Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2008

OR

 

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

For the transition period from             to             

Commission File Number 1-10989

 

 

VENTAS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   61-1055020
(State or Other Jurisdiction of Incorporation or Organization)   (IRS Employer Identification No.)

 

111 S. Wacker Drive, Suite 4800, Chicago, Illinois           60606
(Address of Principal Executive Offices)                        (Zip Code)

(877) 483-6827

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.25 per share   New York Stock Exchange

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

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  x

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  Accelerated filer   ¨   

Non-accelerated filer

 

¨

  Smaller reporting company   ¨   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of shares of the Registrant’s common stock, par value $0.25 per share, held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock on June 30, 2008, was approximately $5.8 billion. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.

As of February 24, 2009, 143,404,798 shares of the Registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 7, 2009 are incorporated by reference into Part III, Items 10 through 14 of this Annual Report on Form 10-K.

 

 

 


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CAUTIONARY STATEMENTS

Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Annual Report on Form 10-K refer to Ventas, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our or our tenants’, operators’, managers’ or borrowers’ expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, acquisitions, investment opportunities, merger integration, growth opportunities, dispositions, expected lease income, continued qualification as a real estate investment trust (“REIT”), plans and objectives of management for future operations, and statements that include words such as “anticipate,” “if,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “could,” “should,” “will,” and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and security holders must recognize that actual results may differ from our expectations. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.

Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the Securities and Exchange Commission (the “Commission”). These factors include without limitation:

 

   

The ability and willingness of our operators, tenants, borrowers, managers and other third parties to meet and/or perform their obligations under their respective contractual arrangements with us, including, in some cases, their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

 

   

The ability of our operators, tenants, borrowers and managers to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities and other indebtedness;

 

   

Our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions or investments, including those in different asset types and outside the United States;

 

   

The nature and extent of future competition;

 

   

The extent of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;

 

   

Increases in our cost of borrowing as a result of changes in interest rates and other factors;

 

   

The ability of our operators and managers, as applicable, to deliver high quality services, to attract and retain qualified personnel and to attract residents and patients;

 

   

The results of litigation affecting us;

 

   

Changes in general economic conditions and/or economic conditions in the markets in which we may, from time to time, compete, and the effect of those changes on our revenues and our ability to access the capital markets or other sources of funds;

 

   

Our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;

 

   

Our ability and willingness to maintain our qualification as a REIT due to economic, market, legal, tax or other considerations;


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Final determination of our taxable net income for the year ended December 31, 2008 and for the year ending December 31, 2009;

 

   

The ability and willingness of our tenants to renew their leases with us upon expiration of the leases and our ability to reposition our properties on the same or better terms in the event such leases expire and are not renewed by our tenants or in the event we exercise our right to replace an existing tenant upon a default;

 

   

Risks associated with our senior living operating portfolio, such as factors causing volatility in our operating income and earnings generated by our properties, including without limitation national and regional economic conditions, costs of materials, energy, labor and services, employee benefit costs, insurance costs and professional and general liability claims, and the timely delivery of accurate property-level financial results for those properties;

 

   

The movement of U.S. and Canadian exchange rates;

 

   

Year-over-year changes in the Consumer Price Index and the effect of those changes on the rent escalators, including the rent escalator for Master Lease 2 with Kindred, and our earnings;

 

   

Our ability and the ability of our operators, tenants, borrowers and managers to obtain and maintain adequate liability and other insurance from reputable and financially stable providers;

 

   

The impact of increased operating costs and uninsured professional liability claims on the liquidity, financial condition and results of operations of our operators, tenants, borrowers and managers and the ability of our operators, tenants, borrowers and managers to accurately estimate the magnitude of those claims;

 

   

The ability and willingness of the lenders under our unsecured revolving credit facilities to fund, in whole or in part, borrowing requests made by us from time to time;

 

   

The impact of market or issuer events on the liquidity or value of our investments in marketable securities; and

 

   

The impact of any financial, accounting, legal or regulatory issues that may affect our major tenants, operators or managers.

Many of these factors, some of which are described in greater detail under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K, are beyond our control and the control of our management.

Kindred, Brookdale Senior Living and Sunrise Information

Each of Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”), Brookdale Senior Living Inc. (together with its subsidiaries, which include Brookdale Living Communities, Inc. (“Brookdale”) and Alterra Healthcare Corporation (“Alterra”), “Brookdale Senior Living”) and Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) is subject to the reporting requirements of the Commission and is required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Kindred, Brookdale Senior Living and Sunrise contained or referred to in this Annual Report on Form 10-K is derived from filings made by Kindred, Brookdale Senior Living or Sunrise, as the case may be, with the Commission or other publicly available information, or has been provided to us by Kindred, Brookdale Senior Living or Sunrise. We have not verified this information either through an independent investigation or by reviewing Kindred’s, Brookdale Senior Living’s or Sunrise’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Kindred’s, Brookdale Senior Living’s and Sunrise’s filings with the Commission can be found at the Commission’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s, Brookdale Senior Living’s and Sunrise’s publicly available filings from the Commission.


Table of Contents

TABLE OF CONTENTS

 

PART I   
Item 1.   

Business

   1
Item 1A.   

Risk Factors

   26
Item 1B.   

Unresolved Staff Comments

   39
Item 2.   

Properties

   39
Item 3.   

Legal Proceedings

   41
Item 4.   

Submission of Matters to a Vote of Security Holders

   41
PART II   
Item 5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   41
Item 6.   

Selected Financial Data

   44
Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   46
Item 7A.   

Quantitative and Qualitative Disclosures About Market Risk

   70
Item 8.   

Financial Statements and Supplementary Data

   71
Item 9.   

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   141
Item 9A.   

Controls and Procedures

   141
Item 9B.   

Other Information

   141
PART III   
Item 10.   

Directors, Executive Officers and Corporate Governance

   141
Item 11.   

Executive Compensation

   141
Item 12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   141
Item 13.   

Certain Relationships and Related Transactions, and Director Independence

   142
Item 14.   

Principal Accountant Fees and Services

   142
PART IV   
Item 15.   

Exhibits and Financial Statement Schedules

   142


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PART I

 

ITEM 1. Business

BUSINESS

Overview

We are a REIT with a geographically diverse portfolio of seniors housing and healthcare properties in the United States and Canada. As of December 31, 2008, this portfolio consisted of 513 assets: 248 seniors housing communities, 192 skilled nursing facilities, 41 hospitals and 32 medical office buildings (“MOBs”) and other properties in 43 states and two Canadian provinces. With the exception of our seniors housing communities that are managed by Sunrise pursuant to long-term management agreements and the majority of our MOBs, we lease our properties to healthcare operating companies under “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. We also had real estate loan investments relating to seniors housing and healthcare companies as of December 31, 2008.

We conduct substantially all of our business through our wholly owned subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”), PSLT OP, L.P. and Ventas SSL, Inc., and ElderTrust Operating Limited Partnership (“ETOP”), in which we own substantially all of the partnership units. Our primary business consists of acquiring, financing and owning seniors housing and healthcare properties and leasing those properties to third parties or operating those properties through independent third party managers.

We were incorporated in Kentucky in 1983, commenced operations in 1985 and reorganized as a Delaware corporation in 1987. We operate through two reportable business segments: triple-net leased properties and senior living operations. See our Consolidated Financial Statements and the related notes, including “Note 2—Accounting Policies,” included in Part II, Item 8 of this Annual Report on Form 10-K.

Our business strategy is comprised of three principal objectives: (1) portfolio diversification; (2) stable earnings and growth; and (3) maintaining a strong balance sheet and liquidity. While current conditions in the capital markets persist, maintaining a strong balance sheet and liquidity will be our primary focus.

Portfolio of Properties and Other Real Estate Investments

As of December 31, 2008, we had a 100% ownership interest in 444 of our properties. Of the remaining 69 properties, we had a 75% to 85% ownership interest in 61 seniors housing communities, with the minority interest in those communities being owned by Sunrise, and we had joint venture ownership interests in eight MOBs ranging from 50% to 99.7%. Our joint venture partners also typically provide management and leasing services for the MOBs.

 

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The following table provides an overview of our portfolio of properties and other real estate investments as of and for the year ended December 31, 2008:

 

Portfolio by Type

  # of
Properties
  # of
Beds/Units
  Revenue   Percent
of Total
Revenues
    Real Estate
Investments,
at Cost (1)
  Percent of
Real Estate
Investments (1)
    Real Estate
Investment
Per
Bed/Unit
  Number of
Locations (2)
                (Dollars in thousands)              

Seniors Housing and Healthcare Properties

               

Seniors housing communities

  248   23,667   $ 628,971   67.1 %   $ 4,761,343   76.3 %   $ 201.2   36

Skilled nursing facilities

  192   23,358     172,682   18.4       825,898   13.2       35.4   28

Hospitals

  41   3,815     93,836   10.0       364,589   5.9       95.6   17

MOBs (3)

  22   —       28,118   3.0       277,761   4.5       nm   10

Other properties

  8   122     950   0.1       7,133   0.1       58.5   1
                                   

Total seniors housing and healthcare properties

  511   50,962     924,557   98.6 %   $ 6,236,724   100.0 %     45
                           

Other Real Estate Investments

               

Loans and investments

    8,847   0.9          
                       
  $ 933,404   99.5 %(4)        
                       

 

(1) Includes assets held for sale at December 31, 2008.
(2) As of December 31, 2008, our seniors housing and healthcare properties were located in 43 states and two Canadian provinces and were operated or managed by 22 different third-party operators or managers.
(3) As of December 31, 2008, nineteen of our MOBs were operated by third-party managers and three were leased under triple-net leases. The table excludes two MOBs that were under development at December 31, 2008.
(4) The remainder of our total revenues is interest and other income. Revenues from properties held for sale as of December 31, 2008 are included in this presentation. Revenues from properties sold during 2008 are excluded from this presentation.

nm—not meaningful.

Seniors Housing and Healthcare Properties

Seniors Housing Communities.    Our seniors housing communities include independent and assisted living communities, and communities providing care for individuals with Alzheimer’s disease and other forms of dementia or memory loss. These communities offer residential units on a month-to-month basis primarily to elderly individuals requiring various levels of assistance. Basic services for residents of these communities include housekeeping, meals in a central dining area and group activities organized by the staff with input from the residents. More extensive care and personal supervision, at additional fees, are also available for such needs as eating, bathing, grooming, transportation, limited therapeutic programs and medication administration, all of which encourage the residents to live as independently as possible according to their abilities. These services are often met by home health providers, close coordination with the resident’s physician and skilled nursing facilities.

 

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Skilled Nursing Facilities.    Our skilled nursing facilities typically provide nursing care services to the elderly and rehabilitation and restoration services, including physical, occupational and speech therapies, and other medical treatment for patients and residents who do not require the high technology, care-intensive setting of an acute care or rehabilitation hospital.

Hospitals.    Substantially all of our hospitals are operated as long-term acute care hospitals, which are hospitals that have a Medicare average length of stay greater than 25 days, that serve medically complex, chronically ill patients who require a high level of monitoring and specialized care, but whose conditions do not necessitate the continued services of an intensive care unit. The operator of these hospitals has the capability to treat patients who suffer from multiple systemic failures or conditions such as neurological disorders, head injuries, brain stem and spinal cord trauma, cerebral vascular accidents, chemical brain injuries, central nervous system disorders, developmental anomalies and cardiopulmonary disorders. Chronic patients are often dependent on technology for continued life support, such as mechanical ventilators, total parenteral nutrition, respiration or cardiac monitors and dialysis machines, and, therefore, due to their severe medical conditions, these patients generally are not clinically appropriate for admission to a nursing facility or rehabilitation hospital. Our hospitals are freestanding facilities, and we do not own any “hospitals within hospitals.” We also own two rehabilitation hospitals devoted to the rehabilitation of patients with various neurological, musculoskeletal, orthopedic and other medical conditions following stabilization of their acute medical issues.

Medical Office Buildings.    Our MOBs offer office space primarily to physicians and other healthcare businesses. While these properties are similar to commercial office buildings, they require more plumbing, electrical and mechanical systems to accommodate multiple physicians’ offices and examination rooms that may have sinks in every room, brighter lights and specialized medical equipment. MOBs are typically multi-tenant properties leased to multiple healthcare providers (hospitals and physician practices). As of December 31, 2008, we had two MOBs under development that are currently scheduled to open in 2009 or early 2010.

Other Properties.    Our other properties consist of personal care facilities, which provide specialized care, including supported living services, neurorehabilitation, neurobehavioral management and vocational programs, for persons with acquired or traumatic brain injury.

Other Real Estate Investments

As of December 31, 2008, we held $112.5 million principal amount of first mortgage debt issued by a national provider of healthcare services, primarily skilled nursing care. We purchased this debt in June 2008 at a discount for $98.8 million, resulting in an effective interest rate to maturity of LIBOR plus 533 basis points. Interest on the loan is payable monthly at an annual rate of LIBOR plus 125 basis points, and the loan matures in January 2012, subject to a one-year extension, at the borrower’s option, subject to certain conditions.

As of December 31, 2008, we held a receivable for three outstanding first mortgage loans (the “Sunwest Loans”) in the aggregate principal amount of $20.0 million. During the third quarter of 2008, the borrowers defaulted on certain of their obligations under the Sunwest Loans, including the monthly payment of principal and interest to us. We recorded a provision for loan losses on the Sunwest Loans of $6.0 million. See “Note 8—Loans Receivable” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

In December 2008, we sold five assets for $62.5 million, and the buyer issued a $10.0 million note to us as partial payment of the purchase price. The loan is payable in full in December 2011. Principal payments of $40,000 and interest payments at a rate of 8% in year one, 8.25% in year two and 8.5% in year three, are due and payable to us monthly. See “Note 8—Loans Receivable” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

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Geographic Diversification

Our portfolio of seniors housing and healthcare properties is broadly diversified by geographic location in the United States and Canada, with properties in only two states comprising more than 10% of our 2008 total revenues (including amounts in discontinued operations from properties held for sale at December 31, 2008). The following table shows our rental income and resident fees and services derived by geographic location for our portfolio of properties:

 

     For the Year Ended
December 31, 2008
 
     Rental Income and
Resident Fees and
Services
   Percent of Total
Revenues
 
     (Dollars in thousands)  

Geographic Location

     

California

   $ 119,882    12.8 %

Illinois

     98,597    10.5  

Massachusetts

     54,261    5.8  

Pennsylvania

     52,194    5.6  

New Jersey

     45,992    4.9  

Florida

     36,628    3.9  

Colorado

     35,087    3.7  

New York

     33,819    3.6  

Georgia

     32,785    3.5  

Michigan

     30,000    3.2  

Other (33 states)

     309,834    33.1  
             

Total U.S.

     849,079    90.6 %

Canada (two Canadian provinces)

     75,478    8.0  
             

Total

   $ 924,557    98.6 % (1)
             

 

(1) The remainder of our total revenues is income from loans and investments and interest and other income. Revenues from properties held for sale as of December 31, 2008 are included in this presentation. Revenues from properties sold during 2008 are excluded from this presentation.

Segment Information

As of December 31, 2008, we operated through two reportable business segments: triple-net leased properties and senior living operations. See “Note 19—Segment Information” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information about our business segments and the geographic diversification of our portfolio of properties.

Certificates of Need

A majority of our skilled nursing facilities and hospitals are located in states that have certificate of need (“CON”) requirements. A CON, which is issued by a governmental agency with jurisdiction over healthcare facilities, is at times required for expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. The CON rules and regulations may restrict our or our operators’ ability to expand our properties in certain circumstances.

 

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The following table shows the percentage of our rental income derived by skilled nursing facilities and hospitals in states with and without CON requirements:

 

     For the Year Ended
December 31, 2008
 
     Skilled
Nursing
Facilities
    Hospitals     Total  

States with CON requirements

   72.4 %   48.4 %   64.1 %

States without CON requirements

   27.6     51.6     35.9  
                  

Total

   100.0 %   100.0 %   100.0 %
                  

Significant Tenants and Operators

As of December 31, 2008, approximately 38.5%, 21.9% and 14.7% of our properties, based on the gross book value of real estate investments (including assets held for sale), were managed or operated by Sunrise, Brookdale Senior Living and Kindred, respectively. Approximately 45.4%, 25.5% and 12.8% of our total revenues and 21.9%, 38.0% and 19.2% of our total NOI (net operating income) (including amounts in discontinued operations) for the year ended December 31, 2008 were attributable to senior living operations managed by Sunrise, our master lease agreements with Kindred (the “Kindred Master Leases”) and our leases with Brookdale Senior Living, respectively. Sunrise became a manager of our properties as a result of our acquisition of the assets of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) in April 2007. The Kindred Master Leases originated in our spin off of Kindred in May 1998, pursuant to which we transferred to Kindred our previous hospital, nursing facility and ancillary services businesses and we retained substantially all of the real property which we leased to Kindred. In addition to the lease transaction we entered into with Brookdale Senior Living in 2004, we became party to various lease agreements with Brookdale Senior Living in connection with our acquisition of Provident Senior Living Trust (“Provident”) in June 2005 and the subsequent combination of Brookdale and Alterra under Brookdale Senior Living.

Triple-Net Leased Properties

Each of our leases with Kindred and Brookdale Senior Living is a triple-net lease pursuant to which the tenant is required to pay all taxes, utilities and maintenance and repairs related to the properties and to maintain and pay all insurance covering the properties and their operations. In addition, the tenants are required to comply with the terms of the mortgage financing documents, if any, affecting the properties.

Because we lease a substantial portion of our triple-net leased properties to Kindred and Brookdale Senior Living and they are each a significant source of our total revenues, their financial condition and ability and willingness to satisfy their obligations under their respective leases and certain other agreements with us and their willingness to renew those leases upon expiration of the initial base terms thereof will significantly impact our revenues and our ability to service our indebtedness and to make distributions to our stockholders. We cannot assure you that Kindred or Brookdale Senior Living will have sufficient assets, income and access to financing to enable it to satisfy its obligations under its respective leases and other agreements with us, and any inability or unwillingness on its part to do so would have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”). We also cannot assure you that Kindred and/or Brookdale Senior Living will elect to renew their respective leases with us upon expiration of the initial base terms or any renewal terms thereof or that, if such leases are not renewed, that we can reposition the affected properties on the same or better terms. See “Risks Factors—Risks Arising from Our Business—We depend on Kindred and Brookdale Senior Living for a significant portion of our revenues and operating income; Any inability or unwillingness by Kindred or Brookdale Senior Living to satisfy its obligations under its agreements with us could have a Material Adverse Effect on us” included in Item 1A of this Annual Report on Form 10-K.

 

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Kindred Master Leases.    Under each Kindred Master Lease, the aggregate annual rent is referred to as Base Rent (as defined in the applicable Kindred Master Lease). Base Rent escalates on May 1 of each year at a specified rate over the Prior Period Base Rent (as defined in the applicable Kindred Master Lease) contingent upon the satisfaction of specified facility revenue parameters. The annual rent escalator is 2.7% under Kindred Master Leases 1, 3 and 4, and is based on year-over-year changes in the Consumer Price Index, with a floor of 2.25% and a ceiling of 4%, under Kindred Master Lease 2. Assuming the specified revenue parameters are met, Base Rent due under the Kindred Master Leases will be approximately $248.0 million from May 1, 2009 to April 30, 2010. See “Note 3—Revenues from Properties” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

The properties leased to Kindred pursuant to the Kindred Master Leases are grouped into bundles, with each bundle containing a varying number of properties. All properties within a bundle have primary terms ranging from ten to fifteen years from May 1, 1998 and, provided certain conditions are satisfied, are subject to three five-year renewal terms. Kindred has renewed, through April 30, 2013, its leases covering all 57 assets owned by us whose initial base term expired on April 30, 2008. The term for each of ten bundles will expire on April 30, 2010 unless Kindred provides us with a renewal notice with respect to such individual bundle, on or before April 30, 2009. The ten bundles expiring in 2010 contain an aggregate of 109 properties currently representing $123.9 million of annual Base Rent. Each bundle covers six to 20 assets, including at least one hospital. Kindred is required to continue to perform all of its obligations under the applicable lease for any assets that are not renewed until expiration of the term on April 30, 2010, including without limitation, payment of all rental amounts. For any assets that are not renewed, we will have at least one year to arrange for the repositioning of such assets with new operators. We own or have the rights to all licenses and CONs at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of the properties to another operator. We cannot assure you that we would be successful in identifying suitable replacement operators or that we will be able to enter into leases with new tenants or operators on terms as favorable to us as our current leases, if at all. See “Risk Factors—Risks Arising from Our Business—We may be unable to reposition our properties on as favorable terms, or at all, if we have to replace any of our tenants or operators, and we may be subject to delays, limitations and expenses in repositioning our assets” included in Item 1A of this Annual Report on Form 10-K.

Brookdale Senior Living Leases.    Our leases with Brookdale have primary terms of fifteen years, commencing either January 28, 2004 (in the case of fifteen “Grand Court” properties we acquired in early 2004) or October 19, 2004 (in the case of the properties we acquired in connection with the Provident acquisition), and, provided certain conditions are satisfied, are subject to two ten-year renewal terms. Our leases with Alterra also have primary terms of fifteen years, commencing either October 20, 2004 or December 16, 2004 (both in the case of properties we acquired in connection with the Provident acquisition), and, provided certain conditions are satisfied, are subject to two five-year renewal terms. Brookdale Senior Living guarantees all obligations under these leases, and all of our Brookdale Senior Living leases are cross-defaulted.

Under the terms of the Brookdale leases assumed in connection with the Provident acquisition, Brookdale is obligated to pay base rent, which escalates on January 1 of each year, by an amount equal to the lesser of (i) four times the percentage increase in the Consumer Price Index during the immediately preceding year or (ii) 3%. Under the terms of the Brookdale leases with respect to our “Grand Court” properties, Brookdale is obligated to pay base rent, which escalates on February 1 of each year, by an amount equal to the greater of (i) 2% or (ii) 75% of the increase in the Consumer Price Index during the immediately preceding year. Under the terms of the Alterra leases, Alterra is obligated to pay base rent, which escalates either on January 1 or November 1 of each year by an amount equal to the lesser of (i) four times the percentage increase in the Consumer Price Index during the immediately preceding year or (ii) 2.5%. The aggregate annual contractual cash base rent expected from Brookdale Senior Living for 2009 is approximately $110.1 million, excluding variable interest Brookdale is obligated to pay as additional rent based on certain floating rate mortgage debt assumed by us during the Provident acquisition. The aggregate annual contractual GAAP rent (computed in accordance with U.S. generally accepted accounting principles (“GAAP”)), excluding the variable interest, expected from Brookdale Senior Living for 2009 is approximately $120.4 million. See “Note 3—Revenues from Properties” and

 

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“Note 13—Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Senior Living Operations

We are party to management agreements with Sunrise pursuant to which Sunrise currently provides comprehensive accounting and property management services with respect to 79 of our seniors housing communities. Each management agreement has a term of 30 years from its effective date, the earliest of which began in 2004. See “Note 3—Revenues from Properties” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Although we have various rights as owner under the Sunrise management agreements, we rely on Sunrise’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on Sunrise to set resident fees and otherwise operate those properties in compliance with our management agreements. Because a significant portion of our properties are managed by Sunrise, its inability to efficiently and effectively manage those properties and to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. In addition, Sunrise’s inability or unwillingness to satisfy its obligations under our management agreements, a change in Sunrise’s senior management or any adverse developments in Sunrise’s business and affairs or financial condition could have a Material Adverse Effect on us. See “Risk Factors—Risks Arising from Our Business—The properties managed by Sunrise account for a significant portion of our revenues and operating income; Adverse developments in Sunrise’s business and affairs or financial condition could have a Material Adverse Effect on us” included in Item 1A of this Annual Report on Form 10-K.

Competition

We compete for real property investments with healthcare providers, other healthcare REITs, healthcare lenders, real estate partnerships, banks, insurance companies, private equity and other investors. Some of our competitors are significantly larger and have greater financial resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. As a result, our ability to compete successfully for real property investments is impacted by numerous factors, including the availability of suitable acquisition or investment targets, our ability to negotiate acceptable terms for any such acquisition and the availability and cost of capital to us. See “Risk Factors—Risks Arising from Our Business—We may encounter certain risks when implementing our business strategy to pursue investments in, and/or acquisitions or development of, additional seniors housing and/or healthcare assets” included in Item 1A of this Annual Report on Form 10-K and “Note 9—Borrowing Arrangements” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Revenues from our properties are dependent on the ability of our operators and managers to compete with other seniors housing and healthcare operators and managers. These operators and managers compete on a local and regional basis for residents and patients at our properties on a number of different levels. Their ability to successfully attract and retain residents and patients depends upon several factors, including the scope and quality of services provided, the ability to attract and retain qualified personnel, the operational reputation of the operator or manager, physician referral patterns, physical appearance of the properties, other competitive systems of healthcare delivery within the community, population and demographics, and the financial condition of the operator or manager. Private, federal and state reimbursement programs and the effect of other laws and regulations also may have a significant impact on our operators’ and managers’ ability to compete successfully for residents and patients at the properties. See “Risk Factors—Risks Arising from Our Business—Our tenants, managers and operators may be adversely affected by increasing healthcare regulation and enforcement” and “—Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare

 

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and Medicaid programs, could have a material adverse effect on certain of our tenants and operators” included in Item 1A of this Annual Report on Form 10-K.

Employees

As of December 31, 2008, we had 63 full-time employees, none of whom are subject to a collective bargaining agreement. We consider the relationship with our employees to be good.

Insurance

We maintain and/or require in our existing leases and other agreements that our tenants, managers and operators maintain all applicable lines of insurance on our properties and their operations. For example, under the Kindred Master Leases, Kindred is required to maintain, at its expense, certain insurance coverage related to the properties under the Kindred Master Leases and Kindred’s operations at those properties. We believe that our tenants, managers and operators are in substantial compliance with the insurance requirements contained in their respective leases and other agreements with us. However, we cannot assure you that Kindred or our other tenants, managers and operators will maintain such insurance, and any failure by them to do so could have a Material Adverse Effect on us. General and professional liability and casualty insurance covering our properties managed by Sunrise and the related operations is currently maintained by Sunrise in accordance with the standards contained in our management agreements. However, we may elect, on an annual basis, to opt in or out of the Sunrise insurance program. If for any reason we chose to opt out of the Sunrise insurance program, we would maintain general and professional liability and casualty insurance for our Sunrise-managed properties in accordance with the standards contained in the management agreements. The costs of the insurance program covering our Sunrise-managed properties are facility expenses paid from the revenues of these properties, regardless of who maintains the insurance.

We believe that the amount and scope of insurance coverage provided by our policies and the policies maintained by our tenants, managers and operators are customary for similarly situated companies in our industry. We cannot assure you that in the future such insurance will be available at a reasonable cost or that we or our tenants, managers and operators will be able to maintain adequate levels of insurance coverage. In addition, we cannot give any assurances as to the future financial viability of our insurers or that the insurance coverage provided will fully cover all losses on our properties upon the occurrence of a catastrophic event.

Due to historically high frequency and severity of professional liability claims against healthcare providers, the availability of professional liability insurance is limited and the premiums for such coverage remain very high. In addition, many healthcare providers are pursuing different organizational and corporate structures coupled with self-insurance programs that provide less insurance coverage. As a result, the tenants, managers and operators of our properties could incur large funded and unfunded professional liability expense, which could have a material adverse effect on their liquidity, financial condition and results of operations, and which, in turn, could affect adversely their ability to make rental payments under, or otherwise comply with the terms of, their leases with us or, with regard to our Sunrise-managed properties, adversely affect our results of operations. We cannot assure you that our tenants, managers and operators will continue to carry the insurance coverage required under the terms of their leases and other agreements with us or that we will continue to require the same levels of insurance under those leases and agreements.

Additional Information

We maintain a website at www.ventasreit.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K, and our web address is included as an inactive textual reference only.

We make available, free of charge, through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished

 

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pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. In addition, our Guidelines on Governance, the charters for each of our Audit and Compliance, Nominating and Governance and Executive Compensation Committees and our Code of Ethics and Business Conduct are available on our website, and we will mail copies of the foregoing documents to stockholders, free of charge, upon request to Corporate Secretary, Ventas, Inc., 10350 Ormsby Park Place, Suite 300, Louisville, Kentucky 40223.

GOVERNMENTAL REGULATION

Healthcare Regulation

Overview

Seniors housing communities are subject to relatively few, if any, federal regulations. Instead, to the extent they are regulated, the regulation is conducted mainly by state and local laws governing licensure, provision of services, staffing requirements and other operational matters. These laws vary greatly from one jurisdiction to another. Although recent growth in the U.S. seniors housing industry has attracted the attention of various federal agencies which believe there should be more federal regulation of these properties, thus far, Congress has deferred to state regulation of seniors housing communities. However, as a result of this growth and increased federal scrutiny, some states have revised and strengthened their regulation of seniors housing communities, and more are expected to do the same in the future.

In contrast, skilled nursing facilities, hospitals and other healthcare facilities are subject to extensive and extremely complex federal, state and local laws and regulations relating to, among other things, licensure, conduct of operations, ownership and addition of facilities, provision of services, rate setting and billing, reimbursement, and confidentiality and security of health-related information. These laws authorize periodic inspections and investigations and identification of deficiencies that, if not corrected, can result in sanctions such as suspension or loss of licensure to operate and loss of rights to participate in government-funded healthcare programs. Regulatory agencies have substantial powers to affect the actions of the operators of these properties if they believe that there is an imminent threat to patient welfare, and, in some states, these powers can include assumption of interim control over facilities through receiverships.

While different properties within our portfolio may be more likely subject to certain types of regulation, we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. A significant expansion of applicable federal, state or local laws and regulations, new interpretations of existing laws and regulations or changes in enforcement priorities could have a material adverse effect on certain of our operators’ liquidity, financial condition and results of operations, which, in turn, could adversely impact their ability to make rental payments under, or otherwise comply with the terms of, their leases with us. In addition, efforts by third-party payors, such as the federal Medicare program, state Medicaid programs and private insurance carriers, including health maintenance organizations and other health plans, to impose greater discounts and more stringent cost controls upon operators (through changes in reimbursement rates and methodologies, discounted fee structures, the assumption by healthcare providers of all or a portion of the financial risk or otherwise) are expected to intensify and continue. Significant limits on the scope of services reimbursed and on reimbursement rates and fees could also have a material adverse effect on certain of our operators’ liquidity, financial condition and results of operations, which could affect adversely their ability to make rental payments under, and otherwise comply with the terms of, their leases with us.

Licensure and Certification

Participation in the Medicare and Medicaid programs generally requires the operators of our skilled nursing facilities to be licensed on an annual or bi-annual basis and certified annually through various regulatory agencies which determine compliance with federal, state and local laws. These legal requirements relate to the quality of

 

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the nursing care provided, qualifications of the administrative personnel and nursing staff, the adequacy of the physical plant and equipment and continuing compliance with the laws and regulations governing the operation of skilled nursing facilities. The failure of an operator to maintain or renew any required license or regulatory approval or to correct serious deficiencies identified in compliance surveys could prevent it from continuing operations at a property. A loss of licensure or certification could also adversely affect a skilled nursing facility operator’s ability to receive payments from the Medicare and Medicaid programs, which, in turn, could adversely impact the operator’s ability to make rental payments under its leases with us.

Similarly, in order to receive Medicare and Medicaid reimbursement, our hospitals must meet the applicable conditions of participation set forth by the U.S. Department of Health and Human Services (“HHS”) relating to the type of hospital and its equipment, personnel and standard of medical care, as well as comply with state and local laws and regulations. Hospitals undergo periodic on-site licensure surveys, which generally are limited if the hospital is accredited by The Joint Commission (formerly the Joint Commission on Accreditation of Healthcare Organizations) or other recognized accreditation organizations. A loss of licensure or certification could adversely affect a hospital’s ability to receive payments from the Medicare and Medicaid programs, which, in turn, could adversely impact the operator’s ability to make rental payments under its leases with us.

Certificates of Need

Skilled nursing facilities and hospitals are subject to various state CON laws requiring governmental approval prior to the development or expansion of healthcare facilities and services. The approval process in these states generally requires a facility to demonstrate the need for additional or expanded healthcare facilities or services. CONs, where applicable, are sometimes necessary for expansion of existing facilities, construction of new facilities, changes in ownership or control of licensed facilities, addition of beds, investment in major capital equipment, introduction of new services or termination of services previously approved through the CON process. Over the last several years, in response to mounting Medicaid budget deficits, many states have begun to tighten CON controls, including through the imposition of moratoriums on new skilled nursing facilities and hospitals. Some states have also increased controls over licensing and change-of-ownership rules.

These CON laws and regulations may restrict an operator’s ability to expand our properties and grow its business in certain circumstances, which could have an effect on the operator’s revenues and, in turn, adversely impact us. In addition, in the event that any operator of our properties fails to make rental payments to us or to comply with applicable healthcare regulations, our ability to evict that operator and substitute another operator for a particular facility may be materially delayed or limited by CON laws, as well as by various state licensing and receivership laws and Medicare and Medicaid change-of-ownership rules. Such delays and limitations could have a material adverse effect on our ability to collect rent, to obtain possession of leased properties, or otherwise to exercise remedies for tenant default. We may also incur substantial additional expenses in connection with any such licensing, receivership or change-of-ownership proceedings.

Fraud and Abuse

Various federal and state laws and regulations prohibit a wide variety of fraud and abuse by healthcare providers who participate in, receive payments from or make or receive referrals for work in connection with government-funded healthcare programs, including Medicare and Medicaid. The federal laws include:

 

   

The anti-kickback statute (Section 1128B(b) of the Social Security Act), which prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs;

 

   

The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, commonly referred to as the “Stark Law”), which prohibits referrals by physicians of Medicare patients to providers of a broad

 

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range of designated healthcare services with which the physicians (or their immediate family members) or Medicaid have ownership interests or certain other financial arrangements;

 

   

The False Claims Act, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs);

 

   

The Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent acts; and

 

   

The Health Insurance Portability and Accountability Act of 1996 (commonly referred to as “HIPAA”), which among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure.

Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties, imprisonment, denial of Medicare and Medicaid payments, and/or exclusion from the Medicare and Medicaid programs. These laws also impose an affirmative duty on operators to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs.

Many states have adopted or are considering legislative proposals similar to the federal anti-fraud and abuse laws, some of which extend beyond the Medicare and Medicaid programs to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals, regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted or are considering legislative proposals to increase patient protections, such as minimum staffing levels, criminal background checks, and limiting the use and disclosure of patient specific health information. These state laws also impose criminal and civil penalties similar to the federal laws.

In the ordinary course of their business, the operators of our properties have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. Increased funding through recent federal and state legislation has led to significant growth in the number of investigations and enforcement actions over the past several years. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the civil False Claims Act in 1986 that were designed to encourage private individuals to sue on behalf of the government. These whistleblower suits by private individuals, known as qui tam suits, may be filed by almost anyone, including present and former patients or nurses and other employees. HIPAA also created a series of new healthcare crimes.

As federal and state budget pressures continue, administrative agencies may continue to escalate their investigation and enforcement efforts to eliminate waste and to control fraud and abuse in governmental healthcare programs. A violation of any of these federal and state anti-fraud and abuse laws and regulations by an operator of our properties could have a material adverse effect on the operator’s liquidity, financial condition or results of operations, which could affect adversely its ability to make rental payments under, or otherwise comply with the terms of, its leases with us.

Healthcare Reform

Healthcare is one of the largest industries in the United States and continues to attract a great deal of legislative interest and public attention. In an effort to reduce federal spending on healthcare, the federal government enacted the Balanced Budget Act of 1997 (“BBA”), which fundamentally altered payment methodologies for the Medicare and Medicaid programs, resulting in substantial, and in some cases drastic, Medicare reimbursement reductions for healthcare providers. The BBA also afforded states greater flexibility in administering their Medicaid programs, including the ability to shift most Medicaid enrollees into managed care plans without first obtaining a federal waiver.

 

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To lessen the negative financial impact from implementation of the BBA, the federal government subsequently passed the following key statutes and regulations:

 

   

The Balanced Budget Refinement Act of 1999 (“BBRA”);

 

   

The Medicare, Medicaid, and State Child Health Insurance Program Benefits Improvement and Protection Act of 2000 (“BIPA”);

 

   

The one-time “administrative fix” to increase skilled nursing facility payment rates by 3.26%, instituted by the Centers for Medicare & Medicaid Services (“CMS”), which began on October 1, 2003;

 

   

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Medicare Modernization Act,” sometimes referred to as the “Drug Bill”);

 

   

The Deficit Reduction Act of 2005 (Pub. L No. 109-171) (“DRA”); and

 

   

The Tax Relief and Health Care Act of 2006 (Pub. L. No. 109-432).

The Medicare and Medicaid programs, including payment levels and methods, continue to evolve and are less predictable following the enactment of the BBA, notwithstanding these reform activities. We cannot assure you that future healthcare legislation or changes in the administration or implementation of governmental healthcare reimbursement programs will not have a material adverse effect on our operators’ liquidity, financial condition or results of operations, which could adversely affect their ability to make rental payments to, or otherwise comply with the terms of, their leases with us and which, in turn, could have a Material Adverse Effect on us.

Medicare Reimbursement; Long-Term Acute Care Hospitals

The BBA mandated the creation of a prospective payment system for long-term acute care hospitals (“LTAC PPS”), which became effective on October 1, 2002 for cost reporting periods commencing on or after that date. Under LTAC PPS, which classifies patients into distinct diagnostic groups based on clinical characteristics and expected resource needs, long-term acute care hospitals are reimbursed on a predetermined rate, rather than on a reasonable cost basis that reflects costs incurred. LTAC PPS requires payment for a Medicare beneficiary at a predetermined, per discharge amount for each defined patient category (called “Long-Term Care—Diagnosis Related Groups” or “LTC-DRGs”), adjusted for differences in area wage levels.

Updates to LTAC PPS payment rates are established by regulators and published annually for the long-term acute care hospital rate year, which historically has been July 1 through June 30. However, effective for the 2010 rate year, as more fully explained below, annual rate updates will coincide with annual updates to the LTC-DRG classification system, which correspond to the federal fiscal year (October 1 through September 30).

On December 29, 2007, President Bush signed into law the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. No. 110-173) (the “Medicare Extension Act”). Section 114 of the Medicare Extension Act was intended to implement the recommendations of the Medicare Payment Advisory Commission (“MedPAC”), an independent agency established by the BBA to advise Congress on issues affecting the Medicare program, to better define long-term acute care hospitals and the patients they treat by using better patient and facility-level criteria. Long-term acute care hospitals must institute a patient review process to better assess patients upon admission and on a continuing basis for appropriateness of care, and, as a result of the Medicare Extension Act, CMS medical necessity reviews for long-term acute care hospitals will be significantly expanded. Section 114 of the Medicare Extension Act, among other things, also provided the following relief from recent long-term acute care hospital payment policy changes:

 

   

It prevents CMS from applying the “25-percent rule,” which limits payments from referring co-located hospitals, to freestanding and grandfathered long-term acute care hospitals for three years;

 

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It modifies the application of the 25-percent rule to certain urban and rural long-term acute care “hospitals-within-hospitals” and “satellite” facilities for three years;

 

   

It prevents CMS from applying the “very short stay outlier” policy for three years; and

 

   

It prevents CMS from making any one-time adjustments to correct estimates used in implementing LTAC PPS for three years.

Lastly, the Medicare Extension Act placed a partial-year freeze on long-term acute care hospital rates in the fourth quarter of fiscal year 2008 (April 1, 2008 through June 30, 2008) and introduced a moratorium on new long-term acute care hospitals and beds for three years.

On May 9, 2008, CMS published its final rule updating LTAC PPS payment rates for the 2009 rate year (July 1, 2008 through September 30, 2009). The final rule increased the standard federal payment rate for long-term acute care hospitals by 2.7% from the 2008 rate established by Congress in the Medicare Extension Act. The final rule included a 3.6% increase in the hospital market basket index, less a 0.9% adjustment to offset recent coding behavioral changes. The final rule also changed the annual rate update to October 1 (effective for the 2010 rate year) to coincide with the annual update to the severity-adjusted diagnosis-related group (MS-DRG) classifications and weights. CMS estimates that payments to long-term acute care hospitals under the final rule will increase by approximately $110 million in the first twelve months of the 2009 extended fifteen-month rate year.

On May 22, 2008, CMS published a final rule addressing two LTAC PPS payment policies mandated by the Medicare Extension Act. The rule delays the extension of the 25-percent rule to freestanding and grandfathered long-term acute care hospitals and increases the patient percentage thresholds for certain urban and rural long-term acute care “hospitals-within-hospitals” and “satellite” facilities for three years. The rule also sets forth policies on implementing the moratorium on new long-term acute care hospitals and beds imposed by the Medicare Extension Act.

On August 19, 2008, CMS published its final rule updating the inpatient prospective payment system (“IPPS”) for short-term and long-term acute care hospitals for the 2009 federal fiscal year (October 1, 2008 through September 30, 2009). On October 3, 2008, CMS published corrections to the final rule to implement changes required by Section 124 of the Medicare Improvements for Patients & Providers Act of 2008 (Pub. L. No. 110-275) (“MIPPA”). The final rule, as corrected, continues reforms intended to improve the accuracy of Medicare payments for inpatient acute care through the MS-DRG classifications and weights for short-term acute care hospitals and the severity-adjusted diagnosis-related group (MS-LTC-DRG) classification system for long-term acute care hospitals. CMS projects that aggregate annual spending under both classification systems will not change as a result of the reforms. However, CMS expects that payments would increase for hospitals serving more severely ill patients and decrease for hospitals serving patients who are less severely ill.

MedPAC has recommended increasing Medicare rates for long term acute care hospitals by 1.6% for fiscal year 2010. However, we cannot assure you that future updates to LTAC PPS, LTC-DRGs or Medicare reimbursement for long-term acute care hospitals will not materially adversely affect our operators, which, in turn, could have a Material Adverse Effect on us. See “Risk Factors—Risks Arising from Our Business—Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on certain of our tenants and operators” included in Item 1A of this Annual Report on Form 10-K.

Medicare Reimbursement; Skilled Nursing Facilities

The BBA also mandated the creation of a prospective payment system for skilled nursing facilities (“SNF PPS”) offering Part A covered services. Under SNF PPS, payment amounts are based upon classifications determined through assessments of individual Medicare patients in the skilled nursing facility, rather than on the facility’s reasonable costs. SNF PPS payments are made on a per diem basis for each resident and are generally

 

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intended to cover all inpatient services for Medicare patients, including routine nursing care, most capital-related costs associated with the inpatient stay, and ancillary services, such as respiratory therapy, occupational and physical therapy, speech therapy and certain covered drugs.

In response to widespread healthcare industry concern about the reductions in payments under the BBA, the federal government enacted the BBRA in 1999. The BBRA increased the per diem reimbursement rates for certain high acuity patients by 20% from April 1, 2000 until case mix refinements were implemented by CMS, as explained below. The BBRA also imposed a two-year moratorium on the annual cap mandated by the BBA on physical, occupational and speech therapy services provided to a patient by outpatient rehabilitation therapy providers, including Part B covered therapy services in nursing facilities. That moratorium was subsequently extended until December 31, 2005 pursuant to the Medicare Modernization Act, and, on January 1, 2006, the therapy limitations went into effect until the DRA was enacted. The DRA, signed into law on February 8, 2006, retroactively established an exception process for the payment of all claims above the therapy limits when such services are deemed medically necessary. The DRA process for obtaining relief from the therapy caps was extended through December 31, 2007 by the Tax Relief and Health Care Act of 2006 and further extended through June 30, 2008 by Section 105 of the Medicare Extension Act. On July 15, 2008, Congress passed the MIPPA, which, among other things, granted an eighteen-month extension of the Medicare Part B outpatient therapy cap exceptions process that had expired on June 30, 2008.

Pursuant to its final rule updating SNF PPS for the 2006 federal fiscal year, CMS refined the resource utilization groups (“RUGs”) used to determine the daily payment for beneficiaries in skilled nursing facilities by adding nine new payment categories. The result of this refinement, which became effective on January 1, 2006, was to eliminate the temporary add-on payments that Congress enacted as part of the BBRA.

Under its final rule updating LTC-DRGs for the 2007 federal fiscal year, CMS reduced reimbursement of uncollectible Medicare coinsurance amounts for all beneficiaries (other than beneficiaries of both Medicare and Medicaid) from 100% to 70% for skilled nursing facility cost reporting periods beginning on or after October 1, 2005. CMS estimated that this change in treatment of bad debt would result in a decrease in payments to skilled nursing facilities of $490 million over the five-year period from federal fiscal year 2006 to 2010. The rule also included various options for classifying and weighting patients transferred to a skilled nursing facility after a hospital stay less than the mean length of stay associated with that particular diagnosis-related group.

On August 8, 2008, CMS published its final rule updating SNF PPS payment rates for the 2009 federal fiscal year (October 1, 2008 through September 30, 2009). The final rule, among other things, updates the Medicare payment rate to skilled nursing facilities for the 2009 federal fiscal year by increasing the market basket by 3.4%. The final rule also delays a proposed recalibration of the case-mix indices for the resource utilization groups (RUGs) used to determine the daily payment for beneficiaries in skilled nursing facilities. The proposed recalibration was intended to revise the RUG payment rates to more accurately reflect the needs of patients and would have reduced payments to skilled nursing facilities by an estimated 3.3% in federal fiscal year 2009. CMS has indicated it will continue to evaluate the underlying data carefully for possible future adjustments. CMS estimates that, as a result of the market basket increase, payments to skilled nursing facilities will increase by $780 million in fiscal year 2009.

MedPAC has recommended stable Medicare rates for skilled nursing facilities for fiscal year 2010. We cannot assure you that future updates to SNF PPS, therapy services or Medicare reimbursement for skilled nursing facilities will not materially adversely impact our operators, which, in turn, could have a Material Adverse Effect on us. See “Risk Factors—Risks Arising from Our Business—Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on certain of our tenants and operators” included in Item 1A of this Annual Report on Form 10-K.

 

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Medicaid Reimbursement; Skilled Nursing Facilities

Approximately two-thirds of all nursing home residents are dependent on Medicaid. Medicaid reimbursement rates, however, typically are less than the amounts charged by the operators of our skilled nursing facilities. Although the federal government and the states share responsibility for financing Medicaid, states have a wide range of discretion, within certain federal guidelines, to determine eligibility and reimbursement methodology. In addition, federal legislation limits an operator’s ability to withdraw from the Medicaid program by restricting the eviction or transfer of Medicaid residents. For the last several years, many states have announced actual or potential budget shortfalls. As a result of these shortfalls, many states are attempting to slow the rate of growth in Medicaid expenditures by implementing “freezes” or cuts in Medicaid rates paid to providers, including hospitals and skilled nursing facilities, or by restricting eligibility and benefits.

In the DRA, Congress made changes to the Medicaid program that were estimated to result in $10 billion in savings to the federal government over the five years following enactment of the legislation, primarily through the accounting practices some states use to calculate their matched payments and revising the qualifications for individuals who are eligible for Medicaid benefits. The changes made by CMS’s final rule updating SNF PPS for the 2006 federal fiscal year were also anticipated to reduce Medicaid payments to skilled nursing facility operators. In addition, as part of the Tax Relief and Health Care Act of 2006, Congress reduced the ceiling on taxes that states may impose on healthcare providers and which would qualify for federal financial participation under Medicaid by 0.5%, from 6% to 5.5%. Nationally, it was anticipated that this reduction should have a negligible effect, affecting only those states with taxes in excess of 5.5%. We have not ascertained the impact of this reduction on our skilled nursing facility operators.

Reimbursement methodologies continue to evolve. At this time, we cannot predict whether significant Medicaid rate freezes or cuts or other program changes will be adopted and if so, by how many states or whether the U.S. government will revoke, reduce or stop approving “provider taxes” that have the effect of increasing Medicaid payments to the states, or the impact of such actions on our operators. We also cannot assure you that payments under Medicaid are currently, or will be in the future, sufficient to fully reimburse our operators for the cost of providing skilled nursing services. Severe and widespread Medicaid rate cuts or freezes could have a material adverse effect on our skilled nursing facility operators, which, in turn, could have a Material Adverse Effect on us.

Recent Developments

On February 17, 2009, the President signed into law the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5) (the “Recovery Act”). The Recovery Act appropriates additional funds for health care improvement, expansion, and research. The Recovery Act, for example, temporarily increases federal payments to state Medicaid programs by $86.6 billion by, among other things, increasing the federal share of Medicaid payments to the states by 6.2% across the board, with additional funds available depending on a State’s rate. The Recovery Act requires states to promptly pay nursing facilities under their Medicaid program, and precludes states, as a condition of receiving the additional funding, from heightening their Medicaid eligibility requirements. The additional federal payments to state Medicaid programs under the Recovery Act may have a positive impact on our skilled nursing facility operators, although the precise impact and when it will occur, and whether it will in fact be positive, cannot be ascertained at this time.

The President’s Budget, released on February 26, 2009, proposed certain adjustments to Medicaid, Medicare and Medicare Advantage Plans, which may or may not affect the operating income of the operators of our healthcare properties. The impact of these adjustments, if any, has not been determined.

Nursing Home Quality Initiative

In 2002, HHS launched the Nursing Home Quality Initiative program. This program, which is designed to provide consumers with comparative information about nursing home quality measures, rates nursing homes on

 

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various quality of care indicators. Since 2002, investigative and enforcement activities regarding nursing home quality compliance has intensified both on the federal and state administrative levels.

If the operators of certain of our properties are unable to achieve quality of care ratings that are comparable or superior to those of their competitors, patients may choose alternate facilities, which could cause operating revenues to decline. In the event the financial condition or operating revenues of these operators are adversely affected, the operators’ ability to make rental payments to us could be adversely affected, which, in turn, could have a Material Adverse Effect on us.

Environmental Regulation

As an owner of real property, we are subject to various federal, state and local laws and regulations regarding environmental, health and safety matters. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes. In certain cases, the costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. For example, although we do not generally operate or manage our properties, we may be held primarily or jointly and severally liable for costs relating to the investigation and clean-up of any property from which there is or has been a release or threatened release of a regulated material and any other affected properties, regardless of whether we knew of or caused the release. In addition to these costs, which are typically not limited by law or regulation and could exceed the property’s value, we could be liable for certain other costs, including governmental fines and injuries to persons, property or natural resources. See “Risk Factors—Risks Arising from Our Business—If any of our properties are found to be contaminated, or if we become involved in any environmental disputes, we could incur substantial liabilities and costs” included in Item 1A of this Annual Report on Form 10-K.

We are generally indemnified by the current operators of our properties for contamination caused by those operators. For example, under the Kindred Master Leases, Kindred has agreed to indemnify us against any environmental claims (including penalties and clean-up costs) resulting from any condition arising in, on or under, or relating to, the leased properties at any time on or after the lease commencement date for the applicable leased property and from any condition permitted to deteriorate on or after such date (including as a result of migration from adjacent properties not owned or operated by us or any of our affiliates other than Kindred and its direct affiliates). However, we cannot assure you that Kindred or another operator will have the financial capability or the willingness to satisfy any such environmental claims, and in the event Kindred or another operator is unable or unwilling to do so, we may be required to satisfy the claims. See “Risk Factors—Risks Arising from Our Business—We depend on Kindred and Brookdale Senior Living for a significant portion of our revenues and operating income; Any inability or unwillingness by Kindred or Brookdale Senior Living or to satisfy its obligations under its agreements with us could have a Material Adverse Effect on us” included in Item 1A of this Annual Report on Form 10-K.

We have also generally agreed to indemnify certain of our operators against any environmental claims (including penalties and clean-up costs) resulting from any condition arising in, on or under, or relating to, the leased properties at any time before the lease commencement date for the applicable leased property. We have agreed to indemnify Sunrise against any environmental claims (including penalties and clean-up costs) resulting from any conditions on our properties managed by Sunrise, unless Sunrise caused or contributed to those conditions.

We did not make any material capital expenditures in connection with environmental, health, and safety laws, ordinances and regulations in 2008 and do not expect that we will have to make any such material capital expenditures during 2009.

 

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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

This section summarizes certain U.S. federal income tax considerations that you may consider relevant as a holder of our common stock. It is not tax advice. The discussion does not address all aspects of taxation that may be relevant to particular stockholders in light of their personal investment or tax circumstances, nor does it apply to certain types of stockholders that are subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations (except to the extent discussed below under “—Treatment of Tax-Exempt Stockholders”), financial institutions, pass-through entities (or investors in such entities) or broker-dealers, and non-U.S. persons and foreign corporations (except to the extent discussed below under “—Special Tax Considerations for Non-U.S. Stockholders”).

The statements in this section are based on the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Regulations and administrative and judicial interpretations thereof. The laws governing the federal income tax treatment of REITs and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the authorities listed above, as in effect on the date hereof. We cannot assure you that new laws, interpretations of law or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate.

Federal Income Taxation of Ventas

We elected REIT status beginning with the year ended December 31, 1999. Beginning with the 1999 tax year, we believe that we have satisfied the requirements to qualify as a REIT, and we intend to continue to qualify as a REIT for federal income tax purposes. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal income tax on net income that we currently distribute to stockholders. This treatment substantially eliminates the “double taxation” (i.e., taxation at both the corporate and stockholder levels) that generally results from investment in a corporation.

Notwithstanding our qualification as a REIT, we will be subject to federal income tax on any undistributed taxable income, including undistributed net capital gains, at regular corporate rates. In addition, we will be subject to a 4% excise tax if we do not satisfy specific REIT distribution requirements. See “—Requirements for Qualification as a REIT—Annual Distribution Requirements.” Under certain circumstances, we may be subject to the “alternative minimum tax” on our undistributed items of tax preference. If we have (i) net income from the sale or other disposition of “foreclosure property” (see below) that is held primarily for sale to customers in the ordinary course of business or (ii) certain other non-qualifying income from foreclosure property, we will be subject to tax at the highest corporate rate on such income. See “—Requirements for Qualification as a REIT—Asset Tests.” In addition, if we have net income from “prohibited transactions” (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), that income will be subject to a 100% tax.

