BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

Ventas; (iv) that certain defendants, including GFB-AS and our Chief Financial Officer, but not including the Company, BLC, the general partners, or FIG, committed wire fraud in connection with certain communications with plaintiffs in the Action and another investor in a limited partnership; (v) that the defendants, with the exception of the Company, committed substantive violations of the Racketeer Influenced and Corrupt Organizations Act (‘‘RICO’’); (vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the general partners violated the partnership agreements of the 14 investing partnerships; (viii) that GFB-AS, the general partners, and our Chief Financial Officer breached fiduciary duties to the plaintiffs; and (ix) that the defendants were unjustly enriched. The plaintiffs have asked for damages in excess of $100.0 million on each of the counts described above, including treble damages for the RICO claims. We have filed a motion to dismiss the claims, and plan to continue to vigorously defend this Action. A putative class action lawsuit was also filed on March 22, 2006, by certain limited partners in four of the same partnerships involved in the Action in the Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. (the ‘‘Second Action’’). The putative class in the Second Action consists only of those limited partners in the four investing partnerships who are not plaintiffs in the Action. The Second Action names as defendants BLC and GFB-AS. The complaint alleges a claim for breach of fiduciary duty arising out of the sale of facilities indirectly owned by the investing partnerships to Ventas and the subsequent lease of those facilities by Ventas to subsidiaries of BLC. The plaintiffs seek, among other relief, an accounting, damages in an unspecified amount, and disgorgement of unspecified amounts by which the defendants were allegedly unjustly enriched. We also intend to vigorously defend this Second Action. Because these actions are in an early stage we cannot estimate the possible range of loss, if any.

In addition, we are involved in various lawsuits and are subject to various claims arising in the normal course of business. In the opinion of management, although the outcomes of these suits and claims are uncertain, in the aggregate, they should not have a material adverse effect on our business, financial condition and results of operations.

5.    Employee Restricted Stock Plans and Omnibus Stock Incentive Plan

In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (‘‘SFAS No. 123R’’), which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R is a revision to SFAS No. 123 and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. We adopted SFAS 123R in connection with our initial grants of restricted stock effective August 2005, which were converted into Brookdale restricted stock on September 30, 2005.

On August 5, 2005, BLC and Alterra adopted employee restricted stock plans to attract, motivate, and retain key employees. The plans provide for the grant of restricted securities to those participants selected by the board of directors. Upon adoption of the plans, restricted securities of BLC and Alterra were granted to employees. At September 30, 2005, as a result of the formation transactions described in Note 1, these restricted shares were converted into a total of 2.6 million shares of restricted stock in BSL at a value of $19.00 per share. Pursuant to the plans, 25% to 50% of each individual's award vested upon completion of the initial public offering on November 22, 2005. The remaining awards vest over a period of three to five years.

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

On October 14, 2005, we adopted a new equity incentive plan for our employees, the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (‘‘Incentive Plan’’), which was approved by our stockholders on October 14, 2005. A total of 2.0 million shares of our common stock was initially reserved for issuance under the Incentive Plan; provided, however, that commencing on the first day of our fiscal year beginning in calendar year 2006, the number of shares reserved and available for issuance will be increased by an amount equal to the lesser of (1) 0.4 million shares or (2) 2% of the number of outstanding shares of our common stock on the last day of the immediately preceding fiscal year. When Section 162(m) of the Internal Revenue Code becomes applicable, the maximum aggregate number of shares that will be subject to stock options or stock appreciation rights that may be granted to any individual during any fiscal year may not exceed 0.4 million, and the maximum aggregate number of shares that will be subject to awards of restricted stock, deferred shares, unrestricted shares or other stock-based awards that may be granted to any individual during any fiscal year will be 0.4 million.

On June 15, 2006, we registered an additional 2.9 million shares of common stock, par value $0.01 per share of the Incentive Plan. This registration of 2.9 million shares of common stock increased the number of shares registered for issuance under the Incentive Plan to 4.9 million. (See Note 8).

As a result of the formation transactions described in Note 1, the employee restricted stock plans described above were merged into the Omnibus Stock Incentive Plan. Additional grants of restricted shares under the Incentive Plan were as follows:

			Grants						Value Per Share						Total Value
As of December 31, 2005					554					$	19.00-28.75					$	10,100
Three months ended March 31, 2006					44					$	33.10						1,451
Three months ended June 30, 2006					49					$	44.40						2,196

Compensation expense of $3.8 million and $6.8 million was recorded for the three and six months ended June 30, 2006, net of forfeitures estimated at 5% of the shares granted. The Company records compensation expense over the requisite service period in accordance with SFAS 123R.

6.    Acquisitions and Financings

On June 30, 2006, we completed the acquisition of two facilities with 193 units/beds from AEW II Corporation for $37.8 million. We refer to these facilities as the ‘‘AEW-New Jersey Portfolio’’. Concurrent with the closing, we obtained $24.9 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through June 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the Southland Portfolio.

On May 1, 2006, we completed the acquisition of four owned senior living facilities with 262 units/beds located in Florida from Southland Suites for $24.0 million. We refer to these facilities as the ‘‘Southland Portfolio’’. On May 18, 2006, we obtained $16.1 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through maturity in June 2009, with two one-year extensions, at our option, and we entered into an interest rate swap to convert the loan from a floating rate of interest to a fixed rate of interest. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the AEW-New Jersey Portfolio.

On April 28, 2006, we acquired five facilities with 813 units/beds for $179.5 million from AEW Capital Management. In connection with the acquisition, we obtained $124.5 million of first mortgage financing, bearing interest at LIBOR plus 1.50%, payable interest only through maturity in May 2009, with two one-year extensions, at our option, and we entered into an interest rate swap to convert the

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

loan from a floating rate of interest to a fixed rate of interest. The swap is accounted for as a cash flow hedge. On June 30, 2006, we closed on an interim agreement with an affiliate of AEW Capital Management to (i) loan $12.4 million to the affiliate pending lender approval of our acquiring the facility and assuming the outstanding mortgage loan related to the affiliate, and (ii) assumed management of the facility (with 84 units/beds). The loan is due the earlier of (i) June 30, 2007, or (ii) the date on which the lender approved the assumption of the existing mortgage loan by us. The loan bears interest in an amount equal to the facility's net cash flow (as defined) or the maximum permissible by law. For financial reporting purposes, we evaluated our relationship with the entity that owns the facility pursuant to FIN 46R and determined that the entity is a VIE and we are the primary beneficiary and accordingly, consolidated the entity as of June 30, 2006. We are also under contract with AEW Capital Management to purchase a skilled nursing component of one of the purchased facilities for an additional $9.5 million. The remainder of this transaction is expected to close during the third quarter of 2006 and is subject to customary closing conditions and possible multiple closings. We refer to these facilities as the ‘‘AEW Portfolio’’. The AEW Portfolio is located in California, Ohio and Washington and is comprised of six independent living, assisted living and CCRC facilities with a total of 1,017 units/beds.

On April 7, 2006, we acquired the outstanding stock of Southern Assisted Living Inc., which operates 41 leased senior living facilities with 2,887 units/beds (the ‘‘SALI Portfolio’’), for $82.9 million. Also included in the transaction was one property managed by SALI for a third party with 155 independent and assisted living units/beds. The SALI Portfolio is located in North Carolina, South Carolina and Virginia.

On March 31, 2006, we completed the acquisition of seven senior living facilities, all of which are owned, with 1,077 units/beds from American Senior Living L.P. for an aggregate purchase price of $92.2 million (the ‘‘Liberty Owned Portfolio’’). The Liberty Owned Portfolio is located in Florida, Georgia and Tennessee all of which are owned facilities. In connection with the acquisition, we obtained a $65.2 million first mortgage loan, bearing interest at LIBOR plus 1.75%, payable interest only through maturity in March 2011, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge.

On March 28, 2006, we completed the acquisition of 17 assisted living facilities with 814 units/beds from the Wellington Group LLC for $79.5 million (the ‘‘Wellington Portfolio’’). On January 11, 2006, we signed a definitive agreement to acquire 18 facilities; however, the agreement to acquire one facility was terminated. In connection with the acquisition we obtained $52.6 million of first mortgage financing bearing interest at LIBOR plus 1.70%, payable interest only through maturity in March 2009, with two-one year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The portfolio is located in Alabama, Florida, Georgia, Mississippi, and Tennessee and consists of 13 owned and four leased facilities.

On February 28, 2006, we acquired two facilities in Orlando, Florida with 114 units/beds from Orlando Madison Ivy, LLC, for an aggregate purchase price of $13.0 million. In connection with the acquisition, we obtained an $8.8 million first mortgage bearing interest at LIBOR plus 1.70% payable, interest only through maturity in December 2008, with two-one year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge.

The above acquisitions were accounted for using the purchase method of accounting and the purchase prices were allocated to the assets and liabilities based on their estimated fair values. The results of operations of the acquisitions are included in the financial statements subsequent to the closing of the transactions.

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

The following unaudited pro forma condensed consolidated financial information sets forth the historical information for the three and six months ended June 30, 2006 and 2005 derived from the historical financial statements, as adjusted to give effect to:

	•	Pro forma adjustments to give effect to the Fortress CCRC Portfolio, the Prudential Portfolio, the Chambrel Portfolio, the Merrill Gardens Portfolio, the Orlando, FL facilities, the Wellington Portfolio, the Liberty Owned Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio acquisitions on the statement of operations as if these transactions closed on January 1, 2005;

	•	Pro forma adjustments to give effect to the September 30, 2005 step-up in basis of non-controlling ownership (ownership interests not controlled or owned by affiliates of Fortress Investment Group LLC, ‘‘Minority Shareholders’’) due to the exchanges of Brookdale Facility Group minority ownership for Company ownership as if the transaction was completed on January 1, 2005;

	•	Pro forma adjustments to give effect to the consolidation of three limited partnerships pursuant to EITF 04-5 on January 1, 2005;

	•	Pro forma adjustments to give effect to the compensation expense in connection with the grants under the restricted stock plan;

	•	Incremental general and administrative expenses related to operating as a public company;

	•	Our initial public offering, repayment of indebtedness and other use of proceeds; and

	•	Pro forma adjustments to give effect as if we entered into the Credit Agreement on January 1, 2005.

The unaudited pro forma condensed consolidated financial information is presented for informational purposes only, and we do not expect that this information will reflect our future results of operations. The unaudited pro forma adjustments are based on available information and upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that the transactions and our initial offering were completed as of January 1, 2005.

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Revenues				$	274,131					$	255,170					$	544,426					$	510,431
Income (loss) from operations					5,496						(6,556	)					(1,134	)					(37,401	)
Loss before income taxes					(22,744	)					(34,680	)					(57,099	)					(92,645	)
Loss from continuing operations					(23,250	)					(31,803	)					(58,107	)					(87,402	)
Weighted average basic and diluted loss per share				$	(0.36	)				$	(0.49	)				$	(0.89	)				$	(1.34	)
Weighted average shares used in computing basic and diluted loss per share					65,007						65,007						65,007						65,007

7.    Segment Information

Pursuant to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (‘‘SFAS No. 131’’), we have seven reportable segments which we determined based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. In addition, the management approach focuses on financial information that an enterprise's decision makers use to make decisions about the enterprise's operating matters. We continue to evaluate the type of financial information necessary for the decision makers as we implement our growth strategies. Each of Brookdale Living, which includes BLC, the Fortress CCRC

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

Portfolio and the Prudential Portfolio, and Alterra, had and has distinct chief operating decision makers, or CODMS. Each of our facilities are considered separate operating segments because they each engage in business activities from which they earn revenues and incur expenses, their operating results are regularly reviewed by the CODMS to make decisions about resources to be allocated to the segment and assess its performance, and discrete financial information is available.

SFAS No. 131 permits aggregation of operating segments that share all common operating characteristics (similar products and services, similar methods used to deliver or provide their products and services, and similar type and class of customer for their products and services) and similar economic characteristics (revenue recognition and gross margin). We believe that each of our facilities provides similar services, delivers these services in a similar manner, and has a common type and class of customer. In addition, all of our facilities recognize and report revenue in a similar manner. However, our individual facility gross margins vary significantly. Therefore, we have aggregated our segments based upon the lowest common economic characteristic of each of our facilities, gross margin. The CODMS allocate resources in large part based on margin and analyze each of the facilities as having either (1) less than 20% operating margins, (2) more than 20% operating margins but less than 40% operating margins, or (3) greater than 40% operating margins. The CODMS believe that the margin is the primary, most significant and most useful indicator of the necessary allocation of resources to each individual facility because it is the best indicator of a facility's operating performance and resource requirements. Accordingly, our operating segments are aggregated into six reportable segments based on comparable operating margins within each of Brookdale Living and Alterra. We define our operating margin for each group of facilities as that group's operating income divided by its revenue. Operating income represents revenue less operating expenses (excluding depreciation and amortization).

We also present a seventh reportable segment for management services because the economic and operating characteristics of these services are different from our facilities aggregated above.

Brookdale Living

Our Brookdale Living group of facilities operates independent living facilities and CCRCs that provide a continuum of services, including independent living, assisted living, Alzheimer's care, dementia care and skilled nursing care. Our facilities include rental facilities and three entrance fee facilities. We also provide various ancillary services to our residents, including extensive wellness programs, personal care and therapy services for all levels of care.

Alterra

Our Alterra group of facilities operates primarily assisted living facilities that provide specialized assisted living care to residents in a comfortable residential atmosphere. Most of our facilities provide specialized care, including Alzheimer's and other dementia programs. These facilities are designed to provide care in a home-like setting, as opposed to a more institutional setting.

Management Services

Our management services segment includes facilities owned by others and operated by us pursuant to management agreements. Under our management agreements for these facilities, we receive management fees and reimbursed expenses, which represent the reimbursement of certain expenses we incur on behalf of the owners.

The accounting policies of our reporting segments are the same as those described in the summary of significant accounting policies. The following table sets forth certain segment financial and operating data.

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Revenue(3):
Brookdale Living
Less than 20% operating margin				$	—					$	13,635					$	16,926					$	17,127
20%-40% operating margin					51,197						33,418						83,248						60,610
Greater than 40% operating margin					68,744						41,562						128,617						81,802
Total Brookdale Living					119,941						88,615						228,791						159,539
Alterra
Less than 20% operating margin					5,155						11,756						18,892						26,854
20%-40% operating margin					54,188						48,345						100,758						97,149
Greater than 40% operating margin					88,558						43,634						140,437						82,920
Total Alterra					147,901						103,735						260,087						206,923
Management services					585						945						1,732						1,816
				$	268,427					$	193,295					$	490,610					$	368,278
Segment Operating Income(1):
Brookdale Living
Less than 20% operating margin				$	—					$	1,602					$	2,487					$	2,025
20%-40% operating margin					13,522						10,699						24,527						19,466
Greater than 40% operating margin					33,382						21,236						63,626						40,893
Total Brookdale Living					46,904						33,537						90,640						62,384
Average Margin					39.1	%					37.8	%					39.6	%					39.1	%
Alterra
Less than 20% operating margin					828						973						2,073						2,115
20%-40% operating margin					17,436						15,123						32,453						30,966
Greater than 40% operating margin					41,393						19,851						65,486						37,782
Total Alterra					59,657						35,947						100,012						70,863
Average Margin					40.3	%					34.7	%					38.5	%					34.2	%
Management services					410						662						1,212						1,271
				$	106,971					$	70,146					$	191,864					$	134,518
General and administrative (including non-cash stock compensation expense)(2)				$	22,950					$	11,040					$	43,690					$	22,436
Facility lease expense					46,623						47,091						92,357						93,593
Deprecation and amortization					30,947						9,072						53,246						14,245
Operating income				$	6,451					$	2,943					$	2,571					$	4,244
Total assets:
Brookdale Living				$	1,590,482					$	927,512					$	1,590,482					$	927,512
Alterra					790,704						306,657						790,704						306,657
Management services					—						—						—						—
				$	2,381,186					$	1,234,169					$	2,381,186					$	1,234,169

(1)	Segment operating income defined as segment revenues less segment operating expenses (excluding depreciation and amortization).

