Results of Operations
Care commenced operations on June 22, 2007; thus, there is no meaningful prior period information for comparison to the three month and six month periods ended June 30, 2008. Therefore, the following management discussion and analysis is specific to the results of Care's activity for the three and six months ended June 30, 2008.
Results for the three months ended June 30, 2008 Revenue
We earned investment income on our portfolio of mortgage investments of approximately $3.5 million for the three month period ended June 30, 2008. Our portfolio of mortgage investments are all variable rate instruments, and at June 30, 2008, had a weighted average spread of 4.46% over one month LIBOR, and an average maturity of approximately three years. The effective yield on the portfolio at the period ended June 30, 2008 was 6.92%.
Other income for the three month period ended June 30, 2008, reflects $0.2 million in interest earned on invested cash balances, as well as miscellaneous fees.
Expenses
For the three months ended June 30, 2008, we recorded total related party expenses of approximately $1.3 million consisting of the base management fee payable to our Manager under our management agreement.
Marketing, general and administrative expenses were approximately $0.5 million for the three months ended June 30, 2008 and consist of professional fees, insurance and general overhead costs for the Company. Included in our expenses is stock based non-employee compensation related to our issuance of restricted common stock to our Manager's employees, some of whom are also Care officers or directors, and our independent directors. Pursuant to SFAS 123R, we recognized $0.4 million in reversal of expense for the three month period ended June 30, 2008 related to these stock grants. The balance of this compensation will be recognized over the remaining vesting period and the amount of the compensation adjusted to fair value at each measurement date pursuant to SFAS 123R. In addition, we paid $0.1 million in stock-based compensation related to shares of our common stock earned by our independent directors as part of their compensation. Each independent director is paid a base retainer of $100,000, which is payable 50% in cash and 50% in stock. Payments are made quarterly in arrears. Shares of our common stock issued to our independent directors as part of their annual compensation vest immediately and are expensed by us accordingly.
The management fees, expense reimbursements, and the relationship between our Manager and us are discussed further in "Related Party Transactions".
Loss from investments in partially-owned entities For the three months ended June 30, 2008, net loss from partially-owned entities amounted to $1.1 million. Our equity in the non-cash operating loss of the Cambridge properties was $1.4 million which was partially offset by our share of equity income in SMC of $0.3 million.
Unrealized gains on derivatives
We recognized a $0.2 million unrealized gain on the fair value of our obligation to issue partnership units related to the Cambridge transaction, and a $44,000 gain on the fair value of our interest rate caps. See Notes 10 and 14 for more information.
Interest Expense
We increased our borrowings under our warehouse line of credit to $38.3 million and incurred interest expense of approximately $0.4 million. In order to increase our net income and the cash flows available to pay dividends to our stockholders, we intend to pursue a strategy of acquiring additional investments by leveraging our portfolio of investments through our warehouse line, dedicated asset financing and other

