As filed with the Securities and Exchange Commission on May 24, 2010

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SHG Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware

8051

13-4230695

(State of Incorporation)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification No.)

18831 Von Karman, Suite 400

Irvine, CA 92612

(949) 255-7100

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

William A. Mathies

President and Chief Operating Officer

SHG Services, Inc.

18831 Von Karman, Suite 400

Irvine, CA 92612

(949) 255-7100

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

With copies to:

Andor D. Terner, Esq.

Robert T. Plesnarski, Esq.

O’Melveny & Myers LLP

610 Newport Center Drive, 17^th Floor

Newport Beach, CA 92660

(949) 823-6900

Jeffrey Bagner, Esq.

Steven Epstein, Esq.

Fried, Frank, Harris, Shriver & Jacobson LLP

One New York Plaza

New York, NY 10004

(212) 859-8000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement is declared effective and all conditions to the proposed transaction have been satisfied or waived.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer x (Do not check if smaller reporting company)		Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Amount to be Registered(1)	Proposed Maximum Offering Price per Share(2)	Proposed Maximum Aggregate Offering Price(2)	Amount of Registration Fee
Common Stock, par value $0.01 per share	43,909,934	N/A	$188,963,000	$13,473.06

(1)

Consists of the maximum number of shares of common stock, par value $0.01 per share, of SHG Services, Inc., a Delaware corporation, that may be issuable to the holders of Sun Healthcare Group, Inc. common stock pursuant to the distribution transaction described in the proxy statement/prospectus that forms a part of this registration statement, based upon the number of shares of common stock, par value $0.01 per share, of Sun Healthcare Group, Inc. outstanding at the close of business on May 18, 2010.

(2)	Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f)(2) promulgated under the Securities Act of 1933, as amended, based on the book value of the net assets held or expected to be held by SHG Services, Inc.

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

EXPLANATORY NOTE

SHG Services, Inc. (“New Sun”), a wholly owned subsidiary of Sun Healthcare Group, Inc. (“Sun”), is filing this registration statement on Form S-1 to register the issuance of shares of its common stock, $0.01 par value per share, which will be distributed on a pro rata basis to Sun stockholders (the “Separation”). Immediately following the Separation, Sun intends to merge with and into Sabra Health Care REIT, Inc., a wholly owned subsidiary of Sun (“Sabra”), with Sabra surviving the merger and Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Sun common stock (the “REIT Conversion Merger”). Concurrently with the filing of this registration statement on Form S-1, Sabra is filing a registration statement on Form S-4 (Reg. No. 333- ) to register the issuance of shares of its common stock, par value $0.01 per share, in exchange for shares of Sun common stock in connection with the REIT Conversion Merger. This registration statement also includes a proxy statement relating to a special meeting of Sun stockholders to consider and vote on the Separation and the adoption of the agreement and plan of merger to implement the REIT Conversion Merger.

The information in the proxy statement/prospectus is not complete and may be changed. Neither New Sun nor Sabra may sell the securities offered by the proxy statement/prospectus until their respective registration statements are effective with the Securities and Exchange Commission. The proxy statement/prospectus is not an offer to sell these securities and neither New Sun nor Sabra is soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 24, 2010

[SUN HEALTHCARE GROUP, INC. LETTERHEAD]

, 2010

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders of Sun Healthcare Group, Inc. (“Sun”) to be held on , 2010 at at a.m., local time, and at any adjournment or postponement thereof.

On May 24, 2010, Sun announced that it intends to restructure its business by separating its real estate assets and its operating assets into the following two separate publicly traded companies (SHG Services, Inc. and Sabra Health Care REIT, Inc.), subject to the approval of its stockholders and other conditions:

•

SHG Services, Inc., a Delaware corporation and a wholly owned subsidiary of Sun (“New Sun”), will own and continue to operate all of Sun’s operating subsidiaries. New Sun will be renamed “Sun Healthcare Group, Inc.” and the shares of New Sun common stock are expected to trade on the NASDAQ Global Select Market under the symbol “SUNH.” Sun will distribute to its stockholders on a pro rata basis all of the outstanding shares of New Sun common stock. This distribution is referred to in the proxy statement/prospectus as the “Separation.”

•

Sabra Health Care REIT, Inc., a Maryland corporation and a wholly owned subsidiary of Sun (“Sabra”), will own substantially all of Sun’s currently owned real property assets and will lease those assets to New Sun’s subsidiaries. Sabra expects to grow its portfolio through acquisitions as a broad-based healthcare REIT. Immediately following the Separation, Sun will be merged with and into Sabra with Sabra surviving the merger. This merger is referred to in the proxy statement/prospectus as the “REIT Conversion Merger.” The shares of Sabra common stock are expected to trade on the under the symbol “SBRA.” Sabra currently intends to qualify and elect to be treated as a real estate investment trust for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011. This election, together with the REIT Conversion Merger, is collectively referred to in the proxy statement/prospectus as the “REIT Conversion.”

In connection with the Separation, Sun also intends to make a cash distribution to holders of Sun common stock of approximately $ per share, although the final amount of this cash distribution will not be determined until the time of the Separation. The issuance of shares of New Sun common stock and the cash distribution by Sun in connection with the Separation should be treated as a taxable distribution to taxable U.S. stockholders for U.S. federal income tax purposes.

The board of directors of Sun has unanimously approved the Separation and REIT Conversion Merger, and recommends that stockholders vote “FOR” the Separation and “FOR” the REIT Conversion Merger as further described in the proxy statement/prospectus.

Your vote is very important. Whether or not you plan to attend the special meeting in person, it is important that your shares be represented and voted at the special meeting. You may submit your proxy or voting instructions by completing, signing, dating and returning the proxy or voting instruction card enclosed with the proxy materials you received or by submitting your proxy or voting instructions over the Internet or by telephone. We urge you to promptly submit your proxy or voting instructions in order to ensure your representation and the presence of a quorum at the special meeting. Please note that if you do not submit a proxy or voting instruction form or do not vote in person at the special meeting, the effect will be the same as a vote against the adoption of the agreement and plan of merger to implement the REIT Conversion Merger. In addition, if you “ABSTAIN” from voting on the Separation or on the adoption of the agreement and plan of merger to implement the REIT Conversion Merger, the effect will be the same as a vote against each of these proposals.

The proxy statement/prospectus provides you with important information about the Separation and REIT Conversion. Please give this information your careful attention. In particular, you should read and consider carefully the discussion in the section entitled “Risk Factors ” beginning on page 22 of the proxy statement/prospectus.

Sincerely,

Richard K. Matros

Chairman and Chief Executive Officer

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved the issuance of the shares of common stock of New Sun and Sabra as described in the proxy statement/prospectus or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

The proxy statement/prospectus is dated , 2010, and is first being mailed to stockholders of Sun on or about , 2010.

SUN HEALTHCARE GROUP, INC.

18831 Von Karman, Suite 400

Irvine, California 92612

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON , 2010

To the Stockholders of Sun Healthcare Group, Inc.:

The special meeting of stockholders of Sun Healthcare Group, Inc., a Delaware corporation (“Sun”), will be held on , 2010 at at a.m., local time, and at any adjournment or postponement thereof, to consider and vote on the following matters described in the proxy statement/prospectus:

To consider and vote upon a proposal to distribute to Sun stockholders on a pro rata basis all of the outstanding shares of common stock of SHG Services, Inc., a Delaware corporation and a wholly owned subsidiary of Sun (the “Separation”).

To consider and vote upon a proposal to adopt the agreement and plan of merger between Sun and Sabra Health Care REIT, Inc., a Maryland corporation and a wholly owned subsidiary of Sun (“Sabra”), which contemplates that, immediately following the Separation, Sun will be merged with and into Sabra with Sabra surviving the merger and Sun stockholders receiving shares of Sabra in exchange for their shares of Sun common stock (the “REIT Conversion Merger”).

To consider and vote upon a proposal to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation or adopt the agreement and plan of merger to implement the REIT Conversion Merger.

To transact such other business as may properly come before the special meeting, or any adjournments or postponements thereof.

The Separation and REIT Conversion Merger are conditioned on approval by Sun stockholders and satisfaction or waiver of all other conditions to the transactions as described in this proxy statement/prospectus.

The board of directors of Sun has fixed the close of business on , 2010 as the record date for determining stockholders entitled to receive notice of and vote at the special meeting and at any adjournment or postponement thereof. At the close of business on the record date, there were shares of Sun common stock outstanding and entitled to vote.

All stockholders are cordially invited to attend the special meeting in person. Whether or not you plan to attend the special meeting, you are urged to promptly submit your proxy or voting instructions. If you attend the special meeting and wish to vote your own shares in person, you may withdraw your proxy at that time.

For the Board of Directors,

Michael T. Berg

Secretary

, 2010

After careful consideration, the board of directors of Sun has unanimously determined that the Separation and REIT Conversion Merger are advisable and in the best interests of Sun and you, the Sun stockholders. The board of directors of Sun unanimously recommends that you vote “FOR” the Separation, “FOR” the adoption of the agreement and plan of merger to implement the REIT Conversion Merger and “FOR” the adjournment of the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation or adopt the agreement and plan of merger to implement the REIT Conversion Merger.

Important Notice Regarding the Availability of Proxy Materials for Sun’s Special Meeting of Stockholders to Be Held on , 2010. The accompanying proxy statement/prospectus is available at www.sunh.com.

REFERENCES TO ADDITIONAL INFORMATION

This proxy statement/prospectus incorporates important information about Sun Healthcare Group, Inc. (“Sun”) that is not included in or delivered with this proxy statement/prospectus. For a listing of the documents incorporated by reference into this proxy statement/prospectus, see “Where You Can Find More Information.” You may obtain these documents through the website of the Securities and Exchange Commission (the “SEC”) at www.sec.gov. You may also request a copy of these documents at no cost by writing or telephoning Sun at:

Sun Healthcare Group, Inc.

101 Sun Avenue, N.E.

Albuquerque, New Mexico 87109

(505) 468-2341

Attention: Investor Relations

To obtain timely delivery of such information, you must request such information no later than , 2010.

TABLE OF CONTENTS


		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		v
STRUCTURE OF THE SEPARATION AND REIT CONVERSION MERGER		vi
QUESTIONS AND ANSWERS		1
SUMMARY		11
RISK FACTORS		22
Risks Relating to the Separation and REIT Conversion		22
Risks Associated with the Status of Sabra as a REIT		24
Risks Relating to New Sun’s Business		27
Risks Relating to Sabra’s Business		35
INFORMATION ABOUT THE SPECIAL MEETING OF SUN STOCKHOLDERS		40
Date, Time and Place of the Special Meeting		40
Purpose of the Special Meeting		40
Recommendation of the Board of Directors of Sun		40
Vote Required		40
Record Date; Shares Entitled to Vote; Quorum		41
Other Matters		41
To Attend the Special Meeting of Sun Stockholders		41
Communications by Sun Stockholders with Sun		42
THE PROPOSALS		43
Overview of the Separation and REIT Conversion		43
Background and Reasons for the Separation and REIT Conversion		43
Accounting Treatment for the Separation and REIT Conversion		43
Regulatory Approvals Required for the Separation and REIT Conversion Merger		44
Treatment of Equity Awards		44
PROPOSAL NO. 1—APPROVAL OF THE SEPARATION		45
Manner of Effecting the Separation		45
Management of New Sun		46
Interests of Certain Persons in the Separation		46
Market for New Sun Common Stock; Trading of New Sun Common Stock Following the Separation		46
Trading Between the Record Date for the Separation and the Distribution Date for the Separation		47
U.S. Federal Income Tax Consequences of the Separation		47
Conditions to the Separation		47
Absence of Appraisal Rights		48
PROPOSAL NO. 2—ADOPTION OF THE AGREEMENT AND PLAN OF MERGER		49
Structure and Completion of the REIT Conversion Merger		49
Management of Sabra		50
Qualification as a REIT		50
Interests of Certain Persons in the REIT Conversion Merger		50
Market for Sabra Common Stock; Trading of Sabra Common Stock Following the REIT Conversion Merger		50
U.S. Federal Income Tax Consequences of the REIT Conversion Merger		50
Manner and Procedure for Receiving Shares of Sabra Common Stock		51
Conditions to the REIT Conversion Merger		51
Absence of Appraisal Rights		51
PROPOSAL NO. 3—APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING		52
RELATIONSHIP BETWEEN NEW SUN AND SABRA AFTER THE SEPARATION AND REIT CONVERSION MERGER		53
The Distribution Agreement		53


		Page
The Lease Agreements		54
The Tax Allocation Agreement		56
The Transition Services Agreement		57
DESCRIPTION OF MATERIAL INDEBTEDNESS		58
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES		59
U.S. Federal Income Tax Consequences of the Separation		60
U.S. Federal Income Tax Consequences of the REIT Conversion Merger		61
U.S. Federal Income Tax Considerations Relating to Sabra		62
U.S. Federal Income Tax Considerations Relating to New Sun		72
DISTRIBUTION AND DIVIDEND POLICY		74
New Sun		74
Sabra		74
BUSINESS OF NEW SUN		75
Overview		75
Business Segments		75
Competition		76
Business Strategy		76
Employees and Labor Relations		77
Federal and State Regulatory Oversight		77
Compliance Process		79
General Information		80
Properties		81
Legal Proceedings		81
BUSINESS OF SABRA		83
Overview		83
Portfolio of Healthcare Properties		83
Tenants and Operators		85
Business Strategy		85
Competition		86
Employees of Sabra		86
Government Regulation		86
General Information		86
Legal Proceedings		87
NEW SUN PRO FORMA CAPITALIZATION		88
SABRA PRO FORMA CAPITALIZATION AND SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION		89
NEW SUN UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS		90
SABRA UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS		97
SABRA AUDITED BALANCE SHEET OF ASSETS TO BE CONTRIBUTED AND LIABILITIES TO BE ASSUMED		104
SELECTED FINANCIAL INFORMATION AND OTHER DATA		105
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR SUN AND NEW SUN		106
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		139
MANAGEMENT OF NEW SUN		140
Information Regarding Directors and Executive Officers of New Sun		140
Directors		140
Executive Officers		143
Director Independence		144

iii


		Page
Committees of the Board of Directors		145
Stockholder and Interested Party Communications with Directors		146
MANAGEMENT OF SABRA		147
Information Regarding Directors and Executive Officers of Sabra		147
Directors		147
Executive Officers		148
Director Independence		148
Committees of the Board of Directors		149
Stockholder and Interested Party Communications with Directors		150
DIRECTOR COMPENSATION—FISCAL 2009		151
EXECUTIVE COMPENSATION		153
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		176
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		177
MARKET PRICES AND RELATED STOCKHOLDER MATTERS		181
DESCRIPTION OF NEW SUN CAPITAL STOCK		183
DESCRIPTION OF SABRA STOCK		187
COMPARATIVE RIGHTS OF SABRA AND SUN STOCKHOLDERS		196
LEGAL MATTERS		206
EXPERTS		206
OTHER MATTERS		206
FUTURE STOCKHOLDER PROPOSALS		206
WHERE YOU CAN FIND MORE INFORMATION		207

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference herein contain forward-looking statements and information. Any statements that do not relate to historical or current facts or matters are forward-looking statements.

Examples of forward-looking statements include all statements regarding the expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, the impact of reductions in reimbursements and other changes in government reimbursement programs, the timing and impact of the Separation and REIT Conversion, the expected amounts and timing of dividends and distributions, the expected or intended tax treatment for the Separation and REIT Conversion and transactions related thereto, the outcome and costs of litigation, projected expenses and capital expenditures, growth opportunities, plans and objectives of management for future operations and compliance with and changes in governmental regulations. You can identify some of the forward-looking statements by the use of forward-looking words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “may” and other similar expressions, although not all forward-looking statements contain these identifying words.

You are cautioned that any forward-looking statements made in this proxy statement/prospectus or the documents incorporated by reference herein are not guarantees of future performance and that you should not place undue reliance on any of such forward-looking statements. The forward-looking statements are based on the information currently available and are applicable only as of the date on the cover of this proxy statement/prospectus or, in the case of forward-looking statements incorporated by reference, as of the date of the filing that includes the forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements. You should carefully consider the risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including those set forth under the heading “Risk Factors” and those described in Sun’s filings with the SEC, including Sun’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and Sun’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010. None of Sun, New Sun or Sabra intend, nor do they undertake any obligation, to update the forward-looking statements to reflect future events or circumstances.

STRUCTURE OF THE SEPARATION AND REIT CONVERSION MERGER

In order to help you better understand the structure of the Separation and REIT Conversion Merger, the charts below illustrate, in simplified form, the organizational structure of Sun Healthcare Group, Inc., SHG Services, Inc. and Sabra Health Care REIT, Inc. as they exist currently, and as they will exist immediately following the Separation and immediately following the REIT Conversion Merger:

Current

LOGO

After the Separation

LOGO

After the REIT Conversion Merger

LOGO

vii

QUESTIONS AND ANSWERS

Q:	What transactions are being proposed?

A:	The board of directors of Sun has approved a plan to restructure its business by separating its real estate assets and its operating assets into two separate publicly traded companies. This plan consists of the following key transactions:

•

reorganizing, through a series of internal corporate restructurings, such that:

•

substantially all of Sun’s owned real property and mortgage indebtedness owed to third parties will be held or assumed by Sabra Health Care REIT, Inc., a Maryland corporation and a wholly owned subsidiary of Sun (“Sabra”), or by one or more subsidiaries of Sabra; and

•

all of Sun’s operations and other assets and liabilities will be held or assumed by SHG Services, Inc. (to be renamed “Sun Healthcare Group, Inc.”), a Delaware corporation and a wholly owned subsidiary of Sun (“New Sun”), or by one or more subsidiaries of New Sun;

•

New Sun and Sabra entering into certain agreements with each other, including multiple master lease agreements (the “Lease Agreements”), which will set forth the material terms pursuant to which New Sun will lease from Sabra all of the real property that Sabra will own immediately following the restructuring of Sun’s business, (representing 93 of the 205 properties that New Sun will lease and operate immediately following the Separation (as defined below));

•

Sun distributing to its stockholders on a pro rata basis all of the outstanding shares of New Sun common stock (this distribution is referred to in this proxy statement/prospectus as the “Separation”);

•

Sun merging with and into Sabra, with Sabra surviving the merger as a Maryland corporation and Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Sun common stock (this merger is referred to in this proxy statement/prospectus as the “REIT Conversion Merger”); and

•

Sabra qualifying and electing to be treated as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, which is currently expected to occur commencing with its taxable year beginning on January 1, 2011 (this election, together with the REIT Conversion Merger, is collectively referred to in this proxy statement/prospectus as the “REIT Conversion”).

Q:	How will the Separation work?

As part of the restructuring of Sun’s business described above, all of Sun’s operations and assets that are not held by New Sun or its subsidiaries (other than substantially all of its owned real property) will be transferred to New Sun or one or more of its subsidiaries. New Sun will retain ownership of administrative office buildings in Albuquerque, New Mexico (the “New Sun Retained Properties”). Substantially all of Sun’s liabilities, other than indebtedness and other liabilities related to the real property to be owned by Sabra, will be liabilities of New Sun and its subsidiaries. All of the outstanding shares of New Sun common stock will be distributed by Sun to its stockholders on a pro rata basis. Cash will be paid in lieu of fractional shares.

Q:	How will the REIT Conversion work?

All of Sun’s owned real property (excluding the New Sun Retained Properties) will be transferred to Sabra or one or more of its subsidiaries. Sabra will assume the liabilities of Sun, including mortgage indebtedness owed to third parties, that are related to the real property to be owned by Sabra. Immediately following the Separation, Sun will merge with and into Sabra, with Sabra surviving the REIT Conversion Merger. In accordance with the Internal Revenue Code of 1986, as amended (the “Code”), Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011.

Q:	What is a REIT?

A REIT is a company that derives most of its income from real estate mortgages or real property. If a corporation qualifies and elects to be treated as a REIT, it generally will not be subject to U.S. federal corporate income taxes on income that it currently distributes to its stockholders. A company’s qualification as a REIT depends on its ability to meet on a continuing basis various tests under the Code relating to, among other things, the sources of its gross income, the composition and value of its assets, its distribution levels to its stockholders and the diversity of ownership of its stock.

Q:	Why is Sun proposing the Separation and REIT Conversion?

The board of directors of Sun believes that the Separation and REIT Conversion will create two focused companies—one that will concentrate on providing quality care to residents and patients and the other that will concentrate on building a strong healthcare real property company. The board of directors of Sun believes that the two separate public companies will:

•

more readily enable Sun stockholders to maximize their investment in Sun;

•

provide the flexibility to each company to optimize its capital structure and focus on its core competencies;

•

better position Sabra to realize the full value of its portfolio of healthcare properties and to strategically expand its business in the healthcare sector beyond Sun’s portfolio of properties while affording Sabra stockholders the benefit of a tax-advantaged REIT security; and

•

enable New Sun to pursue its growth strategies with significantly less debt on its balance sheet.

For a further discussion of the reasons for the proposed restructuring of Sun’s business, see “The Proposals—Background and Reasons for the Separation and REIT Conversion.”

Q:	When will the Separation and REIT Conversion Merger occur?

The Separation and REIT Conversion Merger are expected to occur on or about , 2010. The board of directors of Sun will set the record date for the Separation after the special meeting. The REIT Conversion Merger is expected to occur immediately following the Separation. The timing of the Separation and REIT Conversion Merger will ultimately depend upon the satisfaction or waiver of certain conditions, including obtaining stockholder approval of the Separation and REIT Conversion Merger.

Sun reserves the right to abandon, defer or modify the Separation and REIT Conversion Merger at any time, even if Sun stockholders approve the Separation and REIT Conversion Merger. Sun may not proceed with the Separation and REIT Conversion Merger if the board of directors of Sun determines for any reason that these transactions are no longer in the best interests of Sun and its stockholders.

Q:	What will be the relationship of New Sun and Sabra following the Separation and REIT Conversion Merger?

To govern their ongoing relationship, New Sun and Sabra will enter into certain agreements on or prior to the distribution date for the Separation. These agreements include: (i) a distribution agreement, providing for certain organizational matters, the mechanics related to the Separation and REIT Conversion Merger as well as other ongoing obligations of New Sun and Sabra (the “Distribution Agreement”), (ii) the Lease Agreements, (iii) an agreement relating to tax allocation matters (the “Tax Allocation Agreement”), and (iv) an agreement pursuant to which New Sun will provide certain services to Sabra on a transitional basis until Sabra can provide these services to itself or retain a third party to provide these services (the “Transition Services Agreement”).

Two members of the board of directors of Sun, Michael J. Foster and Milton J. Walters, will be directors of both New Sun and Sabra. No other person will be a director, executive officer or other employee of both New Sun and Sabra. See “Relationship Between New Sun and Sabra After the Separation and REIT Conversion Merger.”

Q:	What will I receive in connection with the Separation and REIT Conversion Merger?

As a result of the Separation, you will be entitled to receive shares of New Sun common stock for each share of Sun common stock held by you on the record date for the Separation. In addition, Sun intends to make a cash distribution to holders of Sun common stock on the record date for the Separation of approximately $ per share resulting in an aggregate cash distribution of approximately $13 million. The final amount of this cash distribution will not be determined until the time of the Separation.

In addition, your Sun common stock will automatically convert in the REIT Conversion Merger into shares of Sabra common stock for each share of Sun common stock held by you at the effective time of the REIT Conversion Merger.

Q:	Will I receive fractional shares of New Sun common stock or Sabra common stock in connection with the Separation and REIT Conversion Merger?

No fractional shares of New Sun common stock or Sabra common stock will be issued in connection with the Separation and REIT Conversion Merger. Instead, American Stock Transfer & Trust Company, LLC (“American Stock Transfer”), who will serve as the distribution agent for the Separation and as the exchange agent for the REIT Conversion Merger, will aggregate all fractional shares that would otherwise have been distributed to Sun stockholders into whole shares, sell these whole shares in the open market at prevailing market prices and distribute the net cash proceeds from these sales to those stockholders who would have been entitled to receive fractional shares. This payment will be made from these sales on a pro rata basis based on the fractional interest in a share of New Sun common stock or Sabra common stock, as applicable, that the stockholder would have otherwise been entitled to receive. The amount of the cash payment will depend on the prices at which the aggregated fractional shares are sold by American Stock Transfer and the timing of such payment will be based upon the time that will be necessary for American Stock Transfer to sell these shares in an orderly manner. New Sun will be responsible for the payment of any brokerage or other fees in connection with the sale of aggregated fractional shares of New Sun common stock and Sabra will be responsible for the payment of any brokerage or other fees in connection with the sale of aggregated fractional shares of Sabra common stock. Recipients of cash in lieu of fractional shares will not be entitled to any interest on payments made in lieu of fractional shares.

Q:	Will I still own my shares of Sun after the completion of the transactions?

A:	No. You will receive shares of New Sun common stock as a result of the Separation and, upon the completion of the REIT Conversion Merger, your existing shares of Sun common stock will automatically convert into shares of Sabra common stock.

Q:	Should I send in my stock certificates now?

No. If the proposals are approved at the special meeting and the Separation and REIT Conversion Merger are thereafter completed, you will not be required to return your stock certificates representing shares of Sun common stock in order to receive your shares of New Sun common stock or Sabra common stock. Neither New Sun nor Sabra expects to issue physical certificates for the shares you will receive in connection with the Separation or REIT Conversion Merger in exchange for your shares of Sun common stock, even if you currently hold a physical certificate. Instead, New Sun and Sabra will electronically issue shares of New Sun common stock and Sabra common stock to you or to your bank, broker or other nominee on your behalf by way of direct registration in book-entry form. Any physical certificates representing shares of Sun common stock will be deemed cancelled and will no longer represent any ownership interest.

Q:	How will the rights of Sun stockholders change following the Separation and REIT Conversion Merger?

Upon the Separation, Sun stockholders as of the record date for the Separation will also become stockholders of New Sun. The rights of the stockholders of New Sun following the Separation will be governed by the Delaware General Corporation Law (the “DGCL”) and the provisions of the certificate of incorporation and bylaws of New Sun as described in this proxy statement/prospectus. As a Delaware corporation, Sun is also governed by the DGCL. New Sun’s certificate of incorporation and bylaws will be substantially similar to Sun’s existing amended and restated certificate of incorporation and bylaws.

Following the REIT Conversion Merger, Sun stockholders will become stockholders of Sabra and their rights will be governed by the Maryland General Corporation Law (the “MGCL”) and the provisions of Sabra’s charter and bylaws as described in this proxy statement/prospectus. One of the primary differences between Sun’s existing amended and restated certificate of incorporation and Sabra’s charter is that Sabra’s charter will contain transfer and ownership restrictions on the percentage of outstanding shares of its stock that a person may own or acquire. These restrictions are intended to assist Sabra in qualifying and maintaining its qualification as a REIT for U.S. federal income tax purposes. Under Sabra’s charter, subject to certain limitations, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.9% in value or number of shares, whichever is more restrictive, of Sabra’s outstanding common stock. For a more detailed discussion of the material differences between the current rights of Sun stockholders and the rights those stockholders would have as stockholders of Sabra following the REIT Conversion Merger, see “Comparative Rights of Sabra and Sun Stockholders.”

Q:	What are the U.S. federal income tax consequences of the Separation to holders of Sun common stock?

The Separation should be treated as a taxable distribution under Section 301 of the Code. Accordingly, the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distributed in connection with the Separation to a U.S. holder (as defined in the section titled “Certain U.S. Federal Income Tax Consequences”) should be treated as a dividend to the extent of the U.S. holder’s share of the current and accumulated earnings and profits of Sun (i.e. Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles, which may be taxable to non-corporate U.S. holders at a reduced rate of 15%. To the extent the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by a U.S. holder exceeds the U.S. holder’s share of the earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles, the excess first will be treated as a tax-free return of capital to the extent, generally, of the U.S. holder’s adjusted tax basis in Sun common stock, and any remaining excess will be treated as capital gain. In addition, a U.S. holder’s tax basis in New Sun common stock received in the Separation will be equal to its fair market value at the time of the Separation and the holding period in the New Sun common stock received in the Separation will begin the day after the Separation.

All holders of shares of Sun common stock should read “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of the Separation” for a more complete discussion of the U.S. federal income tax consequences of the Separation and “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to New Sun” for a more complete discussion of the U.S. federal income tax consequences of the acquisition, ownership and disposition of New Sun common stock that will be received in the Separation. All holders of shares of Sun common stock are urged to consult with their tax advisors regarding the tax consequences of the Separation to them, including the effects of U.S. federal, state and local, non-U.S. and other tax laws.

Q:	What are the U.S. federal income tax consequences of the REIT Conversion Merger to holders of Sun common stock?

All holders of shares of Sun common stock should read “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of the REIT Conversion Merger” for a more complete discussion of the U.S. federal income tax consequences of the REIT Conversion Merger and “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra” for a discussion of the U.S. federal income tax consequences of the acquisition, ownership and disposition of Sabra common stock that will be received in the REIT Conversion Merger. In addition, all holders of shares of Sun common stock are urged to consult with their tax advisors regarding the tax consequences of the REIT Conversion to them, including the effects of U.S. federal, state and local, non-U.S. and other tax laws.

Q:	When will I be able to trade shares of New Sun common stock or shares of Sabra common stock?

A:	It is expected that, upon completion of the Separation and REIT Conversion Merger, the shares of New Sun common stock will trade on the NASDAQ Global Select Market under the symbol “SUNH” and the shares of Sabra common stock will trade on the under the symbol “SBRA.”

Shares of New Sun common stock are expected to trade on a “when-issued” basis beginning on or shortly before the record date for the Separation and continuing through the distribution date for the Separation. “When-issued” trading in the context of the Separation refers to a sale or purchase effected on or before the date of the Separation and made conditionally because the securities of New Sun have not yet been distributed. “When-issued” trades are generally expected to settle within three trading days after the distribution date for the Separation. You may trade this entitlement to receive New Sun common stock, without the Sun common stock you own, on the “when-issued” market. On the first trading day following the distribution date for the Separation, “when-issued” trading with respect to New Sun common stock will end and “regular trading” will begin.

Q:	What will be the composition of the board of directors and management of each of New Sun and Sabra following the Separation and REIT Conversion Merger?

The Chief Executive Officer of New Sun will be William A. Mathies, currently the President and Chief Operating Officer of SunBridge Healthcare Corporation (“SunBridge”), Sun’s inpatient services subsidiary. Other than Richard K. Matros, the current Chief Executive Officer of Sun, the remaining Sun management team will be the management team of New Sun, including L. Bryan Shaul, who will be the Chief Financial Officer. The members of the existing board of directors of Sun will become the members of the board of directors of New Sun, except that Mr. Matros will be replaced on the board by Mr. Mathies.

Sabra will be led by Mr. Matros as Chairman and Chief Executive Officer. Sabra anticipates that Harold W. Andrews, Jr., a finance professional who has extensive real estate ownership experience as well as extensive experience with healthcare providers, will become its Chief Financial Officer. Sabra’s board of directors will consist of Mr. Matros, two members of the board of directors of Sun, Michael J. Foster and Milton J. Walters, who will also be New Sun directors, and other directors not affiliated with Sun or New Sun. These other directors will be appointed by the board of directors of Sabra prior to the Separation and REIT Conversion Merger.

Q:	How will the Separation and REIT Conversion Merger affect options to purchase shares of Sun common stock and shares subject to stock units or restricted stock units?

Except as described below for Mr. Matros, Sun options, whether vested or unvested, and unvested restricted stock units of Sun are expected to be converted, and adjusted as described below, into awards with respect to shares of New Sun common stock. The number of shares subject to and the exercise price of each converted option, and the number of shares subject to each unvested restricted stock unit, will be adjusted to preserve the same intrinsic value of the awards that existed immediately prior to the Separation and REIT Conversion Merger. These converted awards will otherwise have the same general terms and conditions as the outstanding Sun awards, including the applicable vesting conditions. Each Sun restricted stock unit which has vested but the payment of which has been deferred to a later date is expected to be converted into an award with respect to the same number of shares of New Sun common stock and Sabra common stock that a Sun stockholder will receive for each share of Sun common stock in connection with the Separation and REIT Conversion Merger. The unvested Sun options and restricted stock units held by Mr. Matros will be terminated for no consideration, while vested options held by Mr. Matros are expected to terminate for no consideration if they are not exercised prior to or within up to three months following the Separation and REIT Conversion Merger. It is expected that the termination of the existing Sun awards held by Mr. Matros will be taken into account by Sabra’s compensation committee when determining the amount of Sabra equity awards to be initially granted to Mr. Matros.

Q:	Why did Sun adopt a stockholder rights agreement, and will the stockholder rights agreement continue at New Sun and Sabra after completion of the transactions?

Sabra may not qualify for REIT status if a single stockholder owned 10% or more of Sun common stock immediately prior to the Separation and REIT Conversion Merger. The stockholder rights agreement (the “Rights Plan”) was adopted to discourage third parties from exceeding this ownership limitation and will terminate upon the earlier of the effective time of the REIT Conversion Merger or May 24, 2011. Accordingly, the Rights Plan will not continue in respect of shares of New Sun common stock or shares of Sabra common stock. Neither New Sun nor Sabra will initially have a stockholder rights agreement and neither has plans to adopt one, although each of their respective boards of directors could make the determination at a future date to adopt a stockholder rights agreement. Sabra’s charter will contain restrictions on the transfer and ownership of its stock. See “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock.”

Q:	Will New Sun and Sabra have any debt?

Yes. Immediately prior to the Separation, Sun’s outstanding 9.125% senior subordinated notes and the outstanding term loans under Sun’s existing credit facility will be repaid from the net proceeds of indebtedness to be incurred by New Sun and Sabra of up to $ and $ , respectively, together with cash on hand. The amount of the indebtedness to be incurred by New Sun and Sabra will depend on the cash position of Sun immediately prior to the Separation. Sun’s cash position at that time will include the net proceeds expected to be received by Sun from a public offering of Sun common stock. The terms and structure of the indebtedness to be incurred by New Sun and Sabra have not yet been determined. In addition, following the Separation, New Sun will have mortgage indebtedness to third parties of $6.2 million and Sabra will have mortgage indebtedness to third parties of $164.0 million. For additional information relating to these financing arrangements, see “Description of Material Indebtedness.”

Q:	Who will pay the costs of the Separation and REIT Conversion Merger?

A:	New Sun will pay all costs associated with the Separation and REIT Conversion Merger that are incurred prior to the Separation, except that Sabra will bear all costs of the Separation and REIT Conversion Merger

specifically identifiable to it, including the costs incurred by Sabra in entering into the financing transactions described under the caption “Description of Material Indebtedness.” All costs relating to the Separation or REIT Conversion Merger incurred after the Separation will be borne by the party incurring such costs.

Q:	What items of business am I being asked to vote on at the special meeting?

A:	At the special meeting, you will be asked to consider and vote on the following proposals:

•

a proposal to approve the Separation (Proposal No. 1);

•

a proposal to adopt the agreement and plan of merger by and between Sun and Sabra to implement the REIT Conversion Merger (Proposal No. 2); and

•

a proposal to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger (Proposal No. 3).

Q:	What will be the effect on the proposals if the Separation or the REIT Conversion Merger is not approved by Sun stockholders?

A condition to each of the Separation and REIT Conversion Merger is that both transactions have been approved by Sun stockholders. Even if stockholder approval of the Separation has been obtained, the Separation will not proceed unless all other required conditions to the Separation have been satisfied or waived, including the satisfaction or waiver of all required conditions to the REIT Conversion Merger. Similarly, even if stockholder approval of the REIT Conversion Merger has been obtained, the REIT Conversion Merger will not proceed unless the Separation has been completed and all other required conditions to the REIT Conversion Merger have been satisfied or waived.

Q:	How does the board of directors of Sun recommend that I vote?

The board of directors of Sun has unanimously approved the Separation and the REIT Conversion Merger and has determined that these actions are advisable and in the best interests of Sun and its stockholders. The board of directors of Sun unanimously recommends that you vote your shares “FOR” approval of the Separation, “FOR” adoption of the agreement and plan of merger to implement the REIT Conversion Merger and “FOR” the adjournment proposal.

Q:	What votes are required?

The Separation. The affirmative vote of a majority of the outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the proposal is required to approve the Separation. If you “ABSTAIN” from voting on approval of the Separation, the effect will be the same as a vote against the Separation.

The REIT Conversion Merger. The affirmative vote of a majority of the outstanding shares of Sun common stock entitled to vote at the special meeting is required to adopt the agreement and plan of merger to implement the REIT Conversion Merger. If you do not submit a proxy or voting instruction form or do not vote in person at the special meeting, or if you “ABSTAIN” from voting on adoption of the agreement and plan of merger, the effect will be the same as a vote against the adoption of the agreement and plan of merger.

Adjournment of the special meeting. The affirmative vote of a majority of the outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the proposal is required to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation and adopt

the agreement and plan of merger to implement the REIT Conversion Merger. If you “ABSTAIN” from voting on approval of the adjournment, the effect will be the same as a vote against the adjournment of the special meeting.

Q:	How many shares of Sun common stock must be present or represented to conduct business at the special meeting?

The holders of a majority in voting power of the outstanding shares of Sun common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting and any adjournments or postponements thereof. If you submit a proxy or voting instructions, your shares will be counted for purposes of determining the presence of a quorum, even if you “ABSTAIN” from voting your shares on the proposals. If a quorum is not present at the special meeting, the special meeting may be adjourned until a quorum is obtained.

Q:	Who is entitled to vote at the special meeting?

As of the close of business on the record date for the special meeting, executive officers and directors of Sun held an aggregate of shares of Sun common stock, which represents approximately % of all shares entitled to vote at the special meeting.

Q:	What is the difference between a “stockholder of record” and a “beneficial stockholder”?

A:	Whether you are a stockholder of record or a beneficial stockholder depends on how you hold your shares of Sun common stock.

Stockholders of Record. If your shares of Sun common stock are registered directly in your name with Sun’s transfer agent, American Stock Transfer, you are considered the stockholder of record with respect to those shares, and the proxy materials for the special meeting are being mailed to you directly by Sun.

Beneficial Stockholders. Most of Sun’s stockholders hold their shares through a bank, broker or other nominee (that is, in “street name”) rather than directly in their own name. If you hold your shares of Sun common stock in street name, you are a “beneficial stockholder,” and the proxy materials are being mailed to you by the organization holding your shares. This organization, or its nominee, is considered the stockholder of record for purposes of voting at the special meeting. As a beneficial stockholder, you have the right to instruct that organization on how to vote the shares held in your account.

Q:	May I vote in person?

If you are a stockholder of record as of the close of business on the record date for the special meeting, you may attend the special meeting and vote your shares of Sun common stock in person rather than signing and returning your proxy card or otherwise providing your proxy instructions. Your name will be verified against the list of stockholders of record on the record date for the special meeting prior to your being admitted to the special meeting.

If you are a beneficial stockholder, you are also invited to attend the special meeting but you may not vote these shares of Sun common stock in person at the special meeting unless you obtain a “legal proxy” from the bank, broker or other nominee, giving you the right to vote the shares at the special meeting. You will be asked to provide proof of beneficial ownership on the record date for the special meeting, such as your most

recent account statement, a copy of the voting instruction card provided by your bank, broker or other nominee, or other similar evidence of ownership, prior to your being admitted to the special meeting.

If you do not comply with the procedures outlined above, you will not be admitted to the special meeting. Even if you plan to attend the special meeting, it is recommended that you submit your proxy or voting instructions in advance of the special meeting as described below so that your vote will be counted if you later decide not to attend the special meeting.

