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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number 000-53969
CORNERSTONE HEALTHCARE PLUS REIT, INC.
(Exact name of registrant as specified in its charter)
     
MARYLAND
(State or other jurisdiction of
incorporation or organization)
  20-5721212
(I.R.S. Employer Identification No.)
     
1920 MAIN STREET, SUITE 400, IRVINE, CA
(Address of principal executive offices)
  92614
(Zip Code)
949-852-1007
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o  Non-accelerated filer o  Smaller reporting company þ
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
     As of August 12, 2011, there were 12,981,826 shares of common stock of Cornerstone Healthcare Plus REIT, Inc. outstanding.
 
 


 

PART I — FINANCIAL INFORMATION
FORM 10-Q
Cornerstone Healthcare Plus REIT, Inc.
TABLE OF CONTENTS
         
PART I. FINANCIAL INFORMATION
       
 
Item 1. Financial Statements:
       
 
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 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
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 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    June 30,     December 31,  
    2011     2010  
ASSETS
               
Cash and cash equivalents
  $ 31,683,000     $ 29,819,000  
Investments in real estate
               
Land
    21,269,000       18,949,000  
Buildings and improvements, net
    115,680,000       87,933,000  
Furniture, fixtures and equipment, net
    2,707,000       2,410,000  
Development costs and construction in progress
    921,000       13,669,000  
Intangible lease assets, net
    7,127,000       5,907,000  
 
           
 
    147,704,000       128,868,000  
 
               
Deferred financing costs, net
    1,381,000       1,382,000  
Tenant and other receivables
    1,613,000       1,462,000  
Receivable from related parties, net (Note 12)
           
Deferred costs and other assets
    1,588,000       554,000  
Restricted cash
    3,281,000       2,942,000  
Goodwill
    5,965,000       5,329,000  
 
           
Total assets
  $ 193,215,000     $ 170,356,000  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Notes payable
  $ 97,298,000     $ 80,792,000  
Accounts payable and accrued liabilities
    6,700,000       4,886,000  
Payable to related parties
          65,000  
Prepaid rent and security deposits
    1,625,000       1,127,000  
Distributions payable
    801,000       722,000  
 
           
Total liabilities
    106,424,000       87,592,000  
 
               
Commitments and contingencies (Note 13)
               
 
               
Equity
               
Preferred stock, $0.01 par value per share; 20,000,000 shares authorized; no shares were issued or outstanding at June 30, 2011 and December 31, 2010
           
Common stock, $0.01 par value per share; 580,000,000 shares authorized; 13,000,825 and 11,592,883 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    130,000       116,000  
Additional paid-in capital
    99,012,000       91,588,000  
Accumulated deficit
    (15,013,000 )     (11,722,000 )
 
           
Total stockholders’ equity
    84,129,000       79,982,000  
Noncontrolling interests
    2,662,000       2,782,000  
 
           
Total equity
    86,791,000       82,764,000  
 
           
Total liabilities and equity
  $ 193,215,000     $ 170,356,000  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Revenue:
                               
Rental revenue
  $ 8,371,000     $ 3,373,000     $ 15,931,000     $ 5,810,000  
Resident services and fee income
    2,020,000       576,000       3,722,000       1,071,000  
Tenant reimbursements and other income
    308,000       122,000       631,000       232,000  
 
                       
 
    10,699,000       4,071,000       20,284,000       7,113,000  
Expenses:
                               
Property operating and maintenance
    6,464,000       2,642,000       12,152,000       4,502,000  
General and administrative expenses
    1,297,000       512,000       1,961,000       1,040,000  
Asset management fees and expenses
    376,000       195,000       807,000       360,000  
Real estate acquisition costs and earn-out costs
    514,000       881,000       1,641,000       1,339,000  
Depreciation and amortization
    2,129,000       930,000       3,990,000       1,570,000  
 
                       
 
    10,780,000       5,160,000       20,551,000       8,811,000  
 
                       
Loss from operations
    (81,000 )     (1,089,000 )     (267,000 )     (1,698,000 )
 
                               
Other income (expense):
                               
Interest income
    3,000       9,000       7,000       12,000  
Interest expense
    (1,604,000 )     (546,000 )     (3,080,000 )     (883,000 )
 
                       
 
                               
Net loss
    (1,682,000 )     (1,626,000 )     (3,340,000 )     (2,569,000 )
Net income (loss) attributable to noncontrolling interests
    16,000       (82,000 )     (49,000 )     (78,000 )
 
                       
Net loss attributable to common stockholders
  $ (1,698,000 )   $ (1,544,000 )   $ (3,291,000 )   $ (2,491,000 )
 
                       
 
                               
Basic and diluted net loss per common share attributable to common stockholders
  $ (0.13 )   $ (0.22 )   $ (0.26 )   $ (0.42 )
 
                       
 
                               
Weighted-average number of common shares
    13,004,904       7,099,586       12,488,389       5,959,909  
 
                               
Distribution declared, per common share
  $ 0.19     $ 0.19     $ 0.38     $ 0.38  
 
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
                                                         
    Common Stock              
            Common     Additional             Total              
    Number of     Stock Par     Paid-In     Accumulated     Stockholders’     Noncontrolling     Total  
    Shares     Value     Capital     Deficit     Equity     Interests     Equity  
Balance — December 31, 2010
    11,592,883     $ 116,000     $ 91,588,000     $ (11,722,000 )   $ 79,982,000     $ 2,782,000     $ 82,764,000  
Issuance of common stock
    1,575,250       16,000       15,628,000             15,644,000             15,644,000  
Redeemed shares
    (167,308 )     (2,000 )     (1,602,000 )           (1,604,000 )           (1,604,000 )
Offering costs
                (1,890,000 )           (1,890,000 )           (1,890,000 )
Distributions
                (4,712,000 )           (4,712,000 )     (71,000 )     (4,783,000 )
Net loss
                      (3,291,000 )     (3,291,000 )     (49,000 )     (3,340,000 )
 
                                         
Balance — June 30, 2011
    13,000,825     $ 130,000     $ 99,012,000     $ (15,013,000 )   $ 84,129,000     $ 2,662,000     $ 86,791,000  
 
                                         
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
                                                         
    Common Stock              
            Common     Additional             Total              
    Number of     Stock Par     Paid-In     Accumulated     Stockholders’     Noncontrolling     Total  
    Shares     Value     Capital     Deficit     Equity     Interests     Equity  
Balance — December 31, 2009
    4,993,751     $ 50,000     $ 39,551,000     $ (5,403,000 )   $ 34,198,000     $     $ 34,198,000  
Issuance of common stock
    3,221,344       32,000       32,125,000             32,157,000             32,157,000  
Redeemed shares
    (23,709 )           (220,000 )           (220,000 )           (220,000 )
Noncontrolling interest contribution
                                  2,621,000       2,621,000  
Offering costs
                (3,567,000 )           (3,567,000 )           (3,567,000 )
Distributions
                (2,392,000 )           (2,392,000 )     (7,000 )     (2,399,000 )
Net loss
                      (2,491,000 )     (2,491,000 )     (78,000 )     (2,569,000 )
 
                                         
Balance — June 30, 2010
    8,191,386     $ 82,000     $ 65,497,000     $ (7,894,000 )   $ 57,685,000     $ 2,536,000     $ 60,221,000  
 
                                         
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended  
    June 30,  
    2011     2010  
Cash flows from operating activities:
               
Net loss
  $ (3,340,000 )   $ (2,569,000 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of acquisitions:
               
Amortization of deferred financing costs
    283,000       26,000  
Depreciation and amortization
    3,990,000       1,570,000  
Straight-line rent amortization
    (452,000 )     (146,000 )
Real estate earn out costs
    721,000        
Cancellation of advisor obligation
    1,630,000        
Change in operating assets and liabilities:
               
Tenant and other receivables
    299,000       266,000  
Deferred costs and deposits
    (1,027,000 )     (517,000 )
Restricted cash
    (221,000 )      
Prepaid rent and tenant security deposits
    498,000       83,000  
Payable to related parties
    (38,000 )     (180,000 )
Receivable from related parties
    (1,630,000 )      
Accounts payable and accrued liabilities
    1,475,000       918,000  
 
           
Net cash provided by (used in) operating activities
    2,188,000       (549,000 )
 
               
Cash flows from investing activities:
               
Real estate acquisitions
    (19,751,000 )     (12,363,000 )
Additions to real estate
    (371,000 )     (49,000 )
Restricted cash
    (118,000 )     (752,000 )
Development of real estate
    (2,807,000 )     (4,058,000 )
Acquisition deposits
    100,000       (106,000 )
 
           
Net cash used in investing activities
    (22,947,000 )     (17,328,000 )
 
               
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    14,160,000       31,074,000  
Redeemed shares
    (1,604,000 )     (220,000 )
Repayment of note payable
    (395,000 )     (137,000 )
Proceeds from notes payable
    16,901,000       5,613,000  
Payment of real estate earn out costs
    (1,000,000 )      
Offering costs
    (1,917,000 )     (4,148,000 )
Deferred financing costs
    (302,000 )     (260,000 )
Noncontrolling interest contribution
          886,000  
Distributions paid to stockholders
    (3,149,000 )     (1,129,000 )
Distributions paid to noncontrolling interests
    (71,000 )     (7,000 )
 
           
Net cash provided by financing activities
    22,623,000       31,672,000  
 
           
 
               
Net increase in cash and cash equivalents
    1,864,000       13,795,000  
Cash and cash equivalents — beginning of period
    29,819,000       14,900,000  
 
           
Cash and cash equivalents — end of period
  $ 31,683,000     $ 28,695,000  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 2,718,000     $ 652,000  
Cash paid for income taxes
  $ 441,000     $  
Supplemental disclosure of non-cash financing and investing activities:
               
Distributions declared not paid
  $ 801,000     $ 485,000  
Distribution reinvested
  $ 1,484,000     $ 1,083,000  
Loan assumed at property acquisition
  $     $ 12,902,000  
Assets contributed by noncontrolling interest
  $     $ 1,735,000  
Accrued offering costs
  $     $ 149,000  
Accrued real estate development costs
  $ 279,000     $  
Accrued acquisition fees
  $     $ 30,000  
Accrued promote monetization liability
  $ 2,018,000     $  
Deferred financing amortization capitalized to real estate development
  $ 20,000     $  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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CORNERSTONE HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(UNAUDITED)
1. Organization
Cornerstone Healthcare Plus REIT, Inc. (formerly known as Cornerstone Growth & Income REIT, Inc.), a Maryland corporation, was formed on October 16, 2006 under the Maryland General Corporation Law for the purpose of engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone Healthcare Plus REIT, Inc. and its consolidated subsidiaries, except where context otherwise requires. We are recently formed and are subject to the general risks associated with a start-up enterprise, including the risk of business failure. Subject to certain restrictions and limitations, our business is managed by an affiliate, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited liability company that was formed on October 16, 2006 (the “Advisor”), pursuant to an advisory agreement.
Effective July 29, 2011, the Company and the Advisor, together with Cornerstone Ventures, Inc., an affiliate of the Company’s advisor (“CVI”), CIP Leveraged Fund Advisors, LLC, the sole member of the Company’s advisor (“CLFA”), Servant Healthcare Investment, LLC, the Company’s sub-advisor (the “Sub-Advisor”), and Terry Roussel (together with CVI, CLFA and the Advisor, the “Cornerstone Parties”), entered into an Omnibus Agreement (the “Omnibus Agreement”) which, among other actions: (1) amended the advisory agreement, initially executed on September 12, 2007, by and between the Advisor and the Company (as amended, “the Advisory Agreement”); (2) provided for the transfer of certain interests in the Company from the Cornerstone Parties to the Company; (3) terminated the alliance agreement, dated as of May 19, 2008, by and between CVI and the Sub-Advisor; (4) modified and assigned to the Company the Sub-Advisory Agreement, dated as of May 19, 2008, by and between the Advisor, CLFA and the Sub-Advisor; and (5) canceled and forgave certain amounts due from the Advisor to the Company, all as further described herein.
Cornerstone Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on October 17, 2006. At June 30, 2011, we owned a 99.8% general partner interest in the Operating Partnership while the Advisor owned a 0.2% limited partnership interest. In addition, the Advisor owned a 0.9% limited partnership interest in CGI Healthcare Operating Partnership, L.P., a subsidiary of the Operating Partnership. We anticipate that we will conduct all or a portion of our operations through the Operating Partnership. Our financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated in consolidation. Effective July 29, 2011, pursuant to the Omnibus Agreement, the Advisor has no ownership interest in the Company or its affiliates.
For federal income tax purposes, we have elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with our taxable year ended December 31, 2008. REIT status imposes limitations related to operating assisted-living properties. Generally, to qualify as a REIT, we cannot directly operate assisted-living facilities. However, such facilities may generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease with the Company. Therefore, we have formed Master HC TRS, LLC (“Master TRS”), a wholly owned subsidiary of CGI Healthcare Operating Partnership, LP, to lease any assisted-living properties we acquire and to operate the assisted-living properties pursuant to contracts with unaffiliated management companies. Master TRS and the Company have made the applicable election for Master TRS to qualify as a TRS. Under the management contracts, the management companies will have direct control of the daily operations of these assisted-living properties.
On May 21, 2011, Terry G. Roussel, the President, Chief Executive Officer, Chairman of the board of directors and a director of the Company, informed the Company that he had resigned from his positions as President, Chief Executive Officer and Chairman of the board of directors effective as of May 21, 2011. As a result of negotiations relating to the Omnibus Agreement, Mr. Roussel also resigned as a director of the Company, effective July 29, 2011.
In response to the resignation of Mr. Roussel, our board of directors appointed Sharon C. Kaiser to serve as our President, effective May 25, 2011.