We may also be subject to “Built-in Gains Tax” on any appreciated asset that we own or acquire that was previously owned by a C corporation (i.e., a corporation generally subject to full corporate level tax). If we dispose of any of these assets and recognize gain on the disposition of such asset during the ten-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, or through stock acquisition or merger), then we generally will be subject to regular corporate income tax on the gain equal to the lower of (i) the recognized gain at the time of the disposition or (ii) the built-in gain in that asset as of the date it became a REIT asset. Effective January 1, 2009, our Kindred assets were no longer subject to Built-in Gains Tax. The 21 Brookdale assets we acquired in connection with our Provident acquisition will remain subject to Built-in Gains Tax until November 2014.

In addition, if we fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below) and nonetheless maintain our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the gross income attributable to the greater of the amount by which we failed the applicable test (or, for our 2001 through 2004 taxable years, a 90% test in lieu of the 95% test), multiplied by a

 

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fraction intended to reflect our profitability. If we violate one or more of the REIT asset tests (as discussed below) under certain circumstances, but the violation is due to reasonable cause and not willful neglect and we were to take certain remedial actions, we may avoid a loss of our REIT status by, among other things, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying asset during a specified period. If we fail to satisfy one or more requirements for REIT qualification, other than the 75% gross income test, the 95% gross income test or the assets tests, but nonetheless maintain our qualification as a REIT because certain other requirements have been met, we may be subject to a $50,000 penalty for each failure. Finally, we will incur a 100% excise tax on certain transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.

See “—Requirements for Qualification as a REIT” below for other circumstances in which we may be required to pay federal taxes.

Requirements for Qualification as a REIT

To qualify as a REIT, we must meet the requirements discussed below, relating to our organization, sources of income, nature of assets and distributions of income to stockholders.

Organizational Requirements

The Code defines a REIT as a corporation, trust or association: (i) that is managed by one or more directors or trustees; (ii) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (iii) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (iv) that is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons during at least 335 days of a taxable year of twelve months, or during a proportionate part of a shorter taxable year (the “100 Shareholder Rule”); (vi) not more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year (the “5/50 Rule”); (vii) that makes an election to be a REIT (or has made such election for a previous taxable year) and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service (“IRS”) that must be met in order to elect and to maintain REIT status; (viii) that uses a calendar year for federal income tax purposes; and (ix) that meets certain other tests, described below, regarding the nature of its income and assets.

We believe, but we cannot assure you, that we have satisfied and will continue to satisfy the organizational requirements. In order to prevent a concentration of ownership of our stock that would cause us to fail the 5/50 Rule or the 100 Shareholder Rule, we have placed certain restrictions on the transfer of our shares that are intended to prevent such concentration of share ownership. However, such restrictions may not prevent us from failing to meet these requirements, and thereby failing to qualify as a REIT.

In addition, to qualify as a REIT, a corporation may not have (as of the end of the taxable year) any earnings and profits that were accumulated in periods before it elected REIT status. We believe that we have not had any accumulated earnings and profits that are attributable to non-REIT periods, although the IRS is entitled to challenge that determination.

Gross Income Tests

To qualify as a REIT, we must satisfy two annual gross income requirements. First, at least 75% of our gross income (excluding gross income from prohibited transactions) for each taxable year must consist of defined types of income derived directly or indirectly from investments relating to real property or mortgages on real property (including pledges of equity interest in certain entities holding real property and also including “rents from real property” (as defined in the Code)) and, in certain circumstances, interest on certain types of temporary investment income. Second, at least 95% of our gross income (excluding gross income from prohibited

 

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transactions) for each taxable year must be derived from such real property or temporary investments, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing.

We believe, but we cannot assure you, that we have been and will continue to be in compliance with the gross income tests. If we fail to satisfy one or both gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year under certain relief provisions of the Code. If we were eligible to qualify under the relief provisions, a 100% tax would be imposed with respect to the income exceeding one or both of the gross income tests.

If we fail to satisfy one or both of the gross income tests and the relief provisions for any year, we will not qualify as a REIT for such year. Loss of our REIT status would have a Material Adverse Effect on us.

Asset Tests

At the close of each quarter of our taxable year, we must satisfy the following tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by cash or cash items (including certain receivables), government securities, “real estate assets” (including interest in real property and in mortgages on real property and shares in other qualifying REITs) or, in cases where we raise new capital through stock or long-term (maturity of at least five years) debt offerings, temporary investments in stock or debt instruments during the one-year period following our receipt of such capital (the “75% asset test”). Second, of the investments not meeting the requirements of the 75% asset test, the value of any one issuer’s debt and equity securities owned by us (other than our interest in any entity classified as a partnership for federal income tax purposes, the stock of a taxable REIT subsidiary (as defined below) or the stock of a qualified REIT subsidiary) may not exceed 5% of the value of our total assets (the “5% asset test”), and we may not own more than 10% of any one issuer’s outstanding voting securities (the “10% voting securities test”) or 10% of the value of any one issuer’s outstanding securities, subject to limited “safe harbor” exceptions (the “10% value test”). In addition, no more than 25% of the value of our assets can be represented by securities of taxable REIT subsidiaries (the “25% TRS test”).

If we fail to satisfy the asset tests at the end of any quarter other than our first quarter, we may nevertheless continue to qualify as a REIT and maintain our REIT status if (i) we satisfied all of the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by an acquisition of nonqualifying assets.

Furthermore, if we fail any of the asset tests discussed above at the end of any quarter without curing such failure within 30 days after the end of such quarter, we would fail to qualify as a REIT, unless we were to qualify under certain relief provisions enacted as part of the American Jobs Creation Act of 2004. Under one of these relief provisions, if we fail the 5% asset test, the 10% voting securities test or the 10% value test, we nevertheless would continue to qualify as a REIT if the failure is due to the ownership of assets having a total value not exceeding the lesser of 1% of our assets at the end of the relevant quarter or $10 million, and we were to dispose of such assets (or otherwise meet such asset tests) within six months after the end of the quarter in which the failure was identified. If we fail to meet any of the REIT asset tests for a particular quarter, but we do not qualify for the relief for de minimis failures that is described in the preceding sentence, then we would be deemed to have satisfied the relevant asset test if: (i) following our identification of the failure, we were to file a schedule with a description of each asset that caused the failure; (ii) the failure is due to reasonable cause and not willful neglect; (iii) we were to dispose of the non-qualifying asset (or otherwise meet the relevant asset test) within six months after the last day of the quarter in which the failure was identified; and (iv) we were to pay a penalty tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying asset during the period beginning on the first date of the failure and ending on the date we dispose of the asset (or otherwise cure the asset test failure). It is not possible to predict, however, whether in all circumstances we would be entitled to the benefit of these relief provisions. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take such other actions as may be required to comply with those tests.

 

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We believe, but we cannot assure you, that we have been and will continue to be in compliance with the 75% asset test, the 10% voting securities test, the 10% value test, the 5% asset test and the 25% TRS test. If we fail to satisfy any of these tests and the relief provisions, we would lose our REIT status, which would have a Material Adverse Effect on us.

Foreclosure Property

The foreclosure property rules permit us (by our election) to foreclose or repossess properties without being disqualified as a REIT as a result of receiving income that does not qualify under the gross income tests; however, a corporate tax is imposed upon such net non-qualifying income from “foreclosure property.” Detailed rules specify the calculation of the tax, and the after-tax amount would increase the dividends we would be required to distribute to stockholders each year. See “—Annual Distribution Requirements” below.

Foreclosure property treatment will end on the first day on which we enter into a lease of the property that will give rise to income that is not “good REIT” income under Section 856(c)(3) of the Code. In addition, foreclosure property treatment will end if any construction takes place on the property (other than completion of a building, or other improvement more than 10% complete before default became imminent). Foreclosure property treatment is available for an initial period of three years and may, in certain circumstances, be extended for an additional three years. Foreclosure property treatment for qualified healthcare property is available for an initial period of two years and may, in certain circumstances, be extended for an additional four years.

Taxable REIT Subsidiaries

We are permitted to own up to 100% of a “taxable REIT subsidiary” or “TRS.” A TRS is a corporation subject to tax as a regular C corporation. Generally, a TRS can own assets that cannot be owned by a REIT and can perform otherwise impermissible tenant services (excluding the direct or indirect operation or management of a lodging or healthcare facility) which would otherwise disqualify the REIT’s rental income under the REIT income tests. There are certain limits on the ability of a TRS to deduct interest payments made to us. In addition, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by the TRS if the economic arrangements between the REIT, the REIT’s tenants and the TRS are not comparable to similar arrangements among unrelated parties.

Annual Distribution Requirements

In order to be taxed as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (i) the sum of (A) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our net capital gain) and (B) 90% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if (i) they are (A) declared in October, November or December, (B) payable to stockholders of record on a specified date in any one of these months and (C) actually paid during January of such following year or (ii)(A) they are declared before we timely file our tax return for such year, (B) paid on or before the first regular dividend payment after such declaration, and (C) we elect on our federal income tax return for the prior year to have a specified amount of the subsequent dividend as treated as paid in the prior year. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our “REIT taxable income,” as adjusted, we will be subject to tax on the undistributed amount at regular capital gains and ordinary corporate tax rates except to the extent of net operating loss or capital loss carryforwards. If any taxes are paid in connection with the Built-in Gains Tax rules, these taxes will be deductible in computing REIT taxable income. Furthermore, if we fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January following such calendar year) at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year (other than long-term capital gain we elect to retain and treat as having been distributed to stockholders), and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of such required distribution over the amounts actually distributed.

 

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We believe, but we cannot assure you, that we have satisfied the annual distribution requirements for the year of our REIT election and each year thereafter through the year ended December 31, 2008. Although we intend to continue meeting the annual distribution requirements to qualify as a REIT for federal income tax purposes for the year ending December 31, 2009 and subsequent years, it is possible that economic, market, legal, tax or other considerations may limit our ability to meet such requirements. As a result, if we are not able to meet the annual distribution requirement, we would fail to qualify as a REIT. Moreover, if we distribute 100% of our REIT taxable income by taking advantage of the “throwback rule” described in clause (ii)(C) of the second sentence of the preceding paragraph, satisfying the REIT distribution requirement and generally avoiding corporate level tax, we may incur a 4% nondeductible excise tax.

In Revenue Procedure 2009-15, the IRS stated that it would treat stock dividends as distributions for purposes of satisfying the REIT distribution requirements for calendar years 2008 and 2009, provided that stockholders can elect to receive the distribution in either cash or stock, subject to certain limitations. Any stock so distributed would be taxable to the recipient. We may choose to declare stock dividends in accordance with Revenue Procedure 2009-15 or otherwise. Also, we have net operating loss carryforwards that we can use to reduce our annual distribution requirements. See “Note 12—Income Taxes” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Failure to Continue to Qualify

If we fail to satisfy one or more requirements for REIT qualification, other than an asset or income test violation of a type for which relief is otherwise available as described above, we would retain our REIT qualification if the failure is due to reasonable cause and not willful neglect and if we were to pay a penalty of $50,000 for each such failure. However, it is not possible to predict whether in all circumstances we would be entitled to the benefit of this relief provision.

If our election to be taxed as a REIT is revoked or terminated (e.g., due to a failure to meet the REIT qualification tests and no relief provisions were to apply), we would be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates (for all open tax years beginning with the year our REIT election is revoked or terminated) except to the extent of net operating loss and capital loss carryforwards. Distributions to stockholders would not be deductible by us, nor would they be required to be made. To the extent of current and accumulated earnings and profits, all distributions to stockholders would be taxable as ordinary income, and, subject to certain limitations in the Code, corporate stockholders may be eligible for the dividends received deduction. In addition, we would be prohibited from re-electing REIT status for the four taxable years following the year during which we ceased to qualify as a REIT, unless certain relief provisions of the Code applied. It is impossible to predict whether we would be entitled to such statutory relief.

Federal Income Taxation of U.S. Stockholders

As used herein, the term “U.S. Stockholder” means a holder of our common stock that for U.S. federal income tax purposes is: (i) an individual who is a citizen or resident of the United States; (ii) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or (iv) any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust or (B) an election has been made under applicable U.S. Treasury Regulations to retain its pre-August 20, 1996 classification as a U.S. person. If a partnership holds our common stock, the tax treatment of a partner will generally depend on the status of the partner and on the activities of the partnership. Partners of partnerships holding our stock should consult their tax advisors. This section assumes the U.S. Stockholder holds our common stock as a capital asset.

As long as we qualify as a REIT, distributions made to our taxable U.S. Stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) generally will be taken into account by such U.S. Stockholders as ordinary income and will not be eligible for the qualified dividends rate

 

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generally available to non-corporate holders or for the dividends received deduction generally available to corporations. Distributions that are designated as capital gain dividends will be taxed as a capital gain (to the extent such distributions do not exceed our actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its shares. The tax rates applicable to such capital gains are discussed below. Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder’s shares (determined on a share-by-share basis), but rather will reduce the adjusted basis of those shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a stockholder’s shares, such distributions will be included in income as capital gains. The tax rate applicable to such capital gain will depend on the stockholder’s holding period for the shares. In addition, any distribution declared by us in October, November or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by us and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by us during January of the following calendar year.

We may elect to treat all or a part of our undistributed net capital gain as if it had been distributed to our stockholders (including for purposes of the 4% excise tax discussed above under “—Requirements for Qualification as a REIT—Annual Distribution Requirements”). If we make such an election, our stockholders would be required to include in their income as long-term capital gain their proportionate share of our undistributed net capital gain, as designated by us. Each such stockholder would be deemed to have paid its proportionate share of the income tax imposed on us with respect to such undistributed net capital gain, and this amount would be credited or refunded to the stockholder. In addition, the tax basis of the stockholder’s shares would be increased by its proportionate share of undistributed net capital gains included in its income, less its proportionate share of the income tax imposed on us with respect to such gains.

Stockholders may not include in their individual income tax returns any of our net operating losses or net capital losses. Instead, such losses would be carried over by us for potential offset against our future income (subject to certain limitations). Taxable distributions from us and gain from the disposition of our common stock will not be treated as passive activity income, and, therefore, stockholders generally will not be able to apply any “passive activity losses” (such as losses from certain types of limited partnerships in which the stockholder is a limited partner) against such income. In addition, taxable distributions from us generally will be treated as investment income for purposes of the investment interest limitations.

We will notify stockholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income, return of capital and capital gain. To the extent a portion of the distribution is designated as a capital gain dividend, we will notify stockholders as to the portion that is a “15% rate gain distribution” and the portion that is an unrecaptured Section 1250 distribution. A 15% rate gain distribution is a capital gain distribution to domestic stockholders that are individuals, estates or trusts that is taxable at a maximum rate of 15%. An unrecaptured Section 1250 gain distribution would be taxable to taxable domestic stockholders that are individuals, estates or trusts at a maximum rate of 25%.

Taxation of U.S. Stockholders on the Disposition of Shares of Common Stock

In general, a U.S. Stockholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of our common stock as long-term capital gain or loss if the U.S. Stockholder has held the shares for more than one year, and otherwise as short-term capital gain or loss. However, a U.S. Stockholder must treat any loss upon a sale or exchange of shares of our common stock held for six months or less as a long-term capital loss to the extent of capital gain dividends and any other actual or deemed distributions from us which the U.S. Stockholder treats as long-term capital gain. All or a portion of any loss that a U.S. Stockholder realizes upon a taxable disposition of our common stock may be disallowed if the U.S. Stockholder purchases other shares of our common stock within 30 days before or after the disposition.

 

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Treatment of Tax-Exempt Stockholders

Tax-exempt organizations, including qualified employee pension and profit sharing trusts and individual retirement accounts (collectively, “Exempt Organizations”), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income (“UBTI”). While many investments in real estate generate UBTI, the IRS has issued a published ruling that dividend distributions by a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on that ruling, and subject to the exceptions discussed below, amounts distributed by us to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of our common stock with debt, a portion of its income from us will constitute UBTI pursuant to the “debt-financed property” rules. Furthermore, social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of Section 501(c) of the Code are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI. In addition, in certain circumstances, a pension trust that owns more than 10% of our stock is required to treat a percentage of the dividends from us as UBTI.

Special Tax Considerations for Non-U.S. Stockholders

The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign estates and foreign trusts (collectively, “Non-U.S. Stockholders”) are complex, and the following is no more than a brief summary of those rules. Non-U.S. Stockholders should consult with their own tax advisors to determine the impact of federal, state, local and non-U.S. tax laws with regard to their ownership of our common stock, including any reporting requirements.

For purposes of this discussion, the term “Non-U.S. Stockholder” does not include any foreign stockholder whose investment in our stock is “effectively connected” with the conduct of a trade or business in the United States. Such a foreign stockholder, in general, will be subject to U.S. federal income tax with respect to its investment in our stock in the same manner as a U.S. Stockholder is taxed (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In addition, a foreign corporation receiving income that is treated as effectively connected with a U.S. trade or business also may be subject to an additional 30% “branch profits tax,” unless an applicable tax treaty provides a lower rate or an exemption. Certain certification requirements must be satisfied in order for effectively connected income to be exempt from withholding.

Distributions to Non-U.S. Stockholders that are not attributable to gain from sales or exchanges by us of U.S. real property interests and are not designated by us as capital gain dividends (or deemed distributions of retained capital gains) will be treated as dividends of ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. Distributions in excess of our current and accumulated earnings and profits will not be taxable to a stockholder to the extent that such distributions do not exceed the adjusted basis of the stockholder’s shares (determined on a share-by-share basis), but rather will reduce the adjusted basis of those shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a Non-U.S. Stockholder’s shares, such distributions will give rise to tax liability if the Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale or disposition of its shares, as described below.

We expect to withhold U.S. tax at the rate of 30% on the gross amount of any dividends, other than dividends treated as attributable to gain from sales or exchanges of U.S. real property interests and capital gain dividends, paid to a Non-U.S. Stockholder, unless (i) a lower treaty rate applies and the required IRS Form W-8BEN evidencing eligibility for that reduced rate is filed with us or the appropriate withholding agent or (ii) the Non-U.S. Stockholder files an IRS Form W-8ECI or a successor form with us or the appropriate withholding agent properly claiming that the distributions are effectively connected with the Non-U.S. Stockholder’s conduct of a U.S. trade or business.

 

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For any year in which we qualify as a REIT, distributions to a Non-U.S. Stockholder that owns more than 5% of our common shares at any time during the one-year period ending on the date of distribution and that are attributable to gain from sales or exchanges by us of U.S. real property interests will be taxed to a Non-U.S. Stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Under FIRPTA, distributions attributable to gain from sales of U.S. real property interests are taxed to a Non-U.S. Stockholder as if such gain were effectively connected with a U.S. business. Accordingly, a Non-U.S. Stockholder that owns more than 5% of our shares will be taxed at the normal capital gain rates applicable to a U.S. Stockholder (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Distributions subject to FIRPTA made to a Non-U.S. Stockholder that owns more than 5% of our shares also may be subject to 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to treaty relief or exemption. Under FIRPTA, we are required to withhold 35% of any distribution to a Non-U.S. Stockholder that owns more than 5% of our shares which is or could be designated as a capital gain dividend attributable to U.S. real property interests. Moreover, if we designate previously made distributions as capital gain dividends attributable to U.S. real property interests, subsequent distributions (up to the amount of such prior distributions) will be treated as capital gain dividends subject to FIRPTA withholding. This amount is creditable against the Non-U.S. Stockholder’s FIRPTA tax liability. It should be noted that the 35% withholding tax rate on capital gain dividends paid to Non-U.S. Stockholders owning more than 5% of our shares is higher than the maximum rate on long-term capital gains of non-corporate persons. Capital gain dividends not attributable to gain on the sale or exchange of U.S. real property interests are not subject to U.S. taxation if there is no requirement of withholding.

If a Non-U.S. Stockholder does not own more than 5% of our shares at any time during the one-year period ending on the date of the distribution, the gain will not be considered to be effectively connected with a U.S. business. As such, a Non-U.S. Stockholder who does not own more than 5% of our shares would not be required to file a U.S. federal income tax return by receiving such a distribution. In this case, the distribution will be treated as a REIT dividend to that Non-U.S. Stockholder and taxed as a REIT dividend that is not a capital gain distribution (and subject to possible withholding), as described above. In addition, the branch profits tax will not apply to the distribution.

For so long as our common stock continues to be regularly traded on an established securities market, the sale of such stock by any Non-U.S. Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below) generally will not be subject to U.S. federal income tax (unless the Non-U.S. Stockholder is a nonresident alien individual who was present in the United States for more than 182 days during the taxable year of the sale and certain other conditions apply, in which case such gain will be subject to a 30% tax on a gross basis). A “Five Percent Non-U.S. Stockholder” is a Non-U.S. Stockholder who, at some time during the five-year period preceding such sale or disposition, beneficially owned (including under certain attribution rules) more than 5% of the total fair market value of our common stock (as outstanding from time to time).

In general, the sale or other taxable disposition of our common stock by a Five Percent Non-U.S. Stockholder also will not be subject to U.S. federal income tax if we are a “domestically controlled REIT.” A REIT is a “domestically controlled REIT” if, at all times during the five-year period preceding the disposition in question, less than 50% in value of its shares is held directly or indirectly by Non-U.S. Stockholders. Although we believe that we currently qualify as a domestically controlled REIT, because our common stock is publicly traded, we cannot assure you that we currently qualify or will qualify as a domestically controlled REIT at any time in the future. If we do not constitute a domestically controlled REIT, a Five Percent Non-U.S. Stockholder will be taxed in the same manner as a U.S. Stockholder with respect to gain on the sale of our common stock (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals).

Information Reporting Requirements and Backup Withholding Tax

Information reporting to our stockholders and to the IRS will apply to the amount of distributions paid during each calendar year and distributions required to be treated as so paid during a calendar year, and the

 

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amount of tax withheld, if any, and to the proceeds of a sale or other disposition of our common stock. Under the backup withholding rules, a stockholder may be subject to backup withholding at the applicable rate (currently 28%) with respect to distributions paid and proceeds from a disposition of our common stock unless such holder (i) is a corporation, non-U.S. person or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. A stockholder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the IRS.

Stockholders should consult their own tax advisors regarding their qualifications for an exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a U.S. Stockholder will be allowed as a credit against the U.S. Stockholder’s U.S. federal income tax liability and may entitle the U.S. Stockholder to a refund, provided that the required information is furnished timely to the IRS.

As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of our common stock by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of our common stock by a foreign office of a broker that (i) is a U.S. person, (ii) is a foreign partnership that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or more than 50% of whose capital or profit interests are owned during certain periods by U.S. persons, or (iii) is a “controlled foreign corporation” for U.S. tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Stockholder and certain other conditions are satisfied, or the stockholder otherwise establishes an exemption. Payment to or through a U.S. office of a broker of the proceeds of a sale of our common stock is subject to both backup withholding and information reporting unless the stockholder certifies under penalties of perjury that the stockholder is a Non-U.S. Stockholder or otherwise establishes an exemption. A stockholder may obtain a refund of any amounts withheld under the backup withholding rules in excess of its U.S. federal income tax liability by timely filing the appropriate claim for a refund with the IRS.

Other Tax Consequences

State and Local Taxes

We and/or our stockholders may be subject to taxation by various states and localities, including those in which we or a stockholder transact business, own property or reside. The state and local tax treatment may differ from the federal income tax treatment described above. Consequently, stockholders should consult their own tax advisers regarding the effect of state and local tax laws, in addition to the federal, foreign and other tax laws, in connection with an investment in our common stock.

Possible Legislative or Other Actions Affecting Tax Consequences

You should recognize that our present federal income tax treatment may be modified by future legislative, judicial and administrative actions or decisions at any time, which may be retroactive in effect, and which could adversely affect the tax consequences of an investment in shares of our common stock. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in statutory changes as well as promulgation of new, or revisions to existing, regulations and revised interpretations of established concepts.

On July 30, 2008, the Housing and Economic Recovery Tax Act of 2008 (the “2008 Act”) was enacted into law. The 2008 Act’s sections that affect the REIT provisions of the Code are generally effective for taxable years beginning after its date of enactment, and for us will generally mean that the new provisions apply from and after January 1, 2009, except as otherwise indicated below.

 

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The 2008 Act made the following changes to, or clarifications of, the REIT provisions of the Code that could be relevant for us:

 

   

Taxable REIT Subsidiaries.    The limit on the value of taxable REIT subsidiaries’ securities held by a REIT has been increased from 20% to 25% of the total value of such REIT’s assets. See “—Requirements for Qualification as a REIT—Taxable REIT Subsidiaries.”

 

   

Rental Income from a TRS.    A REIT is generally limited in its ability to earn qualifying rental income from a TRS. The 2008 Act permits a REIT to earn qualifying rental income from the lease of a qualified healthcare property to a TRS if an eligible independent contractor operates the property. In certain future circumstances, we may find it advantageous to lease properties to one or more TRSs in this manner.

 

   

Foreign Currency as Cash.    Foreign currency that is the functional currency of a REIT or a qualified business unit of a REIT and is held for use in the normal course of business of such REIT or qualified business unit will be treated as cash for purposes of the 75% asset test. The foreign currency must not be derived from dealing, or engaging in substantial and regular trading in securities. See “—Requirements for Qualification as a REIT—Asset Tests.”

 

   

Foreign Currency Gain.    Under the 2008 Act, foreign currency gain earned after July 30, 2008 that qualifies as “real estate foreign exchange gain” is excluded from both the 75% and 95% gross income tests, while income from foreign currency gains that qualifies as “passive foreign exchange gain” is excluded from the 95% gross income test, but is treated as non-qualifying income for the 75% gross income test. Real estate foreign exchange gain is foreign currency gain attributable to (i) any item of income or gain which qualifies for purposes of the 75% gross income test, (ii) the acquisition or ownership of obligations secured by mortgages on real property or interests in real property, or (iii) becoming or being an obligor under debt obligations secured by mortgages on real property or on interests in real property. Real estate foreign exchange gain also includes foreign currency gain attributable to a qualified business unit (“QBU”) of the REIT if the QBU meets the 75% gross income test for the taxable year and the 75% asset test at the close of each quarter of the taxable year that the REIT directly or indirectly owned an interest in the QBU. Passive foreign exchange gain includes all real estate foreign exchange gain plus foreign currency gain attributable to (i) any item of income or gain which qualifies for purposes of the 95% gross income test, (ii) the acquisition or ownership of debt obligations, or (iii) becoming or being the obligor under debt obligations. The Treasury Department has the authority to expand the definitions of real estate foreign exchange and passive foreign exchange gain to include other items of foreign currency gain.

 

   

Expanded Prohibited Transactions Safe Harbor.    The safe harbor from the prohibited transactions tax for certain sales of real estate assets is expanded by reducing the required minimum holding period from four years to two years, among other changes.

 

   

Hedging Income.    Income from a hedging transaction entered into after July 30, 2008, that complies with identification procedures set out in U.S. Treasury Regulations and hedges indebtedness incurred or to be incurred by us to acquire or carry real estate assets will not constitute gross income for purposes of both the 75% and 95% gross income tests.

 

   

Reclassification Authority.    The Secretary of the Treasury is given broad authority to determine whether particular items of gain or income recognized after July 30, 2008, qualify or not under the 75% and 95% gross income tests, or are to be excluded from the measure of gross income for such purposes.

We cannot predict the likelihood of passage of any new tax legislation or other provisions either directly or indirectly affecting us or our stockholders or the value of an investment in our common stock.

 

ITEM 1A. Risk Factors

This section discusses the most significant factors that affect our business, operations and financial condition. It does not describe all risks and uncertainties applicable to us, our industry or ownership of our

 

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securities. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently think are not material, actually occur, we could be materially adversely affected. In that event, the value of our securities could decline.

We have grouped these risk factors into three general categories:

 

   

Risks arising from our business;

 

   

Risks arising from our capital structure; and

 

   

Risks arising from our status as a REIT.

Risks Arising from Our Business

We depend on Kindred and Brookdale Senior Living for a significant portion of our revenues and operating income; Any inability or unwillingness by Kindred or Brookdale Senior Living to satisfy its obligations under its agreements with us could have a Material Adverse Effect on us.

We lease a substantial portion of our properties to Kindred and Brookdale Senior Living, and they are each a significant source of our total revenues and operating income. Since the Kindred Master Leases and our leases with Brookdale Senior Living are triple-net leases, we depend on Kindred and Brookdale Senior Living not only for rental income, but also to pay insurance, taxes, utilities and maintenance and repair expenses in connection with the leased properties. Any inability or unwillingness by Kindred or Brookdale Senior Living to make rental payments to us or to otherwise satisfy its obligations under its agreements with us could have a Material Adverse Effect on us. Any failure by Kindred or Brookdale Senior Living to effectively conduct its operations could adversely affect its business reputation and ability to attract and retain patients and residents in its properties and also could have a Material Adverse Effect on us. Moreover, Kindred and certain subsidiaries of Brookdale Senior Living, namely Brookdale and Alterra, have agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses. We cannot assure you that Kindred or such subsidiaries of Brookdale Senior Living will have sufficient assets, income, access to financing and insurance coverage to enable it to satisfy these indemnification obligations.

The properties managed by Sunrise account for a significant portion of our revenues and operating income; Adverse developments in Sunrise’s business and affairs or financial condition could have a Material Adverse Effect on us.

Sunrise currently manages 79 of our seniors housing communities pursuant to long-term management agreements. These properties represent a substantial portion of our portfolio, based on their gross book value, and account for a significant portion of our revenues and operating income. Although we have various rights as owner under the Sunrise management agreements, we rely on Sunrise’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our properties efficiently and effectively. We also rely on Sunrise to set resident fees, to provide accurate property-level financial results for our properties in a timely manner and to otherwise operate those properties in accordance with the terms of our management agreements and in compliance with all applicable laws and regulations. For example, we depend on Sunrise’s ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of our seniors housing communities. A shortage of nurses or other trained personnel or general inflationary pressures may force Sunrise to enhance its pay and benefits package to compete effectively for such personnel, and Sunrise may not be able to offset such added costs by increasing the rates charged to residents. Any increase in these costs, which are included in the operating budget for each property, any failure by Sunrise to attract and retain qualified personnel, or any change in Sunrise’s senior management could adversely affect the income we receive from these properties and have a Material Adverse Effect on us.

In addition, any adverse developments in Sunrise’s business and affairs, financial strength or ability to operate our properties efficiently and effectively could have a Material Adverse Effect on us. As a result of the current economic and credit crisis and Sunrise’s weakened financial condition, as disclosed in Sunrise’s filings with the Commission and other public announcements, Sunrise may experience significant financial, legal,

 

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accounting or regulatory difficulties, which could result in, among other adverse events, acceleration of its indebtedness, the inability to renew or extend its revolving credit facility, the enforcement of default remedies by its counterparties or the commencement of insolvency proceedings under the U.S. Bankruptcy Code by or against Sunrise. Any one or a combination of these events could have a Material Adverse Effect on us.

The severe weakening economy could adversely impact our operating income and earnings, as well as the results of operations of our tenants and operators, which could impair their ability to meet their obligations to us.

The United States is experiencing a recession which is nearing the longest duration since the Great Depression. Continued concerns about the uncertainty over whether our economy will be adversely affected by inflation, deflation or stagflation, and the systemic impact of increased unemployment, volatile energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a severely distressed real estate market have contributed to increased market volatility and weakened business and consumer confidence. This difficult operating environment could adversely affect our ability to generate revenues and/or increase our costs at our Sunrise-managed properties, thereby reducing our operating income and earnings. It could also have an adverse impact on the ability of our tenants and operators to maintain occupancy rates in our properties, which could harm their financial condition. If these economic conditions continue, we may experience operating deficiencies at our Sunrise-managed properties and/or our tenants and operators may be unable to meet their rental payments and other obligations due to us, which could have a Material Adverse Effect on us.

We face potential adverse consequences of bankruptcy or insolvency by our tenants, operators, borrowers, managers and other obligors.

We are exposed to the risk that our tenants, operators, borrowers, managers or other obligors could become bankrupt or insolvent. Although our lease, loan and management agreements provide us with the right to exercise certain remedies in the event of default on the obligations owing to us or upon the occurrence of certain insolvency events, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. For example, a debtor-lessee may reject its lease with us in a bankruptcy proceeding. In such a case, our claim against the debtor-lessee for unpaid and future rents would be limited by the statutory cap of the U.S. Bankruptcy Code. This statutory cap might be substantially less than the remaining rent actually owed under the lease, and it is quite likely that any claim we might have for unpaid rent would not be paid in full. In addition, a debtor-lessee may assert in a bankruptcy proceeding that its lease should be re-characterized as a financing agreement. If such a claim is successful, our rights and remedies as a lender, compared to a landlord, would generally be more limited. Similarly, if a debtor-manager seeks bankruptcy protection, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing our remedies against the manager unless relief is first obtained from the court having jurisdiction over the bankruptcy case. In the event of an obligor bankruptcy, we may also be required to fund certain expenses and obligations (e.g. real estate taxes, debt costs and maintenance expenses) to preserve the value of our properties, avoid the imposition of liens on a property and/or transition a property to a new tenant, operator or manager.

We may be unable to reposition our properties on as favorable terms, or at all, if we have to replace any of our tenants or operators, and we may be subject to delays, limitations and expenses in repositioning our assets.

We cannot predict whether our tenants will renew existing leases upon the expiration of the terms thereof. If the Kindred Master Leases, our leases with Brookdale Senior Living or any of our other leases are not renewed, we would be required to reposition those properties with another tenant or operator. In certain circumstances, we could also exercise our right to replace any tenant or operator upon a default under the terms of the applicable lease. In case of non-renewal, our tenants are required to continue to perform all obligations (including the payment of all rental amounts) for any assets that are not renewed until expiration of the then current lease term. We generally have one year to arrange for the repositioning of non-renewed assets prior to the expiration of the lease term. If we exercise our right to replace a tenant upon a default under a

 

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lease, during any period that we are attempting to locate a suitable replacement tenant or operator, there could be a decrease or cessation of rental payments on those properties. We cannot assure you that we would be successful in identifying suitable replacements or entering into leases with new tenants or operators on terms as favorable to us as our current leases, if at all. In this event, we may be required to fund certain expenses and obligations (e.g. real estate taxes, debt costs and maintenance expenses) to preserve the value and avoid the imposition of liens on properties while they are being repositioned.

Our ability to reposition our properties with another suitable tenant or operator could be significantly delayed or limited by various state licensing receivership, CON or other laws, as well as by the Medicare and Medicaid change-of-ownership rules. We could also incur substantial additional expenses in connection with any licensing, receivership or change-of-ownership proceedings. These delays, limitations and expenses could materially delay or impact our ability to reposition our properties, collect rent, obtain possession of leased properties or otherwise to exercise remedies for tenant default and could have a Material Adverse Effect on us.

Our counterparties may not be able to satisfy their obligations to us due to the continued turmoil and uncertainty in the capital markets.

As a result of current economic conditions, including turmoil and uncertainty in the capital markets, credit markets have tightened significantly such that the ability to obtain new capital has become more challenging and more expensive. In addition, several large financial institutions have either recently failed or become dependent on the assistance of the U.S. federal government to continue to operate as a going concern. Interest rate fluctuations, financial market volatility or credit market disruptions could limit the ability of our tenants, operators and managers to obtain credit to finance their businesses on acceptable terms, which could adversely affect their ability to satisfy their obligations to us. Similarly, if any of our other counterparties, such as letter of credit issuers, insurance carriers, banking institutions, title companies and escrow agents, experiences difficulty in accessing capital or other sources of funds or fails to remain a viable entity, it could have a Material Adverse Effect on us.

We may be unable to successfully foreclose on the collateral securing our real estate loan investments, and even if we are successful in our foreclosure efforts, we may be unable to successfully reposition the properties, which may adversely affect our ability to recover our investments.

If a borrower defaults under one of our mortgage loans, we may have to foreclose on the loan, as we are doing with respect to the Sunwest Loans, or protect our interest by acquiring title to the property and thereafter making substantial improvements or repairs in order to maximize the property’s investment potential. The borrower may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against our exercise of enforcement or other remedies and/or bring claims for lender liability in response to actions to enforce mortgage obligations. If the borrower seeks bankruptcy protection, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing foreclosure or other remedies against the borrower unless relief is first obtained from the court having jurisdiction over the bankruptcy case. Foreclosure-related costs, high loan-to-value ratios or declines in the value of the property may prevent us from realizing an amount equal to our mortgage loans upon foreclosure, and we may be required to record valuation allowance for such losses. Even if we are able to successfully foreclose on the collateral securing our real estate loan investments, we may inherit properties that we are unable to expeditiously reposition with new tenants or operators, if at all, which would adversely affect our ability to recover our investment.

We are exposed to various operational risks, liabilities and claims with respect to our operating assets that may adversely affect our ability to generate revenues and/or increase our costs and could have a Material Adverse Effect on us.

We are exposed to various operational risks, liabilities and claims with respect to our operating assets, including our Sunrise-managed properties and our medical office buildings, that may adversely affect our ability to generate revenues and/or increase our costs, thereby reducing our profitability. These risks include fluctuations

 

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in occupancy levels, the inability to achieve economic resident fees (including anticipated increases in those fees), rent control regulations, increases in costs of materials, energy, labor and services, national and regional economic conditions, the imposition of new or increased taxes, capital expenditure requirements, professional and general liability claims and the availability and costs of professional and general liability insurance. Any one or a combination of these factors could result in operating deficiencies at our operating assets which could have a Material Adverse Effect on us.

We may encounter certain risks when implementing our business strategy to pursue investments in, and/or acquisitions or development of, additional seniors housing and/or healthcare assets.

We intend to continue to pursue investments in, and/or acquisitions or development of, additional seniors housing and/or healthcare assets domestically and internationally, subject to the contractual restrictions contained in our unsecured revolving credit facilities and the indentures governing our outstanding senior notes. Investments in and acquisitions of these properties entail general risks associated with any real estate investment, including risks that the investment will fail to perform in accordance with expectations, that the estimates of the cost of improvements necessary for acquired properties will prove inaccurate or that the tenant, operator or manager will fail to meet performance expectations. In addition, any new development projects that we pursue would be subject to risks of construction delays or cost overruns that may increase project costs, new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits and the risk of incurring development costs in connection with projects that are not pursued to completion. Investments in and acquisitions of properties outside the United States would also expose us to legal, economic and market risks associated with operating in foreign countries, such as currency and tax risks. If we incur additional debt or issue equity securities, or both, to finance future investments, acquisitions or development activity, our leverage could increase or our per share financial results may be reduced.

When we attempt to finance, acquire or develop properties, we compete with healthcare providers, other healthcare REITs, healthcare lenders, real estate partnerships, banks, insurance companies, private equity and other investors, some of whom are significantly larger and have substantially greater financial resources than we do. Our ability to compete successfully for investment and acquisition opportunities is affected by many factors, including our cost of obtaining debt and equity capital at rates comparable to or better than our competitors. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our business objectives and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition and development activities. See “Business—Competition” included in Item 1 of this Annual Report on Form 10-K. Even if we succeed in identifying and competing for such opportunities, we could encounter unanticipated difficulties and expenditures relating to the properties or businesses we invest in or acquire, the investment or acquisition could divert management’s attention from our existing business, or the value of such investment or acquisition could decrease substantially, some or all of which could have a Material Adverse Effect on us.

Furthermore, as we continue to implement our business strategy to pursue investments in, and/or acquisitions or development of, additional seniors housing and/or healthcare assets or businesses, we expect to increase the number of operators of our properties and, potentially, our business segments. We cannot assure you that we will have the capabilities to successfully monitor and manage a portfolio of properties with a growing number of operators and/or manage such businesses.

Our investments are concentrated in seniors housing and healthcare real estate, making us more vulnerable economically than if our investments were diversified.

We invest primarily in real estate—in particular, seniors housing and healthcare properties. This concentration exposes us to all of the risks inherent in investments in real estate to a greater degree than if our portfolio was diversified, and these risks are magnified by the fact that our real estate investments are limited to properties used in the seniors housing or healthcare industries. If the current downturn in the real estate industry continues or intensifies, it could adversely affect the value of our properties and our ability to sell properties for a

 

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price or on terms acceptable to us. A downturn in the seniors housing or healthcare industries could negatively impact our operating income and earnings, as well as our operators’ ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us.

Because real estate investments are relatively illiquid, our ability to quickly sell or exchange any of our properties in response to changes in economic or other conditions will be limited. We cannot give any assurances that we will recognize full value for any property that we are required to sell for liquidity reasons. This inability to respond quickly to changes in the performance of our investments could adversely affect our business, results of operations and financial condition.

Furthermore, the healthcare industry is highly regulated, and changes in government regulation and reimbursement in the past have had material adverse consequences on the industry in general, which consequences may not have been contemplated by lawmakers and regulators. We cannot assure you that future changes in government regulation of healthcare will not have a material adverse effect on the healthcare industry, including our seniors housing and healthcare operations, tenants and operators. Our ability to invest in non-seniors housing or non-healthcare properties is restricted by the terms of our unsecured revolving credit facilities, so these adverse effects may be more pronounced than if we diversified our investments outside of real estate or outside of seniors housing or healthcare.

Our tenants, operators and managers may be adversely affected by increasing healthcare regulation and enforcement.

Over the last several years, the regulatory environment surrounding the long-term healthcare industry has intensified both in the amount and type of regulations and in the efforts to enforce those regulations. This is particularly true for large for-profit, multi-facility providers like Kindred, Brookdale Senior Living and Sunrise. The extensive federal, state and local laws and regulations affecting the healthcare industry include those relating to, among other things, licensure, conduct of operations, ownership of facilities, addition of facilities and equipment, allowable costs, services, prices for services, qualified beneficiaries, quality of care, patient rights, fraudulent or abusive behavior, and financial and other arrangements which may be entered into by healthcare providers. Changes in enforcement policies by federal and state governments have resulted in a significant increase in the number of inspections, citations of regulatory deficiencies and other regulatory sanctions, including terminations from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments for new admissions, civil monetary penalties and even criminal penalties. See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K.

If our tenants, operators and managers fail to comply with the extensive laws, regulations and other requirements applicable to their businesses and the operation of our properties, they could become ineligible to receive reimbursement from governmental and private third-party payor programs, face bans on admissions of new patients or residents, suffer civil and/or criminal penalties and/or be required to make significant changes to their operations. Our tenants, operators and managers also could be forced to expend considerable resources responding to an investigation or other enforcement action under applicable laws or regulations. In such event, the results of operations and financial condition of our tenants, operators and managers and the results of operations of our properties operated or managed by those entities could be adversely affected, which, in turn, could have a Material Adverse Effect on us. We are unable to predict the future course of federal, state and local regulation or legislation, including the Medicare and Medicaid statutes and regulations, and any changes in the regulatory framework could likewise have a material adverse effect on our tenants, operators and managers, which, in turn, could have a Material Adverse Effect on us.

Changes in the reimbursement rates or methods of payment from third-party payors, including the Medicare and Medicaid programs, could have a material adverse effect on certain of our tenants and operators.

Kindred and certain of our other tenants and operators rely on reimbursement from third-party payors, including the Medicare and Medicaid programs, for substantially all of their revenues. There continue to be various federal and state legislative and regulatory proposals to implement cost-containment measures that limit

 

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payments to healthcare providers. See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K. In addition, private third-party payors have continued their efforts to control healthcare costs. We cannot assure you that adequate reimbursement levels will be available for services to be provided by Kindred and our other tenants and operators which are currently being reimbursed by Medicare, Medicaid or private payors. Significant limits by governmental and private third-party payors on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on the liquidity, financial condition and results of operations of certain of our tenants and operators, which could affect adversely their ability to make rental payments under, and otherwise comply with the terms of, their leases with us.

We have only limited rights to terminate our management agreements with Sunrise, and we may be unable to replace Sunrise if our management agreements are terminated or not renewed.

We and Sunrise are parties to long-term management agreements pursuant to which Sunrise currently provides comprehensive property management services with respect to 79 of our seniors housing communities. Each management agreement has a term of 30 years, but may be terminated by us upon the occurrence of an event of default by Sunrise in the performance of a material covenant or term thereof (including the revocation of any licenses or certificates necessary for operation), subject in each case to Sunrise’s rights to cure deficiencies. Each management agreement may also be terminated upon the occurrence of certain insolvency events relating to Sunrise. In addition, if a minimum number of properties fail to achieve a targeted NOI level for a given period, then we may terminate the management agreement on each property in such pool. This targeted NOI level for each property is based upon an expected operating income projection set at the commencement of the management agreement for the applicable property, with such projection escalating annually. However, various legal and contractual considerations may limit or delay our exercise of any or all of these termination rights.

In the event that our management agreements with Sunrise are terminated for any reason or are not renewed upon expiration of their terms, we will have to find another manager for the properties covered by those agreements. We believe there are a number of qualified national and regional seniors care providers that would be interested in managing our Sunrise-managed properties. However, we cannot assure you that we will be able to locate another suitable manager or, if we are successful in locating such a manager, that such manager will manage the properties effectively. Any such inability or lengthy delay in replacing Sunrise as manager following termination or non-renewal of our management agreements could have a Material Adverse Effect on us.

Our current and future investments in joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners.

As of December 31, 2008, we had a 75% to 85% ownership interest in 61 of our seniors housing communities, with the minority interests in those communities being owned by affiliates of Sunrise. In addition, we owned eight medical office buildings through joint ventures with partners who typically provide management and leasing services for the properties. These joint ventures involve risks not present with respect to our wholly owned properties, including the following:

 

   

We may be prevented from taking actions that are opposed by our joint venture partners. As the managing member, we have authority to make all decisions for our Sunrise joint ventures except for a limited set of major decisions, which generally include: (a) the merger or disposition of substantially all the assets of the joint venture; (b) the sale of additional interests in the joint venture; (c) the dissolution of the joint venture; (d) the disposition of a property owned by the joint venture; and (e) the acquisition of any real property by the joint venture. Under our MOB joint venture arrangements, we may share decision-making authority with our joint venture partners regarding major decisions affecting the

 

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ownership or operation of the joint venture and any property held jointly, such as the sale or financing of the property or the making of additional capital contributions for the benefit of the property;

 

   

Our ability to transfer our interest in a joint venture to a third party may be restricted. We can generally transfer our interest in the Sunrise joint ventures, without consent, to anyone other than large seniors housing operators or their majority investors. Prior consent of our MOB joint venture partners may be required for a sale or transfer to a third party of our interests in such joint ventures;

 

   

Our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a property or increase our financial commitment to the joint venture. Generally, in our Sunrise joint ventures, if either member fails to make a required capital contribution to a joint venture after notice and a cure period, the non-defaulting member may (i) revoke the capital contribution funding notice, (ii) advance to the joint venture the amount of the required capital contribution on behalf of the defaulting member in the form of a loan to the defaulting member, with all of the defaulting member’s subsequent distributions being applied to the loan until repayment in full, or (iii) advance the capital on behalf of the defaulting member with a recalculation of each member’s proportionate interest in the joint venture pursuant to the applicable formula in the agreements. Many of our Sunrise joint venture agreements provide for a punitive reduction in the defaulting member’s proportionate interest in the event of an advance of capital by a non-defaulting member pursuant to option (iii);

 

   

Our joint venture partners may have business interests or goals with respect to the property that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of the property;

 

   

Disputes may develop with our joint venture partners over decisions affecting the property or the joint venture, which may result in litigation or arbitration that would increase our expenses and distract our officers and/or directors from focusing their time and effort on our business and possibly disrupt the day-to-day operations of the property, such as delaying the implementation of important decisions until the conflict or dispute is resolved; and

 

   

We may suffer losses as a result of the actions of our joint venture partners with respect to our joint venture investments.

We may be adversely affected by fluctuations in currency exchange rates.

We currently own twelve seniors housing communities in the Canadian provinces of Ontario and British Columbia. As a result, we are subject to fluctuations in U.S. and Canadian exchange rates which may, from time to time, have an impact on our financial condition and results of operations. Increases or decreases in the value of the Canadian dollar will impact the amount of our net income. In addition, if we increase our international presence through investments in, and/or acquisitions or development of, seniors housing and/or healthcare assets outside the United States, we may transact additional business in currencies other than U.S. or Canadian dollars. Although we may decide to pursue hedging alternatives, including borrowing in local currencies, to protect against foreign currency fluctuations, we cannot assure you that any such fluctuations will not have a Material Adverse Effect on us.

Our revenues from the seniors housing communities managed by Sunrise are dependent on private pay sources; Events which adversely affect the ability of seniors to afford our daily resident fees could cause our occupancy rates, resident fee revenues and results of operations to decline.

By and large, assisted and independent living services currently are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Hence, substantially all of the resident fee revenues generated by our Sunrise-managed properties are derived from private pay sources consisting of income or assets of residents or their family members. In general, due to the expense associated with building new properties and the staffing and other costs of providing services at these properties, only seniors with income or assets meeting

 

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or exceeding the comparable median in the regions where our properties are located typically can afford to pay the daily resident and care fees. The current economic downturn and decline in the housing market, as well as other events such as changes in demographics, could adversely affect the ability of seniors to afford these fees. If Sunrise is unable to attract and retain seniors with sufficient income, assets or other resources required to pay the fees associated with assisted and independent living services, our occupancy rates, resident fee revenues and results of operations could decline, which, in turn, could have a Material Adverse Effect on us.

Overbuilding in markets in which our seniors housing communities are located could adversely affect our future occupancy rates, operating margins and profitability.

Barriers to entry in the assisted living industry are not substantial. Consequently, the development of new seniors housing communities could outpace demand. If the development of new seniors housing communities outpaces demand for those communities in the markets in which our properties are located, those markets may become saturated. Overbuilding in our markets, therefore, could cause us to experience decreased occupancy, reduced operating margins and lower profitability.

Termination of resident lease agreements could adversely affect our revenues and earnings.

Applicable regulations governing assisted living communities generally require written resident lease agreements with each resident. Most of these regulations also require that each resident have the right to terminate the resident lease agreement for any reason on reasonable notice. Consistent with these regulations, the resident lease agreements signed by Sunrise with respect to our properties managed by it generally allow residents to terminate their lease agreements on 30 days’ notice. Thus, Sunrise cannot contract with residents to stay for longer periods of time, unlike typical apartment leasing arrangements with terms of up to one year or longer. In addition, the resident turnover rate in our seniors housing communities may be difficult to predict. If a large number of resident lease agreements terminate at or around the same time, and if our units remained unoccupied, then our revenues and earnings could be adversely affected, which, in turn, could have a Material Adverse Effect on us.

Significant legal actions could subject our tenants, operators and managers to increased operating costs and substantial uninsured liabilities, which could materially adversely affect their liquidity, financial condition and results of operation.

Although claims and costs of professional liability insurance seem to be growing at a slower pace, our tenants, operators and managers have experienced substantial increases in both the number and size of professional liability claims in recent years. In addition to large compensatory claims, plaintiffs’ attorneys continue to seek significant punitive damages and attorneys’ fees. Due to historically high frequency and severity of professional liability claims against healthcare providers, the availability of professional liability insurance has been restricted and the premiums on such insurance coverage remain very high. As a result, the insurance coverage of our tenants, operators and managers might not cover all claims against them or continue to be available to them at a reasonable cost. If our tenants, operators and managers are unable to maintain adequate insurance coverage or are required to pay punitive damages, they may be exposed to substantial liabilities.

Kindred insures its professional liability risks, in part, through a wholly owned, limited purpose insurance company. The limited purpose insurance company insures initial losses up to specified coverage levels per occurrence with no aggregate coverage limit. Coverage for losses in excess of those per occurrence levels is maintained through unaffiliated commercial insurance carriers up to an aggregate limit. The limited purpose insurance company then insures all claims in excess of the aggregate limit for the unaffiliated commercial insurance carriers. Kindred maintains general liability insurance and professional malpractice liability insurance in amounts and with deductibles which Kindred management has indicated that it believes are sufficient for its operations.

Our tenants, operators and managers, like Kindred, that insure any part of their general and professional liability risks through their own captive limited purpose entities generally estimate the future cost of general and professional

 

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liability through actuarial studies which rely primarily on historical data. However, due to the rise in the number and severity of professional claims against healthcare providers, these actuarial studies may underestimate the future cost of claims, and we cannot assure you that our tenants’, operators’ and managers’ reserves for future claims will be adequate to cover the actual cost of those claims. If the actual cost of claims is significantly higher than the reserves, our tenants’, operators’ and managers’ liquidity, results of operations and financial condition and the results of operations at our properties could be materially adversely affected, which could have a Material Adverse Effect on us.

Our operators may be sued under a federal whistleblower statute.

Our operators who engage in business with the federal government may be sued under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry. See “Governmental Regulation—Healthcare Regulation” included in Item 1 of this Annual Report on Form 10-K. These lawsuits can involve significant monetary damages and award bounties to private plaintiffs who successfully bring these suits. If any of these lawsuits were to be brought against our operators, such suits combined with increased operating costs and substantial uninsured liabilities could have a material adverse effect on the operators’ liquidity, financial condition and results of operation and on their ability to make rental payments to us, which, in turn, could have a Material Adverse Effect on us.

If any of our properties are found to be contaminated, or if we become involved in any environmental disputes, we could incur substantial liabilities and costs.

Under federal and state environmental laws and regulations, a current or former owner of real property may be liable for costs related to the investigation, removal and remediation of hazardous or toxic substances or petroleum that are released from or are present at or under, or that are disposed of in connection with such property. Owners of real property may also face other environmental liabilities, including government fines and penalties imposed by regulatory authorities and damages for injuries to persons, property or natural resources. Environmental laws and regulations often impose liability without regard to whether the owner was aware of, or was responsible for, the presence, release or disposal of hazardous or toxic substances or petroleum. In certain circumstances, environmental liability may result from the activities of a current or former operator of the property. Although we are generally indemnified by the current operators of our properties for contamination caused by them, these indemnities may not adequately cover all environmental costs. See “Governmental Regulation—Environmental Regulation” included in Item 1 of this Annual Report on Form 10-K.

