UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Commission File Number 000-53969

CORNERSTONE HEALTHCARE PLUS REIT, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		20-5721212
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1920 MAIN STREET, SUITE 400, IRVINE, CA		92614
(Address of principal executive offices)		(Zip Code)

949-852-1007
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes     o No

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes     o No

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes     þ No

     As of May 10, 2011, there were 13,079,203 shares of common stock of Cornerstone Healthcare Plus REIT, Inc. outstanding.

 

 

PART I — FINANCIAL INFORMATION
FORM 10-Q
Cornerstone Healthcare Plus REIT, Inc.
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010 (unaudited)			3
Condensed Consolidated Statements of Operations for the Three months ended March 31, 2011 (unaudited) and 2010 (unaudited)			4
Condensed Consolidated Statements of Equity for the Three months ended March 31, 2011 (unaudited) and 2010 (unaudited)			5
Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2011 (unaudited) and 2010 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 6. Exhibits			35
SIGNATURES			36
EX-31
EX-32

CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

		March 31,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	37,937,000			$	29,819,000
Investments in real estate
Land			20,269,000				18,949,000
Buildings and improvements, net			109,468,000				87,933,000
Furniture, fixtures and equipment, net			2,617,000				2,410,000
Development costs and construction in progress			288,000				13,669,000
Intangible lease assets, net			7,718,000				5,907,000
			140,360,000				128,868,000
Deferred financing costs, net			1,266,000				1,382,000
Tenant and other receivables			1,629,000				1,462,000
Receivable from related parties, net (Note 13)			—				—
Deferred costs and other assets			1,562,000				554,000
Restricted cash			2,824,000				2,942,000
Goodwill			5,606,000				5,329,000
Total assets		$	191,184,000			$	170,356,000
LIABILITIES AND EQUITY
Liabilities:
Notes payable		$	90,885,000			$	80,792,000
Accounts payable and accrued liabilities			8,525,000				4,886,000
Payable to related parties			1,000				65,000
Prepaid rent and security deposits			1,403,000				1,127,000
Distributions payable			807,000				722,000
Total liabilities			101,621,000				87,592,000
Commitments and contingencies (Note 14)
Equity:
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value per share; 20,000,000 shares authorized; no shares were issued or outstanding at March 31, 2011 and December 31, 2010			—				—
Common stock, $0.01 par value per share; 580,000,000 shares authorized; 12,827,244 and 11,592,883 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively			128,000				116,000
Additional paid-in capital			100,046,000				91,588,000
Accumulated deficit			(13,315,000	)			(11,722,000	)
Total stockholders’ equity			86,859,000				79,982,000
Noncontrolling interests			2,704,000				2,782,000
Total equity			89,563,000				82,764,000
Total liabilities and equity		$	191,184,000			$	170,356,000

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

CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
Revenues:
Rental revenues		$	7,560,000			$	2,437,000
Resident services and fee income			1,702,000				495,000
Tenant reimbursements and other income			323,000				110,000
			9,585,000				3,042,000
Expenses:
Property operating and maintenance expenses			5,688,000				1,860,000
General and administrative expenses			664,000				528,000
Asset management fees and expenses			431,000				165,000
Real estate acquisition costs and earn out costs			1,127,000				458,000
Depreciation and amortization			1,861,000				640,000
			9,771,000				3,651,000
Loss from operations			(186,000	)			(609,000	)
Other income (expense):
Interest income			4,000				3,000
Interest expense			(1,476,000	)			(337,000	)
Net loss			(1,658,000	)			(943,000	)
Less: Net (loss) income attributable to the noncontrolling interests			(65,000	)			4,000
Net loss attributable to common stockholders		$	(1,593,000	)		$	(947,000	)
Basic and diluted net loss per common share attributable to common stockholders		$	(0.13	)		$	(0.17	)
Weighted average number of common shares			12,207,623				5,414,179
Distribution declared, per common share		$	0.19			$	0.19

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

CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES

(Unaudited)

		Common Stock
						Common				Additional								Total
		Number of				Stock Par				Paid-In				Accumulated				Stockholders’				Noncontrolling
		Shares				Value				Capital				Deficit				Equity				Interests				Total Equity
Balance — December 31, 2010			11,592,883			$	116,000			$	91,588,000			$	(11,722,000	)		$	79,982,000			$	2,782,000			$	82,764,000
Issuance of common stock			1,278,151				13,000				12,682,000				—				12,695,000				—				12,695,000
Redeemed shares			(43,790	)			(1,000	)			(409,000	)			—				(410,000	)			—				(410,000	)
Noncontrolling interest contribution			—				—				—				—				—				—				—
Offering costs			—				—				(1,539,000	)			—				(1,539,000	)			—				(1.539,000	)
Distributions			—				—				(2,276,000	)			—				(2,276,000	)			(13,000	)			(2,289,000	)
Net (loss) income			—				—				—				(1,593,000	)			(1,593,000	)			(65,000	)			(1,658,000	)
Balance — March 31, 2011			12,827,244			$	128,000			$	100,046,000			$	(13,315,000	)		$	86,859,000			$	2,704,000			$	89,563,000

		Common Stock
						Common				Additional								Total
		Number of				Stock Par				Paid-In				Accumulated				Stockholders’				Noncontrolling
		Shares				Value				Capital				Deficit				Equity				Interests				Total Equity
Balance — December 31, 2009			4,993,751			$	50,000			$	39,551,000			$	(5,403,000	)		$	34,198,000			$	—			$	34,198,000
Issuance of common stock			1,403,524				14,000				13,997,000				—				14,011,000				—				14,011,000
Redeemed shares			(10,209	)			—				(98,000	)			—				(98,000	)			—				(98,000	)
Noncontrolling interest contribution			—				—				—				—				—				886,000				886,000
Offering costs			—				—				(1,546,000	)			—				(1,546,000	)			—				(1,546,000	)
Distributions			—				—				(1,031,000	)			—				(1,031,000	)			(4,000	)			(1,035,000	)
Net (loss) income			—				—				—				(947,000	)			(947,000	)			4,000				(943,000	)
Balance — March 31, 2010			6,387,066			$	64,000			$	50,873,000			$	(6,350,000	)		$	44,587,000			$	886,000			$	45,473,000

