Executive Overview

Business

We are a self-administered health care real estate investment trust (or REIT) that invests primarily in long-term healthcare and other health care related properties through mortgage loans, property lease transactions and other investments. In the first quarter of 2009, long-term healthcare properties, which include skilled nursing and assisted living properties, comprised approximately 98% of our investment portfolio.

The following table summarizes our "direct real estate investment portfolio" (properties that we own or on which we hold promissory notes secured by first mortgages) as of March 31, 2009 (dollar amounts in thousands):

                                                                   For the
                                                                    Three
                                                                   Months
                                                For the Three       Ended                                  Number
                                                Months Ended       3/31/09      Percentage      Number       of      Investment                      Number
Type of            Gross       Percentage of   3/31/09 Rental     Interest          of            of       Beds/        per          Number of         of
Property        Investments     Investments        Income        Income (2)    Revenues (3)   Properties   Units      Bed/Unit     Operators (1)   States (1)
Assisted
Living
Properties     $     282,084            48.8 % $         7,551   $       778           47.9 %        101    4,598   $      61.35              13           22
Skilled
Nursing
Properties           283,563            49.0 %           7,184         1,516           50.0 %        100   11,587          24.47              34           20
Schools               13,020             2.2 %             295            77            2.1 %          2      N/A            N/A               2            2
Totals         $     578,667           100.0 % $        15,030   $     2,371          100.0 %        203   16,185

(2) Includes Interest Income from Mortgage Loans.

(3) Includes Rental Income and Interest Income from Mortgage Loans.

As of March 31, 2009 we had $443.8 million in carrying value of net real estate investment, consisting of $369.1 million or 83.2% invested in owned and leased properties and $74.7 million or 16.8% invested in mortgage loans secured by first mortgages.

For the three months ended March 31, 2009, rental income and interest income from mortgage loans represented 84.8% and 13.4%, respectively, of total gross revenues. In most instances, our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period in accordance with SFAS No. 13, "Accounting for Leases." Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved. This lease structure initially generates lower revenues and net income but enables us to generate additional growth and minimize non-cash straight-line rent over time. For the three months ended March 31, 2009 and 2008, we recorded $1.2 million and $1.0 million, respectively, in straight-line rental income. Also during the three months ended March 31, 2009, we recorded an additional $0.2 million of straight-line rent receivable reserve. Straight-line rental income on a same store basis will decrease from $4.1 million for projected annual 2009 to $2.4 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments with fixed annual rental escalations are added to our portfolio. During the three months ended March 31, 2009 we received $14.0 million of cash rental revenue and recorded $0.2 million of lease inducement cost. At March 31, 2009 and December 31, 2008, the straight-line rent receivable balance, net of reserves, on the balance sheet was $14.9 million and $13.9 million, respectively.

Our primary objectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term healthcare properties and other health care related properties managed by experienced operators. To meet these objectives, we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders

and diversify our investment portfolio by geographic location, operator and form of investment. We opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return. Consistent with this strategy, we pursue, from time to time, opportunities for potential acquisitions and investments, with due diligence and negotiations often at different stages of development at any particular time.

† For investments in skilled nursing properties, we favor low cost per bed opportunities, whether in fee simple properties or in mortgages. The average per bed cost of our owned skilled nursing properties is approximately $33,200 per bed while that of properties subject to our mortgages is approximately $10,000 per bed.

† Additionally with respect to skilled nursing properties, we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients. We seek to invest primarily in properties that are located in suburban and rural areas of states. We prefer to invest in a property that has significant market presence in its community and where state certificate of need and/or licensing procedures limit the entry of competing properties.

† For assisted living investments we have attempted to diversify our portfolio both geographically and across product levels. Thus, we believe that although the majority of our investments are in affordably priced units, our portfolio also includes a significant number of upscale units in appropriate markets with certain operators.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. Our investments in mortgage loans and owned properties represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon. To the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator. Our monitoring process includes periodic review of financial statements for each facility, periodic review of operator credit, scheduled property inspections and review of covenant compliance relating to real estate taxes and insurance.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. Some operating leases and loans are credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates.

Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related properties. New investments are generally funded from cash on hand and temporary borrowings under our unsecured line of credit and internally generated cash flows. Our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured line of credit, is expected to be provided through a combination of public and private offerings of debt and equity securities and secured debt financing. The timing, source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment, especially to changes in interest rates. Changes in the capital markets environment may impact the availability of cost-effective capital. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments during the current period of tightened credit conditions.

Economic Climate

Through the first quarter of 2009, the U.S. experienced challenging financial markets, tighter credit conditions, and slower growth. Continued concerns about the systemic impact of the recession, declining business and consumer confidence, and a weakened real estate market have contributed to increased market volatility and diminished expectations for the U.S. economy. As a result, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our operators.

We expect that the deterioration in the credit markets should exert downward pressure on prices of long term healthcare properties, although the lack of recent transaction volume makes it difficult to determine if this is occurring. However, we believe our business model has enabled and will continue to allow us to maintain the integrity of our property investments, including our ability to respond to financial difficulties that may be experienced by operators. Traditionally, we have taken a conservative approach to managing our business, choosing to maintain liquidity and exercise patience until favorable investment opportunities arise.

At March 31, 2009, we had $21.7 million of cash on hand and $80.0 million available on our unsecured line of credit with no scheduled maturities other than the maturity date of July 17, 2011. On March 31, 2009, we received a $2.0 million prepayment of a loan due in 2016. In calendar year 2009, we have debt maturities of $8.1 million due in October 2009 at an interest rate of 8.43% and $15.6 million due in December 2009 at an interest rate of 8.81%. The October maturity may be paid 90 days early and the December maturity may be paid six months early. In calendar year 2009, we have mortgage receivables of $7.5 million maturing in November.

As a result, we believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance some future investments should we determine such future investments are financially feasible.

Key Transactions

During the three months ended March 31, 2009, we invested $2.0 million to repurchase a total of 109,484 shares of its Series F Cumulative Preferred Stock (or Series F Preferred Stock) at an average cost of $18.27 per share, including commission. The Series F Preferred Stock has a liquidation value of $25.00 per share and a dividend rate of 8.0%. The discounted purchase price on these shares, which is the liquidation value over the fair value, netted with the original issue discount has been added to net income in calculating net income allocable to common stockholders.

Key Performance Indicators, Trends and Uncertainties

We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.

Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is valuable to understand what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property or mortgage loans. In order to qualify as an equity REIT, at least 75 percent of our total assets must be represented by real estate assets, cash, cash items and government securities. Investment mix measures the portion of our investments that relate to our various property types. Operator mix measures the portion of our investments that relate to our top three operators. Geographic mix measures the portion of our investment that relate to our top five states.

The following table reflects our recent historical trends of concentration risk:

                                                   Period Ended
                              3/31/09    12/31/08     9/30/08     6/30/08     3/31/08
                                         (gross investment, in thousands)
Asset mix:
Real property                $ 503,255   $ 502,617   $ 497,656   $ 496,114   $ 495,202
Loans receivable                75,412      78,301      87,581      91,040      91,955

Investment mix:
Assisted living properties   $ 282,084   $ 282,084   $ 282,304   $ 282,406   $ 275,313
Skilled nursing properties     283,563     285,814     289,913     291,728     298,824
Schools                         13,020      13,020      13,020      13,020      13,020

Operator mix:
Brookdale Communities        $  84,210   $  84,210   $  84,210   $  84,210   $  84,210
Preferred Care, Inc. (1)        87,015      87,150      87,281      87,490      93,197
Extendicare (ALC)               88,034      88,034      88,034      88,034      88,034
Remaining operators            319,408     321,524     325,712     327,420     321,716

