Form 10-K
Table of Contents
Index to Financial Statements

 

 

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, 2009

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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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, 2009, was approximately $4.6 billion. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.

As of February 15, 2010, 156,706,398 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 April 30, 2010 are incorporated by reference into Part III, Items 10 through 14 of this Annual Report on Form 10-K.

 

 

 


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Index to Financial Statements

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, operating metrics, 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 tenants, operators, 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 tenants, operators, 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, 2009 and for the year ending December 31, 2010;

 

   

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 Healthcare, Inc. (together with its subsidiaries, “Kindred”), and our earnings;

 

   

Our ability and the ability of our tenants, operators, 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 tenants, operators, borrowers and managers and the ability of our tenants, operators, 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 us or our major tenants, operators, and 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, 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.

 

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TABLE OF CONTENTS

 

PART I   

Item 1.

  

Business

   1

Item 1A.

  

Risk Factors

   26

Item 1B.

  

Unresolved Staff Comments

   40

Item 2.

  

Properties

   40

Item 3.

  

Legal Proceedings

   42

Item 4.

  

Submission of Matters to a Vote of Security Holders

   42
PART II   

Item 5.

  

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

   42

Item 6.

  

Selected Financial Data

   45

Item 7.

  

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

   47

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

   136

Item 9A.

  

Controls and Procedures

   136

Item 9B.

  

Other Information

   136
PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

   136

Item 11.

  

Executive Compensation

   136

Item 12.

  

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

   136

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   137

Item 14.

  

Principal Accountant Fees and Services

   137
PART IV   

Item 15.

  

Exhibits and Financial Statement Schedules

   137

 

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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, 2009, this portfolio consisted of 505 assets: 244 seniors housing communities, 187 skilled nursing facilities, 40 hospitals and 34 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 or properties as of December 31, 2009.

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. 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.

Portfolio of Properties and Other Real Estate Investments

As of December 31, 2009, we had a 100% ownership interest in 439 of our properties. We had 75% to 85% interests in 60 seniors housing communities owned in joint ventures with Sunrise, and we had controlling interests in six MOBs owned through joint ventures with partners who provide management and leasing services for the properties.

 

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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, 2009:

 

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

  244   23,242   $ 615,784   65.8   $ 4,760,278   75.6   $ 204.8   36

Skilled nursing facilities

  187   22,377     176,071   18.8        809,121   12.9        36.2   29

Hospitals

  40   3,517     93,564   10.0        345,172   5.5        98.1   17

MOBs (3)

  26   —       35,922   3.8        373,517   5.9        nm   11

Other properties

  8   122     981   0.1        7,133   0.1        58.5   1
                                   

Total seniors housing and healthcare properties

  505   49,258     922,322   98.5   $ 6,295,221   100.0     45
                           

Other Real Estate Investments

               

Loans and investments

    13,107   1.4           
                       
  $ 935,429   99.9 %(4)         
                       

 

nm—not meaningful.

 

(1) Includes assets held for sale at December 31, 2009.
(2) As of December 31, 2009, 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, 2009, 25 of our MOBs were operated by third-party managers, and one MOB was leased under a triple-net lease.
(4) The remainder of our total revenues is interest and other income. Revenues from properties held for sale as of December 31, 2009 are included in this presentation. Revenues from properties sold during 2009 are excluded from this presentation.

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.

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

 

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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, 2009, our MOB portfolio consisted of over 1.7 million rentable square feet.

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, 2009, we had $131.9 million of net loans receivable relating to seniors housing and healthcare companies or properties. See “Note 6—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 2009 total revenues (including amounts in discontinued operations from properties held for sale at December 31, 2009). 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, 2009:

 

     Rental Income and
Resident Fees and
Services
   Percent of Total
Revenues
 
     (Dollars in thousands)  

Geographic Location

     

California

   $ 118,391    12.6

Illinois

     96,377    10.3   

Pennsylvania

     52,288    5.6   

Massachusetts

     49,761    5.3   

New Jersey

     47,149    5.0   

Florida

     37,943    4.1   

Colorado

     37,191    4.0   

Georgia

     34,556    3.7   

New York

     33,964    3.6   

North Carolina

     30,139    3.2   

Other (33 states)

     310,842    33.2   
             

Total U.S

     848,601    90.6

Canada (two Canadian provinces)

     73,721    7.9   
             

Total

   $ 922,322    98.5 %(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, 2009 are included in this presentation. Revenues from properties sold during 2009 are excluded from this presentation.

Segment Information

As of December 31, 2009, we operated through two reportable business segments: triple-net leased properties and senior living operations. See “Note 18—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, 2009:

 

     Skilled
Nursing
Facilities
    Hospitals     Total  

States with CON requirements

   73.9   48.6   65.1

States without CON requirements

   26.1      51.4      34.9   
                  

Total

   100.0   100.0   100.0
                  

Significant Tenants, Operators and Managers

As of December 31, 2009, approximately 38.9%, 21.8% and 14.1% 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. For the year ended December 31, 2009 (including amounts in discontinued operations): our senior living operations managed by Sunrise accounted for approximately 44.7% of our total revenues and 18.5% of our earnings before interest, taxes, depreciation and amortization (“EBITDA”); our master lease agreements with Kindred (the “Kindred Master Leases”) accounted for approximately 26.2% of our total revenues and 38.5% of our total net operating income (“NOI”); and our leases with Brookdale Senior Living accounted for approximately 12.9% of our total revenues and 19.1% of our total NOI.

Sunrise has managed our senior living operations since April 2007, when we acquired the assets of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”). We have been party to the Kindred Master Leases since May 1998, as a result of our spin off of Kindred, pursuant to which we transferred to Kindred our previous hospital, nursing facility and ancillary services businesses and retained substantially all of the real property that we then leased to Kindred. Our relationship with Brookdale Senior Living dates back to a lease transaction we entered into in 2004, followed by the various lease agreements with Brookdale Senior Living to which we became a party 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 $248.5 million from May 1, 2010 to April 30, 2011. See “Note 3—Concentration of Credit Risk” 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, commencing May 1, 1998, and, provided certain conditions are satisfied, are subject to three five-year renewal terms. Kindred renewed, through April 30, 2013, its leases covering all 57 assets owned by us whose initial base term expired on April 30, 2008. Kindred has also renewed, through April 30, 2015, its leases covering all 109 assets owned by us (one of which we subsequently sold in June 2009) whose initial base term will expire on April 30, 2010. Kindred retains two sequential renewal options for the remaining 108 assets.

The term for each of ten bundles will expire on April 30, 2013 unless Kindred provides us with a renewal notice with respect to those individual bundles on or before April 30, 2012. The ten bundles expiring in 2013 contain an aggregate of 89 properties currently representing $117 million of annual Base Rent. Each bundle covers not less than six properties, including at least one hospital. Kindred is required to continue to perform all of its obligations under the applicable lease for any properties within a bundle that is not renewed until expiration of the term on April 30, 2013, including without limitation, payment of all rental amounts. For any bundles that are not renewed, we will have at least one year to arrange for the repositioning of the applicable properties with new operators. In addition, 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, if Kindred does not renew one or more bundles, 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 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 we 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 2010 is approximately $114.1 million, excluding variable

 

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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 rent (computed in accordance with U.S. generally accepted accounting principles (“GAAP”)), excluding the variable interest, expected from Brookdale Senior Living for 2010 is approximately $121.5 million. See “Note 3—Concentration of Credit Risk” and “Note 12—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—Concentration of Credit Risk” 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 8—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,

 

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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 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, 2009, we had 61 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, operators and managers 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, operators and managers 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, operators and managers will maintain such insurance, and any failure by them to do so could have a Material Adverse Effect on us.

We maintain casualty insurance for our properties managed by Sunrise, but general and professional liability insurance covering those properties and the related operations is currently maintained by Sunrise in accordance with the standards contained in our management agreements. Pursuant to our management agreements, we may elect, on an annual basis, to opt in or out of the Sunrise insurance program, meaning that we can choose whether we or Sunrise will bear responsibility for maintaining 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, operators and managers 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, operators and managers 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 has been restricted 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, operators and managers 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, operators and managers 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.

 

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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 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

While the properties within our portfolio are all susceptible to many varying 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, proposed healthcare reform, 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 satisfy their contractual obligations, including making rental payments under, or otherwise complying 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 satisfy their contractual obligations, including making rental payments under, and otherwise complying 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 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 affect adversely their ability to satisfy their contractual obligations, including making rental payments under, and otherwise complying with the terms of, their 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,

 

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in turn, could adversely affect their ability to satisfy their contractual obligations, including making rental payments under, and otherwise complying with the terms of, their leases with us.

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.

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. 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, by way of example, the following:

 

   

The anti-kickback statute (Section 1128B(b) of the Social Security Act), which prohibits certain business practices and relationships, including the payment, receipt or solicitation of any remuneration, directly or indirectly, to induce a referral of any patient or service or item covered by a federal health care program, including Medicare or a state health program, such as Medicaid;

 

   

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 or Medicaid patients to providers of a broad range of designated healthcare services with which the physicians (or their immediate family members) 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.

 

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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 adversely their ability to satisfy their contractual obligations, including making rental payments under, and otherwise complying with the terms of, their leases with us.

Healthcare Legislation

There are currently pending various comprehensive reform initiatives that could transform the healthcare system in the United States. The U.S. House of Representatives and the U.S. Senate have each passed differing reform bills that address a number of issues, including healthcare cost-saving measures. Many of the proposals could or would affect both public and private healthcare programs and could adversely affect Medicare payments to skilled nursing facilities and long-term acute care hospitals, which, in turn, could have a Material Adverse Effect on us. Future healthcare reform or legislation or changes in the administration or implementation of governmental and non-governmental healthcare reimbursement programs also could have a material adverse effect on our operators’ liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and which, in turn, could have a Material Adverse Effect on us.

The President’s Budget, released on February 2, 2010, assumed that health care reform legislation pending before Congress would be passed and, therefore, did not directly propose 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 or lack thereof, if any, has not been determined.

Healthcare is one of the largest industries in the United States and continues to attract a great deal of legislative interest and public attention. 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 satisfy their obligations to us and which, in turn, could have a Material Adverse Effect on us.

 

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Medicare Reimbursement; Long-Term Acute Care Hospitals

The Balanced Budget Act of 1997 (“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, starting with the 2010 rate year, which commenced October 1, 2009, annual rate updates now coincide with annual updates to the LTC-DRG classification system, which correspond to the federal fiscal year (October 1 through September 30).

The Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. No. 110-173) (the “Medicare Extension Act”) significantly expanded medical necessity reviews by the Centers for Medicare & Medicaid Services (“CMS”) by requiring long-term acute care hospitals to institute a patient review process to better assess patients upon admission and on a continuing basis for appropriateness of care. In addition, the Medicare Extension Act, among other things, provided the following long-term acute care hospital payment policy changes:

 

   

It prevented 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;

 

   

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

 

   

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

Lastly, the Medicare Extension Act introduced a moratorium on new long-term acute care hospitals and beds for three years.

On May 22, 2008, CMS published a final rule addressing two LTAC PPS payment policies mandated by the Medicare Extension Act. The rule delayed the extension of the 25-percent rule to freestanding and grandfathered long-term acute care hospitals and increased 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 set forth policies on implementing the moratorium on new long-term acute care hospitals and beds imposed by the Medicare Extension Act.

On August 27, 2009, CMS published its final rule updating LTAC PPS for the 2010 fiscal year (October 1, 2009 through September 30, 2010), including setting the LTAC PPS standard federal payment rate. CMS estimated that net payments to long-term acute care hospitals under the final rule would increase by approximately 3.3% in fiscal year 2010, reflecting, in part, both a 2% increase in the federal payment rate for fiscal year 2010 as compared to fiscal year 2009 and a nearly 20% decrease in the outlier fixed-loss amount for fiscal year 2010 as compared to fiscal year 2009.

In the August 27, 2009 final rule, CMS also updated the inpatient prospective payment system (“IPPS”) for short-term and long-term acute care hospitals for the 2010 federal fiscal year (October 1, 2009 through September 30, 2010) and finalized policies to implement changes required by Section 124 of the Medicare Improvements for Patients & Providers Act of 2008 (Pub. L. No. 110-275). The final rule continues reforms intended to improve the accuracy of Medicare payments for inpatient acute care through the severity-adjusted

 

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diagnosis-related group (MS-LTC-DRG) classification system for long-term acute care hospitals. CMS projects that aggregate annual spending 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.

We regularly assess the financial implications of CMS’s rules on the operators of our long-term acute care hospitals, but we cannot assure you that the current rules or 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 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 Balanced Budget Refinement Act of 1999 (“BBRA”). 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. Relief from the BBA therapy caps was subsequently extended multiple times by Congress, but these extensions expired on December 31, 2009 and have not yet been renewed by Congress. Therefore, effective January 1, 2010, Medicare coverage of therapy services at nursing facilities paid for under Medicare part B are capped at $1,860 per beneficiary per year for occupational therapy services and $1,860 per beneficiary for speech-language pathology and physical therapy services combined.

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 July 31, 2009, CMS issued its final rule updating SNF PPS for the 2010 fiscal year (October 1, 2009 through September 30, 2010). Under the final rule, the update to the SNF PPS standard federal payment rate for skilled nursing facilities includes a 2.2% increase in the market basket index for the 2010 fiscal year. The final rule also provides a recalibration in the case-mix indexes for the resource utilization groups (RUGs) used to determine the daily payment for beneficiaries in skilled nursing facilities that is expected to reduce payments to

 

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skilled nursing facilities by 3.3% in fiscal year 2010. CMS estimates that net payments to skilled nursing facilities as a result of the market basket increase and the recalibration in the case-mix indexes for RUGS under the final rule would decrease by approximately $360 million, or 1.1%, in fiscal year 2010.

The July 31, 2009 final rule includes other changes that may additionally affect net payments to skilled nursing facilities, including, by way of example, implementation of the RUG-IV classification model for fiscal year 2011 and possible new requirements for the quarterly reporting of nursing home staffing data.

We regularly assess the financial implications of CMS’s rules on the operators of our skilled nursing facilities, but we cannot assure you that the current rules or 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.

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. As state budget pressures continue to escalate as result of the financial crisis, a significant number of states have announced actual or potential budget shortfalls. As a result of these shortfalls, states are reducing 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 Deficit Reduction Act of 2005 (Pub. L. No. 109 171), 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 (Pub. L. No. 109-432), 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, impacting only those states with taxes in excess of 5.5%. The ceiling is scheduled to revert back to 6% on October 1, 2011. We have not ascertained the impact of this reduction on our skilled nursing facility operators.

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 and a temporary increase in federal monies. The increase in payments to States has not yet been extended and the effect of this cannot be ascertained at this time. The President’s 2011 budget submitted to Congress on February 1, 2010 proposes to temporarily extend the Medicaid federal assistance payments for six months, through June 30, 2011.

 

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As state reimbursement methodologies continue to evolve, at this time we expect significant Medicaid rate freezes or cuts or other program changes to be adopted by many states. In addition, the U.S. government may revoke, reduce or stop approving “provider taxes” that have the effect of increasing Medicaid payments to the states. We cannot predict the impact of such actions on our operators and we 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.

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 2009 and do not expect that we will have to make any such material capital expenditures during 2010.

 

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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

 

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investment income. Second, at least 95% of our gross income (excluding gross income from prohibited 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

 

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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.

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 excess payments that we receive or on excess 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

 

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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.

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, 2009. 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, 2010 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 2010-12, the IRS stated that it would treat stock dividends as distributions for purposes of satisfying the REIT distribution requirements for calendar years 2008 through 2012, 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 2010-12 or otherwise. Also, we have net operating loss carryforwards that we can use to reduce our annual distribution requirements. See “Note 11—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

 

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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 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

 

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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.

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.

 

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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.

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

 

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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 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

 

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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, which means that the new provisions apply to us from and after January 1, 2009, except as otherwise indicated below.

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 was 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.

 

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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 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

 

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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, 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 severely weakened 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.

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 and rates in our properties, which could harm their financial condition. These economic conditions could cause us to experience operating deficiencies at our Sunrise-managed properties and/or cause our tenants and operators to 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.

 

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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 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.

Continued turmoil and uncertainty in the capital markets and the tightening of the credit markets have made obtaining new capital more challenging and more expensive. 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 any of our mortgage loans, we may have to foreclose on the loan 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.

 

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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 MOBs, that may adversely affect our ability to generate revenues and/or increase our costs, thereby reducing our profitability. These risks include fluctuations 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 (as a result of unionization or otherwise) 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.

As we invest in, and/or acquire or develop, additional seniors housing and/or healthcare assets or businesses, we expect that the number of operators of our properties and, potentially, our business segments will increase. 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. Moreover, in some cases, acquisitions require the integration of companies that have previously operated independently. Successful integration of the operations of those companies will depend primarily on our ability to consolidate operations,

 

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systems, procedures and personnel to eliminate redundancies and costs. Potential difficulties we could encounter during integration include the loss of key employees, disruption of our business, possible inconsistencies in standards, controls, procedures and policies, and the assumption of unexpected liabilities. In addition, projections of estimated future revenues, costs savings or operating metrics that we develop during the due diligence and integration planning process could prove to be inaccurate. If we experience any of these difficulties, or if we later discover additional liabilities or experience unforeseen costs relating to acquired companies, we might not achieve the economic benefit we expect from acquisitions, which could have a Material Adverse Effect on us.

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 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.

 

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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 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, in certain circumstances, 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.

 

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Our investments in joint ventures could be adversely affected by our lack of sole decision-making authority regarding major decisions, 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, 2009, we had 75% to 85% interests in 60 seniors housing communities owned in joint ventures with Sunrise, and we had controlling interests in six MOBs owned through joint ventures with partners who 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 or general partner, 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 ownership or operation of the joint venture and any property owned by the joint venture, 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.

 

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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 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.

Our ownership of properties through ground leases exposes us to the loss of such properties upon breach or termination of the ground leases and limits our uses of these properties and restricts our ability to sell or otherwise transfer such properties.

We have acquired an interest in certain of our properties by acquiring a leasehold interest in the property on which the building is located, and we may acquire additional properties in the future through the purchase of interests in ground leases. As the lessee under a ground lease, we are exposed to the possibility of losing the property upon termination of the ground lease or an earlier breach of the ground lease by us. In addition, many of our ground leases impose significant limitations on our uses of the subject properties and restrict our right to convey our interest in such ground leases, which may limit our ability to timely sell or exchange the properties and impair their value.

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

Barriers to entry in the assisted living and MOB industries are not substantial. Consequently, the development of new seniors housing communities or MOBs could outpace demand. If the development of new seniors housing communities or MOBs outpaces demand for those asset types 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

 

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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.

The amount and scope of insurance coverage provided by our policies and policies maintained by our tenants, operators and managers may not adequately insure against losses.

We maintain and/or require in our existing leases and other agreements that our tenants, operators and managers maintain all applicable lines of insurance on our properties and their operations. Although we continually review the insurance maintained by us and our tenants, operators and managers and believe the coverage provided to be 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, operators and managers will be able to maintain adequate levels of insurance coverage. We also 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.

Should an uninsured loss or a loss in excess of insured limits occur, we could incur substantial liability or lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenues from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.

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 continue to experience increases in both the number and size of professional liability claims. 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.

In addition, many healthcare providers are pursuing different organizational and corporate structures coupled with self-insurance programs that provide less insurance coverage. For example, Kindred insures its professional liability risks, in part, through a wholly owned, limited purpose insurance company, which 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, and all claims in excess of the aggregate limit are then insured by the limited purpose insurance company. 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 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 reserves for future claims may not be adequate to cover the actual cost of those claims.

 

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As a result, the tenants, operators and managers of our properties could incur large funded and unfunded professional liability expense, which could materially adversely affect their liquidity, financial condition and results of operations, and, in turn, 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, our results of operations, 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.

Failure to maintain effective internal control over financial reporting could harm our business, results of operations and financial condition.

Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business will necessitate ongoing changes to our internal control systems and processes. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any

 

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failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business, results of operations and financial condition could be materially adversely harmed and we could fail to meet our reporting obligations.

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;

 

   

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

Limitations on our ability to access capital could 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 distributions to our stockholders or make future investments necessary to implement our business plan, we may need to raise additional capital. Over the past few years, the global capital and credit markets have experienced 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 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

 

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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 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. Restrictions on our uses and right to transfer our properties under certain healthcare regulations, ground leases, mortgages and other agreements to which our properties may be subject could adversely impact our ability to timely liquidate those investments and could impair the value of our properties. 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, 2009, we had approximately $2.7 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

 

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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.

Covenants in our unsecured revolving credit facilities, the indentures governing our senior notes, our mortgage loans 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, our mortgage loans 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.

 

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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.

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—Limitations on our ability to access capital could 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.

To preserve our qualification as a REIT, our certificate of incorporation contains ownership limits with respect to our capital stock that may delay, defer or prevent a change of control of our company.

To assist us in preserving our qualification as a REIT, our certificate of incorporation provides that if a person acquires beneficial ownership of more than 9.9% of our outstanding preferred stock or 9.0% of our common stock, the shares that are beneficially owned in excess of the applicable limit are considered to be “excess shares” and 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 excess shares and the trustee may exercise all voting power over the excess 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 day we buy the shares, but if we do not purchase them, the trustee of the trust is required to transfer the excess shares at the direction of the Board of Directors. These ownership limits could delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders.

 

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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 2010-12. Under this Revenue Procedure, the IRS will treat stock dividends as distributions for purposes of satisfying the REIT distribution requirements for calendar years 2008 through 2012 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 2010-12, 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, 2009, we owned 505 assets: 244 seniors housing communities, 187 skilled nursing facilities, 40 hospitals and 34 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, 2009, we had mortgage loan obligations outstanding in the aggregate principal amount of $1.5 billion, secured by 117 our properties.

 

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The following table sets forth select information regarding the properties we owned as of December 31, 2009 for each geographic location in which we own property:

 

     Seniors Housing
Communities
   Skilled Nursing
Facilities
   Hospitals    MOBs    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    220    2    329    —      —      —      —  

Arizona

   8    664    3    462    2    109    —      —  

Arkansas

   6    390    —      —      —      —      —      —  

California

   26    3,301    6    771    5    455    —      —  

Colorado

   6    459    4    464    1    68    5    —  

Connecticut

   4    458    5    522    —      —      —      —  

Florida

   14    1,454    —      —      6    511    6    —  

Georgia

   10    837    4    537    —      —      2    —  

Idaho

   1    70    7    624    —      —      —      —  

Illinois

   17    2,634    1    82    4    431    2    —  

Indiana

   9    1,001    13    1,867    1    59    —      —  

Kansas

   3    353    —      —      —      —      —      —  

Kentucky

   —      —      27    3,054    2    424    —      —  

Louisiana

   1    58    —      —      1    168    —      —  

Maine

   —      —      8    654    —      —      —      —  

Maryland

   2    149    —      —      —      —      1    —  

Massachusetts

   6    856    26    2,694    2    109    —      —  

Michigan

   9    771    —      —      —      —      —      —  

Minnesota

   9    634    1    140    —      —      —      —  

Missouri

   1    172    —      —      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    —      —      —      —  

New Mexico

   3    384    —      —      1    61    —      —  

New York

   14    1,307    —      —      —      —      —      —  

North Carolina

   6    438    16    1,802    1    124    —      —  

Ohio

   16    1,153    12    1,575    —      —      2    —  

Oklahoma

   —      —      —      —      1    59    —      —  

Oregon

   —      —      2    205    —      —      —      —  

Pennsylvania

   24    1,597    6    797    2    115    2    —  

Rhode Island

   —      —      2    201    —      —      —      —  

South Carolina

   2    120    —      —      —      —      1    —  

Tennessee

   5    337    3    397    1    49    —      —  

Texas

   3    261    —      —      7    496    3    8

Utah

   1    79    4    411    —      —      —      —  

Vermont

   —      —      1    160    —      —      —      —  

Virginia

   5    400    4    629    —      —      —      —  

Washington

   3    320    7    682    —      —      —      —  

West Virginia

   1    59    —      —      —      —      —      —  

Wisconsin

   4    170    11    1,825    —      —      —      —  

Wyoming

   —      —      4    378    —      —      1    —  
                                       

Total U.S.

   232    22,118    187    22,377    40    3,517    26    8

British Columbia

   3    276    —      —      —      —      —      —  

Ontario

   9    848    —      —      —      —      —      —  
                                       

Total Canada

   12    1,124    —      —      —      —      —      —  
                                       

Total

   244    23,242    187    22,377    40    3,517    26    8
                                       

 

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Corporate Offices

We are headquartered in Chicago, Illinois, with offices in Louisville, Kentucky and New York, New York. We lease all of our corporate offices.

 

ITEM 3. Legal Proceedings

The information contained in “Note 14—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   

2009

        

First Quarter

   $ 33.49    $ 19.13    $ 0.5125

Second Quarter

     32.40      21.66      0.5125

Third Quarter

     40.23      27.41      0.5125

Fourth Quarter

     44.91      36.19      0.5125

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

As of February 15, 2010, there were 156,706,398 shares of our common stock outstanding held by approximately 2,724 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 17, 2010, our Board of Directors declared the first quarterly installment of our 2010 dividend in the amount of $0.535 per share, payable in cash on March 31, 2010 to stockholders of record on March 12, 2010. We expect to distribute 100% or more of our taxable net income to our stockholders for 2010. 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 15—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 has 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, 2009:

 

     Number of Shares
Repurchased (1)
   Average Price Per
Share

October 1 through October 31

   —        —  

November 1 through November 30

   —        —  

December 1 through December 31

   14,659    $ 44.16

 

(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, 2004 through December 31, 2009, 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”), the Russell 1000 Index and the S&P 500 Index over the same period. The comparison assumes $100 was invested on December 31, 2004 in our common stock and in each of the foregoing indexes 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. During 2009, Ventas was added to the S&P 500 Index; accordingly, we have included a comparison to the S&P 500 Index in the graph below and intend to discontinue the use of the Russell 1000 Index in future reports. We have included the other indexes 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.

 

     12/31/2004    12/31/2005    12/31/2006    12/31/2007    12/31/2008    12/31/2009

Ventas

   $ 100    $ 123    $ 170    $ 190    $ 148    $ 206

NYSE Composite Index

   $ 100    $ 109    $ 132    $ 143    $ 87    $ 112

Composite REIT Index

   $ 100    $ 108    $ 145    $ 119    $ 74    $ 95

Healthcare REIT Index

   $ 100    $ 102    $ 147    $ 150    $ 132    $ 165

Russell 1000 Index

   $ 100    $ 106    $ 123    $ 130    $ 81    $ 104

S&P 500 Index

   $ 100    $ 105    $ 121    $ 128    $ 81    $ 102

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)  
    2009     2008     2007     2006     2005  
    (Dollars in thousands, except per share data)  

Operating Data

         

Rental income

  $ 501,087      $ 481,368      $ 459,046      $ 383,140      $ 291,421   

Resident fees and services

    421,058        429,257        282,226        —          —     

Interest expense

    178,503        204,450        196,660        127,353        92,169   

Property-level operating expenses

    302,813        306,944        198,125        3,171        2,576   

General, administrative and professional fees

    38,830        40,651        36,425        26,136        25,075   

Income from continuing operations attributable to common stockholders

    194,746        175,401        131,504        119,444        114,193   

Discontinued operations

    71,749        47,202        142,177        11,710        16,390   

Net income attributable to common stockholders

    266,495        222,603        273,681        131,154        130,583   

Per Share Data

         

Income from continuing operations attributable to common stockholders, basic

  $ 1.28      $ 1.25      $ 1.07      $ 1.15      $ 1.20   

Net income attributable to common stockholders, basic

  $ 1.75      $ 1.59      $ 2.23      $ 1.26      $ 1.37   

Income from continuing operations attributable to common stockholders, diluted

  $ 1.27      $ 1.25      $ 1.07      $ 1.14      $ 1.19   

Net income attributable to common stockholders, diluted

  $ 1.74      $ 1.59      $ 2.22      $ 1.25      $ 1.36   

Dividends declared per common share

  $ 2.05      $ 2.05      $ 1.90      $ 1.58      $ 1.44   

Other Data

         

Net cash provided by operating activities

  $ 422,101      $ 379,907      $ 404,600      $ 238,867      $ 223,764   

Net cash provided by (used in) investing activities

    37,013        (136,256     (1,175,192     (481,974     (615,041

Net cash (used in) provided by financing activities

    (528,939     (95,979     802,675        242,712        389,553   

FFO (2)

    393,409        412,357        374,218        249,392        213,203   

Normalized FFO (2)

    409,045        379,469        327,136        254,878        200,091   

Normalized FAD (2)

    389,099        356,689        303,453        234,547        185,779   

Balance Sheet Data

         

Real estate investments, at cost

  $ 6,292,621      $ 6,160,630      $ 6,292,181      $ 3,707,837      $ 3,027,896   

Cash and cash equivalents

    107,397        176,812        28,334        1,246        1,641   

Total assets

    5,616,245        5,771,418        5,718,475        3,256,021        2,639,118   

Senior notes payable and other debt

    2,670,101        3,136,998        3,346,531        2,312,021        1,802,564   

 

(1) Effective January 1, 2009, we adopted Financial Accounting Standards Board guidance relating to convertible debt instruments that may be settled in cash upon conversion. See “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 the adoption on our Consolidated Financial Statements. This guidance had no impact on our Consolidated Financial Statements for the year ended December 31, 2005.