Our success depends, in part, on our ability to retain key personnel, and the loss of any one of them could adversely impact our business.

The success of our business depends, in part, on the leadership and performance of our executive management team and key employees. Our future performance will be substantially dependent on our ability to retain and motivate these individuals. Competition for these individuals is intense, and we cannot give any assurances that we will retain our key officers and employees or that we can attract or retain other highly qualified individuals in the future. Losing any one or more of these persons could have a Material Adverse Effect on us.

If the liabilities we have assumed in connection with acquisitions are greater than expected, or if there are unknown liabilities, our business could be materially and adversely affected.

We have assumed certain liabilities in connection with our past acquisitions, including, in some cases, contingent liabilities. As we integrate these acquisitions, we may learn additional information about the seller and liabilities that adversely affects us, such as:

 

   

Liabilities relating to the clean-up or remediation of undisclosed environmental conditions;

 

   

Unasserted claims of vendors or other persons dealing with the seller;

 

   

Liabilities, claims and litigation, whether or not incurred in the ordinary course of business, relating to periods prior to our acquisition;

 

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Claims for indemnification by general partners, directors, officers and others indemnified by the seller; and

 

   

Liabilities for taxes relating to periods prior to our acquisition.

As a result, we cannot assure you that our past acquisitions will be successful or will not, in fact, harm our business. Among other things, if the liabilities we have assumed are greater than expected, or if there are obligations relating to the acquired properties of which we were not aware at the time we completed the acquisition, our business could be materially adversely affected.

Risks Arising from Our Capital Structure

The recent and ongoing credit and liquidity crisis may limit our access to capital and have an adverse effect on our ability to meet our debt payments, make distributions to our stockholders or make future investments necessary to implement our business plan.

In order to meet our debt payments, make distribution to our stockholders or make future investments necessary to implement our business plan, we may need to raise additional capital. Recently, the global capital and credit markets have been experiencing a period of extraordinary turmoil and upheaval, characterized by the bankruptcy, failure or sale of various financial institutions and an unprecedented level of intervention from the U.S. federal government. This disruption in the credit markets, the repricing of credit risk and the deterioration of the financial and real estate markets have created increasingly difficult conditions for REITs and other companies to access capital or other sources of funds. These conditions include greater stock price volatility, significantly less liquidity, widening of credit spreads and a lack of price transparency. It is difficult to predict how long these conditions will persist and the extent to which our results of operation and financial condition may be adversely affected.

While we currently have no reason to believe that we will be unable to access our unsecured revolving credit facilities in the future, concern about the stability of the markets generally and the strength of borrowers specifically has led many lenders and institutional investors to reduce and, in some cases, cease funding to borrowers. In addition, the financial institutions that are parties to our unsecured revolving credit facilities might have incurred losses or might have reduced capital reserves on account of their prior lending to borrowers, their holdings of certain mortgage securities or their other financial relationships, in part because of the general weakening of the U.S. economy and the increased financial instability of many borrowers. As a result, these financial institutions might be or become capital constrained and might tighten their lending standards, or become insolvent. If they experience shortages of capital and liquidity, or if they experience excessive volumes of borrowing requests from other borrowers within a short period of time, these lenders might not be able or willing to honor their funding commitments to us, which would adversely affect our ability to draw on our unsecured revolving credit facilities and, over time, could negatively impact our ability to consummate acquisitions, repay indebtedness as it matures, fund capital expenditures or make distributions to our stockholders. Continued adverse conditions in the credit markets in future years could also adversely affect the availability and terms of future borrowings, renewals or refinancings.

Our options for addressing such capital constraints would include without limitation (i) obtaining commitments from the remaining banks in our lending group or from new banks to fund increased amounts under the terms of our unsecured revolving credit facilities, (ii) accessing the public capital markets, (iii) obtaining secured loans from government-sponsored entities, pension funds or similar sources, (iv) decreasing or eliminating our distributions to our stockholders or paying taxable stock dividends and/or (v) delaying or ceasing our acquisition and investment activity. As with other public companies, the availability of debt and equity capital depends, in part, on the trading levels of our bonds and the market price of our common stock, which, in turn, depends upon various market conditions that change from time to time. Among the market conditions and other factors that may affect our bond trading levels and the market price of our common stock is the market’s perception of our financial condition, our growth potential and our current and future earnings and cash distributions. Our failure to meet the market’s expectation with regard to future earnings and cash distributions

 

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would likely adversely affect our bond trading levels and the market price of our common stock. If we cannot access capital or we cannot access capital at an acceptable cost, we may be required to liquidate one or more investments in properties at times that may not permit us to realize the maximum return on those investments, which could also result in adverse tax consequences to us. Moreover, certain healthcare regulations may constrain our ability to sell assets. We cannot assure you that we will be able to raise the necessary capital to meet our debt service obligations, make distributions to our stockholders or make future investments necessary to implement our business plan, and the failure to do so could have a Material Adverse Effect on us.

We may become more leveraged.

As of December 31, 2008, we had approximately $3.1 billion of indebtedness. Our unsecured revolving credit facilities and the indentures governing our outstanding senior notes permit us to incur substantial additional debt, and we may borrow additional funds, which may include secured borrowings. A high level of indebtedness would require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, thereby reducing the funds available to implement our business strategy and to make distributions to stockholders. A high level of indebtedness could also have the following consequences:

 

   

Potential limits on our ability to adjust rapidly to changing market conditions and vulnerability in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries;

 

   

Potential impairment of our ability to obtain additional financing for our business strategy; and

 

   

Potential downgrade in the rating of our debt securities by one or more rating agencies, which could have the effect of, among other things, increasing our cost of borrowing.

In addition, from time to time we mortgage our properties to secure payment of indebtedness. If we are unable to meet our mortgage payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of our properties could have a Material Adverse Effect on us.

We are exposed to increases in interest rates, which could reduce our profitability and adversely impact our ability to refinance existing debt, sell assets or engage in acquisition and investment activity, and our decision to hedge against interest rate risk might not be effective.

We receive a significant portion of our revenues by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual rent escalations, subject to certain limitations. Certain of our debt obligations are floating rate obligations with interest rate and related payments that vary with the movement of LIBOR, Bankers’ Acceptance or other indexes. The generally fixed rate nature of our revenues and the variable rate nature of certain of our obligations create interest rate risk. Although our operating assets provide a partial hedge against interest rate fluctuations, if interest rates rise, our interest costs for our existing floating rate debt and any new debt we incur would also increase. This increased cost could have the effect of reducing our profitability or making our lease and other revenues insufficient to meet our obligations, and could make the financing of any acquisition or investment activity more costly. Further, rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher rates upon refinancing. An increase in interest rates may also decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions.

We may seek to manage our exposure to interest rate volatility by using hedging arrangements that involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income we may earn from hedging transactions may be limited by federal tax provisions governing REITs, and that these arrangements may result in higher interest rates than we would otherwise have. Moreover, no amount of hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate risk, if we choose to engage in such activities, could adversely affect our results of operations and financial condition.

 

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Covenants in our unsecured revolving credit facilities, the indentures governing our senior notes and other debt instruments limit our operational flexibility and a covenant breach could materially adversely affect our operations.

The terms of our unsecured revolving credit facilities, the indentures governing our outstanding senior notes and other debt instruments require us to comply with a number of customary financial and other covenants, such as maintaining debt service coverage, leverage ratios and net worth requirements. Our continued ability to incur indebtedness and operate in general is subject to compliance with these covenants, which limit our operational flexibility. Breaches of these covenants could result in defaults under the applicable debt instruments, in addition to any other indebtedness cross-defaulted against such instruments, even if we satisfy our payment obligations. Financial and other covenants that limit our operational flexibility, as well as defaults resulting from a breach of any of these covenants in our debt instruments, could have a Material Adverse Effect on us.

Risks Arising from Our Status as a REIT

Loss of our status as a REIT would have significant adverse consequences to us and the value of our common stock.

If we lose our status as a REIT, we will face serious tax consequences that will substantially reduce the funds available for satisfying our obligations and for distribution to our stockholders for each of the years involved because:

 

   

We would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

Unless we are entitled to relief under statutory provisions, we could not elect to be subject to tax as a REIT for four taxable years following the year during which we were disqualified.

In addition, in such event we would no longer be required to pay dividends to maintain REIT status. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to implement our business strategy and would adversely affect the value of our common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to remain qualified as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions may adversely affect our investors or our ability to remain qualified as a REIT for tax purposes. Although we believe that we qualify as a REIT, we cannot assure you that we will continue to qualify or remain qualified as a REIT for tax purposes.

The 90% distribution requirement will decrease our liquidity and may limit our ability to engage in otherwise beneficial transactions.

To comply with the 90% distribution requirement applicable to REITs and to avoid the nondeductible excise tax, we must make distributions to our stockholders. See “Certain U.S. Federal Income Tax Considerations—Requirements for Qualification as a REIT—Annual Distribution Requirements” included in Item 1 of this Annual Report on Form 10-K. The indentures governing our outstanding senior notes permit us to make annual distributions to our stockholders in an amount equal to the minimum amount necessary to maintain our REIT status so long as the ratio of our Debt to Adjusted Total Assets (as each term is defined in the indentures) does not exceed 60% and to make additional distributions if we pass certain other financial tests. However, distributions may limit our ability to rely upon rental payments from our properties or subsequently acquired properties to finance investments, acquisitions or new developments.

 

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Although we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the REIT distribution requirement, it is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement. This may be due to the timing differences between the actual receipt of income and actual payment of deductible expenses, on the one hand, and the inclusion of that income and deduction of those expenses in arriving at our taxable income, on the other hand. In addition, non-deductible expenses such as principal amortization or repayments or capital expenditures in excess of non-cash deductions also may cause us to fail to have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement.

In the event that timing differences occur or we decide to retain cash or to distribute such greater amount as may be necessary to avoid income and excise taxation, we may borrow funds, issue additional equity securities (although we cannot assure you that we will be able to do so), pay taxable stock dividends, if possible, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements. This may require us to raise additional capital to meet our obligations; however, see “—Risks Arising from Our Capital Structure—The recent and ongoing credit and liquidity crisis may limit our access to capital and have an adverse effect on our ability to meet our debt payments, make distributions to our stockholders or make future investments necessary to implement our business plan.” The terms of our unsecured revolving credit facilities and the indentures governing our outstanding senior notes restrict our ability to engage in some of these transactions.

If we decide to pay taxable stock dividends to meet the REIT distribution requirements, your tax liability may be greater than the amount of cash you receive.

The IRS has recently issued Revenue Procedure 2009-15. Under this Revenue Procedure, the IRS will treat stock dividends as distributions for purposes of satisfying the REIT distribution requirements for calendar year 2009 if each stockholder can elect to receive the distribution in cash, even if the aggregate cash amount paid to all stockholders is limited, provided certain requirements are met. Accordingly, if we decide to pay a stock dividend in accordance with Revenue Procedure 2009-15, your tax liability with respect to such dividend may be significantly greater than the amount of cash you receive.

 

ITEM 1B. Unresolved Staff Comments

None.

 

ITEM 2. Properties

Seniors Housing and Healthcare Properties

As of December 31, 2008, we owned 513 assets: 248 seniors housing communities, 192 skilled nursing facilities, 41 hospitals and 32 MOBs and other properties in 43 states and two Canadian provinces. We believe that the asset type and geographic diversity of the properties makes our portfolio less susceptible to regional economic downturns and adverse changes in regulation or reimbursement rates or methodologies in any single state.

At December 31, 2008, we had mortgage loan obligations outstanding in the aggregate principal amount of $1.5 billion, secured by certain of our properties.

 

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The following table sets forth select information regarding the properties we owned as of December 31, 2008 for each geographic location in which we own property:

 

    As of December 31, 2008
  Seniors Housing
Communities
  Skilled Nursing
Facilities
  Hospitals   MOBs (1)   Other
Properties

Geographic Location

  Number of
Properties
  Units   Number of
Facilities
  Licensed
Beds
  Number of
Hospitals
  Licensed
Beds
  Number of
Properties
  Number of
Properties

Alabama

  2   221   2   329   —     —     —     —  

Arizona

  8   663   4   591   2   109   —     —  

Arkansas

  6   390   —     —     —     —     —     —  

California

  26   3,304   9   1,132   5   417   —     —  

Colorado

  6   459   4   464   1   68   3   —  

Connecticut

  4   458   6   736   —     —     —     —  

Florida

  14   1,453   —     —     6   511   6   —  

Georgia

  10   837   4   537   —     —     2   —  

Idaho

  1   70   7   624   —     —     —     —  

Illinois

  17   2,637   —     —     4   431   —     —  

Indiana

  9   1,001   13   1,883   1   59   —     —  

Kansas

  3   354   —     —     —     —     —     —  

Kentucky

  —     —     27   3,054   3   760   1   —  

Louisiana

  1   58   —     —     1   168   —     —  

Maine

  —     —     8   654   —     —     —     —  

Maryland

  2   149   —     —     —     —     —     —  

Massachusetts

  10   1,259   26   2,712   2   109   —     —  

Michigan

  9   771   —     —     —     —     —     —  

Minnesota

  9   634   1   140   —     —     —     —  

Missouri

  1   173   —     —     2   227   1   —  

Montana

  —     —     2   276   —     —     —     —  

Nebraska

  1   136   —     —     —     —     —     —  

Nevada

  1   152   2   174   1   52   —     —  

New Hampshire

  —     —     3   512   —     —     —     —  

New Jersey

  9   724   1   153   —     —     1   —  

New Mexico

  2   344   —     —     1   61   —     —  

New York

  14   1,307   —     —     —     —     —     —  

North Carolina

  6   438   16   1,818   1   124   —     —  

Ohio

  16   1,152   12   1,626   —     —     2   —  

Oklahoma

  —     —     —     —     1   59   —     —  

Oregon

  —     —     2   254   —     —     —     —  

Pennsylvania

  25   1,649   6   797   2   115   2   —  

Rhode Island

  —     —     2   201   —     —     —     —  

South Carolina

  2   120   —     —     —     —     —     —  

Tennessee

  5   338   3   397   1   49   —     —  

Texas

  3   262   —     —     7   496   3   8

Utah

  1   79   5   620   —     —     —     —  

Vermont

  —     —     1   160   —     —     —     —  

Virginia

  5   400   4   629   —     —     —     —  

Washington

  3   320   7   682   —     —     —     —  

West Virginia

  1   59   —     —     —     —     —     —  

Wisconsin

  4   172   11   1,825   —     —     —     —  

Wyoming

  —     —     4   378   —     —     1   —  
                               

Total U.S.

  236   22,543   192   23,358   41   3,815   22   8

British Columbia

  3   276   —     —     —     —     —     —  

Ontario

  9   848   —     —     —     —     —     —  
                               

Total Canada

  12   1,124   —     —     —     —     —     —  
                               

Total

  248   23,667   192   23,358   41   3,815   22   8
                               

 

(1) The table excludes two MOBs that were under development as of December 31, 2008.

 

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Corporate Offices

We lease our corporate offices in Louisville, Kentucky and Chicago, Illinois.

 

ITEM 3. Legal Proceedings

The information contained in “Note 15—Litigation” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference into this Item 3. Except as set forth therein, we are not a party to, nor is any of our property the subject of, any material pending legal proceedings.

 

ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock, par value $0.25 per share, is listed and traded on the New York Stock Exchange (the “NYSE”) under the symbol “VTR.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported on the NYSE and the dividends declared per share.

 

     Sales Price of
Common Stock
   Dividends
Declared
   High    Low   

2008

        

First Quarter

   $ 48.09    $ 39.00    $ 0.5125

Second Quarter

     50.39      41.32      0.5125

Third Quarter

     52.00      38.84      0.5125

Fourth Quarter

     49.60      17.31      0.5125

2007

        

First Quarter

   $ 47.97    $ 40.91    $ 0.475

Second Quarter

     45.14      34.90      0.475

Third Quarter

     43.19      31.38      0.475

Fourth Quarter

     47.49      39.37      0.475

As of February 24, 2009, there were 143,404,798 shares of our common stock outstanding held by approximately 2,816 stockholders of record.

Dividends and Distributions

We pay regular quarterly dividends to holders of our common stock so as to comply with the provisions of the Code governing REITs. On February 11, 2009, our Board of Directors declared the first quarterly installment of our 2009 dividend in the amount of $0.5125 per share, payable in cash on March 31, 2009 to stockholders of record on March 18, 2009. We expect to distribute 100% or more of our taxable net income to our stockholders for 2009. See “Certain U.S. Federal Income Tax Considerations—Requirements for Qualification as a REIT—Annual Distribution Requirements” included in Part I, Item 1 of this Annual Report on Form 10-K.

 

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Our Board of Directors normally makes decisions regarding the nature, frequency and amount of our dividends on a quarterly basis. Because the Board considers a number of factors when making these decisions, including our current and future liquidity needs and position, current and projected results from operations and performance and credit quality of our tenants, operators, managers and borrowers, we cannot assure you that we will maintain the policy stated above. Please see “Cautionary Statements” and the risk factors included in Part I, Item 1A of this Annual Report on Form 10-K for a description of other factors that may affect our distribution policy.

Our stockholders may reinvest all or a portion of any cash distribution on their shares of our common stock by participating in our Distribution Reinvestment and Stock Purchase Plan, subject to the terms of the plan. See “Note 16—Capital Stock” of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Director and Employee Stock Sales

Certain of our directors, executive officers and other employees have adopted and may, from time to time in the future, adopt non-discretionary, written trading plans that comply with Rule 10b5-1 under the Exchange Act, or otherwise monetize their equity-based compensation.

Each of our executive officers have advised us that he or she has not pledged any of our equity securities to secure “margin loans.”

Stock Repurchases

The table below summarizes repurchases of our common stock made during the quarter ended December 31, 2008:

 

     Number of Shares
Repurchased (1)
   Average Price Per
Share

October 1 through October 31

   —        —  

November 1 through November 30

   —        —  

December 1 through December 31

   14,507    $ 31.48

 

(1) Repurchases represent shares withheld to pay taxes on the vesting of restricted stock granted to employees.

The value of the shares withheld is the closing price of our common stock on the date the vesting occurs.

 

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Stock Performance Graph

The following performance graph compares the cumulative total return (including dividends) to the holders of our common stock from December 31, 2003 through December 31, 2008, with the cumulative total returns of the NYSE Composite Index, the FTSE NAREIT Composite REIT Index (the “Composite REIT Index”), the FTSE NAREIT Healthcare Equity REIT Index (the “Healthcare REIT Index”) and the Russell 1000 Index over the same period. The comparison assumes $100 was invested on December 31, 2003 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, as applicable. We have included the NYSE Composite Index in the performance graph because our common stock is listed on the NYSE. We have included the other indices because we believe that they are either most representative of the industry in which we compete, or otherwise provide a fair basis for comparison with Ventas, and are therefore particularly relevant to an assessment of our performance. The figures in the table below are rounded to the nearest dollar.

 

     12/31/03    12/31/04    12/31/05    12/31/06    12/31/07    12/31/08

Ventas

   $ 100    $ 131    $ 161    $ 222    $ 249    $ 194

NYSE Composite Index

     100      115      126      151      165      100

Composite REIT Index

     100      130      141      189      156      97

Healthcare REIT Index

     100      121      123      178      182      160

Russell 1000 Index

     100      111      118      137      145      90

LOGO

 

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ITEM 6. Selected Financial Data

You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K and our Consolidated Financial Statements and the notes thereto included in Item 8 of this Annual Report on Form 10-K, as acquisitions, divestitures, changes in accounting policies and other items impact the comparability of the financial data.

 

    As of and For the Years Ended December 31, (1)  
    2008     2007     2006     2005     2004  

Operating Data

         

Rental income

  $ 487,436     $ 465,069     $ 388,167     $ 295,852     $ 207,375  

Resident fees and services

    429,257       282,226       —         —         —    

Interest expense

    203,184       195,731       128,953       93,676       57,122  

Property-level operating expenses

    306,944       198,125       3,171       2,576       1,337  

General, administrative and professional fees

    40,651       36,425       26,136       25,075       18,124  

Income from continuing operations applicable to common shares

    181,814       137,510       122,072       116,357       90,811  

Discontinued operations

    44,474       139,609       9,358       14,226       30,089  

Net income applicable to common shares

    226,288       277,119       131,430       130,583       120,900  

Per Share Data

         

Income from continuing operations applicable to common shares, basic

  $ 1.30     $ 1.12     $ 1.17     $ 1.22     $ 1.09  

Net income applicable to common shares, basic

  $ 1.62     $ 2.26     $ 1.26     $ 1.37     $ 1.45  

Income from continuing operations applicable to common shares, diluted

  $ 1.30     $ 1.12     $ 1.16     $ 1.21     $ 1.08  

Net income applicable to common shares, diluted

  $ 1.62     $ 2.25     $ 1.25     $ 1.36     $ 1.43  

Dividends declared per common share

  $ 2.05     $ 1.90     $ 1.58     $ 1.44     $ 1.30  

Other Data

         

Net cash provided by operating activities

  $ 364,175     $ 401,626     $ 238,867     $ 223,764     $ 149,958  

Net cash used in investing activities

    (136,256 )     (1,175,192 )     (481,974 )     (615,041 )     (298,695 )

Net cash (used in) provided by financing activities

    (80,247 )     805,649       242,712       389,553       69,998  

FFO applicable to common shares (2)

    416,042       377,656       249,668       213,203       150,322  

Balance Sheet Data

         

Real estate investments, at cost

  $ 6,160,630     $ 6,292,181     $ 3,707,837     $ 3,027,896     $ 1,512,211  

Cash and cash equivalents

    176,812       28,334       1,246       1,641       3,365  

Total assets

    5,769,984       5,716,628       3,253,800       2,639,118       1,126,935  

Senior notes payable and other debt

    3,147,694       3,360,499       2,329,053       1,802,564       843,178  

 

(1)

Effective January 1, 2009, we adopted Financial Accounting Standards Board Staff Position No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB14-1”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recently Adopted Accounting Standards” included in Item 7 of this Annual Report on Form 10-K and “Note 2—Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for detail regarding the impact of APB 14-1 on our Consolidated Financial Statements for the years ended December 31, 2008, 2007 and

 

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2006. APB 14-1 had no impact on our Consolidated Financial Statements for the years ended December 31, 2005 and 2004.

(2) We consider funds from operations (“FFO”) an appropriate measure of performance of an equity REIT, and we use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is FFO indicative of sufficient cash flow to fund all of our needs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations” included in Item 7 of this Annual Report on Form 10-K.

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”). You should read this discussion in conjunction with our Consolidated Financial Statements and the notes thereto included in Item 8 of this Annual Report on Form 10-K. This Management’s Discussion and Analysis will help you understand:

 

   

Our corporate and operating environment;

 

   

2008 highlights and other recent developments;

 

   

Our critical accounting policies and estimates;

 

   

Our results of operations for the last three years;

 

   

Asset and liability management;

 

   

Our liquidity and capital resources;

 

   

Our cash flows; and

 

   

Contractual obligations.

Corporate and Operating Environment

We are a real estate investment trust (“REIT”) with a geographically diverse portfolio of seniors housing and healthcare properties in the United States and Canada. As of December 31, 2008, this portfolio consisted of 513 assets: 248 seniors housing communities, 192 skilled nursing facilities, 41 hospitals and 32 medical office buildings (“MOBs”) and other properties in 43 states and two Canadian provinces. With the exception of 79 of our seniors housing communities that are managed by Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) pursuant to long-term management agreements and the majority of our MOBs, we lease our properties to healthcare operating companies under “triple-net” or “absolute net” leases, which require the tenants to pay all property-related expenses. We also had real estate loan investments relating to seniors housing and healthcare companies as of December 31, 2008.

Our primary business consists of acquiring, financing and owning seniors housing and healthcare properties and leasing those properties to third parties or operating those properties through independent third-party managers. We operate through two reportable business segments: triple-net leased properties and senior living operations.

As of December 31, 2008, we had a 100% ownership interest in 444 of our properties. Of the remaining 69 properties, we had a 75% to 85% ownership interest in 61 seniors housing communities, with the minority interest in those communities being owned by Sunrise, and we had joint venture ownership interests in eight MOBs, ranging from 50% to 99.7%. Our joint venture partners also typically provide management and leasing services for these MOBs.

Our business strategy is comprised of three principal objectives: (1) portfolio diversification; (2) stable earnings and growth; and (3) maintaining a strong balance sheet and liquidity. While current conditions in the capital markets persist, maintaining a strong balance sheet and liquidity will be our primary focus.

Access to external capital is an important component of the success of our strategy. Generally, we attempt to match the long-term duration of most of our investments with long-term fixed-rate financing. At December 31, 2008, only 17.4% of our consolidated debt was variable rate debt. We intend to maintain an investment grade rating on our senior debt securities and manage various capital ratios and amounts within appropriate parameters

 

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to the extent it is reasonable to do so. As of December 31, 2008, we had credit ratings of BBB- (stable) from Standard & Poor’s Ratings Services, BBB- (positive) from Fitch Ratings and Ba1 (stable) from Moody’s Investors Service on our senior unsecured debt securities.

Access to capital markets impacts our ability to repay existing indebtedness as it matures and to make future investments. Our cost of and ability to access capital depend on various factors, including general market conditions, interest rates, credit ratings on our securities, perception of our potential future earnings and cash distributions and the market price of our common stock.

2008 Highlights and Other Recent Developments

Liquidity and Balance Sheet

 

   

We amended and extended our unsecured revolving credit facility (the “U.S. credit facility”) and entered into a new unsecured revolving credit facility (the “Canadian credit facility”) to expand our aggregate borrowing capacity to $850.0 million and set the maturity date at April 26, 2010. Under the Canadian credit facility, we may borrow up to $150.0 million or the equivalent in Canadian dollars. The U.S. credit facility includes a $150.0 million “accordion” feature that permits us to further expand our aggregate borrowing capacity to $1.0 billion upon satisfaction of certain conditions. Borrowings under our unsecured revolving credit facilities bear interest at a fluctuating rate per annum (based on U.S. or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was 0.75% at December 31, 2008.

 

   

We completed the sale of 9,236,083 shares of our common stock in two underwritten public offerings pursuant to our existing universal shelf registration statement and received aggregate proceeds of $409.0 million from the sales.

 

 

 

We purchased $124.4 million principal amount of our 8 3/4% senior notes due 2009 and $52.0 million principal amount of our 6 3/4% senior notes due 2010 in open market transactions and recorded a net gain on extinguishment of debt of $2.5 million.

 

   

We benefited in 2008 from the reversal of a previously recorded contingent liability in the amount of $23.3 million. We no longer expected to make any payments relating to that contingent liability and, therefore, the liability was removed from our Consolidated Balance Sheet and included in our income for the year.

 

   

We raised $126.7 million in ten-year 6.6% first mortgage financing on eight seniors housing communities. Our pro rata share of the proceeds was $107.2 million.

Investments

 

   

We purchased $112.5 million principal amount of first mortgage debt issued by a national provider of healthcare services, primarily skilled nursing care. We purchased the debt at a discount for $98.8 million, resulting in an effective interest rate to maturity of LIBOR plus 533 basis points. Interest on the loan is payable monthly at an annual rate of LIBOR plus 125 basis points, and the loan matures in 2012, subject to a one-year extension, at the borrower’s option, subject to certain conditions.

 

   

We purchased a 47-unit seniors housing community located in Texas for $5.1 million and leased it to an affiliate of Capital Senior Living Corporation.

 

   

We purchased three MOBs for approximately $66.8 million, increasing our total MOB investments to over 1.5 million square feet. We own one of these MOBs through a joint venture with a partner that provides management and leasing services for the property.

 

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We entered into an agreement giving us the exclusive right, as part of a joint venture, to develop up to ten identified MOBs on hospital campuses in eight states. This joint venture is with a nationally recognized private developer of MOBs and healthcare facilities. As of December 31, 2008, we had initially invested approximately $8.7 million in two MOBs that were both under development. These developments have $32.6 million of committed construction loans.

 

   

We purchased $70.0 million aggregate principal amount of three fixed rate and one variable rate unsecured corporate debt instruments issued by national healthcare companies, primarily at discounts for a total of $63.7 million. These debt investments mature between October 2012 and April 2016, and the effective interest rate for each investment is approximately 9%.

Dispositions

 

   

We sold seven healthcare assets in the second quarter for $69.1 million and recognized a gain from the sale of $25.9 million.

 

   

In the fourth quarter, we sold five seniors housing communities to the existing tenant for $62.5 million. We realized a gain from the sale of $21.5 million, $8.3 million of which was deferred and will be recognized over the next three years.

 

   

In January 2009, we sold four seniors housing assets for $58.7 million and expect to recognize a gain from the sale of approximately $11 million in the first quarter of 2009.

 

   

In February 2009, we sold a hospital and a MOB for $35 million in an all-cash transaction and expect to recognize a gain from the sale of $18 million in the first quarter of 2009.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires us to make estimates and judgments about future events that affect the reported amounts in the financial statements and the related disclosures. We base estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting treatment would have been applied, resulting in a different presentation of our financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. We believe that the following critical accounting policies, among others, affect our more significant estimates and judgments used in the preparation of our financial statements. For more information regarding our critical accounting policies, please see “Note 2—Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Principles of Consolidation

The Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K include our accounts and the accounts of our wholly owned subsidiaries and joint venture entities over which we exercise control. All intercompany transactions and balances have been eliminated in consolidation, and net earnings are reduced by the portion of net earnings applicable to minority interests.

Long-Lived Assets and Intangibles

Investments in real estate assets are recorded at cost. We account for acquisitions using the purchase method. The cost of the properties acquired is allocated among tangible and recognized intangible assets and

 

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liabilities based upon estimated fair values in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” We estimate fair values of the components of assets and liabilities acquired as of the acquisition date. Recognized intangibles include the value of acquired lease contracts, management agreements and related customer relationships.

Our method for allocating the purchase price paid to acquire investments in real estate requires us to make subjective assessments for determining fair value of the assets and liabilities acquired or assumed. This includes determining the value of the buildings and improvements, land and improvements, ground leases, tenant improvements, in-place tenant leases, above and/or below market leases, other intangibles embedded in contracts and any debt assumed. Each of these estimates requires significant judgment, and some of the estimates involve complex calculations. These allocation assessments have a direct impact on our results of operations, as amounts allocated to some assets and liabilities have different depreciation or amortization lives. Additionally, the amortization of value assigned to above and/or below market leases is recorded as a component of revenue, as compared to the amortization of in-place leases and other intangibles, which is included in depreciation and amortization in our Consolidated Statements of Income.

We estimate the fair value of buildings on an as-if-vacant basis, and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets based upon the replacement cost and depreciate such value over their estimated remaining useful lives. We determine the value of land either based on real estate tax assessed values in relation to the total value of the asset or internal analyses of recently acquired and existing comparable properties within our portfolio. The fair value of in-place leases, if any, reflects (i) above and/or below market leases, if any, determined by discounting the difference between the estimated current market rent and the in-place rentals, the resulting intangible asset or liability of which is amortized to revenue over the remaining life of the associated lease plus any fixed rate renewal periods, if applicable, (ii) the estimated value of the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, which is amortized over the remaining life of the associated lease, and (iii) an estimated value of the absorption period to reflect the value of the rents and recovery costs foregone during a reasonable lease-up period, as if the acquired space was vacant, which is amortized over the remaining life of the associated lease. We also estimate the value of tenant or other customer relationships acquired by considering the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, expectations of lease renewals with the tenant, and the potential for significant, additional future leasing arrangements with the tenant. We amortize such value over the expected term of the associated arrangements or leases, which would include the remaining lives of the related leases and any expected renewal periods. The fair value of long-term debt is calculated by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings. Discount rates are approximated based on the rate we estimate we would incur to replace each instrument on the date of acquisition. Any fair value adjustments related to long-term debt are recognized as effective yield adjustments over the remaining term of the instrument.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, primarily consisting of our investments in real estate, for impairment indicators in accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations and adjust the net book value of leased properties and other long-lived assets to fair value if the sum of the expected future undiscounted cash flows including sales proceeds is less than book value. An impairment loss is recognized at the time we make any such determination. Future events could occur which would cause us to conclude that impairment indicators exist and an impairment loss is warranted.

Marketable Debt and Equity Securities

We record marketable debt and equity securities as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are classified as a

 

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component of other assets on our Consolidated Balance Sheets. These securities are recorded at fair market value, with unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. Interest income, including discount or premium amortization, on marketable debt securities and gains or losses on securities sold, which are based on the specific identification method, are reported in income from loans and investments on our Consolidated Statements of Income.

Loans Receivable

Loans receivable are stated at the unpaid principal balance net of any deferred origination fees, purchase discounts or premiums and/or valuation allowances. Net deferred origination fees are comprised of loan fees collected from the borrower net of certain direct costs. Net deferred origination fees and purchase discounts or premiums are amortized to income over the contractual life of the loan using the effective interest method. We evaluate the collectibility of loans and other amounts receivable from third parties based on a number of factors, including (i) corporate and facility-level financial and operational reports, (ii) compliance with the financial covenants set forth in the loan or lease agreement, (iii) the financial stability of the borrower or tenant and any guarantor, (iv) the payment history of the borrower or tenant and (v) current economic conditions. Our level of reserves, if any, for loans and other amounts receivable from third parties fluctuates depending upon all of these factors.

Revenue Recognition

Certain of our leases, excluding our master lease agreements with Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) (the “Kindred Master Leases”), but including the majority of our leases with Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”), provide for periodic and determinable increases in base rent. Base rental revenues under these leases are recognized on a straight-line basis over the term of the applicable lease. Income on our straight-line revenue is recognized when collectibility is reasonably assured. In the event we determine that collectibility of straight-line revenue is not reasonably assured, we establish an allowance for estimated losses. Recognizing rental income on a straight-line basis results in recognized revenue exceeding cash amounts contractually due from our tenants during the first half of the term for leases that have straight-line treatment.

Certain of our other leases, including the Kindred Master Leases, provide for an annual increase in rental payments only if certain revenue parameters or other substantive contingencies are met. We recognize the increased rental revenue under these leases only if the revenue parameters or other substantive contingencies are met, rather than on a straight-line basis over the term of the applicable lease. We recognize income from rent, lease termination fees and other income once all of the following criteria are met in accordance with Securities and Exchange Commission (the “Commission”) Staff Accounting Bulletin 104: (i) the agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is reasonably assured.

Resident fees and services are recognized monthly as services are provided. Move in fees, which are a component of resident fees and services, are recognized on a straight-line basis over the term of the applicable lease agreement. Lease agreements with residents generally have a term of one year and are cancelable by the resident with 30 days’ notice.

Gain on Sale of Assets

We recognize sales of assets only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets on our Consolidated Balance Sheets. Gains on assets sold are recognized using the full accrual method upon closing when the collectibility of the sale price is reasonably assured, we are not obligated to perform significant activities after the

 

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sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under SFAS No. 66, “Accounting for Sales of Real Estate.”

Federal Income Tax

Since we have elected to be treated as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), prior to our acquisition of the assets of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) in April 2007 we made no provision for federal income tax purposes, and we will continue to make no provision for REIT income and expense. As a result of the Sunrise REIT acquisition, we now record income tax expense or benefit with respect to certain of our entities which are taxed as “taxable REIT subsidiaries” under provisions similar to those applicable to regular corporations and not under the REIT provisions.

We account for deferred income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. An increase or decrease in the deferred tax liability that results from a change in circumstances, and which causes a change in our judgment about expected future tax consequences of events, would be included in the tax provision when the changes in circumstances and our judgment occurs. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, would be included in the tax provision when the changes in circumstances and our judgment occurs.

Recently Adopted Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes when it is uncertain how an income or expense item should be treated on an income tax return. FIN 48 describes when and in what amount an uncertain tax item should be recorded in the financial statements and provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. We adopted FIN 48 on January 1, 2007. See “Note 12—Income Taxes” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

On January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value and provides guidance for measuring fair value and the necessary disclosures. SFAS No. 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The adoption did not have a material impact on our Consolidated Financial Statements.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).

Level one inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level two inputs are inputs other than quoted prices included in level one that are

 

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observable for the asset or liability, either directly or indirectly. Level two inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other than quoted prices, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”), which delays the adoption date of SFAS No. 157 for nonfinancial assets and liabilities. We adopted FSP No. 157-2 on January 1, 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

On January 1, 2009, we adopted SFAS No. 141(R), “Business Combinations;” SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51;” and Financial Accounting Standards Board Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”).

SFAS No. 141(R) requires the acquiring entity in a business combination to measure the assets acquired, liabilities assumed (including contingencies) and any noncontrolling interests at their fair values on the acquisition date. The statement also requires that acquisition-related transaction costs be expensed as incurred, that acquired research and development value be capitalized, and that acquisition-related restructuring costs be capitalized only if they meet certain criteria. SFAS No. 141(R) did not have a material impact on our Consolidated Financial Statements at the time of adoption.

SFAS No. 160 changes the reporting for minority interests, which must now be characterized as noncontrolling interests and classified as a component of consolidated equity. The calculation of income and earnings per share continues to be based on income amounts attributable to the parent and is characterized as net income from controlling interests. As the ownership of a subsidiary increases or decreases, SFAS No. 160 requires that any difference between the consideration paid and the adjustment to the noncontrolling interest balance be recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest. The adoption of SFAS No. 160 also did not have a material impact on our Consolidated Financial Statements.

 

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APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The following table summarizes the impact that the adoption of APB 14-1 is expected to have on our Consolidated Financial Statements.

 

As Reported

   2008     2007     2006  
     (In thousands, except per share amounts)  

Deferred financing costs, net

   $ 20,598     $ 22,836     $ 18,415  

Senior notes payable and other debt

     3,147,694       3,360,499       2,329,053  

Capital in excess of par value

     2,244,596       1,821,294       766,470  

Retained earnings (deficit)

     (110,407 )     (47,846 )     (84,176 )

Interest expense

     203,184       195,731       128,953  

Net income applicable to common shares

     226,288       277,119       131,430  

Earnings per common share—diluted

     1.62       2.25       1.25  

As Adjusted

   2008     2007     2006  
     (In thousands, except per share amounts)  

Deferred financing costs, net

   $ 22,032     $ 24,683     $ 20,636  

Senior notes payable and other debt

     3,136,998       3,346,530       2,312,020  

Capital in excess of par value

     2,264,125       1,840,823       785,999  

Retained earnings (deficit)

     (114,092 )     (51,284 )     (84,452 )

Interest expense

     206,869       199,169       129,229  

Net income applicable to common shares

     222,603       273,681       131,154  

Earnings per common share—diluted

     1.59       2.22       1.25  

 

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Results of Operations

The tables below show our results of operations for each year and the absolute dollar and percentage changes in those results from year to year (dollars in thousands).

Years Ended December 31, 2008 and 2007

 

     Year Ended
December 31,
    Change  
     2008     2007     $     %  

Revenues:

        

Rental income

   $ 487,436     $ 465,069     $ 22,367     4.8 %

Resident fees and services

     429,257       282,226       147,031     52.1  

Income from loans and investments

     8,847       2,586       6,261     >100  

Interest and other income

     4,226       2,839       1,387     48.9  
                          

Total revenues

     929,766       752,720       177,046     23.5  

Expenses:

        

Interest

     203,184       195,731       7,453     3.8  

Depreciation and amortization

     231,802       227,463       4,339     1.9  

Property-level operating expenses

     306,944       198,125       108,819     54.9  

General, administrative and professional fees (including non-cash stock-based compensation expense of $9,976 and $7,493 for the years ended 2008 and 2007, respectively)

     40,651       36,425       4,226     11.6  

Foreign currency gain

     (162 )     (24,280 )     24,118     (99.3 )

Gain on extinguishment of debt

     (2,398 )     (88 )     (2,310 )   >100  

Merger-related expenses

     4,460       2,979       1,481     49.7  
                          

Total expenses

     784,481       636,355       148,126     23.3  
                          

Income before reversal of contingent liability, income taxes, minority interest and discontinued operations

     145,285       116,365       28,920     24.9  

Reversal of contingent liability

     23,328       —         23,328     nm  

Income tax benefit, net of minority interest

     15,885       28,042       (12,157 )   (43.4 )
                          

Income before minority interest and discontinued operations

     184,498       144,407       40,091     27.8  

Minority interest, net of tax

     2,684       1,698       986     58.1  
                          

Income from continuing operations

     181,814       142,709       39,105     27.4  

Discontinued operations

     44,474       139,609       (95,135 )   (68.1 )
                          

Net income

     226,288       282,318       (56,030 )   (19.8 )

Preferred stock dividends and issuance costs

     —         5,199       (5,199 )   nm  
                          

Net income applicable to common shares

   $ 226,288     $ 277,119     $ (50,831 )   (18.3 )%
                          

 

nm—not meaningful

Revenues

The increase in our 2008 rental income primarily reflects $6.7 million of additional rent resulting from the annual escalators in the rent paid under the Kindred Master Leases effective May 1, 2007 and 2008 and $15.0 million in additional rent relating to triple-net leased properties and MOBs acquired during 2007 and 2008. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Rental income included in discontinued operations was $14.0 million and $24.7 million for the years ended December 31, 2008 and 2007, respectively.

 

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Revenues related to our triple-net leased properties segment are received directly from the tenant operator of the property based on the terms of the lease and are generally fixed amounts, with annual escalators (subject to certain limitations). Therefore, while occupancy information is relevant to the operations of the tenant, our revenues and financial results are not directly impacted by the overall occupancy levels or profits at the triple-net leased properties. Looking forward, some of our lease escalators are tied to annual increases in the Consumer Price Index, which recently have trended negatively, and we are likely to see less growth in our rental income from these escalators as long as deflationary conditions continue.

The increase in resident fees and services during 2008 can be attributed primarily to the fact that we did not acquire the Sunrise REIT properties until late April 2007. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. These amounts consist of all amounts earned from residents at our seniors housing communities that are managed by Sunrise, including rental fees related to resident leases, extended health care fees and other ancillary service income. Average occupancy rates related to these properties were as follows:

 

          Occupancy  
     Number of
Communities (1)
   For the Year Ended
December 31,
 
     2008    2007    2008     2007 (2)  

Stabilized Communities

   77    72    91 %   93 %

Lease-Up Communities

   2    7    55 %   57 %
              

Total

   79    79    89 %   90 %
              
          Occupancy  
     Number of
Communities (1)
   For the Year Ended
December 31,
 
     2008    2007    2008     2007 (2)  

Same-Store Stabilized Communities

   72    72    91 %   93 %

Same-Store Lease-Up Communities

   7    7    70 %   57 %
              

Total

   79    79    89 %   90 %
              

 

(1) Includes those communities which were in the respective portfolios as of December 31; five communities were moved from lease-up to stabilized in 2008.
(2) Occupancy for the period from May 1, 2007 through December 31, 2007 as properties were not acquired until late April 2007.

Income from loans and investments increased during 2008 primarily due to interest earned on a $50.0 million marketable debt security purchased in early April 2008 and a first mortgage debt investment of $98.8 million made in late 2008, partially offset by a gain on the sale of marketable equity securities recognized in the second quarter of 2007.

The increase in our interest and other income during 2008 is primarily attributable to the resolution in September 2008 of a legal dispute.

Expenses

Interest expense included in discontinued operations was $6.3 million and $10.6 million for the years ended December 31, 2008 and 2007, respectively. Total interest expense, including interest allocated to discontinued operations, increased $3.1 million in 2008 over 2007, primarily due to $13.8 million of additional interest from higher loan balances as a result of our 2008 acquisition and loan activity, partially offset by a $11.6 million reduction in interest from lower effective interest rates and a $2.6 million loss due to early repayment of bridge

 

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financing in 2007 related to the Sunrise REIT acquisition. Interest expense includes $7.1 million and $5.5 million of amortized deferred financing costs for the years ended December 31, 2008 and 2007, respectively. Our effective interest rate decreased to 6.4% for the year ended December 31, 2008, from 6.8% for the year ended December 31, 2007.

Depreciation and amortization expense increased primarily due to additional depreciation relating to the properties acquired during 2008 and 2007, partially offset by a decrease in amortization expense of approximately $26.9 million related to in-place lease intangibles primarily related to the Sunrise REIT acquisition. These in-place lease intangibles were fully amortized during the second quarter of 2008. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Property-level operating expenses increased primarily due to the Sunrise REIT acquisition, a $6.0 million provision for loan losses recorded in the third quarter of 2008, and a $4.0 million increase related to the growth of our MOB business. Our results for 2007 reflect only eight months of the Sunrise-related expenses due to the late April 2007 acquisition date.

The increase in general, administrative and professional fees is a result of our enterprise growth, an increase in non-cash stock-based compensation and dead deal costs.

The foreign currency gain for the year ended December 31, 2007 primarily relates to the Canadian call option contracts we entered into in conjunction with the Sunrise REIT acquisition. See “Note 2—Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. No similar contracts were in place for the comparable 2008 period.

The gain on extinguishment of debt in 2008 primarily represents the purchase of $124.4 million principal amount of our 8 3/4% senior notes due 2009 and $52.0 million principal amount of our 6 3/4% senior notes due 2010 in open market transactions for a discount. The gain on extinguishment of debt in 2007 represents the purchase of $5.0 million principal amount of our outstanding 7 1/8% senior notes due 2015 in an open market transaction for a discount.

Merger-related expenses for 2008 and 2007 primarily consisted of expenses relating to our litigation with HCP, Inc. arising out of the Sunrise REIT acquisition. Merger-related expenses for 2007 also included incremental costs directly related to the acquisition.

Other

We had a $23.3 million deferred tax liability to be utilized for any built-in gains tax related to the disposition of certain assets owned or deemed to be owned by us prior to our REIT election in 1999. The ten-year period in which these assets were subject to built-in gains tax ended on December 31, 2008. Because we had no pending or planned dispositions of these assets through December 31, 2008, we did not expect to pay any amounts related to this contingent liability. Therefore, this contingent liability was no longer required, and $23.3 million was reversed into income during the third quarter of 2008.

Income tax benefit represents a deferred benefit which is due solely to our taxable REIT subsidiaries as a direct result of the Sunrise REIT acquisition. See “Note 12—Income Taxes” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Minority interest, net of tax primarily represents Sunrise’s share of net income from its ownership percentage in 61 of our seniors housing communities.

Preferred stock dividends and issuance costs in 2007 related to the 700,000 shares of our Series A Senior Preferred Stock that were issued to fund a portion of the Sunrise REIT acquisition, all of which we redeemed in

 

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May 2007 using the proceeds from the sale of our common stock. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Discontinued Operations

The decrease in discontinued operations is primarily the result of a gain of $129.5 million recognized in 2007 from the sale of 22 assets compared to a gain of $39.0 million recognized in 2008 from the sale of twelve assets. See “Note 6—Dispositions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Years Ended December 31, 2007 and 2006

 

     Year Ended
December 31,
   Change  
     2007     2006    $     %  

Revenues:

         

Rental income

   $ 465,069     $ 388,167    $ 76,902     19.8 %

Resident fees and services

     282,226       —        282,226     nm  

Income from loans and investments

     2,586       7,014      (4,428 )   (63.1 )

Interest and other income

     2,839       2,770      69     2.5  
                         

Total revenues

     752,720       397,951      354,769     89.1  

Expenses:

         

Interest

     195,731       128,953      66,778     51.8  

Depreciation and amortization

     227,463       110,754      116,709     >100  

Property-level operating expenses

     198,125       3,171      194,954     nm  

General, administrative and professional fees (including non-cash stock-based compensation expense of $7,493 and $3,046 for the years ended 2007 and 2006, respectively)

     36,425       26,136      10,289     39.4  

Foreign currency gain

     (24,280 )     —        (24,280 )   nm  

(Gain) loss on extinguishment of debt

     (88 )     1,273      (1,361 )   >100  

Merger-related expenses

     2,979       —        2,979     nm  

Rent reset costs

     —         7,361      (7,361 )   nm  
                         

Total expenses

     636,355       277,648      358,707     >100  
                         

Income before reversal of contingent liability, income taxes, minority interest and discontinued operations

     116,365       120,303      (3,938 )   (3.3 )

Reversal of contingent liability

     —         1,769      (1,769 )   nm  

Income tax benefit, net of minority interest

     28,042       —        28,042     nm  
                         

Income before minority interest and discontinued operations

     144,407       122,072      22,335     18.3  

Minority interest, net of tax

     1,698       —        1,698     nm  
                         

Income from continuing operations

     142,709       122,072      20,637     16.9  

Discontinued operations

     139,609       9,358      130,251     >100  
                         

Net income

     282,318       131,430      150,888     >100  

Preferred stock dividends and issuance costs

     5,199       —        5,199     nm  
                         

Net income applicable to common shares

   $ 277,119     $ 131,430    $ 145,689     >100 %
                         

 

nm—not meaningful

Revenues

The increase in our 2007 rental income, excluding rental income allocated to discontinued operations, primarily reflects (i) $26.4 million of additional rent resulting from the annual escalator in the rent paid under the Kindred Master Leases effective May 1, 2007 and the Kindred rent reset that was effective July 19, 2006, (ii) $7.6 million in additional rent relating to the properties acquired during 2007 (excluding the Sunrise REIT

 

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properties), (iii) $41.1 million in additional rent relating to the full year effect in 2007 of properties acquired during 2006, and various other escalations in the rent paid on our existing properties. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Rental income included in discontinued operations was $24.7 million and $30.3 million for the years ended December 31, 2007 and 2006, respectively.

Resident fees and services are a direct result of the Sunrise REIT acquisition and are attributed to the period from April 26, 2007 through December 31, 2007. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. These amounts consist of all amounts earned from residents at our seniors housing communities that are managed by Sunrise, including rental fees related to resident leases, extended health care fees and other ancillary service income.

Income from loans and investments, which includes amortization of deferred fees, decreased $4.4 million in 2007 primarily due to the repayment of a bridge loan we made in 2006 to affiliates of the seller of 64 properties we currently lease to Senior Care, Inc. (“Senior Care”). The bridge loan bore interest at a rate of approximately 10.4% and was repaid upon consummation of the Senior Care acquisition in November 2006. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We recognized approximately $3.4 million of interest income from this loan during 2006. Additionally, three of the six first mortgage loans we issued during 2005 were repaid in May 2007, representing a decrease in income from loans and investments of approximately $0.8 million.

Expenses

Interest expense included in discontinued operations was $10.6 million and $12.1 million for the years ended December 31, 2007 and 2006, respectively. Total interest expense, including interest allocated to discontinued operations, increased $65.2 million in 2007 over 2006, primarily due to $71.8 million of additional interest from higher loan balances as a result of our 2007 acquisition and loan activity, partially offset by a $9.2 million reduction in interest from lower effective interest rates. In 2007, we also recognized a $2.6 million expense for upfront fees on bridge financing related to the Sunrise REIT acquisition. Interest expense includes $5.5 million and $3.3 million of amortized deferred financing costs for the years ended December 31, 2007 and 2006, respectively. Our effective interest rate decreased to 6.8% for the year ended December 31, 2007, from 7.3% for the year ended December 31, 2006.

Depreciation and amortization expense increased primarily due to depreciation relating to the properties acquired during 2007 and 2006. Additionally, we incurred amortization expense of approximately $56.1 million related to in-place lease intangibles from the Sunrise REIT acquisition. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Property-level operating expenses increased primarily due to the Sunrise REIT acquisition. Property-level operating expenses include all expenses related to our MOB operations and all amounts incurred for the operations of our seniors housing communities managed by Sunrise for the period from April 26, 2007 through December 31, 2007, such as labor, food, utilities, marketing, management and other property operating costs.

The increase in general, administrative and professional fees is due primarily to increased stock-based compensation and increases in other general and administrative items resulting from our enterprise growth.

The foreign currency gain for the year ended December 31, 2007 primarily relates to the Canadian call option contracts we entered into in conjunction with the Sunrise REIT acquisition. See “Note 2—Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. No similar contracts were in place for the comparable 2006 period.

The gain on extinguishment of debt in 2007 represents the purchase of $5.0 million principal amount of our outstanding 7 1/8% senior notes due 2015 in an open market transaction for a discount. The loss on

 

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extinguishment of debt in 2006 represents the write-off of unamortized deferred financing costs related to the refinancing of our previous secured revolving credit facility during the second quarter of 2006.

Merger-related expenses in 2007 consisted of incremental costs directly related to the Sunrise REIT acquisition and expenses relating to our litigation with HCP, Inc. arising out of the acquisition.

In connection with the rent reset process under the Kindred Master Leases, we incurred approximately $7.4 million of one-time costs which we expensed during 2006. These costs included fees of the final appraisers and third party experts, consulting fees and legal fees and expenses. No similar costs were incurred during 2007.

During 2006, we were notified by the Internal Revenue Service (“IRS”) that it had completed its audit of our 2001 federal tax return with no additional tax being due. Accordingly, we reversed into income a previously recorded $1.8 million tax liability related to uncertainties surrounding the outcome of this audit. No similar activity occurred during 2007.

Income tax benefit represents a deferred benefit which is due solely to our taxable REIT subsidiaries as a direct result of the Sunrise REIT acquisition. See “Note 12—Income Taxes” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Minority interest, net of tax primarily represents Sunrise’s share of net income from the Sunrise REIT properties based on its ownership percentage in 61 of our seniors housing communities.

