LRP Legacy Healthcare Properties

As filed with the Securities and Exchange Commission on October 5, 2010

Registration No. 333-166448

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Pre-Effective Amendment No. 7

to

Form S-11

FOR REGISTRATION UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

LEGACY HEALTHCARE PROPERTIES TRUST INC.

(Exact name of registrant as specified in governing instruments)

 

189 South Orange Avenue

South Tower, Suite 1150

Orlando, Florida 32801

(407) 412-9200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Thomas J. Hutchison III

Chairman and Chief Executive Officer

Legacy Healthcare Properties Trust Inc.

189 South Orange Avenue

South Tower, Suite 1150

Orlando, Florida 32801

(407) 412-9200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after the effective date of this Registration Statement.

 

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:   þ

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   o

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED OCTOBER 5, 2010

Preliminary Prospectus

 

8,750,000 Shares of Common Stock

and

Up to 8,750,000 Contingent Warrants

and

Up to 8,750,000 Shares of Common Stock

Issuable Upon Exercise of the

Contingent Warrants

 

 

We are offering 8,750,000 shares of common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price of our common stock to be between $18.00 and $19.00 per share. Our common stock has been approved for listing on the New York Stock Exchange, or the NYSE, under the symbol “LRP.”

 

We are also offering contingent warrants to purchase up to an additional 8,750,000 shares of common stock at an exercise price equal to the initial public offering price of our common stock (subject to adjustment in certain circumstances), which warrants would be issued only to investors who purchase shares of common stock in this offering if certain events occur and certain conditions are satisfied. If the warrants are issued, they will be issued for no additional consideration. No public market currently exists for the warrants. We intend to apply for approval to list the warrants, if they are issued, on the NYSE or the New York Stock Exchange Amex, or the NYSE Amex, under the symbol “LRP WS.”

 

Concurrently with this offering, in a separate private placement, we will sell an aggregate of 324,324 shares of our common stock (representing additional net proceeds of $6.0 million based on the expected initial public offering price of our common stock) to certain of our executive officers at a price per share equal to the initial public offering price of our common stock.

 

We intend to elect and qualify to be taxed as a real estate investment trust, or REIT, for federal income tax purposes commencing with our short taxable year ending December 31, 2010. The shares of common stock offered by this prospectus are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. Our charter, subject to certain exceptions, limits beneficial and constructive ownership to no more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock.

 

Investing in our securities involves a high degree of risk. Please read “Risk Factors” beginning on page 18:

 

 

 

 

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Delivery of the shares of common stock is expected to be made on or about          , 2010. We have granted the underwriters an option for a period of 45 days to purchase, on the same terms and conditions set forth above, up to an additional 1,312,500 shares of our common stock to cover overallotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $             and the total proceeds to us, before expenses, will be $            . In addition, if the underwriters exercise the option, the total number of warrants we may issue in connection with this offering will increase by an amount equal to the total number of additional shares of our common stock purchased by the underwriters in connection with such exercise. Delivery of the warrants, if they become issuable, is expected to be made on or about          , 2010, or as soon thereafter as possible, subject to certain conditions.

 

 

Morgan Keegan & Company, Inc.

 

 

Prospectus dated       , 2010.

 

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

 

 

TABLE OF CONTENTS

 

 

Until          , 2010 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

Summary

Ø	Proven track record of acquiring senior housing facilities .  Our management team has a proven track record of identifying and acquiring senior housing facilities. During their years of service as executive officers of CNL Retirement Properties, Inc., or CNL Retirement, and its external advisor, Mr. Hutchison and Mr. Anderson, together with other real estate professionals that included other members of our management team, as well as individuals who are not affiliated with our company, oversaw the investment of approximately $2.7 billion in equity capital that was raised by CNL Retirement. CNL Retirement was a public, non-traded REIT that raised capital through a series of continuous offerings of its common stock at a fixed price of $10.00 per share from its inception in 1998 through March 2006. CNL Financial Group, Inc. and its affiliates are not sponsors of and have no affiliation with our company, have not participated in the preparation of this prospectus and are not endorsing our company or an investment in our common stock.
Ø	Proven acquiror of senior housing facilities with access to off-market acquisition opportunities.   Our management team has substantial experience in the senior housing and real estate industries and has developed an extensive network of long-standing relationships with senior housing owners, operators and developers, brokers, banks, insurance companies, publicly-traded companies, fund managers, REITs, private investors and other parties who invest in or otherwise provide capital to the senior housing industry. We believe these long-standing relationships will provide us with access to a significant pipeline of off-market acquisition opportunities that may not be available to other buyers.
Ø	Attractive initial portfolio with strong embedded growth .  We believe the six senior housing facilities we have under contract are high quality facilities that occupy market-leading positions in markets with strong demand, high barriers to entry and limited new supply. We believe the acquisition of these facilities will provide us with a strong platform to facilitate our future growth.
Ø	Internal growth focus .  Unlike many companies in our industry that seek to generate internal growth through annual rent escalators tied to increases in the Consumer Price Index, or CPI, we intend to structure our transactions, where appropriate, to capture potential growth in facility-level cash flows on an after-tax basis. Our management team has substantial experience structuring net leases that require facility operators to pay, in addition to base rent, percentage rent based on gross revenues. In addition, certain members of our management team and certain of our director nominees have substantial experience in the hospitality REIT industry where the TRS lessee structure has been utilized since 2001. We believe this gives us a competitive advantage to the extent we implement the TRS lessee structure for certain facilities we acquire.

Ø

Growth-oriented capital structure .  After the completion of this offering, the concurrent private placement and the acquisition of the six senior housing facilities that we currently have under contract, we expect to have approximately $72.3 million of cash to invest in additional facilities (assuming an initial public offering price of $18.50 per share, which is the midpoint of the initial public offering price range shown on the cover of this prospectus). We believe certain of our competitors face challenges from the recent economic downturn, such as deteriorating facility-level cash flows and excessive leverage combined with upcoming debt maturities, which will keep management focused on balance sheet repair rather than pursuing senior housing acquisitions. We will not have these issues, which will enable the members of our management team to dedicate substantial amounts of their time to sourcing, negotiating and completing senior housing acquisitions. We also intend to obtain a revolving credit facility to provide us with additional liquidity to, among other things, pursue acquisitions which may require capital exceeding the funds raised in this offering. There is no assurance that we will be successful in securing a revolving credit facility on terms that are acceptable to us or at all.

Ø	Active asset management . Given our strategy of employing creative and flexible acquisition, leasing and management structures to facilitate acquisitions and, where appropriate, to participate on an after-tax basis in operating improvements and capture potential growth in facility-level cash flows, we plan to dedicate substantially more resources to asset management than many companies in our industry, which we believe will provide us with a competitive advantage.
Ø	Committed management team with interests aligned with stockholders . Certain members of our management team will invest $6.0 million in our common stock in the concurrent private placement which will result in ownership by our management team of approximately 3.56% of our outstanding common stock upon the completion of this offering and the concurrent private placement. We believe that our management team’s equity ownership in our company will strongly align the team’s interests with those of our stockholders.

						Number
		Type of				of units								Year built/last
Facility/location		facility				ILF				ALF (1)				major renovation		Occupancy (2)
Lake Barrington Woods—Lake Barrington, IL			ILF				129				64			2000			95.4	%
Bella Terra—Jackson, NJ			ILF				124				91			2001			86.2
Baywinde—Webster, NY (3)			ILF				134				78			2001			88.1
Walden Place—Cortland, NY			ALF				0				80			2001			96.1
Chancellor’s Village—Fredericksburg, VA			ILF				147				40			1989/1998			77.4
Mangrove Bay—Jupiter, FL			ILF				101				54			2002			94.3
Total/Weighted Average							635				407						88.7	%

(1)		Includes 88 Alzheimer’s/dementia care units.
(2)		For the six months ended June 30, 2010, the occupancy rates shown represent the average occupancy rate for the period determined by calculating the average of the average monthly occupancy rates for each month for the six months ended June 30, 2010.
(3)		Consists of a campus that includes nine separate buildings, eight of which are referred to as Castle Pointe and one of which is referred to as Sage Harbor.

Ø	We will enter into new leases for Lake Barrington Woods, Bella Terra, Baywinde—Castle Pointe, Chancellor’s Village and Mangrove Bay with affiliates of Senior Lifestyle Management, LLC, or Senior Lifestyle Management, the management company that currently operates the six facilities we have under contract. Each of these new leases will have a term that expires on January 31, 2012, with a possible extension for a period not to exceed 18 months.
Ø	Until the necessary regulatory approvals to transfer the operating licenses from the current facility operators to affiliates of Senior Lifestyle Management are obtained from the New York State Department of Health, affiliates of Senior Lifestyle Management will continue to lease Baywinde—Sage Harbor and Walden Place, or the New York assisted living facilities, from us pursuant to existing leases which have terms that expire on June 18, 2013 without renewal options. We will amend and restate the existing leases upon receipt of the necessary regulatory approvals.

Ø	independent living facilities;
Ø	assisted living facilities, including freestanding Alzheimer’s/dementia care facilities; and
Ø	continuing care retirement communities.

Ø	Capitalize on network of relationships to pursue off-market transactions.   We plan to pursue off-market transactions in our target markets through the long-standing relationships our management team has developed over the past 20 years. We believe these relationships will be a significant source of senior housing acquisition opportunities.
Ø	Utilize creative and flexible transaction structures to participate in operating improvements .  We intend to capitalize on our management team’s prior experience in utilizing creative and flexible acquisition, management and lease structures that allow senior housing REITs to capture potential growth in facility-level cash flows.
Ø	Maximize value through active asset management .  Based on our management team’s prior experience, we expect to allocate a significant portion of our staffing resources to asset management based on an active ownership philosophy that engages our facility operators in a cooperative relationship. Although we do not intend to operate our senior housing facilities directly, we will actively participate with our facility operators in various aspects of the operations of our facilities,

		including positioning and repositioning, operations analysis, physical design, renovation, capital improvements, resident experience and overall strategic direction.

Ø	We have no operating history and may not be able to successfully operate our business or generate sufficient operating cash flows to make or sustain distributions to our stockholders.
Ø	If we are unable to timely complete the purchase of the six senior housing facilities we currently have under contract or at all, we will have no immediate designated use for substantially all of the net proceeds of this offering and the concurrent private placement, we may experience delays in locating and securing attractive alternative investments, and we will have incurred substantial expenses without our stockholders realizing the expected benefits.
Ø	We depend on the efforts and expertise of the members of our management team and our business would be adversely affected by the loss of their services.
Ø	Upon completion of the acquisition of the six senior housing facilities that we currently have under contract, all six of the facilities will be leased to affiliates of Senior Lifestyle Management which will account for substantially all of our revenues.
Ø	Due to our concentration in senior housing, a downturn in the senior housing or general health care industry would adversely affect our operations and financial condition.
Ø	To the extent we use the net proceeds from this offering and the concurrent private placement to make distributions to our stockholders, the amount of cash we have available to invest in senior housing facilities or for other purposes would be reduced.
Ø	We will depend on our facility operators for a significant portion of our revenues and operating income. Any inability or unwillingness by our facility operators to satisfy their obligations to us under their agreements with us could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

Ø	There is no assurance that purchasers of common stock in this offering will receive warrants, and, upon issuance of the warrants, if any are issued, the exercise price of the warrants could exceed the current market trading price of our common stock.

Ø	If warrants are issued to purchasers of our common stock in this offering, the dilutive effect of the warrants could have an adverse effect on the future market price of our common stock.

Ø	Our failure to qualify, or our failure to remain qualified, as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

(1)		Includes an aggregate of (i) 324,324 shares of our common stock that certain of our executive officers have agreed to purchase in the concurrent private placement and (ii) an aggregate of 25,000 shares of restricted common stock that we will grant to our director nominees pursuant to our 2010 Equity Incentive Plan upon completion of this offering.

 

The offering

Common stock we are offering		8,750,000 shares
Common stock to be outstanding after this offering and the concurrent private placement		9,099,324 shares (1)
Use of proceeds		We will contribute the net proceeds of this offering and the concurrent private placement to our operating partnership. Our operating partnership will use approximately $81.9 million of the net proceeds to fund the cash portion of the $240.0 million contractual purchase price for the six senior housing facilities that we currently have under contract, and approximately $3.0 million to pay the closing costs related to the acquisition. Our operating partnership will use the remaining net proceeds to invest in additional senior housing facilities in accordance with our investment strategy described in this prospectus and for general business purposes. Prior to the full investment of the remaining net proceeds in senior housing facilities, we intend to invest the remaining net proceeds in interest-bearing, short-term securities or money-market accounts that are consistent with our intention to qualify as a REIT. These initial investments are expected to provide a lower net return than we will seek to achieve from investments in senior housing facilities. We will use approximately $0.1 million of the net proceeds to reimburse out-of-pocket expenses incurred by Mr. Hutchison and his affiliates in connection with our formation, approximately $0.6 million to reimburse offering expenses which Mr. Hutchison has advanced on our behalf, and approximately $0.7 million to reimburse costs incurred by Mr. Hutchison in connection with the acquisition of our initial portfolio, primarily the earnest money deposit that Mr. Hutchison advanced on our behalf. See “Use of Proceeds.”
Proposed NYSE common stock symbol		“LRP”
Contingent warrants we are offering		Up to 8,750,000 warrants (2)

Description of contingent warrants		Upon the occurrence of the events and satisfaction of the conditions described below, each purchaser of shares of common stock in this offering will receive warrants to purchase an additional amount of common stock. Each warrant, if issued, will be exercisable for five years after the date of the warrants’ issuance, or earlier upon redemption by us. The exercise price to purchase one full share of common stock under the warrants will be equal to the initial public offering price of our common stock in this offering, subject to adjustment in certain circumstances, including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation of our company. However, the warrant exercise price will not be adjusted for issuances of our common stock at

		a price below the warrant exercise price or for any regular quarterly cash distributions. The amount of common stock that each warrant will give the holder the right to purchase per share of common stock purchased in this offering will depend on the extent to which the 30-day volume weighted average price (VWAP) of our common stock over the 30-day period commencing on the first trading day of our common stock on the NYSE, or the 30-day VWAP, is below the initial public offering price per share of our common stock. The events that must occur and the conditions that must be satisfied in order for purchasers of common stock in this offering to receive warrants are as follows:

		Ø  Warrants will only be issuable if (i) the 30-day VWAP of our common stock is below the initial public offering price and (ii) the warrants are approved for listing, subject to official notice of issuance, on the NYSE or NYSE Amex.

		Ø  If the 30-day VWAP is below the initial public offering price and the warrants are so approved, each purchaser of our common stock in the initial public offering will receive one warrant for each share of our common stock that it purchased in the initial public offering and that it holds continuously throughout such 30-day period.

		Ø  The actual number of shares that each warrant will give the holder the right to purchase in respect of each qualifying share held by a qualifying stockholder will be determined based on the extent to which the 30-day VWAP is below the initial public offering price, as follows:

		(a) Based on an assumed initial public offering price of $18.50 per share, the midpoint of the initial public offering price range shown on the cover of this prospectus.

		(b) If the 30-day VWAP is between two of the 30-day VWAP data points shown above, the number of shares that will be issuable pursuant to each warrant will be

		determined by a straight-line interpolation between the two VWAP data points (rounded to the nearest one-hundredth of a share).

		(c) A minimum of 200,000 warrants will be issued to satisfy the applicable NYSE Amex listing standards.

		Ø  Purchasers who are eligible to receive warrants must complete, sign and return a contingent warrant issuance form to us, in which they, among other things, represent and warrant as to the number of shares of common stock that they purchased in this offering, the number of shares that they have held for the full 30-day period commencing on the first trading day of our common stock on the NYSE and that they have not, directly or indirectly, sold, offered, contracted or granted any option to sell (including without limitation any short sale), pledged, transferred, established an open put equivalent position on, or otherwise disposed of, or publicly announced an intention to do any of the foregoing, with respect to any of the shares held for the full 30-day period.

		Ø  Assuming one share of our common stock is issuable upon exercise of each warrant, all purchasers of common stock in the initial public offering hold all of their shares for the full 30-day period and we do not exercise our option to pay cash in lieu of issuing shares upon exercise of warrants, the maximum number of shares of common stock that could be issued upon full exercise of all possible warrants is 8,750,000 shares (or, in the event the underwriters exercise their overallotment option in full, 10,062,500 shares). See “Description of Securities—Contingent Warrants.”