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2. Public Offering and Strategic Alternatives
On November 14, 2006, Terry G. Roussel purchased 100 shares of common stock for $1,000 and became our initial stockholder. Our charter authorizes the issuance of up to 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share.
On June 20, 2008, we commenced an initial public offering of up to 50,000,000 shares of our common stock, consisting of 40,000,000 shares for sale pursuant to a primary offering and 10,000,000 shares for sale pursuant to our distribution reinvestment plan. We stopped making offers under our initial public offering on February 3, 2011 after raising gross offering proceeds of $123.9 million from the sale of 12.4 million shares, including shares sold under the distribution reinvestment plan.
On February 4, 2011, the U.S. Securities and Exchange Commission (“SEC”) declared the registration statement for our follow-on offering effective and we commenced a follow-on offering of up to 55,000,000 shares of our common stock, consisting of 44,000,000 shares for sale pursuant to a primary offering and 11,000,000 shares for sale pursuant to our dividend reinvestment plan.
On April 29, 2011 we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration is the hiring of a new dealer manager for our follow-on offering; however, the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced. The Independent Directors Committee is continuing to evaluate strategic alternatives, including a possible merger with another company or the sale of the entire portfolio.
As of June 30, 2011, we had sold a total of 12.7 million shares of our common stock for aggregate gross proceeds of $127.0 million.
3. Summary of Significant Accounting Policies
For more information regarding our critical accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2010.
Use of Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates on various assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
Interim Financial Information
The accompanying interim condensed consolidated financial statements have been prepared by our management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the SEC. Certain information and note disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s 2010 Annual Report on Form 10-K, as filed with the SEC.

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Fair Value of Financial Instruments
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 825-10, “Financial Instruments”, requires the disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value.
We generally determine or calculate the fair value of financial instruments using quoted market prices in active markets, when such information is available, or appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow.
Our balance sheets include the following financial instruments: cash and cash equivalents, tenant and other receivables, restricted cash, deferred costs and other assets, prepaid rent and security deposits, accounts payable and accrued liabilities, distributions payable, and notes payable. With the exception of notes payable discussed below, we consider the carrying values of our financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected settlement.
The fair value of notes payable is estimated using lending rates available to us for financial instruments with similar terms and maturities. As of June 30, 2011 and December 31, 2010, the fair value of notes payable was $97.9 million and $81.7 million, compared to the carrying value of $97.3 million and $80.8 million, respectively.
4. Investment in Real Estate
The following table provides summary information regarding our current property portfolio.
                                                 
                    Gross                   June 30,
            Date   Square   Purchase   June 30, 2011   2011
Property   Location   Purchased   Feet   Price   Debt   Occupancy
Caruth Haven Court
  Highland Park, TX     01/22/09       74,647     $ 20,500,000     $ 9,848,000       92.3 %
The Oaks Bradenton
  Bradenton, FL     05/01/09       18,172     $ 4,500,000     $ 2,718,000       98.7 %
GreenTree at Westwood (1)
  Columbus, IN     12/30/09       50,249     $ 5,150,000     $ 2,833,000       94.8 %
Mesa Vista Inn Health Center
  San Antonio, TX     12/31/09       55,525     $ 13,000,000     $ 7,238,000       80.0 %
Rome LTACH Project (2)
  Rome, GA     01/12/10       52,944           $ 10,922,000       100.0 %
Oakleaf Village Portfolio:
                                  $ 17,745,000          
Oakleaf Village at — Lexington
  Lexington, SC     04/30/10       63,917     $ 14,512,000               89.0 %
Oakleaf Village at — Greenville
  Greer, SC     04/30/10       56,437     $ 12,488,000               72.0 %
Global Rehab Inpatient Rehab Facility
  Dallas, TX     08/19/10       40,828     $ 14,800,000     $ 7,485,000       80.0 %
Terrace at Mountain Creek (3)
  Chattanooga, TN     09/03/10       109,643     $ 8,500,000     $ 5,700,000       93.1 %
Littleton Specialty Rehabilitation Facility (5)
  Littleton, CO     12/16/10       26,808 (4)         $ 1,000        
Carriage Court of Hilliard
  Hilliard, OH     12/22/10       69,184     $ 17,500,000     $ 13,514,000       95.1 %
Hedgcoxe Health Plaza
  Plano, TX     12/22/10       32,109     $ 9,094,000     $ 5,060,000       95.0 %
River’s Edge of Yardley
  Yardley, PA     12/22/10       26,146     $ 4,500,000     $ 2,500,000       95.9 %
Forestview Manor
  Meredith, NH     01/14/11       34,270     $ 10,750,000     $ 5,934,000       88.0 %
Woodland Terrace
  Allentown, PA     04/14/11       50,400     $ 9,000,000     $ 5,800,000       87.5 %
 
(1)   The earn-out liability associated with this acquisition was estimated to have a fair value of approximately $0.9 million and $0.4 million as of June 30, 2011 and December 31, 2010, respectively. For the three and six months ended June 30, 2011, the expense of $0.2 million and $0.5 million, respectively, is related to the increased liability and has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs.

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(2)   Rome LTACH Project was completed in February 2011 and its first tenant moved in on February 1, 2011. As of June 30, 2011 the property had $16.2 million in real estate assets. For the three and six months ended June 30, 2011, the expense related to a promote feature was $0 and $0.2 million, respectively, which has been included in the condensed consolidated statements of operations under real estate acquisition costs and earn out costs. Refer to Note 5 for more information on the promote feature.
 
(3)   Under the purchase and sale agreement executed in connection with the acquisition, a portion of the purchase price for the property was to be calculated and paid to the seller as earn out payments based upon the net operating income, as defined, of the property during each of the three years following our acquisition of the property. The earn-out value of $1.0 million was paid during the second quarter of 2011.
 
(4)   Represents estimated gross square footage upon completion of development.
 
(5)   As of June 30, 2011, a total of $1.6 million had been invested in this project.
As of June 30, 2011 and December 31, 2010, goodwill had a balance of $6.0 million and $5.3 million, respectively, all related to our senior living operations segment. During the quarter ended March 31, 2011, we recorded goodwill of $0.3 million for the acquisition of Forestview Manor. During the quarter ended June 30, 2011, we recorded goodwill of $0.4 million for the acquisition of Woodland Terrace. In addition to our annual impairment tests, on a quarterly basis, the Company evaluates for potential impairment indicators on the individual investments or reporting units and performs an interim test when indicators exist. As of June 30, 2011, the Company has recorded no accumulated impairment related to goodwill.
As of June 30, 2011, cost and accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:
                                         
                            Development        
                            costs and        
            Buildings and     Furniture, fixtures     construction in     Intangible lease  
    Land     improvements     and equipment     progress     assets  
Cost
  $ 21,269,000     $ 119,102,000     $ 3,399,000     $ 921,000     $ 12,441,000  
Accumulated depreciation and amortization
          (3,422,000 )     (692,000 )           (5,314,000 )
 
                             
Net
  $ 21,269,000     $ 115,680,000     $ 2,707,000     $ 921,000     $ 7,127,000  
 
                             
As of December 31, 2010, accumulated depreciation and amortization related to investments in real estate and related lease intangibles were as follows:
                                         
                            Development        
                            costs and        
            Buildings and     Furniture, fixtures     construction in     Intangible lease  
    Land     improvements     and equipment     progress     assets  
Cost
  $ 18,949,000     $ 89,719,000     $ 2,780,000     $ 13,669,000     $ 9,187,000  
Accumulated depreciation and amortization
          (1,786,000 )     (370,000 )           (3,280,000 )
 
                             
Net
  $ 18,949,000     $ 87,933,000     $ 2,410,000     $ 13,669,000     $ 5,907,000  
 
                             
Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the three months ended June 30, 2011 and 2010 was $1.0 million and $0.4 million, respectively. Depreciation expense associated with buildings and improvements, site improvements and furniture and fixtures for the six months ended June 30, 2011 and 2010 was $1.9 million and $0.6 million, respectively.
Amortization associated with the intangible assets for the three months ended June 30, 2011 and 2010 was $1.1 million and $0.6 million, respectively. Amortization associated with the intangible assets for the six months ended June 30, 2011 and 2010 was $2.0 million and $0.9 million, respectively.
As of June 30, 2011, the Company has not recorded any asset impairment as a result of its impairment analysis.
Estimated amortization for July 1, 2011 through December 31, 2011 and subsequent years is as follows:
         
    Intangible
    assets
July 2011 — December 2011
  $ 1,574,000  
2012
  $ 1,328,000  
2013
  $ 415,000  
2014
  $ 354,000  
2015
  $ 354,000  
2016
  $ 354,000  
2017 and thereafter
  $ 2,748,000  

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The estimated useful lives for intangible assets range from one to twenty years. As of June 30, 2011, the weighted-average amortization period for intangible assets was 10 years.
5. Investments in Joint Ventures
Oakleaf Joint Venture
On April 30, 2010, we invested $21.6 million to acquire 80% equity interests in Royal Cornerstone South Carolina Portfolio, LLC (“Portfolio LLC”) and Royal Cornerstone South Carolina Tenant Portfolio, LLC (“Tenant LLC”) (collectively, we refer to the Portfolio LLC and the Tenant LLC as the “Oakleaf Joint Venture”). The Oakleaf Joint Venture, which is consolidated in the Company’s financial statements, owns and operates two assisted-living properties located in Lexington and Greenville, South Carolina. As of June 30, 2011, total net assets related to Oakleaf Joint Venture were $8.7 million, which includes $24.8 million of real estate assets and total liabilities of $18.4 million. Liabilities include $17.7 million of secured mortgage debt. We may be required to fund additional capital contributions, including funding of any capital expenditures deemed necessary to continue to operate the entity, and any operating cash shortfalls that the entity may experience.
Rome LTACH Project
On January 12, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $16.3 million free-standing medical facility on the campus of the Floyd Medical Center in Rome, Georgia. We contributed $2.7 million of capital to acquire a 75.0% limited partnership interest in Rome LTH Partners, LP. Cornerstone Private Equity Fund Operating Partnership, LP, an affiliate of our sponsor, contributed $0.5 million of capital to acquire a 15.0% limited partnership interest in Rome LTH Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of $0.3 million to acquire an aggregate 9.5% limited partnership interest in the Rome LTH Partners, LP. A fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Rome LTH Partners LP. As of both June 30, 2011 and December 31, 2010, we owned a 75.0% limited partnership interest in Rome LTH Partners, LP. This joint venture is consolidated in the Company’s financial statements.
Under the terms of this joint venture, we may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint ventures. At June 30, 2011, the construction of the medical facility was completed. During the first quarter of 2011, we determined that payments under these obligations are probable; accordingly, we recorded $2.2 million with respect to the monetization feature which had been included in accounts payable and accrued liabilities on our condensed consolidated balance sheet as of June 30, 2011. The amount to be paid upon monetization is based on a number of factors, including the value of the property, net income earned by the property and payment of preferred returns on equity. Of the $2.2 million, we capitalized certain construction period costs of $1.8 million and $0.2 million, which are included in intangible lease assets and building and improvements, respectively, of our condensed consolidated balance sheet. We expensed post construction period costs of $0.2 million, which are included in real estate acquisition costs and earn out costs in our condensed consolidated statement of operations. We determined the fair value of this obligation using discounted cash flow analysis, incorporating market discount rate information for similar types of obligations, projected net income earned by the property and preferred return payments. As of June 30, 2011, total assets related to this project were $16.5 million, which includes $15.9 million of net real estate assets. Total liabilities were $13.3 million as of June 30, 2011, which includes $10.9 million of secured mortgage debt.
ASC 820-10 establishes a three-tiered fair value hierarchy that prioritizes valuation technique inputs. Level 1 inputs (“observable inputs”) are quoted prices in active markets for identical assets or liabilities and are given the highest priority. Level 2 inputs (“other observable input”) are either observable directly or through corroboration with observable market data. Level 3 inputs (“unobservable inputs”) are unobservable in the market, such as internally developed valuation models. As of December 31, 2010, we had not recorded a liability with respect to the monetization feature of this joint venture. As of June 30, 2011, we estimated the fair value of the monetization feature at $2.2 million on a recurring basis using Level 3 inputs.