Q:	How can I vote my shares without attending the special meeting?

Whether you are a stockholder of record or a beneficial stockholder, you may direct how your shares of Sun common stock are voted without attending the special meeting. If you are a stockholder of record, you may submit a proxy to instruct how your shares of Sun common stock are to be voted at the special meeting. You can submit a proxy by mail by completing, signing, dating and returning the proxy card enclosed with the proxy materials you received or by telephone or Internet by following the instructions provided on the proxy card. If you are a beneficial stockholder, you may submit voting instructions to your bank, broker or other nominee to instruct how your shares of Sun common stock are to be voted at the special meeting. Your voting instructions can be submitted by mail by completing, signing, dating and returning the voting instruction form enclosed with the proxy materials you received or by telephone or Internet, if those voting options are available to you, by following the instructions provided on the voting instruction form.

Q:	May I change or revoke my proxy or voting instructions?

You have the power to revoke or change your proxy or voting instructions before your shares of Sun common stock are voted at the special meeting. If you are a stockholder of record, you may do this by submitting a written notice of revocation to Sun’s Secretary, by submitting a duly executed written proxy bearing a date that is later than the date of your original proxy or by submitting a later dated proxy electronically via the Internet or by telephone. A previously submitted proxy will not be voted if the stockholder of record who executed it is present at the special meeting and votes the shares of Sun common stock represented by the proxy in person at the special meeting. If you are a beneficial stockholder, you may change your vote by submitting new voting instructions to your bank, broker or other nominee, or, if you have obtained a legal proxy from your bank, broker or other nominee giving you the right to vote your shares of Sun common stock, by attending the special meeting and voting in person. Please note that attendance at the special meeting will not by itself constitute revocation of a proxy.

Q:	How will my shares be voted if I do not provide specific instructions in the proxy or voting instruction form I submit?

If you submit a proxy or voting instruction form but do not indicate your specific voting instructions on one or more of the proposals listed in the notice of the special meeting, your shares of Sun common stock will be voted as recommended by the board of directors of Sun on those proposals and, in the case of a proxy, as the proxyholders may determine in their discretion with respect to any other matters properly presented for a vote at the special meeting.

Q:	If my shares are held in “street name” by a bank, broker or other nominee, how will my shares be voted?

You should instruct your bank, broker or other nominee how to vote your shares of Sun common stock, following the directions provided to you. If you do not instruct your broker, your broker will generally not have the discretion to vote your shares of Sun common stock without your instructions on matters that are not considered routine. Sun believes that the Separation proposal, the REIT Conversion Merger proposal and the proposal to adjourn the special meeting are each considered not to be routine matters. Therefore,

your broker cannot vote shares of Sun common stock that it holds in “street name” on any of the proposals unless you return the voting instruction form you received from your broker. Accordingly, Sun does not believe that there will be any broker non-votes occurring in connection with any of the proposals at the special meeting. Please note, however, that if you properly return the voting instruction form to your broker but do not indicate how you want your shares of Sun common stock to be voted, Sun believes your shares of Sun common stock generally will be voted “FOR” all of the proposals listed in the notice for the special meeting.

Q:	Am I entitled to dissenters’ or appraisal rights?

A:	Under Delaware law, you are not entitled to dissenters’ or appraisal rights in connection with the Separation or the REIT Conversion Merger.

Q:	What if I want to transfer my shares of Sun common stock?

You should consult with your financial advisor, such as your broker, bank or tax advisor. Sun, New Sun and Sabra make no recommendations concerning the purchase, retention or sale of shares of Sun common stock or of the New Sun common stock or Sabra common stock you will receive if the Separation and REIT Conversion Merger are completed.

The record date for the special meeting is earlier than the record date for the Separation and the effective time of the REIT Conversion Merger. Therefore, if you sell your shares of Sun common stock after the record date of the special meeting, but prior to the distribution date for the Separation or the effective time of the REIT Conversion Merger, you will retain the right to vote at the special meeting, but the right to receive New Sun common stock in connection with the Separation and Sabra common stock in connection with the REIT Conversion Merger will transfer with the shares of Sun common stock.

Q:	As a Sun stockholder, what should I consider in deciding whether to vote in favor of the Separation and the REIT Conversion Merger?

You should carefully review this proxy statement/prospectus, including the section entitled “Risk Factors” which sets forth certain risks and uncertainties related to the Separation and REIT Conversion Merger and certain risks and uncertainties to which New Sun and Sabra will be subject if these transactions are implemented.

Q:	Who is paying for this proxy solicitation?

Sun is making this solicitation and will pay the entire cost of preparing and distributing these proxy materials and soliciting proxies. In addition to these mailed proxy materials, Sun’s directors, executive officers and other employees may also solicit proxies or votes in person, by telephone or by other means of communication. Directors, executive officers and employees will not be paid any additional compensation for soliciting proxies. Sun will also reimburse banks, brokers and other nominees for their costs in forwarding proxy materials to Sun’s beneficial stockholders.

Q:	Who can help answer my questions?

A:	If you have any questions or need further assistance in voting your shares of Sun common stock, or if you need additional copies of this proxy statement/prospectus or the proxy card, please contact:

Sun Healthcare Group, Inc.

101 Sun Avenue, N.E.

Albuquerque, New Mexico 87109

Attention: Investor Relations

Telephone number: (505) 468-2341

SUMMARY

This summary highlights selected information contained or incorporated by reference in this proxy statement/prospectus and may not contain all of the information that is important to you. This summary is not intended to be complete and reference is made to, and this summary is qualified in its entirety by, the more detailed information contained or incorporated by reference in this proxy statement/prospectus. To fully understand the restructuring of Sun’s business, including the Separation and REIT Conversion, and for a more complete description of the terms of the Separation and REIT Conversion, you should read carefully this proxy statement/prospectus, together with the documents referred to in this proxy statement/prospectus. Unless the context otherwise requires, references in this proxy statement/prospectus to “Sun” shall be deemed to refer to Sun Healthcare Group, Inc. prior to the consummation of the Separation and REIT Conversion Merger.

Information about the Companies

Sun Healthcare Group, Inc.

18831 Von Karman, Suite 400

Irvine, CA 92612

(949) 255-7100

Sun Healthcare Group, Inc. (NASDAQ GS: SUNH) is referred to in this proxy statement/prospectus as Sun. Sun, through its subsidiaries, provides nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Sun’s core business is providing, through its subsidiaries, inpatient services, primarily through 183 skilled nursing centers, 14 assisted and independent living centers and eight mental health centers as of March 31, 2010. As of that date, Sun’s centers had 23,205 licensed beds located in 25 states, of which 22,423 were available for occupancy. Of the 205 centers operated by Sun’s subsidiaries as of March 31, 2010, 112 properties were leased and 93 properties were owned by Sun’s subsidiaries. Sun’s subsidiaries also provide rehabilitation therapy services to affiliated and non-affiliated centers and medical staffing and other ancillary services primarily to non-affiliated centers and other third parties. For the year ended December 31, 2009, Sun’s total net revenues from continuing operations were $1.9 billion. For the three months ended March 31, 2010, Sun’s total net revenues from continuing operations were $0.5 billion.

Business Segments

Sun’s subsidiaries currently engage in the following three principal business segments:

•

inpatient services, primarily skilled nursing centers;

•

rehabilitation therapy services; and

•

medical staffing services.

Inpatient services. Sun operates its healthcare facilities through SunBridge and other subsidiaries. Sun’s skilled nursing centers provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. Rehab Recovery Suites, which specialize in Medicare and managed care patients, are located in 65 of Sun’s skilled nursing centers, and 46 of Sun’s skilled nursing centers contain wings dedicated to the care of residents afflicted with Alzheimer’s disease. Sun’s assisted living centers provide services that include minimal nursing assistance, housekeeping, nutrition, laundry and administrative services for individuals requiring minimal assistance for activities in daily living. Sun’s independent living centers provide services that include security, housekeeping, nutrition and limited laundry services for individuals requiring no assistance for activities in daily living. Sun’s mental health centers provide a range of inpatient and outpatient behavioral health services for adults and children through specialized treatment programs. Sun also provides hospice services, including

palliative care, social services, pain management and spiritual counseling, through its subsidiary SolAmor Hospice Corporation (“SolAmor”), in eight states for individuals facing end of life issues. Sun generated 89.1%, 88.6%, and 87.8% of its total net revenues from continuing operations through inpatient services in 2009, 2008, and 2007, respectively.

Rehabilitation therapy services. Sun provides rehabilitation therapy services through SunDance Rehabilitation Corporation (“SunDance”). SunDance provides a broad array of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. As of March 31, 2010, SunDance provided rehabilitation therapy services to 468 centers in 36 states, 337 of which were operated by nonaffiliated parties and 131 of which were operated by affiliates. In most of Sun’s 74 healthcare centers for which SunDance does not provide rehabilitation therapy services, those services are provided by staff employed by the centers, although some centers engage third-party therapy companies for such services. Sun generated 5.6%, 4.9%, and 5.3% of its total net revenues from continuing operations through rehabilitation therapy services in 2009, 2008, and 2007, respectively.

Medical staffing services. Sun provides temporary medical staffing in 44 states through CareerStaff Unlimited, Inc. (“CareerStaff”). For the year ended December 31, 2009, CareerStaff derived 56.1% of its revenues from hospitals and other providers, 24.7% from skilled nursing centers, 15.3% from schools and 3.9% from prisons. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians, (iv) physicians and (v) related medical personnel. Sun generated 5.3%, 6.5%, and 6.9% of its total net revenues from continuing operations through medical staffing services in 2009, 2008, and 2007, respectively.

SHG Services, Inc.

18831 Von Karman, Suite 400

Irvine, CA 92612

(949) 255-7100

SHG Services, Inc. is referred to in this proxy statement/prospectus as New Sun. New Sun is a wholly owned subsidiary of Sun which, as a result of the restructuring of Sun’s business described in this proxy statement/prospectus, is expected to hold or assume immediately prior to the Separation, directly or indirectly through its subsidiaries, all of Sun’s operations and other assets and liabilities (other than substantially all of Sun’s owned real property). New Sun will also own the New Sun Retained Properties. Following the Separation, New Sun will be renamed “Sun Healthcare Group, Inc.” and through its subsidiaries, will continue to provide the same nursing, rehabilitative and related specialty healthcare services provided by Sun immediately prior to the Separation and will continue to engage in Sun’s three principal business segments of inpatient services, rehabilitation therapy services and medical staffing services. Shares of New Sun common stock are expected to trade on the NASDAQ Global Select Market under the symbol “SUNH.”

Sabra Health Care REIT, Inc.

18831 Von Karman, Suite 400

Irvine, CA 92612

(949) 255-7100

Sabra Health Care REIT, Inc. is referred to in this proxy statement/prospectus as Sabra. Sabra is a wholly owned subsidiary of Sun which, as a result of the restructuring of Sun’s business described in this proxy statement/prospectus, is expected to hold immediately prior to the Separation, directly or indirectly through its subsidiaries, substantially all of Sun’s owned real property, other than the New Sun Retained Properties. The owned real property to be held by Sabra includes fixtures and certain personal property associated with the real property. Pursuant to the Lease Agreements, Sabra will lease those assets to New Sun’s subsidiaries. Following the

consummation of the REIT Conversion Merger, Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011. Sabra expects to grow its portfolio through acquisitions as a broad-based healthcare REIT. As Sabra acquires additional properties, it expects to diversify by geography, asset class and tenant within the healthcare sector. Shares of Sabra common stock are expected to trade on the under the symbol “SBRA.”

Risks Associated with the Separation and REIT Conversion

The Separation and REIT Conversion pose a number of risks to Sun stockholders. Sun stockholders will be receiving shares of New Sun and Sabra common stock as a result of the Separation and REIT Conversion Merger. After the Separation and REIT Conversion Merger, each of New Sun and Sabra will be subject to various risks associated with their respective businesses. These risks are discussed in greater detail under the caption “Risk Factors.” You should read and consider all of these risks carefully.

The Special Meeting of Sun Stockholders

Date, Time and Place. The special meeting of Sun stockholders will be held on , 2010, at at a.m. local time, and at any adjournment or postponement thereof.

Purpose of the Special Meeting. At the special meeting, Sun’s stockholders will be asked to consider and vote upon (i) a proposal to approve the Separation; (ii) a proposal to adopt the agreement and plan of merger by and between Sun and Sabra to implement the REIT Conversion Merger; and (iii) a proposal to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger.

Record Date; Shares Entitled to Vote; Quorum. Only stockholders of record at the close of business on , 2010, the record date for the special meeting, will be entitled to notice of and to vote at the special meeting. At the close of business on the record date for the special meeting, shares of Sun common stock were outstanding and entitled to vote. As of the close of business on the record date for the special meeting, executive officers and directors of Sun held an aggregate of shares of Sun common stock, which represents approximately % of all shares of Sun common stock entitled to vote at the special meeting. The presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of Sun common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the meeting and any adjournments or postponements thereof.

Vote Required

The Separation. The affirmative vote of a majority of the outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the proposal is required to approve the Separation. If you “ABSTAIN” from voting on approval of the Separation, the effect will be the same as a vote against the Separation.

The REIT Conversion Merger. The affirmative vote of a majority of the outstanding shares of Sun common stock entitled to vote at the special meeting is required to adopt the agreement and plan of merger to implement the REIT Conversion Merger. If you do not submit a proxy or voting instruction form or do not vote in person at the special meeting, or if you “ABSTAIN” from voting on adoption of the agreement and plan of merger, the effect will be the same as a vote against the adoption of the agreement and plan of merger.

Adjournment of the Special Meeting. The affirmative vote of a majority of the outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the

proposal is required to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger. If you “ABSTAIN” from voting on approval of the adjournment, the effect will be the same as a vote against the adjournment of the special meeting.

Overview of the Separation and REIT Conversion

Pursuant to the restructuring plan approved by the board of directors of Sun to separate Sun’s real estate assets and its operating assets into two publicly traded companies, Sun will reorganize, through a series of internal corporate restructurings. After the restructuring, Sabra or one or more of its subsidiaries will hold substantially all of Sun’s owned real property (excluding the New Sun Retained Properties). Sabra will assume the liabilities, including the mortgage indebtedness, of Sun that are related to the real property to be owned by it. All of Sun’s operations and other assets and liabilities will be held or assumed by New Sun or by one or more of its subsidiaries. New Sun and Sabra will enter into certain agreements, including the Lease Agreements pursuant to which subsidiaries of New Sun will lease from Sabra all of the real property that Sabra will own immediately following the restructuring of Sun’s business.

Upon satisfaction or waiver of the conditions to the Separation and REIT Conversion Merger, Sun will distribute to its stockholders on a pro rata basis all of the outstanding shares of New Sun common stock. Sun will then merge with and into Sabra, with Sabra surviving the merger as a Maryland corporation and Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Sun common stock. In each case, cash will be paid in lieu of fractional shares. The Separation and REIT Conversion Merger are expected to occur on or about , 2010. Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011.

Following the REIT Conversion, Sabra intends to be a self-managed and self-administered REIT. Sabra intends to operate through an umbrella partnership (commonly referred to as an UPREIT) structure in which substantially all of its properties and assets would be held by Sabra Health Care Limited Partnership, a Delaware limited partnership, of which Sabra is the sole general partner.

Background and Reasons for the Separation and REIT Conversion

The board of directors of Sun believes that the Separation and REIT Conversion Merger will create two focused companies—one that will concentrate on providing quality care to residents and patients and the other that will concentrate on building a diversified healthcare real property company. The board of directors of Sun believes that the two separate public companies will:

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more readily enable Sun stockholders to maximize their investment in Sun;

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provide the flexibility to each company to optimize its capital structure and focus on its core competencies;

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better position Sabra to realize the full value of its portfolio of healthcare properties and to strategically expand it in the healthcare sector beyond Sun’s portfolio of properties while affording Sabra stockholders the benefit of a tax-advantaged REIT security; and

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enable New Sun to pursue its growth strategies with significantly less debt on its balance sheet.

Relationship Between New Sun and Sabra After the Separation and REIT Conversion Merger

To govern their ongoing relationship, New Sun and Sabra or their respective subsidiaries, as applicable, will enter into the Distribution Agreement, the Lease Agreements, the Tax Allocation Agreement and the Transition

Services Agreement on or prior to the distribution date of the Separation. Although it is expected that the agreements between New Sun and Sabra will contain terms and conditions that generally are consistent with current market terms and conditions, because these agreements are being negotiated in the context of the Separation, the terms and conditions in the agreements may be different than those that either Sabra or New Sun may have obtained from unaffiliated parties. See “Risk Factors—New Sun and Sabra may have been able to receive better terms from unaffiliated third parties than the terms they receive in agreements entered into in connection with the Separation.”

Each of New Sun and Sabra will adopt certain policies to minimize potential conflicts of interest that may result from the service of Mr. Foster and Mr. Walters on the boards of directors of each of Sabra and New Sun. No other person will be a director, executive officer or other employee of both New Sun and Sabra.

Description of Material Indebtedness

Immediately prior to the Separation, New Sun and Sabra expect to incur indebtedness of up to $ and $ , respectively. The amount of the indebtedness to be incurred by New Sun and Sabra will depend on the cash position of Sun immediately prior to the Separation. The terms and structure of the indebtedness to be incurred by New Sun and Sabra have not yet been determined. It is anticipated that the debt agreements will contain customary covenants that will include restrictions on each of New Sun’s and Sabra’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures. In addition, following the Separation, New Sun will have mortgage indebtedness to third parties of $6.2 million and Sabra will have mortgage indebtedness to third parties of $164.0 million. For additional information relating to these financing arrangements, see “Description of Material Indebtedness.”

Accounting Treatment for the Separation and REIT Conversion

Following the Separation, New Sun will continue the business and operations of Sun. Sabra will not have operated prior to the Separation. Immediately following the Separation and REIT Conversion Merger, Sabra will hold, directly or indirectly through its subsidiaries, all of Sun’s owned real property (excluding the New Sun Retained Properties). The owned real property to be held by Sabra includes fixtures and certain personal property associated with the real property. The only material liabilities of Sabra will consist of the indebtedness incurred by Sabra at the time of the Separation and the mortgage indebtedness to third parties on the real property to be owned by Sabra. The liabilities of New Sun will consist of indebtedness of New Sun incurred or assumed at the time of the Separation and substantially all of the liabilities of Sun immediately prior to the Separation, excluding the indebtedness of Sun repaid at the time of the Separation and the mortgage indebtedness to third parties assumed by Sabra. The historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun after the Separation. Sabra will not have operated prior to the Separation. Accordingly, at the time of the Separation the balance sheet of Sabra will include the owned real property and the related mortgage indebtedness to third parties on the real property noted above. The statement of operations and cash flows of Sabra will consist solely of its operations after the Separation. The assets and liabilities of both New Sun and Sabra will be recorded at their respective historical carrying values at the date of the Separation.

Regulatory Approvals Required for the Separation and REIT Conversion Merger

In connection with the Separation and the restructuring of Sun’s business, Sun will be required to file notices with, and in some jurisdictions obtain approvals or consents from, the various governmental agencies and commissions responsible for the licensure or certification of Sun’s inpatient centers and other lines of business. In some cases, these filings must be made, and approvals obtained, before the Separation can be completed. In other cases, notice filings will need to be made by New Sun after the Separation has been completed.

In addition, Sun and Sabra will be required to submit applications to the U.S. Department of Housing and Urban Development (“HUD”) to seek approvals regarding ten inpatient centers operated by Sun in order to complete the restructuring of Sun’s business as well as the Separation and REIT Conversion Merger.

Compensation

Following the Separation and REIT Conversion Merger, New Sun’s compensation committee and board of directors will discuss and approve the executive compensation program for New Sun’s executive officers. This compensation program is expected to be substantially similar to the compensation program currently in place at Sun, except with respect to Mr. Mathies. The details of Mr. Mathies’ compensation as the Chief Executive Officer of New Sun have not yet been determined. New Sun also expects to adopt the performance incentive plan, 401(k) plan and the deferred compensation plan of Sun.

Following the Separation and REIT Conversion Merger, Sabra’s compensation committee and board of directors will discuss and approve the executive compensation program for Sabra’s executive officers. The details of Mr. Matros’ compensation as Chief Executive Officer of Sabra, and the compensation of other executives of Sabra, have not yet been determined.

Treatment of Equity Awards in the Separation and REIT Conversion Merger

PROPOSAL NO. 1—APPROVAL OF THE SEPARATION

Manner of Effecting the Separation

In the Separation, Sun stockholders as of the record date for the Separation will receive shares of New Sun common stock for each share of Sun common stock such stockholder owns on the record date.

by such stockholder in the Separation. Cash will be paid in lieu of fractional shares. See “—Trading Between the Record Date for the Separation and the Distribution Date for the Separation” for a discussion of the effect of the distribution on any shares you sell after the record date but prior to the distribution date.

Additionally, on the distribution date for the Separation, Sun intends to make a cash distribution to holders of Sun common stock on the record date for the Separation of approximately $ per share resulting in an aggregate cash distribution of approximately $13 million. The final amount of this cash distribution will not be determined until the time of the Separation.

Management of New Sun

The Chief Executive Officer of New Sun will be William A. Mathies, currently the President and Chief Operating Officer of SunBridge, Sun’s inpatient services subsidiary. Other than Richard K. Matros, the current Chief Executive Officer of Sun, the remaining Sun management team will be the management team of New Sun, including L. Bryan Shaul, who will be the Chief Financial Officer. The members of the existing board of directors of Sun will become the members of the board of directors of New Sun, except that Mr. Matros will be replaced on the board by Mr. Mathies.

Interests of Certain Persons in the Separation

As of the record date for the special meeting, directors and executive officers of Sun beneficially owned approximately % of the outstanding shares of Sun common stock. Directors and executive officers of New Sun who own shares of Sun common stock as of the record date for the Separation will receive a distribution of shares of New Sun common stock and the cash distribution on the same basis as other Sun stockholders. See “Security Ownership of Certain Beneficial Owners and Management.”

Market for New Sun Common Stock; Trading of New Sun Common Stock Following the Separation

There is no current public market for New Sun common stock. Upon completion of the Separation, it is expected that New Sun common stock will be listed and will trade on the NASDAQ Global Select Market using Sun’s current stock symbol, “SUNH.”

Immediately following the Separation, based on the shares of Sun common stock outstanding as of , 2010, New Sun will have shares of common stock outstanding. The actual number of shares of New Sun common stock outstanding will be determined based on the number of shares of Sun common stock outstanding on the record date for the Separation. No shares of preferred stock of New Sun will be issued or outstanding at the time of the Separation. Immediately following the Separation, it is expected that New Sun will have approximately holders of record of shares of its common stock based on the number of holders of record of shares of Sun common stock on , 2010.

Trading Between the Record Date for the Separation and the Distribution Date for the Separation

Sun anticipates that, beginning on or shortly before the record date for the Separation and continuing through the distribution date for the Separation, there will be a “when-issued” market in New Sun common stock. On the first trading day following the distribution date for the Separation, “when-issued” trading with respect to New Sun common stock will end and “regular trading” will begin. For more information on trading Sun or New Sun common stock between the record date for the Separation and the distribution date for the Separation, see “The Proposals—Proposal No. 1—Approval of the Separation—Trading Between the Record Date for the Separation and the Distribution Date for the Separation.”

U.S. Federal Income Tax Consequences of the Separation

The Separation should be treated as a taxable distribution to U.S. holders for U.S. federal income tax purposes. For a more complete discussion, see “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of the Separation.”

Conditions to the Separation

The Separation is conditioned upon the satisfaction or waiver of the following conditions:

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Sun’s stockholders shall have approved the Separation and adopted the agreement and plan of merger to implement the REIT Conversion Merger;

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the restructuring of Sun’s business as described in this proxy statement/prospectus shall have been completed;

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New Sun’s listing application with the NASDAQ Global Select Market shall have been approved, subject to official notice of issuance;

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no stop order shall be in effect with respect to New Sun’s registration statement on Form S-1 filed with the SEC to register under the Securities Act of 1933, as amended, (the “Securities Act”) the distribution of shares of New Sun common stock in the Separation;

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no stop order shall be in effect with respect to Sabra’s registration statement on Form S-4 filed with the SEC to register under the Securities Act the issuance of shares of Sabra common stock in the REIT Conversion Merger;

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Sun, New Sun and Sabra shall have obtained all material authorizations, consents, approvals and clearances of third parties, including U.S. federal, state and local governmental agencies, to complete the Separation and REIT Conversion Merger;

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no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a government, regulatory or administrative agency or commission, and no statute, rule, regulation or executive order promulgated or enacted by any governmental authority, shall be in effect preventing the consummation of the Separation or the REIT Conversion Merger;

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the financing transactions as described under the caption “Description of Material Indebtedness” shall have been consummated, and all material consents, waivers or amendments to any mortgage indebtedness shall have been obtained, in each case, on terms satisfactory to Sun;

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the Distribution Agreement, the Lease Agreements, the Tax Allocation Agreement and the Transition Services Agreement shall have been executed and delivered by New Sun and Sabra;

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no litigation or proceeding challenging or seeking to restrain the Separation or the REIT Conversion Merger shall be pending or threatened; and

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all other conditions required to complete the REIT Conversion Merger shall have been satisfied or waived.

The fulfillment of the foregoing conditions will not create any obligation on Sun’s part to effect the Separation or the REIT Conversion Merger. Sun reserves the right to abandon, defer or modify the Separation and REIT Conversion Merger at any time, even if Sun stockholders approve the Separation and REIT Conversion Merger. Sun may not proceed with the Separation and REIT Conversion Merger if the board of directors of Sun determines for any reason that these transactions are no longer in the best interests of Sun and its stockholders.

Absence of Appraisal Rights

Sun stockholders will not be entitled to dissenters’ or appraisal rights as a result of the Separation.

Distribution and Dividend Policy

New Sun does not anticipate paying dividends on its common stock in the foreseeable future. New Sun anticipates that the agreements governing the indebtedness it expects to incur, like Sun’s current senior credit facility, will restrict New Sun’s ability to pay dividends or make distributions to its stockholders. Any future determination to pay dividends will be at the discretion of the board of directors of New Sun and will be dependent upon such factors as the financial position, results of operations, capital requirements, credit agreement compliance, applicable law and other factors affecting New Sun as its board of directors deems relevant.

PROPOSAL NO. 2—ADOPTION OF THE AGREEMENT AND PLAN OF MERGER

Structure and Completion of the REIT Conversion Merger

In accordance with the agreement and plan of merger to implement the REIT Conversion Merger, at the effective time of the REIT Conversion Merger, each share of Sun common stock issued and outstanding immediately prior to the completion of the REIT Conversion Merger will automatically convert into shares of Sabra common stock.

Qualification as a REIT

Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011. As a REIT, Sabra will generally not be subject to U.S. federal income tax on its REIT taxable income that it distributes currently to its stockholders. Its qualification as a REIT depends upon its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and value of its assets, its distribution levels to stockholders and the diversity of ownership of its shares. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT” for a more complete discussion.

Management of Sabra

Interests of Certain Persons in the REIT Conversion Merger

who own shares of Sun common stock as of the effective time of the REIT Conversion Merger will receive shares of Sabra common stock on the same basis as other Sun stockholders. See “Security Ownership of Certain Beneficial Owners and Management.”

Market for Sabra Common Stock; Trading of Sabra Common Stock Following the REIT Conversion Merger

There is no current public market for Sabra common stock. Upon consummation of the REIT Conversion Merger, it is expected that Sabra common stock will be listed and will trade on the using the stock symbol “SBRA.”

Immediately following the REIT Conversion Merger, based on the shares of Sun common stock outstanding as of , 2010, Sabra will have shares of common stock issued and outstanding. The actual number of shares of Sabra common stock outstanding will be determined based on the number of shares of Sun common stock outstanding at the time of the REIT Conversion Merger. No shares of preferred stock of Sabra will be issued or outstanding at the time of the REIT Conversion Merger. Immediately following the REIT Conversion Merger, it is expected that Sabra will have approximately holders of record of shares of its common stock based on the number of holders of record of shares of Sun common stock on , 2010.

Manner and Procedure for Receiving Shares of Sabra Common Stock

Sabra does not expect to issue physical certificates for the shares you will receive in the REIT Conversion Merger in exchange for your shares of Sun common stock, even if you currently hold a physical certificate. Instead, Sabra will electronically issue shares of Sabra common stock to you or to your bank, broker or other nominee on your behalf by way of direct registration in book-entry form. Any physical certificate representing Sun shares of common stock will be deemed cancelled and will no longer represent any ownership interest.

U.S. Federal Income Tax Consequences of the REIT Conversion Merger

The receipt of Sabra common stock in exchange for Sun common stock in the REIT Conversion Merger should not cause recognition of gain or loss for U.S. federal income tax purposes to U.S. holders with respect to such exchange, except with respect to cash received in lieu of a fractional share of Sun common stock. For a more complete discussion, see “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of the REIT Conversion Merger.”

Conditions to the REIT Conversion Merger

The REIT Conversion Merger is conditioned upon the satisfaction or waiver of the following conditions:

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the Separation shall have been completed;

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Sabra’s listing application with the shall have been approved, subject to official notice of issuance;

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no litigation or proceeding challenging or seeking to restrain the REIT Conversion Merger shall be pending or threatened.

The fulfillment of the foregoing conditions will not create any obligation on Sun’s part to effect the Separation or the REIT Conversion Merger. Sun reserves the right to abandon, defer or modify the Separation and REIT Conversion Merger at any time, even if Sun stockholders approve the Separation and REIT Conversion Merger. Sun may not proceed with the Separation and REIT Conversion Merger if the board of directors of Sun determines for any reason that these transactions are no longer in the best interests of Sun and its stockholders.

Absence of Appraisal Rights

Sun stockholders will not be entitled to dissenters’ or appraisal rights as a result of the REIT Conversion Merger.

Distribution and Dividend Policy

Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011. In order to qualify as a REIT for U.S. federal income tax purposes, Sabra intends to make quarterly cash distributions, commencing in the first quarter of 2011, to holders of its common stock equal to at least 90% of its taxable income on an annual basis (excluding net capital gains), as defined in the Code. The first distribution, for the period ending March 31, 2011, is expected to equal approximately $ per share of Sabra common stock. The actual amount of the distribution will depend on Sabra’s actual funds from operations for such period. See “Risk Factors—Risks Associated with the Status of Sabra as a REIT” and “Risk Factors—Risks Relating to Sabra’s Business.”

PROPOSAL NO. 3—APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING

Sun may propose to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger.

RISK FACTORS

Before you vote, you should carefully consider the risks related to the Separation and REIT Conversion described below and the other information contained in this proxy statement/prospectus or in Sun’s documents incorporated by reference herein, as set forth under “Where You Can Find More Information.” By voting in favor of the Separation and the adoption of the agreement and plan of merger to implement the REIT Conversion Merger, you will be choosing to change your investment from an interest in Sun common stock to an interest in New Sun common stock and Sabra common stock. The risks and uncertainties described below are not the only ones facing New Sun and Sabra. If any of the following risks actually are realized, New Sun’s and/or Sabra’s business, financial position or results of operations could be materially adversely affected, the value of New Sun common stock and/or Sabra common stock could decline and you could lose all or part of your investment.

Risks Relating to the Separation and REIT Conversion

Your receipt of the distribution in the Separation may be taxable, in whole or in part, to you as a dividend.

Your receipt of shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distributed in connection with the Separation may be taxable, in whole or in part, to you as a dividend. The fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distributed in connection with the Separation to a U.S. holder should be treated as a dividend to the extent of a U.S. holder’s share of current and accumulated earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles. To the extent the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by a U.S. holder exceeds the U.S. holder’s share of the current and accumulated earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), the excess first will be treated as a nontaxable return of capital to the extent, generally, of the U.S. holder’s adjusted tax basis in Sun common stock, and any remaining excess will be treated as capital gain. Although Sun will be ascribing a value to the shares of New Sun common stock received in the Separation for tax purposes, this valuation is not binding on the U.S. Internal Revenue Service (“IRS”) or any other tax authority. These taxing authorities could ascribe a higher valuation to the shares, particularly if the stock trades at prices significantly above the value ascribed to the shares by Sun in the period following the Separation. You should consult your own tax advisor as to the particular tax consequences of the Separation to you.

New Sun may be required to indemnify Sabra for certain tax liabilities for taxable periods (or portions thereof) prior to and including the date of the Separation.

Under the terms of the Tax Allocation Agreement, New Sun will agree to indemnify Sabra from and after the Separation with respect to certain tax liabilities for taxable periods (or portions thereof) prior to and including the date of the Separation. See “Relationship Between New Sun and Sabra after the Separation and REIT Conversion Merger—The Tax Allocation Agreement” for a further description of the Tax Allocation Agreement. These indemnification obligations could be significant. New Sun’s ability to satisfy any of these indemnification obligations may depend upon the future financial strength of New Sun. New Sun cannot determine whether it will have to indemnify Sabra for any substantial obligations after the Separation. Sabra also cannot assure you that, if New Sun becomes obligated to indemnify Sabra for any substantial obligations, New Sun will have the ability to satisfy those obligations.

Sun’s inability to obtain all material authorizations, consents, approvals and clearances of third parties including U.S. federal, state and local governmental agencies (“Third-Party Approvals”) in connection with the Separation or REIT Conversion Merger may have a material adverse effect on Sun’s ability to consummate the Separation and REIT Conversion.

There are numerous Third-Party Approvals that Sun must obtain to consummate the restructuring of Sun’s business, including consents of mortgage lenders and landlords of Sun and its subsidiaries. If Sun is unable to

obtain such Third-Party Approvals on commercially reasonable and satisfactory terms, the ability of New Sun or Sabra to conduct their respective businesses may be impaired.

Sun’s inpatient centers, rehabilitation therapy companies, health care staffing companies and hospice companies are extensively regulated by federal and state healthcare regulatory bodies and, in some instances, accreditation bodies. To consummate the restructuring of Sun’s business, Sun is required to file notices with, and in some jurisdictions obtain approvals or consents from, the various governmental agencies and commissions responsible for the licensure or certification of Sun’s inpatient centers and other lines of business. In some cases, these filings must be made, and approvals obtained, before the Separation can be completed. Also, Sun operates ten inpatient centers with mortgages that are guaranteed by HUD. Sun and Sabra will be required to submit applications to HUD to seek approvals regarding those ten centers to complete the restructuring of Sun’s business and the Separation and REIT Conversion Merger.

Although Sun has commenced the process of seeking the necessary Third-Party Approvals, it currently does not have all the necessary Third-Party Approvals. There is no assurance that Sun will be able to obtain these Third-Party Approvals. Sun does not intend to consummate the Separation or the REIT Conversion Merger if it does not receive all required Third-Party Approvals, unless it believes that the inability to obtain one or more Third-Party Approvals would not reasonably be expected to have a material adverse effect on the business, financial position or results of operations of each of New Sun and Sabra. However, there can be no assurance that such a material adverse effect will not occur.

The historical and pro forma financial information included in this proxy statement/prospectus is not necessarily representative of the results New Sun or Sabra would have achieved as separate, publicly traded companies and may not be a reliable indicator of future results.

The historical financial statements of Sun, which will become the historical financial statements of New Sun following the Separation, and the pro forma financial information of New Sun and Sabra included in this proxy statement/prospectus may not reflect the business, financial position or results of operations of New Sun or Sabra would have been had they been separate, publicly traded companies during the periods presented, or what their business, financial position or results of operations will be in the future when they are separate, publicly traded companies. This is primarily because of the following factors, among others:

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Prior to the Separation and REIT Conversion Merger, the business of New Sun and the assets of Sabra were operated by Sun as part of one corporate organization and were not operated as stand-alone companies;

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New Sun and Sabra will enter into transactions with each other that have not existed historically; and

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Significant changes may occur in the cost structure, financing and business operations as a result of New Sun and Sabra operating as stand-alone companies. These changes may result in increased costs associated with reduced economies of scale, stand-alone costs for services currently provided and, as to Sabra, the legal, accounting, compliance and other costs associated with being a public company.

The pro forma financial information included in this proxy statement/prospectus includes adjustments based upon available information believed to be reasonable to reflect these factors. However, the assumptions may change and actual results may differ. For additional information about the basis of presentation of New Sun’s and Sabra’s pro forma financial information and Sun’s historical financial statements included in this proxy statement/prospectus, see “Description of Material Indebtedness,” “New Sun Pro Forma Capitalization,” “Sabra Pro Forma Capitalization and Supplemental Pro Forma Financial Information,” “New Sun Unaudited Pro Forma Consolidated Financial Statements,” “Sabra Unaudited Pro Forma Consolidated Financial Statements” and “Selected Financial Information and Other Data.”

The Separation and REIT Conversion could give rise to liabilities, increased costs or other unfavorable effects that may not have otherwise arisen.

The Separation and REIT Conversion may lead to increased operating and other expenses, of both a nonrecurring and a recurring nature, and to changes to certain operations, which expenses or changes could arise pursuant to

arrangements made between New Sun and Sabra or the triggering of rights and obligations to third parties. Litigation between New Sun and Sabra or other third parties could also arise out of these transactions, and each of New Sun and Sabra could experience unfavorable reactions to the Separation and REIT Conversion from employees, landlords, lenders, ratings agencies, regulators or other interested parties.

New Sun and Sabra may have been able to receive better terms from unaffiliated third parties than the terms they receive in agreements entered into in connection with the Separation.

The agreements related to the Separation, including the Distribution Agreement, the Lease Agreements, the Tax Allocation Agreement and the Transition Services Agreement, will be negotiated in the context of New Sun’s separation from Sun while New Sun is still a part of Sun. Accordingly, these agreements may not reflect terms that may have been obtained from unaffiliated third parties. Some of the terms of the agreements being negotiated in the context of the Separation include the initial cash position of each company, the initial indebtedness to be incurred by each company and the allocation of liabilities, rights, indemnifications and other obligations between the companies. New Sun and Sabra may have received better terms from third parties.

Conflicts of interest may exist between New Sun and Sabra because of their overlapping directors, which conflicts could adversely affect the business, financial position or results of operations of New Sun and Sabra.

Two members of the board of directors of Sun, Michael J. Foster and Milton J. Walters, will be directors of both New Sun and Sabra. Each of New Sun and Sabra will adopt certain policies to minimize potential conflicts of interest that may result from the service of Mr. Foster and Mr. Walters on the boards of directors of each of Sabra and New Sun. No other person will be a director, executive officer or other employee of both New Sun and Sabra.

If Sabra and New Sun are treated by the IRS as being under common control, both Sabra and New Sun could experience adverse tax consequences.

If Sabra and New Sun are treated by the IRS as being under common control, the IRS will be authorized to reallocate income and deductions between them to reflect arm’s length terms. Were the IRS successfully to establish that rents paid by New Sun to Sabra are excessive, (a) New Sun would be denied a deduction for the excessive portion and (b) New Sun would be subject to a penalty on the portion deemed excessive, each of which could have a material adverse effect on the business, financial position or results of operations of New Sun. In addition, New Sun stockholders would be deemed to have received a distribution that was then contributed to the capital of Sabra. To the extent that rents were insufficient, Sabra (i) would be subject to a penalty on the portion deemed insufficient and (ii) would be deemed to have made a distribution to its stockholders equal to the insufficiency, each of which could have a material adverse effect on the business, financial position or results of operations of Sabra.

Risks Associated with the Status of Sabra as a REIT

Because the timing of the REIT Conversion is not certain, Sabra may not realize the anticipated tax benefits from the REIT Conversion commencing with its taxable year beginning on January 1, 2011.