borrowings. Additionally, we incurred approximately $0.1 million of interest expense on our mortgage debt that was incurred for the acquisition of the 12 facilities from Bickford. See Note 3 for further discussion. Results for the six months ended June 30, 2008 Revenue
We earned investment income on our portfolio of mortgage investments of approximately $8.2 million for the six month period ended June 30, 2008. Our portfolio of mortgage investments are all variable rate instruments, and at June 30, 2008, had a weighted average spread of 4.46% over one month LIBOR, and an average maturity of approximately 3 years. The effective yield on the portfolio for the period ended June 30, 2008 was 6.92%.
Other income for the six month period ended June 30, 2008, reflects $0.4 million in interest earned on invested cash balances, as well as miscellaneous fees.
Expenses
For the six months ended June 30, 2008, we recorded total related party expenses of approximately $2.6 million consisting of the base management fee payable to our Manager under our management agreement. No incentive fees were paid to our Manager.
Marketing, general and administrative expenses were approximately $1.5 million for the six months ended June 30, 2008 and consist of professional fees, insurance and general overhead costs for the Company. Included in our expenses is stock based non-employee compensation related to our issuance of shares of restricted common stock to our Manager's employees, some of whom are also Care officers or directors, and our independent directors. Pursuant to SFAS 123R, we recognized $0.2 million in reversal of expense for the six month period ended June 30, 2008 related to these stock grants. The balance of this compensation will be recognized over the remaining vesting period and the amount of the compensation adjusted to fair value at each measurement date pursuant to SFAS 123R. In addition, we paid $0.1 million in stock-based compensation related to shares of our common stock earned by our independent directors as part of their compensation. Each independent director is paid a base retainer of $100,000, which is payable 50% in cash and 50% in stock. Payments are made quarterly in arrears. Shares of our common stock issued to our independent directors as part of their annual compensation vest immediately and are expensed by us accordingly.
The management fees, expense reimbursements, and the relationship between our Manager and us are discussed further in "Related Party Transactions".
Loss from investments in partially-owned entities For the six months ended June 30, 2008, net loss from partially-owned entities amounted to $2.2 million. Our equity in the operating loss of the Cambridge properties was $2.8 million which was partially offset by our share of equity income in SMC of $0.6 million.
Unrealized gains on derivatives
We recognized approximately $22,000 unrealized gain on the fair value of our obligation to issue partnership units related to the Cambridge transaction and a $23,000 unrealized gain on the fair value of our interest rate caps during the six months ended June 30, 2008. See Notes 10 and 14 for more information.
Interest Expense
We increased our borrowings under our warehouse line of credit to $38.3 million and incurred interest expense of approximately $0.7 million during the six months ended June 30, 2008. The increase in interest expense is due to the increase in the outstanding balance and the increase in the interest rate under our warehouse line of credit, which took effect on June 1, 2008. See Note
7. In order to increase our net income and the cash flows available to pay dividends to our stockholders, we intend to pursue a strategy of acquiring additional investments by leveraging our portfolio of investments through our warehouse line, dedicated asset financing and other borrowings. Additionally, we incurred approximately $0.1 million of

interest expense on our mortgage debt that was incurred for the acquisition of the twelve facilities from Bickford during the six months ended June 30, 2008, Cash Flows
Cash and cash equivalents were $15.4 million at June 30, 2008, up from $15.3 million at December 31, 2007. The $0.1 million increase was largely attributable to cash flow from operations for the first half of $1.6. Investment activities utilized $81.4 million and net financing activities contributed an additional $79.9 million.
Net cash provided by operating activities for the six month period ended June 30, 2008 amounted to $1.6 million. Net income before adjustments provided $1.1 million. Equity in the operating results of, and distributions from, investments in partially-owned entities added $2.7 million. Non-cash charges for amortization of loan premium, deferred financing cost, amortization of deferred loan fees, reversal of expense on stock-based compensation, unrealized gains on derivatives, depreciation and amortization and the net loss on the prepayment of a loan contributed $1.2 million. The net change in operating assets and liabilities used $3.4 million in cash flow and consisted of a $3.2 million increase in other assets and a $0.3 million reduction in accounts payable and accrued expenses, offset by $0.7 million in accrued interest collected and a $0.6 million decrease in other liabilities.
Net cash used in investing activities for the six month period ended June 30, 2008 totaled $81.4 million and was primarily used to extend new loans and additional advances to existing borrowers for $10.7 million, net of $0.4 million of origination fees, and to fund a $100.8 million investment in real estate. Principal amortizations and prepayments on our mortgage portfolio provided $30.2 million and we incurred an additional $0.1 million in deferred expenses related to our investments in partially-owned entities.
Net cash provided by financing activities for the six month period ended June 30, 2008, was approximately $79.9 million which resulted from additional draw downs on our warehouse line of credit amounting to $13.6 million, borrowing on a mortgage of $74.6 to acquire the real estate properties, offset by dividend payments of $7.2 million. In addition, we made principal payments on the warehouse line of approximately $0.3 million and deferred additional expenditures related to the mortgage debt of $0.8 million. Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay dividends and other general business needs. Our primary sources of liquidity are net interest income earned on our portfolio of loans, lease income from our real estate properties, distributions from our joint ventures and interest income earned from our available cash balances. Additional sources of liquidity are net cash provided by operating activities, repayment of principal by our borrowers in connection with our loans and investments, asset-specific borrowings and borrowings under our warehouse facility. We believe that we have adequate liquidity to continue to operate, and execute our business plan for at least the next twelve months.
As of June 30, 2008, the Company had $15.4 million in cash and cash equivalents, including $1.8 million related to customer deposits maintained in an unrestricted account. In addition, Care has commitments at June 30, 2008 to extend credit or finance tenant improvements in 2008 amounting to $14.8 million (See Note 13 and the Table under "Contractual Obligations"). Under the terms of the Master Repurchase Agreement (as amended in June 2008) for our warehouse line of credit with Column Financial, Inc., Care is required to maintain minimum liquidity of $5 million under the current level of the line usage. The Company continues to seek other financing sources, including asset specific debt and leveraging unencumbered assets to secure additional borrowings.
Since our initial public offering in June 2007, liquidity in the global credit markets has been reduced and interest rate spreads have widened significantly. Dislocations in the global credit markets, including