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Littleton Specialty Rehabilitation Facility
On December 16, 2010, we funded an investment in a joint venture with affiliates of The Cirrus Group, an unaffiliated entity, to develop a $7.3 million specialty rehabilitation facility in Littleton, CO. We agreed to contribute $1.6 million of capital to acquire a 90% limited partnership interest in Littleton Med Partners, LP. Three affiliates of The Cirrus Group contributed an aggregate of $0.2 million to acquire an aggregate 9.5% limited partnership interest in the Littleton Med Partners, LP. A fourth affiliate of the Cirrus Group acts as the general partner and holds the remaining 0.5% interest in the Littleton Med Partners, LP. As of June 30, 2011 and December 31, 2010, we owned a 90.0% limited partnership interest in Littleton Med Partners, LP. This joint venture is consolidated in the Company’s financial statements.
Under the terms of this joint venture, we may be obligated to monetize a portion of our partners’ interest in the appreciation of value in the joint venture property. These obligations may be exercised by our partners at their sole discretion between years two and four of the joint ventures. The amount that would be paid upon monetization is subject to change based on a number of factors, including the value of the property, net income earned by the property and payment of preferred returns on equities. As of June 30, 2011, the specialty rehabilitation facility in Littleton, CO is still under construction and, therefore, the monetization obligation is not determinable. Accordingly, we have not recognized any obligation as of June 30, 2011 in our condensed consolidated financial statements.
6. Concentration of Risks
Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments; cash is generally invested in investment-grade short-term instruments. On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that includes provisions that made permanent the $250,000 limit for federal deposit insurance and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. It also provides for unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions. As of June 30, 2011, we had no cash accounts in excess of Federal Deposit Insurance Corporation insured limits.
Concentrations of credit risks arise when a number of operators, tenants or obligors related to our investments are engaged in similar business activities, located in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. We regularly monitor various segments of our portfolio to assess potential concentration of risks. Management believes the current portfolio is reasonably diversified across healthcare related real estate and does not contain any other significant concentration of credit risks, except as disclosed herein.
Our senior living operations segment accounted for 73.5% and 88.1% of total revenues for the three months ended June 30, 2011 and 2010, respectively. Our senior living operations segment accounted for 78.3% and 86.3% of total revenues for the six months ended June 30, 2011 and 2010, respectively. The following table provides information about our senior living operation segment concentration for the three and six months ended June 30, 2011:
                                 
    Three Months Ended     Six Months Ended  
    Percentage of     Percentage of     Percentage of     Percentage of  
Operators
  Segment Revenues     Total Revenues     Segment Revenues     Total Revenues  
Good Neighbor Care
    30.1 %     26.3 %     30.1 %     23.6 %
Royal Senior Care
    14.8 %     5.8 %     14.8 %     11.6 %
Woodbine Senior Living
    22.4 %     17.2 %     22.4 %     17.5 %
12 Oaks Senior Living
    21.2 %     15.7 %     21.2 %     16.6 %
Provision Living
    6.1 %     4.5 %     6.1 %     4.7 %
Legend Senior Living
    5.4 %     4.0 %     5.4 %     4.3 %
 
                       
 
    100.0 %     73.5 %     100.0 %     78.3 %
 
                       

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Our triple-net leased segment accounted for 24.1% and 11.9% of total revenues for the three months ended June 30, 2011 and 2010, respectively. Our triple-net leased segment accounted for 19.2% and 13.7% of total revenues for the six months ended June 30, 2011 and 2010, respectively. The following table provides information about our triple-net leased segment for the three and six months ended June 30, 2011:
                                 
    Three Months Ended   Six Months Ended
    Percentage of   Percentage of   Percentage of   Percentage of
Tenant   Segment Revenues   Total Revenues   Segment Revenues   Total Revenues
Babcock PM Management
    19.1 %     4.6 %     25.3 %     4.9 %
Global Rehab Hospitals
    16.6 %     4.0 %     22.0 %     4.2 %
The Specialty Hospital
    55.3 %     13.3 %     45.3 %     8.7 %
Floyd Healthcare Management
    9.0 %     2.2 %     7.4 %     1.4 %
 
                               
 
    100.0 %     24.1 %     100.0 %     19.2 %
 
                               
Our medical office building segment accounted for 2.4% and 0% of total revenues for the three months ended June 30, 2011 and 2010, respectively. Our medical office building segment accounted for 2.5% and 0% of total revenues for the six months ended June 30, 2011 and 2010, respectively.
As of June 30, 2011, we owned 15 properties, geographically located in ten states. The following table provides information about our geographic risks by operating segment for the three and six months ended June 30, 2011:
                                 
    Three Months Ended   Six Months Ended
    Percentage of   Percentage of   Percentage of   Percentage of
State   Segment Revenues   Total Revenues   Segment Revenues   Total Revenues
Senior living operations
                               
South Carolina
    7.9 %     5.8 %     14.8 %     11.6 %
Texas
    21.3 %     15.7 %     21.2 %     16.6 %
Ohio
    15.2 %     11.2 %     14.7 %     11.5 %
Pennsylvania
    18.8 %     13.8 %     14.9 %     11.7 %
New Hampshire
    12.3 %     9.1 %     11.4 %     8.9 %
Tennessee
    12.8 %     9.4 %     11.5 %     9.0 %
Indiana
    6.2 %     4.5 %     6.1 %     4.7 %
Florida
    5.5 %     4.0 %     5.4 %     4.3 %
 
                               
Triple-net leased properties
                               
Texas
    35.7 %     8.6 %     47.3 %     9.1 %
Georgia
    64.3 %     15.5 %     52.7 %     10.1 %
Colorado (1)
                       
 
                               
Medical office building
                               
Texas
    100.0 %     2.4 %     100.0 %     2.5 %
 
(1)   Under construction as of June 30, 2011
7. Income Taxes
For federal income tax purposes, we have elected to be taxed as a REIT, under Sections 856 through 860 of the Code beginning with our taxable year ended December 31, 2008, which imposes limitations related to operating assisted-living properties. As of June 30, 2011, we had acquired ten assisted-living facilities and formed ten wholly owned taxable REIT subsidiaries, or TRSs, which includes a Master TRS that consolidates our wholly owned TRSs.
Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in

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the future in excess of their net recorded amount, we would establish a valuation allowance which would offset the previously recognized income tax benefit.
For the six months ended June 30, 2011 and 2010 the consolidated income tax benefit was $0.2 million and $0, respectively, and was included in general and administrative expenses in our condensed consolidated financial statements. Our net operating loss carryforwards were utilized in 2010 with respect to the TRS entities. Net deferred tax assets related to the TRS entities totaled $0.7 million and $0 million at June 30, 2011 and December 31, 2010, respectively, related primarily to book and tax basis differences for straight-line rent and accrued liabilities. Realization of these deferred tax assets is dependent in part upon generating sufficient taxable income in future periods. These deferred tax assets are included in deferred costs and other assets in our condensed consolidated balance sheets. We have not recorded a valuation allowance against our deferred tax assets as of June 30, 2011.
8. Payable to Related Parties
Payable to related parties at December 31, 2010 was $0.1 million, which consisted of offering costs, acquisition fees, expense reimbursement payable, sales commissions and dealer manager fees to our Advisor and PCC.
9. Segment Reporting
As of June 30, 2011, we operated in three reportable business segments for management and internal financial reporting purposes: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. These operating segments are the segments of the Company for which separate financial information is available and for which segment results are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.
On December 22, 2010, we completed the purchase of Hedgcoxe Health Plaza, a multi-tenant medical office building in Plano, TX. With the addition of Hedgcoxe Health Plaza, we determined that segregating our MOB operations into its own reporting segment better reflects how our business segments are managed and each segment’s performance is evaluated. Prior to the Hedgcoxe Health Plaza acquisition, we operated in two reportable segments: senior living operations and triple-net leased properties. As a result of this realignment, segment information for the three and six months ended June 30, 2010 was recasted to reflect the realigned segment structure.
We evaluate performance of the combined properties in each segment based on net operating income. Net operating income is defined as total revenue less property operating and maintenance expenses. There are no intersegment sales or transfers. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, asset management fees and expenses, real estate acquisition costs, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

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The following tables reconcile the segment activity to consolidated net income for the three and six months ended June 30, 2011 and 2010:
                                                                 
    Three Months Ended June 30, 2011     Three Months Ended June 30, 2010  
    Senior     Triple-net     Medical             Senior     Triple-net     Medical        
    living     leased     office             living     leased     office        
    operations     properties     building     Consolidated     operations     properties     building     Consolidated  
Rental revenues
  $ 5,774,000     $ 2,396,000     $ 201,000     $ 8,371,000     $ 2,927,000     $ 446,000     $     $ 3,373,000  
Resident services and fee income
    2,020,000                   2,020,000       576,000                   576,000  
Tenant reimbursements and other income
    65,000       187,000       56,000       308,000       81,000       41,000             122,000  
 
                                               
 
                                                               
 
  $ 7,859,000     $ 2,583,000     $ 257,000     $ 10,699,000     $ 3,584,000     $ 487,000     $     $ 4,071,000  
Property operating and maintenance expenses
    5,119,000       1,282,000       63,000       6,464,000       2,601,000       41,000             2,642,000  
 
                                               
 
                                                               
Net operating income
  $ 2,740,000     $ 1,301,000     $ 194,000     $ 4,235,000     $ 983,000     $ 446,000     $     $ 1,429,000  
 
                                               
 
                                                               
General and administrative expenses                     1,297,000                               512,000  
Asset management fees and expenses                     376,000                               195,000  
Real estate acquisition costs and earn out costs                 514,000                               881,000  
Depreciation and amortization
                    2,129,000                               930,000  
Interest income
                            (3,000 )                             (9,000 )
Interest expense
                            1,604,000                               546,000  
 
                                                           
 
                                                               
Net loss
                          $ (1,682,000 )                           $ (1,626,000 )
Net income (loss) attributable to the noncontrolling interests
                    16,000                               (82,000 )
Net loss attributable to common stockholders
                  $ (1,698,000 )                           $ (1,544,000 )
 
                                                           
                                                                 
    Six Months Ended June 30, 2011     Six Months Ended June 30, 2010  
    Senior     Triple-net     Medical             Senior     Triple-net     Medical        
    living     leased     office             living     leased     office        
    operations     properties     building     Consolidated     operations     properties     building     Consolidated  
Rental revenues
  $ 11,974,000     $ 3,555,000     $ 402,000     $ 15,931,000     $ 4,917,000     $ 893,000     $     $ 5,810,000  
Resident services and fee income
    3,722,000                   3,722,000       1,071,000                   1,071,000  
Tenant reimbursements and other income
    175,000       345,000       111,000       631,000       151,000       81,000             232,000  
 
                                               
 
                                                               
 
  $ 15,871,000     $ 3,900,000     $ 513,000     $ 20,284,000     $ 6,139,000     $ 974,000     $     $ 7,113,000  
Property operating and maintenance expenses
    10,564,000       1,455,000       133,000       12,152,000       4,421,000       81,000             4,502,000  
 
                                               
 
                                                               
Net operating income
  $ 5,307,000     $ 2,445,000     $ 380,000     $ 8,132,000     $ 1,718,000     $ 893,000     $     $ 2,611,000  
 
                                               
 
                                                               
General and administrative expenses             1,961,000                               1,040,000  
Asset management fees and expenses             807,000                               360,000  
Real estate acquisition costs and earn out costs             1,641,000                               1,339,000  
Depreciation and amortization                     3,990,000                               1,570,000  
Interest income
                            (7,000 )                             (12,000 )
Interest expense
                            3,080,000                               883,000  
 
                                                             
 
                                                             
 
                                                               
Net loss
                          $ (3,340,000 )                           $ (2,569,000 )
Net loss attributable to the noncontrolling interests             (49,000 )                             (78,000 )
Net loss attributable to common stockholders           $ (3,291,000 )                           $ (2,491,000 )
 
                                                         

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The following table reconciles the segment activity to consolidated financial position as of June 30, 2011 and December 31, 2010.
                 