If the Separation and REIT Conversion Merger are delayed beyond December 31, 2010, Sabra will not be qualified to elect REIT status for the taxable year beginning on January 1, 2011. In that case, the U.S. federal income tax benefits attributable to its status as a REIT, including its ability to reduce its corporate-level U.S. federal income tax, would not be available for the taxable year beginning on January 1, 2011.

Failure to qualify as a REIT would subject Sabra to U.S. federal income tax, which would reduce the cash available for distribution to stockholders of Sabra.

Although Sabra intends to operate in a manner that will cause it to qualify as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011, no assurance can be given that Sabra will be able to qualify for and maintain REIT status. The U.S. federal income tax laws governing REITs are

extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Moreover, the Separation and REIT Conversion Merger may complicate REIT compliance, including the requirement that any earnings and profits accumulated before the qualification of Sabra as a REIT be distributed by the end of the taxable year with respect to which Sabra’s REIT election is made. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT—Non-REIT Earnings and Profits.” Qualifying as a REIT also requires Sabra to meet various tests relating to, among other things, the sources of its gross income, the composition and value of its assets, its distribution levels to stockholders and the diversity of ownership of its shares. While Sabra intends to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in Sabra’s circumstances, no assurance can be given that Sabra will so qualify for any particular taxable year.

If Sabra were to fail to qualify as a REIT in any taxable year, it would not be allowed a deduction for distributions to stockholders in computing its taxable income and would be subject to U.S. federal income tax (including any applicable minimum tax) on its taxable income at corporate tax rates. Sabra’s payment of U.S. federal income tax would decrease the amount of its income available for distribution to its stockholders. If Sabra became disqualified, unless entitled to relief under certain Code provisions, Sabra also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, Sabra’s cash available for distribution would be reduced for each of the years involved. Although Sabra currently is expected to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the board of directors of Sabra to revoke the REIT election. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT.”

Sabra could fail to qualify as a REIT if income it receives from New Sun is not treated as qualifying income.

Under applicable provisions of the Code, Sabra will not be treated as a REIT unless it satisfies various requirements, including requirements relating to the sources of its gross income. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT—Gross Income Tests.” Rents received or accrued by Sabra from New Sun will not be treated as qualifying rent for purposes of these requirements if the Lease Agreements are not respected as true leases for U.S. federal income tax purposes and are instead treated as service contracts, joint ventures or some other type of arrangement. If the Lease Agreements are not respected as true leases for U.S. federal income tax purposes, Sabra likely would fail to qualify as a REIT. In addition, rents received or accrued by Sabra from New Sun will not be treated as qualifying rent for purposes of these requirements if Sabra is treated, either directly or under the applicable attribution rules, as owning 10% or more of New Sun common stock. Sabra will be treated as owning, under the applicable attribution rules, 10% or more of New Sun common stock at any time that a stockholder owns, directly or under the applicable attribution rules, (a) 10% or more of Sabra common stock and (b) 10% or more of New Sun common stock. The provisions of Sabra’s charter restrict the transfer and ownership of its common stock that would cause the rents received or accrued by Sabra from New Sun to be treated as non-qualifying rent for purposes of the REIT gross income requirements. The provisions of Sabra’s charter restricting the transfer and ownership of its common stock are described in “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock.” Nevertheless, there can be no assurance that such restrictions will be effective in ensuring that Sabra will not be treated as related to New Sun.

Failure of Sabra to make required distributions would subject Sabra to tax at corporate tax rates, which would reduce the cash available for distribution to holders of Sabra common stock.

In order to qualify as a REIT, Sabra generally will be required each year to distribute to its stockholders at least 90% of its net taxable income (excluding any net capital gain). In addition, Sabra will be subject to U.S. federal income tax on its undistributed taxable income at corporate tax rates and will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it during (or required to be paid during)

any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year (other than capital gain income which Sabra elects to retain and pay tax on) and (iii) 100% of its undistributed income from prior years.

Sabra will be required to make distributions to its stockholders to comply with the 90% distribution requirement and to avoid the nondeductible excise tax. Sabra’s funds from operations, at least at the inception of Sabra, will be generated primarily by rents paid under the Lease Agreements. Differences in timing between taxable income and funds from operations could require Sabra to borrow funds on a short-term basis to meet the 90% distribution requirement and to avoid the nondeductible excise tax. Restrictions in Sabra’s indebtedness following the Separation and REIT Conversion Merger, including restrictions on New Sun’s ability to incur additional indebtedness or make certain distributions, could preclude it from meeting the 90% distribution requirement. See “Description of Material Indebtedness.” Decreases in funds from operations due to unfinanced expenditures for acquisitions of properties or increases in the number of shares of Sabra common stock outstanding without commensurate increases in funds from operations each would adversely affect the ability of Sabra to maintain distributions to its stockholders. Moreover, the failure of New Sun to make rental payments under the Lease Agreements would materially impair the ability of Sabra to make distributions. Consequently, there can be no assurance that Sabra will be able to make distributions at the anticipated distribution rate or any other rate. See “Distribution and Dividend Policy—Sabra.”

Complying with REIT requirements may cause Sabra to forego otherwise attractive opportunities or liquidate otherwise attractive investments or acquisitions.

To qualify as a REIT for U.S. federal income tax purposes, Sabra must continually satisfy certain tests including tests concerning the sources of its income, the nature and diversification of its assets, the amounts its distribute to its stockholders and the ownership of its stock. In order to meet these tests, Sabra may be required to forego investments or acquisitions it might otherwise make. Thus, compliance with the REIT requirements may hinder its performance.

If Sabra has significant amounts of non-cash taxable income, Sabra may have to declare taxable stock dividends or make other non-cash distributions.

Sabra currently intends to pay dividends in cash only, and not in stock. However, if for any taxable year, Sabra has significant amounts of taxable income in excess of available cash flow, Sabra may have to declare dividends in-kind. Sabra may distribute a portion of its dividends in the form of its stock or in the form of its debt instruments. In either event, a stockholder of Sabra common stock will be required to report dividend income as a result of such distributions even though Sabra distributed no cash or only nominal amounts of cash to such stockholder.

Alternatively, Sabra may distribute taxable dividends that are payable in cash and shares of its stock at the election of each Sabra stockholder. The IRS has indicated that it will treat distributions that are paid part in cash and part in stock (through 2011) as dividends that would satisfy the REIT annual distribution requirements and qualify for the dividends paid deduction for U.S. federal income tax purposes. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT—Annual Distribution Requirements.” U.S. holders receiving such taxable dividends will be required to include the full amount of the dividend as ordinary income to the extent of Sabra’s current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. holder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. holder sells the Sabra stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of the stock at the time of the sale. In addition, if a significant number of Sabra stockholders determine to sell shares of Sabra stock in order to pay taxes owed on dividends, these sales may put downward pressure on the trading price of Sabra stock.

Further, because the applicable IRS revenue procedure applies only to taxable dividends payable in cash and/or stock through 2011, it is unclear whether and to what extent Sabra will be able to pay taxable dividends in cash and/or stock in later years. Moreover, various tax aspects of such a taxable dividend payable in cash and/or stock are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable dividends payable in cash and/or stock, including on a retroactive basis, or assert that the requirements for such taxable dividends have not been met.

Sabra’s charter restricts the transfer and ownership of its stock, which may restrict change of control or business combination opportunities in which Sabra stockholders might receive a premium for their shares.

In order for Sabra to maintain its qualification as a REIT for each taxable year after 2011, no more than 50% of the value of its outstanding stock may be owned, directly or constructively, by five or fewer individuals, as defined in the Code. For the purpose of preserving its REIT qualification, Sabra’s charter will prohibit, subject to certain exceptions, direct, indirect and constructive ownership of more than 9.9% in value or number of shares, whichever is more restrictive, of Sabra’s outstanding common stock or more than 9.9% in value of Sabra’s outstanding stock. See “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock” and “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT—Organizational Requirements.” The constructive ownership rules are complex and may cause shares of stock owned directly or constructively by a group of related individuals to be constructively owned by one individual or entity. The ownership limits may have the effect of discouraging an acquisition of control of Sabra without the approval of its board of directors.

Sabra could be subject to tax on any unrealized net built-in gains in the assets held by it before electing to be treated as a REIT.

Sabra will own appreciated assets that were held before the REIT Conversion. If such appreciated property is sold in a taxable transaction within the ten-year period following Sabra’s qualification as a REIT, Sabra will generally be subject to corporate tax on that gain to the extent of the built-in gain in that property at the time Sabra became a REIT. The total amount of gain on which Sabra can be taxed is limited to its net built-in gain at the time it became a REIT, i.e., the excess of the aggregate fair market value of its assets at the time it became a REIT over the adjusted tax bases of those assets at that time.

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

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax law could adversely affect Sabra stockholders. Sabra cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws applicable to Sabra or its stockholders may be changed. See “U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Legislative or Other Actions Affecting REITs.”

Risks Relating to New Sun’s Business

New Sun’s business will depend on reimbursement under federal and state programs, and legislation or regulatory action may reduce or otherwise adversely affect the amount of reimbursements.

Like Sun currently, New Sun’s revenues will be heavily dependent on payments administered under the Medicare and Medicaid programs. The economic downturn has caused many states to institute freezes on or reductions in Medicaid reimbursements to address state budget concerns. Moreover, for the 2010 federal fiscal year (commencing October 1, 2009), the Centers for Medicare and Medicaid Services (“CMS”) effectively reduced Medicare reimbursement rates and, for the 2011 federal fiscal year, CMS is implementing changes to the Resource Utilization Group classification system, which may impact New Sun’s Medicare revenues adversely. In

addition, the skilled nursing center exception to the statutory cap on Medicare reimbursements for therapy services is scheduled to expire on December 31, 2010. If the skilled nursing center exception is not extended, reimbursement for therapy services rendered to New Sun’s residents and patients will be reduced.

In addition to these reductions, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. Aspects of certain of these initiatives, such as further reductions in funding of the Medicare and Medicaid programs, additional changes in reimbursement regulations by CMS, enhanced pressure to contain healthcare costs by Medicare, Medicaid and other payors, and additional operational requirements, could adversely affect New Sun.

Healthcare reform may affect New Sun’s revenues and increase New Sun’s costs and otherwise adversely affect New Sun’s business.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. Together, the two measures make the most sweeping and fundamental changes to the U.S. health care system since the creation of Medicare and Medicaid. These new laws include a large number of health-related provisions that are scheduled to take effect over the next four years, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, and modifying certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste, including through new tools to address fraud and abuse. New Sun cannot predict the exact effect these newly enacted laws or any future legislation or regulation will have on it, including future reimbursement rates and occupancy in New Sun’s inpatient facilities.

New Sun’s revenue and collections may be adversely affected by the economic downturn.

In addition to state and federal budgetary actions that will impact the amount of reimbursements that New Sun will receive for services under state and federal programs, a continuation or worsening of the recent economic downturn could result in reduced demand for the staffing services that New Sun will provide through or to other healthcare providers and could impact New Sun’s ability to collect receivables from nongovernmental sources. If economic conditions do not improve or if they worsen, demand could be reduced for New Sun’s therapy and staffing services, which could have a material adverse effect on New Sun’s business, financial position or results of operations.

Delays in collecting or the inability to collect New Sun’s accounts receivable could adversely affect New Sun’s cash flows and financial position.

Prompt billing and collection will be important factors in New Sun’s liquidity. Billing and collection of New Sun’s accounts receivable will be subject to the complex regulations that govern Medicare and Medicaid reimbursement and rules imposed by nongovernment payors. New Sun’s inability to bill and collect on a timely basis pursuant to these regulations and rules could subject New Sun to payment delays that could negatively impact New Sun’s cash flows and ultimately New Sun’s financial position. In addition, commercial payors and other customers, as well as individual patients, may be unable to make payments to New Sun for which they are responsible. A continuation or worsening of recent unfavorable economic conditions may result in a decrease in New Sun’s ability to collect accounts receivable from some of New Sun’s customers, in which case New Sun will have to make larger allowances for doubtful accounts or incur bad debt write-offs, both of which could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun’s business will be subject to reviews, audits and investigations under federal and state programs and by private payors, which could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun will be subject to review, audit or investigation by federal and state governmental agencies to verify compliance with the requirements of the Medicare and Medicaid programs and other federal and state programs.

Audits under the Medicare and Medicaid programs have intensified in recent years. Private payors also may have the right by contract to review or audit New Sun’s files. Any review, audit or investigation could result in New Sun’s paying back amounts that New Sun will have been paid pursuant to these programs, New Sun’s paying fines or penalties, the suspension of New Sun’s ability to collect payment for new residents to a skilled nursing center, exclusion of a skilled nursing center from participation in one or more governmental programs, revocation of a license to operate a skilled nursing center, or loss of a contract with a private payor. Any of these events could have a material adverse effect on New Sun’s business, financial position or results of operations.

Possible changes in the case mix of residents and patients as well as payor mix and payment methodologies may significantly affect New Sun’s revenue and profitability.

The sources and amount of New Sun’s revenues will be determined by a number of factors, including the licensed bed capacity and occupancy rates of New Sun’s healthcare centers, the mix of residents and patients and the rates of reimbursement among payors. Likewise, services provided by New Sun’s ancillary businesses will vary based upon payor and payment methodologies. Changes in the case mix of the residents and patients as well as payor mix among private pay, Medicare and Medicaid could significantly affect New Sun’s profitability. In particular, any significant decrease in New Sun’s population of high-acuity residents and patients or any significant increase in New Sun’s Medicaid population could have a material adverse effect on New Sun’s business, financial position or results of operations, especially if states operating Medicaid programs continue to limit, or more aggressively seek limits on, reimbursement rates.

Unfavorable resolution of litigation matters and disputes could have a material adverse effect on New Sun’s business, financial position or results of operations.

Skilled nursing center operators, including New Sun’s inpatient services subsidiaries, will from time to time be subject to lawsuits seeking to hold them liable for alleged negligent or other wrongful conduct of employees that allegedly result in injury or death to residents of the centers. Sun currently has numerous patient care lawsuits pending against it, as well as other types of lawsuits, to which New Sun will succeed or become obligated after the Separation. Adverse determinations in legal proceedings, including potential punitive damages, and any adverse publicity arising therefrom could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun will rely primarily on self-funded insurance programs for general and professional liability and workers’ compensation claims against it.

New Sun intends to self-insure for the majority of its insurable risks, including general and professional liabilities, workers’ compensation liabilities and employee health insurance liabilities, through the use of self-insurance or self-funded insurance policies, which vary by the states in which New Sun will operate. New Sun will rely upon self-funded insurance programs for general and professional liability claims up to $5.0 million per claim, which amounts New Sun will be responsible for funding. New Sun intends to maintain excess insurance for claims above this amount. There is a risk that the amounts funded to New Sun’s programs of self-insurance and future cash flows may not be sufficient to respond to all claims asserted under those programs.

There is no assurance that a claim in excess of New Sun’s insurance coverage limits will not arise. A claim against New Sun that is not covered by, or is in excess of, the coverage limits provided by its excess insurance policies could have a material adverse effect upon New Sun’s business, financial position or results of operations. Furthermore, there is no assurance that New Sun will be able to obtain adequate excess liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms.

New Sun’s operations will be extensively regulated and adverse determinations against New Sun could result in severe penalties, including loss of licensure and decertification.

In the ordinary course of its business, New Sun will be subject to a wide variety of federal, state and local laws and regulations and to state and federal regulatory scrutiny and supervision in various areas, including referral of

patients, false claims under Medicare and Medicaid, health and safety laws, environmental laws and the protection of health information. Such regulatory scrutiny often includes inquiries, civil and criminal investigations, examinations, audits, site visits and surveys, some of which are non-routine. If it is found to have engaged in improper practices, New Sun could be subject to civil, administrative or criminal fines, penalties or restitutionary relief or corporate settlement agreements with federal, state or local authorities, and reimbursement authorities could also seek New Sun’s suspension or exclusion from participation in their programs. The exclusion of centers from participating in Medicare or Medicaid could have a material adverse effect on New Sun’s business, financial position or results of operations. New Sun cannot predict the future course of any laws or regulations to which New Sun will be subject, including Medicare and Medicaid statutes and regulations, the intensity of federal and state enforcement actions or the extent and size of any potential sanctions, fines or penalties. Changes in existing laws or regulations, or the enactment of new laws or regulations, could result in changes to New Sun’s operations requiring significant capital expenditures or additional operating expenses. Evolving interpretations of existing, new or amended laws and regulations or heightened enforcement efforts could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun’s hospice business will be subject to a cap on the amount paid by Medicare and other Medicare payment limitations, which limitations could adversely affect New Sun’s hospice revenues and earnings.

Payments made by Medicare for hospice services are subject to a cap amount on a per hospice basis. New Sun’s ability to comply with this limitation will depend on a number of factors, including number of admissions, average length of stay, acuity level of New Sun’s patients and patients that transfer into and out of New Sun’s hospice programs. New Sun’s hospice revenue and profitability may be materially reduced if New Sun is unable to comply with this and other Medicare payment limitations.

New Sun’s business is dependent on referral sources, which have no obligation to refer residents and patients to New Sun’s skilled nursing centers.

New Sun will rely on referrals from physicians, hospitals and other healthcare providers to provide its skilled nursing centers with its patient population. These referral sources are not obligated to refer business to New Sun and may refer business to other long-term care providers. After the Separation, if New Sun fails to maintain its existing referral sources, fails to develop new relationships, or fails to achieve or maintain a reputation for providing high quality of care, New Sun’s patient population, payor mix, revenue and profitability could be adversely affected.

Providers of commercial insurance and other nongovernmental payors are increasingly seeking to control costs, which efforts could negatively impact New Sun’s revenues.

Private insurers are seeking to control healthcare costs through direct contracts with healthcare providers, and reviews of the propriety of, and charges for, services provided. These private payors are increasingly demanding discounted fee structures. These cost control efforts could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun will face national, regional and local competition.

The healthcare industry is highly competitive and subject to continual changes in the method by which services are provided and the types of companies providing services. New Sun’s nursing and rehabilitation centers will compete primarily on a local and regional basis with many long-term care providers, some of whom may own as few as a single nursing center. New Sun’s ability to compete successfully will vary from location to location depending on a number of factors, including the number of competing centers in the local market, the types of services available, quality of care, reputation, age and appearance of each center and the cost of care in each locality. Increased competition in the future could limit New Sun’s ability to attract and retain residents or to expand New Sun’s business.

State efforts to regulate the construction or expansion of healthcare providers could impair New Sun’s ability to expand its operations or make acquisitions.

Some states require healthcare providers (including skilled nursing centers, hospices and assisted living centers) to obtain prior approval, in the form of a certificate of need (a “CON”), for the purchase, construction or expansion of healthcare centers, capital expenditures exceeding a prescribed amount or changes in services or bed capacity. To the extent that New Sun is required to obtain a CON or other similar approvals, New Sun’s expansion could be adversely affected. New Sun cannot make any assurances that it will be able to obtain a CON or other similar approval for any future projects requiring this approval.

New Sun may be unable to reduce costs to offset completely any decreases in its revenues.

Reduced levels of occupancy in New Sun’s healthcare centers or reductions in reimbursements from Medicare and Medicaid would adversely impact New Sun’s cash flow and revenues. Fluctuations in New Sun’s occupancy levels may become more common as New Sun increases its emphasis on patients with shorter stays but higher acuities. If New Sun is unable to put in place corresponding adjustments in costs in response to declines in census or other revenue shortfalls, New Sun would be unable to prevent future decreases in earnings. New Sun’s centers will be able to reduce some of their costs as occupancy decreases, although the decrease in costs will in most cases be less than the decrease in revenues. However, New Sun’s centers will not be able to reduce their costs of providing care upon a decrease in reimbursement revenues from federal and state programs.

New Sun may be adversely affected by an industry-wide shortage of qualified center care-provider personnel and increasing labor costs.

New Sun, like other providers in the long-term care industry, may have difficulties in retaining qualified personnel to staff its healthcare centers, particularly nurses, and in such situations New Sun may be required to use temporary employment agencies to provide additional personnel. The labor costs are generally higher for temporary employees than for full-time employees. In addition, many states in which New Sun will operate have increased minimum staffing standards. As minimum staffing standards are increased, New Sun may be required to retain additional staffing. In addition, New Sun may experience increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel and to increase staffing levels in its centers.

A similar situation exists in the rehabilitation therapy industry. New Sun, like other providers in the long-term care industry, may have difficulties in hiring a sufficient number of rehabilitation therapists. Under these circumstances, New Sun, like others in this industry, may be required to offer higher compensation to attract and retain these personnel, and New Sun may be forced to rely on independent contractors, at higher costs, to fulfill its contractual commitments with its customers. Contractual commitments, regulatory limitations and the market for these services may make it difficult for New Sun to pass through these increased costs to its customers.

If New Sun is unable to meet minimum staffing standards, New Sun may be subject to fines or other sanctions and increased costs.

Increased attention to the quality of care provided in skilled nursing facilities has caused several states to mandate, and other states to consider mandating, minimum staffing laws that require minimum nursing hours of direct care per resident per day. These minimum staffing requirements further increase the gap between demand for and supply of qualified professionals, and lead to higher labor costs. Failure to comply with minimum staffing requirements can result in fines and requirements that New Sun provide a plan of correction.

New Sun’s ability to satisfy minimum staffing requirements depends upon New Sun’s ability to attract and retain qualified healthcare professionals, including nurses, certified nurse’s assistants and other personnel. Attracting and retaining these personnel is difficult, given existing shortages of these employees in the labor markets in

which New Sun will operate. Furthermore, if states do not appropriate additional funds (through Medicaid program appropriations or otherwise) sufficient to pay for any additional operating costs resulting from minimum staffing requirements, New Sun’s profitability may be materially adversely affected.

If New Sun loses its key management personnel, New Sun may not be able to successfully manage its business and achieve its objectives.

New Sun’s success will depend in large part upon the leadership and performance of New Sun’s executive management team, particularly William A. Mathies, New Sun’s chief executive officer, L. Bryan Shaul, New Sun’s chief financial officer, and key employees at the operating level. If New Sun loses the services of one or more of its executive officers or key employees, New Sun may not be able to successfully manage its business or achieve its business objectives. If New Sun loses the services of any of its key employees at the operating or regional level, New Sun may not be able to replace them with similarly qualified personnel, which could have a material adverse effect on New Sun’s business, financial position or results of operations.

New Sun could be materially adversely affected by its level of indebtedness.

At the time of the Separation, New Sun anticipates that it will have up to $ of indebtedness, which will be secured by substantially all of its assets. The level of New Sun’s indebtedness could have adverse consequences to New Sun, such as requiring it to dedicate a substantial portion of its cash flows from operations to payments on its debt, limiting its ability to fund, and potentially increasing the cost of funding, working capital, capital expenditures, acquisitions and other general corporate requirements and making New Sun more vulnerable to general adverse economic and industry conditions. If New Sun fails to comply with the payment requirements or financial covenants contained in its debt agreements, it would be required to seek waivers from its lenders. Seeking these waivers may be difficult or expensive to obtain and, if New Sun fails to obtain any necessary waivers, the resulting default would allow the lenders to accelerate the maturity of the indebtedness, which could have a material adverse effect on New Sun’s business, financial position or results of operations.

An increase in market interest rates could increase New Sun’s interest costs on existing and future debt and could adversely affect its stock price.

If interest rates increase, so could New Sun’s interest costs for any new debt. This increased cost could make the financing of any acquisition more costly. New Sun may incur more variable interest rate indebtedness in the future. Rising interest rates could limit New Sun’s ability to refinance existing debt when it matures, or cause New Sun to pay higher interest rates upon refinancing and increased interest expense on refinanced indebtedness.

Covenants in New Sun’s debt agreements may limit its operational flexibility, and a covenant breach could materially adversely affect its business, financial position or results of operations.

The agreements governing New Sun’s indebtedness are expected to contain customary covenants that will include restrictions on New Sun’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures. These restrictions may limit New Sun’s operational flexibility or require New Sun to approach its lenders for consent to allow New Sun to implement its business plans. Such a consent could be difficult or expensive to obtain. New Sun’s failure to comply with such restrictions and other covenants could adversely affect New Sun’s business, financial position or results of operations or New Sun’s ability to incur additional indebtedness or refinance existing indebtedness.

New Sun intends to seek acquisitions and other strategic opportunities, which may result in the use of a significant amount of management resources or significant costs, and New Sun may not be able to fully realize the potential benefit of such transactions.

New Sun intends to seek acquisitions and other strategic opportunities. Accordingly, it may often be engaged in evaluating potential transactions and other strategic alternatives. In addition, from time to time, it may engage in

discussions that may result in one or more transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, New Sun may devote a significant amount of its management resources to such a transaction, which could negatively impact its operations. In addition, New Sun may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether a transaction is completed and in combining its operations if such a transaction is completed. In the event that New Sun consummates an acquisition or strategic alternative in the future, there is no assurance that it would fully realize the potential benefit of such a transaction.

New Sun does not expect to pay any dividends for the foreseeable future.

It is anticipated that New Sun will be prohibited by the terms of its debt agreements from paying dividends to holders of its common stock, and New Sun does not anticipate that it will pay any dividends to holders of its common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Delaware law and provisions in New Sun’s certificate of incorporation and bylaws may delay or prevent takeover attempts by third parties and therefore inhibit New Sun’s stockholders from realizing a premium on their stock.

New Sun will be subject to the anti-takeover provisions of Section 203 of the DGCL. This section prevents any stockholder who owns 15% or more of New Sun’s outstanding common stock from engaging in certain business combinations with New Sun for a period of three years following the time that the stockholder acquired such stock ownership unless certain approvals were or are obtained from New Sun’s board of directors or the holders of 66²/3% of New Sun’s outstanding common stock (excluding the shares of New Sun common stock owned by the 15% or more stockholder). New Sun’s certificate of incorporation and bylaws also contain several other provisions that may make it more difficult for a third party to acquire control of New Sun without the approval of New Sun’s board of directors. These provisions include (i) advance notice for raising business or making director nominations at meetings, (ii) an affirmative vote of the holders of 66²/3% of New Sun’s outstanding common stock for stockholders to remove directors or amend New Sun’s bylaws or certain provisions of New Sun’s certificate of incorporation, and (iii) the ability to issue “blank check” preferred stock, which New Sun’s board of directors, without stockholder approval, can designate and issue with such dividend, liquidation, conversion, voting or other rights, including the right to issue convertible securities. The issuance of blank check preferred stock may adversely affect the voting and other rights of the holders of shares of New Sun common stock as New Sun’s board of directors may designate and issue preferred stock with terms that are senior to shares of New Sun common stock.

New Sun’s board of directors can use these and other provisions to discourage, delay or prevent a change in the control of New Sun or a change in New Sun’s management. Any delay or prevention of a change of control transaction or a change in New Sun’s board of directors or management could deter potential acquirors or prevent the completion of a transaction in which New Sun’s stockholders could receive a substantial premium over the then current market price for their shares. These provisions could also limit the price that investors might be willing to pay for shares of New Sun common stock.

New Sun will lease substantially all of its centers.

New Sun faces risks because of the number of centers that its subsidiaries will lease, including the 93 centers that they will lease from Sabra under the Lease Agreements. Each of these lease agreements, including the Lease Agreements, provides that the lessor may terminate the lease for a number of reasons, including, subject to applicable cure periods, the default in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement in the lease. Termination of any of the lease agreements, including the Lease Agreements, could result in a default under New Sun’s debt agreements and could have a material adverse effect on New Sun’s business, financial position or results of operations. Although New Sun believes that its subsidiaries will be able to renew their lease agreements, including the Lease Agreements, that they wish to

extend, there is no assurance that they will succeed in obtaining extensions in the future at rental rates and other terms that New Sun believes to be reasonable, or at all. Moreover, if some centers should prove to be unprofitable, New Sun and the subsidiary lessees could remain obligated for lease payments even if they decided to withdraw from those locations. New Sun could incur special charges relating to the closing of such centers including lease termination costs, impairment charges and other special charges that would reduce New Sun’s profits and could have a material adverse effect on New Sun’s business, financial position or results of operations.

Natural disasters and other adverse events may harm New Sun’s centers and residents.

New Sun’s centers and residents may suffer harm as a result of natural or other causes, such as storms, earthquakes, floods, fires and other conditions. Such events can disrupt New Sun’s operations, negatively affect New Sun’s revenues, and increase New Sun’s costs or result in a future impairment charge. For example, nine of New Sun’s healthcare centers will be in Florida, which is prone to hurricanes, and 16 of New Sun’s healthcare centers and New Sun’s executive offices will be in California, which is prone to earthquakes.

New Sun’s ability to use Sun’s net operating losses (“NOLs”) and other tax attributes to offset future taxable income could be limited by an ownership change and/or decisions by California and other states to suspend the use of NOLs.

Sun has significant NOLs, tax credits and amortizable goodwill available to offset its future U.S. federal and state taxable income. New Sun’s ability to utilize these NOLs and other tax attributes may be subject to significant limitations under Section 382 of the Code (and applicable state law) after the Separation if New Sun undergoes an ownership change. New Sun will inherit only a portion of these NOLs as a result of the Separation. An ownership change occurs for purposes of Section 382 of the Code if, among other things, 5% stockholders (i.e., stockholders who own or have owned 5% or more of New Sun stock (with certain groups of less-than-5% stockholders treated as single stockholders for this purpose)) increase their aggregate percentage ownership of New Sun stock by more than fifty percentage points above the lowest percentage of the stock owned by these stockholders at any time during the relevant testing period. An issuance of shares of New Sun common stock in connection with acquisitions or for any other reason can contribute to or result in an ownership change under Section 382. Stock ownership for purposes of Section 382 of the Code is determined under a complex set of attribution rules, so that a person is treated as owning stock directly, indirectly (i.e., through certain entities) and constructively (through certain related persons and certain unrelated persons acting as a group). In the event of an ownership change, Section 382 imposes an annual limitation (based upon New Sun’s value at the time of the ownership change, as determined under Section 382 of the Code) on the amount of taxable income and tax liabilities a corporation may offset with NOLs and other tax attributes, such as tax credit carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL and tax credit carryforwards. As a result, New Sun’s inability to utilize these NOLs or credits as a result of any ownership changes could adversely impact New Sun’s business, financial position or results of operations.

In addition, California and certain states have suspended use of NOLs for certain taxable years, and other states are considering similar measures. As a result, New Sun may incur higher state income tax expense in the future. Depending on New Sun’s future tax position, continued suspension of New Sun’s ability to use NOLs in states in which New Sun is subject to income tax could have an adverse impact on New Sun’s business, financial position or results of operations.

Failure to maintain effective internal control over financial reporting could have an adverse effect on New Sun’s ability to report its financial results on a timely and accurate basis.

New Sun will be required to maintain internal control over financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Failure to maintain such controls could result in misstatements in New Sun’s financial statements and potentially subject New Sun to sanctions or

investigations by the SEC or other regulatory authorities or could cause New Sun to delay the filing of required reports with the SEC and New Sun’s reporting of financial results. Any of these events could result in a decline in the price of shares of New Sun common stock.

Risks Relating to Sabra’s Business

Sabra will be dependent on New Sun until it diversifies its portfolio.

Immediately following the Separation, subsidiaries of New Sun will be the lessees of all of Sabra’s properties (with New Sun guaranteeing the obligations under the leases) and, therefore, the sole source of Sabra’s revenues. There can be no assurance that New Sun and its subsidiaries will have sufficient assets, income and access to financing to enable them to satisfy their payment obligations under the Lease Agreements. The inability of New Sun and its subsidiaries to meet their rent obligations will adversely affect Sabra’s financial position, including its ability to pay dividends to its stockholders as required to maintain its status as a REIT. The inability of New Sun and its subsidiaries to satisfy their other obligations under the Lease Agreements such as the payment of taxes, insurance and utilities could have a material adverse effect on the condition of the leased properties as well as on the business, financial position and results of operations of Sabra. For these reasons, if New Sun were to experience a material adverse effect on its business, financial position or results of operations, Sabra’s business, financial position or results of operations could also be materially adversely affected.

Due to Sabra’s dependence on rental payments from New Sun and its subsidiaries as its primary source of revenues, Sabra may be limited in its ability to enforce its rights under the Lease Agreements or to terminate a lease thereunder. Failure by New Sun and its subsidiaries to comply with the terms of a Lease Agreement or to comply with the healthcare regulations to which the leased properties are subject could require Sabra to find another lessee for such leased property and there could be a decrease or cessation of rental payments by New Sun and its subsidiaries. In such event, Sabra may be unable to locate a suitable lessee at similar rental rates, which would have the effect of reducing Sabra’s rental revenues.

Sabra may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a separate publicly traded company focused on owning a portfolio of healthcare properties.

Upon the completion of the Separation and REIT Conversion Merger, Sabra will become subject to all of the reporting and other requirements of a public company. These requirements include obligations to maintain internal controls and other matters that Sabra will need to implement upon the completion of the Separation and REIT Conversion Merger. Initially, as Sabra has no historical operations, it will be dependent on New Sun for certain transition services as set forth under the Transition Services Agreement. However, Sabra will need to build the infrastructure necessary to take over the functions related to the ownership and leasing of properties that were owned by Sun. Sabra’s management has limited experience in operating a business focused on the ownership of healthcare properties. Accordingly, Sabra cannot assure you that it will be able to successfully implement, on a timely and cost-effective basis, the changes necessary to operate as a separate publicly traded company focused on owning a portfolio of healthcare properties.

Failure to maintain effective internal control over financial reporting could have an adverse effect on Sabra’s ability to report its financial results on a timely and accurate basis.

Sabra will be required to maintain internal control over financial reporting pursuant to Rule 13a-15 under the Exchange Act. Failure to maintain such controls could result in misstatements in Sabra’s financial statements and potentially subject Sabra to sanctions or investigations by SEC or other regulatory authorities or could cause Sabra to delay the filing of required reports with the SEC and Sabra’s reporting of financial results. Any of these events could result in a decline in the price of shares of Sabra common stock.

The continued volatility in the financial markets may impair Sabra’s ability to raise capital, refinance existing obligations or acquire healthcare properties, all of which may negatively impact its business, financial position or results of operations.

The global financial markets have undergone and may continue to experience pervasive and fundamental disruptions. In order to achieve its growth and diversification objectives, Sabra will need to raise capital. The

continuation of volatility in the global financial markets could have a material adverse effect on Sabra’s ability to do so. Among other things, the capital markets have experienced and may continue to see extreme pricing volatility, dislocations and liquidity disruptions, all of which may contribute further to downward pressure on stock prices, widening credit spreads on prospective debt financing and declines in the market values of U.S. and foreign stock exchanges. While the capital markets have recently shown signs of improvement, the sustainability of an economic recovery is uncertain and additional levels of market disruption and volatility could impact Sabra’s ability to obtain new financing or refinance its existing obligations as they mature.

Sabra’s level of indebtedness could materially adversely affect its financial position in many ways, including reducing funds available for other business purposes and reducing its operational flexibility.

At the time of the Separation, Sabra anticipates that it will incur up to $ million of indebtedness, which will be secured by substantially all of its assets. Although it is anticipated that Sabra’s debt agreements will restrict the amount of its indebtedness, Sabra may incur additional indebtedness in the future to refinance mortgages on its properties or to finance newly-acquired properties. Any significant additional indebtedness could require a substantial portion of Sabra’s cash flow to make interest and principal payments due on its indebtedness. Greater demands on its cash resources may reduce funds available to Sabra to pay dividends, make capital expenditures and acquisitions, or carry out other aspects of its business strategy. Increased indebtedness can also limit its ability to adjust rapidly to changing market conditions, make Sabra more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for it compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit Sabra’s operational flexibility, including its ability to acquire properties, finance or refinance its properties, contribute properties to joint ventures or sell properties as needed.

Covenants in Sabra’s debt agreements may limit its operational flexibility, and a covenant breach or default could materially adversely affect its business, financial position or results of operations.

The agreements governing Sabra’s indebtedness are expected to contain customary covenants, including restrictions on Sabra’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures. These restrictions may limit Sabra’s operational flexibility. For example, mortgages on its properties contain customary covenants such as those that restrict its ability, without the consent of the lender, to further encumber or sell the applicable properties or replace the applicable tenant. Such consent could be difficult or expensive to obtain. Breaches of certain covenants may result in defaults under the mortgages on Sabra’s properties and cross-defaults under certain of its other indebtedness, even if Sabra satisfies its payment obligations to the respective obligee. In addition, defaults under the Lease Agreements, including defaults associated with the bankruptcy of the applicable tenant, may result in a default under the underlying mortgage and cross-defaults under certain of Sabra’s other indebtedness. Covenants that limit Sabra’s operational flexibility as well as defaults under its debt instruments could have a material adverse effect on Sabra’s business, financial position or results of operations.

An increase in market interest rates could increase Sabra’s interest costs on existing and future debt and could adversely affect its stock price.

If interest rates increase, so could Sabra’s interest costs for any new debt. This increased cost could make the financing of any acquisition more costly. Rising interest rates could limit Sabra’s ability to refinance existing debt when it matures or cause Sabra to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for Sabra’s assets, thereby limiting Sabra’s ability to reposition its portfolio promptly in response to changes in economic or other conditions.

Further, the dividend yield on Sabra common stock, as a percentage of the price of such common stock, influences the price of such common stock. Thus, an increase in market interest rates may lead prospective purchasers of Sabra common stock to expect a higher dividend yield, which would adversely affect the market price of Sabra common stock.

Sabra expects to seek acquisitions of additional healthcare properties, which may result in the use of a significant amount of management resources or the incurrence of significant costs and Sabra may not be able to fully realize the potential benefit of such transactions.

Sabra is expected to pursue acquisitions of additional healthcare properties. Accordingly, it may often be engaged in evaluating potential transactions and other strategic alternatives. In addition, from time to time, Sabra may engage in discussions that may result in one or more transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, Sabra may devote a significant amount of its management resources to such a transaction, which could negatively impact its operations. Sabra may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed and in combining its operations if such a transaction is completed. In the event that Sabra consummates an acquisition or strategic alternative in the future, there can be no assurance that the potential benefit of such a transaction will be fully realized.

The fact that Sabra must distribute 90% of its net taxable income in order to maintain its qualification as a REIT may limit Sabra’s ability to rely upon rental payments from its leased properties or subsequently acquired properties to finance acquisitions. As a result, if debt or equity financing is not available on acceptable terms, further acquisitions might be curtailed.

Required regulatory approvals can delay or prohibit transfers of Sabra’s healthcare properties.

Transfers of healthcare properties to successor owners, tenants or operators may be subject to regulatory approvals, including change of ownership approvals under CON laws and Medicare and Medicaid provider arrangements, that are not required for transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval process of any federal, state or local government agency necessary for the replacement of the operator licensed to lease and operate the healthcare property.

Sabra is dependent on the healthcare industry and may be susceptible to the risks associated with healthcare reform.

Because all of Sabra’s properties are used as healthcare properties, Sabra will be directly impacted by the risks associated with the healthcare industry. The ability of New Sun and other lessees to generate profits and pay rent under their lease agreements may be adversely impacted by such risks.

Sabra may not be able to sell properties when it desires because real estate investments are relatively illiquid.

Real estate investments generally cannot be sold quickly. In addition, substantially all of Sabra’s properties will serve as collateral for its secured debt obligations and cannot be readily sold unless the underlying mortgage indebtedness is concurrently repaid. Sabra may not be able to vary its portfolio promptly in response to changes in the real estate market. A downturn in the real estate market could adversely affect the value of Sabra’s properties and its ability to sell such properties for acceptable prices or other terms. Sabra also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property or portfolio of properties. These factors and any others that would impede Sabra’s ability to respond to adverse changes in the performance of its properties could have a material adverse effect on the business, financial position or results of operations of Sabra.

