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 second quarter of 2009, long-term healthcare properties, which include skilled nursing and assisted living properties, comprised approximately 98% of our investment portfolio. We have been operating since August 1992.

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 June 30, 2009 (dollar amounts in thousands):

                                                    Six Months                                      Number
                                                   Ended 6/30/09         Percentage      Number       of      Investment                  Number
                                                                                                                            Number of
Type of          Gross       Percentage of     Rental      Interest          of            of        Beds        per        Operators       of
Property      Investments     Investments      Income     Income (2)    Revenues (3)   Properties   /Units     Bed/Unit        (1)      States (1)
Assisted
Living
Properties   $     282,132            48.8 %  $ 15,021   $      1,547           48.1 %    101        4,598   $      61.36      13           22
Skilled
Nursing
Properties         283,487            49.0 %    14,371          2,777           49.8 %    100       11,587          24.47      34           20
Schools             13,021             2.2 %       589            153            2.1 %     2           N/A            N/A       2           2
Totals       $     578,640           100.0 %  $ 29,981   $      4,477          100.0 %    203       16,185

As of June 30, 2009 we had $440.1 million in carrying value of net real estate investment, consisting of $366.5 million or 83.3% invested in owned and leased properties and $73.6 million or 16.7% invested in mortgage loans secured by first mortgages.

For the six months ended June 30, 2009, rental income and interest income from mortgage loans represented 85.4% and 12.8%, 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 six months ended June 30, 2009 and 2008, we recorded $2.2 million and $1.9 million, respectively, in straight-line rental income. Also during the six months ended June 30, 2009, we recorded an additional $0.4 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. Conversely our cash rental income is projected to increase from $56.5 million for projected annual 2009 to $58.8 million for projected annual 2010 assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio. During the six months ended June 30, 2009, we received $28.1 million of cash rental revenue and recorded $0.3 million of lease inducement cost. At June 30, 2009 and December 31, 2008, the straight-line rent receivable balance, net of reserves, on the balance sheet was $15.7 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 $33,300 per bed while that of properties subject to our mortgages is approximately $9,800 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 second 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 June 30, 2009, we had $14.1 million of cash on hand and $74.5 million available on our $80.0 million Unsecured Credit Agreement which matures July 17, 2011. Subsequent to June 30, 2009, we paid $8.1 million on a mortgage loan secured by one assisted living property located in California. The retired debt bore an interest rate of 8.43%. Also, we paid $2.5 million under our Unsecured Credit Agreement resulting in $3.0 million being outstanding under our Unsecured Credit Agreement. 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.

Political Climate

The Centers for Medicare & Medicaid Services (or CMS) annually updates Medicare skilled nursing facility prospective payment system rates and other policies. On July 31, 2009, CMS published the final Medicare skilled nursing facility rates for fiscal year 2010, which will begin on October 1, 2009. The rule reduces Medicare payments by $390 million or 1.2%, compared to fiscal year 2009 levels. The rule provides for a recalibration of the case mix weights that will reduce payments by 3.3%, which would more than offset the 2.1% market basked update. The loss of revenues associated with changes in skilled nursing facility payment rates could, in the future, have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact the timing or level of their payments to us.

In addition, each year legislation is proposed in Congress and in some state legislatures that would affect broader changes in the health care system, either nationally or at the state level. President Obama and congressional leaders have expressed their commitment to enacting major health reform legislation this year. Among the proposals under consideration are additional cost controls on the Medicare and Medicaid programs, health care provider cost-containment initiatives, expanded access to insurance, possibly with a government health insurance option to compete with private plans, measures to prevent medical errors, incentives to promote community-based care as an alternative to institutional long-term care services, and alternative health care delivery systems. Congressional committees are currently considering a wide variety of plans, which are subject to extensive revision before a final plan emerges. We will continue to monitor developments. Given the ongoing debate, we cannot predict whether any reform proposals will be adopted or, if adopted, what effect, if any, such proposals would have on our borrowers and lessees or our business.

Key Transactions

During the three months ended June 30, 2009, we paid $15.8 million related to the payoff of two mortgage loans secured by 10 assisted living properties. The retired debts bore an interest rate of 8.81%. Subsequent to June 30, 2009, we paid $8.1 million on a mortgage loan secured by one assisted living property located in California that bore an interest rate of 8.43%. As a result of these mortgage loans payoffs, we have a $7.8 million mortgage loan remaining secured by an assisted living property located in California. This mortgage loan is due in August 2010 but may be paid 90 days before maturity. Also, we have $4.2 million outstanding on multifamily tax-exempt revenue bonds secured by five assisted living properties located in Washington. These bonds bear interest at a variable interest rate and mature in 2015. The weighted average interest rate as of June 30, 3009, including letter of credit fees, was 1.30%.