    June 30, 2011     December 31, 2010  
Assets
               
Investment in real estate:
               
Senior living operations
  $ 95,035,000     $ 78,722,000  
Triple-net leased properties
    44,102,000       41,433,000  
Medical office building
    8,567,000       8,713,000  
 
           
Total reportable segments
  $ 147,704,000     $ 128,868,000  
Reconciliation to consolidated assets:
               
Cash and cash equivalents
    31,683,000       29,819,000  
Deferred financing costs, net
    1,381,000       1,382,000  
Tenant and other receivables, net
    1,613,000       1,462,000  
Deferred costs and other assets
    1,588,000       554,000  
Restricted cash
    3,281,000       2,942,000  
Goodwill
    5,965,000       5,329,000  
 
           
Total assets
  $ 193,215,000     $ 170,356,000  
 
           
10. Notes Payable
Notes payable were $97.3 million and $80.8 million as of June 30, 2011 and December 31, 2010, respectively. As of June 30, 2011, we had fixed and variable rate secured mortgage loans with effective interest rates ranging from 3.45% to 6.5% per annum and a weighted-average effective interest rate of 5.92% per annum. As of June 30, 2011, we had $33.0 million of fixed rate debt, or approximately 34% of notes payable, at a weighted-average interest rate of 6.01% per annum and $64.3 million of variable rate debt, or approximately 66% of notes payable, at a weighted-average interest rate of 5.87% per annum. As of December 31, 2010, we had fixed and variable rate mortgage loans with effective interest rates ranging from 2.50% to 6.50% per annum and a weighted-average effective interest rate of 6.09% per annum.
We are required by the terms of the applicable loan documents to meet certain financial covenants, such as debt service coverage ratios, rent coverage ratios and reporting requirements. Other than our credit facility as described below, we were in compliance with all such covenants and requirements as of June 30, 2011.
                                 
            Outstanding     Outstanding        
            Principal Balance     Principal Balance        
        Interest   as of June 30,     as of December 31,        
Property Name   Payment Type   Rate   2011(1)     2010(1)     Maturity Date  
Carriage Court of Hilliard
  Principal and interest at a 35-year amortization rate   5.40% — fixed   $ 13,514,000     $ 13,586,000     August 1, 2044
Caruth Haven Court
  Principal and interest at a 30-year amortization rate   6.43% — fixed   $ 9,848,000     $ 9,904,000     December 16, 2019
Greentree (6)
  Interest Only   30-day LIBOR +4.00% with a 2% LIBOR floor   $ 2,833,000           July 31, 2012
Forestview Manor (6)
  Interest Only   30-day LIBOR +4.00% with a 2% LIBOR floor   $ 5,934,000           July 31, 2012
Global Rehab Inpatient Rehab Facility
  Principal and interest at a 30-year amortization rate   6.25% — fixed for 3 years; thereafter the greater of 6.25% and 3yr LIBOR + 3.25%   $ 7,485,000     $ 7,530,000     December 22, 2016
Hedgcoxe Health Plaza (6)
  Interest Only   30-day LIBOR +4.00% with a 2% LIBOR floor   $ 5,060,000     $ 5,060,000     July 31, 2012

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            Outstanding     Outstanding        
            Principal Balance     Principal Balance        
        Interest   as of June 30,     as of December 31,        
Property Name   Payment Type   Rate   2011(1)     2010(1)     Maturity Date  
Mesa Vista Inn Health Center
  Principal and interest at a 20-year amortization rate   6.50% — fixed   $ 7,238,000     $ 7,336,000     January 5, 2015
Oakleaf Village Portfolio
  (2)   (2)   $ 17,745,000     $ 17,849,000     April 30, 2015
Oakleaf Village at Lexington
                     
Oakleaf Village at Greenville
                     
River’s Edge of Yardley (6)
  Interest Only   30-day LIBOR +4.00% with a 2% LIBOR floor   $ 2,500,000     $ 2,500,000     July 31, 2012
Rome LTACH Project (3)
  Month 1-24 Interest-only Month 25 on Principal and interest at a 25-year amortization rate   1Mo LIBOR + 3.00% with a 6.15% floor   $ 10,922,000     $ 8,588,000     December 18, 2012
Littleton Specialty Rehabilitation Facility (4)
  Month 1-18 Interest-only Month 19 on Principal and interest at a 20-year amortization rate   6.0% fixed   $ 1,000     $ 1,000     December 22, 2015
The Oaks Bradenton
  (5)   (5)   $ 2,718,000     $ 2,738,000     May 1, 2014
Terrace at Mountain Creek
  Month 1-24 interest only. Month 25 to 36 Principal and interests at a 25-year amortization rate   3Mo LIBOR + 3.50% with a 5.5% floor   $ 5,700,000     $ 5,700,000     September 1, 2013
Woodland Terrace at the Oaks
  Month 1-22 interest only. Month 23 to 36 Principal and interests at a 25-year amortization rate   3Mo LIBOR + 3.75% with a floor of 5.75%   $ 5,800,000     $     May 1, 2014
 
                           
 
          $ 97,298,000     $ 80,792,000          
 
                           
 
(1)   As of June 30, 2011 and December 31, 2010, all notes payable are secured by the underlying real estate.
 
(2)   The aggregate loan amount is composed of a restatement date balance of $12.9 million outstanding with respect to a prior loan (the “Initial Loan”), and an additional amount of $5.1 million disbursed on the closing date (the “Restatement Date Loan”). From June 1, 2010 through the maturity date, payments on the Restatement Date Loan are due monthly and based upon a 30-year amortization schedule. From June 1, 2010 through January 10, 2011, payments on the Initial Loan were due monthly based upon a 25-year amortization schedule, thereafter through maturity, payments on the Initial Loan are due monthly based upon a 30-year amortization schedule. The Restatement Date Loan bears interest at a variable rate equal to 5.45% per annum plus the greater of 1.0% or the 3-month LIBOR rate (the “Contract Rate”). The outstanding balance of the Initial Loan bore interest at a rate of 6.62% per annum until January 10, 2011 and thereafter bears interest at the Contract Rate.
 
(3)   For the three and six months ended June 30, 2011 we incurred $0.2 million and $0.3 million, respectively, of interest expense related to the Rome LTACH Project. No interest expense was incurred during the same periods last year as the project was under development until February 2011. Interest expense and deferred financing fees capitalized were insignificant during the 6 months ended June 30, 2011.
 
(4)   For the three months ended June 30, 2011 and 2010 we did not incur any interest expense related to the Littleton Specialty Rehabilitation Facility. Interest expense and deferred financing fees capitalized were insignificant during the 6 months ended June 30, 2011.
 
(5)   Of the total loan amount, $2.4 million bears a fixed interest rate of 6.25% per annum. The remaining $0.4 million bears a variable interest rate equivalent to the prevailing market certificate of deposit rate plus a 1.5% margin. Monthly payments for the first twelve months were interest-only. Thereafter, monthly payments included interest and principal based on a 25-year amortization period.
 
(6)   In November 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution (“KeyBank”), to obtain a $25,000,000 revolving credit facility. The initial term of the credit facility was 24 months, maturing on November 18, 2012, and could be extended by six months subject to satisfaction of certain conditions, including payment of an extension fee. The actual amount of credit available under the credit facility was a function of certain loan to cost, loan to value and debt service coverage ratios contained in the

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    credit facility. The amount outstanding under the credit facility was $16.3 million and $7.6 million at June 30, 2011 and December 31, 2010, respectively. The facility included a financial covenant requiring us to raise at least $20 million in our public offering in the six-month period ending June 30, 2011, and to raise an additional $20 million in net offering proceeds during each six-month calendar period thereafter. Because we suspended our public offering on April 29, 2011, we were not able to satisfy this covenant; however, effective August 1, 2011, the Company successfully negotiated the terms of a modification to the credit facility. KeyBank agreed to remove the covenant and revise the maturity date to July 31, 2012, which can be extended to October 30, 2012 subject to satisfaction of certain conditions, including payment of an extension fee. The line of credit was further modified to limit the outstanding balance to the current balance outstanding, impose additional monthly reporting covenants and require the establishment of tax and insurance impound accounts. The credit facility is secured by first priority liens on our eligible real property assets that make up the borrowing base (as such term is defined) for the credit facility. The interest rate for this credit facility is one-month LIBOR plus a margin of 400 basis points, with a floor of LIBOR plus 200 basis points. The original credit facility required payment of a fee of up to 25 basis points related to unused credit available to us under the credit facility. As a result of the modification, this fee is no longer applicable. We are entitled to prepay the obligations at any time without penalty. Financing fees associated with this modification were insignificant and were incurred primarily in the third quarter of 2011.
The principal payments due on our notes payable for July 1, 2011 to December 31, 2011 and each of the subsequent years are as follows and include the payments as modified for the KeyBank credit facility:
         
    Principal
Year   amount
July 1, 2011 to December 31, 2011
  $ 396,000  
2012
  $ 30,930,000  
2013
  $ 6,641,000  
2014
  $ 6,400,000  
2015
  $ 23,919,000  
2016 and thereafter
  $ 29,012,000  
Interest Expense and Deferred Financing Cost
The following table sets forth our gross interest expense and deferred financing cost amortization for the three and six months ended June 30, 2011 and 2010. The capitalized amount is a cost of development and increases the carrying value of construction in progress.
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Total interest costs incurred
  $ 1,636,000     $ 578,000     $ 3,121,000     $ 948,000  
Capitalized interest expense and deferred financing cost amortization
    (32,000 )     (32,000 )     (41,000 )     (65,000 )
 
                       
Interest Expense
  $ 1,604,000     $ 546,000     $ 3,080,000     $ 883,000  
 
                       
As of June 30, 2011 and December 31, 2010, our net deferred financing costs were $1.4 million. All deferred financing costs are capitalized and amortized over the life of the agreements.
11. Stockholders’ Equity
Common Stock
Our charter authorizes the issuance of 580,000,000 shares of common stock with a par value of $0.01 per share and 20,000,000 shares of preferred stock with a par value of $0.01 per share. As of June 30, 2011, including distributions reinvested, we had issued 13.3 million shares of common stock for a total of $132.3 million of gross proceeds in our initial and follow-on public offering. As of June 30, 2010, including distributions reinvested, we had issued 8.2 million shares of common stock for total gross proceeds of $82.1 million in our initial public offering.