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

CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES

		Three Months Ended
		March 31,
		2011				2010
Cash flows from operating activities:
Net loss		$	(1,658,000	)		$	(943,000	)
Adjustments to reconcile net loss to net cash used in operating activities (net of acquisitions):
Amortization of deferred financing costs			154,000				9,000
Depreciation and amortization			1,861,000				640,000
Straight-line rent amortization			(200,000	)			(73,000
Real estate earn out costs			521,000				—
Bad debt expense			1,630,000				—
Change in operating assets and liabilities:
Tenant and other receivables			34,000				240,000
Deferred costs and deposits			—				(69,000	)
Prepaid expenses and other assets			(731,000	)			44,000
Restricted cash			264,000
Prepaid rent and tenant security deposits			276,000				56,000
Payable to related parties			(38,000	)			(206,000	)
Receivable from related parties			(1,630,000	)			—
Accounts payable and accrued liabilities			1,100,000				350,000
Net cash provided by operating activities			1,583,000				48,000
Cash flows from investing activities:
Real estate acquisitions			(10,750,000	)			—
Additions to real estate			(179,000	)			(7,000	)
Restricted cash			(146,000	)			(750,000	)
Development of real estate			(779,000	)			(2,243,000	)
Acquisition deposits			(170,000	)			(535,000	)
Net cash used in investing activities			(12,024,000	)			(3,535,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock			11,609,000				13,545,000
Redeemed shares			(410,000	)			(98,000	)
Repayment of note payable			(209,000	)			(46,000	)
Proceeds from notes payable			10,302,000				1,000
Offering costs			(1,565,000	)			(1,692,000	)
Deferred financing costs			(50,000	)			(10,000	)
Noncontrolling interest contribution			—				886,000
Distributions paid to stockholders			(1,105,000	)			(484,000	)
Distributions paid to noncontrolling interests			(13,000	)			(4,000	)
Net cash provided by financing activities			18,559,000				12,098,000
Net increase in cash and cash equivalents			8,118,000				8,611,000
Cash and cash equivalents — beginning of period			29,819,000				14,900,000
Cash and cash equivalents — end of period		$	37,937,000			$	23,511,000
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,260,000			$	219,000
Supplemental disclosure of non-cash financing and investing activities:
Distributions declared not paid		$	807,000			$	386,000
Distribution reinvested		$	1,086,000			$	466,000
Capitalized interest		$	19,000			$	—
Payable to related parties		$	—			$	104,000
Accrued acquisition fees		$	—			$	30,000
Accrued promote monetization liability		$	2,018,000			$	—
Deferred financing amortization capitalized to real estate development		$	12,000			$	—

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

CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES

March 31, 2011

(UNAUDITED)

1. Organization

Cornerstone Healthcare Plus REIT, Inc. (formerly known as Cornerstone Growth & Income REIT, Inc.), a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone Healthcare Plus REIT, Inc. and its consolidated subsidiaries, except where context otherwise requires. We are recently formed and are subject to the general risks associated with a start-up enterprise, including the risk of business failure. Subject to certain restrictions and limitations, our business is managed by an affiliate, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited liability company that was formed on October 16, 2006 (the “Advisor”), pursuant to an advisory agreement.

Cornerstone Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. At March 31, 2011, we owned approximately a 99.8% general partner interest in the Operating Partnership while the Advisor owned approximately a 0.2% limited partnership interest. In addition, the Advisor owned approximately a 0.9% limited partnership interest in CGI Healthcare Operating Partnership, L.P., a subsidiary of the Operating Partnership. We anticipate that we will conduct all or a portion of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation.

For federal income tax purposes, we have elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our taxable year ended December 31, 2008. REIT status imposes limitations related to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly operate assisted-living facilities. However, such facilities may generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease with the Company. Therefore, we have formed Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of CGI Healthcare Operating Partnership, LP, to lease any assisted-living properties we acquire and to operate the assisted-living properties pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the management companies will have direct control of the daily operations of these assisted-living properties.

2. Public Offering

On November 14, 2006, Terry G. Roussel purchased 100 shares of common stock for $1,000 and became our initial stockholder. Our charter authorizes the issuance of up to 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share.

On June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000 shares for sale pursuant to our distribution reinvestment plan. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of approximately $123.9 million from the sale of approximately 12.4 million shares, including shares sold under the distribution reinvestment plan.

On February 4, 2011, the Securities and Exchange Commission (“SEC”) declared the registration statement for our follow-on offering effective and we commenced a follow-on offering of up to 55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan.

As of March 31, 2011, we had sold a total of approximately 12.5 million shares of our common stock for aggregate gross proceeds of approximately $124.5 million. We intend to use the net proceeds of our offerings to invest in real estate including healthcare, multi-tenant industrial, net-leased retail properties and other real estate investments where we believe there are opportunities to enhance cash flow and value.

On April 29, 2011 we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration is the hiring of a new dealer manager for our follow-on offering; however, the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced. In addition, the Independent Directors Committee is continuing to evaluate possible changes to our advisory relationships.

3. Summary of Significant Accounting Policies

For more information regarding our critical accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

Use of Estimates

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.

Interim Financial Information

The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the SEC. Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Our accompanying interim condensed consolidated financial statements should be read in conjunction with our audited condensed consolidated financial statements and the notes thereto included on our 2010 Annual Report on Form 10-K, as filed with the SEC.

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 825-10, “Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value.

We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets when such information is available or using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.

Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, deferred costs and other assets, prepaid rent and security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. With the exception of notes payable discussed below, we consider the carrying values of our financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected payment.

The fair value of notes payable is estimated using lending rates available to us for financial instruments with similar terms and maturities. As of March 31, 2011 and 2010, the fair value of notes payable was approximately $91.9 million and $20.2 million, compared to the carrying value of approximately $90.9 million and $20.2 million, respectively.

4. Investment in Real Estate

The following table provides summary information regarding our current property portfolio.

																March 31,				March 31,
				Date				Gross Square				Purchase				2011				2011
Property		Location		Purchased				Feet				Price				Debt				% Occupancy
Caruth Haven Court		Highland Park, TX			01/22/09				74,647			$	20,500,000			$	9,875,000				95.60	%
The Oaks Bradenton		Bradenton, FL			05/01/09				18,172			$	4,500,000			$	2,728,000				100.00	%
GreenTree at Westwood (1)		Columbus, IN			12/30/09				50,249			$	5,150,000			$	2,832,000				94.83	%
Mesa Vista Inn Health Center		San Antonio, TX			12/31/09				55,525			$	13,000,000			$	7,282,000				100.00	%
Rome LTACH Project		Rome, GA			01/12/10				53,000				(2	)		$	10,122,000				100.00	%
Oakleaf Village Portfolio																$	17,794,000
Oakleaf Village at — Lexington		Lexington, SC			04/30/10				67,000			$	14,512,000			$	—				86.20	%
Oakleaf Village at — Greenville		Greer, SC			04/30/10				65,000			$	12,488,000			$	—				73.10	%
Global Rehab Inpatient Rehab Facility		Dallas, TX			08/19/10				40,000			$	14,800,000			$	7,506,000				100.00	%
Terrace at Mountain Creek (3)		Chattanooga, TN			09/03/10				109,643			$	8,500,000			$	5,700,000				88.89	%
Littleton Specialty Rehabilitation Facility		Littleton, CO			12/16/10				26,808	(4)			(5	)		$	1,000				—
Carriage Court of Hilliard		Hilliard, OH			12/22/10				69,184			$	17,500,000			$	13,550,000				80.95	%
Hedgcoxe Health Plaza		Plano, TX			12/22/10				32,109			$	9,094,000			$	5,060,000				94.90	%
River’s Edge of Yardley		Yardley, PA			12/22/10				26,146			$	4,500,000			$	2,500,000				97.96	%
Forestview Manor		Meredith, NH			01/14/11				34,270			$	10,750,000			$	5,935,000				92.00	%