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
                                  6/30/09     3/31/09    12/31/08     9/30/08     6/30/08
                                             (gross investment, in thousands)
    Asset mix:
    Real property                $ 504,354   $ 503,255   $ 502,617   $ 497,656   $ 496,114
    Loans receivable                74,286      75,412      78,301      87,581      91,040

    Investment mix:
    Assisted living properties   $ 282,132   $ 282,084   $ 282,084   $ 282,304   $ 282,406
    Skilled nursing properties     283,487     283,563     285,814     289,913     291,728
    Schools                         13,021      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)        86,923      87,015      87,150      87,281      87,490
    Extendicare (ALC)               88,034      88,034      88,034      88,034      88,034
    Remaining operators            319,473     319,408     321,524     325,712     327,420

    Geographic mix:
    Colorado                     $  27,753   $  27,723   $  27,706   $  27,581   $  27,581
    Florida                         43,887      43,836      43,884      43,930      43,975
    Ohio                            56,804      56,804      56,804      56,804      55,862
    Texas                          103,657     103,944     104,197     104,637     106,568
    Washington                      27,312      27,334      27,355      27,376      27,412
    Remaining states               319,227     319,026     320,972     324,909     325,756

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
                                   6/30/09      3/31/09      12/31/08      9/30/08      6/30/08

Debt to book capitalization
ratio                                  5.3 %(1)     7.3 %         7.4 %        7.4 %        7.4 %
Debt & Preferred Stock to book
capitalization ratio                  44.1 %(1)    45.2 %        45.5 %       45.3 %       45.2 %

Debt to market capitalization
ratio                                  3.8 %(1)     5.9 %(4)      5.4 %(4)     4.2 %(6)     4.6 %
Debt & Preferred Stock to market
capitalization ratio                  29.5 %(1)    32.8 %(4)     30.1 %(4)    23.0 %(6)    26.8 %

Interest coverage ratio               18.7 x(2)    17.7 x(3)     15.4 x(5)    17.1 x(2)    15.0 x
Fixed charge coverage ratio            3.3 x        3.4 x         3.1 x        3.2 x        3.3 x

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 June 30, 2009 compared to three months ended June 30, 2008

Revenues for the three months ended June 30, 2009 decreased to $17.4 million from $17.9 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 increases in rental income, as discussed below. Rental income for the three months ended June 30, 2009 increased $0.3 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 June 30, 2009 and 2008, increased $0.3 million due to rental increases provided for in existing lease agreements.

Interest income from mortgage loans for the three months ended June 30, 2009 decreased $0.5 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 statements included in our Annual Report on Form 10-K as amended by our Current Report on Form 8-K dated June 30, 2009 for the year ended December 31, 2008.

Interest and other income for the three months ended June 30, 2009 decreased $0.3 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 June 30, 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 and normal amortization of existing mortgage loans.

Depreciation and amortization expense was comparable for each of the three months ended June 30, 2009 and 2008.

Provisions for doubtful accounts increased $0.2 million due to an increase in straight-line rent receivable reserve.

Operating and other expenses were $0.3 million higher in the three months ended June 30, 2009 as compared to the same period in 2008 primarily due to an increase in legal and accounting fees related to the new accounting rules effective January 1, 2009, property tax expenses paid on behalf of one of our operators and the timing of certain expenditures.

Net income allocable to common stockholders for the three months ended June 30, 2009 decreased $0.6 million from the same period in 2008 due to the changes previously described above.

Six months ended June 30, 2009 compared to six months ended June 30, 2008

Revenues for the six months ended June 30, 2009 decreased to $35.1 million from $35.7 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 increases in rental income, as discussed below. Rental income for the six months ended June 30, 2009 increased $0.7 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 six months ended June 30, 2009 and 2008, increased $0.7 million due to rental increases provided for in existing lease agreements.

Interest income from mortgage loans for the six months ended June 30, 2009 decreased $0.8 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 statements included in our Annual Report on Form 10-K as amended by our Current Report on Form 8-K dated June 30, 2009 for the year ended December 31, 2008.

Interest and other income for the six months ended June 30, 2009 decreased $0.6 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 six months ended June 30, 2009 was $0.6 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 and normal amortization of existing mortgage loans.

Depreciation and amortization expense was comparable for each of the six months ended June 30, 2009 and 2008.

Provisions for doubtful accounts increased $0.4 million due to an increase in straight-line rent receivable reserve.

Operating and other expenses were $0.2 million higher in the six months ended June 30, 2009 as compared to the same period in 2008 primarily due to an increase in legal and accounting fees related to the new accounting rules effective January 1, 2009, property tax expenses paid on behalf of one of . . .