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Distributions
In 2007, we adopted a distribution reinvestment plan that allows our stockholders to have dividends and other distributions otherwise distributable to them, invested in additional shares of our common stock at their election. We registered 10,000,000 shares of our common stock for sale pursuant to the distribution reinvestment plan. The purchase price per share is 95% of the price paid by the purchaser for our common stock, but not less than $9.50 per share. As of June 30, 2011 and December 31, 2010, 551,000 and 394,000 shares, respectively, had been issued under the distribution reinvestment plan.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment plan and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholders’ value. As a result, we suspended our distribution reinvestment plan effective as of May 10, 2011.
The following are the distributions declared quarterly during the six months ended June 30, 2011 and 2010:
                         
    Distribution Declared(1)
Period   Cash   Reinvested   Total
First quarter 2010
  $ 525,000     $ 506,000     $ 1,031,000  
Second quarter 2010
  $ 696,000     $ 665,000     $ 1,361,000  
 
                       
First quarter 2011
  $ 1,152,000     $ 1,124,000     $ 2,276,000  
Second quarter 2011
  $ 2,436,000     $     $ 2,436,000  
 
(1)   Distributions declared represented a return of capital for tax purposes. In order to meet the requirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our stockholders each taxable year equal to at least 90% of our net ordinary taxable income. Some of our distributions have been paid from sources other than operating cash flow, such as offering proceeds. Until proceeds from our offerings are fully invested and generating operating cash flow sufficient to fully cover distributions to stockholders, we intend to pay all or a portion of our distributions from the proceeds of our offerings or from borrowings in anticipation of future cash flow.
The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant. On June 30, 2011, our board of directors resolved to lower our distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of $10.00) from the current annualized rate of $0.75 per share (7.5% based on a share price of $10.00), effective July 1, 2011 and continuing until and including September 30, 2011. The distribution will be paid quarterly commencing October 2011. The rate and frequency of distributions is subject to the discretion of our board of directors and may change from time to time based on our operating results and cash flow.
From our inception in October 2006 through June 30, 2011, we declared aggregate distributions of $13.0 million, our cumulative net loss attributable to common stockholders during the same period was $15.0 million and our cumulative cash flow used in operations during the same period was $5.2 million.
Stock Repurchase Program
In 2007, we adopted a stock repurchase program for investors who have held their shares for at least one year, unless the shares are being repurchased in connection with a stockholder’s death. Under our stock repurchase program, the repurchase price varies depending on the purchase price paid by the stockholder and the number of years the shares are held. Our board of directors may amend, suspend or terminate the program at any time with 30 days prior notice to stockholders. We have no obligation to repurchase our stockholders’ shares. In 2009, our board of directors waived the one-year holding period in the event of the death of a stockholder and adjusted the repurchase price to 100% of such stockholders purchase price if the stockholder held the shares for less than three years.

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During the three and six months ended June 30, 2011, we repurchased shares pursuant to our stock repurchase program as follows:
                 
    Total Number   Average
    of Shares   Price Paid
Period   Redeemed   per Share
January
    1,194     $ 9.88  
February
    17,379     $ 9.42  
March
    25,217     $ 9.29  
 
               
First quarter 2011
    43,790     $ 9.35  
April
    45,139     $ 9.48  
May
    19,126     $ 9.14  
June
    59,213     $ 9.99  
 
               
Second quarter 2011
    123,478     $ 9.67  
 
               
 
    167,268          
 
               
During the three and six months ended June 30, 2010, we repurchased 13,500 and 23,709 shares pursuant to our stock repurchase program.
During the six months ended June 30, 2011, we received requests to have an aggregate of 252,367 shares repurchased pursuant to our stock repurchase program. Of these requests, 71,293 shares were not able to be repurchased due to the limitations contained in the terms of our stock repurchase program and the suspension of our stock repurchase program as of May 29, 2011, as described below. During the six months ended June 30, 2010, all but 41 shares were repurchased. Such shares were not repurchased due to limitations contained in the terms of our stock repurchase program.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee consideration of various strategic alternatives to enhance our stockholder value. As a result, we suspended our stock repurchase program effective as of May 29, 2011.
12. Related Party Transactions
The Company has no employees. Our Advisor is primarily responsible for managing our business affairs and carrying out the policies established by our board of directors. As discussed in Note 1, on July 29, 2011, the Company executed the Omnibus Agreement, which provided for a number of significant changes to the Company’s material contracts as discussed in more detail in the subsections below.
The Company may immediately terminate the Advisory Agreement in the event of (1) the bankruptcy of the Advisor, CLFA or CVI or the commencement of any similar insolvency proceeding by any such party; or (2) any material breach of the Advisory Agreement by the Advisor which (a) is not cured within 30 days after written notice thereof, or (b) in the reasonable determination of the Committee, cannot be cured within 30 days. The Advisor also is no longer entitled to recommend nominees for election to the Company’s board of directors
Advisory Agreement
Advisory Agreement Overview. Under the terms of the Advisory Agreement, the Advisor is required to use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. The Advisory Agreement calls for the Advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties. The fees and expense reimbursements payable to the Advisor under the Advisory Agreement are described below.
Organizational and Offering Costs. Organizational and offering costs paid by the Advisor on our behalf are being reimbursed to the Advisor from the proceeds of our offerings. Organizational and offering costs consist of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with our offerings, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse the Advisor for all marketing

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related costs and expenses such as salaries and direct expenses of employees of the Advisor and its affiliates in connection with registering and marketing our shares; (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. At times during our offering stage, the amount of organization and offering expenses that we incur, or that the Advisor and its affiliates incur on our behalf, may exceed 3.5% of the gross offering proceeds then raised, but our Advisor is required to reimburse us to the extent that our organization and offering expenses exceed 3.5% of aggregate gross offering proceeds at the conclusion of our offering. In addition, the Advisor will also pay any organization and offering expenses to the extent that such expenses, plus sales commissions and the dealer manager fee (but not the acquisition fees or expenses) are in excess of 13.5% of gross offering proceeds. In no event will we have any obligation to reimburse the Advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from our primary offerings.
As of June 30, 2011, the Advisor and its affiliates had incurred organizational and offering costs totaling $5.1 million, including $0.1 million of organizational costs that have been expensed and $5.0 million of offering costs that reduce net proceeds of our offerings. Of this amount $4.0 million reduced the net proceeds of our initial public offering and $1.0 million reduced the net proceeds of our follow-on offering. As of December 31, 2010, the Advisor and its affiliates had incurred organizational and offering costs totaling $4.6 million, including $0.1 million of organizational costs that have been expensed and $4.5 million of offering costs which reduce net proceeds of our offerings. Upon the execution of the Omnibus Agreement, we forgave $0.8 million of organization and offering costs in excess of the 3.5% of gross offering proceeds advanced to the Advisor pursuant to the advisory agreement. This amount reduced our offering proceeds and has therefore been treated as a reduction in additional paid-in capital in our condensed consolidated balance sheet.
Acquisition Fees and Expenses. The Advisory Agreement requires us to pay the Advisor acquisition fees in an amount equal to 2.0% of the investments acquired, including any debt attributable to such investments. A portion of the acquisition fees will be paid upon receipt of offering proceeds, and the balance will be paid at the time we acquire a property. However, if the advisory agreement is terminated or not renewed, the Advisor must return acquisition fees not yet allocated to one of our investments. In addition, we are required to reimburse the Advisor for direct costs the Advisor incurs and amounts the Advisor pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. For the three months ended June 30, 2011 and 2010, the Advisor earned $0.2 million and $0.5 million in acquisition fees, respectively. For the six months ended June 30, 2011 and 2010, the Advisor earned $0.5 million and $0.9 million in acquisition fees, respectively.
As of June 30, 2011, the amount of acquisition fees advanced to the Advisor but not yet allocated to an investment was $0.9 million. This amount has been expensed and included in real estate acquisition costs and earn out costs in our condensed consolidated statements of operations. Upon the execution of the Omnibus Agreement, we forgave the advance not earned through services rendered in connection with future acquisitions.
Management Fees. Prior to the execution of the Omnibus Agreement, the Advisory Agreement required us to pay the Advisor a monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis in book carrying values of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in accordance with GAAP (Average Invested Assets). In addition, we have historically reimbursed the Advisor for the direct and indirect costs and expenses incurred by the Advisor in providing asset management services to us, including personnel and related employment costs related to providing asset management services on our behalf and amounts paid by our Advisor to Servant Investments, LLC and Servant Healthcare Investments, LLC (“SHI”) for portfolio management services provided on our behalf. These fees and expenses were in addition to management fees that we expect to pay to third-party property managers.
For the three months ended June 30, 2011 and 2010, the Advisor earned $0.4 million and $0.2 million of management fees, respectively, which were expensed. For the three months ended June 30, 2011 and 2010, the Advisor incurred $0.2 million and $0.1 million, respectively of direct and indirect costs and expenses, which are included in asset management fees and expenses in the condensed consolidated statement of operations.
For the six months ended June 30, 2011 and 2010, the Advisor earned $0.8 million and $0.4 million of management fees, respectively, which were expensed. For both the six months ended June 30, 2011 and 2010, the Advisor

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incurred $0.4 million of direct and indirect costs and expenses, which are included in asset management fees and expenses in the condensed consolidated statement of operations.
Upon the execution of the Omnibus Agreement, the asset management fee payable to the Advisor was reduced to a maximum annual rate of 0.5% of Average Invested Assets and a separate asset management fee payable to the Sub-Advisor at a maximum annual rate of 0.25% of Average Invested Assets was added. In the event that operating expenses, as described below, exceed the 2%/25% Guidelines, the asset management fees will be reduced on a pro-rata basis with a minimum 0.35% annual asset management fee rate.
Operating Expenses. The Advisory Agreement provides for reimbursement of the Advisor’s direct and indirect costs of providing administrative and management services to us. For the three months ended June 30, 2011 and 2010, $0.4 million and $0.3 million of such costs, respectively, were reimbursed and included in general and administrative expenses on our condensed consolidated statements of operations. Under the Advisory Agreement, the Advisor must restrict its total operating expenses for the preceding four consecutive fiscal quarters, as determined at the end of each fiscal quarter, to the greater of 2% of the Company’s Average Invested Assets or 25% of the Company’s net income for such period (the “2%/25% Guidelines”), unless the Independent Directors Committee of the Board of Directors of the Company (the “Committee”) determines that a higher level of expenses (an “Excess Amount”) is justified, based on unusual and non-recurring factors. The total operating expenses include operating expenses incurred by both the Advisor and the Sub-Advisor. The Advisor must estimate and submit all of its reasonable direct internal expenses on a semi-monthly basis for the prior approval of the Committee and/or its financial advisor. The Committee will not approve any operating expenses (other than those determined to be justified based on unusual and non-recurring factors) if, in its reasonable discretion, the Committee determines that such operating expenses, considered together with operating expenses previously approved for the relevant period, as well as estimated operating expenses for the remainder of the relevant period, would exceed the 2%/25% Guidelines. The Advisor must submit any operating expenses which it deems unusual and non-recurring to the Committee, after review by the Committee’s financial advisor, for the Committee’s determination of whether such expenses are justified prior to any payment thereof.
For the four quarters ended March 31, 2011, our management fees and expenses and operating expenses exceeded the greater of 2% of our average invested assets and 25% of our net income and our Independent Directors Committee had determined that $0.2 million of the Excess Amount was justified as unusual and non-recurring. The Excess Amount for the fiscal quarter ended March 31, 2011 was $0.6 million. The Excess Amount for the four fiscal quarters ended March 31, 2011 was $1.8 million. In accordance with our charter, the Independent Directors Committee instructed us to record a receivable from the Advisor for $1.6 million, reflecting the Excess Amount paid to the Advisor for the four quarters ended March 31, 2011 less the amount determined by the Independent Directors Committee to be justified as unusual and non-recurring. Upon the execution of the Omnibus Agreement, we forgave the receivable of $1.6 million, as well as the Excess Amount for the second quarter of 2011, which was $0.5 million. We recorded an allowance for receivable for the total Excess Amount of $1.6 million during the first quarter of 2011, which is included in general and administrative expenses in our condensed consolidated statement of operations.
Disposition Fee. Prior to the execution of the Omnibus Agreement, the Advisory Agreement provided that if the Advisor or its affiliate provides a substantial amount of the services (as determined by a majority of our directors, including a majority of our independent directors) in connection with the sale of one or more properties, we would pay the Advisor or such affiliate at closing a disposition fee up to 3% of the sales price of such property or properties. Upon the execution of the Omnibus Agreement, the disposition fee payable to the Advisor was reduced to 0.25% of the sales price of properties sold and a separate disposition fee to the Sub Advisor of 1% of the sales price of properties sold was added. The Sub Advisor will receive monthly advances of its disposition fee at a rate of 1/12th of .25% of the Company’s Average Invested Assets, for up to, but not exceeding, six monthly installments. Such advances will be credited against the final disposition fee payable to the Sub-Advisor upon the sale of the Company’s properties. The disposition fee may be paid in addition to real estate commissions paid to non-affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by us for each property shall not exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each property or (ii) the competitive real estate commission for each property. We pay the disposition fees for a property at the time the property is sold.
Subordinated Participation Provisions. Prior to the execution of the Omnibus Agreement, the Advisor was entitled to receive a subordinated participation upon the sale of our properties, listing of our common stock or termination of the Advisor, as follows:
    After we pay stockholders cumulative distributions equal to their invested capital plus a 6% cumulative, non-compounded return, the Advisor would be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned an annualized return of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.
 
    Upon termination of the Advisory Agreement, the Advisor would receive the subordinated performance fee due upon termination. This fee ranged from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the Advisory Agreement was terminated plus total distributions (other than stock distributions) paid prior to termination of the Advisory Agreement exceeded the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus its liabilities plus all prior distributions (other than stock distributions) exceeded the amount of invested capital plus annualized returns of 10% or more.
 
