care delivery system in lower and upper New York State. Such a
system likely will include these hospitals as the base for delivery systems in
their respective markets and is intended to address the potential negative
consequences of the expected changes in Medicaid reimbursement and the increase
in managed care penetration in the State of New York. The Psychiatric Group is
supportive of the operator's strategy and has agreed in principle to release
certain of its security interests in the operator's short-term assets on a
staged basis to permit the operator to obtain the capital required to develop
this system.

Pursuant to the terms of the mortgage notes receivable, the Psychiatric
Group may receive additional interest each year based on the increase in annual
operating revenues of the related psychiatric facility. The Psychiatric Group
may provide permanent financing for capital additions at the facilities.

The carrying amount of mortgage notes receivable is a reasonable estimate
of fair value, as the pricing and terms of the notes are indicative of current
rates and credit risk.

OTHER NOTES RECEIVABLE

The Psychiatric Group provides financing at variable rates to certain
psychiatric hospital operators under revolving credit agreements. The aggregate
commitment under these credit agreements is $5,700,000 as of December 31, 1995.
Borrowings under the credit agreements are subject to compliance with various
covenants and may not exceed a specified percentage of the operators' net
accounts receivable. Borrowings under the credit agreements are secured by
accounts receivable and other personal property of the operators. As of December
31, 1995, $4,475,000 was outstanding under revolving credit agreements at a
weighted average interest rate of 11.5%. The weighted average amount of
borrowings under revolving credit agreements outstanding during 1995 was
$5,066,000 at a weighted average interest rate of 11.9% with a maximum of
$8,800,000 outstanding during the year.

PENSION PLANS

A portion of the cost of the Company's pension plans has been allocated to
the Psychiatric Group under the general and administrative expense allocation
methodology described previously.

84
<PAGE> 87

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK INCENTIVE PLANS

The Company's stock incentive plans provide for the issuance of shares of
the Company's stock to directors and key employees as stock incentives. Pursuant
to the terms of the Company's stock incentive plans, stock options, restricted
stock, deferred shares and dividend equivalent rights (DERs) were adjusted to
reflect the Distribution. The Notes to the Consolidated Financial Statements of
the Company should be read for further details regarding the Company's stock
incentive plans. The Company's consolidated cost of its stock incentive plans is
allocated to the Psychiatric Group under the general and administrative expense
allocation methodology described previously.

PREFERRED STOCK PURCHASE RIGHTS PLAN

DIVIDENDS

A quarterly dividend of $.80 per share for Psychiatric Group Depositary
Shares, or approximately $1,668,000, was declared by the Board of Directors on
January 24, 1996, payable on February 23, 1996 to shareholders of record on
February 9, 1996. The dividend has been reflected as dividends payable in the
accompanying financial statements as of December 31, 1995. Dividends of $1.60
per share paid on Psychiatric Group Depositary Shares during the year ended
December 31, 1995 are characterized as $1.25 of ordinary income and $.35 of
return of capital for tax purposes.

In general, dividends on the Company's capital stock are limited by the
Company's unsecured revolving credit agreement to 95% of cash flow available for
debt service, less interest expense, plus gains on asset dispositions and
certain proceeds (PG Excess Proceeds) from the disposition of Psychiatric Group
assets after the repayment of Psychiatric Group indebtedness. Dividends or other
distributions paid out of PG Excess Proceeds will be available only for the
Psychiatric Group Depositary Shares and will be limited to $30 million in the
aggregate and $15 million in any calendar year.

LEGAL PROCEEDINGS

85
<PAGE> 88

AMERICAN HEALTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO PSYCHIATRIC GROUP COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- -------- ------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1995
Revenues..................................... $ 2,891 $ 2,441 $ 2,534 $ 2,480 $ 10,346
Net income................................... 1,691 1,339(1) 1,649 1,595 6,274
Net income per depositary share.............. .81 .64 .79 .76 3.00
1994
Revenues..................................... $ 3,836 $ 3,974 $ 4,051 $ 3,527 $ 15,388
Net income (loss)............................ 1,860 (27,894)(2) 2,476 703(1) (22,855)
Net income (loss) per depositary share....... .89 (13.37) 1.19 .34 (10.96)
</TABLE>

- ---------------

(1) The second quarter of 1995 and the fourth quarter of 1994 include costs
related to the Distribution of $300,000 and $1,450,000, respectively.
(2) Includes a write-down of $30,000,000 relating to investments in psychiatric
properties.