 

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(2) We consider Funds From Operations (“FFO”) and normalized FFO and Funds Available for Distribution (“FAD”) appropriate measures 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. We define normalized FFO as FFO excluding (a) gains and losses on the sales of assets, including marketable securities, (b) merger-related costs and expenses and deal costs and expenses, including expenses relating to our lawsuit against HCP, Inc. and the issuance of preferred stock or bridge loan fees, (c) the impact of any expenses related to asset impairment and valuation allowances, the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts or premiums incurred as a result of early debt retirement or payment of our debt, including hedging transactions, (d) the non-cash effect of income tax benefits, (e) the reversal of contingent liabilities, (f) gains and losses for foreign currency hedge agreements, (g) one-time expenses in connection with the Kindred rent reset process, (h) net proceeds received by us in relation to litigation, and (i) contributions made to the Ventas Charitable Foundation. Normalized FAD represents normalized FFO excluding straight-line rental adjustments and routine capital expenditures. FFO and normalized FFO and FAD presented herein are not necessarily comparable to FFO and normalized FFO and FAD presented by other real estate companies due to the fact that not all real estate companies use the same definitions. FFO and normalized FFO and FAD should not be considered alternatives to net income (determined in accordance with GAAP) as indicators of our financial performance or alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are FFO and normalized FFO and FAD 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 for a reconciliation of these measures to our GAAP earnings.

 

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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;

 

   

2009 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, 2009, this portfolio consisted of 505 assets: 244 seniors housing communities, 187 skilled nursing facilities, 40 hospitals and 34 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 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 or properties as of December 31, 2009.

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, 2009, we had a 100% ownership interest in 439 of our properties. We had 75% to 85% interests in 60 seniors housing communities owned in joint ventures with Sunrise, and we had controlling interests in six MOBs owned through joint ventures with partners who provide management and leasing services for the properties.

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.

Access to external capital is an important component of the success of our strategy as it 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. Generally, we attempt to match the long-term duration of most of our investments with long-term fixed rate financing. At December 31, 2009, only 8.3% of our consolidated debt was variable rate debt.

 

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As of December 31, 2009, our senior unsecured debt securities were rated BBB- (stable) by Standard & Poor’s Ratings Services (“S&P”), BBB (stable) by Fitch Ratings and Ba1 (stable) by Moody’s Investors Service (“Moody’s”). On February 4, 2010, Moody’s upgraded the rating on our unsecured debt securities to Baa3 (stable), giving us a third investment grade rating. To the extent it is reasonable to do so, and we believe it to be in the best interests of our stakeholders, we intend to maintain investment grade ratings on our senior debt securities and to manage various capital ratios and amounts within appropriate parameters.

2009 Highlights and Other Recent Developments

Liquidity and Balance Sheet

 

   

Following the upgrade by Moody’s on February 4, 2010, our unsecured debt securities now have investment grade ratings from all three nationally recognized ratings agencies.

 

   

We extended and amended the terms of our unsecured revolving credit facilities from 2010 to 2012. Additionally, we increased our aggregate borrowing capacity under the unsecured revolving credit facilities to $1.0 billion, of which $800.0 million matures on April 26, 2012 and $200.0 million matures on April 26, 2010.

 

   

We issued and sold 13,062,500 shares of our common stock in an underwritten public offering for aggregate proceeds of $312.2 million.

 

   

We issued and sold $200.0 million aggregate principal amount of our 6 1/2% senior notes due 2016, at a 15 3/4% discount to par value, for total proceeds of $168.5 million, before the underwriting discount and expenses.

 

   

We purchased in open market transactions and/or through cash tender offers $361.6 million aggregate principal amount of our outstanding senior notes due 2010, 2012, 2014 and 2015. We recognized a net loss on extinguishment of debt of $6.1 million related to these transactions.

 

   

We repaid in full, at par, $49.8 million principal amount of our outstanding senior notes due 2009, and our mortgage debt obligations decreased by $148.7 million during 2009, including normal periodic principal amortization of $25.8 million and debt transfers of $38.8 million related to asset dispositions.

 

   

We obtained first mortgage loans aggregating $172.6 million principal amount, secured by eighteen of our seniors housing communities with a weighted average fixed interest rate of 6.3% per annum.

Investments

 

   

We purchased four MOBs for an aggregate purchase price of $77.7 million, increasing our MOB investments to over 1.7 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.

 

   

We purchased one skilled nursing facility for $10.0 million and leased it to Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”).

 

   

We completed the development of two MOBs pursuant to an arrangement we entered into with a nationally recognized private developer of MOBs and healthcare facilities in 2008. That arrangement gave us the exclusive right, as part of a joint venture, to develop up to ten identified MOBs on hospital campuses in eight states. As of December 31, 2009, we had invested approximately $35.6 million in two MOBs under the arrangement.

Dispositions

 

   

We sold five seniors housing communities, one hospital, one MOB and one other property to the existing tenants for an aggregate sales price (before expenses) of $96.2 million and transferred related debt of $38.8 million. We recognized a net gain from the sales of these assets of $27.5 million.

 

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We sold six skilled nursing facilities to Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”) for total consideration of $58.0 million and recognized a gain from the sale of these assets of $39.3 million.

Other

 

   

We were included in the S&P 500 Index, widely regarded as the best single gauge of the large cap U.S. equities market. It includes 500 leading companies in leading industries of the U.S. economy.

 

   

Kindred extended, from the renewal date of April 30, 2010 through April 30, 2015, the lease term for 109 assets (one of which we subsequently sold) that it leases from us. At December 31, 2009, annual cash rent on the remaining 108 assets was approximately $126 million.

 

   

We received a favorable jury verdict of $101.6 million in our litigation against HCP, Inc. ( “HCP”) due to HCP’s interference with our acquisition of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”) in 2007.

Critical Accounting Policies and Estimates

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) launched the Accounting Standards Codification (“ASC”), which changes U.S. generally accepted accounting principles (“GAAP”) from a standards-based model to a topical-based model. The topics are organized by ASC number and are updated with an Accounting Standards Update. The ASC is the single source of nongovernmental authoritative GAAP for interim and annual periods ending after September 15, 2009.

Our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K have been prepared in accordance with GAAP set forth in the ASC, as published by the FASB. GAAP requires us to make estimates and assumptions about future events 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 revenues and expenses during the reporting periods. We base these estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. However, 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, and in the event estimates or assumptions prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. We believe that the critical accounting policies described below, 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, see “Note 2Accounting 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 the 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 attributable to noncontrolling interests. We apply FASB guidance for arrangements with variable interest entities (“VIEs”), which requires the identification of entities for which control is achieved through means other than voting rights and the determination of which a business enterprise is the primary beneficiary of the VIE. We consolidate investments in VIEs when we are determined to be the primary beneficiary of the VIE.

We must make judgments regarding our level of influence or control of an entity and whether we are (or are not) the primary beneficiary of a VIE. In making those judgments, we consider various factors, including the

 

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form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, various cash flow scenarios related to the VIE, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the venture, if applicable. Our ability to correctly assess our influence or control over an entity and determine the primary beneficiary of a VIE affects the presentation of these entities in our Consolidated Financial Statements. In the future, our assumptions may change, which could result in the identification of a different primary beneficiary.

Long-Lived Assets and Intangibles

Investments in real estate assets are recorded at cost. We account for acquisitions using the purchase method and allocate the cost of the properties acquired among tangible and recognized intangible assets and liabilities based upon their estimated fair values 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 on internal analyses of recently acquired and existing comparable properties within our portfolio. The fair value of in-place leases, if any, reflects (i) the estimated value of any above and/or below market leases, 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 also amortized over the remaining life of the associated lease. We 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 and amortize that value over the expected term of the associated arrangements or leases, which includes the remaining lives of the related leases and any expected renewal periods. We calculate the fair value of long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which is 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. If indicators of impairment are present, we evaluate the carrying value of the related real

 

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estate investments in relation to the future undiscounted cash flows of the underlying operations, and 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 that would cause us to conclude that impairment indicators exist and an impairment loss is warranted.

Business Combinations

For our acquisitions, we measure the assets acquired, liabilities assumed (including contingencies) and any noncontrolling interests at their fair values on the acquisition date. Our acquisition-related transaction costs are included in merger-related expenses and deal costs on our Consolidated Statement of Income for the year ended December 31, 2009. Prior to January 1, 2009, these costs were capitalized as part of the asset value at the time of the acquisition, as required by FASB guidance at that time.

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, which are comprised of loan fees collected from the borrower net of certain direct costs, 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 applicable 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.

Fair Value

We follow FASB guidance that defines fair value and provides direction for measuring fair value and providing the necessary disclosures. The guidance 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, the guidance 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 the reporting entity has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are 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 the reporting 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 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. Additionally, if an entity determines there has been a significant decrease in the volume and level of activity for an asset or liability in relation to the normal market activity for such asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. 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.

 

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We record marketable debt and equity securities as available-for-sale and classify them 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.

We determined the valuation of our current investments in marketable securities using level one inputs. Additionally, we determined the valuation allowance for loan losses based on level three inputs. See “Note 6—Loans Receivable” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

We also follow FASB guidance relating to the recognition and presentation of other-than-temporary impairments, which requires entities to separate an other-than-temporary impairment of a fixed maturity security into two components when (i) there are credit losses associated with the security that management asserts that it does not have an intent to sell and (ii) it is more likely than not that the entity will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. We have not recognized any other-than-temporary impairment.

Revenue Recognition

Certain of our leases, 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 term of the applicable lease. Income on our straight-line revenue is recognized when collectibility is reasonably assured, and 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.

Our master lease agreements with Kindred (the “Kindred Master Leases”) and certain of our other 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 all 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.

We recognize resident fees and services, other than move in fees, 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.

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 REIT in April 2007 we made no provision for federal income tax purposes. As a result of the Sunrise REIT acquisition, however, 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.

 

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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 our 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

On January 1, 2010, we adopted FASB guidance related to variable interest accounting. The guidance requires an enterprise to analyze whether its variable interest gives it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The guidance requires an enterprise to perform this analysis on an ongoing basis and requires additional disclosures about an enterprise’s involvement in VIEs. We do not believe the adoption of this guidance will impact our Consolidated Financial Statements.

 

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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.

Years Ended December 31, 2009 and 2008

 

     Year Ended
December 31,
    Change  
     2009    2008     $     %  
     (Dollars in thousands)  

Revenues:

         

Rental income

   $ 501,087    $ 481,368      $ 19,719      4.1

Resident fees and services

     421,058      429,257        (8,199   (1.9

Income from loans and investments

     13,107      8,847        4,260      48.2   

Interest and other income

     842      4,226        (3,384   (80.1
                         

Total revenues

     936,094      923,698        12,396      1.3   

Expenses:

         

Interest

     178,503      204,450        (25,947   (12.7

Depreciation and amortization

     200,911      230,881        (29,970   (13.0

Property-level operating expenses

     302,813      306,944        (4,131   (1.3

General, administrative and professional fees (including non-cash stock-based compensation expense of $11,882 and $9,976 for the years ended 2009 and 2008, respectively)

     38,830      40,651        (1,821   (4.5

Foreign currency loss (gain)

     50      (162     212      >100   

Loss (gain) on extinguishment of debt

     6,080      (2,398     8,478      >100   

Merger-related expenses and deal costs

     13,015      4,460        8,555      >100   
                         

Total expenses

     740,202      784,826        (44,624   (5.7
                         

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

     195,892      138,872        57,020      41.1   

Reversal of contingent liability

     —        23,328        (23,328   nm   

Income tax benefit

     1,719      15,885        (14,166   (89.2
                         

Income from continuing operations

     197,611      178,085        19,526      11.0   

Discontinued operations

     71,749      47,202        24,547      52.0   
                         

Net income

     269,360      225,287        44,073      19.6   

Net income attributable to noncontrolling interest, net of tax

     2,865      2,684        181      6.7   
                         

Net income attributable to common stockholders

   $ 266,495    $ 222,603      $ 43,892      19.7
                         

 

nm—not meaningful

Revenues

The increase in our 2009 rental income can be attributed primarily to $6.4 million of additional rent resulting from the annual escalators in the rent paid under the Kindred Master Leases effective May 1, 2008 and 2009, $8.6 million in additional rent relating to triple-net leased properties and MOBs acquired during 2008 and 2009, a rent reset increase of $1.8 million on four seniors housing communities and three skilled nursing facilities and various other escalations in the rent paid on our other existing properties. See “Note 4Acquisitions” 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 $3.6 million and $20.0 million for the years ended December 31, 2009 and 2008, respectively.

 

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Revenues related to our triple-net leased properties segment consist of fixed rental amounts (subject to annual escalations) received directly from our tenants based on the terms of the applicable leases and generally do not depend on the operating performance of our properties. Therefore, while occupancy information is relevant to the operations of our tenants, our revenues and financial results are not directly impacted by the overall occupancy levels or profits at the triple-net leased properties.

Resident fees and services 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. The decrease in resident fees and services during 2009 is attributed primarily to an increase in the average Canadian dollar exchange rate, which had an unfavorable impact of $5.0 million in 2009, and lower average occupancy in our communities. Average occupancy rates related to these properties in 2009 and 2008 were as follows:

 

               Average Resident Occupancy  
     Number of
Communities
   For the Year Ended
December 31,
 
         2009            2008            2009             2008      

Stabilized Communities

   78    73    88.3   91.4

Lease-Up Communities

   1    6    70.4   67.2
              

Total

   79    79    87.7   89.1
              

Same-Store Stabilized Communities

   73    73    88.6   91.4

Income from loans and investments increased during 2009 primarily due to interest earned on the investments we made during 2008 and 2009. See “Note 6Loans Receivable” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The decrease in our interest and other income during 2009 is primarily attributable to the resolution in 2008 of a legal dispute and higher interest rates earned on cash balances in 2008.

Expenses

Interest expense included in discontinued operations was $1.2 million and $8.7 million for the years ended December 31, 2009 and 2008, respectively. Total interest expense, including interest allocated to discontinued operations, decreased $33.4 million in 2009 over 2008, primarily due to a $8.6 million reduction in interest from lower effective interest rates and a $25.6 million reduction in interest from lower loan balances. Interest expense includes $7.4 million and $6.4 million of amortized deferred financing fees for the years ended December 31, 2009 and 2008, respectively. Our effective interest rate decreased to 6.3% for the year ended December 31, 2009, from 6.6% for the year ended December 31, 2008. An increase in the average Canadian dollar exchange rate had a favorable impact on interest expense of $0.4 million for the year ended December 31, 2009, compared to the same period in 2008.

Approximately $28.9 million of the decrease in 2009 depreciation and amortization expense is due to in-place lease intangibles related to the Sunrise REIT acquisition, which were fully amortized during the second quarter of 2008. See “Note 4Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Property-level operating expenses include expenses incurred for the operations of our seniors housing communities managed by Sunrise, such as labor, food, utilities, marketing, management and other property operating costs, operating expenses of our MOBs and loan receivable valuation allowances. Property-level operating expenses decreased in 2009 primarily due to a $6.0 million loan receivable valuation allowance recorded in 2008, not related to our MOBs or Sunrise-managed communities, and an increase in the average Canadian dollar exchange rate, which had a favorable impact of $3.6 million in 2009. The decrease was partially

 

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offset by approximately $4 million of property-level expense credits and reconciliations related to our Sunrise-managed communities in 2008 that did not recur in 2009 and MOB growth in 2009.

The decrease in general, administrative and professional fees during 2009 is a result of lower professional fees and dead deal costs recorded in 2008, partially offset by an increase in non-cash stock-based compensation.

The loss on extinguishment of debt in 2009 primarily relates to the purchase, in open market transactions and/or through cash tender offers, of $361.6 million aggregate principal amount of our outstanding senior notes. The gain on extinguishment of debt in 2008 primarily represents the purchase of $176.4 million aggregate principal amount of our outstanding senior notes in open market transactions for a discount.

Merger-related expenses and deal costs primarily consisted of expenses relating to our litigation with HCP arising out of the Sunrise REIT acquisition and, during 2009, deal costs now required by GAAP to be expensed rather than capitalized into the asset value.

Other

We had a $23.3 million deferred tax liability 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 and did not expect to pay any amounts related to this contingent liability, the $23.3 million deferred tax liability was reversed into income during 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 11Income Taxes” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Discontinued operations for 2009 include a $67.3 million net gain on the sale of fourteen assets sold during 2009. Discontinued operations for 2008 include a $39.0 million gain on the sale of twelve assets sold during 2008. See “Note 5—Dispositions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Net income attributable to noncontrolling interest, net of tax primarily represents Sunrise’s share of net income from its ownership percentage in 60 and 61 of our seniors housing communities during 2009 and 2008, respectively.

 

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Years Ended December 31, 2008 and 2007

 

     Year Ended
December 31,
    Change  
     2008     2007     $     %  
     (Dollars in thousands)  

Revenues:

        

Rental income

   $ 481,368      $ 459,046      $ 22,322      4.9

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

     923,698        746,697        177,001      23.7   

Expenses:

        

Interest

     204,450        196,660        7,790      4.0   

Depreciation and amortization

     230,881        226,517        4,364      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 and deal costs

     4,460        2,979        1,481      49.7   
                          

Total expenses

     784,826        636,338        148,488      23.3   
                          

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

     138,872        110,359        28,513      25.8   

Reversal of contingent liability

     23,328        —          23,328      nm   

Income tax benefit

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

Income from continuing operations

     178,085        138,401        39,684      28.7   

Discontinued operations

     47,202        142,177        (94,975   (66.8
                          

Net income

     225,287        280,578        (55,291   (19.7

Net income attributable to noncontrolling interest, net of tax

     2,684        1,698        986     

Preferred stock dividends and issuance costs

     —          5,199        (5,199   nm   
                          

Net income attributable to common stockholders

   $ 222,603      $ 273,681      $ (51,078   (18.7 )% 
                          

 

nm—not meaningful

Revenues

The increase in our 2008 rental income can be attributed primarily to $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 4—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 $20.0 million and $30.7 million for the years ended December 31, 2008 and 2007, respectively.

 

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The increase in resident fees and services during 2008 is attributed to the fact that we did not acquire the Sunrise REIT properties until late April 2007 and, therefore, our results for 2007 reflect only eight months of Sunrise-related revenues. See “Note 4—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Average occupancy rates related to our seniors housing communities managed by Sunrise in 2008 and 2007 were as follows:

 

               Average Resident Occupancy  
     Number of Communities    For the Year Ended
December 31,
 
     2008    2007    2008     2007  

Stabilized Communities

   73    72    91.4   93.0

Lease-Up Communities

   6    7    67.2   58.8
              

Total

   79    79    89.1   90.4
              

Same-Store Stabilized Communities

   72    72    91.4   93.0

Income from loans and investments increased during 2008 primarily due to interest earned on a $50.0 million marketable debt security we purchased in early April 2008 and a first mortgage debt investment of $98.8 million we made in late 2008, partially offset by a gain on the sale of marketable equity securities of $0.9 million recognized in the second quarter of 2007.

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

Expenses

Interest expense included in discontinued operations was $8.7 million and $13.1 million for the years ended December 31, 2008 and 2007, respectively. Total interest expense, including interest allocated to discontinued operations, increased $3.4 million in 2008 over 2007, primarily due to $14.3 million of additional interest from higher loan balances as a result of our 2008 acquisition and loan activity, partially offset by a $11.8 million reduction in interest from lower effective interest rates and a $2.6 million loss due to early repayment of bridge financing in 2007 related to the Sunrise REIT acquisition. Interest expense includes $6.4 million and $4.8 million of amortized deferred financing fees for the years ended December 31, 2008 and 2007, respectively. Our effective interest rate decreased to 6.6% for the year ended December 31, 2008, from 6.9% for the year ended December 31, 2007.

Depreciation and amortization expense increased primarily as result of the properties acquired during 2008 and 2007, partially offset by a $26.9 million decrease in amortization expense due 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 4—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, the $6.0 million loan receivable valuation allowance 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 expenses related to our Sunrise-managed communities due to the late April 2007 acquisition of the Sunrise REIT properties.

The increase in general, administrative and professional fees in 2008 is a result of our enterprise growth, an increase in non-cash stock-based compensation and dead deal costs.

The foreign currency gain in 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 during 2008.

 

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The gain on extinguishment of debt in 2008 primarily represents the purchase of $176.4 million principal amount of our outstanding senior notes 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 senior notes in an open market transaction for a discount.

Merger-related expenses and deal costs primarily consisted of expenses relating to our litigation with HCP arising out of the Sunrise REIT acquisition and, for 2007, also include incremental costs directly related to the Sunrise REIT 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 and did not expect to pay any amounts related to this contingent liability, the $23.3 million deferred tax liability was reversed into income during 2008.

The decrease in discontinued operations is primarily the result of a $129.5 million gain recognized in 2007 from the sale of 22 assets, compared to a $39.0 million gain recognized in 2008 from the sale of twelve assets. See “Note 5—Dispositions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Preferred stock dividends and issuance costs in 2007 relate to the issuance and sale of 700,000 shares of our Series A Senior Preferred Stock 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 4—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

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Funds From Operations

Our Funds From Operations (“FFO”) for the five years ended December 31, 2009 are summarized in the following table:

 

     For the Year Ended December 31,  
     2009     2008     2007     2006     2005  
     (In thousands)  

Net income attributable to common stockholders

   $ 266,495      $ 222,603      $ 273,681      $ 131,154      $ 130,583   

Adjustments:

          

Real estate depreciation and amortization

     200,221        230,158        225,408        108,571        78,523   

Real estate depreciation related to noncontrolling interest

     (6,349     (6,251     (3,749     —          —     

Loss on real estate disposals

     —          —          —          —          175   

Discontinued operations:

          

Gain on sale of real estate assets

     (67,305     (39,026     (129,478     —          (5,114

Depreciation on real estate assets

     347        4,873        8,356        9,667        9,036   
                                        

FFO

     393,409        412,357        374,218        249,392        213,203   

Adjustments:

          

Reversal of contingent liability

     —          (23,328     —          (1,769     —     

Provision for loan losses

     —          5,994        —          —          —     

Income tax benefit

     (3,459     (17,616     (29,095     —          —     

Loss (gain) on extinguishment of debt

     6,080        (2,398     (88     1,273        1,376   

Merger-related expenses and deal costs

     13,015        4,460        2,979        —          —     

Net gain on sale of marketable equity securities

     —          —          (864     (1,379     —     

Gain on foreign currency hedge

     —          —          (24,314     —          —     

Preferred stock issuance costs

     —          —          1,750        —          —     

Bridge loan fee

     —          —          2,550        —          402   

Rent reset costs

     —          —          —          7,361        —     

Contribution to charitable foundation

     —          —          —          —          2,000   

Net proceeds from litigation settlement

     —          —          —          —          (15,909

Net gain on swap breakage

     —          —          —          —          (981
                                        

Normalized FFO

     409,045        379,469        327,136        254,878        200,091   

Straight-lining of rental income .

     (11,879     (14,652     (17,311     (19,963     (14,287

Routine capital expenditures

     (8,067     (8,128     (6,372     (368     (25
                                        

Normalized FAD

   $ 389,099      $ 356,689      $ 303,453      $ 234,547      $ 185,779   
                                        

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 and normalized FFO and Funds Available for Distribution (“FAD”) appropriate measures 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. We define normalized FFO as FFO excluding (a) gains and losses on the sales of assets, including marketable securities, (b) merger-related costs and expenses and deal costs and expenses, including expenses relating to our lawsuit against HCP and the issuance of preferred stock or bridge loan fees, (c) the impact of any expenses related to asset impairment and valuation allowances, the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts or premiums incurred as a result of

 

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early debt retirement or payment of our debt, including hedging transactions, (d) the non-cash effect of income tax benefits, (e) the reversal of contingent liabilities, (f) gains and losses for foreign currency hedge agreements, (g) one-time expenses in connection with the Kindred rent reset process, (h) net proceeds received by us in relation to litigation, and (i) contributions made to the Ventas Charitable Foundation. Normalized FAD represents normalized FFO excluding straight-line rental adjustments and routine capital expenditures.

FFO and normalized FFO and FAD presented herein are not necessarily comparable to FFO and normalized FFO and FAD presented by other real estate companies due to the fact that not all real estate companies use the same definitions. FFO and normalized FFO and FAD should not be considered as alternatives to net income (determined in accordance with GAAP) as indicators of our financial performance or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are FFO and normalized FFO and FAD 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 and normalized FFO and FAD should be examined in conjunction with net income as presented in our 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

We are exposed to market risk for changes in interest rates on borrowings under our unsecured revolving credit facilities, certain of our mortgage loans that are floating rate obligations and mortgage loans receivable. These market risks result primarily from changes in U.S. or Canadian LIBOR rates, the Canadian Bankers’ Acceptance rate or the U.S. or Canadian Prime rates. 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.

Interest rate fluctuations generally do not affect our fixed rate debt obligations until such instruments mature. However, changes in interest rates 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 the time we refinance such debt, our future earnings and cash flows 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.

 

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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, 2009 and 2008:

 

     As of December 31,
     2009    2008
     (In thousands)

Gross book value

   $ 2,477,225    $ 2,592,730

Fair value (1)

     2,572,472      2,436,620

Fair value reflecting change in interest rates: (1)

     

-100 BPS

     2,681,982      2,538,334

+100 BPS

     2,469,655      2,340,746

 

(1) The change in fair value of fixed rate debt was due primarily to debt repayments and overall changes in interest rates, partially offset by additional borrowings.

The table below sets forth certain information with respect to our debt, excluding premiums and discounts:

 

     As of December 31,  
     2009     2008  
     (Dollars in thousands)  

Balance:

    

Fixed rate

   $ 2,477,225      $ 2,592,730   

Variable rate

     224,436        546,410   
                

Total

   $ 2,701,661      $ 3,139,140   
                

Percent of total debt:

    

Fixed rate

     91.7     82.6

Variable rate

     8.3     17.4
                

Total

     100.0     100.0
                

Weighted average interest rate at end of period:

    

Fixed rate

     6.3     6.5

Variable rate

     2.1     2.3

Total weighted average rate

     6.0     5.8

The decrease in our outstanding variable rate debt from December 31, 2008 is primarily attributable to payments on our unsecured revolving credit facilities and certain repayments on our variable rate mortgage debt. Pursuant to the terms of certain leases with one of our tenants, if interest rates increase on certain debt that we have totaling $80.0 million as of December 31, 2009, 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, 2009, interest expense for 2010 would increase and our net income would decrease by approximately $1.7 million, or $0.01 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.

We have investments in marketable debt securities on which we earn interest on a fixed or floating rate basis. We record these investments as available-for-sale 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, 2009, the fair market value of our marketable debt securities, which had an original cost of $58.7 million, was $65.0 million.

 

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As of December 31, 2009, the fair value of our loans receivable was $129.5 million and was based on our estimates of currently prevailing rates for comparable loans. See “Note 6—Loans Receivable” and “Note 9—Fair Value of Financial Instruments” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

We are also 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 2009 results, if the Canadian dollar exchange rate were to increase or decrease by $0.10, our net income would decrease or increase, as applicable, by approximately $0.4 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”).

Credit Risk

We derive 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 at our seniors housing communities managed by Sunrise and tenants in our MOBs. For the year ended December 31, 2009, 21.6% of our EBITDA (earnings before interest, taxes, depreciation and amortization) was derived from 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, 2009 and 2008, Kindred accounted for $246.9 million, or 26.2%, of our total revenues and 38.5% of our total NOI (net operating income) (including amounts in discontinued operations), and $241.2 million, or 25.5%, of our total revenues and 38.0% of our total NOI (including amounts in discontinued operations), respectively. For the years ended December 31, 2009 and 2008, Brookdale Senior Living accounted for $121.4 million, or 12.9%, of our total revenues and 19.1% of our total NOI (including amounts in discontinued operations), and $121.5 million, or 12.8%, of our total revenues and 19.2% of our total NOI (including amounts in discontinued operations), respectively. This concentration of rental revenues and NOI creates 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 3—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.

For the years ended December 31, 2009 and 2008, senior living operations managed by Sunrise accounted for $421.1 million, or 44.7%, of our total revenues and 18.5% of our total EBITDA (including amounts in

 

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discontinued operations), and $429.6 million, or 45.4%, of our total revenues and 20.0% of our total EBITDA (including amounts in discontinued operations), respectively.

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 2009, we paid a 5.0% management fee for 76 properties and management fees of between 6.0% and 6.5% for three 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, in certain circumstances, 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 underperforming 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.

As of December 31, 2009, we had 75% to 85% interests in 60 seniors housing communities owned in joint ventures with Sunrise, who only has protective rights related to major business decisions. Each of these joint ventures is managed by a board of managers or a general partner, each of which we control. As the controlling member or partner, as the case may be, we have sole authority to make all decisions for our Sunrise joint ventures, except for a limited set of major decisions, which generally include:

 

   

the merger or disposition of substantially all the assets of the joint venture;

 

   

the sale of additional interests in the joint venture;

 

   

the dissolution of the joint venture;

 

   

the disposition of a property owned by the joint venture; and

 

   

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. However, Sunrise must obtain our prior consent for any direct or indirect transfer of its noncontrolling interest. With limited exceptions, profits and losses of the joint ventures are allocated on a pro rata basis in accordance with the ownership interests. 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.

 

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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 their leases and, in such event, that we may be unable to reposition the applicable properties on as favorable terms or at all. The following table summarizes our triple-net lease expirations scheduled to occur over the next ten years.

 

     Number of
Tenants
   2009 Annual
Rental Income
   % of 2009 Total
Triple-Net Rental
Income (1)
 
     (Dollars in thousands)  

2010

   8    $ 981    0.2

2011

   —        —      —     

2012

   4      3,759    0.8   

2013

   90      116,413    25.0   

2014

   3      3,261    0.7   

2015

   132      150,752    32.4   

2016

   1      1,054    0.2   

2017

   —        —      —     

2018

   1      399    0.1   

2019

   89      126,161    27.1   

 

(1) Total 2009 triple-net rental income excludes 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 2009, our principal sources of liquidity were proceeds from issuances of debt and equity securities, debt financings, sales of assets and cash flows from 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 $173.8 million of mortgage debt; (iv) fund capital expenditures for our senior living operations and our MOBs; (v) fund acquisitions, 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, cash on hand, 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 significant 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. See “Risk Factors—Risks Arising from Our Capital Structure—Limitations on our ability to access capital could 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, 2009, we had a total of $107.4 million of unrestricted cash and cash equivalents, consisting primarily of investments in U.S. treasury money market funds and cash related to our senior living operations that is deposited and held in property-level accounts. Funds maintained in the property-level accounts

 

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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, 2009, we also had escrow deposits and restricted cash of $39.8 million, and unused credit availability of $988.4 million under our unsecured revolving credit facilities.