As of March 31, 2011, cost and accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:

														Development
														costs and
						Buildings and				Furniture, fixtures				construction in				Intangible lease
		Land				improvements				and equipment				progress				assets
Cost		$	20,269,000			$	112,025,000			$	3,140,000			$	288,000			$	11,937,000
Accumulated depreciation and amortization			—				(2,557,000	)			(523,000	)			—				(4,219,000	)
Net		$	20,269,000			$	109,468,000			$	2,617,000			$	288,000			$	7,718,000

As of December 31, 2010, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:

														Development
														costs and
						Buildings and				Furniture, fixtures				construction in				Intangible lease
		Land				improvements				and equipment				progress				assets
Cost		$	18,949,000			$	89,719,000			$	2,780,000			$	13,669,000			$	9,187,000
Accumulated depreciation and amortization			—				(1,786,000	)			(370,000	)			—				(3,280,000	)
Net		$	18,949,000			$	87,933,000			$	2,410,000			$	13,669,000			$	5,907,000

Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended March 31, 2011 and 2010 was approximately $0.9 million and $0.2 million, respectively.

Amortization associated with the intangible assets for the three months ended March 31, 2011 and 2010 was $0.9 million and $0.4 million, respectively.

Estimated amortization for April 1, 2011 through December 31, 2011 and each of the subsequent years is as follows:

		Intangible
		assets
April 2011 — December 2011		$	1,845,000
2012		$	836,000
2013		$	468,000
2014		$	408,000
2015		$	408,000
2016		$	408,000
2017 and thereafter		$	3,345,000

The estimated useful lives for intangible assets range from approximately one to twenty years. As of March 31, 2011, the weighted-average amortization period for intangible assets was 7.0 years.

5. Investments in Joint Ventures

Oakleaf Joint Venture

On April 30, 2010, we invested approximately $21.6 million to acquire 80% equity interests in Royal Cornerstone South Carolina Portfolio, LLC (“Portfolio LLC”) and Royal Cornerstone South Carolina Tenant Portfolio, LLC (“Tenant LLC”) (collectively, we refer to the Portfolio LLC and the Tenant LLC as the “Oakleaf Joint Venture”). The Oakleaf Joint Venture owns and operates two assisted-living properties located in Lexington and Greenville, South Carolina. As of March 31, 2011, total net assets related to Oakleaf Joint Venture were approximately $26.8 million, which includes approximately $25.3 million of real estate assets and total liabilities were approximately $18.3 million, which includes an approximately $17.8 million of secured mortgage debt. We may be required to fund additional capital contributions, including funding of any capital expenditures deemed necessary to continue to operate the entity, and any operating cash shortfalls that the entity may experience.

Rome LTACH Project

On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the campus of the Floyd Medical Center in Rome, Georgia. We contributed approximately $2.7 million of capital to acquire a 75.0% limited partnership interest in Rome LTH Partners, LP. Cornerstone Private Equity Fund Operating Partnership, LP, an affiliate of our sponsor, contributed approximately $0.5 million of capital to acquire a 15.0% limited partnership interest in Rome LTH Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.3 million to acquire an aggregate 9.5% limited partnership interest in the Rome LTH Partners, LP. A fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Rome LTH Partners LP. As of both March 31, 2011 and December 31, 2010, we owned a 75.0% of limited partnership interest in Rome LTH Partners, LP.

Under the terms of this joint venture, we may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint ventures. At March 31, 2011, the construction of the free-standing medical facility on the campus of the Floyd Medical Center in Rome, Georgia was completed. As of March 31, 2011, we believe that payments under these obligations are probable; accordingly, we have recorded approximately $2.2 million with respect to the monetization feature which had been included in accounts payable and accrued liabilities on our condensed consolidated balance sheet. The amount to be paid upon monetization is based on a number of factors, including the value of the property, net income earned by the property and payment of preferred returns on equity. Of the $2.2 million, we capitalized approximately $1.8 million and $0.2 million incurred during the construction period which are included in the intangible lease assets and building and improvements, respectively, of our condensed consolidated balance sheet and expensed post construction period approximately $0.2 million which had been included in real estate acquisition costs and earn out costs of our condensed consolidated statement of operations. We determined the fair value of this obligation using discounted cash flow analysis, incorporating market discount rate information for similar types of obligations, projected net income earned by the property and preferred return payments. As of March 31, 2011, total assets related to this project were approximately

$16.6 million, which includes approximately $16.1 million of real estate assets and total liabilities were approximately $13.2 million, which includes an approximately $10.1 million of secured mortgage debt.

ASC 820-10 establishes a three-tiered fair value hierarchy that prioritizes valuation technique input. Level 1 inputs (“observable inputs”) are quoted prices in active markets for identical assets or liabilities and are given the highest priority. Level 2 inputs (“other observable input”) are either observable directly or through corroborative with observable market data. Level 3 inputs (“unobservable inputs”) are unobservable in the market, such as internally developed valuation models. As of December 31, 2010, we had not recorded a liability with respect to the monetization feature of this joint venture. As of March 31, 2011, we measured the payments with respect to the monetization feature at approximately $2.2 million on a recurring basis using Level 3 inputs.

Littleton Specialty Rehabilitation Facility

On December 16, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in Littleton, CO. We agreed to contribute approximately $1.6 million of capital to acquire a 90% limited partnership interest in Littleton Med Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of approximately $0.2 million to acquire an aggregate 9.5% limited partnership interest in the Littleton Med Partners, LP. A fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Littleton Med Partners, LP. As of both March 31, 2011 and December 31, 2010, we owned a 90.0% of limited partnership interest in Littleton Med Partners, LP.

Under the terms of this joint venture, we may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint ventures. The amount that would be paid upon monetization is subject to change based on a number of factors, including the value of the property, net income earned by the property and payment of preferred returns on equities. At March 31, 2011, the specialty rehabilitation facility in Littleton, CO has not started construction and we have determined that sufficient uncertainty exists with respect to exercise of the monetization features that the probability of payment under the monetization obligation is not determinable; accordingly, we have not recognized the obligation in our March 31, 2011 condensed consolidated financial statements. As of the date of this report, the amount of contingent liability with respect to the monetization feature with regards to the development in Littleton, CO is inestimable.

6. Allowance for Doubtful Accounts

As of both March 31, 2011 and December 31, 2010, we had recorded $35,000 as an allowance for tenants and other receivables doubtful accounts and have fully reserved for a receivable from related parties.