86
<PAGE> 89

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on the 29th day of March, 1996.

AMERICAN HEALTH PROPERTIES, INC.

By: /s/ MICHAEL J. MCGEE

------------------------------------
Michael J. McGee
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph P. Sullivan and Michael J. McGee, and each
or either of them as his true and lawful attorney-in-fact and agent, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute may
lawfully do or cause to be done by virtue hereof.

87
<PAGE> 90

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------- ---------------
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER

/s/ JOSEPH P. SULLIVAN Principal Executive Officer March 29, 1996
- ------------------------------------------ and Director
Joseph P. Sullivan

PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER

/s/ MICHAEL J. MCGEE Senior Vice President and March 29, 1996
- ------------------------------------------ Chief Financial Officer
Michael J. McGee

/s/ WALTER J. MCNERNEY Chairman of the Board March 29, 1996
- ------------------------------------------
Walter J. McNerney

/s/ NORMAN BARKER, JR. Director March 29, 1996
- ------------------------------------------
Norman Barker, Jr.

/s/ ROYCE DIENER Director March 29, 1996
- ------------------------------------------
Royce Diener

/s/ JAMES L. FISHEL Director March 29, 1996
- ------------------------------------------
James L. Fishel

/s/ CHARLES M. HAAR Director March 29, 1996
- ------------------------------------------
Charles M. Haar

/s/ SHELDON S. KING Director March 29, 1996
- ------------------------------------------
Sheldon S. King

/s/ LOUIS T. ROSSO Director March 29, 1996
- ------------------------------------------
Louis T. Rosso
</TABLE>

88
<PAGE> 91
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C>
3.1 -- Certificate of Incorporation, as amended to date, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-3 (No. 33-61895), effective October
17, 1995, and incorporated herein by reference.
3.2 -- Amended and Restated Bylaws of the Company, filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
4.1 -- Rights Agreement dated as of April 10, 1990, filed as Exhibit 2 to the
Company's Registration Statement on Form 8-A dated April 20, 1990, and
incorporated herein by reference.
4.2 -- Form of Note Agreement between the Company and various institutional investors,
dated as of May 1, 1989, for the Company's $5,000,000 11.33% Series A Notes due
May 30, 1996 and $120,000,000 11.44% Series B Notes due May 30, 1999, filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-11 (No.
33-29387), effective August 4, 1989, and incorporated herein by reference.
4.3 -- Form of Note Agreement between the Company and various institutional investors,
dated as of September 1, 1990, for the Company's $100,000,000 10.41% Senior
Notes due September 15, 2000, filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990, and incorporated
herein by reference.
4.4 -- Certificate of Designations of Psychiatric Group Preferred Stock, filed as
Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 14, 1995, and incorporated herein
by reference.
10.1 -- American Health Properties, Inc. 1988 Stock Option Plan, filed as Exhibit 28 to
the Company's Registration Statement on Form S-8 (No. 33-25781), filed with the
Securities and Exchange Commission on November 28, 1988, and incorporated
herein by reference.
10.2 -- American Health Properties, Inc. 1990 Stock Incentive Plan, filed as Exhibit B
to the Company's Proxy Statement for its 1990 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission on May 7, 1990, and
incorporated herein by reference.
10.3 -- Employment Agreements between the Company and Joseph P. Sullivan, C. Gregory
Schonert and Michael J. McGee, filed as Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992, and incorporated
herein by reference.
10.4 -- American Health Properties, Inc. 1994 Stock Incentive Plan, filed as Appendix A
to the Company's Proxy Statements for its 1994 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission on April 8, 1994, and
incorporated herein by reference.
10.5 -- American Health Properties, Inc. Nonqualified Stock Option Plan for Nonemployee
Directors, filed as Appendix B to the Company's Proxy Statement for its 1994
Annual Meeting of Shareholders filed with the Securities and Exchange
Commission on April 8, 1994, and incorporated herein by reference.
10.6 -- Credit Agreement dated as of December 27, 1995 among American Health
Properties, Inc., the financial institutions listed therein, Banque Paribas as
Co-Agent, First Union Bank of North Carolina as Co-Agent, NationsBank of Texas,
N.A. as Co-Agent and Wells Fargo Bank, N.A. as Arranger, Agent and Facing Bank,
filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Securities Exchange Commission on January 5, 1996, and incorporated herein
by reference.
*21 -- List of subsidiaries of the Company
*23 -- Consent of Independent Public Accountants
*24 -- Powers of Attorney (included in signature page at page 24)
*27 -- Financial Data Schedule
*99.1 -- Four Winds, Inc. Financial Highlights
</TABLE>

- ---------------
* Filed herewith

<PAGE> 1

EXHIBIT 21
SUBSIDIARIES

The following list includes all of the subsidiaries of the Company, all of
which are wholly-owned.