Real estate is a competitive business and this competition may make it difficult to identify and purchase suitable healthcare properties.

Sabra will operate in a highly competitive industry and face competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders and other

institutional investors, some of whom are significantly larger and have greater resources and lower costs of capital than Sabra. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet Sabra’s investment objectives. If Sabra cannot identify and purchase a sufficient quantity of healthcare properties at favorable prices or if it is unable to finance acquisitions on commercially favorable terms, its business, financial position or results of operations may be materially adversely affected.

Because of the unique and specific improvements required for healthcare properties, Sabra may be required to incur substantial renovation costs to make certain of its properties suitable for other operators and tenants, which could materially adversely affect its business, financial position or results of operations.

Healthcare properties are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant-specific. A new or replacement operator or tenant may require different features in a property, depending on that operator’s or tenant’s particular operations. If a current operator or tenant is unable to pay rent and vacates a property, Sabra may incur substantial expenditures to modify a property before it is able to secure another operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, Sabra may incur substantial expenditures before it is able to re-lease the space. These expenditures or renovations may materially adversely affect Sabra’s business, financial position or results of operations.

If Sabra loses its key management personnel, it may not be able to successfully manage its business and achieve its objectives.

Sabra’s success depends in large part upon the leadership and performance of its executive management team, particularly Richard K. Matros, its chief executive officer. If Sabra loses the services of Mr. Matros, Sabra may not be able to successfully manage its business or achieve its business objectives.

Sabra may experience uninsured or underinsured losses, which could result in a significant loss of the capital it has invested in a property, decrease anticipated future revenues or cause it to incur unanticipated expense.

While the Lease Agreements will require, and new lease agreements are expected to require, that comprehensive insurance and hazard insurance be maintained by the tenants, there are certain types of losses, generally of a catastrophic nature, such as earthquake and floods, that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property.

Environmental compliance costs and liabilities associated with real estate properties may materially impair the value of those investments.

Under various federal, state and local laws, ordinances and regulations, as a current or previous owner of real estate, Sabra may be required to investigate and clean up certain hazardous substances released at a property, and may be held liable to a governmental entity or a third party for property damage, injuries, and investigation and cleanup costs incurred in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Although Sabra intends to require its operators and tenants to undertake to indemnify it for environmental liabilities they cause, such liabilities could exceed the amount of the financial ability of the tenant or operator to indemnify Sabra or the value of the contaminated property. The presence of contamination or the failure to remediate contamination may adversely affect Sabra’s ability to sell or lease the real estate or to borrow using the real estate as collateral.

An ownership limit and certain anti-takeover defenses could inhibit a change of control of Sabra or reduce the value of its stock.

Upon completion of the REIT Conversion Merger, certain provisions of the MGCL and of Sabra’s charter and bylaws may have an anti-takeover effect. The following provisions of Maryland law and these governing documents could have the effect of making it more difficult for a third party to acquire control of Sabra, including certain acquisitions that Sabra’s stockholders may deem to be in their best interests:

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the charter contains transfer and ownership restrictions on the percentage by number and value of outstanding shares of Sabra stock that may be owned or acquired by any stockholder;

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the charter permits the issuance of one or more classes or series of preferred stock with rights and preferences to be determined by the board of directors and permits the board of directors of Sabra, without stockholder action, to amend the charter to increase or decrease the aggregate number of authorized shares or the number of shares of any class or series that Sabra has authority to issue;

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“business combination” provisions of Maryland law, subject to certain limitations, impose a moratorium on business combinations with “interested stockholders” or affiliates thereof for five years and thereafter impose additional requirements on such business combinations;

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the bylaws require advance notice of stockholder proposals and director nominations; and

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the bylaws may only be amended by the board of directors of Sabra.

INFORMATION ABOUT THE SPECIAL MEETING OF SUN STOCKHOLDERS

This proxy statement/prospectus is being furnished to you in connection with the solicitation of proxies by Sun’s board of directors for use at the special meeting for the purposes described in this proxy statement/prospectus and in the accompanying notice of special meeting of stockholders.

Date, Time and Place of the Special Meeting

The special meeting will be held on , 2010 at at a.m., local time, and at any adjournment or postponement thereof.

Purpose of the Special Meeting

At the special meeting, you will be asked to consider and vote on the following proposals:

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a proposal to approve the Separation (Proposal No. 1);

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a proposal to adopt the agreement and plan of merger by and between Sun and Sabra to implement the REIT Conversion Merger (Proposal No. 2);

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such other business as may properly come before the special meeting or any postponement or adjournment thereof.

Recommendation of the Board of Directors of Sun

The board of directors of Sun has unanimously approved the Separation and REIT Conversion, including the agreement and plan of merger to implement the REIT Conversion Merger, and has determined that these actions are advisable and in the bests interests of Sun and its stockholders. Sun’s board of directors unanimously recommends that Sun stockholders vote “FOR” Proposal No. 1 to approve the Separation, “FOR” Proposal No. 2 to adopt the agreement and plan of merger to implement the REIT Conversion Merger and “FOR” Proposal No. 3 to approve adjournment of the special meeting to a later date, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Separation or adopt the agreement and plan of merger.

Vote Required

The Separation. The affirmative vote of a majority of outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the proposal is required to approve the Separation. If you “ABSTAIN” from voting on approval of the Separation, the effect will be the same as a vote against the Separation.

Adjournment of the Special Meeting. The affirmative vote of a majority of outstanding shares of Sun common stock present, either in person or represented by proxy, at the special meeting and entitled to vote on the proposal is required to adjourn the special meeting to a later date, if necessary, to solicit additional proxies if there are

insufficient votes at the time of the special meeting to approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger. If you “ABSTAIN” from voting on the adjournment, the effect will be the same as a vote against the adjournment of the special meeting.

Record Date; Shares Entitled to Vote; Quorum

Only stockholders of record at the close of business on , 2010, the record date for the special meeting, will be entitled to notice of and to vote at the special meeting. At the close of business on the record date for the special meeting, shares of Sun common stock were outstanding and entitled to vote. The holders of a majority in voting power of the outstanding shares of Sun common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting and any adjournments or postponements thereof.

If your shares are held in “street name” by a bank, broker or other nominee, you should follow the directions provided to you to have your shares voted at the special meeting. If you do not instruct your broker, your broker will generally not have the discretion to vote your shares without your instructions on matters that are not considered routine. Sun believes that the Separation proposal, the REIT Conversion Merger proposal and the proposal to adjourn the special meeting are each considered not to be routine matters. Therefore, your broker cannot vote shares of Sun common stock that it holds in “street name” on any of the proposals unless you return the voting instruction form you received from your broker. Accordingly, Sun does not believe that there will be any broker non-votes occurring in connection with any of the proposals at the special meeting. Please note, however, that if you properly return the voting instruction form to your broker but do not indicate how you want your shares to be voted, Sun believes your shares generally will be voted “FOR” all of the proposals listed in the notice for the special meeting.

Other Matters

As of the date of this proxy statement/prospectus, the board of directors of Sun is not aware of any business to be acted upon at the special meeting of Sun stockholders other than as described in this proxy statement/prospectus. If any other matters should properly come before the special meeting, or any adjournment or postponement thereof, the persons named in the proxy will have discretion to vote on such other matters in accordance with their best judgment.

To Attend the Special Meeting of Sun Stockholders

Only stockholders as of the close of business on the record date for the special meeting, authorized proxy holders and Sun’s guests may attend the special meeting. Your name will be verified against the list of stockholders of record on the record date for the special meeting prior to your being admitted to the special meeting. If you are not a stockholder of record but hold shares in “street name” through a bank, broker or other nominee, you should provide proof of beneficial ownership on the record date for the special meeting, such as your most recent account statement, a copy of the voting instruction card provided by your bank, broker or nominee, or other similar evidence of ownership. If you do not comply with the procedures outlined above, you will not be admitted to the special meeting.

If you attend the special meeting in person, you will be permitted to vote your shares in person rather than signing and returning your proxy card or providing other proxy or voting instructions. Please note, however, that if your shares are held in “street name,” you may not vote your shares in person at the special meeting unless you receive a “legal proxy” from your bank, broker or other nominee giving you the right to vote the shares at the special meeting.

Communications by Sun Stockholders with Sun

Any written revocation of a proxy or other communications in connection with this proxy statement/prospectus and any requests for additional copies of this proxy statement/prospectus or the proxy card should be addressed to Sun Healthcare Group, Inc., 101 Sun Avenue, N.E., Albuquerque, New Mexico 87109, Attention: Investor Relations. If you have any questions or need further assistance in voting your shares of Sun common stock, please call Sun at (505) 468-2341.

Your vote is important. Please sign, date and return your proxy card or submit your proxy and/or voting instructions by telephone or through the Internet promptly.

THE PROPOSALS

Overview of the Separation and REIT Conversion

Pursuant to the restructuring plan approved by the board of directors of Sun to separate Sun’s real estate assets and its operating assets into two publicly traded companies, Sun will reorganize, through a series of internal corporate restructurings. After the restructuring, Sabra or one or more of its subsidiaries will hold substantially all of Sun’s owned real property (excluding the New Sun Retained Properties). Sabra will assume the liabilities of Sun, including the mortgage indebtedness to third parties that is related to the real property to be owned by it. All of Sun’s operations and other assets and liabilities will be held or assumed by New Sun or by one or more of its subsidiaries. New Sun and Sabra will enter into certain agreements, including the Lease Agreements pursuant to which subsidiaries of New Sun will lease from Sabra all of the real property that Sabra will own immediately following the restructuring of Sun’s business.

Following the REIT Conversion, Sabra intends to be a self-managed and self-administered REIT. Sabra intends to operate through an umbrella partnership (commonly referred to as an UPREIT) structure in which substantially all of its properties and assets are held by Sabra Health Care Limited Partnership, a Delaware limited partnership, of which Sabra is the sole general partner.

Background and Reasons for the Separation and REIT Conversion

The board of directors of Sun believes that the Separation and REIT Conversion will more readily enable Sun stockholders to maximize their investment in Sun by giving them a continuing interest in a healthcare company that will concentrate on providing quality care to residents and patients as well as a tax-advantaged REIT security that is expected to provide both the opportunity for consistent cash dividends and capital appreciation. New Sun is expected to benefit from the Separation as it will be able to pursue its growth strategies with significantly less debt on its balance sheet. Sabra is expected to grow its portfolio through acquisitions as a broad-based healthcare REIT. As Sabra acquires additional properties, it expects to diversify by geography, asset class and tenant within the healthcare sector.

Upon conversion to REIT status, Sabra will benefit from the tax advantages that apply to REITs, including that it will generally not be subject to U.S. federal corporate income taxes. Sabra intends to make quarterly distributions that are at least sufficient to satisfy the annual distribution requirements for REITs. See “Distribution and Dividend Policy—Sabra” and “Certain U.S. Federal Income Tax Consequences.”

Accounting Treatment for the Separation and REIT Conversion

the indebtedness of Sun repaid at the time of the Separation and the mortgage indebtedness assumed by Sabra. The historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun after the Separation. Sabra will not have operated prior to the Separation. Accordingly, at the time of the Separation the balance sheet of Sabra will include the owned real property and the related mortgage indebtedness on the real property noted above. The statement of operations and cash flows of Sabra will consist solely of its operations after the Separation. The assets and liabilities of both New Sun and Sabra will be recorded at their respective historical carrying values at the date of the Separation.

Regulatory Approvals Required for the Separation and REIT Conversion Merger

Sun’s inpatient centers, rehabilitation therapy companies, health care staffing companies and hospice companies are extensively regulated by federal and state healthcare regulatory bodies and, in some instances, accreditation bodies. In connection with the Separation and to consummate the restructuring of Sun’s business, Sun will be required to file notices with, and in some jurisdictions obtain approvals or consents from, the various governmental agencies and commissions responsible for the licensure or certification of Sun’s inpatient centers and other lines of business. In some cases, these filings must be made, and approvals obtained, before the Separation can be completed. In other cases, notice filings will need to be made by New Sun after the Separation has been completed.

In addition, Sun operates ten inpatient centers with mortgages that are guaranteed by HUD. Sun and Sabra will be required to submit applications to HUD to seek approvals regarding these centers to complete the restructuring of Sun’s business, the Separation and REIT Conversion Merger.

Sun does not believe that any other material federal or state regulatory approvals will be required in connection with the Separation or the REIT Conversion.

Treatment of Equity Awards

PROPOSAL NO. 1—APPROVAL OF THE SEPARATION

Holders of Sun common stock are being asked to approve the Separation. Sun stockholders should read carefully this proxy statement/prospectus in its entirety, including the exhibits, for more detailed information concerning the Separation.

Manner of Effecting the Separation

In the event Sun stockholders approve the Separation and adopt the agreement and plan of merger to implement the REIT Conversion Merger and the board of directors of Sun proceeds with the Separation, each Sun stockholder as of the record date for the Separation will receive shares of New Sun common stock for each share of Sun common stock such stockholder owns on the record date. The timing of the Separation will ultimately depend upon the satisfaction or waiver of certain conditions. See “The Proposals—Proposal No. 1—Approval of the Separation—Conditions to the Separation.”

American Stock Transfer will serve as the distribution agent for the Separation. On the distribution date for the Separation, American Stock Transfer will electronically issue shares of New Sun common stock to holders of Sun common stock who hold such shares on the record date for the Separation, or to such stockholders’ bank, broker or other nominee on such stockholders’ behalf by way of direct registration in book-entry form. As soon as practicable after the distribution date for the Separation, an account statement will be mailed to each holder of Sun common stock who holds such shares on the record date for the Separation, stating the number of shares of New Sun common stock received by such stockholder in the Separation. See “—Trading Between the Record Date for the Separation and the Distribution Date for the Separation” for a discussion of the effect of the distribution on any shares you sell after the record date but prior to the distribution date. All shares of New Sun common stock so distributed will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. See “Description of New Sun Capital Stock.”

No fractional shares of New Sun common stock will be issued in connection with the Separation. Instead, American Stock Transfer will aggregate all fractional shares that would otherwise have been distributed to Sun stockholders into whole shares, sell these whole shares in the open market at prevailing market prices and distribute the net cash proceeds from these sales to those stockholders who would have been entitled to receive fractional shares. This payment will be made from these sales on a pro rata basis based on the fractional interest in a share of New Sun common stock that the stockholder would have otherwise been entitled to receive. The amount of the cash payment will depend on the prices at which the aggregated fractional shares are sold by American Stock Transfer and the timing of such payment will be based upon the time that will be necessary for American Stock Transfer to sell these shares in an orderly manner. New Sun will be responsible for the payment of any brokerage or other fees in connection with the sale of aggregated fractional shares of New Sun common stock. Recipients of cash in lieu of fractional shares will not be entitled to any interest on payments made in lieu of fractional shares.

Additionally, on the distribution date for the Separation, Sun intends to make a cash distribution to holders of Sun common stock who hold such shares on the record date for the Separation. The final amount of this cash distribution will not be determined until the time of the Separation, but Sun currently expects it to be approximately $ per share, resulting in an aggregate cash distribution of approximately $13 million.

Sun stockholders will not be required to pay for shares of New Sun common stock received in the Separation, to surrender or exchange shares of Sun common stock in order to receive shares of New Sun common stock, or to take any other action in connection with the Separation. For an explanation of the U.S. federal income tax consequences of the Separation, including the effect of receiving New Sun common stock, cash in lieu of fractional shares and/or the cash distribution, see “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of the Separation—U.S. Holders of Sun Common Stock.”

In order to be entitled to receive shares of New Sun common stock in the Separation, you must be a holder of Sun common stock at the close of business on the record date for the Separation. The board of directors of Sun has not yet set a record date for the Separation but will do so after the special meeting.

Immediately prior to the Separation, New Sun and Sabra will incur indebtedness of up to $ and $ , respectively. The amount of the indebtedness to be incurred by New Sun and Sabra will depend on the cash position of Sun as of immediately prior to the Separation. The terms and structure of the indebtedness to be incurred by New Sun and Sabra have not yet been determined. It is anticipated that the agreements relating to the indebtedness will contain customary covenants and events of default, and will, among other things, restrict each of New Sun and Sabra’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures. In addition, following the Separation, New Sun will have mortgage indebtedness to third parties of $6.2 million and Sabra will have mortgage indebtedness to third parties of $164.0 million. For additional information relating to these financing arrangements, see “Description of Material Indebtedness.”

In addition, New Sun and Sabra will be parties to a number of agreements that govern the Separation and the ongoing relationship between the two companies. See “Relationship Between New Sun and Sabra After the Separation and REIT Conversion Merger.”

Management of New Sun

The following eight individuals will be the directors of New Sun: Gregory S. Anderson, Tony M. Astorga, Christian K. Bement, Michael J. Foster, Barbara B. Kennelly, Steven M. Looney, William A. Mathies and Milton J. Walters. Except for Mr. Mathies, each of these individuals is currently a director of Sun. With the exception of Messrs. Foster and Walters, who will each be directors of both New Sun and Sabra, as well as Mr. Matros, the existing directors of Sun will resign their positions as directors of Sun effective upon the Separation.

The following individuals will serve in the following capacities as the executive officers of New Sun: William A. Mathies, Chief Executive Officer; L. Bryan Shaul, Executive Vice President and Chief Financial Officer; Michael Newman, Executive Vice President and General Counsel; Chauncey J. Hunker, Ph.D., Chief Risk Officer and Chief Compliance Officer; Cindy Chrispell, Senior Vice President of Human Resources; Richard L. Peranton, President of CareerStaff; and Susan E. Gwyn, President of SunDance. Except for Mr. Mathies, who is currently the President and Chief Operating Officer of SunBridge, each of these individuals is currently serving in the same capacity for Sun. See “Management of New Sun.”

Interests of Certain Persons in the Separation

Market for New Sun Common Stock; Trading of New Sun Common Stock Following the Separation

There is no current public market for New Sun common stock. New Sun expects to have the shares of its common stock to be issued in connection with the Separation listed on the NASDAQ Global Select Market and that New Sun will receive authorization to adopt Sun’s current stock symbol so that New Sun common stock will trade on the NASDAQ Global Select Market following the Separation using the stock symbol “SUNH.”

Immediately following the Separation, based on the shares of Sun common stock outstanding as of , 2010, New Sun will have shares of common stock issued and outstanding. The actual number of shares of New Sun common stock outstanding will be determined based on the number of shares of Sun common stock outstanding on the record date for the Separation. No shares of preferred stock of New Sun will be issued or outstanding at the time of the Separation.

Trading Between the Record Date for the Separation and the Distribution Date for the Separation

Stockholders who hold shares of Sun common stock at the close of business on the record date for the Separation will be entitled to receive shares of New Sun common stock in the Separation, but shares of Sun common stock will trade with the entitlement to New Sun common stock to be distributed pursuant to the Separation through the day prior to the distribution date for the Separation. Therefore, if you own shares of Sun common stock at the close of business on the record date for the Separation and you sell those shares prior to the distribution date for the Separation, you will be selling your right to receive shares of New Sun common stock in the Separation. However, the cash distribution that Sun intends to pay to stockholders who own shares of Sun common stock at the close of business on the record date for the Separation will be retained by these stockholders even if they sell those shares prior to the distribution date for the Separation.

In addition, Sun anticipates that, beginning on or shortly before the record date for the Separation and continuing through the distribution date for the Separation, there will be a “when-issued” market in New Sun common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has not yet been distributed. If you own Sun common stock at the close of business on the record date for the Separation, you would be entitled to New Sun common stock distributed pursuant to the Separation. You may trade this entitlement to New Sun common stock, without the Sun common stock you own, on the “when-issued” market. On the first trading day following the distribution date for the Separation, “when-issued” trading with respect to New Sun common stock will end and “regular trading” will begin.

U.S. Federal Income Tax Consequences of the Separation

The Separation should be treated as a taxable distribution under Section 301 of the Code. Accordingly, a U.S. holder will include the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distributed in connection with the Separation to such U.S. holder in gross income as ordinary dividend income to the extent of the U.S. holder’s share of the current and accumulated earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), which may be taxable to non-corporate U.S. holders at a reduced rate of 15%. To the extent the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by a U.S. holder exceeds the U.S. holder’s share of Sun’s earnings and profits, as determined under U.S. federal income tax principles, the excess first will be treated as a tax-free return of capital to the extent, generally, of the U.S. holder’s adjusted tax basis in Sun common stock, and any remaining excess will be treated as capital gain. In addition, a U.S. holder’s tax basis in New Sun common stock received in the Separation will be equal to its fair market value at the time of the Separation, and the holding period in the New Sun common stock received in the Separation will begin the day after the Separation.

Conditions to the Separation

The Separation is conditioned upon the satisfaction or waiver of the following conditions:

•

Sun’s stockholders shall have approved the Separation and adopted the agreement and plan of merger to implement the REIT Conversion Merger;

•

the restructuring of Sun’s business as described in this proxy statement/prospectus shall have been completed;

•

New Sun’s listing application with the NASDAQ Global Select Market shall have been approved, subject to official notice of issuance;

•

no stop order shall be in effect with respect to New Sun’s registration statement on Form S-1 filed with the SEC to register under the Securities Act the distribution of shares of New Sun common stock in the Separation;

•

the Distribution Agreement, the Lease Agreements, the Tax Allocation Agreement and the Transition Services Agreement shall have been executed and delivered by New Sun and Sabra;

•

no litigation or proceeding challenging or seeking to restrain the Separation or the REIT Conversion Merger shall be pending or threatened; and

•

all other conditions required to complete the REIT Conversion Merger shall have been satisfied or waived.

The fulfillment of the foregoing conditions will not create any obligation on Sun’s part to effect the Separation or the REIT Conversion Merger. Sun reserves the right to abandon, defer or modify the Separation and REIT Conversion Merger at any time, even if Sun stockholders approve the Separation and REIT Conversion Merger. Sun may not proceed with the Separation and REIT Conversion Merger if the board of directors of Sun determines for any reason that these transactions are no longer in the best interests of Sun and its stockholders.

Absence of Appraisal Rights

Sun stockholders will not be entitled to dissenters’ or appraisal rights as a result of the Separation.

THE BOARD OF DIRECTORS OF SUN UNANIMOUSLY RECOMMENDS THAT SUN

STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 1 TO APPROVE THE SEPARATION.

PROPOSAL NO. 2—ADOPTION OF THE AGREEMENT AND PLAN OF MERGER

Holders of Sun common stock are being asked to adopt the agreement and plan of merger to implement the REIT Conversion Merger. The following is a summary of the agreement and plan of merger to implement the REIT Conversion Merger. This summary is qualified in its entirety by reference to the agreement and plan of merger to implement the REIT Conversion Merger, which is incorporated by reference in its entirety and attached to this proxy statement/prospectus as Annex . Sun stockholders should read the agreement and plan of merger in its entirety.

Structure and Completion of the REIT Conversion Merger

Pursuant to the agreement and plan of merger to implement the REIT Conversion Merger and in accordance with applicable law, immediately following the Separation, Sun will merge with and into Sabra. As a result of the REIT Conversion Merger, the separate existence of Sun will terminate and Sabra will continue as the surviving corporation. The charter of Sabra to be amended and in effect immediately prior to the REIT Conversion Merger, as set forth in the form of articles of amendment and restatement, attached as an exhibit to the registration statement of which this proxy statement/prospectus is a part, will be the charter of the surviving corporation. The bylaws of Sabra as in effect immediately prior to the REIT Conversion Merger, as set forth in the form of amended and restated bylaws of Sabra, attached as an exhibit to the registration statement of which this proxy statement/prospectus is a part, will be the bylaws of the surviving corporation.

The closing of the REIT Conversion Merger is expected to take place immediately following the Separation. The REIT Conversion Merger will be effective when the parties file the articles of merger with the State Department of Assessments and Taxation of the State of Maryland and the certificate of merger with the Secretary of State of the State of Delaware, and these filings are accepted for recording.

No fractional shares of Sabra common stock will be issued in connection with the REIT Conversion Merger. Instead, American Stock Transfer, who will serve as the exchange agent for the REIT Conversion Merger, will aggregate all fractional shares that would otherwise have been distributed to Sun stockholders into whole shares, sell these whole shares in the open market at prevailing market prices and distribute the net cash proceeds from these sales to those stockholders who would have been entitled to receive fractional shares. This payment will be made from these sales on a pro rata basis based on the fractional interest in a share of Sabra common stock that the stockholder would have otherwise been entitled to receive. The amount of the cash payment will depend on the prices at which the aggregated fractional shares are sold by American Stock Transfer and the timing of such payment will be based upon the time that will be necessary for American Stock Transfer to sell these shares in an orderly manner. Sabra will be responsible for the payment of any brokerage or other fees in connection with the sale of aggregated fractional shares of Sabra common stock. Recipients of cash in lieu of fractional shares will not be entitled to any interest on payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient.

Sabra may not qualify for REIT status if a single stockholder owned 10% or more of Sun common stock immediately prior to the Separation and REIT Conversion Merger. The Rights Plan was adopted to discourage third parties from exceeding this ownership limitation and will terminate upon the earlier of the effective time of the REIT Conversion Merger or May 24, 2011. Accordingly, the Rights Plan will not continue in respect of shares of New Sun common stock or shares of Sabra common stock. Sabra will not initially have a stockholder rights agreement and has no plans to adopt one, although its board of directors could make the determination at a future date to adopt a stockholder rights agreement. Sabra’s charter will contain restrictions on the transfer and ownership of its stock. See “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra stock.”

Management of Sabra

Sabra will be led by Mr. Matros as Chairman and Chief Executive Officer. Sabra anticipates that Harold W. Andrews, Jr., a finance professional who has extensive real estate ownership experience as well as extensive experience with healthcare providers, will become its Chief Financial Officer. The board of directors of Sabra will consist of Mr. Matros, two members of the board of directors of Sun, Michael J. Foster and Milton J. Walters, who will also be New Sun directors, and other directors not affiliated with Sun or New Sun. Mr. Matros is currently the sole director of Sabra. See “Management of Sabra.” These other directors will be appointed by the board of directors of Sabra prior to the Separation and REIT Conversion Merger.

Qualification as a REIT

Sabra currently intends to qualify and elect to be treated as a REIT for U.S. federal income tax purposes commencing with its taxable year beginning on January 1, 2011. Its qualification as a REIT depends upon its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to the sources of its gross income, the composition and value of its assets, its distribution levels to stockholders and the diversity of ownership of its shares. Sabra believes that it will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code and that its intended manner of operation will enable it to meet the requirements for qualification and taxation as a REIT. As a REIT, Sabra will generally not be subject to U.S. federal income tax on its REIT taxable income that it distributes currently to its stockholders. If Sabra failed to qualify as a REIT in any taxable year and did not qualify for certain statutory relief provisions, it would be subject to U.S. federal income tax at corporate tax rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT.”

Interests of Certain Persons in the REIT Conversion Merger

As of the record date for the special meeting, directors and executive officers of Sun beneficially owned approximately % of the outstanding shares of Sun common stock. Directors and executive officers of Sabra who own shares of Sun common stock as of the effective time of the REIT Conversion Merger will receive shares of Sabra common stock on the same basis as other Sun stockholders. See “Security Ownership of Certain Beneficial Owners and Management.”

Market for Sabra Common Stock; Trading of Sabra Common Stock Following the REIT Conversion Merger

There is no current public market for Sabra common stock. Sabra expects to have the shares of its common stock to be issued in connection with the REIT Conversion Merger listed on the and that Sabra common stock will trade on the following the REIT Conversion Merger using the symbol “SBRA.”

U.S. Federal Income Tax Consequences of the REIT Conversion Merger

received in the REIT Conversion Merger. In addition, all holders of shares of Sun common stock are urged to consult with their tax advisors regarding the tax consequences of the REIT Conversion to them, including the effects of U.S. federal, state and local, non-U.S. and other tax laws.

Manner and Procedure for Receiving Shares of Sabra Common Stock

Sabra will not issue physical certificates for the shares you will receive in the REIT Conversion Merger in exchange for your shares of Sun common stock, even if you currently hold a physical certificate. At the effective time of the REIT Conversion Merger, American Stock Transfer, the exchange agent, will electronically issue shares of Sabra common stock to holders of Sun common stock who hold such shares at the effective time for the REIT Conversion Merger, or to such stockholders’ bank, broker or other nominee on such stockholders’ behalf by way of direct registration in book-entry form. As soon as practicable after the effective time of the REIT Conversion Merger, an account statement will be mailed to each holder of Sun common stock who holds such shares at the effective time of the REIT Conversion Merger, stating the number of shares of Sabra common stock received by such stockholder in the REIT Conversion Merger. All shares of Sabra common stock so distributed will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. Any physical certificate representing Sun shares of common stock will be deemed cancelled and will no longer represent any ownership interest. See “Description of Sabra Stock.”

Conditions to the REIT Conversion Merger

The REIT Conversion Merger is conditioned upon the satisfaction or waiver of the following conditions:

•

the Separation shall have been completed;

•

Sabra’s listing application with the shall have been approved, subject to official notice of issuance;

•

no litigation or proceeding challenging or seeking to restrain the REIT Conversion Merger shall be pending or threatened.

Absence of Appraisal Rights

Sun stockholders will not be entitled to dissenters’ or appraisal rights as a result of the REIT Conversion Merger.

THE BOARD OF DIRECTORS OF SUN UNANIMOUSLY RECOMMENDS THAT SUN STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 2 TO ADOPT THE AGREEMENT AND PLAN OF

MERGER TO IMPLEMENT THE REIT CONVERSION MERGER.

PROPOSAL NO. 3—APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING

If there are insufficient votes at the time of the special meeting to approve Proposal No. 1, the Separation, or Proposal No. 2, the adoption of the agreement and plan of merger to implement the REIT Conversion Merger, Sun may propose to adjourn the special meeting to a later date, if necessary, to solicit additional proxies.

THE BOARD OF DIRECTORS OF SUN UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SUN COMMON STOCK VOTE “FOR” PROPOSAL NO. 3 TO APPROVE THE ADJOURNMENT OF THE SPECIAL MEETING.

RELATIONSHIP BETWEEN NEW SUN AND SABRA AFTER THE SEPARATION AND REIT CONVERSION MERGER

To govern their ongoing relationship, New Sun and Sabra or their respective subsidiaries, as applicable, will enter into the various agreements as described in this section on or prior to the date of the Separation. Each of New Sun and Sabra will adopt certain policies to minimize potential conflicts of interest that may result from the service of Mr. Foster and Mr. Walters on the boards of directors of each of New Sun and Sabra. No other person will be a director, executive officer or other employee of both New Sun and Sabra. The form of each of the agreements summarized in this section will be included as exhibits to the registration statement of which this proxy statement/prospectus is a part, and the following summaries are qualified in their entirety by reference to the agreements as filed.

The Distribution Agreement

The Distribution Agreement will provide for the various actions to be taken in connection with the Separation, the conditions to the Separation and the relationship between the parties subsequent to the Separation.

Pursuant to the Distribution Agreement, any liability arising from or relating to legal proceedings involving Sun’s healthcare business prior to the Separation will be assumed by New Sun, and New Sun will indemnify Sabra against any losses arising from or relating to such legal proceedings. See “Business of New Sun—Legal Proceedings.” The Distribution Agreement will provide that any liability arising from or relating to legal proceedings involving Sun’s real property assets to be owned by Sabra will be assumed by Sabra and that Sabra will indemnify New Sun against any losses arising from or relating to such legal proceedings. See “Business of Sabra—Legal Proceedings.” Any liability arising from or relating to legal proceedings prior to the Separation, other than those arising from or relating to legal proceedings involving Sun’s healthcare business or such real property assets, will be assumed by New Sun.

In addition, the Distribution Agreement will provide for cross-indemnities that require (i) Sabra to indemnify New Sun (and its subsidiaries, directors, officers, employees and agents and certain other related parties) against all losses arising from or relating to the liabilities being assumed by Sabra or the breach of the Distribution Agreement or any ancillary agreement by Sabra and (ii) New Sun to indemnify Sabra (and its respective subsidiaries, directors, officers, employees and agents and certain other related parties) against all losses arising from or relating to the liabilities being assumed or retained by New Sun or the breach of the Distribution Agreement or any ancillary agreement by New Sun.

Pursuant to the Distribution Agreement, each of the parties will agree to use reasonable best efforts to take or cause to be taken all action, and do or cause to be done all things, reasonably necessary, proper or advisable to consummate the transactions contemplated by and carry out the purposes of the Distribution Agreement and the ancillary agreements. The Distribution Agreement will provide that if any contemplated internal mergers and stock and asset transfers have not been effected on or prior to the date of the Separation, the parties will cooperate to effect these transfers as quickly thereafter as reasonably practicable. The entity retaining any asset or liability that should have been transferred prior to the date of the Separation will continue to hold that asset for the benefit of the party entitled thereto or that liability for the account of the party required to assume it, and must take any other action as may be reasonably requested by the party to whom such asset was to be transferred or by whom such liability was to be assumed in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred or assumed as contemplated by the Distribution Agreement.

New Sun and Sabra have agreed in the Distribution Agreement that New Sun will pay all costs associated with the Separation and REIT Conversion that are incurred prior to the Separation, except that Sabra will bear all costs of the Separation and REIT Conversion specifically identifiable to it, including the costs incurred by Sabra in

entering into the financing transactions described under the caption “Description of Material Indebtedness.” All costs relating to the Separation or REIT Conversion incurred after the Separation will be borne by the party incurring such costs.

The Distribution Agreement will also provide for the execution and delivery of certain other agreements governing the relationship between New Sun and Sabra following the Separation. See “—The Lease Agreements,” “—The Tax Allocation Agreement,” and “—The Transition Services Agreement” below.

The Lease Agreements

Subsidiaries of New Sun (each a “Tenant”) will enter into the Lease Agreements with subsidiaries of Sabra (each a “Lessor”) pursuant to which the Tenants will lease an aggregate of 82 skilled nursing centers, nine assisted and independent living centers and two mental health centers.

The following description of the Lease Agreements does not purport to be complete but contains a summary of the material provisions of the Lease Agreements.

Term and Renewals. Each Lease Agreement will provide for the lease of land, buildings, structures and other improvements on the land, easements and similar appurtenances to the land and improvements, and equipment relating to the operation of the leased properties. The parties to each Lease Agreement will consist of multiple Lessors and multiple Tenants.

Each Lease Agreement will provide for an initial term of between 10 and 15 years. At the option of the Tenant, each Lease Agreement may be extended for up to two five-year renewal terms beyond the initial term at a fair market value rental rate. If the Lessor and the Tenant cannot agree on the rent for a renewal term, the fair market value rental rate will be determined through an appraisal procedure set forth in the Lease Agreements. In such a circumstance, the then fair market value rental rate may be materially higher than the existing rental rate. In such a situation the Tenant may be forced either not to exercise the renewal or to pay the higher rental rate, either of which could have a material adverse effect on New Sun’s business, financial position, results of operations and liquidity. If the Tenant elects to renew the term of a Lease Agreement, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Lease Agreement.

The following chart sets forth the anticipated expiration dates and renewal dates under the Lease Agreements:


Expiration date	Renewal date	Facility renewals		Mental Health centers
Expiration date	Renewal date	Nursing centers	ALF/ILF	Mental Health centers

, 2020

, 2021

, 2022

, 2023

, 2024

, 2025

Extension of the term of any Lease Agreements will be subject to several conditions, including (1) no event of default under a particular Lease Agreement having occurred and being continuing and (2) the Tenant’s agreement to the rent for the renewal term. The term of each Lease Agreement will be subject to termination prior to the expiration of the then current term upon default by the Tenant in its obligations, if not cured within any applicable cure periods set forth in the Lease Agreements, and certain other conditions described in the Lease Agreements, such as material damage to or destruction or condemnation of a leased property.

Rental Amounts and Escalators. Each Lease Agreement is commonly known as a triple-net lease. Accordingly, in addition to rent, the Tenant will be required to pay the following: (1) all insurance required in connection with the leased properties and the business conducted on the leased properties, (2) certain taxes levied on or with respect to the leased properties (other than taxes on the income of the Lessor) and (3) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

Under the Lease Agreements, it is anticipated that the annual aggregate base rent will be approximately $72 million. Each Lease Agreement will provide for rent escalations on of each year. It is anticipated that the annual rent escalator under each Lease Agreement will be determined as follows: (1) if the percentage change from the start of one lease year to the next in the Consumer Price Index is equal to or greater than 1.00%, the lesser of the percentage change in the Consumer Price Index or 2.50%, (2) if the percentage change in the Consumer Price Index from the start of one lease year to the next is less than 1.00% but greater than zero, two times the percentage change in the Consumer Price Index, or (3) if the percentage change in the Consumer Price Index from the start of one lease year to the next is equal to or less than zero for any given year, zero.

Maintenance and Capital Improvements. The Tenant will be responsible for maintenance of the properties in good repair and condition, and will be required to pay the expenses of all maintenance, repair and restoration. In furtherance of these obligations, the Tenant will be obligated each year to make maintenance expenditures in an amount set forth in the Lease Agreement. The Tenant will also be responsible to maintain all personal property located at the leased properties in good repair and condition as is necessary to operate the leased properties in compliance with applicable legal, insurance and licensing requirements.

Each Lease Agreement will provide that the Tenant may, but will not be required to, make capital improvements to a leased property, subject to the Lessor’s approval of the plans and specifications and any required mortgagee consent. The Lessor may, at its option, elect to pay for all or a portion of any such capital improvement, in which case the rent under the Lease Agreement will be increased for that leased property. If the Lessor elects not to finance the capital improvement and the Tenant elects to proceed with such capital improvement, the Tenant will be required to fund any costs, but the rent will not be adjusted. Any such capital improvement, whether or not the costs of which are funded by the Lessor, will become subject to the terms of the Lease Agreement and become the property of the Lessor upon termination of the Lease Agreement, subject to the Lessor’s reimbursement of undepreciated cost of the improvement.

Use of the Leased Property. The Lease Agreements will require that the Tenant utilize a leased property solely for the provision of healthcare services as specified in the applicable Lease Agreement and related uses and such other uses as the Lessor of the leased property may otherwise approve. The Tenant will be responsible for maintaining or causing to be maintained all licenses, certificates and permits necessary for the leased properties to comply with various healthcare and other regulations. With certain exceptions, the Tenant will also be obligated to operate continuously each leased property as a provider of healthcare services.

Events of Default. Under each Lease Agreement, an “Event of Default” will be deemed to occur upon certain events, including: (1) the failure by a Tenant to pay rent or other amounts when due or within any applicable cure period, (2) the failure by a Tenant to comply with the covenants set forth in the Lease Agreement when due or within any applicable cure period, (3) certain events of bankruptcy or insolvency with respect to a Tenant, (4) the occurrence of an event of default under any agreement or instrument evidencing indebtedness in excess of $ , (5) an event of default occurs under the New Sun guaranty of that Lease Agreement, (6) a Tenant breaches a representation or warranty in the Lease Agreement in a material manner, (7) a cross default occurs under other Lease Agreements or (8) the occurrence of certain events of regulatory non compliance which would reasonably be expected to have a material adverse effect on the operations at the leased property or the financial condition of the Tenant.