Unsecured Revolving Credit Facilities

Our aggregate borrowing capacity under the unsecured revolving credit facilities is $1.0 billion, of which $800.0 million matures on April 26, 2012 and $200.0 million matures on April 26, 2010. 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. At December 31, 2009, the applicable percentage was 0.75% for 2010 maturities and 2.80% for 2012 maturities. Our unsecured revolving credit facilities have a 20 basis point facility fee.

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

As of February 15, 2010, we had approximately $9 million outstanding under our unsecured revolving credit facilities and approximately $155 million of unrestricted cash and cash equivalents, for cash available of approximately $146 million.

Convertible Senior Notes

As of December 31, 2009, we had $230.0 million aggregate principal amount of our 3 7/8% Convertible Senior Notes due 2011 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 (December 1, 2011), 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 22.9457 shares per $1,000 principal amount of notes (which equates to a current conversion price of approximately $43.58 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 indenture governing the convertible notes subjects us to a number of restrictive covenants. See “Note 8—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.

Senior Notes

As of December 31, 2009, the following series of senior notes issued by our subsidiaries, Ventas Realty, Limited Partnership and Ventas Capital Corporation, were outstanding:

 

   

$1.4 million principal amount of 6 3/4% Senior Notes due 2010;

 

   

$82.4 million principal amount of 9% Senior Notes due 2012;

 

   

$71.7 million principal amount of 6 5/8% Senior Notes due 2014;

 

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$142.7 million principal amount of 7 1/8% Senior Notes due 2015;

 

   

$400.0 million principal amount of 6 1/2% Senior Notes due 2016; and

 

   

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

During 2009, we issued and sold $200.0 million aggregate principal amount of senior notes due 2016 at a 15 3 /4% discount to par value for total proceeds of $168.5 million, before the underwriting discount and expenses. We also repaid in full, at par, $49.8 million principal amount of our outstanding 8 3/4% senior notes due 2009 at maturity on May 1, 2009, and purchased in open market transactions and/or through cash tender offers $361.6 million of our senior notes composed of: $121.6 million principal amount of our outstanding senior notes due 2010; $109.4 million principal amount of our outstanding senior notes due 2012; $103.3 million principal amount of our outstanding senior notes due 2014; and $27.3 million principal amount of our outstanding senior notes due 2015. We recognized a net loss on extinguishment of debt of $6.1 million related to these purchases.

During 2008, we purchased $124.4 million principal amount of our outstanding senior notes due 2009 and $52.0 million principal amount of our outstanding senior notes due 2010 in open market transactions. As a result of these purchases, we recorded a $2.5 million gain on the extinguishment of debt in 2008.

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. However, at any time we maintain investment grade ratings by both Moody’s and S&P, the indentures provide that certain of these restrictive covenants will either be suspended or fall away. See “Note 8—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.

Mortgage Loan Obligations

During 2008, we assumed $34.6 million of facility-level mortgage debt in connection with certain property acquisitions. See “Note 4—Acquisitions” of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. Total facility-level mortgage debt outstanding was approximately $1.5 billion as of December 31, 2009 and 2008.

During 2009, we closed a pool of seventeen first mortgage loans through a government-sponsored entity aggregating $132.1 million principal amount. These loans, which are secured by seventeen of our seniors housing communities, mature in July 2019 and bear interest at a weighted average fixed rate of 6.68% per annum. We also closed a first mortgage loan through a government-sponsored entity in the original principal amount of $40.5 million. This loan is secured by one seniors housing community, matures in November 2014 and bears interest at a fixed rate of 5.14% per annum.

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 2009 aggregated $2.05 per share, which is greater than 100% of our 2009 estimated taxable income. We also intend to pay dividends greater than 100% of taxable income for 2010. On February 17, 2010, our Board of Directors declared a quarterly dividend of $0.535 per share, payable in cash on March 31, 2010 to holders of record on March 12, 2010.

 

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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 other 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 1 of this Annual Report on Form 10-K.

Capital Expenditures

Our tenants generally bear the responsibility to maintain and improve our triple-net leased properties. Accordingly, we do not expect to incur any major capital 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 MOBs and our senior living communities managed by Sunrise, 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.

Equity Offerings

In April 2009, we filed an automatic shelf registration statement on Form S-3 with the Commission relating 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 replaced our previous automatic shelf registration statement, which expired pursuant to the Commission’s rules.

In April 2009, we completed the sale of 13,062,500 shares of our common stock in an underwritten public offering pursuant to the shelf registration statement. We received $312.2 million in aggregate proceeds from the sale, which we used, together with our net proceeds from the sale of the senior notes due 2016, to fund our cash tender offers with respect to the outstanding senior notes, to repay debt and for general corporate purposes.

In 2008, we sold 9,236,083 shares of our common stock in two underwritten public offerings pursuant to our previous 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.

Other

We received proceeds of $2.2 million and $6.2 million for the years ended December 31, 2009 and 2008, 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 1.6 million as of December 31, 2009, from 1.4 million as of December 31, 2008. The average weighted exercise price was $35.85 as of December 31, 2009.

 

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We issued approximately 20,800 and 18,400 shares of common stock under our Distribution Reinvestment and Stock Purchase Plan, for net proceeds of $0.6 million and $0.7 million for the years ended December 31, 2009 and 2008, 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 $422.1 million and $379.9 million for the years ended December 31, 2009 and 2008, respectively. Cash flows from operating activities increased in 2009 primarily due to higher rental income, lower interest expense and changes in working capital, partially offset by lower NOI from our senior living operations and increased merger-related expenses and deal costs.

Cash Flows from Investing Activities

Net cash used in investing activities was $1.7 million and $136.3 million for the years ended December 31, 2009 and 2008, respectively. These activities consisted primarily of investments in real estate ($45.7 million and $53.8 million in 2009 and 2008, respectively), capital expenditures ($13.8 million and $16.4 million in 2009 and 2008, respectively), investments in loans receivable and marketable debt securities ($13.8 million and $172.5 million in 2009 and 2008, respectively), proceeds from mortgage loans ($8.0 million and $0.1 million in 2009 and 2008, respectively), proceeds from the sale of investments ($5.0 million in 2009) and proceeds from real estate disposals ($58.5 million and $104.2 million in 2009 and 2008, respectively).

Cash Flows from Financing Activities

Net cash used in financing activities totaled $490.2 million for the year ended December 31, 2009. Proceeds primarily consisted of $365.7 million related to the issuance of debt and $299.2 million from the issuance of common stock. The uses primarily included $292.9 million of net payments made on our unsecured revolving credit facilities, $16.7 million of payments for deferred financing costs, $314.4 million of cash dividend payments to common stockholders, $411.5 million of senior note purchases and repayments, $113.7 million of aggregate principal payments on mortgage obligations and $9.9 million of distributions to noncontrolling interest.

Net cash used in financing activities totaled $96.0 million for the year ended December 31, 2008 and included $288.8 million of cash dividend payments to common stockholders, $416.9 million of aggregate principal payments on mortgage obligations and $15.7 million of distributions to noncontrolling interest. The uses were partially offset by proceeds of $408.5 million from the issuance of common stock, $140.3 million from the issuance of debt and $73.4 million of net borrowings on our unsecured revolving credit facilities.

 

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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, 2009.

 

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

Long-term debt obligations (1) (2)

  $ 3,525,291   $ 360,747   $ 1,016,532   $ 454,041   $ 1,693,971

Operating and ground lease obligations

    114,375     2,072     3,500     3,078     105,725
                             

Total

  $ 3,639,666   $ 362,819   $ 1,020,032   $ 457,119   $ 1,799,696
                             

 

(1) Amounts represent contractual amounts due, including interest.
(2) Interest on variable rate debt was based on forward rates obtained as of December 31, 2009.
(3) Includes $1.4 million outstanding principal amount of our senior notes due 2010.
(4) Includes $230.0 million outstanding principal amount of our convertible notes, $82.4 million outstanding principal amount of our senior notes due 2012, and $8.5 million under our unsecured revolving credit facilities that matures in 2012.
(5) Includes $71.7 million outstanding principal amount of our senior notes due 2014.
(6) Includes outstanding principal amounts of $142.7 million of our senior notes due 2015, $400.0 million of our senior notes due 2016 and $225.0 million of our senior notes due 2017.

As of December 31, 2009, we had $15.0 million of unrecognized tax benefits 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, 2009 and 2008

   75

Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007

   76

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2009, 2008 and 2007

   77

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007

   79

Notes to Consolidated Financial Statements

   80

Consolidated Financial Statement Schedule

  

Schedule III—Real Estate and Accumulated Depreciation

   122

 

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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, 2009 was effective.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 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, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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, the Company changed its method of accounting for convertible debt instruments and noncontrolling interests with the adoption of the guidance originally issued in FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (codified primarily in FASB ASC Topic 470, Debt) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (codified primarily in FASB ASC Topic 810, Consolidation), respectively, effective January 1, 2009 and applied retroactively.

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, 2009, 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 19, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

19 February 2010

 

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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, 2009, 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, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2009 consolidated financial statements and financial statement schedule of Ventas, Inc. and our report dated February 19, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Chicago, Illinois

19 February 2010

 

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VENTAS, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2009 and 2008

(In thousands, except per share amounts)

 

     2009     2008  

Assets

    

Real estate investments:

    

Land

   $ 557,276      $ 555,015   

Buildings and improvements

     5,722,837        5,593,024   

Construction in progress

     12,508        12,591   
                
     6,292,621        6,160,630   

Accumulated depreciation

     (1,177,911     (987,691
                

Net real estate property

     5,114,710        5,172,939   

Loans receivable, net

     131,887        123,289   
                

Net real estate investments

     5,246,597        5,296,228   

Cash and cash equivalents

     107,397        176,812   

Escrow deposits and restricted cash

     39,832        55,866   

Deferred financing costs, net

     29,252        22,032   

Other

     193,167        220,480   
                

Total assets

   $ 5,616,245      $ 5,771,418   
                

Liabilities and equity

    

Liabilities:

    

Senior notes payable and other debt .

   $ 2,670,101      $ 3,136,998   

Deferred revenue .

     4,315        7,057   

Accrued interest

     17,974        21,931   

Accounts payable and other accrued liabilities

     186,130        168,198   

Deferred income taxes

     253,665        257,499   
                

Total liabilities

     3,132,185        3,591,683   

Commitments and contingencies

    

Equity:

    

Ventas stockholders’ equity:

    

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

     —          —     

Common stock, $0.25 par value; 300,000 shares authorized; 156,627 and 143,302 shares issued at December 31, 2009 and 2008, respectively

     39,160        35,825   

Capital in excess of par value

     2,573,039        2,264,125   

Accumulated other comprehensive income (loss) .

     19,669        (21,089

Retained earnings (deficit)

     (165,710     (117,806

Treasury stock, 15 shares at December 31, 2009 and 2008

     (647     (457
                

Total Ventas stockholders’ equity

     2,465,511        2,160,598   

Noncontrolling interest

     18,549        19,137   
                

Total equity

     2,484,060        2,179,735   
                

Total liabilities and equity

   $ 5,616,245      $ 5,771,418   
                

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands, except per share amounts)

 

     2009    2008     2007  

Revenues:

       

Rental income

   $ 501,087    $ 481,368      $ 459,046   

Resident fees and services

     421,058      429,257        282,226   

Income from loans and investments

     13,107      8,847        2,586   

Interest and other income

     842      4,226        2,839   
                       

Total revenues

     936,094      923,698        746,697   

Expenses:

       

Interest

     178,503      204,450        196,660   

Depreciation and amortization

     200,911      230,881        226,517   

Property-level operating expenses

     302,813      306,944        198,125   

General, administrative and professional fees (including non-cash stock-based compensation expense of $11,882, $9,976 and $7,493 for the years ended December 31, 2009, 2008 and 2007, respectively)

     38,830      40,651        36,425   

Foreign currency loss (gain)

     50      (162     (24,280

Loss (gain) on extinguishment of debt

     6,080      (2,398     (88

Merger-related expenses and deal costs

     13,015      4,460        2,979   
                       

Total expenses

     740,202      784,826        636,338   
                       

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

     195,892      138,872        110,359   

Reversal of contingent liability

     —        23,328        —     

Income tax benefit

     1,719      15,885        28,042   
                       

Income from continuing operations

     197,611      178,085        138,401   

Discontinued operations

     71,749      47,202        142,177   
                       

Net income

     269,360      225,287        280,578   

Net income attributable to noncontrolling interest, net of tax

     2,865      2,684        1,698   

Preferred stock dividends and issuance costs

     —        —          5,199   
                       

Net income attributable to common stockholders

   $ 266,495    $ 222,603      $ 273,681   
                       

Earnings per common share:

       

Basic:

       

Income from continuing operations attributable to common stockholders

   $ 1.28    $ 1.25      $ 1.07   

Discontinued operations

     0.47      0.34        1.16   
                       

Net income attributable to common stockholders

   $ 1.75    $ 1.59      $ 2.23   
                       

Diluted:

       

Income from continuing operations attributable to common stockholders

   $ 1.27    $ 1.25      $ 1.07   

Discontinued operations

     0.47      0.34        1.15   
                       

Net income attributable to common stockholders

   $ 1.74    $ 1.59      $ 2.22   
                       

Weighted average shares used in computing earnings per common share:

       

Basic

     152,566      139,572        122,597   

Diluted

     152,758      139,912        123,012   

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands, except per share amounts)

 

    Common
Stock Par
Value
  Capital in
Excess of
Par Value
  Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Treasury
Stock
    Total Ventas
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balance at January 1, 2007

  $ 26,545   $ 785,999   $ 1,037      $ (84,452   $ —        $ 729,129      $ —        $ 729,129   

Comprehensive Income:

               

Net income, net of preferred distributions

    —       —       —          273,681        —          273,681        1,698        275,379   

Foreign currency translation

    —       —       18,651        —          —          18,651        —          18,651   

Unrealized loss on interest rate swap

    —       —       (995     —          —          (995     —          (995

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

    —       —       (548     —          —          (548     —          (548

Realized gain on marketable securities

    —       —       (729     —          —          (729     —          (729
                                 

Comprehensive income

    —       —       —          —          —          290,060        1,698        291,758   

Net change in noncontrolling interest

    —       —       —          —          —          —          29,756        29,756   

Dividends to common stockholders—$1.90 per share

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

Issuance of common stock

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

Issuance of common stock for stock plans

    106     15,395     —          —          434        15,935        —          15,935   

Grant of restricted stock, net of forfeitures

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

Balance at December 31, 2007

    33,416     1,840,823     17,416        (51,560     (626     1,839,469        31,454        1,870,923   

Comprehensive Income:

               

Net income

    —       —       —          222,603        —          222,603        2,684        225,287   

Foreign currency translation

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

Unrealized loss on interest rate swaps

    —       —       (637     —          —          (637     —          (637

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

    —       —       1,103        —          —          1,103        —          1,103   

Unrealized loss on marketable debt securities

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

Other

    —       —       58        —          —          58        —          58   
                                 

Comprehensive income

    —       —       —          —          —          184,098        2,684        186,782   

Net change in noncontrolling interest

    —       —       —          —          —          —          (15,001     (15,001

Dividends to common stockholders—$2.05 per share

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

Issuance of common stock

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

Issuance of common stock for stock plans

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

Grant of restricted stock, net of forfeitures

    36     1,170     —          —          (878     328        —          328   
                                                           

Balance at December 31, 2008

    35,825     2,264,125     (21,089     (117,806     (457     2,160,598        19,137        2,179,735   

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF EQUITY (Continued)

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands, except per share amounts)

 

    Common
Stock Par
Value
  Capital in
Excess of
Par Value
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Treasury
Stock
    Total Ventas
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Comprehensive Income:

               

Net income

    —       —          —          266,495        —          266,495        2,865        269,360   

Foreign currency translation

    —       —          23,552        —          —          23,552        —          23,552   

Unrealized gain on marketable debt securities

    —       —          17,327        —          —          17,327        —          17,327   

Other

    —       —          (121     —          —          (121     —          (121
                                 

Comprehensive income

    —       —          —          —          —          307,253        2,865        310,118   

Net change in noncontrolling interest

    —       334        —          —          —          334        (3,453     (3,119

Dividends to common stockholders—$2.05 per share

    —       —          —          (314,399     —          (314,399     —          (314,399

Issuance of common stock

    3,266     295,935        —          —          —          299,201        —          299,201   

Issuance of common stock for stock plans

    30     12,819        —          —          175        13,024        —          13,024   

Grant of restricted stock, net of forfeitures

    39     (174     —          —          (365     (500     —          (500
                                                             

Balance at December 31, 2009

  $ 39,160   $ 2,573,039      $ 19,669      $ (165,710   $ (647   $ 2,465,511      $ 18,549      $ 2,484,060   
                                                             

See accompanying notes.

 

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VENTAS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2009, 2008 and 2007

(In thousands)

 

     2009     2008     2007  

Cash flows from operating activities:

      

Net income

   $ 269,360      $ 225,287      $ 280,578   

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

      

Depreciation and amortization (including amounts in discontinued operations)

     201,254        235,754        235,045   

Amortization of deferred revenue and lease intangibles, net

     (6,669     (9,344     (9,819

Other amortization expenses

     6,353        3,994        5,894   

Stock-based compensation

     11,882        9,976        7,493   

Straight-lining of rental income

     (11,879     (14,652     (17,311

Reversal of contingent liability

     —          (23,328     —     

Loss (gain) on extinguishment of debt

     6,080        (168     —     

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

     (67,305     (39,026     (129,478

Net gain on sale of marketable equity securities

     —          —          (864

Loss on bridge financing

     —          —          2,550   

Income tax benefit

     (1,719     (15,885     (28,042

Provision for loan losses

     —          5,994        —     

Other

     (91     614        (1,476

Changes in operating assets and liabilities:

      

(Increase) decrease in other assets

     (1,514     (3,541     47,528   

(Decrease) increase in accrued interest

     (3,957     1,100        (4,906

Increase in accounts payable and other liabilities

     20,306        3,132        17,408   
                        

Net cash provided by operating activities

     422,101        379,907        404,600   

Cash flows from investing activities:

      

Net investment in real estate property

     (45,715     (53,801     (1,348,354

Proceeds from real estate disposals

     58,542        104,183        157,400   

Investment in loans receivable

     (13,803     (108,826     —     

Purchase of marketable debt securities

     —          (63,680     —     

Proceeds from sale of securities

     —          —          7,773   

Proceeds from loans receivable

     8,028        135        15,803   

Proceeds from sale of investments

     5,000        —          —     

Capital expenditures

     (13,798     (16,359     (8,188

Other

     —          2,092        374   
                        

Net cash used in investing activities

     (1,746     (136,256     (1,175,192

Cash flows from financing activities:

      

Net change in borrowings under revolving credit facilities

     (292,873     73,366        176,586   

Issuance of bridge financing

     —          —          1,230,000   

Repayment of bridge financing

     —          —          (1,230,000

Proceeds from debt

     365,682        140,262        53,832   

Repayment of debt

     (525,173     (416,896     (184,613

Debt and preferred stock issuance costs

     —          —          (4,300

Payment of deferred financing costs

     (16,655     (3,857     (7,856

Issuance of common stock, net

     299,201        408,540        1,045,713   

Cash distribution to preferred stockholders

     —          —          (3,449

Cash distribution to common stockholders

     (314,399     (288,849     (282,739

Contributions from noncontrolling interest

     1,211        —          —     

Distributions to noncontrolling interest

     (9,869     (15,732     (2,974

Other

     2,695        7,187        12,475   
                        

Net cash (used in) provided by financing activities

     (490,180     (95,979     802,675   
                        

Net (decrease) increase in cash and cash equivalents

     (69,825     147,672        32,083   

Effect of foreign currency translation on cash and cash equivalents

     410        806        (4,995

Cash and cash equivalents at beginning of year

     176,812        28,334        1,246   
                        

Cash and cash equivalents at end of year

   $ 107,397      $ 176,812      $ 28,334   
                        

Supplemental disclosure of cash flow information:

      

Interest paid including swap payments and receipts

   $ 175,298      $ 202,360      $ 207,478   

Supplemental schedule of non-cash activities:

      

Assets and liabilities assumed from acquisitions:

      

Real estate investments

   $ 67,781      $ 33,967      $ 1,199,787   

Utilization of escrow funds held for an Internal Revenue Code Section 1031 exchange

     (64,995     —          (5,165

Other assets acquired

     —          1,684        163,030   

Debt assumed

     —          34,629        970,301   

Deferred taxes

     —          —          306,225   

Noncontrolling interest

     2,724        685        32,730   

Other liabilities

     62        337        48,396   

Debt transferred on the sale of assets

     38,759        6,917        —     

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, 2009, this portfolio consisted of 505 assets: 244 seniors housing communities, 187 skilled nursing facilities, 40 hospitals and 34 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 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 197 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 84 of our properties as of December 31, 2009. We also had real estate loan investments relating to seniors housing and healthcare companies or properties as of December 31, 2009.

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. 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

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) launched the Accounting Standards Codification (“ASC”), which changes U.S. generally accepted accounting principles (“GAAP”) from a standards-based model to a topical-based model. The topics are organized by ASC number and are updated with an Accounting Standards Update. The ASC is the single source of nongovernmental authoritative GAAP for interim and annual periods ending after September 15, 2009. The ASC did not have any impact on our Consolidated Financial Statements as it does not change the accounting of or disclosure for transactions, only how GAAP guidance is catalogued and referenced.

Principles of Consolidation

The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries and the 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 attributable to noncontrolling interests.

We apply FASB guidance for arrangements with variable interest entities (“VIEs”), which requires the identification of entities for which control is achieved through means other than voting rights and the determination of which a business enterprise is the primary beneficiary of the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We consolidate investments in VIEs when we are determined to be the primary beneficiary of the VIE. Changes to our original assessment of a VIE can occur from events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposal of all or a portion of an interest held by the primary

 

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beneficiary. We consider qualitative and quantitative factors when determining whether we are (or are not) the primary beneficiary of a VIE. These factors include, but are not limited to, the form of our ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, various cash flow scenarios related to the VIE, our ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace us as manager and/or liquidate the venture, if applicable. At December 31, 2009, we did not have any VIEs that we are not consolidating.

Further, we apply FASB guidance related to investments in joint ventures based on the type of rights held by the limited partner(s) that preclude consolidation in circumstances in which the sole general partner would otherwise consolidate the limited partnership in accordance with GAAP. The assessment of limited partners’ rights and their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of the limited partners, (ii) the sole general partner increases or decreases its ownership of limited partnership interests, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. This guidance is also applied to managing member interests in limited liability companies.

On January 1, 2009, we adopted FASB guidance which now requires minority interests to 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 attributable to common stockholders. As the ownership of a controlled subsidiary increases or decreases, any difference between the consideration paid and the adjustment to the noncontrolling interest balance must be recorded as a component of equity in additional paid-in capital, so long as we maintain a controlling ownership interest. As required, all prior year amounts have been reclassified to reflect our adoption of this guidance.

Accounting Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions about future events 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 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 and allocate the cost of the properties acquired among tangible and recognized intangible assets and liabilities based upon their estimated fair values 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 based on real estate tax assessed values in relation to the total value of the asset or on internal analyses of recently acquired and existing comparable properties within our portfolio. The fair value of in-place leases, if any, reflects (i) the estimated value of any above and/or below market leases, 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 also amortized over

 

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the remaining life of the associated lease. We 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 and amortize that value over the expected term of the associated arrangements or leases, which includes the remaining lives of the related leases and any expected renewal periods. We calculate the fair value of long-term debt by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which is 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 $68.6 million and $73.3 million at December 31, 2009 and 2008, 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. 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 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 that 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, 2009, 2008 and 2007.

Assets Held for Sale and Discontinued Operations

Certain long-lived assets are classified as held-for-sale. 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 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. The results of operations and gain or loss on assets sold or held-for-sale are reflected in our 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, which are comprised of loan fees collected from the borrower net of certain direct costs, 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 applicable 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 $3.7 million and $5.5 million at December 31, 2009 and 2008, respectively. See “Note 6–Loans Receivable.”

 

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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 $29.3 million and $19.8 million at December 31, 2009 and 2008, respectively. Amortized costs of approximately $14.6 million, $7.6 million and $5.9 million were included in interest expense for the years ended December 31, 2009, 2008 and 2007, respectively.

Marketable Debt and Equity Securities

We record marketable debt and equity securities as available-for-sale and classify them 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, 2009, 2008 and 2007, we realized gains related to the sale of various marketable debt and equity securities of $0.2 million, $0 million and $0.9 million, respectively.

Derivative Instruments

From time to time, we may use derivative instruments to protect our future cash flows against the risk of interest rate movements under our variable rate debt agreements and the risk of foreign currency exchange rate movements. 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 4—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 $33.2 million in cash 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

On January 1, 2008, we adopted FASB guidance which defines fair value and provides direction for measuring fair value and providing the necessary disclosures. This guidance 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.

 

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The guidance 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, the guidance 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 the reporting entity has the ability to access. Level two inputs are inputs other than quoted prices included in level one that are 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 the reporting 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 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. Additionally, we determined the valuation allowance for loan losses based on level three inputs. See “Note 6—Loans Receivable.”

On January 1, 2009, we adopted additional FASB guidance related to fair value, which delayed the requirements related to the valuation of nonfinancial assets and liabilities. The adoption did not have a material impact on our Consolidated Financial Statements.

We use the following methods and assumptions in estimating fair value disclosures for financial instruments.

 

   

Cash and cash equivalents: The carrying amount of unrestricted cash and cash equivalents 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 current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. See “—Loans Receivable” above regarding valuation allowances for loan losses.

 

   

Marketable debt securities: The fair value of marketable debt securities is estimated using quoted prices in active markets for identical assets or liabilities that we have the ability to access.

 

   

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.

In April 2009, the FASB issued guidance relating to the recognition and presentation of other-than-temporary impairments, which requires entities to separate an other-than-temporary impairment of a fixed maturity security into two components when (i) there are credit losses associated with the security that management asserts that it does not have an intent to sell and (ii) it is more likely than not that the entity will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. The guidance is effective for periods

 

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ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to adopt this guidance during the second quarter of 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

In April 2009, the FASB issued additional guidance relating to fair value determinations. The guidance provides that if an entity determines there has been a significant decrease in the volume and level of activity for an asset or liability in relation to the normal market activity for such asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. The guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We elected to adopt this guidance effective January 1, 2009. The adoption did not have a material impact on our Consolidated Financial Statements.

In April 2009, the FASB issued guidance relating to the disclosure of fair value information in interim and annual financial statements. This guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance during the second quarter of 2009. The adoption did not have any effect on our Consolidated Financial Statements.

Revenue Recognition

Certain of our leases, 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, and 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 $78.4 million and $68.2 million at December 31, 2009 and 2008, respectively.

Our master lease agreements with Kindred (the “Kindred Master Leases”) and certain of our other 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 all other income when all of the following criteria are met in accordance with the 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.

We recognize resident fees and services, other than move-in fees, 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 FASB guidance requiring all share-based payments to employees, including grants of employee stock options, to be recognized in our Consolidated Statements of Income on a straight-line basis as the requisite service periods are rendered based on their grant date fair values.

 

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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. We recognize gains on assets sold using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform any 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 following requirements of gain recognition: (i) the profit is determinable, meaning that the collectability of the sales price is reasonably assured or the amount that will not be collectible can be estimated; and (ii) the earnings process is virtually complete, meaning that we are not obliged to perform any significant activities after the sale to earn the profit.

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”), we make no provision for REIT income and expense, other than for certain unrecognized tax benefit items. However, we 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.

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 our 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.

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, 2009, 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.

 

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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 necessary quantitative thresholds at the current time. See “Note 18—Segment Information.”

Business Combinations

On January 1, 2009, we adopted FASB guidance related to business combinations, which 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 guidance also requires that acquisition-related transaction costs be expensed as incurred, acquired research and development value be capitalized and acquisition-related restructuring costs be capitalized only if they meet certain criteria. This guidance did not have a material impact on our Consolidated Financial Statements at the time of adoption. Beginning January 1, 2009, we began expensing acquisition-related transaction costs as incurred. These costs are included in merger-related expenses and deal costs on our Consolidated Statement of Income for the year ended December 31, 2009.

Convertible Debt Instruments

On January 1, 2009, we adopted FASB guidance relating to convertible debt instruments that may be settled in cash upon conversion. The guidance 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. Our nonconvertible debt borrowing rate at the time our convertible senior notes were issued was 6 1/8%. As required, all prior year amounts have been restated to reflect our adoption of this guidance. As a result of the adoption, interest expense increased and net income decreased by $3.9 million ($0.03 per diluted share), $3.7 million ($0.03 per diluted share) and $3.4 million ($0.03 per diluted share) for the years ended December 31, 2009, 2008 and 2007, respectively, and total equity increased by $12.1 million at December 31, 2008, which includes the calculated equity component of $19.5 million. As of December 31, 2009, the remaining unamortized liability component was $220.9 million.

Subsequent Events

In May 2009, the FASB issued guidance relating to subsequent events, which establishes general standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. We are required to disclose the date through which we have evaluated subsequent events and transactions and the basis for that date. We adopted this guidance during the second quarter of 2009. The adoption did not have any effect on our Consolidated Financial Statements. We have evaluated disclosure of subsequent events and transactions through the time of filing on February 19, 2010 for this Annual Report on Form 10-K.