Option to pay cash in lieu of issuing shares upon exercise of warrants		Upon the valid exercise of a warrant, we have the right, but not the obligation, to pay cash in an amount equal to the fair market value of the shares of common stock that are issuable to the holder as a result of the exercise.

Redemption of contingent warrants		At any time while the warrants are exercisable and there is an effective registration statement covering the shares of our common stock that are issuable upon exercise of the warrants available and a current prospectus relating to the shares of common stock issuable upon exercise of the warrants available for use by the holders of the warrants, we may call all outstanding warrants for redemption, in whole and not in part, at a price of $0.01 per warrant upon not less than 30 days’ prior written notice of redemption to each warrant holder and the warrant agent if, and only if, the reported last sale price of our common stock equals or exceeds $27.75 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to but not including the date on which notice of redemption is delivered to warrant holders and the warrant agent. We will call the warrants for redemption by mailing a notice of redemption to each warrant holder and the

		warrant agent. We will also announce the redemption, including the specified redemption date, at the time of mailing of the notice of redemption by filing a Current Report on Form 8-K. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption.

Warrant agent		Mellon Investor Services LLC
Proposed NYSE or NYSE Amex warrant symbol		“LRP WS’’
Ownership and transfer restrictions		Our charter, subject to certain exceptions, limits beneficial and constructive ownership to no more than 9.8% by value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. See “Description of Securities—Restrictions on Ownership and Transfer.”

(1)		As of the date of this prospectus, we have a total of 1,000 shares of common stock outstanding. We sold these shares to Mr. Hutchison in connection with our formation and initial capitalization for total consideration of $1,000. At the closing of this offering, we will repurchase these shares from Mr. Hutchison for $1,000. Accordingly, the 1,000 shares of common stock that we currently have outstanding are excluded from the number of shares of our common stock to be outstanding immediately after the closing of this offering. The number of shares to be outstanding immediately after the closing of this offering includes:

	Ø	shares of our common stock that we are offering in this offering;
	Ø	an aggregate of 324,324 shares of our common stock that our executive officers have agreed to purchase in the concurrent private placement; and
	Ø	an aggregate of 25,000 shares of restricted common stock that will be granted to our director nominees pursuant to our 2010 Equity Incentive Plan upon completion of this offering.

	Ø	1,312,500 shares of our common stock issuable pursuant to the exercise of the underwriters’ overallotment option;
	Ø	any shares of common stock that may be issued upon the exercise of warrants that may be issued in connection with this offering; and
	Ø	any additional shares that are available for future issuance under our 2010 Equity Incentive Plan.

(2)		The number of contingent warrants we are offering assumes no exercise of the underwriters’ overallotment option.

 

Summary pro forma financial and other data

		Pro forma
		June 30,
		2010
Health care properties		$	257,155
Cash and cash equivalents			72,257
Total assets			330,992
Long term debt			158,075
Total liabilities and stockholders’ equity		$	330,992

		Pro forma
		six months				Pro forma
		ended				year ended
		June 30,				December 31,
		2010				2009
Operating Data
Revenues
Rental income		$	8,619			$	17,140
Net residence services			—				—
Membership fees			—				317
Total revenues		$	8,619			$	17,457
Operating expenses
Salaries and benefits			1,362				2,676
Real estate taxes and insurance			178				355
General and administrative			527				984
Property acquisition costs			408				408
Depreciation and amortization			3,321				6,643
Total operating expenses		$	5,796			$	11,066
Net operating income			2,823				6,391
Interest expense and loan cost amortization			(2,119	)			(4,994	)
Net income		$	704			$	1,397
Net income per share
Basic and diluted			0.08				0.15
Weighted average number of shares outstanding
Basic and diluted			9,099,324				9,099,324
Other Data
Funds from operations		$	4,025			$	8,040
EBITDA		$	6,144			$	13,034

		Pro forma
		six months				Pro forma
		ended				year ended
		June 30,				December 31,
		2010				2009
Net income		$	704			$	1,397
Depreciation and amortization			3,321				6,643
Funds from operations		$	4,025			$	8,040

		Pro forma
		six months				Pro forma
		ended				year ended
		June 30,				December 31,
		2010				2009
Net income		$	704			$	1,397
Depreciation and amortization			3,321				6,643
Interest expense and loan cost amortization			2,119				4,994
EBITDA		$	6,144			$	13,034

 

An investment in our common stock involves risks. In addition to other information contained in this prospectus, you should carefully consider the following risks before acquiring shares of our common stock offered by this prospectus. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations, our ability to make cash distributions to our stockholders and the market price of our common stock, which could cause you to lose all or a significant portion of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

 

RISKS RELATED TO OUR BUSINESS

 

We have no operating history and may not be able to successfully operate our business or generate sufficient operating cash flows to make or sustain distributions to our stockholders.

 

We were organized in April 2010 and have no operating history. We currently own no senior housing facilities and will only commence operations upon completion of this offering and the concurrent private placement. Our ability to make or sustain distributions to our stockholders will depend on many factors, including our availability to identify attractive acquisition opportunities that satisfy our investment criteria, our success in completing acquisitions on favorable terms, the level and volatility of interest rates, readily accessible short-term and long-term financing on favorable terms, and conditions in the financial markets, the real estate market and the economy. We will face competition in acquiring high quality senior housing facilities. The value of the facilities that we acquire may decline substantially after we purchase them. Additionally, the past performance of CNL Retirement and CNL Hotels & Resorts, or CNL Hotels, contained herein should not be viewed as an indication of the future performance of our company. There can be no guarantee that we will have similar opportunities to invest in assets that generate similar returns.

 

We may not be able to successfully operate our business or implement our operating policies and strategies successfully, which may affect our ability to make or sustain distributions to our stockholders. Furthermore, there can be no assurance that we will be able to generate sufficient operating cash flows to pay our operating expenses and make distributions to our stockholders.

 

We are a newly formed company and subject to the risks of any newly established business enterprise.

 

As a newly formed company, we are subject to the risks of any newly established business enterprise, including risks that we will be unable to attract and retain qualified personnel, create effective operating and financial controls and systems or effectively manage our anticipated growth, any of which could have a material adverse effect on our business and our operating results.

 

We have not yet committed a substantial portion of the net proceeds from this offering to any specific senior housing facilities other than the six facilities we currently have under contract and, therefore, you will be unable to evaluate the allocation of a substantial amount of the net proceeds from this offering and the concurrent private placement or the economic merits of some of our acquisitions prior to making your investment decision.

 

We have not yet committed a substantial portion of the net proceeds from this offering to any specific senior housing facilities other than the six facilities we currently have under contract, and therefore, you will be unable to evaluate the allocation of a substantial amount of the net proceeds from this offering and the concurrent private placement or the economic merits of some of our acquisitions prior to

 

Risk factors

 

 

making your investment decision. As a result, we will have broad authority to invest the net proceeds in any real estate investments that we may identify in the future and we may use those proceeds to make investments with which you may not agree. In addition, our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. These factors will increase the uncertainty, and thus the risk, of investing in our common stock. Our failure to apply the net proceeds effectively or find suitable facilities to acquire in a timely manner or on acceptable terms could result in returns that are substantially below expectations or result in losses.

 

Until appropriate investments can be identified, we intend to invest the net proceeds in interest-bearing, short-term securities or money-market accounts that are consistent with our intention to qualify as a REIT. These investments are expected to provide a lower net return than we will seek to achieve from our investments in senior housing facilities. We may not be able to identify senior housing facilities that meet our investment criteria, we may not be successful in completing any investment we identify and our investments may not produce acceptable, or any, returns. We may be unable to invest the proceeds on acceptable terms, or at all.

 

If we are unable to timely complete the purchase of the six senior housing facilities we currently have under contract or at all, we will have no immediate designated use for substantially all of the net proceeds of this offering and the concurrent private placement, we may experience delays in locating and securing attractive alternative investments, and we will have incurred substantial expenses without our stockholders realizing the expected benefits.

 

We intend to use a portion of the net proceeds from this offering and the concurrent private placement to fund the cash portion of the purchase price for the six senior housing facilities that we currently have under contract. We cannot assure you that we will acquire any of these facilities because the acquisitions are subject to a variety of factors, such as the satisfaction of closing conditions, including receipt of certain licenses, lender consents and other third-party consents and approvals. If we acquire any of these facilities, we must acquire all of them. As a result, we cannot terminate the purchase of a particular facility, even if there is a problem with that facility, without jeopardizing our ability to acquire the other facilities. If we are unable to complete the purchase of the six facilities that we currently have under contract, we will have no specific designated use for the net proceeds from this offering and the concurrent private placement and investors will be unable to evaluate in advance the manner in which we invest, or the economic merits of the facilities we may ultimately acquire with, the net proceeds.

 

In addition, if we do not complete the purchase of the facilities within our anticipated time frame or at all, we may experience delays in locating and securing attractive alternative investments. These delays could result in our future operating results not meeting expectations and adversely affect our ability to make distributions to our stockholders.

 

Furthermore, if we are unable to complete the purchase of the six senior housing facilities we have under contract, we may forfeit a deposit of up to $20.5 million. If we do not complete the purchase of these facilities, other than as a result of the failure of the sellers to satisfy their obligations or the failure of certain other conditions precedent to closing under the purchase agreement, we will forfeit the deposit.

 

The new leases that we intend to enter into with affiliates of Senior Lifestyle Management and the new management agreements are subject to lender approval and may change following the completion of this offering in a manner that adversely affects us.

 

The new leases that we intend to enter into with affiliates of Senior Lifestyle Management are subject to lender approval and may change following the completion of this offering. If the lender requires us to modify the terms of the new leases, including the termination provisions, our ability to implement the TRS lessee structure, pending receipt of the private letter ruling discussed under “Material Federal Income Tax Considerations” and the regulatory approvals required to transfer the operating licenses, could be

 

Risk factors

 

 

negatively impacted. The new management agreements that the tenants of the facilities, including, if we obtain the New York state regulatory approvals required to transfer the current facility operators to affiliates of Senior Lifestyle Management, the New York assisted living facilities, will enter into with Senior Lifestyle Management are subject to lender approval and may change following completion of this offering. Further, if the lender requires changes to the economic terms of these leases or management agreements, these changes may adversely impact our financial results and cause our actual rental revenue to differ from the expected rental revenue reflected in the pro forma financial information included elsewhere in this prospectus. In addition, there is a possibility that the applicable state healthcare agencies may request modifications to the new leases or management agreements in connection with reviewing the operating license applications.

 

Our facilities may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.

 

The senior housing facilities that we acquire may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to our acquisition of senior housing facilities may not survive the closing of the transactions. While we will likely seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive and with respect to pre-closing liabilities that we do not agree to assume, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on indemnifiable losses. For example, the purchase and sale agreement relating to the six senior housing facilities provides that, if the closing occurs, the liability of the seller will not, in the aggregate, exceed $500,000 for claims arising out of breaches of the sellers’ representations and warranties, in the case of the facility located in Florida, and $1.5 million, in the case of the other facilities. There is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties or arising out of successor liability from pre-closing liabilities. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these facilities may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Our remedies will be limited if the sellers default and fail to perform their contractual obligations under the purchase agreement that relates to the six senior housing facilities we currently have under contract.

 

In the event that the sellers of these six senior housing facilities that we currently have under contract fail to perform their contractual obligations, we will have limited remedies. For example, if the sellers default, we would have the right to seek specific performance. In seeking specific performance, we would face considerable delays and expense in completing the acquisition of these facilities, if at all. Pursuing specific performance may also prevent or delay us from identifying and acquiring attractive alternative investments in which to invest the net proceeds from this offering and the concurrent private placement. If we were to elect to terminate the agreement in lieu of pursuing a lawsuit, our remedies would likely be limited to the return of our deposit and, in certain circumstances where the sellers have acted intentionally, reimbursement of our actual due diligence costs (not to exceed $350,000) plus, where the sellers have acted both intentionally and in bad faith, the additional payment to us of liquidated damages of $1.5 million. We cannot assure you that our deposit will be returned or the sellers will have sufficient funds to reimburse our due diligence expenses or pay the liquidated damages.

 

Risk factors

 

 

Our due diligence has been limited and we are obtaining limited representations and warranties in the purchase and sale agreement related to our acquisition of the six senior housing facilities we have under contract.

 

The purchase and sale agreement for the six senior housing facilities contains limited representations and warranties regarding these facilities. For example, while the sellers have represented that they have provided all material environmental reports prepared by third party consultants relating to the facilities that are in their possession, the environmental representations relating to such facilities (1) are generally qualified by the sellers’ knowledge, (2) do not specifically include violations of environmental laws by the sellers, the entities that own or ground lease the facilities, the tenants, or the business that manages the facilities, and (3) do not include representations regarding remediation of hazardous materials (including mold or infectious medical waste) at the facilities or the properties.

 

We have not obtained recent independent appraisals of the six facilities we have under contract and there is no assurance that the purchase price we have agreed to pay for these facilities does not exceed their current fair market value.

 

We have not obtained recent independent appraisals of the six facilities we have under contract. The most recent independent appraisals performed on these six facilities, which were performed more than two years ago when the current owners obtained debt financing on the facilities, are not reflective of the current fair market value of the facilities. There is no assurance that the purchase price we have agreed to pay for these facilities does not exceed their current fair market value.

 

There can be no assurance that we will complete the acquisition of any of the senior housing facilities that we have identified as potential acquisition targets or that we will identify other senior housing facilities for acquisition.

 

There can be no assurance that we will complete the acquisition of any of the senior housing facilities that we have identified as potential acquisition targets, including the senior housing facility we have under non-binding letter of intent, or that we will be able identify other acquisition targets that meet our investment criteria. Our acquisition of the senior housing facilities that we have identified as potential acquisition targets, or of any other senior housing properties that we identify in the future, will depend on, among other things, the willingness of the parties to proceed with the contemplated transaction and our ability to negotiate mutually satisfactory acquisition terms with the sellers and to enter into binding purchase and sale agreements with the sellers. Even if we do enter into binding purchase and sale agreements, we cannot assure you that the closing conditions under those agreements will be satisfied and that we will close on the acquisitions. Our inability to acquire properties in the future that satisfy our investment criteria would have an adverse effect on our operating results and our ability to pay dividends to our stockholders.

 

We may not be successful in identifying and completing off-market acquisitions and other suitable acquisitions or investment opportunities, which may impede our growth and materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

A key component of our growth strategy is to acquire senior housing facilities before they are widely marketed by the owners, or “off-market.” Facilities that are acquired off-market are typically more attractive to us as a purchaser because of the absence of a formal marketing process, which could lead to higher prices. If we cannot obtain off-market deal flow in the future, our ability to locate and acquire facilities at attractive prices could be materially and adversely affected.

 

Risk factors

 

 

We expect to compete for investment opportunities with entities that may have substantially greater financial resources than we have. These entities generally may be able to accept more risk than we can prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us or the number of facilities that we are able to acquire. This competition may also increase the bargaining power of facility owners seeking to sell to us, making it more difficult for us to acquire new facilities on attractive terms.

 

Because our management team will have broad discretion to invest the net proceeds of this offering and the concurrent private placement, it may make investments where the returns are substantially below expectations or which result in net operating losses.

 

Our management team will have broad discretion, within the general investment criteria established by our board of directors, to invest the net proceeds of this offering and the concurrent private placement and to determine the timing of such investments. Our management team may therefore make investments where the returns are substantially below expectations or which result in net losses.

 

Our investment policies are subject to revision from time to time in our board’s discretion, which could diminish stockholder returns below expectations.

 

Our investment policies may be amended or revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Such discretion could result in investments that may not yield returns consistent with investors’ expectations.

 

We depend on the efforts and expertise of the members of our management team and our business would be adversely affected by the loss of their services.

 

We depend on the efforts and expertise of the members of our management team, including Mr. Hutchison, our Chairman and Chief Executive Officer, and Mr. Anderson, our President and Chief Operating Officer, to execute our strategy. The loss of the services of the members of our management team, and our inability to find suitable replacements, would have an adverse effect on our business.