    In the event we listed our stock for trading, the Advisor would receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranged from a low of 5% of the amount by which the market value of our common stock plus all prior distributions (other than stock distributions) exceeded the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior distributions (other than stock distributions) exceeded the amount of invested capital plus annualized returns of 10% or more.
Pursuant to the Omnibus Agreement, no fees, other than the disposition fee described above, including any incentive fees or subordinated participations in cash flows, will be due to the Advisor upon the sale of the Company’s properties or the termination of the Advisory Agreement.

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Dealer Manager Agreements
PCC was the dealer manager for our initial and follow-on public offerings. Prior to the suspension of our follow-on offering on April 29, 2011, PCC was entitled to receive a sales commission of up to 7% of gross proceeds from sales in our primary offerings. PCC was also entitled to receive a dealer manager fee of up to 3% of gross proceeds from sales in our primary offerings. PCC was also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales in our primary offerings. Prior to the execution of the Omnibus Agreement, the Advisory Agreement required the Advisor to reimburse us to the extent that offering expenses including sales commissions, dealer manager fees and organization and offering expenses (but excluding acquisition fees and acquisition expenses discussed above) were in excess of 13.5% of gross proceeds from our primary offerings. For the three months ended June 30, 2011 and 2010, our dealer manager earned sales commission and a dealer manager fee of $0.3 million and $1.7 million, respectively. For the six months ended June 30, 2011 and 2010, our dealer manager earned sales commission and a dealer manager fee of $1.4 million and $3.0 million, respectively. Dealer manager fees and sales commissions paid to PCC are a cost of capital raised and, as such, are included as a reduction of additional paid in capital in the accompanying condensed consolidated balance sheets.
13. Commitments and Contingencies
We monitor our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that we believe would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our condensed consolidated financial position, cash flows and results of operations. We are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against the Company which if determined unfavorably to us would have a material adverse effect on our cash flows, financial condition or results of operations.
14. Business Combinations
On January 14, 2011, through a wholly-owned subsidiary, we purchased the assets of an assisted-living property, Forestview Manor, from 153 Parade Road, LLC, for $10.8 million. The acquisition was funded by our revolving credit facility from Key Bank National Association and with proceeds from our initial public offering.
On April 14, 2011, through a wholly-owned subsidiary, we purchased an assisted-living property, Sunrise of Allentown, from an affiliate of Sunrise Senior Living, Inc., for $9.0 million. The property has been rebranded as Woodland Terrace at the Oaks Senior Living. The acquisition of Woodland Terrace was funded with proceeds from our public offerings and a mortgage loan from an unaffiliated lender, post-closing.
On April 30, 2010, we purchased the Oakleaf Village Portfolio for $12.4 million.
We have accounted for each acquisition as a business combination under U.S. GAAP. Under business combination accounting, the assets and liabilities of the acquired property are recorded as of the acquisition date, at their respective fair values, and consolidated in our financial statements. The following table shows the allocation of the purchase price to the assets acquired and liabilities assumed for each current year acquisition as of the acquisition date.

                         
    Forestview     Sunrise of     Oakleaf  
    Manor     Allentown     Village  
Land
  $ 1,320,000     $ 1,000,000     $ 3,121,000  
Buildings & improvements
    6,803,000       6,395,000       20,058,000  
Site improvements
    1,040,000       350,000       499,000  
Furniture & fixtures
    350,000       220,000       515,000  
Other intangible assets
          90,000        
In-place lease value
    960,000       500,000       1,658,000  
Tenant relationship
                219,000  
Loan assumed at Property acquisition
                (12,902,000 )
Assets contributed by noncontrolling interest
                (1,735,000 )
Goodwill
    277,000       445,000       930,000  
 
                 
 
                         
Real estate acquisitions
  $ 10,750,000     $ 9,000,000     $ 12,363,000  
 
                 
Acquisition expenses
  $ 160,000     $ 142,000     $ 306,000  


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The following unaudited pro forma information for the three and six months ended June 30, 2011 and 2010 has been prepared to reflect the incremental effect of the Oakleaf Village, Forestview Manor and Sunrise of Allentown acquisitions as if such acquisitions had occurred on January 1, 2010. For the three and six months ended June 30, 2011, acquisition-related costs of $0.1 million and $0.3 million, respectively, were excluded from pro forma net loss. Pro forma net loss for the six months ended June 30, 2010, was adjusted to include $0.3 million of acquisition-related costs incurred in 2011 for the Forestview Manor and Sunrise of Allentown acquisitions.
                 
    Three months   Three months
    Ended   Ended
    June 30, 2011   June 30, 2010
Revenues
  $ 10,810,000     $ 6,488,000  
Net loss
  $ (1,618,000 )   $ (1,516,000 )
Basic and diluted net loss per common share attributable to common stockholders
  $ (0.12 )   $ (0.21 )
                 
    Six months   Six months
    Ended   Ended
    June 30, 2011   June 30, 2010
Revenues
  $ 21,261,000     $ 13,117,000  
Net loss
  $ (3,471,000 )   $ (2,609,000 )
Basic and diluted net loss per common share attributable to common stockholders
  $ (0.28 )   $ (0.44 )
The Company recorded revenues of $1.0 million and $1.8 million for the three and six months ended June 30, 2011, respectively, and net loss of $0.1 million and $0.3 million for the three and six months ended June 30, 2011, respectively, for Forestview Manor.
The Company recorded revenues of $0.6 million for the three and six months ended June 30, 2011 and net loss of $0.3 million for the three and six months ended June 30, 2011, respectively, for Sunrise of Allentown.
15. Subsequent Events
Other than the KeyBank loan modification (as discussed at Note 10) and the executed Omnibus Agreement (as discussed at Note 1 and Note 12), no significant events have occurred subsequent to our balance sheet date that require further disclosure or adjustment to our balances.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly any forward —looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2010 as filed with the SEC, and the risks identified in Part II, Item 1A of this quarterly report.
Our actual future results and trends may differ materially from expectations depending on a variety of factors discussed in our filings with the SEC. These factors include without limitation:
    changes in economic conditions generally and the real estate and healthcare markets specifically;
 
    legislative and regulatory changes impacting the healthcare industry, including the implementation of the healthcare reform legislation enacted in 2010;
 
    legislative and regulatory changes impacting real estate investment trusts, or REITs, including their taxation;
 
    the availability of debt and equity capital;
 
    changes in interest rates;
 
    competition in the real estate industry;
 
    the supply and demand for operating properties in our proposed market areas;
 
    changes in accounting principles generally accepted in the United States of America, or GAAP; and
 
    the risk factors in our Annual Report for the year ended December 31, 2010 and this quarterly report on Form 10-Q.
Overview
We were incorporated on October 16, 2006 for the purpose of engaging in the business of investing in and owning commercial real estate. Our intent was to invest the net proceeds from our offerings primarily in investment real estate including health care, multi-tenant industrial, net-leased retail properties and other real estate related assets located in major metropolitan markets in the United States. As of June 30, 2011, we raised $127.0 million of gross proceeds from the sale of 12.7 million shares of our common stock in our initial and follow-on public offerings.
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our follow-on offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with our Independent Directors Committee evaluation of various strategic alternatives to enhance our stockholders’ value. One of the alternatives under consideration is the hiring of a new dealer manager for our follow-on offering, however the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced. The Independent Directors Committee is continuing to evaluate strategic alternatives, including a possible merger with another company or the sale of the entire portfolio.

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Our total revenue, which is comprised largely of rental income, includes rents reported on a straight-line basis over the initial term of the lease. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; (ii) maximize tenant recoveries given the underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market-specific, general economic and other conditions.
Highlights for the Three Months Ended June 30, 2011
    We completed one acquisition for a purchase price of approximately $9.0 million. See Note 14 to the condensed consolidated financial statements.
 
    On August 1, 2011, we executed a Second Amendment and Waiver to the KeyBank credit facility. See Note 10 to the condensed consolidated financial statements.
 
    On July 29, 2011, we executed an Omnibus Agreement, which implemented, among other things, a number of advisory relationship changes. See Notes 1 and 12 to the condensed consolidated financial statements.
Status of Our Offering
    Prior to the suspension of our follow-on offering on April 29, 2011, we had raised approximately $127.0 million through the issuance of approximately 12.7 million shares of our common stock under our initial and follow-on offerings, excluding approximately 551,000 shares that were issued pursuant to our distribution reinvestment plan, reduced by approximately 281,000 shares repurchased pursuant to our stock repurchase program.
Market Outlook — Real Estate and Real Estate Finance Markets
In recent years, the national as well as most global economies have experienced substantially increased unemployment and a downturn in economic activity. The aforementioned conditions, combined with low consumer confidence, have resulted in an unprecedented global recession and continue to contribute to a challenging economic environment that, together with the recent stock market turbulence, may delay the implementation of our business strategy or force us to modify it.
Despite the economic conditions discussed above, the demand for health care services is projected to continue to grow for the foreseeable future. The Centers for Medicare and Medicaid Services projects that national health expenditures will rise to $3.4 trillion in 2015, or 17.7% of gross domestic product (“GDP”), up from $2 trillion or 15.7% of GDP in 2005. The elderly are an important component of health care utilization, especially independent living services, assisted-living services, skilled nursing services, inpatient and outpatient hospital services and physician ambulatory care. The elderly population aged 65 and over is projected to increase by 76.6% through 2030.
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.
Results of Operations
As of June 30, 2011, we operated in three reportable business segments for management and internal financial reporting purposes: senior living operations, triple-net leased properties, and medical office building (“MOB”) properties. Our senior living operations segment primarily consists of investments in senior housing communities located in the United States for which we engage independent third-party managers. Our triple-net leased properties segment consists of investments in skilled nursing and hospital facilities in the United States. These facilities are leased to healthcare operating companies under long-term “triple-net” or “absolute-net” leases, which require the tenants to pay all property-related expenses. Our MOB operations segment primarily consists of investing in medical office buildings and leasing those properties to healthcare providers under long-term leases, which may require tenants to pay property-related expenses.

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We began accepting subscriptions for shares under our initial public offering on June 20, 2008. We purchased our first senior housing property in January 2009, and as of June 30, 2011, we owned 15 properties. These properties include ten assisted-living facilities which comprise our senior living operations segment, one medical office building, which comprises our MOB segment, and four operating healthcare facilities including one development healthcare facility, which comprise our triple-net leased segment. During the three-months ended June 30, 2010, we owned six real estate properties and had one development project under construction. Accordingly, the results of our first quarter 2011 and 2010 operations are not directly comparable.
Comparison of the Three Months Ended June 30, 2011 and 2010
                                 
    Three Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Net operating income, as defined (1)
                               
 
                               
Senior living operations
  $ 2,740,000     $ 984,000     $ 1,756,000       178  
Triple-net leased properties
    1,301,000       445,000       856,000       192  
Medical office building
    194,000             194,000       N/A  
 
                       
Total portfolio net operating income
  $ 4,235,000     $ 1,429,000     $ 2,806,000       196  
 
                       
 
                               
Reconciliation to net loss:
                               
Net operating income, as defined (1)
  $ 4,235,000     $ 1,429,000     $ 2,806,000       196  
Unallocated (expenses) income:
                               
General and administrative expenses
    (1,297,000 )     (512,000 )     785,000       153  
Asset management fees and expenses
    (376,000 )     (195,000 )     181,000       93  
Real estate acquisitions costs and earn out costs
    (514,000 )     (881,000 )     (367,000 )     (42 )
Depreciation and amortization
    (2,129,000 )     (930,000 )     1,199,000       129  
Interest income
    3,000       9,000       (6,000 )     (67 )
Interest expense
    (1,604,000 )     (546,000 )     1,058,000       194  
 
                       
Net loss
    (1,682,000 )     (1,626,000 )     56,000       3  
Net loss (income) attributable to noncontrolling interests
    (16,000 )     82,000       (98,000 )     (120 )
 
                       
Net loss attributable to common stockholders
  $ (1,698,000 )   $ (1,544,000 )   $ 154,000       10  
 
                       
 
(1)   Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.
Senior Living Operations
Total revenue for senior living operations includes rental revenue, resident services and fee income, and tenant reimbursement and other income. Total revenue for the three months ended June 30, 2011 increased to $7.9 million from $3.6 million for the three months ended June 30, 2010. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the three months ended June 30, 2011 increased to $2.7 million from $1.0 million for the three months ended June 30, 2010. The increase in total revenue and net operating income is primarily due to acquisitions completed during the second half of 2010.