Recently Adopted Accounting Standards

On January 1, 2010, we adopted FASB guidance related to variable interest accounting. The guidance requires an enterprise to analyze whether its variable interest gives it a controlling financial interest in a variable

 

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interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the variable interest entity that could potentially be significant to the entity. The guidance requires an enterprise to perform this analysis on an ongoing basis and requires additional disclosures about an enterprise’s involvement in variable interest entities. We do not believe the adoption of this guidance will impact our Consolidated Financial Statements.

Reclassifications

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

Note 3—Concentration of Credit Risk

As of December 31, 2009, approximately 38.9%, 21.8% and 14.1% 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 74.1% and 12.6%, respectively, of our portfolio, based on the gross book value of real estate investments (including assets held for sale), as of December 31, 2009, 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, 2009) during the year ended December 31, 2009, 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, 2008 and 2007, respectively.

Approximately 26.2%, 25.5% and 30.8% of our total revenues and 38.5%, 38.0% and 41.5% of our total NOI (net operating income) (including amounts in discontinued operations) for the years ended December 31, 2009, 2008 and 2007, respectively, were derived from our four Kindred Master Leases. Approximately 12.9%, 12.8% and15.7% of our total revenues and 19.1%, 19.2% and 21.2% of our total NOI (including amounts in discontinued operations) for the years ended December 31, 2009, 2008 and 2007, 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.

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)

2010

   $ 246,393    $ 121,547    $ 104,467    $ 472,407

2011

     252,773      121,554      106,446      480,773

2012

     259,320      121,562      108,462      489,344

2013

     179,915      121,569      108,366      409,850

2014

     141,519      121,577      109,148      372,244

Thereafter

     47,574      505,229      583,009      1,135,812
                           

Total

   $ 1,127,494    $ 1,113,038    $ 1,119,898    $ 3,360,430
                           

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

 

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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 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.

For the years ended December 31, 2009 and 2008, senior living operations managed by Sunrise accounted for approximately 44.7% and 45.4% of our total revenues and 18.5% and 20.0% of our total EBITDA (earnings before interest, taxes, depreciation and amortization) (including amounts in discontinued operations), respectively. Approximately 36.2% of our total revenues and 13.8% of our total EBITDA (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.

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.

Each of Kindred, Brookdale Senior Living and 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.

Note 4—Acquisitions of Real Estate Property

The following summarizes our acquisitions in 2009, 2008 and 2007. We completed these acquisitions primarily to invest in additional seniors housing and healthcare properties and achieve 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.

 

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2009 Acquisitions

We purchased four MOBs for an aggregate purchase price of $77.7 million, including $1.7 million of noncontrolling interest, increasing our MOB investments to over 1.7 million square feet. We own one of these MOBs through a joint venture, which we consolidate, with a partner that provides management and leasing services for the property. The purchase price was allocated between building and improvements, tenant improvements and lease intangibles of $60.9 million, $11.1 million and $5.7 million, respectively. Additionally, in 2009, we purchased one skilled nursing facility for $10.0 million and leased it to Brookdale Senior Living. The purchase price was allocated between land of $0.7 million and building and improvements of $9.3 million.

We also completed the development of two MOBs pursuant to an arrangement we entered into with a nationally recognized private developer of MOBs and healthcare facilities in 2008. That arrangement gave us the exclusive right, as part of a joint venture, to develop up to ten identified MOBs on hospital campuses in eight states. As of December 31, 2009, we had invested approximately $35.6 million, including $1.4 million of noncontrolling interest, in two MOBs under the arrangement, both of which we consolidate. The investment was allocated between land, building and improvements and tenant improvements of $1.4 million, $25.5 million and $8.7 million, respectively.

2008 Acquisitions

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

We acquired 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, which we consolidate, with a partner that provides management and leasing services for the property.

As of December 31, 2008, we had invested approximately $8.7 million in the two MOBs that were both under development pursuant to our exclusive joint venture arrangement described above.

Sunrise REIT Acquisition

In 2007, we acquired from Sunrise REIT a portfolio of 77 communities managed by Sunrise for approximately $2.0 billion, including assumed debt. We acquired a 100% ownership interest in eighteen seniors housing communities and a 75% to 85% ownership interest in 59 additional seniors housing communities, with the noncontrolling 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.

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 and 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 5—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).

 

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Later in 2007, we acquired 80% ownership interests in two additional 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 certain merger-related expenses in connection with the Sunrise REIT acquisition during the years ended December 31, 2009, 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 14—Litigation”).

Other 2007 Acquisitions

We acquired two 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”).

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. Two of these MOBs are currently owned through joint ventures, which we consolidate, with two different partners that provide management and leasing services for the properties.

Note 5—Dispositions

We present separately, as discontinued operations, in all periods presented the results of operations for all assets held for sale or disposed of during the three-year period ended December 31, 2009.

2009 Dispositions and Assets Held for Sale

In February 2010, we sold one seniors housing community for approximately $2.5 million. The net book value of this asset, $2.4 million, is reflected as held for sale as of December 31, 2009. We do not expect to record any gain or loss from the sale in first quarter of 2010. The operations for this asset have been reported as discontinued operations for the years ended December 31, 2009, 2008 and 2007.

In June 2009, we sold six skilled nursing facilities to Kindred for total consideration of $58.0 million, consisting of a $55.7 million aggregate sale price and a $2.3 million lease termination fee. The proceeds from the sale were held in a Code Section 1031 exchange escrow account with a qualified intermediary and used for our acquisition of three MOBs in December 2009. Cash rent for these assets for the May 1, 2008 to April 30, 2009 lease year was approximately $5.6 million. We recognized a gain from the sale of these assets of $39.3 million in the second quarter of 2009.

During 2009, we also sold five seniors housing communities, one hospital, one MOB and one other property to the existing tenants for an aggregate sale price of $96.2 million and transferred related debt of $38.8 million. We recognized a net gain from the sales of these assets of $27.5 million in 2009.

2008 Dispositions

In December 2008, we sold five seniors housing communities to the existing 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 due to a $10.0 million loan we made to the buyer in conjunction with the sale and will be recognized over a period of three years from the date of the sale. We recognized $0.5 million of the gain during the year ended December 31, 2009. See “Note 6—Loans Receivable.”

 

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In April 2008, we sold seven properties for an aggregate sale price of $69.1 million. We recognized a 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.

2007 Dispositions

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 a Code Section 1031 exchange escrow account with a qualified intermediary and subsequently used in the second half of 2007 for other acquisitions. See “Note 4—Acquisitions.” In addition, Kindred paid us a lease termination fee of $3.5 million. We recognized a gain on the sale of assets of $129.5 million during the year ended December 31, 2007.

Set forth below is a summary of the results of operations of properties sold or held for sale during the years ended December 31, 2009, 2008 and 2007 , all of which were included in our triple-net leased properties segment, with the exception of one MOB sold during the first quarter of 2009 (included in all other for segment reporting purposes):

 

     2009    2008    2007
     (In thousands)

Revenues:

        

Rental income

   $ 3,601    $ 20,031    $ 30,682

Interest and other income

     2,423      1,700      3,655
                    
     6,024      21,731      34,337

Expenses:

        

Interest

     1,233      8,682      13,111

Depreciation and amortization

     347      4,873      8,527
                    
     1,580      13,555      21,638
                    

Income before gain on sale of real estate assets

     4,444      8,176      12,699

Gain on sale of real estate assets

     67,305      39,026      129,478
                    

Discontinued operations

   $ 71,749    $ 47,202    $ 142,177
                    

Note 6—Loans Receivable

As of December 31, 2009, we had $131.9 million of net loans receivable relating to seniors housing and healthcare companies or properties.

In June 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 this 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, but may be extended for one year, at the borrower’s option, subject to certain conditions.

In 2008, we received a $10.0 million three-year note issued to us as partial consideration for five assets we sold in December 2008.

In 2005, we made three first mortgage loans (the “Sunwest Loans”) in the aggregate principal amount of $20 million to affiliates of Sunwest Management, Inc. (“Sunwest”). The Sunwest Loans originally accrued interest at a non-default annual rate of 9% and were secured by four seniors housing communities and guaranteed by Sunwest and two of its principals. During 2008, the borrowers defaulted on their obligations under the Sunwest Loans, and we initiated foreclosure actions on the four secured assets. Due to the unfavorable capital

 

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markets and economic environment at that time, we recorded a provision for loan losses on the Sunwest Loans of $6.0 million. In September 2009, we completed the non-judicial foreclosure of a seniors housing asset related to one of the Sunwest Loans and immediately sold the property to an affiliate of one of our existing tenants for approximately $6.3 million. In connection with the sale, we provided $5.0 million of first mortgage financing to the purchaser, secured by, among other things, the property, and received cash consideration of $1.2 million after expenses. We recorded no gain or loss from this transaction. The loan matures in September 2012, bears interest at a variable rate of 30-day LIBOR plus 6.5% per annum and is guaranteed by our tenant. In December 2009, we obtained ownership through judicial foreclosure of another seniors housing asset related to another Sunwest Loan, which had a carrying amount of $1.1 million. Operations from this property will be consolidated into our consolidated financial statements beginning in 2010. The net carrying value of the remaining Sunwest Loan, secured by two seniors housing assets, as of December 31, 2009 was $7.9 million.

As of December 31, 2009, the remainder of our loans receivable consisted of a $6.5 million first mortgage loan receivable originated under our sourcing and services agreement with a third party to acquire or originate a diversified pool of mortgage loans secured by stable, cash flowing seniors housing and MOB assets. Subsequent to December 31, 2009, we acquired another $15.8 million in first mortgage investments identified by such third party under the sourcing and services agreement.

Note 7—Intangibles

At December 31, 2009, intangible lease assets, comprised of above market resident leases, in-place resident leases and other intangibles, were $10.5 million, $96.3 million and $2.5 million, respectively. At December 31, 2008, these intangible lease assets were $7.4 million, $88.6 million and $2.2 million, respectively. At December 31, 2009 and 2008, the accumulated amortization of the intangible assets was $92.6 and $89.2 million, respectively. The weighted average amortization period of our lease-related intangible assets at December 31, 2009 was approximately 8.0 years.

At December 31, 2009 and 2008, intangible lease liabilities, comprised of below market resident leases, were $15.1 million and $12.2 million, respectively. At December 31, 2009 and 2008, the accumulated amortization of the intangible liabilities was $10.8 million and $10.0 million, respectively. The weighted average amortization period of intangible liabilities at December 31, 2009 was approximately 8.3 years.

Note 8—Borrowing Arrangements

The following is a summary of our long-term debt and certain interest rate and maturity information as of December 31, 2009 and 2008:

 

     2009     2008  
     (In thousands)  

Unsecured revolving credit facilities

   $ 8,466      $ 300,207   

8 3/4% Senior Notes due 2009

     —          49,807   

6 3/4% Senior Notes due 2010

     1,375        122,980   

3 7/8% Convertible Senior Notes due 2011

     230,000        230,000   

9% Senior Notes due 2012

     82,433        191,821   

6 5/8% Senior Notes due 2014

     71,654        175,000   

7 1/8% Senior Notes due 2015

     142,669        170,000   

6 1/2% Senior Notes due 2016

     400,000        200,000   

6 3/4% Senior Notes due 2017

     225,000        225,000   

Mortgage loans and other

     1,540,064        1,474,325   
                

Total

     2,701,661        3,139,140   

Unamortized fair value adjustment

     11,642        14,256   

Unamortized commission fees and discounts

     (43,202     (16,398
                

Senior notes payable and other debt

   $ 2,670,101      $ 3,136,998   
                

 

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Unsecured Revolving Credit Facilities

Our aggregate borrowing capacity under the unsecured revolving credit facilities is $1.0 billion, of which $800.0 million matures on April 26, 2012 and $200.0 million matures on April 26, 2010. 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. At December 31, 2009, the applicable percentage was 0.75% for 2010 maturities and 2.80% for 2012 maturities. Our unsecured revolving credit facilities have a 20 basis point facility fee. At December 31, 2009, we had $8.5 million outstanding under our unsecured revolving credit facilities and approximately $988.4 million of availability.

Convertible Senior Notes

As of December 31, 2009, we had $230.0 million aggregate principal amount of our 3 7/8% convertible notes due 2011 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 (December 1, 2011), 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 22.9457 shares per $1,000 principal amount of notes (which equates to a conversion price of approximately $43.58 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, 2009. See “Note 13—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, 2009, we had $1.2 billion aggregate principal amount of senior notes issued by our subsidiaries, Ventas Realty and Ventas Capital Corporation (collectively, the “Issuers”) outstanding. We issued $200.0 million principal amount of each of our senior notes due 2016 and senior notes due 2017 at initial discounts to par value of 1/2% and 5/8%, respectively. We issued $50.0 million principal amount of our senior notes due 2014 at a 1% discount to par value.

During 2009, we issued and sold another $200.0 million aggregate principal amount of senior notes due 2016 at a 15 3/4% discount to par value, for total proceeds of $168.5 million, before the underwriting discount and expenses. We also repaid in full, at par, $49.8 million principal amount of our senior notes due 2009 at maturity on May 1, 2009, and purchased in open market transactions and/or through cash tender offers $361.6 million of

 

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our senior notes composed of: $121.6 million principal amount of our outstanding senior notes due 2010; $109.4 million principal amount of our outstanding senior notes due 2012; $103.3 million principal amount of our outstanding senior notes due 2014; and $27.3 million principal amount of our outstanding senior notes due 2015. We recognized a net loss on extinguishment of debt of $6.1 million related to these purchases.

During 2008, we purchased $124.4 million principal amount of senior notes due 2009 and $52.0 million principal amount of senior notes due 2010 in open market transactions and reported a net gain on extinguishment of debt of $2.5 million.

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 (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) 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, 2009, we had outstanding 121 mortgage loans totaling $1.5 billion that are collateralized by the underlying properties. The loans generally bear interest at fixed rates ranging from 5.1% to 8.5% per annum, except for twelve loans having aggregate outstanding principal balances totaling $216.0 million which bear interest at the lender’s variable rates ranging from 1.0% to 4.5% per annum as of December 31, 2009. At December 31, 2009, the weighted average annual rate on our fixed rate mortgage loans was 6.3%, and the weighted average annual rate on our variable rate mortgage loans was 2.1%. Our mortgage loans had a weighted average maturity of 5.3 years as of December 31, 2009.

 

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Scheduled Maturities of Borrowing Arrangements and Other Provisions

As of December 31, 2009, our indebtedness had the following maturities:

 

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

2010

   $ 175,134    $ —      $ 27,848    $ 202,982

2011

     301,127      —        26,379      327,506

2012

     388,937      8,466      22,824      420,227

2013

     150,962      —        17,294      168,256

2014

     109,137      —        15,084      124,221

Thereafter

     1,399,020      —        59,449      1,458,469
                           

Total maturities

   $ 2,524,317    $ 8,466    $ 168,878    $ 2,701,661
                           

 

(1) On December 31, 2009, we had $107.4 million of unrestricted cash and cash equivalents, for cash available of $98.9 million, net of amounts outstanding on our unsecured revolving credit facilities.

As of December 31, 2009, our joint venture partners’ share of total debt was $159.0 million.

The instruments governing our senior notes and certain other 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. At any time we maintain investment grade ratings by both Moody’s and S&P, the indentures governing our senior notes provide that certain of these restrictive covenants will either be suspended or fall away. 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, 2009, 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 obligations and the effect of foreign currency exchange rate movements on our senior living operations. We attempt to minimize these risks by following established risk management policies and procedures, including the use of derivative instruments.

For interest rate exposures, we use derivatives primarily to fix the rate on debt based on floating rate indexes 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 4Acquisitions.” 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.

 

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These contracts were settled on April 26, 2007, the acquisition date, and we received $33.2 million in cash 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, 2009, 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 $11.6 million and will be 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 (reduction of interest expense) for each of the next five years follows: 2010 – $2.9 million; 2011 – $2.9 million; 2012 – $2.4 million; 2013 – $1.4 million; and 2014 – $1.0 million.

Note 9—Fair Values of Financial Instruments

As of December 31, 2009 and 2008, the carrying amounts and fair values of our financial instruments were as follows:

 

     2009     2008  
     Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  
     (In thousands)  

Cash and cash equivalents

   $ 107,397      $ 107,397      $ 176,812      $ 176,812   

Loans receivable, net

     131,887        129,512        123,289        111,942   

Marketable debt securities

     65,038        65,038        51,550        51,550   

Senior notes payable and other debt, gross

     (2,701,661     (2,780,405     (3,139,140     (2,949,268

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.

At December 31, 2009, we held marketable debt securities, classified as available-for-sale, with an aggregate amortized cost basis and fair value of $60.6 million and $65.0 million, respectively. At December 31, 2008, these securities had an aggregate amortized cost basis and fair value of $64.4 million and $51.6 million, respectively. The contractual maturities of our marketable debt securities range from October 1, 2012 to April 15, 2016. We do not intend to sell these securities and it is more likely than not that we will not be required to sell these securities prior to maturity.

Note 10—Stock-Based Compensation

Compensation Plans

We have four plans under which outstanding 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 2000 Incentive Compensation Plan (Employee Plan); (2) the 2004 Stock Plan for Directors; (3) the Common Stock Purchase Plan for Directors (the “Directors Stock Purchase Plan”); (4) the Executive Deferred Stock Compensation Plan; (5) the Nonemployee Directors’ Deferred Stock Compensation Plan; (6) the 2006 Incentive Plan; and (7) the 2006 Stock Plan for Directors.

 

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During the year ended December 31, 2009, 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. 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, 2009 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, 2009, 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, 2009, 459,004 shares were available for future issuance.

 

   

2006 Incentive Plan—5,000,000 shares are reserved for grants or issuance to employees and 3,271,378 were available for future grants or issuance as of December 31, 2009. 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 279,272 were available for future grants or issuance as of December 31, 2009. 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.

Compensation cost for all share-based awards are based on the grant date fair value and are recognized on a straight-line basis as the requisite service periods are rendered. Compensation costs related to stock options for the years ended December 31, 2009, 2008 and 2007 were $2.9 million, $2.3 million and $1.9 million.

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:

 

     2009     2008     2007  

Risk-free interest rate

   1.37 - 2.32   2.48   4.65

Dividend yield

   5.75   5.75   4.83

Volatility factors of the expected market price for our common stock

   36.1 - 42.7   21.0   21.0

Weighted average expected life of options

   3.5 - 6.0 years      3.5 years      6.0 years   

 

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The following is a summary of stock option activity in 2009:

 

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, 2008

  1,355,884      $ 3.31 - $45.25   $ 36.90    

Options granted

  397,485        21.57 - 33.57     28.25    

Options exercised

  (99,891     3.31 - 28.96     21.63    

Options canceled

  (13,502     4.00 - 41.76     22.68    
             

Outstanding as of December 31, 2009

  1,639,976        11.34 - 45.25     35.85   7.6   $ 12,974
                   

Exercisable as of December 31, 2009

  1,155,633      $ 11.34 - $45.25   $ 36.36   7.1   $ 8,567
                   

A summary of the status of our nonvested stock options as of December 31, 2009 and changes during the year then ended follows:

 

Activity

   Shares     Weighted Average
Grant Date Fair
Value

Nonvested at beginning of year

   543,943      $ 4.12

Granted

   397,485        5.86

Vested

   (449,333     4.83

Forfeited

   (7,752     4.22
        

Nonvested at end of year

   484,343      $ 4.89
        

As of December 31, 2009, there was $704,000 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 one year. Proceeds received from options exercised under the Plans for the years ended December 31, 2009, 2008 and 2007 were $2.2 million, $6.2 million and $9.5 million, respectively.

Restricted Stock and Restricted Stock Units

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 $9.0 million in 2009, $7.7 million in 2008 and $5.6 million in 2007. Restricted stock and restricted stock units generally vest over two- to five-year periods. The vesting of restricted stock and restricted stock units 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, 2009, and changes during the year ended December 31, 2009 follows:

 

     Restricted
Stock
Units
    Weighted Average
Grant Date Fair
Value
   Restricted
Stock
    Weighted Average
Grant Date Fair
Value

Nonvested at December 31, 2008

   6,450      $ 44.14    343,655      $ 42.31

Granted

   4,118        33.57    200,327        27.70

Vested

   (4,446     43.64    (178,669     36.63

Forfeited

   —          —      (4,140     25.54
                 

Nonvested at December 31, 2009

   6,122      $ 37.39    361,173      $ 37.16
                 

As of December 31, 2009, there was $7.5 million unrecognized compensation cost related to nonvested restricted stock and restricted stock units under the Plans. We expect to recognize that cost over a weighted average of 1.5 years.

 

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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, 2009, 31,700 shares had been purchased under the ESPP and 2,468,300 shares were available for future issuance.

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 2009, 2008 and 2007, our contributions were approximately $189,000, $164,000 and $106,000, respectively.

Note 11—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 11.

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, 2009, 2008 and 2007, our tax treatment of distributions per common share was as follows:

 

     2009    2008    2007  

Tax treatment of distributions:

        

Ordinary income

   $ 1.8356    $ 1.9025    $ 1.2872   

Long-term capital gain

     0.1510      0.0712      0.9621   

Unrecaptured Section 1250 gain

     0.0634      0.0763      0.0457   
                      

Distribution reported for 1099-DIV purposes

     2.0500      2.0500      2.2950   

Less: Dividend declared in prior year and taxable in current year

     —        —        (0.3950
                      

Distributions declared per common share outstanding

   $ 2.0500    $ 2.0500    $ 1.9000   
                      

We believe we have met the annual REIT distribution requirement by payment of at least 90% of our estimated taxable income for 2009, 2008 and 2007. 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, 2009, 2008 and 2007 is as follows:

 

     2009     2008     2007  
     (In thousands)  

Current

   $ 2,166      $ 3,010      $ 908   

Deferred

     (3,885     (18,895     (28,950
                        

Total

   $ (1,719   $ (15,885   $ (28,042
                        

The deferred tax benefit for the years ended December 31, 2009, 2008 and 2007 was reduced by income tax expense of $1.7 million, $1.7 million and $1.1 million, respectively, related to the noncontrolling interest share of

 

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net income. For the tax years ended December 31, 2009, 2008 and 2007, the Canadian income tax benefit included in the consolidated benefit for income taxes was $2.0 million, $3.3 million and $7.1 million, respectively.

Although the TRS entities did not pay any federal income taxes for the year ended December 31, 2009, 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.

Income tax expense computed by applying the federal corporate tax rate for the years ended December 31, 2009, 2008 and 2007 is reconciled to the income tax benefit as follows:

 

     2009     2008     2007  
     (In thousands)  

Tax at statutory rate on earnings from continuing operations before noncontrolling interest and income taxes

   $ 68,562      $ 48,605      $ 38,626   

State income taxes, net of federal benefit

     (126     (445     (2,787

Increase in valuation allowance

     7,713        1,170        —     

Increase in ASC 740 income tax liability

     2,166        3,010        —     

Tax at statutory rate on earnings not subject to federal income taxes

     (79,689     (69,009     (65,225

Other differences

     (345     784        1,344   
                        

Income tax benefit

   $ (1,719   $ (15,885   $ (28,042
                        

The REIT made no income tax payments for the year ended December 31, 2009 and 2008. 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, 2009, 2008 and 2007 are summarized as follows:

 

     2009     2008     2007  
     (In thousands)  

Property, primarily differences in depreciation and amortization, the tax basis of land assets and the treatment of interests and certain costs

   $ (293,800   $ (291,481   $ (315,835

Operating loss and interest deduction carryforwards

     86,014        70,302        57,483   

Expense accruals and other

     (58     275        87   

Valuation allowance

     (45,821     (36,595     (39,325
                        

Net deferred tax liabilities

   $ (253,665   $ (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 $384.7 million and $497.1 million less than the book bases of those assets and liabilities for financial reporting purposes for the years ended December 31, 2009 and 2008, respectively.

 

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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.

Generally, we are subject to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the year ended December 31, 2006 and subsequent years and are subject to audit by state taxing authorities for the year ended December 31, 2005 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.

We have a combined NOL carryforward of $132.5 million at December 31, 2009 related to the TRS entities and an NOL carryforward related to the REIT of $90.4 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, 2009 and 2008. 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.

The following table summarizes the activity related to our unrecognized tax benefits:

 

     2009     2008
     (In thousands)

Balance as of January 1

   $ 12,870      $ 9,384

Additions to tax positions related to the current year

     2,562        3,486

Additions to tax positions related to prior years

     577        —  

Subtractions to tax positions related to prior years

     (565     —  
              

Balance as of December 31

   $ 15,444      $ 12,870
              

Included in the unrecognized tax benefits of $15.0 million at December 31, 2009 was $15.0 million of tax benefits that, if recognized, would reduce our annual effective tax rate. We accrued no penalties. Interest of $0.4 million related to the unrecognized tax benefits was accrued during 2009. We expect our unrecognized tax benefits to increase by $2.0 million during 2010.

 

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Note 12—Commitments and Contingencies

Assumption of Certain Operating Liabilities and Litigation

As a result of the structure used to acquire the Sunrise REIT properties, we may be subject to various liabilities arising out of the ownership or operation of those 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 acquisition, such liabilities and/or obligations could have a Material Adverse Effect on us.

Similarly, we have assumed various liabilities in connection with other past acquisitions, including liabilities arising out of the ownership or operation of properties acquired in a merger. 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 those acquisitions, such liabilities and/or obligations 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. 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.

Other

We have certain operating and ground lease obligations that generally require fixed monthly or annual rent payments and may also include escalation clauses and renewal options. These leases have terms that expire during the next 85 years, excluding extension options. Future minimum lease obligations under non-cancelable operating and ground leases as of December 31, 2009 were $2.1 million in 2010, $1.7 million in 2011, $1.8 million in 2012, $1.8 million in 2013, $1.3 million in 2014 and $105.7 million thereafter.

 

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Note 13—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,
             2009            2008            2007        
     (In thousands, except per share amounts)

Numerator for basic and diluted earnings per share:

        

Income from continuing operations attributable to common stockholders

   $ 194,746    $ 175,401    $ 131,504

Discontinued operations

     71,749      47,202      142,177
                    

Net income attributable to common stockholders

   $ 266,495    $ 222,603    $ 273,681
                    

Denominator:

        

Denominator for basic earnings per share—
weighted average shares

     152,566      139,572      122,597

Effect of dilutive securities:

        

Stock options

     126      223      383

Restricted stock awards

     64      17      14

Convertible notes

     2      100      18
                    

Dilutive potential common stock

     192      340      415
                    

Denominator for diluted earnings per share—
adjusted weighted average shares

     152,758      139,912      123,012
                    

Basic earnings per share:

        

Income from continuing operations attributable to common stockholders

   $ 1.28    $ 1.25    $ 1.07

Discontinued operations

     0.47      0.34      1.16
                    

Net income attributable to common stockholders

   $ 1.75    $ 1.59    $ 2.23
                    

Diluted earnings per share:

        

Income from continuing operations attributable to common stockholders

   $ 1.27    $ 1.25    $ 1.07

Discontinued operations

     0.47      0.34      1.15
                    

Net income attributable to common stockholders

   $ 1.74    $ 1.59    $ 2.22
                    

There were 975,500, 940,500 and 222,200 anti-dilutive options outstanding for the years ended December 31, 2009, 2008 and 2007, respectively.

Note 14—Litigation

Legal Proceedings Defended and Indemnified by Third Parties

Kindred, Brookdale Senior Living, 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. However, the resolution of any litigation or investigations, either individually or in the aggregate, could have a material adverse effect on Kindred’s, Brookdale Senior Living’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.

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 asserted claims of

 

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tortious interference with contract and tortious interference with prospective business advantage. Our complaint alleged 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 alleged, 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 above the original contract price necessary to obtain unitholder approval and increased costs associated with the delay in closing the acquisition, including increased costs to finance the transaction as a result of the delay.

HCP brought counterclaims against us alleging misrepresentation and negligent misrepresentation by Sunrise REIT related to its sale process, claiming that we were responsible for those actions as successor. HCP sought compensatory and punitive damages. On March 25, 2009, the District Court granted us judgment on the pleadings against all counterclaims brought by HCP and dismissed HCP’s counterclaims with prejudice. Thereafter, the District Court confirmed the dismissal of HCP’s counterclaims.

On July 16, 2009, the District Court denied HCP’s summary judgment motion as to our claim for tortious interference with business expectation, permitting us to present that claim against HCP at trial. The District Court granted HCP’s motion for summary judgment as to our claim for tortious interference with contract and dismissed that claim. The District Court also ruled that we could not seek to recover a portion of our alleged damages.

On September 4, 2009, the jury unanimously held that HCP tortiously interfered with our business expectation to acquire Sunrise REIT at the agreed price by employing significantly wrongful means such as fraudulent misrepresentation, deceit and coercion. The jury awarded us $101.6 million in compensatory damages, which is the full amount of damages the District Court permitted us to seek at trial. The District Court entered judgment on the jury’s verdict on September 8, 2009.

On November 16, 2009, the District Court affirmed the jury’s verdict and denied all of HCP’s post-trial motions, including a motion requesting that the District Court overturn the jury’s verdict and enter judgment for HCP or, in the alternative, award HCP a new trial. The District Court also denied our motion for approximately $20 million in pre-judgment interest and/or to modify the jury award to increase it by approximately $4 million to reflect the currency rates in effect on September 8, 2009, the date of entry of the judgment.

On November 17, 2009, HCP appealed the District Court’s judgment to the United States Court of Appeals for the Sixth Circuit (the “Sixth Circuit”). Based on filings by HCP with the Sixth Circuit, in the appeal, HCP is expected to argue that the judgment against it should be vacated and the case remanded for a new trial and/or that judgment should be entered in its favor as a matter of law. We intend to vigorously contest HCP’s appeal and seek the confirmation by the Sixth Circuit of both the jury’s verdict and the various rulings in our favor in the District Court. However, there can be no assurance as to the outcome of HCP’s appeal.