Remedies for an Event of Default. Upon an Event of Default under one of the Lease Agreements, the Lessor of the leased property may, at its option, exercise the following remedies:

(1) after not less than days notice, terminate the Lease Agreement to which such Event of Default relates, repossess any leased property, relet any leased property to a third party and require that the Tenant pay to the Lessor, as liquidated damages, the net present value of the rent for the balance of the term, discounted at , plus any past due rent and costs related to the exercise of remedies,

(2) without terminating the Lease Agreement to which such Event of Default relates, repossess the leased property and relet the leased property with the Tenant remaining liable under such Lease Agreement for all obligations to be performed thereunder, including the difference, if any, between the rent under such Lease Agreement and the rent payable as a result of the reletting of the leased property, and

(3) seek any and all other rights and remedies available under law or in equity.

In addition to the remedies noted above, under the Lease Agreements, in the case of a facility-specific event of default, the Lessor may terminate a Lease Agreement as to the leased property to which the Event of Default relates, and may, but need not, terminate the entire Lease Agreement.

Assignment and Subletting. Except as noted below, the Lease Agreements will provide that a Tenant may not assign or otherwise transfer any leased property or any portion of a leased property as a whole (or in substantial part), including by virtue of a change of control of a Tenant, without the consent of the Lessor, which may not be unreasonably withheld if the proposed assignee (1) is a creditworthy entity with sufficient financial stability to satisfy its obligations under the related Lease Agreement, (2) has sufficient experience in operating healthcare properties for the purpose of the applicable property’s primary intended use, (3) has a favorable operational reputation and character, (4) has an acceptable regulatory record and (5) has all licenses, permits, approvals and authorizations to operate the facility and agrees to comply with the use restrictions in the related Lease Agreement. The obligation of a Lessor to consent to a subletting or assignment may be subject to the reasonable approval rights of any mortgagee. Upon any such assignment or transfer, the Tenant will be released from obligations under the applicable Lease Agreement and New Sun will be released from its guaranty of the obligations of the Tenant with respect to the assigned or transferred property.

The Lease Agreements will also provide that a Tenant may assign or otherwise transfer any leased property or a portion thereof to an affiliate subject to the Lessor’s reasonable approval of the transfer documents. Upon any such assignment or transfer, the Tenant will not be released from obligations under the applicable Lease Agreement and New Sun will not be released from the related obligations under its guaranty.

In addition, each Lease Agreement will allow a Tenant to sublease all or a portion of a facility to a third party subject to a Lessor’s reasonable approval of the third party’s business and operating experience and reputation. Upon any such sublease, the Tenant will not be released from obligations under the applicable Lease Agreement and New Sun will not be released from the related obligations under its guaranty.

Purchase Rights. Each Lease Agreement will provide that, in the event the Lessors are interested in disposing of any or all of the leased property which is the subject of such Lease Agreement, the Tenant will have a first right to negotiate with the Lessor with respect to the terms of the purchase of the affected leased property.

The Tax Allocation Agreement

The Tax Allocation Agreement will include an allocation of liability for taxes for taxable periods (or portions thereof) prior to and including the date of the Separation. Under the Tax Allocation Agreement, New Sun will be responsible for and will indemnify Sabra against all income taxes, including any taxes resulting from the restructuring of Sun’s business and the distribution of shares of New Sun common stock to Sun’s stockholders, and all non-income taxes (other than non-income taxes imposed on or with respect to assets of Sabra or its

subsidiaries, which shall be the responsibility of Sabra) for periods before and including the Separation that are reportable on any tax return that includes Sabra or one of its subsidiaries, on the one hand, and New Sun or one of its subsidiaries, on the other hand.

New Sun will not pay Sabra any amount under the Tax Allocation Agreement that is expected to exceed the maximum amount that can be paid to Sabra without causing Sabra to fail to meet the REIT gross income requirements under the Code. The unpaid amount, if any, will be placed in escrow and will be paid in subsequent years to the extent the payment would not cause Sabra to fail to meet the REIT gross income requirements under the Code. See “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Related to Sabra—Taxation of Sabra as a REIT—Gross Income Tests.” New Sun’s obligations to pay any unpaid portion will terminate on the date that is five years from the date such indemnification amount otherwise would have been made but for such escrow arrangement.

The Tax Allocation Agreement will not be binding on the IRS or any other governmental entity and will not affect the liability of each of New Sun, Sabra, and their respective subsidiaries and affiliates, to the IRS or any other governmental authority for all U.S. federal, state or local or non-U.S. taxes of the Sun consolidated group relating to periods through the distribution date for the Separation. Accordingly, although the Tax Allocation Agreement described above will allocate tax liabilities between New Sun and Sabra, Sabra and its subsidiaries could be liable for tax liabilities not allocated to them under the Tax Allocation Agreement in the event that any tax liability is not discharged by New Sun.

The Transition Services Agreement

Pursuant to the Transition Services Agreement, New Sun will provide Sabra with administrative and support services on a transitional basis, including finance and accounting, human resources, legal support, and information systems support (the “Transition Services”) for a period of up to , subject to any permitted extensions contained therein. The agreed upon charges for the Transition Services are generally intended to allow New Sun to recover all out-of-pocket costs and expenses and a predetermined profit.

The Transition Services Agreement will provide that Sabra has the right to terminate a Transition Service after an agreed notice period. The Transition Services Agreement also will contain provisions whereby Sabra will generally agree to indemnify New Sun for all claims, losses, damages, liabilities and other costs incurred by New Sun to a third party which arise in connection with the provision of a Transition Service, other than those costs resulting from New Sun’s gross negligence or willful misconduct.

DESCRIPTION OF MATERIAL INDEBTEDNESS

Prior to the Separation, New Sun and Sabra will enter into debt agreements secured by substantially all of their respective assets, the proceeds of which will be used to repay Sun’s outstanding indebtedness at the time of the Separation.

The debt agreements to be entered into by New Sun will be in an amount of up to $ million, of which up to $ million will be borrowed at the time of the Separation. The amount of indebtedness to be incurred by New Sun at the time of the Separation will depend on the cash position of Sun as of immediately prior to the Separation. The terms and structure of the indebtedness to be incurred by New Sun have not yet been determined. It is anticipated that New Sun’s debt agreements will contain customary covenants that would include restrictions on New Sun’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures as well as customary events of default. In addition, following the Separation, New Sun will have mortgage indebtedness to third parties of $6.2 million.

The debt agreements to be entered into by Sabra will be in an amount of up to $ , of which up to $ million will be borrowed at the time of the Separation. The amount of indebtedness to be incurred by Sabra at the time of the Separation will depend on the cash position of Sun as of immediately prior to the Separation. The terms and structure of the indebtedness to be incurred by Sabra have not yet been determined. It is anticipated that Sabra’s debt agreements will contain customary covenants that would include restrictions on Sabra’s ability to make acquisitions and other investments, pay dividends, incur additional indebtedness and make capital expenditures as well as customary events of default. In addition, following the Separation, Sabra will have mortgage indebtedness to third parties of $164.0 million.

Immediately prior to the Separation, Sun’s outstanding 9.125% senior subordinated notes and the outstanding term loans under Sun’s existing credit facility will be repaid from the net proceeds of indebtedness to be incurred by New Sun and Sabra as described above, together with cash on hand. Sun’s cash position immediately prior to the time of the Separation will include the net proceeds expected to be received by Sun from a public offering of Sun common stock.

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of certain U.S. federal income tax consequences to U.S. holders (as defined below) of (i) the Separation (see “—U.S. Federal Income Tax Consequences of the Separation” below), (ii) the REIT Conversion Merger (see “—U.S. Federal Income Tax Consequences of the REIT Conversion Merger” below), (iii) the acquisition, ownership and disposition of Sabra common stock (see “—U.S. Federal Income Tax Considerations Relating to Sabra” below), and (iv) the acquisition, ownership and disposition of New Sun common stock (see “—U.S. Federal Income Tax Considerations Relating to New Sun” below).

This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to U.S. holders of shares of Sun common stock, Sabra common stock or New Sun common stock. The summary is based on the Code, final, temporary or proposed U.S. Treasury regulations, administrative rulings and court decisions in effect as of the date of this proxy statement/prospectus, all of which are subject to change at any time, possibly with retroactive effect. Any such change could alter the U.S. federal income tax consequences described herein. No ruling has been or will be sought from the IRS as to the U.S. federal income tax consequences of the Separation or the REIT Conversion Merger. Accordingly, there can be no assurance that the IRS will not challenge any of the U.S. federal income tax consequences described herein.

For purposes of this summary, the term “U.S. holder” means a holder of shares of Sun common stock, shares of Sabra common stock and/or shares of New Sun common stock, as applicable, that is for U.S. federal income tax purposes:

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a citizen or resident of the United States;

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a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof (or the District of Columbia);

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a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or

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an estate that is subject to U.S. federal income tax on its income regardless of its source.

This summary only addresses U.S. federal income tax consequences of the Separation and REIT Conversion Merger to U.S. holders of shares of Sun common stock, shares of Sabra common stock and shares of New Sun common stock, as applicable, that hold such shares as a capital asset within the meaning of Section 1221 of the Code. Further, this summary does not address all aspects of U.S. federal income taxation that may be relevant to such holder in light of such holder’s particular circumstances or that may be applicable to holders subject to special treatment under U.S. federal income tax laws (including, for example, banks or other financial institutions, insurance companies, REITs or regulated investment companies, broker-dealers, dealers in securities or currencies, traders in securities that have elected to use a mark-to-market method of accounting, tax-exempt entities including governmental authorities (both U.S. and non-U.S.), persons that hold shares through a non-financial foreign entity, persons that hold shares through a foreign financial institution, holders whose functional currency is not the U.S. dollar, holders who acquired their shares pursuant to the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan, holders who hold their shares in an individual retirement or other tax-deferred account, holders subject to the alternative minimum tax provisions of the Code, U.S. expatriates, holders who hold their shares as part of a hedge, straddle, integration, constructive sale, conversion or other risk reduction transaction, and S corporations, partnerships or other pass-through entities (or investors in S corporations, partnerships or other pass-through entities)). In addition, no information is provided herein with respect to the tax consequences of the Separation and REIT Conversion under applicable state, local or non-U.S. tax laws or U.S. federal laws other than those pertaining to the U.S. federal income tax (except to the extent discussed in “—U.S. Federal Income Tax Considerations Relating to Sabra” below).

If a partnership (including an entity or arrangement classified as a partnership for U.S. federal income tax purposes) holds shares of Sun common stock, the tax treatment of a partner in the partnership generally will

depend on the status of the partners and the activities of the partnership. A stockholder that is a partner in a partnership and partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the acquisition, ownership and disposition of shares of Sun common stock, shares of Sabra common stock and/or shares of New Sun common stock.

THE U.S. FEDERAL INCOME TAX CONSEQUENCES DESCRIBED BELOW ARE NOT INTENDED TO CONSTITUTE A COMPLETE DESCRIPTION OF ALL TAX CONSEQUENCES RELATING TO THE SEPARATION AND REIT CONVERSION MERGER. YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF THE SEPARATION AND REIT CONVERSION MERGER AND OWNERSHIP OF SABRA COMMON STOCK AND NEW SUN COMMON STOCK, INCLUDING THE EFFECTS OF U.S. FEDERAL, STATE AND LOCAL, NON-U.S. AND OTHER TAX LAWS.

U.S. Federal Income Tax Consequences of the Separation

Sun

It is expected that Sun will recognize gain, if any, for U.S. federal income tax purposes on the distribution of New Sun common stock in an amount equal to the fair market value of such stock minus the tax basis of Sun in such stock at the time of such distribution. It is also expected that no gain or loss for U.S. federal income tax purposes will be recognized by New Sun as a result of the distribution of its stock in the Separation. The tax payable by Sun will be dependent upon the trading price of New Sun common stock immediately following the distribution of New Sun common stock and certain other factors. Sun believes that it will not be subject to a material amount of U.S. federal income tax as a result of the Separation.

U.S. Holders of Sun Common Stock

The distribution of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distribution in connection with the Separation to a U.S. holder of Sun common stock should be treated as a taxable distribution to a U.S. holder of Sun common stock for U.S. federal income tax purposes. The amount and the character of the gain to be recognized by a U.S. holder as a result of the Separation is unclear and depends in part on whether such distribution is properly treated as a distribution of property under Section 301 of the Code or instead as other property (“boot”) in the REIT Conversion Merger.

Although the matter is not entirely free from doubt, the Separation should be treated as a distribution of property under Section 301 of the Code. Assuming such characterization prevails and Section 301 of the Code applies, the U.S. federal income tax consequences to U.S. holders will be as follows. A U.S. holder will include the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash distributed in connection with the Separation to the U.S. holder in gross income as ordinary dividend income to the extent of such U.S. holder’s share of the current and accumulated earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles, through the end of 2010. The shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation will be taxable to non-corporate U.S. holders at the 15% rate of tax currently (through 2010) in effect for “qualified dividend income” to the extent that it is paid out of the current and accumulated earnings and profits of Sun (i.e., Sabra following the Separation), provided certain holding period requirements are satisfied. In particular, the 15% maximum tax rate available to non-corporate U.S. holders for “qualified dividend income” is not available unless the shares on which an otherwise qualifying dividend is paid has been held for more than 60 days during the 121-day period beginning 60 days before the date on which the shares become “ex-dividend.” For purposes of calculating the 60-day holding period as applied to non-corporate U.S. holders potentially eligible to be taxed on “qualified dividend income” at reduced rates, any period in which the holder has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, or has granted certain options to buy

substantially identical shares or securities, or holds one or more other positions in substantially similar or related property that diminishes the risk of loss from holding shares of Sun (i.e., Sabra following the REIT Conversion Merger) will not be counted toward the required holding period.

In addition, it should be noted that U.S. federal income tax law does not provide definitive guidance regarding the determination of the fair market value of publicly traded securities (which New Sun common stock is expected to be on the date of the Separation). Several courts have held that the fair market value of such securities for U.S. federal income tax purposes equals the average of the high and low sales prices of such securities on the date of determination, but there can be no assurance that the IRS would not seek to establish a different fair market value for New Sun common stock. Although Sun will be ascribing a value to the shares of New Sun common stock received in the Separation for tax purposes, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the shares, particularly if the stock trades at prices significantly above the value ascribed to the shares by Sun in the period following the Separation.

The exact amount of Sun’s earnings and profits depends upon a variety of factors and cannot be determined until after the close of Sun’s current taxable year. Sun’s management believes that Sun will have current (but not accumulated) earnings and profits for U.S. federal income tax purposes in the current taxable year. To the extent the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by a U.S. holder exceeds the U.S. holder’s share of the current and accumulated earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles, the excess first will be treated as a tax-free return of capital to the extent, generally, of the U.S. holder’s adjusted tax basis in Sun common stock, and any remaining excess will be treated as capital gain. In addition, a U.S. holder’s tax basis in New Sun common stock received in the Separation will be equal to its fair market value at the time of the Separation, and the holding period in the New Sun common stock received in the Separation will begin the day after the Separation. See “—U.S. Federal Income Tax Considerations Relating to New Sun—Taxation of U.S. Holders of New Sun Stock.” Sabra does not expect to report to U.S. holders the portion of the Separation that should be treated as a dividend prior to January 2011.

Alternative U.S. federal income tax characterizations of the Separation are possible. For example, it is possible that the IRS could seek to treat the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation as other property (“boot”) in the REIT Conversion Merger. In this event, a U.S. holder of Sun common stock would recognize gain, but not loss, equal to the lesser of (i) the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by such U.S. holder and (ii) the fair market value of the shares of Sabra common stock received in the REIT Conversion Merger and the fair market value of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by such U.S. holder minus the adjusted tax basis of such U.S. holder in its Sun common stock converted therefor. In general, the determination as to whether such gain recognized by a U.S. holder would be treated as capital gain or dividend income depends upon whether and to what extent the transactions related to the REIT Conversion Merger would be deemed to reduce the U.S. holder’s percentage ownership of Sabra following the REIT Conversion Merger. A U.S. holder whose interest is not reduced by the requisite percentage generally would be treated as receiving a dividend distribution under Section 301 of the Code to the extent of such U.S. holder’s share of the undistributed earnings and profits of Sun (i.e., Sabra following the REIT Conversion Merger), as determined under U.S. federal income tax principles, as of the effective time of the REIT Conversion Merger and any excess would then be treated as gain from the exchange of property.

U.S. Federal Income Tax Consequences of the REIT Conversion Merger

The receipt of Sabra common stock in exchange for Sun common stock should not cause recognition of gain or loss for U.S. federal income tax purposes to U.S. holders with respect to such exchange, except with respect to

cash received in lieu of a fractional share of Sabra common stock as discussed below (for the U.S. federal income tax treatment of the shares of New Sun common stock (including fractional shares for which Sun stockholders receive cash) and the cash received in connection with the Separation by U.S. holders in connection with the Separation, see “—U.S. Federal Income Tax Consequences of the Separation—U.S. Holders of Sun Common Stock”). No gain or loss should be recognized by Sun or Sabra as a result of the REIT Conversion Merger (for the U.S. federal income tax treatment to Sun of the distribution of New Sun common stock by Sun, see “—U.S. Federal Income Tax Consequences of the Separation—Sun”).

Cash in Lieu of Fractional Shares

A U.S. holder of Sun common stock who receives cash in lieu of a fractional share of Sabra common stock in the REIT Conversion Merger generally will be treated as having received such fractional share in the REIT Conversion Merger and then as having received cash in redemption of such fractional share. Gain or loss generally will be recognized based on the difference between the amount of cash received in lieu of the fractional share and the portion of the U.S. holder’s aggregate tax basis in the Sun common stock surrendered that is allocable to the fractional share. This gain or loss generally will be long-term capital gain or loss if the holding period for the Sun common stock is more than one year at the effective time of the REIT Conversion Merger.

U.S. Federal Income Tax Considerations Relating to Sabra

Taxation of Sabra as a Corporation under Subchapter C of the Code and not as a REIT

Until such time as Sabra qualifies and elects to be treated as a REIT for U.S. federal income tax purposes, Sabra will continue to be taxed as a corporation under Subchapter C of the Code as Sun is taxed at the present time.

Except as stated otherwise, the remainder of this discussion “—U.S. Federal Income Tax Considerations Relating to Sabra” assumes that Sabra is treated as a REIT for U.S. federal income tax purposes.

Taxation of Sabra as a REIT

General

Sabra currently intends to qualify and elect to be treated as a REIT under Sections 856 through 860 of the Code and the applicable U.S. Treasury regulations (the “REIT Requirements”), which are the requirements for qualifying as a REIT, commencing with its taxable year beginning on January 1, 2011. Sabra believes that, commencing with its taxable year beginning on January 1, 2011, it will be owned and organized, and will operate in such a manner, as to qualify for taxation as a REIT for U.S. federal income tax purposes. Sabra intends to continue to operate in such a manner, but no assurance can be given that it will operate in a manner so as to qualify or remain qualified.

The REIT Requirements are technical and complex. The following discussion sets forth only certain material aspects of those requirements. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Sabra’s qualification and taxation as a REIT depends upon its ability to meet, through actual annual operating results, distribution levels to stockholders and diversity of stock ownership, and the various qualification tests imposed under the REIT Requirements which are discussed below. Satisfaction of these tests both as an initial and ongoing matter is more complicated in the case of a REIT, such as Sabra, which owns properties leased to New Sun with which it was historically related and has common stockholders, directors and officers. No assurance can be given that the actual results of Sabra’s operation for any one taxable year will satisfy such requirements. See “—Failure to Qualify as a REIT.” If Sabra qualifies for taxation as a REIT, it generally will not be subject to U.S. federal corporate income taxes on that portion of its ordinary income or capital gain that is currently distributed to stockholders. Such treatment is expected to substantially eliminate the U.S. federal “double taxation” on earnings (at the corporate and the stockholder levels) that generally results from investment in a corporation.

If Sabra remains qualified as a REIT, it will nonetheless be subject to U.S. federal income or excise tax in certain circumstances, which include, but are not limited to, the following:

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Sabra will be taxed at regular corporate income tax rates on any undistributed REIT taxable income, including undistributed net capital gains;

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Under certain circumstances, Sabra may be subject to the “alternative minimum tax” on certain of its tax preference items, if any;

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If Sabra has (i) net income from the sale or other disposition of “foreclosure property” that is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying net income from foreclosure property, it will be subject to tax at the highest corporate tax rate on such income;

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If Sabra has net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than sales of foreclosure property and sales that qualify for a statutory safe harbor), such income will be subject to a 100% tax;

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If Sabra should fail to satisfy the 75% gross income test or the 95% gross income test (which are discussed below), but has nonetheless maintained its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which Sabra fails the 75% or the 95% test;

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Similarly, if Sabra should fail to satisfy the asset or other requirements applicable to REITs, as described below, yet nonetheless qualify as a REIT because there is reasonable cause for the failure and other applicable requirements are met, Sabra may be subject to a penalty. In that case, the amount of the penalty will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate if that amount exceeds $50,000 per failure;

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If Sabra should fail to distribute, or fail to be treated as having distributed, with respect to each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than capital gain income Sabra elects to retain and pay tax on) and (iii) any undistributed taxable income from prior periods, Sabra would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed;

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If Sabra should receive rents from New Sun deemed not to be fair market value rents or if Sabra misvalues its assets, Sabra may be liable for valuation penalties; and

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Sabra will own appreciated assets that it held before electing to be treated as a REIT. If such appreciated property is sold in a taxable transaction within the 10-year period following Sabra’s qualification as a REIT, Sabra will generally be subject to corporate tax on that gain to the extent of the built-in gain in that property at the time Sabra becomes a REIT. The total amount of gain on which Sabra can be taxed is limited to its net built-in gain at the time it became a REIT, i.e., the excess of the aggregate fair market value of its assets at the time it became a REIT over the adjusted tax bases of those assets at that time. In certain circumstances, Sabra may also be subject to tax on the disposition of any appreciated assets that it acquires from a taxable corporation in a transaction in which any gain on the transfer is not fully recognized.

Requirements for Qualification

As indicated above, to qualify as a REIT, a corporation must elect to be so treated and must meet various (a) organizational requirements, (b) gross income tests, (c) asset tests and (d) distribution requirements. Sabra’s ability to satisfy the asset tests will depend upon its analysis of the fair market values of its assets, some of which are not susceptible to a precise determination. Its compliance with the REIT income and quarterly asset requirements will also depend upon its ability to successfully manage the composition of its income and assets on an ongoing basis.

Organizational Requirements

The Code defines a REIT as a corporation, trust, or association that makes a REIT election with its tax return and:

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that is managed by one or more trustees or directors;

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the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

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that would be taxable as a domestic corporation, but for the REIT Requirements;

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that is not a bank, an insurance company or certain other specified types of financial institutions;

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the beneficial ownership of which is held by 100 or more persons;

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not more than 50% in value of the outstanding stock of which is owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year; and

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that meets certain other tests, described below, regarding the nature of its income and assets.

The Code provides that the conditions described in the first four bullets above, inclusive, must be met during the entire taxable year and that the condition described in the fifth bullet above must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. The conditions described in the fifth and sixth bullets above will not apply until after the first taxable year for which an election is made to be taxed as a REIT. For purposes of the condition described in the sixth bullet above, certain tax-exempt entities are generally treated as individuals, and the beneficiaries of a pension trust that qualifies under Section 401(a) of the Code and that holds shares of a REIT will be treated as holding shares of the REIT in proportion to their actuarial interests in the pension trust. In addition, if a REIT fails to satisfy the condition described in the sixth bullet above for any taxable year, the REIT will nonetheless be deemed to have satisfied the condition if it complied with U.S. Treasury regulations requiring the maintenance of records to ascertain ownership and did not know (and would not have known using reasonable diligence) that it was closely held for the year. Sabra believes that it will have sufficient diversity of ownership to satisfy the conditions in the fifth and sixth bullets above. In addition, Sabra’s charter restricts the transfer and ownership of its stock so that it should continue to satisfy these conditions. The provisions of Sabra’s charter restricting the transfer and ownership of its stock are described in “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock.”

In addition, Sabra will request on an annual basis of certain stockholders, and those stockholders will be required to provide, information relating to the number of shares actually or constructively owned by the stockholder. Ownership for purposes of conditions described in the fifth and sixth bullet above is defined using certain constructive ownership rules. As a result, the acquisition of less than 9.9% of Sabra stock by an individual or entity may cause that individual or entity to constructively own more than 9.9% of such stock, thereby triggering the transfer restrictions described in “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock.”

Effect of Subsidiary Entities

Disregarded Entities and Partnerships. An unincorporated domestic entity, such as a partnership or limited liability company that has a single owner, generally is not treated as an entity separate from its parent for U.S. federal income tax purposes. An unincorporated domestic entity with two or more owners is generally treated as a partnership for U.S. federal income tax purposes. In the case of a REIT that is a partner in a partnership that has other partners, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Sabra’s proportionate share for purposes of the 10% value test (see “—Asset Tests”) will be based on Sabra’s proportionate interest in the equity interests and certain debt securities issued by the

partnership. For all of the other asset and income tests, Sabra’s proportionate share will be based on Sabra’s proportionate interest in the capital interests in the partnership. Sabra’s proportionate share of the assets, liabilities, and items of income of any partnership, joint venture, or limited liability company that is treated as a partnership for U.S. federal income tax purposes in which Sabra acquires an equity interest, directly or indirectly, will be treated as Sabra’s assets and gross income for purposes of applying the various REIT qualification requirements.

Taxable REIT Subsidiaries. A REIT may own up to 100% of the shares of one or more taxable REIT subsidiaries (“TRSs”). A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by the parent REIT. The subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Sabra is not treated as holding the assets of a TRS or as receiving any income that the subsidiary earns. Rather, the stock issued by a TRS to Sabra is an asset in Sabra’s hands, and Sabra treats the distributions paid to Sabra from such taxable subsidiary, if any, as income. This treatment can affect Sabra’s compliance with the gross income and asset tests. Because Sabra does not include the assets and income of TRSs in determining its compliance with the REIT requirements, Sabra may use such entities to undertake indirectly activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis.

A TRS may not directly or indirectly operate or manage any health care facilities or lodging facilities or provide rights to any brand name under which any health care facility or lodging facility is operated. A TRS may provide rights to any brand name under which any health care facility or lodging facility is operated if such rights are provided to an “eligible independent contractor” (as described below), to operate or manage a health care facility or lodging facility, if such rights are held by the TRS as a franchisee, licensee, or in a similar capacity, and such health care facility or lodging facility is either owned by the TRS or leased to the TRS by its parent REIT. A TRS will not be considered to operate or manage a “qualified health care property” or “qualified lodging facility” solely because the TRS directly or indirectly possesses a license, permit, or similar instrument enabling it to do so. Additionally, a TRS that employs individuals working at a “qualified health care property” or “qualified lodging facility” outside of the United States will not be considered to operate or manage a “qualified health care property” or “qualified lodging facility”, as long as an “eligible independent contractor” is responsible for the daily supervision and direction of such individuals on behalf of the TRS pursuant to a management agreement or similar service contract. Rent that Sabra receives from any TRS lessee will qualify as “rents from real property” as long as the property is a “qualified health care property” and is operated on behalf of a TRS lessee by a person who qualifies as an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified health care properties” for any person unrelated to Sabra and a TRS lessee (an “eligible independent contractor”). A “qualified health care property” includes any real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a provider of such services which is eligible for participation in the Medicare program with respect to such facility.

Non-REIT Earnings and Profits.

In addition, in order to qualify as a REIT, Sabra cannot have at the end of any taxable year any earnings and profits that were accumulated in any taxable year in which the REIT provisions did not apply (“pre-REIT E&P”). It is anticipated that the distribution of the stock of New Sun in the Separation will reduce the earnings and profits of Sun (i.e., Sabra following the Separation) to zero at the time of the REIT Conversion. The calculation

of Sabra’s pre-REIT E&P, however, is a complex factual and legal determination. Sabra may have less than complete information at the time it undertakes its analysis or may interpret the applicable law differently than the IRS. There can be no assurances that the IRS will agree with Sabra’s determination of its pre-REIT E&P, and there are uncertainties regarding the amount of such pre-REIT E&P. These uncertainties include the possibility that the IRS could, upon audit, increase Sabra’s taxable income, which would increase Sabra’s pre-REIT E&P. If the IRS subsequently were to determine that Sun did have earnings and profits and Sabra had not distributed such earnings and profits by the end of the taxable year with respect to which Sabra’s REIT election is made, Sabra and its stockholders could be subject to adverse tax consequences.

Gross Income Tests

In order to maintain qualification as a REIT, Sabra must annually satisfy the following two gross income requirements:

•

At least 75% of Sabra’s gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (such as interest on obligations secured by mortgages on real property, certain “rents from real property” or gain on the sale or exchange of such property and certain fees with respect to agreements to make or acquire mortgage loans), from certain types of temporary investments or certain other types of gross income; and

•

At least 95% of Sabra’s gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments as aforesaid and from dividends, interest, and gain from the sale or other disposition of stock or securities and certain other types of gross income (or from any combination of the foregoing).

In order to qualify as a REIT, the rental income received by Sabra (including rents received from New Sun pursuant to the Lease Agreements) must constitute “rents from real property.” Rent that Sabra receives from its real property will qualify as “rents from real property,” which is qualifying income for purposes of the 75% and 95% gross income tests, only if the following conditions are met:

•

First, the rent must not be based, in whole or in part, on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales;

•

Second, neither Sabra nor a direct or indirect owner of 10% or more of Sabra stock may own, actually or constructively, 10% or more of a tenant from whom Sabra receive rents. If the tenant is a TRS, such TRS may not directly or indirectly operate or manage the related property. Instead, the property must, among other requirements, be operated on behalf of the TRS by a person who qualifies as an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating healthcare facilities for any person unrelated to Sabra and the TRS;

•

Third, if rent attributable to personal property (including furniture, fixtures and equipment which Sabra will be leasing pursuant to the Lease Agreements to New Sun), leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as “rents from real property.” However, if the 15% threshold is exceeded, the rent attributable to personal property will not qualify as “rents from real property.” Sabra does not intend to derive rental income attributable to personal property (other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease). There can be no assurance, however, that the IRS would not challenge Sabra’s calculation of a personal property ratio, or that a court would not uphold such assertion. If such a challenge were successfully asserted, Sabra could fail to satisfy the 75% or 95% gross income test and thus potentially lose its REIT status; and

•

Fourth, Sabra generally must not operate or manage its real property or furnish or render services to its tenants, other than through an “independent contractor” who is adequately compensated and from whom Sabra does not derive revenue. However, Sabra need not provide services through an

“independent contractor,” but instead may provide services directly to its tenants, if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not considered to be provided for the tenants’ convenience. Furthermore, Sabra may own up to 100% of the stock of one or more TRSs which may, except in certain circumstances, provide customary and noncustomary services to Sabra’s tenants without tainting Sabra’s rental income for the related properties. Sabra does not intend to perform noncustomary services, other than through independent contractors or TRSs.

The rents received by Sabra pursuant to the Lease Agreements will qualify as “rents from real property” in satisfying the gross income requirements for a REIT only if the conditions described in the four bullets above are met. For example, rents received or accrued by Sabra from New Sun will not qualify as “rents from real property” if Sabra is treated, either directly or under the applicable attribution rules, as owning 10% or more of New Sun common stock. Sabra will be treated as owning, under the applicable attribution rules, 10% or more of New Sun common stock at any time that a holder owns, directly or under the applicable attribution rules, (a) 10% or more of Sabra common stock and (b) 10% or more of New Sun common stock. In order for the rents received or accrued by Sabra from New Sun to be treated as qualifying rents for purposes of the REIT gross income requirements, the provisions of Sabra’s charter restrict the transfer and ownership of its common stock. The provisions of Sabra’s charter restricting the transfer and ownership of its common stock are described in “Description of Sabra Stock—Restrictions on Transfer and Ownership of Sabra Stock.” Nevertheless, there can be no assurance that such restrictions will be effective in ensuring that Sabra will not be treated as related to New Sun.

In addition, the Lease Agreements must be respected as true leases for U.S. federal income tax purposes and not treated as service contracts, joint ventures or some other type of arrangement. The determination of whether the Lease Agreements are true leases depends on an analysis of all the surrounding facts and circumstances. In making such a determination, courts have considered a variety of factors, including the following: (i) the intent of the parties, (ii) the form of the agreement, (iii) the degree of control over the property that is retained by the property owner (e.g., whether the lessee has substantial control over the operation of the property or whether the lessee was required to use its best efforts to perform its obligations under the agreement), and (iv) the extent to which the property owner retains the risk of loss with respect to the property (e.g., whether the lessee bears the risk of increases in operating expenses or the risk of damage to the property) or the potential for economic gains (e.g., appreciation) with respect to the property. If the Lease Agreements are recharacterized as service contracts or partnership agreements, rather than true leases, part or all of the payments that Sabra receives from New Sun would not be considered rent or would not otherwise satisfy the various requirements for qualification as “rents from real property.” In that case, Sabra likely would not be able to satisfy either the 75% or 95% gross income tests and, as a result, would lose its REIT status. In addition, if the payments under the Lease Agreements do not represent fair market value rentals and the IRS determines that New Sun and Sabra are under common control, the IRS may reallocate income between New Sun and Sabra. The reallocation could cause Sabra or New Sun to be subject to valuation penalties. Sabra believes that the payments under the Lease Agreements will represent fair market rentals.

Relief Provisions for Failing the 75% or 95% Gross Income Tests. If Sabra fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if certain relief provisions of the Code apply. These relief provisions will generally apply if Sabra’s failure to meet such tests was due to reasonable cause and not due to willful neglect, Sabra attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. Under certain circumstances, Sabra may prefer not to have the relief provisions apply. If these relief provisions are inapplicable to a particular set of circumstances involving Sabra, it would not qualify as a REIT.

Asset Tests

At the close of each quarter of its taxable year, Sabra must satisfy the following four tests relating to the nature of its assets:

•

At least 75% of the value of Sabra’s total assets must be represented by real estate assets (including stock or debt instruments that do not otherwise qualify as real estate assets and that are not held for more than one year that were purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of Sabra), cash, cash items, and government securities;

•

Not more than 25% of Sabra’s total assets may be represented by securities other than those in the 75% asset class;

•

Of the investments included in the 25% asset class, the value of any one issuer’s securities owned by Sabra may not exceed 5% of the value of Sabra’s total assets, and Sabra may not own more than 10% of any one issuer’s outstanding voting securities or more than 10% of the value of any one issuer’s outstanding securities; and

•

Not more than 25% of Sabra’s total assets may be represented by securities of one or more TRSs.

After initially meeting the asset tests at the close of any quarter, Sabra will not lose its status as a REIT if it fails to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values.

Relief Provisions for Failing the Asset Tests. If Sabra fails to satisfy the asset tests as the end of a quarter, Sabra will not lose its REIT qualification if:

•

it satisfied the asset tests at the end of the preceding calendar quarter; and

•

the discrepancy between the value of Sabra’s assets and the asset test requirements arose from changes in the market values of Sabra’s assets and was not wholly or partly caused by the acquisition of one or more non-qualifying assets.

If Sabra did not satisfy the condition described in the second bullet above and the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. Sabra intends to maintain adequate records of the value of its assets to ensure compliance with the asset tests, and to take such action within 30 days after the close of any quarter as may be required to cure any noncompliance but no assurance can be given that such asset tests will be met.

If Sabra violates the 5% value test, 10% voting test or 10% value test described above at the end of any calendar quarter, Sabra will not lose its REIT qualification if (i) the failure is de minimis (up to the lesser of 1% of Sabra’s total assets or $10 million) and (ii) Sabra disposes of these assets or otherwise complies with the asset tests within six months after the last day of the quarter. In the event of a more than de minimis failure of any of the asset tests, as long as the failure was due to reasonable cause and not to willful neglect, Sabra will not lose its REIT qualification if Sabra (i) files with the IRS a schedule describing the assets that caused the failure, (ii) disposes of these assets or otherwise comply with the asset tests within six months after the last day of the quarter and (iii) pays a tax equal to the greater of $50,000 per failure or an amount equal to the product of the highest corporate income tax rate (currently 35%) and the net income from the non-qualifying assets during the period in which Sabra failed to satisfy the asset tests.

Annual Distribution Requirements

In order to be treated as a REIT, Sabra is required to distribute dividends (other than capital gains dividends) to its stockholders in an amount at least equal to:

(A)

the sum of

(i)

90% of Sabra’s “REIT taxable income” (computed without regard to the dividends paid deduction and Sabra’s net capital gain), and

(ii)

90% of the net income, if any, from foreclosure property in excess of the special tax on income from foreclosure property,

minus

(B)

the sum of certain items of noncash income.

Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if either (i) Sabra declares the distribution before Sabra files a timely U.S. federal income tax return for the year and pays the distribution with or before the first regular dividend payment after such declaration or (ii) Sabra declares the distribution in October, November or December of the taxable year, payable to stockholders of record on a specified day in any such month, and Sabra actually pays the dividends before the end of January of the following year. The distributions under clause (i) are taxable to owners of Sabra common stock in the year in which paid, and the distributions in clause (ii) are treated as paid on December 31 of the prior taxable year. In both instances, these distributions relate to Sabra’s prior taxable year for purposes of the 90% distribution requirement.

To the extent that Sabra does not distribute (or is not treated as having distributed) all of its net capital gain or distributes (or is treated as having distributed) at least 90%, but less than 100% of its “REIT taxable income,” as adjusted, it will be subject to tax thereon at regular ordinary and capital gains corporate tax rates. If Sabra so elects, the net capital gain retained by it will be treated as having been (i) distributed to its stockholders, (ii) taxed at the stockholder level and (iii) contributed to Sabra in amount equal to the gain less the tax. In such a case, stockholders will receive certain tax credits and basis adjustments reflecting the deemed distribution and deemed payment of taxes by stockholders. The Code also permits a stockholder to elect to be treated for tax purposes as having (i) received a distribution in the amount specified in the election and (ii) contributed the amount thereof to the capital of Sabra.

If Sabra should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year (other than capital gain income which Sabra elects to retain and pay tax on), and (iii) any undistributed taxable income from prior periods, Sabra would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Sabra may elect to retain rather than distribute its net long-term capital gains while treating the capital gain as if distributed. The effect of such an election is that (i) Sabra is required to pay the tax on such gains, (ii) U.S. holders, while required to include their proportionate share of the undistributed long-term capital gain in income, will receive a credit or refund for their share of the tax paid by Sabra, and (iii) the basis of a U.S. holder’s stock would be increased by the amount of the undistributed long-term capital gains (minus the amount of capital gains tax paid by Sabra) included in the U.S. holder’s long-term capital gains. Sabra intends to make timely distributions sufficient to satisfy the annual distribution requirement. “REIT taxable income” is the taxable income of a REIT, which generally is computed in the same fashion as the taxable income of any corporation, except that (i) certain deductions are not available, such as the deduction for dividends received, (ii) a REIT may deduct dividends paid (or deemed paid) during the taxable year, (iii) net capital gains and losses are excluded, and (iv) certain other adjustments are made. It is possible that, from time to time, Sabra may not have sufficient cash or other liquid assets to meet the 90% distribution requirement due to timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in calculating the taxable income of Sabra.

In the event that such an insufficiency or such timing differences occur, in order to meet the 90% distribution requirement and maintain Sabra’s status as a REIT, Sabra may have to sell assets at unfavorable prices, borrow at unfavorable terms, make taxable stock dividends, or pursue other strategies. Sabra does not currently intend to pay taxable stock dividends. However, if for any taxable year, Sabra has significant amounts of taxable income in excess of available cash flow, Sabra may have to declare dividends in-kind. Pursuant to IRS Revenue Procedure 2010-12, the IRS has indicated that it will treat distributions that are paid part in cash and part in stock as dividends that would satisfy the REIT annual distribution requirements and qualify for the dividends paid

deduction for U.S. federal income tax purposes. In order to qualify for such treatment, IRS Revenue Procedure 2010-12 requires that at least 10% of the total distribution be payable in cash and that each stockholder have a right to elect to receive its entire distribution in cash. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a proportionate share of the cash to be distributed (although no stockholder electing to receive cash may receive less than 10% of such stockholder’s distribution in cash). IRS Revenue Procedure 2010-12 applies to distributions declared on or before December 31, 2012 with respect to taxable years ending on or before December 31, 2011. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable dividends payable in cash and/or stock, including on a retroactive basis, or assert that the requirements for such taxable dividends have not been met.