 

We intend to invest primarily in high quality private-pay senior housing facilities, a segment of the senior housing market that is highly competitive.

 

Private-pay senior housing is a competitive segment of the senior housing industry. Our senior housing facilities will compete on the basis of location, affordability, quality of service, reputation and availability of alternative care environments. Our senior housing facilities will rely on the willingness and ability of seniors to select senior housing options. Our facility operators may have competitors with greater marketing and financial resources and may be able to offer incentives or reduce fees charged to residents thereby potentially reducing the perceived affordability of our facilities during downturns in the economy. Additionally, the high demand for quality caregivers in a given market could increase the costs associated with providing care and services to residents. These and other factors could cause the amount of our revenue generated by private payment sources to decline or our operating expenses to increase. In periods of weak demand, as may occur during a general economic recession, profitability is negatively affected by the relatively high fixed costs of operating a senior housing facility.

 

Risk factors

 

 

Failure of the general economy to exhibit improvement or other events that adversely affect the ability of seniors to afford the fees and costs associated with living in a senior housing facility could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Costs to seniors associated with senior housing facilities are generally not reimbursable under government reimbursement programs such as Medicaid and Medicare. Only seniors with income or assets meeting or exceeding certain standards can typically afford to pay our resident and service fees and, in some cases, entrance fees. Economic downturns, softness in the housing market, reductions or declining growth of government entitlement programs, such as social security benefits, or stock market volatility could adversely affect the ability of seniors to afford the fees for our senior housing facilities. If our facility operators are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay entrance and other resident fees charged at our senior housing facilities, our occupancy rates could decline, which could, in turn, materially adversely affect our business, results of operations and financial condition and our ability to make distributions to our stockholders.

 

The inability of seniors to sell their homes could negatively impact occupancy rates, revenues, cash flows and results of operations of the facilities we acquire.

 

Recent housing price declines and reduced home mortgage availability have negatively affected the U.S. housing market, with certain geographic areas experiencing more acute deterioration than others. Downturns in the housing markets, such as the one we have recently experienced, could adversely affect the ability (or perceived ability) of seniors to afford our entrance fees and resident fees as potential residents frequently use the proceeds from the sale of their homes to cover the cost of these fees. Specifically, if seniors have a difficult time selling their homes, these difficulties could impact their ability to relocate into or finance their stays at our facilities with private resources. If the recent volatility in the housing market continues for a prolonged period, our occupancy rates, revenues, cash flows and results of operations could be negatively impacted.

 

Upon completion of the acquisition of the six senior housing facilities that we currently have under contract, all six of the facilities will be leased to affiliates of Senior Lifestyle Management which will account for substantially all of our revenues.

 

Upon completion of the acquisition of the six senior housing facilities that we currently have under contract, all six of the facilities will be leased to affiliates of Senior Lifestyle Management which will account for substantially all of our revenues. This concentration of credit risk in one facility operator makes us more vulnerable economically than if we entered into leases and management agreements with several facility operators. Any adverse developments in this facility operator’s business and affairs, financial strength or ability to operate our facilities efficiently and effectively could have a material adverse effect on our results of operations. We cannot assure you that this facility operator will have sufficient assets, income and access to financing and insurance coverage to enable it satisfy its lease obligations to us or effectively and efficiently operate the six facilities we intend to acquire with a portion of the net proceeds from this offering and the concurrent private placement. The failure or inability of this facility operator to satisfy its lease obligations to us or effectively and efficiently operate these facilities would materially reduce our revenues and net income, which could in turn reduce the amount of our distributable cash and cause our stock price to decline. Our pursuit of any remedies upon a default under any agreement between us and the facility operator may be impacted by our consideration of the effect such remedies will have on other facilities leased to or managed by the facility operator.

 

With respect to senior housing facilities that we lease to our facility operators, we will depend on our facility operators for a significant portion of our revenues and operating income. Any

 

Risk factors

 

 

inability or unwillingness by our facility operators to satisfy their obligations to us under their agreements with us could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

 

With respect to senior housing facilities that we lease to our facility operators, rental income paid by our facility operators will be a significant source of our total revenues and operating income. Since our leases with our facility operators generally will be net leases, we will depend on our facility operators not only for rental income, but also to pay insurance, taxes, utilities and maintenance and repair expenses in connection with the leased facilities. Any inability or unwillingness by our facility operators to make rental payments to us or to otherwise satisfy their obligations under their agreements with us could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders. Any failure by our facility operators to effectively conduct their operations could adversely affect their business reputation and ability to attract and retain residents in facilities we lease to our facility operators. This could also have a material adverse effect on our results of operations and our ability to make distributions to our stockholders. We anticipate that our leases will require our facility operators to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with our facility operators’ respective businesses. We cannot assure you that our facility operators or their respective subsidiaries will have sufficient assets, income, access to financing and insurance coverage to enable it to satisfy these indemnification obligations.

 

With respect to senior housing facilities leased to our TRS lessee, adverse developments in our facility operators’ respective businesses, affairs or financial condition could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

 

With respect to senior housing facilities leased to our TRS lessee, these facilities will be operated by our facility operators pursuant to incentivized management agreements. Although we expect our TRS lessee to have various rights as the lessee of these facilities under these management agreements, we will rely on our facility operators’ personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment to manage the facilities leased to our TRS lessee efficiently and effectively. We also will rely on our facility operators to set resident fees, to provide accurate property-level financial results for our facilities in a timely manner and to otherwise operate those facilities in accordance with the terms of our management agreements and in compliance with all applicable laws and regulations. Various factors could cause our facility operators’ costs to operate these facilities to increase. For example, a shortage of trained personnel or general inflationary pressures may force our facility operators to enhance the pay and benefits packages offered to compete effectively for such personnel, and our facility operators may not be able to offset such added costs by increasing the rates charged to residents. Increases in our facility operators’ costs, failure on the part of our facility operators to attract and retain qualified personnel or changes in our facility operators’ management teams could adversely affect the revenue we receive from the facilities leased to our TRS lessee and operated by our facility operators.

 

Our facility operators may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us.

 

Our facility operators may be subject to claims that their services have resulted in resident injury or other adverse effects. The insurance coverage that will be maintained by our facility operators, whether through commercial insurance or self-insurance, may not cover all claims made against them or continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to our facility operators due to state law prohibitions or limitations of availability. As a result, our facility operators operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. From time to time, there may also be

 

Risk factors

 

 

increases in government investigations of long-term care providers, as well as increases in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or government investigation, whether currently asserted or arising in the future, could lead to potential termination from government programs, large penalties and fines and otherwise have a material adverse effect on a facility operator’s financial condition. If a facility operator is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a facility operator is required to pay uninsured punitive damages, or if a facility operator is subject to an uninsurable government enforcement action, the facility operator could be exposed to substantial additional liabilities, which could result in its bankruptcy or insolvency or have a material adverse effect on a facility operator’s business and its ability to meet its obligations to us.

 

Moreover, advocacy groups that monitor the quality of care at senior housing facilities have sued senior housing facility operators and called upon state and federal legislators to enhance their oversight of trends in senior housing facility ownership and quality of care. Patients have also sued senior housing facility operators and have, in certain cases, succeeded in winning very large damage awards for alleged abuses. This litigation and potential litigation in the future will materially increase the costs incurred by our facility operators for monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice and liability insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of senior housing facilities continues. Increased costs could limit our facility operator’s ability to meet their obligations to us, potentially decreasing our revenue and increasing our collection and litigation costs. To the extent we are required to remove or replace a facility operator, our revenue from the affected facility could be reduced or eliminated for an extended period of time.

 

Finally, if we lease a senior housing facility to our TRS lessee rather than leasing the facility to a facility operator, our TRS lessee will become subject to state licensing requirements that apply to senior housing facility operators and our TRS lessee will have increased liability resulting from events or conditions that occur at the facility, including for example injuries to residents at the facility that are caused by the negligence or misconduct of the facility operator or its employees. Insurance may not cover all such liabilities.

 

We face potential adverse consequences of bankruptcy or insolvency by our facility operators.

 

We are exposed to the risk that our facility operators could become bankrupt or insolvent. This risk would be magnified to the extent that a facility operator leased or managed multiple facilities. 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.

 

Risk factors

 

 

Restrictive covenants in our management agreements could preclude us from taking actions with respect to the sale or refinancing of a senior housing facility that would otherwise be in our best interest.

 

We may enter into management agreements that contain some restrictive covenants or acquire facilities subject to existing management agreements that do not allow us the flexibility to sell or refinance our senior housing facilities without the consent of or obligation to the facility operator. For example, the terms of some management agreements may require that we pay the facility manager a termination fee or a buy-out fee if we or the buyer wishes to terminate the management agreement upon the sale of a facility or may restrict our ability to sell a facility unless the purchaser is not a competitor of the facility operator and assumes the related management agreement and meets specified other conditions. If we enter into any such management agreements, or acquire facilities with such terms, we may be precluded from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense.

 

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

 

Various legal and contractual considerations may limit or delay our exercise of any termination rights contained in the management agreements we intend to enter into with facility operators. In the event these management agreements are terminated for any reason or are not renewed upon expiration of their terms, we will have to find another facility operator for the facilities covered by those agreements. We believe there are a number of qualified national and regional senior housing operators that would be interested in managing our facilities. However, we cannot assure you that we will be able to locate another suitable facility operator or, if we are successful in locating such a facility operator, that such facility operator will manage the properties effectively and efficiently. Any such inability or lengthy delay in replacing a facility operator following termination or non-renewal of our management agreements could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

 

If we are unable to successfully manage our growth, our operating results and financial condition could be adversely affected.

 

Our ability to grow our business will depend upon our management team’s business contacts and their ability to successfully hire, train, supervise and manage additional personnel, including the team of dedicated asset managers that we intend to employ following completion of this offering. We may not be able to hire and train sufficient personnel or develop management, information and operating systems suitable for our expected growth. If we are unable to manage any future growth effectively, our operating results and financial condition could be adversely affected.

 

Our TRS lessee structure subjects us to the risk of increased operating expenses.

 

Our TRS lessee will engage facility operators pursuant to management agreements and will pay these managers a fee for operating the facilities and reimburse certain expenses paid by these managers; however, the TRS lessee will receive all the operating profit or losses at the facility, net of corporate income tax, and we will be subject to the risk of increased operating expenses.

 

Risk factors

 

 

We will be exposed to various operational risks, liabilities and claims with respect to our senior housing facilities that may adversely affect our ability to generate revenues and/or increase our costs, which could have a material adverse effect on our results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Through our ownership of senior housing facilities, we will be exposed to various operational risks, liabilities and claims with respect to our facilities. 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 senior housing facilities, which could have a material adverse effect on our facility operators’ results of operations and their ability to meet their obligations to us and operate our facilities effectively and efficiently, which in turn could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and unanticipated capital improvements requirements.

 

To qualify for taxation as a REIT, we will be required to distribute at least 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains) each year to our stockholders, and we generally expect to make distributions in excess of such amount. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal income tax on the retained taxable income. In the event of downturns in our operating results, unanticipated capital improvements to our senior housing facilities or other factors we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors which will consider, among other factors, our financial performance, any debt service obligations, any debt covenants, and capital expenditure requirements. We cannot assure you that we will generate sufficient cash in order to fund distributions.

 

We may rely on credit enhancements to our leases for minimum rent payments.

 

Our leases may have credit enhancement provisions, such as guarantees or shortfall reserves provided by a third-party. These credit enhancement provisions may terminate at either a specific time during the lease term or once operating thresholds are met or exceeded. After the termination of a credit enhancement, we may only look to the facility operator to make lease payments, and if our facilities are unable to generate sufficient cash flow to meet minimum rent payments and the facility operator does not otherwise have the resources to make rent payments, our results of operations, financial performance and distributions to stockholders could be adversely affected.

 

We may make distributions to our stockholders before we have fully invested the net proceeds from this offering and the concurrent private placement, which would, among other things, reduce our cash available to invest in senior housing facilities and may reduce the returns we are able to generate for our stockholders.

 

Prior to the time we have fully invested the net proceeds of this offering and the concurrent private placement, we may fund distributions to our stockholders for the purpose of satisfying the requirements for qualification as a REIT for federal income tax purposes, or for any other authorized corporate purpose. We may use cash on hand which may include cash flow from operations or net proceeds of

 

Risk factors

 

 

this offering and the concurrent private placement. In such an event, it is possible that we could make distributions in excess of our earnings and profits and thereby reduce our funds available to invest in senior housing facilities, which may adversely affect our financial results and reduce the returns on your investment in our common stock. In addition, funding such distributions may constitute a return of capital to our stockholders, which could have the effect of reducing each stockholder’s tax basis in our common stock.

 

Our future growth depends on obtaining new financing and if we cannot obtain financing in the future, our growth will be limited.

 

We may not be able to fund acquisitions and capital improvements solely from cash provided from our operating activities because we must distribute to our stockholders at least 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains) each year to satisfy the requirements for qualification as a REIT for federal income tax purposes. As a result, our ability to fund acquisitions and capital improvements through retained earnings will be limited. Our ability to generate external growth by acquiring senior housing facilities will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on capital markets conditions. We cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms. Specifically, while we intend to seek to arrange a credit facility to fund investments and operating activities following the investment of the net proceeds of this offering, we have no commitment from any lender at the current time and there can be no assurance that we will be able to arrange a credit facility in the future on acceptable terms, or at all.

 

Our debt service obligations could adversely affect our overall operating results, may require us to sell facilities, may jeopardize our qualification as a REIT and could adversely affect our ability to make distributions to our stockholders and the market price of our common stock.

 

In connection with the acquisition of the six senior housing facilities that we have under contract, we expect to assume an aggregate of approximately $158.1 million of in-place mortgage debt. These mortgage loans mature on June 1, 2013. Although the in-place mortgage debt is made up of individual mortgage loans related to the individual facilities, most of the mortgage loans contain cross-default and cross-collateralization provisions which means that a default under any one of the loans could trigger a default under the other loans. Furthermore, our business strategy generally contemplates the use of both secured and unsecured debt to finance long-term growth. Our governing documents contain no limitations on the amount of debt that we can incur and our board of directors may approve increases in our leverage at any time without stockholder approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

 

 

Risk factors

 

 

 

If we violate covenants in our debt agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all.

 

If we are unable to repay our debt obligations in the future, we may be forced to refinance debt or dispose of or encumber our assets, which could adversely affect distributions to stockholders.

 

If we do not have sufficient funds to repay the debt we expect to assume in connection with our acquisition of the six senior housing facilities we have under contract or any other debt we incur in the future at maturity, or before maturity in the event we breach our debt agreements and our lenders exercise their right accelerate repayment, it may be necessary to refinance the debt through additional debt or equity financings. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of senior housing facilities on disadvantageous terms, potentially resulting in losses. We may place mortgages on senior housing facilities that we acquire to secure a revolving credit facility or other debt. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our senior housing facilities that may be pledged to secure our obligations to foreclosure. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our senior housing facilities in order to meet our debt service obligations at times which may not permit us to receive an attractive return on our investments.

 

Interest expense on any debt we incur may limit our cash available for distribution to our stockholders.

 

The debt we expect to assume in connection with our acquisition of the six senior housing facilities we have under contract bears interest at a variable rate and we may incur additional variable rate debt in the future. Higher interest rates could increase debt service requirements on any variable rate debt that we incur and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future business opportunities, or other purposes.

 

Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.

 

To the extent consistent with our intention to qualify as a REIT for federal income tax purposes, we may obtain in the future one or more forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to “hedge” against the possible negative effects of interest rate fluctuations. For example, in connection with our assumption of the in-place mortgage debt that is secured by the six senior housing facilities we have under contract, we will be required to obtain an interest rate cap. However, such hedging implies costs and we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreement will honor their obligations thereunder.

 

Joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and disputes between us and our joint venture partners.

 

We may co-invest in senior housing facilities with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a senior housing facility, partnership, joint venture or other entity. In this event, we would not be in a position to exercise sole decision-making authority regarding the facility, partnership, joint venture or other entity. Investments through partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that

 

Risk factors

 

 

joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the partnership or joint venture. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent the members of our management team from focusing its time and effort on our business. Consequently, action by, or disputes with, our joint venture partners might result in subjecting the facilities owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

 

Unanticipated expenses and insufficient demand for senior housing facilities in new geographic markets could adversely affect our profitability and our ability to make distributions to our stockholders.