Preferred stock dividends and issuance costs related to the 700,000 shares of our Series A Senior Preferred Stock that were issued to fund a portion of the Sunrise REIT acquisition, all of which we redeemed in May 2007 using the proceeds from the sale of our common stock. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Discontinued Operations

The increase in discontinued operations is primarily due to the $129.5 million gain on sale of real estate assets recognized in the second quarter of 2007 resulting primarily from the sale of 22 properties to Kindred. See “Note 6—Dispositions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Funds from Operations

Our funds from operations (“FFO”) for the five years ended December 31, 2008 are summarized in the following table:

 

    For the Year Ended December 31,  
    2008     2007     2006   2005     2004  
    (In thousands)  

Net income applicable to common shares

  $ 226,288     $ 277,119     $ 131,430   $ 130,583     $ 120,900  

Adjustments:

         

Real estate depreciation and amortization

    231,079       226,354       109,370     79,283       42,128  

Real estate depreciation related to minority interest

    (6,251 )     (3,749 )     —       —         —    

Loss on real estate disposals

    —         —         —       175       —    

Discontinued operations:

         

Gain on sale of real estate assets

    (39,026 )     (129,478 )     —       (5,114 )     (19,428 )

Depreciation on real estate assets

    3,952       7,410       8,868     8,276       6,722  
                                     

FFO applicable to common shares

    416,042       377,656       249,668     213,203       150,322  

Preferred stock dividends and issuance costs

    —         5,199       —       —         —    
                                     

FFO

  $ 416,042     $ 382,855     $ 249,668   $ 213,203     $ 150,322  
                                     

 

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Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values, instead, have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. To overcome this problem, we consider FFO an appropriate measure of performance of an equity REIT, and we use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is FFO necessarily indicative of sufficient cash flow to fund all of our needs. We believe that in order to facilitate a clear understanding of our consolidated historical operating results, FFO should be examined in conjunction with net income as presented in the Consolidated Financial Statements and data included elsewhere in this Annual Report on Form 10-K.

Asset/Liability Management

Asset/liability management is a key element of our overall risk management program. The objective of asset/liability management is to support the achievement of our business strategies while maintaining appropriate risk levels. The asset/liability management process focuses on a variety of risks, including market risk (primarily interest rate risk and foreign currency exchange risk) and credit risk. Effective management of these risks is an important determinant of the absolute levels and variability of our FFO and net worth. The following discussion addresses our integrated management of assets and liabilities, including the use of derivative financial instruments. We do not use derivative financial instruments for speculative purposes.

Market Risk

Market risks relating to our financial instruments result primarily from changes in U.S. or Canadian LIBOR rates, the Canadian Bankers’ Acceptance rate or the U.S. or Canadian Prime rates. Our exposure to market risk for changes in interest rates relate primarily to borrowings under our unsecured revolving credit facilities, certain of our mortgage loans that are floating rate obligations and mortgage loans receivable.

While interest rate fluctuations will generally not affect our fixed rate debt obligations unless such instruments mature, or until such time that we would be required to refinance such debt, they will affect the fair value of our fixed rate instruments. If interest rates have risen at the time our fixed rate debt matures, or at such time we would be required to refinance such debt, our profitability could be adversely affected by the additional cost of borrowings. Conversely, lower interest rates at the time our debt matures or at the time of refinancing may lower our overall borrowing costs. We continuously monitor our level of floating rate debt with respect to total debt and other factors, including our assessment of the current and future economic environment.

 

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To highlight the sensitivity of our fixed rate debt to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (BPS) in interest rates as of December 31, 2008 and 2007:

 

     As of December 31,
   2008    2007
   (In thousands)

Gross book value

   $ 2,592,730    $ 2,879,907

Fair value (1)

     2,436,620      3,002,090

Fair value reflecting change in interest rates: (1)

     

-100 BPS

     2,538,334      3,134,816

+100 BPS

     2,340,746      2,877,929

 

(1) The change in fair value of fixed rate debt was due primarily to debt repayments and overall changes in interest rates.

The table below sets forth certain information with respect to our debt, excluding premiums and discounts (dollars in thousands):

 

     As of December 31,  
   2008     2007  

Balance:

    

Fixed rate

   $ 2,592,730     $ 2,879,907  

Variable rate

     546,410       467,769  
                

Total

   $ 3,139,140     $ 3,347,676  
                

Percent of total debt:

    

Fixed rate

     82.6 %     86.0 %

Variable rate

     17.4       14.0  
                

Total

     100.0 %     100.0 %
                

Weighted average interest rate at end of period:

    

Fixed rate

     6.5 %     6.7 %

Variable rate

     2.3 %     5.5 %

Total weighted average rate

     5.8 %     6.5 %

The increase in our outstanding variable rate debt from December 31, 2007 is primarily attributable to additional net borrowings under our unsecured revolving credit facilities and additional borrowings related to 2008 acquisitions. Pursuant to the terms of certain leases with one of our tenants, if interest rates increase on certain debt that we have totaling $97.5 million as of December 31, 2008, our tenant is required to pay us additional rent (on a dollar-for-dollar basis) in an amount equal to the increase in interest expense resulting from the increased interest rates. Therefore, the increase in interest expense related to this debt is equally offset by an increase in additional rent due to us from the tenant. Assuming a one percentage point increase in the interest rate related to the variable rate debt, and assuming no change in the outstanding balance as of December 31, 2008, interest expense for 2009 (inclusive of the $97.5 million) would increase and our net income would decrease by approximately $4.5 million, or $0.03 per common share on a diluted basis. The fair value of our fixed and variable rate debt is based on current interest rates at which we could obtain similar borrowings.

In the past, we mitigated some interest rate risk through an interest rate swap agreement designed to hedge against rising interest rates. However, the swap expired on June 30, 2008, and we do not currently have any interest rate swap agreements in effect, nor do we expect to enter into any additional interest rate swap agreements at this time. We may, however, engage in hedging strategies in the future, depending on management’s analysis of the interest rate and foreign currency exchange rate environments and the costs and risks of such strategies. We do not enter into market risk sensitive instruments for trading purposes.

 

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We are subject to fluctuations in U.S. and Canadian exchange rates which may, from time to time, have an impact on our financial condition and results of operations. Increases or decreases in the value of the Canadian dollar will impact the amount of net income we earn from our Canadian operations. Based on 2008 results, if the Canadian exchange rate were to increase or decrease by $0.10, our net income would decrease or increase, as applicable, by approximately $0.2 million per year. If we increase our international presence through investments in, and/or acquisitions or development of, seniors housing and/or healthcare assets outside the United States, we may also decide to transact additional business in currencies other than U.S. or Canadian dollars. Although we may decide to pursue hedging alternatives (including additional borrowings in local currencies) to protect against foreign currency fluctuations, we cannot assure you that any such fluctuations will not have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”).

We also have investments in marketable debt securities where we earn interest on a fixed and floating rate basis. These investments are classified as available for sale and are recorded at fair market value with unrealized gains and losses recorded as a component of stockholders’ equity. Interest rate fluctuations and market conditions will cause the fair market value of these investments to change. As of December 31, 2008, the fair market value of our marketable debt securities was $51.6 million, with an original cost of $63.7 million.

During 2008, we purchased $112.5 million principal amount of first mortgage debt issued by a national provider of healthcare services, primarily skilled nursing care. We purchased the debt at a discount for $98.8 million, resulting in an effective interest rate to maturity of LIBOR plus 533 basis points. Interest on the loan is payable monthly at an annual rate of LIBOR plus 125 basis points, and the loan matures in January 2012, subject to a one-year extension, at the borrower’s option, subject to certain conditions.

As of December 31, 2008, we held a receivable for three outstanding first mortgage loans (the “Sunwest Loans”) in the aggregate principal amount of $20.0 million. During 2008, we recorded a provision for loan losses on the Sunwest Loans of $6.0 million as a result of certain defaults by the borrower.

As of December 31, 2008, the fair value of our loans receivable was $111.9 million and was based on our estimates of currently prevailing rates for comparable loans. See “Note 8—Loans Receivable” and “Note 10—Fair Value of Financial Instruments” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Credit Risk

We receive a significant portion of our revenue by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual escalators, subject to certain limitations. Some of our triple-net lease escalators are tied to the Consumer Price Index, with caps, floors or collars. We also earn revenue from residents and tenants at our operating assets. Historically, most of our revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) were derived from assets subject to long-term triple-net leases. Currently, 22.3% of our EBITDA is derived from non-triple-net leases (our senior living operations and MOBs) where rental rates may fluctuate upon lease rollovers and renewals due to economic or market conditions.

For the years ended December 31, 2008 and 2007, Kindred accounted for $241.2 million, or 25.5%, of our total revenues and 38.0% of our total NOI (net operating income) (including amounts in discontinued operations), and $240.6 million, or 30.8%, of our total revenues and 41.5% of our total NOI (including amounts in discontinued operations), respectively. For the years ended December 31, 2008 and 2007, Brookdale Senior Living accounted for $121.5 million, or 12.8%, of our total revenues and 19.2% of our total NOI (including amounts in discontinued operations), and $122.8 million, or 15.7%, of our total revenues and 21.2% of our total NOI (including amounts in discontinued operations), respectively. This concentration of rental revenues creates

 

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credit risk. As a result, Kindred’s and Brookdale Senior Living’s financial condition and ability to meet their rental payments and other obligations to us has a significant impact on our results of operations and our ability to make distributions to our stockholders. Any failure by Kindred or Brookdale Senior Living to effectively conduct its operations could have a material adverse effect on its business reputation or on its ability to enlist and maintain patients in its facilities, which could also affect its ability to pay rent to us. See “Risk Factors—Risks Arising from Our Business—We depend on Kindred and Brookdale Senior Living for a significant portion of our revenues and operating income; Any inability or unwillingness of Kindred or Brookdale Senior Living to satisfy its obligations under its agreements with us could have a Material Adverse Effect on us” included in Part I, Item 1A of this Annual Report on Form 10-K and “Note 4—Concentration of Credit Risk” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We regularly monitor the credit risk under our lease agreements with our tenants by, among other things, (i) reviewing and analyzing information regarding the healthcare industry generally, publicly available information regarding tenants, and information provided by the tenants and borrowers under our lease and other agreements, and (ii) having periodic discussions with tenants, borrowers and their representatives.

Approximately 20.0% of our EBITDA and 45.4% of our total revenues (including amounts in discontinued operations) for the year ended December 31, 2008 were attributable to senior living operations managed by Sunrise. Approximately 36.2% of our total revenues (including amounts in discontinued operations) for the year ended December 31, 2007 were attributable to senior living operations managed by Sunrise for the period from April 26, 2007 (the date of the Sunrise REIT acquisition) through December 31, 2007.

We are party to management agreements with Sunrise pursuant to which Sunrise currently provides comprehensive property management and accounting services with respect to 79 of our seniors housing communities. Each management agreement has a term of 30 years from its effective date, the earliest of which began in 2004. Pursuant to the management agreements, we pay Sunrise a base management fee of 6% of resident fees and similar revenues, subject to reduction based on below target performance relating to NOI for a pool of properties. The minimum management fee assessable under these agreements is 5% of resident fees and similar revenues of the properties. We also pay incentive fees if a pool of properties exceeds aggregate performance targets relating to NOI; provided, however, that total management fees, including incentive fees, shall not exceed 8% of resident fees and similar revenues. In 2008, we paid a 5.75% management fee for 71 properties and management fees of between 6% and 10.4% for eight properties. The management agreements also specify that we (or the joint venture to which we are party, as applicable) will reimburse Sunrise for direct or indirect costs necessary to manage our seniors housing communities.

We may terminate our management agreements upon the occurrence of an event of default by Sunrise in the performance of a material covenant or term thereof (including the revocation of any licenses or certificates necessary for operation), subject in each case to Sunrise’s rights to cure deficiencies. Each management agreement may also be terminated upon the occurrence of certain insolvency events relating to Sunrise. In addition, if a minimum number of properties fail to achieve a targeted NOI level for a given period, then we may terminate the management agreement on each property in such pool. This targeted NOI level for each property is based upon an expected operating income projection set at the commencement of the management agreement for the applicable property, with such projection escalating annually. However, various legal and contractual considerations may limit or delay our exercise of any or all of these termination rights.

We own a 75% to 85% ownership interest in 61 of our seniors housing communities pursuant to joint venture agreements, with the minority interests in these joint ventures being owned by Sunrise. These joint ventures are each managed by a board of managers, which we control. As the controlling member, we have authority to make all decisions for our Sunrise joint ventures except for a limited set of major decisions, which generally include: (a) the merger or disposition of substantially all the assets of the joint venture; (b) the sale of

 

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additional interests in the joint venture; (c) the dissolution of the joint venture; (d) the disposition of a senior housing community owned by the joint venture; and (e) the acquisition of any real property. We can generally transfer our interest in a Sunrise joint venture, without consent, to anyone other than large seniors housing operators or their majority investors. Generally, Sunrise must obtain our prior consent for any direct or indirect transfer of its interest in a joint venture. With limited exceptions, profits and losses of the joint venture are allocated pro rata to each member. If either member fails to make a required capital contribution to a joint venture after notice and a cure period, the non-defaulting member may (i) revoke the capital contribution funding notice, (ii) advance to the joint venture the amount of the required capital contribution on behalf of the defaulting member in the form of a loan to the defaulting member, with all of the defaulting member’s subsequent distributions being applied to the loan until repayment in full, or (iii) advance the capital on behalf of the defaulting member with a recalculation of each member’s proportionate interest in the joint venture pursuant to the applicable formula in the agreements. Many of our Sunrise joint venture agreements provide for a punitive reduction in the defaulting member’s proportionate interest in the event of an advance of capital by a non-defaulting member pursuant to option (iii). The joint ventures are generally limited to incurring new or refinanced mortgage indebtedness in excess of 75% of the market value of its properties.

See “Risk Factors—Risks Arising from Our Business—The properties managed by Sunrise account for a significant portion of our revenues and operating income; Adverse developments in Sunrise’s business and affairs or financial condition could have a Material Adverse Effect on us” included in Part I, Item 1A of this Annual Report on Form 10-K.

Lease Expirations

As our triple-net leases expire, we are exposed to the risks that our tenants may elect not to renew and, in such event, that we may be unable to reposition our properties on the same or better terms, if at all. The following table summarizes our triple-net lease expirations scheduled to occur over the next ten years (dollars in thousands).

 

     Number of
Tenants
   Total Area in
Square Feet
   2008 Annual
Rental Income
   % of 2008 Total Rental
Income (1)
 

2009

   —      —      $ —      —   %

2010

   117    5,259,703      124,726    27.1  

2011

   —      —        —      —    

2012

   6    361,280      4,080    0.9  

2013

   95    4,496,794      117,657    25.6  

2014

   3    366,089      3,113    0.7  

2015

   22    2,140,306      22,149    4.8  

2016

   1    35,417      1,054    0.2  

2017

   —      —        —      —    

2018

   1    31,919      360    0.1  

 

(1) Total 2008 rental income excludes triple-net rental income included in discontinued operations.

The failure of our tenants to renew our leases could have a Material Adverse Effect on us. See “Risk Factors—Risks Arising from Our Business—We may be unable to reposition our properties on as favorable terms, or at all, if we have to replace any of our tenants or operators, and we may be subject to delays, limitations and expenses in repositioning our assets” included in Part I, Item IA of this Annual Report on Form 10-K.

Liquidity and Capital Resources

During 2008, our principal sources of liquidity were proceeds from our common stock offerings, issuance of mortgage debt, borrowings under our revolving credit facilities, asset dispositions and cash flows from

 

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operations. During the next twelve months, our principal liquidity needs are to: (i) fund normal operating expenses; (ii) meet our debt service requirements; (iii) repay $118.1 million of debt maturing; (iv) fund capital expenditures; (v) fund investments and/or commitments; and (vi) make distributions to our stockholders to maintain our REIT qualification under the Code. We believe that these needs will be satisfied by cash flows from operations, debt financings, proceeds from sales of assets and borrowings under our unsecured revolving credit facilities. However, if these sources of capital are not available and/or if we make acquisitions and investments, we may be required to obtain funding from additional borrowings, assumption of debt from the seller, dispositions of assets (in whole or in part through joint venture arrangements with third parties) and issuance of secured or unsecured long-term debt or other securities. We expect to be able to extend, refinance, renew or replace a substantial portion of our unsecured revolving credit facilities prior to their maturity in April 2010, but we cannot give any assurances as to whether we will be able to extend, refinance, renew or replace any portion of our unsecured revolving credit facilities or as to the timing or terms of any such extension, refinancing, renewal or replacement. See “Risk Factors—Risks Arising from Our Capital Structure—The recent and ongoing credit and liquidity crisis may limit our access to capital and have an adverse effect on our ability to meet our debt payments, make distributions to our stockholders or make future investments necessary to implement our business plan” included in Part I, Item 1A of this Annual Report on Form 10-K.

As of December 31, 2008, we had $176.8 million of unrestricted cash and cash equivalents, consisting primarily of investments in U.S. treasury money market funds and cash related to our seniors housing communities that is deposited and held in property-level accounts. Funds maintained in the property-level accounts are used primarily for the payment of property-level expenses and certain capital expenditures. A portion of the cash maintained in these property-level accounts is distributed to us monthly. At December 31, 2008, we also had escrow deposits and restricted cash of $55.9 million and unused credit availability of $546.0 million under our unsecured revolving credit facilities.

Unsecured Revolving Credit Facilities

Our unsecured revolving credit facilities mature in April 2010 and permit us to borrow up to an aggregate of $850.0 million. Of this amount, we may borrow up to $150.0 million or the equivalent in Canadian dollars under the Canadian credit facility. The U.S. credit facility includes a $150.0 million “accordion” feature that permits us to further expand our aggregate borrowing capacity to $1.0 billion upon satisfaction of certain conditions. Borrowings under our unsecured revolving credit facilities bear interest at a fluctuating rate per annum (based on U.S. or Canadian LIBOR, Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was 0.75% at December 31, 2008.

The agreements governing our unsecured revolving credit facilities subject us to a number of restrictive covenants. See “Note 9—Borrowing Arrangements” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Lehman Commercial Paper, Inc. (“Lehman”) is a named lender under our unsecured revolving credit facilities and has a $20 million funding commitment (approximately 2% of the aggregate borrowing capacity under our unsecured revolving credit facilities) to us. Lehman has defaulted on its obligations to fund our borrowing requests, and we are seeking an assignment of this portion of our unsecured revolving credit facilities, through Lehman’s Chapter 11 proceeding, to a third party investor who we believe represents the economic interest in such obligation. We cannot give any assurances as to whether or when an assignment of Lehman’s interest in our unsecured revolving credit facilities may occur. We also cannot give any assurances that the other lenders under our unsecured revolving credit facilities will continue to fund their respective portions of our borrowing requests. While we currently have no reason to believe that we will be unable to access our unsecured revolving credit facilities in the future, concern about the stability of the markets generally and the strength of borrowers specifically has led many lenders and institutional investors to reduce and, in some cases, cease funding to borrowers. The economic downturn and credit crisis have resulted in the bankruptcy or merger of

 

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many financial institutions, like Lehman, that could adversely impact our ability to draw on our unsecured revolving credit facilities. If we are unable to access our unsecured revolving credit facilities, our liquidity and financial condition could be adversely affected.

As of February 20, 2009, we had $410.6 million outstanding under our unsecured revolving credit facilities due April 2010 and approximately $392.3 million of unrestricted cash and cash equivalents, for a net amount of $18.3 million.

Convertible Senior Notes

As of December 31, 2008, we had $230.0 million aggregate principal amount of our 3 7/8% Convertible Senior Notes due 2011 (the “Convertible Notes”) outstanding. The Convertible Notes are convertible at the option of the holder (i) prior to September 15, 2011, upon the occurrence of specified events and (ii) on or after September 15, 2011, at any time prior to the close of business on the second business day prior to the stated maturity, in each case into cash up to the principal amount of the Convertible Notes and cash or shares of our common stock, at our election, in respect of any conversion value in excess of the principal amount at the current conversion rate of 22.6262 shares per $1,000 principal amount of notes (which equates to a current conversion price of approximately $44.20 per share). The conversion rate is subject to adjustment in certain circumstances, including the payment of a quarterly dividend in excess of $0.395 per share. To the extent the market price of our common stock exceeds the conversion price our earnings per share will be diluted.

Pursuant to the registration rights agreement entered into in connection with our initial offering of the Convertible Notes, we have filed a shelf registration statement covering resales by the holders of shares of our common stock, if any, issued upon conversion of the Convertible Notes. We will not receive any proceeds in connection with any such resales.

The indenture governing the Convertible Notes subjects us to a number of restrictive covenants. See “Note 9—Borrowing Arrangements” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Certain of our subsidiaries have fully and unconditionally guaranteed the Convertible Notes.

Effective January 1, 2009, we adopted APB 14-1, which requires us to separately account for the liability and equity component in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized. See “Note 2—Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Senior Notes

As of December 31, 2008, we had the following series of senior notes (collectively, the “Senior Notes”) issued by our subsidiaries, Ventas Realty, Limited Partnership and Ventas Capital Corporation, outstanding:

 

 

 

$49.8 million principal amount of 8 3/4% Senior Notes due 2009 (the “2009 Senior Notes”);

 

 

 

$123.0 million principal amount of 6 3/4% Senior Notes due 2010 (the “2010 Senior Notes”);

 

   

$191.8 million principal amount of 9% Senior Notes due 2012 (the “2012 Senior Notes”);

 

 

 

$175.0 million principal amount of 6 5/8% Senior Notes due 2014 (the “2014 Senior Notes”);

 

 

 

$170.0 million principal amount of 7 1/8% Senior Notes due 2015 (the “2015 Senior Notes”);

 

 

 

$200.0 million principal amount of 6 1/2% Senior Notes due 2016 (the “2016 Senior Notes”); and

 

 

 

$225.0 million principal amount of the 6 3/4 % Senior Notes due 2017 (the “2017 Senior Notes”).

 

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During 2008, we purchased $124.4 million principal amount of our outstanding 2009 Senior Notes and $52.0 million principal amount of our outstanding 2010 Senior Notes in open market transactions. As a result of these purchases, we recorded a $2.5 million gain on the extinguishment of debt in 2008. In 2007, we purchased $5.0 million principal amount of our outstanding 2015 Senior Notes in an open market transaction. We may, from time to time, seek to retire or purchase additional amounts of the outstanding Senior Notes for cash and/or in exchange for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, prospects for future access to capital and other factors. The amounts involved may be material.

The indentures governing the Senior Notes subject us to a number of restrictive covenants. See “Note 9—Borrowing Arrangements” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We and certain of our subsidiaries have fully and unconditionally guaranteed the Senior Notes.

Dividends

In order to continue to qualify as a REIT, we must make annual distributions to our stockholders of at least 90% of REIT taxable income (excluding net capital gain). Our quarterly dividends in 2008 aggregated $2.05 per share, which is greater than 100% of our 2008 estimated taxable income. We also intend to pay dividends greater than 100% of taxable income for 2009. On February 11, 2009, our Board of Directors declared a quarterly dividend of $0.5125 per share, payable in cash on March 31, 2009 to holders of record on March 18, 2009.

We expect that REIT taxable income will be less than cash flow due to the allowance of depreciation and other non-cash deductions in computing REIT taxable income. Although we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement, it is possible that from time to time we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement or we may decide to retain cash or distribute such greater amount as may be necessary to avoid income and excise taxation. If we do not have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement, or if we desire to retain cash, we may borrow funds, issue additional equity securities, pay taxable stock dividends, if possible, distribute other property or securities or engage in a transaction intended to enable us to meet the REIT distribution requirements or any combination of the foregoing. See “Certain U.S. Federal Income Tax Considerations—Requirements for Qualification as a REIT—Annual Distribution Requirements” included in Part I, Item I of this Annual Report on Form 10-K.

Capital Expenditures

Capital expenditures to maintain and improve our triple-net leased properties are generally the responsibility of our tenants. Accordingly, we do not believe that we will incur any major expenditures in connection with these properties. After the terms of the triple-net leases expire, or in the event that the tenants are unable or unwilling to meet their obligations under those leases, we anticipate funding any capital expenditures for which we may become responsible by cash flows from operations or through additional borrowings. With respect to our operating assets, including our communities that are managed by Sunrise and our MOBs, we expect that capital expenditures will be funded by the cash flows from the properties or through additional borrowings. To the extent that unanticipated expenditures or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow funds may be restricted in certain circumstances by the terms of our unsecured revolving credit facilities and the indentures governing our outstanding Senior Notes. Our ability to borrow may also be limited by our lenders’ ability and willingness to fund, in whole or in part, borrowing requests under our unsecured revolving credit facilities.

 

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Equity Offerings

In 2008, we sold 9,236,083 shares of our common stock in underwritten public offerings pursuant to our existing universal shelf registration statement. We received aggregate proceeds of $409.0 million from the sales, which we used to repay indebtedness outstanding under our unsecured revolving credit facilities and for working capital and other general corporate purposes.

In May 2007, we completed the sale of 26,910,000 shares of our common stock in an underwritten public offering pursuant to our existing universal shelf registration statement. We received $1.05 billion in net proceeds from the sale, which we used along with the proceeds from our disposition of certain Kindred assets (see “Note 6—Dispositions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K) and borrowings under our unsecured revolving credit facility to redeem all of our outstanding Series A Senior Preferred Stock and to repay our indebtedness under the senior interim loan used to fund a portion of the Sunrise REIT acquisition.

Our automatic universal shelf registration statement, filed with the Commission in April 2006, relates to the sale, from time to time, of an indeterminate amount of debt securities and related guarantees, common stock, preferred stock, depositary shares and warrants. The registration statement will expire in April 2009 pursuant to the Commission’s rules, and we intend to replace it with a new universal shelf registration statement upon expiration.

Other

During 2008 and 2007, we assumed facility-level mortgage debt in connection with certain property acquisitions, including the Sunrise REIT acquisition. See “Note 5—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

All facility-level mortgage debt outstanding was approximately $1.5 billion and $1.6 billion as of December 31, 2008 and 2007, respectively.

We received proceeds of $6.2 million and $9.8 million for the years ended December 31, 2008 and 2007, respectively, from the exercises of outstanding stock options. Future proceeds from the exercises of stock options will be primarily affected by the future performance of our stock price and the number of options outstanding. Options outstanding have increased to 1.4 million as of December 31, 2008, from 0.9 million as of December 31, 2007.

We issued approximately 18,400 and 20,750 shares of common stock under our Distribution Reinvestment and Stock Purchase Plan, for net proceeds of $0.7 million and $0.8 million for the years ended December 31, 2008 and 2007, respectively. We currently offer a 1% discount on the purchase price of our stock to shareholders who reinvest their dividends and/or make optional cash purchases of common stock through the plan. Each month or quarter, as applicable, we may lower or eliminate the discount without prior notice, thereby affecting the future proceeds that we receive from this plan.

Cash Flows

Cash Flows from Operating Activities

Net cash provided by operating activities was $364.2 million and $401.6 million for the years ended December 31, 2008 and 2007, respectively. The decrease in 2008 is attributable to changes in working capital, partially offset by higher FFO resulting from a full year of our senior living operations, accretive acquisitions and rent escalations from our triple-net lease tenants.

 

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Cash Flows from Investing Activities

Net cash used in investing activities was $136.3 million and $1.2 billion for the years ended December 31, 2008 and 2007, respectively. These activities consisted primarily of: (i) investments in real estate ($53.8 million and $1.3 billion in 2008 and 2007, respectively); (ii) capital expenditures ($16.4 million and $8.2 million in 2008 and 2007, respectively); (iii) investments in loans receivable and marketable debt securities ($172.5 million in 2008); (iv) proceeds from mortgage loans ($0.1 million and $15.8 million in 2008 and 2007, respectively); (v) the sale of marketable equity securities ($7.8 million in 2007); and (vi) proceeds from real estate disposals ($104.2 million and $157.4 million in 2008 and 2007, respectively).

Cash Flows from Financing Activities

Net cash used in financing activities totaled $80.2 million for the year ended December 31, 2008 and included $288.8 million of cash dividend payments to common stockholders and $416.9 million of aggregate principal payments on mortgage obligations. The uses were partially offset by proceeds of $408.5 million from the issuance of common stock, $140.3 million related to the issuance of debt and $73.4 million of net borrowings on our unsecured revolving credit facilities.

Net cash provided by financing activities totaled $805.6 million for the year ended December 31, 2007 and included proceeds of $1.2 billion in bridge financing, $1.05 billion from the issuance of common stock, $176.6 million of net borrowings on our unsecured revolving credit facility and our previous Canadian credit facility and $53.8 million from the issuance of other debt. Uses consisted of (i) $1.2 billion for repayment of the bridge financing, (ii) $286.2 million of cash dividend payments to common and preferred stockholders and (iii) $184.6 million of aggregate principal payments on mortgage obligations.

Contractual Obligations

The following table summarizes the effect that minimum debt (which includes principal and interest payments) and other material noncancelable commitments are expected to have on our cash flow in future periods as of December 31, 2008.

 

    Total   Less than
1 year (4)
  1-3 years (5)   3-5 years (6)   More than
5 years (7)
    (In thousands)

Long-term debt obligations (1) (2)

  $ 4,205,902   $ 361,750   $ 1,248,611   $ 902,735   $ 1,692,806

Acquisition commitments (3)

    17,093     17,093     —       —       —  

Operating and ground lease obligations

    83,180     1,426     2,421     2,059     77,274
                             

Total

  $ 4,306,175   $ 380,269   $ 1,251,032   $ 904,794   $ 1,770,080
                             

 

(1) Amounts represent contractual amounts due, including interest. Includes $300.2 million outstanding on our unsecured revolving credit facilities; we had $176.8 million of unrestricted cash and cash equivalents at December 31, 2008.
(2) Interest on variable rate debt was based on forward rates obtained as of December 31, 2008.
(3) Includes commitments for the purchase of one hospital and additional fundings related to our two MOBs that were under development at December 31, 2008.
(4) Includes $49.8 million outstanding principal amount of the 2009 Senior Notes.
(5) Includes outstanding principal amounts of $123.0 million of the 2010 Senior Notes, $230.0 million of the Convertible Notes and $300.2 million under our unsecured revolving credit facilities that mature in 2010; we had $176.8 million in unrestricted cash and cash equivalents at December 31, 2008.
(6) Includes $191.8 million outstanding principal amount of the 2012 Senior Notes.
(7) Includes outstanding principal amounts of $175.0 million of the 2014 Senior Notes, $170.0 million of the 2015 Senior Notes, $200.0 million of the 2016 Senior Notes and $225.0 million of the 2017 Senior Notes.

 

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As of December 31, 2008, we had $12.9 million of unrecognized tax benefits under the provisions of FIN 48 that have been excluded from the table above, as we are unable to make a reasonable reliable estimate of the period of cash settlement, if any, with the respective tax authority.

 

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

The information set forth in Item 7 of this Annual Report on Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asset/Liability Management” is incorporated by reference into this Item 7A.

 

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ITEM 8. Financial Statements and Supplementary Data

Ventas, Inc.

Index to Consolidated Financial Statements and Financial Statement Schedules

 

Management Report on Internal Control over Financial Reporting

   72

Report of Independent Registered Public Accounting Firm

   73

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

   74

Consolidated Balance Sheets as of December 31, 2008 and 2007

   75

Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006

   76

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006

   77

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006

   78

Notes to Consolidated Financial Statements

   79

Consolidated Financial Statement Schedule

  

Schedule III—Real Estate and Accumulated Depreciation

   127

 

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Ventas, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has determined that the Company’s internal control over financial reporting as of December 31, 2008 was effective.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included herein.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Ventas, Inc.

We have audited the accompanying consolidated balance sheets of Ventas, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the accompanying index to the financial statements and schedule. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ventas, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in 2006 Ventas, Inc. changed its method of accounting for stock-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ventas Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

26 February 2009

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Stockholders and Board of Directors

Ventas, Inc.

We have audited Ventas, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Ventas, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Ventas, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2008 consolidated financial statements and financial statement schedule of Ventas, Inc. and our report dated February 26, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Chicago, Illinois

26 February 2009

 

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VENTAS, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2008 and 2007

(In thousands, except per share amounts)

 

     2008     2007  

Assets

    

Real estate investments:

    

Land

   $ 555,015     $ 572,092  

Buildings and improvements

     5,593,024       5,718,273  

Construction in progress

     12,591       1,816  
                
     6,160,630       6,292,181  

Accumulated depreciation

     (987,691 )     (816,352 )
                

Net real estate property

     5,172,939       5,475,829  

Loans receivable, net

     123,289       19,998  
                

Net real estate investments

     5,296,228       5,495,827  

Cash and cash equivalents

     176,812       28,334  

Escrow deposits and restricted cash

     55,866       54,077  

Deferred financing costs, net

     20,598       22,836  

Notes receivable-related parties

     —         2,092  

Other

     220,480       113,462  
                

Total assets

   $ 5,769,984     $ 5,716,628  
                

Liabilities and stockholders’ equity

    

Liabilities:

    

Senior notes payable and other debt

   $ 3,147,694     $ 3,360,499  

Deferred revenue

     7,057       9,065  

Accrued interest

     21,931       20,790  

Accounts payable and other accrued liabilities

     168,198       173,576  

Deferred income taxes

     257,499       297,590  
                

Total liabilities

     3,602,379       3,861,520  

Minority interest

     19,137       31,454  

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, $1.00 par value; 10,000 shares authorized, unissued

     —         —    

Common stock, $0.25 par value; 300,000 shares authorized; 143,302 and 133,665 shares issued at December 31, 2008 and 2007, respectively

     35,825       33,416  

Capital in excess of par value

     2,244,596       1,821,294  

Accumulated other comprehensive (loss) income

     (21,089 )     17,416  

Retained earnings (deficit)

     (110,407 )     (47,846 )

Treasury stock, 15 and 14 shares at December 31, 2008 and 2007, respectively

     (457 )     (626 )
                

Total stockholders’ equity

     2,148,468       1,823,654  
                

Total liabilities and stockholders’ equity

   $ 5,769,984     $ 5,716,628  
                

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands, except per share amounts)

 

     2008     2007     2006

Revenues:

      

Rental income

   $ 487,436     $ 465,069     $ 388,167

Resident fees and services

     429,257       282,226       —  

Income from loans and investments

     8,847       2,586       7,014

Interest and other income

     4,226       2,839       2,770
                      

Total revenues

     929,766       752,720       397,951

Expenses:

      

Interest

     203,184       195,731       128,953

Depreciation and amortization

     231,802       227,463       110,754

Property-level operating expenses

     306,944       198,125       3,171

General, administrative and professional fees (including non-cash stock-based compensation expense of $9,976, $7,493 and $3,046 for the years ended December 31, 2008, 2007 and 2006, respectively)

     40,651       36,425       26,136

Foreign currency gain

     (162 )     (24,280 )     —  

(Gain) loss on extinguishment of debt

     (2,398 )     (88 )     1,273

Merger-related expenses

     4,460       2,979       —  

Rent reset costs

     —         —         7,361
                      

Total expenses

     784,481       636,355       277,648
                      

Income before reversal of contingent liability, income taxes, minority interest and discontinued operations

     145,285       116,365       120,303

Reversal of contingent liability

     23,328       —         1,769

Income tax benefit, net of minority interest

     15,885       28,042       —  
                      

Income before minority interest and discontinued operations

     184,498       144,407       122,072

Minority interest, net of tax

     2,684       1,698       —  
                      

Income from continuing operations

     181,814       142,709       122,072

Discontinued operations

     44,474       139,609       9,358
                      

Net income

     226,288       282,318       131,430

Preferred stock dividends and issuance costs

     —         5,199       —  
                      

Net income applicable to common shares

   $ 226,288     $ 277,119     $ 131,430
                      

Earnings per common share:

      

Basic:

      

Income from continuing operations applicable to common shares

   $ 1.30     $ 1.12     $ 1.17

Discontinued operations

     0.32       1.14       0.09
                      

Net income applicable to common shares

   $ 1.62     $ 2.26     $ 1.26
                      

Diluted:

      

Income from continuing operations applicable to common shares

   $ 1.30     $ 1.12     $ 1.16

Discontinued operations

     0.32       1.13       0.09
                      

Net income applicable to common shares

   $ 1.62     $ 2.25     $ 1.25
                      

Weighted average shares used in computing earnings per common share:

      

Basic

     139,572       122,597       104,206

Diluted

     139,912       123,012       104,731

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands, except per share amounts)

 

    Common
Stock Par
Value
  Capital in
Excess of
Par Value
    Unearned
Compensation
on Restricted
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Treasury
Stock
    Total  

Balance at January 1, 2006

  $ 25,927   $ 692,650     $ (713 )   $ (143 )   $ (50,402 )   $ —       $ 667,319  

Comprehensive Income:

             

Net income applicable to common shares

    —       —         —         —         131,430       —         131,430  

Unrealized gain on interest rate swap

    —       —         —         810       —         —         810  

Reclassification adjustment for realized gain on interest rate swap included in net income during the year

    —       —         —         (359 )     —         —         (359 )

Unrealized gain on marketable securities

    —       —         —         729       —         —         729  
                   

Comprehensive income

    —       —         —         —         —         —         132,610  

Dividends to common stockholders—$1.58 per share

    —       —         —         —         (165,204 )     —         (165,204 )

Issuance of common stock

    427     64,573       —         —         —         —         65,000  

Issuance of common stock for stock plans

    191     9,545       —         —         —         170       9,906  

Grant of restricted stock, net of forfeitures

    —       415       —         —         —         (170 )     245  

Reclassification of unearned compensation on restricted stock to capital in excess of par value

    —       (713 )     713       —         —         —         —    
                                                     

Balance at December 31, 2006

    26,545     766,470       —         1,037       (84,176 )     —         709,876  

Comprehensive Income:

             

Net income applicable to common shares

    —       —         —         —         277,119       —         277,119  

Foreign currency translation

    —       —         —         18,651       —         —         18,651  

Unrealized loss on interest rate swap

    —       —         —         (995 )     —         —         (995 )

Reclassification adjustment for realized gain on interest rate swap included in net income during the year

    —       —         —         (548 )     —         —         (548 )

Realized gain on marketable securities

    —       —         —         (729 )     —         —         (729 )
                   

Comprehensive income

    —       —         —         —         —         —         293,498  

Dividends to common stockholders—$1.90 per share

    —       —         —         —         (240,789 )     —         (240,789 )

Issuance of common stock

    6,727     1,038,986       —         —         —         —         1,045,713  

Issuance of common stock for stock plans

    106     15,395       —         —         —         434       15,935  

Grant of restricted stock, net of forfeitures

    38     443       —         —         —         (1,060 )     (579 )
                                                     

Balance at December 31, 2007

    33,416     1,821,294       —         17,416       (47,846 )     (626 )     1,823,654  

Comprehensive Income:

             

Net income applicable to common shares

    —       —         —         —         226,288       —         226,288  

Foreign currency translation

    —       —         —         (26,142 )     —         —         (26,142 )

Unrealized loss on interest rate swaps

    —       —         —         (579 )     —         —         (579 )

Reclassification adjustment for realized loss on interest rate swap included in net income during the year

    —       —         —         1,103       —         —         1,103  

Unrealized loss on marketable debt securities

    —       —         —         (12,887 )     —         —         (12,887 )
                   

Comprehensive income

    —       —         —         —         —         —         187,783  

Dividends to common stockholders—$2.05 per share

    —       —         —         —         (288,849 )     —         (288,849 )

Issuance of common stock

    2,309     406,231       —         —         —         —         408,540  

Issuance of common stock for stock plans

    64     15,901       —         —         —         1,047       17,012  

Grant of restricted stock, net of forfeitures

    36     1,170       —         —         —         (878 )     328  
                                                     

Balance at December 31, 2008

  $ 35,825   $ 2,244,596     $ —       $ (21,089 )   $ (110,407 )   $ (457 )   $ 2,148,468  
                                                     

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands)

 

    2008     2007     2006  

Cash flows from operating activities:

     

Net income

  $ 226,288     $ 282,318     $ 131,430  

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation and amortization (including amounts in discontinued operations)

    235,754       235,045       119,653  

Amortization of deferred revenue and lease intangibles, net

    (9,344 )     (9,819 )     (2,412 )

Other amortization expenses

    309       2,456       3,253  

Stock-based compensation

    9,976       7,493       3,046  

Straight-lining of rental income

    (14,652 )     (17,311 )     (19,963 )

Reversal of contingent liability

    (23,328 )     —         (1,769 )

(Gain) loss on extinguishment of debt

    (168 )     —         1,273  

Gain on sale of assets (including amounts in discontinued operations)

    (39,026 )     (129,478 )     —    

Net gain on sale of marketable equity securities

    —         (864 )     (1,379 )

Loss on bridge financing

    —         2,550       —    

Income tax benefit

    (15,885 )     (28,042 )     —    

Provision for loan losses

    5,994       —         —    

Other

    3,298       222       488  

Changes in operating assets and liabilities:

     

(Increase) decrease in other assets

    (3,541 )     47,528       (41,684 )

Increase (decrease) in accrued interest

    1,100       (4,906 )     5,511  

(Decrease) increase in accounts payable and other liabilities

    (12,600 )     14,434       41,420  
                       

Net cash provided by operating activities

    364,175       401,626       238,867  

Cash flows from investing activities:

     

Net investment in real estate property

    (53,801 )     (1,348,354 )     (490,311 )

Proceeds from real estate disposals

    104,183       157,400       —    

Investment in loans receivable

    (108,826 )     —         (191,068 )

Purchase of marketable debt securities

    (63,680 )     —         —    

Proceeds from sale of securities

    —         7,773       —    

Proceeds from loans receivable

    135       15,803       195,411  

Capital expenditures

    (16,359 )     (8,188 )     (368 )

Escrow funds returned from an Internal Revenue Code Section 1031 exchange

    —         —         9,902  

Purchase of marketable equity securities

    —         —         (5,530 )

Other

    2,092       374       (10 )
                       

Net cash used in investing activities

    (136,256 )     (1,175,192 )     (481,974 )

Cash flows from financing activities:

     

Net change in borrowings under revolving credit facilities

    73,366       176,586       (32,200 )

Issuance of bridge financing

    —         1,230,000       —    

Repayment of bridge financing

    —         (1,230,000 )     —    

Proceeds from debt

    140,262       53,832       449,005  

Repayment of debt

    (416,896 )     (184,613 )     (16,084 )

Debt and preferred stock issuance costs

    —         (4,300 )     —    

Payment of deferred financing costs

    (3,857 )     (7,856 )     (4,876 )

Issuance of common stock, net

    408,540       1,045,713       831  

Cash distribution to preferred stockholders

    —         (3,449 )     —    

Cash distribution to common stockholders

    (288,849 )     (282,739 )     (160,598 )

Other

    7,187       12,475       6,634  
                       

Net cash (used in) provided by financing activities

    (80,247 )     805,649       242,712  
                       

Net increase (decrease) in cash and cash equivalents

    147,672       32,083       (395 )

Effect of foreign currency translation on cash and cash equivalents

    806       (4,995 )     —    

Cash and cash equivalents at beginning of year

    28,334       1,246       1,641  
                       

Cash and cash equivalents at end of year

  $ 176,812     $ 28,334     $ 1,246  
                       

Supplemental disclosure of cash flow information:

     

Interest paid including swap payments and receipts

  $ 202,360     $ 207,478     $ 133,653  

Supplemental schedule of non-cash activities:

     

Assets and liabilities assumed from acquisitions:

     

Real estate investments

  $ 33,967     $ 1,199,787     $ 189,262  

Other assets acquired

    1,684       157,865       835  

Debt assumed

    34,629       970,301       125,633  

Deferred taxes

    —         306,225       —    

Minority interest

    685       32,730       —    

Other liabilities

    337       48,396       (536 )

Issuance of common stock

    —         —         65,000  

See accompanying notes.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Description of Business

Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”) is a real estate investment trust (“REIT”) with a geographically diverse portfolio of seniors housing and healthcare properties in the United States and Canada. As of December 31, 2008, this portfolio consisted of 513 assets: 248 seniors housing communities, 192 skilled nursing facilities, 41 hospitals and 32 medical office buildings (“MOBs”) and other properties in 43 states and two Canadian provinces. With the exception of 79 of our seniors housing communities that are managed by Sunrise Senior Living, Inc. (together with its subsidiaries, “Sunrise”) pursuant to long-term management agreements and the majority of our MOBs, we lease our properties to healthcare operating companies under “triple-net” or “absolute net” leases, which require the tenants to pay all property-related expenses. Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) leased 203 of our properties and Brookdale Senior Living Inc. (together with its subsidiaries, which include Brookdale Living Communities, Inc. (“Brookdale”) and Alterra Healthcare Corporation (“Alterra”), “Brookdale Senior Living”) leased 83 of our properties as of December 31, 2008. We also had real estate loan investments relating to seniors housing and healthcare third parties as of December 31, 2008.

We conduct substantially all of our business through our wholly owned subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”), PSLT OP, L.P. and Ventas SSL, Inc., and ElderTrust Operating Limited Partnership (“ETOP”), in which we own substantially all of the partnership units. Our primary business consists of acquiring, financing and owning seniors housing and healthcare properties and leasing those properties to third parties or operating those properties through independent third party managers.

Note 2—Accounting Policies

Principles of Consolidation

The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries and joint venture entities over which we exercise control. All intercompany transactions and balances have been eliminated in consolidation, and net earnings are reduced by the portion of net earnings applicable to minority interests.

Accounting Estimates

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

Long-Lived Assets and Intangibles

Investments in real estate assets are recorded at cost. We account for acquisitions using the purchase method. The cost of the properties acquired is allocated among tangible and recognized intangible assets and liabilities based upon estimated fair values in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” We estimate fair values of the components of assets and liabilities acquired as of the acquisition date. Recognized intangibles include the value of acquired lease contracts, management agreements and related customer relationships.

Our method for determining fair value varies with the categorization of the asset or liability acquired. We estimate the fair value of buildings on an as-if-vacant basis, and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets based upon the replacement cost and depreciate such value over their estimated remaining useful lives. We determine the value of land either

 

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based on real estate tax assessed values in relation to the total value of the asset or internal analyses of recently acquired and existing comparable properties within our portfolio. The fair value of in-place leases, if any, reflects (i) above and/or below market leases, if any, determined by discounting the difference between the estimated current market rent and the in-place rentals, the resulting intangible asset or liability of which is amortized to revenue over the remaining life of the associated lease plus any fixed rate renewal periods, if applicable, (ii) the estimated value of the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, which is amortized over the remaining life of the associated lease, and (iii) an estimated value of the absorption period to reflect the value of the rents and recovery costs foregone during a reasonable lease-up period, as if the acquired space was vacant, which is amortized over the remaining life of the associated lease. We also estimate the value of tenant or other customer relationships acquired by considering the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, expectations of lease renewals with the tenant, and the potential for significant, additional future leasing arrangements with the tenant. We amortize such value over the expected term of the associated arrangements or leases, which would include the remaining lives of the related leases and any expected renewal periods. The fair value of long-term debt is calculated by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings. Discount rates are approximated based on the rate we estimate we would incur to replace each instrument on the date of acquisition. Any fair value adjustments related to long-term debt are recognized as effective yield adjustments over the remaining term of the instrument.

Fixtures and equipment, with a net book value of $73.3 million and $110.2 million at December 31, 2008 and 2007, respectively, is included in net real estate property on our Consolidated Balance Sheets. Depreciation is recorded on the straight-line basis, using estimated useful lives ranging from 20 to 50 years for buildings and improvements and three to ten years for fixtures and equipment. Depreciation is discontinued when a property is identified as held for sale.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, primarily consisting of our investments in real estate, for impairment indicators in accordance with SFAS No. 144 “Accounting for the Impairment and Disposal of Long-Lived Assets.” If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations. We adjust the net book value of leased properties and other long-lived assets to fair value, if the sum of the expected future undiscounted cash flows including sales proceeds is less than book value. An impairment loss is recognized at the time we make any such determination. Future events could occur which would cause us to conclude that impairment indicators exist and an impairment loss is warranted. We did not record any impairment charges for the years ended December 31, 2008, 2007 and 2006.

Assets Held for Sale and Discontinued Operations

Certain long-lived assets are classified as held-for-sale in accordance with SFAS No. 144. Long-lived assets to be disposed of are reported at the lower of their carrying amount or their fair value less cost to sell and are no longer depreciated. Discontinued operations is defined in SFAS No. 144 as a component of an entity that has either been disposed of or is deemed to be held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. We have classified six assets totaling $62.5 million as assets held for sale and recorded these assets as a component of other assets on the Consolidated Balance Sheets as of December 31, 2008. As of December 31, 2008, $38.8 million of mortgage debt related to these assets was recorded as a component of senior notes payable and other debt on the Consolidated Balance Sheets. The operations for these assets are included as a component of discontinued operations on the Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006. The results of operations and gain or loss on assets sold or held for sale are reflected in our

 

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Consolidated Statements of Income as discontinued operations for all periods presented. Interest expense allocated to discontinued operations has been estimated based on a proportional allocation of rental income and identified mortgage interest, or some combination thereof.

Loans Receivable

Loans receivable are stated at the unpaid principal balance net of any deferred origination fees, purchase discounts or premiums and/or valuation allowances. Net deferred origination fees are comprised of loan fees collected from the borrower net of certain direct costs. Net deferred origination fees and purchase discounts or premiums are amortized to income over the contractual life of the loan using the effective interest method. We evaluate the collectibility of loans and other amounts receivable from third parties based on a number of factors, including (i) corporate and facility-level financial and operational reports, (ii) compliance with the financial covenants set forth in the loan or lease agreement, (iii) the financial stability of the applicable borrower or tenant and any guarantor, (iv) the payment history of the borrower or tenant, and (v) current economic conditions. Our level of reserves, if any, for loans and other amounts receivable from third parties fluctuates depending upon all of these factors. The valuation allowance for loan losses was $5.5 million and $0 million at December 31, 2008 and 2007, respectively. See “Note 8—Loans Receivable.”

Cash Equivalents

Cash equivalents consist of highly liquid investments with a maturity date of three months or less when purchased. These investments are stated at cost, which approximates fair value.

Escrow Deposits and Restricted Cash

Escrow deposits consist of amounts held by us or lenders to provide for future real estate tax and insurance expenditures and tenant improvements related to our operations and properties. Restricted cash represents amounts paid to us for security deposits and other purposes.

Deferred Financing Costs

Deferred financing costs are amortized as a component of interest expense over the terms of the related borrowings using a method that approximates a level yield, and are net of accumulated amortization of approximately $19.0 million and $13.5 million at December 31, 2008 and 2007, respectively. Amortized costs of approximately $7.1 million, $5.5 million and $3.3 million were included in interest expense for the years ended December 31, 2008, 2007 and 2006, respectively.

Marketable Debt and Equity Securities

We record marketable debt and equity securities as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are classified as a component of other assets on our Consolidated Balance Sheets. These securities are recorded at fair market value, with unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. Interest income, including discount or premium amortization, on marketable debt securities and gains or losses on securities sold, which are based on the specific identification method, are reported in income from loans and investments on our Consolidated Statements of Income. During the years ended December 31, 2008, 2007 and 2006, we realized gains related to the sale of various equity securities of $0, $0.9 million and $1.4 million, respectively.

Derivative Instruments

We use derivative instruments to protect against the risk of interest rate movements on future cash flows under our variable rate debt agreements and the risk of foreign currency exchange rate movements. In accordance

 

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with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” as amended, derivative instruments are reported at fair value on our Consolidated Balance Sheets. Changes in the fair value of derivatives are recognized as adjustments to net income if the derivative does not qualify for hedge accounting. If the derivative is deemed to be eligible for hedge accounting, such changes are reported in accumulated other comprehensive income, exclusive of ineffectiveness amounts, which are recognized as adjustments to net income.

In January 2007, we entered into two Canadian call options in conjunction with our agreement to acquire the assets of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”). See “Note 5—Acquisitions.” We paid an aggregate purchase price of $8.5 million for these contracts, which had an aggregate notional call amount of Cdn $750.0 million at a Cdn $1.18 strike price. These contracts were settled on April 26, 2007, the acquisition date, and we received cash of $33.2 million upon settlement. For the year ended December 31, 2007, we recognized gains related to these call option contracts of $24.7 million, which is included in our Consolidated Statements of Income as a foreign currency gain.

Fair Values of Financial Instruments

The following methods and assumptions were used in estimating fair value disclosures for financial instruments.

 

   

Cash and cash equivalents: The carrying amount of cash and cash equivalents, which is unrestricted, reported in our Consolidated Balance Sheets approximates fair value because of the short maturity of these instruments.

 

   

Loans receivable: The fair value of loans receivable is estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. See discussion above regarding valuation allowances for loan losses.

 

   

Notes receivable-related parties: The fair value of notes receivable-related parties is estimated using a discounted cash flow analysis, using interest rates being offered for similar loans to borrowers with similar credit ratings.

 

   

Senior notes payable and other debt: The fair values of borrowings are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made by us.

Revenue Recognition

Certain of our leases, excluding our master lease agreements with Kindred (the “Kindred Master Leases”) but including the majority of our leases with Brookdale Senior Living, provide for periodic and determinable increases in base rent. Base rental revenues under these leases are recognized on a straight-line basis over the terms of the applicable lease. Income on our straight-line revenue is recognized when collectibility is reasonably assured. In the event we determine that collectibility of straight-line revenue is not reasonably assured, we establish an allowance for estimated losses. Recognizing rental income on a straight-line basis results in recognized revenue exceeding cash amounts contractually due from our tenants during the first half of the term for leases that have straight-line treatment. The cumulative excess is included in other assets, net of allowances, on our Consolidated Balance Sheets and totaled $68.2 million and $54.5 million at December 31, 2008 and 2007, respectively.

Certain of our other leases, including the Kindred Master Leases, provide for an annual increase in rental payments only if certain revenue parameters or other substantive contingencies are met. We recognize the increased rental revenue under these leases only if the revenue parameters or other substantive contingencies are met, rather than on a straight-line basis over the term of the applicable lease. We recognize income from rent, lease termination fees and other income when all of the following criteria are met in accordance with the

 

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Securities and Exchange Commission (the “Commission”) Staff Accounting Bulletin 104: (i) the agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) collectibility is reasonably assured.

Resident fees and services are recognized monthly as services are provided. Move-in fees, a component of resident fees and services, are recognized on a straight-line basis over the term of the applicable lease agreement. Lease agreements with residents generally have a term of one year and are cancelable by the resident with 30 days’ notice.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123, except that SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under SFAS No. 123(R). See “Note 11—Stock-Based Compensation.”