On November 24, 2009, we filed a cross-appeal to the Sixth Circuit. The cross-appeal will be heard and decided in conjunction with HCP’s appeal. In addition to maintaining the full benefit of our favorable jury verdict, in our cross-appeal, we intend to assert that we are entitled to substantial monetary relief in addition to the jury verdict, including punitive damages, additional compensatory damages and pre-judgment interest. We intend to vigorously pursue our cross-appeal and to seek additional proceedings in the District Court in which a jury may supplement the current judgment. However, there can be no assurance as to the outcome of our cross-appeal.

On December 11, 2009, HCP posted a $102.8 million letter of credit in our favor to serve as security to stay execution of the jury verdict pending the appellate proceedings.

 

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The briefing process for HCP’s appeal and our cross-appeal is expected to commence in March 2010 and conclude in June 2010 and a final decision could be issued by June 2011. However, there can be no assurance about the timing of a decision by the Sixth Circuit.

Other Litigation

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 14, 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.

Note 15—Capital Stock

At December 31, 2009 and 2008, 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 April 2009, we filed an automatic shelf registration statement on Form S-3 with the Commission relating 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 replaced our previous automatic shelf registration statement, which expired pursuant to the Commission’s rules.

In April 2009, we issued and sold 13,062,500 shares of our common stock in an underwritten public offering pursuant to the shelf registration statement. We received $312.2 million in aggregate proceeds from the sale, which we used, together with our net proceeds from the sale of our senior notes due 2016, to fund our cash tender offers with respect to the outstanding senior notes, to repay debt and for general corporate purposes.

In 2008, we issued and sold 9,236,083 shares of our common stock in two underwritten public offerings pursuant to our previous shelf registration statement. We received $409.0 million in aggregate 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.

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 more 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.

Our Board of Directors is empowered to grant waivers from the excess share provisions of our Certificate of Incorporation.

 

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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, subject to certain limits. In addition, existing stockholders, as well as new investors, may purchase shares of common stock under the DRIP by making optional cash payments, subject to certain limits. We currently offer a 1% discount on the purchase price of our common stock to shareholders who reinvest their dividends and/or make optional cash purchases 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.

Accumulated Other Comprehensive Income

 

      As of December 31,  
     2009     2008  
     (In thousands)  

Foreign currency translation

   $ 16,059      $ (7,493

Unrealized gain (loss) on marketable debt securities

     4,440        (12,887

Other

     (830     (709
                

Total accumulated other comprehensive income (loss)

   $ 19,669      $ (21,089
                

Note 16—Related Party Transactions

We currently lease eight personal care facilities to Tangram Rehabilitation Network, Inc. (“Tangram”), a wholly owned subsidiary of Res-Care, Inc. (“Res-Care”). The properties are leased pursuant to a master lease agreement which is guaranteed by Res-Care, of which a member of our Board of Directors serves as Chairman of the Board. For the years ended December 31, 2009, 2008 and 2007, Tangram has paid us approximately $980,900, $949,800 and $917,000, respectively, in base rent payments.

 

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Note 17—Quarterly Financial Information (Unaudited)

Summarized unaudited consolidated quarterly information for the years ended December 31, 2009 and 2008 is provided below.

 

     For the Year Ended December 31, 2009
     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
     (In thousands, except per share amounts)

Revenues (1)

   $ 229,377    $ 231,924    $ 235,767    $ 239,026
                           

Income from continuing operations attributable to common stockholders (1)

   $ 45,189    $ 46,134    $ 49,656    $ 53,767

Discontinued operations (1)

     29,039      42,247      149      314
                           

Net income attributable to common stockholders

   $ 74,228    $ 88,381    $ 49,805    $ 54,081
                           

Earnings per share:

           

Basic:

           

Income from continuing operations attributable to common stockholders

   $ 0.32    $ 0.30    $ 0.32    $ 0.35

Discontinued operations

     0.20      0.27      0.00      0.00
                           

Net income attributable to common stockholders

   $ 0.52    $ 0.57    $ 0.32    $ 0.35
                           

Diluted:

           

Income from continuing operations applicable to common shares

   $ 0.32    $ 0.30    $ 0.32    $ 0.35

Discontinued operations

     0.20      0.27      0.00      0.00
                           

Net income applicable to common shares

   $ 0.52    $ 0.57    $ 0.32    $ 0.35
                           

Dividends declared per share

   $ 0.5125    $ 0.5125    $ 0.5125    $ 0.5125

 

(1) The amounts presented for the three months ended March 31, 2009, June 30, 2009 and September 30, 2009 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 2009 and properties reflected as held for sale as of December 31, 2009.

 

     For the Three Months Ended  
     March 31,
2009
    June 30,
2009
    September 30,
2009
 
     (In thousands, except per share amounts)  

Revenues, previously reported in Form 10-Q

   $ 229,440      $ 231,988      $ 235,830   

Revenues, previously reported in Form 10-Q, subsequently reclassified to discontinued operations

     (63     (64     (63
                        

Total revenues disclosed in Form 10-K

   $ 229,377      $ 231,924      $ 235,767   
                        

Income from continuing operations attributable to common stockholders, previously reported in Form 10-Q

   $ 45,215      $ 46,162      $ 49,685   

Income from continuing operations attributable to common stockholders, previously reported in Form 10-Q, subsequently reclassified to discontinued operations

     (26     (28     (29
                        

Income from continuing operations attributable to common stockholders disclosed in Form 10-K

   $ 45,189      $ 46,134      $ 49,656   
                        

Discontinued operations, previously reported in Form 10-Q

   $ 29,013      $ 42,219      $ 120   

Discontinued operations from properties sold subsequent to the respective reporting period

     26        28        29   
                        

Discontinued operations disclosed in Form 10-K

   $ 29,039      $ 42,247      $ 149   
                        

 

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     For the Year Ended December 31, 2008
     First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
     (In thousands, except per share amounts)

Revenues (1)

   $ 227,223    $ 228,963    $ 235,059    $ 232,453
                           

Income from continuing operations attributable to common stockholders (1)

   $ 29,015    $ 41,294    $ 62,193    $ 42,899

Discontinued operations (1)

     2,139      28,859      1,573      14,631
                           

Net income attributable to common stockholders

   $ 31,154    $ 70,153    $ 63,766    $ 57,530
                           

Earnings per share:

           

Basic:

           

Income from continuing operations attributable to common stockholders

   $ 0.21    $ 0.30    $ 0.44    $ 0.30

Discontinued operations

     0.02      0.21      0.01      0.10
                           

Net income attributable to common stockholders

   $ 0.23    $ 0.51    $ 0.45    $ 0.40
                           

Diluted:

           

Income from continuing operations applicable to common shares

   $ 0.21    $ 0.30    $ 0.44    $ 0.30

Discontinued operations

     0.02      0.21      0.01      0.10
                           

Net income applicable to common shares

   $ 0.23    $ 0.51    $ 0.45    $ 0.40
                           

Dividends declared per share

   $ 0.5125    $ 0.5125    $ 0.5125    $ 0.5125

 

(1) The amounts presented for 2008 are not equal to the same amounts previously reported in our Current Report on Form 8-K filed with the Commission on August 7, 2009 as a result of discontinued operations consisting of properties sold in 2009 and properties reflected as held for sale as of December 31, 2009.

 

     For the Three Months Ended  
     March 31,
2008
    June 30,
2008
    September 30,
2008
    December 31,
2008
 
     (In thousands, except per share amounts)  

Revenues, previously reported in Form 8-K

   $ 227,291      $ 229,031      $ 235,121      $ 232,515   

Revenues, previously reported in Form 8-K, subsequently reclassified to discontinued operations

     (68     (68     (62     (62
                                

Total revenues disclosed in Form 10-K

   $ 227,223      $ 228,963      $ 235,059      $ 232,453   
                                

Income from continuing operations attributable to common stockholders, previously reported in Form 8-K

   $ 29,035      $ 41,313      $ 62,211      $ 42,921   

Income from continuing operations attributable to common stockholders, previously reported in Form 8-K, subsequently reclassified to discontinued operations

     (20     (19     (18     (22
                                

Income from continuing operations attributable to common stockholders disclosed in Form 10-K

   $ 29,015      $ 41,294      $ 62,193      $ 42,899   
                                

Discontinued operations, previously reported in Form 8-K

   $ 2,119      $ 28,840      $ 1,555      $ 14,609   

Discontinued operations from properties sold subsequent to the respective reporting period

     20        19        18        22   
                                

Discontinued operations disclosed in Form 10-K

   $ 2,139      $ 28,859      $ 1,573      $ 14,631   
                                

 

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Note 18—Segment Information

As of December 31, 2009, 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 during 2007. However, the MOBs segment is not individually reported and is included in “All Other” because it does not meet necessary quantitative thresholds 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 noncontrolling 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, 2009:

 

     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
     (In thousands)  

Revenues:

        

Rental income

   $ 465,165      $ —        $ 35,922      $ 501,087   

Resident fees and services

     —          421,058        —          421,058   

Income from loans and investments

     —          —          13,107        13,107   

Interest and other income

     494        24        324        842   
                                

Total revenues

   $ 465,659      $ 421,082      $ 49,353      $ 936,094   
                                

Segment net operating income

   $ 465,165      $ 131,013      $ 36,261      $ 632,439   

Interest and other income

     494        24        324        842   

Interest expense

     (86,137     (88,537     (3,829     (178,503

Depreciation and amortization

     (119,921     (68,624     (12,366     (200,911

General, administrative and professional fees

     —          —          (38,830     (38,830

Foreign currency loss

     —          (50     —          (50

Loss on extinguishment of debt

     (6,012     —          (68     (6,080

Merger-related expenses and deal costs

     (187     (11,548     (1,280     (13,015
                                

Net income (loss) before income taxes, discontinued operations and noncontrolling interest

   $ 253,402      $ (37,722   $ (19,788   $ 195,892   
                                

 

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For the year ended December 31, 2008:

 

     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
     (In thousands)  

Revenues:

        

Rental income

   $ 453,652      $ —        $ 27,716      $ 481,368   

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

   $ 455,785      $ 429,595      $ 38,318      $ 923,698   
                                

Segment net operating income

   $ 453,652      $ 138,813      $ 20,063      $ 612,528   

Interest and other income

     2,133        338        1,755        4,226   

Interest expense

     (105,072     (95,595     (3,783     (204,450

Depreciation and amortization

     (121,197     (98,511     (11,173     (230,881

General, administrative and professional fees

     —          —          (40,651     (40,651

Foreign currency gain

     —          162        —          162   

Gain on extinguishment of debt

     1,868        530        —          2,398   

Merger-related expenses and deal costs

     —          (4,460     —          (4,460
                                

Net income (loss) before reversal of contingent liability, income taxes, discontinued operations and noncontrolling interest

   $ 231,384      $ (58,723   $ (33,789   $ 138,872   
                                

For the year ended December 31, 2007:

 

     Triple-Net
Leased
Properties
    Senior
Living
Operations
    All Other     Total  
     (In thousands)  

Revenues:

        

Rental income

   $ 444,811      $ —        $ 14,235      $ 459,046   

Income from loans and investments

     —          282,226        —          282,226   

Interest and other income

     —          —          2,586        2,586   

Total revenues

     1,970        832        37        2,839   
                                
   $ 446,781      $ 283,058      $ 16,858      $ 746,697   
                                

Segment net operating income

   $ 444,811      $ 90,137      $ 10,785      $ 545,733   

Interest and other income

     1,970        832        37        2,839   

Interest expense

     (130,213     (64,547     (1,900     (196,660

Depreciation and amortization

     (121,182     (101,223     (4,112     (226,517

General, administrative and professional fees

     —          —          (36,425     (36,425

Foreign currency gain

     —          24,280        —          24,280   

Gain on extinguishment of debt

     88        —          —          88   

Merger-related expenses and deal costs

     —          (2,979     —          (2,979
                                

Net income (loss) before income taxes, discontinued operations and noncontrolling interest

   $ 195,474      $ (53,500   $ (31,615   $ 110,359   
                                

 

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     As of December 31,
     2009    2008
     (In thousands)

Assets:

     

Triple-net leased properties

   $ 2,902,126    $ 3,128,995

Senior living operations

     2,341,834      2,362,282

All other assets

     372,285      280,141
             

Total assets

   $ 5,616,245    $ 5,771,418
             

 

     For the Year Ended December 31,
     2009    2008    2007
     (In thousands)

Capital expenditures:

        

Triple-net leased properties (1)

   $ 10,867    $ 11,487    $ 10,107

Senior living operations

     11,081      7,301      1,231,083

All other expenditures (2)

     105,880      51,372      127,636
                    

Total capital expenditures

   $ 127,828    $ 70,160    $ 1,368,826
                    

 

(1) 2009 includes $9.3 million from funds held in an Internal Revenue Code Section 1031 exchange escrow account with a qualified intermediary.
(2) 2009 includes $55.7 million from funds held in an Internal Revenue Code Section 1031 exchange escrow account with a qualified intermediary.

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,
     2009    2008    2007
     (In thousands)

Revenue:

        

United States

   $ 862,366    $ 848,320    $ 699,786

Canada

     73,728      75,378      46,911
                    

Total revenues

   $ 936,094    $ 923,698    $ 746,697
                    

 

     As of December 31,
     2009    2008
     (In thousands)

Long-lived assets:

     

United States

   $ 4,696,674    $ 4,786,734

Canada

     418,036      386,205
             

Total long-lived assets

   $ 5,114,710    $ 5,172,939
             

Note 19—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

 

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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. In April 2009, ElderTrust Operating Limited Partnership (“ETOP”), of which we owned substantially all of the partnership units, was liquidated and dissolved. Accordingly, the financial results of ETOP and its wholly owned subsidiaries are no longer separately reported but are now included among the Subsidiary Guarantors. 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, 2009 and 2008 and for the years ended December 31, 2009, 2008, and 2007:

 

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2009

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
  Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
    (In thousands)

Assets

           

Net real estate investments

  $ 9,496      $ 2,185,897   $ 769,857      $ 2,281,347   $ —        $ 5,246,597

Cash and cash equivalents

    —          4,332     82,886        20,179     —          107,397

Escrow deposits and restricted cash

    215        9,093     12,766        17,758     —          39,832

Deferred financing costs, net

    1,192        1,407     15,577        11,076     —          29,252

Investment in and advances to affiliates

    1,169,609        —       1,308,403        —       (2,478,012     —  

Other

    3        76,154     82,346        34,664     —          193,167
                                         

Total assets

  $ 1,180,515      $ 2,276,883   $ 2,271,835      $ 2,365,024   $ (2,478,012   $ 5,616,245
                                         

Liabilities and stockholders’ equity

           

Liabilities:

           

Senior notes payable and other debt

  $ 220,942      $ 370,299   $ 876,987      $ 1,201,873   $ —        $ 2,670,101

Intercompany

    (45,563     453,763     (408,200     —       —          —  

Deferred revenue

    3        544     1,969        1,799     —          4,315

Accrued interest

    (3,552     5,117     10,732        5,677     —          17,974

Accounts payable and other accrued liabilities

    15,693        66,318     40,611        63,508     —          186,130

Deferred income taxes

    253,665        —       —          —       —          253,665
                                         

Total liabilities

    441,188        896,041     522,099        1,272,857     —          3,132,185

Total equity

    739,327        1,380,842     1,749,736        1,092,167     (2,478,012     2,484,060
                                         

Total liabilities and stockholders’ equity

  $ 1,180,515      $ 2,276,883   $ 2,271,835      $ 2,365,024   $ (2,478,012   $ 5,616,245
                                         

 

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2008

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
  Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
    (In thousands)

Assets

           

Net real estate investments

  $ 10,144      $ 2,176,719   $ 812,954      $ 2,296,411   $ —        $ 5,296,228

Cash and cash equivalents

    —          10,325     144,918        21,569     —          176,812

Escrow deposits and restricted cash

    216        9,792     19,555        26,303     —          55,866

Deferred financing costs, net

    1,752        687     11,243        8,350     —          22,032

Investment in and advances to affiliates

    1,170,475        9,039     1,119,378        —       (2,298,892     —  

Other .

    11        58,625     84,612        77,232     —          220,480
                                         

Total assets

  $ 1,182,598      $ 2,265,187   $ 2,192,660      $ 2,429,865   $ (2,298,892   $ 5,771,418
                                         

Liabilities and stockholders’ equity

           

Liabilities:

           

Senior notes payable and other debt

  $ 216,518      $ 496,174   $ 1,351,526      $ 1,072,780   $ —        $ 3,136,998

Intercompany

    (940     497,261     (513,602     17,281     —          —  

Deferred revenue

    11        554     3,617        2,875     —          7,057

Accrued interest

    —          1,928     15,721        4,282     —          21,931

Accounts payable and other accrued liabilities

    12,578        65,403     26,019        64,198     —          168,198

Deferred income taxes

    257,499        —       —          —       —          257,499
                                         

Total liabilities

    485,666        1,061,320     883,281        1,161,416     —          3,591,683

Total equity

    696,932        1,203,867     1,309,379        1,268,449     (2,298,892     2,179,735
                                         

Total liabilities and stockholders’ equity

  $ 1,182,598      $ 2,265,187   $ 2,192,660      $ 2,429,865   $ (2,298,892   $ 5,771,418
                                         

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2009

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
  Consolidated
Elimination
    Consolidated
    (In thousands)

Revenues:

           

Rental income

  $ 2,351      $ 153,600      $ 276,008      $ 69,128   $ —        $ 501,087

Resident fees and services

    —          109,320        —          311,738     —          421,058

Income from loans and investments

    —          3        13,104        —       —          13,107

Equity earnings in affiliates

    264,163        2,309        —          —       (266,472     —  

Interest and other income

    1        (3     800        44     —          842
                                           

Total revenues

    266,515        265,229        289,912        380,910     (266,472     936,094

Expenses:

           

Interest

    4,318        22,036        88,988        63,161     —          178,503

Depreciation and amortization

    651        82,237        40,398        77,625     —          200,911

Property-level operating expenses

    —          80,644        456        221,713     —          302,813

General, administrative and professional fees

    109        14,727        18,934        5,060     —          38,830

Foreign currency (gain) loss

    (45     63        23        9     —          50

Loss on extinguishment of debt

    —          —          6,012        68     —          6,080

Merger-related expenses and deal costs

    —          11,682        1,333        —       —          13,015

Intercompany interest

    (3,294     38,422        (35,130     2     —          —  
                                           

Total expenses

    1,739        249,811        121,014        367,638     —          740,202
                                           

Income before income taxes, discontinued operations and noncontrolling interest

    264,776        15,418        168,898        13,272     (266,472     195,892

Income tax benefit

    1,719        —          —          —       —          1,719
                                           

Income from continuing operations

    266,495        15,418        168,898        13,272     (266,472     197,611

Discontinued operations

    —          (1,593     61,981        11,361     —          71,749
                                           

Net income

    266,495        13,825        230,879        24,633     (266,472     269,360

Net (loss) income attributable to noncontrolling interest, net of tax

    —          (1,724     —          4,589     —          2,865
                                           

Net income attributable to common stockholders

  $ 266,495      $ 15,549      $ 230,879      $ 20,044   $ (266,472   $ 266,495
                                           

 

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2008

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
    Consolidated  
    (In thousands)  

Revenues:

           

Rental income

  $ 2,296      $ 147,559      $ 263,801      $ 67,712      $ —        $ 481,368   

Resident fees and services

    —          112,851        —          316,406        —          429,257   

Income from loans and investments

    —          —          8,847        —          —          8,847   

Equity earnings in affiliates

    191,524        5,596        —          —          (197,120     —     

Interest and other income

    73        185        3,539        429        —          4,226   
                                               

Total revenues

    193,893        266,191        276,187        384,547        (197,120     923,698   

Expenses:

           

Interest

    3,845        33,893        104,873        61,839        —          204,450   

Depreciation and amortization

    648        91,780        40,115        98,338        —          230,881   

Property-level operating expenses

    —          78,910        6,515        221,519        —          306,944   

General, administrative and professional fees

    6,045        13,501        16,320        4,785        —          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 and deal costs

    —          3,922        815        (277     —          4,460   

Intercompany interest

    (161     47,933        (48,708     936        —          —     
                                               

Total expenses

    10,503        269,742        118,061        386,520        —          784,826   
                                               

Income (loss) before reversal of contingent liability, income taxes, discontinued operations and noncontrolling interest

    183,390        (3,551     158,126        (1,973     (197,120     138,872   

Reversal of contingent liability

    23,328        —          —          —          —          23,328   

Income tax benefit

    15,885        —          —          —          —          15,885   
                                               

Income (loss) from continuing operations

    222,603        (3,551     158,126        (1,973     (197,120     178,085   

Discontinued operations

    —          114        39,538        7,550        —          47,202   
                                               

Net income (loss)

    222,603        (3,437     197,664        5,577        (197,120     225,287   

Net (loss) income attributable to noncontrolling interest, net of tax

    —          (1,860     —          4,544        —          2,684   
                                               

Net income (loss) attributable to common stockholders

  $ 222,603      $ (1,577   $ 197,664      $ 1,033      $ (197,120   $ 222,603   
                                               

 

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Index to Financial Statements

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the Year Ended December 31, 2007

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
    Consolidated  
    (In thousands)  

Revenues:

           

Rental income

  $ 2,248      $ 140,325      $ 261,659      $ 54,814      $ —        $ 459,046   

Resident fees and services

    —          75,198        —          207,028        —          282,226   

Income from loans and investments

    —          —          2,586        —          —          2,586   

Equity earnings in affiliates

    250,530        5,927        —          —          (256,457     —     

Interest and other income

    82        392        1,460        905        —          2,839   
                                               

Total revenues

    252,860        221,842        265,705        262,747        (256,457     746,697   

Expenses:

           

Interest

    4,313        31,373        115,301        45,673        —          196,660   

Depreciation and amortization

    648        89,905        42,093        93,871        —          226,517   

Property-level operating expenses

    —          54,466        —          143,659        —          198,125   

General, administrative and professional fees

    1,337        12,563        19,198        3,327        —          36,425   

Foreign currency loss (gain)

    120        12        (24,317     (95     —          (24,280

Gain on extinguishment of debt

    —          —          (88     —          —          (88

Merger-related expenses and deal costs

    —          2,198        739        42        —          2,979   

Intercompany interest

    (4,396     30,353        (26,791     834        —          —     
                                               

Total expenses

    2,022        220,870        126,135        287,311        —          636,338   
                                               

Income (loss) before income taxes, discontinued operations and noncontrolling interest

    250,838        972        139,570        (24,564     (256,457     110,359   

Income tax benefit

    28,042        —          —          —          —          28,042   
                                               

Income (loss) from continuing operations

    278,880        972        139,570        (24,564     (256,457     138,401   

Discontinued operations

    —          805        141,165        207        —          142,177   
                                               

Net income (loss)

    278,880        1,777        280,735        (24,357     (256,457     280,578   

Net (loss) income attributable to noncontrolling interest, net of tax

    —          (1,333     —          3,031        —          1,698   

Preferred stock dividends and issuance costs

    5,199        —          —          —          —          5,199   
                                               

Net income (loss) attributable to common stockholders

  $ 273,681      $ 3,110      $ 280,735      $ (27,388   $ (256,457   $ 273,681   
                                               

 

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Index to Financial Statements

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2009

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
    (In thousands)  

Net cash provided by operating activities

  $ 1,385      $ 108,578      $ 220,936      $ 91,202      $ —     $ 422,101   

Net cash provided by (used in) investing activities

    —          10,536        11,447        (23,729     —       (1,746

Cash flows from financing activities:

           

Net change in borrowings under revolving credit facilities

    —          (42,633     (250,240     —          —       (292,873

Proceeds from debt

    —          —          166,000        199,682        —       365,682   

Repayment of debt

    —          (28,918     (433,528     (62,727     —       (525,173

Net change in intercompany debt

    (44,623     (22,143     105,402        (38,636     —       —     

Payment of deferred financing costs

    —          (1,172     (11,034     (4,449     —       (16,655

Issuance of common stock, net

    299,201        —          —          —          —       299,201   

Cash distribution from (to) affiliates

    55,741        (29,862     128,575        (154,454     —       —     

Cash distribution to common stockholders

    (314,399     —          —          —          —       (314,399

Contributions from noncontrolling interest

    —          —          —          1,211        —       1,211   

Distributions to noncontrolling interest

    —          (379     —          (9,490     —       (9,869

Other

    2,695        —          —          —          —       2,695   
                                             

Net cash used in financing activities

    (1,385     (125,107     (294,825     (68,863     —       (490,180
                                             

Net decrease in cash and cash equivalents

    —          (5,993     (62,442     (1,390     —       (69,825

Effect of foreign currency translation on cash and cash equivalents

    —          —          410        —          —       410   

Cash and cash equivalents at beginning of year

    —          10,325        144,918        21,569        —       176,812   
                                             

Cash and cash equivalents at end of year

  $ —        $ 4,332      $ 82,886      $ 20,179      $ —     $ 107,397   
                                             

 

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Index to Financial Statements

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2008

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
    (In thousands)  

Net cash provided by operating activities

  $ 548      $ 74,297      $ 172,479      $ 132,583      $ —     $ 379,907   

Net cash provided by (used in) investing activities

    1,717        (34,999     (73,663     (29,311     —       (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

    —          (115,978     (206,835     (94,083     —       (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, net

    408,540        —          —          —          —       408,540   

Cash distribution (to) from affiliates

    (172,582     188,116        108,397        (123,931     —       —     

Cash distribution to common stockholders

    (288,817     (32     —          —          —       (288,849

Distributions to noncontrolling interest

    —          —          —          (15,732     —       (15,732

Other

    7,187        —          —          —          —       7,187   
                                             

Net cash (used in) provided by financing activities

    (2,265     (34,361     44,802        (104,155     —       (95,979
                                             

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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Index to Financial Statements

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2007

 

    Ventas, Inc.     Wholly
Owned
Subsidiary
Guarantors
    Issuers     Non-
Guarantor
Subsidiaries
    Consolidated
Elimination
  Consolidated  
    (In thousands)  

Net cash provided by operating activities

  $ 22,852      $ 67,167      $ 207,855      $ 106,726      $ —     $ 404,600   

Net cash (used in) provided by investing activities

    (1     (580,675     180,755        (775,271     —       (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

    —          13,217        —          40,615        —       53,832   

Repayment of debt

    —          (126,671     (5,001     (52,941     —       (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, net

    1,045,713        —          —          —          —       1,045,713   

Cash distribution to preferred stockholders

    (3,449     —          —          —          —       (3,449

Cash distribution (to) from affiliates

    (746,388     70,712        (61,704     737,380        —       —     

Cash distribution to common stockholders

    (282,620     (119     —          —          —       (282,739

Distributions to noncontrolling interest

    —          —          —          (2,974     —       (2,974

Other

    12,540        24,466        (65     (24,466     —       12,475   
                                             

Net cash (used in) provided by financing activities

    (22,851     518,896        (383,900     690,530        —       802,675   
                                             

Net increase in cash and cash equivalents

    —          5,388        4,710        21,985        —       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

  $ —        $ 5,388      $ 494      $ 22,452      $ —     $ 28,334   
                                             

 

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Index to Financial Statements

VENTAS, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2009

(Dollars in Thousands)

 

     For the Years Ended December 31,  
     2009     2008     2007  
     (In thousands)  

Reconciliation of real estate:

      

Carrying cost:

      

Balance at beginning of period

   $ 6,160,630      $ 6,292,181      $ 3,707,837   

Additions during period:

      

Acquisitions

     108,376        93,901        2,619,050   

Capital expenditures

     13,798        16,359        8,188   

Dispositions:

      

Sale of assets

     (34,525     (173,399     (82,274

Foreign currency translation

     44,342        (68,412     39,380   
                        

Balance at end of period

   $ 6,292,621      $ 6,160,630      $ 6,292,181   
                        

Accumulated depreciation:

      

Balance at beginning of period

   $ 987,691      $ 816,352      $ 659,584   

Additions during period:

      

Depreciation expense

     198,789        200,132        175,494   

Acquisitions—noncontrolling interest share

     —          —          20,482   

Dispositions:

      

Sale of assets

     (11,469     (30,355     (40,212

Foreign currency translation

     2,900        1,562        1,004   
                        

Balance at end of period

   $ 1,177,911      $ 987,691      $ 816,352   
                        

 

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Index to Financial Statements

VENTAS, INC.

SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2009

(Dollars in Thousands)

 

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           
  BROOKDALE SENIORS HOUSING COMMUNITIES                        
3225   Clare Bridge of Oro Valley   Oro Valley   AZ   $ 666   $ 6,169   $ —     $ 666   $ 6,169   $ 6,835   $ 1,341   $ 5,494   1998   2005   35 years
3236   Clare Bridge of Tempe   Tempe   AZ     611     4,066     —       611     4,066     4,677     884     3,793   1997   2005   35 years
3219   Sterling House of Mesa   Mesa   AZ     655     6,998     —       655     6,998     7,653     1,521     6,132   1998   2005   35 years
3227   Sterling House of Peoria   Peoria   AZ     598     4,872     —       598     4,872     5,470     1,059     4,411   1998   2005   35 years
3238   Sterling House on East Speedway   Tucson   AZ     506     4,745     —       506     4,745     5,251     1,032     4,219   1998   2005   35 years
2424   The Springs of East Mesa   Mesa   AZ     2,747     24,918     —       2,747     24,918     27,665     5,513     22,152   1986   2005   35 years
2429   Brookdale Place   San Marcos   CA     4,288     36,204     —       4,288     36,204     40,492     8,253     32,239   1987   2005   35 years
2428   The Atrium   San Jose   CA     6,240     66,329     —       6,240     66,329     72,569     13,797     58,772   1987   2005   35 years

2426

  Woodside Terrace   Redwood City   CA     7,669     66,691     —       7,669     66,691     74,360     15,015     59,345   1988   2005   35 years

3206

  Wynwood of Colorado Springs   Colorado Springs   CO     715     9,279     —       715     9,279     9,994     2,017     7,977   1997   2005   35 years

3220

  Wynwood of Pueblo   Pueblo   CO     840     9,403     —       840     9,403     10,243     2,044     8,199   1997   2005   35 years

2435

  Chatfield   West Hartford   CT     2,493     22,833     —       2,493     22,833     25,326     5,032     20,294   1989   2005   35 years

2420

  The Gables at Farmington   Farmington   CT     3,995     36,310     —       3,995     36,310     40,305     8,027     32,278   1984   2005   35 years

3245

  Clare Bridge Cottage of Winter Haven   Winter Haven   FL     232     3,006     —       232     3,006     3,238     653     2,585   1997   2005   35 years

3235

  Clare Bridge of Tallahassee   Tallahassee   FL     667     6,168     —       667     6,168     6,835     1,341     5,494   1998   2005   35 years

3241

  Clare Bridge of West Melbourne   West Melbourne   FL     586     5,481     —       586     5,481     6,067     1,192     4,875   2000   2005   35 years

3226

  Sterling House of Pensacola   Pensacola   FL     633     6,087     —       633     6,087     6,720     1,323     5,397   1998   2005   35 years

3246

  Sterling House of Winter Haven   Winter Haven   FL     438     5,549     —       438     5,549     5,987     1,206     4,781   1997   2005   35 years

2436

  The Classic at West Palm Beach   West Palm Beach   FL     3,758     33,072     —       3,758     33,072     36,830     7,410     29,420   1990   2005   35 years

2403

  The Grand Court Fort Myers (Waterford Place)   Fort Myers   FL     1,065     9,586     —       1,065     9,586     10,651     1,847     8,804   1988   2004   35 years

2414

  The Grand Court Tavares   Tavares   FL     431     3,881     —       431     3,881     4,312     858     3,454   1985   2004   35 years

3239

  Wynwood of Twin Falls   Twin Falls   ID     703     6,153     —       703     6,153     6,856     1,338     5,518   1997   2005   35 years

2421

  Devonshire of Hoffman Estates   Hoffman Estates   IL     3,886     44,130     —       3,886     44,130     48,016     8,962     39,054   1987   2005   35 years

2432

  Hawthorn Lakes   Vernon Hills   IL     4,439     35,044     —       4,439     35,044     39,483     8,225     31,258   1987   2005   35 years

2415

  Seasons at Glenview   Northbrook   IL     1,988     39,762     —       1,988     39,762     41,750     6,909     34,841   1999   2004   35 years

2423

  The Devonshire   Lisle   IL     7,953     70,400     —       7,953     70,400     78,353     15,733     62,620   1990   2005   35 years

2408

  The Grand Court Belleville   Belleville   IL     370     3,333     —       370     3,333     3,703     647     3,056   1984   2004   35 years

2416

  The Hallmark   Chicago   IL     11,057     107,517     —       11,057     107,517     118,574     23,137     95,437   1990   2005   35 years

2418

  The Heritage   Des Plaines   IL     6,871     60,165     —       6,871     60,165     67,036     13,507     53,529   1993   2005   35 years

2417

  The Kenwood of Lake View   Chicago   IL     3,072     26,668     —       3,072     26,668     29,740     6,009     23,731   1950   2005   35 years

2433

  The Willows   Vernon Hills   IL     1,147     10,041     —       1,147     10,041     11,188     2,254     8,934   1999   2005   35 years

2437

  Westbury   Lisle   IL     730     9,270     —       730     9,270     10,000     321     9,679   1990   2009   35 years

2422

  Berkshire of Castleton   Indianapolis   IN     1,280     11,515     —       1,280     11,515     12,795     2,556     10,239   1986   2005   35 years

3209

  Sterling House of Evansville   Evansville   IN     357     3,765     —       357     3,765     4,122     818     3,304   1998   2005   35 years

3218

  Sterling House of Marion   Marion   IN     207     3,570     —       207     3,570     3,777     776     3,001   1998   2005   35 years

3230

  Sterling House of Portage   Portage   IN     128     3,649     —       128     3,649     3,777     793     2,984   1999   2005   35 years

3232

  Sterling House of Richmond   Richmond   IN     495     4,124     —       495     4,124     4,619     897     3,722   1998   2005   35 years

 

123


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

3237

  Clare Bridge Cottage of Topeka   Topeka   KS   370   6,825   —     370   6,825   7,195   1,484   5,711   2000   2005   35 years

3216

  Clare Bridge of Leawood   Leawood   KS   117   5,127   —     117   5,127   5,244   1,115   4,129   2000   2005   35 years

2412

  The Grand Court Overland Park   Overland Park   KS   2,297   20,676   —     2,297   20,676   22,973   3,726   19,247   1988   2004   35 years

2425

  River Bay Club   Quincy   MA   6,101   57,862   —     6,101   57,862   63,963   12,575   51,388   1986   2005   35 years

2401

  The Grand Court Adrian   Adrian   MI   601   5,411   —     601   5,411   6,012   1,136   4,876   1988   2004   35 years

2407

  The Grand Court Farmington Hills   Farmington Hills   MI   847   7,620   —     847   7,620   8,467   1,447   7,020   1989   2004   35 years

3224

  Wynwood of Northville   Northville   MI   407   6,068   —     407   6,068   6,475   1,319   5,156   1996   2005   35 years

3240

  Wynwood of Utica   Utica   MI   1,142   11,808   —     1,142   11,808   12,950   2,567   10,383   1996   2005   35 years

3208

  Clare Bridge of Eden Prairie   Eden Prairie   MN   301   6,228   —     301   6,228   6,529   1,354   5,175   1998   2005   35 years

3223

  Clare Bridge of North Oaks   North Oaks   MN   1,057   8,296   —     1,057   8,296   9,353   1,804   7,549   1998   2005   35 years

3229

  Clare Bridge of Plymouth   Plymouth   MN   679   8,675   —     679   8,675   9,354   1,886   7,468   1998   2005   35 years

2419

  Edina Park Plaza   Edina   MN   3,621   33,141   —     3,621   33,141   36,762   7,306   29,456   1998   2005   35 years

3203

  Sterling House of Blaine   Blaine   MN   150   1,675   —     150   1,675   1,825   364   1,461   1997   2005   35 years

3211

  Sterling House of Inver Grove Heights  

Inver Grove Heights

  MN   253   2,655   —     253   2,655   2,908   577   2,331   1997   2005   35 years

2405

  The Grand Court Kansas City I   Kansas City   MO   1,250   11,249   —     1,250   11,249   12,499   2,084   10,415   1989   2004   35 years

3204

  Clare Bridge of Cary   Cary   NC   724   6,466   —     724   6,466   7,190   1,406   5,784   1997   2005   35 years

3244

  Clare Bridge of Winston-Salem   Winston-Salem   NC   368   3,497   —     368   3,497   3,865   760   3,105   1997   2005   35 years

2434

  Brendenwood   Voorhees   NJ   3,158   29,909   —     3,158   29,909   33,067   6,503   26,564   1987   2005   35 years

3242

  Clare Bridge of Westampton   Westampton   NJ   881   4,741   —     881   4,741   5,622   1,031   4,591   1997   2005   35 years

2430

  Ponce de Leon   Santa Fe   NM   —     28,178   —     —     28,178   28,178   5,834   22,344   1986   2005   35 years

2404

  The Grand Court Albuquerque   Albuquerque   NM   1,382   12,440   —     1,382   12,440   13,822   2,532   11,290   1991   2004   35 years

2406

  The Grand Court Las Vegas   Las Vegas   NV   679   6,107   —     679   6,107   6,786   1,320   5,466   1987   2004   35 years

3221

  Clare Bridge of Niskayuna   Niskayuna   NY   1,021   8,333   —     1,021   8,333   9,354   1,812   7,542   1997   2005   35 years

3228

  Clare Bridge of Perinton   Pittsford   NY   611   4,066   —     611   4,066   4,677   884   3,793   1997   2005   35 years

3243

  Clare Bridge of Williamsville   Williamsville   NY   839   3,841   —     839   3,841   4,680   835   3,845   1997   2005   35 years

2427

  The Gables at Brighton   Rochester   NY   1,131   9,498   —     1,131   9,498   10,629   2,171   8,458   1988   2005   35 years

3205

  Villas of Sherman Brook   Clinton   NY   947   7,528   —     947   7,528   8,475   1,637   6,838   1991   2005   35 years

3234

  Villas of Summerfield   Syracuse   NY   1,132   11,434   —     1,132   11,434   12,566   2,486   10,080   1991   2005   35 years

3212

  Wynwood of Kenmore   Kenmore   NY   1,487   15,170   —     1,487   15,170   16,657   3,298   13,359   1995   2005   35 years

3222

  Wynwood of Niskayuna   Niskayuna   NY   1,884   16,103   —     1,884   16,103   17,987   3,501   14,486   1996   2005   35 years

3201

  Clare Bridge Cottage of Austintown   Austintown   OH   151   3,087   —     151   3,087   3,238   671   2,567   1999   2005   35 years

3200

  Sterling House of Alliance   Alliance   OH   392   6,283   —     392   6,283   6,675   1,366   5,309   1998   2005   35 years

3202

  Sterling House of Beaver Creek   Beavercreek   OH   587   5,381   —     587   5,381   5,968   1,170   4,798   1998   2005   35 years

3233

  Sterling House of Salem   Salem   OH   634   4,659   —     634   4,659   5,293   1,013   4,280   1998   2005   35 years

3207

  Sterling House of Westerville   Columbus   OH   267   3,600   —     267   3,600   3,867   783   3,084   1999   2005   35 years

2402

  The Grand Court Dayton   Dayton   OH   636   5,721   —     636   5,721   6,357   1,364   4,993   1987   2004   35 years

2410

  The Grand Court Findlay   Findlay   OH   385   3,464   —     385   3,464   3,849   732   3,117   1984   2004   35 years

2413

  The Grand Court Springfield   Springfield   OH   250   2,250   —     250   2,250   2,500   538   1,962   1986   2004   35 years

2411

  The Grand Court Lubbock   Lubbock   TX   720   6,479   —     720   6,479   7,199   1,229   5,970   1984   2004   35 years

2409

  The Grand Court Bristol   Bristol   VA   648   5,835   —     648   5,835   6,483   1,197   5,286   1985   2004   35 years

3217

  Clare Bridge of Lynwood   Lynwood   WA   1,219   9,573   —     1,219   9,573   10,792   2,081   8,711   1999   2005   35 years

3231

  Clare Bridge of Puyallup   Puyallup   WA   1,055   8,298   —     1,055   8,298   9,353   1,804   7,549   1998   2005   35 years

2431

  Park Place   Spokane   WA   1,622   12,895   —     1,622   12,895   14,517   3,017   11,500   1915   2005   35 years

3214

  Clare Bridge Cottage of La Crosse   LaCrosse   WI   621   4,056   1,126   621   5,182   5,803   926   4,877   2004   2005   35 years

3213

  Clare Bridge of Kenosha   Kenosha   WI   551   5,431   2,772   551   8,203   8,754   1,289   7,465   2000   2005   35 years

 

124


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

3210

  Sterling House of Fond du Lac   Fond du Lac   WI   196   1,603   —        196   1,603   1,799   348   1,451   2000   2005   35 years

3215

  Sterling House of La Crosse   LaCrosse   WI   644   5,831   2,637      644   8,468   9,112   1,373   7,739   1998   2005   35 years
                                             
 

TOTAL FOR BROOKDALE SENIORS HOUSING COMMUNITIES

      130,531   1,265,826   6,535      130,531   1,272,361   1,402,892   271,902   1,130,990      
 

SUNRISE SENIORS HOUSING COMMUNITIES

                         

4064

  Sunrise of Scottsdale   Scottsdale   AZ   2,229   27,575   84      2,238   27,650   29,888   2,267   27,621   2007   2007   35 years

4073

  Sunrise of Lynn Valley   Vancouver   BC   11,759   37,424   (2,619   11,115   35,449   46,564   2,880   43,684   2002   2007   35 years

4077

  Sunrise of Vancouver   Vancouver   BC   6,649   31,937   57      6,649   31,994   38,643   2,772   35,871   2005   2007   35 years

4069

  Sunrise of Victoria   Victoria   BC   8,332   29,970   (1,930   7,876   28,496   36,372   2,369   34,003   2001   2007   35 years

4043

  Sunrise of Canyon Crest   Riverside   CA   5,486   19,658   354      5,489   20,009   25,498   1,984   23,514   2006   2007   35 years

4055

  Sunrise of Fair Oaks   Fair Oaks   CA   1,456   23,679   1,464      2,685   23,914   26,599   2,324   24,275   2001   2007   35 years

4023

  Sunrise of La Costa   Carlsbad   CA   4,890   20,590   276      4,898   20,858   25,756   2,313   23,443   1999   2007   35 years

4045

  Sunrise of Mission Viejo   Mission Viejo   CA   3,802   24,560   129      3,802   24,689   28,491   2,436   26,055   1998   2007   35 years

4047

  Sunrise of Pacific Palisades   Pacific Palisades   CA   4,458   17,064   121      4,462   17,181   21,643   1,883   19,760   2001   2007   35 years

4066

  Sunrise of Rocklin   Rocklin   CA   1,378   23,565   245      1,374   23,814   25,188   1,985   23,203   2007   2007   35 years

4035

  Sunrise of San Mateo   San Mateo   CA   2,682   35,335   399      2,682   35,734   38,416   2,829   35,587   1999   2007   35 years

4050

  Sunrise of Sterling Canyon   Valencia   CA   3,868   29,293   1,531      3,887   30,805   34,692   2,746   31,946   1998   2007   35 years

4012

  Sunrise of Sunnyvale   Sunnyvale   CA   2,933   34,361   89      2,933   34,450   37,383   2,960   34,423   2000   2007   35 years

4016

  Sunrise of Westlake Village   Westlake Village   CA   4,935   30,722   107      4,935   30,829   35,764   2,535   33,229   2004   2007   35 years

4018

  Sunrise of Yorba Linda   Yorba Linda   CA   1,689   25,240   50      1,689   25,290   26,979   2,081   24,898   2002   2007   35 years

4009

  Sunrise of Cherry Creek   Denver   CO   1,621   28,370   102      1,621   28,472   30,093   2,482   27,611   2000   2007   35 years

4059

  Sunrise of Orchard   Littleton   CO   1,813   22,183   296      1,813   22,479   24,292   2,195   22,097   1997   2007   35 years

4030

  Sunrise of Pinehurst   Denver   CO   1,417   30,885   174      1,417   31,059   32,476   3,118   29,358   1998   2007   35 years

4061

  Sunrise of Westminster   Westminster   CO   2,649   16,243   186      2,671   16,407   19,078   1,677   17,401   2000   2007   35 years

4028

  Sunrise of Stamford   Stamford   CT   4,612   28,533   254      4,612   28,787   33,399   2,843   30,556   1999   2007   35 years

4053

  Sunrise of East Cobb   Marietta   GA   1,797   23,420   218      1,798   23,637   25,435   2,195   23,240   1997   2007   35 years

4056

  Sunrise of Huntcliff I   Atlanta   GA   4,232   66,161   2,052      4,240   68,205   72,445   6,314   66,131   1987   2007   35 years

4057

  Sunrise of Huntcliff II   Atlanta   GA   2,154   17,137   164      2,154   17,301   19,455   1,601   17,854   1998   2007   35 years

4058

  Sunrise of Ivey Ridge   Alpharetta   GA   1,507   18,516   124      1,507   18,640   20,147   1,873   18,274   1998   2007   35 years

4040

  Sunrise of Bloomingdale   Bloomingdale   IL   1,287   38,625   153      1,289   38,776   40,065   3,497   36,568   2000   2007   35 years

4042

  Sunrise of Buffalo Grove   Buffalo Grove   IL   2,154   28,021   159      2,154   28,180   30,334   2,651   27,683   1999   2007   35 years

4021

  Sunrise of Glen Ellyn   Glen Ellyn   IL   2,455   34,064   75      2,455   34,139   36,594   3,353   33,241   2000   2007   35 years

4015

  Sunrise of Lincoln Park   Chicago   IL   3,485   26,687   41      3,485   26,728   30,213   2,145   28,068   2003   2007   35 years

4024

  Sunrise of Naperville   Naperville   IL   1,946   28,538   213      1,952   28,745   30,697   2,887   27,810   1999   2007   35 years

4060

  Sunrise of Palos Park   Palos Park   IL   2,363   42,205   212      2,363   42,417   44,780   3,848   40,932   2001   2007   35 years

4014

  Sunrise of Park Ridge   Park Ridge   IL   5,533   39,557   93      5,539   39,644   45,183   3,409   41,774   1998   2007   35 years

4036

  Sunrise of Willowbrook   Willowbrook   IL   1,454   60,738   414      1,454   61,152   62,606   3,840   58,766   2000   2007   35 years

4052

  Sunrise of Baton Rouge   Baton Rouge   LA   1,212   23,547   269      1,212   23,816   25,028   2,171   22,857   2000   2007   35 years

4051

  Sunrise of Arlington   Arlington   MA   86   34,393   126      86   34,519   34,605   3,266   31,339   2001   2007   35 years

4032

  Sunrise of Norwood   Norwood   MA   2,230   30,968   554      2,240   31,512   33,752   2,522   31,230   1997   2007   35 years

4033

  Sunrise of Columbia   Columbia   MD   1,780   23,083   577      1,780   23,660   25,440   1,885   23,555   1996   2007   35 years

4034

  Sunrise of Rockville   Rockville   MD   1,039   39,216   404      1,039   39,620   40,659   3,091   37,568   1997   2007   35 years

4038

  Sunrise of Bloomfield Hills   Bloomfield Hills   MI   3,736   27,657   1,095      3,737   28,751   32,488   2,457   30,031   2006   2007   35 years

4008

  Sunrise of North Ann Arbor   Ann Arbor   MI   1,703   15,857   157      1,668   16,049   17,717   1,510   16,207   2000   2007   35 years

4046

  Sunrise of Northville   Plymouth   MI   1,445   26,090   146      1,445   26,236   27,681   2,506   25,175   1999   2007   35 years

4048

  Sunrise of Rochester   Rochester   MI   2,774   38,666   111      2,774   38,777   41,551   3,571   37,980   1998   2007   35 years

 

125


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

4031

  Sunrise of Troy   Troy   MI   1,758   23,727   56      1,761   23,780   25,541   2,375   23,166   2001   2007   35 years

4054

  Sunrise of Edina   Edina   MN   3,181   24,224   561      3,181   24,785   27,966   2,399   25,567   1999   2007   35 years

4017

  Sunrise of North Hills   Raleigh   NC   749   37,091   382      751   37,471   38,222   3,082   35,140   2000   2007   35 years

4019

  Sunrise of Providence   Charlotte   NC   1,976   19,472   306      1,976   19,778   21,754   1,839   19,915   1999   2007   35 years

4025

  Sunrise of East Brunswick   East Brunswick   NJ   2,784   26,173   225      2,784   26,398   29,182   2,737   26,445   1999   2007   35 years

4001

  Sunrise of Morris Plains   Morris Plains   NJ   1,492   32,052   181      1,492   32,233   33,725   2,835   30,890   1997   2007   35 years

4002

  Sunrise of Old Tappan   Old Tappan   NJ   2,985   36,795   118      2,985   36,913   39,898   3,257   36,641   1997   2007   35 years

4062

  Sunrise of Wall   Wall   NJ   1,053   19,101   96      1,055   19,195   20,250   1,854   18,396   1999   2007   35 years

4005

  Sunrise of Wayne   Wayne   NJ   1,288   24,990   200      1,288   25,190   26,478   2,241   24,237   1996   2007   35 years

4006

  Sunrise of Westfield   Westfield   NJ   5,057   23,803   278      5,057   24,081   29,138   2,191   26,947   1996   2007   35 years

4029

  Sunrise of Woodcliff Lake   Woodcliff Lake   NJ   3,493   30,801   123      3,493   30,924   34,417   3,169   31,248   2000   2007   35 years

4044

  Sunrise of Fleetwood   Mount Vernon   NY   4,381   28,434   186      4,381   28,620   33,001   2,835   30,166   1999   2007   35 years

4011

  Sunrise of New City   New City   NY   1,906   27,323   158      1,906   27,481   29,387   2,464   26,923   1999   2007   35 years

4027

  Sunrise of North Lynbrook   Lynbrook   NY   4,622   38,087   294      4,670   38,333   43,003   3,887   39,116   1999   2007   35 years

4049

  Sunrise of Smithtown   Smithtown   NY   2,853   25,621   537      3,013   25,998   29,011   2,785   26,226   1999   2007   35 years

4063

  Sunrise of Staten Island   Staten Island   NY   7,237   23,910   (338   7,283   23,526   30,809   2,595   28,214   2006   2007   35 years

4010

  Sunrise of Cuyahoga Falls   Cuyahoga Falls   OH   626   10,239   110      626   10,349   10,975   1,001   9,974   2000   2007   35 years

4013

  Sunrise of Parma   Cleveland   OH   695   16,641   54      695   16,695   17,390   1,488   15,902   2000   2007   35 years

4075

  Sunrise of Aurora   Aurora   ON   1,570   36,113   (1,994   1,484   34,205   35,689   2,963   32,726   2002   2007   35 years

4070

  Sunrise of Burlington   Burlington   ON   1,173   24,448   21      1,173   24,469   25,642   2,002   23,640   2001   2007   35 years

4076

  Sunrise of Erin Mills   Mississauga   ON   1,957   27,020   (1,468   1,850   25,659   27,509   2,393   25,116   2007   2007   35 years

4068

  Sunrise of Mississauga   Mississauga   ON   3,554   33,631   (1,911   3,359   31,915   35,274   2,593   32,681   2000   2007   35 years

4071

  Sunrise of Oakville   Oakville   ON   2,753   37,489   25      2,753   37,514   40,267   3,035   37,232   2002   2007   35 years

4072

  Sunrise of Richmond Hill   Richmond Hill   ON   2,155   41,254   (2,258   2,040   39,111   41,151   3,137   38,014   2002   2007   35 years

4078

  Sunrise of Steeles   Vaughan   ON   2,563   57,513   (228   1,360   58,488   59,848   3,827   56,021   2003   2007   35 years

4067

  Sunrise of Unionville   Markham   ON   2,322   41,140   (2,303   2,200   38,959   41,159   3,111   38,048   2000   2007   35 years

4074

  Sunrise of Windsor   Windsor   ON   1,813   20,882   76      1,830   20,941   22,771   1,763   21,008   2001   2007   35 years

4004

  Sunrise of Abington   Abington   PA   1,838   53,660   314      1,862   53,950   55,812   4,682   51,130   1997   2007   35 years

4041

  Sunrise of Blue Bell   Blue Bell   PA   1,765   23,920   259      1,770   24,174   25,944   2,356   23,588   2006   2007   35 years

4022

  Sunrise of Exton   Exton   PA   1,123   17,765   167      1,124   17,931   19,055   1,777   17,278   2000   2007   35 years

4003

  Sunrise of Granite Run   Media   PA   1,272   31,781   192      1,272   31,973   33,245   2,683   30,562   1997   2007   35 years

4007

  Sunrise of Haverford   Haverford   PA   941   25,872   254      947   26,120   27,067   2,288   24,779   1997   2007   35 years

4020

  Sunrise of Westtown   West Chester   PA   1,547   22,996   159      1,557   23,145   24,702   2,625   22,077   1999   2007   35 years

4037

  Sunrise of Hillcrest   Dallas   TX   2,616   27,680   (68   2,616   27,612   30,228   2,362   27,866   2006   2007   35 years

4065

  Sunrise of Sandy   Sandy   UT   2,576   22,987   69      2,600   23,032   25,632   1,961   23,671   2007   2007   35 years

4039

  Sunrise of Alexandria   Alexandria   VA   88   14,811   259      102   15,056   15,158   1,730   13,428   1998   2007   35 years

4026

  Sunrise of Richmond   Richmond   VA   1,120   17,446   281      1,137   17,710   18,847   1,792   17,055   1999   2007   35 years

4000

  Sunrise of Springfield   Springfield   VA   4,440   18,834   464      4,440   19,298   23,738   1,733   22,005   1997   2007   35 years
                                             
 

TOTAL FOR SUNRISE SENIORS HOUSING COMMUNITIES

      212,352   2,286,059   4,563      211,092   2,291,882   2,502,974   205,118   2,297,856      
 

OTHER SENIORS HOUSING COMMUNITIES

                         

3106

  CaraVita Village   Montgomery   AL   779   8,507   752      779   9,259   10,038   1,375   8,663   1987   2005   35 years

3800

  Elmcroft of Halcyon   Montgomery   AL   220   5,476   —        220   5,476   5,696   495   5,201   1999   2006   35 years

3821

  Elmcroft of Blytheville   Blytheville   AR   294   2,946   —        294   2,946   3,240   267   2,973   1997   2006   35 years

3822

  Elmcroft of Maumelle   Maumelle   AR   1,252   7,601   —        1,252   7,601   8,853   688   8,165   1997   2006   35 years

3823

  Elmcroft of Mountain Home   Mountain Home   AR   204   8,971   —        204   8,971   9,175   812   8,363   1997   2006   35 years

 

126


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

3825

  Elmcroft of Sherwood   Sherwood   AR   1,320   5,693   —     1,320   5,693   7,013   515   6,498   1997   2006   35 years

3605

  West Shores   Hot Springs   AR   1,326   10,904   —     1,326   10,904   12,230   1,450   10,780   1988   2005   35 years

3601

  Cottonwood Village   Cottonwood   AZ   1,200   15,124   —     1,200   15,124   16,324   1,982   14,342   1986   2005   35 years

3808

  ActivCare at La Mesa   La Mesa   CA   2,431   6,101   —     2,431   6,101   8,532   552   7,980   1997   2006   35 years

3807

  ActivCare at Point Loma   San Diego   CA   2,117   6,865   —     2,117   6,865   8,982   621   8,361   1999   2006   35 years

2813

  Emeritus at Barrington Court   Danville   CA   360   4,640   —     360   4,640   5,000   537   4,463   1999   2006   35 years

2803

  Emeritus at Fairwood Manor   Anaheim   CA   2,464   7,908   —     2,464   7,908   10,372   1,418   8,954   1977   2005   35 years

3810

  Grossmont Gardens   La Mesa   CA   9,104   59,349   —     9,104   59,349   68,453   5,370   63,083   1964   2006   35 years

3811

  Las Villas Del Carlsbad   Carlsbad   CA   1,760   30,469   —     1,760   30,469   32,229   2,757   29,472   1987   2006   35 years

3805

  Las Villas Del Norte   Escondido   CA   2,791   32,632   —     2,791   32,632   35,423   2,952   32,471   1986   2006   35 years

3809

  Mountview Retirement Residence   Montrose   CA   1,089   15,449   —     1,089   15,449   16,538   1,398   15,140   1974   2006   35 years

3806

  Rancho Vista   Vista   CA   6,730   21,828   —     6,730   21,828   28,558   1,975   26,583   1982   2006   35 years

2815

  Emeritus at Roseville Gardens   Roseville   CA   220   2,380   —     220   2,380   2,600   278   2,322   1996   2006   35 years

2804

  Emeritus at Heritage Place   Tracy   CA   1,110   13,296   —     1,110   13,296   14,406   1,862   12,544   1986   2005   35 years

3604

  Villa Santa Barbara   Santa Barbara   CA   1,219   12,426   —     1,219   12,426   13,645   1,642   12,003   1977   2005   35 years

2802

  Emeritus at South Windsor   South Windsor   CT   2,187   12,682   —     2,187   12,682   14,869   2,095   12,774   1999   2004   35 years

3801

  Elmcroft of Timberlin Parc   Jacksonville   FL   455   5,905   —     455   5,905   6,360   534   5,826   1998   2006   35 years

3102

  Highland Terrace   Inverness   FL   269   4,108   —     269   4,108   4,377   633   3,744   1997   2005   35 years

2807

  Emeritus at Bonita Springs   Bonita Springs   FL   1,540   10,783   —     1,540   10,783   12,323   2,246   10,077   1989   2005   35 years

2808

  Emeritus at Boynton Beach   Boynton Beach   FL   2,317   16,218   —     2,317   16,218   18,535   3,194   15,341   1999   2005   35 years

2809

  Emeritus at Deer Creek   Deerfield   FL   1,399   9,791   —     1,399   9,791   11,190   2,287   8,903   1999   2005   35 years

2810

  Emeritus at Jensen Beach   Jensen Beach   FL   1,831   12,820   —     1,831   12,820   14,651   2,654   11,997   1999   2005   35 years

3826

  Elmcroft of Martinez   Martinez   GA   408   6,764   —     408   6,764   7,172   483   6,689   1997   2007   35 years

3101

  Greenwood Gardens   Marietta   GA   706   3,132   —     706   3,132   3,838   528   3,310   1997   2005   35 years

3103

  Peachtree Estates   Dalton   GA   501   5,229   —     501   5,229   5,730   814   4,916   2000   2005   35 years

3104

  Tara Plantation   Cumming   GA   1,381   7,707   —     1,381   7,707   9,088   1,164   7,924   1998   2005   35 years

3107

  The Sanctuary at Northstar   Kennesaw   GA   906   5,614   —     906   5,614   6,520   833   5,687   2001   2005   35 years

3100

  Winterville Retirement   Winterville   GA   243   7,418   —     243   7,418   7,661   1,092   6,569   1999   2005   35 years

3827

  Elmcroft of Muncie   Muncie   IN   244   11,218   —     244   11,218   11,462   801   10,661   1998   2007   35 years

3606

  Georgetowne Place   Fort Wayne   IN   1,315   18,185   —     1,315   18,185   19,500   2,255   17,245   1987   2005   35 years