 

As part of our business strategy, we may acquire senior housing facilities in geographic areas in which the members of our management team may have little or no operating experience and in which potential customers may not be familiar with benefits of and care provided by that particular facility. As a result, we may have to incur costs relating to the opening, operation and promotion of such facilities that are substantially greater than those incurred in other areas. These facilities may attract fewer residents than other senior housing facilities we may acquire, while at the same time, we may incur substantial additional costs with such facilities. As a result, the results of operations at any facilities that we may acquire in unfamiliar markets may be less than those of other senior housing facilities that we may acquire. Unanticipated expenses and insufficient demand could adversely affect our financial condition and results of operations.

 

The conflicts of interest policy we will adopt may not adequately address all of the conflicts of interest that may arise with respect to our activities.

 

In order to avoid any actual or perceived conflicts of interest with our directors, officers or employees, we intend to adopt a conflicts of interest policy to specifically address some of the conflicts relating to our activities. Although under this policy the approval of a majority of our disinterested directors will be required to approve any transaction, agreement or relationship in which any of our directors, officers or employees has an interest, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us. In addition, our current board of directors consists only of Mr. Hutchison, and as a result, the transactions and agreements entered into in connection with our formation prior to this offering and the concurrent private placement have not been approved by any independent or disinterested directors.

 

RISKS RELATED TO THE SENIOR HOUSING INDUSTRY

 

Our failure or the failure of our facility operators to comply with licensing and certification requirements, the requirements of governmental programs, fraud and abuse regulations or new legislative developments may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

The operations of our facilities are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing laws. The ultimate timing or effect of any changes in these laws and regulations cannot be predicted. Failure to obtain licensure or loss or suspension of licensure or certification may prevent a facility from operating or result in a

 

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suspension of certain revenue sources until all licensure or certification issues have been resolved. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. State laws may require compliance with extensive standards governing operations and agencies administering those laws regularly inspect such facilities and investigate complaints. Failure to comply with all regulatory requirements could result in the loss of the ability to provide or bill and receive payment for health care services. Additionally, transfers of operations of senior housing facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate. We may have no direct control over our facility operators’ ability to meet regulatory requirements and failure to comply with these laws, regulations and requirements may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

 

Cost control and other health care reform measures may reduce reimbursement revenue available to our senior housing facilities.

 

The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs and the vertical and horizontal consolidation of health care providers. The pressure to control health care costs has intensified in recent years as a result of the national health care reform debate and has continued as Congress attempts to slow the rate of growth of federal health care expenditures as part of its effort to balance the federal budget. Similar debates are ongoing at the state level in many states. These trends are likely to lead to reduced or slower growth in reimbursement for services provided by our operators at some of our senior housing facilities and could therefore result in reduced profitability, which may have an adverse affect on our results of operations, our ability to make distributions to our stockholders and the market price of our common stock.

 

Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, nationally or at the state level. We cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our facility operators and, thus, our business.

 

Health care, including the long-term care and assisted living sectors, remains a dynamic, evolving industry. On March 23, 2010, the Patient Protection and Affordable Care Act of 2010 was enacted and on March 30, 2010, the Health Care and Education Reconciliation Act was enacted, which in part modified the Patient Protection and Affordable Care Act. Together, the two Acts serve as the primary vehicle for comprehensive health care reform in the United States. The two Acts are intended to reduce the number of individuals in the United States without health insurance and effect significant other changes to the ways in which health care is organized, delivered and reimbursed. The legislation will become effective in a phased approach, beginning in 2010 and concluding in 2018. At this time, the effects of the legislation and its impact on our business are not yet known. Our business, results of operations and ability to pay cash distributions to our stockholders could be materially and adversely effected by the two Acts and further governmental initiatives undertaken pursuant to the two Acts.

 

Current economic conditions may reduce demand for senior housing facilities and adversely affect operating profitability.

 

The performance of the senior housing industry is linked to the performance of the general economy and, specifically, the housing market in the United States. It is also sensitive to personal wealth and available fixed income of seniors and their adult children. Declines in home values, consumer confidence and net worth due to adverse general economic conditions may reduce demand for senior housing.

 

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We cannot predict how severe or prolonged the global economic downturn will be or how the senior housing industry will be impacted by it. A further extended period of economic weakness would likely have an adverse impact on our revenues and negatively affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

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.

 

In general, assisted and independent living services currently are not reimbursable under government reimbursement programs, such as Medicare and Medicaid. Substantially all of the resident fee revenues generated by our facilities will be derived from private payment sources consisting of income or assets of residents or their family members. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our facilities 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 our facility operators are 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 our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

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

 

Although we intend to target senior housing facilities in markets that have high barriers to entry for new facilities, barriers to entry in the senior housing industry are not substantial in all markets. Consequently, the development of new senior housing facilities could outpace demand. If the development of new senior housing facilities outpaces demand for those asset types in the markets in which our facilities 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 facilities 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 or upon the death of the resident. Our facility operators 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 facilities 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 Employee Free Choice Act could substantially increase the cost of doing business by increasing wage and benefit costs.

 

A number of members of the legislative and executive branches of the Federal government have stated that they support the Employee Free Choice Act, which, if enacted, would discontinue the current practice of having an open process where both the union and the employer are permitted to educate employees regarding the pros and cons of joining a union before having an election by secret ballot. Under the Employee Free Choice Act, the employees would only hear the union’s side of the argument

 

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before making a commitment to join the union. The Employee Free Choice Act would permit unions to quietly collect employee signatures supporting the union without notifying the employer and permitting the employer to explain its views before a final decision is made by the employees. Once a union has collected signatures from a majority of the employees, the employer would have to recognize, and bargain with, the union. If the employer and the union fail to reach agreement on a collective bargaining contract within a certain number of days, both sides would be forced to submit their respective proposals to binding arbitration and a federal arbitrator would be permitted to create an employment contract binding on the employer. If the Employee Free Choice Act is enacted, a number of the senior housing facilities we will own or seek to acquire could become unionized.

 

Generally, unionized senior housing employees are subject to a number of work rules which increase expenses and decrease operating margins at unionized facilities. We believe that the unionization of senior housing employees may result in a significant decline in profitability and property value, which could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

GENERAL RISKS RELATED TO REAL ESTATE

 

The ownership of real estate is subject to various risks beyond our control.

 

The ownership of real estate is affected by many factors beyond our control, including:

 

 

We may decide to sell senior housing facilities in the future. We cannot predict whether we will be able to sell any facility for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a facility.

 

We may be required to expend funds to correct defects or to make improvements before a facility can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a senior housing facility, we may agree to lock-out provisions that materially restrict us from selling that facility for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that facility. These factors and any others that would impede our ability to respond to adverse changes in the performance of the senior housing facilities or a need for liquidity could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Due to our concentration in senior housing, a downturn in the senior housing or general health care industry would adversely affect our operations and financial condition.

 

We invest primarily in real estate—in particular, senior housing facilities. 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

 

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facilities used in the senior housing industry. If the current downturn in the real estate industry continues or intensifies, it could adversely affect the value of our facilities and our ability to sell facilities for a price or on terms acceptable to us. A downturn in the senior housing industry could negatively impact our operating income and earnings, as well as our facility operators’ ability to make rental or other payments to us, which, in turn, could have a material adverse effect on our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Because real estate investments are relatively illiquid, our ability to quickly sell or exchange any of our facilities 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 facility 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 health care 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 health care will not have a material adverse effect on the health care industry, including our senior housing operations and facility operators. These adverse effects may be more pronounced than if we diversified our investments outside of real estate or outside of senior housing.

 

Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to make distributions to our stockholders.

 

Each of our senior housing facilities will be subject to real and personal property taxes. These taxes may increase as tax rates change and as the facilities are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely affected and the market price of our common stock could decline.

 

Actions by competitors may have an adverse effect on our ability to deploy capital.

 

Existing health care REITs, private funds, investment pools or well capitalized new competitors in our sector may present challenges and competitive bidding for projects that meet our investment criteria. These competitive forces may reduce the number or volume of feasible acquisition targets in the future.

 

Noncompliance with environmental laws and releases of hazardous substances could subject us to fines and liabilities, which could adversely affect our operating results.

 

The senior housing facilities that we acquire will be subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner or operator of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the release of the contamination. These laws also apply to persons who owned or operated a property at the time that it became contaminated, and therefore it is possible that we could incur these costs even after we sell some of the properties we acquire. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

 

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Furthermore, various court decisions have established that third parties may recover damages for personal injury, as well as for damage to property and to natural resources caused by contamination. For instance, a person exposed to asbestos while staying in a senior housing facility may seek to recover damages if he or she suffers personal injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals (such as swimming pool treatment chemicals at a senior housing facility) to manage them carefully and to notify local officials that the chemicals are being used.

 

We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, to satisfy a judgment or pay a penalty, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We have obtained a Phase I environmental site assessment for each of the six senior housing facilities that we have under contract and expect to obtain Phase I environmental site assessments for facilities we acquire in the future. Based on these Phase I environmental site assessments and the sellers’ representations in the purchase and sale agreement related to the six senior housing facilities we have under contract, we are not aware of any material environmental liabilities related to these facilities. However, these environmental site assessments may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities. For example, the Phase I environmental site assessments did not include a comprehensive mold investigation.

 

As a result, we may become subject to material environmental liabilities. We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities on us, or (2) the environmental condition of our senior housing facilities will not be affected by the condition of the properties in the vicinity of our senior housing facilities (such as the presence of leaking underground storage tanks on an adjacent up-gradient property) or by third parties unrelated to us.

 

Our senior housing facilities may contain or develop harmful or toxic mold, which could lead to liability for adverse health effects and costs of remediation.

 

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce harmful airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. Some of the facilities in our portfolio may contain harmful amounts of microbial matter, such as mold and mildew. The presence of such microbial matter at any of our properties could require us to undertake a costly remediation program to contain or remove the material from the affected property. The presence of such microbial matter could also expose us to liability from residents, employees and others if property damage or health concerns arise.

 

Any mortgage debt obligations we incur will expose us to increased risk of property losses to foreclosure, which could adversely affect our financial condition, cash flow and ability to satisfy our other debt obligations and make distributions to our stockholders.

 

Incurring mortgage debt increases our risk of property losses, because any defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing the loan for which we are in default. For tax purposes, a foreclosure of any of our facilities would be treated as a sale of the facility for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the facility, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders of that income.

 

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In addition, any default under our mortgage debt obligations may increase the risk of our default on other indebtedness. If this occurs, our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders may be adversely affected.

 

Capital expenditure requirements at our facilities may be costly and require us to incur debt, postpone improvements, reduce distributions or otherwise adversely affect the results of our operations and the market price of our common stock.

 

Some of the senior housing facilities we acquire may have a need for renovations and capital improvements at the time of acquisition and all of the facilities we acquire will have an ongoing need for renovations and other capital improvements, including replacement, from time to time, of furniture, fixtures and equipment. In addition, if we incur indebtedness, as we intend to do in the future, our lenders will likely require that we set aside annual amounts for capital improvements to our properties. These capital improvements may give rise to the following risks:

 

 

The costs of renovations and capital improvements could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Real estate development and redevelopment is subject to timing, budgeting and other risks that may adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Though not intended to be a primary focus of our initial investment strategy, we may engage in the development and redevelopment of senior housing facilities if suitable opportunities arise. Development and redevelopment involves a number of risks, including risks associated with:

 

 

We may not have control over facilities under construction and we may be subject to risks in connection with a developer’s ability to control construction costs and the timing of completion of construction or a developer’s ability to build in conformity with plans, specifications and timetables.

 

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We cannot assure you that any development or redevelopment project will be completed on time or within budget. Our inability to complete a project on time or within budget could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

Uninsured and underinsured losses could result in a loss of capital.

 

We intend to maintain comprehensive insurance on each of our facilities, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by senior housing facility owners. There are no assurances that coverage will be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, and losses from terrorist activities may not be insurable or may not be economically insurable. In this regard, one of the six senior housing facilities that we currently have under contract is located in Jupiter, Florida, which is an area that is known to be subject to hurricane and flood risk. Further, lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements.

 

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a senior housing facility, as well as the anticipated future revenue from the facility. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the facility. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a senior housing facility after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed facility.

 

Compliance with the Americans with Disabilities Act could require us to incur substantial costs.

 

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. In June 2008, the Department of Justice proposed a substantial number of changes to the Accessibility Guidelines under the ADA. In January 2010, final publication and implementation of these regulations, pending a comprehensive review by the current administration, was suspended. If implemented as proposed, the new guidelines could cause some of the senior housing facilities we acquire to incur costly measures to become fully compliant. If we are required to make substantial modifications to facilities we acquire, whether to comply with the Americans with Disabilities Act, or the ADA, or other changes in governmental rules and regulations, our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders could be adversely affected.

 

We may incur significant unexpected costs to comply with fire, safety and other regulations, which could adversely impact our financial condition, results of operations, and ability to make distributions.

 

The senior housing facilities that we acquire are subject to various additional federal, state and local regulatory requirements, such as state and local fire and safety requirements, building codes and land use regulations. If we fail to comply with these requirements, we could be subject to governmental fines or private damage awards. We believe that the six senior housing facilities we currently have under contract are currently in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether future requirements, including any requirements that may emerge from pending or future climate change legislation, will require us to

 

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make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flow, the per share trading price of our common stock, our ability to satisfy our debt service obligations and our ability to pay distributions to you.

 

RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE

 

Provisions of our charter may limit the ability of a third party to acquire control of us by authorizing our board of directors to authorize issuances of additional securities.

 

Upon completion of this offering and the concurrent private placement, our charter will authorize our board of directors to issue up to 500 million shares of common stock and up to 100 million shares of preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may authorize the issuance of additional shares or establish a series of common or preferred stock that may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control is in their interest.

 

We are subject to anti-takeover provisions, which may have the effect of delaying, deferring or preventing a transaction or change in control of our company.

 

Our charter and bylaws contain various procedural and other requirements which could make it difficult for stockholders to effect certain corporate actions. For example, our board of directors has the power to increase or decrease the aggregate number of authorized shares of our stock or the number of authorized shares of any class or series of our stock, to cause us to issue additional shares of common stock or preferred stock and to fix the terms of one or more classes or series of our stock without stockholder approval. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

 

Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of directors or stockholders to approve proposals to acquire our company or effect a change in control.

 

Certain provisions of the Maryland General Corporation Law, or the MGCL, applicable to Maryland corporations may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

 

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By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.

 

Additionally, Title 8, Subtitle 3 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain provisions, such as a classified board, some of which we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then current market price.

 

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

 

Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

 

Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies.

 

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Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.

 

Our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in the election of directors. Our charter also provides that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors with their own nominees and may prevent a change in control of our company that is in the best interests of our stockholders.

 

The ability of our board of directors to change our major policies without the consent of stockholders may not be in your interest.

 

Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our board may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

 

We will enter into an employment agreement with each of our executive officers that will require us to make payments in the event the officer’s employment is terminated by us without cause, by the officer for good reason or if we do not renew the agreements.

 

The agreements that we will enter into with our executive officers upon completion of this offering and the concurrent private placement provide benefits under certain circumstances that could make it more difficult for us to terminate these executive officers and may prevent or deter a change in control of our company that would otherwise be in the interest of our stockholders.

 

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could harm our business and the value of our common stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We are a newly formed company that will develop financial and operational reporting and control systems. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. While we intend to undertake substantial work to prepare for compliance with Section 404, we cannot be certain that we will be successful in implementing or maintaining adequate internal controls over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness in our internal controls, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common stock. Additionally, the existence of any material weakness or significant deficiency in respect of our internal controls would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.

 

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RISKS RELATED TO WARRANTS

 

There is no assurance that purchasers of common stock in this offering will receive warrants, and, upon issuance of the warrants, if any are issued, the exercise price of the warrants could exceed the current market trading price of our common stock.