Gain on Sale of Assets

We recognize sales of assets only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets on our Consolidated Balance Sheets. Gains on assets sold are recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform significant activities after the sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under SFAS No. 66, “Accounting for Sales of Real Estate.”

Federal Income Tax

Since we have elected to be treated as a real estate investment trust (“REIT”) under the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), prior to our acquisition of the assets of Sunrise REIT in April 2007 we made no provision for federal income tax purposes, and we will continue to make no provision for REIT income and expense. As a result of the Sunrise REIT acquisition, we now record income tax expense or benefit with respect to certain of our entities which are taxed as “taxable REIT subsidiaries” under provisions similar to those applicable to regular corporations and not under the REIT provisions.

Deferred income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. An increase or decrease in the deferred tax liability that results from a change in circumstances, and which causes a change in our judgment about expected future tax consequences of events, would be included in the tax provision when the changes in circumstances and our judgment occurs. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. An increase or decrease in the valuation allowance that results from a change in circumstances, and which causes a change in our judgment about the realizability of the related deferred tax asset, would be included in the tax provision when the changes in circumstances and our judgment occurs.

 

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Foreign Currency

Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. We translate the results of operations of our foreign subsidiaries into U.S. dollars using average rates of exchange in effect during the period, whereas balance sheet accounts are translated using exchange rates in effect at the end of the period. Resulting currency translation adjustments are recorded in accumulated other comprehensive income, a component of stockholders’ equity, in our Consolidated Balance Sheets. Transaction gains and losses are recorded in our Consolidated Statements of Income.

Segment Reporting

As of December 31, 2008, we operated through two reportable business segments: triple-net leased properties and senior living operations. Our triple-net leased properties segment consists of acquiring, financing and owning seniors housing and healthcare properties in the United States and leasing those properties to healthcare operating companies under “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our senior living operations segment consists of investments in seniors housing communities located in the United States and Canada for which we engage Sunrise to manage the operations.

We acquired the senior living operations segment on April 26, 2007, pursuant to the purchase of the Sunrise REIT properties. With the addition of these properties, we believed segment differentiation would be appropriate based on the different economic and legal structures used to acquire and own those assets. Prior to the acquisition, we operated through one reportable segment—investment in real estate—which included the triple-net leased properties and our MOBs. Our MOB business consists of leasing space primarily to physicians and other healthcare businesses and engaging third parties to manage those operations. Due to our limited operation of and allocation of capital to the MOBs, we separated them from the triple-net leased properties segment. However, the MOB segment is not individually reported and is included in “All Other” because it does not meet the quantitative thresholds of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” at the current time. See “Note 19—Segment Information.”

Recently Adopted Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes when it is uncertain how an income or expense item should be treated on an income tax return. FIN 48 describes when and in what amount an uncertain tax item should be recorded in the financial statements and provides guidance on recording interest and penalties and accounting and reporting for income taxes in interim periods. We adopted FIN 48 on January 1, 2007. See “Note 12—Income Taxes.”

On January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value and provides guidance for measuring fair value and the necessary disclosures. SFAS No. 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The adoption did not have a material impact on our Consolidated Financial Statements.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).

Level one inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level two inputs are inputs other than quoted prices included in level one that are

 

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observable for the asset or liability, either directly or indirectly. Level two inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other than quoted prices, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level three inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

We determined the valuation of our current investments in marketable securities using level one inputs, which utilize quoted prices in active markets for identical assets or liabilities that we have the ability to access. Additionally, we determined the valuation allowance for loan losses recorded in 2008 based off of level three inputs. See “Note 8—Loans Receivable.”

In February 2008, the FASB issued Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”), which delays the adoption date of SFAS No. 157 for nonfinancial assets and liabilities. We adopted FSP No. 157-2 on January 1, 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

On January 1, 2009, we adopted SFAS No. 141(R), “Business Combinations,” SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” and FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”).

SFAS No. 141(R) requires the acquiring entity in a business combination to measure the assets acquired, liabilities assumed (including contingencies) and any noncontrolling interests at their fair values on the acquisition date. The statement also requires that acquisition-related transaction costs be expensed as incurred, that acquired research and development value be capitalized and that acquisition-related restructuring costs be capitalized only if they meet certain criteria. SFAS No. 141(R) did not have a material impact on our Consolidated Financial Statements at the time of adoption.

SFAS No. 160 changes the reporting for minority interests, which now must be characterized as noncontrolling interests and classified as a component of consolidated equity. The calculation of income and earnings per share continues to be based on income amounts attributable to the parent and is characterized as net income from controlling interests. As the ownership of a subsidiary increases or decreases, SFAS No. 160 requires any difference between the consideration paid and the adjustment to the noncontrolling interest balance be recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest. The adoption did not have a material impact on our Consolidated Financial Statements.

 

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APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The following table summarizes the impact that the adoption of APB 14-1 is expected to have on our Consolidated Financial Statements.

 

As Reported

   2008     2007     2006  
     (In thousands, except per share amounts)  

Deferred financing costs, net

   $ 20,598     $ 22,836     $ 18,415  

Senior notes payable and other debt

     3,147,694       3,360,499       2,329,053  

Capital in excess of par value

     2,244,596       1,821,294       766,470  

Retained earnings (deficit)

     (110,407 )     (47,846 )     (84,176 )

Interest expense

     203,184       195,731       128,953  

Net income applicable to common shares

     226,288       277,119       131,430  

Earnings per common share—diluted

     1.62       2.25       1.25  

As Adjusted

   2008     2007     2006  
     (In thousands, except per share amounts)  

Deferred financing costs, net

   $ 22,032     $ 24,683     $ 20,636  

Senior notes payable and other debt

     3,136,998       3,346,530       2,312,020  

Capital in excess of par value

     2,264,125       1,840,823       785,999  

Retained earnings (deficit)

     (114,092 )     (51,284 )     (84,452 )

Interest expense

     206,869       199,169       129,229  

Net income applicable to common shares

     222,603       273,681       131,154  

Earnings per common share—diluted

     1.59       2.22       1.25  

The adoption of APB 14-1 did not have any impact on our Consolidated Financial Statements for any years prior to 2006.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 3—Revenues from Properties

Triple-Net Leased Properties

Approximately 25.5%, 30.8% and 51.6% of our total revenues and 38.0%, 41.5% and 52.3% of our total NOI (net operating income) (including amounts in discontinued operations) for the years ended December 31, 2008, 2007 and 2006, respectively, were derived from our four Kindred Master Leases.

Approximately 12.8%, 15.7% and 28.6% of our total revenues and 19.2%, 21.2% and 29.0% of our total NOI (including amounts in discontinued operations) for the years ended December 31, 2008, 2007 and 2006, respectively, were derived from our lease agreements with Brookdale Senior Living. Each of the Kindred Master Leases and our leases with Brookdale Senior Living is a triple-net lease pursuant to which the tenant is required to pay all insurance, taxes, utilities and maintenance and repairs related to the properties. In addition, the tenants are required to comply with the terms of the mortgage financing documents, if any, affecting the properties.

Each of Kindred and Brookdale Senior Living is subject to the reporting requirements of the Commission and is required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Kindred and Brookdale Senior Living contained or referred to in this Annual Report on Form 10-K is derived from filings made by Kindred or

 

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Brookdale Senior Living, as the case may be, with the Commission or other publicly available information, or has been provided to us by Kindred or Brookdale Senior Living. We have not verified this information either through an independent investigation or by reviewing Kindred’s or Brookdale Senior Living’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Kindred’s and Brookdale Senior Living’s filings with the Commission can be found at the Commission’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s and Brookdale Senior Living’s publicly available filings from the Commission.

Kindred Master Leases.    Under each Kindred Master Lease, the aggregate annual rent is referred to as Base Rent (as defined in the applicable Kindred Master Lease). Base Rent escalates on May 1 of each year at a specified rate over the Prior Period Base Rent (as defined in the applicable Kindred Master Lease), contingent upon the satisfaction of the specified facility revenue parameters. The annual rent escalator is 2.7% under Kindred Master Leases 1, 3 and 4, and is based on year-over-year changes in the Consumer Price Index, with a floor of 2.25% and a ceiling of 4%, under Kindred Master Lease 2, in all cases contingent only upon satisfaction of the aforementioned revenue parameters.

The properties leased to Kindred pursuant to the Kindred Master Leases are grouped into bundles, with each bundle containing a varying number of properties. All properties within a bundle have primary terms ranging from ten to fifteen years from May 1, 1998 and, provided certain conditions are satisfied, are subject to three five-year renewal terms. Kindred has renewed, through April 30, 2013, its leases covering all 57 assets owned by us whose initial base term expired on April 30, 2008. The term for each of ten bundles will expire on April 30, 2010 unless Kindred provides us with a renewal notice with respect to such individual bundle, on or before April 30, 2009. The ten bundles expiring in 2010 contain an aggregate of 109 properties, currently representing $123.9 million of annual Base Rent. Each bundle covers six to 20 assets, including at least one hospital. Kindred is required to continue to perform all of its obligations under the applicable lease for any assets that are not renewed until expiration of the term on April 30, 2010, including without limitation, payment of all rental amounts. For any assets that are not renewed, we will have at least one year to arrange for the repositioning of such assets with new operators. We own or have the rights to all licenses and CONs at the properties, and Kindred has extensive and detailed obligations to cooperate and ensure an orderly transition of all properties to another operator. We cannot assure you that we would be successful in identifying suitable replacement operators or that we will be able to enter into leases with new tenants or operators on terms as favorable to us as our current leases, if at all.

Brookdale Senior Living Leases.    Our leases with Brookdale have primary terms of fifteen years, commencing either January 28, 2004 (in the case of fifteen “Grand Court” properties we acquired in early 2004) or October 19, 2004 (in the case of the properties we acquired in connection with the Provident acquisition), and, provided certain conditions are satisfied, are subject to two ten-year renewal terms. Our leases with Alterra also have primary terms of fifteen years, commencing either October 20, 2004 or December 16, 2004 (both in the case of properties we acquired in connection with the Provident acquisition), and, provided certain conditions are satisfied, are subject to two five-year renewal terms. Brookdale Senior Living guarantees all obligations under these leases, and all of our Brookdale Senior Living leases are cross-defaulted.

Under the terms of the Brookdale leases assumed in connection with the Provident acquisition, Brookdale is obligated to pay base rent, which escalates on January 1 of each year, by an amount equal to the lesser of (i) four times the percentage increase in the Consumer Price Index during the immediately preceding year or (ii) 3%. Under the terms of the Brookdale leases with respect to the “Grand Court” properties, Brookdale is obligated to pay base rent, which escalates on February 1 of each year, by an amount equal to the greater of (i) 2% or (ii) 75% of the increase in the Consumer Price Index during the immediately preceding year. Under the terms of the Alterra leases, Alterra is obligated to pay base rent, which escalates either on January 1 or November 1 of each year by an amount equal to the lesser of (i) four times the percentage increase in the Consumer Price Index during the immediately preceding year or (ii) 2.5%. We recognize rent revenue under the Brookdale and Alterra leases on a straight-line basis. See “Note 13—Commitments and Contingencies.”

 

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The future contracted minimum rentals, excluding contingent rent escalations, but with straight-line rents where applicable, for all of our triple-net leases are as follows:

 

     Kindred    Brookdale
Senior
Living
   Other    Total
     (In thousands)

2009

   $ 241,724    $ 120,422    $ 99,988    $ 462,134

2010

     159,156      120,421      101,101      380,678

2011

     117,873      120,428      102,826      341,127

2012

     117,873      120,435      104,532      342,840

2013

     39,291      120,443      104,289      264,023

Thereafter

     —        702,406      684,075      1,386,481
                           

Total

   $ 675,917    $ 1,304,555    $ 1,196,811    $ 3,177,283
                           

Senior Living Operations

Approximately 20.0% of our EBITDA (earnings before interest, taxes, depreciation and amortization) and 45.4% of our total revenues (including amounts in discontinued operations) for the year ended December 31, 2008 were attributable to senior living operations managed by Sunrise. Approximately 36.2% of our total revenues (including amounts in discontinued operations) for the year ended December 31, 2007 were attributable to senior living operations managed by Sunrise for the period from April 26, 2007 (the date of the Sunrise REIT acquisition) through December 31, 2007.

We are party to management agreements with Sunrise pursuant to which Sunrise currently provides comprehensive property management and accounting services with respect to 79 of our seniors housing communities. Each management agreement has a term of 30 years from its effective date, the earliest of which began in 2004. Pursuant to the management agreements, we pay Sunrise a base management fee of 6% of resident fees and similar revenues, subject to reduction based on below target performance relative to NOI for a pool of properties. The minimum management fee assessable under these agreements is 5% of resident fees and similar revenues of the properties. We also pay incentive fees if a pool of properties exceeds aggregate performance targets relative to NOI; provided, however, that total management fees, including incentive fees, shall not exceed 8% of resident fees and similar revenues. In 2008, we paid a 5.75% management fee for 71 properties and management fees of between 6% and 10.4% for eight properties. The management agreements also specify that we (or the joint venture to which we are party, as applicable) will reimburse Sunrise for direct or indirect costs necessary to manage our seniors housing communities.

We may terminate our management agreements upon the occurrence of an event of default by Sunrise in the performance of a material covenant or term thereof (including the revocation of any licenses or certificates necessary for operation), subject in each case to Sunrise’s rights to cure deficiencies. Each management agreement may also be terminated upon the occurrence of certain insolvency events relating to Sunrise. In addition, if a minimum number of properties fail to achieve a targeted NOI level for a given period, then we may terminate the management agreement on each property in such pool. This targeted NOI level for each property is based upon an expected operating income projection set at the commencement of the management agreement for the applicable property, with such projection escalating annually. However, various legal and contractual considerations may limit or delay our exercise of any or all of these termination rights.

Under the terms of our agreements between us and Sunrise, we have, among other things, a right of first offer to acquire seniors housing communities developed by Sunrise in Canada. In addition, we have a right of first offer to acquire seniors housing communities developed by Sunrise in the United States within a demographically defined radius of any of the properties acquired by us in the Sunrise REIT acquisition. Sunrise has agreed to cooperate with us in connection with our compliance with the REIT rules under the Code, and in connection with our financial reporting obligations.

 

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We own a 75% to 85% ownership interest in 61 of our seniors housing communities pursuant to joint venture agreements, with the minority interests in these joint ventures being owned by Sunrise. These joint ventures are each managed by a board of managers, which we control. As the controlling member, we have authority to make all decisions for our Sunrise joint ventures except for a limited set of major decisions, which generally include: (a) the merger or disposition of substantially all the assets of the joint venture; (b) the sale of additional interests in the joint venture; (c) the dissolution of the joint venture; (d) the disposition of a senior housing community owned by the joint venture; and (e) the acquisition of any real property. We can generally transfer our interest in a Sunrise joint venture, without consent, to anyone other than large seniors housing operators or their majority investors. Generally, Sunrise must obtain our prior consent for any direct or indirect transfer of its interest in a joint venture. With limited exceptions, profits and losses of the joint venture are allocated pro rata to each member. If either member fails to make a required capital contribution to a joint venture after notice and a cure period, the non-defaulting member may (i) revoke the capital contribution funding notice, (ii) advance to the joint venture the amount of the required capital contribution on behalf of the defaulting member in the form of a loan to the defaulting member, with all of the defaulting member’s subsequent distributions being applied to the loan until repayment in full, or (iii) advance the capital on behalf of the defaulting member with a recalculation of each member’s proportionate interest in the joint venture pursuant to the applicable formula in the agreements. Many of our Sunrise joint venture agreements provide for a punitive reduction in the defaulting member’s proportionate interest in the event of an advance of capital by a non-defaulting member pursuant to option (iii). The joint ventures are generally limited to incurring new or refinanced mortgage indebtedness in excess of 75% of the market value of its properties.

Sunrise is subject to the reporting requirements of the Commission and is required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Sunrise contained or referred to in this Annual Report on Form 10-K is derived from filings made by Sunrise with the Commission or other publicly available information, or has been provided to us by Sunrise. We have not verified this information either through an independent investigation or by reviewing Sunrise’s public filings. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all of this information is accurate. Sunrise’s filings with the Commission can be found at the Commission’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Sunrise’s publicly available filings from the Commission.

Note 4—Concentration of Credit Risk

As of December 31, 2008, approximately 38.5%, 21.9% and 14.7% of our properties, based on the gross book value of real estate investments (including assets held for sale), were managed or operated by Sunrise, Brookdale Senior Living and Kindred, respectively. Seniors housing communities and skilled nursing facilities constituted approximately 74.9% and 13.0%, respectively, of our portfolio, based on the gross book value of real estate investments (including assets held for sale), as of December 31, 2008, with the remaining properties consisting of hospitals, MOBs and other healthcare assets. These properties were located in 43 states, with properties in only two states accounting for more than 10% of our total revenues (including amounts in discontinued operations related to properties held for sale at December 31, 2008) during the year ended December 31, 2008, and two Canadian provinces. Properties in two states accounted for more than 10% of our total revenues (including amounts in discontinued operations) for the years ended December 31, 2007 and 2006, respectively.

In view of the fact that Kindred and Brookdale Senior Living lease a substantial portion of our triple-net leased properties and are each a significant source of our revenues and operating income, their financial condition and ability and willingness to satisfy their obligations under their respective leases and other agreements with us, as well as their willingness to renew those leases upon expiration of the terms thereof, have a considerable impact on our results of operations and our ability to service our indebtedness and to make distributions to our stockholders. We cannot assure you that Kindred or Brookdale Senior Living will have

 

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sufficient assets, income and access to financing to enable it to satisfy its obligations under its respective leases and other agreements with us, and any inability or unwillingness on its part to do so would have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and on our ability to make distributions to our stockholders, as required for us to continue to qualify as a REIT (a “Material Adverse Effect”). We also cannot assure you that Kindred or Brookdale Senior Living will elect to renew its respective leases with us upon expiration of the initial base terms or any renewal terms thereof.

Unlike Kindred and Brookdale Senior Living, Sunrise does not lease properties from us, but rather acts as a property manager for all of our senior living operations. Therefore, while we are not directly exposed to credit risk with Sunrise, Sunrise’s inability to efficiently and effectively manage our properties and to provide timely and accurate accounting information with respect thereto could have a Material Adverse Effect on us. Although we have various rights as owner under the Sunrise management agreements, we rely on Sunrise’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage our seniors housing communities efficiently and effectively. We also rely on Sunrise to set resident fees and otherwise operate those properties pursuant to our management agreements. Any adverse developments in Sunrise’s business and affairs or financial condition, including without limitation, the acceleration of its indebtedness, the inability to renew or extend its revolving credit facility, the enforcement of default remedies by its counterparties, or the commencement of insolvency proceedings under the U.S. Bankruptcy Code by or against Sunrise could have a Material Adverse Effect on us.

Note 5—Acquisitions of Real Estate Property

The following summarizes our acquisitions in 2008, 2007 and 2006. We completed these acquisitions primarily to invest in additional seniors housing and healthcare properties with an expected yield on investment, as well as to diversify our portfolio and revenue base and reduce our dependence on any single operator, geography or asset type for our revenue.

2008 Acquisitions

We purchased a 47-unit seniors housing community located in Texas for an aggregate purchase price of $5.1 million. The purchase price was allocated to building and improvements based upon estimated fair value. This property is being leased to an affiliate of Capital Senior Living Corporation.

Also throughout 2008, we purchased three MOBs for an aggregate purchase price of $66.8 million, inclusive of assumed debt of $34.6 million at the time of the acquisitions. The purchase price was allocated between land, building and improvements, tenant improvements and lease intangibles of $4.6 million, $59.1 million, $3.0 million and $0.1 million, respectively, based upon their estimated fair values. One of these MOBs is owned through a joint venture with a partner that provides management and leasing services for the property.

Additionally, we entered into an agreement giving us the exclusive right, as part of a joint venture, to develop up to ten identified MOBs on hospital campuses in eight states. This joint venture is with a nationally recognized private developer of MOBs and healthcare facilities. As of December 31, 2008, we had initially invested approximately $8.7 million in two MOBs that were both under development.

Sunrise REIT Acquisition

In 2007, we acquired from Sunrise REIT 77 communities managed by Sunrise for approximately $2.0 billion, including assumption of debt. We acquired a 100% interest in eighteen seniors housing communities and a 75% to 85% interest in 59 additional seniors housing communities, with the minority interest in those 59 communities being owned by affiliates of Sunrise. Of these 77 communities, 66 are located in metropolitan areas of nineteen U.S. states and eleven are located in the Canadian provinces of Ontario and British Columbia.

 

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We funded the Sunrise REIT acquisition through $530.0 million of borrowings under a senior interim loan, an equity-backed facility providing for the issuance of 700,000 shares of our Series A Senior Preferred Stock, with a liquidation preference of $1,000 per share, and the assumption of $861.1 million of existing mortgage debt. In May 2007, we completed the sale of 26,910,000 shares of our common stock in an underwritten public offering pursuant to our shelf registration statement. We used the net proceeds from the sale ($1.05 billion), along with the proceeds of the disposition of certain of our Kindred assets (see “Note 6—Dispositions”) and borrowings under our unsecured revolving credit facility, to redeem all of our Series A Senior Preferred Stock and to repay our indebtedness under the senior interim loan. For the year ended December 31, 2007, we expensed $5.2 million of preferred stock dividends and issuance costs related to the Series A Senior Preferred Stock and $5.0 million of fees and interest associated with the senior interim loan (the latter of which is included in interest expense in our Consolidated Statements of Income for the year ended December 31, 2007).

Later in 2007, we acquired 80% interests in two seniors housing communities, one located in Staten Island, New York for approximately $25.5 million, inclusive of our share of assumed debt of $15.3 million, and one in Vaughan, Ontario for approximately Cdn $43.6 million, inclusive of our share of assumed construction debt of Cdn $23.3 million. The joint venture for the Vaughan, Ontario property has the ability to borrow an additional Cdn $5.8 million under the existing construction loan for capital improvements.

We incurred $4.5 million and $3.0 million of merger-related expenses (that were not capitalized) in connection with the Sunrise REIT acquisition during the years ended December 31, 2008 and 2007, respectively. Merger-related expenses include incremental costs directly related to the acquisition and expenses relating to our litigation with HCP, Inc. (“HCP”) (see “Note 15—Litigation”).

Other 2007 Acquisitions

During 2007, we acquired two additional seniors housing communities for an aggregate purchase price of $18.5 million, inclusive of assumed debt of $9.0 million at the time of the acquisition. The purchase price was allocated between land and buildings and improvements of $0.7 million and $17.8 million, respectively, based upon their estimated fair values. These properties are being leased to affiliates of Senior Care, Inc. (“Senior Care”).

Also throughout 2007, we acquired eight MOBs, in seven separate transactions, for an aggregate purchase price of $150.5 million, inclusive of assumed debt of $21.5 million at the time of the acquisitions. The purchase price was allocated between land and buildings and improvements of $7.6 million and $142.9 million, respectively, based upon their estimated fair values. Five of these MOBs are owned through joint ventures with two different partners that provide management and leasing services for the properties. The joint venture partners have minority interests in the properties ranging from less than 1% to less than 9%.

Senior Care

In November 2006, we acquired a portfolio of 64 seniors housing and healthcare properties for aggregate consideration of $602.4 million, consisting of approximately $422.6 million in cash, the assumption of $114.8 million of mortgage debt that was repaid in January 2007 and 1,708,279 shares of our common stock. The portfolio includes 40 assisted living communities, four multi-level retirement communities, eighteen skilled nursing facilities and two rehabilitation hospitals in fifteen states.

The properties are being leased to affiliates of Senior Care, pursuant to the terms of a triple-net master lease having an initial term of fifteen years and two five-year extensions. Approximately 5.3% and 6.1% of our total revenues (including amounts in discontinued operations) for the years ended December 31, 2008 and 2007, respectively, were derived from our lease agreements with Senior Care.

 

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Other 2006 Acquisitions

Also during 2006, we acquired eight seniors housing communities, in five separate transactions, for an aggregate purchase price of $74.3 million, including assumed debt of $10.8 million at the time of the acquisitions. The seniors housing communities are leased to various operators under triple-net leases, each having initial terms ranging from ten to fifteen years and initially providing aggregate, annual cash base rent of approximately $6.2 million, subject to escalation as provided in the leases.

Unaudited Pro Forma

The following table illustrates the effect on net income and earnings per share as if we had consummated our 2008 and 2007 acquisitions and issuances of common stock as of the beginning of each of the years ended December 31, 2008 and 2007:

     For the Year Ended
December 31,
         2008            2007    
     (In thousands, except per
share amounts)

Revenues

   $ 934,525    $ 919,297

Income from continuing operations applicable to common shares

     181,441      132,387

Discontinued operations

     44,474      134,409

Net income applicable to common shares

     225,915      266,796

Earnings per common share:

     

Basic:

     

Income from continuing operations applicable to common shares

   $ 1.27    $ 0.99

Discontinued operations

     0.31      1.01
             

Net income applicable to common shares

   $ 1.58    $ 2.00
             

Diluted:

     

Income from continuing operations applicable to common shares

   $ 1.27    $ 0.99

Discontinued operations

     0.31      1.01
             

Net income applicable to common shares

   $ 1.58    $ 2.00
             

Weighted average shares used in computing earnings per common share:

     

Basic

     142,872      133,140

Diluted

     143,212      133,555

Note 6—Dispositions

Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we present separately, as discontinued operations, in all periods presented the results of operations for all assets held for sale or disposed of on or after January 1, 2002.

In February 2009, we sold a hospital and a MOB for $35 million. The net book value of these assets, $16.2 million, is reflected as held for sale at December 31, 2008. We expect to record a gain from the sale of approximately $18 million. The operations for these assets have been reported as discontinued operations for the years ended December 31, 2008, 2007 and 2006.

In January 2009, we sold four seniors housing assets for an aggregate sale price of $58.7 million. The net book value of these assets, $46.3 million, is reflected as held for sale at December 31, 2008. As of December 31, 2008, we had $38.8 million of mortgage debt related to these four assets which is included in senior notes payable and other debt in our Consolidated Balance Sheet. We expect to record a gain from the sale of approximately $11 million. The operations for these assets have been reported as discontinued operations for the years ended December 31, 2008, 2007 and 2006.

 

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In December 2008, we sold five seniors housing communities to the current tenant for an aggregate sale price of $62.5 million. We realized a gain from the sale of these assets of $21.5 million in the fourth quarter of 2008, $8.3 million of which was deferred and will be recognized over the next three years. The deferred gain resulted from a $10.0 million loan that we made to the buyer in conjunction with the sale. See “Note 8—Loans Receivable” for further discussion on this loan.

In April 2008, we sold seven properties for $69.1 million. We recognized a net gain from the sale of these assets of $25.9 million in the second quarter of 2008. In addition, we received a lease termination fee from the tenant of $1.6 million.

In June 2007, we completed the sale of 22 properties to Kindred for $171.5 million in net cash proceeds. Of these net proceeds, $14.1 million was held in escrow for use in a Code Section 1031 exchange and subsequently used in the second half of 2007 for other acquisitions. See “Note 5—Acquisitions.” In addition, Kindred paid us a lease termination fee of $3.5 million. We recognized a net gain on the sale of assets of $129.5 million during the year ended December 31, 2007.

We did not make any dispositions during the year ended December 31, 2006.

Set forth below is a summary of the results of operations of properties sold or held for sale during the years ended December 31, 2008, 2007 and 2006, all of which were included in our triple-net leased properties segment, with the exception of one MOB held for sale at December 31, 2008 (included in all other for segment reporting purposes):

 

     2008    2007    2006
     (In thousands)

Revenues:

        

Rental income

   $ 13,963    $ 24,659    $ 30,282

Interest and other income

     1,700      3,655      116
                    
     15,663      28,314      30,398

Expenses:

        

Interest

     6,263      10,602      12,141

Depreciation and amortization

     3,952      7,581      8,899
                    
     10,215      18,183      21,040
                    

Income before gain on sale of real estate assets

     5,448      10,131      9,358

Gain on sale of real estate assets

     39,026      129,478      —  
                    

Discontinued operations

   $ 44,474    $ 139,609    $ 9,358
                    

Note 7—Intangibles

At December 31, 2008, intangible lease assets, comprised of above market resident leases, in-place resident leases and other intangibles were $7.4 million, $88.6 million and $2.2 million, respectively. At December 31, 2007, intangible lease assets, comprised of above market resident leases, in-place resident leases and other intangibles, were $7.3 million, $81.2 million and $2.6 million, respectively. At December 31, 2008 and 2007, the accumulated amortization of the intangible assets was $89.2 and $58.4 million, respectively. The weighted average amortization period of intangible assets at December 31, 2008 was approximately five years.

At December 31, 2008, intangible lease liabilities, comprised of below market resident leases, were $12.2 million. At December 31, 2007, intangible lease liabilities, comprised of below market resident leases, were $9.8 million. At December 31, 2008 and 2007, the accumulated amortization of the intangible liabilities was $10.0 million and $6.6 million, respectively. The weighted average amortization period of intangible liabilities at December 31, 2008 was approximately five years.

 

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Note 8—Loans Receivable

On June 30, 2008, we purchased $112.5 million principal amount of first mortgage debt issued by a national provider of healthcare services, primarily skilled nursing care. We purchased the debt at a discount for $98.8 million, resulting in an effective interest rate to maturity of LIBOR plus 533 basis points. Interest on the loan is payable monthly at an annual rate of LIBOR plus 125 basis points, and the loan matures in January 2012, subject to a one-year extension, at the borrower’s option, subject to certain conditions.

As of December 31, 2008, we held a receivable for three outstanding first mortgage loans (the “Sunwest Loans”) in the aggregate principal amount of $20.0 million. These loans, made in 2005, originally accrued interest at a non-default annual rate of 9%. During the third quarter of 2008, the borrowers defaulted on certain of their obligations under the Sunwest Loans, including the monthly payment of principal and interest to us. The Sunwest Loans are secured by four seniors housing communities containing approximately 300 units and are jointly and severally guaranteed by Sunwest Management, Inc. (“Sunwest”) and two of its principals. We have appointed receivers at, and initiated foreclosure actions on, each asset securing the Sunwest Loans. We have also commenced a collection and enforcement action against the guarantors. One of the principal guarantors has filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and our action to collect under his guarantee is currently stayed. We intend to vigorously pursue all of our rights and remedies and take all appropriate actions to fully recover amounts due to us under the Sunwest Loans and the guarantees. However, due to the current unfavorable capital markets and economic environment, we recorded a provision for loan losses on the Sunwest Loans of $6.0 million, which was based on estimated discounted cash flows and other valuation metrics, including the fair value of the collateral. This amount is included as a component of property-level operating expenses on our Consolidated Statement of Income for the year ended December 31, 2008. Although we cannot give any assurances regarding the value of our recovery on the collateral for the Sunwest Loans, we currently anticipate the estimated fair value of the foreclosed assets, if foreclosure proceedings are successful, we may take ownership of the facilities and engage healthcare operators to operate the facilities under a management or lease arrangement, or we may sell one or more of the facilities. These loans were classified as non-accrual in the fourth quarter of 2008 and the accrual of interest was discontinued.

In December 2008, we sold five assets for $62.5 million, and the buyer issued a $10.0 million note to us as partial payment of the purchase price. The loan is payable in full in December 2011. Principal payments of $40,000 and interest payments at a rate of 8% in year one, 8.25% in year two and 8.5% in year three, are due and payable to us monthly. We recorded the loan, which is guaranteed by a publicly traded company and secured by real estate collateral, at its fair market value of $8.3 million and will amortize the discount to interest income over the next three years.

 

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Note 9—Borrowing Arrangements

The following is a summary of our long-term debt and certain interest rate and maturity information as of December 31, 2008 and 2007:

 

     2008     2007  
     (In thousands)  

Unsecured revolving credit facilities due 2010 (1)

   $ 300,207     $ 238,970  

8 3/4% Senior Notes due 2009

     49,807       174,217  

6 3/4% Senior Notes due 2010

     122,980       175,000  

3 7/8% Convertible Senior Notes due 2011

     230,000       230,000  

9% Senior Notes due 2012

     191,821       191,821  

6 5/8% Senior Notes due 2014

     175,000       175,000  

7 1/8% Senior Notes due 2015

     170,000       170,000  

6 1/2% Senior Notes due 2016

     200,000       200,000  

6 3/4% Senior Notes due 2017

     225,000       225,000  

Mortgage loans and other

     1,474,325       1,567,668  
                

Total

     3,139,140       3,347,676  

Unamortized fair value adjustment

     14,256       19,669  

Unamortized commission fees and discounts

     (5,702 )     (6,846 )
                

Senior notes payable and other debt

   $ 3,147,694     $ 3,360,499  
                

 

(1) On December 31, 2008, we had $176.8 million of unrestricted cash and cash equivalents, for a net amount of $123.4 million.

Unsecured Revolving Credit Facilities

We currently have $850.0 million of unsecured revolving credit facilities that mature on April 26, 2010, comprised of a $700.0 million U.S. credit facility and a $150.0 million Canadian credit facility. Under the Canadian credit facility, we may borrow up to $150.0 million or the equivalent in Canadian dollars. The U.S. credit facility includes a $150.0 million “accordion” feature that permits us to further expand our aggregate borrowing capacity to $1.0 billion upon satisfaction of certain conditions.

Borrowings under our unsecured revolving credit facilities bear interest at a fluctuating rate per annum (based on U.S. or Canadian LIBOR, the Canadian Bankers’ Acceptance rate, or the U.S. or Canadian Prime rate) plus an applicable percentage based on our consolidated leverage. The applicable percentage was 0.75% at December 31, 2008, 2007 and 2006.

Lehman Commercial Paper, Inc. (“Lehman”) is a named lender under our unsecured revolving credit facilities and has a $20 million funding commitment (approximately 2% of the aggregate borrowing capacity under our unsecured revolving credit facilities) to us. Lehman has defaulted on its obligations to fund our borrowing requests, and we are seeking an assignment of this portion of our unsecured revolving credit facilities, through Lehman’s Chapter 11 proceeding, to a third party investor who we believe represents the economic interest in such obligation. We cannot give any assurances as to whether or when an assignment of Lehman’s interest in our unsecured revolving credit facilities may occur.

We incurred losses on extinguishment of debt in the amount of $1.3 million for the year ended December 31, 2006 representing the write-off of unamortized deferred financing costs related to our previous secured revolving credit facility.

 

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Convertible Senior Notes

As of December 31, 2008, we had $230.0 million aggregate principal amount of our 3 7/8 % Convertible Senior Notes due 2011 (the “Convertible Notes”) outstanding. The Convertible Notes are convertible at the option of the holder (i) prior to September 15, 2011, upon the occurrence of specified events and (ii) on or after September 11, 2011, at any time prior to the close of business on the second business day prior to the stated maturity, in each case into cash up to the principal amount of the Convertible Notes and cash or shares of our common stock, at our election, in respect of any conversion value in excess of the principal amount at the current conversion rate of 22.6262 shares per $1,000 principal amount of notes (which equates to a conversion price of approximately $44.20 per share). The conversion rate is subject to adjustment in certain circumstances, including the payment of a quarterly dividend in excess of $0.395 per share. To the extent the market price of our common stock exceeds the conversion price, our earnings per share will be diluted. The Convertible Notes had a minimal dilutive impact per share for the year ended December 31, 2008. See “Note 14—Earnings Per Share.”

The Convertible Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Ventas Realty and by certain of our other direct and indirect subsidiaries. The Convertible Notes are part of our and the guarantors’ general unsecured obligations, ranking equal in right of payment with all of our and the guarantors’ existing and future senior obligations and ranking senior to all of our and the guarantors’ existing and future subordinated indebtedness. However, the Convertible Notes are effectively subordinated to our and the guarantors’ secured indebtedness, if any, to the extent of the value of the assets securing that indebtedness. The Convertible Notes are also structurally subordinated to preferred equity and indebtedness, whether secured or unsecured, of our subsidiaries that do not guarantee the Convertible Notes.

We may not redeem the Convertible Notes prior to maturity except to the extent necessary to preserve our status as a REIT.

If we experience certain kinds of changes of control, holders may require us to repurchase all or a portion of their Convertible Notes for cash at a purchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to the date of purchase.

Senior Notes

As of December 31, 2008, we had the following series of senior notes (collectively, the “Senior Notes”) issued by our subsidiaries, Ventas Realty and Ventas Capital Corporation (collectively, the “Issuers”), outstanding:

 

 

 

$49.8 million principal amount of 8 3/4% Senior Notes due 2009 (the “2009 Senior Notes”);

 

 

 

$123.0 million principal amount of 6 3/4% Senior Notes due 2010 (the “2010 Senior Notes”);

 

   

$191.8 million principal amount of 9% Senior Notes due 2012 (the “2012 Senior Notes”);

 

 

 

$175.0 million principal amount of 6 5/8% Senior Notes due 2014 (the “2014 Senior Notes”);

 

 

 

$170.0 million principal amount of 7 1/8% Senior Notes due 2015 (the “2015 Senior Notes”);

 

 

 

$200.0 million principal amount of 6 1/2% Senior Notes due 2016 (the “2016 Senior Notes”); and

 

 

 

$225.0 million principal amount of the 6 3/4 % Senior Notes due 2017 (the “2017 Senior Notes”).

We issued the 2016 Senior Notes and 2017 Senior Notes at initial discounts to par value of  1/2% and  5/8%, respectively. We issued $50 million of our 2014 Senior Notes at a 1% discount to par value.

During 2008, we purchased $124.4 million principal amount of 2009 Senior Notes and $52.0 million principal amount of 2010 Senior Notes in open market transactions and reported a net gain on extinguishment of debt of $2.5 million. In August 2007, we purchased $5.0 million principal amount of 2015 Senior Notes in an open market transaction and reported a gain on extinguishment of debt of $0.1 million during the year ended December 31, 2007.

 

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The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and by certain of our direct and indirect subsidiaries. The Senior Notes are part of our and the guarantors’ general unsecured obligations, ranking equal in right of payment with all of our and the guarantors’ existing and future senior obligations and ranking senior to all of our and the guarantors’ existing and future subordinated indebtedness. However, the Senior Notes are effectively subordinated to our and the guarantors’ secured indebtedness, if any, to the extent of the value of the assets securing that indebtedness. The Senior Notes are also structurally subordinated to the preferred equity and indebtedness, whether secured or unsecured, of our subsidiaries that do not guarantee the Senior Notes.

The Issuers may redeem each series of Senior Notes, in whole at any time or in part from time to time, prior to maturity at varying redemption prices set forth in the applicable indenture, plus, in each case, accrued and unpaid interest thereon to the redemption date. In addition, at certain times, the Issuers may redeem up to 35% of the aggregate principal amount of each series of Senior Notes with the net cash proceeds from certain equity offerings at the redemption price set forth in the applicable indenture, plus accrued and unpaid interest thereon to the redemption date.

If we experience certain kinds of changes of control, the Issuers must make an offer to repurchase the Senior Notes, in whole or in part, at a purchase price in cash equal to 101% of the principal amount of the Senior Notes, plus any accrued and unpaid interest to the date of purchase; provided, however, that in the event Moody’s Investors Service and S&P Ratings Services have confirmed their ratings at Ba3 or higher and BB- or higher on the Senior Notes and certain other conditions are met, this repurchase obligation will not apply.

Mortgages

At December 31, 2008, we had outstanding 113 mortgage loans totaling $1.47 billion that are collateralized by the underlying assets of the properties. The loans generally bear interest at fixed rates ranging from 5.4% to 8.5% per annum, except for fourteen loans having aggregate outstanding principal balances totaling $246.2 million which bear interest at the lender’s variable rates ranging from 1.1% to 3.9% per annum as of December 31, 2008. At December 31, 2008, the weighted average annual rate on our fixed rate mortgage loans was 6.4%, and the weighted average annual rate on our variable rate mortgage loans was 2.4%. The loans had a weighted average maturity of 7.0 years as of December 31, 2008.

Scheduled Maturities of Borrowing Arrangements and Other Provisions

As of December 31, 2008, our indebtedness had the following maturities (in thousands):

 

     Principal Amount
Due at Maturity
   Unsecured
Revolving Credit
Facilities (1)
   Scheduled
Periodic
Amortization
   Total
Maturities

2009

   $ 125,442    $ —      $ 25,475    $ 150,917

2010

     289,780      300,207      25,997      615,984

2011

     278,931      —        24,978      303,909

2012

     498,325      —        21,461      519,786

2013

     150,962      —        15,811      166,773

Thereafter

     1,292,867      —        88,904      1,381,771
                           

Total maturities

   $ 2,636,307    $ 300,207    $ 202,626    $ 3,139,140
                           

 

(1) On December 31, 2008, we had $176.8 million of unrestricted cash and cash equivalents, for a net amount of $123.4 million.

The principal amounts due at maturity above reflect our intent to extend $54.5 million of 2009 maturities to 2010 as a result of extension options with the lenders. In connection with the disposition of a property subsequent to December 31, 2008, $7.3 million of 2009 maturities were transferred to the buyer, so the as adjusted 2009 principal amounts due at maturity are $118.1 million.

 

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As of December 31, 2008, our joint venture partners’ share of total debt was $159.9 million.

The instruments governing certain of our indebtedness contain covenants that limit our ability and the ability of certain of our subsidiaries to, among other things, (i) incur debt; (ii) make certain dividends, distributions and investments; (iii) enter into certain transactions; (iv) merge, consolidate or transfer certain assets; and (v) sell assets. We and certain of our subsidiaries are also required to maintain total unencumbered assets of at least 150% of this group’s unsecured debt. Our unsecured revolving credit facilities also require us to maintain certain financial covenants pertaining to, among other things, our consolidated leverage, secured debt, fixed charge coverage and net worth.

As of December 31, 2008, we were in compliance with all of these covenants.

Derivatives and Hedging

In the normal course of business, we are exposed to the effect of interest rate movements on future cash flows under our variable rate debt agreements and the effect of foreign currency exchange rate movements. We limit these risks by following established risk management policies and procedures, including the use of derivative instruments.

For interest rate exposures, derivatives are used primarily to fix the rate on debt based on floating rate indices and to manage the cost of borrowing obligations. We prohibit the use of derivative instruments for trading or speculative purposes. Further, we have a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivative is designed to hedge, we do not anticipate any material adverse effect on our net income or financial position in the future from the use of derivatives.

The interest rate swap agreement that we entered into in 2001 expired on June 30, 2008, and we do not currently have any interest rate swap agreements in effect.

In January 2007, we entered into two Canadian call options in conjunction with our agreement to acquire the assets of Sunrise REIT. See “Note 5—Acquisitions.” We paid an aggregate purchase price of $8.5 million for these contracts, which had an aggregate notional call amount of Cdn $750.0 million at a Cdn $1.18 strike price. These contracts were settled on April 26, 2007, the acquisition date, and we received cash of $33.2 million upon settlement. For the year ended December 31, 2007, we recognized gains related to call option contracts of $24.3 million, which is included as a foreign currency gain on our Consolidated Statement of Income for the year ended December 31, 2007.

Unamortized Fair Value Adjustment

As of December 31, 2008, the unamortized fair value adjustment related to the long-term debt we assumed in connection with the Sunrise REIT acquisition and various MOB acquisitions was $14.3 million and is recognized as effective yield adjustments over the remaining term of the instruments. The estimated aggregate amortization of the fair value adjustment related to long-term debt for each of the next five years follows: 2009 – $2.8 million; 2010 – $2.9 million; 2011 – $2.9 million; 2012 – $2.3 million; and 2013 – $1.4 million.

 

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Note 10—Fair Values of Financial Instruments

As of December 31, 2008 and 2007, the carrying amounts and fair values of our financial instruments were as follows:

 

     2008     2007  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  
           (In thousands)        

Cash and cash equivalents

   $ 176,812     $ 176,812     $ 28,334     $ 28,334  

Loans receivable

     123,289       111,942       19,998       22,148  

Notes receivable - related parties

     —         —         2,092       2,125  

Interest rate swap agreement

     —         —         (503 )     (503 )

Senior notes payable and other debt, gross

     (3,139,140 )     (2,949,268 )     (3,347,676 )     (3,471,199 )

Fair value estimates are subjective in nature and depend on a number of important assumptions, including estimates of future cash flows, risks, discount rates and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the estimates presented above are not necessarily indicative of the amounts we would realize in a current market exchange.

Note 11—Stock-Based Compensation

Compensation Plans

We have six plans under which options to purchase common stock and/or shares or units of restricted stock have been, or may be, granted to officers, employees and non-employee directors, one plan under which executive officers may receive common stock in lieu of compensation and two plans under which certain directors have received or may receive common stock in lieu of director fees (the following are collectively referred to as the “Plans”): (1) the 1987 Incentive Compensation Program (Employee Plan); (2) the 2000 Incentive Compensation Plan (Employee Plan); (3) the 2004 Stock Plan for Directors; (4) the TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan; (5) the Common Stock Purchase Plan for Directors (the “Directors Stock Purchase Plan”); (6) the Executive Deferred Stock Compensation Plan; (7) the Nonemployee Directors’ Deferred Stock Compensation Plan; (8) the 2006 Incentive Plan; and (9) the 2006 Stock Plan for Directors.

During the year ended December 31, 2008, option and restricted stock grants and stock issuances could only be made under the Executive Deferred Stock Compensation Plan, the Nonemployee Directors’ Deferred Stock Compensation Plan, the 2006 Incentive Plan and the 2006 Stock Plan for Directors. The 2000 Incentive Compensation Plan (Employee Plan) and the 2004 Stock Plan for Directors expired on December 31, 2006, and no additional grants were permitted under those Plans after that date. Additional grants are also not permitted under the 1987 Incentive Compensation Program (Employee Plan) or the TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. In addition, the Directors Stock Purchase Plan terminated in accordance with its terms during 2007.

The number of shares reserved and the number of shares available for future grants or issuance under these Plans as of December 31, 2008 are as follows:

 

   

Executive Deferred Stock Compensation Plan—500,000 shares are reserved for issuance to our executive officers in lieu of the payment of all or a portion of their salary, at their option, and, as of December 31, 2008, 500,000 shares were available for future issuance.

 

   

Nonemployee Directors’ Deferred Stock Compensation Plan—500,000 shares are reserved for issuance to nonemployee directors in lieu of the payment of all or a portion of their retainer and meeting fees, at their option, and, as of December 31, 2008, 466,540 shares were available for future issuance.

 

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2006 Incentive Plan—5,000,000 shares are reserved for grants or issuance to employees and 3,813,003 were available for future grants or issuance as of December 31, 2008. This plan replaced the 2000 Incentive Compensation Plan (Employee Plan).

 

   

2006 Stock Plan for Directors—400,000 shares are reserved for grants or issuance to non-employee directors and 328,685 were available for future grants or issuance as of December 31, 2008. This plan replaced the 2004 Stock Plan for Directors.

Under the Plans (other than the Executive Deferred Stock Compensation Plan, the Directors Stock Purchase Plan and the Nonemployee Director Deferred Stock Compensation Plan), options are exercisable at the market price on the date of grant, expire ten years from the date of grant, and vest over varying periods ranging from one to five years. Vesting of certain options may accelerate upon a change of control of Ventas, as defined in the applicable Plan, and other events.

We have also granted options and restricted stock to certain officers, employees and non-employee directors outside of the Plans. These options and shares of restricted stock vest over varying periods, and the options are exercisable at the market price on the date of grant and expire ten years from the date of grant. As of December 31, 2008, options for 4,000 shares had been granted outside of the Plans to certain non-employee directors and remained outstanding.

Effective January 1, 2006, we adopted the fair value provisions for share-based awards pursuant to SFAS No. 123(R), using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (i) compensation cost for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the attribution method and grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant date fair value as estimated in accordance with the provisions of SFAS No. 123(R), all recognized on a straight-line basis as the requisite service periods are rendered. Results for prior periods have not been restated. Compensation costs related to stock options for the years ended December 31, 2008, 2007 and 2006 were $2.3 million, $1.9 million and $0.9 million, respectively.

Stock Options

In determining the estimated fair value of our stock options as of the date of grant, we used the Black-Scholes option pricing model with the following assumptions:

 

     2008     2007     2006  

Risk-free interest rate

   2.48 %   4.65 %   4.57 %

Dividend yield

   5.75 %   4.83 %   4.95 %

Volatility factors of the expected market price for our common stock

   21.0 %   21.0 %   15.0 %

Weighted average expected life of options

   3.5 years     6.0 years     6.5 years  

The following is a summary of stock option activity in 2008:

 

Activity

   Shares     Range of Exercise
Prices
   Weighted Average
Exercise Price
   Weighted
Average
Remaining
Contractual
Life (years)
   Intrinsic
Value
($000’s)

Outstanding as of December 31, 2007

   950,395     $ 3.31 - $43.26    $ 28.52      

Options granted

   720,834       41.54 - 45.25      41.67      

Options exercised

   (255,115 )     3.31 - 42.32      24.31      

Options canceled

   (60,230 )     4.93 - 20.81      15.06      
                 

Outstanding as of December 31, 2008

   1,355,884       3.31 - 45.25      36.90    8.0    $ 3,422
                       

Exercisable as of December 31, 2008

   811,941     $ 3.31 - $45.25    $ 33.63    7.2    $ 3,421
                       

 

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A summary of the status of our nonvested stock options as of December 31, 2008 and changes during the year then ended follows:

 

Activity

   Shares     Weighted Average
Grant Date Fair
Value

Nonvested at beginning of year

   246,779     $ 4.83

Granted

   720,834       3.87

Vested

   (423,670 )     4.11

Forfeited

   —         —  
        

Nonvested at end of year

   543,943     $ 4.12
        

As of December 31, 2008, there was $912,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plans. We expect to recognize that cost over a weighted average period of 1.2 years. Proceeds received from options exercised under the Plans for the years ended December 31, 2008, 2007 and 2006 were $6.2 million, $9.5 million and $6.6 million, respectively.

Restricted Stock

The market value of shares of restricted stock and restricted stock units on the date of the award is recognized as stock-based compensation expense over the service period, with charges to general and administrative expenses of approximately $7.7 million in 2008, $5.6 million in 2007 and $2.1 million in 2006. Restricted stock generally vests over two- to five-year periods. The vesting of certain restricted shares may accelerate upon a change of control of Ventas, as defined in the applicable Plan, and other events.

A summary of the status of our nonvested restricted stock units and restricted stock as of December 31, 2008, and changes during the year ended December 31, 2008 follows:

 

     Restricted
Stock
Units
    Weighted Average
Grant Date Fair
Value
   Restricted
Shares
    Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2007

   7,503     $ 38.72    313,561     $ 41.58

Granted

   4,011       45.25    166,196       41.60

Vested

   (5,064 )     36.98    (131,069 )     39.73

Forfeited

   —         —      (5,033 )     40.82
                 

Nonvested at December 31, 2008

   6,450     $ 44.14    343,655     $ 42.31
                 

As of December 31, 2008, there was $10.5 million unrecognized compensation cost related to nonvested restricted stock under the Plans. We expect to recognize that cost over a weighted average of 2.0 years.

Employee and Director Stock Purchase Plan

We have in effect an Employee and Director Stock Purchase Plan (“ESPP”) under which our employees and directors may purchase shares of our common stock at a discount. Pursuant to the terms of the ESPP, on each purchase date, participants may purchase shares of common stock at a price not less than 90% of the market price on that date, with respect to the employee tax-favored portion of the plan, and not less than 95% of the market price on that date, with respect to the additional employee and director portion of the plan. We have reserved 2,500,000 shares for issuance under the ESPP. As of December 31, 2008, 24,856 shares had been purchased under the ESPP and 2,475,144 shares were available for future issuance.

 

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Employee Benefit Plan

We maintain a 401(K) plan that allows for eligible employees to defer compensation subject to certain limitations imposed by the Code. We make a contribution for each qualifying employee of up to 3% of his or her salary, subject to limitations, regardless of the employee’s individual contribution. During 2008, 2007 and 2006, our contributions were approximately $164,000, $106,000 and $85,600, respectively.

Note 12—Income Taxes

We have elected to be taxed as a REIT under the Code commencing with the year ended December 31, 1999. We have elected for certain of our subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”), which are subject to federal and state income taxes. The TRS entities were created or acquired in connection with the Sunrise REIT acquisition. All entities other than the TRS entities are collectively referred to as “the REIT” within this Note 12.

We intend to continue to operate in such a manner as to enable us to qualify as a REIT. Our actual qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, distribution levels, stock ownership, and the various qualification tests. During the years ended December 31, 2008, 2007 and 2006, our tax treatment of distributions per common share was as follows:

 

     2008    2007     2006  

Tax treatment of distributions:

       

Ordinary income

   $ 1.9025    $ 1.2872     $ 1.5450  

Long-term capital gain

     0.0712      0.9621       —    

Unrecaptured Section 1250 gain

     0.0763      0.0457       —    
                       

Distribution reported for 1099-DIV purposes

     2.0500      2.2950       1.5450  

Add: Dividend declared in current year and taxable in following year

     —        —         0.3950  

Less: Dividend declared in prior year and taxable in current year

     —        (0.3950 )     (0.3600 )
                       

Distributions declared per common share outstanding

   $ 2.0500    $ 1.9000     $ 1.5800  
                       

No net provision for income taxes was recorded in our Consolidated Financial Statements for the year ended December 31, 2006 due to our belief that we qualified as a REIT and the distribution of more than 100% of our 2006 taxable income as a dividend. We believe we have met the annual distribution requirement by payment of at least 90% of our estimated taxable income for 2008, 2007 and 2006. As a result of the TRS entities created and acquired in 2007, the consolidated provision (benefit) for income taxes for the years ended December 31, 2008 and 2007 is as follows (in thousands):

 

     2008     2007  

Current

   $ 3,010     $ 908  

Deferred

     (18,895 )     (28,950 )
                

Total

   $ (15,885 )   $ (28,042 )
                

The deferred tax benefit for the years ended December 31, 2008 and 2007 was reduced by income tax expense of $1.7 million and $1.1 million, respectively, related to the minority interest share of net income. For the tax years ended December 31, 2008 and 2007, the Canadian income tax benefit included in the consolidated benefit for income taxes was $3.1 million and $7.2 million, respectively.