(2)	Net of general and administrative costs allocated to management services reporting segment.

(3)	All revenue is earned from external third parties in the United States.

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

8.    Subsequent Events

On January 12, 2006, we signed a definitive agreement to purchase seven owned and 11 leased senior living facilities from American Senior Living L.P. As described in Note 6, we acquired the seven (1,077 units/beds) owned facilities and the remaining 11 leased facilities were under contract for $79.5 million. The portfolio is located in Alabama, Florida, Georgia, Mississippi and Tennessee. On July 27, 2006, we completed the acquisition of 10 of the 11 remaining facilities. Five of the facilities previously leased were purchased and financed with $33.0 million of first mortgage financing bearing interest at 9.8%, payable interest only until maturity in 2009, and five facilities are leased. The purchase agreement for the eleventh facility was terminated.

On May 12, 2006, we signed an Agreement and Plan of Merger pursuant to which Beta Merger Sub Corporation, our wholly-owned subsidiary, merged with and into American Retirement Corporation (‘‘ARC’’) with ARC continuing as the surviving corporation and our wholly-owned subsidiary (the ‘‘ARC Merger’’). The ARC Merger was completed on July 25, 2006. Under the terms of the ARC Merger, each outstanding share of common stock, par value $0.01 per share, of ARC (‘‘ARC Common Stock’’), together with the rights issued pursuant to the Rights Agreement, dated as of November 18, 1998, between ARC and American Stock Transfer and Trust Company, received $33.00 per share in cash. All of the options to purchase ARC Common Stock, whether vested or unvested, were cancelled and each holder of any such option received a cash payment equal to the product of (i) the excess of $33.00 over the applicable option exercise price and (ii) the number of shares of ARC Common Stock for which the options had not been previously exercised.

In connection with the ARC Merger, our board of directors approved an amendment to the Incentive Plan (the ‘‘Plan Amendment’’) to reserve an additional 2,500,000 shares of common stock for issuance thereunder to satisfy (i) obligations to provide for certain purchases of common stock by ARC officers and employees, (ii) obligations to make corresponding grants of restricted shares of common stock under the Incentive Plan to those ARC officers and employees who purchase such shares of common stock pursuant to employment agreements and optionee agreements entered into in connection with the ARC Merger, and for such other grants that may be made from time to time. Upon completion of the ARC Merger, we issued 475,681 shares of common stock to certain officers of ARC at $38.07 per share for aggregate proceeds of $18.1 million and granted the officers 475,681 shares of restricted stock at $38.07 per share. On May 12, 2006, funds managed by affiliates of Fortress, which held approximately 65% of our common stock, executed a written consent approving the Plan Amendment effective upon consummation of the ARC Merger. This consent constituted the consent of a majority of the total number of shares of our outstanding common stock and was sufficient to approve the Plan Amendment.

In connection with the ARC Merger, a fund managed by an affiliate of Fortress (‘‘Investor’’) committed to purchase $1.3 billion in aggregate of our common stock at a price of $36.93 per share. Prior to closing the ARC Merger, we exercised our right to reduce the Investor's commitment and on July 25, 2006, issued Investor 17,600,867 common shares at $36.93 per share for aggregate net proceeds of $650.0 million.

On July 25, 2006, we completed a follow-on equity offering, pursuant to which we issued and sold 17,721,519 primary shares, and an existing shareholder, Health Partners, which is an affiliate of Capital Z Partners sold 4,399,999 shares (including 2,885,415 shares pursuant to the option granted by Health Partners to the underwriters to purchase up to an additional 2,885,415 shares of common stock to cover over-allotments). The shares were issued at a price of $39.50 per common share. We did not receive any proceeds from the shares sold by the selling stockholder. We received net proceeds of approximately $673.5 million, after deducting an aggregate of $24.5 million in underwriting discounts and commissions paid to the underwriters and an estimated $2.0 million in other direct expenses

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BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

incurred in connection with the offering. Funds managed by affiliates of Fortress, which beneficially owned over 65% of Brookdale's common stock prior to the consummation of the offering, did not sell any shares in the offering and after completion of the offering own approximately 60% of the outstanding shares of common stock. As of June 30, 2006, $5.6 million of costs related to the ARC Merger and offering have been deferred.

On July 14, 2006, we refinanced $150.0 million Series A notes payable. The new mortgage loan bears interest at LIBOR plus ..88%, is payable in monthly installments of interest only through August 2011 and payable in installments of principal and interest through maturity in August 2013. The mortgage loan is additionally secured by a $7.0 million guaranty by BLC until the debt service coverage ratio is 1.35:1.00 for six months. In addition BLC is required to have $3.0 million of cash availability until it secures its obligation with a $3.0 million letter of credit, no later than December 15, 2006.

On July 25, 2006, we repaid the $195.0 million outstanding balance of the term portion of our credit agreement plus accrued interest. Pursuant to the credit agreement, the $250.0 million term loan portion is terminated. We expect to either amend the existing credit agreement to provide for additional borrowing capacity or enter into a new credit agreement during the third quarter of 2006. There can be no assurance that we will amend the current credit agreement or enter into a new agreement or obtain terms satisfactory to us.

On July 25, 2006, concurrent with the ARC Merger, ARC obtained a $310.0 million first mortgage loan commitment, $225.0 million of which was funded at closing. The balance of the commitment expires in one year. The loan is secured by 13 facilities, bears interest at a variable rate of LIBOR plus .70%, and is payable interest only through maturity in August 2012. We entered into an interest rate swap to convert the loan from floating to fixed. The swap is recorded as a cash flow hedge.

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Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain items in this Quarterly Report on Form 10-Q, and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our ability to deploy capital, close accretive acquisitions, close dispositions of under-performing facilities, close acquisitions under letters of intent, close the AEW Capital Management transaction, integrate ARC's facilities and business into our operations, anticipate, manage and address industry trends and their effect on our business, pay and grow dividends, generate growth organically or through acquisitions, secure financing and increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income and add residents. Words such as ‘‘anticipate(s),’’ ‘‘expect(s)’’, ‘‘intend(s)’’, ‘‘plan(s)’’, ‘‘target(s)’’, ‘‘project(s)’’, ‘‘believe(s)’’, ‘‘will’’, ‘‘would’’, ‘‘seek(s)’’, ‘‘estimate(s)’’ and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Brookdale Senior Living Inc. can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from Brookdale Senior Living's expectations include, but are not limited to, our continued ability to acquire facilities at attractive prices which will generate returns consistent with expectations; the possibility that the facilities that we have acquired and will acquire may not generate sufficient additional income to justify their acquisition; possibilities that conditions to closing of certain transactions will not be satisfied; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads and our ability to close on facilities under non-binding letters of intent, which is generally less probable then closing on facilities under definitive agreements, or other factors could make financing more expensive or unavailable to us; a decrease in the overall demand for senior housing; general economic conditions and economic conditions in the markets in which we operate; real estate markets in the regions where our facilities are located; competitive pressures within the industry and/or markets in which we operate; the creditworthiness of our residents; interest rate fluctuations; licensing risks; our failure to comply with federal, state and local laws and regulations; our failure to comply with environmental laws; the effect of future legislation or regulatory changes in our operations; and other risks detailed from time to time in Brookdale Senior Living's SEC reports including in ‘‘Risk Factors’’ included in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K, filed on March 31, 2006. Such forward-looking statements speak only as of the date of this Quarterly Report. Brookdale Senior Living expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Executive Overview

Upon consummation of the merger with ARC on July 25, 2006, or the ARC Merger, as described in this report, we became the largest operator of senior living facilities in the United States based on total capacity with over 530 facilities in 33 states and the ability to serve over 50,000 residents. We currently operate 97 independent living facilities with 18,890 units/beds, 409 assisted living facilities with 21,284 units/beds, 27 continuing care retirement communities, or CCRCs, with 9,874 units/beds and three skilled nursing facilities with 395 units/beds. We believe that the consummation of the ARC Merger and other recent acquisitions will bring us significant additional incremental revenue and help us to attain additional synergies and cost savings.

Prior to the consummation of the ARC Merger, as of June 30, 2006, we operated 453 facilities in 32 states with the ability to serve over 34,000 residents. We offer our residents access to a full

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continuum of services across all sectors of the senior living industry. As of June 30, 2006, we operated 77 independent living facilities with 13,733 units/beds, 368 assisted living facilities with 17,447 units/beds, seven continuing care retirement communities, or CCRCs, with 3,084 units/beds (including 817 resident-owned cottages on our CCRC campuses managed by us) and one skilled nursing facility with 82 units/beds. The majority of our units/beds are located in campus settings or facilities containing multiple services, including CCRCs. As of June 30, 2006, our facilities were 90.1% occupied. We generate over 95% of our revenues from private pay customers, which limits our exposure to government reimbursement risk. In addition, we control all financial and operational decisions regarding our facilities through property ownership and long-term leases. As of June 30, 2006, we are in compliance with the financial covenants of our debt and lease agreements. We believe we operate in the most attractive sectors of the senior living industry with significant opportunities to increase our revenues through providing a combination of housing, hospitality services and health care services. For the three and six months ended June 30, 2006, 35.9% and 34.9% of our revenues were generated from owned facilities, 63.9% and 64.7% from leased facilities and 0.2% and 0.4% from management fees from facilities we operate on behalf of third parties and affiliates.

We plan to grow our revenue and operating income through a combination of: (i) organic growth in our existing portfolio; (ii) acquisitions of additional operating companies and facilities; and (iii) the realization of economies of scale, including the continuing realization of those created by the combination of BLC and Alterra and those that we expect to be created as a result of the ARC Merger. Given the size and breadth of our nationwide platform, we believe that we are well positioned to continue to invest in a broad spectrum of assets in the senior living industry, including independent living, assisted living, and CCRC assets. Since January 2001 through the date of this report, we have begun leasing or acquired the ownership or management of 125 senior living facilities (not including those facilities we acquired and subsequently disposed of) with approximately 15,200 units/beds. Since the completion of our initial public offering in November 2005, we have purchased or entered into definitive agreements to purchase $818.6 million in senior housing assets representing 106 facilities (which includes 12 facilities that we previously operated through long-tem leases) with 9,360 units/beds.

Our senior living facilities offer residents a supportive ‘‘home-like’’ setting, assistance with activities of daily living, or ADLs, and, in a few facilities, licensed skilled nursing services. By providing residents with a range of service options as their needs change, we provide greater continuity of care, enabling seniors to ‘‘age-in-place’’ and thereby maintain residency with us for a longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are burdened with care decisions for their elderly relatives.

Our independent living facilities' average resident is 83 years old and desires or needs a more supportive living environment. The typical independent living resident resides in an independent living facility for 34 months. Many of our residents relocate to one of our independent living facilities in order to be in a metropolitan area that is closer to their adult children. Our assisted living facilities' average resident is an 83 year old who requires assistance with two or three ADLs. 85% of our assisted living residents require medication management. The typical assisted living resident resides in an assisted living facility for 23 months. Residents typically enter an assisted living facility due to a relatively immediate need for services that might have been triggered by a medical event or need. Our assisted living facilities consist of 75% traditional assisted living facilities and 25% memory care facilities.

Overbuilding in the late 1990s in the senior living industry put downward pressure on the occupancy rates and the resident fees of certain senior living providers. The slowdown in construction and lack of construction financing since 1999 has led to a reduction in the supply of new units being constructed. Growing demand for senior living services has resulted in a recent trend towards increasing occupancy rates and resident fees for operators of existing facilities.

Growing consumer awareness among seniors and their families concerning the types of services provided by independent and assisted living operators has further contributed to the opportunities in the senior living industry. Also, seniors possess greater financial resources, which makes it more likely

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that they are able to afford to live in market-rate senior housing. Seniors in the geographic areas in which we operate tend to have a significant amount of assets generated from savings, pensions and, due to strong national housing markets, the sale of private homes.

Challenges in our industry include increased state and local regulation of the assisted living industry, which has led to an increase in the cost of doing business; the regulatory environment continues to intensify in the amount and types of laws and regulations affecting us, accompanied by an increase by state and local officials in enforcement thereof. In addition, like other companies, our financial results may be negatively impacted by increasing employment costs including salaries, wages and benefits, such as health care, for our employees. Increases in the costs of utilities and real estate taxes will also have a negative impact on our financial results.

Formation Transactions

We are a holding company formed in June 2005 for the purpose of combining, through a series of mergers, two leading senior living operating companies, BLC and Alterra. The combination of these two companies created a nationwide operating platform to grow our existing portfolio, realize economies of scale and add to our existing portfolio through strategic acquisitions of existing assets and/or senior living portfolios. In connection with the combination of BLC and Alterra, we negotiated new contracts for food, insurance and other goods and services and have and will continue to consolidate our corporate functions such as accounting, finance, human resources and legal, which are collectively expected to result in recurring operating and general and administrative expense savings, net of additional recurring costs expected to be incurred as a public company, of between approximately $13.0 million and $15.0 million per year. We began to realize these savings upon completion of the formation transactions in September 2005 and expect to realize the remainder by the end of 2006.

In addition to the combination of BLC and Alterra, funds managed by affiliates of Fortress contributed the Prudential Portfolio to Alterra in exchange for membership interests in FEBC and merged the Fortress CCRC Portfolio with and into a wholly-owned subsidiary of the Company in exchange for shares of our common stock. Alterra purchased the Prudential Portfolio to expand its western presence and to strengthen its overall financial position. These portfolios together consisted of 17 senior living facilities with an aggregate of 4,499 units, of which two facilities with an aggregate of 422 units/beds were sold on July 1, 2005 and September 14, 2005, for $2.5 million and $9.0 million, respectively, and the proceeds of which were contributed to us in the series of formation transactions described in our Annual Report on Form 10-K, filed on March 31, 2006. An affiliate of BLC managed one of these facilities through January 2006. All of the preceding were purchased in the second and third quarter of 2005 by funds managed by affiliates of Fortress.

As a holding company, we own 100% of the outstanding stock and membership interests of the operating companies of our business. The previous stockholders and members of the operating companies contributed their ownership interests to us in exchange for shares of our common stock. For financial reporting purposes, the Fortress entities that own the stock or membership interests in the operating companies are considered the control group as defined under paragraph 3 of EITF No. 02-5, ‘‘Definition of 'Common Control' in relation to FASB Statement No. 141.’’ Accordingly, the combined financial statements for the three and six months ended June 30, 2005 reflect the historical cost of the operating companies. Upon the completion of the formation transactions on September 30, 2005, the non-controlling minority interests were accounted for as a purchase in accordance with Statement of Financial Accounting Standards (‘‘SFAS’’) No. 141.

Acquisitions and Dispositions

Our financial results are impacted by the timing, size and number of acquisitions, leases and sale-leasebacks we complete in a period. During the three and six months ended June 30, 2006, the number of facilities we owned or leased increased by 54 and 80, which resulted in an increase of approximately 4,394 and 6,399 units/beds, for an aggregate purchase price or lease value of approximately $344.7 and $529.3 million, respectively.