 

Our obligation to issue warrants to purchasers of our common stock in this offering is subject to various conditions, including (i) the 30-day VWAP of our common stock must be below the initial public offering price, (ii) the warrants must be approved for listing, subject to official notice of issuance, on the NYSE or the NYSE Amex, (iii) warrants will be issuable only to purchasers of our common stock in this offering and then only in respect of initial public offering shares that such initial purchasers hold for the full 30-day period following this offering and (iv) purchasers who are eligible to receive warrants based on satisfaction of the foregoing conditions must complete, sign and return to us a contingent warrant issuance form in which such purchasers, among other things, represent and warrant as to the number of shares of common stock that they purchased in this offering, the number of shares that they have held for the full 30-day period following this offering and that they have not, directly or indirectly, sold, offered, contracted or granted any option to sell (including without limitation any short sale), pledged, transferred, established an open put equivalent position on, or otherwise disposed of, or publicly announced an intention to do any of the foregoing, with respect to any of the shares held for the full 30-day period. It is possible that purchasers of our common stock in this offering will not receive any warrants if any of the foregoing conditions is not satisfied. Upon issuance of the warrants, if any are issued, the exercise price of the warrants could exceed the current market trading price of our common stock.

 

If warrants are issued to purchasers of our common stock in this offering, the dilutive effect of the warrants could have an adverse effect on the future market price of our common stock.

 

If we issue warrants to purchasers of our common stock in this offering, the warrants will have an exercise price equal to the initial public offering price of our common stock (subject to adjustment in certain circumstances) and will be exercisable for five years after the date of the warrants’ issuance, or earlier upon redemption by us. The exercise of the warrants in the future, if we elect to issue shares of common stock rather than paying cash, would be dilutive to holders of our common stock if our book value per share or the market price of our common stock is higher than the exercise price at the time of exercise. The potential for dilution from the warrants could have an adverse effect on the future market price of our common stock.

 

Holders of our warrants will have no rights as common stockholders until they exercise their warrants and acquire our common stock.

 

Until you acquire shares of our common stock upon the exercise of the warrants, you will have no rights with respect to the shares of common stock issuable upon exercise of the warrants, including rights to vote or to receive distributions in respect of such shares. Upon the exercise of the warrants, if we elect to issue shares of common stock rather than paying cash, you will have rights as a common stockholder with respect to the shares issued upon exercise only as to matters for which the record date occurs after the exercise date. Further, we may elect to pay cash instead of issuing common stock and, as a result, you may not acquire any shares of common stock upon exercise of the warrants.

 

We cannot assure you that a public market for our warrants will develop and your ability to sell our warrants may be limited.

 

Currently, there is not a public market for our warrants. We intend to apply to have our warrants listed on the NYSE or the NYSE Amex. However, we cannot assure you that the warrants will be approved

 

Risk factors

 

 

for listing on the NYSE or the NYSE Amex, and, if we issue the warrants, we cannot assure you that a regular trading market for our warrants will develop or, if one does develop, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate an investment in our warrants.

 

An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants and causing such warrants to be practically worthless.

 

If we issue the warrants, no warrant will be exercisable and we will not be obligated to issue shares of common stock unless at the time such holder seeks to exercise such warrant, a registration statement relating to the common stock issuable upon exercise of the warrant is effective and a current prospectus relating to such shares is available. Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to the common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so, and if we do not maintain an effective registration statement or a current prospectus related to the common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants and we will not be required to settle any such warrant exercise. If the registration statement or the prospectus relating to the common stock issuable upon the exercise of the warrants is not effective or current, as applicable, the warrants may have no value, the market for such warrants may be limited and such warrants may expire worthless.

 

An investor will only be able to exercise a warrant if the issuance of common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.

 

If we issue the warrants, no warrants will be exercisable and we will not be obligated to issue shares of common stock unless the common stock issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. If we issue the warrants, we expect they will be listed on the NYSE or the NYSE Amex, which would provide an exemption from registration in every state. Accordingly, we believe holders in every state will be able to exercise their warrants as long as our registration statement and prospectus relating to the common stock issuable upon exercise of the warrants are effective and current. However, we cannot assure you of this fact. As a result, the warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the common stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.

 

The exercise price of and the number of shares of common stock underlying the warrants may not be adjusted for all dilutive events.

 

The exercise price of and the number of shares of common stock underlying the warrants will be subject to adjustment for certain events, including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation of our company. The exercise price will not be adjusted, however, for issuances of our common stock for cash or in connection with an acquisition by us. Additionally, the exercise price of, and the number of shares of common stock underlying, the warrants will not be adjusted for any cash distributions.

 

Risk factors

 

 

You will recognize gain or loss for federal income tax purposes if we elect to pay cash upon the exercise of a warrant.

 

Upon the valid exercise of a warrant, we have a right to elect to issue shares of our common stock or pay cash in an amount equal to the fair market value of the shares of common stock that are issuable as a result of the exercise. If we elect to issue shares of common stock upon the exercise of a warrant, you will generally not recognize gain or loss for federal income tax purposes. However, if we elect to pay cash upon the exercise of a warrant, you will recognize gain or loss for federal income tax purposes equal to the difference between (1) the excess of the cash received over the exercise price of the warrant and (2) your tax basis, if any, in the warrant.

 

Your ability to exercise your warrants may be limited by the ownership limits contained in our charter.

 

If we issue the warrants, your ability to exercise your warrants may be limited by the ownership limits contained in our charter. In particular, to assist us in qualifying as a REIT, ownership of shares of our common stock by any person is limited under the charter, with certain exceptions, to 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Moreover, the terms of the warrants limit a holder’s ability to exercise warrants to ensure that such holder’s “beneficial ownership” or “constructive ownership” as defined in our charter does not exceed the restrictions contained in the charter limiting the ownership of shares of our common stock, assuming we elect to issue shares of common stock rather than paying cash upon exercise of the warrants. In addition, our charter contains various other restrictions limiting the ownership and transfer of our common stock. As a result, you may not be able to exercise your warrants if such exercise would cause you to own shares of our common stock in excess of these ownership limits. In particular, the terms of the warrants provide that we may call the warrants for redemption at a price of $0.01 per warrant upon not less than 30 days’ prior written notice of redemption under certain circumstances. Warrants may be exercised prior to the scheduled redemption date, subject to the ownership limits contained in our charter. As a result, in the event we call the warrants for redemption, these ownership limits may limit your ability to exercise some or all of your warrants prior to the redemption date.

 

RISKS RELATED TO THIS OFFERING

 

We have not established a minimum distribution payment level and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.

 

We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by the risk factors described in this prospectus. Because we will commence operations only upon completion of this offering and the concurrent private placement, we may not generate sufficient income to make distributions to our stockholders and cannot predict when distributions consisting, in part, of cash flow from the senior housing facilities we expect to acquire will commence. To the extent we use the net proceeds from this offering or the concurrent private placement to make distributions to our stockholders, the amount of cash we have available to invest in senior housing facilities or for other purposes would be reduced.

 

Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to our stockholders and there can be no assurance as to the determinations our board of directors will make in respect of any of our future dividends.

 

Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to our stockholders, subject to applicable law. The amount of such distributions may be

 

Risk factors

 

 

limited until we have a portfolio of income-generating senior housing facilities. Our board of directors will make determinations regarding distributions based upon, among other factors, our financial performance, any debt service obligations, any debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make distributions to our stockholders are:

 

 

As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will increase or even be maintained over time, any of which could materially and adversely affect the market price of our common stock.

 

A portion of our distributions may constitute a return of capital, which would have the effect of reducing the basis of a stockholder’s investment in our common stock.

 

Distributions that we make to our stockholders generally will be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our accumulated earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.

 

We cannot assure you that a public market for our common stock will develop and your ability to sell our common stock may be limited.

 

Prior to this offering, there has not been a public market for our common stock. Our common stock has been approved for listing on the NYSE. However, we cannot assure you that a regular trading market for our common stock will develop or, if one does develop, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate an investment in our common stock. The initial public offering price will be determined by us and the representatives of the underwriters. We cannot assure you that the price at which the common stock will sell in the public market after the closing of this offering will not be lower than the price at which they are sold by the underwriters.

 

Common stock eligible for future sale may adversely affect the prevailing market prices for our common stock.

 

We cannot predict the effect, if any, of future sales of common stock, or the availability of common stock for future sale, on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued to our directors and officers), or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

 

Each of our directors and officers who has received share grants has entered into a lock-up agreement with respect to his or her common stock, restricting the sale of such person’s shares, for 180 days after the date of this prospectus. Jefferies & Company, Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without public notice, release all or any portion of the securities subject to lock-up agreements. If the restrictions under such agreements are waived, the affected common stock may be available for sale into the market, which could reduce the market price for our common stock.

 

Risk factors

 

 

We also may issue from time to time additional common stock or limited partnership interests in our operating partnership in connection with the acquisition of properties and we may grant demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our common stock or the perception that these sales could occur may adversely affect the prevailing market price for our common stock or may impair our ability to raise capital through a sale of additional equity securities.

 

The market price of our common stock may be volatile due to numerous circumstances beyond our control.

 

The trading prices of equity securities issued by REITs historically have been affected by changes in market interest rates. One of the factors that may influence the price of our common stock is the annual yield from distributions on our common stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our common stock to demand a higher annual yield, which could reduce the market price of our common stock.

 

Other factors that could affect the market price of our common stock include the following:

 

 

Future offerings of debt or equity securities ranking senior to our common stock may limit our operating and financial flexibility and may adversely affect the market price of our common stock.

 

If we decide to issue debt or equity securities in the future ranking senior to our common stock or otherwise incur indebtedness, it is possible that these securities or indebtedness will be governed by an indenture or other instrument containing covenants restricting our operating flexibility and limiting our ability to make distributions to our stockholders. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges, including with respect to distributions, more favorable than those of our common stock and may result in dilution to owners of our common stock. Because our decision to issue debt or equity securities in any future offering or otherwise incur indebtedness will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings or financings, any of which could reduce the market price of our common stock and dilute the value of our common stock.

 

Risk factors

 

 

FEDERAL INCOME TAX RISK FACTORS

 

Our failure to qualify, or our failure to remain qualified, as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

 

We intend to elect to be taxed as a REIT for federal income tax purposes, commencing with our short taxable year beginning on the business day prior to the closing of this offering and ending December 31, 2010. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.

 

Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially applicable with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our shares. If, for any reason, we failed to qualify as a REIT and we were not entitled to relief under certain Code provisions, we would be unable to elect REIT status for the four taxable years following the year during which we ceased to so qualify which would negatively impact the value of our common stock.

 

Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.

 

To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined before the deduction for dividends paid and excluding any net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:

 

 

We intend to distribute our taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. However, there is no requirement that TRSs distribute their after-tax net income to their parent REIT or their stockholders.

 

Our taxable income may substantially exceed our net income as determined based on United States generally accepted accounting principles, or GAAP, because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell properties at prices or at times that we regard as unfavorable in order to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in a particular year.

 

Risk factors

 

 

Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate otherwise attractive investments.

 

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our shares. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

 

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

 

The formation of our TRS lessee increases our overall tax liability.

 

Our TRS lessee will be subject to federal and state income tax on its taxable income, which will consist of the revenues from the senior housing facilities leased by the TRS lessee, net of the operating expenses for such properties and rent payments to us. Accordingly, although our ownership of our TRS lessee will allow us to participate in the operating income from our properties leased to our TRS lessee on an after tax basis in addition to receiving rent, that operating income will be fully subject to federal and state income tax. The after-tax net income of the TRS lessee is available for distribution to us.

 

Our ownership of our TRSs will be limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

 

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from operations pursuant to management contracts. A subsidiary that intends to be treated as a TRS of a REIT and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the securities will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

 

Our TRSs will pay applicable federal, foreign, state and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but is not required to be distributed by our TRSs to us. We anticipate that the aggregate value of the securities of our TRSs will be less than 25% of the value of our total assets (including our TRSs’ securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership

 

Risk factors

 

 

limitations. In addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax discussed above.

 

If the leases of our senior housing facilities are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our stockholders.

 

To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our operating partnership by our TRS lessee and third-party lessees pursuant to the leases of our senior housing facilities will constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

 

If our TRS lessee failed to qualify as a TRS or the facility operators engaged by our TRS lessee do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our stockholders.

 

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We expect to lease certain of our senior housing facilities to our TRS lessee. So long as our TRS lessee qualifies as a TRS, it will not be treated as a “related party tenant” with respect to our properties that are managed by an independent facility operator that qualifies as an “eligible independent contractor.” We believe that our TRS lessee will qualify to be treated as TRSs for federal income tax purposes, but there can be no assurance that the IRS will not challenge the status of a TRS for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in disqualifying our TRS lessee from treatment as a TRS, it is possible that we would fail to meet the asset tests applicable to REITs and a significant portion of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes.

 

Additionally, if the facility operators engaged by our TRS lessee do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT. Each of the facility operators that enter into a management contract with our TRS lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS lessee to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor a facility operator must not own, directly or indirectly, more than 35% of our outstanding shares and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the facility operator, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex. Although we intend to monitor ownership of our shares by our facility operators and their owners, there can be no assurance that these ownership levels will not be exceeded.

 

Risk factors

 

 

Our ability to lease certain of the senior housing facilities we acquire from operators to our TRS lessee will be limited by the ability of those senior housing facilities to qualify as “qualified health care properties” and the ability of those operators to qualify as “eligible independent contractors.”

 

We intend to lease certain of the senior housing facilities we acquire from operators and that constitute “qualified health care properties” to our TRS lessee and to cause our TRS lessee to contract with those operators to manage the health care operations at those facilities. Our ability to utilize this TRS lessee structure may be limited by the ability of those senior housing facilities to qualify as “qualified health care properties” and the ability of the operators from whom we acquire “qualified health care properties” to qualify as “eligible independent contractors.”

 

A “qualified health care property” includes any real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of such services which is eligible for participation in the Medicare program with respect to such facility. We expect that some of the properties that we will acquire will not be treated as “qualified health care properties.” To the extent a property does not constitute a “qualified health care property,” we will be unable to utilize the TRS lessee structure with respect to that property, and instead may lease the property back to the operator pursuant to a net lease. One of the initial properties we have under contract contains solely assisting living units, and consequently, will constitute a “qualified health care property.” With respect to the remaining five initial properties, four are senior housing facilities containing both independent and assisted living units housed in the same building and one is a senior housing facility containing both independent living and assisted living units housed on the same campus, in each case with a majority of the units constituting independent living units. Under current law, it is unclear whether such facilities will constitute “qualified health care properties.” Consequently, we intend to initially lease our initial properties to affiliates of Senior Lifestyle Management, the management company that currently operates those properties, and to request a private letter ruling from the IRS (i) confirming that our initial properties constitute “qualified health care properties” and (ii) with respect to our initial properties located in the State of New York, that certain powers our TRS lessee will be required to retain under healthcare regulations issued by the State of New York will not cause our TRS lessee to be considered to operate or manage a health care facility. If we do not receive a private letter ruling that confirms our ability to lease the six facilities that we currently have under contract to our TRS lessee and the regulatory approvals required to transfer the operating licenses for these facilities to our TRS lessee, we will either lease the facilities to affiliates of Senior Lifestyle Management under a long-term net lease that provides for the payment of base rent subject to annual escalators as well as percentage rent based on gross revenue or we could lease the units at the facilities directly to the residents and provide services to these residents through a TRS.

 

In order to qualify as an “eligible independent contractor,” among other requirements, an operator (or any related person) must be actively engaged in the trade or business of operating “qualified health care properties” for persons who are not related to us or our TRS lessee. Consequently, if an operator (or a related person) from whom we acquire a “qualified health care property” does not operate sufficient “qualified health care properties” for third parties, the operator will not qualify as an “eligible independent contractor.” Under this scenario, we would either be required to contract with another third party operator who qualifies as an “eligible independent contractor,” which could serve as a disincentive for the current operator to sell the property to us, or we would be unable to lease the property to our TRS lessee and instead would likely lease the property back to the operator pursuant to a long-term net lease.

 

Risk factors

 

 

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

 

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates has been reduced by legislation to 15% (through the end of 2010). Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

 

Under recently issued IRS guidance, we may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

 

Under recently issued IRS guidance, we may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. Under Revenue Procedure 2010-12, up to 90% of any such taxable dividend paid with respect to our 2010 and 2011 taxable years could be payable in shares of our common stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we utilize Revenue Procedure 2010-12 and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to utilize Revenue Procedure 2010-12.