Although the TRS entities did not pay any federal income taxes for the year ended December 31, 2008, federal income tax payments for these TRS entities may increase in future years as we exhaust net operating loss carryforwards and as our senior living operations segment grows. Such increases could be significant.

 

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Income tax expense computed by applying the federal corporate tax rate for the years ended December 31, 2008 and 2007 is reconciled to the income tax benefit as follows (in thousands):

 

     2008     2007  

Tax at statutory rate on earnings from continuing operations before minority interest and income taxes

   $ 50,850     $ 40,728  

State income taxes, net of federal benefit

     (445 )     (2,787 )

Increase in valuation allowance

     1,170       —    

Increase in FIN 48 liability

     3,010       —    

Tax at statutory rate on earnings not subject to federal income taxes

     (71,254 )     (67,327 )

Other differences

     784       1,344  
                

Income tax benefit

   $ (15,885 )   $ (28,042 )
                

The REIT made no income tax payments for the year ended December 31, 2008 and 2006. Tax payments of $2.1 million related to built-in gains tax were made for the year ended December 31, 2007.

In connection with the Sunrise REIT acquisition, we established a beginning net deferred tax liability of $306.3 million related to temporary differences between the financial reporting and tax bases of assets and liabilities acquired (primarily property and related assets, net of net operating loss carryforwards).

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of temporary differences and carryforwards included in the net deferred tax liabilities at December 31, 2008 and 2007 are summarized as follows (in thousands):

 

     2008     2007  

Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs

   $ (291,481 )   $ (315,835 )

Operating loss and interest deduction carryforwards

     70,302       57,483  

Expense accruals and other

     275       87  

Valuation allowance

     (36,595 )     (39,325 )
                

Net deferred tax liabilities

   $ (257,499 )   $ (297,590 )
                

Due to the uncertainty of the realization of certain deferred tax assets, we established valuation allowances. The majority of these valuation allowances related to the net operating loss (“NOL”) carryforward related to the REIT where there was uncertainty regarding its realization.

The net difference between tax bases and the reported amount of REIT assets and liabilities for federal income tax purposes was approximately $497.1 million and $485.1 million less than the book bases of those assets and liabilities for financial reporting purposes for the years ended December 31, 2008 and 2007, respectively.

We are subject to corporate level taxes for any asset dispositions during the ten-year period immediately after the assets were owned by a C corporation (either prior to our REIT election, through stock acquisition or merger) (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is generally equal to the lesser of (i) the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset or (ii) the actual amount of gain. Some but not all future gains could be offset by available NOLs. We had a $23.3 million deferred tax liability as of December 31, 2007 to be utilized for any built-in gains tax related to the disposition of assets owned prior to our REIT election in 1999. The ten-year period in which these assets were subject to built-in gains tax ended on December 31, 2008. Because we did not have any dispositions of these assets through December 31, 2008, we do not expect to pay any amounts related to this contingent liability. Therefore, this contingent liability was no longer required, and $23.3 million was reversed into income during 2008.

 

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Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2005 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2004 and subsequent years. The potential impact on income tax expense of years open under the statute of limitations for Canadian entities acquired as part of the Sunrise REIT acquisition is not expected to be material.

During 2006, we were notified by the IRS that it had completed its audit of our 2001 federal tax return with no additional tax being due. Accordingly, our Consolidated Statement of Income for the year ended December 31, 2006 reflects the reversal into income of a previously recorded $1.8 million tax liability related to uncertainties surrounding the outcome of that audit.

We have a combined NOL carryforward of $109.7 million at December 31, 2008 related to the TRS entities and an NOL carryforward related to the REIT of $88.6 million. These amounts can be used to offset future taxable income (and/or taxable income for prior years if audits of any prior year’s return determine that amounts are owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. The NOL carryforwards begin to expire in 2024 with respect to the TRS entities and in 2020 for the REIT.

As a result of the uncertainties relating to the ultimate utilization of existing REIT NOLs, no net deferred tax benefit has been ascribed to REIT NOL carryforwards as of December 31, 2008 and 2007. The IRS may challenge our entitlement to these tax attributes during its review of the tax returns for the previous tax years. We believe we are entitled to these tax attributes, but we cannot give any assurances as to the outcome of these matters.

On January 1, 2007, we adopted FIN 48. As a result of applying the provisions of FIN 48, we recognized no change in the liability for unrecognized tax benefits, and no adjustment in accumulated earnings as of January 1, 2007. Our policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):

 

     2008    2007

Balance as of January 1

   $ 9,384    $ —  

Additions to tax positions related to the current year

     3,486      9,384
             

Balance as of December 31

   $ 12,870    $ 9,384
             

Included in the unrecognized tax benefits of $12.9 million at December 31, 2008 was $12.9 million of tax benefits that, if recognized, would reduce our annual effective tax rate. We accrued no penalties. Interest of $360,000 related to the unrecognized tax benefits was accrued during 2008. We expect our unrecognized tax benefits to increase by $3.0 million during 2009.

Note 13—Commitments and Contingencies

Assumption of Certain Operating Liabilities and Litigation

As a result of the structure of the Sunrise REIT acquisition, we may be subject to various liabilities of Sunrise REIT arising out of the ownership or operation of the Sunrise REIT properties prior to the acquisition. If the liabilities we have assumed are greater than expected, or if there are obligations relating to the Sunrise REIT properties of which we were not aware at the time of completion of the Sunrise REIT acquisition, such liabilities and/or obligations could have a Material Adverse Effect on us.

 

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Similarly, in connection with Provident’s acquisition of certain Brookdale-related and Alterra-related entities in 2005 and our subsequent acquisition of Provident, Brookdale and Alterra agreed, among other things, to indemnify and hold Provident (and, as a result of the Provident acquisition, us) harmless from and against certain liabilities arising out of the ownership or operation of such entities prior to their acquisition by Provident.

We cannot give any assurances that Kindred or such Brookdale Senior Living subsidiaries will have sufficient assets, income and access to financing to enable them to satisfy, or that they will be willing to satisfy, their respective obligations under these arrangements. If Kindred or such Brookdale Senior Living subsidiaries do not satisfy or otherwise honor their respective obligations to indemnify, defend and hold us harmless under their respective contractual arrangements with us, then we may be liable for the payment and performance of such obligations and may have to assume the defense of such claims or litigation, which could have a Material Adverse Effect on us.

Brookdale Leases

Subject to certain limitations and restrictions, and provided Brookdale has not waived its rights, if during the first six years of the initial term of our Brookdale leases (affecting 21 properties) assumed in connection with the Provident acquisition (i.e., through December 2010) we, either voluntarily or at Brookdale’s request, obtain new mortgage debt or refinance existing mortgage debt on property covered by a Brookdale lease, then we may be required to pay Brookdale the net proceeds from any such mortgage debt financing or refinancing. Also, subject to certain limitations and conditions, and provided Brookdale has not waived its rights, Brookdale may request that we obtain new mortgage debt or refinance existing mortgage debt on the property covered by the Brookdale leases, and we have agreed to use commercially reasonable efforts to pursue any such financing or refinancing from the holder of the then existing mortgage debt on the applicable Brookdale property. In connection with any such financing or refinancing, the rent for the applicable Brookdale property will be increased using a recomputed lease basis increased by an amount equal to the net financed proceeds paid to Brookdale plus (with limited exceptions) any fees, penalties, premiums or other costs related to such financing or refinancing. If the monthly debt service on any financed or refinanced proceeds paid to Brookdale exceeds the rent increase attributable to those financed or refinanced proceeds, then Brookdale is required to pay the excess. In addition, under certain circumstances, Brookdale will also be required to pay additional amounts relating to increases in debt service and other costs relating to any such financing or refinancing.

 

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Note 14—Earnings Per Share

The following table shows the amounts used in computing basic and diluted earnings per common share:

 

     For the Year Ended December 31,
             2008                    2007                    2006        
     (In thousands, except per share amounts)

Numerator for basic and diluted earnings per share:

        

Income from continuing operations

   $ 181,814    $ 142,709    $ 122,072

Preferred stock dividends and issuance costs

     —        5,199      —  
                    

Income from continuing operations applicable to common shares

     181,814      137,510      122,072

Discontinued operations

     44,474      139,609      9,358
                    

Net income applicable to common shares

   $ 226,288    $ 277,119    $ 131,430
                    

Denominator:

        

Denominator for basic earnings per share—weighted average shares

     139,572      122,597      104,206

Effect of dilutive securities:

        

Stock options

     223      383      511

Restricted stock awards

     17      14      14

Convertible notes

     100      18      —  
                    

Dilutive potential common stock

     340      415      525
                    

Denominator for diluted earnings per share—adjusted weighted average shares

     139,912      123,012      104,731
                    

Basic earnings per share:

        

Income from continuing operations applicable to common shares

   $ 1.30    $ 1.12    $ 1.17

Discontinued operations

     0.32      1.14      0.09
                    

Net income applicable to common shares

   $ 1.62    $ 2.26    $ 1.26
                    

Diluted earnings per share:

        

Income from continuing operations applicable to common shares

   $ 1.30    $ 1.12    $ 1.16

Discontinued operations

     0.32      1.13      0.09
                    

Net income applicable to common shares

   $ 1.62    $ 2.25    $ 1.25
                    

There were 940, 500, 222,200, 11,500 anti-dilutive options outstanding for the years ended December 31, 2008, 2007 and 2006, respectively.

Note 15—Litigation

Legal Proceedings Defended and Indemnified by Third Parties

Kindred, Brookdale, Alterra, Sunrise and our other tenants, operators and managers are parties to certain legal actions and regulatory investigations arising in the normal course of their business. In certain cases, the tenant, operator or manager, as applicable, has agreed to indemnify, defend and hold us harmless against these actions and investigations. We cannot assure you that the resolution of any litigation or investigations, either individually or in the aggregate, would not have a material adverse effect on Kindred’s, Brookdale’s, Alterra’s, Sunrise’s or such other tenants’, operators’ and managers’ liquidity, financial condition or results of operations, which, in turn, could have a Material Adverse Effect on us.

 

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Litigation Related to the Sunrise REIT Acquisition

On May 3, 2007, we filed a lawsuit against HCP, Inc. (“HCP”) in the United States District Court for the Western District of Kentucky, entitled Ventas, Inc. v. HCP, Inc., Case No. 07-cv-238-JGH. We assert claims of tortious interference with contract and tortious interference with prospective business advantage. The complaint alleges that HCP interfered with our purchase agreement to acquire the assets and liabilities of Sunrise REIT and with the process for unitholder consideration of the purchase agreement. The complaint alleges, among other things, that HCP made certain improper and misleading public statements and/or offers to acquire Sunrise REIT and that HCP’s actions caused us to suffer substantial damages, including, among other things, the payment of materially greater consideration to acquire Sunrise REIT resulting from the substantial increase in the purchase price that was agreed to in the original purchase agreement and the delay in closing the acquisition, as well as the negative movements in the foreign currency exchange rates and the per share price of our common equity during such delay. We are seeking monetary relief and punitive damages against HCP. On July 2, 2007, HCP filed its response to our complaint, along with a motion to dismiss the lawsuit. On December 19, 2007, the District Court denied HCP’s motion to dismiss. On April 8, 2008, HCP filed a motion requesting permission from the District Court to add a counterclaim against us. The counterclaim alleges that Sunrise REIT failed to conduct a fair sale process when it put itself up for sale in 2006 and that we, as the alleged successor to Sunrise REIT, are now responsible for those actions. On July 25, 2008, the District Court granted HCP’s motion to amend its answer to include the counterclaim. HCP is seeking compensatory and punitive damages. On November 13, 2008, HCP filed a motion requesting permission to amend its counterclaim to assert an additional count for an alleged negligent misrepresentation made by Sunrise REIT for which HCP contends that we, as the alleged successor of Sunrise REIT, are responsible. On December 8, 2008, the District Court granted HCP permission to amend its counterclaim, subject to our right to file a motion challenging all of HCP’s counterclaims on the pleadings. On December 23, 2008, we filed a motion challenging all of HCP’s counterclaims on the pleadings. That motion is pending. The District Court has scheduled a trial by jury in this matter to commence August 18, 2009. We intend to pursue our claims in the action and contest HCP’s counterclaim (which we believe has no merit) vigorously, although we cannot assure you that we will prevail in the action, or, if we do prevail, of the amount of recovery that may be awarded to us or if we do not prevail, the amount that we may be required to pay. We are unable at this time to estimate the possible loss or range of loss for the potential counterclaim in this action, and therefore, no provision for liability, if any, resulting from this litigation has been made in our Consolidated Financial Statements as of December 31, 2008.

Other Litigation

We are a plaintiff in an action seeking a declaratory judgment and damages entitled Ventas Realty, Limited Partnership et al. v. Black Diamond CLO 1998-1 Ltd., et al., Case No. 99 C107076, filed November 22, 1999 in the Circuit Court of Jefferson County, Kentucky. Two of the defendants have asserted counterclaims against us under theories of breach of contract, tortious interference with contract and abuse of process. We dispute the material allegations contained in the counterclaims and we intend to continue to pursue our claims and defend the counterclaims vigorously. We do not expect to suffer any loss for the counterclaims in this action, and therefore, no provision for liability resulting from this litigation has been made in our Consolidated Financial Statements as of December 31, 2008.

We are party to various other lawsuits, investigations and claims (some of which may not be insured) arising in the normal course of our business, including without limitation, in connection with the operations of our seniors housing communities managed by Sunrise. It is the opinion of management that, except as set forth in this Note 15, the disposition of these actions, investigations and claims will not, individually or in the aggregate, have a Material Adverse Effect on us. However, we are unable to predict the ultimate outcome of pending litigation, investigations and claims, and if management’s assessment of our liability with respect to these actions, investigations and claims is incorrect, such actions, investigations and claims could have a Material Adverse Effect on us.

 

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Note 16—Capital Stock

At December 31, 2008 and 2007, our authorized capital stock consisted of 300,000,000 shares of common stock, par value $0.25 per share, and 10,000,000 shares of preferred stock, par value $1.00 per share.

In 2008, we sold 9,236,083 shares of our common stock in underwritten public offerings pursuant to our existing universal shelf registration statement. We received $408.5 million in net proceeds from the sales, which we used to repay indebtedness outstanding under our unsecured revolving credit facilities and for working capital and other general corporate purposes.

In May 2007, we completed the sale of 26,910,000 shares of our common stock in an underwritten public offering pursuant to our existing universal shelf registration statement. We received $1.05 billion in net proceeds from the sale, which we used along with the proceeds of the disposition of the Kindred assets (see “Note 6—Dispositions”) and borrowings under our unsecured revolving credit facility to redeem all of our outstanding Series A Senior Preferred Stock and to repay our indebtedness under the senior interim loan used to fund a portion of the Sunrise REIT acquisition.

Our automatic universal shelf registration statement, filed with the Commission in April 2006, relates to the sale, from time to time, of an indeterminate amount of debt securities and related guarantees, common stock, preferred stock, depositary shares and warrants. The registration statement expires in April 2009 pursuant to the Commission’s rules, and we intend to replace it with a new universal shelf registration statement upon expiration.

Excess Share Provision

In order to preserve our ability to maintain REIT status, our Certificate of Incorporation provides that if a person acquires beneficial ownership of greater than 9% of our outstanding common stock or 9.9% of our outstanding preferred stock, the shares that are beneficially owned in excess of such limit are deemed to be excess shares. These shares are automatically deemed transferred to a trust for the benefit of a charitable institution or other qualifying organization selected by our Board of Directors. The trust is entitled to all dividends with respect to the shares and the trustee may exercise all voting power over the shares.

We have the right to buy the excess shares for a purchase price equal to the lesser of (i) the price per share in the transaction that created the excess shares, or (ii) the market price on the date we buy the shares, and we may defer payment of the purchase price for the excess shares for up to five years. If we do not purchase the excess shares, the trustee of the trust is required to transfer the excess shares at the direction of the Board of Directors. The owner of the excess shares is entitled to receive the lesser of the proceeds from the sale of the excess shares or the original purchase price for such excess shares; any additional amounts are payable to the beneficiary of the trust.

The Board of Directors is empowered to grant waivers from the excess share provisions of our Certificate of Incorporation.

Distribution Reinvestment and Stock Purchase Plan

We have in effect a Distribution Reinvestment and Stock Purchase Plan (“DRIP”), under which existing stockholders may purchase shares of common stock by reinvesting all or a portion of the cash distribution on their shares of our common stock. In addition, existing stockholders, as well as new investors, may purchase shares of common stock under the DRIP by making optional cash payments. We currently offer a 1% discount on the purchase price of our stock to shareholders who reinvest their dividends and/or make optional cash purchases of common stock through the DRIP. The amount and availability of this discount is at our discretion. The granting of a discount for one month or quarter, as applicable, will not insure the availability or amount of a discount in future periods, and each month or quarter, as applicable, we may lower or eliminate the discount without prior notice. We may also, without prior notice, change our determination as to whether common shares will be purchased by the plan administrator directly from us or in the open market.

 

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Note 17—Related Party Transactions

During 1998, we acquired eight personal care facilities and related facilities for approximately $7.1 million from Tangram Rehabilitation Network, Inc. (“Tangram”). Tangram is a wholly owned subsidiary of Res-Care, Inc. (“Res-Care”) of which a member of our Board of Directors is the Chairman of the Board. We lease the Tangram facilities to Tangram pursuant to a master lease agreement which is guaranteed by Res-Care. For the years ended December 31, 2008, 2007 and 2006, Tangram has paid us approximately $949,800, $917,000 and $897,000, respectively, in base rent payments.

At December 31, 2007, we had loans receivable of approximately $2.1 million, due from certain current and former executive officers. Both of these loans had been repaid in full as of December 31, 2008.

Note 18—Quarterly Financial Information (Unaudited)

Summarized unaudited consolidated quarterly information for the years ended December 31, 2008 and 2007 is provided below.

 

     For the Year Ended December 31, 2008
     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter

Revenues (1)

   $ 228,744    $ 230,503    $ 236,562    $ 233,957
                           

Income from continuing operations applicable to
common shares (1)

   $ 30,584    $ 42,894    $ 63,810    $ 44,526

Discontinued operations (1)

     1,468      28,172      885      13,949
                           

Net income applicable to common shares

   $ 32,052    $ 71,066    $ 64,695    $ 58,475
                           

Earnings per share:

           

Basic:

           

Income from continuing operations applicable to common shares

   $ 0.23    $ 0.31    $ 0.45    $ 0.31

Discontinued operations

     0.01      0.20      0.01      0.10
                           

Net income applicable to common shares

   $ 0.24    $ 0.51    $ 0.46    $ 0.41
                           

Diluted:

           

Income from continuing operations applicable to common shares

   $ 0.22    $ 0.31    $ 0.45    $ 0.31

Discontinued operations

     0.01      0.20      0.01      0.10
                           

Net income applicable to common shares

   $ 0.23    $ 0.51    $ 0.46    $ 0.41
                           

Dividends declared per share

   $ 0.5125    $ 0.5125    $ 0.5125    $ 0.5125

 

(1) The amounts presented for the three months ended March 31, 2008, June 30, 2008 and September 30, 2008 are not equal to the same amounts previously reported in our Quarterly Reports on Form 10-Q as a result of discontinued operations consisting of properties sold in 2008 and properties reflected as held for sale as of December 31, 2008.

 

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     For the Three Months Ended  
     March 31,
2008
    June 30,
2008
    September 30,
2008
 
     (In thousands, except per share amounts)  

Revenues, previously reported in Form 10-Q

   $ 231,764     $ 233,513     $ 238,554  

Revenues, previously reported in Form 10-Q, subsequently reclassified to discontinued operations

     (3,020 )     (3,010 )     (1,992 )
                        

Total revenues disclosed in Form 10-K

   $ 228,744     $ 230,503     $ 236,562  
                        

Income from continuing operations applicable to common shares, previously reported in Form 10-Q

   $ 31,098     $ 43,407     $ 64,073  

Income from continuing operations applicable to common shares, previously reported in Form 10-Q, subsequently reclassified to discontinued operations

     (514 )     (513 )     (263 )
                        

Income from continuing operations applicable to common shares disclosed in Form 10-K

   $ 30,584     $ 42,894     $ 63,810  
                        

Discontinued operations, previously reported in Form 10-Q

   $ 954     $ 27,659     $ 622  

Discontinued operations from properties sold subsequent to the respective reporting period

     514       513       263  
                        

Discontinued operations disclosed in Form 10-K

   $ 1,468     $ 28,172     $ 885  
                        

 

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     For the Year Ended December 31, 2007
     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter

Revenues (1)

   $ 114,552    $ 188,938    $ 221,489    $ 227,741
                           

Income from continuing operations (1)

   $ 43,205    $ 44,149    $ 26,982    $ 28,373

Preferred stock dividends and issuance costs

     —        5,199      —        —  
                           

Income from continuing operations applicable to
common shares (1)

     43,205      38,950      26,982      28,373

Discontinued operations (1)

     1,901      135,648      1,032      1,028
                           

Net income applicable to common shares

   $ 45,106    $ 174,598    $ 28,014    $ 29,401
                           

Earnings per share:

           

Basic:

           

Income from continuing operations applicable to common shares

   $ 0.41    $ 0.33    $ 0.20    $ 0.21

Discontinued operations

     0.02      1.16      0.01      0.01
                           

Net income applicable to common shares

   $ 0.43    $ 1.49    $ 0.21    $ 0.22
                           

Diluted:

           

Income from continuing operations applicable to common shares

   $ 0.40    $ 0.33    $ 0.20    $ 0.21

Discontinued operations

     0.02      1.15      0.01      0.01
                           

Net income applicable to common shares

   $ 0.42    $ 1.48    $ 0.21    $ 0.22
                           

Dividends declared per share

   $ 0.475    $ 0.475    $ 0.475    $ 0.475

 

(1) The amounts presented for 2007 are not equal to the same amounts previously reported in our Current Report on Form 8-K filed with the Commission on November 24, 2008 as a result of discontinued operations consisting of properties reflected as held for sale as of December 31, 2008.

 

     For the Year Ended December 31, 2007  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (In thousands, except per share amounts)  

Revenues, previously reported in Form 8-K

   $ 116,421     $ 190,921     $ 223,492     $ 229,737  

Revenues, previously reported in Form 8-K, subsequently reclassified to discontinued operations

     (1,869 )     (1,983 )     (2,003 )     (1,996 )
                                

Total revenues disclosed in Form 10-K

   $ 114,552     $ 188,938     $ 221,489     $ 227,741  
                                

Income from continuing operations, previously reported in Form 8-K

   $ 43,360     $ 44,369     $ 27,226     $ 28,612  

Income from continuing operations, previously reported in Form 8-K, subsequently reclassified to discontinued operations

     (155 )     (220 )     (244 )     (239 )
                                

Income from continuing operations disclosed in Form 10-K

   $ 43,205     $ 44,149     $ 26,982     $ 28,373  
                                

Income from continuing operations applicable to common shares, previously reported in Form 8-K

   $ 43,360     $ 39,170     $ 27,226     $ 28,612  

Income from continuing operations applicable to common shares, previously reported in Form 8-K, subsequently reclassified to discontinued operations

     (155 )     (220 )     (244 )     (239 )
                                

Income from continuing operations applicable to common shares disclosed in Form 10-K

   $ 43,205     $ 38,950     $ 26,982     $ 28,373  
                                

Discontinued operations, previously reported in Form 8-K

   $ 1,746     $ 135,428     $ 788     $ 789  

Discontinued operations from properties sold subsequent to the respective reporting period

     155       220       244       239  
                                

Discontinued operations disclosed in Form 10-K

   $ 1,901     $ 135,648     $ 1,032     $ 1,028  
                                

 

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Note 19—Segment Information

As of December 31, 2008, we operated through two reportable business segments: triple-net leased properties and senior living operations. Our triple-net leased properties segment consists of acquiring, financing and owning seniors housing and healthcare properties in the United States and leasing those properties to healthcare operating companies under “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our senior living operations segment consists of investments in seniors housing communities located in the United States and Canada for which we engage Sunrise to manage the operations.

We acquired the senior living operations segment on April 26, 2007, pursuant to the purchase of the Sunrise REIT properties. With the addition of these properties, we believed segment differentiation would be appropriate based on the different economic and legal structures used to acquire and own those assets. Prior to the acquisition, we operated through one reportable segment—investment in real estate—which included the triple-net leased properties and our MOBs. Our MOB segment consists of leasing space primarily to physicians and other healthcare businesses and engaging third parties to manage those operations. Due to our limited operation of and allocation of capital to the MOBs, we separated them from the triple-net leased properties segment. However, the MOBs segment is not individually reported and is included in “All Other” because it does not meet the quantitative thresholds of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” at the current time.

We evaluate performance of the combined properties in each segment based on net operating income before interest (excluding income from loans and investments), income taxes, depreciation and amortization, rent reset costs, reversal of contingent liability, foreign currency gains/losses, general, administrative and professional fees, merger-related expenses and minority interest. There are no intersegment sales or transfers.

All other revenues consist primarily of rental income related to the MOBs, income from loans and investments and other miscellaneous income. All other assets consist primarily of MOB assets and corporate assets including cash, restricted cash, deferred financing costs, notes receivable, and miscellaneous accounts receivable.

Summary information by business segment is as follows:

For the year ended December 31, 2008:

 

     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
           (In thousands)        

Revenues:

        

Rental income

   $ 459,643     $ —       $ 27,793     $ 487,436  

Resident fees and services

     —         429,257       —         429,257  

Income from loans and investments

     —         —         8,847       8,847  

Interest and other income

     2,133       338       1,755       4,226  
                                

Total revenues

   $ 461,776     $ 429,595     $ 38,395     $ 929,766  
                                

Segment net operating income

   $ 459,643     $ 138,813     $ 20,140     $ 618,596  

Interest and other income

     2,133       338       1,755       4,226  

Merger-related expenses

     —         (4,460 )     —         (4,460 )

Interest expense

     (103,780 )     (95,595 )     (3,809 )     (203,184 )

Depreciation and amortization

     (122,094 )     (98,511 )     (11,197 )     (231,802 )

General, administrative and professional fees

     —         —         (40,651 )     (40,651 )

Foreign currency gain

     —         162       —         162  

Gain on extinguishment of debt

     1,868       530       —         2,398  

Minority interest

     —         (2,510 )     (174 )     (2,684 )
                                

Net income (loss) before taxes and discontinued operations

   $ 237,770     $ (61,233 )   $ (33,936 )   $ 142,601  
                                

 

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For the year ended December 31, 2007:

 

     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
           (In thousands)        

Revenues:

        

Rental income

   $ 450,757     $ —       $ 14,312     $ 465,069  

Resident fees and services

     —         282,226       —         282,226  

Income from loans and investments

     —         —         2,586       2,586  

Interest and other income

     1,970       832       37       2,839  
                                

Total revenues

   $ 452,727     $ 283,058     $ 16,935     $ 752,720  
                                

Segment net operating income

   $ 450,757     $ 90,137     $ 10,862     $ 551,756  

Interest and other income

     1,970       832       37       2,839  

Merger-related expenses

     —         (2,979 )     —         (2,979 )

Interest expense

     (129,250 )     (64,547 )     (1,934 )     (195,731 )

Depreciation and amortization

     (122,104 )     (101,223 )     (4,136 )     (227,463 )

General, administrative and professional fees

     —         —         (36,425 )     (36,425 )

Foreign currency gain

     —         24,280       —         24,280  

Gain on extinguishment of debt

     88       —         —         88  

Minority interest

     —         (1,721 )     23       (1,698 )
                                

Net income (loss) before taxes and discontinued operations

   $ 201,461     $ (55,221 )   $ (31,573 )   $ 114,667  
                                

For the year ended December 31, 2006:

        
     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
           (In thousands)        

Revenues:

        

Rental income

   $ 381,016     $ —       $ 7,151     $ 388,167  

Income from loans and investments

     —         —         7,014       7,014  

Interest and other income

     2,734       —         36       2,770  
                                

Total revenues

   $ 383,750     $ —       $ 14,201     $ 397,951  
                                

Segment net operating income

   $ 381,016     $ —       $ 10,994     $ 392,010  

Interest and other income

     2,734       —         36       2,770  

Interest expense

     (127,534 )     —         (1,419 )     (128,953 )

Depreciation and amortization

     (108,790 )     —         (1,964 )     (110,754 )

General, administrative and professional fees

     —         —         (26,136 )     (26,136 )

Loss on extinguishment of debt

     (1,273 )     —         —         (1,273 )

Rent reset costs

     (7,361 )     —         —         (7,361 )
                                

Net income (loss) before taxes and discontinued operations

   $ 138,792     $ —       $ (18,489 )   $ 120,303  
                                

 

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     As of December 31,
     2008    2007
     (In thousands)

Assets:

     

Triple-net leased properties

   $ 3,127,561    $ 3,011,920

Senior living operations

     2,362,282      2,506,780

All other assets

     280,141      197,928
             

Total assets

   $ 5,769,984    $ 5,716,628
             

 

     For the Year Ended December 31,
     2008    2007    2006
     (In thousands)

Capital expenditures:

        

Triple-net leased properties

   $ 11,487    $ 10,107    $ 490,311

Senior living operations

     7,301      1,231,083      —  

All other expenditures

     51,372      127,636      368
                    

Total capital expenditures

   $ 70,160    $ 1,368,826    $ 490,679
                    

Our portfolio of properties and real estate investments are located in the United States and Canada. Revenues are attributed to an individual country based on the location of each property.

Geographic information regarding our business segments is as follows:

 

     For the Year Ended December 31,
   2008    2007    2006
   (In thousands)

Revenue:

        

United States

   $ 854,388    $ 705,828    $ 397,951

Canada

     75,378      46,892      —  
                    

Total revenues

   $ 929,766    $ 752,720    $ 397,951
                    

 

     As of December 31,
     2008    2007
     (In thousands)

Long-lived assets:

     

United States

   $ 4,786,734    $ 5,024,678

Canada

     386,205      451,151
             

Total long-lived assets

   $ 5,172,939    $ 5,475,829
             

 

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Note 20—Condensed Consolidating Information

We and certain of our direct and indirect wholly owned subsidiaries (the “Wholly Owned Subsidiary Guarantors”) have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to the Senior Notes of the Issuers. Ventas Capital Corporation is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offering of the Senior Notes and has no assets or operations. In addition, Ventas Realty and the Wholly Owned Subsidiary Guarantors have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to our Convertible Notes. ETOP, of which we own substantially all of the partnership units, and certain of its wholly owned subsidiaries (the “ETOP Subsidiary Guarantors” and collectively, with the Wholly Owned Subsidiary Guarantors, the “Guarantors”), have also provided a guarantee, on a joint and several basis, of the Senior Notes and the Convertible Notes. We have other subsidiaries (“Non-Guarantor Subsidiaries”) that are not included among the Guarantors, and such subsidiaries are not obligated with respect to the Senior Notes or the Convertible Notes. Contractual and legal restrictions, including those contained in the instruments governing certain Non-Guarantor Subsidiaries’ outstanding indebtedness, may under certain circumstances restrict our ability to obtain cash from our Non-Guarantor Subsidiaries for the purpose of meeting our debt service obligations, including our guarantee of payment of principal and interest on the Senior Notes and our primary obligation to pay principal and interest on the Convertible Notes. Certain of our real estate assets are also subject to mortgages. The following summarizes our condensed consolidating information as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006:

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2008

 

    Ventas, Inc.     ETOP and
ETOP
Subsidiary
Guarantors
  Wholly
Owned
Subsidiary
Guarantors
  Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
    (In thousands)

Assets

             

Net real estate investments

  $ 10,144     $ 49,785   $ 2,144,350   $ 852,203     $ 2,239,746   $ —       $ 5,296,228

Cash and cash equivalents

    —         —       10,325     144,918       21,569     —         176,812

Escrow deposits and restricted cash

    216       —       9,398     21,128       25,124     —         55,866

Deferred financing costs, net

    318       —       672     11,243       8,365     —         20,598

Notes receivable-related parties

    —         —       —       —         —       —         —  

Investment in and advances to affiliates

    1,170,475       9,039     —       1,119,378       —       (2,298,892 )     —  

Other

    11       935     57,799     84,612       77,123     —         220,480
                                               

Total assets

  $ 1,181,164     $ 59,759   $ 2,222,544   $ 2,233,482     $ 2,371,927   $ (2,298,892 )   $ 5,769,984
                                               

Liabilities and stockholders’ equity

             

Liabilities:

             

Senior notes payable and other debt

  $ 227,214     $ —     $ 442,098   $ 1,351,526     $ 1,126,856   $ —       $ 3,147,694

Intercompany

    (940 )     7,500     491,696     (498,256 )     —       —         —  

Deferred revenue

    11       —       518     3,617       2,911     —         7,057

Accrued interest

    —         —       1,733     15,721       4,477     —         21,931

Accounts payable and other accrued liabilities

    12,578       37     67,700     29,957       57,926     —         168,198

Deferred income taxes

    257,499       —       —       —         —       —         257,499
                                               

Total liabilities

    496,362       7,537     1,003,745     902,565       1,192,170     —         3,602,379

Minority interest

    393       —       —       —         18,744     —         19,137

Total stockholders’ equity

    684,409       52,222     1,218,799     1,330,917       1,161,013     (2,298,892 )     2,148,468
                                               

Total liabilities and stockholders’ equity

  $ 1,181,164     $ 59,759   $ 2,222,544   $ 2,233,482     $ 2,371,927   $ (2,298,892 )   $ 5,769,984
                                               

 

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2007

 

    Ventas, Inc.     ETOP and
ETOP
Subsidiary
Guarantors
  Wholly
Owned
Subsidiary
Guarantors
  Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
    (In thousands)

Assets

             

Net real estate investments

  $ 10,793     $ 51,923   $ 2,233,454   $ 874,031     $ 2,325,626   $ —       $ 5,495,827

Cash and cash equivalents

    —         —       6,040     494       21,800     —         28,334

Escrow deposits and restricted cash

    214       —       24,618     6,341       22,904     —         54,077

Deferred financing costs, net

    419       —       401     14,101       7,915     —         22,836

Notes receivable-related parties

    1,717       —       —       375       —       —         2,092

Investment in and advances to affiliates

    1,114,775       9,039     —       956,394       —       (2,080,208 )     —  

Other

    —         714     55,430     15,433       41,885     —         113,462
                                               

Total assets

  $ 1,127,918     $ 61,676   $ 2,319,943   $ 1,867,169     $ 2,420,130   $ (2,080,208 )   $ 5,716,628
                                               

Liabilities and stockholders’ equity

             

Liabilities:

             

Senior notes payable and other debt

  $ 226,323     $ 400   $ 606,806   $ 1,457,168     $ 1,069,802   $ —       $ 3,360,499

Intercompany loans

    (44,347 )     7,500     569,778     (541,655 )     8,724     —         —  

Deferred revenue

    (8 )     —       568     5,463       3,042     —         9,065

Accrued interest

    (796 )     3     3,287     16,621       1,675     —         20,790

Accounts payable and other accrued liabilities

    12,264       112     65,875     43,369       51,956     —         173,576

Deferred income taxes

    297,590       —       —       —         —       —         297,590
                                               

Total liabilities

    491,026       8,015     1,246,314     980,966       1,135,199     —         3,861,520

Minority interest

    393       —       21     2,115       28,925     —         31,454

Total stockholders’ equity

    636,499       53,661     1,073,608     884,088       1,256,006     (2,080,208 )     1,823,654
                                               

Total liabilities and stockholders’ equity

  $ 1,127,918     $ 61,676   $ 2,319,943   $ 1,867,169     $ 2,420,130   $ (2,080,208 )   $ 5,716,628
                                               

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2008

 

    Ventas,
Inc.
    ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
    Consolidated  
  (In thousands)  

Revenues:

             

Rental income

  $ 2,296     $ 5,812     $ 144,502     $ 273,658     $ 61,168     $ —       $ 487,436  

Resident fees and services

    —         —         109,038       —         320,219       —         429,257  

Income from loans and investments

    —         —         —         8,847       —         —         8,847  

Equity earnings (loss) in affiliates

    191,524       (6 )     5,602       —         —         (197,120 )     —    

Interest and other income

    73       —         184       3,539       430       —         4,226  
                                                       

Total revenues

    193,893       5,806       259,326       286,044       381,817       (197,120 )     929,766  

Expenses:

             

Interest

    160       27       31,925       107,114       63,958       —         203,184  

Depreciation and amortization

    648       2,152       90,155       42,696       96,151       —         231,802  

Property-level operating expenses

    —         —         73,787       6,515       226,642       —         306,944  

General, administrative and professional fees

    6,045       362       13,561       16,320       4,363       —         40,651  

Foreign currency loss (gain)

    126       —         (227 )     —         (61 )     —         (162 )

Loss (gain) on extinguishment of debt

    —         —         30       (1,869 )     (559 )     —         (2,398 )

Merger-related expenses (gain)

    —         —         3,922       815       (277 )     —         4,460  

Intercompany interest

    (161 )     (336 )     48,269       (48,708 )     936       —         —    
                                                       

Total expenses

    6,818       2,205       261,422       122,883       391,153       —         784,481  
                                                       

Income (loss) before reversal of contingent liability, income taxes, minority interest and discontinued operations

    187,075       3,601       (2,096 )     163,161       (9,336 )     (197,120 )     145,285  

Reversal of contingent liability

    23,328       —         —         —         —         —         23,328  

Income tax benefit, net of minority interest

    15,885       —         —         —         —         —         15,885  
                                                       

Income (loss) before minority interest and discontinued operations

    226,288       3,601       (2,096 )     163,161       (9,336 )     (197,120 )     184,498  

Minority interest, net of tax

    —         —         (1,752 )     —         4,436       —         2,684  
                                                       

Income (loss) from continuing operations

    226,288       3,601       (344 )     163,161       (13,772 )     (197,120 )     181,814  

Discontinued operations

    —         —         —         36,924       7,550       —         44,474  
                                                       

Net income (loss) applicable to common shares

  $ 226,288     $ 3,601     $ (344 )   $ 200,085     $ (6,222 )   $ (197,120 )   $ 226,288  
                                                       

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2007

 

    Ventas,
Inc.
    ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
    Consolidated  
  (In thousands)  

Revenues:

             

Rental income

  $ 2,248     $ 670     $ 142,821     $ 271,283     $ 48,047     $ —       $ 465,069  

Resident fees and services

    —         —         73,714       —         208,512       —         282,226  

Income from loans and investments

    —         —         —         2,586       —         —         2,586  

Equity earnings (loss) in affiliates

    250,530       (227 )     6,154       —         —         (256,457 )     —    

Interest and other income

    82       (2 )     362       1,460       937       —         2,839  
                                                       

Total revenues

    252,860       441       223,051       275,329       257,496       (256,457 )     752,720  

Expenses:

             

Interest

    875       (2,842 )     32,164       117,584       47,950       —         195,731  

Depreciation and amortization

    648       441       91,094       44,698       90,582       —         227,463  

Property-level operating expenses

    —         —         51,057       —         147,068       —         198,125  

General, administrative and professional fees

    1,337       409       12,374       19,198       3,107       —         36,425  

Foreign currency loss (gain)

    120       —         12       (24,317 )     (95 )     —         (24,280 )

Gain on extinguishment of debt

    —         —         —         (88 )     —         —         (88 )

Merger-related expenses

    —         —         2,198       739       42       —         2,979  

Intercompany interest

    (4,396 )     (233 )     30,586       (26,791 )     834       —         —    
                                                       

Total expenses

    (1,416 )     (2,225 )     219,485       131,023       289,488       —         636,355  
                                                       

Income (loss) before income taxes, minority interest and discontinued operations

    254,276       2,666       3,566       144,306       (31,992 )     (256,457 )     116,365  

Income tax benefit, net of minority interest

    28,042       —         —         —         —         —         28,042  
                                                       

Income (loss) before minority interest and discontinued operations

    282,318       2,666       3,566       144,306       (31,992 )     (256,457 )     144,407  

Minority interest, net of tax

    —         —         (1,076 )     —         2,774       —         1,698  
                                                       

Income (loss) from continuing operations

    282,318       2,666       4,642       144,306       (34,766 )     (256,457 )     142,709  

Discontinued operations

    —         657       —         138,745       207       —         139,609  
                                                       

Net income (loss)

    282,318       3,323       4,642       283,051       (34,559 )     (256,457 )     282,318  

Preferred stock dividends and issuance costs

    5,199       —         —         —         —         —         5,199  
                                                       

Net income (loss) applicable to common shares

  $ 277,119     $ 3,323     $ 4,642     $ 283,051     $ (34,559 )   $ (256,457 )   $ 277,119  
                                                       

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2006

 

    Ventas,
Inc.
  ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
  Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
  (In thousands)

Revenues:

             

Rental income

  $ 2,317   $ 634     $ 100,623   $ 243,012     $ 41,581   $ —       $ 388,167

Income from loans and investments

    —       —         —       7,014       —       —         7,014

Equity earnings (loss) in affiliates

    128,902     (99 )     4,179     —         —       (132,982 )     —  

Interest and other income

    79     (116 )     37     2,412       358     —         2,770
                                               

Total revenues

    131,298     419       104,839     252,438       41,939     (132,982 )     397,951

Expenses:

             

Interest

    86     (2,904 )     25,747     89,029       16,995     —         128,953

Depreciation and amortization

    673     440       48,716     45,057       15,868     —         110,754

Property-level operating expenses

    —       —         —       904       2,267     —         3,171

General, administrative and professional fees

    878     402       6,266     16,029       2,561     —         26,136

Rent reset costs

    —       —         —       7,361       —       —         7,361

Loss on extinguishment of debt

    —       —         —       1,273       —       —         1,273

Intercompany interest

    —       (115 )     —       (600 )     715     —         —  
                                               

Total expenses

    1,637     (2,177 )     80,729     159,053       38,406     —         277,648
                                               

Income before reversal of contingent liability and discontinued operations

    129,661     2,596       24,110     93,385       3,533     (132,982 )     120,303

Reversal of contingent liability

    1,769     —         —       —         —       —         1,769
                                               

Income from continuing operations

    131,430     2,596       24,110     93,385       3,533     (132,982 )     122,072

Discontinued operations

    —       561       —       8,605       192     —         9,358
                                               

Net income applicable to common shares

  $ 131,430   $ 3,157     $ 24,110   $ 101,990     $ 3,725   $ (132,982 )   $ 131,430
                                               

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2008

 

    Ventas, Inc.     ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
  (In thousands)  

Net cash provided by operating activities

  $ 548     $ 7,445     $ 75,734     $ 175,741     $ 104,707     $ —     $ 364,175  

Net cash provided by (used in) investing activities

    1,717       (306 )     (35,255 )     (73,663 )     (28,749 )     —       (136,256 )

Cash flows from financing activities:

             

Net change in borrowings under revolving credit facilities

    —         —         (27,574 )     100,940       —         —       73,366  

Proceeds from debt

    —         —         —         —         140,262       —       140,262  

Repayment of debt

    —         (2,002 )     (136,228 )     (206,835 )     (71,831 )     —       (416,896 )

Net change in intercompany debt

    43,407       —         (78,082 )     43,399       (8,724 )     —       —    

Payment of deferred financing costs

    —         —         (811 )     (1,099 )     (1,947 )     —       (3,857 )

Issuance of common stock

    408,540       —         —         —         —         —       408,540  

Cash distribution (to) from affiliates

    (172,582 )     (5,105 )     207,153       105,135       (134,601 )     —       —    

Cash distribution to common stockholders

    (288,817 )     (32 )     —         —         —         —       (288,849 )

Other

    7,187       —         —         —         —         —       7,187  
                                                     

Net cash (used in) provided by financing activities

    (2,265 )     (7,139 )     (35,542 )     41,540       (76,841 )     —       (80,247 )
                                                     

Net increase (decrease) in cash and cash equivalents

    —         —         4,937       143,618       (883 )     —       147,672  

Effect of foreign currency translation on cash and cash equivalents

    —         —         —         806       —         —       806  

Cash and cash equivalents at beginning of year

    —         —         5,388       494       22,452       —       28,334  
                                                     

Cash and cash equivalents at end of year

  $ —       $ —       $ 10,325     $ 144,918     $ 21,569     $ —     $ 176,812  
                                                     

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2007

 

    Ventas, Inc.     ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
  (In thousands)  

Net cash provided by operating activities

  $ 22,852     $ 5,309     $ 67,384     $ 212,004     $ 94,077     $ —     $ 401,626  

Net cash (used in) provided by investing activities

    (1 )     —         (567,237 )     180,755       (788,709 )     —       (1,175,192 )

Cash flows from financing activities:

             

Net change in borrowings under revolving credit facilities

    —         —         84,286       92,300       —         —       176,586  

Issuance of bridge financing

    —         —         —         1,230,000       —         —       1,230,000  

Repayment of bridge financing

    —         —         —         (1,230,000 )     —         —       (1,230,000 )

Proceeds from debt

    —         —         —         —         53,832       —       53,832  

Repayment of debt

    —         (13 )     (126,158 )     (5,001 )     (53,441 )     —       (184,613 )

Net change in intercompany debt

    (44,347 )     —         453,502       (409,155 )     —         —       —    

Debt and preferred stock issuance costs

    (4,300 )     —         —         —         —         —       (4,300 )

Payment of deferred financing costs

    —         —         (497 )     (275 )     (7,084 )     —       (7,856 )

Issuance of common stock

    1,045,713       —         —         —         —         —       1,045,713  

Cash distribution to preferred stockholders

    (3,449 )     —         —         —         —         —       (3,449 )

Cash distribution (to) from affiliates

    (746,388 )     (5,177 )     70,294       (65,853 )     747,124       —       —    

Cash distribution to common stockholders

    (282,620 )     (119 )     —         —         —         —       (282,739 )

Other

    12,540       —         24,466       (65 )     (24,466 )     —       12,475  
                                                     

Net cash (used in) provided by financing activities

    (22,851 )     (5,309 )     505,893       (388,049 )     715,965       —       805,649  
                                                     

Net increase in cash and cash equivalents

    —         —         6,040       4,710       21,333       —       32,083  

Effect of foreign currency translation on cash and cash equivalents

    —         —         —         (4,995 )     —         —       (4,995 )

Cash and cash equivalents at beginning of year

    —         —         —         779       467       —       1,246  
                                                     

Cash and cash equivalents at end of year

  $ —       $ —       $ 6,040     $ 494     $ 21,800     $ —     $ 28,334  
                                                     

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2006

 

    Ventas, Inc.     ETOP and
ETOP
Subsidiary
Guarantors
    Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
  (In thousands)  

Net cash provided by operating activities

  $ 608     $ 4,618     $ 56,465     $ 160,833     $ 16,343     $ —     $ 238,867  

Net cash provided by (used in) investing activities

    —         —         167       (481,640 )     (501 )     —       (481,974 )

Cash flows from financing activities:

             

Net change in borrowings under revolving credit facilities

    —         —         —         (32,200 )     —         —       (32,200 )

Proceeds from debt

    225,469       —         —         221,462       2,074       —       449,005  

Repayment of debt

    —         (11 )     (11,501 )     —         (4,572 )     —       (16,084 )

Payment of deferred financing costs

    —         —         —         (4,876 )     —         —       (4,876 )

Issuance of common stock, net

    831       —         —         —         —         —       831  

Cash distribution (to) from affiliates

    (73,232 )     (4,321 )     (45,131 )     136,173       (13,489 )     —       —    

Cash distribution to stockholders

    (160,311 )     (287 )     —         —         —         —       (160,598 )

Other

    6,634       —         (3,376 )     —         3,376       —       6,634  
                                                     

Net cash (used in) provided by financing activities

    (609 )     (4,619 )     (60,008 )     320,559       (12,611 )     —       242,712  
                                                     

Net (decrease) increase in cash and cash equivalents

    (1 )     (1 )     (3,376 )     (248 )     3,231       —       (395 )

Cash and cash equivalents at beginning of year

    1       1       —         1,027       612       —       1,641  
                                                     

Cash and cash equivalents at end of year

  $ —       $ —       $ (3,376 )   $ 779     $ 3,843     $ —     $ 1,246  
                                                     

Note 21—ETOP Condensed Consolidating Information

ETOP, of which we own substantially all of the partnership interests, and the ETOP Subsidiary Guarantors have provided full and unconditional guarantees, on a joint and several basis with us and certain of our direct and indirect wholly owned subsidiaries, of the obligation to pay principal and interest with respect to the Senior Notes and the Convertible Notes. See “Note 20—Condensed Consolidating Information.” Certain of ETOP’s other direct and indirect wholly owned subsidiaries (the “ETOP Non-Guarantor Subsidiaries”) have not provided a guarantee of the Senior Notes or the Convertible Notes and, therefore, are not directly obligated with respect to the Senior Notes or the Convertible Notes.

Contractual and legal restrictions, including those contained in the instruments governing certain of the ETOP Non-Guarantor Subsidiaries’ outstanding indebtedness, may under certain circumstances restrict ETOP’s (and therefore our) ability to obtain cash from the ETOP Non-Guarantor Subsidiaries for the purpose of satisfying ETOP’s and our debt service obligations, including ETOP’s and our guarantee of payment of principal and interest on the Senior Notes and our primary obligation to pay principal and interest on the Convertible Notes. See “Note 9—Borrowing Arrangements.” Certain of the ETOP Subsidiary Guarantors’ properties are subject to mortgages.