Under certain circumstances, Sabra may be able to rectify a failure to meet the distribution requirement for a year by paying “deficiency dividends” to stockholders in a later year, which may be included in Sabra’s deduction for dividends paid for the earlier year. Thus, Sabra may be able to avoid being taxed on amounts distributed as deficiency dividends; however, Sabra will be required to pay interest based upon the amount of any deduction taken for deficiency dividends.

Failure to Qualify as a REIT

If Sabra fails to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, Sabra will be subject to tax (including any applicable alternative minimum tax) on its taxable income at corporate tax rates. Distributions to stockholders in any year in which Sabra fails to qualify will not be deductible by Sabra and they will not be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and subject to certain limitations of the Code, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, Sabra will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost, and will not be permitted to requalify unless it distributes any earnings and profits attributable to the period when it failed to qualify. In addition, it would be subject to tax on any built-in gains on property held during the period during which it did not qualify if it sold such property within 10 years of requalification, to the extent of its net built-in gain at the time of requalification. It is not possible to state whether in all circumstances Sabra would be entitled to such statutory relief.

Taxation of U.S. Holders of Sabra Common Stock

REIT Distributions

Distributions Generally. As long as Sabra qualifies as a REIT, distributions by Sabra to a U.S. holder out of Sabra’s current and accumulated earnings and profits (and not designated as capital gains dividends) will be taken into account by such U.S. holders as ordinary income. Dividends paid by Sabra to a corporate U.S. holder will not be eligible for the dividends-received deduction for corporations. A distribution in excess of current and accumulated earnings and profits will first be treated as a tax-free return of capital, reducing the tax basis in the U.S. holder’s Sabra common stock, and a distribution in excess of the U.S. holder’s tax basis in its Sabra common stock will be a taxable gain realized from the sale of such shares. Dividends declared by Sabra in October, November or December of any year payable to a stockholder of record on a specified date in any such month shall be treated as both paid by Sabra and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by Sabra during January of the following calendar year. Sabra will be treated as having sufficient earnings and profits to treat as a dividend any distribution by Sabra up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed under “—Taxation of Sabra as a REIT—General” and “—Taxation of Sabra as a REIT—Annual Distribution Requirements” above. As a result, stockholders may be required to treat as taxable dividends certain distributions that would otherwise result in tax-free returns of capital. Moreover, any “deficiency dividend” will be treated as a “dividend” (an ordinary dividend or a capital gain dividend, as the case may be), regardless of Sabra’s earnings and profits.

Capital Gain Distributions. Distributions that are designated by Sabra as capital gain dividends will be treated as long-term capital gain (to the extent they do not exceed Sabra’s actual net capital gain) for the taxable year without regard to the period for which the stockholder has held its stock. However, corporate stockholders may be required to treat up to 20% of certain capital gains dividends as ordinary income, pursuant to Section 291(d) of the Code. If Sabra elects to retain capital gains rather than distribute them, a U.S. holder will be deemed to receive a capital gain dividend equal to the amount of such retained capital gains. In such a case, a U.S. holder will receive certain tax credits and basis adjustments reflecting the deemed distribution and deemed payment of taxes by the U.S. holder.

To the extent that Sabra has available net operating losses and capital losses carried forward from prior taxable years, such losses may reduce the amount of distributions that Sabra must make to comply with the REIT distribution requirements described under “—Taxation of Sabra as a REIT—Annual Distribution Requirements” above. Such losses, however, are not passed through to a stockholder of Sabra common stock and do not offset such stockholder’s income from other sources, nor would they affect the character of any distributions that you receive from Sabra.

Dispositions of Sabra Common Stock

In general, a U.S. holder will realize gain or loss upon the sale, redemption, or other taxable disposition of Sabra common stock in an amount equal to the difference between the sum of the fair market value of any property received and the amount of cash received in such disposition, and the U.S. holder’s adjusted tax basis in the common shares at the time of the disposition. In general, a U.S. holder’s tax basis will equal the U.S. holder’s acquisition cost, increased by the excess of net capital gains deemed distributed to the U.S. holder, less tax deemed paid on it, and reduced by returns of capital. Gain from the sale or disposition of Sabra common stock held for more than 12 months will generally be long-term capital gain. Capital losses recognized by a U.S. holder upon the disposition of shares of Sabra common stock held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the U.S. holder but not ordinary income, except in the case of individuals, who may offset up to $3,000 of ordinary income each year. In addition, any loss upon a sale or exchange of shares of shares of Sabra common stock by a U.S. holder who has held such shares for six months or less, after applying holding period rules, will be treated as a long-term capital loss to the extent of distributions received from Sabra that are required to be treated by the U.S. holder as long-term capital gain.

If a U.S. holder recognizes a loss upon a disposition of Sabra common stock in an amount that exceeds a prescribed threshold, it is possible that the provisions of U.S. Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS. While these regulations are directed towards “tax shelters,” they are written quite broadly, and apply to transactions that would not typically be considered tax shelters. In addition, there are significant penalties for failure to comply with these requirements. Each prospective holder of Sabra common stock should consult its tax advisor concerning any possible disclosure obligation with respect to the receipt or disposition of Sabra common stock, or transactions that might be undertaken directly or indirectly by Sabra. Moreover, holders should be aware that Sun and other participants in the transactions involving Sabra (including its advisors) may be subject to disclosure or other requirements pursuant to these regulations.

Passive Activity Losses and Investment Interest

Distributions made by Sabra and gain arising from the sale or exchange by a U.S. holder of shares of Sabra common stock will not be treated as passive activity income. As a result, U.S. holders will not be able to apply any “passive losses” against income or gain relating to shares of Sabra common stock. Distributions made by Sabra, to the extent they do not constitute return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation.

Information Reporting and Backup Withholding Tax

Sabra will report to a U.S. holder and the IRS the amount of distributions it pays during each calendar year and the amount of tax it withholds, if any. Under the backup withholding rules, a U.S. holder of Sabra common stock may be subject to backup withholding at a current rate of 28% with respect to distributions unless such U.S. holder:

•

are a corporation or come within certain other exempt categories and, when required, demonstrate this fact; or

•

provide a taxpayer identification number, certify as to no loss of exemption from backup withholding, and otherwise comply with the applicable requirements of the backup withholding rules.

Any amount paid as backup withholding will be creditable against your income tax liability.

U.S. holders should consult their own tax advisors with respect to the U.S. federal, state and local and non-U.S. tax consequences to them of an investment in Sabra common stock, including applicable tax rates, and the effect of any possible changes in the tax laws.

Legislative or Other Actions Affecting REITs

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. No assurance can be given as to whether, or in what form, any proposals affecting REITs or their stockholders will be enacted. Changes to the federal tax laws and interpretations thereof could adversely affect an investment in Sabra common stock.

U.S. Federal Income Tax Considerations Relating to New Sun

Taxation of New Sun

As a C-corporation under the Code, New Sun will be subject to U.S. federal income tax on its taxable income at the U.S. federal corporate tax rate of 35%.

Taxation of U.S. Holders of New Sun Common Stock

Distributions

Distributions to U.S. holders of New Sun common stock generally will be taxable as dividend income to such U.S. holders up to the amount of New Sun’s then current and accumulated earnings and profits. Dividends paid by New Sun to a corporate U.S. holder may be eligible for the dividends-received deduction for corporations. To the extent that New Sun makes distributions to a U.S. holder in excess of the U.S. holder’s share of the current and accumulated earnings and profits of New Sun, the excess first will be treated as a tax-free return of capital to the extent, generally, of the U.S. holder’s tax basis in the U.S. holder’s New Sun common stock, and any remaining excess will be treated as capital gain.

Dispositions of New Sun Common Stock

A U.S. holder generally will recognize gain or loss on the sale, exchange or other disposition of shares of New Sun common stock (unless a specific nonrecognition provision applies). Such gain or loss will be equal to the difference between the amount of cash and the fair market value of any property received and the U.S. holder’s tax basis in such shares. A U.S. holder’s holding period for shares of New Sun common stock acquired in the Separation will begin on the day after date of the Separation. Gain from the sale of New Sun common stock held for more than 12 months will generally be long-term capital gain. Long-term capital losses recognized by a U.S. holder upon the disposition of shares of New Sun common stock are generally available only to offset capital

gain income of the U.S. holder but not ordinary income, except in the case of individuals, who may offset up to $3,000 of ordinary income each year. Non-corporate U.S. holders may carry forward unused capital losses indefinitely. Unused capital losses of a corporation may be carried back three years and carried forward five years.

Information Reporting and Backup Withholding Tax

Distributions on the shares of New Sun common stock will be subject to certain information reporting and backup withholding requirements. See “—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of U.S. Holders of Sabra Common Stock—Information Reporting and Backup Withholding Tax.”

U.S. holders should consult their own tax advisors with respect to the U.S. federal, state and local and non-U.S. tax consequences to them of an investment in New Sun common stock, including applicable tax rates, and the effect of any possible changes in the tax laws.

DISTRIBUTION AND DIVIDEND POLICY

New Sun

New Sun does not anticipate paying dividends on its common stock in the foreseeable future. New Sun anticipates that the agreements with respect to the indebtedness it expects to incur, like Sun’s current senior credit facility, will restrict New Sun’s ability to pay dividends or make distributions to its stockholders. Any future determination to pay dividends will be at the discretion of the board of directors of New Sun and will be dependent upon such factors as the financial condition, results of operations, capital requirements, credit agreement compliance, applicable law and other factors affecting New Sun as its board of directors deems relevant.

Sabra

The first distribution, for the period ending March 31, 2011, is expected to be a cash distribution equal to approximately $ per share of Sabra common stock. The actual amount of the distribution will depend on Sabra’s actual funds from operations for such period. See “Risk Factors—Risks Associated with the Status of Sabra as a REIT” and “Risk Factors—Risks Relating to Sabra’s Business.”

Initially, cash available for distribution to Sabra stockholders will be derived solely from the rental payments under the Lease Agreements. All distributions will be made by Sabra at the discretion of its board of directors and will depend on the cash flow and earnings of Sabra, its financial condition, bank covenants, applicable law and such other factors as the board of directors of Sabra deems relevant.

Sabra’s taxable income will be calculated without reference to its cash flow. Therefore, under certain circumstances, Sabra may not have available cash sufficient to pay its required distributions. Under the applicable IRS revenue procedure, up to 90% of any taxable dividends (through 2011) could be payable in Sabra stock. For more information, see “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of Sabra as a REIT—Annual Distribution Requirements.” Sabra believes that it will have sufficient available cash to pay its required distributions for 2011 but there can be no assurance that Sabra will have sufficient available cash. The board of directors of Sabra has not determined when any such distributions will be declared or paid.

It presently is anticipated that additional acquisitions, including capital improvements to the acquired properties, will be financed primarily through borrowings by Sabra or the issuance of equity securities. To the extent that those sources of funds are insufficient to meet all such cash needs, or the cost of such financing exceeds the cash flow generated by the acquired properties for any period, funds available for distribution could be reduced. See “Risk Factors.”

Sabra anticipates that its distributions generally will be taxable as ordinary income to its stockholders, although a portion of the distributions may be designated as capital gain or may constitute a return of capital. For a discussion of the U.S. federal income tax treatment of distributions to stockholders of Sabra, see “Certain U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Considerations Relating to Sabra—Taxation of U.S. Holders of Sabra Common Stock.”

BUSINESS OF NEW SUN

Overview

Following the Separation, New Sun, through its subsidiaries, will continue to provide the same nursing, rehabilitative and related specialty healthcare services provided by Sun immediately prior to the Separation and will continue to engage in Sun’s three principal business segments of inpatient services, rehabilitation therapy services and medical staffing services. New Sun’s core business will be to provide inpatient services, which as of March 31, 2010, are provided by Sun primarily through 183 skilled nursing centers, 14 assisted and independent living centers and 8 mental health centers. At these centers, Sun has 23,205 licensed beds located in 25 states, of which 22,423 are available for occupancy as of March 31, 2010. New Sun’s subsidiaries will also provide rehabilitation therapy services to affiliated and non-affiliated centers and medical staffing and other ancillary services primarily to non-affiliated centers and other third parties.

Business Segments

New Sun’s subsidiaries will engage in the following three principal business segments:

•

inpatient services, primarily skilled nursing centers;

•

rehabilitation therapy services; and

•

medical staffing services.

Inpatient services. Upon consummation of the Separation, New Sun will operate all of Sun’s healthcare facilities (as of March 31, 2010, these facilities consist of 183 skilled nursing centers, 14 assisted and independent living centers and 8 mental health centers in 25 states with 23,205 licensed beds through SunBridge and other subsidiaries). New Sun’s skilled nursing centers will provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. Rehab Recovery Suites, which specialize in Medicare and managed care patients, as of March 31, 2010, are located in 65 of the skilled nursing centers, and 46 of these skilled nursing centers contain wings dedicated to the care of residents afflicted with Alzheimer’s disease. New Sun’s assisted living centers will provide services that include minimal nursing assistance, housekeeping, nutrition, laundry and administrative services for individuals requiring minimal assistance for activities in daily living. New Sun’s independent living centers will provide services that include security, housekeeping, nutrition and limited laundry services for individuals requiring no assistance for activities in daily living. New Sun’s mental health centers will provide a range of inpatient and outpatient behavioral health services for adults and children through specialized treatment programs. New Sun will also provide hospice services, including palliative care, social services, pain management and spiritual counseling, through its subsidiary SolAmor, in eight states for individuals facing end-of-life issues.

Rehabilitation therapy services. New Sun will provide rehabilitation therapy services through SunDance. SunDance provides a broad array of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. Upon consummation of the Separation, SunDance will continue to provide rehabilitation therapy services, which are currently provided to 468 centers in 36 states, 337 of which are operated by nonaffiliated parties and 131 of which are operated by affiliates. In most of New Sun’s 74 healthcare centers for which SunDance will not provide rehabilitation therapy services, those services will be provided by staff employed by the centers, although some centers will engage third-party therapy companies for such services.

Medical staffing services. New Sun will provide temporary medical staffing in 44 states through CareerStaff. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians, (iv) physicians and (v) related medical personnel.

Competition

Competition within the inpatient services industry varies by location. New Sun will compete with other healthcare centers based on key factors such as the number of centers in the local market, the types of services available, quality of care, reputation, age and appearance of each center and the cost of care in each locality. Increased competition in the future could limit New Sun’s ability to attract and retain residents or to expand its business.

New Sun will also compete with other companies in providing rehabilitation therapy services, medical staffing services and hospice services, and in employing and retaining qualified nurses, therapists and other medical personnel. The primary competitive factors for the ancillary services markets are quality of services, charges for services and responsiveness to customer needs.

New Sun believes the following strengths will allow it to improve its operations and profitability:

National footprint. The size of New Sun’s operations will enable it to realize the benefits of economies of scale, purchasing power and increased year-over-year operating efficiencies. Furthermore, its geographic diversity will help to mitigate the risk associated with adverse state regulatory changes related to Medicaid reimbursement in any one state.

Core inpatient services business. New Sun’s inpatient business will achieve consistent revenue and earnings growth by expanding its services and increasing its focus on integrated skilled nursing care and rehabilitation therapy services to attract high-acuity patients throughout all nursing and rehabilitation centers and through targeting specific centers with Rehab Recovery Suites that exclusively specialize in Medicare and managed care patients. New Sun’s hospice business, which will serve patients in certain of its nursing centers, in-home settings and in non-affiliated centers, will be an important contributor to the strength of its inpatient business.

Quality of care. New Sun will maintain programs to provide a high quality of care to its patients. These programs have received third-party recognition for quality of care and clinical services.

Ancillary businesses will support inpatient services and provide diversification. New Sun’s rehabilitation therapy business will complement its core inpatient services business, which will be particularly attractive to high-acuity patients who require more intensive and medically complex care. New Sun’s medical staffing business, which primarily services non-affiliated providers, will derive a majority of its revenues from its placement of therapists. New Sun will also place physicians, nurses and pharmacists.

Infrastructure in place to leverage growth. New Sun will have an established corporate and regional infrastructure in place to leverage its growth.

Experienced management team with a proven track record. New Sun will have a strong and committed management team with substantial industry knowledge. The Chief Executive Officer and the Chief Financial Officer combined have over 45 years of cumulative healthcare experience, as well as a proven track record of operations success in the long-term care industry. New Sun’s management team has successfully acquired and integrated numerous businesses, assets and properties, and this experience should position New Sun well to successfully implement its growth and integration strategies.

Business Strategy

New Sun intends to build on current competitive strengths and to grow its business and strengthen its position as a nationwide provider of senior healthcare services by achieving the following objectives:

Focus on inpatient growth. New Sun intends to develop inpatient revenue and profitability by maintaining high occupancy rates and by focusing on attracting more high-acuity and Medicare patients. New Sun will implement

this strategy by focusing on expanding its clinical services and case management and by developing Rehab Recovery Suites that exclusively specialize in Medicare and managed care patients. New Sun plans to take advantage of its marketing infrastructure and local community knowledge to attract new patients and to expand its referral and customer bases.

Seek growth in hospice and ancillary businesses. New Sun intends to grow its SolAmor hospice operations through acquisitions and internal growth. New Sun will focus on its rehabilitation therapy business, which will be a key driver of its Medicare services and revenues, by improving its clinical product offering, labor productivity and operating profitability and increasing the number of third-party contracts. New Sun’s hospice and ancillary services should provide it with diversified revenue sources, favorable payor mix and growth opportunities.

Improve operational efficiency. New Sun will focus on improving operating efficiency without compromising high quality of care. New Sun plans to reduce costs and enhance efficiency through various methods, including:

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reducing labor and billing expenses through technological advances and operational improvements that allow management to allocate employees more efficiently;

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reducing costs through process improvement initiatives;

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improving therapist productivity in its rehabilitation services business;

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controlling litigation expense by focusing on risk management; and

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monitoring and analyzing the operations and profitability of individual business units.

Employees and Labor Relations

Upon consummation of the Separation, New Sun intends to employ substantially all of the current employees of Sun. New Sun’s subsidiaries will continue to be obligated under existing collective bargaining agreements. As of March 31, 2010, Sun had 29,655 full-time, part-time and per diem employees. Of this total, 24,073 employees were in its inpatient services operations, 3,110 employees in its rehabilitation therapy services operations, 1,721 employees in its medical staffing business, 450 employees in its hospice operations and 301 employees at its corporate and regional offices.

As of March 31, 2010, SunBridge operated 35 centers with union employees. As of March 31, 2010, approximately 2,835 of its employees (9.6% of all of its employees) who worked in healthcare centers in Alabama, California, Connecticut, Georgia, Massachusetts, Maryland, Montana, New Jersey, Ohio, Rhode Island, Washington and West Virginia were covered by collective bargaining contracts. Collective bargaining agreements covering approximately 674 of these employees (2.3% of all its employees) either are currently in renegotiations or will shortly be in renegotiations due to the expiration of the collective bargaining agreements.

Federal and State Regulatory Oversight

The healthcare industry is extensively regulated. In the ordinary course of business, New Sun’s operations will be continuously subject to federal, state and local regulatory scrutiny and supervision. This will often include inquiries, investigations, examinations, audits, site visits and surveys. As more fully described below, various laws, including anti-kickback, anti-fraud and abuse provisions codified under the Social Security Act, prohibit certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare and Medicaid. Sanctions for violating these anti-kickback, anti-fraud and abuse provisions include criminal penalties, civil sanctions, fines and possible exclusion from government programs such as Medicare and Medicaid. If a center is decertified as a Medicare or Medicaid provider by CMS or a state, the center will not thereafter be reimbursed for caring for residents that are covered by Medicare and Medicaid, and the center would be forced to care for such residents without being reimbursed or to transfer such residents.

New Sun’s skilled nursing centers and mental health centers will be licensed under applicable state law, and will be certified or approved as providers under the Medicare and Medicaid programs. State and local agencies survey all skilled nursing centers on a regular basis to determine whether such centers are in compliance with governmental operating and health standards and conditions for participation in government sponsored third-party payor programs. From time to time, New Sun may receive notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. New Sun will review such notices for factual correctness, and based on such reviews, either take appropriate corrective action or challenge the stated basis for the allegation of noncompliance. Where corrective action is required, New Sun will work with the reviewing agency to create mutually agreeable measures to be taken to bring the center or service provider into compliance. Under certain circumstances, the federal and state agencies have the authority to take adverse actions against a center or service provider, including the imposition of a monitor, the imposition of monetary penalties and the decertification of a center or provider from participation in the Medicare and/or Medicaid programs or licensure revocation. When appropriate, New Sun will vigorously contest such sanctions. Challenging and appealing notices or allegations of noncompliance can require significant legal expenses and management attention.

Various states in which New Sun will operate centers have established minimum staffing requirements or may establish minimum staffing requirements in the future. New Sun’s ability to satisfy such staffing requirements depends upon its ability to attract and retain qualified healthcare professionals, including nurses, certified nurse’s assistants and other staff. Failure to comply with such minimum staffing requirements may result in the imposition of fines or other sanctions.

Most states in which New Sun will operate have statutes requiring that prior to the addition or construction of new nursing home beds, to the addition of new services or to certain capital expenditures in excess of defined levels, New Sun first must obtain a CON, which certifies that the state has made a determination that a need exists for such new or additional beds, new services or capital expenditures. The certification process is intended to promote quality healthcare at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and centers.

New Sun will be subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

•

the “anti-kickback” provisions of the Medicare and Medicaid programs, which prohibit knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate) directly or indirectly in return for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under Medicare or Medicaid; and

•

the “Stark laws” which prohibit, with limited exceptions, the referral of patients by physicians for certain services, including physical therapy and occupational therapy, to an entity in which the physician has a financial interest.

False claims are prohibited pursuant to criminal and civil statutes. These provisions prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid or failing to refund overpayments or improper payments. Suits alleging false claims can be brought by individuals, including employees and competitors. Newly adopted legislation has expanded the scope of the federal False Claims Act and eased some requirements for the filing of a lawsuit under the act. New Sun believes that its billing practices will be compliant with the False Claims Act and similar state laws. However, if its practices, policies and procedures are found not to comply with the provisions of those laws, New Sun could be subject to civil sanctions.

Commencing January 1, 2010, recovery audit contractors, or RACs, operating under the Medicare Integrity Program, have sought to identify alleged Medicare overpayments based on the medical necessity of services provided in nursing centers. Similar audits are conducted by various state agencies under the Medicaid program.

As of March 31, 2010, Sun had approximately $5.2 million of claims that were under various stages of review or appeal with the Medicare Administration Contractors/Fiscal Intermediaries. Upon consummation of the Separation, New Sun will not be able to assure you that future recoveries will not be material or that any appeal of a medical review or RAC audit will be successful.

New Sun will also be subject to regulations under the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996. The privacy rules provide for, among other things, (i) giving consumers the right and control over the release of their medical information, (ii) the establishment of boundaries for the use of medical information and (iii) civil or criminal penalties for violation of an individual’s privacy rights.

These privacy regulations apply to “protected health information,” which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations limit a provider’s use and disclosure of most paper, oral and electronic communications regarding a patient’s past, present or future physical or mental health or condition, or relating to the provision of healthcare to the patient or payment for that healthcare.

The security regulations will require New Sun to ensure the confidentiality, integrity, and availability of all electronic protected health information that it creates, receives, maintains or transmits. New Sun must protect against reasonably anticipated threats or hazards to the security of such information and the unauthorized use or disclosure of such information.

Compliance Process

New Sun’s compliance program is referred to in this proxy statement/prospectus as the “Compliance Process,” and as of the Separation will be substantially the same as Sun’s Compliance Process as of immediately prior to the Separation. New Sun’s Compliance Process will evolve as the requirements of federal and private healthcare programs change. There are seven principal elements to the Compliance Process:

Written Policies, Procedures and Standards of Conduct. Sun’s business lines, which will be operated by New Sun following the Separation, have extensive policies and procedures (“P&Ps”) modeled after applicable laws, regulations, government manuals and industry practices and customs. The P&Ps govern the clinical, reimbursement and operational aspects of each subsidiary. To emphasize adherence to its P&Ps, New Sun will publish and distribute a Code of Conduct and an employee handbook.

Designated Compliance Officer and Compliance Committee. New Sun will have a Chief Compliance Officer whose responsibilities include: (i) overseeing the Compliance Process; (ii) overseeing compliance with judicial and regulatory requirements and functioning as the liaison with the state agencies and the federal government on matters related to the Compliance Process and such requirements; (iii) reporting to New Sun’s board of directors, the Compliance Committee of its board of directors, and senior corporate managers on the status of the Compliance Process; and (iv) overseeing the coordination of a comprehensive training program which focuses on the elements of the Compliance Process and employee background screening process. Compliance matters will be reported to the Compliance Committee of New Sun’s board of directors on a regular basis. The Compliance Committee will be composed solely of independent directors.

Effective Training and Education. Every employee, director and officer will be trained on the Compliance Process and Code of Conduct. Training will also occur for appropriate employees in applicable provisions of the Medicare and Medicaid laws, fraud and abuse prevention, clinical standards, and practices, and claim submission and reimbursement P&Ps.

Effective Lines of Communication. Employees will be encouraged to report issues of concern without fear of retaliation using a Four Step Reporting Process, which will include the toll-free “New Sun Quality Line.” The Four Step Reporting Process will encourage employees to discuss clinical, ethical or financial concerns with supervisors and local management since these individuals will be most familiar with the laws, regulations, and policies that impact their concerns. The Sun Quality Line will be an always-available option that may be used for anonymous reporting if the employee so chooses. Reported concerns will be internally reviewed, and proper follow-up will be conducted.

Internal Monitoring and Auditing. New Sun’s Compliance Process will put internal controls in place to meet the following objectives: (i) accuracy of claims, reimbursement submissions, cost reports and source documents; (ii) provision of patient care, services, and supplies as required by applicable standards and laws; (iii) accuracy of clinical assessment and treatment documentation; and (iv) implementation of judicial and regulatory requirements (e.g., background checks, licensing and training). Each business line will monitor and audit compliance with P&Ps and other standards to ensure that the objectives listed above are met. Data from these internal monitoring and auditing systems will be analyzed and acted upon through a quality improvement process. New Sun will designate the subsidiary presidents and each member of the operations management team as Compliance Liaisons. Each Compliance Liaison will be responsible for making certain that all requirements of the Compliance Process are completed at the operational level for which the Compliance Liaison is responsible.

Enforcement of Standards. New Sun’s policies, the Code of Conduct and the employee handbook, as well as all associated training materials, will clearly indicate that employees who violate its standards will be subjected to discipline. Sanctions will range from oral warnings to suspensions and/or to termination of employment. New Sun will take a proactive approach to offset the need for punitive measures. First, New Sun will have employee background review practices that surpass industry standards. Second, as noted above, New Sun will devote significant resources to employee training. Finally, New Sun will have a performance management program intended to make certain that all employees are aware of what duties are expected of them and understand that compliance with policies, procedures, standards and laws related to job functions is required.

Responses to Detected Offenses and Development of Corrective Actions. Correction of detected misconduct or a violation of New Sun’s policies will be the responsibility of every manager. As appropriate, a manager will be expected to develop and implement corrective action plans and monitor whether such actions are likely to keep a similar violation from occurring in the future.

New Sun’s Compliance Process will incorporate the terms of a revised Permanent Injunction and Final Judgment entered on September 14, 2005 (“PIFJ”). The PIFJ, which resulted from investigations by the Bureau of Medi-Cal Fraud and Elder Abuse of the Office of the California Attorney General and will apply to New Sun’s California centers, requires compliance with certain clinical practices that are substantially consistent with existing law and Sun’s current practices, and imposes staffing requirements and specific training obligations. All California administrators will be trained on the requirements of the PIFJ, as required. The PIFJ will also require New Sun to issue to the State of California annual reports documenting its compliance efforts. A breach of the PIFJ could subject New Sun to substantial monetary penalties.

General Information

New Sun is incorporated in Delaware. New Sun’s principal executive offices will be located at 18831 Von Karman, Suite 400, Irvine, CA 92612, and its telephone number will be (949) 255-7100. It will maintain a website at www.sunh.com. Following the Separation, New Sun will file reports with the SEC. Through its website, New Sun will make available free of charge, as soon as reasonably practicable after such information has been filed or furnished to the SEC, each of its filings with the SEC, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, investors and other members of the public will be able to read and copy any materials New Sun files with the SEC at the SEC’s Public Reference at

100 F Street, NE, Washington, DC 20549. Information concerning the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. This information, and any other reports, proxy and information statements or other information filed with the SEC by issuers, can also be obtained free of charge on the Internet site maintained by the SEC, www.sec.gov.

Properties

Inpatient Services

Upon consummation of the Separation, New Sun’s subsidiaries will operate all of Sun’s nursing and rehabilitation centers, assisted living centers and independent living centers, which as of March 31, 2010 totaled 205 centers. All of these centers will be leased, including the 93 centers to be leased from Sabra under the Lease Agreements. Subsidiaries of New Sun will continue to lease administrative office space in 18 locations in 13 states for the inpatient segment, and administrative office space in 22 locations in 10 states for the hospice operations. As of the Separation, New Sun expects that its properties will be generally in good operating condition and suitable for the purposes for which they will be used. The leased healthcare centers are subject to long-term operating leases or subleases, including the Lease Agreements, that require the tenant, among other things, to fund all applicable capital expenditures, taxes, insurance and maintenance costs. The annual rent payable under most of the leases will generally increase based on a fixed percentage or on increases in the U.S. Consumer Price Index. Many of the leases contain renewal options to extend the term.

Rehabilitation Therapy Services

Upon consummation of the Separation, subsidiaries of New Sun will continue to be parties to leases for offices and patient care delivery sites at which the rehabilitation therapy businesses are operating, which, as of March 31, 2010, included 37 locations in 11 states.

Medical Staffing Services

Upon consummation of the Separation, subsidiaries of New Sun will continue to be parties to leases for offices constituting the medical staffing business which, as of March 31, 2010, included 43 locations in 17 states.

Corporate

New Sun will lease its executive offices in Irvine, California and will own three corporate office buildings as well as lease office space in a fourth building in Albuquerque, New Mexico.

Legal Proceedings

It is expected that, pursuant to the Distribution Agreement, any liability arising from or relating to legal proceedings involving Sun’s healthcare business prior to the Separation (other than any liability arising from or relating to legal proceedings where the dispute is based upon the real property to be owned by Sabra following the Separation) will be assumed by New Sun and that New Sun will indemnify Sabra against any losses it may incur arising from or relating to such legal proceedings. Sun is currently a party to various legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of its business, including claims that its services have resulted in injury or death to the residents of its healthcare centers and claims relating to employment and commercial matters. Although New Sun will vigorously defend these matters, there can be no assurance that the outcomes of these matters will not have a material adverse effect on its business, financial position or results of operations. In certain states in which New Sun will have operations, insurance coverage for the risk of punitive damages arising from general and professional liability litigation may not be available due to state law public policy prohibitions. There can be no assurance that New Sun will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.

New Sun will operate in an industry that is extensively regulated. As such, in the ordinary course of business, New Sun will be continuously subject to state and federal regulatory scrutiny and supervision. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, these industries are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is found by a court of competent jurisdiction to have engaged in improper practices, the provider could be subject to civil, administrative or criminal fines, penalties or restitutionary relief; reimbursement authorities could seek the suspension or exclusion of the provider from participation in their program. It is believed that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal or regulatory proceedings, whether currently asserted or arising in the future, could have a material adverse effect on New Sun’s business, financial position or results of operations.

BUSINESS OF SABRA

Overview

Following the Separation and REIT Conversion Merger, Sabra will be a self-administered, self-managed realty company incorporated under the laws of the State of Maryland. Sabra currently intends to elect to be taxed as a REIT for U.S. federal income tax purposes commencing January 1, 2011. Sabra will invest primarily in real estate serving the healthcare industry in the United States and will initially lease all of its properties to New Sun. Sabra’s portfolio will initially consist of the 93 Sun properties that Sabra will acquire in connection with the REIT Conversion Merger. Sabra expects to grow its portfolio through acquisitions as a broad-based healthcare REIT. As Sabra acquires additional properties, it expects to diversify by geography, asset class and tenant within the healthcare sector.

Sabra intends to operate through an umbrella partnership (UPREIT) structure in which substantially all of its properties and assets will be held by Sabra Health Care Limited Partnership (the “Operating Partnership”), of which Sabra is the sole general partner. In the discussion that follows in this section, references to “Sabra” include all direct or indirect wholly owned subsidiaries of Sabra, including the Operating Partnership.

Portfolio of Healthcare Properties

Following the Separation and REIT Conversion Merger, Sabra will have a geographically diverse portfolio of healthcare properties in the United States that will offer a range of long-term care health services in the areas of skilled nursing, assisted and independent living and mental health. These properties will initially consist of the following 93 properties: 82 skilled nursing centers, nine assisted and independent living centers and two mental health centers.

At March 31, 2010, Sabra’s properties had 9,934 beds located in 21 states, of which 9,586 were available for occupancy. Aggregate occupancy percentage for all of the skilled nursing, assisted living, independent living and mental health centers was 89.4% for the quarter ended March 31, 2010 and 89.9%, 91.1% and 91.2% for the years ended December 31, 2009, 2008 and 2007, respectively. The percentages are computed by dividing the average daily number of beds occupied by the total number of available beds for use during the periods indicated (beds of acquired centers are included in the computation following the date of acquisition only). Occupancy percentages, either individually or in the aggregate, should not be relied upon alone to determine the performance of a center. Other factors that may impact the performance of a center include the sources of payment, terms of reimbursement and the acuity level of the patients.

The following table sets forth certain information concerning Sabra’s 93 properties as of March 31, 2010.


	Total Number of Centers	Number of Licensed Beds/Units(1)
State	Total Number of Centers	Skilled Nursing	Assisted / Independent Living	Mental Health	Total
CA	3	301	0	0	301
CO	2	362	0	0	362
CT	10	1,350	49	0	1,399
FL	5	660	0	0	660
GA	3	310	32	0	342
ID	3	245	0	22	267
IN	1	88	0	0	88
KY	15	1,080	68	0	1,148
MA	3	301	0	0	301
MD	2	257	0	0	257
MT	4	538	0	0	538
NC	1	100	0	0	100
NH	15	1,402	203	0	1,605
NM	6	366	0	0	366
OH	8	954	0	0	954
OK	5	441	83	60	584
RI	2	261	0	0	261
TN	1	134	0	0	134
WA	1	0	36	0	36
WV	2	185	0	0	185
WY	1	46	0	0	46

Total	93	9,381	471	82	9,934

(1)

“Licensed Beds” refers to the number of beds for which a license has been issued, which may vary in some instances from licensed beds available for use, which is used in the computation of occupancy. Available beds for the 93 properties were 9,586.

Skilled nursing centers. Sabra’s skilled nursing centers will be operated by subsidiaries of New Sun and will provide services that include daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for individuals requiring certain assistance for activities in daily living. Rehab Recovery Suites, which specialize in Medicare and managed care patients, are currently located in 27 of Sabra’s 82 skilled nursing centers, and 10 of these skilled nursing centers contain Solana Alzheimer’s units dedicated to the care of residents afflicted with Alzheimer’s disease.

Assisted living centers. Sabra’s assisted living centers will be operated by subsidiaries of New Sun and will provide services that include minimal nursing assistance, housekeeping, nutrition, laundry and administrative services for individuals requiring minimal assistance for activities in daily living.

Independent living centers. Sabra’s independent living centers will be operated by subsidiaries of New Sun and will provide services that include security, housekeeping, nutrition and limited laundry services for individuals requiring no assistance for activities in daily living.

Mental health centers. Sabra’s mental health centers will be operated by subsidiaries of New Sun and will provide a range of inpatient and outpatient behavioral health services for adults and children through specialized treatment programs.

Tenants and Operators

Following the Separation and REIT Conversion Merger, all of Sabra’s skilled nursing, assisted living, independent living and mental health centers will be operated by subsidiaries of New Sun, and their obligations will be guaranteed by New Sun. On or prior to the date of the Separation, subsidiaries of New Sun will enter into the Lease Agreements with Sabra to lease the 93 properties that will be owned by Sabra. The Lease Agreements will be triple-net leases under which subsidiaries of New Sun will be responsible for all insurance required in connection with the leased properties and the business conducted on the leased properties, certain taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor) and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. It is anticipated that the annual aggregate base rent payable by New Sun under the Lease Agreements will be approximately $72 million. See “Relationship Between New Sun and Sabra after the Separation and REIT Conversion Merger—The Lease Agreements” for a further description of the Lease Agreements.

Because New Sun’s subsidiaries will be the lessees of all of the properties that Sabra will own following the Separation and REIT Conversion Merger, New Sun will be the primary source of Sabra’s revenues. New Sun’s financial condition and ability and willingness to satisfy its obligations under the Lease Agreements and renew those leases upon expiration of the initial base terms thereof will significantly impact Sabra’s revenues and determine Sabra’s ability to service its indebtedness and to make distributions to its stockholders. There can be no assurance that New Sun will have sufficient assets, income and access to financing to enable it to satisfy its obligations under the Lease Agreements. Any inability or unwillingness on the part of New Sun to do so would have a material adverse effect on the condition of the leased properties as well as on the results of operations and financial condition of Sabra and could prevent Sabra from being able to pay distributions to its stockholders as required to maintain its status as a REIT. In addition, in the event that New Sun and its subsidiaries are unable to satisfy obligations under the Lease Agreements or are unwilling to renew the Lease Agreements following expiration of their initial base terms, there can also be no assurance that Sabra would be able to locate a suitable replacement lessee on terms that are the same or better than those contained in the Lease Agreements. See “Risk Factors—Risks Relating to Sabra’s Business—Sabra will be dependent in large part on New Sun for its revenues” and “Risk Factors—Risks Relating to Sabra’s Business—Sabra will be dependent on New Sun’s ability to successfully operate its healthcare properties” included in the section captioned “Risk Factors.”

Business Strategy

Following the Separation and REIT Conversion, Sabra’s primary goal will be to create long-term stockholder value through the payment of consistent cash dividends and through capital appreciation. To achieve this goal, Sabra intends to pursue a business strategy focused on opportunistic acquisitions and property diversification. Sabra also intends to develop its relationships with tenants and healthcare providers with a goal to expand over time the mixture of tenants managing and operating its properties.

Opportunistically pursue acquisitions and diversification. Sabra expects to grow its portfolio through acquisitions as a broad-based healthcare REIT. As Sabra acquires additional properties, it expects to diversify by geography, asset class and tenant within the healthcare sector. Sabra will seek to take advantage of acquisitions that meet specified investment objectives to enable it to drive profitable growth and maximize stockholder value. Sabra does not anticipate limiting the size of the acquisitions that it pursues. Sabra believes that smaller acquisitions, which may not be of interest to larger real estate investors, may be advantageously undertaken by Sabra.

Develop new tenant relationships. Sabra intends to cultivate its relationships with tenants and healthcare providers in addition to New Sun in order to expand the mixture of tenants operating its properties and, in doing so, to reduce its dependence on any single tenant or operator. Sabra expects that this objective will be achieved over time as part of Sabra’s strategies to acquire new properties and diversify its overall portfolio of healthcare properties.