7. Concentration of Risks

Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments; cash is generally invested in investment-grade short-term instruments. On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that includes provisions that made permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions. As of March 31, 2011, we had cash accounts in excess of Federal Deposit Insurance Corporation insured limits. We believe this risk is not significant.

Concentrations of credit risks arise when a number of operators, tenants or obligors related to our investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. We regularly monitor various segments of our portfolio to assess potential concentrations of risks. Management believes the current portfolio is reasonably diversified across healthcare related real estate and does not contain any other significant concentration of credit risks, except as disclosed herein.

Our senior living operations segment accounted for approximately 83.6% and 84.0% of total revenues for the three months ended March 31, 2011 and 2010, respectively. The following table provides information about our senior living operation segment concentration for the three months ended March 31, 2011:

		Percentage of				Percentage of
Operators		Segment Revenues				Total Revenues
Good Neighbor Care			24.6	%			20.6	%
Royal Senior Care			21.6	%			18.0	%
Woodbine Senior Living			21.4	%			17.9	%
12 Oaks Senior Living			21.1	%			17.6	%
Provision Living			5.9	%			5.0	%
Legend Senior Living			5.4	%			4.5	%
			100.0	%			83.6	%

Our triple-net leased segment accounted for approximately 13.7% and 16.0% of total revenues for the three months ended March 31, 2011 and 2010, respectively. The following table provides information about our triple-net leased segment for the year ended March 31, 2011:

		Percentage of				Percentage of
Tenant		Segment Revenues				Total Revenues
Babcock PM Management			37.4	%			5.1	%
Global Rehab Hospitals			32.7	%			4.5	%
The Specialty Hospital			27.1	%			3.7	%
Floyd Healthcare Management			2.8	%			0.4	%
			100.0	%			13.7	%

Our medical office building segment accounted for approximately 2.7% and 0% of total revenues for the three months ended March 31, 2011 and 2010, respectively.

As of March 31, 2011, we owned 14 properties, geographically located in ten states. The following table provides information about our geographic risks by operating segment for the three months ended March 31, 2011:

		Percentage of				Percentage of
State		Segment Revenues				Total Revenues
Senior living operations
South Carolina			21.6	%			18.0	%
Texas			21.1	%			17.6	%
Ohio			14.3	%			12.0	%
Pennsylvania			10.9	%			9.1	%
New Hampshire			10.5	%			8.8	%
Tennessee			10.3	%			8.6	%
Indiana			5.9	%			5.0	%
Florida			5.4	%			4.5	%
Triple net leased properties
Texas			70.1	%			9.6	%
Georgia			29.9	%			4.1	%
Colorado (1)			—	%			—	%
Medical office building
Texas			100.0	%			2.7	%

8. Income Taxes

For federal income tax purposes, we have elected to be taxed as a REIT, under Sections 856 through 860 of the Code beginning with our taxable year ended December 31, 2008, which imposes limitations related to operating assisted-living properties. As of March 31, 2011, we had acquired nine assisted-living facilities and formed nine wholly owned taxable REIT subsidiaries, or TRSs, which includes a Master TRS that consolidates our wholly owned TRSs.

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would establish a valuation allowance which would reduce the provision for income taxes.

The consolidated income tax benefit for the three months ended March 31, 2011 and 2010 was approximately $0.2 million and $0 million, respectively, which has been included in general and administrative expenses of our condensed consolidated financial statements,. Realization of a deferred tax benefit is dependent in part upon generating sufficient taxable income in future periods. Our net operating loss carryforwards were utilized in 2010 with respect to the TRS entities. Net deferred tax assets related to the TRS entities totaled approximately $0.6 million and $0 million at March 31, 2011 and December 31, 2010, respectively, related primarily to book and tax basis differences for straight-line rent and accrued liabilities. These deferred tax assets are included in deferred costs and other assets of our condensed consolidated balance sheets.

9. Payable to Related Parties

Payable to related parties at March 31, 2011 and December 31, 2010 was $1,000 and $65,000, respectively, which consists of offering costs, acquisition fees, expense reimbursement payable, sales commissions and dealer manager fees to our Advisor and PCC.

10. Segment Reporting

As of March 31, 2011, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our medical office building operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

On December 22, 2010, we completed the purchase of Hedgcoxe Health Plaza, a multi-tenant medical office building in Plano, TX. With the addition of Hedgcoxe Health Plaza, we determined that segregating our MOB operations into its own reporting segment would be useful in assessing the performance of this portion of our business as a business segment consistent with management’s focus in assessing performance and operating decisions. Prior to the Hedgcoxe Health Plaza acquisition, we operated in two reportable segments: senior living operations and triple-net leased properties.

We evaluate performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenue less property operating and maintenance expenses. There are no intersegment sales or transfers. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, asset management fees and expenses, real estate acquisition costs, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

The following tables reconcile the segment activity to consolidated net income for the three months ended March 31, 2011 and 2010:

		For the three months ended March 31, 2011
		Senior living				Triple-net leased				Medical office
		operations				properties				building				Consolidated
Rental revenues		$	6,200,000			$	1,159,000			$	201,000			$	7,560,000
Resident services and fee income			1,702,000				—				—				1,702,000
Tenant reimbursements and other income			110,000				158,000				55,000				323,000
		$	8,012,000			$	1,317,000			$	256,000			$	9,585,000
Property operating and maintenance expenses			5,445,000				173,000				70,000				5,688,000
Net operating income		$	2,567,000			$	1,144,000			$	186,000			$	3,897,000
General and administrative expenses															664,000
Asset management fees and expenses															431,000
Real estate acquisition costs and earn out costs															1,127,000
Depreciation and amortization															1,861,000
Interest income															(4,000	)
Interest expense															1,476,000
Net loss														$	(1,658,000	)
Net loss attributable to the noncontrolling interests															(65,000	)
Net loss attributable to common stockholders														$	(1,593,000	)

		For the three months ended March 31, 2010
		Senior living				Triple-net leased				Medical office
		operations				properties				building				Consolidated
Rental revenues		$	1,990,000			$	447,000			$	—			$	2,437,000
Resident services and fee income			495,000				—				—				495,000
Tenant reimbursements and other income			70,000				40,000				—				110,000
		$	2,555,000			$	487,000			$	—			$	3,042,000
Property operating and maintenance expenses			1,820,000				40,000				—				1,860,000
Net operating income		$	735,000			$	447,000			$	—			$	1,182,000
General and administrative expenses															528,000
Asset management fees and expenses															165,000
Real estate acquisition costs and earn out costs															458,000
Depreciation and amortization															640,000
Interest income															(3,000	)
Interest expense															337,000
Net loss														$	(943,000	)
Net income attributable to the noncontrolling interests															4,000
Net loss attributable to common stockholders														$	(947,000	)

The following table reconciles the segment activity to consolidated financial position as of March 31, 2011 and December 31, 2010.