 

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2008

 

     ETOP and
ETOP
Subsidiary
Guarantors
   ETOP
Non-Guarantor
Subsidiaries
   Consolidated
Elimination
   Consolidated
        (In thousands)     

Assets

           

Net real estate investments

   $ 49,785    $ 33,690    $ —      $ 83,475

Escrow deposits and restricted cash

     —        8,731      —        8,731

Investment in and advances to affiliates

     9,039      —        —        9,039

Other

     935      48,083      —        49,018
                           

Total assets

   $ 59,759    $ 90,504    $ —      $ 150,263
                           

Liabilities and partners’ capital

           

Liabilities:

           

Notes payable and other debt

   $ —      $ 62,289    $ —      $ 62,289

Note payable to affiliate

     7,500      —        —        7,500

Accrued interest

     —        403      —        403

Accounts payable and other accrued liabilities

     37      3,240      —        3,277
                           

Total liabilities

     7,537      65,932      —        73,469

Total partners’ capital

     52,222      24,572      —        76,794
                           

Total liabilities and partners’ capital

   $ 59,759    $ 90,504    $ —      $ 150,263
                           

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2007

 

     ETOP and
ETOP
Subsidiary
Guarantors
   ETOP
Non-Guarantor
Subsidiaries
   Consolidated
Elimination
   Consolidated
        (In thousands)     

Assets

           

Net real estate investments

   $ 51,923    $ 82,974    $ —      $ 134,897

Escrow deposits and restricted cash

     —        7,536      —        7,536

Investment in and advances to affiliates

     9,039      —        —        9,039

Other

     714      1,534      —        2,248
                           

Total assets

   $ 61,676    $ 92,044    $ —      $ 153,720
                           

Liabilities and partners’ capital

           

Liabilities:

           

Notes payable and other debt

   $ 400    $ 63,891    $ —      $ 64,291

Note payable to affiliate

     7,500      —        —        7,500

Accrued interest

     3      413      —        416

Accounts payable and other accrued liabilities

     112      3,071      —        3,183
                           

Total liabilities

     8,015      67,375      —        75,390

Total partners’ capital

     53,661      24,669      —        78,330
                           

Total liabilities and partners’ capital

   $ 61,676    $ 92,044    $ —      $ 153,720
                           

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2008

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated
         (In thousands)     

Revenues:

         

Rental income

   $ 5,812     $ 5,876     $ —      $ 11,688

Interest and other income

     —         —         —        —  

Equity loss in affiliates

     (6 )     —         6      —  
                             

Total revenues

     5,806       5,876       6      11,688

Expenses:

         

Interest

     27       2,032       —        2,059

Depreciation and amortization

     2,152       1,540       —        3,692

Property-level operating expenses

     —         1,575       —        1,575

General, administrative and professional fees

     362       486       —        848

Intercompany interest

     (336 )     936       —        600
                             

Total expenses

     2,205       6,569       —        8,774
                             

Net income (loss) from continuing operations

     3,601       (693 )     6      2,914

Discontinued operations

     —         687       —        687
                             

Net income (loss)

   $ 3,601     $ (6 )   $ 6    $ 3,601
                             

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2007

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated
         (In thousands)     

Revenues:

         

Rental income

   $ 5,754     $ 5,777     $ —      $ 11,531

Interest and other income

     153       3       —        156

Equity loss in affiliates

     (227 )     —         227      —  
                             

Total revenues

     5,680       5,780       227      11,687

Expenses:

         

Interest

     36       2,074       —        2,110

Depreciation and amortization

     2,145       1,517       —        3,662

Property-level operating expenses

     —         1,597       —        1,597

General, administrative and professional fees

     409       643       —        1,052

Intercompany interest

     (233 )     833       —        600
                             

Total expenses

     2,357       6,664       —        9,021
                             

Net income (loss) from continuing operations

     3,323       (884 )     227      2,666

Discontinued operations

     —         657       —        657
                             

Net income (loss)

   $ 3,323     $ (227 )   $ 227    $ 3,323
                             

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2006

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated
         (In thousands)     

Revenues:

         

Rental income

   $ 5,722     $ 5,699     $ —      $ 11,421

Interest and other income

     —         10       —        10

Equity loss in affiliates

     (99 )     —         99      —  
                             

Total revenues

     5,623       5,709       99      11,431

Expenses:

         

Interest

     35       2,121       —        2,156

Depreciation and amortization

     2,144       1,490       —        3,634

Property-level operating expenses

     —         1,448       —        1,448

General, administrative and professional fees

     402       595       —        997

Intercompany interest

     (115 )     715       —        600
                             

Total expenses

     2,466       6,369       —        8,835
                             

Net income (loss) from continuing operations

     3,157       (660 )     99      2,596

Discontinued operations

     —         561       —        561
                             

Net income (loss)

   $ 3,157     $ (99 )   $ 99    $ 3,157
                             

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2008

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated  
         (In thousands)       

Net cash provided by operating activities

   $ 5,440     $ 2,005     $ —      $ 7,445  

Net cash used in investing activities

     —         (306 )     —        (306 )

Net cash used in financing activities

     (5,440 )     (1,699 )     —        (7,139 )
                               

Net change in cash and cash equivalents

     —         —         —        —    

Cash and cash equivalents at beginning of year

     —         —         —        —    
                               

Cash and cash equivalents at end of year

   $ —       $ —       $ —      $ —    
                               

 

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2007

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated  
         (In thousands)       

Net cash provided by operating activities

   $ 5,309     $ 2,187     $ —      $ 7,496  

Net cash used in investing activities

     —         (135 )     —        (135 )

Net cash used in financing activities

     (5,309 )     (2,388 )     —        (7,697 )
                               

Net decrease in cash and cash equivalents

     —         (336 )     —        (336 )

Cash and cash equivalents at beginning of year

     —         336       —        336  
                               

Cash and cash equivalents at end of year

   $ —       $ —       $ —      $ —    
                               

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2006

 

     ETOP and
ETOP
Subsidiary
Guarantors
    ETOP
Non-Guarantor
Subsidiaries
    Consolidated
Elimination
   Consolidated  
         (In thousands)       

Net cash provided by operating activities

   $ 4,618     $ 2,873     $ —      $ 7,491  

Net cash used in investing activities

     —         (259 )     —        (259 )

Net cash used in financing activities

     (4,619 )     (2,716 )     —        (7,335 )
                               

Net decrease in cash and cash equivalents

     (1 )     (102 )     —        (103 )

Cash and cash equivalents at beginning of year

     1       438       —        439  
                               

Cash and cash equivalents at end of year

   $ —       $ 336     $ —      $ 336  
                               

 

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VENTAS, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2008

(Dollars in Thousands)

 

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           
  KINDRED SKILLED NURSING FACILITIES                          

791

  Whitesburg Gardens Health Care Center   Huntsville   AL   $ 534   $ 4,216   $ —     $ 534   $ 4,216   $ 4,750   $ 2,978   $ 1,772   1968   1991   25 years

824

  Kindred Healthcare Center of Mobile   Mobile   AL     5     2,981     —       5     2,981     2,986     1,747     1,239   1967   1992   29 years

436

  Valley Healthcare & Rehab Center   Tucson   AZ     383     1,954     —       383     1,954     2,337     1,249     1,088   1964   1993   28 years

743

  Desert Life Rehab & Care Center   Tucson   AZ     611     5,117     —       611     5,117     5,728     3,658     2,070   1979   1982   37 years

851

  Villa Campana Health Center   Tucson   AZ     533     2,201     —       533     2,201     2,734     1,076     1,658   1983   1993   35 years

853

  Kachina Point Health Care & Rehab   Sedona   AZ     364     4,179     —       364     4,179     4,543     2,520     2,023   1983   1984   45 years

148

  Village Square Nursing & Rehab Center   San Marcos   CA     766     3,507     —       766     3,507     4,273     1,333     2,940   1989   1993   42 years

150

  Nob Hill Healthcare Center   San Francisco   CA     1,902     7,531     —       1,902     7,531     9,433     4,361     5,072   1967   1993   28 years

167

  Canyonwood Nursing & Rehab Center   Redding   CA     401     3,784     —       401     3,784     4,185     1,686     2,499   1989   1989   45 years

210

  The Californian Care Center   Bakersfield   CA     1,438     5,609     —       1,438     5,609     7,047     2,469     4,578   1988   1992   40 years

335

  Lawton Healthcare Center   San Francisco   CA     943     514     —       943     514     1,457     397     1,060   1962   1996   20 years

350

  Valley Gardens Healthcare & Rehab Center   Stockton   CA     516     3,405     —       516     3,405     3,921     1,616     2,305   1988   1988   29 years

411

  Alta Vista Healthcare Center   Riverside   CA     376     1,669     —       376     1,669     2,045     1,056     989   1966   1992   29 years

525

  La Veta Healthcare Center   Orange   CA     47     1,459     —       47     1,459     1,506     883     623   1964   1992   28 years

738

  Bay View Nursing & Rehab Center   Alameda   CA     1,462     5,981     —       1,462     5,981     7,443     3,517     3,926   1967   1993   45 years

744

  Cherry Hills Health Care Center   Englewood   CO     241     2,180     —       241     2,180     2,421     1,328     1,093   1960   1995   30 years

745

  Aurora Care Center   Aurora   CO     197     2,328     —       197     2,328     2,525     1,305     1,220   1962   1995   30 years

859

  Castle Garden Care Center   Northglenn   CO     501     8,294     —       501     8,294     8,795     4,504     4,291   1971   1993   29 years

873

  Brighton Care Center   Brighton   CO     282     3,377     —       282     3,377     3,659     1,923     1,736   1969   1992   30 years

562

  Andrew House Healthcare   New Britain   CT     247     1,963     —       247     1,963     2,210     1,066     1,144   1967   1992   29 years

563

  Camelot Nursing & Rehab Center   New London   CT     202     2,363     —       202     2,363     2,565     1,343     1,222   1969   1994   28 years

566

  Windsor Rehab & Healthcare Center   Windsor   CT     368     2,520     —       368     2,520     2,888     1,566     1,322   1965   1994   30 years

567

  Nutmeg Pavilion Healthcare   New London   CT     401     2,776     —       401     2,776     3,177     1,743     1,434   1968   1992   29 years

568

  Parkway Pavilion Healthcare   Enfield   CT     337     3,607     —       337     3,607     3,944     2,245     1,699   1968   1994   28 years

1221

  Courtland Gardens Health Center Inc.   Stamford   CT     1,126     9,399     —       1,126     9,399     10,525     2,992     7,533   1956   1990   45 years

155

  Savannah Rehab & Nursing Center   Savannah   GA     213     2,772     —       213     2,772     2,985     1,577     1,408   1968   1993   28.5 years

645

  Specialty Care of Marietta   Marietta   GA     241     2,782     —       241     2,782     3,023     1,676     1,347   1968   1993   28.5 years

660

  Savannah Specialty Care Center   Savannah   GA     157     2,219     —       157     2,219     2,376     1,476     900   1972   1991   26 years

1228

  Lafayette Nursing & Rehab Center   Fayetteville   GA     598     6,623     —       598     6,623     7,221     4,200     3,021   1989   1995   20 years

216

  Hillcrest Rehab Care Center   Boise   ID     256     3,593     —       256     3,593     3,849     1,144     2,705   1977   1998   45 years

218

  Cascade Rehab & Care Center   Caldwell   ID     312     2,050     —       312     2,050     2,362     729     1,633   1974   1998   45 years

221

  Lewiston Rehab & Care Center   Lewiston   ID     133     3,982     —       133     3,982     4,115     2,647     1,468   1964   1984   29 years

222

  Nampa Care Center   Nampa   ID     252     2,810     —       252     2,810     3,062     2,618     444   1950   1983   25 years

223

  Weiser Rehab & Care Center   Weiser   ID     157     1,760     —       157     1,760     1,917     1,808     109   1963   1983   25 years

225

  Aspen Park Healthcare   Moscow   ID     261     2,571     —       261     2,571     2,832     1,892     940   1955   1990   25 years

409

  Mountain Valley Care & Rehab   Kellogg   ID     68     1,280     —       68     1,280     1,348     1,246     102   1971   1984   25 years

111

  Rolling Hills Health Care Center   New Albany   IN     81     1,894     —       81     1,894     1,975     1,192     783   1984   1993   25 years

 

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Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

112

  Royal Oaks Healthcare & Rehab Center   Terre Haute   IN   418   5,779   —     418   5,779   6,197   1,851   4,346   1995   1995   45 years

113

  Southwood Health & Rehab Center   Terre Haute   IN   90   2,868   —     90   2,868   2,958   1,763   1,195   1988   1993   25 years

131

  Harrison Health and Rehabilitation Center   Corydon   IN   125   6,068   —     125   6,068   6,193   1,464   4,729   N/A   1998   45 years

209

  Valley View Health Care Center   Elkhart   IN   87   2,665   —     87   2,665   2,752   1,662   1,090   1985   1993   25 years

213

  Wildwood Healthcare Center   Indianapolis   IN   134   4,983   —     134   4,983   5,117   3,047   2,070   1988   1993   25 years

269

  Meadowvale Health & Rehab Center   Bluffton   IN   7   787   —     7   787   794   435   359   1962   1995   22 years

290

  Bremen Health Care Center   Bremen   IN   109   3,354   —     109   3,354   3,463   1,627   1,836   1982   1996   45 years

294

  Windsor Estates Health & Rehab Center   Kokomo   IN   256   6,625   —     256   6,625   6,881   3,076   3,805   1962   1995   35 years

406

  Muncie Health Care & Rehab   Muncie   IN   108   4,202   —     108   4,202   4,310   2,519   1,791   1980   1993   25 years

407

  Parkwood Health Care Center   Lebanon   IN   121   4,512   —     121   4,512   4,633   2,730   1,903   1977   1993   25 years

694

  Wedgewood Healthcare Center   Clarksville   IN   119   5,115   —     119   5,115   5,234   2,374   2,860   1985   1995   35 years

780

  Columbus Health & Rehab Center   Columbus   IN   345   6,817   —     345   6,817   7,162   4,731   2,431   1966   1991   25 years

277

  Rosewood Health Care Center   Bowling Green   KY   248   5,371   —     248   5,371   5,619   3,288   2,331   1970   1990   30 years

278

  Oakview Nursing & Rehab Center   Calvert City   KY   124   2,882   —     124   2,882   3,006   1,763   1,243   1967   1990   30 years

280

  Winchester Centre for Health/Rehab   Winchester   KY   137   6,120   —     137   6,120   6,257   3,707   2,550   1967   1990   30 years

281

  Riverside Manor Health Care   Calhoun   KY   103   2,119   —     103   2,119   2,222   1,313   909   1963   1990   30 years

282

  Maple Manor Healthcare Center   Greenville   KY   59   3,187   —     59   3,187   3,246   1,967   1,279   1968   1990   30 years

782

  Danville Center for Health & Rehab   Danville   KY   322   3,538   —     322   3,538   3,860   1,833   2,027   1962   1995   30 years

784

  Northfield Center for Health & Rehab   Louisville   KY   285   1,555   —     285   1,555   1,840   1,055   785   1969   1985   30 years

785

  Hillcrest Health Care Center   Owensboro   KY   544   2,619   —     544   2,619   3,163   2,596   567   1963   1982   22 years

787

  Woodland Terrace Health Care Facility.   Elizabethtown   KY   216   1,795   —     216   1,795   2,011   1,871   140   1969   1982   26 years

864

  Harrodsburg Health Care Center   Harrodsburg   KY   137   1,830   —     137   1,830   1,967   1,321   646   1974   1985   35 years

198

  Harrington House Nursing & Rehab Center   Walpole   MA   4   4,444   —     4   4,444   4,448   1,783   2,665   1991   1991   45 years

327

  Laurel Ridge Rehab & Nursing Center   Jamaica Plain   MA   194   1,617   —     194   1,617   1,811   1,099   712   1968   1989   30 years

501

  Blue Hills Alzheimer’s Care Center   Stoughton   MA   511   1,026   —     511   1,026   1,537   1,237   300   1965   1982   28 years

503

  Brigham Manor Nursing & Rehab Center   Newburyport   MA   126   1,708   —     126   1,708   1,834   1,362   472   1806   1982   27 years

506

  Presentation Nursing & Rehab Center   Brighton   MA   184   1,220   —     184   1,220   1,404   1,173   231   1968   1982   28 years

507

  Country Manor Rehab & Nursing Center   Newburyport   MA   199   3,004   —     199   3,004   3,203   2,346   857   1968   1982   27 years

508

  Crawford Skilled Nursing & Rehab Center   Fall River   MA   127   1,109   —     127   1,109   1,236   1,006   230   1968   1982   29 years

513

  Hallmark Nursing & Rehab Center   New Bedford   MA   202   2,694   —     202   2,694   2,896   2,154   742   1968   1982   26 years

514

  Sachem Nursing & Rehab Center   East Bridgewater   MA   529   1,238   —     529   1,238   1,767   1,417   350   1968   1982   27 years

516

  Hammersmith House Nursing Care Center   Saugus   MA   112   1,919   —     112   1,919   2,031   1,452   579   1965   1982   28 years

517

  Oakwood Rehab & Nursing Center   Webster   MA   102   1,154   —     102   1,154   1,256   1,022   234   1967   1982   31 years

518

 

Timberlyn Heights Nursing & Alzheimer’s Center

  Great Barrington   MA   120   1,305   —     120   1,305   1,425   1,138   287   1968   1982   29 years

526

  The Eliot Healthcare Center   Natick   MA   249   1,328   —     249   1,328   1,577   1,149   428   1996   1982   31 years

529

  Bolton Manor Nursing Home   Marlborough   MA   222   2,431   —     222   2,431   2,653   1,798   855   1973   1984   34.5 years

532

  Hillcrest Nursing Center   Fitchburg   MA   175   1,461   —     175   1,461   1,636   1,451   185   1957   1984   25 years

534

  Country Gardens Skilled Nursing & Rehab   Swansea   MA   415   2,675   —     415   2,675   3,090   2,086   1,004   1969   1984   27 years

537

  Quincy Rehab & Nursing Center   Quincy   MA   216   2,911   —     216   2,911   3,127   2,537   590   1965   1984   24 years

539

  Newton & Wellesley Alzheimer Center   Wellesley   MA   297   3,250   —     297   3,250   3,547   2,308   1,239   1971   1984   30 years

542

  Den-Mar Rehab & Nursing Center   Rockport   MA   23   1,560   —     23   1,560   1,583   1,254   329   1963   1985   30 years

573

  Eagle Pond Rehab & Living Center   South Dennis   MA   296   6,896   —     296   6,896   7,192   3,133   4,059   1985   1987   50 years

581

  Blueberry Hill Healthcare   Beverly   MA   129   4,290   —     129   4,290   4,419   2,864   1,555   1965   1968   40 years

582

  Colony House Nursing & Rehab Center   Abington   MA   132   999   —     132   999   1,131   1,029   102   1965   1969   40 years

584

  Franklin Skilled Nursing & Rehab Center   Franklin   MA   156   757   —     156   757   913   775   138   1967   1969   40 years

585

  Great Barrington Rehab & Nursing Center   Great Barrington   MA   60   1,142   —     60   1,142   1,202   1,102   100   1967   1969   40 years

 

128


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

587

  River Terrace Healthcare   Lancaster   MA   268   957   —     268   957   1,225   1,047   178   1969   1969   40 years

588

  Walden Rehab & Nursing Center   Concord   MA   181   1,347   —     181   1,347   1,528   1,339   189   1969   1968   40 years

544

  Augusta Rehabilitation Center   Augusta   ME   152   1,074   —     152   1,074   1,226   864   362   1968   1985   30 years

545

  Eastside Rehab & Living Center   Bangor   ME   316   1,349   —     316   1,349   1,665   1,008   657   1967   1985   30 years

546

  Winship Green Nursing Center   Bath   ME   110   1,455   —     110   1,455   1,565   1,019   546   1974   1985   35 years

547

  Brewer Rehab & Living Center   Brewer   ME   228   2,737   —     228   2,737   2,965   1,789   1,176   1974   1985   33 years

549

  Kennebunk Nursing Center   Kennebunk   ME   99   1,898   —     99   1,898   1,997   1,216   781   1977   1985   35 years

550

  Norway Rehab & Living Center   Norway   ME   133   1,658   —     133   1,658   1,791   1,073   718   1972   1985   39 years

554

  Westgate Manor   Bangor   ME   287   2,718   —     287   2,718   3,005   1,960   1,045   1969   1985   31 years

555

  Brentwood Manor Rehab & Nursing Center   Yarmouth   ME   181   2,789   —     181   2,789   2,970   1,897   1,073   1945   1985   45 years

416

  Park Place Health Care Center   Great Falls   MT   600   6,311   —     600   6,311   6,911   3,594   3,317   1963   1993   28 years

433

  Parkview Acres Care & Rehab Center   Dillon   MT   207   2,578   —     207   2,578   2,785   1,479   1,306   1965   1993   29 years

116

  Pettigrew Rehab & Healthcare Center   Durham   NC   101   2,889   —     101   2,889   2,990   1,731   1,259   1969   1993   28 years

137

  Sunnybrook Healthcare & Rehab Specialists   Raleigh   NC   187   3,409   —     187   3,409   3,596   2,376   1,220   1971   1991   25 years

143

  Raleigh Rehab & Healthcare Center   Raleigh   NC   316   5,470   —     316   5,470   5,786   3,788   1,998   1969   1991   25 years

146

  Rose Manor Health Care Center   Durham   NC   200   3,527   —     200   3,527   3,727   2,351   1,376   1972   1991   26 years

188

  Cypress Pointe Rehab & HC Center   Wimington   NC   233   3,710   —     233   3,710   3,943   2,275   1,668   1966   1993   28.5 years

191

  Silas Creek Manor   Winston-Salem   NC   211   1,893   —     211   1,893   2,104   1,098   1,006   1966   1993   28.5 years

307

  Lincoln Nursing Center   Lincoln   NC   39   3,309   —     39   3,309   3,348   2,155   1,193   1976   1986   35 years

704

  Guardian Care of Roanoke Rapids   Roanoke Rapids   NC   339   4,132   —     339   4,132   4,471   2,799   1,672   1967   1991   25 years

706

  Guardian Care of Henderson   Henderson   NC   206   1,997   —     206   1,997   2,203   1,148   1,055   1957   1993   29 years

707

  Rehab & Nursing Center of Monroe   Monroe   NC   185   2,654   —     185   2,654   2,839   1,646   1,193   1963   1993   28 years

711

  Kinston Rehab and Healthcare Center   Kinston   NC   186   3,038   —     186   3,038   3,224   1,684   1,540   1961   1993   29 years

713

  Guardian Care of Zebulon   Zebulon   NC   179   1,933   —     179   1,933   2,112   1,112   1,000   1973   1993   29 years

723

  Guardian Care of Rocky Mount   Rocky Mount   NC   240   1,732   —     240   1,732   1,972   1,253   719   1975   1997   25 years

724

  Rehab & Health Center of Gastonia   Gastonia   NC   158   2,359   —     158   2,359   2,517   1,424   1,093   1968   1992   29 years

726

  Guardian Care of Elizabeth City   Elizabeth City   NC   71   561   —     71   561   632   632   —     1977   1982   20 years

806

  Chapel Hill Rehab & Healthcare Center   Chapel Hill   NC   347   3,029   —     347   3,029   3,376   1,817   1,559   1984   1993   28 years

591

  Dover Rehab & Living Center   Dover   NH   355   3,797   —     355   3,797   4,152   2,882   1,270   1969   1990   25 years

592

  Greenbriar Terrace Healthcare   Nashua   NH   776   6,011   —     776   6,011   6,787   4,191   2,596   1963   1990   25 years

593

  Hanover Terrace Healthcare   Hanover   NH   326   1,825   —     326   1,825   2,151   1,033   1,118   1969   1993   29 years

640

  Las Vegas Healthcare & Rehab Center   Las Vegas   NV   454   1,018   —     454   1,018   1,472   478   994   1940   1992   30 years

641

  Torrey Pines Care Center   Las Vegas   NV   256   1,324   —     256   1,324   1,580   815   765   1971   1992   29 years

560

  Franklin Woods Health Care Center   Columbus   OH   190   4,712   —     190   4,712   4,902   2,129   2,773   1986   1992   38 years

569

  Chillicothe Nursing & Rehab Center   Chillicothe   OH   128   3,481   —     128   3,481   3,609   2,392   1,217   1976   1985   34 years

570

  Pickerington Nursing & Rehab Center   Pickerington   OH   312   4,382   —     312   4,382   4,694   1,993   2,701   1984   1992   37 years

571

  Logan Health Care Center   Logan   OH   169   3,750   —     169   3,750   3,919   2,187   1,732   1979   1991   30 years

572

  Winchester Place Nursing & Rehab Center   Canal Winchester   OH   454   7,149   —     454   7,149   7,603   4,728   2,875   1974   1993   28 years

577

  Minerva Park Nursing & Rehab Center   Columbus   OH   210   3,684   —     210   3,684   3,894   1,192   2,702   1973   1997   45 years

634

  Cambridge Health & Rehab Center   Cambridge   OH   108   2,642   —     108   2,642   2,750   1,662   1,088   1975   1993   25 years

635

  Coshocton Health & Rehab Center   Coshocton   OH   203   1,979   —     203   1,979   2,182   1,236   946   1974   1993   25 years

868

  Lebanon Country Manor   Lebanon   OH   105   3,617   —     105   3,617   3,722   1,976   1,746   1984   1986   43 years

452

  Sunnyside Care Center   Salem   OR   1,512   2,249   —     1,512   2,249   3,761   1,196   2,565   1981   1991   30 years

453

  Medford Rehab & Healthcare Center   Medford   OR   362   4,610   —     362   4,610   4,972   2,674   2,298   N/A   1991   34 years

1237

  Wyomissing Nursing & Rehab Center   Reading   PA   61   5,095   —     61   5,095   5,156   1,596   3,560   1966   1993   45 years

1224

  Health Havens Nursing & Rehab Center   E. Providence   RI   174   2,643   —     174   2,643   2,817   848   1,969   1962   1990   45 years

 

129


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

1231

  Oak Hill Nursing & Rehab Center   Pawtucket   RI   91   6,724   —       91   6,724   6,815   2,134   4,681   1966   1990   45 years

132

  Madison Healthcare & Rehab Center   Madison   TN   168   1,445   —       168   1,445   1,613   867   746   1968   1992   29 years

822

  Primacy Healthcare & Rehab Center   Memphis   TN   1,222   8,344   —       1,222   8,344   9,566   4,230   5,336   1980   1990   37 years

884

  Masters Health Care Center   Algood   TN   524   4,370   —       524   4,370   4,894   2,601   2,293   1981   1987   38 years

140

  Wasatch Care Center   Ogden   UT   373   597   —       373   597   970   561   409   1964   1990   25 years

230

  Crosslands Rehab & Health Care Center   Sandy   UT   334   4,300   —       334   4,300   4,634   1,858   2,776   1987   1992   40 years

247

  Saint George Care & Rehab Center   St George   UT   419   4,465   —       419   4,465   4,884   2,427   2,457   1976   1993   29 years

655

  Federal Heights Rehab & Nursing Center   Salt Lake City   UT   201   2,322   —       201   2,322   2,523   1,375   1,148   1962   1992   29 years

690

  Wasatch Valley Rehabilitation   Salt Lake City   UT   389   3,545   —       389   3,545   3,934   2,035   1,899   1962   1995   29 years

825

  Nansemond Point Rehab & HC Center   Suffolk   VA   534   6,990   —       534   6,990   7,524   3,810   3,714   1963   1991   32 years

826

  Harbour Point Med. & Rehab Center   Norfolk   VA   427   4,441   —       427   4,441   4,868   2,591   2,277   1969   1993   28 years

829

  River Pointe Rehab & HC Center   Virginia Beach   VA   770   4,440   —       770   4,440   5,210   3,171   2,039   1953   1991   25 years

842

  Bay Pointe Medical & Rehab Center   Virginia Beach   VA   805   2,886   (380 )   425   2,886   3,311   1,614   1,697   1971   1993   29 years

559

  Birchwood Terrace Healthcare   Burlington   VT   15   4,656   —       15   4,656   4,671   3,359   1,312   1965   1990   27 years

114

  Arden Rehab & Healthcare Center   Seattle   WA   1,111   4,013   —       1,111   4,013   5,124   2,291   2,833   1950   1993   28.5 years

127

  Northwest Continuum Care Center   Longview   WA   145   2,563   —       145   2,563   2,708   1,505   1,203   1955   1992   29 years

158

  Bellingham Health Care & Rehab Center   Bellingham   WA   441   3,824   —       441   3,824   4,265   2,197   2,068   1972   1993   28.5 years

165

  Rainier Vista Care Center   Puyallup   WA   520   4,780   —       520   4,780   5,300   2,073   3,227   1986   1991   40 years

168

  Lakewood Healthcare Center   Lakewood   WA   504   3,511   —       504   3,511   4,015   1,648   2,367   1989   1989   45 years

180

  Vancouver Healthcare & Rehab Center   Vancouver   WA   449   2,964   —       449   2,964   3,413   1,766   1,647   1970   1993   28 years

462

  Queen Anne Healthcare   Seattle   WA   570   2,750   —       570   2,750   3,320   1,649   1,671   1970   1993   29 years

289

  San Luis Medical & Rehab Center   Green Bay   WI   259   5,299   —       259   5,299   5,558   3,446   2,112   N/A   1996   25 years

765

  Eastview Medical & Rehab Center   Antigo   WI   200   4,047   —       200   4,047   4,247   2,740   1,507   1962   1991   28 years

766

  Colonial Manor Medical & Rehab Center   Wausau   WI   169   3,370   —       169   3,370   3,539   1,842   1,697   1964   1995   30 years

767

  Colony Oaks Care Center   Appleton   WI   353   3,571   —       353   3,571   3,924   2,244   1,680   1967   1993   29 years

769

  North Ridge Med. & Rehab Center   Manitowoc   WI   206   3,785   —       206   3,785   3,991   2,259   1,732   1964   1992   29 years

770

  Vallhaven Care Center   Neenah   WI   337   5,125   —       337   5,125   5,462   3,085   2,377   1966   1993   28 years

771

  Kennedy Park Med. & Rehab Center   Schofield   WI   301   3,596   —       301   3,596   3,897   3,295   602   1966   1982   29 years

773

  Mt. Carmel Med. & Rehab Center   Burlington   WI   274   7,205   —       274   7,205   7,479   3,772   3,707   1971   1991   30 years

775

  Sheridan Medical Complex   Kenosha   WI   282   4,910   —       282   4,910   5,192   3,368   1,824   1964   1991   25 years

776

  Woodstock Health & Rehab Center   Kenosha   WI   562   7,424   —       562   7,424   7,986   5,279   2,707   1970   1991   25 years

774/4631

  Mt. Carmel Health & Rehab Center   Milwaukee   WI   2,678   25,867   —       2,678   25,867   28,545   16,489   12,056   1958   1991   30 years

441

  Mountain Towers Healthcare & Rehab   Cheyenne   WY   342   3,468   —       342   3,468   3,810   1,910   1,900   1964   1992   29 years

481

  South Central Wyoming HC & Rehab   Rawlins   WY   151   1,738   —       151   1,738   1,889   986   903   1955   1993   29 years

482

  Wind River Healthcare & Rehab Center   Riverton   WY   179   1,559   —       179   1,559   1,738   874   864   1967   1992   29 years

483

  Sage View Care Center   Rock Springs   WY   287   2,392   —       287   2,392   2,679   1,376   1,303   1964   1993   30 years
                                             
 

TOTAL KINDRED SKILLED NURSING FACILITIES

      54,493   567,946   (380 )   54,113   567,946   622,059   340,943   281,116      
 

NON-KINDRED SKILLED NURSING FACILITIES

                         

3829

  McCreary Health & Rehabilitation Center   Pine Knot   KY   73   2,443   —       73   2,443   2,516   151   2,365   1990   2006   35 years

3830

 

New Colonial Health & Rehabilitation Center

  Bardstown   KY   38   2,829   —       38   2,829   2,867   175   2,692   1968   2006   35 years

3831

 

New Glasgow Health & Rehabilitation Center

  Glasgow   KY   21   2,997   —       21   2,997   3,018   186   2,832   1968   2006   35 years

 

130


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

3832

 

New Green Valley Health & Rehabilitation Center

  Carrollton   KY   29   2,325   —       29   2,325   2,354   144   2,210   1978   2006   35 years

3833

  New Hart County Health Center   Horse Cave   KY   68   6,059   —       68   6,059   6,127   375   5,752   1993   2006   35 years

3834

 

New Heritage Hall Health & Rehabilitation Center

  Lawrenceburg   KY   38   3,920   —       38   3,920   3,958   243   3,715   1973   2006   35 years

3835

  New Jackson Manor   Annville   KY   131   4,442   —       131   4,442   4,573   275   4,298   1989   2006   35 years

3836

  New Jefferson Manor   Louisville   KY   2,169   4,075   —       2,169   4,075   6,244   252   5,992   1982   2006   35 years

3837

  New Jefferson Place   Louisville   KY   1,307   9,175   —       1,307   9,175   10,482   568   9,914   1991   2006   35 years

3838

 

New Meadowview Health & Rehabilitation Center

  Louisville   KY   317   4,666   —       317   4,666   4,983   289   4,694   1973   2006   35 years

3839

  New Monroe Health & Rehabilitation Center   Tompkinsville   KY   32   8,756   —       32   8,756   8,788   542   8,246   1969   2006   35 years

3840

 

New North Hardin Health & Rehabilitation Center

  Radcliff   KY   218   11,944   —       218   11,944   12,162   739   11,423   1986   2006   35 years

3841

  New Professional Care Health & Rehabilitation Center   Hartford   KY   22   7,905   —       22   7,905   7,927   489   7,438   1967   2006   35 years

3842

  New Rockford Manor Health & Rehabilitation Center   Louisville   KY   364   9,568   —       364   9,568   9,932   592   9,340   1975   2006   35 years

3843

 

New Summerfield Health & Rehabilitation Center

  Louisville   KY   1,089   10,756   —       1,089   10,756   11,845   666   11,179   1979   2006   35 years

3844

  New Tanbark Health & Rehabilitation Center   Lexington   KY   868   6,061   —       868   6,061   6,929   375   6,554   1989   2006   35 years

3845

 

Summit Manor Health & Rehabilitation Center

  Columbia   KY   38   12,510   —       38   12,510   12,548   774   11,774   1965   2006   35 years

3764

  Bear Creek Care & Rehab Center   Rochester   MN   639   3,497   —       639   3,497   4,136   3,339   797   N/A   1982   28 years

2505

  Lopatcong Center   Phillipsburg   NJ   1,490   12,336   —       1,490   12,336   13,826   2,399   11,427   1982   2004   30 years

2701

  Regency Manor   Columbus   OH   606   16,424   —       606   16,424   17,030   2,698   14,332   1883   2004   35 years

2702

  Burlington House   Cincinnati   OH   918   5,087   —       918   5,087   6,005   833   5,172   1989   2004   35 years

3920

  Marietta Convalescent Center   Marietta   OH   158   3,266   75     158   3,341   3,499   2,068   1,431   N/A   1993   25 years

2506

  Wayne Center   Wayne   PA   662   6,872   —       662   6,872   7,534   1,294   6,240   1875   2004   30 years

2507

  Belvedere Nursing & Rehab   Chester   PA   822   7,203   —       822   7,203   8,025   1,388   6,637   1899   2004   30 years

2508

  Chapel Manor   Philadelphia   PA   1,595   13,982   —       1,595   13,982   15,577   2,695   12,882   1948   2004   30 years

2509

  Pennsburg Manor   Pennsburg   PA   1,091   7,871   —       1,091   7,871   8,962   1,580   7,382   1982   2004   30 years

3852

  Balanced Care at Bloomsburg   Bloomsburg   PA   621   1,371   —       621   1,371   1,992   85   1,907   1997   2006   35 years
                                             
 

TOTAL NON-KINDRED SKILLED NURSING FACILITIES

      15,424   188,340   75     15,424   188,415   203,839   25,214   178,625      
 

TOTAL FOR SKILLED NURSING FACILITIES

      69,917   756,286   (305 )   69,537   756,361   825,898   366,157   459,741      
  KINDRED HOSPITALS                          

4656

  Kindred Hospital Phoenix   Phoenix   AZ   226   3,359   —       226   3,359   3,585   2,022   1,563   N/A   1992   30 years

4658

  Kindred Hospital Tucson   Tucson   AZ   130   3,091   —       130   3,091   3,221   2,291   930   N/A   1994   25 years

4644

  Kindred Hospital Brea   Brea   CA   3,144   2,611   —       3,144   2,611   5,755   840   4,915   1990   1995   40 years

4807

  Kindred Hospital Ontario   Ontario   CA   523   2,988   —       523   2,988   3,511   2,099   1,412   N/A   1994   25 years

4822

  Kindred Hospital San Francisco Bay Area   San Leandro   CA   2,735   5,870   —       2,735   5,870   8,605   5,362   3,243   N/A   1993   25 years

4842

  Kindred Hospital Westminster   Westminster   CA   727   7,384   —       727   7,384   8,111   5,962   2,149   N/A   1993   20 years

4848

  Kindred Hospital San Diego   San Diego   CA   670   11,764   —       670   11,764   12,434   8,261   4,173   N/A   1994   25 years

4665

  Kindred Hospital Denver   Denver   CO   896   6,367   —       896   6,367   7,263   5,172   2,091   N/A   1994   20 years

4602

 

Kindred Hospital So. Florida Coral Gables Campus

  Coral Gables   FL   1,071   5,348   —       1,071   5,348   6,419   3,918   2,501   N/A   1992   30 years

 

131


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

4611

 

Kindred Hospital Bay Area St. Petersburg Campus

  St. Petersburg   FL   1,401   16,706   —     1,401   16,706   18,107   10,266   7,841   1968   1997   40 years

4652

  Kindred Hospital North Florida   Green Cove Springs   FL   145   4,613   —     145   4,613   4,758   3,151   1,607   N/A   1994   20 years

4674

  Kindred Hospital Central Tampa   Tampa   FL   2,732   7,676   —     2,732   7,676   10,408   3,355   7,053   1970   1993   40 years

4876

 

Kindred Hospital So. Florida Hollywood Campus

  Hollywood   FL   605   5,229   —     605   5,229   5,834   3,672   2,162   1937   1995   20 years

4645/4646

 

Kindred Hospital So. Florida Ft. Lauderdale Campus

  Ft. Lauderdale   FL   1,758   14,080   —     1,758   14,080   15,838   10,270   5,568   N/A   1989   30 years

4615

  Kindred Hospital Sycamore   Sycamore   IL   77   8,549   —     77   8,549   8,626   5,517   3,109   N/A   1993   20 years

4637

 

Kindred Hospital Chicago North Campus

  Chicago   IL   1,583   19,980   —     1,583   19,980   21,563   13,795   7,768   N/A   1995   25 years

4690

 

Kindred Hospital Chicago Northlake Campus

  Northlake   IL   850   6,498   —     850   6,498   7,348   4,319   3,029   N/A   1991   30 years

4871

 

Kindred Hospital Chicago Lakeshore Campus

  Chicago   IL   1,513   9,525   —     1,513   9,525   11,038   9,099   1,939   1995   1976   20 years

4638

  Kindred Hospital Indianapolis   Indianapolis   IN   985   3,801   —     985   3,801   4,786   2,554   2,232   N/A   1993   30 years

4633

  Kindred Hospital Louisville   Louisville   KY   3,041   12,279   —     3,041   12,279   15,320   9,033   6,287   N/A   1995   20 years

4666

  Kindred Hospital New Orleans   New Orleans   LA   648   4,971   —     648   4,971   5,619   3,449   2,170   1968   1978   20 years

4673

  Kindred Hospital Boston North Shore   Peabody   MA   543   7,568   —     543   7,568   8,111   3,679   4,432   1974   1993   40 years

4688

  Kindred Hospital Boston   Boston   MA   1,551   9,796   —     1,551   9,796   11,347   7,539   3,808   N/A   1994   25 years

4612

  Kindred Hospital Kansas City   Kansas City   MO   277   2,914   —     277   2,914   3,191   2,071   1,120   N/A   1992   30 years

4680/4681

  Kindred Hospital St. Louis   St. Louis   MO   1,126   2,087   —     1,126   2,087   3,213   1,501   1,712   N/A   1991   40 years

4662

  Kindred Hospital Greensboro   Greensboro   NC   1,010   7,586   —     1,010   7,586   8,596   5,678   2,918   N/A   1994   20 years

4664

  Kindred Hospital Albuquerque   Albuquerque   NM   11   4,253   —     11   4,253   4,264   1,817   2,447   1985   1993   40 years

4647

  Kindred Hospital Las Vegas Sahara   Las Vegas   NV   1,110   2,177   —     1,110   2,177   3,287   879   2,408   1980   1994   40 years

4618

  Kindred Hospital Oklahoma City   Oklahoma City   OK   293   5,607   —     293   5,607   5,900   3,262   2,638   N/A   1993   30 years

4614

  Kindred Hospital Philadelphia   Philadelphia   PA   135   5,223   —     135   5,223   5,358   2,175   3,183   N/A   1995   35 years

4619

  Kindred Hospital Pittsburgh   Oakdale   PA   662   12,854   —     662   12,854   13,516   6,554   6,962   N/A   1996   40 years

4628

  Kindred Hospital Chattanooga   Chattanooga   TN   756   4,415   —     756   4,415   5,171   3,101   2,070   N/A   1993   22 years

4635

  Kindred Hospital San Antonio   San Antonio   TX   249   11,413   —     249   11,413   11,662   6,207   5,455   N/A   1993   30 years

4653

 

Kindred Hospital Tarrant County Ft Worth SW Campus

  Ft. Worth   TX   2,342   7,458   —     2,342   7,458   9,800   6,504   3,296   1987   1986   20 years

4654

 

Kindred Hospital Houston NW Campus

  Houston   TX   1,699   6,788   —     1,699   6,788   8,487   3,542   4,945   1986   1985   40 years

4660

  Kindred Hospital Mansfield   Mansfield   TX   267   2,462   —     267   2,462   2,729   1,459   1,270   N/A   1990   40 years

4668

  Kindred Hospital Ft. Worth   Ft. Worth   TX   648   10,608   —     648   10,608   11,256   6,530   4,726   N/A   1994   34 years

4685

  Kindred Hospital Houston   Houston   TX   33   7,062   —     33   7,062   7,095   4,845   2,250   N/A   1994   20 years
                                           
 

TOTAL FOR KINDRED HOSPITALS

      38,172   272,960   —     38,172   272,960   311,132   181,750   129,382      
  NON-KINDRED HOSPITALS                          

3828

 

Gateway Rehabilitation Hospital at Florence

  Florence   KY   3,600   4,924   —     3,600   4,924   8,524   305   8,219   2001   2006   35 years

3864

 

Highlands Regional Rehabilitation Hospital

  El Paso   TX   1,900   23,616   —     1,900   23,616   25,516   1,462   24,054   1999   2006   35 years
                                           
 

TOTAL FOR NON-KINDRED HOSPITALS

      5,500   28,540   —     5,500   28,540   34,040   1,767   32,273      
  TOTAL FOR HOSPITALS       43,672   301,500   —     43,672   301,500   345,172   183,517   161,655      

 

132


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           
 

BROOKDALE SENIORS HOUSING FACILITIES

                         

2424

  The Springs of East Mesa   Mesa   AZ   2,747   24,918   —     2,747   24,918   27,665   4,310   23,355   1986   2005   35 years

3219

  Sterling House of Mesa   Mesa   AZ   655   6,998   —     655   6,998   7,653   1,190   6,463   1998   2005   35 years

3225

  Clare Bridge of Oro Valley   Oro Valley   AZ   666   6,169   —     666   6,169   6,835   1,049   5,786   1998   2005   35 years

3227

  Sterling House of Peoria   Peoria   AZ   598   4,872   —     598   4,872   5,470   828   4,642   1998   2005   35 years

3236

  Clare Bridge of Tempe   Tempe   AZ   611   4,066   —     611   4,066   4,677   691   3,986   1997   2005   35 years

3238

  Sterling House on East Speedway   Tucson   AZ   506   4,745   —     506   4,745   5,251   807   4,444   1998   2005   35 years

2426

  Woodside Terrace   Redwood City   CA   7,669   66,691   —     7,669   66,691   74,360   11,739   62,621   1988   2005   35 years

2428

  The Atrium   San Jose   CA   6,240   66,329   —     6,240   66,329   72,569   10,787   61,782   1987   2005   35 years

2429

  Brookdale Place   San Marcos   CA   4,288   36,204   —     4,288   36,204   40,492   6,452   34,040   1987   2005   35 years

3206

  Wynwood of Colorado Springs   Colorado Springs   CO   715   9,279   —     715   9,279   9,994   1,577   8,417   1997   2005   35 years

3220

  Wynwood of Pueblo   Pueblo   CO   840   9,403   —     840   9,403   10,243   1,598   8,645   1997   2005   35 years

2420

  The Gables at Farmington   Farmington   CT   3,995   36,310   —     3,995   36,310   40,305   6,276   34,029   1984   2005   35 years

2435

  Chatfield   West Hartford   CT   2,493   22,833   —     2,493   22,833   25,326   3,934   21,392   1989   2005   35 years

2403

 

The Grand Court Fort Myers (Waterford Place)

  Fort Myers   FL   1,065   9,586   —     1,065   9,586   10,651   1,535   9,116   1988   2004   35 years

2414

  The Grand Court Tavares   Tavares   FL   431   3,881   —     431   3,881   4,312   713   3,599   1985   2004   35 years

2436

  The Classic at West Palm Beach   West Palm Beach   FL   3,758   33,072   —     3,758   33,072   36,830   5,793   31,037   1990   2005   35 years

3226

  Sterling House of Pensacola   Pensacola   FL   633   6,087   —     633   6,087   6,720   1,035   5,685   1998   2005   35 years

3235

  Clare Bridge of Tallahassee   Tallahassee   FL   667   6,168   —     667   6,168   6,835   1,048   5,787   1998   2005   35 years

3241

  Clare Bridge of West Melbourne   West Melbourne   FL   586   5,481   —     586   5,481   6,067   932   5,135   2000   2005   35 years

3245

  Clare Bridge Cottage of Winter Haven   Winter Haven   FL   232   3,006   —     232   3,006   3,238   511   2,727   1997   2005   35 years

3246

  Sterling House of Winter Haven   Winter Haven   FL   438   5,549   —     438   5,549   5,987   943   5,044   1997   2005   35 years

3239

  Wynwood of Twin Falls   Twin Falls   ID   703   6,153   —     703   6,153   6,856   1,046   5,810   1997   2005   35 years

2408

  The Grand Court Belleville   Belleville   IL   370   3,333   —     370   3,333   3,703   536   3,167   1984   2004   35 years

2415

  Seasons at Glenview   Northbrook   IL   1,988   39,762   —     1,988   39,762   41,750   5,705   36,045   1999   2004   35 years

2416

  The Hallmark   Chicago   IL   11,057   107,517   —     11,057   107,517   118,574   18,089   100,485   1990   2005   35 years

2417

  The Kenwood of Lake View   Chicago   IL   3,072   26,668   —     3,072   26,668   29,740   4,698   25,042   1950   2005   35 years

2418

  The Heritage   Des Plaines   IL   6,871   60,165   —     6,871   60,165   67,036   10,560   56,476   1993   2005   35 years

2421

  Devonshire of Hoffman Estates   Hoffman Estates   IL   3,886   44,130   —     3,886   44,130   48,016   7,007   41,009   1987   2005   35 years

2423

  The Devonshire   Lisle   IL   7,953   70,400   —     7,953   70,400   78,353   12,301   66,052   1990   2005   35 years

2432

  Hawthorn Lakes   Vernon Hills   IL   4,439   35,044   —     4,439   35,044   39,483   6,430   33,053   1987   2005   35 years

2433

  The Willows   Vernon Hills   IL   1,147   10,041   —     1,147   10,041   11,188   1,762   9,426   1999   2005   35 years

2422

  Berkshire of Castleton   Indianapolis   IN   1,280   11,515   —     1,280   11,515   12,795   1,998   10,797   1986   2005   35 years

3209

  Sterling House of Evansville   Evansville   IN   357   3,765   —     357   3,765   4,122   640   3,482   1998   2005   35 years

3218

  Sterling House of Marion   Marion   IN   207   3,570   —     207   3,570   3,777   607   3,170   1998   2005   35 years

3230

  Sterling House of Portage   Portage   IN   128   3,649   —     128   3,649   3,777   620   3,157   1999   2005   35 years

3232

  Sterling House of Richmond   Richmond   IN   495   4,124   —     495   4,124   4,619   701   3,918   1998   2005   35 years

2412

  The Grand Court Overland Park   Overland Park   KS   2,297   20,676   —     2,297   20,676   22,973   3,078   19,895   1988   2004   35 years

3216

  Clare Bridge of Leawood   Leawood   KS   117   5,127   —     117   5,127   5,244   871   4,373   2000   2005   35 years

3237

  Clare Bridge Cottage of Topeka   Topeka   KS   370   6,825   —     370   6,825   7,195   1,160   6,035   2000   2005   35 years

2425

  River Bay Club   Quincy   MA   6,101   57,862   —     6,101   57,862   63,963   9,831   54,132   1986   2005   35 years

2401

  The Grand Court Adrian   Adrian   MI   601   5,411   —     601   5,411   6,012   944   5,068   1988   2004   35 years

 

133


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

2407

  The Grand Court Farmington Hills   Farmington Hills   MI   847   7,620   —     847   7,620   8,467   1,195   7,272   1989   2004   35 years

3224

  Wynwood of Northville   Northville   MI   407   6,068   —     407   6,068   6,475   1,031   5,444   1996   2005   35 years

3240

  Wynwood of Utica   Utica   MI   1,142   11,808   —     1,142   11,808   12,950   2,007   10,943   1996   2005   35 years

2419

  Edina Park Plaza   Edina   MN   3,621   33,141   —     3,621   33,141   36,762   5,712   31,050   1998   2005   35 years

3203

  Sterling House of Blaine   Blaine   MN   150   1,675   —     150   1,675   1,825   285   1,540   1997   2005   35 years

3208

  Clare Bridge of Eden Prairie   Eden Prairie   MN   301   6,228   —     301   6,228   6,529   1,059   5,470   1998   2005   35 years

3211

 

Sterling House of Inver Grove Heights

 

Inver Grove Heights

  MN   253   2,655   —     253   2,655   2,908   451   2,457   1997   2005   35 years

3223

  Clare Bridge of North Oaks   North Oaks   MN   1,057   8,296   —     1,057   8,296   9,353   1,410   7,943   1998   2005   35 years

3229

  Clare Bridge of Plymouth   Plymouth   MN   679   8,675   —     679   8,675   9,354   1,474   7,880   1998   2005   35 years

2405

  The Grand Court Kansas City I   Kansas City   MO   1,250   11,249   —     1,250   11,249   12,499   1,727   10,772   1989   2004   35 years

3204

  Clare Bridge of Cary   Cary   NC   724   6,466   —     724   6,466   7,190   1,099   6,091   1997   2005   35 years

3244

  Clare Bridge of Winston-Salem   Winston-Salem   NC   368   3,497   —     368   3,497   3,865   594   3,271   1997   2005   35 years

2434

  Brendenwood   Voorhees   NJ   3,158   29,909   —     3,158   29,909   33,067   5,084   27,983   1987   2005   35 years

3242

  Clare Bridge of Westampton   Westampton   NJ   881   4,741   —     881   4,741   5,622   806   4,816   1997   2005   35 years

2404

  The Grand Court Albuquerque   Albuquerque   NM   1,382   12,440   —     1,382   12,440   13,822   2,104   11,718   1991   2004   35 years

2430

  Ponce de Leon   Santa Fe   NM   —     28,178   —     —     28,178   28,178   4,561   23,617   1986   2005   35 years

2406

  The Grand Court Las Vegas   Las Vegas   NV   679   6,107   —     679   6,107   6,786   1,091   5,695   1987   2004   35 years

2427

  The Gables at Brighton   Rochester   NY   1,131   9,498   —     1,131   9,498   10,629   1,697   8,932   1988   2005   35 years

3205

  Villas of Sherman Brook   Clinton   NY   947   7,528   —     947   7,528   8,475   1,280   7,195   1991   2005   35 years

3212

  Wynwood of Kenmore   Kenmore   NY   1,487   15,170   —     1,487   15,170   16,657   2,578   14,079   1995   2005   35 years

3221

  Clare Bridge of Niskayuna   Niskayuna   NY   1,021   8,333   —     1,021   8,333   9,354   1,416   7,938   1997   2005   35 years

3222

  Wynwood of Niskayuna   Niskayuna   NY   1,884   16,103   —     1,884   16,103   17,987   2,737   15,250   1996   2005   35 years

3228

  Clare Bridge of Perinton   Pittsford   NY   611   4,066   —     611   4,066   4,677   691   3,986   1997   2005   35 years

3234

  Villas of Summerfield   Syracuse   NY   1,132   11,434   —     1,132   11,434   12,566   1,943   10,623   1991   2005   35 years

3243

  Clare Bridge of Williamsville   Williamsville   NY   839   3,841   —     839   3,841   4,680   653   4,027   1997   2005   35 years

2402

  The Grand Court Dayton   Dayton   OH   636   5,721   —     636   5,721   6,357   1,133   5,224   1987   2004   35 years

2410

  The Grand Court Findlay   Findlay   OH   385   3,464   —     385   3,464   3,849   606   3,243   1984   2004   35 years

2413

  The Grand Court Springfield   Springfield   OH   250   2,250   —     250   2,250   2,500   446   2,054   1986   2004   35 years

3200

  Sterling House of Alliance   Alliance   OH   392   6,283   —     392   6,283   6,675   1,068   5,607   1998   2005   35 years

3201

  Clare Bridge Cottage of Austintown   Austintown   OH   151   3,087   —     151   3,087   3,238   525   2,713   1999   2005   35 years

3202

  Sterling House of Beaver Creek   Beavercreek   OH   587   5,381   —     587   5,381   5,968   915   5,053   1998   2005   35 years

3207

  Sterling House of Westerville   Columbus   OH   267   3,600   —     267   3,600   3,867   612   3,255   1999   2005   35 years

3233

  Sterling House of Salem   Salem   OH   634   4,659   —     634   4,659   5,293   792   4,501   1998   2005   35 years

2411

  The Grand Court Lubbock   Lubbock   TX   720   6,479   —     720   6,479   7,199   1,015   6,184   1984   2004   35 years

2409

  The Grand Court Bristol   Bristol   VA   648   5,835   —     648   5,835   6,483   994   5,489   1985   2004   35 years

2431

  Park Place   Spokane   WA   1,622   12,895   —     1,622   12,895   14,517   2,359   12,158   1915   2005   35 years

3217

  Clare Bridge of Lynwood   Lynwood   WA   1,219   9,573   —     1,219   9,573   10,792   1,627   9,165   1999   2005   35 years

3231

  Clare Bridge of Puyallup   Puyallup   WA   1,055   8,298   —     1,055   8,298   9,353   1,410   7,943   1998   2005   35 years

3210

  Sterling House of Fond du Lac   Fond du Lac   WI   196   1,603   —     196   1,603   1,799   272   1,527   2000   2005   35 years

3213

  Clare Bridge of Kenosha   Kenosha   WI   551   5,431   2,707   551   8,138   8,689   953   7,736   2000   2005   35 years

3214

  Clare Bridge Cottage of La Crosse   La Crosse   WI   621   4,056   1,088   621   5,144   5,765   702   5,063   2004   2005   35 years

3215

  Sterling House of La Crosse   La Crosse   WI   644   5,831   2,592   644   8,423   9,067   1,021   8,046   1998   2005   35 years
                                           
 

TOTAL FOR BROOKDALE SENIORS HOUSING FACILITIES

      129,801   1,256,556   6,387   129,801   1,262,943   1,392,744   213,467   1,179,277      

 

134


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           
 

SUNRISE SENIORS HOUSING FACILITIES

                         

4064

  Sunrise of Scottsdale   Scottsdale   AZ   2,229   27,575   (258 )   2,238   27,308   29,546   1,356   28,190   2007   2007   35 years

4012

  Sunrise of Sunnyvale   Sunnyvale   CA   2,933   34,361   76     2,933   34,437   37,370   1,912   35,458   2000   2007   35 years

4016

  Sunrise of Westlake Village   Westlake Village   CA   4,935   30,722   42     4,935   30,764   35,699   1,577   34,122   2004   2007   35 years

4018

  Sunrise of Yorba Linda   Yorba Linda   CA   1,689   25,240   32     1,689   25,272   26,961   1,331   25,630   2002   2007   35 years

4023

  Sunrise of La Costa   Carlsbad   CA   4,890   20,590   80     4,898   20,662   25,560   1,672   23,888   1999   2007   35 years

4035

  Sunrise of San Mateo   San Mateo   CA   2,682   35,335   238     2,682   35,573   38,255   1,738   36,517   1999   2007   35 years

4043

  Sunrise of Canyon Crest   Riverside   CA   5,486   19,658   246     5,489   19,901   25,390   1,332   24,058   2006   2007   35 years

4045

  Sunrise of Mission Viejo   Mission Viejo   CA   3,802   24,560   67     3,802   24,627   28,429   1,679   26,750   1998   2007   35 years

4047

  Sunrise of Pacific Palisades   Pacific Palisades   CA   4,458   17,064   41     4,458   17,105   21,563   1,333   20,230   2001   2007   35 years

4050

  Sunrise of Sterling Canyon   Valencia   CA   3,868   29,293   367     3,883   29,645   33,528   1,838   31,690   1998   2007   35 years

4055

  Sunrise of Fair Oaks   Fair Oaks   CA   1,456   23,679   821     2,166   23,790   25,956   1,574   24,382   2001   2007   35 years

4066

  Sunrise of Rocklin   Rocklin   CA   1,378   23,565   230     1,374   23,799   25,173   1,151   24,022   2007   2007   35 years

4009

  Sunrise of Cherry Creek   Denver   CO   1,621   28,370   53     1,621   28,423   30,044   1,602   28,442   2000   2007   35 years

4030

  Sunrise of Pinehurst   Denver   CO   1,417   30,885   46     1,417   30,931   32,348   2,187   30,161   1998   2007   35 years

4059

  Sunrise of Orchard   Littleton   CO   1,813   22,183   156     1,813   22,339   24,152   1,509   22,643   1997   2007   35 years