 

The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets, that would be treated as sales for federal income tax purposes.

 

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.

 

The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to federal income tax and reduce distributions to our stockholders.

 

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our

 

Risk factors

 

 

stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.

 

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

 

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

 

The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.

 

In order to qualify as a REIT for each taxable year after 2010, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity actually or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after 2010. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.

 

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.

 

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects are forward-looking by their nature.

 

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, prospects, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our common stock. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

 

 

Cautionary note regarding forward-looking statements

 

 

 

 

When we use the words “will,” “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

We estimate that the net proceeds of this offering will be approximately $151.2 million, assuming an initial public offering price of $18.50 per share, the midpoint of the initial public offering price range shown on the cover of this prospectus, and after deducting the full underwriting discounts and commissions and other estimated offering expenses payable by us. If the underwriters’ overallotment option is exercised in full, our net proceeds will be approximately $174.2 million.

 

Concurrently with the completion of this offering, we will sell an aggregate of 324,324 shares of common stock to certain of our executive officers in a private placement at a price per share equal to the public offering price per share in this offering shown on the cover of this prospectus, without payment of any placement fee by us, yielding an additional $6.0 million of net proceeds to us.

 

We will contribute the net proceeds of this offering and the concurrent private placement to our operating partnership. Our operating partnership will use approximately $84.9 million of the net proceeds to fund (i) the approximate $81.9 million cash portion of the $240.0 million contractual purchase price for the six senior housing facilities that we currently have under contract and (ii) the payment of approximately $3.0 million of closing costs related to the acquisition. We will also assume approximately $158.1 million of in-place mortgage debt that encumbers the six facilities and $15.7 million of deposit liabilities relating to deferred and refundable resident entrance fees associated with the six facilities.

 

Our operating partnership will use the remaining net proceeds to invest in additional senior housing facilities in accordance with our investment strategy described in this prospectus, and for general business purposes. If any of the warrants are issued and subsequently exercised and we elect to issue shares of common stock rather than paying cash upon such exercise, we will contribute the proceeds to our operating partnership and our operating partnership will use the proceeds for general corporate purposes, including working capital. Prior to the full investment of the remaining net proceeds in senior housing facilities, we intend to invest the remaining net proceeds in interest-bearing, short-term securities or money-market accounts which are consistent with our intention to qualify as a REIT. Such investments may include, for example, government and government agency certificates, certificates of deposit, interest-bearing bank deposits and mortgage loan participations. These initial investments are expected to provide a lower net return than we will seek to achieve from investments in senior housing facilities.

 

Although we do not currently intend to use any of the net proceeds from this offering or the concurrent private placement to fund distributions to our stockholders, to the extent we use net offering proceeds to fund distributions, these payments may be treated as a return of capital to our stockholders and the amount of cash we have available to invest in senior housing facilities or for other purposes would be reduced.

 

We will use approximately $0.1 million of the proceeds of this offering and the concurrent private placement to repurchase the 1,000 shares of our common stock that were issued to Mr. Hutchison when we were formed and to reimburse out-of-pocket expenses incurred by Mr. Hutchison and his affiliates in connection with our formation, approximately $0.6 million to reimburse offering expenses which Mr. Hutchison has advanced on our behalf, and approximately $0.7 million to reimburse costs incurred by Mr. Hutchison in connection with the acquisition of our initial portfolio, primarily the earnest money deposit that Mr. Hutchison advanced on our behalf.

 

The following table sets forth:

 

 

 

This table should be read in conjunction with the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

We intend to make regular quarterly distributions to our common stockholders out of funds legally available therefor beginning at such time as our board of directors determines that we have acquired senior housing facilities generating sufficient cash flow to do so. Until we invest a substantial portion of the net proceeds of this offering and the concurrent private placement in senior housing facilities, we expect our distributions will be nominal. We cannot predict the timing of our senior housing facility investments or when we will commence paying quarterly distributions.

 

In order to qualify for taxation as a REIT, we intend to make annual distributions to our stockholders of an amount at least equal to:

 

 

Generally, we expect to distribute 100% of our taxable income so as to avoid the tax on undistributed REIT taxable income. However, we cannot assure you as to when we will begin to generate sufficient cash flow to make distributions to our stockholders or our ability to sustain those distributions. See the section entitled “Material Federal Income Tax Considerations” below.

 

Distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including:

 

 

Distributions to our stockholders generally will be taxable to our stockholders as ordinary income; however, because a significant portion of our investments will be ownership of equity interests in senior housing facilities, which will generate depreciation and other non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent that, in respect of any calendar year, cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable share distribution or distribution of debt securities. In addition, prior to the time we have fully invested the net proceeds of this offering and our concurrent private placement, we may fund our quarterly distributions out of such net proceeds, although we do not currently expect to do so. The use of our net proceeds for distributions could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its common stock. Income as computed for purposes of the tax rules described above will not necessarily correspond to our income as determined for financial reporting purposes. To the extent consistent with maintaining our qualification as a REIT, we may retain earnings that accumulate in our TRS lessee or any other TRS we may form.

 

The following selected pro forma condensed consolidated balance sheet data as of June 30, 2010 has been prepared to reflect adjustments to our historical consolidated balance sheet to illustrate the estimated effect of the following transactions as if they had occurred on June 30, 2010:

 

 

 

 

 

The following selected pro forma condensed consolidated operating data for the six months ended June 30, 2010 and the year ended December 31, 2009 has been prepared to illustrate the estimated effect of the transactions described in items (i) through (iv) above, assuming such transactions were completed on January 1, 2009 and also includes our anticipated operating costs and estimated payments under the proposed leases with affiliates of Senior Lifestyle Management for Lake Barrington Woods, Bella Terra, Baywinde—Castle Pointe, Chancellor’s Village and Mangrove Bay and the existing leases with affiliates of Senior Lifestyle Management for the New York assisted living facilities. The selected pro forma financial information and other data does not reflect the impact of the TRS lessee structure.

 

The following selected pro forma financial and other data should be read in conjunction with (i) our historical audited consolidated financial statements and the notes thereto appearing elsewhere in this prospectus, (ii) our unaudited pro forma financial statements and the notes thereto appearing elsewhere in this prospectus, (iii) the historical audited and unaudited consolidated financial statements of WSL IV and the notes thereto appearing elsewhere in this prospectus, (iv) the historical audited and unaudited financial statements of SL Jupiter and the notes thereto appearing elsewhere in this prospectus, and (v) the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this prospectus. We have based our unaudited pro forma adjustments on available information and assumptions that we believe are reasonable. The following selected pro forma financial and other data are presented for informational purposes only and do not purport to be indicative of our results of operations or financial condition even if the various events and transactions reflected therein had occurred on the dates, or been in effect during the periods indicated. The following selected pro forma

 

Selected pro forma financial information

 

 

financial and other data are presented for informational purposes only and should not be viewed as indicative of our future results of operations or financial condition.

 

The following table presents our unaudited pro forma condensed consolidated balance sheet data as of June 30, 2010 (in thousands):

 

 

The following table presents our unaudited pro forma condensed consolidated operating data for the six months ended June 30, 2010 and the year ended December 31, 2009 (in thousands, except per share amounts):

 

 

Selected pro forma financial information

 

 

The following table presents a reconciliation of our pro forma net income to pro forma FFO for the six months ended June 30, 2010 and the year ended December 31, 2009 (in thousands):

 

 

We consider FFO to be an indicative measure of operating performance due to the significant effect of depreciation of real estate assets on net income. We calculate FFO in accordance with standards established by NAREIT which defines FFO as net income or loss determined in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment write downs, plus depreciation and amortization (excluding amortization of deferred financing costs) of real estate assets, and after adjustments for the portion of these items related to unconsolidated partnerships and joint ventures.

 

In calculating FFO, net income is determined in accordance with GAAP and includes the noncash effect of scheduled rent increases throughout the lease terms. This is a GAAP convention requiring real estate companies to report rental revenue based on the average rent per year over the life of the leases. We believe that by excluding the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. We also believe FFO captures trends in occupancy rates, rental rates and operating costs. FFO was developed by NAREIT as a relative measure of performance and liquidity of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP, which assumes that the value of real estate diminishes predictably over time. In addition, we believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of equity REITs. However, FFO (1) does not represent cash generated from operating activities determined in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income), (2) is not necessarily indicative of cash flow available to fund cash needs and (3) should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance. FFO, as presented, may not be comparable to similarly titled measures reported by other equity REITS. Accordingly, we believe that in order to facilitate a clear understanding of our pro forma operating results, FFO should be considered only as supplemental information and only in conjunction with our pro forma net income as reported in the accompanying pro forma financial statements and notes thereto.

 

At this time, we have not made a determination regarding whether adjustments to the manner in which FFO is calculated in order to adjust for the effect of straight line rent, capital expenditures, depreciation and other adjustments are appropriate for our company. We will assess whether any such adjustments are appropriate during our first year of operations following completion of this offering.

 

Selected pro forma financial information

 

 

The following table presents a reconciliation of our pro forma net income to our pro forma EBITDA for the six months ended June 30, 2010 and the year ended December 31, 2009 (in thousands):

 

 

EBITDA is defined as net income (loss) (calculated in accordance with GAAP) excluding: (1) interest expense, (2) income tax benefit or expense; and (3) depreciation and amortization. We believe EBITDA is useful to us and to an investor as a supplemental measure in evaluating our financial performance because it excludes expenses that we believe may not be indicative of our operating performance. By excluding interest expense, EBITDA measures our financial performance regardless of how we finance our operations and our capital structure. By excluding depreciation and amortization expense, which can vary by property based on factors unrelated to property operating performance, we and our investors can more accurately assess the financial performance of our portfolio. Our management also uses EBITDA as one measure in determining the value of acquisitions and dispositions. In addition, we believe EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of equity REITs, particularly in the health care and senior housing industry. However, because EBITDA is calculated before recurring cash charges such as interest expense and taxes and is not adjusted for capital expenditures or other recurring cash requirements of our business, it does not reflect the amount of capital needed to maintain our properties nor does it reflect trends in interest costs due to interest rate changes or increased borrowings. EBITDA should be considered only as a supplement to net income, net cash provided by operating activities or any other financial and operating performance measure prescribed by GAAP. Other equity REITs may calculate EBITDA differently than we do and, accordingly, our calculation of EBITDA may not be comparable to such other REITs’ EBITDA.

 

You should read the following discussion in conjunction with the information provided under the sections of this prospectus entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Selected Pro Forma Financial Information,” and “Business” and our audited financial statements and the pro forma financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus.

 

OVERVIEW

 

We are a self-advised real estate company that was organized in April 2010 to acquire, own and actively asset manage income-producing senior housing facilities that derive substantially all of their revenues from private payment sources, generate stable cash flows and have the potential for long-term capital appreciation. As a newly formed company with no business activity to date, we have no historical operating history and only nominal assets, consisting of only cash contributed in connection with our formation. See “Capitalization.” However, shortly after completion of this offering and the concurrent private placement, we expect to complete the acquisition of six high quality senior housing facilities located in Florida, Illinois, New Jersey, New York and Virginia for an aggregate contractual purchase price of $240.0 million excluding transaction costs and the assumption of certain deposit liabilities, including approximately $81.9 million in cash and the assumption of approximately $158.1 million of in-place mortgage debt. Substantially all of the revenues at these facilities are derived from private payment sources.

 

We intend to elect and qualify to be treated as a REIT for federal income tax purposes commencing with our short taxable year ending December 31, 2010. We will own our senior housing facilities and conduct substantially all operations through our operating partnership, Legacy Healthcare Properties, LP, and its subsidiaries. Upon completion of this offering and the concurrent private placement, we will own a 100% partnership interest in our operating partnership and be our operating partnership’s sole general partner. See “Operating Partnership and the Partnership Agreement.”

 

For us to qualify as a REIT for federal income tax purposes, we cannot operate the senior housing facilities we acquire. We will lease the facilities we acquire either to our TRS lessee which will engage facility operators that are “eligible independent contractors” to manage those facilities, or directly to third-party facility operators under lease agreements. We may also lease the individual units at certain of our facilities directly to the residents at those facilities and provide services to the residents through a TRS. Our TRS lessee or any TRS service provider will be treated as a TRS for federal income tax purposes and will be consolidated into our financial statements in accordance with GAAP. However, since both our operating partnership and our TRS lessee are controlled by us, our principal source of funds from any facilities we lease to our TRS lessee will, on a consolidated basis, be from the operations of those facilities. Our principal source of funds from any facilities we lease to third-party facility operators or residents will be from rental income paid by our facility operators under net lease agreements or by residents under lease agreements with those residents. If our TRS lessee or any TRS service provider provides services to the residents at a facility, our consolidated revenue will include the fees earned by these entities for those services and our consolidated expenses will include the expenses incurred by these entities in providing the services. The earnings of our TRS lessee or any TRS service provider will be fully subject to taxation as a C corporation, which will reduce our FFO and the cash otherwise available for distribution to our stockholders.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

As further described in “Material Federal Income Tax Considerations,” following the completion of this offering and our receipt of the private letter ruling from the IRS that we intend to request confirming our ability to lease the six facilities we have under contract to our TRS lessee and the regulatory approvals required to transfer the operating licenses for these facilities to our TRS lessee, we intend to lease these facilities to our TRS lessee and engage Senior Lifestyle Management to manage the operations of these facilities pursuant to a management agreement. Pending receipt of these approvals, we will enter into new or assume existing leases with affiliates of Senior Lifestyle Management, which we expect to terminate upon receipt of the private letter ruling and regulatory approvals. For more details regarding the terms of the management agreement and the new and existing leases, see “Business—Our Portfolio—Senior Housing Facilities Under Contract.”

 

Our unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2010 and for the year ended December 31, 2009 included elsewhere in this prospectus reflect the expected rental revenue to be received pursuant to the terms of the new and existing leases with affiliates of Senior Lifestyle Management with respect to the six senior housing facilities we have under contract and do not reflect the TRS lessee structure that we expect to put in place upon receipt of the private letter ruling and regulatory approvals. If we obtain such private letter ruling and regulatory approvals and then lease the facilities to our TRS lessee, the rental revenue presented in our unaudited pro forma condensed combined statement of operations would no longer be applicable and the operations of the facilities, by virtue of the TRS lessee structure, would be reflected in our statement of operations.

 

We estimate that, if we had completed the acquisition of the six facilities we have under contract as of January 1, 2009, and implemented the TRS lessee structure immediately upon completion of the acquisition, while our pro forma total revenues for the six months ended June 30, 2010 and the year ended December 31, 2009 would have increased from approximately $8.6 million and $17.1 million, respectively, to approximately $21.9 million and $43.4 million, respectively, our pro forma FFO for the six months ended June 30, 2010 and the year ended December 31, 2009 would have been substantially consistent with the pro forma FFO for the six months ended June 30, 2010 and the year ended December 31, 2009 presented elsewhere in this prospectus.

 

Utilization of the TRS lessee structure for any or all of these facilities would cause the revenues and expenses of the underlying operations of the facilities to be reflected in our results of operations, with such expenses inclusive of the management fees paid to Senior Lifestyle Management pursuant to the management agreement entered into by the TRS lessee. The TRS lessee structure subjects us to the business risks inherent in the facilities’ operations while allowing us to benefit from any potential increase in revenues or cost efficiencies achieved by the operations. Should we instead utilize the TRS lessee structure for some but not all of these facilities, and lease units in the facilities for which we do not utilize the TRS lessee structure directly to the residents while using a TRS to provide services to such residents, our results of operations, cash flows, and the nature of our business risks and opportunities would not change materially. Alternatively, if we lease the facilities through net leases to the operators or affiliates of the operators, we would recognize rental revenues pursuant to the net leases and our results of operations would benefit primarily from any rent escalators.