securitized financing vehicles such as short-term warehouse facilities and longer-term structures such as CDOs and CMBS, have resulted in significant contraction of liquidity.
As of December 31, 2007, the Company pledged five mortgage loans with a total principal balance of $92.3 million into the warehouse line and had $25.0 million in borrowings outstanding under the line which was used to partially fund our investments in Cambridge and SMC. In January 2008, Care pledged additional assets to the warehouse line providing increased availability under the line, and on February 19, 2008, utilized $10.2 million in additional borrowings to fund a new mortgage investment. On March 19, 2008, we drew another $3.4 million on the warehouse line. Pledging additional eligible assets into the warehouse line may provide additional funding availability up to approximately $24 million, subject to the purchase of interest rate caps and at the sole discretion and current underwriting standards of our lender. However, with widespread dislocation in the debt markets persisting well into 2008, we cannot be assured with any certainty that additional funds from the warehouse facility will be advanced. In addition, should we not be able to consummate a securitization transaction, our warehouse provider could liquidate the warehoused collateral and we would have to pay any amount by which the original purchase price of the collateral exceeds its sale price, subject to negotiated caps, if any, on our exposure, notwithstanding Care's right to repay the outstanding obligation under the warehouse line.
Our ability to meet our long-term liquidity and capital resource requirements will be subject to obtaining additional debt financing and equity capital. We cannot anticipate when credit markets will stabilize and liquidity will become available. Our actual leverage will depend on our mix of investments and the cost and availability of leverage. If we are unable to renew, replace or expand our sources of financing, it may have an adverse effect on our business, results of operations, and ability to make distributions to our stockholders. Any indebtedness we incur will likely be subject to continuing covenants and we will likely be required to make continuing representations and warranties about our company in connection with such debt. Our debt financing terms may require us to keep un-invested cash on hand, or to maintain a certain portion of our assets free of liens, each of which could serve to limit our borrowing ability. Moreover, our debt may be secured by our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock. In addition, posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets.
To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. We believe that, if the credit markets return to more historically normal conditions, our capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new lending and investment opportunities, paying distributions to our stockholders and servicing our debt obligations.
Capitalization
As of June 30, 2008, we had 21,004,323 shares of common stock outstanding. Quantitative and Qualitative Disclosures about Market Risk Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risks to which we will be exposed are real estate and interest rate risks.