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On June 30, 2006, we completed the acquisition of two facilities from AEW II Corporation for $37.8 million. We refer to these facilities as the ‘‘AEW-New Jersey Portfolio’’. The AEW-New Jersey Portfolio is located in New Jersey. Concurrent with the closing, we obtained $24.9 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through maturity in June 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the Southland Portfolio.

On May 12, 2006, we entered into the ARC Merger Agreement. See ‘‘— Financial Developments — Effect of the American Retirement Corporation Transaction’’.

On May 1, 2006, we completed the acquisition of four owned senior living facilities with 262 units/beds located in Florida from Southland Suites for $24.0 million. We refer to these facilities as the ‘‘Southland Portfolio’’. On May 18, 2006, we obtained $16.1 million of first mortgage financing bearing interest at LIBOR plus 1.65%, payable interest only through maturity in June 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. The loan is combined with the financing of and is also secured by the AEW-New Jersey Portfolio.

On April 28, 2006, we acquired five facilities with 813 units/beds for $179.5 million from AEW Capital Management. In connection with the acquisition, we obtained $124.5 million of first mortgage financing, bearing interest at LIBOR plus 1.50%, payable interest only through maturity in May 2009, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. On June 30, 2006, we closed on an interim agreement with an affiliate of AEW Capital Management Corporation to (i) loan approximately $12.4 million to the affiliate pending lender approval of our acquiring one additional facility from AEW Capital Management and our assuming the outstanding mortgage loan related to the facility and (ii) assumed the management of the facility (84 units/beds). The loan is due the earlier of (i) June 30, 2007, or (ii) the date on which the lender approves the assumption of the existing mortgage loan by us. The loan bears interest in an amount equal to the facility's net cash flow (as defined) or the maximum permissible by law. For financial reporting purposes, we evaluated our relationship with the entity that owns the facility pursuant to FIN 46R and determined that the entity is a VIE and we are the primary beneficiary and accordingly, consolidated the entity as of June 30, 2006. We are also under contract with AEW to purchase a skilled nursing component of one of the purchased facilities for an additional $9.5 million. The remainder of this transaction is expected to close during the third quarter of 2006 and is subject to customary closing conditions and possible multiple closings. We refer to these facilities, as the ‘‘AEW Portfolio’’. The AEW Portfolio is located in California, Ohio and Washington and is comprised of six independent living, assisted living and CCRC facilities with a total of 1,017 units/beds.

On April 7, 2006, we acquired the outstanding stock of Southern Assisted Living Inc., which operates 41 leased facilities with 2,887 units/beds (the ‘‘SALI Portfolio’’), for $82.9 million. Also included in the transaction was one property managed by SALI for a third party with 155 independent and assisted living units/beds. The SALI Portfolio is located in North Carolina, South Carolina and Virginia.

On March 31, 2006, we acquired seven owned senior living facilities with 1,077 units/beds from American Senior Living L.P. for an aggregate purchase price of $92.2 million (the ‘‘Liberty Owned Portfolio’’). The Liberty Owned Portfolio is located in Florida, Georgia and Tennessee. In connection with the acquisition, we obtained a $65.2 million first mortgage loan, secured by the facilities, payable interest only at LIBOR plus 1.75%, through maturity in March 2011, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge. We completed the acquisition of 10 of the remaining 11 facilities (the ‘‘Liberty II Portfolio’’) on July 27, 2006. Five of the facilities previously leased were purchased and financed with $33.0 million of first mortgage financing bearing interest at 9.8%, payable interest only until maturity in 2009, and five facilities are leased. The purchase agreement for the eleventh facility was terminated.

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On March 28, 2006, we acquired 17 assisted living facilities with 814 units/beds from the Wellington Group LLC for $79.5 million. We refer to these facilities as the ‘‘Wellington Portfolio’’. On January 11, 2006, we signed a definitive agreement to acquire 18 facilities; however, the agreement to acquire one facility was terminated. The portfolio is located in Alabama, Florida, Georgia, Mississippi, and Tennessee and is divided into 13 owned and four leased facilities. In connection with the acquisition, we obtained a $52.6 million first mortgage loan, secured by the facilities, bearing interest at LIBOR plus 1.70%, payable interest only through maturity in March 2009, with two one-year extensions, at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge.

On February 28, 2006, we acquired two facilities in Orlando, Florida with 114 units/beds from Orlando Madison Ivy, LLC for an aggregate purchase price of $13.0 million. In connection with the acquisition, we obtained an $8.8 million first mortgage loan, secured by the facilities, bearing interest at LIBOR plus 1.70%, payable interest only through maturity in December 2008, with two one-year extensions at our option, and we entered into an interest rate swap to convert the loan from floating to fixed. The swap is accounted for as a cash flow hedge.

On December 30, 2005, we acquired from Capstead Mortgage Corporation (‘‘Capstead’’) all of the outstanding stock of CMCP Properties Inc., or CMCP, which owns six senior living facilities that we previously leased with 1,394 units/beds that we operated since May 2002 under a long-term operating lease. We refer to these facilities as the ‘‘Chambrel Portfolio’’. In connection with the acquisition, the lease was terminated. We paid $57.5 million in cash to acquire all of the outstanding stock of CMCP, and assumed $119.8 million of debt and $5.2 million of working capital and cash and investments-restricted. In connection with the acquisition we obtained a $30.0 million first mortgage related to one facility that refinanced the existing $18.9 million first mortgage on that facility and we incurred a loss of $2.5 million in connection with the early extinguishment of debt. On April 14, 2006, we completed a $12.0 million financing secured by the Chambrel Portfolio, bearing interest at 6.56% and payable principal and interest until maturity in 2013.

On December 22, 2005, we acquired four facilities with 183 units/beds from Merrill Gardens for an aggregate purchase price of $16.5 million. We refer to these facilities as the ‘‘Merrill Gardens Portfolio’’. On November 30, 2005, we completed our acquisition of six facilities which we leased at the time with 237 units/beds from Omega Healthcare Investors, Inc., pursuant to our exercise of a purchase option, for an aggregate purchase price of $20.5 million. We refer to these facilities as the ‘‘Omega Portfolio’’ and the leases were terminated following the acquisition. The Merrill Gardens Portfolio and the Omega Portfolio acquisitions were financed in part by a $24.0 million of first mortgage financing bearing interest at a variable rate of LIBOR plus 1.70% and in part using a portion of the proceeds of our initial public offering.

The above acquisitions were accounted for using the purchase method of accounting and the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values.

The following unaudited pro forma condensed consolidated financial information sets forth the historical information for the three and six months ended June 30, 2006 and 2005 derived from the historical financial statements, as adjusted to give effect to:

	•	pro forma adjustment to give effect to the refinancing of five facilities;

	•	pro forma adjustments to give effect to the Fortress CCRC Portfolio, the Prudential Portfolio, the Merrill Gardens Portfolio, the Orlando, FL facilities, the Wellington Portfolio, the Liberty Owned Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio acquisitions on the statement of operations as if these transactions closed on January 1, 2005;

	•	pro forma adjustments to give effect to the September 30, 2005 step-up in basis of non-controlling ownership (ownership interests not controlled or owned by affiliates of Fortress ‘‘Minority Shareholders’’) due to the exchanges of Brookdale Facility Group minority ownership for Company ownership as if the transaction was completed on January 1, 2005;

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	•	pro forma adjustments to give effect to the consolidation of three limited partnerships pursuant to EITF 04-5 on January 1, 2005;

	•	pro forma adjustments to give effect to the compensation expense in connection with the grants under the restricted stock plans;

	•	incremental general and administrative expenses related to operating as a public company;

	•	our initial public offering, repayment of indebtedness and other use of proceeds; and

	•	pro forma adjustments to give effect as if we entered into the Line of Credit Agreement on January 1, 2005.

The following unaudited pro forma condensed consolidated and combined financial information is presented for informational purposes only, as we do not expect that this information will reflect our future results of operations. The unaudited pro forma adjustments are based on available information and upon assumptions that we believe are reasonable. The unaudited pro forma financial information assumes that the transactions and our initial public offering were completed as of January 1, 2005.

			Three Months Ended June 30,												Six Months Ended June 30,
			2006						2005						2006						2005
Revenues				$	274,131					$	255,170					$	544,426					$	510,431
Income (loss) from operations					5,496						(6,556	)					(1,134	)					(37,401	)
Loss before income taxes					(22,744	)					(34,680	)					(57,099	)					(92,645	)
Loss from continuing operations					(23,250	)					(31,803	)					(58,107	)					(87,402	)
Weighted average basic and diluted loss per share				$	(0.36	)				$	(0.49	)				$	(0.89	)				$	(1.34	)
Weighted average shares used in computing basic and diluted loss per share					65,007						65,007						65,007						65,007

Segments

We have seven reportable segments which we determined based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. In addition, the management approach focuses on financial information that an enterprise's decision makers use to make decisions about the enterprise's operating matters. We continue to evaluate the type of financial information necessary for the decision makers as we implement our growth strategies. Prior to September 30, 2005 (the date of the formation transactions described in ‘‘Business — History’’ of our Annual Report on Form 10-K filed with the SEC on March 31, 2006 and presently, each of Brookdale Living, which includes BLC, the Fortress CCRC Portfolio and the Prudential Portfolio, and Alterra, had and has distinct chief operating decision makers, or CODMS. Each of our facilities are considered separate operating segments because they each engage in business activities from which they earn revenues and incur expenses, their operating results are regularly reviewed by the CODMS to make decisions about resources to be allocated to the segment and assess its performance, and discrete financial information is available.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, permits aggregation of operating segments that share all common operating characteristics (similar products and services, similar methods used to deliver or provide their products and services, and similar type and class of customer for their products and services) and similar economic characteristics (revenue recognition and gross margin). We believe that each of our facilities provides similar services, delivers these services in a similar manner, and has common type and class of customer. In addition, all of our facilities recognize and report revenue in a similar manner. However, our individual facility gross margins vary significantly. Therefore, we have aggregated our segments based upon the lowest common economic characteristic of each of our facilities: gross margin. The CODMS allocate resources in large part based on margin and analyze each of the facilities as having either (1) less than 20% operating margins, (2) more than 20% operating margins but less than 40% operating margins, or

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(3) greater than 40% operating margins. The CODMS believe that the margin is the primary, most significant and most useful indicator of the necessary allocation of resources to each individual facility because it is the best indicator of a facility's operating performance and resource requirements. Accordingly, our operating segments are aggregated into six reportable segments based on comparable operating margins within each of Brookdale Living and Alterra. We define our operating margin for each group of facilities as that group's operating income divided by its revenue. Operating income represents revenue less operating expenses (excluding depreciation and amortization).

We also present a seventh reportable segment for management services because the economic and operating characteristics of these services are different from our facilities aggregated above.

Brookdale Living.    Our Brookdale Living group of facilities operates independent living facilities and CCRCs that provide a continuum of services, including independent living, assisted living, Alzheimer's care, dementia care and skilled nursing care. Our facilities include rental facilities and three entrance fee facilities. We also provide various ancillary services to our residents, including extensive wellness programs, personal care and therapy services for all levels of care. Our facilities are large, often in campus or high-rise settings, with an average unit/bed capacity of 211 units/beds. These facilities generally maintain high and consistent occupancy levels. We operate 70 facilities, with an aggregate capacity of 14,802 units/beds, representing approximately 43.1% of the total unit/bed capacity of our facilities.

Alterra.    Our Alterra group of facilities operates primarily assisted living facilities that provide specialized assisted living care to residents in a comfortable residential atmosphere. Most of our facilities provide specialized care, including Alzheimer's and other dementia programs. These facilities are designed to provide care in a home-like setting, as opposed to a more institutional setting. Our assisted living facilities target residents generally requiring assistance with two or three ADLs and are generally smaller than our Brookdale Living facilities, with an average unit/bed capacity of 49 units/beds. We operate 376 facilities, with an aggregate capacity of 18,243 units/beds, representing approximately 53.1% of the total unit/bed capacity of our facilities.

Management Services.    Our management services segment includes 7 facilities owned by others and operated by us pursuant to management agreements. Under our management agreements for these facilities, we receive management fees as well as reimbursed expense revenues, which represent the reimbursement of certain expenses we incur on behalf of the owners. These 7 facilities have an aggregate capacity of 1,301 units/beds, representing approximately 3.8% of the total unit/bed capacity of our facilities.

Revenues

We generate all of our revenues from resident fees, entrance fees and management fees. For the three and six months ended June 30, 2006 and 2005, approximately 99.8% and 99.6% and 0.2% and 0.4% and 99.5% and 99.5% and 0.5% and 0.5% of our revenues were generated from resident fees and management fees, respectively. In addition, we generated a small amount of revenue from entrance fees, which accounted for less than 0.1% of our revenue during this period.

We derive over 95% of our resident fees from private pay sources. Our resident fees are paid, on a monthly basis in advance, by residents, their families or other responsible parties, typically out of personal income, assets or other savings. As a result, economic downturns or changes in demographics, among other things, could impact our ability to charge and collect resident fees. Ancillary charges are billed in arrears.

Resident Fees.    We generate resident fee revenue on a monthly basis from each resident in each facility that we own and operate or lease and operate. The rates we charge are highly dependent on local market conditions and the competitive environment in which the facilities operate. Substantially all of our independent and assisted living residency agreements allow for adjustments in the monthly fee payable thereunder not less frequently than 12 or 13 months, or monthly, respectively, thereby enabling us to seek increases in monthly fees due to inflation, increased levels of care or other factors. Any such pricing increase would be subject to market and competitive conditions and could result in a

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decrease in occupancy in the facilities. In addition, regulations governing assisted living facilities in several states stipulate that each resident must have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, a majority of our assisted living resident agreements allow residents to terminate their agreements upon 0 to 30 days' notice. Our independent living facilities generally allow residents to terminate their leases upon the need for a higher level of care not provided at the facility or death.

Upon termination of a lease, the resident is usually obligated to pay rent for the lesser of 60 days after he or she vacates the unit or until the unit is rented by another resident.

For the three and six months ended June 30, 2006 and 2005, we generated resident fees of approximately $267.8 million and $488.9 million or an average of $3,098 and $3,107 per unit/bed per month, and approximately $192.4 million and $366.5 million at $2,928 and $2,908 per unit/bed, respectively. The increases were attributable to increased rates at our existing facilities and integration of the recent acquisitions into our operations.

Entrance Fees.    In three of our CCRC facilities, independent living residents pay an entrance fee upon moving into the facility in addition to a monthly fee. We have two types of entrance fee arrangements, as described below.

In two of our facilities, a portion of the entrance fee is generally non-refundable and a portion is refundable. The non-refundable portion of the fee is initially recorded as deferred revenue and amortized to revenue over the estimated stay of the resident in the facility. The refundable portion of the fee is generally refundable upon the resale of the unit, or in certain agreements upon resale of a comparable unit or 12 months after the resident vacates the unit and is classified as current liabilities. Based on market conditions and resident preferences we periodically review our entrance fee arrangements to determine the amount of the fee and the allocation between the refundable and non-refundable portions.

In one facility the entrance fee is refundable to the resident pro rata over a 67-month period. Accordingly, the fee is amortized to revenue over 67 months.