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    Three Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Senior Living Operations — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 5,774,000     $ 2,927,000     $ 2,847,000       97  
Resident services and fee income
    2,020,000       576,000       1,444,000       251  
Tenant reimbursement and other income
    65,000       81,000       (16,000 )     (20 )
Less:
                               
Property operating and maintenance expenses
    (5,119,000 )     (2,601,000 )     2,518,000       97  
 
                       
Total portfolio net operating income
  $ 2,740,000     $ 983,000     $ 1,757,000       179  
 
                       
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Total revenue for the three months ended June 30, 2011 increased to $2.6 million from $0.5 million for the three months ended June 30, 2010. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income increased to $1.3 million for the three months ended June 30, 2011 compared to $0.4 million for the three months ended June 30, 2010. Total revenue and net operating income increased due to the completion of construction on the Rome LTACH project and its 100% occupancy as of June 30, 2011.
                                 
    Three Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Triple-Net Leased Properties — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 2,396,000     $ 446,000     $ 1,950,000       437  
Tenant reimbursement and other income
    187,000       41,000       146,000       356  
Less:
                               
Property operating and maintenance expenses
    (1,282,000 )     (41,000 )     1,241,000       3027  
 
                       
Total portfolio net operating income
  $ 1,301,000     $ 446,000     $ 855,000       192  
 
                       
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Total revenue for the three months ended June 30, 2011 increased to $0.3 million from $0 for the three months ended June 30, 2010. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income increased to $0.2 million for the three months ended June 30, 2011 compared to $0 for the three months ended June 30, 2010. Total revenue and net operating income increased due to the acquisition completed in December 2010, which makes up this segment.
                                 
    Three Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Medical Office Buildings — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 201,000     $     $ 201,000       N/A  
Tenant reimbursement and other income
    56,000             56,000       N/A  
Less:
                               
Property operating and maintenance expenses
    (63,000 )           63,000       N/A  
 
                       
Total portfolio net operating income
  $ 194,000     $     $ 194,000       N/A  
Unallocated (expenses) income
General and administrative expenses increased to $1.3 million for the three months ended June 30, 2011 from $0.5 million for the three months ended June 30, 2010. The increase was principally due to higher legal, consulting and board of director fees associated with the Company’s evaluation of strategic alternatives. The increase was partially offset by an income tax benefit during the three months ended June 30, 2011 as compared to income tax expense during the three months ended June 30, 2010. The income tax benefit during the three months ended June 30, 2011 is due to the Company recognizing a deferred tax asset related primarily to book and tax-basis differences for straight-line rent and accrued liabilities..

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As a result of the acquisitions during the second half of 2010 through June 30, 2011, asset management fees and expenses for the three months ended June 30, 2011 and 2010 increased to $0.4 million from $0.2 million and depreciation and amortization for the same periods increased to $2.1 million from $0.9 million.
For the three months ended June 30, 2011 and 2010, real estate acquisition costs and earn out costs, consisting of fees paid to the Advisor, acquisition costs paid directly to third-parties, and an earn-out provision related to GreenTree at Westwood, were $0.5 million and $0.9 million, respectively. The 2011 decrease in acquisition costs was due to lower third party expenses for transactions closed or in process during the second quarter of 2011 and by lower acquisition fees related to lower equity raised in the second quarter of 2011. These decreases were offset by an increase in the estimated amount to be paid in connection with the GreenTree at Westwood acquisition earn-out. A portion of the acquisition fees due to our Advisor are paid upon receipt of offering proceeds and the balance is paid at the time of investment acquisition.
Interest income was comparable for the three months ended June 30, 2011 and 2010.
Interest expense for the three months ended June 30, 2011 increased to $1.6 million from $0.5 million for the three months ended June 30, 2010 due to increased real estate acquisition financing during the second half of 2010 through June 30, 2011.
Net income attributable to noncontrolling interests for the three months ended June 30, 2011 as compared to net loss attributable to noncontrolling interests for the three months ended June 30, 2010 was primarily due to the completion of Rome during the first quarter of 2011 and the high occupancy rate of that joint venture.
Comparison of the Six Months Ended June 30, 2011 and 2010
                                 
    Six Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Net operating income, as defined (1)
                               
 
                               
Senior living operations
  $ 5,307,000     $ 1,718,000     $ 3,589,000       209  
Triple-net leased properties
    2,445,000       893,000       1,552,000       174  
Medical office building
    380,000             380,000       N/A  
 
                       
Total portfolio net operating income
  $ 8,132,000     $ 2,611,000     $ 5,521,000       211  
 
                       
 
                               
Reconciliation to net loss:
                               
Net operating income, as defined (1)
  $ 8,132,000     $ 2,611,000     $ 5,521,000       211  
Unallocated (expenses) income:
                               
General and administrative expenses
    (1,961,000 )     (1,040,000 )     921,000       89  
Asset management fees and expenses
    (807,000 )     (360,000 )     447,000       124  
Real estate acquisitions costs and earn out costs
    (1,641,000 )     (1,339,000 )     302,000       23  
Depreciation and amortization
    (3,990,000 )     (1,570,000 )     2,420,000       154  
Interest income
    7,000       12,000       (5,000 )     (42 )
Interest expense
    (3,080,000 )     (883,000 )     2,197,000       249  
 
                       
Net loss
    (3,340,000 )     (2,569,000 )     771,000       30  
Net loss attributable to noncontrolling interests
    49,000       78,000       (29,000 )     (37 )
Net loss attributable to common stockholders
  $ (3,291,000 )     (2,491,000 )     800,000       32  
 
                       
 
(1)   Net operating income, a non-GAAP supplemental measure, is defined as total revenue less property operating and maintenance expenses. We use net operating income to evaluate the operating performance of our real estate investments and to make decisions concerning the operation of the property. We believe that net operating income is useful to investors in understanding the value of income-producing real estate. Net income is the GAAP measure that is most directly comparable to net operating income; however, net operating income should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, interest expense and corporate general and administrative expenses. Additionally, net operating income as we define it may not be comparable to net operating income as defined by other REITs or companies.

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Senior Living Operations
Total revenue for senior living operations includes rental revenue, resident services and fee income, and tenant reimbursement and other income. Total revenue for the six months ended June 30, 2011 increased to $15.9 million from $6.1 million for the six months ended June 30, 2010. Property operating and maintenance expenses include labor, food, utilities, marketing, management and other property operating costs. Net operating income for the six months ended June 30, 2011 increased to $5.3 million from $1.7 million for the six months ended June 30, 2010. The increase in total revenue and net operating income is primarily due to acquisitions completed during the second half of 2010.
                                 
    Six Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Senior Living Operations — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 11,974,000     $ 4,917,000     $ 7,057,000       144  
Resident services and fee income
    3,722,000       1,071,000       2,651,000       248  
Tenant reimbursement and other income
    175,000       151,000       24,000       16  
Less:
                               
Property operating and maintenance expenses
    (10,564,000 )     (4,421,000 )     6,143,000       139  
 
                       
Total portfolio net operating income
  $ 5,307,000     $ 1,718,000     $ 3,589,000       209  
 
                       
Triple-Net Leased Properties
Total revenue for triple-net leased properties includes rental revenue and expense reimbursements from tenants. Total revenue for the six months ended June 30, 2011 increased to $3.9 million from $1.0 million for the six months ended June 30, 2010. Property operating and maintenance expenses include insurance and property taxes and other operating expenses reimbursed by our tenants. Net operating income increased to $2.4 million for the six months ended June 30, 2011 compared to $0.9 million for the six months ended June 30, 2010. Total revenue and net operating income increased due to the completion of construction on the Rome LTACH project and its 100% occupancy as of June 30, 2011.
                                 
    Six Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Triple-Net Leased Properties — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 3,555,000     $ 893,000     $ 2,662,000       298  
Tenant reimbursement and other income
    345,000       81,000       264,000       326  
Less:
                               
Property operating and maintenance expenses
    (1,455,000 )     (81,000 )     1,374,000       1696  
 
                       
Total portfolio net operating income
  $ 2,445,000     $ 893,000     $ 1,552,000       174  
 
                       
Medical Office Buildings
Total revenue for medical office buildings includes rental revenue and expense reimbursements from tenants. Total revenue for the six months ended June 30, 2011 increased to $0.5 million from $0 for the six months ended June 30, 2010. Property operating and maintenance expenses include utilities, repairs and maintenance, insurance and property taxes. Net operating income increased to $0.4 million for the six months ended June 30, 2011 compared to $0 for the six months ended June 30, 2010. Total revenue and net operating income increased due to the acquisition completed in December 2010, which makes up this segment.
                                 
    Six Months Ended              
    June 30,              
    2011     2010     $ Change     % Change  
Medical Office Buildings — Net operating income
                               
 
                               
Total revenues
                               
Rental revenue
  $ 402,000     $     $ 402,000       N/A  
Tenant reimbursement and other income
    111,000             111,000       N/A  
Less:
                               
Property operating and maintenance expenses
    (133,000 )           133,000       N/A  
 
                       
Total portfolio net operating income
  $ 380,000     $     $ 380,000       N/A  

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Unallocated (expenses) income
General and administrative expenses increased to $2.0 million for the six months ended June 30, 2011 from $1.0 million for the six months ended June 30, 2010. The increase was principally due to higher legal, consulting and board of director fees associated with the Company’s evaluation of strategic alternatives. In addition, reimbursements to the Advisor for the direct and indirect costs of providing administrative and management services were higher as a result of the growth of the investment portfolio since June 30, 2010. These increases were partially offset by the recognition of a deferred income tax benefit during the six months ended June 30, 2011 as compared to income tax expense during the six months ended June 30, 2010.
As a result of the acquisitions during the second half of 2010 through June 30, 2011, asset management fees and expenses for the six months ended June 30, 2011 increased to $0.8 million from $0.4 million for the six months ended June 30, 2010 and depreciation and amortization for the same periods increased to $4.0 million from $1.6 million.
For the six months ended June 30, 2011 and 2010, real estate acquisition costs and earn out costs, consisting of fees paid to the Advisor, acquisition costs paid directly to third-parties, an earn-out provision related to GreenTree at Westwood and the promote provision related to Rome LTACH, were $1.6 million and $1.3 million, respectively. The 2011 increase in acquisition costs was due to increases in the estimated amounts to be paid in connection with the GreenTree at Westwood acquisition earn out and the Rome LTACH promote provision partially offset by lower third party expenses related to transactions closed or in process during the first quarter of 2011 and lower acquisition fees related to lower equity raised in the first half of 2011. A portion of the acquisition fees due to our Advisor are paid upon receipt of offering proceeds and the balance is paid at the time of investment acquisition.
Interest income was comparable for the six months ended June 30, 2011 and 2010.
Interest expense for the six months ended June 30, 2011 increased to $3.1 million from $0.9 million for the six months ended June 30, 2010 due to increased real estate acquisition financing during the second half of 2010 through June 30.
Net loss attributable to noncontrolling interests was lower for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 primarily due to the completion of Rome during the first quarter of 2011 and the high occupancy rate of that joint venture.
Liquidity and Capital Resources
On April 29, 2011, we informed our stockholders that our Independent Directors Committee had directed us to suspend our offering, our dividend reinvestment program and our stock repurchase program (except repurchases due to death) because of the uncertainty associated with their consideration of various strategic alternatives to enhance our stockholders’ value. While one of the alternatives under consideration was the hiring of a new dealer manager for our follow-on offering, the Independent Directors Committee has made no determination regarding whether or when our follow-on offering may be recommenced. The Independent Directors Committee also evaluated possible changes to our advisory relationships. An agreement (the Omnibus Agreement) dated July 29, 2011, implemented a number of advisory relationship changes. The success of these changes in accomplishing the Independent Directors’ objectives is uncertain. In addition to uncertainties associated with dealer manager or advisor relationships, financial markets have recently experienced unusual volatility and uncertainty. Liquidity has tightened in all financial markets, including the debt and equity markets. We expect that our primary uses of capital over the next twelve months will be for the payment of tenant improvements, earn out and promote liabilities, operating expenses, including interest expense on any outstanding indebtedness, reducing outstanding indebtedness and for the payment of distributions.