		March 31, 2011				December 31, 2010
Assets
Investment in real estate:
Senior living operations		$	87,811,000			$	78,722,000
Triple-net leased properties			43,911,000				41,433,000
Medical office building			8,638,000				8,713,000
Total reportable segments		$	140,360,000			$	128,868,000
Reconciliation to consolidated assets:
Cash and cash equivalents			37,937,000				29,819,000
Deferred financing costs, net			1,266,000				1,382,000
Tenant and other receivables, net			1,629,000				1,462,000
Deferred costs and other assets			1,562,000				554,000
Restricted cash			2,824,000				2,942,000
Goodwill			5,606,000				5,329,000
Total assets		$	191,184,000			$	170,356,000

As of March 31, 2011 and December 31, 2010, goodwill had a balance of approximately $5.6 million and $5.3 million, respectively, all related to senior living operations segment. During the first quarter of 2011, due to an acquisition in our senior living operations segment, we recorded approximately $0.3 million of goodwill.

11. Notes Payable

Notes payable were approximately $90.9 million and $80.8 million as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 2.5% to 6.5% per annum and a weighted average effective interest rate of 6.08% per annum. As of March 31, 2011, we had $40.6 million of fixed rate debt, or approximately 45% of notes payable, at a weighted average interest rate of 4.90% per annum and $50.3 million of variable rate debt, or approximately 55% of notes payable, at a weighted average interest rate of 5.99% per annum. As of December 31, 2010, we had fixed and variable rate mortgage loans with effective interest rates ranging from 2.50% to 6.50% per annum and a weighted average effective interest rate of 6.09% per annum.

We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. As of March 31, 2011, we were in compliance with all such covenants and requirements.

										Outstanding				Outstanding
										Principal Balance				Principal Balance
						Interest				as of March 31,				as of December 31,
Property Name		Payment Type				Rate				2011(1)				2010(1)				Maturity Date
Carriage Court of Hilliard		Principal and interest at a 35-year amortization rate				5.40% — fixed				$	13,550,000			$	13,586,000			August 1, 2044
Caruth Haven Court		Principal and interest at a 30-year amortization rate				6.43% — fixed				$	9,875,000			$	9,904,000			December 16, 2019
Greentree		Interest Only				30-day LIBOR +4.00% with a 2% LIBOR floor				$	2,832,000				—			November 18, 2012
Forestview Manor		Interest Only				30-day LIBOR +4.00% with a 2% LIBOR floor				$	5,935,000				—			November 18, 2012
Global Rehab Inpatient Rehab Facility		Principal and interest at a 30-year amortization rate				6.25% — fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR + 3.25%				$	7,506,000			$	7,530,000			December 22, 2016
Hedgcoxe Health Plaza		Interest Only				30-day LIBOR +4.00% with a 2% LIBOR floor				$	5,060,000			$	5,060,000			November 18, 2012
Mesa Vista Inn Health Center		Principal and interest at a 20-year amortization rate				6.50% — fixed				$	7,282,000			$	7,336,000			January 5, 2015
Oakleaf Village Portfolio		(2)				(2)				$	17,794,000			$	17,849,000			April 30, 2015
Oakleaf Village at Lexington		—				—					—				—			—
Oakleaf Village at Greenville		—				—					—				—			—
River’s Edge of Yardley		Interest Only				30-day LIBOR +4.00% with a 2% LIBOR floor				$	2,500,000			$	2,500,000			November 18, 2012
Rome LTACH Project (3)		Month 1-24 Interest-only Month 25 on Principal and interest at a 25-year amortization rate				1Mo LIBOR + 3.00% with a 6.15% floor				$	10,122,000			$	8,588,000			December 18, 2012
Littleton Specialty Rehabilitation Facility (4)		Month 1-18 Interest-only Month 19 on Principal and interest at a 20-year amortization rate				6.0% fixed				$	1,000			$	1,000			December 22, 2015
The Oaks Bradenton		(5)				(5)				$	2,728,000			$	2,738,000			May 1, 2014
Terrace at Mountain Creek		Month 1-24 interest only. Month 25 to 36 Principal and interests at a 25-year amortization rate				3Mo LIBOR + 3.50% with a 5.5% floor				$	5,700,000			$	5,700,000			September 1, 2013
										$	90,885,000			$	80,792,000

In November 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution, to obtain a $25,000,000 revolving credit facility. The credit facility may be increased in the future in incremental amounts of at least $25.0 million at our request subject to attaining certain portfolio size targets. The initial term of the credit facility is 24 months, maturing on November 18, 2012, and may be extended by six months subject to satisfaction of certain conditions, including payment of an extension fee. The actual amount of credit available under the credit facility is a function of certain loan to cost, loan to value and debt service coverage ratios contained in the credit facility. The credit facility will be secured by first priority liens on our eligible real property assets that make up the borrowing base (as such term is defined) for the credit facility. The interest rate for this credit facility is one-month LIBOR plus a margin of 400 basis points, with a floor of 200 basis points for one-month LIBOR. The credit facility also requires payment of a fee of up to 25 basis points related to unused credit available to us under the credit facility. We are entitled to prepay the obligations at any time without penalty. The facility includes a financial covenant requiring us to raise at least $20 million in our public offering in the six-month period ending June 30, 2011, and to raise an additional $20 million in net offering proceeds during each six-month calendar period thereafter. Because we suspended our public offering on April 29, 2011, we will be not be able to satisfy this covenant; however, we expect to negotiate a waiver of the covenant with the lender or to pay off the outstanding balance under the credit facility using currently available cash. As of March 31, 2011, the credit facility had a balance of approximately $16.3 million and we were in compliance with the covenants of the credit agreement.

The principal payments due on our notes payable for April 1, 2011 to December 31, 2011 and each of the subsequent years is as follows:

		Principal
Year		amount
April 1, 2011 to December 31, 2011		$	588,000
2012		$	27,298,000
2013		$	6,572000
2014		$	3,499,000
2015		$	23,852,000
2016 and thereafter		$	29,076,000

Interest Expense and Deferred Financing Cost

The following table sets forth our gross interest expense and deferred financing cost amortization for the three months ended March 31, 2011 and 2010. The capitalized amount is a cost of development and increases the carrying value of construction in progress.

		Three Months Ended
		March 31,
		2011				2010
Gross interest expense and deferred financing cost amortization		$	1,508,000			$	370,000
Capitalized interest expense and deferred financing cost amortization			(32,000	)			(33,000	)
Interest expense		$	1,476,000			$	337,000

As of March 31,2011 and December 31, 2010, our net deferred financing costs were approximately $1.3 million and $1.4 million, respectively. All deferred amortized financing costs are capitalized and amortized over the life of the agreements.

12. Stockholders’ Equity

Common Stock

Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of March 31, 2011, including distributions reinvested, we had issued approximately 13.0 million shares of common stock for a total of approximately $129.3 million of gross proceeds in our initial and follow-on public offering. As of March 31, 2010, including distributions reinvested, we had issued approximately 6.4 million shares of common stock for total gross proceeds of approximately $64.0 million in our initial public offering.