For the three and six months ended June 30, 2006 and 2005, we received $1.3 million and $3.4 million and $1.3 million and $1.3 million of entrance fees and refunded $0.3 million and $1.0 million and $0.3 million and $0.3 million, respectively. We had no entrance fees prior to April 2005. Of the amount received, $0.2 million and $0.6 million and $0.3 million and $0.3 million is deferred and amortized and $1.1 million and $2.8 million and $1.0 million and $1.0 million, respectively, including net obligations assumed in connection with the purchase, is refundable to the resident generally upon resale of the unit or a comparable unit.

Management Fees.    Management fees are monthly fees that we collect from owners of facilities for which we are the manager. Management fees typically range from 2.8% to 5.0% of the facility's total gross revenues. All management fees are recognized as revenues when services are provided. For the three and six months ended June 30, 2006 and 2005, we earned approximately $0.6 million and $1.7 million and $0.9 million and $1.8 million, respectively, in management fee revenue. Management fee revenues decreased primarily due to the third party owners' sale of four and nine facilities partially offset by receipt of $0.4 million and $0.6 million received in connection with the third party owner's sale of four facilities during the three and six months ended June 30, 2006, respectively.

The terms of our management agreements generally range from one to three years and can be cancelled by the facility owners for cause, sale of the facility or upon 30 to 60 days' notice at renewal.

Operating Expenses

We classify our operating expenses into the following categories: (i) facility operating expenses, which include labor, food, marketing and other direct facility expenses, insurance and real estate taxes; (ii) general and administrative expenses, which primarily include the cost to staff and maintain our corporate headquarters, our regional and divisional operating infrastructure and other overhead costs; (iii) facility lease payments; and (iv) depreciation and amortization.

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Financial Developments

The following are certain changes in our financial results that have occurred or that we expect to occur in 2006 and beyond, as compared to our 2005 results.

As a new public company, we have incurred, and will continue to incur, significant legal, accounting and other expenses that we did not incur as a private company related to corporate governance, Securities and Exchange Commission, or SEC, reporting requirements under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and compliance with the various provisions of the Sarbanes-Oxley Act of 2002. In particular, we expect to incur significant incremental expenses associated with Sarbanes-Oxley Section 404 compliance documentation and remediation. In addition, as a New York Stock Exchange-listed company, we were required to establish an internal audit function, and did so, on an outsourced basis. As a result, we will incur additional cost associated with this function. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. We expect to fund these additional costs using cash flows from operations and from financing activities and additional indebtedness, including availability under our expected lines of credit.

As of June 30, 2006, our facilities were 90.1% occupied. We expect to maintain and increase these occupancy levels due to the projected demand for senior living services; however, there can be no assurance that we will maintain or increase this occupancy level or the resident fees we charge for our services. Due to the stable nature of our portfolio, we do not expect to add significant personnel to our facilities as occupancy increases; however, we are subject to wage and benefit cost increases as we strive to attract and retain skilled management and staff at our facilities. In addition, we are subject to increases in other operating expenses such as real estate taxes, as the taxing authorities are under increasing pressure to raise revenues; utilities, as a result of the recent oil shortages and supply problems; and insurance costs.

General and administrative costs have increased primarily due to the increase in the number of facilities we own, lease and manage. During 2005, we purchased the Fortress CCRC Portfolio (eight facilities with 3,238 units/beds of which 817 are resident-owned cottages managed by us; we sold two of these facilities in the third quarter of 2005, one of which we continued to manage through January 2006), we purchased the Prudential Portfolio (nine facilities with 1,261 units/beds), we purchased the Chambrel Portfolio (six facilities with 1,394/beds) from Capstead that we previously leased, we purchased the Merrill Gardens Portfolio (four facilities with 187 units/beds), and we purchased the Omega Portfolio (six facilities with 237 units/beds) that we previously leased. During 2006 through the date of this report, we purchased two facilities with 114 units/beds from Orlando Madison Ivy, LLC, we purchased the Wellington Portfolio (17 facilities with 814 units/beds), we purchased the Liberty Owned Portfolio (seven facilities with 1,077 units/beds), we purchased the SALI Portfolio (42 facilities with 3,042 units/beds), we purchased the AEW Portfolio (six facilities with 897 units/beds) and we purchased the AEW-New Jersey Portfolio (two facilities with 193 units). These acquisitions, excluding the Capstead and Omega acquisitions, required us to add additional corporate staff to oversee these facilities, and we expect to incur similar incremental and general and administrative costs in the future as we acquire additional senior housing facilities.

Historically we have leased facilities under long-term leases. We intend to finance our future acquisitions primarily through a combination of traditional mortgage debt and equity and to reduce our use of sale-leaseback transactions. As a result, we expect the overall percentage of our revenues derived from our leased portfolio to decline. From a business standpoint, there is no fundamental difference in the way we manage the operations of our leased versus owned facilities, while from a financial standpoint, financing future acquisitions with traditional mortgage financing and equity is expected to generate more cash flow to distribute to our stockholders and the opportunity to generate additional proceeds from future refinancing opportunities.

Due to the fact that we are an acquisition-focused company, as we evaluate operating companies and facilities for potential acquisition, we incur costs both internally and for various third parties' assistance, including in connection with due diligence, negotiation and structuring of these acquisitions.

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These third party costs are capitalized once the acquisition is deemed probable. If an acquisition is abandoned, these costs will be expensed. If the acquisition is consummated, these third party costs will be capitalized as a part of the total purchase price.

Effect of the American Retirement Corporation Transaction

On May 12, 2006, we entered into an Agreement and Plan of Merger, or the ARC Merger Agreement, with Beta Merger Sub Corporation, a Delaware corporation and a wholly-owned subsidiary of the Company, or Merger Sub, and ARC, pursuant to which Merger Sub would be merged with and into ARC with ARC continuing as the surviving corporation and as a wholly-owned subsidiary of the Company. We refer to this transaction as the ‘‘ARC Merger’’.

Upon consummation of the ARC Merger on July 25, 2006, we became the largest operator of senior living facilities in the United States based on total capacity. On a pro forma basis for the ARC Merger and other recent acquisitions, as of June 30, 2006, we own, manage or lease over 530 facilities in 33 states and have the ability to serve over 50,000 residents.

We will account for the acquisition of ARC common stock as a purchase and hence record the assets and liabilities on our balance sheet at fair value. We will depreciate and amortize these tangible and intangible assets over the shorter of their estimated useful lives or lease terms, which we expect to be similar to the current estimated useful lives of our existing tangible and intangible assets. As a result, depreciation and amortization will increase significantly.

The ARC Merger is significantly larger than any acquisition that we have completed since the completion of our initial public offering in November 2005. ARC owns or leases and operates 83 senior living facilities in 19 states, with a unit capacity of approximately 16,100 unit/beds. Integrating these facilities into our current operations will be a significant undertaking, as our resident capacity will be increased by nearly 50%. To help facilitate the integration of the ARC facilities into our company, we entered into employment agreements, which took effect at the closing of the ARC Merger on July 25, 2006, with W.E. Sheriff, ARC's Chief Executive Officer, and the following other executive officers of ARC: Gregory B. Richard, George T. Hicks, Bryan D. Richardson, H. Todd Kaestner, and James T. Money, regarding their continued service with us following the consummation of the ARC Merger. Mr. Sheriff became our co-Chief Executive Officer. We also expect to maintain an executive office in Nashville, Tennessee, as well as add over 10,800 employees, all of which will add significant costs. We will also incur a substantial amount of non-recurring integration costs with respect to the ARC Merger transaction that will be expensed primarily in 2006 and 2007.

As a result of the increased depreciation and amortization, additional general and administrative expenses, integration costs, lease expense and interest expense that we expect to incur upon consummation of the ARC Merger, we expect to generate net losses under generally accepted accounting principles (United States) after the closing of the ARC Merger.

Simultaneously with entering into the ARC Merger Agreement, in order to finance the ARC Merger, we entered into an Investment Agreement, or the Investment Agreement, with RIC Coinvestment Fund LP, or the Investor, a fund managed by an affiliate of Fortress. Under the terms of the Investment Agreement, the Investor committed to purchase from us, at and simultaneously with the closing of the ARC Merger, up to $1.3 billion of our common stock at a price of $36.93 per share. We used a portion of the net proceeds from our follow-on equity offering together with the proceeds we received from the Investor pursuant to the Investment Agreement to consummate the ARC Merger on July 25, 2006.

Results of Operations

Comparison of Three Months Ended June 30, 2006 to Three Months Ended June 30, 2005

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data

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should be read in conjunction with our condensed consolidated and combined financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of the Fortress CCRC Portfolio (effective April 2005), the Prudential Portfolio (effective June/July 2005), the Merrill Gardens Portfolio (effective November 2005), the Omega and Chambrel Portfolios (effective December 2005), two facilities in Orlando, Florida (effective February 2006), the Liberty Owned Portfolio, the Wellington Portfolio (effective March 2006), SALI Portfolio (April 2006), the AEW Portfolio and AEW-New Jersey Portfolio (April/June 2006) and the Southland Portfolio (May 2006) into our operations. We completed our formation transaction on September 30, 2005. Results prior to that date represent the combined operations of BLC, Alterra, the Fortress CCRC Portfolio and the Prudential Portfolio (together, the ‘‘Brookdale Facility Group’’):

			Three Months Ended June 30,												Increase (Decrease)						% Increase (Decrease)
			2006						2005
Statement of Operations Data:
Revenue
Resident fees:
Brookdale Living:
Less than 20% operating margin				$	—					$	13,635					$	(13,635	)					(100.0	)%
20% – 40% operating margin					51,197						33,418						17,779						53.2	%
Greater than 40% operating margin					68,744						41,562						27,182						65.4	%
Total					119,941						88,615						31,326						35.4	%
Alterra:
Less than 20% operating margin					5,155						11,756						(6,601	)					(56.2	)%
20% – 40% operating margin					54,188						48,345						5,843						12.1	%
Greater than 40% operating margin					88,558						43,634						44,924						103.0	%
Total					147,901						103,735						44,166						42.6	%
Total resident fees					267,842						192,350						75,492						39.2	%
Management fees					585						945						(360	)					(38.1	)%
Total revenue					268,427						193,295						75,132						38.9	%
Expenses
Facility operating:
Brookdale Living:
Less than 20% operating margin					—						12,033						(12,033	)					(100.0	)%
20% – 40% operating margin					37,675						22,719						14,956						65.8	%
Greater than 40% operating margin					35,362						20,326						15,036						74.0	%
Total					73,037						55,078						17,959						32.6	%
Alterra:
Less than 20% operating margin				$	4,327					$	10,783					$	(6,456	)					(59.9	)%
20% – 40% operating margin					36,752						33,222						3,530						10.6	%
Greater than 40% operating margin					47,165						23,783						23,382						98.3	%
Total					88,244						67,788						20,456						30.2	%
Total facility operating expenses					161,281						122,866						38,415						31.3	%
Lease expense					46,623						47,091						(468	)					(1.0	)%
General and administrative					23,125						11,323						11,802						104.2	%
Depreciation and amortization					30,947						9,072						21,875						241.1	%
Total operating expenses					261,976						190,352						71,624						37.6	%
Income from operations					6,451						2,943						3,508						119.2	%
Interest income					625						680						(55	)					(8.1	)%
Interest expense:
Debt					(25,544	)					(11,188	)					(14,356	)					(128.3	)%
Amortization of deferred financing costs					(1,335	)					(1,136	)					(199	)					(17.5	)%
Change in fair value of derivatives					519						85						434						510.6	%

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			Three Months Ended June 30,												Increase (Decrease)						% Increase (Decrease)
			2006						2005
Equity in earnings (loss) of unconsolidated ventures, net of minority interests					(469	)					(258	)					(211	)					(81.8	)%
Loss before income taxes					(19,753	)					(8,874	)					(10,879	)					(122.6	)%
Provision for income taxes					(273	)					(19	)					(254	)					(1,336.8	)%
Loss before minority interest					(20,026	)					(8,893	)					(11,133	)					(125.2	)%
Minority interest					(233	)					2,939						(3,172	)					(107.9	)%
Loss before discontinued operations					(20,259	)					(5,954	)					(14,305	)					(240.3	)%
Discontinued operations					—						112						(112	)					(100.0	)%
Net loss				$	(20,259	)				$	(5,842	)				$	(14,417	)					(246.8	)%
Selected Operating and Other Data:
Number of facilities (at end of period)					453						380						73						19.2	%
Total units/beds operated(1)					34,346						30,164						4,182						13.9	%
Owned/leased facilities units/beds					33,045						26,923						6,122						22.7	%
Owned/leased facilities occupancy rate:
Period end					89.9	%					88.5	%					1.4	%					1.6	%
Weighted average					90.0	%					88.3	%					1.7	%					1.9	%
Average monthly revenue per unit/beds(2)				$	3,098					$	2,928					$	170						5.8	%
Selected Segment Operating and Other Data
Brookdale Living:
Number of Facilities (period end)					70						65						5						7.7	%
Total Units/beds					14,802						13,859						943						6.8	%
Occupancy Rate:
Period end					90.3	%					90.4	%					(0.1	)%					(0.1	)%
Weighted average					90.4	%					89.7	%					0.7	%					0.8	%
Average monthly rate per unit/bed(2)				$	3,134					$	2,783					$	351						12.6	%
Alterra:
Number of Facilities (period end)					376						299						77						25.8	%
Total Units/beds					18,243						13,064						5,179						39.6	%
Occupancy Rate
Period end					89.5	%					86.5	%					3.0	%					3.5	%
Weighted average					89.6	%					86.2	%					3.4	%					3.9	%
Average monthly rate per unit/bed(2)				$	3,069					$	3,069					$	0						0.0	%
Managed:
Number of Facilities (period end)					7						16						(9	)					(56.3	)%
Total Units/beds					1,301						3,241						(1,940	)					(59.9	)%
Occupancy Rate(3):
Period end					93.4	%					88.2	%					5.2	%					5.9	%
Weighted average					94.1	%					86.9	%					7.2	%					8.3	%
Average monthly rate per unit/beds(2)				$	2,595					$	2,364					$	231						9.8	%

(1)	Total units/beds operated represent the total units/beds operated as of the end of the period. Occupancy rate is calculated by dividing total occupied units/beds by total units/beds operated as of the end of the period.

(2)	Average monthly revenue per unit/bed represents the average of the total monthly revenues divided by occupied units/beds at the end of the period averaged over the respective period presented.

(3)	Includes facilities managed by us but excludes Town Village Oklahoma City, which is under development and was sold January, 2006.

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Revenues

Total revenues increased primarily due to increased resident fees of approximately $75.5 million, or 39.2% partially offset by a decrease in management fees of $0.4 million, or 38.1%.

Resident fee revenue

Resident fees increased by approximately $13.9 million, or 7.9%, at the 348 facilities we operated during both periods, which includes the lease-up of four facilities. The remaining increase in resident fee revenue was primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio, the Merrill Gardens Portfolio, two facilities located in Orlando, Florida, the Liberty Owned Portfolio, the Wellington Portfolio, the AEW Portfolio, the Southland Portfolio, and the AEW-New Jersey Portfolio into our operations.

Brookdale Living revenue increased $31.3 million, or 35.4%, primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio, the Liberty Owned Portfolio and the AEW Portfolio into our operations. The Prudential Portfolio and AEW Portfolio had higher average monthly rates, which were partially offset by the Fortress CCRC Portfolio's average rate as the independent living units/beds at three facilities charge an entrance fee which is deferred and amortized over the expected stay of the resident.