3603

  The Harrison   Indianapolis   IN   1,200   5,740   —     1,200   5,740   6,940   843   6,097   1985   2005   35 years

3607

  Towne Centre   Merrillville   IN   1,291   27,709   —     1,291   27,709   29,000   5,747   23,253   1987   2006   35 years

2510

  Heritage Woods   Agawam   MA   1,249   4,625   —     1,249   4,625   5,874   1,293   4,581   1997   2004   30 years

2805

  Summerville at Farm Pond   Framingham   MA   5,819   33,361   —     5,819   33,361   39,180   5,019   34,161   1999   2004   35 years

2806

  Whitehall Estate   Hyannis   MA   1,277   9,063   —     1,277   9,063   10,340   1,308   9,032   1999   2005   35 years

3608

  Rose Arbor   Maple Grove   MN   1,140   12,421   —     1,140   12,421   13,561   2,513   11,048   2000   2006   35 years

3609

  Wildflower Lodge   Maple Grove   MN   504   5,035   —     504   5,035   5,539   1,022   4,517   1981   2006   35 years

3802

  Elmcroft of Little Avenue   Charlotte   NC   250   5,077   —     250   5,077   5,327   459   4,868   1997   2006   35 years

3846

  Elmcroft of Northridge   Raleigh   NC   184   3,592   —     184   3,592   3,776   325   3,451   1984   2006   35 years

3602

  Crown Pointe   Omaha   NE   1,316   11,950   —     1,316   11,950   13,266   1,602   11,664   1985   2005   35 years

2233

  Cottonbloom Assisted Living   Las Cruces   NM   153   897   —     153   897   1,050   —     1,050   1996   2009   35 years

3600

  The Amberleigh   Amherst   NY   3,498   19,097   —     3,498   19,097   22,595   2,738   19,857   1988   2005   35 years

3847

  Elmcroft of Lima   Lima   OH   490   3,368   —     490   3,368   3,858   305   3,553   1998   2006   35 years

3813

  Elmcroft of Medina   Medina   OH   661   9,788   —     661   9,788   10,449   886   9,563   1999   2006   35 years

3812

  Elmcroft of Ontario   Mansfield   OH   523   7,968   —     523   7,968   8,491   721   7,770   1998   2006   35 years

3816

  Elmcroft of Sagamore Hills   Sagamore Hills   OH   980   12,604   —     980   12,604   13,584   1,140   12,444   2000   2006   35 years

3814

  Elmcroft of Washington Township   Miamisburg   OH   1,235   12,611   —     1,235   12,611   13,846   1,141   12,705   1998   2006   35 years

 

127


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

3848

  Elmcroft of Xenia   Xenia   OH   653   2,801   —     653   2,801   3,454   253   3,201   1999   2006   35 years

2501

  Berkshire Commons   Reading   PA   470   4,301   —     470   4,301   4,771   1,049   3,722   1997   2004   30 years

3849

  Elmcroft of Allison Park   Allison Park   PA   1,171   5,686   —     1,171   5,686   6,857   514   6,343   1986   2006   35 years

3850

  Elmcroft of Altoona   Duncansville   PA   331   4,729   —     331   4,729   5,060   428   4,632   1997   2006   35 years

3851

  Elmcroft of Berwick   Berwick   PA   111   6,741   —     111   6,741   6,852   610   6,242   1998   2006   35 years

3853

  Elmcroft of Chippewa   Beaver Falls   PA   1,394   8,586   —     1,394   8,586   9,980   777   9,203   1998   2006   35 years

3817

  Elmcroft of Dillsburg   Dillsburg   PA   432   7,797   —     432   7,797   8,229   705   7,524   1998   2006   35 years

3818

  Elmcroft of Lebanon   Lebanon   PA   240   7,336   —     240   7,336   7,576   664   6,912   1999   2006   35 years

3854

  Elmcroft of Lewisburg   Lewisburg   PA   232   5,666   —     232   5,666   5,898   513   5,385   1999   2006   35 years

3856

  Elmcroft of Loyalsock   Montoursville   PA   413   3,412   —     413   3,412   3,825   309   3,516   1999   2006   35 years

3857

  Elmcroft of Reading   Reading   PA   638   4,942   —     638   4,942   5,580   447   5,133   1998   2006   35 years

3855

  Elmcroft of Reedsville   Lewistown   PA   189   5,170   —     189   5,170   5,359   468   4,891   1998   2006   35 years

3858

  Elmcroft of Saxonburg   Saxonburg   PA   770   5,949   —     770   5,949   6,719   538   6,181   1994   2006   35 years

3815

  Elmcroft of Shippensburg   Shippensburg   PA   203   7,634   —     203   7,634   7,837   691   7,146   1999   2006   35 years

3860

  Elmcroft of State College   State College   PA   320   7,407   —     320   7,407   7,727   670   7,057   1997   2006   35 years

2504

  Highgate at Paoli Pointe   Paoli   PA   1,151   9,079   —     1,151   9,079   10,230   1,985   8,245   1997   2004   30 years

2502

  Lehigh Commons   Macungie   PA   420   4,406   —     420   4,406   4,826   1,048   3,778   1997   2004   30 years

2511

  Mifflin Court   Shillington   PA   689   4,265   —     689   4,265   4,954   835   4,119   1997   2004   35 years

2503

  Sanatoga Court   Pottstown   PA   360   3,233   —     360   3,233   3,593   791   2,802   1997   2004   30 years

3803

  Elmcroft of Florence   Florence   SC   108   7,620   —     108   7,620   7,728   689   7,039   1998   2006   35 years

3105

  The Inn at Seneca   Seneca   SC   365   2,768   —     365   2,768   3,133   444   2,689   1999   2005   35 years

3804

  Elmcroft of Hamilton Place   Chattanooga   TN   87   4,248   —     87   4,248   4,335   384   3,951   1998   2006   35 years

3861

  Elmcroft of Hendersonville   Hendersonville   TN   174   2,586   —     174   2,586   2,760   234   2,526   1999   2006   35 years

3819

  Elmcroft of Kingsport   Kingsport   TN   22   7,815   —     22   7,815   7,837   707   7,130   2000   2006   35 years

3863

  Elmcroft of Lebanon   Lebanon   TN   180   7,086   —     180   7,086   7,266   641   6,625   2000   2006   35 years

3862

  Elmcroft of West Knoxville   Knoxville   TN   439   10,697   —     439   10,697   11,136   968   10,168   2000   2006   35 years

3610

  Whitley Place   Keller   TX   —     5,100   —     —     5,100   5,100   279   4,821   1998   2008   35 years

3865

  Elmcroft of Chesterfield   Richmond   VA   829   6,534   —     829   6,534   7,363   591   6,772   1999   2006   35 years

3820

  Elmcroft of Martinsburg   Martinsburg   WV   248   8,320   —     248   8,320   8,568   753   7,815   1999   2006   35 years
                                           
 

TOTAL FOR OTHER SENIORS HOUSING COMMUNITIES

      88,101   772,959   752   88,101   773,711   861,812   96,606   765,206      
 

TOTAL FOR SENIORS HOUSING COMMUNITIES

      430,984   4,324,844   11,850   429,724   4,337,954   4,767,678   573,626   4,194,052      
 

KINDRED SKILLED NURSING FACILITIES

                         

0824

  Specialty Healthcare & Rehabilitation Center of Mobile   Mobile   AL   5   2,981   —     5   2,981   2,986   1,846   1,140   1967   1992   29 years

0791

  Whitesburg Gardens Health Care Center   Huntsville   AL   534   4,216   —     534   4,216   4,750   3,149   1,601   1968   1991   25 years

0743

  Desert Life Rehabilitation and Care Center   Tucson   AZ   611   5,117   —     611   5,117   5,728   3,813   1,915   1979   1982   37 years

0853

  Kachina Point Health Care and Rehabilitation Center   Sedona   AZ   364   4,179   —     364   4,179   4,543   2,628   1,915   1983   1984   45 years

0851

  Villa Campana Health Care Center   Tucson   AZ   533   2,201   —     533   2,201   2,734   1,136   1,598   1983   1993   35 years

0738

  Bay View Nursing and Rehabilitation Center   Alameda   CA   1,462   5,981   -   1,462   5,981   7,443   3,725   3,718   1967   1993   45 years

0167

  Canyonwood Nursing and Rehab Center   Redding   CA   401   3,784   —     401   3,784   4,185   1,773   2,412   1989   1989   45 years

0335

  Lawton Healthcare Center   San Francisco   CA   943   514   —     943   514   1,457   414   1,043   1962   1996   20 years

0150

  The Tunnell Center for Rehabilitation & Heathcare   San Francisco   CA   1,902   7,531   —     1,902   7,531   9,433   4,607   4,826   1967   1993   28 years

 

128


Table of Contents
Index to Financial Statements


Property

#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

0350

 

Valley Gardens Health Care & Rehabilitation Center

  Stockton   CA   516   3,405   —     516   3,405   3,921   1,690   2,231   1988   1988   29 years

0148

 

Village Square Nursing and Rehabilitation Center

  San Marcos   CA   766   3,507   —     766   3,507   4,273   1,417   2,856   1989   1993   42 years

0745

  Aurora Care Center   Aurora   CO   197   2,328   —     197   2,328   2,525   1,380   1,145   1962   1995   30 years

0873

  Brighton Care Center   Brighton   CO   282   3,377   —     282   3,377   3,659   2,041   1,618   1969   1992   30 years

0859

  Malley Healthcare and Rehabilitation Center   Northglenn   CO   501   8,294   —     501   8,294   8,795   4,770   4,025   1971   1993   29 years

0744

  Cherry Hills Health Care Center   Englewood   CO   241   2,180   —     241   2,180   2,421   1,390   1,031   1960   1995   30 years

0562

  Andrew House Healthcare   New Britain   CT   247   1,963   —     247   1,963   2,210   1,128   1,082   1967   1992   29 years

0563

  The Crossings West Campus   New London   CT   202   2,363   —     202   2,363   2,565   1,433   1,132   1969   1994   28 years

0567

  The Crossings East Campus   New London   CT   401   2,776   —     401   2,776   3,177   1,847   1,330   1968   1992   29 years

0568

  Parkway Pavilion Healthcare   Enfield   CT   337   3,607   —     337   3,607   3,944   2,384   1,560   1968   1994   28 years

0566

  Windsor Rehabilitation and Healthcare Center   Windsor   CT   368   2,520   —     368   2,520   2,888   1,662   1,226   1965   1994   30 years

1228

  Lafayette Nursing and Rehab Center   Fayetteville   GA   598   6,623   —     598   6,623   7,221   4,568   2,653   1989   1995   20 years

0155

  Savannah Rehabilitation & Nursing Center   Savannah   GA   213   2,772   —     213   2,772   2,985   1,666   1,319   1968   1993   28.5 years

0660

  Savannah Specialty Care Center   Savannah   GA   157   2,219   —     157   2,219   2,376   1,562   814   1972   1991   26 years

0645

  Specialty Care of Marietta   Marietta   GA   241   2,782   —     241   2,782   3,023   1,761   1,262   1968   1993   28.5 years

0225

  Aspen Park Healthcare   Moscow   ID   261   2,571   —     261   2,571   2,832   1,994   838   1955   1990   25 years

0218

  Canyon West Health and Rehabilitation Center   Caldwell   ID   312   2,050   —     312   2,050   2,362   773   1,589   1974   1998   45 years

0216

  Boise Health and Rehabilitation Center   Boise   ID   256   3,593   —     256   3,593   3,849   1,216   2,633   1977   1998   45 years

0221

  Lewiston Rehabilitation & Care Center   Lewiston   ID   133   3,982   —     133   3,982   4,115   2,810   1,305   1964   1984   29 years

0409

  Mountain Valley Care & Rehabilitation Center   Kellogg   ID   68   1,280   —     68   1,280   1,348   1,262   86   1971   1984   25 years

0222

  Nampa Care Center   Nampa   ID   252   2,810   —     252   2,810   3,062   2,633   429   1950   1983   25 years

0223

  Weiser Rehabilitation & Care Center   Weiser   ID   157   1,760   —     157   1,760   1,917   1,813   104   1963   1983   25 years

0290

  Bremen Health Care Center   Bremen   IN   109   3,354   —     109   3,354   3,463   1,728   1,735   1982   1996   45 years

0780

  Columbus Health and Rehabilitation Center   Columbus   IN   345   6,817   —     345   6,817   7,162   5,011   2,151   1966   1991   25 years

0131

  Harrison Health and Rehabilitation Centre   Corydon   IN   125   6,068   —     125   6,068   6,193   1,605   4,588   1998   1998   45 years

0269

  Meadowvale Health and Rehabilitation Center   Bluffton   IN   7   787   —     7   787   794   474   320   1962   1995   22 years

0406

  Muncie Health & Rehabilitation Center   Muncie   IN   108   4,202   —     108   4,202   4,310   2,703   1,607   1980   1993   25 years

0407

  Parkwood Health Care Center   Lebanon   IN   121   4,512   —     121   4,512   4,633   2,925   1,708   1977   1993   25 years

0111

  Rolling Hills Health Care Center   New Albany   IN   81   1,894   —     81   1,894   1,975   1,269   706   1984   1993   25 years

0112

 

Royal Oaks Health Care and Rehabilitation Center

  Terre Haute   IN   418   5,779   —     418   5,779   6,197   1,989   4,208   1995   1995   45 years

0113

  Southwood Health & Rehabilitation Center   Terre Haute   IN   90   2,868   —     90   2,868   2,958   1,884   1,074   1988   1993   25 years

0209

  Valley View Health Care Center   Elkhart   IN   87   2,665   —     87   2,665   2,752   1,772   980   1985   1993   25 years

0694

  Wedgewood Healthcare Center   Clarksville   IN   119   5,115   —     119   5,115   5,234   2,560   2,674   1985   1995   35 years

0213

  Wildwood Health Care Center   Indianapolis   IN   134   4,983   —     134   4,983   5,117   3,257   1,860   1988   1993   25 years

0294

  Windsor Estates Health & Rehab Center   Kokomo   IN   256   6,625   —     256   6,625   6,881   3,293   3,588   1962   1995   35 years

0782

  Danville Centre for Health and Rehabilitation   Danville   KY   322   3,538   —     322   3,538   3,860   1,947   1,913   1962   1995   30 years

0864

  Harrodsburg Health Care Center   Harrodsburg   KY   137   1,830   —     137   1,830   1,967   1,374   593   1974   1985   35 years

0785

  Hillcrest Health Care Center   Owensboro   KY   544   2,619   —     544   2,619   3,163   2,628   535   1963   1982   22 years

0282

  Maple Manor Health Care Center   Greenville   KY   59   3,187   —     59   3,187   3,246   2,077   1,169   1968   1990   30 years

0784

  Northfield Centre for Health and Rehabilitation   Louisville   KY   285   1,555   —     285   1,555   1,840   1,108   732   1969   1985   30 years

0278

  Oakview Nursing and Rehabilitation Center   Calvert City   KY   124   2,882   —     124   2,882   3,006   1,862   1,144   1967   1990   30 years

0281

  Riverside Manor Healthcare Center   Calhoun   KY   103   2,119   —     103   2,119   2,222   1,386   836   1963   1990   30 years

0277

  Rosewood Health Care Center   Bowling Green   KY   248   5,371   —     248   5,371   5,619   3,472   2,147   1970   1990   30 years

0280

  Fountain Circle Health and Rehabilitation   Winchester   KY   137   6,120   —     137   6,120   6,257   3,914   2,343   1967   1990   30 years

 

129


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

0787

 

Woodland Terrace Health Care Facility

  Elizabethtown   KY   216   1,795   —     216   1,795   2,011   1,878   133   1969   1982   26 years

0501

 

Blue Hills Alzheimer’s Care Center

  Stoughton   MA   511   1,026   —     511   1,026   1,537   1,291   246   1965   1982   28 years

0581

 

Blueberry Hill Skilled Nursing & Rehabilitation Center

  Beverly   MA   129   4,290   —     129   4,290   4,419   2,961   1,458   1965   1968   40 years

0529

 

Bolton Manor Nursing and Rehabilitation Center

  Marlborough   MA   222   2,431   —     222   2,431   2,653   1,862   791   1973   1984   34.5 years

0503

 

Brigham Manor Nursing and Rehabilitation Center

  Newburyport   MA   126   1,708   —     126   1,708   1,834   1,427   407   1806   1982   27 years

0582

 

Colony House Nursing and Rehabilitation Center

  Abington   MA   132   999   —     132   999   1,131   1,050   81   1965   1969   40 years

0534

 

Country Gardens Skilled Nursing & Rehabilitation Center

  Swansea   MA   415   2,675   —     415   2,675   3,090   2,198   892   1969   1984   27 years

0507

 

Country Rehabilitation and Nursing Center

  Newburyport   MA   199   3,004   —     199   3,004   3,203   2,456   747   1968   1982   27 years

0508

 

Crawford Skilled Nursing and Rehabilitation Center

  Fall River   MA   127   1,109   —     127   1,109   1,236   1,043   193   1968   1982   29 years

0542

 

Den-Mar Rehabilitation and Nursing Center

  Rockport   MA   23   1,560   —     23   1,560   1,583   1,304   279   1963   1985   30 years

0573

 

Eagle Pond Rehabilitation and Living Center

  South Dennis   MA   296   6,896   —     296   6,896   7,192   3,278   3,914   1985   1987   50 years

0584

 

Franklin Skilled Nursing and Rehabilitation Center

  Franklin   MA   156   757   —     156   757   913   791   122   1967   1969   40 years

0585

 

Great Barrington Rehabilitation and Nursing Center

  Great Barrington   MA   60   1,142   —     60   1,142   1,202   1,125   77   1967   1969   40 years

0513

 

Hallmark Nursing and Rehabilitation Center

  New Bedford   MA   202   2,694   —     202   2,694   2,896   2,219   677   1968   1982   26 years

0516

 

Hammersmith House Nursing Care Center

  Saugus   MA   112   1,919   —     112   1,919   2,031   1,531   500   1965   1982   28 years

0198

 

Harrington House Nursing and Rehabilitation Center

  Walpole   MA   4   4,444   —     4   4,444   4,448   1,884   2,564   1991   1991   45 years

0532

 

Hillcrest Nursing and Rehabilitation Center

  Fitchburg   MA   175   1,461   —     175   1,461   1,636   1,457   179   1957   1984   25 years

0327

 

Laurel Ridge Rehabilitation and Nursing Center

  Jamaica Plain   MA   194   1,617   —     194   1,617   1,811   1,155   656   1968   1989   30 years

0539

 

Newton and Wellesley Alzheimer Center

  Wellesley   MA   297   3,250   —     297   3,250   3,547   2,421   1,126   1971   1984   30 years

0517

 

Oakwood Rehabilitation and Nursing Center

  Webster   MA   102   1,154   —     102   1,154   1,256   1,056   200   1967   1982   31 years

0506

 

Presentation Nursing & Rehabilitation Center

  Brighton   MA   184   1,220   —     184   1,220   1,404   1,211   193   1968   1982   28 years

0537

 

Quincy Rehabilitation and Nursing Center

  Quincy   MA   216   2,911   —     216   2,911   3,127   2,584   543   1965   1984   24 years

0587

 

River Terrace Healthcare

  Lancaster   MA   268   957   —     268   957   1,225   1,073   152   1969   1969   40 years

0514

 

Sachem Skilled Nursing & Rehabilitation Center

  East Bridgewater   MA   529   1,238   —     529   1,238   1,767   1,465   302   1968   1982   27 years

0526

 

The Eliot Healthcare Center

  Natick   MA   249   1,328   —     249   1,328   1,577   1,197   380   1996   1982   31 years

0518

 

Timberlyn Heights Nursing and Rehabilitation Center

  Great Barrington   MA   120   1,305   —     120   1,305   1,425   1,178   247   1968   1982   29 years

0588

 

Walden Rehabilitation and Nursing Center

  Concord   MA   181   1,347   —     181   1,347   1,528   1,355   173   1969   1968   40 years

0544

 

Augusta Rehabilitation Center

  Augusta   ME   152   1,074   —     152   1,074   1,226   902   324   1968   1985   30 years

0555

 

Brentwood Rehabilitation and Nursing Center

  Yarmouth   ME   181   2,789   —     181   2,789   2,970   1,978   992   1945   1985   45 years

0547

 

Brewer Rehabilitation and Living Center

  Brewer   ME   228   2,737   —     228   2,737   2,965   1,878   1,087   1974   1985   33 years

0545

 

Eastside Rehabilitation and Living Center

  Bangor   ME   316   1,349   —     316   1,349   1,665   1,061   604   1967   1985   30 years

0549

 

Kennebunk Nursing and Rehabilitation Center

  Kennebunk   ME   99   1,898   —     99   1,898   1,997   1,274   723   1977   1985   35 years

0550

 

Norway Rehabilitation & Living Center

  Norway   ME   133   1,658   —     133   1,658   1,791   1,120   671   1972   1985   39 years

0554

 

Westgate Manor

  Bangor   ME   287   2,718   —     287   2,718   3,005   2,068   937   1969   1985   31 years

0546

 

Winship Green Nursing Center

  Bath   ME   110   1,455   —     110   1,455   1,565   1,065   500   1974   1985   35 years

0416

 

Park Place Health Care Center

  Great Falls   MT   600   6,311   —     600   6,311   6,911   3,800   3,111   1963   1993   28 years

 

130


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

0433

 

Parkview Acres Care and Rehabilitation Center

  Dillon   MT   207   2,578   —     207   2,578   2,785   1,564   1,221   1965   1993   29 years

0806

 

Chapel Hill Rehabilitation and Healthcare Center

  Chapel Hill   NC   347   3,029   —     347   3,029   3,376   1,913   1,463   1984   1993   28 years

0188

 

Cypress Pointe Rehabilitation and Health Care Centre

  Wilmington   NC   233   3,710   —     233   3,710   3,943   2,401   1,542   1966   1993   28.5 years

0726

 

Guardian Care of Elizabeth City

  Elizabeth City   NC   71   561   —     71   561   632   632   —     1977   1982   20 years

0706

 

Guardian Care of Henderson

  Henderson   NC   206   1,997   —     206   1,997   2,203   1,214   989   1957   1993   29 years

0704

 

Guardian Care of Roanoke Rapids

  Roanoke Rapids   NC   339   4,132   —     339   4,132   4,471   2,963   1,508   1967   1991   25 years

0723

 

Guardian Care of Rocky Mount

  Rocky Mount   NC   240   1,732   —     240   1,732   1,972   1,302   670   1975   1997   25 years

0713

 

Guardian Care of Zebulon

  Zebulon   NC   179   1,933   —     179   1,933   2,112   1,177   935   1973   1993   29 years

0711

 

Kinston Rehabilitation and Healthcare Center

  Kinston   NC   186   3,038   —     186   3,038   3,224   1,777   1,447   1961   1993   29 years

0307

 

Lincoln Nursing Center

  Lincolnton   NC   39   3,309   —     39   3,309   3,348   2,250   1,098   1976   1986   35 years

0116

 

Pettigrew Rehabilitation and Healthcare Center

  Durham   NC   101   2,889   —     101   2,889   2,990   1,831   1,159   1969   1993   28 years

0143

 

Raleigh Rehabilitation & Healthcare Center

  Raleigh   NC   316   5,470   —     316   5,470   5,786   4,008   1,778   1969   1991   25 years

0724

 

Rehabilitation and Health Center of Gastonia

  Gastonia   NC   158   2,359   —     158   2,359   2,517   1,500   1,017   1968   1992   29 years

0707

 

Rehabilitation and Nursing Center of Monroe

  Monroe   NC   185   2,654   —     185   2,654   2,839   1,728   1,111   1963   1993   28 years

0146

 

Rose Manor Healthcare Center

  Durham   NC   200   3,527   —     200   3,527   3,727   2,489   1,238   1972   1991   26 years

0191

 

Silas Creek Manor

  Winston-Salem   NC   211   1,893   —     211   1,893   2,104   1,161   943   1966   1993   28.5 years

0137

 

Sunnybrook Healthcare and Rehabilitation Specialists

  Raleigh   NC   187   3,409   —     187   3,409   3,596   2,517   1,079   1971   1991   25 years

0591

 

Dover Rehabilitation and Living Center

  Dover   NH   355   3,797   —     355   3,797   4,152   3,047   1,105   1969   1990   25 years

0592

 

Greenbriar Terrace Healthcare

  Nashua   NH   776   6,011   —     776   6,011   6,787   4,431   2,356   1963   1990   25 years

0593

 

Hanover Terrace Healthcare

  Hanover   NH   326   1,825   —     326   1,825   2,151   1,094   1,057   1969   1993   29 years

0640

 

Las Vegas Healthcare and Rehabilitation Center

  Las Vegas   NV   454   1,018   —     454   1,018   1,472   511   961   1940   1992   30 years

0641

 

Torrey Pines Care Center

  Las Vegas   NV   256   1,324   —     256   1,324   1,580   863   717   1971   1992   29 years

0634

 

Cambridge Health & Rehabilitation Center

  Cambridge   OH   108   2,642   —     108   2,642   2,750   1,770   980   1975   1993   25 years

0569

 

Chillicothe Nursing & Rehabilitation Center

  Chillicothe   OH   128   3,481   —     128   3,481   3,609   2,506   1,103   1976   1985   34 years

0635

 

Coshocton Health & Rehabilitation Center

  Coshocton   OH   203   1,979   —     203   1,979   2,182   1,316   866   1974   1993   25 years

0560

 

Franklin Woods Nursing and Rehabilitation Center

  Columbus   OH   190   4,712   —     190   4,712   4,902   2,251   2,651   1986   1992   38 years

0868

 

Lebanon Country Manor

  Lebanon   OH   105   3,617   —     105   3,617   3,722   2,072   1,650   1984   1986   43 years

0571

 

Logan Health Care Center

  Logan   OH   169   3,750   —     169   3,750   3,919   2,317   1,602   1979   1991   30 years

0577

 

Minerva Park Nursing and Rehabilitation Center

  Columbus   OH   210   3,684   —     210   3,684   3,894   1,273   2,621   1973   1997   45 years

0570

 

Pickerington Nursing & Rehabilitation Center

  Pickerington   OH   312   4,382   —     312   4,382   4,694   2,113   2,581   1984   1992   37 years

0572

 

Winchester Place Nursing and Rehabilitation Center

 

Canal Winchester

  OH   454   7,149   —     454   7,149   7,603   4,937   2,666   1974   1993   28 years

0453

 

Medford Rehabilitation and Healthcare Center

  Medford   OR   362   4,610   —     362   4,610   4,972   2,833   2,139   1961   1991   34 years

0452

 

Sunnyside Care Center

  Salem   OR   1,512   2,249   —     1,512   2,249   3,761   1,259   2,502   1981   1991   30 years

1237

 

Wyomissing Nursing and Rehabilitation Center

  Reading   PA   61   5,095   —     61   5,095   5,156   1,732   3,424   1966   1993   45 years

1224

 

Chestnut Terrace Nursing and Rehabilitation Center

  E. Providence   RI   174   2,643   —     174   2,643   2,817   919   1,898   1962   1990   45 years

1231

 

Oak Hill Nursing and Rehabilitation Center

  Pawtucket   RI   91   6,724   —     91   6,724   6,815   2,316   4,499   1966   1990   45 years

0132

 

Madison Healthcare and Rehabilitation Center

  Madison   TN   168   1,445   —     168   1,445   1,613   915   698   1968   1992   29 years

0884

 

Masters Health Care Center

  Algood   TN   524   4,370   —     524   4,370   4,894   2,734   2,160   1981   1987   38 years

0822

 

Primacy Healthcare and Rehabilitation Center

  Memphis   TN   1,222   8,344   —     1,222   8,344   9,566   4,489   5,077   1980   1990   37 years

0230

 

Crosslands Rehabilitation & Healthcare Center

  Sandy   UT   334   4,300   —     334   4,300   4,634   1,976   2,658   1987   1992   40 years

 

131


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
    Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

0655

 

Federal Heights Rehabilitation and Nursing Center

  Salt Lake City   UT   201   2,322   —        201   2,322   2,523   1,456   1,067   1962   1992   29 years

0247

 

St. George Care and Rehabilitation Center

  Saint George   UT   419   4,465   —        419   4,465   4,884   2,546   2,338   1976   1993   29 years

0140

 

Wasatch Care Center

  Ogden   UT   373   597   —        373   597   970   579   391   1964   1990   25 years

0842

 

Bay Pointe Medical and Rehabilitation Center

  Virginia Beach   VA   805   2,886   (380   425   2,886   3,311   1,708   1,603   1971   1993   29 years

0826

 

Harbour Pointe Medical and Rehabilitation Center

  Norfolk   VA   427   4,441   —        427   4,441   4,868   2,741   2,127   1969   1993   28 years

0825

 

Nansemond Pointe Rehabilitation and Healthcare Center

  Suffolk   VA   534   6,990   —        534   6,990   7,524   4,033   3,491   1963   1991   32 years

0829

 

River Pointe Rehabilitation and Healthcare Center

  Virginia Beach   VA   770   4,440   —        770   4,440   5,210   3,348   1,862   1953   1991   25 years

0559

 

Birchwood Terrace Healthcare

  Burlington   VT   15   4,656   —        15   4,656   4,671   3,552   1,119   1965   1990   27 years

0114

 

Arden Rehabilitation and Healthcare Center

  Seattle   WA   1,111   4,013   —        1,111   4,013   5,124   2,425   2,699   1950   1993   28.5 years

0158

 

Bellingham Health Care and Rehabilitation Services

  Bellingham   WA   441   3,824   —        441   3,824   4,265   2,326   1,939   1972   1993   28.5 years

0168

 

Lakewood Healthcare Center

  Lakewood   WA   504   3,511   —        504   3,511   4,015   1,752   2,263   1989   1989   45 years

0127

 

Northwest Continuum Care Center

  Longview   WA   145   2,563   —        145   2,563   2,708   1,590   1,118   1955   1992   29 years