<TABLE>
<CAPTION>
ORGANIZED UNDER
NAME LAWS OF
- --------------------------------------- ----------------
<S> <C>
AMIREIT (Frye), Inc. North Carolina
AMIREIT (Kendall), Inc. Florida
AMIREIT Lucy Lee, Inc. Missouri
AMIREIT (North Fulton), Inc. Georgia
AMIREIT (Palm Beach Gardens), Inc. Florida
AHE of California, Inc. California
AHE of Irvine, Inc. California
American Health Properties of Arizona,
Inc. Arizona
AHP of Colorado, Inc. Colorado
AHP of Fayetteville, Inc. Arkansas
AHP of Illinois, Inc. Illinois
AHP of Kansas, Inc. Kansas
AHP of New Orleans, Inc. Louisiana
AHP of South Carolina, Inc. South Carolina
AHP of Sunrise, Inc. Florida
AHP of Tarpon Springs, Inc. Florida
AHP of Texas, Inc. Texas
AHP of Utah, Inc. Utah
AHP of Washington, Inc. Washington
AHP of West Virginia, Inc. West Virginia
</TABLE>

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the following of the Company's
previously filed Registration Statements: Form S-8 (File No. 33-25781); Form S-8
(File No. 33-36090); Form S-8 (File No. 33-54813); Form S-8 (File No. 33-54815);
Form S-3 (File No. 33-36091); and Form S-3 (File No. 33-61895).

ARTHUR ANDERSEN LLP

Denver, Colorado,
March 25, 1996.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 7,571
<SECURITIES> 0
<RECEIVABLES> 7,141
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 601,892
<DEPRECIATION> 82,435
<TOTAL-ASSETS> 586,316
<CURRENT-LIABILITIES> 0
<BONDS> 207,378
0
2
<COMMON> 234
<OTHER-SE> 352,824
<TOTAL-LIABILITY-AND-EQUITY> 586,316
<SALES> 0
<TOTAL-REVENUES> 91,230
<CGS> 0
<TOTAL-COSTS> 14,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,057
<INCOME-PRETAX> 42,381
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,381
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Primary and fully diluted earnings per share attributable to Core Group Common
Stock $1.69; Psychiatric Group Depositary Shares $3.00
</FN>

</TABLE>

<PAGE> 1

EXHIBIT 99.1

FOUR WINDS, INC. Financial Highlights(1)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 FISCAL YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net revenue..................... $ 23,401 $ 21,991 $ 29,000 $ 26,380 $ 26,182
Operating income(2)............. 3,517 4,676 5,166 5,431 260
Depreciation.................... 1,026 956 1,339 1,360 1,477
Interest: senior(3)............. 2,952 2,874 3,862 3,539 3,533
other.................. 446 449 656 530 4,514
Net income (loss)............... (195) 965 35 749 27,508(4)
Cash flows from operating
activities................... 1,026 422 1,480 25 (2,633)
BALANCE SHEET
Total assets.................... $ 27,574 $ 27,302 $ 26,779 $ 27,064 $ 26,589
Debt: senior(3)................. 28,889 29,072 29,028 29,198 29,350
other..................... 6,182 6,182 5,988 6,165 4,983
Stockholders' deficit........... (13,001) (11,831) (12,805) (12,611) (13,360)
Working capital................. 4,205 5,436 3,941 3,800 2,275
</TABLE>

NOTES
- ---------------
(1) Audited financial statements for Four Winds, Inc. can be obtained by making
a written request that includes the provider's name and address (Four Winds
Hospital, 800 Cross River Road, Katonah, New York 10536) submitted to: New
York State Department of Health, Empire State Plaza, 2230 Corning Tower,
Albany, New York 12237.

(2) Operating income consists of net income before interest, depreciation,
amortization and nonoperating gains and losses.

(3) Senior debt consists of a mortgage loan and term note payable to American
Health Properties, Inc. Interest expense also includes participation
interest paid to American Health Properties, Inc. pursuant to the mortgage
loan agreement.

(4) Includes a $36 million extraordinary gain on early extinguishment of debt.