Alterra revenue increased $44.2 million, or 42.6%, primarily due to the addition of the Merrill Gardens Portfolio, the Wellington Portfolio, the SALI Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio, and a 3.4% increase in average occupancy.

Management fee revenue

Management fee revenue decreased over this period primarily due to the third party owners' sale of four facilities during the three months ended June 30, 2006 partially offset by one new management contract and receipt of $0.4 million of termination fees.

Operating Expenses

The increase in total operating expenses was attributable to the following: (i) facility operating expenses increased $38.4 million, or 31.3%; (ii) general and administrative expenses increased $11.8 million, or 104.2%; and (iii) depreciation and amortization expenses increased $21.9 million, or 241.1%, partially offset by a decrease in lease expense of $0.5 million, or 1.0%.

Explanations of significant variances noted in individual line-item expenses for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 are as follows:

	•	Of our increased facility operating expenses, $1.3 million, or 1.2% of the increase was attributable to the 348 facilities we operated during both periods. The remaining increase was primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio, the Merrill Gardens Portfolio, two facilities in Orlando, Florida, the Wellington Portfolio, the Liberty Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio into our operations.

Brookdale Living facility operating expenses increased $18.0 million, or 32.6%, primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio and the AEW Portfolio into our operations. The balance was primarily due to increases in salaries, wages and benefits.

Alterra facility operating expenses increased $20.5 million, or 30.2%, primarily due to the addition of Merrill Gardens Portfolio, the two facilities in Orlando, Florida, the Wellington Portfolio, the SALI Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio into our operations and increased salaries, wages and benefits as a result of increased occupancy and level of care provided to residents.

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	•	General and administrative expenses increased $11.8 million, or 104.2%, primarily as a result of $3.7 million of non-recurring merger and integration costs in connection with our formation in September 2005 , non-cash compensation expense of $3.8 million, an increase in salaries, wages and benefits, an increase in the number of employees in anticipation of and in connection with the acquisitions. General and administrative expense as a percentage of total revenue, including revenue generated by the facilities we manage was 5.6% and 5.2% for the three months ended June 30, 2006 and 2005, respectively, calculated as follows:

			Three Months Ended June 30,
			2006						2005
Resident fee revenues				$	267,842					$	192,350
Resident fee revenues under management					11,439						18,837
Total				$	279,281					$	211,187
General and administrative expenses (excluding non-recurring merger and integration expenses and non-cash stock compensation expense totaling $7.4 million in 2006)				$	15,681					$	10,980
General and administrative expenses as of % of total revenues					5.6	%					5.2	%

	•	Lease expense decreased by $0.5 million, or 1.0%, primarily due to the acquisition of the Omega and Chambrel Portfolios in December 2005, which were previously leased, by us partially offset by the lease expense associated with the Liberty Owned Portfolio, annual increases in our existing leases and payments to lessors related to increased revenues and includes $5.2 million of straight-line rent expense, partially offset by $1.1 million of deferred gain amortization.

	•	Total depreciation and amortization expense increased by $21.9 million, or 241.1%, primarily due to the step-up in minority interest recorded in connection with the initial public offering, increased capital expenditures and leasehold improvements and the additional acquisitions.

	•	Interest income decreased $0.1 million, or 8.1%, primarily due to a decrease in cash and cash equivalents invested from our initial public offering and cash flow from operations used to fund a portion of the purchase price of our acquisitions.

	•	Interest expense increased $14.1 million, or 53.65%, primarily due to additional debt in connection with our acquisitions and $3.3 million on the line of credit partially offset by the change in the fair value of the interest rate swaps from the three months ended June 30, 2006 and 2005.

Results of Operations

Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated and combined financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of the Fortress CCRC Portfolio (effective April 2005), the Prudential Portfolio (effective June/July 2005), the Merrill Gardens Portfolio (effective November 2005), the Omega and Chambrel Portfolios (effective December 2005), two facilities in Orlando, Florida (effective February 2006), the Liberty Owned Portfolio, the Wellington Portfolio (effective March 2006), the SALI Portfolio (April 2006), the AEW (April/June 2006), the Southland Portfolio (May 2006) and AEW-New Jersey (June 2006) into our operations. We completed our formation transaction on September 30, 2005. Results prior to that date represent the combined operations of BLC, Alterra, the Fortress CCRC Portfolio and the Prudential Portfolio (together, the ‘‘Brookdale Facility Group’’):

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			Six Months Ended June 30,												Increase (Decrease)						% Increase (Decrease)
			2006						2005
Statement of Operations Data:
Revenue
Resident fees:
Brookdale Living:
Less than 20% operating margin				$	16,926					$	17,127					$	(201	)					(1.2	)%
20% – 40% operating margin					83,248						60,610						22,638						37.4	%
Greater than 40% operating margin					128,617						81,802						46,815						57.2	%
Total					228,791						159,539						69,252						43.4	%
Alterra:
Less than 20% operating margin					18,892						26,854						(7,962	)					(29.6	)%
20% – 40% operating margin					100,758						97,149						3,609						3.7	%
Greater than 40% operating margin					140,437						82,920						57,517						69.4	%
Total					260,087						206,923						53,164						25.7	%
Total resident fees					488,878						366,462						122,416						33.4	%
Management fees					1,732						1,816						(84	)					(4.6	)%
Total revenue					490,610						368,278						122,332						33.2	%
Expenses
Facility operating:
Brookdale Living:
Less than 20% operating margin					14,439						15,102						(663	)					(4.4	)%
20% – 40% operating margin					58,721						41,144						17,577						42.7	%
Greater than 40% operating margin					64,991						40,909						24,082						58.9	%
Total					138,151						97,155						40,996						42.2	%
Alterra:
Less than 20% operating margin					16,819						24,739						(7,920	)					(32.0	)%
20% – 40% operating margin					68,305						66,183						2,122						3.2	%
Greater than 40% operating margin					74,951						45,138						29,813						66.0	%
Total					160,075						136,060						24,015						17.7	%
Total facility operating expenses					298,226						233,215						65,011						27.9	%
Lease expense					92,357						93,593						(1,236	)					(1.3	)%
General and administrative					44,210						22,981						21,229						92.4	%
Depreciation and amortization					53,246						14,245						39,001						273.8	%
Total operating expenses					488,039						364,034						124,005						34.1	%
Income (loss) from operations					2,571						4,244						(1,673	)					(39.4	)%
Interest income					1,677						1,376						301						21.9	%
Interest expense:
Debt					(39,234	)					(20,313	)					(18,921	)					(93.1	)%
Amortization of deferred financing costs					(2,038	)					(1,559	)					(479	)					(30.7	)%
Change in fair value of derivatives					418						4,147						(3,729	)					(89.9	)%
Loss on extinguishment of debt					(1,334	)					(453	)					(881	)					(194.5	)%
Equity in earnings (loss) of unconsolidated ventures, net of minority interests					(637	)					(445	)					(192	)					(43.1	)%
Loss before income taxes					(38,577	)					(13,003	)					(25,574	)					(196.7	)%
Provision for income taxes					(659	)					(185	)					(474	)					(256.2	)%
Loss before minority interest					(39,236	)					(13,188	)					(26,048	)					(197.5	)%
Minority interest					(349	)					5,471						(5,820	)					(106.4	)%
Loss before discontinued operations					(39,585	)					(7,717	)					(31,868	)					(413.0	)%
Discontinued operations					—						77						(77	)					(100.0	)%
Net loss				$	(39,585	)				$	(7,640	)				$	(31,945	)					(418.1	)%

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			Six Months Ended June 30,												Increase (Decrease)						% Increase (Decrease)
			2006						2005
Selected Operating and Other Data:
Number of facilities (at end of period)					453						380						73						19.2	%
Total units/beds operated(1)					34,346						30,164						4,182						13.9	%
Owned/leased facilities units/beds					33,045						26,923						2,881						9.6	%
Owned/leased facilities occupancy rate:
Period end					89.9	%					88.5	%					1.4	%					1.6	%
Weighted average					89.8	%					88.5	%					1.3	%					1.5	%
Average monthly revenue per unit/beds(2)				$	3,107					$	2,908					$	199						6.8	%
Selected Segment Operating and Other Data
Brookdale Living:
Number of Facilities (period end)					70						65						5						7.7	%
Total Units/beds					14,802						13,859						943						6.8	%
Occupancy Rate:
Period end					90.3	%					90.4	%					(0.1	)%					(0.1	)%
Weighted average					90.7	%					91.0	%					(0.3	)%					(0.3	)%
Average monthly rate per unit/bed(2)				$	3,091					$	2,741					$	350						12.8	%
Alterra:
Number of Facilities (period end)					376						299						77						25.8	%
Total Units/beds					18,243						13,064						5,179						39.6	%
Occupancy Rate
Period end					89.5	%					86.5	%					3.0	%					3.5	%
Weighted average					89.0	%					86.4	%					2.6	%					3.0	%
Average monthly rate per unit/bed(2)				$	3,121					$	3,055					$	66						2.2	%
Managed:
Number of Facilities (period end)					7						16						(9	)					(56.3	)%
Total Units/beds					1,301						3,241						(1,940	)					(59.9	)%
Occupancy Rate(3):
Period end					93.4	%					88.2	%					5.2	%					5.9	%
Weighted average					92.8	%					85.7	%					7.1	%					8.3	%
Average monthly rate per unit/beds(2)				$	2,461					$	2,462					$	(1	)					0.0	%

(1)	Total units/beds operated represent the total units/beds operated as of the end of the period. Occupancy rate is calculated by dividing total occupied units/beds by total units/beds operated as of the end of the period.

(2)	Average monthly revenue per unit/bed represents the average of the total monthly revenues divided by occupied units/beds at the end of the period averaged over the respective period presented.

(3)	Includes facilities managed by us but excludes Town Village Oklahoma City, which is under development and was sold January, 2006.

Revenues

Total revenues increased primarily due to increased resident fees of approximately $122.4 million, or 33.4% partially offset by a decrease in management fees of $0.1 million, or 4.6%.

Resident fee revenue

Resident fees increased by approximately $25.4 million, or 7.3%, at the 348 facilities we operated during both periods which includes the lease-up of four facilities. The remaining increase in resident fee revenue was primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio, the Merrill Gardens Portfolio, two facilities located in Orlando, Florida, the Liberty Owned Portfolio, the Wellington Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio into our operations.

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Brookdale Living revenue increased $69.3 million, or 43.4%, primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio and the AEW Portfolio into our operations. The Prudential Portfolio and AEW Portfolio had higher average monthly rates which were partially offset by the Fortress CCRC Portfolio's average rate as the independent living units/beds at three facilities charge an entrance fee which is deferred and amortized over the expected stay of the resident.

Alterra revenue increased $53.2 million, or 25.7%, primarily due to the addition of the Merrill Gardens Portfolio, the Wellington Portfolio, the SALI Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio and a 3.0% increase in average occupancy and a 2.2% increase in average monthly rent per unit/bed.

Management fee revenue

Management fee revenue decreased over this period primarily due to the termination of nine management contracts partially offset by one new management contract and the receipt of termination fees from eight management contracts of $0.6 million during the six months ended June 30, 2006.

Operating Expenses

The increase in total operating expenses was attributable to the following: (i) facility operating expenses increased $65.0 million, or 27.9%; (ii) general and administrative expenses increased $21.2 million, or 92.4%; and (iii) depreciation and amortization expenses increased $39.0 million, or 273.8%, partially offset by a decrease in lease expense of $1.2 million, or 1.3%.

Explanations of significant variances noted in individual line-item expenses for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 are as follows:

	•	Of our increased facility operating expenses, $3.4 million, or 1.5% of the increase was attributable to the 348 facilities we operated during both periods. The remaining increase was primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio, the Merrill Gardens Portfolio, the two facilities in Orlando, Florida, the Liberty Owned Portfolio, the Wellington Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio into our operations.

Brookdale Living facility operating expenses increased $41.0 million, or 42.2%, primarily due to the addition of the Fortress CCRC Portfolio, the Prudential Portfolio and the AEW Portfolio into our operations. The balance was primarily due to increases in salaries, wages and benefits.

Alterra facility operating expenses increased $24.0 million, or 17.7%, primarily due to the Merrill Gardens, the two facilities in Orlando, Florida, the Wellington Portfolio, the SALI Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio acquisition and increased salaries, wages and benefits as a result of increased occupancy and level of care provided to residents.

	•	General and administrative expenses increased $21.2 million, or 92.4%, primarily as a result of $6.7 million of non-recurring merger and integration costs in connection with our formation in September 2005, non-cash compensation expense of $6.8 million, an increase in salaries, wages and benefits, an increase in the number of employees in anticipation of and in connection with the acquisitions. General and administrative expense as a percentage of total revenue, including revenue generated by the facilities we manage was 6.0% and 5.6% for the six months ended June 30, 2006 and 2005, respectively, calculated as follows:

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			Six Months Ended June 30,
			2006						2005
Resident fee revenues				$	488,878					$	366,462
Resident fee revenues under management					21,297						38,727
Total				$	510,175					$	405,189
General and administrative expenses (excluding non-recurring merger and integration expenses and non-cash stock compensation expense totaling $13.5 million in 2006)				$	30,742					$	22,523
General and administrative expenses as of % of total revenues					6.0	%					5.6	%

	•	Lease expense decreased by $1.2 million, or 1.3%, primarily due to the acquisition of the Omega and Chambrel Portfolios in December 2005 which were previously leased by us partially offset by the leases in the Wellington Portfolio, scheduled annual increases in our existing leases and increased payments to certain lessors due to increased revenues for the leased facilities and includes $10.5 million of straight-line rent expense, partially offset by $2.2 million of deferred gain amortization.

	•	Total depreciation and amortization expense increased by $39.0 million, or 273.8%, primarily due to the step-up in minority interest recorded in connection with the initial public offering, increased capital expenditures and leasehold improvements and the addition of the acquisitions.

	•	Interest income increased $0.3 million, or 21.9%, primarily due to an increase in cash and cash equivalents invested from our initial public offering and cash flow from operations.

	•	Interest expense increased $23.1 million, or 56.6%, primarily due to additional debt in connection with our acquisitions and $3.9 million on the line of credit partially offset by a $3.7 million reduction in the fair value of the interest rate swaps from the six months ended June 30, 2006 and 2005.

Liquidity and Capital Resources

We had $30.4 million of cash and cash equivalents at June 30, 2006, excluding cash and investments- restricted and lease security deposits of $69.5 million. In addition, we had $20.0 million available under our revolving credit agreement. On July 25, 2006, we repaid the $195.0 million outstanding under the term portion of the credit agreement and terminated that portion of the credit agreement.

As discussed below, we had a net decrease in cash and cash equivalents of $47.3 million for the six months ended June 30, 2006.

Net cash provided by operating activities was $23.2 million and $11.6 million for the six months ended June 30, 2006 and 2005, respectively. The increase of $11.6 million was primarily due to recent acquisitions and the decrease in lease expense as a result of the acquisition of the Omega and Chambrel Portfolios, which we previously leased, acquired in the fourth quarter of 2005. Changes in current assets and current liabilities primarily relate to the timing of collections of resident fees and payment of operating expenses, including salaries and wages, real estate taxes and insurance.

Net cash used in investing activities was $(526.7) million and $(458.5) million for the six months ended June 30, 2006 and 2005, respectively. During the six months ended June 30, 2006 we used $531.9 million to purchase two facilities in Orlando, Florida, the Liberty Owned Portfolio and the Wellington Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio and $15.0 million to fund capital improvements at our existing facilities which was partially offset by a reduction in lease security deposits of $5.3 million and cash and investments-restricted of $14.9 million primarily as a result of posting letters of credit.