 

There can be no assurance, however, that we will obtain the necessary regulatory approvals or be able to utilize the TRS lessee structure as outlined above. If we obtain the necessary rulings and regulatory approvals, there can be no assurance that the revenues generated or operating expenses incurred by us will be consistent with the revenues and operating expenses reflected in the historical audited and unaudited financial statements of SL Jupiter and the historical audited and unaudited financial statements of Senior Lifestyle operators referenced below for the six months ended June 30, 2010 and the year ended December 31, 2009.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

We have included the historical audited and unaudited consolidated financial statements of WSL IV, which reflect the historical financial position and operating history of the owner of five of the six senior housing facilities we intend to acquire after the completion of this offering and the concurrent private placement. We have included the historical audited and unaudited consolidated financial statements of SL Jupiter, which reflect the historical financial position and operating history of the owner and operator of the sixth senior housing facility we intend to acquire after the completion of this offering and the concurrent private placement. We have also included the historical audited and unaudited combined financial statements of Senior Lifestyle 2004 Portfolio, which contain the historical operating history of six limited liability companies (SL Bella Terra, LLC, SL Barrington, LLC, SL Walden, LLC, SL Sage Harbor, LLC, SL Castle Pointe, LLC and SL Chancellor’s Village, LLC, which we collectively refer to as the Senior Lifestyle operators) that operate the five senior housing facilities owned by WSL IV. We will not acquire the Senior Lifestyle operators as part of our intended acquisition of WSL IV or SL Jupiter; however we believe these financial statements and the notes thereto are meaningful to potential investors, since these operations will be relevant to our future operating results whether or not we implement the TRS lessee structure described above.

 

See “Selected Pro Forma Financial Information” and the pro forma financial statements and the related notes for additional information.

 

FACTORS AFFECTING OUR BUSINESS AND THE BUSINESS OF OUR FACILITY OPERATORS

 

The success of our business is dependent on a number of macroeconomic, demographic demand and industry fundamental trends. These trends will influence our ongoing ability to source accretive investment opportunities while other factors will impact our facility operators’ ability to conduct the operations of our facilities profitably and meet their obligations to us.

 

Industry trends

 

The number of Americans age 65 and older is expected to grow significantly in aggregate numbers and as a relative percentage of the total U.S. population. For example, the United States Census Bureau projects that the segment of the U.S. population age 65 and older will grow from a combined 40.2 million in 2010 (13.0% of the total population), to 54.8 million in 2020 (16.1% of the total population) and to more than 72.0 million Americans age 65 and older by 2030 (19.3% of the total population).

 

Supply fundamentals have been an important factor in previous senior housing cycles, notably supply overhang due to overbuilding in the late 1990s, which produced a sustained period of lower supply growth that increased net absorption and contributed to significant sustained rate increases within the sector. According to NIC Map Data Analysis and the American Senior Housing Association’s 2009 State of Seniors Housing report, construction starts and new unit delivery reductions will cause industry supply growth to trend from an estimated 1.7% in 2008 to an estimated 1.3% for 2009, significantly below the historical average supply growth rate of 4.8% since 1985. We believe capital market dislocations, a scarcity of development capital and continued challenging credit market conditions will restrain supply growth in the near term.

 

For more information regarding industry trends, you should refer to “Business—Our Market Opportunity.”

 

Competitive environment for health care real estate investing

 

We expect to compete for investment opportunities with institutional investors, private equity investors, other REITs and numerous local, regional and national owners, in each of our target markets. Some of these entities may have substantially greater financial resources than we do and may be able and willing to accept more risk than we can prudently manage. Competition generally may increase the bargaining

 

Management’s discussion and analysis of financial condition and results of operations

 

 

power of property owners seeking to sell and reduce the number of suitable investment opportunities offered to us or purchased by us.

 

The senior housing industry is highly competitive. Senior housing facilities we acquire will compete with other properties for residents in our markets. In addition, we must compete against home health care and other in home services which may allow residents to extend their stay in their apartment or home. Competitive factors include location, convenience, brand affiliation, rates, range of services, facilities and amenities or accommodations offered and quality of service. Competition in the markets in which our facilities will operate will include competition from existing, newly renovated and newly developed senior housing facilities in the relevant segments. Competition can adversely affect the occupancy and rates of our facilities, and thus our financial results, and may require us to provide additional amenities, incur additional costs or make capital improvements that we otherwise might not choose to make, which may adversely affect our profitability.

 

Liquidity and access to capital

 

Although our governing documents contain no limitations on the amount of debt that we can incur, we expect to maintain a reasonably low-leverage capital structure and intend to target on a long-term basis the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference or redemption feature of any outstanding shares of preferred stock of approximately 40% to 45% of the cost basis of our total assets. In addition, our assumption of in-place mortgage debt in connection with our initial acquisition may cause our consolidated indebtedness to exceed the general limitation described above.

 

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under a future revolving credit facility. We believe that net cash provided by operations will be adequate to fund operating requirements, including management fee payments made to our facility operators, to pay interest on any borrowings and fund dividends in accordance with the requirements to qualify as a REIT under federal income tax laws.

 

Our indebtedness outstanding upon the completion of this offering and the acquisition of our initial portfolio of senior housing facilities will be comprised principally of secured mortgage debt. Following the anticipated application of the net proceeds of this offering, we expect to have approximately $158.1 million of outstanding indebtedness, all of which will mature in 2013.

 

Factors affecting our operators’ profitability

 

Our revenues will be derived principally from rents we receive from net leases with our facility operators or from rents we receive from our TRS lessee pursuant to net leases if we are able to utilize the TRS lessee structure. Certain economic factors present both opportunities and risks to our facility operators and, therefore, influence their ability to meet their obligations to us. These factors will directly affect our facility operators’ operations and, given our reliance on their performance under our leases and management agreements, will present risks to us that may affect our results of operations or ability to meet our financial obligations.

 

Labor and related expenses typically represent our facility operators’ largest cost component. Therefore, the labor markets in which our facility operators operate will affect their ability to operate cost effectively and profitably. In order for our facility operators to be successful, they must possess the management capability to attract and maintain skilled and motivated workforces. Much of the required labor needed to operate senior housing facilities requires specific technical experience and education. As a result, our facility operators may be required to increase their payroll costs to attract labor and adequately staff their operations. Increases in labor costs due to higher wages and greater employee

 

Management’s discussion and analysis of financial condition and results of operations

 

 

benefits required to attract and retain qualified personnel could affect our facility operators’ ability to meet their obligations to us.

 

For the facilities we net lease, we will seek to establish our rent at an appropriate level so that our facility operators are able to earn a reasonable return for their services and performance. This requires discipline to ensure that we do not overpay for the properties we acquire and negotiate long-term lease contracts with facility operators which fairly compensate us and them for the investment and operating risks associated with the business. While we operate in a competitive environment, we carefully assess the long-term risks facing our facility operators as we consider an investment. Because our leases are long-term arrangements, we are required to assess both the short and long-term capital needs of the properties we acquire. The senior housing facilities on which we focus are generally highly specialized real estate assets. We believe our dedicated management team has developed broad expertise in assessing the short and long-term needs of this asset class.

 

RESULTS OF OPERATIONS

 

As of the date of this prospectus, we have no operations because we have been in our organizational stage. We will not commence operations until we have closed the sale of all or a portion of the shares of our common stock offered hereby. Following the completion of this offering and the acquisition of our initial portfolio of facilities, our operations will consist primarily of revenues from the facility operators who will lease our facilities and our expenses will consist primarily of general and administrative expenses, salaries and benefits, interest expense on the mortgage debt we will assume, insurance costs and other general overhead expenses.

 

COMPONENTS OF OUR REVENUES AND EXPENSES

 

This section describes what we expect will be the components of our revenues and expenses following the completion of the acquisition of our initial portfolio of facilities. The components of our revenues and expenses are dependent upon whether our properties are leased to a third-party tenant who operates the facilities under a net lease agreement or we lease our properties to our TRS lessee and the TRS lessee enters into a management agreement with a qualified independent contractor to operate the day-to-day operations of the facility, which we refer to as the TRS lessee structure.

 

Revenues

 

Our rental income from our initial portfolio will consist primarily of the rents received from affiliates of Senior Lifestyle Management pursuant to new or existing leases. The leases contain scheduled changes in rent payments, and, as a result, rental income will include unbilled rent relating to the straight-lining of rent based upon the cumulative rent to be paid pursuant to the leases recognized ratably over the term of the lease.

 

In addition to rent payable by affiliates of Senior Lifestyle Management, our revenue may include other cash payments owed to us by affiliates of Senior Lifestyle Management.

 

To the extent that we lease our facilities to our TRS lessee whose operations will be consolidated into our financial statements, we will also recognize rental income from residents at our facilities as well as resident services revenue.

 

Expenses

 

We will recognize a variety of cash and non-cash charges in our financial statements. Our cash expenses will consist primarily of general and administrative expenses, salaries and benefits, insurance costs, interest expense on the borrowings we will assume in connection with the acquisition of our initial

 

Management’s discussion and analysis of financial condition and results of operations

 

 

portfolio and other corporate overhead. Our general and administrative costs will consist primarily accounting, legal and other professional fees. Our non-cash expenses will consist primarily of stock-based compensation expenses. To the extent that we lease our facilities to our TRS lessee whose operations will be consolidated into our financial statements, we will recognize expenses related to the operation of our facilities, including salaries, marketing costs, utilities and repairs and maintenance.

 

Change in fair value of derivatives

 

The long-term debt agreements we will assume in connection with the acquisition of our initial portfolio are floating rate obligations. We will be required to obtain an interest rate cap for these floating rate obligations. In accordance with GAAP, all derivatives, including certain derivative instruments embedded in other contracts, are to be recorded as either an asset or liability measured at their fair value. We will recognize any changes in the fair value of the cap agreements in equity as a component of other comprehensive income.

 

Depreciation and amortization

 

We will incur depreciation expense on all of our acquired long-lived assets and amortization expense on any intangible assets acquired with an estimated useful life, resulting from the required application of purchase accounting in the initial recording of our real estate acquisitions. This non-cash expense is designed under GAAP to reflect the economic useful lives of our assets.

 

CRITICAL ACCOUNTING POLICIES

 

Below is a discussion of the accounting policies that we believe will be critical once we commence operations. We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements. From time to time, we will re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments would be made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.

 

Revenue recognition

 

For properties leased to our TRS lessee, we will recognize rental income as earned under rental agreements with the residents of our facilities which typically have terms of one year or less. We also will recognize resident services revenue, which consists of ancillary charges to residents for services such as personal care and assistance with daily living activities, upon completion of the applicable service.

 

For properties net leased to facility operators, we will recognize rental revenue on a straight-line basis over the lease term when collectability is reasonably assured and the facility operator has taken possession or controls the physical use of the leased facility. For facilities acquired subject to leases, we will recognize revenue upon acquisition of the facility provided the facility operator has taken possession or controls the physical use of the leased facility. If the lease provides for tenant improvements, we will determine whether the tenant improvements, for accounting purposes, are owned by the facility operator or us. When we are the owner of the tenant improvements, the facility operator will not be considered to have taken physical possession or have control of the physical use of the leased facility until the tenant improvements are substantially completed. When the facility operator is the owner of the tenant improvements, any tenant

 

Management’s discussion and analysis of financial condition and results of operations

 

 

improvement allowance funded will be treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements will be subject to significant judgment. If our assessment of the owner of the tenant improvements for accounting purposes were to change, the timing and amount of our revenue recognized would be impacted.

 

Certain leases with facility operators may provide for additional rents contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue will be recognized when actual results reported by the facility operator, or estimates of facility operator results, exceed the base amount or other thresholds. The recognition of additional rents will require us to make estimates of amounts owed and to a certain extent will be dependent on the accuracy of the facility results reported to us by the facility operator. Our estimates may differ from actual results, which could be material to our consolidated financial statements.

 

We will maintain an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from facility operator defaults or the inability of facility operator to make contractual rent and for estimated losses resulting from residents defaults or inability of the residents to make their contractual rent payments. We will monitor the liquidity and creditworthiness of our facility operators on an ongoing basis. For facility operators this evaluation will consider industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent amounts, our assessment will be based on income recoverable over the term of the lease. We will exercise judgment in establishing allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.

 

Real estate

 

We will make estimates as part of our allocation of the purchase price of acquisitions of properties to the various components of the acquisition based upon the relative value of each component. Upon acquisition, we allocate the purchase price based on the fair value of the acquired land, building, furniture, fixtures and equipment, identifiable intangible assets, other assets and assumed liabilities. Identifiable intangible assets typically arise from contractual arrangements. We determine the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information, and we utilize the services of independent third-party consultants to perform valuation studies to support our determinations of the fair values of assets acquired and liabilities assumed. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. Acquisition costs are expensed as incurred.

 

Renovations to our health care properties and/or replacements of assets that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Furniture, fixtures and equipment under capital leases are carried at the present value of the minimum lease payments.

 

Repair and maintenance costs are charged to expense as incurred.

 

Depreciation and amortization

 

Health care properties will be carried at cost and depreciated using the straight-line method over an estimated useful life of 25 to 40 years for buildings and one to seven years for furniture, fixtures and equipment. Intangible assets arising from contractual arrangements will typically be amortized over the life of the contract.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

We will be required to make subjective assessments as to the useful lives and classification of our properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets. These assessments may impact our results of operations.

 

Impairment of long-lived assets and goodwill

 

We will assess the carrying value of our real estate assets and related intangibles which we refer to as real estate assets, whenever events or changes in circumstances indicate that the carrying amount of a real estate asset or asset group may not be recoverable. Goodwill will be tested at least annually by applying the two-step approach. If the sum of the expected future net undiscounted cash flows is less than the carrying amount of the real estate assets, an impairment loss will be recognized by adjusting the asset’s carrying amount to its estimated fair value. If the fair value of a reporting unit containing goodwill is less than its carrying value, then a second step of the test will be needed to measure the amount of potential goodwill impairment. The second step will require the fair value of the reporting unit to be allocated to all the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination at the date of the impairment test. The excess of the fair value of the reporting unit over the fair value of assets and liabilities will be the implied value of goodwill and will be used to determine the amount of impairment. The determination of the fair value of real estate assets and goodwill will involve significant judgment. This judgment will be based on our analysis and estimates of fair value of real estate assets and reporting units, and the future operating results and resulting cash flows of each real estate asset whose carrying amount may not be recoverable. Our ability to accurately predict future operating results and cash flows and estimate and allocate fair values will impact the timing and recognition of impairments. While we believe our assumptions will be reasonable, changes in these assumptions may have a material impact on our financial results. A property will be considered held for sale when a contract for sale is entered into, a substantial, non-refundable deposit has been committed by the purchaser, and sale is reasonably expected to close.

 

Stock-based compensation

 

Prior to the completion of this offering and the concurrent private placement, we will adopt our 2010 Equity Incentive Plan, which provides for the grant of stock options, stock awards, stock appreciation rights, performance units and other equity-based awards. Equity-based compensation will be recognized as an expense in our financial statements and measured at the fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of the accounting guidance.

 

Stock purchase warrants

 

We account for stock purchase warrants as equity securities, unless, based on the underlying terms of the stock warrant agreement, the stock purchase warrants are determined to be derivative instruments. We expect the warrants we may issue in connection with this offering will be treated as equity securities.

 

Income taxes

 

We intend to elect to be taxed as a REIT under the Code and intend to operate as such beginning with our short taxable year ending December 31, 2010. We expect to have little or no taxable income prior to electing REIT status. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders each year, computed without regard to the dividends paid deduction or net capital gain. As a REIT, excluding the taxes applicable to our TRS lessee, we generally will not be subject to federal income tax to the extent we currently distribute our taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT

 

Management’s discussion and analysis of financial condition and results of operations

 

 

for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we intend to organize and operate in such a manner as to qualify for treatment as a REIT.

 

Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by our TRS lessee, and any other TRS we form in the future, will be fully subject to federal, state, and local corporate income tax.

 

As part of the process of preparing consolidated financial statements, significant judgment is required of management to evaluate our compliance with applicable REIT requirements. Our determinations are based on our interpretations of tax laws, and our conclusions may have an impact on the income tax expense recognized. Events or circumstances which may require adjustments to income tax expense include: (i) our ability to qualify as a REIT, (ii) audits conducted by federal and state taxing authorities, and (iii) changes in tax laws.