Real Estate Risk
The value of owned real estate, commercial mortgage assets and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions which may be adversely affected by industry slowdowns and other factors, local real estate conditions (such as an oversupply of retail, industrial, office or other commercial space), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, retroactive changes to building or similar codes, and increases in operating expenses (such as energy costs). In the event net operating income decreases, or the value of property held for sale decreases, a borrower may have difficulty paying our rent or repaying our loans, which could result in losses to us. Even when a property's net operating income is sufficient to cover the property's debt service, at the time an investment is made, there can be no assurance that this will continue in the future.
The current turmoil in the residential mortgage market may continue to have an effect on the commercial mortgage market and real estate industry in general. Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including the availability of liquidity, governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
Our operating results will depend in large part on differences between the income from assets in our mortgage loan portfolio and our borrowing costs. All of our loan assets are variable-rate instruments that we finance with variable rate debt. The objective of this strategy is to minimize the impact of interest rate changes on the spread between the yield on our assets and our cost of funds. Some of our loans may be subject to various interest rate floors. As a result, if interest rates fall below the floor rates, the spread between the yield on our assets and our cost of funds will increase, which will generally increase our returns.

At present, our portfolio of variable rate mortgage loans is substantially funded by our equity as restrictive conditions in the securitized debt markets have not enabled us to leverage the portfolio through our warehouse line as we originally intended. Accordingly, the income we earn on these loans is subject to variability in interest rates. At current investment levels, changes in interest rates at the magnitudes listed would have the following estimated effect on our gross annual income from investments in loans:

                                              Increase/(decrease) in income
                                                from investments in loans
      Increase/(decrease) in interest rate       (dollars in thousands)
      (200) basis points                                         ($1,716,000 )
      (150) basis points                                          (1,287,000 )
      (100) basis points                                            (858,000 )
      Base interest rate                                                   0
      +100 basis points                                              917,000
      +150 basis points                                            1,433,000
      +200 basis points                                            2,134,000

In the event of a significant rising interest rate environment and/or economic downturn, delinquencies and defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Further, such delinquencies or defaults could have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
Our original funding strategy involved leveraging our loan investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, repurchase agreements, secured loans, securitizations, including the issuance of CDOs or CMBS, loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings. In the short term we intend to use warehouse lines of credit, to the extent available, to finance the acquisition of assets as well as utilizing asset-specific debt. Currently, the availability of liquidity through CDOs is very limited due to investor concerns over dislocations in the debt markets, hedge fund losses, the large volume of unsuccessful leveraged loan syndications and related impact on the overall credit markets. These concerns have materially impacted liquidity in the debt markets, making financing terms for borrowers significantly less attractive. We cannot foresee when credit markets may stabilize and liquidity becomes available. Contractual Obligations
Under the Management Agreement we entered into in connection with our initial public offering, our Manager, subject to the oversight of the Company's Board of Directors, is required to manage the day-to-day activities of Care, for which the Manager receives a base management fee and is eligible for an incentive fee. The Management Agreement has an initial term expiring on June 30, 2010, and will be automatically renewed for one-year terms thereafter unless either we or our Manager elect not to renew the agreement. The base management fee is payable monthly in arrears in an amount equal to 1/12 of 1.75% of the Company stockholders' equity at the end of each month, computed in accordance with GAAP, adjusted for certain items pursuant to the terms of the agreement. Our Manager is also eligible to receive an incentive fee, payable quarterly in arrears, based upon performance thresholds stipulated in the Management Agreement. For the period ended June 30, 2008, we recognized $2.6 million in management fee expense related to the base management fee, and our Manager was not eligible for an incentive fee. (See Note 15).
In addition, our Manager may be entitled to a termination fee, payable for non-renewal of the Management Agreement without cause, in an amount equal to three times the sum of the average annual base fee and the average annual incentive fee, both as earned by our Manager during the two years immediately preceding the most recently completed calendar quarter prior to the date of termination. No termination fee is payable if we terminate the Management Agreement for cause.
On October 1, 2007, Care entered into a master repurchase agreement ("Agreement") with Column Financial, Inc., an affiliate of Credit Suisse ("Column", for short-term financing through a warehouse facility. The Agreement provides an

initial line of credit up to $300 million, which may be increased temporarily to . . .