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Net cash provided by financing activities was $456.2 million and $420.0 million for the six months ended June 30, 2006 and 2005, respectively. During the six months ended June 30, 2006, we received $516.2 million of net proceeds from debt primarily as a result of the debt incurred in connection with our acquisitions and draws on our line of credit to fund a portion of the equity required for these acquisitions, partially offset by the repayment of $11.4 million of debt, payments of $39.7 million in dividends in January and April 2006 and payment of financing costs of $10.6 million.

To date we have financed our operations primarily with cash generated from operations, both short- and long-term borrowings and draws from our line of credit.

At June 30, 2006, we had $1,247.1 million of debt outstanding at a weighted-average interest rate of 6.83%, of which $15.9 million was due in the next 12 months and primarily attributable to the three limited partnerships consolidated pursuant to EITF 04-5.

In addition, in February 2006 we entered into a $330.0 million credit agreement as amended in May 2006 and June 2006, consisting of a $250.0 million term loan, a $20.0 million revolving loan, and a $60.0 million letters of credit commitment of which $195.0 million is drawn on the term loan and $59.4 million of letters of credit have been issued as of June 30, 2006. On July 25, 2006, we repaid the $195.0 outstanding under the term loan portion of our Credit Facility. See ‘‘Credit Facility’’ below.

Our liquidity requirements have historically arisen from, and we expect they will continue to arise from, working capital, general and administrative costs, debt service and lease payments, acquisition costs, employee compensation and related benefits, capital improvements and dividend payments. In the past, we have met our cash requirements for operations using cash flows from operating revenues, the receipt of resident fees and the receipt of management fees from third-party-managed facilities. In addition to using cash flows from operating revenues, we use available funds from our indebtedness and long-term leasing of our facilities to meet our cash obligations. Over 95% of our resident fee revenues are generated from private pay residents with less than 5% of our resident fee revenues coming from reimbursement programs such as Medicare and Medicaid. The primary use of our cash is for operating costs, which includes debt service and lease payments and capital expenditures. We currently estimate that our existing cash flows from operations, together with existing working capital, asset sales and the credit facility will be sufficient to fund our short-term liquidity needs. In addition to normal recurring capital expenditures, we expect to spend approximately $14.3 million for major improvements at the six Fortress CCRC Portfolio facilities and several existing Alterra facilities that we own. The source of these funds is cash on hand and cash generated from operations and financings. There can be no assurance that financing or refinancing will be available to us or available on acceptable terms.

We expect to fund the growth of our business through cash flows from operations and cash flows from financing activities, such as equity offerings, and through the incurrence of additional indebtedness or leasing arrangements. We expect to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our business development activities, which could harm the growth of our business. We may incur additional indebtedness or lease financing to fund such acquisitions. In addition, we may incur additional indebtedness or lease financing to fund future dividends.

Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, our ability to acquire new facilities, general economic conditions and the cost of capital.

American Retirement Transaction and Related Financing

On May 12, 2006, we entered into an Agreement and Plan of Merger, or the ARC Merger Agreement, with Beta Merger Sub Corporation, a Delaware corporation and a wholly-owned

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subsidiary of the Company, or Merger Sub, and American Retirement Corporation, a Tennessee corporation, or ARC, pursuant to which Merger Sub would be merged with and into ARC with ARC continuing as the surviving corporation and as a wholly-owned subsidiary of the Company. We refer to this transaction as the ‘‘ARC Merger’’.

Under the terms of the ARC Merger Agreement, upon consummation of the ARC Merger, each outstanding share of common stock, par value $0.01 per share, of ARC, or ARC Common Stock, together with the rights issued pursuant to the Rights Agreement, dated as of November 18, 1998, between ARC and American Stock Transfer and Trust Company, was converted into the right to receive $33.00 per share in cash. In addition to the outstanding shares, all of the options to purchase ARC Common Stock, whether vested or unvested, were cancelled and each holder of any such option was entitled to receive a cash payment equal to the product of (i) the excess of $33.00 over the applicable option exercise price, and (ii) the number of shares of ARC Common Stock for which the options had not been previously exercised, for aggregate consideration of approximately $1.2 billion in cash. We used a portion of the net proceeds from our public offering of equity securities, which closed on July 25, 2006, towards fulfillment of our obligations in connection with the ARC Merger. We financed the remainder of the purchase price through a private placement of equity, as is more fully described below.

Simultaneously with entering into the ARC Merger Agreement, in order to finance the ARC Merger, we entered into the Investment Agreement with the Investor and affiliate of FIG. Under the terms of the Investment Agreement, the Investor committed to purchase from us, at and simultaneously with the closing of the ARC Merger, up to $1.3 billion in aggregate of our common stock at a price of $36.93 per share.

Prior to the ARC Closing, we exercised our right to reduce the Investor's $1.3 billion commitment by $650.0 million. The issuance of these securities was made pursuant to an exemption from registration provided by Section 424(b) of the Securities Act of 1933, as amended.

Cash Flows

We had cash and cash equivalents of $30.4 million and $77.7 million at June 30, 2006 and December 31, 2005, respectively. These amounts exclude cash and investments-restricted and lease security deposits totaling $69.5 million and $86.7 million, respectively, escrowed pursuant to the terms of our indebtedness, leases, residency agreements and insurance programs. Restricted cash amounts are generally available to pay real estate taxes and insurance premiums, reimbursements of capital improvements and refundable tenant security deposits, and to collateralize our debt, lease and self-insured retention obligations.

The increase in cash and cash equivalents at June 30, 2006 as compared to June 30, 2005 was primarily due to the following:

	•	Net cash provided by operating activities for the six months ended June 30, 2006 totaled approximately $23.2 million, compared to approximately $11.6 million for the six months ended June 30, 2005, primarily due to recent acquisitions and decreased facility lease expense related to the Chambrel and Omega acquisitions as these were previously leased by us;

	•	Net cash used in investing activities for the six months ended June 30, 2006 totaled approximately $(526.7) million, compared to approximately $(458.5) million for the six months ended June 30, 2005, primarily due to the 2006 purchase of two facilities in Orlando, Florida, the Liberty Owned Portfolio, the Wellington Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio, and additions to property, plant and equipment and partially offset by the posting of letters of credit to release cash from cash and investments-restricted; and

	•	Net cash provided by financing activities for the six months ended June 30, 2006 totaled approximately $456.2 million, compared to approximately $420.0 million for the six months

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		ended June 30, 2005, primarily due to the receipt of net proceeds from debt primarily as a result of the debt incurred in connection with the purchase of the Orlando, Florida facilities, the Liberty Owned Portfolio, the Wellington Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio and draws on our credit agreement.

Credit Facility

On February 10, 2006, we entered into a $330.0 million credit agreement, as amended on May 10, 2006 and June 29, 2006 (the ‘‘Credit Facility’’), consisting of a $250.0 million term loan, a $20.0 million revolving loan and a $60.0 million letters of credit commitment, with the several lenders from time to time parties thereto, Lehman Brothers Inc., as lead arranger, LaSalle Bank National Association, as syndication agent, Goldman Sachs Credit Partners L.P., Citigroup Global Markets Inc., and LaSalle Bank National Association, as co-arrangers, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents and Lehman Commercial Paper Inc., as administrative agent. Concurrent with the New Credit Facility we terminated our existing line of credit.

In connection with the Credit Facility, we and certain of our subsidiaries (the ‘‘Guarantors’’) made a Guarantee and Pledge Agreement (the ‘‘Guarantee and Pledge Agreement’’) in favor of Lehman Commercial Paper Inc., as administrative agent for the banks and other financial institutions from time to time parties to the New Credit Facility, pursuant to which certain of the Guarantors guarantee the prompt and complete payment and performance when due by us of our obligations under the Credit Facility and certain of the Guarantors pledge certain assets for the benefit of the secured parties as collateral security for the payment and performance of our obligations under the Credit Facility and under the guarantee. The pledged assets include, among other things, equity interests in certain of our subsidiaries, all related books and records and, to the extent not otherwise included, all proceeds and products of any and all of the foregoing, all supporting obligations in respect of any of the foregoing and all collateral security and guarantees given by any person with respect to any of the foregoing.

The term loan, revolving loan and the letters of credit commitment under the Credit Facility is scheduled to expire on February 10, 2007. The term loan was terminated on July 25, 2006. We have the option of requesting a six-month extension of any or all of the maturity or expiration dates.

At our option, the term loan and the revolving loan bear interest at either (i) the greater of (a) the prime lending rate as set forth on the British Banking Association Telerate Page 5 plus a margin of 0.50% and (b) the Federal Funds Effective Rate plus ½ of 1% plus a margin of 0.50%, or (ii) the Eurodollar rate plus a margin of 1.50%. In connection with the revolving loan and the letters of credit commitment, we will pay a commitment fee of 0.25% per annum on the average daily amount of undrawn funds. In connection with the term loan, we will pay a commitment fee of 0.125% of the average daily amount of undrawn funds so long as we draw less than $150.0 million, or 0.25% if we draw $150.0 million or more.

The proceeds of the loans under the Credit Facility shall be used to finance a portion of acquisitions of fee-simple and leasehold ownership interests in senior housing real estate and to pay related fees and expenses and for general corporate purposes.

The Credit Facility contains typical representations and covenants for loans of this type. A violation of any of these covenants could result in a default under the Credit Facility, which would result in termination of all commitments and loans under the Credit Facility and all other amounts owing under the Credit Facility and other loan documents to become immediately due and payable.

As of June 30, 2006, we have drawn $195.0 million and $0 on the term loan and the revolving loan, respectively. In addition $59.4 million of letters of credit have been issued under the letter of credit commitment. On July 25, 2006, we repaid the $195.0 outstanding under the term loan and terminated the $250.0 term loan portion of the commitment.

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Contractual Commitments

The following table presents a summary of our material indebtedness, lease and other contractual commitments, as of June 30, 2006.

			Total						2007						2008						2009						2010						2011						Thereafter
			($ in 000's)
Contractual Obligations:
Long-term debt(1)				$	1,373,077					$	74,602					$	128,887					$	305,797					$	156,220					$	100,714					$	606,857
Capital lease obligations(1)					341,509						17,682						18,653						19,321						20,091						20,796						244,966
Operating lease obligations(2)					2,427,472						163,655						166,363						168,998						172,078						175,194						1,581,184
Purchase obligations(3)					1,948						1,256						532						160						—						—						—
Total				$	4,144,006					$	257,195					$	314,435					$	494,276					$	348,389					$	296,704					$	2,433,007

(1)	Includes contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the June 30, 2006 rate.

(2)	Reflects future cash payments after giving effect to lease escalators and assumes payments on variable rate instruments at the June 30, 2006 rate.

(3)	Represents minimum purchase commitments pursuant to contracts with suppliers.

Company Indebtedness, Long-term Leases and Hedging Agreements

Indebtedness

As of June 30, 2006 and December 31, 2005, our outstanding property-specific debt was approximately $1,247.1 million, and $754.3 million, respectively. The increase from December 31, 2005 to June 30, 2006 was primarily due to debt incurred or assumed to fund the acquisitions of the two facilities in Orlando, Florida, the Wellington Portfolio, the Liberty Owned Portfolio, the SALI Portfolio, the AEW Portfolio, the Southland Portfolio and the AEW-New Jersey Portfolio, additional $12.0 million financing secured by five facilities in the Chambrel Portfolio, and inclusion of the debt associated with three limited partnerships consolidated pursuant to EITF 04-5. The increase is partially offset by scheduled principal payments and repayment of debt from the proceeds of our initial public offering.

We had a credit facility of $330.0 million at June 30, 2006, of which $60.0 million was restricted for certain letters of credit and $20.0 million for working capital. The balance consists of a $250.0 term loan to partially fund the purchase of our acquisitions. As of June 30, 2006, we had drawn $195.0 million on the term loan and had issued $59.4 million of letters of credit. On July 25, 2006, we repaid the $195.0 outstanding under the term loan portion of the Credit Facility and terminated the term loan portion of the commitment.

On March 30, 2005, we refinanced the construction loans secured by five facilities with new construction loans in the aggregate amount of $182.0 million, bearing interest at 30-day LIBOR plus 3.05% to 5.60% (with a weighted average of 3.50%), payable in monthly installments of interest only through the maturity of April 1, 2008. Upon completion of our initial public offering, we repaid $32.0 million of this loan that bore interest at LIBOR plus 5.60%. The remaining loan bore interest at LIBOR plus 3.05%. These loans were refinanced on July 14, 2006 at an interest rate of LIBOR plus ..88%, payable interest only until August 2011 and principal and interest thereafter until maturity in August 2013. The loans are also secured by a partial guaranty of BLC.

We have secured our self-insured retention risk under our workers' compensation and general liability and professional liability programs and a portion of our lease security deposits with $4.4 million and $33.8 million, of restricted cash and letters of credit, respectively, at June 30, 2006.

As of June 30, 2006, we are in compliance with the financial covenants of our outstanding debt, including those covenants measuring facility operating income to gauge debt coverage.

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Long-term Leases

We have historically financed our acquisitions and current portfolio with a combination of mortgage financing and long-term leases. Our strategy going forward is to finance acquisitions through traditional mortgage financing of up to 65% of the cost of a facility, with the balance in the form of our equity. The source of equity is expected to be from current cash and cash equivalents, cash generated from operations, lines of credit, refinancing of our existing facilities, joint ventures or additional equity offerings.

As of June 30, 2006, we have 340 facilities under long-term leases. The leased facilities are generally fixed rate leases with annual escalators that are either fixed or tied to the consumer price index.

The following two leases have or had a floating-rate debt component built into the lease payment:

We acquired the Chambrel Portfolio from Capstead on December 30, 2005. Prior to the acquisition, the Chambrel portfolio lease payment was a pass through of debt service, which includes $100.8 million of floating rate tax-exempt debt that is credit enhanced by Fannie Mae and subject to interest rate caps at 6.0% and $18.9 million of fixed rate debt, and a stated equity return subject to annual escalation based on the CPI.

As of June 30, 2006, the Brookdale Provident leases contain $104.2 million of variable rate mortgages, which includes $80.0 million of floating-rate tax-exempt debt that is credit enhanced by Freddie Mac. The payments under the lease are capped pursuant to the terms of the lease and are subject to interest rate caps purchased by the lessor with a weighted-average rate of 6.39%. $24.2 million is hedged by an interest rate swap.

For the six months ended June 30, 2006, our minimum annual lease payments for our capital and financing leases and operating leases was $8.7 million and $84.0 million, respectively. This amount excludes the straight-line expense associated with our annual escalators and the amortization of the deferred gains recognized in connection with the sale-leasebacks.

As of June 30, 2006, we are in compliance with the financial covenants of our capital and operating leases, including those covenants measuring facility operating income to gauge debt coverage.

Hedging

We had one interest rate swap agreement with Firstar Bank, N.A. (now doing business as US Bank Corp.) that converted $37.3 million of its floating-rate construction debt to a fixed-rate basis of 5.19% through maturity on April 1, 2005. This interest rate swap agreement was designated as a fair value hedge.