0462

 

Queen Anne Healthcare

  Seattle   WA   570   2,750   —        570   2,750   3,320   1,742   1,578   1970   1993   29 years

0165

 

Rainier Vista Care Center

  Puyallup   WA   520   4,780   —        520   4,780   5,300   2,192   3,108   1986   1991   40 years

0180

 

Vancouver Health & Rehabilitation Center

  Vancouver   WA   449   2,964   —        449   2,964   3,413   1,861   1,552   1970   1993   28 years

0766

 

Colonial Manor Medical and Rehabilitation Center

  Wausau   WI   169   3,370   —        169   3,370   3,539   1,935   1,604   1964   1995   30 years

0767

 

Colony Oaks Care Center

  Appleton   WI   353   3,571   —        353   3,571   3,924   2,376   1,548   1967   1993   29 years

0765

 

Eastview Medical and Rehabilitation Center

  Antigo   WI   200   4,047   —        200   4,047   4,247   2,901   1,346   1962   1991   28 years

0771

 

Kennedy Park Medical & Rehabilitation Center

  Schofield   WI   301   3,596   —        301   3,596   3,897   3,405   492   1966   1982   29 years

0774

 

Mt. Carmel Health & Rehabilitation Center

  Milwaukee   WI   2,678   25,867   —        2,678   25,867   28,545   17,457   11,088   1958   1991   30 years

0773

 

Mount Carmel Medical and Rehabilitation Center

  Burlington   WI   274   7,205   —        274   7,205   7,479   3,991   3,488   1971   1991   30 years

0769

 

North Ridge Medical and Rehabilitation Center

  Manitowoc   WI   206   3,785   —        206   3,785   3,991   2,394   1,597   1964   1992   29 years

0289

 

San Luis Medical and Rehabilitation Center

  Green Bay   WI   259   5,299   —        259   5,299   5,558   3,697   1,861   1968   1996   25 years

0775

 

Sheridan Medical Complex

  Kenosha   WI   282   4,910   -      282   4,910   5,192   3,563   1,629   1964   1991   25 years

0770

 

Vallhaven Care Center

  Neenah   WI   337   5,125   —        337   5,125   5,462   3,264   2,198   1966   1993   28 years

0776

 

Woodstock Health and Rehabilitation Center

  Kenosha   WI   562   7,424   —        562   7,424   7,986   5,581   2,405   1970   1991   25 years

0441

 

Mountain Towers Healthcare and Rehabilitation Center

  Cheyenne   WY   342   3,468   —        342   3,468   3,810   2,026   1,784   1964   1992   29 years

0483

 

Sage View Care Center

  Rock Springs   WY   287   2,392   —        287   2,392   2,679   1,455   1,224   1964   1993   30 years

0481

 

South Central Wyoming Healthcare and Rehabilitation

  Rawlins   WY   151   1,738   —        151   1,738   1,889   1,043   846   1955   1993   29 years

0482

 

Wind River Healthcare and Rehabilitation Center

  Riverton   WY   179   1,559   —        179   1,559   1,738   924   814   1967   1992   29 years
                                             
 

TOTAL KINDRED SKILLED NURSING FACILITIES

      50,734   544,311   (380   50,354   544,311   594,665   348,089   246,576      
 

NON-KINDRED SKILLED NURSING FACILITIES

                         

3829

 

McCreary Health & Rehabilitation Center

  Pine Knot   KY   73   2,443   —        73   2,443   2,516   221   2,295   1990   2006   35 years

3830

 

New Colonial Health & Rehabilitation Center

  Bardstown   KY   38   2,829   —        38   2,829   2,867   256   2,611   1968   2006   35 years

3831

 

New Glasgow Health & Rehabilitation Center

  Glasgow   KY   21   2,997   —        21   2,997   3,018   271   2,747   1968   2006   35 years

 

132


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
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   210   2,144   1978   2006   35 years

3833

 

New Hart County Health Center

  Horse Cave   KY   68   6,059   —     68   6,059   6,127   548   5,579   1993   2006   35 years

3834

 

New Heritage Hall Health & Rehabilitation Center

  Lawrenceburg   KY   38   3,920   —     38   3,920   3,958   355   3,603   1973   2006   35 years

3835

 

New Jackson Manor

  Annville   KY   131   4,442   —     131   4,442   4,573   402   4,171   1989   2006   35 years

3836

 

New Jefferson Manor

  Louisville   KY   2,169   4,075   —     2,169   4,075   6,244   369   5,875   1982   2006   35 years

3837

 

New Jefferson Place

  Louisville   KY   1,307   9,175   —     1,307   9,175   10,482   830   9,652   1991   2006   35 years

3838

 

New Meadowview Health & Rehabilitation Center

  Louisville   KY   317   4,666   —     317   4,666   4,983   422   4,561   1973   2006   35 years

3839

 

New Monroe Health & Rehabilitation Center

  Tompkinsville   KY   32   8,756   —     32   8,756   8,788   792   7,996   1969   2006   35 years

3840

 

New North Hardin Health & Rehabilitation Center

  Radcliff   KY   218   11,944   —     218   11,944   12,162   1,081   11,081   1986   2006   35 years

3841

 

New Professional Care Health & Rehabilitation Center

  Hartford   KY   22   7,905   —     22   7,905   7,927   715   7,212   1967   2006   35 years

3842

 

New Rockford Manor Health & Rehabilitation Center

  Louisville   KY   364   9,568   —     364   9,568   9,932   866   9,066   1975   2006   35 years

3843

 

New Summerfield Health & Rehabilitation Center

  Louisville   KY   1,089   10,756   —     1,089   10,756   11,845   973   10,872   1979   2006   35 years

3844

 

New Tanbark Health & Rehabilitation Center

  Lexington   KY   868   6,061   —     868   6,061   6,929   548   6,381   1989   2006   35 years

3845

 

Summit Manor Health & Rehabilitation Center

  Columbia   KY   38   12,510   —     38   12,510   12,548   1,132   11,416   1965   2006   35 years

3764

 

Golden Living Center - Rochester East

  Rochester   MN   639   3,497   —     639   3,497   4,136   3,459   677   1967   1982   28 years

2505

 

Lopatcong Center

  Phillipsburg   NJ   1,490   12,336   —     1,490   12,336   13,826   2,887   10,939   1982   2004   30 years

2702

 

Burlington House

  Cincinnati   OH   918   5,087   —     918   5,087   6,005   1,001   5,004   1989   2004   35 years

3920

 

Marietta Convalescent Center

  Marietta   OH   158   3,266   75   158   3,341   3,499   2,210   1,289   1972   1993   25 years

2701

 

Regency Manor

  Columbus   OH   606   16,424   —     606   16,424   17,030   3,234   13,796   1883   2004   35 years

3852

 

Balanced Care at Bloomsburg

  Bloomsburg   PA   621   1,371   —     621   1,371   1,992   124   1,868   1997   2006   35 years

2507

 

The Belvedere

  Chester   PA   822   7,203   —     822   7,203   8,025   1,671   6,354   1899   2004   30 years

2508

 

Chapel Manor

  Philadelphia   PA   1,595   13,982   —     1,595   13,982   15,577   3,243   12,334   1948   2004   30 years

2509

 

Pennsburg Manor

  Pennsburg   PA   1,091   7,871   —     1,091   7,871   8,962   1,902   7,060   1982   2004   30 years

2506

 

Wayne Center

  Wayne   PA   662   6,872   617   662   7,489   8,151   1,557   6,594   1875   2004   30 years
                                           
 

TOTAL NON-KINDRED SKILLED NURSING FACILITIES

      15,424   188,340   692   15,424   189,032   204,456   31,279   173,177      
 

TOTAL FOR SKILLED NURSING FACILITIES

      66,158   732,651   312   65,778   733,343   799,121   379,368   419,753      
 

KINDRED HOSPITALS

                         

4656

 

Kindred Hospital - Arizona - Phoenix

  Phoenix   AZ   226   3,359   —     226   3,359   3,585   2,121   1,464   1980   1992   30 years

4658

 

Kindred Hospital - Tucson

  Tucson   AZ   130   3,091   —     130   3,091   3,221   2,389   832   1969   1994   25 years

4644

 

Kindred Hospital - Brea

  Brea   CA   3,144   2,611   —     3,144   2,611   5,755   909   4,846   1990   1995   40 years

4807

 

Kindred Hospital - Ontario

  Ontario   CA   523   2,988   —     523   2,988   3,511   2,210   1,301   1950   1994   25 years

4848

 

Kindred Hospital - San Diego

  San Diego   CA   670   11,764   —     670   11,764   12,434   8,837   3,597   1965   1994   25 years

4822

 

Kindred Hospital - San Francisco Bay Area

  San Leandro   CA   2,735   5,870   —     2,735   5,870   8,605   5,479   3,126   1962   1993   25 years

4842

 

Kindred Hospital - Westminster

  Westminster   CA   727   7,384   —     727   7,384   8,111   6,333   1,778   1973   1993   20 years

4665

 

Kindred Hospital - Denver

  Denver   CO   896   6,367   —     896   6,367   7,263   5,470   1,793   1963   1994   20 years

4674

 

Kindred Hospital - Central Tampa

  Tampa   FL   2,732   7,676   —     2,732   7,676   10,408   3,612   6,796   1970   1993   40 years

4652

 

Kindred Hospital - North Florida

  Green Cove Springs   FL   145   4,613   —     145   4,613   4,758   3,363   1,395   1956   1994   20 years

 

133


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

4602

 

Kindred Hospital - South Florida - Coral Gables

  Coral Gables   FL   1,071   5,348   —     1,071   5,348   6,419   4,091   2,328   1956   1992   30 years

4645

 

Kindred Hospital - South Florida Ft. Lauderdale

  Ft. Lauderdale   FL   1,758   14,080   —     1,758   14,080   15,838   10,852   4,986   N/A   1989   30 years

4876

 

Kindred Hospital - South Florida - Hollywood

  Hollywood   FL   605   5,229   —     605   5,229   5,834   3,995   1,839   1937   1995   20 years

4611

 

Kindred Hospital - Bay Area St. Petersburg

  St. Petersburg   FL   1,401   16,706   —     1,401   16,706   18,107   10,892   7,215   1968   1997   40 years

4871

 

Kindred - Chicago - Lakeshore

  Chicago   IL   1,513   9,525   —     1,513   9,525   11,038   9,150   1,888   1995   1976   20 years

4637

 

Kindred Hospital - Chicago (North Campus)

  Chicago   IL   1,583   19,980   —     1,583   19,980   21,563   14,699   6,864   1949   1995   25 years

4690

 

Kindred Hospital - Chicago (Northlake Campus)

  Northlake   IL   850   6,498   —     850   6,498   7,348   4,537   2,811   1960   1991   30 years

4615

 

Kindred Hospital - Sycamore

  Sycamore   IL   77   8,549   —     77   8,549   8,626   5,897   2,729   1949   1993   20 years

4638

 

Kindred Hospital - Indianapolis

  Indianapolis   IN   985   3,801   —     985   3,801   4,786   2,670   2,116   1955   1993   30 years

4633

 

Kindred Hospital - Louisville

  Louisville   KY   3,041   12,279   —     3,041   12,279   15,320   9,583   5,737   1964   1995   20 years

4666

 

Kindred Hospital - New Orleans

  New Orleans   LA   648   4,971   —     648   4,971   5,619   3,597   2,022   1968   1978   20 years

4688

 

Kindred Hospital - Boston

  Boston   MA   1,551   9,796   —     1,551   9,796   11,347   7,884   3,463   1930   1994   25 years

4673

 

Kindred Hospital - Boston North Shore

  Peabody   MA   543   7,568   —     543   7,568   8,111   4,006   4,105   1974   1993   40 years

4612

 

Kindred Hospital - Kansas City

  Kansas City   MO   277   2,914   —     277   2,914   3,191   2,157   1,034   N/A   1992   30 years

4680

 

Kindred Hospital - St. Louis

  St. Louis   MO   1,126   2,087   —     1,126   2,087   3,213   1,557   1,656   1984   1991   40 years

4662

 

Kindred Hospital - Greensboro

  Greensboro   NC   1,010   7,586   —     1,010   7,586   8,596   6,045   2,551   1964   1994   20 years

4664

 

Kindred Hospital - Albuquerque

  Albuquerque   NM   11   4,253   —     11   4,253   4,264   1,980   2,284   1985   1993   40 years

4647

 

Kindred Hospital - Las Vegas (Sahara)

  Las Vegas   NV   1,110   2,177   —     1,110   2,177   3,287   952   2,335   1980   1994   40 years

4618

 

Kindred Hospital - Oklahoma City

  Oklahoma City   OK   293   5,607   —     293   5,607   5,900   3,448   2,452   1958   1993   30 years

4614

 

Kindred Hospital - Philadelphia

  Philadelphia   PA   135   5,223   —     135   5,223   5,358   2,327   3,031   N/A   1995   35 years

4619

 

Kindred Hospital - Pittsburgh

  Oakdale   PA   662   12,854   —     662   12,854   13,516   7,050   6,466   1972   1996   40 years

4628

 

Kindred Hospital - Chattanooga

  Chattanooga   TN   756   4,415   —     756   4,415   5,171   3,245   1,926   1975   1993   22 years

4668

 

Kindred Hospital - Fort Worth

  Ft. Worth   TX   648   10,608   —     648   10,608   11,256   6,904   4,352   1960   1994   34 years

4685

 

Kindred Hospital - Houston

  Houston   TX   33   7,062   —     33   7,062   7,095   5,152   1,943   N/A   1994   20 years

4654

 

Kindred Hospital (Houston Northwest)

  Houston   TX   1,699   6,788   —     1,699   6,788   8,487   3,834   4,653   1986   1985   40 years

4660

 

Kindred Hospital - Mansfield

  Mansfield   TX   267   2,462   —     267   2,462   2,729   1,523   1,206   1983   1990   40 years

4635

 

Kindred Hospital - San Antonio

  San Antonio   TX   249   11,413   —     249   11,413   11,662   6,582   5,080   1981   1993   30 years

4653

 

Kindred Hospital - Tarrant Country
(Fort Worth South West)

 

Ft. Worth

  TX   2,342   7,458   —     2,342   7,458   9,800   6,647   3,153   1987   1986   20 years
                                           
 

TOTAL FOR KINDRED HOSPITALS

      38,172   272,960   —     38,172   272,960   311,132   191,979   119,153      
 

NON-KINDRED HOSPITALS

                         

3828

 

Gateway Rehabilitation Hospital at Florence

  Florence   KY   3,600   4,924   —     3,600   4,924   8,524   446   8,078   2001   2006   35 years

3864

 

Highlands Regional Rehabilitation Hospital

  El Paso   TX   1,900   23,616   —     1,900   23,616   25,516   2,137   23,379   1999   2006   35 years
                                           
 

TOTAL FOR NON-KINDRED HOSPITALS

      5,500   28,540   —     5,500   28,540   34,040   2,583   31,457      
 

TOTAL FOR HOSPITALS

      43,672   301,500   —     43,672   301,500   345,172   194,562   150,610      
 

MEDICAL OFFICE BUILDINGS

                         

2956

 

Avista Two Medical Plaza

  Louisville   CO   —     17,330   —     —     17,330   17,330   64   17,266   2003   2009   35 years

2952

 

Briargate Medical Campus

  Colorado Springs   CO   1,238   12,301   130   1,238   12,431   13,669   1,150   12,519   2002   2007   35 years

3071

 

The Sierra Medical Building

  Parker   CO   1,444   14,059   460   1,444   14,519   15,963   217   15,746   2009   2009   35 years

2951

 

Potomac Medical Plaza

  Aurora   CO   2,401   9,118   927   2,442   10,004   12,446   1,765   10,681   1986   2007   35 years

2953

 

Printers Park Medical Plaza

  Colorado Springs   CO   2,641   47,507   101   2,645   47,604   50,249   4,365   45,884   1999   2007   35 years

2907

 

Aventura Medical Arts Building

  Aventura   FL   —     25,361   1,685   —     27,046   27,046   2,448   24,598   2006   2007   35 years

2902

 

JFK Medical Plaza

  Lake Worth   FL   453   1,711   139   453   1,850   2,303   280   2,023   1999   2004   35 years

 

134


Table of Contents
Index to Financial Statements

Property
#

 

Property Name

 

Location

  Initial Cost to
Company
  Costs
Capitalized
Subsequent to
Acquisition
  Gross Amount
Carried at Close of
Period
  Total   Accumulated
Depreciation
  NBV   Year of
Construction
  Year
Acquired
  Life on
Which
Depreciation
in Income
Statement
is Computed
   

City

  State /
Province
  Land   Buildings and
Improvements
    Land   Buildings and
Improvements
           

2903

 

Palms West Building 6

  Loxahatchee   FL     965     2,678     27     965     2,705     3,670     417     3,253   2000   2004   35 years

2905

 

Regency Medical Office Park Phase I

  Melbourne   FL     590     3,156     18     590     3,174     3,764     480     3,284   1995   2004   35 years

2904

 

Regency Medical Office Park Phase II

  Melbourne   FL     770     3,809     19     770     3,828     4,598     579     4,019   1998   2004   35 years

2906

 

University Medical Office Building

  Tamarac   FL     —       6,690     —       —       6,690     6,690     602     6,088   2006   2007   35 years

3006

 

Eastside Physicians Center

  Snellville   GA     1,289     25,019     24     1,289     25,043     26,332     1,579     24,753   1994   2008   35 years

3007

 

Eastside Physicians Plaza

  Snellville   GA     294     12,948     21     294     12,969     13,263     673     12,590   2003   2008   35 years

2955

 

Doctors Office Building III

  Hoffman Estates   IL     —       24,550     —       —       24,550     24,550     135     24,415   2005   2009   35 years

2954

 

Eberle Medical Office Building

  Elk Grove Village   IL     —       16,315     —       —       16,315     16,315     87     16,228   2005   2009   35 years

3015

 

Charles O. Fisher Medical Building

  Westminster   MD     —       13,795     —       —       13,795     13,795     —       13,795   2009   2009   35 years

2950

 

Broadway Medical Office Building

  Kansas City   MO     1,300     12,602     1,024     1,300     13,626     14,926     2,386     12,540   1976   2007   35 years

2925

 

Anderson Medical Arts Building I

  Cincinnati   OH     —       9,632     671     —       10,303     10,303     902     9,401   1984   2007   35 years

2926

 

Anderson Medical Arts Building II

  Cincinnati   OH     —       15,123     544     —       15,667     15,667     1,262     14,405   2007   2007   35 years

3003

 

DCMH Medical Office Building

  Drexel Hill   PA     —       10,424     724     —       11,148     11,148     2,511     8,637   1984   2004   30 years

3002

 

Professional Office Building I

  Upland   PA     —       6,283     696     —       6,979     6,979     1,499     5,480   1978   2004   30 years

3070

 

St. Francis Millennium Medical Office Building

  Greenville   SC     —       13,062     6,598     —       19,660     19,660     213     19,447   2009   2009   35 years

2901

 

Abilene Medical Commons I

  Abilene   TX     179     1,611     —       179     1,611     1,790     249     1,541   2000   2004   35 years

3061

 

Bayshore Rehabilitation Center MOB

  Pasadena   TX     95     1,128     —       95     1,128     1,223     158     1,065   1988   2005   35 years

3060

 

Bayshore Surgery Center MOB

  Pasadena   TX     765     9,123     323     765     9,446     10,211     1,357     8,854   2001   2005   35 years

3021

 

Casper WY MOB

  Casper   WY     3,015     26,513     99     3,017     26,610     29,627     1,311     28,316   2008   2008   35 years
                                                           
 

TOTAL FOR MEDICAL OFFICE BUILDINGS

        17,439     341,848     14,230     17,486     356,031     373,517     26,689     346,828      
 

PERSONAL CARE FACILITIES

                         

3718, 19, 21-28

 

ResCare - Tangram - 8 sites

  San Marcos   TX     616     6,517     —       616     6,517     7,133     3,666     3,467   N/A   1998   20 years
                                                           
 

TOTAL FOR PERSONAL CARE FACILITIES

        616     6,517     —       616     6,517     7,133     3,666     3,467      
                                                           
 

TOTAL FOR ALL PROPERTIES

      $ 558,869   $ 5,707,360   $ 26,392   $ 557,276   $ 5,735,345   $ 6,292,621   $ 1,177,911   $ 5,114,710      
                                                           

 

135


Table of Contents
Index to Financial Statements
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, 2009. 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, 2009, 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 2009, 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 2010 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2010.

 

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 2010 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2010.

 

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 2010 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2010.

 

136


Table of Contents
Index to Financial Statements
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 2010 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2010.

 

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 2010 Annual Meeting of Stockholders, which we will file with the Commission not later than April 30, 2010.

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:

 

     Page

Report of Independent Registered Public Accounting Firm

   73

Consolidated Balance Sheets as of December 31, 2009 and 2008

   75

Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007

   76

Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2009, 2008 and 2007

   77

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   79

Notes to Consolidated Financial Statements

   80

Consolidated Financial Statement Schedule

  

Schedule III—Real Estate and Accumulated Depreciation

   122

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.

 

137


Table of Contents
Index to Financial Statements

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 the Prospectus included in 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.

 

138


Table of Contents
Index to Financial Statements

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

  Letter Agreement dated April 4, 2008 by and between Brookdale Provident Properties LLC and PSLT-BLC Properties Holdings, LLC.    Filed herewith.

10.2.4.4

  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.    Incorporated by reference to Exhibit 10.2.4.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.2.4.5

  Second Amendment to Agreement Regarding Leases dated as of March 2, 2009 by and between PSLT-BLC Properties Holdings, LLC and Brookdale Provident Properties LLC, et al.    Filed herewith.

10.2.4.6

  Third Amendment to Agreement Regarding Leases dated as of November 6, 2009 by and between PSLT-BLC Properties Holdings, LLC and Brookdale Provident Properties LLC, et al.    Filed herewith.

 

139


Table of Contents
Index to Financial Statements

Exhibit

Number

 

Description of Document

  

Location of Document

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.

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.

10.2.9

  Guaranty dated as of February 11, 2009 by Brookdale Senior Living Inc., for the benefit of the landlords with respect to the Brookdale and Alterra properties, PSLT-BLC Properties Holdings, LLC and PSLT-ALS Properties Holdings, LLC.    Filed herewith.

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.

 

140


Table of Contents
Index to Financial Statements

Exhibit

Number

 

Description of Document

  

Location of Document

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.

10.3.5

  Third Amendment dated as of March 31, 2009 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, 2009.

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*

  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.

10.7*

  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.

10.8.1*

  Ventas, Inc. 2006 Incentive Plan, as amended.    Incorporated by reference to Exhibit 10.10.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.8.2*

  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.

10.8.3*

  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.

 

141


Table of Contents
Index to Financial Statements

Exhibit

Number

 

Description of Document

  

Location of Document

10.9.1*

  Ventas, Inc. 2006 Stock Plan for Directors, as amended.    Incorporated by reference to Exhibit 10.11.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.2*

  Form of Stock Option Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.3*

  Form of Restricted Stock Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.4*

  Form of Restricted Stock Unit Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.4 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.10.1*

  Ventas Executive Deferred Stock Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.12.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.10.2*

  Deferral Election Form under the Ventas Executive Deferred Stock Compensation Plan.    Incorporated by reference to Exhibit 10.12.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.11.1*

  Ventas Nonemployee Directors’ Deferred Stock Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.13.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.11.2*

  Deferral Election Form under the Ventas Nonemployee Directors’ Deferred Stock Compensation Plan.    Incorporated by reference to Exhibit 10.13.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.12.1*

  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.

10.12.2*

  Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Debra A. Cafaro.    Incorporated by reference to Exhibit 10.14.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.13.1*

  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.

10.13.2*

  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.

10.13.3*

  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.

10.13.4*

  Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.4 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.13.5*

  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.

 

142


Table of Contents
Index to Financial Statements

Exhibit

Number

 

Description of Document

  

Location of Document

10.13.6*   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.

10.13.7*

  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.

10.13.8*

  Amendment dated as of December 31, 2008 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.8 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.14.1*

  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.

10.14.2*

  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.

10.14.3*

  Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Richard A. Schweinhart.    Incorporated by reference to Exhibit 10.16.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.15.1*

  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.

10.15.2*

  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.

10.15.3*

  Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.17.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.16*

  Ventas Employee and Director Stock Purchase Plan, as amended.    Incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.17

  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.

10.18.1

  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.
10.18.2   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.

 

143


Table of Contents
Index to Financial Statements

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.

101

  Interactive Data File.    Filed herewith.

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.

 

144


Table of Contents
Index to Financial Statements

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 19, 2010

 

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 19, 2010

/S/    RICHARD A. SCHWEINHART        

Richard A. Schweinhart

  

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

  February 19, 2010

/S/    ROBERT J. BREHL        

Robert J. Brehl

  

Chief Accounting Officer and Controller

(Principal Accounting Officer)

  February 19, 2010

/S/    DOUGLAS CROCKER II        

Douglas Crocker II

   Director   February 19, 2010

/S/    RONALD G. GEARY        

Ronald G. Geary

   Director   February 19, 2010

/S/    JAY M. GELLERT        

Jay M. Gellert

   Director   February 19, 2010

/S/    ROBERT D. REED        

Robert D. Reed

   Director   February 19, 2010

/S/    SHELI Z. ROSENBERG        

Sheli Z. Rosenberg

   Director   February 19, 2010

/S/    JAMES D. SHELTON        

James D. Shelton

   Director   February 19, 2010

/S/    THOMAS C. THEOBALD        

Thomas C. Theobald

   Director   February 19, 2010

 

145


Table of Contents
Index to Financial Statements

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 the Prospectus included in 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.


Table of Contents
Index to Financial Statements

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

   Letter Agreement dated April 4, 2008 by and between Brookdale Provident Properties LLC and PSLT-BLC Properties Holdings, LLC.    Filed herewith.

10.2.4.4

   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.    Incorporated by reference to Exhibit 10.2.4.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.2.4.5

   Second Amendment to Agreement Regarding Leases dated as of March 2, 2009 by and between PSLT-BLC Properties Holdings, LLC and Brookdale Provident Properties LLC, et al.    Filed herewith.


Table of Contents
Index to Financial Statements

Exhibit

Number

  

Description of Document

  

Location of Document

10.2.4.6

   Third Amendment to Agreement Regarding Leases dated as of November 6, 2009 by and between PSLT-BLC Properties Holdings, LLC and Brookdale Provident Properties LLC, et al.    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.
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.

10.2.9

   Guaranty dated as of February 11, 2009 by Brookdale Senior Living Inc., for the benefit of the landlords with respect to the Brookdale and Alterra properties, PSLT-BLC Properties Holdings, LLC and PSLT-ALS Properties Holdings, LLC.    Filed herewith.


Table of Contents
Index to Financial Statements

Exhibit

Number

  

Description of Document

  

Location of Document

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.
10.3.5    Third Amendment dated as of March 31, 2009 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, 2009.

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*

   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.

10.7*

   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.

10.8.1*

   Ventas, Inc. 2006 Incentive Plan, as amended.    Incorporated by reference to Exhibit 10.10.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.


Table of Contents
Index to Financial Statements

Exhibit

Number

  

Description of Document

  

Location of Document

10.8.2*

   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.

10.8.3*

   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.

10.9.1*

   Ventas, Inc. 2006 Stock Plan for Directors, as amended.    Incorporated by reference to Exhibit 10.11.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.2*

   Form of Stock Option Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.3*

   Form of Restricted Stock Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.9.4*

   Form of Restricted Stock Unit Agreement—2006 Stock Plan for Directors.    Incorporated by reference to Exhibit 10.11.4 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.10.1*

   Ventas Executive Deferred Stock Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.12.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.
10.10.2*    Deferral Election Form under the Ventas
Executive Deferred Stock Compensation Plan.
   Incorporated by reference to Exhibit 10.12.2 to
our Annual Report on Form 10-K for the year
ended December 31, 2008.

10.11.1*

   Ventas Nonemployee Directors’ Deferred Stock Compensation Plan, as amended.    Incorporated by reference to Exhibit 10.13.1 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.11.2*

   Deferral Election Form under the Ventas Nonemployee Directors’ Deferred Stock Compensation Plan.    Incorporated by reference to Exhibit 10.13.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.12.1*

   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.

10.12.2*

   Amendment dated as of December 31, 2008 to Amended and Restated Employment Agreement between Ventas, Inc. and Debra A. Cafaro.    Incorporated by reference to Exhibit 10.14.2 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.13.1*

   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.

10.13.2*

   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.

10.13.3*

   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.


Table of Contents
Index to Financial Statements

Exhibit

Number

  

Description of Document

  

Location of Document

10.13.4*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.4 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.13.5*

   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.

10.13.6*

   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.

10.13.7*

   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.

10.13.8*

   Amendment dated as of December 31, 2008 to Change-in-Control Severance Agreement between Ventas, Inc. and T. Richard Riney.    Incorporated by reference to Exhibit 10.15.8 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.14.1*

   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.

10.14.2*

   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.
10.14.3*    Amendment dated as of December 31, 2008 to
Amended and Restated Employment Agreement
between Ventas, Inc. and Richard A.
Schweinhart.
   Incorporated by reference to Exhibit 10.16.3 to
our Annual Report on Form 10-K for the year
ended December 31, 2008.

10.15.1*

   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.

10.15.2*

   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.

10.15.3*

   Amendment dated as of December 31, 2008 to Employment Agreement between Ventas, Inc. and Raymond J. Lewis.    Incorporated by reference to Exhibit 10.17.3 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.16*

   Ventas Employee and Director Stock Purchase Plan, as amended.    Incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended December 31, 2008.

10.17

   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.

10.18.1

   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.


Table of Contents
Index to Financial Statements

Exhibit

Number

  

Description of Document

  

Location of Document

10.18.2

   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.

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.

101

   Interactive Data File.    Filed herewith.

 

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K.