Geographic mix:
Colorado                     $  27,723   $  27,706   $  27,581   $  27,581   $  27,581
Florida                         43,836      43,884      43,930      43,975      47,368
Ohio                            56,804      56,804      56,804      55,862      55,121
Texas                          103,944     104,197     104,637     106,568     102,245
Washington                      27,334      27,355      27,376      27,412      27,504
Remaining states               319,026     320,972     324,909     325,756     327,338

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization relates to long-term debt. Our coverage ratios include interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends). The coverage ratios are based on earnings before interest, taxes, depreciation and amortization. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:

                                                    Three Months Ended
                               3/31/09      12/31/08      9/30/08      6/30/08       3/31/08

Debt to book capitalization
ratio (6)                          7.3 %         7.4 %        7.4 %        7.4 %(5)     10.0 %
Debt & Preferred Stock to
book capitalization ratio
(6)                               45.2 %        45.5 %       45.3 %       45.2 %(5)     46.7 %

Debt to market
capitalization ratio (6)           5.9 %(2)      5.4 %(2)     4.2 %        4.6 %(5)      6.2 %
Debt & Preferred Stock to
market capitalization ratio
(6)                               32.8 %(2)     30.1 %(2)    23.0 %       26.8 %(5)     28.6 %

Interest coverage ratio           17.7 x(1)     15.4 x(3)    17.1 x(4)    15.0 x (4)    13.6 x
Fixed charge coverage ratio        3.4 x         3.1 x        3.2 x        3.3 x         3.2 x

(2) Increase primarily due to the decrease in market capitalization.

(3) This decrease is due primarily to non-payment of rental income and mortgage interest income from affiliates of Sunwest Management, Inc., loan pay-offs and lower invested cash balances at lower interest rates, partially offset by lower interest expense due to debt paid off in 2008. Additionally in the fourth quarter of 2008 we incurred $0.6 million of one-time charges related primarily to lease/loan defaults and terminated transactions.

(4) Increase primarily due to decrease in interest expense relating to repayment of a $14.2 million mortgage loan secured by four assisted living properties located in Ohio.

(5) Decrease due to repayment of a $14.2 million mortgage loan secured by four assisted living properties located in Ohio.

(6) Revised as required by Statement of Financial Accounting Standards No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin No. 51."

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to

†          The status of the economy;

†          The status of capital markets, including prevailing interest rates
and availability of capital;

†          Compliance with and changes to regulations and payment policies
within the health care industry;

†          Changes in financing terms;

†          Competition within the health care and senior housing industries; and

†          Changes in federal, state and local legislation.

Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends.

Operating Results

Three months ended March 31, 2009 compared to three months ended March 31, 2008

Revenues for the three months ended March 31, 2009 decreased to $17.7 million from $17.8 million for the same period in 2008 primarily due to decreases in interest income from mortgage loans and decreases in interest and other income partially offset by increase in rental income, as discussed below. Rental income for the three months ended March 31, 2009 increased $0.4 million from the same period in 2008 primarily as a result of increases provided for in existing lease agreements. Same store cash rental income, properties owned for the three months ended March 31, 2009, and the three months ended March 31, 2008, increased $0.4 million due to rental increases provided for in existing lease agreements.

Interest income from mortgage loans for the three months ended March 31, 2009 decreased $0.3 million from the same period in 2008 primarily due to payoffs and the conversion of a mortgage loan to an owned property in the fourth quarter of 2008 resulting from the non-payment of interest income from affiliates of Sunwest Management, Inc., as described in Note 6. Real Estate Investments to our consolidated financial statement included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Interest and other income for the three months ended March 31, 2009 decreased $0.2 million from the same period in 2008 primarily due to lower interest income from our investments of cash resulting from lower interest rates and lower cash balances.

Interest expense for the three months ended March 31, 2009 was $0.3 million lower than the same period in 2008 due to a decrease in average debt outstanding during the period resulting from the repayment of a mortgage loan during 2008 and normal amortization of existing mortgage loans.

Depreciation and amortization expense was comparable for each of the three months ended March 31, 2009 and 2008.