We had four 10-year forward interest rate swaps with LaSalle Bank, N.A. to fix $97.3 million of future mortgage debt at 7.03%-7.325% with maturity dates ranging from August 2012 to March 2013 with a scheduled termination date of June 2006. The terms of the forward interest rate swaps required us to pay a fixed-interest rate to the counterparties. On March 30, 2005, we terminated our four 10-year forward interest rate swaps and incurred a termination payment of $15.8 million, including accrued interest of $1.7 million, which was funded by cash deposited with the counterparty and a $10.0 million unsecured loan bearing interest payable monthly at prime plus 1% and principal payable in quarterly installments of $500 commencing July 1, 2005 and maturing March 31, 2007. The loan was repaid in November 2005 from the proceeds of our initial public offering.

In connection with the funding of $182.0 million of loans secured by five facilities on March 30, 2005, we entered into interest rate swaps for a notional amount of $182.0 million to hedge the floating rate debt payments where we pay an average fixed rate of 4.64% and receive 30-day LIBOR from the counterparty. The interest rate swaps are comprised of a $145.0 million notional amount for seven years and a $37.0 million notional amount for three years. In connection with the swaps, we originally posted approximately $2.3 million as cash collateral with the counterparty, which was returned in March 2006, and are required to post additional cash collateral based on changes in the fair value of the swaps. The swaps are recorded as cash flow hedges.

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In connection with the purchase of the Chambrel Portfolio, we assumed interest rate caps with an aggregate notional amount of $100.8 million, a strike price of 6.0% and a maturity date of November/December 2007.

In February and June 2006, we entered into five-year forward interest rate swaps in the aggregate notional amounts of $283.5 million and $160.0 million, respectively, whereby we pay an average fixed rate of 5.10% and receive 30-day LIBOR from the counterparty. The $160.0 million interest rate swap was designated to hedge a future financing of which $75.0 million occurred. The balance of the financing of $85.0 was not probable at June 30, 2006, accordingly, the $85.0 million balance of the $160.0 million swap was marked-to-market at June 30, 2006 through earnings.

The following table summarizes our swap instruments at June 30, 2006:

Current notional balance			$812,400
Highest possible notional			$812,400
Lowest interest rate			3.615%
Highest interest rate			5.344%
Average fixed rate			4.75%
Earliest maturity date			2008
Latest maturity date			2012
Weighted average maturity			5.2 years
Estimated asset fair value (included in other assets at June 30, 2006)			$21,190

Impacts of Inflation

Resident fees for the facilities we own or lease and management fees from facilities we manage for third parties are our primary source of revenue. These revenues are affected by the amount of monthly resident fee rates and facility occupancy rates. The rates charged are highly dependent on local market conditions and the competitive environment in which our facilities operate. Substantially all of our independent and assisted living residency agreements allow for adjustments in the monthly fee payable thereunder not less frequently than 12 or 13 months, or monthly, respectively, thereby enabling us to seek increases in monthly fees due to inflation, increased levels of care or other factors. Any pricing increase would be subject to market and competitive conditions and could result in a decrease in occupancy in the facilities. We believe, however, that our ability to periodically adjust the monthly fee serves to reduce the adverse affect of inflation. In addition, employee compensation expense is a principal cost element of facility operations and is also dependent upon local market conditions. There can be no assurance that resident fees will increase or that costs will not increase due to inflation or other causes. At June 30, 2006, approximately $846.9 million of our indebtedness and lease payments bore interest at floating rates. We have mitigated all of our exposure to floating rates on our existing indebtedness and planned financings by using $812.4 million of interest rate swaps and $180.9 million of interest rate caps under our debt and lease arrangements. Inflation, and its impact on floating interest rates, could affect the amount of interest payments due on such debt.

Application of Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates that could have been selected, could have a material impact on our combined results of operations or financial condition. We have identified the following critical accounting policies that affect significant estimates and judgments.

Self-Insurance Liability Accruals

We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and professional liability insurance policies for our

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owned, leased and managed facilities under a master insurance program, our current policy provides for deductibles of $1.0 million for each and every claim. As a result, we are effectively self-insured for most claims. In addition, we maintain a self-insured workers compensation program (with excess loss coverage above $0.5 million per individual claim) and a self-insured employee medical program (with excess loss coverage above $0.2 million to $0.3 million per individual claim). We are self-insured for amounts below these excess loss coverage amounts. We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party administrator estimates, consultants, advice from legal counsel and industry data, and adjust accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Tax Valuation Allowance

We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. As of June 30, 2006 and December 31, 2005, we had a valuation allowance against deferred tax assets of approximately $28.3 million and $47.5 million, respectively. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected in either income or as an adjustment to Goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized.

Lease Accounting

We determine whether to account for our leases as either operating or capital leases depending on the underlying terms. As of June 30, 2006, we operated 340 facilities under long-term leases with operating and capital and financing lease obligations. The determination of this classification is complex and in certain situations requires a significant level of judgment. Our classification criteria is based on estimates regarding the fair value of the leased facilities, minimum lease payments, effective cost of funds, the economic life of the facility and certain other terms in the lease agreements. Facilities under operating leases are accounted for in our statement of operations as lease expenses for actual rent paid plus or minus straight-line adjustments for fixed or estimated minimum lease escalators and amortization of deferred gains. For facilities under capital lease and lease financing obligation arrangements, a liability is established on our balance sheet and a corresponding long-term asset is recorded. Lease payments are allocated between principal and interest on the remaining base lease obligations and the lease asset is depreciated over the shorter of the estimated useful life of the asset or term of the lease. In addition, we amortize leasehold improvements purchased during the term of the lease over the shorter of their economic life or the lease term. Sale-leaseback transactions are recorded as lease financing obligations when the transactions include a form of continuing involvement, such as purchase options.

One of our leases provides for various additional lease payments based on changes in the interest rates on the debt underlying the lease. All of our leases contain fixed or formula-based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are accounted for on a straight-line basis over the life of the lease. In addition, we recognize all rent-free or rent holiday periods in operating leases on a straight-line basis over the lease term, including the rent holiday period.

Allowance for Doubtful Accounts

Accounts receivable are reported net of an allowance for doubtful accounts, to represent our estimate of the amount that ultimately will be realized in cash. The allowance for doubtful accounts

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was $4.6 million and $3.0 million as of June 30, 2006 and December 31, 2005, respectively. The adequacy of our allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Changes in legislation are not expected to have a material impact on collections; however, changes in economic conditions could have an impact on the collection of existing receivable balances or future allowance considerations.

Long-lived Assets and Goodwill

As of June 30, 2006 and December 31, 2005, our long-lived assets were comprised primarily of, $2,108.8 million and $1,408.7 million, respectively, of property, plant and equipment. In accounting for our long-lived assets other than goodwill, we apply the provisions of SFAS No. 141, Business Combinations, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In connection with our formation transactions, for financial reporting purposes we recorded the non-controlling stockholders' interest at fair value. Goodwill associated with the step-up was allocated to the carrying value of each facility and included in our application of the provisions of SFAS No. 142. We account for goodwill under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. As of June 30, 2006 and December 31, 2005, we had $65.6 million and $65.6 million of goodwill, respectively.

In determining the allocation of the purchase price of facilities to net tangible and identified intangible assets acquired, we make estimates of the fair value of the tangible and intangible assets using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. We allocate a portion of the purchase price to the value of leases acquired based on the difference between the facility valued with existing leases adjusted to market rental rates and the facility valued as if vacant. The determination and measurement of an impairment loss under these accounting standards requires the significant use of judgment and estimates. The determination of fair value of these assets utilizes cash flow projections that assume certain future revenue and cost levels, assumed cap and discount rates based upon current market conditions and other valuation factors, all of which involve the use of significant judgment and estimation. Future events may indicate differences from management's current judgments and estimates, which could, in turn, result in impairment. Future events that may result in impairment charges include increases in interest rates, which would impact discount rates, differences in projected occupancy rates and changes in the cost structure of existing communities.

Off-Balance Sheet Arrangements

We have one joint venture, Brookdale Senior Housing LLC, with an affiliate of Northwestern Mutual Life, which owns and operates two facilities, The Heritage of Southfield, Southfield, Michigan (which includes 217 units/beds) and The Devonshire of Mt. Lebanon, Mt. Lebanon (Pittsburgh), Pennsylvania (which includes 218 units/beds). The venture partner made a first mortgage loan to a third facility owned by us, The Heritage at Gaines Ranch, Austin, Texas (which includes 208 units/beds) and the venture made a mezzanine loan of $12.7 million to the entity that owns the facility. Pursuant to the terms of the mezzanine loan, all net cash flow, including sale or refinancing proceeds, is payable to the venture. Pursuant to the terms of the venture agreements all net cash flow, including sale or refinancing proceeds, is distributed to the venture partner until it receives a 16% compounded return and then net cash flow is distributed 60% to the venture partner and 40% to us. Capital contributions, if any, are contributed 75% by the venture partner and 25% by us.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-GAAP financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.

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Adjusted EBITDA

Definition of Adjusted EBITDA

We define Adjusted EBITDA as follows:

Net income before:

	•	provision (benefit) for income taxes;

	•	non-operating (income) loss items;

	•	depreciation and amortization;

	•	straight-line rent expense (income);

	•	amortization of deferred entrance fees;

	•	and non-cash compensation expense;

and including:

	•	entrance fee receipts and refunds.

Management's Use of Adjusted EBITDA

We use Adjusted EBITDA to assess our overall financial and operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, straight-line rent expense (income), taxation and interest expense associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a monthly basis. Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.

Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

	•	the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of facilities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

	•	depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our facilities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

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Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our consolidated and combined financial statements included below. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net income (loss) to Adjusted EBITDA for the three and six months ended June 30, 2006 and 2005:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006(1)						2005(1)						2006(1)						2005(1)
Net loss				$	(20,259	)				$	(5,842	)				$	(39,585	)				$	(7,640	)
Income from discontinued operations					—						(112	)					—						(77	)
Minority interest					233						(2,939	)					349						(5,471	)
Provision for income taxes					273						19						659						185
Equity in loss of unconsolidated ventures					469						258						637						445
Loss extinguishment of debt					—						—						1,334						453
Interest Expense:
Debt					18,963						8,913						30,493						15,762
Amortization of deferred financing costs					1,335						1,136						2,038						1,559
Capitalized lease obligation					6,581						2,275						8,741						4,551
Change in fair value of derivatives					(519	)					(85	)					(418	)					(4,147	)
Interest income					(625	)					(680	)					(1,677	)					(1,376	)
Income from operations					6,451						2,943						2,571						4,244
Depreciation and amortization					30,947						9,072						53,246						14,245
Straight-line lease expense					5,239						5,881						10,498						11,975
Amortization of deferred gain					(1,086	)					(2,289	)					(2,173	)					(4,585	)
Amortization of entrance fees					(62	)					—						(145	)					—
Non-cash compensation expense					3,755						—						6,773						—
Entrance fee receipts					1,300						1,259						3,369						1,259
Entrance fee disbursements					(308	)					(257	)					(1,011	)					(257	)
Adjusted EBITDA				$	46,236					$	16,609					$	73,128					$	26,881

(1)	Includes non-recurring expenses totaling $3.7 million and $6.7 million for the three and six months ended June 30, 2006.

Cash From Facility Operations

Definition of Cash From Facility Operations

We define Cash From Facility Operations as follows:

Net cash provided by (used in) operating activities adjusted for:

	•	changes in operating assets and liabilities;

	•	deferred interest and fees added to principal;

	•	non refundable entrance fees;

	•	entrance fees disbursed;

	•	other; and

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	•	recurring capital expenditures.

Recurring capital expenditures include expenditures capitalized in accordance with GAAP that are funded from Cash From Facility Operations. Amounts excluded from recurring capital expenditures consist primarily of unusual or non-recurring capital items and facility purchases and/or major renovations that are funded using financing proceeds and/or proceeds from the sale of facilities that are held for sale.

Management's Use of Cash From Facility Operations

We use Cash From Facility Operations to assess our overall liquidity. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Cash From Facility Operations is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding indebtedness (including our credit facilities and long-term leases), (ii) our ability to pay dividends to stockholders, (iii) our ability to make regular recurring capital expenditures to maintain and improve our facilities on a period-to-period basis and (iv) for planning purposes, including preparation of our annual budget. Our credit facility, which we entered into on February 10, 2006 with Lehman Brothers Inc., LaSalle Bank National Association, Goldman Sachs Credit Partners L.P., and Citicorp North America, Inc. contains a concept similar to Cash From Facility Operations as part of a formula to calculate availability of borrowing under the credit facility. In addition, our operating leases and loan agreements generally contain provisions requiring us to make minimum annual capital expenditures. These agreements generally require us to escrow or spend a minimum of between $250 and $450 per unit/bed per year. Historically, we have spent in excess of these per unit/bed amounts; however, there is no assurance that we will have funds available to escrow or spend these per unit/bed amounts in the future. If we do not escrow or spend the required minimum annual amounts, we would be in default of the applicable debt or lease agreement which could trigger cross default provisions in our outstanding indebtedness and lease arrangements.

Limitations of Cash From Facility Operations

Cash From Facility Operations has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations. Cash From Facility Operations does not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary expenditures not reflected in the measure. Material limitations in making the adjustment to our cash flow from operations to calculate Cash From Facility Operations, and using this non-GAAP financial measure as compared to GAAP operating cash flows, include:

	•	the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of facilities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

	•	depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our facilities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

We believe Cash From Facility Operations is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our ability to make regular recurring capital expenditures to maintain and improve our facilities.

Cash From Facility Operations is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on Cash From

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Facility Operations as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of Cash From Facility Operations to GAAP net cash provided by (used in) operating activities, along with our combined financial statements included below. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Cash From Facility Operations is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Cash From Facility Operations measure, as presented in this report, may differ from and may not be comparable to similarly title measures used by other companies.

The calculation of Cash From Facility Operations includes non-recurring merger and integration expenses of $3.7 million and $6.7 million for the three and six months ended June 30, 2006.

The table below shows the reconciliation of net cash provided by operating activities to Cash From Facility Operations for the three months ended June 30, 2006 and 2005:

			Three Months Ended June 30,												Six Months Ended June 30,
			2006(1)						2005(1)						2006(1)						2005(1)
Net cash provided by operating activities				$	11,120					$	15,989					$	23,239					$	11,561
Changes in operating assets and liabilities					9,097						(10,621	)					9,928						(4,350	)
Refundable entrance fees received					1,135						1,672						2,756						1,672
Reimbursement of operating expenses					1,350						—						2,850						—
Entrance fees disbursed					(308	)					(794	)					(1,011	)					(794	)
Recurring capital expenditures, net					(5,299	)					(4,598	)					(7,360	)					(8,026	)
Cash From Facility Operations				$	17,095					$	1,648					$	30,402					$	63

(1)	Includes non-recurring expense totaling $3.7 million and $6.7 million for the three and six months ended June 30, 2006.

Facility Operating Income

Definition of Facility Operating Income

We define Facility Operating Income as follows:

Net income before:

	•	provision (benefit) for income taxes;

	•	non-operating (income) loss items;

	•	depreciation and amortization;

	•	facility lease expense;

	•	general and administrative expense

	•	compensation expense;

	•	amortization of deferred entrance fee revenue; and

	•	management fees.

Management's Use of Facility Operating Income

We use Facility Operating Income to assess our facility operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility operations. This measure provides an assessment of revenue generation and expense management and

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affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal facility financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, lease expense, taxation and interest expense associated with our capital structure. This metric measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Facility Operating Income is one of the metrics used by our senior management and board of directors to review the financial performance of the business on a monthly basis. Facility Operating Income is also used by research analysts and investors to evaluate the performance of and value companies in our industry by investors, lenders and lessors. In addition, Facility Operating Income is a common measure used in the industry to value the acquisition or sales price of facilities and is used as a measure of the returns expected to be generated by a facility.