 

Business combinations and property acquisition costs

 

Effective with our inception, we adopted Financial Accounting Standards Board, or FASB, guidance related to business combinations and property acquisitions, which requires the acquiring entity in a business combination or asset purchase to measure the assets acquired, liabilities assumed (including contingencies) and any non-controlling 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. These costs, totaling $407,789, are included in property acquisition costs on our consolidated statement of operations for the period from inception to June 30, 2010.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

In April 2009, the FASB issued additional disclosure provisions of Accounting Standards Codification, or ASC, 825-10, Financial Instruments—Overall , which we refer to as ASC 825-10. ASC 825-10 requires disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies in addition to the annual financial statements. ASC 825-10 is effective for interim periods ending after June 15, 2009. Prior period presentation is not required for comparative purposes at initial adoption. The adoption of ASC 825-10 on June 30, 2009 will not have a material impact on our consolidated financial position or results of operations.

 

In April 2009, the FASB issued an amendment to ASC 320-10, Investment-Debt and Equity Securities—Overall , which we refer to as ASC 320-10. ASC 320-10 amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The amended provision of ASC 320-10 is effective for fiscal years and interim periods ending after June 15, 2009. The adoption of ASC 320-10 on June 30, 2009 will not have a material impact on our consolidated financial position or results of operations.

 

In April 2009, the FASB issued an amendment to ASC 820-10, Fair Value Measurements and Disclosures—Overall , which we refer to as ASC 820-10. ASC 820-10 provides additional guidance for estimating fair value when the volume and level of activity for both financial and nonfinancial assets or liabilities have significantly decreased. ASC 820-10 is effective for fiscal years and interim periods ending after June 15, 2009 and shall be applied prospectively. The adoption of ASC 820-10 on June 30, 2009 will not have a material impact on our consolidated financial position or results of operations.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

In May 2009, the FASB issued ASC 855, Subsequent Events , which we refer to as ASC 855. ASC 855 provides general guidelines to account for the disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These guidelines are consistent with current accounting requirements, but clarify the period, circumstances, and disclosures for properly identifying and accounting for subsequent events. ASC 855 is effective for interim periods and fiscal years ending after June 15, 2009. The adoption of ASC 855 on June 30, 2009 will not have a material impact on our consolidated financial position or results of operations.

 

In June 2009, the FASB issued Accounting Standards Update No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities , which we refer to as Update No. 2009-17. Update No. 2009-17 requires enterprises to perform a qualitative approach to determining whether or not a variable interest entity will need to be consolidated on a continuous basis. This evaluation will be based on an enterprise’s ability to direct and influence the activities of a variable interest entity that most significantly impact its economic performance. Update No. 2009-17 is effective for interim periods and fiscal years beginning after November 15, 2009. The adoption of Update No. 2009-17 will not have a material impact on our consolidated financial position or results of operations.

 

In June 2009, the FASB Accounting Standards Codification, or the Codification, was issued in the form of ASC 105, Generally Accepted Accounting Principles , which we refer to as ASC 105. Upon issuance, the Codification became the single source of authoritative, nongovernmental U.S. GAAP. The Codification reorganized GAAP pronouncements into accounting topics, which are displayed using a single structure. Certain SEC guidance is also included in the Codification and will follow a similar topical structure in separate SEC sections. ASC 105 is effective for interim periods and fiscal years ending after September 15, 2009. The adoption of the Codification will not have a material impact on our consolidated financial position or results of operations.

 

In August 2009, the FASB issued Accounting Standards Update No. 2009-04, Accounting for Redeemable Equity Instruments—Amendment to Section 480-10-S99 (SEC Update), which we refer to as Update No. 2009-04. This update requires that preferred securities, or instruments with similar characteristics, such as noncontrolling interests, that are redeemable for cash or other assets be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the issuer. The SEC believes that it is necessary to highlight the future cash obligations attached to this type of security so as to distinguish it from permanent capital. The adoption of Update No. 2009-04 will not have a material impact on our consolidated financial position or results of operations.

 

In January 2010, the FASB issued Accounting Standards Update No. 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification . The amendments in this update clarify that a decrease in ownership resulting from sales of in substance real estate should be accounted for under the guidelines in ASC Sub Topics 360-20, Property, Plant, and Equipment, and ASC Sub Topics 976-605, Retail/Land . This update will not have a material impact on our consolidated financial position or results of operations.

 

PRO FORMA LIQUIDITY AND CAPITAL RESOURCES

 

Although our governing documents contain no limitations on the amount of debt that we can incur, we expect to maintain a reasonably low-leverage capital structure and intend to target on a long-term basis the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference or redemption feature of any outstanding shares of preferred stock of approximately 40% to 45% of the cost basis of our total assets. In addition, our assumption of in-place mortgage debt in connection with our initial acquisition may cause our consolidated indebtedness to exceed the general limitation described above.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

We anticipate that our total pro forma consolidated indebtedness will be approximately $158.1 million upon completion of the acquisition of the six senior housing facilities we have under contract.

 

Our short-term and long-term liquidity requirements consist primarily of funding our operating expenses and other expenditures directly associated with our properties, including:

 

 

We expect to meet our short term liquidity needs through a combination of the following:

 

 

We expect to meet our long term liquidity needs through a combination of the following:

 

 

In addition to the sources described above, we intend to obtain a revolving credit facility to provide us with additional liquidity to, among other things, pursue acquisitions which may require capital exceeding the funds raised in this offering. There is no assurance that we will be successful in securing a revolving credit facility on terms that are acceptable to us or at all.

 

We do not currently intend to reserve funds to retire existing secured or unsecured indebtedness upon maturity.

 

In order to remain qualified as a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding net capital gains and determined without regard to the dividends paid deduction, to stockholders. We intend to pay distributions to our stockholders on a quarterly basis pursuant to our distribution policy, as more fully described under “Distribution Policy.” In addition, we utilize our capital to acquire or develop properties or entities that own properties and invest in joint ventures that acquire and own properties. Our properties will require recurring investment related to capital expenditures and general capital improvements.

 

We intend to invest in senior housing facilities only as suitable opportunities arise. In the near-term, we intend to fund future investments in properties with the net proceeds of this offering and the concurrent private placement and borrowings assumed or executed in connection with such acquisitions. Longer term, we intend to finance our additional senior housing investments and scheduled debt maturities under our mortgages with the net proceeds from additional issuances of common stock and issuances of OP units in our operating partnership and through long-term secured and unsecured borrowings which we anticipate will have staggered maturities. Over time, we intend to take advantage of the strength of

 

Management’s discussion and analysis of financial condition and results of operations

 

 

the senior housing segment in obtaining attractive long-term debt from government sponsored entities, or GSEs, such as the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac. For example, Fannie Mae is the lender of the approximately $158.1 million of in-place mortgage debt that we will assume in connection with the acquisition of our initial portfolio of facilities.

 

Although we have no formal written agreement with Mr. Hutchison or any of his affiliates to do so, we intend to use approximately $0.1 million of the net proceeds of this offering and the concurrent private placement to reimburse out-of-pocket costs incurred by Mr. Hutchison and his affiliates in connection with our formation, approximately $0.6 million to reimburse offering expenses which Mr. Hutchison has advanced on our behalf, and approximately $0.7 million to reimburse the costs incurred by Mr. Hutchison in connection with the acquisition of our initial portfolio, primarily the earnest money deposit that Mr. Hutchison advanced on our behalf.

 

DEFERRED AND REFUNDABLE ENTRANCE FEES

 

Our pro forma financial information includes the receipt and recognition of member deposits and membership fee income representing the required entrance fee paid by residents of rented units, pursuant to a membership contract entered into at the time of the execution of the residency agreement. Under most membership arrangements, a portion of the upfront fee paid is refundable to the resident in accordance with the underlying residency agreement. The remaining amount of the entrance fee is accounted for as deferred revenue and included in the balance of other liabilities, and a portion is recognized each year as membership fee revenue, depending upon the terms of the residency agreement. Under the membership program, deposits generally become refundable upon the member’s withdrawal from the program and a request for a refund. However, for a substantial majority of our deposits, our obligation to refund the deposit of a member who has requested a refund occurs only after we have entered into a new resident agreement with a new resident upon the resale of the specific unit. We recognize a liability for the membership deposits, which do bear interest, and recognize the cash flow from these deposits. On a pro forma basis, our accrued deposit liability pertaining to deferred and refundable resident entrance fees was approximately $15.7 million as of June 30, 2010.

 

COMMITMENTS

 

Upon the completion of the acquisition of our initial portfolio, we expect to have long-term indebtedness totaling approximately $158.1 million. The following table summarizes the repayment schedule for such indebtedness for each of the years from 2010 to 2013 assuming we do not exercise our conversion right which would extend the term for up to 10 years (in thousands):

 

 

Management’s discussion and analysis of financial condition and results of operations

 

 

PRO FORMA CONSOLIDATED INDEBTEDNESS

 

We anticipate that, upon completion of the acquisition of our initial portfolio, we will have approximately $158.1 million of outstanding mortgage debt, all of which will bear interest at a floating rate. This indebtedness is expected to be comprised of the following (in thousands):

 

 

 

 

MATERIAL COVENANTS OF OUR PRO FORMA CONSOLIDATED OUTSTANDING INDEBTEDNESS

 

We expect that our outstanding pro forma indebtedness as a result of the acquisition of our initial portfolio will be secured by the individual health care facilities and the loans will be cross-defaulted and cross-collateralized. We anticipate that, in addition to the pro forma indebtedness, any additional indebtedness incurred in connection with our acquisitions of facilities or portfolios of facilities will generally contain customary affirmative covenants, which are also found in our outstanding pro forma indebtedness, specific to the facility or facilities such as financial reporting and standard lease requirements and negative covenants, including, among others, restrictions on or require approval for the borrower’s ability to (i) create or incur additional liens or indebtedness, (ii) transfer the facility or an interest in the facility, (iii) merge or consolidate with or into, or convey, transfer or dispose of all or substantially all of its assets to or in favor of, any other person and (iv) change the management of the facilities.

 

CONTRACTUAL OBLIGATIONS

 

As of the date of this prospectus, we have entered into the purchase and sale agreement relating to the acquisition of our initial portfolio. Other than this purchase and sale agreement, we do not have any other material contractual obligations.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of the date of this prospectus, we had no off-balance sheet transactions.

 

FUNDS FROM OPERATIONS

 

One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. Due to certain unique operating characteristics of real estate companies, NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which it believes more accurately reflects the operating performance of a REIT such as us. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper.

 

Management’s discussion and analysis of financial condition and results of operations

 

 

The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization (excluding amortization of deferred financing costs) of real estate assets, and after adjustments for the portion of these items related to unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.

 

We consider FFO to be an appropriate supplemental measure of a REIT’s operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a supplemental performance measure.

 

Presentation of this information is intended to assist the reader in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance. Our FFO reporting will comply with NAREIT’s policy described above. For additional information, see “Selected Pro Forma Financial Information.”

 

At this time, we have not made a determination regarding whether any adjustments to the manner in which we calculate FFO in order to adjust for the effect of straight line rent, capital expenditures, depreciation and other adjustments are appropriate for our company. We will assess whether any such adjustments are appropriate during our first year of operations following completion of this offering.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. In connection with our assumption of the in-place mortgage debt that is secured by the initial portfolio of facilities that we have under contract, we will be required to enter into an interest rate cap. We will not enter into derivative transactions for speculative purposes.

 

We estimate that a one-percentage point increase in the variable interest rate on our outstanding pro forma indebtedness as of June 30, 2010 and as of December 31, 2009 would have resulted in additional interest expense of approximately $0.8 million for the six months ended June 30, 2010 and approximately $1.6 million for the year ended December 31, 2009.

 

In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of facility operators, which may affect our ability to refinance our debt if necessary.

 

Upon completion of the acquisition of the six senior housing facilities that we currently have under contract, an affiliate of Senior Lifestyle Management is expected to account for substantially all of our revenues. This concentration of credit risk in one facility operator makes us more vulnerable

 

Management’s discussion and analysis of financial condition and results of operations

 

 

economically than if we entered into leases and management agreements with several facility operators. Any adverse developments in this facility operator’s business and affairs, financial strength or ability to operate our facilities efficiently and effectively could have a material adverse effect on our results of operations. We cannot assure you that this facility operator will have sufficient assets, income and access to financing and insurance coverage to enable it satisfy its lease obligations to us or effectively and efficiently operate the six facilities we intend to acquire with a portion of the net proceeds from this offering and the concurrent private placement. The failure or inability of this facility operator to satisfy its lease obligations to us or effectively and efficiently operate these facilities would materially reduce our revenues and net income, which could in turn reduce the amount of our distributable cash and cause our stock price to decline. Our pursuit of any remedies upon a default under any agreement between us and the facility operator may be impacted by our consideration of the effect such remedies will have on other facilities leased to or managed by the facility operator.

 

INFLATION

 

We expect to be exposed to inflation risk as income from future long-term leases will be a significant source of our cash flows from operations. For our leased facilities, we expect there to be provisions in the majority of our leases that will protect us from the impact of inflation. These provisions may include rent steps, reimbursement billings for operating expense pass-through charges, and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the anticipated leases, they may not re-set frequently enough to cover inflation. For our non-leased facilities, we will be subject to inflation risks if our facility operators are unable to increase the costs of services provided by them at our facilities to negate the effects of inflation.

 

OUR COMPANY

 

We are a self-advised real estate company that was recently organized to acquire, own and actively asset manage income-producing senior housing facilities that derive substantially all of their revenues from private payment sources, generate stable cash flows and have the potential for long-term capital appreciation. Shortly after completion of this offering and the concurrent private placement, we expect to complete the acquisition of six high quality senior housing facilities located in Florida, Illinois, New Jersey, New York and Virginia for an aggregate contractual purchase price of $240.0 million excluding transaction costs and the assumption of certain deposit liabilities. We believe the markets in which these facilities are located exhibit strong demand, high barriers to entry and limited new supply. These facilities contain 1,042 independent and assisted living units with a weighted average occupancy of approximately 88.7% for the six months ended June 30, 2010. Substantially all of the revenues at these facilities are derived from private payment sources. The acquisition of these facilities demonstrates our ability to execute our growth strategy and acquire senior housing facilities that meet our targeted acquisition criteria.

 

We were formed in April 2010 to utilize the substantial experience and extensive network of relationships in the senior housing and real estate industries of our management team, which is led by Thomas J. Hutchison III, our Chairman and Chief Executive Officer, to identify and acquire independent living facilities, assisted living facilities, which may include Alzheimer’s/dementia care units or free-standing Alzheimer’s/dementia care facilities, and continuing care retirement communities which, in each case, generate substantially all of their revenues from private payment sources. We will generally target high quality facilities that occupy a market leading position within their local markets and are located in and around metropolitan areas with strong demographic profiles, high barriers to entry and limited new supply, as well as in destination retirement areas such as California, Florida, North Carolina, South Carolina and Texas. While not a primary focus of our strategy, we may also opportunistically acquire additional types of senior housing facilities, including but not limited to senior apartments and skilled nursing facilities.

 

We intend to capitalize on our management team’s prior experience in utilizing creative and flexible acquisition, lease and management structures to facilitate acquisitions and, where appropriate, to participate on an after-tax basis in operating improvements and capture potential growth in facility-level cash flows. We may, for example, lease certain facilities to our TRS lessee, which will contract with facility operators to operate these facilities, or lease our facilities to facility operators pursuant to net leases that will provide for the payment of base rent subject to annual escalators and require additional percentage rent based on gross revenues. For certain facilities, such as skilled nursing facilities, that possess slower growth characteristics or reimbursement risk from government programs such as Medicare and Medicaid, we may use traditional net lease structures even if the facilities are eligible for the TRS lessee structure. Alternatively, we may lease the units in certain facilities directly to the residents and form a TRS to provide services to the residents.

 

A key element of our strategy is to employ a dedicated and experienced asset management team to proactively manage our facility operators in order to improve operational performance and enhance the return on our investments. We plan to dedicate substantially more resources to asset management than many companies in our industry, which we believe will provide us with a competitive advantage. Although we do not intend to operate our facilities, our management team and the asset managers we intend to employ will actively participate with our facility operators in various aspects of the operations of our facilities, including property positioning and repositioning, operations analysis, physical design, renovation,

 

Business

 

 

capital improvements, resident experience and overall strategic direction. Our facilities will be managed by or leased to experienced operators that we believe have track records of growth and profitability.