Distributions

We have adopted a distribution reinvestment plan that allows our stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of our common stock at their election. We have registered 10,000,000 shares of our common stock for sale pursuant to the distribution reinvestment plan. The purchase price per share is 95% of the price paid by the purchaser for our common stock, but not less than $9.50 per share. As of March 31, 2011 and December 31, 2010, approximately 509,000 and 394,000 shares, respectively, had been issued under the distribution reinvestment plan.

On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment plan and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. As a result, we suspended our distribution reinvestment plan effective as of May 10, 2011.

The following are the distributions declared during the three months ended March 31, 2011 and 2010:

		Distribution Declared
Period		Cash				Reinvested				Total
First quarter 2010 (1)		$	525,000			$	506,000			$	1,031,000
First quarter 2011		$	1,152,000			$	1,124,000			$	2,276,000

The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.

From our inception in October 2006 through March 31, 2011, we declared aggregate distributions of $10.5 million and our cumulative net loss during the same period was $13.3 million.

Stock Repurchase Program

We adopted a stock repurchase program for investors who have held their shares for at least one year, unless the shares are being repurchased in connection with a stockholder’s death. Under our stock repurchase program, the repurchase price varies depending on the purchase price paid by the stockholder and the number of years the shares are held. Our board of directors may amend, suspend or terminate the program at any time on 30 days prior notice to stockholders. We have no obligation to repurchase our stockholders’ shares. Our board of directors waived the one-year holding period in the event of the death of a stockholder and adjusted the repurchase price to 100% of such stockholders purchase price if the stockholder held the shares for less than three years. Our board of directors reserves the right in its sole discretion at any time and from time to time, upon 30 days prior notice to our stockholders, to adjust the repurchase price for our shares of stock, or suspend or terminate our stock repurchase program.

During the three months ended March 31, 2011, we repurchased shares pursuant to our stock repurchase program as follows:

		Total Number				Average
		of Shares				Price Paid
Period		Redeemed				per Share
January			1,194			$	9.88
February			17,379			$	9.42
March			25,217			$	9.29
			43,790

During the three months ended March 31, 2010, we repurchased 10,209 shares pursuant to our stock repurchase program.

During the three months ended March 31, 2011, we received requests to have an aggregate of 89,261 shares repurchased pursuant to our stock repurchase program. Of these requests 1,525 shares were not able to be repurchased due to the limitations contained in the terms of our stock repurchase program.

Our board of directors may modify our stock repurchase program so that we can repurchase stock using the proceeds from the sale of our real estate investments or other sources. On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholder value. As a result, we suspended our stock repurchase program effective as of May 29, 2011.

13. Related Party Transactions

The Company has no employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the policies established by our board of directors. We have an advisory agreement with the Advisor and dealer manager agreements with Pacific Cornerstone Capital, Inc. (“PCC”) related to our initial and follow-on public offerings, which entitle the Advisor and PCC to specified fees upon the provision of certain services to us, as well as reimbursement for organizational and offering costs incurred by the Advisor and PCC on our behalf and reimbursement of certain costs and expenses incurred by the Advisor in providing services to us.

Advisory Agreement

Under the terms of the advisory agreement, the Advisor is required to use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. The advisory agreement calls for the Advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties.

The fees and expense reimbursements payable to the Advisor under the advisory agreement are described below.

Organizational and Offering Costs. Organizational and offering costs of our offerings paid by the Advisor on our behalf are being reimbursed to the Advisor from the proceeds of our offerings. Organizational and offering costs consist of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with our offerings, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. At times during our offering stage, the amount of organization and offering expenses that we incur, or that the Advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds then raised, but our Advisor is required to reimburse us to the extent that our organization and offering expenses exceed 3.5% of aggregate gross offering proceeds at the conclusion of our offering. In addition, the Advisor will also pay any organization and offering expenses to the extent that such expenses, plus sales commissions and the dealer manager fee (but not the acquisition fees or expenses) are in excess of 13.5% of gross offering proceeds. In no event will we have any obligation to reimburse the Advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from our primary offerings. As of March 31, 2011, the Advisor and its affiliates had incurred organizational and offering costs totaling approximately $5.0 million, including approximately $0.1 million of organizational costs that have been expensed and approximately $4.9 million of offering costs that reduce net proceeds of our offerings. Of this amount $4.0 million reduced the net proceeds of our initial public offering and $0.9 million reduced the net proceeds of our follow-on offering. As of December 31, 2010, the advisor and its affiliates had incurred organizational and offering costs totaling approximately $4.6 million, including approximately $0.1 million of organizational costs that have been expensed and approximately $4.5 million of offering costs which reduce net proceeds of our offerings.

Acquisition Fees and Expenses. The advisory agreement requires us to pay the Advisor acquisition fees in an amount equal to 2.0% of the investments acquired, including any debt attributable to such investments. A portion of the acquisition fees will be paid upon receipt of offering proceeds, and the balance will be paid at the time we acquire a property. However, if the advisory agreement is terminated or not renewed, the Advisor must return acquisition fees not yet allocated to one of our investments. In addition, we are required to reimburse the Advisor for direct costs the Advisor incurs and amounts the Advisor pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. For the three months ended March 31, 2011 and 2010, the Advisor earned approximately $0.3 million and $0.4 million in acquisition fees, respectively. As of March 31, 2011, the amount of acquisition fees that have been paid to the advisor, but have not yet been allocated to one of our investments is $0.9 million, that have been expensed and included in real estate acquisition costs and earn out costs in our condensed consolidated statements of operations.

Management Fees. The advisory agreement requires us to pay the Advisor a monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis in book carrying values of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in accordance with GAAP. In addition, we have historically reimbursed the Advisor for the direct and indirect costs and expenses incurred by the Advisor in providing asset management services to us, including personnel and related employment costs related to providing asset management services on our behalf and amounts paid by our Advisor to Servant Investments, LLC and Servant Healthcare Investments, LLC for portfolio management services provided on our behalf. These fees and expenses are in addition to management fees that we expect to pay to third party property managers. For the three months ended March 31, 2011 and 2010, the Advisor earned approximately $0.4 million and $0.2 million of management fees, respectively, which were expensed. For the three months ended March 31, 2011 and 2010, the Advisor incurred $172,000 and $55,000, respectively, of such direct and indirect costs and expenses, which are included in asset management fees and expenses in the condensed consolidated statement of operations.