A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages. The debt or lease coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as determined on an accrual basis in accordance with GAAP). For purposes of the coverage calculation, the lender or lessor will further require a pro forma adjustment to facility operating income to include a management fee (generally 4%-5% of operating revenue) and an annual capital reserve (generally $250-$450 per unit/bed). As of June 30, 2006, we are in compliance with the financial covenants of all of our debt and lease agreements. An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position, particularly on a facility-by-facility basis.

Limitations of Facility Operating Income

Facility Operating Income has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

	•	interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of facilities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

	•	depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our facilities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-facility basis. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on Facility Operating Income as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of Facility Operating Income to GAAP net income (loss), along with our combined financial statements included below. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Facility Operating Income is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Facility Operating Income measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net income (loss) to Facility Operating Income for the three and six months ended June 30, 2006 and 2005:

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			Three Months Ended June 30,												Six Months Ended June 30,
			2005						2005						2006						2005
Net loss				$	(20,259	)				$	(5,842	)				$	(39,585	)				$	(7,640	)
Loss on discontinued operations					—						(112	)					—						(77	)
Minority interest					233						(2,939	)					349						(5,471	)
Provision (benefit) for income taxes					273						19						659						185
Equity in (earning) loss of unconsolidated ventures					469						258						637						445
Loss (gain) on extinguishment of debt					—						—						1,334						453
Interest expense:
Debt					18,963						8,913						30,493						15,762
Amortization of deferred financing costs					1,335						1,136						2,038						1,559
Capitalized lease obligation					6,581						2,275						8,741						4,551
Change in fair value of derivatives					(519	)					(85	)					(418	)					(4,147	)
Interest income					(625	)					(680	)					(1,677	)					(1,376	)
Income from operations					6,451						2,943						2,571						4,244
Depreciation and amortization					30,947						9,072						53,246						14,245
Facility lease expense					46,623						47,091						92,357						93,593
General and administrative (including non-cash stock compensation expense)					23,125						11,323						44,210						22,981
Amortization of entrance fees					(62	)					—						(145	)					—
Management fees					(585	)					(945	)					(1,732	)					(1,816	)
Facility operating income				$	106,499					$	69,484					$	190,507					$	133,247

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks from changes in interest rates charged on our credit facilities used to finance acquisitions on an interim basis, floating-rate indebtedness and lease payments subject to floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates and prices. As of June 30, 2006, we had approximately $275.1 million of long-term fixed rate debt, $742.6 million of long-term variable rate debt, and $229.4 million of capital lease obligations. As of June 30, 2006, our total fixed-rate debt and variable-rate debt outstanding had weighted-average interest rates of 6.83%.

We do not expect changes in interest rates to have a material effect on earnings or cash flows since 100% of our debt and lease payments either have fixed rates or variable rates that are subject to swap or interest agreements with major financial institutions to manage our risk.

The following table presents future principal payment obligations and weighted-average interest rates as of June 30, 2006 associated with long-term debt instruments.

			Weighted Average Interest Rate(1)						Total						Expected Maturity Date — Year Ended June 30,
															2007						2008						2009						2010						2011						Thereafter
Mortgage notes payable 2008 through 2012					6.50	%				$	382,901					$	1,189					$	1,449					$	260,994					$	18,105					$	66,968					$	34,196
Mortgage notes payable 2005 through 2037					9.12	%					74,582						26						71,232						26						28						30						3,240
Mortgage notes payable through 2010					5.865	%					105,756						—						—						1,401						104,355						—						—
Mortgage notes payable through 2010					5.38	%					171,000						—						—						—						—						2,478						168,522
Mortgage notes payable through 2010(3)					7.88	%					19,833						10,702						158						168						2,585						91						6,129
Notes payable					5.58	%					150,000						—						—						—						—						—						150,000
Capital and financing lease obligation					9.36	%					229,431						3,958						5,321						6,486						7,850						9,287						196,529
Mezzanine loan					(2	)					12,739						—						—						—						—						—						12,739
Tax exempt and taxable bonds					4.63	%					100,841						—						—						—						—						—						100,841
Total Debt					6.83	%				$	1,247,083					$	15,875					$	78,160					$	269,075					$	132,923					$	78,854					$	672,196

(1)	Variable rate debt reflected at the swapped rate.

(2)	Payable to the extent of all available net cash flow (as defined).

(3)	Debt related to limited partnership’s consolidated pursuant to EITF 04-5.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), as of the end of the period covered by this report. Our Company's disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such terms is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

In connection with the sale of certain facilities to Ventas Realty Limited Partnership (‘‘Ventas’’) in 2004, two legal actions have been filed. The first action was filed on September 15, 2005, by current and former limited partners in 36 investing partnerships in the United States District Court for the Eastern District of New York captioned David T. Atkins et. al. v. Apollo Real Estate Advisors, L.P., et al (the ‘‘Action’’). On March 17, 2006, a third amended complaint was filed in the Action. The third amended complaint is brought on behalf of current and former limited partners in 14 investing partnerships. It names as defendants, among others, the Company, BLC, a subsidiary of the Company, GFB-AS Investors, LLC (‘‘GFB-AS’’), a subsidiary of BLC, the general partners of the 14 investing partnerships, which are alleged to be subsidiaries of GFB-AS, FIG, an affiliate of our largest stockholder, and our Chief Financial Officer. The nine count third amended complaint alleges, among other things, (i) that the defendants converted for their own use the property of the limited partners of 11 partnerships, including through the failure to obtain consents the plaintiffs contend were required for the sale of facilities indirectly owned by those partnerships to Ventas; (ii) that the defendants fraudulently persuaded the limited partners of three partnerships to give up a valuable property right based upon incomplete, false and misleading statements in connection with certain consent solicitations; (iii) that certain defendants, including GFB-AS, the general partners, and our Chief Financial Officer, but not including the Company, BLC, or FIG, committed mail fraud in connection with the sale of facilities indirectly owned by the 14 partnerships at issue in the Action to Ventas; (iv) that certain defendants, including GFB-AS and our Chief Financial Officer, but not including the Company, BLC, the general partners, or FIG, committed wire fraud in connection with certain communications with plaintiffs in the Action and another investor in a limited partnership; (v) that the defendants, with the exception of the Company, committed substantive violations of the Racketeer Influenced and Corrupt Organizations Act (‘‘RICO’’); (vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the general partners violated the partnership agreements of the 14 investing partnerships; (viii) that GFB-AS, the general partners, and our Chief Financial Officer breached fiduciary duties to the plaintiffs; and (ix) that the defendants were unjustly enriched. The plaintiffs have asked for damages in excess of $100.0 million on each of the counts described above, including treble damages for the RICO claims. We have filed a motion to dismiss the claims, and plan to continue to vigorously defend this Action. A putative class action lawsuit was also filed on March 22, 2006, by certain limited partners in four of the same partnerships involved in the Action in the Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. (the ‘‘Second Action’’). The putative class in the Second Action consists only of those limited partners in the four investing partnerships who are not plaintiffs in the Action. The Second Action names as defendants BLC and GFB-AS. The complaint alleges a claim for breach of fiduciary duty arising out of the sale of facilities indirectly owned by the investing partnerships to Ventas and the subsequent lease of those facilities by Ventas to subsidiaries of BLC. The plaintiffs seek, among other relief, an accounting, damages in an unspecified amount, and disgorgement of unspecified amounts by which the defendants were allegedly unjustly enriched. We also intend to vigorously defend this Second Action. Because these actions are in an early stage we cannot estimate the possible range of loss, if any.

In addition, we have been involved in litigation and claims incidental to the conduct of our business comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage claims and may require significant legal costs to defend and resolve. Similarly, our industry is always subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, we maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. We believe that the cost of defending any pending or future litigation or challenging any pending or future regulatory compliance matter will not have a material adverse effect on our business.

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Item 1A.    RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 31, 2006, includes a description of our risk factors. The information set forth below updates those risk factors and should be read in conjunction with the risk factors and other information set forth in that Annual Report on Form 10-K.

The market price of our stock could be negatively affected by sales of substantial amounts of our common stock if Fortress, our largest stockholder, defaults under credit agreements secured by its holdings of shares of our common stock.

On June 28, 2006, Fortress informed us of the following:

Two affiliates of Fortress, FRIT Holdings LLC and FIT Holdings LLC entered into separate credit agreements, both dated June 28, 2006, with Deutsche Bank AG, London Branch, or Deutsche Bank, as Administrative Agent and sole lender. Pursuant to these credit agreements, the affiliates have received an aggregate commitment of approximately $1.43 billion from Deutsche Bank, and this amount has been secured by, among other things, a pledge by the borrowers and one other affiliate of Fortress of a total of 40,628,000 shares of our common stock owned by such affiliates. The 40,628,000 shares of common stock represent approximately 61% of our issued and outstanding common stock as of June 28, 2006.

The credit agreements contain customary default provisions and also require prepayment of a portion of the borrowings by the borrowers in the event the trading price of our common stock decreases below certain specified levels. In the event of a default under the credit agreement by the borrowers, Deutsche Bank may foreclose upon any and all shares of our common stock pledged to it. The borrowers have agreed in the credit agreements that if a shelf registration statement is not effective and usable for resale of any portion of the pledged common stock by Deutsche Bank (in the event of foreclosure) as of June 9, 2007, the applicable affiliate will prepay a related portion of the borrowings.

The sale of these pledged shares in the event of a default could have an adverse impact on the price our shares.

We are not a party to the credit agreements and have no obligations thereunder. Wesley R. Edens, the Chairman of our board of directors, owns an interest in Fortress and is the Chairman of its Management Committee.

Item 2.    UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)    On July 25, 2006, pursuant to a previously executed Investment Agreement, the Company sold an aggregate of 17,600,867 shares of its common stock to RIC Coinvestment Fund LP, a Delaware limited partnership and a fund managed by an affiliate of Fortress Investment Group LLC, our largest stockholder, for a cash price of $36.87 per share, resulting in approximately $650.0 million of gross proceeds to the Company. This issuance of securities was made pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. The proceeds of the sale of these securities was used to partially fund the ARC Merger.

(b)    None.

(c)    None.

Item 3.    DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

(a)    The annual meeting of shareholders of Brookdale Senior Living Inc. was held on May 18, 2006.

(b)    Jeffrey R. Leeds and Dr. Samuel Waxman were reelected as directors at the meeting.

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(c)    The following votes were taken in connection with the election of directors at the meeting:

Trustee			Votes For						Withhold Authority
Jeffrey R. Leeds					64,428,941						33,624
Dr. Samuel Waxman					64,457,402						5,163

The terms of office of the following directors continued after the annual meeting: Wesley R. Edens, William B. Doniger, Jeffrey G. Edwards, Bradley E. Cooper, and Jackie M. Clegg.

The proposal to ratify the Audit Committee’s appointment of Ernst & Young LLP as independent auditors for 2006 was approved. The following votes were taken in connection with the proposal:

Proposal			Votes For						Votes Against						Abstentions						Broker Non-Votes
Ratification of the Audit Committee’s appointment of Ernst & Young LLP as independent auditors for 2006					63,048,428						1,413,862						275						—

(d)    Not applicable.

Item 5.    OTHER INFORMATION

(a)    None.

(b)    None.

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ITEM 6.     EXHIBITS

Exhibit No.						Description
	2	.1				Agreement and Plan of Merger, dated as of May 12, 2006, by and among Brookdale Senior Living Inc., Beta Merger Sub Corporation, and American Retirement Corporation* (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on May 12, 2006).
	3	.1				Amended and Restated Certificate of Incorporation of the Company.
	3	.2				Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Amendment No. 2) (No. 333-127372) filed on October 11, 2005).
	4	.1				Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Amendment No. 2) (No. 333-127372) filed on October 11, 2005).
	4	.2				Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K (File No. 001-32641) filed on March 31, 2006).
	4	.3				Amendment No. 1 to Stockholders Agreement, dated as of July 26, 2006, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT Holdings LLC.
	10	.1				Investment Agreement, dated as of May 12, 2006, by and among Brookdale Senior Living Inc. and RIC Coinvestment Fund LP* (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 12, 2006).
	10	.2				Employment Agreement, dated May 12, 2006, by and between Brookdale Senior Living Inc. and W.E. Sheriff* (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on May 12, 2006).
	10	.3				Form of Employment Agreement for Gregory B. Richard, George T. Hicks, Bryan D. Richardson, H. Todd Kaestner and James T. Money* (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on May 12, 2006).
	10	.4				Second Amended and Restated Master Lease Agreement, dated as of April 7, 2006, among Health Care REIT, Inc., HCRI North Carolina Properties III, Limited Partnership, HCRI Tennessee Properties, Inc., HCRI Indiana Properties, LLC, HCRI Wisconsin Properties, LLC, and HCRI Texas Properties, Ltd., and Alterra Healthcare Corporation (incorporated by reference to Exhibit 10.32 to the Company's Form Registration Statement on Form S-1 (No. 333-135030) filed on June 14, 2006).*
	10	.5				First Amendment, Consent and Waiver to Credit Agreement, dated May 10, 2006, among Brookdale Senior Living Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto, Lehman Brothers Inc, as lead arranger, Goldman Sachs Credit Partners L.P., Citigroup Global Markets Inc. and LaSalle Bank National Association, as co-arrangers, LaSalle Bank National Association, as syndication agent, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents and Lehman Commercial Paper Inc., as administrative agent (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2006).*

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Exhibit No.						Description
	10	.6				Second Amendment, Consent and Waiver to Credit Agreement, dated as of June 29, 2006, among Brookdale Senior Living Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto, Lehman Brothers Inc, as lead arranger, Goldman Sachs Credit Partners L.P., Citigroup Global Markets Inc. and LaSalle Bank National Association, as co-arrangers, LaSalle Bank National Association, as syndication agent, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents and Lehman Commercial Paper Inc., as administrative agent*.
	10	.7				Consent to Change of Control and Third Amendment to Master Lease, dated April 1, 2006, by and between Health Care Property Investors, Inc., Texas HCP Holding, L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland Real Estate Holdings, LLC, ARC Sun City Center Real Estate Holdings, LLC, and ARC LaBarc Real Estate Holdings, LLC, on the one hand, and Fort Austin Limited Partnership, ARC Santa Catalina, Inc., ARC Richmond Place, Inc., Freedom Village of Holland, Michigan, Freedom Village of Sun City Center, Ltd., LaBarc, L.P. and Park Place Investments, LLC, on the other hand, and ARCPI Holdings, Inc. and American Retirement Corporation.
	10	.8				Waiver, dated as of August 10, 2006. to the Credit Agreement dated as of February 10, among Brookdale Senior Living Inc., as Borrower, the several banks and other financial institutions or entities from time to time parties thereto, Lehman Brothers Inc, as lead arranger, Goldman Sachs Credit Partners L.P., Citigroup Global Markets Inc. and LaSalle Bank National Association, as co-arrangers, LaSalle Bank National Association, as syndication agent, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents and Lehman Commercial Paper Inc., as administrative agent.*
	31	.1				Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2				Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1				Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Schedules and exhibits omitted pursuant to Item 601(b) (2) of Reg. S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			BROOKDALE SENIOR LIVING INC. (Registrant)
			By:           /s/ R. Stanley Young
			Name:    R. Stanley Young
			Title:       Duly authorized officer and                 Chief Financial Officer
			Date:       August 14, 2006

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