Competition

Sabra will compete for real property investments with other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders and other institutional investors. Some of Sabra’s competitors are significantly larger and have greater financial resources and lower costs of capital than Sabra. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet Sabra’s investment objectives. Sabra’s ability to compete is also impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends. See “Risk Factors—Risks Relating to Sabra’s Business—Real estate is a competitive business and this competition may make it difficult to identify and purchase suitable healthcare properties.”

In addition, revenues from Sabra’s properties will be dependent on the ability of Sabra’s tenants and operators to compete with other healthcare operators. These operators compete on a local and regional basis for residents and patients and their ability to successfully attract and retain residents and patients depends on key factors such as the number of centers in the local market, the types of services available, the quality of care, reputation, age and appearance of each center and the cost of care in each locality. Private, federal and state payment programs and the effect of other laws and regulations may also have a significant impact on the ability of Sabra’s tenants and operators to compete successfully for residents and patients at the properties.

Employees of Sabra

Following the Separation and REIT Conversion Merger, Sabra expects to employ full-time employees, none of whom is expected to be subject to a collective bargaining agreement.

Government Regulation

The tenants of Sabra’s properties who will operate Sabra’s skilled nursing, assisted living, independent living and mental health centers following the Separation and REIT Conversion Merger will be subject to extensive and complex federal, state and local healthcare laws and regulations. See “Business of New Sun—Federal and State Regulatory Oversight” for a description of these laws and regulations that are applicable to New Sun.

Upon completion of the Separation and REIT Conversion Merger, Sabra will own nine health centers with mortgages that are guaranteed by HUD. Those centers will be subject to the rules and regulations of HUD, including periodic inspections by HUD, although the tenants of those centers will have the primary responsibility for maintaining the centers in compliance with HUD’s rules and regulations.

In addition, as an owner of real property, Sabra will be subject to various federal, state and local environmental and health and safety laws and regulations. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel oil management, wastewater discharges, air emissions, radioactive materials, medical wastes and hazardous wastes. In certain cases, the costs of complying with these laws and regulations and the penalties for non-compliance can be substantial. For example, although Sabra will not operate or manage its properties, it may be held primarily or jointly and severally liable for costs relating to the investigation and clean up of any property from which there has been a release or threatened release of a regulated material and any other affected properties, regardless of whether Sabra knew of or caused the release. In addition to these costs, which are typically not limited by law or regulation and could exceed the property’s value, Sabra could be liable for certain other costs, including governmental fines and injuries to persons, property or natural resources. See “Risk Factors—Risks Relating to Sabra’s Business—Environmental compliance costs and liabilities associated with real estate related investments may materially impair the value of those investments.”

General Information

Sabra is incorporated in Maryland. Sabra’s principal executive offices initially will be located at 18831 Von Karman, Suite 400, Irvine, CA 92612 pursuant to the terms of the Transition Services Agreement, and its

telephone number will be . Sabra will maintain a website at www.sabrahealth.com. Following the Separation and REIT Conversion Merger, Sabra Health will file reports with the SEC. Sabra will make available free of charge on its website, as soon as reasonably practicable after such information has been filed or furnished to the SEC, each of its filings with the SEC, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In addition, investors and other members of the public will be able to read and copy any materials Sabra files with the SEC at the SEC’s Public Reference at 100 F Street, NE, Washington, DC 20549. Information concerning the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. This information, and any other reports, proxy and information statements or other information filed with the SEC by issuers, can also be obtained free of charge on the Internet site maintained by the SEC, www.sec.gov.

Legal Proceedings

It is expected that pursuant to the Distribution Agreement, any liability arising from or relating to legal proceedings involving Sun’s owned real property assets will be assumed by Sabra and that Sabra will indemnify New Sun against any losses arising from or relating to such legal proceedings. Sun is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its business. While these actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted and there is no assurance that the ultimate outcome will not have a material adverse effect on Sabra’s business, financial position or results of operations.

In addition, pursuant to the Distribution Agreement, New Sun has agreed to indemnify Sabra for any liability arising from or relating to legal proceedings involving Sun’s healthcare business prior to the Separation, and, pursuant to the Lease Agreements, the tenants will agree to indemnify Sabra for any liability arising from operation at the real property leased from Sabra. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on New Sun’s business, financial position or results of operations, which, in turn, could have a material adverse effect on Sabra’s business, financial position or results of operations if New Sun or its subsidiaries are unable to meet their indemnification obligations.

NEW SUN PRO FORMA CAPITALIZATION

The following table sets forth the unaudited pro forma capitalization of New Sun at March 31, 2010 which gives effect to a proposed common stock offering by Sun (the “Equity Offering”) and the Separation as if the Equity Offering and the Separation occurred on March 31, 2010. For accounting purposes, the historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun. Accordingly, the actual capitalization of New Sun presented below is identical to that of Sun. See “The Proposals—Accounting Treatment for the Separation and REIT Conversion” and “New Sun Unaudited Pro Forma Consolidated Financial Statements.”


	Actual March 31, 2010 (in millions)		Pro Forma March 31, 2010 (in millions)
Long-term debt, including amounts due within one year:
Revolving credit facility	$	—	$	—
Term loans		309.4		—
Senior subordinated notes		200.0		—
Mortgage notes payable		169.5		5.5
Capital leases		0.7		0.7
New Sun indebtedness		—		179.0	(1)

Total debt		679.6		185.2
Common stockholders’ equity		461.2		476.7

Total capitalization	$	1,140.8	$	661.9

(1)

The actual amount of New Sun indebtedness may be less than the amount shown above if cash collections from operations between March 31, 2010 and the date of the Separation are received in accordance with Sun’s projections.

SABRA PRO FORMA CAPITALIZATION AND SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION

The following tables set forth the unaudited pro forma capitalization of Sabra at March 31, 2010 which give effect to the Separation and REIT Conversion Merger as if the REIT Conversion Merger occurred on March 31, 2010 and also reflect the supplemental pro forma financial information of Sabra for the year ended December 31, 2009 and three months ended March 31, 2010 as if the Separation and REIT Conversion had occurred at January 1, 2009. Sabra will not have been operated as a REIT prior to the REIT Conversion. Accordingly, no historical capitalization of Sabra is presented herein. See “The Proposals—Accounting Treatment for the Separation and REIT Conversion” and “Sabra Unaudited Pro Forma Consolidated Financial Statements.”


	Actual March 31, 2010 (in millions)		Pro Forma March 31, 2010 (in millions)
Long-term debt, including amounts due within one year:
Sabra indebtedness	$	—	$	208.5	(1)
Sabra mortgage loans		—		164.0

Total debt		—		372.5
Common stockholders’ equity		—		57.9

Total capitalization	$	—	$	430.4


	Three Months Ended March 31, 2010		Year Ended December 31, 2009
Supplemental pro forma financial information(2)
Funds from operations (FFO)	$	11,596	$	46,383
Funds available for distribution (FAD)	$	11,596	$	46,383

(1)

The actual amount of Sabra indebtedness may be less than the amount shown above if cash collections from operations between March 31, 2010 and the date of the Separation are received in accordance with Sun’s projections.

(2)

FFO and FAD are non-GAAP financial measures that are considered supplemental measures for the real estate industry and a supplement to GAAP measures. For an explanation of these measures and reconciliation to the most directly comparable pro forma financial measures prepared in accordance with GAAP, see Note 4 of “Sabra Unaudited Pro Forma Consolidated Financial Statements”.

NEW SUN UNAUDITED PRO FORMA

CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements reflect the unaudited pro forma consolidated balance sheet of New Sun as of March 31, 2010, as if the Equity Offering, the Separation and REIT Conversion had occurred on March 31, 2010, and also reflect the unaudited pro forma consolidated income statement of New Sun for the year ended December 31, 2009 and for the three months ended March 31, 2010 as if the Separation and REIT Conversion had occurred on January 1, 2009. The pro forma adjustments are preliminary and have been made solely for purposes of developing the pro forma financial information for illustrative purposes necessary to comply with the requirements of the SEC. The actual results reported in periods following the transactions may differ significantly from that reflected in these pro forma financial statements for a number of reasons, including but not limited to, differences between the assumptions used to prepare these pro forma financial statements and actual amounts and cost savings from operating efficiencies. In addition, no adjustments have been made to the Pro Forma Consolidated Income Statements for non-recurring items related to the transactions. As a result, the pro forma financial information does not purport to be indicative of what the financial condition or results of operations would have been had the transactions been completed on the applicable dates of this pro forma financial information. The pro forma financial statements are based upon the historical financial statements of Sun and do not purport to project the future financial condition and results of operations after giving effect to the transactions.

For accounting purposes, the historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun. Accordingly, the accompanying pro forma consolidated financial statements of New Sun are based upon the historical consolidated financial statements of Sun. See “The Proposals—Accounting Treatment for the Separation and REIT Conversion.”

The accompanying unaudited pro forma consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for Sun and New Sun.”

NEW SUN

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

For the Three Months Ended March 31, 2010

(in thousands, except per share data)


	Historical New Sun		Pro Forma Adjustments			Pro Forma New Sun
Total net revenues	$	473,255	$	—		$	473,255

Costs and expenses:
Operating salaries and benefits		267,034		—			267,034
Self-insurance for workers’ compensation and general and professional liability insurance		14,538		—			14,538
Operating administrative expenses		12,289		—			12,289
Other operating costs		97,480		—			97,480
Center rent expense		18,552		17,975	(a)		36,527
General and administrative expenses		15,266		(600	) (b)		14,666
Depreciation and amortization		12,446		(5,227	) (c)		7,219
Provision for losses on accounts receivable		5,878		—			5,878
Interest, net		11,977		(9,302	) (d)		2,675

Total costs and expenses		455,460		2,846			458,306

Income before income taxes and discontinued operations		17,795		(2,846	)		14,949
Income tax expense		7,296		(1,167	) (e)		6,129

Income from continuing operations	$	10,499	$	(1,679	)	$	8,820

Basic earnings from continuing operations per common or common equivalent share	$	0.24	$	—		$	0.15

Diluted earnings from continuing operations per common or common equivalent share	$	0.24	$	—		$	0.14

Weighted average number of common and common equivalent shares outstanding
Basic		44,033		16,771	(k)		60,804
Diluted		44,183		16,771	(k)		60,954

See accompanying notes to unaudited pro forma consolidated financial statements.

NEW SUN

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

For the Year Ended December 31, 2009

(in thousands, except per share data)


	Historical New Sun		Pro Forma Adjustments			Pro Forma New Sun
Total net revenues	$	1,881,799	$	—		$	1,881,799

Costs and expenses:
Operating salaries and benefits		1,057,645		—			1,057,645
Self-insurance for workers’ compensation and general and professional liability insurance		63,752		—			63,752
Operating administrative expenses		50,924		—			50,924
Other operating costs		384,832		—			384,832
Center rent expense		73,149		71,900	(f)		145,049
General and administrative expenses		62,068		(2,400	) (g)		59,668
Depreciation and amortization		45,463		(20,906	) (h)		24,557
Provision for losses on accounts receivable		21,197		—			21,197
Interest, net		49,327		(38,627	) (i)		10,700
Loss on sale of assets, net		42		—			42
Restructuring costs		1,304		—			1,304

Total costs and expenses		1,809,703		9,967			1,819,670

Income before income taxes and discontinued operations		72,096		(9,967	)		62,129
Income tax expense		29,616		(4,143	) (j)		25,473

Income from continuing operations	$	42,480	$	(5,824	)	$	36,656

Basic earnings from continuing operations per common or common equivalent share	$	0.97	$	—		$	0.60

Diluted earnings from continuing operations per common or common equivalent share	$	0.97	$	—		$	0.60

Weighted average number of common and common equivalent shares outstanding
Basic		43,841		16,771	(k)		60,612
Diluted		43,963		16,771	(k)		60,734

See accompanying notes to unaudited pro forma consolidated financial statements.

NEW SUN

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of March 31, 2010

(in thousands)


	Historical Sun			Adjustments from Equity Offering			Subtotal			Adjustments from Debt Restructuring			Subtotal			Adjustments from Spin-Off			Pro Forma New Sun
Assets:
Cash and cash equivalents	$	102,453		$	151,600	(k)	$	254,053		$	(509,380	) (l)
											(36,415	) (m)
											387,500	(o)
											(22,858	) (p)
											(10,000	) (q)
											(12,900	) (r)	$	50,000		$	(10,000	) (s)	$	40,000
Restricted cash		25,186			—			25,186			—			25,186			(1,107	) (t)		24,079
Accounts receivables, net of allowance for doubtful accounts		220,627			—			220,627			—			220,627			—			220,627
Prepaid expenses and other assets		17,679			—			17,679			—			17,679			—			17,679
Deferred tax assets		69,679			—			69,679			—			69,679			—			69,679

Total current assets		435,624			151,600			587,224			(204,053	)		383,171			(11,107	)		372,064
Property and equipment, net of accumulated depreciation		622,263			—			622,263			—			622,263			(414,019	) (x)		208,244
Intangible assets, net		52,432			—			52,432			(12,335	) (n)
											7,800	(p)		47,897			(6,174	) (u)		41,723
Goodwill		338,364			—			338,364			—			338,364			—			338,364
Restricted cash, non-current		3,321			—			3,321			—			3,321			—			3,321
Deferred tax assets		102,799			—			102,799			20,134	(z)		122,933			(20,009	) (y)		102,924
Other assets		5,097			—			5,097			—			5,097			—			5,097

Total assets	$	1,559,900		$	151,600		$	1,711,500		$	(188,454	)	$	1,523,046		$	(451,309	)	$	1,071,737

Liabilities:
Accounts payable	$	45,679		$	—		$	45,679		$	—		$	45,679		$	—		$	45,679
Accrued compensation and benefits		67,377			—			67,377			—			67,377			—			67,377
Accrued self-insurance obligations, current portion		45,703			—			45,703			—			45,703			—			45,703
Income taxes payable		628			—			628			—			628			—			628
Other accrued liabilities		58,995			—			58,995			(8,415	) (m)		50,580			(895	) (w)		49,685
Current portion of long-term debt		27,076			—			27,076			—			27,076			(22,685	) (v)		4,391

Total current liabilities		245,458			—			245,458			(8,415	)		237,043			(23,580	)		213,463
Accrued self-insurance obligations, net of current portion		123,943			—			123,943			—			123,943			—			123,943
Long-term debt, net of current portion		652,528			—			652,528			(509,380	) (l)
											387,500	(o)		530,648			(349,805	) (v)		180,843
Unfavorable lease obligations		11,948			—			11,948			—			11,948			—			11,948
Other long-term liabilities		64,836			—			64,836			—			64,836			—			64,836

Total liabilities		1,098,713			—			1,098,713			(130,295	)		968,418			(373,385	)		595,033

Stockholders’ equity:
Common stock		438			18	(k)		456			—			456			—			456
Additional paid-in capital		656,616			151,582	(k)		808,198			—			808,198			—			808,198
Retained deficit		(193,814	)		—			(193,814	)		(28,000	) (m)
											(12,335	) (n)
											(15,058	) (p)
											(10,000	) (q)
											(12,900	) (r)		(251,973	)		(10,000	) (s)
											20,134	(z)					(1,107	) (t)
																	(6,174	) (u)
																	372,490	(v)
																	895	(w)
																	(414,019	) (x)
																	(20,009	) (y)		(329,897	)
Accumulated other comprehensive loss		(2,053	)		—			(2,053	)					(2,053	)		—			(2,053	)

Total stockholders’ equity		461,187			151,600			612,787			(58,159	)		554,628			(77,924	)		476,704

Total liabilities and stockholders’ equity	$	1,559,900		$	151,600		$	1,711,500		$	(188,454	)	$	1,523,046		$	(451,309	)	$	1,071,737

See accompanying notes to unaudited pro forma consolidated financial statements.

NOTES TO NEW SUN UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – New Sun Basis of Presentation:

Following the Separation and REIT Conversion Merger, New Sun will continue the business and operations of Sun. Therefore, for accounting purposes, the historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun. Accordingly, the accompanying unaudited pro forma consolidated financial statements of New Sun are based upon the historical consolidated financial statements of Sun. Sabra will not have operated prior to the Separation. Immediately following the Separation and REIT Conversion Merger, Sabra will hold, directly or indirectly through its subsidiaries, all of Sun’s owned real property (including fixtures and certain personal property associated with the real property, but excluding the New Sun Retained Properties), and will assume the related mortgage indebtedness owed to third parties. The assets and liabilities of New Sun will be recorded at their historical carrying values at the Separation.

Note 2 – Pro Forma Adjustments:

To record rent expense associated with the Annual Base Rent incurred by subsidiaries of New Sun in connection with the Lease Agreements. Rental expense relates to the 93 properties owned and operated by Sun prior to the Separation and REIT Conversion Merger that will be leased by Sabra to subsidiaries of New Sun (the “Leased Properties”). Amounts due under the terms of the Lease Agreements are fixed (except for an anticipated annual rent escalator described below), and there is no contingent rent feature based upon the revenues or net income which may be derived by New Sun from the Leased Properties. The pro forma effects of the Lease Agreements assume that the leases between subsidiaries of New Sun and Sabra will be accounted for as operating leases by New Sun.

The annual rent escalator under each Lease Agreement is expected to be determined as follows: (1) if the percentage change from the start of one lease year to the next in the Consumer Price Index is equal to or greater than 1.00%, the lesser of the percentage change in the Consumer Price Index or 2.50%, (2) if the percentage change in the Consumer Price Index from the start of one lease year to the next is less than 1.00% but greater than zero, two times the percentage change in the Consumer Price Index, or (3) if the percentage change in the Consumer Price Index from the start of one lease year to the next is equal to or less than zero for any given year, zero.

b.	To record administrative services provided to Sabra pursuant to the Transition Services Agreement, which are estimated to be $2.4 million annually.

c.	To adjust depreciation expense for the property and equipment transferred to Sabra by Sun.

NOTES TO NEW SUN UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

d.	To adjust interest expense related to New Sun indebtedness (dollars in millions):


	Debt		Interest Expense
New Sun indebtedness	$	179.0	$	2.4
(assumed annual interest rate %)
New Sun mortgage and capital lease indebtedness		6.2		0.1
(weighted average annual interest rate 8.9%)

	$	185.2	$	2.5

Add % commitment fee related to New Sun indebtedness				0.1
Add amortization of $3.6 million of deferred financing costs related to New Sun indebtedness				0.1

Total New Sun interest expense			$	2.7
Eliminate historical interest expense				(12.0	)

Total interest expense elimination			$	(9.3	)

Impact of 1/8% change in weighted average interest rates			$	0.1

See also Note 1 to the table setting forth the unaudited pro forma capitalization of New Sun at March 31, 2010 at “New Sun Pro Forma Capitalization.”

e.	To adjust income tax expense for the adjustments made to pre-tax book income at an effective tax rate of approximately 41%.

To record rent expense associated with the rent incurred by subsidiaries of New Sun in connection with the Lease Agreements. Amounts due under the terms of the Lease Agreements are fixed (except for an anticipated annual rent escalator as described in Note (a) above), and there is no contingent rent feature based upon the revenues or net income which may be derived by New Sun from the Leased Properties.

g.	To record administrative services provided to Sabra pursuant to the Transition Services Agreement, which are estimated to be $2.4 million annually.

h.	To reduce depreciation expense related to the property and equipment transferred to Sabra by Sun.

i.	To adjust interest expense related to New Sun indebtedness (dollars in millions):


	Debt		Interest Expense
New Sun indebtedness	$	179.0	$	9.4
(assumed annual interest rate %)
New Sun mortgage and capital lease indebtedness		6.2		0.5
(weighted average annual interest rate 8.9%)

	$	185.2	$	9.9

Add % commitment fee related to New Sun indebtedness				0.3
Add amortization of $3.6 million of deferred financing costs related to New Sun indebtedness				0.5

Total New Sun interest expense			$	10.7
Eliminate historical interest expense				(49.3	)

Total interest expense elimination			$	(38.6	)

Impact of 1/8% change in weighted average interest rates			$	0.2

See also Note 1 to the table setting forth the unaudited pro forma capitalization of New Sun at March 31, 2010 at “New Sun Pro Forma Capitalization.”

NOTES TO NEW SUN UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

j.	To adjust income tax expense for the adjustments made to pre-tax book income at an effective tax rate of approximately 41%.

For pro forma purposes, the number of shares to be issued from the Equity Offering has been based upon estimated gross proceeds of $160 million at a price of $9.54 per share, which represents the closing price of Sun’s common stock on March 31, 2010. A 10% increase or decrease in the per share price used would result in a change in the shares issued of approximately 1.5 million and 1.9 million, respectively.

l.	To record the impact of repayment of $200 million of Senior Subordinated Notes and $309.3 million in term loans associated with the Sun indebtedness.

m.	To record the payment of early redemption fees of $28.0 million and accrued interest of $8.4 million related to the Senior Subordinated Notes.

n.	To record the write-off of capitalized deferred financing costs related to the payoff of Senior Subordinated Notes and term loans.

o.	To record the anticipated indebtedness, of which $179.0 million is for New Sun and $208.5 million is for Sabra.

p.	To record the payment of deferred financing fees of $7.8 million (related to the New Sun and Sabra indebtedness) and period cost transaction fees (for professional services received for the Separation and REIT Conversion Merger).

q.	To record payment of transfer taxes associated with the internal restructuring of the ownership of real estate assets and related mortgage indebtedness to third parties.

r.	To record an anticipated cash distribution as discussed in this proxy statement/prospectus to Sun stockholders at the time of the Separation.

s.	To record cash and cash equivalents to be held by Sabra in order to provide Sabra with initial working capital at the time of the Separation.

t.	To record the restricted cash in the form of escrow funds associated with Sabra mortgage indebtedness.

u.	To record capitalized deferred financing costs related to Sabra indebtedness.

v.	To record the indebtedness to be incurred or assumed by Sabra.

w.	To record the impact of accrued interest payable related to mortgage indebtedness to be assumed by Sabra.

x.	To record property and equipment to be held by Sabra.

y.	To adjust the deferred tax assets as a result of the Separation.

z.	To record deferred taxes associated with the payment of early redemption fees, write off of deferred financing costs and payment of transfer taxes.

SABRA UNAUDITED PRO FORMA

CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements reflect the unaudited pro forma consolidated balance sheet of Sabra as of March 31, 2010, as if the Separation and REIT Conversion had occurred on March 31, 2010, and also reflect the unaudited pro forma consolidated income statement of Sabra for the year ended December 31, 2009 and for the three months ended March 31, 2010 as if the Separation and REIT Conversion had occurred on January 1, 2009. The pro forma adjustments are preliminary and have been made solely for purposes of developing the pro forma financial information for illustrative purposes necessary to comply with the requirements of the SEC. The actual results reported in periods following the transactions may differ significantly from that reflected in these pro forma financial statements for a number of reasons, including but not limited to, differences between the assumptions used to prepare these pro forma financial statements and actual amounts and cost savings from operating efficiencies. In addition, no adjustments have been made to the Pro Forma Consolidated Income Statements for non-recurring items related to the transactions. As a result, the pro forma financial information does not purport to be indicative of what the financial condition or results of operations would have been had the transactions been completed on the applicable dates of this pro forma financial information. The pro forma financial statements do not purport to project the future financial condition and results of operations after giving effect to the transactions.

Sabra will not have operated prior to the Separation. The balance sheet of Sabra at the time of the Separation will reflect the assets and liabilities of Sabra at their respective historical carrying values. The other financial statements of Sabra will reflect solely the results of operations of Sabra after the Separation. See “The Proposals—Accounting Treatment for the Separation and REIT Conversion” and “New Sun Unaudited Pro Forma Consolidated Financial Statements.”

SABRA

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

For the Three Months Ended March 31, 2010

(in thousands, except per share data)


	Historical Sabra		Pro Forma Adjustments			Pro Forma Sabra
Total net revenues	$	—	$	17,975	(a)	$	17,975

Costs and expenses:
General and administrative expenses		—		600	(b)		600
Depreciation and amortization		—		5,227	(c)		5,227
Interest, net		—		5,779	(d)		5,779

Total costs and expenses		—		11,606			11,606

Income before income taxes		—		6,369			6,369
Income tax expense		—		—			—

Net income	$	—	$	6,369		$	6,369

Basic earnings per common or common equivalent share	$	—	$	0.10		$	0.10

Diluted earnings per common or common equivalent share	$	—	$	0.10		$	0.10

Weighted average number of common and common equivalent shares outstanding
Basic		—		60,804	(i)		60,804
Diluted		—		60,954	(i)		60,954

See accompanying notes to unaudited pro forma consolidated financial statements.

SABRA

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT

For the Year Ended December 31, 2009

(in thousands, except per share data)


	Historical Sabra		Pro Forma Adjustments			Pro Forma Sabra
Total net revenues	$	—	$	71,900	(e)	$	71,900

Costs and expenses:
General and administrative expenses		—		2,400	(f)		2,400
Depreciation and amortization		—		20,906	(g)		20,906
Interest, net		—		23,117	(h)		23,117

Total costs and expenses		—		46,423			46,423

Income before income taxes		—		25,477			25,477
Income tax expense		—		—			—

Net income	$	—	$	25,477		$	25,477

Basic earnings per common or common equivalent share	$	—	$	0.42		$	0.42

Diluted earnings per common or common equivalent share	$	—	$	0.42		$	0.42

Weighted average number of common and common equivalent shares outstanding
Basic		—		60,612	(i)		60,612
Diluted		—		60,734	(i)		60,734

See accompanying notes to unaudited pro forma consolidated financial statements.

SABRA

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of March 31, 2010

(in thousands)


	Historical Sabra		Pro Forma Adjustments			Pro Forma Sabra
Assets:
Real estate investments, net of accumulated depreciation	$	414,019	$	—		$	414,019
Cash and cash equivalents		—		10,000	(j)		10,000
Restricted cash		1,107		—			1,107
Intangible assets, net		1,974		4,200	(k)		6,174

Total assets	$	417,100	$	14,200		$	431,300

Liabilities:
Mortgage notes payable	$	163,990	$	—		$	163,990
Accrued interest on mortgage notes		895		—			895
Long-term debt		—		208,500	(l)		208,500

Total liabilities	$	164,885	$	208,500		$	373,385

Stockholders’ equity:
Common stock	$	10	$	—		$	10
Additional paid-in capital		252,205		10,000	(j)
				4,200	(k)
				(208,500	) (l)		57,905

Total stockholders’ equity		252,215		(194,300	)		57,915

Total liabilities and stockholders’ equity	$	417,100	$	14,200		$	431,300

See accompanying notes to unaudited pro forma consolidated financial statements.

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NOTES TO SABRA UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Sabra Basis of Presentation:

Following the Separation and REIT Conversion Merger, New Sun will continue the business and operations of Sun. The historical operations and the historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun at the Separation. Sabra will not have operated prior to the Separation. Immediately following the Separation and REIT Conversion Merger, Sabra will hold, directly or indirectly through its subsidiaries, all of Sun’s owned real property (including fixtures and certain personal property associated with the real property, but excluding the New Sun Retained Properties). The balance sheet of Sabra at the time of the Separation will reflect the assets and liabilities of Sabra at their respective historical carrying values. The other financial statements of Sabra will reflect solely the results of operations of Sabra after the Separation.

The accompanying unaudited pro forma consolidated financial statements of Sabra have accordingly been prepared based on the Separation and REIT Conversion as described above.

Note 2 – Pro Forma Adjustments:

To record rent income associated with the rent from subsidiaries of New Sun in connection with the Lease Agreements. Amounts due under the terms of the Lease Agreements are fixed (except for an anticipated annual rent escalator described below), and there is no contingent rental income based upon the revenues or net income which may be derived by New Sun from the Leased Properties.

To record general and administrative costs for administrative services provided by New Sun under the Transition Services Agreement, which are estimated to be $2.4 million annually. The pro forma consolidated statement of income excludes other general and administrative costs to be incurred by Sabra after the Separation. These costs, comprised principally of compensation and various other costs associated with development activities, are expected to approximate $2.4 million to $2.9 million annually.

c.	To adjust depreciation expense related to the property and equipment transferred to Sabra by Sun.

d.	To record interest expense related to the Sabra indebtedness (dollars in millions):


	Debt		Interest Expense
Sabra indebtedness	$	208.5	$	2.8
(assumed annual interest rate %)
Sabra mortgage indebtedness		164.0		2.7
(weighted average annual interest rate 6.5%)

	$	372.5	$	5.5

Add % commitment fee related to Sabra indebtedness				0.1
Add amortization associated with $6.2 million of deferred financing costs related to Sabra indebtedness				0.2

			$	5.8

See also Note 1 to the table setting forth the unaudited pro forma capitalization of Sabra at March 31, 2010 at “Sabra Pro Forma Capitalization and Supplemental Pro Forma Financial Information.”

101

NOTES TO SABRA UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

To record the rent from subsidiaries of New Sun in connection with the Lease Agreements. Amounts due under the terms of the Lease Agreements are fixed (except for an anticipated annual rent escalator described in Note (a) above) and there is no contingent rental income based upon the revenues or net income which may be derived by New Sun from the leased properties.

To record the general and administrative costs for administrative services provided by New Sun under the Transition Services Agreement, which are estimated to be $2.4 million annually. The pro forma consolidated statement of income excludes other general and administrative costs which are expected to be incurred by Sabra after the Separation. These costs, comprised principally of compensation and various other costs associated with development activities, are expected to approximate $2.4 million to $2.9 million annually.

g.	To record depreciation expense related to the property and equipment transferred to Sabra by Sun.

h.	To record interest expense related to the anticipated Sabra indebtedness (dollars in millions):


	Debt		Interest Expense
Sabra indebtedness	$	208.5	$	11.5
(assumed annual interest rate %)
Sabra mortgage indebtedness		164.0		10.7
(assumed annual interest rate 6.5%)

	$	372.5	$	22.2

Add % commitment fee related to Sabra indebtedness				0.3
Add amortization associated with $6.2 million of deferred financing costs related to Sabra indebtedness				0.6

			$	23.1

See also Note 1 to the table setting forth the unaudited pro forma capitalization of Sabra at March 31, 2010 at “Sabra Pro Forma Capitalization and Supplemental Pro Forma Financial Information.”

i.	Pro Forma earnings per share of Sabra are based upon the number of shares used in computing earnings per share of New Sun.

j.	To record cash and cash equivalents to be distributed by Sun to Sabra at the time of the Separation in order to provide initial working capital to Sabra.

k.	To record deferred financing costs related to the Sabra indebtedness.

l.	To record anticipated amounts of Sabra indebtedness.

Note 3 – Income Taxes

The pro forma financial statements assume that Sabra has met all conditions necessary for it to be treated as a REIT for all periods presented. As a result, no deferred taxes have been recorded as of March 31, 2010, and there is no provision for income taxes for the year ended December 31, 2009 or the three months ended March 31, 2010.

Note 4 – Reconciliation of Pro Forma FFO and FAD to Pro Forma Net Income

Funds from Operations and Funds Available for Distribution

Funds from operations (“FFO”) and funds available for distribution (“FAD”), as presented in the section captioned “Sabra Pro Forma Capitalization and Supplemental Pro Forma Financial Information,” are non-GAAP

102

NOTES TO SABRA UNAUDITED

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

financial measures that are considered supplemental measures for the real estate industry and a supplement to GAAP measures. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD represents FFO excluding straight-line rent adjustments.

FFO and FAD are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization and Sabra believes that real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. Sabra believes such a presentation also provides investors with a more meaningful measure of Sabra’s operating results in comparison to the operating results of other REITs.

FFO and FAD do not represent cash flow from operations as defined by GAAP, should not be considered as alternatives to net income as defined by GAAP and are not indicative of cash available to fund all cash flow needs. Investors are also cautioned that FFO and FAD, as presented, may not be comparable to similarly titled measures reported by other REITs due to the fact that not all real estate companies use the same definitions. The reconciliation of FFO and FAD to net income available to stockholders is provided below. Sabra compensates for the limitations of FFO and FAD by providing investors with pro forma financial statements, along with this detailed discussion of FFO and FAD and a reconciliation of FFO and FAD to pro forma net income.

The following reconciles pro forma net income to pro forma FFO and pro forma FAD (dollars in thousands):

For the Three Months Ended March 31, 2010

(in thousands)


	Pro Forma Sabra
Net income	$	6,369
Depreciation and amortization		5,227

FFO(1)	$	11,596
Straight-line rent adjustment		—

FAD	$	11,596

For the Year Ended December 31, 2009

(in thousands)


	Pro Forma Sabra
Net income	$	25,477
Depreciation and amortization		20,906

FFO(1)	$	46,383
Straight-line rent adjustment		—

FAD	$	46,383

(1)	Calculated in accordance with NAREIT’s definition of FFO except that there are no adjustments for gains (or losses) from sales of property or adjustments for unconsolidated partnerships and joint ventures.

103

SABRA AUDITED BALANCE SHEET OF ASSETS

TO BE CONTRIBUTED AND LIABILITIES TO BE ASSUMED

The Sabra audited balance sheet will be comprised of the assets to be contributed to and liabilities to be assumed by Sabra at the date of the Separation. The assets will include substantially all of the real estate assets owned by Sun, and the liabilities will include related mortgage indebtedness to third parties. Sun is currently in the process of preparing this balance sheet and the accompanying notes, which will then be subject to audit. Because this balance sheet and the required audit have not yet been completed, the balance sheet has not at this time been included in this proxy statement/prospectus. When completed, the audited balance sheet and related notes will be included in a subsequent filing.

104

SELECTED FINANCIAL INFORMATION AND OTHER DATA

The following table sets forth selected historical financial data of Sun for each of the five years in the period ended December 31, 2009 and for the three months ended March 31, 2010 and 2009. For accounting purposes, the historical consolidated financial statements of Sun will become the historical financial statements of New Sun after the Separation. The selected historical financial data presented herein have been derived from Sun’s audited consolidated financial statements. Sabra will not have operated prior to the Separation. The balance sheet of Sabra at the time of the Separation will reflect the assets and liabilities of Sabra at their respective historical carrying values. The other financial statements of Sabra will reflect solely the results of operations of Sabra after the Separation.

The following selected financial data may not reflect the results of operations or financial position that would have been obtained had New Sun been a separate, publicly held company during such periods. In particular, the lease payments that would have been paid by New Sun to Sabra pursuant to the Lease Agreements are not reflected. In addition, the historical financial statements of Sun include certain expenses that, upon completion of the Separation, will not be incurred by New Sun on an ongoing basis. These expenses include (i) depreciation on real estate assets which New Sun will lease from Sabra and (ii) interest on mortgage debt to third parties which will be assumed by Sabra. The following table should be read in conjunction with: “New Sun Unaudited Pro Forma Consolidated Financial Statements,” “Sabra Unaudited Pro Forma Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations for Sun and New Sun” and the historical consolidated financial statements of Sun presented elsewhere herein.


	For the Three Months Ended March 31,						At or For the Year Ended December 31,
	2010			2009			2009			2008			2007		2006		2005
Total net revenues	$	473,255		$	468,129		$	1,881,799		$	1,823,503		$	1,557,756	$	982,658	$	716,048
Income (loss) before income taxes and discontinued operations		17,795			19,661			72,096			66,576			43,179		11,259		(3,290	)
Income (loss) from continuing operations		10,499			11,602			42,480			113,924			54,093		11,473		(2,504	)
(Loss) income from discontinued operations		(301	)		(1,359	)		(3,809	)		(4,637	)		3,417		15,645		27,265

Net income	$	10,198		$	10,243		$	38,671		$	109,287		$	57,510	$	27,118	$	24,761

Basic earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.24		$	0.27		$	0.97		$	2.63		$	1.28	$	0.36	$	(0.16	)
(Loss) income from discontinued operations	$	(0.01	)	$	(0.04	)		(0.09	)		(0.11	)		0.08		0.50		1.71

Net income	$	0.23		$	0.23		$	0.88		$	2.52		$	1.36	$	0.86	$	1.55

Diluted earnings per common and common equivalent share:
Income (loss) from continuing operations	$	0.24		$	0.26		$	0.97		$	2.59		$	1.25	$	0.36	$	(0.16	)
(Loss) income from discontinued operations	$	(0.01	)	$	(0.03	)		(0.09	)		(0.10	)		0.08		0.49		1.71

Net income	$	0.23		$	0.23		$	0.88		$	2.49		$	1.33	$	0.85	$	1.55

Weighted average number of common and common equivalent shares:
Basic		44,033			43,643			43,841			43,331			42,350		31,638		16,003
Diluted		44,183			43,872			43,963			43,963			43,390		31,788		16,003

Working capital (deficit)	$	190,166		$	179,089		$	175,604		$	172,145		$	83,721	$	96,245	$	(62,786	)

Total assets	$	1,559,900		$	1,540,816		$	1,571,194		$	1,543,334		$	1,373,826	$	621,423	$	512,306

Long-term debt and capital lease obligations, including current portion	$	679,604		$	706,286		$	700,548		$	725,841		$	729,268	$	174,165	$	197,779

Stockholders’ equity (deficit)	$	461,187		$	414,796		$	449,064		$	403,709		$	246,256	$	144,133	$	(2,895	)

105

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS FOR SUN AND NEW SUN

The following is a discussion and analysis of the financial condition and results of operations for Sun and New Sun. Following the Separation and REIT Conversion Merger, New Sun will continue the business and operations of Sun. For accounting purposes, the historical consolidated financial statements of Sun will become the historical consolidated financial statements of New Sun at the Separation. Sabra will not have operated prior to the Separation. Accordingly, for accounting purposes, the financial statements of Sabra will consist solely of its operations after the Separation. See “The Proposals—Accounting Treatment for the Separation and REIT Conversion.” The following should be read in conjunction with the consolidated financial statements and accompanying notes which appear elsewhere in this proxy statement/prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. New Sun’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed below and elsewhere in this proxy statement/prospectus. See also “Risk Factors.”

Overview

Sun’s subsidiaries provide and, following the Separation, New Sun’s subsidiaries will provide long-term, subacute and related specialty healthcare services primarily to the senior population in the United States. Sun was engaged in the following three principal business segments during 2009:

•

inpatient services, primarily skilled nursing centers;

•

rehabilitation therapy services; and

•

medical staffing services.

Commencing in 2005, Sun implemented a business strategy to leverage its existing platform, and in December 2005, Sun acquired an operator of 56 skilled nursing centers and independent and assisted living residences and a small hospice operation. In 2006, Sun continued this strategy by purchasing a hospice company now known as SolAmor. In April 2007, Sun acquired Harborside Healthcare Corporation (“Harborside”), an operator of 73 skilled nursing centers, one assisted living center and one independent living center with approximately 9,000 licensed beds in ten states. Harborside’s results of operations have been included in Sun’s consolidated financial statements since April 1, 2007.

Sun has periodically reviewed its operations and portfolio of facilities to determine if any of these operations or assets no longer fits with its business strategies. This review has resulted in dispositions of certain assets and operations.

In 2006, Sun sold a subsidiary that provided skilled home healthcare, non-skilled home care and pharmacy services. During 2007, Sun sold its 75% interest in a home health services subsidiary and sold its remaining laboratory and radiology business.

During 2008, Sun reclassified six skilled nursing centers into discontinued operations because they were divested, sold or qualified as assets held for sale. In 2008, Sun sold two hospitals that were classified as held for sale since 2007; exercised an option to purchase a skilled nursing center that was classified as held for sale since 2007 and simultaneously sold the asset; exercised options to purchase two skilled nursing centers that were classified as held for sale and sold those centers and a third center; transferred operations of two leased skilled nursing centers; and sold a regional provider of adolescent rehabilitation and special education services.