Operating Expenses. The advisory agreement provides for reimbursement of the Advisor’s direct and indirect costs of providing administrative and management services to us. For the three months ended March 31, 2011 and 2010, approximately $0.4 million and $0.2 million of such costs, respectively, were reimbursed and included in general and administrative expenses on our condensed consolidated statements of operations. Consistent with limitations set forth in our charter, the advisory agreement further provides that, commencing four fiscal quarters after the acquisition of our first real estate asset, we shall not reimburse the Advisor at the end of any fiscal quarter management fees and expenses and operating expenses that, in the four consecutive fiscal quarters then ended exceed (the “Excess Amount”) the greater of 2% of our average invested assets or 25% of our net income for such year (the “2%/25% Guidelines”) unless the Independent Directors Committee of our board of directors determines that such excess was justified, based on unusual and nonrecurring factors which it deems sufficient. If the Independent Directors Committee does not approve such excess as being so justified, the advisory agreement requires that any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. In addition, our charter provides that, if the Independent Directors Committee does not determine that the Excess Amount is justified, the Advisor shall reimburse us the amount by which the aggregate annual expenses paid to the Advisor during the four consecutive fiscal quarters then ended exceed the 2%/25% Guidelines. For the four quarters

ended March 31, 2011, our management fees and expenses and operating expenses exceeded the greater of 2% of our average invested assets and 25% of our net income and our Independent Directors Committee has determined that $0.2 million of the Excess Amount was justified as unusual and non-recurring. The Excess Amount for the fiscal quarter ended March 31, 2011 was approximately $0.6 million. The Excess Amount for the four fiscal quarters ended March 31, 2011 was approximately $1.8 million. In accordance with our charter, the Independent Directors Committee instructed us to record a receivable from the Advisor for $1.6 million reflecting the Excess Amount for the four quarters ended March 31, 2011 less the amount determined by the Independent Directors Committee to be justified as unusual and non-recurring. Our March 31, 2011 financial statements include a receivable for this amount and a corresponding reserve for the full amount related to our evaluation of various factors related to collectability. The Advisor has informed us that it disputes the amount of this liability.

Disposition Fee. The advisory agreement provides that if the Advisor or its affiliate provides a substantial amount of the services (as determined by a majority of our directors, including a majority of our independent directors) in connection with the sale of one or more properties, we will pay the Advisor or such affiliate at closing a disposition fee up to 3% of the sales price of such property or properties. This disposition fee may be paid in addition to real estate commissions paid to non-affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by us for each property shall not exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each property or (ii) the competitive real estate commission for each property. We will pay the disposition fees for a property at the time the property is sold.

Subordinated Participation Provisions. The Advisor is entitled to receive a subordinated participation upon the sale of our properties, listing of our common stock or termination of the Advisor, as follows:

	•		After we pay stockholders cumulative distributions equal to their invested capital plus a 6% cumulative, non-compounded return, the Advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized return of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.
	•		Upon termination of the advisory agreement, the Advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total distributions (other than stock distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus its liabilities plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more.
	•		In the event we list our stock for trading, the Advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of our common stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior distributions (other than stock distributions) exceeds the amount of invested capital plus annualized returns of 10% or more.

Dealer Manager Agreements

PCC, as dealer manager for our initial and follow-on public offerings, is entitled to receive a sales commission of up to 7% of gross proceeds from sales in the primary offerings. PCC is also entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the primary offerings. PCC is also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales in the primary offerings. The advisory agreement requires the Advisor to reimburse us to the extent that offering expenses including sales commissions, dealer manager fees and organization and offering expenses (but excluding acquisition fees and acquisition expenses discussed above) are in excess of 13.5% of gross proceeds from our primary offerings. For the three months ended March 31, 2011 and 2010, our dealer manager earned sales commission and dealer manager fee of approximately $1.1 million and $1.3 million, respectively. Dealer manager fees and sales commissions paid to PCC are a cost of capital raised and, as such, are included as a reduction of additional paid in capital in the accompanying condensed consolidated balance sheets.

14. Commitments and Contingencies

We monitor our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environment liability does not exist, we are not currently aware of any environmental liability with respect to the properties that we believe would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our condensed consolidated financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.

At the recommendation of our advisor, the Independent Directors Committee of our board of directors is considering various strategic alternatives to enhance value for our stockholders. One of the alternatives under consideration is the hiring of a new dealer manager for our public offering of common stock, which was suspended on April 29, 2011. In addition, the Independent Directors Committee is continuing to evaluate possible changes to our advisory relationships. We may have difficulty finding a new qualified dealer manager and/or advisor, and any change in the dealer manager and/or advisor would disrupt our operations and our ability to raise capital in our public offering.

15. Business Combinations

On January 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property, Forestview Manor, from 153 Parade Road, LLC a non-related party, for a purchase price of approximately $10.8 million. The acquisition was funded with our revolving credit facility from KeyBank National Association and with proceeds from our initial public offering.

The following summary provides the allocation of the acquired assets and liabilities as of the acquisition date. We have accounted for the acquisition as business combination under U.S. GAAP. Under business combination accounting, the assets and liabilities of the acquired property were recorded as of the acquisition date, at their respective fair values, and consolidated in our financial statements. The detail of the purchase price of the acquired property is set forth below:

		Forestview
		Manor
Land		$	1,320,000
Buildings & improvements			6,803,000
Site improvements			1,040,000
Furniture & fixtures			350,000
Intangible assets			960,000
Goodwill			277,000
Real estate acquisitions		$	10,750,000
Acquisition expenses		$	131,000

We did not complete any acquisitions during the first quarter of 2010. The following unaudited pro forma information for the three months ended March 31, 2011 and 2010 has been prepared to reflect the incremental effect of the acquisition as if such acquisition had occurred on January 1, 2010.

		Three months				Three months
		Ended				Ended
		March 31, 2011				March 31, 2010
Revenues		$	9,783,000			$	3,992,000
Net loss		$	(1,594,000	)		$	(979,000	)
Basic and diluted net loss per common share attributable to common stockholders		$	(0.13	)		$	(0.16	)

The Company recorded revenues and net income for the three months ended March 31, 2011 of approximately $0.8 million and $0.1 million, respectively, related to the acquisitions during the first quarter of 2011.

16. Subsequent Events

On April 14, 2011, we purchased an assisted-living property, Sunrise of Allentown, from an affiliate of Sunrise Senior Living, Inc., a non-related party, for a purchase price of $9.0 million. The property will be rebranded as Woodland Terrace at the Oaks Senior Living (“Woodland Terrace”). The acquisition was funded with proceeds from our initial public offering and with proceeds from a mortgage loan from an unaffiliated lender that funded subsequent to the closing.

Sale of Shares of Common Stock

As of April 29, 2011, we had raised approximately $127.0 million through the issuance of approximately 12.7 million shares of our common stock under our initial and follow-on public offerings, excluding approximately 551,000 shares that were issued pursuant to our distribution reinvestment plans reduced by approximately 202,000 shares repurchased pursuant to our stock repurchase program.

Suspension of Offering, Dividend Reinvestment Plan and Stock Repurchase Program.

On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration is the hiring of a new dealer manager for our follow-on offering; however, the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced.