Operating and other expenses were $0.1 million higher in the three months ended March 31, 2009 as compared to the same period in 2008 primarily due to an increase in straight-line rent receivable reserve.

Net income allocable to common stockholders for the three months ended March 31, 2009 decreased $0.3 million from the same period in 2008 primarily due to the decrease of allocation of income from our preferred stock buyback application of FSP No. EITF Topic No. D-42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock" (or EITF Topic No. D-42), partially offset by the decrease in preferred stock dividends related to the preferred stock buyback in 2009.

Liquidity and Capital Resources

Operating Activities:

At March 31, 2009, our real estate investment portfolio (before accumulated depreciation and amortization) consisted of $503.3 million invested primarily in owned long-term healthcare properties and mortgage loans of approximately $75.4 million (prior to deducting a $0.8 million reserve). Our portfolio consists of direct investments (properties that we either own or on which we hold promissory notes secured by first mortgages) in 100 skilled nursing properties, 101 assisted living properties and two schools. These properties are located in 30 states. For the three months ended March 31, 2009, we had net cash provided by operating activities of $13.9 million.

For the three months ended March 31, 2009 we recorded $1.2 million in straight-line rent in accordance with Statement of Financial Accounting Standard No. 13. "Accounting for Leases" (or SFAS No. 13). We currently expect that straight-line rent on a same store basis will decrease from $4.1 million for projected annual 2009 to $2.4 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio. Also during the three months ended March 31, 2009, we recorded an additional reserve of $0.2 million on our straight-line rent receivable. During the three months ended March 31, 2009 we received $14.0 million of cash rental revenue and recorded $0.2 million of lease inducement cost.

Investing and Financing Activities:

For the three months ended March 31, 2009, we received $2.3 million of cash from investing activities. We invested $0.4 million, at an average yield of approximately 11.5%, under agreements to expand and renovate three existing properties operated by two different operators. Additionally, we invested $0.2 million in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

During the three months ended March 31, 2009, we invested $0.2 million under one existing mortgage loan for capital improvements. Additionally, we received $3.1 million in principal payments on mortgage loans including $2.0 million related to the payoff of one mortgage receivable secured by a skilled nursing property.

For the three months ended March 31, 2009, we used $15.6 million of cash in financing activities. We paid $0.7 million in principal payments on mortgage loans payable. We also paid cash dividends on our Series C, Series E, and Series F preferred stocks totaling $0.8 million, $21,000 and $3.0 million, respectively. Additionally, we declared and paid cash dividends on our common stock totaling $9.0 million. In April 2009, we declared a monthly cash dividend of $0.130 per common share per month for the months of April, May and June 2009, payable on April 30, May 29 and June 30, 2009, respectively, to stockholders of record on April 22, May 21 and June 22, 2009, respectively.

Our Board of Directors authorized a share repurchase program enabling us to repurchase up to 5,000,000 shares of our equity securities, including common and preferred securities. During the three months ended March 31, 2009, we invested $2.0 million to repurchase a total of 109,484 shares of our 8.0% Series F Cumulative Preferred Stock (or Series F preferred stock) at an average cost of $18.27 per share, including commissions. The Series F preferred stock has a liquidation value of $25.00 per share. As required by EITF Topic No. D-42 the discounted purchase price on these shares, which is the liquidation value over the fair value, netted with the original issue discount has been added to net income in calculating net income allocable to common stockholders. After this purchase, 5,894,216 shares of our Series F preferred stock remained issued and outstanding. Subsequent to March 31, 2009, we purchased on the open market and retired 900 shares of common stock for an aggregate purchase price of $16,000 or $17.33 per share, including commission. Including this common stock purchase and the preferred stock repurchase, we continue to have an open Board authorization to purchase an additional 3,360,237 shares.

During the three months ended March 31, 2009, holders of 900 shares of our 8.5% Series E Cumulative Convertible Preferred Stock (or Series E preferred stock) elected to convert such shares into 1,800 shares of our common stock at the Series E preferred stock conversion rate of $12.50 per share. Total shares . . .