During 2009, Sun reclassified an assisted living facility into discontinued operations. Sun elected not to renew the lease of the assisted living facility and allowed operations to transfer to another operator. Sun also closed a leased skilled nursing center and transferred the remaining residents to other centers.

106

Sun has updated its historical financial statements to reflect the reclassification of one assisted living center to discontinued operations during the year ended December 31, 2009. U.S. generally accepted accounting principles (“GAAP”) require that these operations be reclassified as discontinued operations on a retroactive basis. The financial information in this proxy statement/prospectus reflects that reclassification for all periods since January 1, 2005.

Revenues from Medicare, Medicaid and Other Sources

Sun receives revenues from Medicare, Medicaid, commercial insurance, self-pay residents, other third-party payors and healthcare centers that utilize Sun’s specialty medical services. The sources and amounts of Sun’s inpatient services revenues are determined by a number of factors, including the number of licensed beds and occupancy rates of its centers, the acuity level of patients and the rates of reimbursement among payors. Federal and state governments continue to focus on methods to curb spending on healthcare programs such as Medicare and Medicaid, and pressures on state budgets resulting from the recent adverse economic conditions in the United States may intensify these efforts. This focus has not been limited to skilled nursing centers, but includes specialty services provided by Sun, such as skilled therapy services, to third parties. Sun cannot at this time predict the extent to which proposals limiting federal or state expenditures will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on Sun or New Sun. Efforts to impose reduced coverage, greater discounts and more stringent cost controls by government and other payors are expected to continue.

In addition, due to recent adverse economic conditions, Sun has experienced reduced demand for the specialty services that it provides to third parties. If economic conditions do not improve or worsen, New Sun may experience additional reductions in demand for these specialty services it will provide following the Separation. Sun is unable at this time to predict the impact or extent of such reduced demand.

The following table sets forth the total nonaffiliated revenues and percentage of revenues by payor source for Sun’s continuing operations, on a consolidated and on an inpatient operations only basis, for the periods indicated (data include revenues for acquired centers following the date of acquisition only):


	For the Three Months Ended								For the Years Ended
Sources of Revenues	March 31, 2010				March 31, 2009				December 31, 2009				December 31, 2008				December 31, 2007
	(dollars in thousands)
Consolidated:
Medicaid	$	189,324	40.0	%	$	181,451	38.7	%	$	753,393	40.0	%	$	729,014	40.0	%	$	645,084	41.4	%
Medicare		142,181	30.0			141,876	30.3			555,593	29.5			522,555	28.7			418,665	26.9
Private pay and other		117,337	24.8			118,393	25.4			471,218	25.1			480,243	26.3			436,556	27.9
Managed care and commercial insurance		24,413	5.2			26,409	5.6			101,595	5.4			91,691	5.0			57,451	3.8

Total	$	473,255	100.0	%	$	468,129	100.0	%	$	1,881,799	100.0	%	$	1,823,503	100.0	%	$	1,557,756	100.0	%

Inpatient Only:
Medicaid	$	189,287	45.0	%	$	181,410	43.7	%	$	753,260	44.9	%	$	728,882	45.1	%	$	644,959	47.2	%
Medicare		137,722	32.7			137,864	33.2			539,339	32.2			510,013	31.6			410,365	30.0
Private pay and other		69,386	16.6			69,694	16.8			282,300	16.9			286,025	17.7			255,075	18.6
Managed care and commercial insurance		24,133	5.7			26,267	6.3			100,876	6.0			91,139	5.6			57,000	4.2

Total	$	420,528	100.0	%	$	415,235	100.0	%	$	1,675,775	100.0	%	$	1,616,059	100.0	%	$	1,367,399	100.0	%

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Medicare

Medicare is available to nearly every United States citizen 65 years of age and older. It is a broad program of health insurance designed to help the nation’s elderly meet hospital, hospice, home health and other healthcare costs. Health insurance coverage extends to certain persons under age 65 who qualify as disabled or those having end-stage renal disease. Medicare is composed of four related health insurance programs. Medicare Part A provides for inpatient services including hospital, skilled long-term care, hospice and home healthcare. Medicare Part B provides for outpatient services including physicians’ services, diagnostic service, skilled therapy services and medical supplies. Medicare Part C is a managed care option (“Medicare Advantage”) for beneficiaries who are entitled to Part A and enrolled in Part B. Medicare Part D is a benefit that provides prescription drug benefits for both Medicare and Medicare/Medicaid dually eligible patients.

Medicare reimburses Sun’s skilled nursing centers for Medicare Part A services under the Prospective Payment System (“PPS”) as defined by the Balanced Budget Act of 1997 and subsequently refined in 1999, 2000 and 2005. PPS regulations predetermine a payment amount per patient, per day, based on the 1995 costs of treating patients indexed forward. The amount to be paid is determined by classifying each patient into one of 53 Resource Utilization Group (“RUG”) categories that are based upon each patient’s acuity level.

CMS has announced that it expects to expand RUG categories to 66, effective October 1, 2010. At the same time, it is implementing a new patient assessment tool for the collection of clinical data to be used for classification into the RUG categories. Sun is unable to estimate the effect that the new RUG categories and the new assessment tool will have on Sun’s Medicare revenues.

On July 31, 2008, the CMS issued a final rule to implement a 3.4% market basket increase for the 2009 federal fiscal year, which commenced on October 1, 2008. The rule also contained an update of the wage indices. The net impact of these changes was approximately a 3.3% increase in Sun’s reimbursement rates, which resulted in increased revenues of approximately $3.8 million per quarter.

On July 31, 2009, CMS issued its final rule for skilled nursing facilities for the 2010 federal fiscal year, which commenced on October 1, 2009. This rule provides for a market basket increase of 2.2% in Sun’s reimbursement rates and a 3.3% reduction for a forecast error/parity adjustment. Sun estimates that the net result of the two adjustments, based on Sun’s current acuity mix, will be a decrease of 0.85% in reimbursement rates, which Sun estimates will decrease its net revenues by approximately $1.0 million per quarter.

In addition to the changes that affect the upcoming 2010 federal fiscal year, the rule also contains provisions for the 2011 federal fiscal year, which commences on October 1, 2010. Sun is not able to predict whether these changes will occur but is able to confirm that CMS has determined that the changes will be budget neutral.

The following table sets forth the average amounts of inpatient Medicare Part A revenues per patient, per day, recorded by Sun’s healthcare centers for the periods indicated (data include revenues for acquired centers following the date of acquisition only):


For the Three Months Ended			For the Years Ended
March 31, 2010	March 31, 2009		December 31, 2009		December 31, 2008		December 31, 2007
$465.96	$	450.41	$	455.00	$	424.19	$	391.50

Under current law, there are limits on reimbursement provided under Medicare Part B for therapy services. An automatic exception to this limit is in place for patients residing in skilled nursing centers until December 31, 2010. In addition, therapy rates are calculated using the Physicians Fee Schedule, for which rates are subject to a reduction of 21.3% based on a statutory formula. Congress has repeatedly eliminated this exception in prior years and has eliminated it through May 31 in the current year. Legislation is currently pending in Congress to extend the elimination of the reduction. If the exception is not extended, revenues from therapy services provided to Sun’s residents and residents of non-affiliated nursing and assisted living centers in which Sun provides therapy services will be adversely affected.

108

Sun receives Medicare reimbursements for hospice care at daily or hourly rates based on the level of care furnished to the patient. Sun’s ability to receive Medicare reimbursement for its hospice services is subject to two limitations:

•

If inpatient days of care provided to all patients at a hospice exceed 20% of the total days of hospice care provided by that hospice for an annual period, then payments for days in excess of this limit are made at the routine home care rate. None of Sun’s hospice programs exceeded the payment limits on inpatient services for 2009 or 2008.

Overall payments made by Medicare on a per hospice program basis are subject to a cap amount at the end of an annual period. The cap amount is calculated by multiplying the number of first-time Medicare hospice beneficiaries during the year by the Medicare per beneficiary cap amount, resulting in that hospice’s aggregate cap, which is the allowable amount of total Medicare payments that hospice can receive for that cap year. If a hospice program exceeds its aggregate cap, then the hospice must repay the excess. In 2009, only one of Sun’s hospice programs exceeded the Medicare cap limit. The amount in excess of the aggregate cap was immaterial.

On July 31, 2009, CMS issued its final rule for hospice services for the 2010 federal fiscal year. The rule includes a market basket increase of 2.1% and a 0.7% decrease resulting from a phaseout of the wage index budget neutrality factor. Sun estimates that the net impact on its hospice service operations of these two adjustments will be an increase of 1.52% in its reimbursement rates, which it estimates will result in increased revenues of approximately $0.1 million per quarter.

Medicaid

Medicaid is a state-administered program financed by state funds and federal matching funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods. Each state in which Sun operates nursing and rehabilitation centers has a unique Medicaid reimbursement system.

Medicaid outlays are a significant component of state budgets, and there have been cost containment pressures on Medicaid outlays for nursing homes. The recent economic downturn has caused many states to institute freezes on or reductions in Medicaid spending to address state budget concerns.

Twenty-one of the states in which Sun operates will impose a provider tax on nursing homes as a method of increasing federal matching funds paid to those states for Medicaid. Those states that have imposed a provider tax have used some or all of the matching funds to fund Medicaid reimbursement to nursing homes.

The following table sets forth the average amounts of inpatient Medicaid revenues per patient, per day (excluding any impact of individually identifiable state-imposed provider taxes), recorded by Sun’s healthcare centers for the periods indicated (data include revenues for acquired centers following the date of acquisition only):


For the Three Months Ended			For the Years Ended
March 31, 2010	March 31, 2009		December 31, 2009		December 31, 2008		December 31, 2007
$173.07	$	168.71	$	171.55	$	166.62	$	159.36

For comparison purposes, the following table sets forth the average amounts of inpatient Medicaid revenues per patient, per day (including the impact from individually identifiable state-imposed provider taxes), recorded by Sun’s healthcare centers for the periods indicated (data include revenues for acquired centers following the date of acquisition only):


For the Three Months Ended			For the Years Ended
March 31, 2010	March 31, 2009		December 31, 2009		December 31, 2008		December 31, 2007
$159.61	$	158.60	$	159.51	$	157.08	$	149.95

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Managed Care and Insurance

During the three months ended March 31, 2010 and the year ended December 31, 2009, Sun received 5.2% and 5.4%, respectively, of its revenues from managed care and insurance, of which the Medicare Advantage program is the primary component. As discussed above, Medicare Advantage is the managed care option for Medicare beneficiaries. Medicare Advantage is administered by contracted third-party payors. The managed care and insurance payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers and increased utilization review. These payors are increasingly demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk.

The following table sets forth the average amounts of inpatient revenues per patient, per day, recorded by Sun’s healthcare centers from these revenue sources for the periods indicated (data include revenues for acquired centers following the date of acquisition only):


For the Three Months Ended			For the Years Ended
March 31, 2010	March 31, 2009		December 31, 2009		December 31, 2008		December 31, 2007
$363.84	$	373.93	$	372.93	$	351.93	$	322.35

Private Payors, Veterans and Other

During the three months ended March 31, 2010 and the year ended December 31, 2009, Sun received 24.8% and 25.1%, respectively, of its revenues from private payors, veterans’ coverage, healthcare centers that utilize its specialty medical services, self-pay center residents and other third-party payors. These private and other payors are continuing their efforts to control healthcare costs. Private payor rates are set at a price point that enables continued competition; they are driven by the markets in which Sun’s healthcare centers operate.


For the Three Months Ended			For the Years Ended
March 31, 2010	March 31, 2009		December 31, 2009		December 31, 2008		December 31, 2007
$189.66	$	178.93	$	179.05	$	172.50	$	164.10

Other Reimbursement Matters

Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment by payors during the settlement process. Under cost-based reimbursement plans, payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional supporting documentation is necessary. Sun recognizes revenues from third-party payors and accrues estimated settlement amounts in the period in which the related services are provided. Sun estimates these settlement balances by making determinations based on its prior settlement experience and its understanding of the applicable reimbursement rules and regulations.

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Results of Operations

The following table sets forth Sun’s historical consolidated income statements and certain percentage relationships for the periods indicated (dollars in thousands):


	For the Three Months Ended										For the Years Ended
	March 31, 2010					March 31, 2009					December 31, 2009					December 31, 2008					December 31, 2007
Total net revenues	$	473,255		100.0	%	$	468,129		100.0	%	$	1,881,799		100.0	%	$	1,823,503		100.0	%	$	1,557,756		100.0	%

Costs and expenses:
Operating salaries and benefits		267,034		56.4			262,909		56.1			1,057,645		56.2			1,028,987		56.4			888,102		56.9
Self-insurance for workers’ compensation and general and professional liabilities		14,538		3.1			14,653		3.1			63,752		3.4			59,694		3.3			44,524		2.9
Other operating costs(1)		109,769		23.2			108,356		23.2			435,756		23.2			424,255		23.3			358,960		23.1
Center rent expense		18,552		3.9			18,363		3.9
General and administrative expenses		15,266		3.2			16,750		3.6			62,068		3.3			62,302		3.4			64,835		4.2
Depreciation and amortization		12,446		2.7			10,723		2.3			45,463		2.4			40,354		2.2			31,218		2.0
Provision for losses on accounts receivable		5,878		1.2			3,988		0.9			21,197		1.1			14,107		0.8			8,982		0.6
Interest, net		11,977		2.5			12,726		2.7			49,327		2.6			54,603		3.0			44,347		2.8

Other expense (income)												1,346		0.1			(976	)	(0.1	)		3,197		0.2

Income before income taxes and discontinued operations		17,795		3.8			19,661		4.2			72,096		3.8			66,576		3.7			43,179		2.8
Income tax expense (benefit)		7,296		1.5			8,059		1.7			29,616		1.6			(47,348	)	(2.6	)		(10,914	)	(0.7	)

Income from continuing operations		10,499		2.3			11,602		2.5			42,480		2.2			113,924		6.3			54,093		3.5
(Loss) income from discontinued operations, net		(301	)	(0.1	)		(1,359	)	(0.3	)		(3,809	)	(0.1	)		(4,637	)	(0.3	)		3,417		0.2

Net income	$	10,198		2.2	%	$	10,243		2.2	%	$	38,671		2.1	%	$	109,287		6.0	%	$	57,510		3.7	%

Supplemental Financial Information:(2)
EBITDA	$	42,218		8.9	%	$	43,110		9.2	%	$	166,886		8.9	%	$	161,533		8.9	%	$	118,744		7.6	%
EBITDAR	$	60,770		12.8	%	$	61,473		13.1	%
Adjusted EBITDA											$	168,232		8.9	%	$	160,557		8.8	%	$	121,941		7.8	%
Adjusted EBITDAR											$	241,381		12.8	%	$	234,158		12.8	%	$	192,353		12.3	%

(1)	Operating administrative expenses are included in “other operating costs” above.

(2)

Sun defines EBITDA as net income before loss (gain) on discontinued operations, interest expense (net of interest income), income tax expense (benefit), depreciation and amortization. EBITDA margin is EBITDA as a percentage of revenue. EBITDAR is EBITDA before center rent expense. EBITDAR margin is EBITDAR as a percentage of revenue. Adjusted EBITDA is EBITDA adjusted for gain (loss) on sale of assets, net, restructuring costs, loss on extinguishment of debt, net, loss on contract termination and loss on asset impairment. Adjusted EBITDAR is Adjusted EBITDA before center rent expense.

Sun believes that the presentation of EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR provides useful information regarding Sun’s operational performance because they enhance the overall understanding of the financial performance and prospects for the future of Sun’s core business activities.

Specifically, Sun believes that a presentation of EBITDA and EBITDAR provides consistency in Sun’s financial reporting and provides a basis for the comparison of results of core business operations between current, past and future periods. EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are some of the primary indicators Sun uses for planning and forecasting in future periods, including trending and analyzing the core operating performance of its business from period to period without the effect of U.S. generally accepted accounting principles, or GAAP, expenses, revenues and gains that are unrelated to the day-to-day performance of Sun’s business. Sun also uses EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR to benchmark

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the performance of its business against expected results, analyzing year-over-year trends as described below and to compare Sun’s operating performance to that of its competitors.

In addition to other financial measures, including net segment income, Sun uses EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR to assess the performance of its core business operations, to prepare operating budgets and to measure its performance against those budgets on a consolidated, segment and center-by-center level. EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are useful in this regard because they do not include such costs as interest expense (net of interest income), income taxes and depreciation and amortization expense, which may vary from business unit to business unit and period to period depending upon various factors, including the method used to finance the business, the amount of debt that Sun has determined to incur, whether a center is owned or leased, the date of acquisition of a facility or business, the original purchase price of a facility or business unit or the tax law of the state in which a business unit operates. These types of charges are dependent on factors unrelated to Sun’s underlying business. As a result, Sun believes that the use of EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR provides a meaningful and consistent comparison of Sun’s underlying business between periods by eliminating certain items required by GAAP which have little or no significance in Sun’s day-to-day operations.

Sun also makes capital allocations to each of its centers based on expected EBITDA returns and establishes compensation programs and bonuses for its center-level employees that are based upon the achievement of pre-established EBITDA and Adjusted EBITDA targets.

Despite the importance of these measures in analyzing Sun’s underlying business, in maintaining its financial requirements, in designing incentive compensation and for its goal setting on both an aggregate and a facility level, EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are non-GAAP financial measures that have no standardized meaning defined by GAAP. As the items excluded from EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are significant components in understanding and assessing Sun’s financial performance, EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as alternatives to net income, cash flows generated by or used in operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Therefore, Sun’s EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of Sun’s results as reported under GAAP. Some of these limitations are as follows:

•

they do not reflect Sun’s cash expenditures, or future requirements for capital expenditures, or contractual commitments;

•

they do not reflect changes in, or cash requirements for, Sun’s working capital needs;

•

they do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on Sun’s debt;

•

they do not reflect any income tax payments Sun may be required to make;

•

although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements;

•

they are not adjusted for all noncash income or expense items that are reflected in Sun’s consolidated statements of cash flows;

•

they do not reflect the impact on earnings of charges resulting from certain matters Sun considers not to be indicative of its ongoing operations; and

•

other companies in Sun’s industry may calculate these measures differently than Sun does, which may limit their usefulness as comparative measures.

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Sun compensates for these limitations by using EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR only to supplement net income on a basis prepared in conformance with GAAP in order to provide a more complete understanding of the factors and trends affecting Sun’s business. Sun strongly encourages investors to consider net income determined under GAAP as compared to EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR, and to perform their own analysis, as appropriate.

The following table provides a reconciliation of Sun’s net income, which is the most directly comparable financial measure presented in accordance with GAAP, to EBITDA and EBITDAR for the three months ended March 31 (in thousands):


	2010		2009
Net income	$	10,198	$	10,243
Plus:
Loss from discontinued operations	$	301	$	1,359
Interest expense, net		11,977		12,726
Income tax expense		7,296		8,059
Depreciation and amortization		12,446		10,723

EBITDA	$	42,218	$	43,110

Plus:
Center rent expense		18,552		18,363

EBITDAR	$	60,770	$	61,473

The following table provides a reconciliation of Sun’s net income, which is the most directly comparable financial measure presented in accordance with GAAP, to EBITDA, Adjusted EBITDA and Adjusted EBITDAR for the years ended December 31 (in thousands):


	For the Years Ended December 31,
	2009		2008			2007
Net income	$	38,671	$	109,287		$	57,510

Plus:
Income (loss) from discontinued operations		3,809		4,637			(3,417	)
Interest expense, net of interest income		49,327		54,603			44,347
Income tax expense (benefit)		29,616		(47,348	)		(10,914	)
Depreciation and amortization		45,463		40,354			31,218

EBITDA	$	166,886	$	161,533		$	118,744

Plus:
Gain (loss) on sale of assets, net		42		(976	)		24
Restructuring costs		1,304		—			—
Loss on extinguishment of debt		—		—			3,173
Loss on contract termination		—		—			—
Loss on asset impairment		—		—			—

Adjusted EBITDA	$	168,232	$	160,557		$	121,941

Plus:
Center rent expense		73,149		73,601			70,412

Adjusted EBITDAR	$	241,381	$	234,158		$	192,353

The following discussions of the “Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009,” the “Year Ended December 31, 2009 Compared to Year Ended December 31, 2008” and the

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“Year Ended December 31, 2008 Compared to Year Ended December 31, 2007” are based, in part, on the financial information presented in Note 14—“Segment Information” to Sun’s consolidated financial statements included in Sun’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and Note 8 – “Segment Information” to Sun’s consolidated financial statements included in Sun’s Report on Form 10-Q for the fiscal quarter ended March 31, 2010, each of which is incorporated in this proxy statement/prospectus. See “Where You Can Find More Information.”

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

The following summarizes Sun’s results of operations on a consolidated basis. A more detailed discussion and analysis of the results of operations of each of Sun’s segments (Inpatient Services, Rehabilitation Therapy Services, Medical Staffing Services and Corporate) is provided below under “Segment Information.”

Net revenues increased $5.2 million, or 1.1%, to $473.3 million for the three months ended March 31, 2010 from $468.1 million for the three months ended March 31, 2009. Sun reported net income for the three-month periods ended March 31, 2010 and 2009 of $10.2 million each.

The increase in net revenues for the 2010 period included $5.3 million of additional revenue in Sun’s Inpatient Services segment primarily due to increases in rates from Medicare Part A and Medicaid, although the Medicaid rate increases were significantly offset by increased provider taxes. Higher customer bases under Sun’s Medicaid, managed care, commercial insurance and Medicare hospice programs, the October 2009 acquisition of a hospice company and a $6.8 million increase in revenue from Sun’s Rehabilitation Therapy segment, due primarily to increases in billable minutes and billing rates, also contributed to the increase in net revenues. This increase was partially offset by lower customer bases in Sun’s Medicare Part A and Part B, managed care and commercial insurance programs coupled with a $4.4 million decrease in revenue from Sun’s Medical Staffing segment, mainly due to a decrease in billable nursing hours.

Operating salaries and benefits increased $4.1 million, or 1.6%, to $267.0 million (56.4% of net revenues) for the three months ended March 31, 2010 from $262.9 million (56.1% of net revenues) for the three months ended March 31, 2009. The increase resulted primarily from a $5.5 million increase in Sun’s Rehabilitation Therapy segment driven by increased service volume and wage rate increases and a $1.2 million increase in Sun’s Inpatient Services segment driven by health insurance costs and wage increases. These increases were offset by a $2.5 million decrease in Sun’s Medical Staffing segment due to a decline in staffing levels resulting from a decrease in the nurse staffing and pharmacy business.

Self-insurance for workers’ compensation and general and professional liability insurance decreased $0.2 million, or 1.4%, to $14.5 million (3.1% of net revenues) for the three months ended March 31, 2010 from $14.7 million (3.1% of net revenues) for the three months ended March 31, 2009, primarily due to decreased exposures in Sun’s workers’ compensation programs.

Other operating costs increased $1.4 million, or 1.3%, to $109.8 million (23.2% of net revenues) for the three months ended March 31, 2010 from $108.4 million (23.2% of net revenues) for the three months ended March 31, 2009. The increase was primarily due to provider taxes and increased therapy costs in Sun’s Inpatient Services segment resulting from an increase in higher acuity patients requiring more rehabilitation therapy.

Center rent expense increased $0.2 million, or 1.1%, to $18.6 million (3.9% of net revenues) for the three months ended March 31, 2010 from $18.4 million (3.9% of net revenues) for the three months ended March 31, 2009. The increase is attributable to additional offices for a hospice operation that Sun acquired in 2009.

General and administrative expenses decreased $1.5 million, or 8.9%, to $15.3 million (3.2% of net revenues) for the three months ended March 31, 2010 from $16.8 million (3.6% of net revenues) for the three months ended March 31, 2009. The decrease was primarily due to decreases in salaries and benefits resulting from restructuring efforts undertaken in 2009.

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Depreciation and amortization increased $1.7 million, or 15.9%, to $12.4 million (2.7% of net revenues) for the three months ended March 31, 2010 from $10.7 million (2.3% of net revenues) for the three months ended March 31, 2009. The increase was attributable to additional depreciation expense for property and equipment acquired during the period.

The provision for losses on accounts receivable increased $1.9 million, or 47.5%, to $5.9 million (1.2% of net revenues) for the three months ended March 31, 2010 from $4.0 million (0.9% of net revenues) for the three months ended March 31, 2009. The increase resulted from increased credit risk associated with slower cash collections.

Net interest expense decreased $0.7 million, or 5.5%, to $12.0 million (2.5% of net revenues) for the three months ended March 31, 2010 from $12.7 million (2.7% of net revenues) for the three months ended March 31, 2009 due to lower interest rates on variable rate indebtedness in the current quarter coupled with reduced debt balances.

Segment information

The following table sets forth the amount and percentage of certain elements of total net revenues for the three months ended March 31 (dollars in thousands):


	2010					2009
Inpatient Services	$	420,528		88.8	%	$	415,235		88.7	%
Rehabilitation Therapy Services		50,516		10.7			43,732		9.3
Medical Staffing Services		23,500		5.0			27,934		6.0
Corporate		8		—			4		—
Intersegment Eliminations		(21,297	)	(4.5	)		(18,776	)	(4.0	)

Total net revenues	$	473,255		100.0	%	$	468,129		100.0	%

Inpatient Services revenues include revenues billed to patients for therapy and medical staffing provided by Sun’s affiliated operations. The following table sets forth a summary of the intersegment revenues for the three months ended March 31 (in thousands):


	2010		2009
Rehabilitation Therapy Services	$	21,154	$	18,216
Medical Staffing Services		143		560
Total intersegment revenue	$	21,297	$	18,776

The following table sets forth the amount of net segment income for the three months ended March 31 (in thousands):


	2010			2009
Inpatient Services	$	37,756		$	41,793
Rehabilitation Therapy Services		3,876			2,889
Medical Staffing Services		1,482			2,021

Net segment income before Corporate		43,114			46,703
Corporate		(25,319	)		(27,042	)
Net segment income	$	17,795		$	19,661

Sun’s reportable segments are strategic business units that provide different products and services. They are managed separately because each business has different marketing strategies due to differences in types of

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customers, distribution channels and capital resource needs. Sun evaluates the operational strengths and performance of each segment based on financial measures, including net segment income. Net segment income is defined as earnings before income tax expense and discontinued operations. Net segment income for the three months ended March 31, 2010 for Sun’s (1) Inpatient Services segment decreased $4.0 million, or 9.7%, to $37.8 million, (2) Rehabilitation Therapy Services segment increased $1.0 million, or 34.2%, to $3.9 million and (3) Medical Staffing Services segment decreased $0.5 million, or 26.7%, to $1.5 million in comparison to the three months ended March 31, 2009, due to the factors which are discussed below for each segment. Sun uses the measure of net segment income to help identify opportunities for improvement and assist in allocating resources to each segment.

Inpatient Services

Net revenues increased $5.3 million, or 1.3%, to $420.5 million for the three months ended March 31, 2010 from $415.2 million for the three months ended March 31, 2009. The increase was primarily the result of:

•

an increase of $8.2 million in Medicaid revenues consisting of $4.6 million related to improved rates, which were significantly offset by increased provider tax expense (which are discussed below), and $3.6 million from an increase in customer base; and

•

a $5.2 million increase in hospice revenues resulting from an October 2009 acquisition of a hospice company and a higher customer base;

Offset in part by:

•

a decrease of $4.9 million in Medicare revenues as a result of a $8.4 million decrease in revenues due to a lower customer base and a $0.7 million decrease in Medicare Part B revenues, partially offset by a $4.2 million increase in revenues from higher Medicare Part A rates;

•

a $2.2 million decrease in managed care and commercial insurance revenues driven by lower customer base, which contributed $1.4 million of the decrease, and lower rates, which drove the remaining $0.8 million of the decrease; and

•

a $1.0 million decrease in private pay and other revenues, primarily resulting from lower customer base.

Operating salaries and benefits expenses increased $1.2 million, or 0.6%, to $208.2 million for the three months ended March 31, 2010 from $207.0 million for the three months ended March 31, 2009. The increase was attributable to the following:

•

an increase of $1.8 million in health insurance expense; and

•

wage increases and related benefits and taxes of $1.0 million;

Offset in part by:

•

a decrease of $1.6 million in overtime pay.

Self-insurance for workers’ compensation and general and professional liability insurance increased $0.1 million, or 0.7%, to $13.7 million for the three months ended March 31, 2010 as compared to $13.6 million for the three months ended March 31, 2009, which was driven by increased exposures in Sun’s workers’ compensation programs.

Other operating costs increased $5.2 million, or 4.8%, to $113.5 million for the three months ended March 31, 2010 from $108.3 million for the three months ended March 31, 2009. The increase was attributable to the following:

•

a $3.9 million increase in provider taxes;

•

a $1.1 million increase in contract labor driven by therapy costs due to an increase in higher acuity patients requiring more rehabilitation therapy;

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•

a $0.7 million increase in purchased services primarily related to housekeeping contracts; and

•

a $0.6 million increase in legal fees;

Offset in part by:

•

a $0.4 million decrease in energy costs;

•

a $0.3 million additional cost savings due to vendor rebates;

•

a $0.2 million decrease in recruiting expenses;

•

a $0.1 million decrease in equipment rentals; and

•

a $0.1 million decrease in civil monetary penalties.

Operating administrative expenses decreased $0.4 million, or 4.0%, to $9.5 million for the three months ended March 31, 2010 from $9.9 million for the three months ended March 31, 2009, primarily due to lower aggregate salaries and benefits.

The provision for losses on accounts receivable increased $1.9 million, or 51.4%, to $5.6 million for the three months ended March 31, 2010 from $3.7 million for the three months ended March 31, 2009. The increase resulted from increased credit risk associated with slower cash collections.

Center rent expense increased $0.2 million, or 1.1%, to $18.2 million for the three months ended March 31, 2010 from $18.0 million for the three months ended March 31, 2009. The increase is attributable to additional offices for a hospice operation Sun acquired in 2009.

Depreciation and amortization increased $1.6 million, or 16.5%, to $11.3 million for the three months ended March 31, 2010 from $9.7 million for the three months ended March 31, 2009. The increase was attributable to additional depreciation expense on property and equipment acquired during the period.

Net interest expense decreased $0.4 million, or 12.5%, to $2.8 million for the three months ended March 31, 2010 from $3.2 million for the three months ended March 31, 2009. The decrease is a result of lower interest rates and lower aggregate borrowings.

Rehabilitation Therapy Services

Total revenues from the Rehabilitation Therapy Services segment increased $6.8 million, or 15.6%, to $50.5 million for the three months ended March 31, 2010 from $43.7 million for the three months ended March 31, 2009. The revenue increase was the result of:

•

an increase of $5.2 million attributable to increased billable minutes, due in part to the addition of 17 new contracts, net of lost contracts;

•

an increase of $1.3 million attributable to a higher revenue per minute rate due to Sun’s renegotiation of certain customer contract rates and a shift in payor mix; and

•

an increase of $0.3 million in other revenue, primarily related to contract management fees.

Operating salaries and benefits expenses increased $5.5 million, or 15.2%, to $41.7 million for the three months ended March 31, 2010 from $36.2 million for the three months ended March 31, 2009. The increase was primarily driven by the increase in service volume mentioned above coupled with wage rate increases.

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Medical Staffing Services

Total revenues from the Medical Staffing Services segment decreased $4.4 million, or 15.8%, to $23.5 million for the three months ended March 31, 2010 from $27.9 million for the three months ended March 31, 2009. The decrease was primarily the result of:

•

a decrease of $1.1 million attributable to a decline in demand for Sun’s nurse staffing business;

•

a decrease of $1.0 million due to a decline in hours for therapy and pharmacy;

•

a decrease of $1.7 million related to closed offices; and

•

a decrease of $0.6 million due to lower fees earned from the temporary placement of physicians.

Operating salaries and benefits expenses decreased $2.5 million, or 12.7%, to $17.2 million for the three months ended March 31, 2010 as compared to $19.7 million for the three months ended March 31, 2009. The decrease in operating salaries and benefits is a direct result of the decline in staffing levels for Sun’s nurse staffing, therapy staffing and pharmacy businesses.

Corporate

General and administrative expenses not directly attributed to segments decreased $1.5 million, or 8.9%, to $15.3 million for the three months ended March 31, 2010 from $16.8 million for the three months ended March 31, 2009. The decrease was primarily due to decreases in salaries and benefits resulting from restructuring efforts taken in 2009.

Interest expense

Interest expense not directly attributed to operating segments decreased $0.3 million, or 3.2%, to $9.2 million for the three months ended March 31, 2010 from $9.5 million for the three months ended March 31, 2009 due to lower interest rates on variable rate indebtedness in the current quarter coupled with a decrease in aggregate indebtedness since March 31, 2009.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Total net revenue increased $58.3 million, or 3.2%, to $1,881.8 million for the year ended December 31, 2009 from $1,823.5 million for the year ended December 31, 2008. Of this increase in revenue, $59.7 million was contributed by Sun’s Inpatient Services segment and $15.7 million by Sun’s Rehabilitation Therapy segment. These increases were offset by a $17.1 million decrease in revenue from Sun’s Medical Staffing segment.

Operating salaries and benefits expense increased $28.6 million, or 2.8%, to $1,057.6 million (56.2% of net revenues) for the year ended December 31, 2009 from $1,029.0 million (56.4% of net revenues) for the year ended December 31, 2008. The increase is primarily the result of wage rate increases.

Self-insurance for workers’ compensation and general and professional liability insurance increased $4.1 million, or 6.9%, to $63.8 million (3.4% of net revenues) for the year ended December 31, 2009 from $59.7 million (3.3% of net revenues) for the year ended December 31, 2008. The increase was attributable to a $6.1 million increase in general and professional liability insurance costs driven by an increased claims costs related to prior years, partially offset by a $1.7 million decrease in workers’ compensation costs resulting from costs recorded in 2008 related to earlier years.

General and administrative expenses decreased $0.2 million, or 0.3%, to $62.1 million (3.3% of net revenues) for the year ended December 31, 2009 from $62.3 million (3.4% of net revenues) for the year ended December 31, 2008. The decrease was due to cost reductions in professional and consultant fees and benefits expenses.

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Other operating costs increased $11.5 million, or 2.7%, to $435.8 million (23.2% of net revenues) for the year ended December 31, 2009 from $424.3 million (23.3% of net revenues) for the year ended December 31, 2008. The increase in other operating costs was principally composed of (1) cost increases relating to pharmaceutical, therapy and other ancillary services, which in turn were driven by increased patient needs, coupled with (2) increases in utilities and provider and real estate taxes.

Center rent expense decreased $0.5 million, or 1.0%, to $73.1 million (3.9% of net revenues) for the year ended December 31, 2009 from $73.6 million (4.0% of net revenues) for the year ended December 31, 2008. The decrease was due to reduced rent for a previously leased center that was purchased in the first quarter of 2009.

Depreciation and amortization increased $5.1 million, or 12.6%, to $45.5 million (2.4% of net revenues) for the year ended December 31, 2009 from $40.4 million (2.2% of net revenues) for the year ended December 31, 2008. The increase was primarily attributable to the purchase of previously leased centers and additional capital expenditures incurred for center and information systems improvements in 2009.

The provision for losses on accounts receivable increased $7.1 million, or 50.4%, to $21.2 million (1.1% of net revenues) for the year ended December 31, 2009 from $14.1 million (0.8% of net revenues) for the year ended December 31, 2008. The increase was principally driven by lower recoveries of inpatient services bad debt and continued deterioration in the aging of uncollected accounts, which are primarily private payor accounts.

Net interest expense decreased $5.3 million, or 9.7%, to $49.3 million (2.6% of net revenues) for the year ended December 31, 2009 from $54.6 million (3.0% of net revenues) for the year ended December 31, 2008, principally due to lower interest rates on variable rate indebtedness coupled with reduced debt balances.

There is a provision for income taxes of $29.6 million for the year ended December 31, 2009, compared to an income tax benefit of $47.3 million for the year ended December 31, 2008. The 2008 benefit amount included a $70.5 million benefit from the reversal of a portion of the valuation allowance on Sun’s net deferred tax assets offset by a provision from operations and other adjustments totaling $23.2 million. Sun’s valuation allowance on its net deferred tax assets decreased $6.7 million during the year ended December 31, 2009 due to the write-off of deferred tax assets for certain state net operating loss carryforwards that were fully reserved. No portion of the $6.7 million reduction in Sun’s valuation allowance in 2009 affected its provision for income taxes.

Sun’s Adjusted EBITDA increased $7.6 million, or 4.7%, to $168.2 million (8.9% of net revenues) for the year ended December 31, 2009 from $160.6 million (8.8% of net revenues) for the year ended December 31, 2008. The increase was primarily attributable to additional revenues of $58.3 million, offset by additional expenses, primarily operating salaries and benefits ($28.6 million), other operating costs ($11.5 million), provision for losses on accounts receivable ($7.1 million) and self-insurance for workers’ compensation and general and professional liability insurance ($4.1 million), all discussed above. For an explanation of Adjusted EBITDA, including a description of Sun’s uses of, and the limitations associated with, Adjusted EBITDA, and a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see the disclosure and reconciliation.

Segment information

119

The following table sets forth the amount and percentage of certain elements of total net revenues for the years ended December 31 (dollars in thousands):


	2009					2008					2007
Inpatient Services	$	1,675,775		89.1	%	$	1,616,059		88.6	%	$	1,367,398		87.8	%
Rehabilitation Therapy Services		179,532		9.5			150,475		8.3			127,056		8.2
Medical Staffing Services		102,554		5.4			120,410		6.6			111,232		7.1
Corporate		34		0.0			37		0.0			77		0.0
Intersegment eliminations		(76,096	)	(4.0	)		(63,478	)	(3.5	)		(48,007	)	(3.1	)

Total net revenues	$	1,881,799		100.0	%	$	1,823,503		100.0	%	$	1,557,756		100.0	%

Inpatient services revenues for long-term care, subacute care and assisted living services include revenues billed to patients or third-party payors for therapy and medical staffing services provided by Sun’s affiliated operations. The following table sets forth a summary of the intersegment revenues for the years ended December 31 (in thousands):


	2009		2008		2007
Rehabilitation Therapy Services	$	74,166	$	60,856	$	44,857
Medical Staffing Services		1,930		2,622		3,150

Total affiliated revenues	$	76,096	$	63,478	$	48,007

Sun evaluates the operational strengths and performance of each segment based on financial measures, including net segment income. Net segment income is defined as earnings before loss (gain) on sale of assets, net, restructuring costs, income tax benefit and discontinued operations. Net segment income for the year ended December 31, 2009 for Sun’s (1) Inpatient Services segment increased $1.8 million, or 1.2%, to $156.1 million; (2) Rehabilitation Therapy Services segment increased $2.6 million, or 30.6%, to $11.1 million; and (3) Medical Staffing Services segment decreased $1.1 million, or 11.3%, to $8.6 million due to the factors which are discussed below for each segment. Sun uses the measure of net segment income to help identify opportunities for improvement and assist in allocating resources to each segment. The following table sets forth the amount of net segment income for the years ended December 31 (in thousands):


	2009		2008		2007
Inpatient Services	$	156,088	$	154,281	$	132,435
Rehabilitation Therapy Services		11,112		8,462		7,753
Medical Staffing Services		8,610		9,690		8,221

Net segment income before Corporate		175,810		172,433

SHG Services, Inc. S-1