4061

  Sunrise of Westminster   Westminster   CO   2,649   16,243   108     2,671   16,329   19,000   1,155   17,845   2000   2007   35 years

4028

  Sunrise of Stamford   Stamford   CT   4,612   28,533   63     4,612   28,596   33,208   1,980   31,228   1999   2007   35 years

4053

  Sunrise of East Cobb   Marietta   GA   1,797   23,420   100     1,798   23,519   25,317   1,474   23,843   1997   2007   35 years

4056

  Sunrise of Huntcliff I   Atlanta   GA   4,232   66,161   413     4,240   66,566   70,806   4,270   66,536   1987   2007   35 years

4057

  Sunrise of Huntcliff II   Atlanta   GA   2,154   17,137   49     2,154   17,186   19,340   1,061   18,279   1998   2007   35 years

4058

  Sunrise of Ivey Ridge   Alpharetta   GA   1,507   18,516   68     1,507   18,584   20,091   1,279   18,812   1998   2007   35 years

4014

  Sunrise of Park Ridge   Park Ridge   IL   5,533   39,557   50     5,533   39,607   45,140   2,180   42,960   1998   2007   35 years

4015

  Sunrise of Lincoln Park   Chicago   IL   3,485   26,687   5     3,485   26,692   30,177   1,352   28,825   2003   2007   35 years

4021

  Sunrise of Glen Ellyn   Glen Ellyn   IL   2,455   34,064   47     2,455   34,111   36,566   2,326   34,240   2000   2007   35 years

4024

  Sunrise of Naperville   Naperville   IL   1,946   28,538   78     1,952   28,610   30,562   2,038   28,524   1999   2007   35 years

4036

  Sunrise of Willowbrook   Willowbrook   IL   1,454   60,738   146     1,454   60,884   62,338   2,416   59,922   2000   2007   35 years

4040

  Sunrise of Bloomingdale   Bloomingdale   IL   1,287   38,625   49     1,289   38,672   39,961   2,348   37,613   2000   2007   35 years

4042

  Sunrise of Buffalo Grove   Buffalo Grove   IL   2,154   28,021   22     2,154   28,043   30,197   1,769   28,428   1999   2007   35 years

4060

  Sunrise of Palos Park   Palos Park   IL   2,363   42,205   187     2,363   42,392   44,755   2,539   42,216   2001   2007   35 years

4052

  Sunrise of Baton Rouge   Baton Rouge   LA   1,212   23,547   15     1,212   23,562   24,774   1,454   23,320   2000   2007   35 years

4032

  Sunrise of Norwood   Norwood   MA   2,230   30,968   323     2,230   31,291   33,521   1,547   31,974   1997   2007   35 years

4051

  Sunrise of Arlington   Arlington   MA   86   34,393   76     86   34,469   34,555   2,206   32,349   2001   2007   35 years

4033

  Sunrise of Columbia   Columbia   MD   1,780   23,083   250     1,780   23,333   25,113   1,142   23,971   1996   2007   35 years

4034

  Sunrise of Rockville   Rockville   MD   1,039   39,216   227     1,039   39,443   40,482   1,911   38,571   1997   2007   35 years

4008

  Sunrise of North Ann Arbor   Ann Arbor   MI   1,703   15,857   153     1,708   16,005   17,713   1,008   16,705   2000   2007   35 years

4031

  Sunrise of Troy   Troy   MI   1,758   23,727   41     1,761   23,765   25,526   1,638   23,888   2001   2007   35 years

4038

  Sunrise of Bloomfield Hills   Bloomfield Hills   MI   3,736   27,657   1,287     3,737   28,943   32,680   1,584   31,096   2006   2007   35 years

4046

  Sunrise of Northville   Plymouth   MI   1,445   26,090   89     1,445   26,179   27,624   1,712   25,912   1999   2007   35 years

4048

  Sunrise of Rochester   Rochester   MI   2,774   38,666   90     2,774   38,756   41,530   2,396   39,134   1998   2007   35 years

4054

  Sunrise of Edina   Edina   MN   3,181   24,224   129     3,181   24,353   27,534   1,644   25,890   1999   2007   35 years

4017

  Sunrise of North Hills   Raleigh   NC   749   37,091   217     749   37,308   38,057   1,905   36,152   2000   2007   35 years

4019

  Sunrise of Providence   Charlotte   NC   1,976   19,472   34     1,976   19,506   21,482   1,248   20,234   1999   2007   35 years

4001

  Sunrise of Morris Plains   Morris Plains   NJ   1,492   32,052   54     1,492   32,106   33,598   1,834   31,764   1997   2007   35 years

4002

  Sunrise of Old Tappan   Old Tappan   NJ   2,985   36,795   60     2,985   36,855   39,840   2,152   37,688   1997   2007   35 years

4005

  Sunrise of Wayne   Wayne   NJ   1,288   24,990   44     1,288   25,034   26,322   1,454   24,868   1996   2007   35 years

4006

  Sunrise of Westfield   Westfield   NJ   5,057   23,803   140     5,057   23,943   29,000   1,450   27,550   1996   2007   35 years

4025

  Sunrise of East Brunswick   East Brunswick   NJ   2,784   26,173   66     2,784   26,239   29,023   1,942   27,081   1999   2007   35 years

 

135


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

4029

  Sunrise of Woodcliff Lake   Woodcliff Lake   NJ   3,493   30,801   75     3,493   30,876   34,369   2,219   32,150   2000   2007   35 years

4062

  Sunrise of Wall   Wall   NJ   1,053   19,101   58     1,055   19,157   20,212   1,258   18,954   1999   2007   35 years

4011

  Sunrise of New City   New City   NY   1,906   27,323   55     1,906   27,378   29,284   1,597   27,687   1999   2007   35 years

4027

  Sunrise of North Lynbrook   Lynbrook   NY   4,622   38,087   60     4,622   38,147   42,769   2,747   40,022   1999   2007   35 years

4044

  Sunrise of Fleetwood   Mount Vernon   NY   4,381   28,434   70     4,381   28,504   32,885   1,984   30,901   1999   2007   35 years

4049

  Sunrise of Smithtown   Smithtown   NY   2,853   25,621   348     2,982   25,840   28,822   1,931   26,891   1999   2007   35 years

4063

  Sunrise of Staten Island   Staten Island   NY   7,237   23,910   (349 )   7,281   23,517   30,798   1,624   29,174   2006   2007   35 years

4010

  Sunrise of Cuyahoga Falls   Cuyahoga Falls   OH   626   10,239   68     626   10,307   10,933   644   10,289   2000   2007   35 years

4013

  Sunrise of Parma   Cleveland   OH   695   16,641   28     695   16,669   17,364   964   16,400   2000   2007   35 years

4003

  Sunrise of Granite Run   Media   PA   1,272   31,781   58     1,272   31,839   33,111   1,743   31,368   1997   2007   35 years

4004

  Sunrise of Abington   Abington   PA   1,838   53,660   93     1,857   53,734   55,591   3,029   52,562   1997   2007   35 years

4007

  Sunrise of Haverford   Haverford   PA   941   25,872   142     947   26,008   26,955   1,481   25,474   1997   2007   35 years

4020

  Sunrise of Westtown   West Chester   PA   1,547   22,996   38     1,557   23,024   24,581   1,904   22,677   1999   2007   35 years

4022

  Sunrise of Exton   Exton   PA   1,123   17,765   59     1,125   17,822   18,947   1,197   17,750   2000   2007   35 years

4041

  Sunrise of Blue Bell   Blue Bell   PA   1,765   23,920   132     1,770   24,047   25,817   1,599   24,218   2006   2007   35 years

4037

  Sunrise of Hillcrest   Dallas   TX   2,616   27,680   (78 )   2,616   27,602   30,218   1,502   28,716   2006   2007   35 years

4065

  Sunrise of Sandy   Sandy   UT   2,576   22,987   5     2,600   22,968   25,568   1,240   24,328   2007   2007   35 years

4000

  Sunrise of Springfield   Springfield   VA   4,440   18,834   359     4,440   19,193   23,633   1,113   22,520   1997   2007   35 years

4026

  Sunrise of Richmond   Richmond   VA   1,120   17,446   53     1,123   17,496   18,619   1,262   17,357   1999   2007   35 years

4039

  Sunrise of Alexandria   Alexandria   VA   88   14,811   126     102   14,923   15,025   1,221   13,804   1998   2007   35 years

4069

  Sunrise of Beacon Hill   *Victoria   BC   8,332   29,970   (6,944 )   6,804   24,554   31,358   1,362   29,996   2001   2007   35 years

4073

  Sunrise of Lynn Valley   *Vancouver   BC   11,759   37,424   (8,992 )   9,603   30,588   40,191   1,662   38,529   2002   2007   35 years

4077

  Sunrise of Vancouver   *Vancouver   BC   6,649   31,937   (151 )   6,649   31,786   38,435   1,838   36,597   2005   2007   35 years

4067

  Sunrise of Unionville   *Markham   ON   2,322   41,140   (7,912 )   1,901   33,649   35,550   1,793   33,757   2000   2007   35 years

4068

  Sunrise of Mississauga   *Mississauga   ON   3,554   33,631   (6,768 )   2,902   27,515   30,417   1,496   28,921   2000   2007   35 years

4070

  Sunrise of Burlington   *Burlington   ON   1,173   24,448   (51 )   1,173   24,397   25,570   1,374   24,196   2001   2007   35 years

4071

  Sunrise of Oakville   *Oakville   ON   2,753   37,489   (76 )   2,753   37,413   40,166   1,985   38,181   2002   2007   35 years

4072

  Sunrise of Richmond Hill   *Richmond Hill   ON   2,155   41,254   (7,890 )   1,762   33,757   35,519   1,794   33,725   2002   2007   35 years

4074

  Sunrise of Windsor   *Windsor   ON   1,813   20,882   (38 )   1,820   20,837   22,657   1,159   21,498   2001   2007   35 years

4075

  Sunrise of Aurora   *Aurora   ON   1,570   36,113   (6,861 )   1,282   29,540   30,822   1,667   29,155   2002   2007   35 years

4076

  Sunrise of Erin Mills   *Mississauga   ON   1,957   27,020   (5,225 )   1,598   22,154   23,752   1,354   22,398   2007   2007   35 years

4078

  Sunrise, Thorne Mill on Steeles   *Vaughan   ON   2,563   57,513   (9,051 )   1,076   49,949   51,025   1,777   49,248   2003   2007   35 years
                                             
 

TOTAL FOR SUNRISE SENIORS HOUSING FACILITIES

      212,352   2,286,059   (51,642 )   206,122   2,240,647   2,446,769   133,725   2,313,044      
 

OTHER SENIORS HOUSING FACILITIES

                         

3106

  CaraVita Village   Montgomery   AL   779   8,507   651     779   9,158   9,937   1,063   8,874   1987   2005   35 years

3800

  Elmcroft of Halcyon   Montgomery   AL   220   5,476   —       220   5,476   5,696   339   5,357   1999   2006   35 years

3605

  West Shores   Hot Springs   AR   1,326   10,904   —       1,326   10,904   12,230   1,109   11,121   1988   2005   35 years

3821

  Elmcroft of Blytheville   Blytheville   AR   294   2,946   —       294   2,946   3,240   182   3,058   1997   2006   35 years

3822

  Elmcroft of Maumelle   Maumelle   AR   1,252   7,601   —       1,252   7,601   8,853   471   8,382   1997   2006   35 years

3823

  Elmcroft of Mountain Home   Mountain Home   AR   204   8,971   —       204   8,971   9,175   555   8,620   1997   2006   35 years

3824

  Elmcroft of Pocahontas   Pocahontas   AR   575   2,026   —       575   2,026   2,601   125   2,476   1997   2006   35 years

3825

  Elmcroft of Sherwood   Sherwood   AR   1,320   5,693   —       1,320   5,693   7,013   352   6,661   1997   2006   35 years

3601

  Cottonwood Village   Cottonwood   AZ   1,200   15,124   —       1,200   15,124   16,324   1,516   14,808   1986   2005   35 years

2803

  Fairwood Manor   Anaheim   CA   2,464   7,908   —       2,464   7,908   10,372   1,129   9,243   1977   2005   35 years

 

136


Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

2804

  Summerville at Heritage Place   Tracy   CA   1,110   13,296   —     1,110   13,296   14,406   1,448   12,958   1986   2005   35 years

2813

  Barrington Court Alzheimer’s Residence   Danville   CA   360   4,640   —     360   4,640   5,000   394   4,606   1999   2006   35 years

2815

  Somer Park Residence for Memory Impaired   Roseville   CA   220   2,380   —     220   2,380   2,600   204   2,396   1996   2006   35 years

3604

  Villa Santa Barbara   Santa Barbara   CA   1,219   12,426   —     1,219   12,426   13,645   1,256   12,389   1977   2005   35 years

3805

  Las Villas Del Norte   Escondido   CA   2,791   32,632   —     2,791   32,632   35,423   2,020   33,403   1986   2006   35 years

3806

  Rancho Vista   Vista   CA   6,730   21,828   —     6,730   21,828   28,558   1,351   27,207   1982   2006   35 years

3807

  ActivCare at Point Loma   San Diego   CA   2,117   6,865   —     2,117   6,865   8,982   425   8,557   1999   2006   35 years

3808

  ActivCare at La Mesa   La Mesa   CA   2,431   6,101   —     2,431   6,101   8,532   378   8,154   1997   2006   35 years

3809

  Mountview Retirement Residence   Montrose   CA   1,089   15,449   —     1,089   15,449   16,538   956   15,582   1974   2006   35 years

3810

  Grossmont Gardens   La Mesa   CA   9,104   59,349   —     9,104   59,349   68,453   3,674   64,779   1964   2006   35 years

3811

  Las Villas Del Carlsbad   Carlsbad   CA   1,760   30,469   —     1,760   30,469   32,229   1,886   30,343   1987   2006   35 years

2802

  Summerville at South Windsor   South Windsor   CT   2,187   12,682   —     2,187   12,682   14,869   1,710   13,159   1999   2004   35 years

2807

  The Plaza at Bonita Springs   Bonita Springs   FL   1,540   10,783   —     1,540   10,783   12,323   1,738   10,585   1989   2005   35 years

2808

  The Plaza at Boynton Beach   Boynton Beach   FL   2,317   16,218   —     2,317   16,218   18,535   2,471   16,064   1999   2005   35 years

2809

  The Plaza at Deer Creek   Deerfield   FL   1,399   9,791   —     1,399   9,791   11,190   1,769   9,421   1999   2005   35 years

2810

  The Plaza at Jensen Beach   Jensen Beach   FL   1,831   12,820   —     1,831   12,820   14,651   2,053   12,598   1999   2005   35 years

3102

  Highland Terrace   Inverness   FL   269   4,108   —     269   4,108   4,377   499   3,878   1997   2005   35 years

3801

  Elmcroft of Timberlin Parc   Jacksonville   FL   455   5,905   —     455   5,905   6,360   366   5,994   1998   2006   35 years

3100

  Winterville Retirement   Winterville   GA   243   7,418   —     243   7,418   7,661   862   6,799   1999   2005   35 years

3101

  Greenwood Gardens   Marietta   GA   706   3,132   —     706   3,132   3,838   417   3,421   1997   2005   35 years

3103

  Peachtree Estates   Dalton   GA   501   5,229   —     501   5,229   5,730   643   5,087   2000   2005   35 years

3104

  Tara Plantation   Cumming   GA   1,381   7,707   —     1,381   7,707   9,088   919   8,169   1998   2005   35 years

3107

  The Sanctuary at Northstar   Kennesaw   GA   906   5,614   —     906   5,614   6,520   654   5,866   2001   2005   35 years

3826

  Elmcroft of Martinez   Martinez   GA   408   6,764   —     408   6,764   7,172   290   6,882   1997   2007   35 years

3603

  The Harrison   Indianapolis   IN   1,200   5,740   —     1,200   5,740   6,940   645   6,295   1985   2005   35 years

3606

  Georgetowne Place   Fort Wayne   IN   1,315   18,185   —     1,315   18,185   19,500   1,724   17,776   1987   2005   35 years

3607

  Towne Centre   Merrillville   IN   1,291   27,709   —     1,291   27,709   29,000   4,214   24,786   1987   2006   35 years

3827

  Elmcroft of Muncie   Muncie   IN   244   11,218   —     244   11,218   11,462   481   10,981   1998   2007   35 years

2510

  Heritage Woods   Agawam   MA   1,249   4,625   —     1,249   4,625   5,874   1,074   4,800   1997   2004   30 years

2805

  The Village at Farm Pond   Framingham   MA   5,819   33,361   —     5,819   33,361   39,180   4,033   35,147   1999   2004   35 years

2806

  Whitehall Estate   Hyannis   MA   1,277   9,063   —     1,277   9,063   10,340   1,033   9,307   1999   2005   35 years

3608

  Rose Arbor   Maple Grove   MN   1,140   12,421   —     1,140   12,421   13,561   1,812   11,749   2000   2006   35 years

3609

  Wildflower Lodge   Maple Grove   MN   504   5,035   —     504   5,035   5,539   737   4,802   1981   2006   35 years

3802

  Elmcroft of Little Avenue   Charlotte   NC   250   5,077   —     250   5,077   5,327   314   5,013   1997   2006   35 years

3846

  Elmcroft of Northridge   Raleigh   NC   184   3,592   —     184   3,592   3,776   222   3,554   1984   2006   35 years

3602

  Crown Pointe   Omaha   NE   1,316   11,950   —     1,316   11,950   13,266   1,225   12,041   1985   2005   35 years

3600

  The Amberleigh   Amherst   NY   3,498   19,097   —     3,498   19,097   22,595   2,094   20,501   1988   2005   35 years

3812

  Outlook Pointe at Ontario   Mansfield   OH   523   7,968   —     523   7,968   8,491   493   7,998   1998   2006   35 years

3813

  Outlook Pointe at Medina   Medina   OH   661   9,788   —     661   9,788   10,449   606   9,843   1999   2006   35 years

3814

  Outlook Pointe at Washington Township   Miamisburg   OH   1,235   12,611   —     1,235   12,611   13,846   781   13,065   1998   2006   35 years

3816

  Outlook Pointe at Sagamore Hills   Sagamore Hills   OH   980   12,604   —     980   12,604   13,584   780   12,804   2000   2006   35 years

3847

  Outlook Pointe at Lima   Lima   OH   490   3,368   —     490   3,368   3,858   209   3,649   1998   2006   35 years

3848

  Outlook Pointe at Xenia   Xenia   OH   653   2,801   —     653   2,801   3,454   173   3,281   1999   2006   35 years

 

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Facility
#

 

Facility Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

2501

  Berkshire Commons   Reading   PA   470   4,301   —       470   4,301   4,771   872   3,899   1997   2004   30 years

2502

  Lehigh   Macungie   PA   420   4,406   —       420   4,406   4,826   871   3,955   1997   2004   30 years

2503

  Sanatoga Court   Pottstown   PA   360   3,233   —       360   3,233   3,593   657   2,936   1997   2004   30 years

2504

  Highgate at Paoli Pointe   Paoli   PA   1,151   9,079   —       1,151   9,079   10,230   1,650   8,580   1997   2004   30 years

2511

  Mifflin Court   Shillington   PA   689   4,265   —       689   4,265   4,954   700   4,254   1997   2004   35 years

3815

  Elmcroft of Shippensburg   Shippensburg   PA   203   7,634   —       203   7,634   7,837   473   7,364   1999   2006   35 years

3817

  Elmcroft of Dillsburg   Dillsburg   PA   432   7,797   —       432   7,797   8,229   483   7,746   1998   2006   35 years

3818

  Elmcroft of Lebanon   Lebanon   PA   240   7,336   —       240   7,336   7,576   454   7,122   1999   2006   35 years

3849

  Elmcroft of Allison Park   Allison Park   PA   1,171   5,686   —       1,171   5,686   6,857   352   6,505   1986   2006   35 years

3850

  Elmcroft of Altoona   Duncansville   PA   331   4,729   —       331   4,729   5,060   293   4,767   1997   2006   35 years

3851

  Elmcroft of Berwick   Berwick   PA   111   6,741   —       111   6,741   6,852   417   6,435   1998   2006   35 years

3853

  Elmcroft of Chippewa   Beaver Falls   PA   1,394   8,586   —       1,394   8,586   9,980   532   9,448   1998   2006   35 years

3854

  Elmcroft of Lewisburg   Lewisburg   PA   232   5,666   —       232   5,666   5,898   351   5,547   1999   2006   35 years

3855

  Elmcroft of Reedsville   Lewistown   PA   189   5,170   —       189   5,170   5,359   320   5,039   1998   2006   35 years

3856

  Elmcroft of Loyalsock   Montoursville   PA   413   3,412   —       413   3,412   3,825   211   3,614   1999   2006   35 years

3857

  Elmcroft of Reading   Reading   PA   638   4,942   —       638   4,942   5,580   306   5,274   1998   2006   35 years

3858

  Elmcroft of Saxonburg   Saxonburg   PA   770   5,949   —       770   5,949   6,719   368   6,351   1994   2006   35 years

3859

  Elmcroft of South Beaver   Darlington   PA   627   3,220   —       627   3,220   3,847   199   3,648   1984   2006   35 years

3860

  Elmcroft of State College   State College   PA   320   7,407   —       320   7,407   7,727   459   7,268   1997   2006   35 years

3105

  The Inn at Seneca   Seneca   SC   365   2,768   —       365   2,768   3,133   351   2,782   1999   2005   35 years

3803

  Elmcroft of Florence   Florence   SC   108   7,620   —       108   7,620   7,728   472   7,256   1998   2006   35 years

3804

  Elmcroft of Hamilton Place   Chattanooga   TN   87   4,248   —       87   4,248   4,335   263   4,072   1998   2006   35 years

3819

  Elmcroft of Kingsport   Kingsport   TN   22   7,815   —       22   7,815   7,837   484   7,353   2000   2006   35 years

3861

  Elmcroft of Hendersonville   Hendersonville   TN   174   2,586   —       174   2,586   2,760   160   2,600   1999   2006   35 years

3862

  Elmcroft of West Knoxville   Knoxville   TN   439   10,697   —       439   10,697   11,136   662   10,474   2000   2006   35 years

3863

  Elmcroft of Lebanon   Lebanon   TN   180   7,086   —       180   7,086   7,266   439   6,827   2000   2006   35 years

3610

  Whitley Place   Keller   TX   —     5,100   —       —     5,100   5,100   134   4,966   1998   2008   35 years

3865

  Elmcroft of Chesterfield   Richmond   VA   829   6,534   —       829   6,534   7,363   404   6,959   1999   2006   35 years

3820

  Elmcroft of Martinsburg   Martinsburg   WV   248   8,320   —       248   8,320   8,568   515   8,053   1999   2006   35 years
                                             
 

TOTAL FOR OTHER SENIORS HOUSING FACILITIES

      89,150   777,308   651     89,150   777,959   867,109   71,726   795,383      
 

TOTAL FOR SENIORS HOUSING FACILITIES

      431,303   4,319,923   (44,604 )   425,073   4,281,549   4,706,622   418,918   4,287,704      
 

PERSONAL CARE FACILITIES

                         

3718,19,21-28

  ResCare - Tangram - 8 sites   San Marcos   TX   616   6,517   —       616   6,517   7,133   3,340   3,793   N/A   1998   20 years
                                             
 

TOTAL FOR PERSONAL CARE FACILITIES

      616   6,517   —       616   6,517   7,133   3,340   3,793      
 

MEDICAL OFFICE BUILDINGS

                         

2951

  Potomac Medical Plaza   Aurora   CO   2,401   9,118   885     2,442   9,962   12,404   1,072   11,332   1986   2007   35 years

2952

  Briargate Medical Campus   Colorado Springs   CO   1,238   12,301   141     1,238   12,442   13,680   622   13,058   2002   2007   35 years

2953

  Printers Park Medical Plaza   Colorado Springs   CO   2,641   47,507   51     2,659   47,540   50,199   2,633   47,566   1999   2007   35 years

3071

  Parker II MOB   Parker   CO   —     3,457   —       —     3,457   3,457   —     3,457   CIP   CIP   N/A

2902

  JFK Medical Plaza   Lake Worth   FL   453   1,711   79     453   1,790   2,243   219   2,024   1999   2004   35 years

2903

  Palms West Building 6   Loxahatchee   FL   965   2,678   8     965   2,686   3,651   339   3,312   2000   2004   35 years

 

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Table of Contents

Facility
#

 

Facility Name

 

Location

  Initial Cost to Company   Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Date of
Construction
  Date
Acquired
  Life on
Which
Depreciation
in Income
Statement

is Computed
   

City

 

State /
Province

  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

2904

  Regency Medical Park Phase II   Melbourne   FL     770     3,809     19       770     3,828     4,598     468     4,130   1998   2004   35 years

2905

  Regency Medical Office Park Phase I   Melbourne   FL     590     3,156     18       590     3,174     3,764     388     3,376   1995   2004   35 years

2906

  University Medical Office Building   Tamarac   FL     —       6,690     —         —       6,690     6,690     318     6,372   2006   2007   35 years

2907

  Aventura Medical Arts Building   Aventura   FL     —       25,361     843       —       26,204     26,204     1,239     24,965   2006   2007   35 years

3006

  Eastside Physicians Center   Snellville   GA     1,289     25,019     —         1,289     25,019     26,308     339     25,969   1994   2008   35 years

3007

  Eastside Physicians Plaza   Snellville   GA     294     12,948     —         294     12,948     13,242     156     13,086   2003   2008   35 years

2950

  Broadway Medical Office Building   Kansas City   MO     1,300     12,506     954       1,300     13,460     14,760     1,452     13,308   1976   2007   35 years

3004

  Lacey Branch Office Building   Forked River   NJ     63     621     —         63     621     684     118     566   1996   2004   30 years

2925

  Anderson Medical Arts Building I   Cincinnati   OH     —       9,632     99       —       9,731     9,731     566     9,165   1984   2007   35 years

2926

  Anderson Medical Arts Building II   Cincinnati   OH     —       15,123     105       —       15,228     15,228     791     14,437   2007   2007   35 years

3002

  Professional Office Building I   Upland   PA     —       6,283     208       —       6,491     6,491     1,216     5,275   1978   2004   30 years

3003

  DCMH Medical Office Building   Drexel Hill   PA     —       10,424     519       —       10,943     10,943     2,046     8,897   1984   2004   30 years

3070

  Greenville MOB   Greenville   SC     —       8,962     —         —       8,962     8,962     —       8,962   CIP   CIP   N/A

2901

  Abilene Medical Commons I   Abilene   TX     179     1,611     —         179     1,611     1,790     203     1,587   2000   2004   35 years

3060

  Bayshore Surgery Center MOB   Pasadena   TX     765     9,123     137       765     9,260     10,025     1,060     8,965   2001   2005   35 years

3061

  Bayshore Rehabilitation Center MOB   Pasadena   TX     95     1,128     —         95     1,128     1,223     126     1,097   1988   2005   35 years

3021/3020

  Casper WY MOB   Casper   WY     3,015     26,513     —         3,015     26,513     29,528     388     29,140   2008   2008   35 years
                                                             
  TOTAL FOR MEDICAL OFFICE BUILDINGS         16,058     255,681     4,066       16,117     259,688     275,805     15,759     260,046      
                                                             
  TOTAL FOR ALL PROPERTIES       $ 561,566   $ 5,639,907   $ (40,843 )   $ 555,015   $ 5,605,615   $ 6,160,630   $ 987,691   $ 5,172,939      
                                                             

 

* Includes the impact of movements in the foreign currency exchange rate between acquisition date and December 31, 2008.

 

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Table of Contents

VENTAS, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2008

 

     For the Years Ended December 31,
     2008     2007     2006
     (In thousands)

Reconciliation of real estate:

      

Carrying cost:

      

Balance at beginning of period

   $ 6,292,181     $ 3,707,837     $ 3,027,896

Additions during period:

      

Acquisitions

     93,901       2,619,050       679,573

Capital expenditures

     16,359       8,188       368

Dispositions:

      

Sale of assets

     (173,399 )     (82,274 )     —  

Foreign currency translation

     (68,412 )     39,380       —  
                      

Balance at end of period

   $ 6,160,630     $ 6,292,181     $ 3,707,837
                      

Accumulated depreciation:

      

Balance at beginning of period

   $ 816,352     $ 659,584     $ 541,346

Additions during period:

      

Depreciation expense

     200,132       175,494       118,238

Acquisitions—minority interest share

     —         20,482       —  

Dispositions:

      

Sale of assets

     (30,355 )     (40,212 )     —  

Foreign currency translation

     1,562       1,004       —  
                      

Balance at end of period

   $ 987,691     $ 816,352     $ 659,584
                      

 

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Table of Contents
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

 

ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of December 31, 2008, at the reasonable assurance level.

Internal Control over Financial Reporting

The information set forth under “Management Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” included in Part II, Item 8 of this Annual Report on Form 10-K is incorporated by reference into this Item 9A.

Internal Control Changes

During the fourth quarter of 2008, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. Other Information

Not applicable.

PART III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated by reference to the material under the headings “Proposal 1—Election of Directors,” “Executive Officers,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for the 2009 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2009.

 

ITEM 11. Executive Compensation

The information required by this Item 11 is incorporated by reference to the material under the headings “Non-Employee Director Compensation” and “Executive Compensation Matters” in our definitive Proxy Statement for the 2009 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2009.

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 is incorporated by reference to the material under the headings “Equity Compensation Plan Information” and “Security Ownership of Principal Stockholders, Directors and Executive Officers” in our definitive Proxy Statement for the 2009 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2009.

 

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Table of Contents
ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item 13 is incorporated by reference to the material under the headings “Transactions with Related Persons” and “Corporate Governance” in our definitive Proxy Statement for the 2009 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2009.

 

ITEM 14. Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the material under the heading “Audit Matters” in our definitive Proxy Statement for the 2009 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2009.

PART IV

 

ITEM 15. Exhibits and Financial Statement Schedules

Financial Statements and Financial Statement Schedules

The following documents have been included in Part II, Item 8 of this Annual Report on Form 10-K:

 

Report of Independent Registered Public Accounting Firm

   73

Consolidated Balance Sheets as of December 31, 2008 and 2007

   75

Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006

   76

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006

   77

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

   78

Notes to Consolidated Financial Statements

   79

Consolidated Financial Statement Schedule

  

Schedule III—Real Estate and Accumulated Depreciation

   127

All other schedules have been omitted because they are inapplicable, not required or the information is included elsewhere in the Consolidated Financial Statements or notes thereto.

 

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Table of Contents

Exhibits

 

Exhibit
Number

  

Description of Document

  

Location of Document

  3.1

   Amended and Restated Certificate of Incorporation of Ventas, Inc., as amended.    Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

  3.2

   Third Amended and Restated Bylaws of Ventas, Inc.    Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended December 31, 1997.

  4.1

   Specimen common stock certificate.    Incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998.

  4.2

   Ventas, Inc. Distribution Reinvestment and Stock Purchase Plan.    Incorporated by reference to our Registration Statement on Form S-3, filed on November 28, 2008, File No. 333-155770.

  4.3

   Registration Rights Agreement dated as of December 1, 2006 by and among Ventas, Inc. and Banc of America Securities LLC, J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Initial Purchasers.    Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on December 6, 2006.

  4.4

   Certain instruments with respect to long-term debt of Ventas, Inc. and its consolidated subsidiaries are not filed herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K, since the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of Ventas, Inc. and its subsidiaries on a consolidated basis. Ventas, Inc. agrees to furnish a copy of any such instrument to the Commission upon request.   

10.1.1

   Second Amended and Restated Master Lease Agreement No. 1 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 3, 2007.

10.1.2

   Second Amended and Restated Master Lease Agreement No. 2 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on May 3, 2007.

10.1.3

   Second Amended and Restated Master Lease Agreement No. 3 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on May 3, 2007.

 

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Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.1.4

   Second Amended and Restated Master Lease Agreement No. 4 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on May 3, 2007.

10.2.1

   Form of Property Lease Agreement with respect to the Brookdale properties.    Incorporated by reference to Exhibit 10.13 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.2

   Form of Lease Guaranty with respect to the Brookdale properties.    Incorporated by reference to Exhibit 10.16 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.3

   Schedule of Agreements Substantially Identical in All Material Respects to the agreements incorporated by reference as Exhibits 10.2.1 and 10.2.2 to this Annual Report on Form 10-K, pursuant to Instruction 2 to Item 601 of Regulation S-K.    Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

10.2.4.1

   Agreement Regarding Leases dated as of October 19, 2004 by and between Brookdale Provident Properties LLC and PSLT-BLC Properties Holdings, LLC.    Incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.4.2

   Letter Agreement dated March 28, 2005 by and among Brookdale Provident Properties LLC, PSLT-BLC Properties Holdings, LLC and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.19 to Amendment No. 4 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on April 11, 2005, File No. 333-120206.

10.2.4.3

   First Amendment to Agreement Regarding Leases dated as of February 11, 2009 by and between PSLT-BLC Properties Holdings, LLC, Brookdale Provident Properties LLC, Brookdale Provident Management LLC and Ventas Provident, LLC.    Filed herewith.

10.2.5

   Guaranty of Agreement Regarding Leases dated as of October 19, 2004 by Brookdale Living Communities, Inc. in favor of PSLT-BLC Properties Holdings, LLC.    Incorporated by reference to Exhibit 10.15 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.6.1

   Tax Matters Agreement dated as of June 18, 2004 by and among Fortress Brookdale Acquisition LLC, BLC Senior Holdings, Inc. and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

 

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Exhibit
Number

  

Description of Document

  

Location of Document

10.2.6.2

   Letter Agreement dated March 28, 2005 by and among Fortress Brookdale Acquisition LLC, Brookdale Living Communities, Inc. and Ventas Provident, LLC (successor to Provident Senior Living Trust) relating to the Tax Matters Agreement.    Incorporated by reference to Exhibit 10.20 to Amendment No. 4 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on April 11, 2005, File No. 333-120206.

10.2.7.1

   Stock Purchase Agreement, dated as of June 18, 2004, among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.10 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.7.2

   Amendment No. 1 to Stock Purchase Agreement dated as of August 2, 2004 among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.11 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.7.3

   Amendment No. 2 to Stock Purchase Agreement dated as of October 17, 2004 among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.12 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.8

   Amended and Restated Stock Purchase Agreement, dated as of October 19, 2004, between Alterra Healthcare Corporation and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.18 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.3.1

   Credit and Guaranty Agreement dated as of April 26, 2006 among Ventas Realty, Limited Partnership, as borrower, Ventas, Inc. and the other guarantors named therein, as guarantors, Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender, and the lenders identified therein.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 2, 2006.

10.3.2

   Modification Agreement dated as of March 30, 2007 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership, the Guarantors and Lenders signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

10.3.3

   First Amendment dated as of July 27, 2007 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership, the Guarantors and Lenders signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on August 1, 2007.

 

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Exhibit
Number

  

Description of Document

  

Location of Document

10.3.4

   Second Amendment dated as of March 13, 2008 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership and the other Borrowers identified therein, the Guarantors and Lenders Signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

10.4

   Letter Agreement dated as of January 14, 2007 between Ventas, Inc. and Sunrise Senior Living, Inc.    Incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.5.1

   Agreement Regarding Leases dated as of November 7, 2006 by and between Senior Care Operations Holdings, LLC and Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 10.9.1 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.5.2

   Guaranty of Agreement Regarding Leases dated as of November 7, 2006 by Senior Care, Inc. in favor of Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 10.9.2 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.6

   Interim Loan and Guaranty Agreement dated as of April 26, 2007 among Ventas, Inc., Ventas Realty, Limited Partnership, Merrill Lynch Capital Corporation, as Administrative Agent, Citigroup Global Markets Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Runners, and the lenders referred to therein.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 1, 2007.

10.7

   Purchase Agreement dated April 26, 2007 between Ventas, Inc., Ventas Realty, Limited Partnership and the Purchasers named therein.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on May 1, 2007.

10.8*

   Ventas, Inc. 2000 Incentive Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.14.1 to our Annual Report on Form 10-K for the year ended December 31, 2004.

10.9*

   Ventas, Inc. 2004 Stock Plan for Directors, as amended.    Incorporated by reference to Exhibit 10.16.1 to our Annual Report on Form 10-K for the year ended December 31, 2004.

10.10.1*

   Ventas, Inc. 2006 Incentive Plan, as amended.    Filed herewith.

10.10.2*

   Form of Stock Option Agreement—2006 Incentive Plan.    Incorporated by reference to Exhibit 10.15.2 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.10.3*

   Form of Restricted Stock Agreement—2006 Incentive Plan.    Incorporated by reference to Exhibit 10.15.3 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.11.1*

   Ventas, Inc. 2006 Stock Plan for Directors, as amended.    Filed herewith.

10.11.2*

   Form of Stock Option Agreement—2006 Stock Plan for Directors.    Filed herewith.

 

146


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.11.3*

   Form of Restricted Stock Agreement—2006 Stock Plan for Directors.    Filed herewith.

10.11.4*

   Form of Restricted Stock Unit Agreement—2006 Stock Plan for Directors.    Filed herewith.

10.12.1*

   Ventas Executive Deferred Stock Compensation Plan, as amended.    Filed herewith.

10.12.2*

   Deferral Election Form under the Ventas Executive Deferred Stock Compensation Plan.    Filed herewith.

10.13.1*

   Ventas Nonemployee Directors’ Deferred Stock Compensation Plan, as amended.    Filed herewith.

10.13.2*

   Deferral Election Form under the Ventas Nonemployee Directors’ Deferred Stock Compensation Plan.    Filed herewith.

10.14.1*

   Amended and Restated Employment Agreement dated as of December 28, 2006 between Ventas, Inc. and Debra A. Cafaro.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on January 5, 2007.

10.14.2*

   Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Debra A. Cafaro.    Filed herewith.

10.15.1*

   Employment Agreement dated as of July 31, 1998 between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.1 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.2*

   Amendment dated as of September 30, 1999 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.2 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.3*

   Amendment dated as of March 19, 2007 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 23, 2007.

10.15.4*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Filed herewith.

10.15.5*

   Change-in-Control Severance Agreement dated as of May 1, 1998 between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.3 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.6*

   Amendment dated as of September 30, 1999 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.4 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.7*

   Amendment dated as of March 19, 2007 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 23, 2007.

10.15.8*

   Amendment dated as of December 31, 2008 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Filed herewith.

10.16.1*

   Amended and Restated Employment Agreement dated as of December 31, 2004 between Ventas, Inc. and Richard A. Schweinhart.    Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on January 6, 2005.

 

147


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.16.2*

   Amendment dated as of March 19, 2007 to Amended and Restated Employment Agreement between Ventas, Inc. and Richard A. Schweinhart.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on March 23, 2007.

10.16.3*

   Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Richard A. Schweinhart.    Filed herewith.

10.17.1*

   Employment Agreement dated as of September 18, 2002 between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

10.17.2*

   Amendment dated as of March 19, 2007 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on March 23, 2007.

10.17.3*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Filed herewith.

10.18*

   Ventas Employee and Director Stock Puchase Plan, as amended.    Filed herewith.

10.19

   First Amended and Restated Agreement of Limited Partnership of Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 3.5 to our Registration Statement on Form S-4, as amended, File No. 333-89312.

10.20.1

   Second Amended and Restated Agreement of Limited Partnership of ETOP.    Incorporated by reference to Exhibit 10.1 to ElderTrust’s Annual Report on Form 10-K for the year ended December 31, 1997.

10.20.2

   Second Amendment to Second Amended and Restated Agreement of Limited Partnership of ETOP, dated October 13, 1999.    Incorporated by reference to Exhibit 3.2 to ElderTrust’s Annual Report on Form 10-K for the year ended December 31, 1999.

10.20.3

   Consent of General Partner and Third Amendment to Second Amended and Restated Agreement of Limited Partnership of ETOP, dated June 7, 2005.    Incorporated by reference to Exhibit 4.1 to ETOP’s Current Report on Form 8-K filed on June 10, 2005.

10.21.1

   Amended and Restated Agreement of Limited Partnership of PSLT OP, L.P.    Incorporated by reference to Exhibit 10.9 to Provident Senior Living Trust’s Registration Statement on Form S-11, as amended, File No. 333-120206.

10.21.2

   Supplement to the Amended and Restated Agreement of Limited Partnership of PSLT OP, L.P., dated as of August 3, 2004.    Incorporated by reference to Exhibit 10.10 to Provident Senior Living Trust’s Registration Statement on Form S-11, as amended, File No. 333-120206.

12

   Statement Regarding Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends.    Filed herewith.

21

   Subsidiaries of Ventas, Inc.    Filed herewith.

23

   Consent of Ernst & Young LLP.    Filed herewith.

 

148


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

31.1

   Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Exchange Act.    Filed herewith.

31.2

   Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Exchange Act.    Filed herewith.

32.1

   Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. 1350.    Filed herewith.

32.2

   Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. 1350.    Filed herewith.

99.1

   Settlement Agreement dated as of April 10, 2007 between Ventas, Inc. and Sunrise REIT.    Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K, filed on April 12, 2007.

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

 

149


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 27, 2009

 

VENTAS, INC.
By:  

/S/    DEBRA A. CAFARO        

  Debra A. Cafaro
 

Chairman, President and Chief Executive

Officer

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

 

Signature

  

Title

 

Date

/S/    DEBRA A. CAFARO        

Debra A. Cafaro

  

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

  February 27, 2009
    

/S/    RICHARD A. SCHWEINHART        

Richard A. Schweinhart

  

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

  February 27, 2009
    

/S/    ROBERT J. BREHL        

Robert J. Brehl

  

Chief Accounting Officer and Controller

(Principal Accounting Officer)

  February 27, 2009
    

/S/    DOUGLAS CROCKER II        

Douglas Crocker II

   Director   February 27, 2009
    

/S/    RONALD G. GEARY        

Ronald G. Geary

   Director   February 27, 2009
    

/S/    JAY M. GELLERT        

Jay M. Gellert

   Director   February 27, 2009
    

/S/    ROBERT D. REED        

Robert D. Reed

   Director   February 27, 2009
    

/S/    SHELI Z. ROSENBERG        

Sheli Z. Rosenberg

   Director   February 27, 2009
    

/S/    JAMES D. SHELTON        

James D. Shelton

   Director   February 27, 2009
    

/S/    THOMAS C. THEOBALD        

Thomas C. Theobald

   Director   February 27, 2009
    

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description of Document

  

Location of Document

  3.1

   Amended and Restated Certificate of Incorporation of Ventas, Inc., as amended.    Incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

  3.2

   Third Amended and Restated Bylaws of Ventas, Inc.    Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended December 31, 1997.

  4.1

   Specimen common stock certificate.    Incorporated by reference to Exhibit 4.1 to our Annual Report on Form 10-K for the year ended December 31, 1998.

  4.2

   Ventas, Inc. Distribution Reinvestment and Stock Purchase Plan.    Incorporated by reference to our Registration Statement on Form S-3, filed on November 28, 2008, File No. 333-155770.

  4.3

   Registration Rights Agreement dated as of December 1, 2006 by and among Ventas, Inc. and Banc of America Securities LLC, J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Initial Purchasers.    Incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K, filed on December 6, 2006.

  4.4

   Certain instruments with respect to long-term debt of Ventas, Inc. and its consolidated subsidiaries are not filed herewith pursuant to Item 601(b)(4)(iii) of Regulation S-K, since the total amount of securities authorized under each such instrument does not exceed 10% of the total assets of Ventas, Inc. and its subsidiaries on a consolidated basis. Ventas, Inc. agrees to furnish a copy of any such instrument to the Commission upon request.   

10.1.1

   Second Amended and Restated Master Lease Agreement No. 1 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 3, 2007.

10.1.2

   Second Amended and Restated Master Lease Agreement No. 2 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on May 3, 2007.

10.1.3

   Second Amended and Restated Master Lease Agreement No. 3 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on May 3, 2007.

 

151


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.1.4

   Second Amended and Restated Master Lease Agreement No. 4 dated as of April 27, 2007 for lease executed by Ventas Realty, Limited Partnership, as Lessor, and Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc., as Tenant.    Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K, filed on May 3, 2007.

10.2.1

   Form of Property Lease Agreement with respect to the Brookdale properties.    Incorporated by reference to Exhibit 10.13 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.2

   Form of Lease Guaranty with respect to the Brookdale properties.    Incorporated by reference to Exhibit 10.16 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.3

   Schedule of Agreements Substantially Identical in All Material Respects to the agreements incorporated by reference as Exhibits 10.2.1 and 10.2.2 to this Annual Report on Form 10-K, pursuant to Instruction 2 to Item 601 of Regulation S-K.    Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

10.2.4.1

   Agreement Regarding Leases dated as of October 19, 2004 by and between Brookdale Provident Properties LLC and PSLT-BLC Properties Holdings, LLC.    Incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.4.2

   Letter Agreement dated March 28, 2005 by and among Brookdale Provident Properties LLC, PSLT-BLC Properties Holdings, LLC and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.19 to Amendment No. 4 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on April 11, 2005, File No. 333-120206.

10.2.4.3

   First Amendment to Agreement Regarding Leases dated as of February 11, 2009 by and between PSLT-BLC Properties Holdings, LLC, Brookdale Provident Properties LLC, Brookdale Provident Management LLC and Ventas Provident, LLC.    Filed herewith.

10.2.5

   Guaranty of Agreement Regarding Leases dated as of October 19, 2004 by Brookdale Living Communities, Inc. in favor of PSLT-BLC Properties Holdings, LLC.    Incorporated by reference to Exhibit 10.15 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.6.1

   Tax Matters Agreement dated as of June 18, 2004 by and among Fortress Brookdale Acquisition LLC, BLC Senior Holdings, Inc. and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

 

152


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.2.6.2

   Letter Agreement dated March 28, 2005 by and among Fortress Brookdale Acquisition LLC, Brookdale Living Communities, Inc. and Ventas Provident, LLC (successor to Provident Senior Living Trust) relating to the Tax Matters Agreement.    Incorporated by reference to Exhibit 10.20 to Amendment No. 4 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on April 11, 2005, File No. 333-120206.

10.2.7.1

   Stock Purchase Agreement, dated as of June 18, 2004, among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.10 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.7.2

   Amendment No. 1 to Stock Purchase Agreement dated as of August 2, 2004 among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.11 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.7.3

   Amendment No. 2 to Stock Purchase Agreement dated as of October 17, 2004 among Fortress Brookdale Acquisition LLC, Ventas Provident, LLC (successor to Provident Senior Living Trust) and BLC Senior Holdings, Inc.    Incorporated by reference to Exhibit 10.12 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.2.8

   Amended and Restated Stock Purchase Agreement, dated as of October 19, 2004, between Alterra Healthcare Corporation and Ventas Provident, LLC (successor to Provident Senior Living Trust).    Incorporated by reference to Exhibit 10.18 to Amendment No. 2 to Provident Senior Living Trust’s Registration Statement on Form S-11, filed on January 18, 2005, File No. 333-120206.

10.3.1

   Credit and Guaranty Agreement dated as of April 26, 2006 among Ventas Realty, Limited Partnership, as borrower, Ventas, Inc. and the other guarantors named therein, as guarantors, Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender, and the lenders identified therein.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 2, 2006.

10.3.2

   Modification Agreement dated as of March 30, 2007 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership, the Guarantors and Lenders signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.

10.3.3

   First Amendment dated as of July 27, 2007 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership, the Guarantors and Lenders signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on August 1, 2007.

10.3.4

   Second Amendment dated as of March 13, 2008 to Credit and Guaranty Agreement among Ventas Realty, Limited Partnership and the other Borrowers identified therein, the Guarantors and Lenders Signatory thereto and Bank of America, N.A.    Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.

 

153


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.4

   Letter Agreement dated as of January 14, 2007 between Ventas, Inc. and Sunrise Senior Living, Inc.    Incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.5.1

   Agreement Regarding Leases dated as of November 7, 2006 by and between Senior Care Operations Holdings, LLC and Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 10.9.1 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.5.2

   Guaranty of Agreement Regarding Leases dated as of November 7, 2006 by Senior Care, Inc. in favor of Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 10.9.2 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.6

   Interim Loan and Guaranty Agreement dated as of April 26, 2007 among Ventas, Inc., Ventas Realty, Limited Partnership, Merrill Lynch Capital Corporation, as Administrative Agent, Citigroup Global Markets Inc., as Syndication Agent, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book Runners, and the lenders referred to therein.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on May 1, 2007.

10.7

   Purchase Agreement dated April 26, 2007 between Ventas, Inc., Ventas Realty, Limited Partnership and the Purchasers named therein.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on May 1, 2007.

10.8*

   Ventas, Inc. 2000 Incentive Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.14.1 to our Annual Report on Form 10-K for the year ended December 31, 2004.

10.9*

   Ventas, Inc. 2004 Stock Plan for Directors, as amended.    Incorporated by reference to Exhibit 10.16.1 to our Annual Report on Form 10-K for the year ended December 31, 2004.

10.10.1*

   Ventas, Inc. 2006 Incentive Plan, as amended.    Filed herewith.

10.10.2*

   Form of Stock Option Agreement—2006 Incentive Plan.    Incorporated by reference to Exhibit 10.15.2 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.10.3*

   Form of Restricted Stock Agreement—2006 Incentive Plan.    Incorporated by reference to Exhibit 10.15.3 to our Annual Report on Form 10-K for the year ended December 31, 2006.

10.11.1*

   Ventas, Inc. 2006 Stock Plan for Directors, as amended.    Filed herewith.

10.11.2*

   Form of Stock Option Agreement—2006 Stock Plan for Directors.    Filed herewith.

10.11.3*

   Form of Restricted Stock Agreement—2006 Stock Plan for Directors.    Filed herewith.

10.11.4*

   Form of Restricted Stock Unit Agreement—2006 Stock Plan for Directors.    Filed herewith.

10.12.1*

   Ventas Executive Deferred Stock Compensation Plan, as amended.    Filed herewith.

 

154


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.12.2*

   Deferral Election Form under the Ventas Executive Deferred Stock Compensation Plan.    Filed herewith.

10.13.1*

   Ventas Nonemployee Directors’ Deferred Stock Compensation Plan, as amended.    Filed herewith.

10.13.2*

   Deferral Election Form under the Ventas Nonemployee Directors’ Deferred Stock Compensation Plan.    Filed herewith.

10.14.1*

   Amended and Restated Employment Agreement dated as of December 28, 2006 between Ventas, Inc. and Debra A. Cafaro.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on January 5, 2007.

10.14.2*

   Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Debra A. Cafaro.    Filed herewith.

10.15.1*

   Employment Agreement dated as of July 31, 1998 between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.1 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.2*

   Amendment dated as of September 30, 1999 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.2 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.3*

   Amendment dated as of March 19, 2007 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 23, 2007.

10.15.4*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Filed herewith.

10.15.5*

   Change-in-Control Severance Agreement dated as of May 1, 1998 between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.3 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.6*

   Amendment dated as of September 30, 1999 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.2.4 to our Annual Report on Form 10-K for the year ended December 31, 2002.

10.15.7*

   Amendment dated as of March 19, 2007 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on March 23, 2007.

10.15.8*

   Amendment dated as of December 31, 2008 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Filed herewith.

10.16.1*

   Amended and Restated Employment Agreement dated as of December 31, 2004 between Ventas, Inc. and Richard A. Schweinhart.    Incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed on January 6, 2005.

10.16.2*

   Amendment dated as of March 19, 2007 to Amended and Restated Employment Agreement between Ventas, Inc. and Richard A. Schweinhart.    Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on March 23, 2007.

 

155


Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

10.16.3*

   Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Richard A. Schweinhart.    Filed herewith.

10.17.1*

   Employment Agreement dated as of September 18, 2002 between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

10.17.2*

   Amendment dated as of March 19, 2007 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on March 23, 2007.

10.17.3*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Filed herewith.

10.18*

   Ventas Employee and Director Stock Purchase Plan, as amended.    Filed herewith.

10.19

   First Amended and Restated Agreement of Limited Partnership of Ventas Realty, Limited Partnership.    Incorporated by reference to Exhibit 3.5 to our Registration Statement on Form S-4, as amended, File No. 333-89312.

10.20.1

   Second Amended and Restated Agreement of Limited Partnership of ETOP.    Incorporated by reference to Exhibit 10.1 to ElderTrust’s Annual Report on Form 10-K for the year ended December 31, 1997.

10.20.2

   Second Amendment to Second Amended and Restated Agreement of Limited Partnership of ETOP, dated October 13, 1999.    Incorporated by reference to Exhibit 3.2 to ElderTrust’s Annual Report on Form 10-K for the year ended December 31, 1999.

10.20.3

   Consent of General Partner and Third Amendment to Second Amended and Restated Agreement of Limited Partnership of ETOP, dated June 7, 2005.    Incorporated by reference to Exhibit 4.1 to ETOP’s Current Report on Form 8-K filed on June 10, 2005.

10.21.1

   Amended and Restated Agreement of Limited Partnership of PSLT OP, L.P.    Incorporated by reference to Exhibit 10.9 to Provident Senior Living Trust’s Registration Statement on Form S-11, as amended, File No. 333-120206.

10.21.2

   Supplement to the Amended and Restated Agreement of Limited Partnership of PSLT OP, L.P., dated as of August 3, 2004.    Incorporated by reference to Exhibit 10.10 to Provident Senior Living Trust’s Registration Statement on Form S-11, as amended, File No. 333-120206.

12

   Statement Regarding Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends.    Filed herewith.

21

   Subsidiaries of Ventas, Inc.    Filed herewith.

23

   Consent of Ernst & Young LLP.    Filed herewith.

31.1

   Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Exchange Act.    Filed herewith.

 

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Table of Contents

Exhibit
Number

  

Description of Document

  

Location of Document

31.2

   Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Exchange Act.    Filed herewith.

32.1

   Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. 1350.    Filed herewith.

32.2

   Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. 1350.    Filed herewith.

99.1

   Settlement Agreement dated as of April 10, 2007 between Ventas, Inc. and Sunrise REIT.    Incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K, filed on April 12, 2007.

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

 

157