Departure and Election of Certain Officers

On May 21, 2011, Terry G. Roussel, the President, Chief Executive Officer, Chairman of the board of directors and a director of the Company, informed the Company that he had resigned from his positions as President, Chief Executive Officer and Chairman of the board of directors effective as of May 21, 2011. Mr. Roussel remains a director of the Company and continues to serve as a member of the investment committee of the board of directors.

In response to the resignation of Mr. Roussel, our board of directors has elected Sharon C. Kaiser to serve as our President, effective as of May 23, 2011.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward —looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2010 as filed with the SEC, and the risks identified in Part II, Item 1A of this quarterly report.

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:

	•		the possibility of changes in our advisory and dealer-manager relationships as further described in the Risk Factors section of this quarterly report on Form 10-Q;
	•		changes in economic conditions generally and the real estate and healthcare markets specifically;

	•		legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;
	•		legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation;
	•		the availability of debt and equity capital;
	•		changes in interest rates;
	•		competition in the real estate industry;
	•		the supply and demand for operating properties in our proposed market areas;
	•		changes in accounting principles generally accepted in the United States of America, or GAAP; and
	•		the risk factors in our Annual Report for the year ended December 31, 2010 and this quarterly report on Form 10-Q.

Overview

We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing in and owning commercial real estate. We intend to invest the net proceeds from our offerings primarily in investment real estate including health care, multi-tenant industrial, net-leased retail properties and other real estate related assets located in major metropolitan markets in the United States. As of March 31, 2011, we raised approximately $124.5 million of gross proceeds from the sale of approximately 12.5 million shares of our common stock in our initial and follow-on public offerings.

On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee evaluation of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration is the hiring of a new dealer manager for our follow-on offering, however the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced. In addition, the Independent Directors Committee is continuing to evaluate possible changes to our advisory relationships.

Our revenues, which will be comprised largely of rental income, will include rents reported on a straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; (ii) maximize tenant recoveries given the underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market-specific, general economic and other conditions.

Highlights for the Three Months Ended March 31, 2011

	•		We completed one acquisition for an aggregate purchase price of approximately $10.8 million. See Note 15.
	•		We increased our borrowing on the KeyBank credit facility by approximately $5.9 million in connection with the acquisition of Forestview Manor.

Status of Our Offering

•

Prior to the suspension of our follow-on offering on April 29, 2011, we had raised approximately $127.0 million through the issuance of approximately 12.7 million shares of our common stock under our initial and follow-on offerings, excluding approximately 551,000 shares that were issued pursuant to our distribution reinvestment plan, reduced by approximately 202,000 shares repurchased pursuant to our stock repurchase program.

Market Outlook — Real Estate and Real Estate Finance Markets

In recent years, both the national and most global economies have experienced substantially increased unemployment and a downturn in economic activity. Despite certain recent positive economic indicators and improved stock market performance, the aforementioned conditions, combined with low consumer confidence, have resulted in an unprecedented global recession and continue to contribute to a challenging economic environment that may delay the implementation of our business strategy or force us to modify it.

Despite the economic conditions discussed above, the demand for health care services is projected to continue to grow for the foreseeable future. The Centers for Medicare and Medicaid Services projects that national health expenditures will rise to $3.4 trillion in 2015, or 17.7% of gross domestic product (“GDP”), up from $2 trillion or 15.7% of GDP in 2005. The elderly are an important component of health care utilization, especially independent living services, assisted-living services, skilled nursing services, inpatient and outpatient hospital services and physician ambulatory care. The elderly population aged 65 and over is projected to increase by 76.6% through 2030.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.

Results of Operations

As of March 31, 2011, we operated in three reportable business segments: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment invests in and operates assisted-living, memory care and other senior housing communities located in the United States. We engage independent third party managers to operate these properties. Our triple-net leased properties segment invests in healthcare properties in the United States leased under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB segment invests in medical office buildings and leases those properties to healthcare providers under long-term “full service” leases which may require tenants to reimburse property related expenses to us.

We began accepting subscriptions for shares under our initial public offering on June 20, 2008. We purchased our first senior housing property in January 2009, and as of March 31, 2011, we owned 14 properties. These properties included nine assisted-living facilities which comprise our senior housing segment, one medical office building, which comprises our MOB segment, and four operating healthcare facilities and one development healthcare facility, which comprise our triple-net leased segment. During the three months ended March 31, 2010, we owned five properties, including three senior housing facilities, one net leased facility and one development project. Accordingly, the results of our first quarter 2011 and 2010 operations are not directly comparable.

Comparison of the Three Months Ended March 31, 2011 and 2010

		Three Month Ended
		March 31,
		2011				2010				$ Change				% Change
Net operating income, as defined (1)
Senior living operations		$	2,567,000			$	735,000			$	1,832,000				249
Triple-net leased properties			1,144,000				447,000				697,000				156
Medical office building			186,000				—				186,000				N/A
Total portfolio net operating income		$	3,897,000			$	1,182,000			$	2,715,000				230
Reconciliation to net loss:
Net operating income, as defined (1)		$	3,897,000			$	1,182,000			$	2,715,000				229
Unallocated (expenses) income:
General and administrative expenses			(664,000	)			(528,000	)			136,000				26
Asset management fees and expenses			(431,000	)			(165,000	)			266,000				161
Real estate acquisitions costs and earn out costs			(1,127,000	)			(458,000	)			669,000				146
Depreciation and amortization			(1,861,000	)			(640,000	)			1,221,000				191
Interest income			4,000				3,000				1,000				33
Interest expense			(1,476,000	)			(337,000	)			1,139,000				338
Net loss		$	(1,658,000	)		$	(943,000	)		$	715,000				76

Senior Living Operations

Total revenue for senior living operations includes rental revenue and resident fees and service income. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the three months ended March 31, 2011 increased to $2.6 million from $0.7 million for the three months ended March 31, 2010. The increase is primarily due to acquisitions completed during 2010.

		Three Months Ended
		March 31,
		2011				2010				$ Change				% Change
Senior Living Operations — Net operating income
Total revenues
Rental revenue		$	6,200,000			$	1,990,000			$	4,210,000				212
Resident services and fee income			1,702,000				495,000				1,207,000				244
Tenant reimbursement and other income			110,000				70,000				40,000				57
Less:
Property operating and maintenance expenses			5,445,000				1,820,000				3,625,000				199
Total portfolio net operating income		$	2,567,000			$	735,000			$	1,832,000				249

Triple-Net Leased Properties

Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income increased to $1.1 million for the three months ended March 31, 2011 compared to $0.4 million for the three months ended March 31, 2010 due to the acquisitions completed in 2010.

		Three Months Ended
		March 31,
		2011				2010				$ Change				% Change
Triple-Net Leased Properties — Net operating income
Total revenues
Rental revenue		$	1,159,000			$	447,000			$	712,000				159
Tenant reimbursement and other income			158,000				40,000				118,000				295
Less:
Property operating and maintenance expenses			173,000				40,000				133,000				333
Total portfolio net operating income		$	1,144,000			$	447,000			$	697,000				156