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We expect to have sufficient cash available from cash on hand and operations to fund capital improvements and principal payments due on our borrowings in the next twelve months. We plan to refinance the KeyBank credit facility or use funds from the sale of the portfolio to meet the payment obligations due in the second half of 2012. We expect to fund stockholder distributions from the excess of cash on hand and from operations over required capital improvements and debt payments. This excess may be insufficient to make distributions at the current level or at all. On June 30, 2011, our directors declared distributions for the quarter to end September 30, 2011 at a reduced annualized rate of 2.5%.
As of June 30, 2011, we had approximately $31.7 million in cash and cash equivalents on hand. Our liquidity will increase if cash flow from the operation of our properties exceeds non-property expenditures and will decrease if it does not. Available cash is temporarily invested in short-term, liquid investments that yield lower returns than investments in real estate.
On November 19, 2010, we entered into an agreement with KeyBank National Association, an unaffiliated financial institution, to obtain a $25.0 million revolving credit facility (the “Facility”). The Facility included a financial covenant requiring us to raise at least $20 million in our public offering in the six-month period ending June 30, 2011, and to raise an additional $20 million in net offering proceeds during each six-month calendar period thereafter. Because we suspended our public offering on April 29, 2011, we were not able to satisfy this covenant; however, effective August 1, 2011, the Company successfully negotiated the terms of a modification to the credit facility. The terms of the agreement were amended to convert the Facility from a revolving loan commitment to a term loan and reduced the maximum amount of the commitment from $25.0 million to the current outstanding amount of $16.3 million. The amendment also changed the maturity date of the Facility from November 18, 2012 to July 31, 2012 (subject to one ninety-day extension option). The amendment increased the minimum amount of cash and cash equivalents that the Company must maintain from $5.0 million to $8.0 million, but eliminated a covenant that required the Company to raise equity capital of at least $20.0 million during each calendar six-month period. The interest rate for this Facility is one-month LIBOR plus a margin of 400 basis points, with a floor of 200 basis points for one-month LIBOR. We are entitled to prepay the obligations at any time without penalty.
Distributions
Some or all of our distributions have been paid from sources other than operating cash flow, such as offering proceeds and proceeds from loans, including those secured by our assets. Through June 30, 2011, we made cash distributions to our stockholders at an annualized rate of 7.5%, based on a $10.00 per-share purchase price. On June 30, 2011, our board of directors resolved to lower our distributions to a current annualized rate of $0.25 per share (2.5% based on a share price of $10.00). The distribution will be paid quarterly commencing October 2011. This distribution rate is expected to more closely align distributions to funds available from operations.
Historically, we have used a portion of the proceeds from our distribution reinvestment plan for general corporate purposes, including capital expenditures on our real estate investments, tenant improvement costs and leasing costs related to our investments in real estate properties; reserves required by financings of our investments in real estate properties; and the repayment of debt. Because our distribution reinvestment plan was suspended on May 10, 2011, we will no longer have distribution reinvestment plan proceeds available for such general corporate purposes. Because such funds will not be available from the distribution reinvestment plan offering, we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions. As noted above, the distribution rate was decreased to an annualized rate of 2.5% on June 30, 2011 in response to the current situation.

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    Distributions Declared   Cash Flow from
Period   Cash   Reinvested   Total   Operations
First quarter 2010
  $ 525,000     $ 506,000     $ 1,031,000     $ 48,000  
Second quarter 2010
  $ 696,000     $ 665,000     $ 1,361,000     $ (597,000 )
First quarter 2011
  $ 1,152,000     $ 1,124,000     $ 2,276,000     $ 1,583,000  
Second quarter 2011
  $ 2,436,000     $     $ 2,436,000     $ 605,000  
From our inception in October 2006 through June 30, 2011, we declared aggregate distributions of $13.0 million, our cumulative net loss attributable to common stockholders during the same period was $15.0 million, and our cumulative cash flow used in operations during the same period was $5.2 million.
Contractual Obligations
The following table reflects our contractual obligations as of June 30, 2011, specifically our obligations under long-term debt agreements and purchase obligations:
                                         
    Payment due by period
            Less than 1                   More than
Contractual Obligations   Total   year   1-3 years   3-5 years   5 years
Long-Term Debt Obligations (1)
  $ 97,298,000     $ 880,000     $ 28,140,000     $ 14,893,000     $ 53,385,000  
Interest expense related to long-term debt (2)
  $ 32,544,000     $ 5,602,000     $ 6,454,000     $ 5,271,000     $ 15,217,000  
Performance based earn outs (3)
  $ 941,000     $ 941,000     $     $     $  
 
(1)   Represents principal amount owed on all outstanding debt as of June 30, 2011.
 
(2)   Represents interest expense related to various loan agreements in connection with all acquisitions as of June 30, 2011. The information in the table above reflects our projected interest rate obligations for these loan agreements based on the contract interest rates, interest payment dates, and scheduled maturity dates.
 
(3)   Represents the earn-out agreement related to Greentree at Westwood. Contractually, the seller has until December 2012 to exercise the right to the earn out amount. Subsequent to June 30, 2011, the seller has provided the company with written notice of seller’s election to receive the current amount earned.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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. We invest our cash and cash equivalents in government-backed securities and FDIC-insured savings accounts, which, by their nature, are subject to interest rate fluctuations. However, we believe that the primary market risk to which we will be exposed is interest rate risk relating the variable portion of our debt financing. As of June 30, 2011, we had approximately $64.3 million of variable rate debt, the majority of which is at a rate tied to the 3-month LIBOR. A 1.0% change in 3-Month LIBOR would result in a change in annual interest expense of approximately $0.6 million per year. Our interest rate risk management objectives will be to monitor and manage the impact of interest rate changes on earnings and cash flows by using certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.
In addition to changes in interest rates, the fair value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for healthcare facilities, local, regional and national economic conditions and changes in the credit worthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our President and Chief Financial Officer has reviewed the effectiveness of our disclosure controls and procedures and has concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Under the supervision and with the participation of our management, including our President and Chief Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated,

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can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on her evaluation as of the end of the period covered by this report, our President and Chief Financial Officer has concluded that we maintained effective internal control over financial reporting, at the reasonable assurance level, as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1A. Risk Factors
The following risk supplements the risks disclosed in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2010.
We are dependent upon our Advisor and Sub-Advisor to conduct our operations. If our Advisor or Sub-Advisor became unable to continue in those roles, we may have difficulty finding qualified successors, and any successor advisor or sub-advisor may not be as well suited to manage us and our portfolio. In addition, we are continuing to explore various strategic alternatives to enhance value for our stockholders. These potential changes could result in a significant disruption of our business and may adversely affect the value of our stockholders’ investment in us.
At the recommendation of our advisor, the Independent Directors Committee of our board of directors is considering various strategic alternatives to enhance value for our stockholders. In connection with this process, our Independent Directors Committee, with the assistance of its independent financial advisor, has negotiated and caused us to execute an Omnibus Agreement with, among other parties, Cornerstone Leveraged Realty Advisors, LLC, our Advisor, and Servant Healthcare Investments, LLC, our Sub-Advisor. Among other actions, the Omnibus Agreement amends the Advisory Agreement between us and our Advisor, and amends and assigns to us the Sub-Advisory Agreement originally entered into by and between our Advisor and the Sub-Advisor. The Omnibus Agreement requires our Advisor to continue to provide the services that it is obligated to perform pursuant to the Advisory Agreement, reduces the amounts of certain fees payable to our Advisor and Sub-Advisor, and restricts total operating expenses that may be incurred on our behalf by the Advisor and Sub-Advisor. As previously reported, our Advisor has been losing money with respect to the services it provides to us. If our Advisor and Sub-Advisor cannot meet their obligations as they arise, or if they are unable to provide adequate service to us as required under the terms of the Omnibus Agreement, we may have to find another Advisor or Sub-Advisor. If we are required to find a new Advisor or Sub-Advisor we may have difficulty doing so, and any successor advisor may not be as well suited to manage us and our portfolio. As we have no employees and are entirely dependent on our Advisor and Sub-Advisor to manage our operations, these potential changes could result in a significant disruption of our business.
In addition, our Independent Directors Committee is continuing to explore various strategic alternatives and capital raising opportunities. This focus could adversely affect our operations in a number of ways, including, among other things, by:
    disrupting our operations and diverting management resources;
 
    failing to successfully produce the expected benefits;
 
    being time consuming and expensive;
 
    resulting in the loss of business opportunities; and
 
    subjecting us to litigation.
The occurrence of any or all of these events could adversely affect the results of our operations and lead to lower overall returns to our stockholders.

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We have paid, and may in the future pay, distributions from sources other than cash provided from operations.
Until proceeds from our offerings are invested and generating operating cash flow sufficient to support distributions to stockholders, we intend to pay a substantial portion of our distributions from the proceeds of our offerings or from borrowings in anticipation of future cash flow. Our organizational documents do not limit the amount of distributions we can fund from sources other than from operating cash flow. To the extent that we use offering proceeds to fund distributions to stockholders, the amount of cash available for investment in properties will be reduced. For the four quarters ended June 30, 2011, our cash outflow from operations was approximately $0.4 million. During that period we paid distributions to investors of approximately $8.6 million, of which approximately $3.4 million was reinvested pursuant to our distribution reinvestment plan and approximately $5.1 million was paid to investors in cash from our offering proceeds.
We will no longer have funds available from the distribution reinvestment plan offering to use for general corporate purposes; therefore, we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions.
Historically, we have used a portion of the proceeds from our distribution reinvestment plan for general corporate purposes, including capital expenditures on our real estate investments, tenant improvement costs and leasing costs related to our investments in real estate properties; reserves required by financings of our investments in real estate properties; and the repayment of debt. Because our distribution reinvestment plan was suspended on May 10, 2011, we will no longer have distribution reinvestment plan proceeds available for such general corporate purposes. Because such funds will not be available from the distribution reinvestment plan offering, we may have to use a greater proportion of our cash flow from operations to meet our general cash requirements, which would reduce cash available for distributions. As a consequence, we may not have sufficient cash available to maintain our current level of distributions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)   We did not sell any equity securities that we did not register under the Securities Act of 1933 during the period covered by this Form 10-Q.
 
(b)   On August 10, 2007, our Registration Statement on Form S-11 (File No. 333-139704), covering a public offering of up to 40,000,000 shares of common stock for an aggregate offering amount of $400.0 million was declared effective under the Securities Act of 1933. The offering has not terminated yet. As of June 30, 2011, we had sold 12.7 million shares of common stock in our ongoing public offering and raised gross offering proceeds of $127.0 million. From this amount, we incurred $12.3 million in selling commissions and dealer manager fees payable to our dealer manager and $4.2 million in acquisition fees payable to the Advisor. We had acquired 15 properties including one development project as of June 30, 2011.
 
(c)   During the six months ended June 30, 2011, we repurchased shares pursuant to our stock repurchase program as follows:
                 
    Total Number   Average
    of Shares   Price Paid
Period   Redeemed   per Share
January
    1,194     $ 9.88  
February
    17,379     $ 9.42  
March
    25,217     $ 9.29  
April
    45,139     $ 9.48  
May
    19,126     $ 9.14  
June
    59,213     $ 9.99  
 
    167,268          

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Item 6. Exhibits
  3.1   Articles of Amendment and Restatement of the Registrant (incorporated by reference to the Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2009).
 
  3.2   Articles of Amendment of the Registrant, dated as of December 29, 2009 (incorporated by reference to the Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2009).
 
  3.3   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-11 (No. 333-139704), filed on March 21, 2007).
 
  4.1   Subscription Agreement (incorporated by reference to Appendix A to the Registrant’s prospectus filed on February 7, 2011).
 
  4.2   Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-139704) filed on June 15, 2007).
 
  4.3   Distribution Reinvestment Plan (incorporated by reference to Appendix B to the Registrant’s prospectus filed on February 7, 2011).
 
    31   Certification of Principal Executive and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
    32   Certification of Principal Executive and Principal Financial Officer and Chief Financial Officer Pursuant to 18 U.S.C. Sec.1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
    101.INS   XBRL Instance Document*
 
    101.SCH   XBRL Taxonomy Extension Schema Document*
 
    101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
 
    101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
 
    101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*
 
    101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
 
*   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized this 15th day of August 2011.
         
  CORNERSTONE HEALTHCARE PLUS REIT, INC.
 
 
  By:   /s/ SHARON C. KAISER    
    Sharon C. Kaiser, President and Chief Financial Officer   
    (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)   
 

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