Exhibit 2
ILM SENIOR LIVING, INC.
28 State Street, Suite 1100
Boston, Massachusetts 02109
July 7, 1998
Dear Shareholder:
You should have recently received materials from Redwood Investors, LLC, a
Delaware limited liability company ("Redwood"), offering (the "Offer") to
purchase up to 700,000 shares (the "Shares") (approximately 9.31%) of the issued
and outstanding shares of common stock (the "Common Stock") of ILM Senior
Living, Inc. (the "Company") at a purchase price of $7.00 per Share (the "Offer
Price"). You also received a letter from us and other materials dated June 17,
1998. The Board of Directors of your Company continues to believe that the Offer
Price is inadequate and has made an updated filing with the Securities and
Exchange Commission in the form of a Schedule 14D-9/A, a copy of which is
enclosed herewith.
THE BOARD OF DIRECTORS BELIEVES THAT THE PURCHASE PRICE OF $7.00 PER SHARE
IS FINANCIALLY INADEQUATE RELATIVE TO THE UNDERLYING NET ASSET VALUE OF YOUR
SHARES AND THAT REDWOOD IS INTERESTED IN PAYING THE LOWEST POSSIBLE PRICE FOR
YOUR SHARES, IN ORDER TO MAXIMIZE ITS PROFITS AT YOUR EXPENSE. WE BELIEVE THAT
BY ACCEPTING REDWOOD'S OFFER FOR YOUR SHARES, YOU WILL NOT BE ABLE TO FULLY
REALIZE THE VALUE OF YOUR SHARES.
The Company engaged the investment banking firm of Schroder & Co. Inc.
("Schroders") to render its opinion to the Company's Board of Directors as to
the fairness of the Offer Price from a financial point of view. On June 17,
1998, Schroders rendered its opinion to the effect that, as of the date of such
opinion, the Offer Price is inadequate, from a financial point of view, to the
shareholders of the Company.
References in this letter to Schroders' opinion are qualified in their
entirety by reference to the full text of Schroders' opinion letter which is
annexed to the Schedule 14D-9/A which accompanies this letter. Shareholders
should read Schroders' opinion letter in its entirety for information with
respect to the procedures followed, assumptions made, matters considered and
limitations on the review undertaken by Schroders in rendering its opinion. The
material assumptions of Schroders in rendering its opinion include that the
information furnished by the
Company or any publicly available information reviewed is accurate and complete,
that the financial and operating forecasts of the Company were reasonably
prepared, and that the Company will effect certain contemplated restructuring
alternatives intended to increase shareholder value. The contemplated
restructuring alternatives referred to in Schroders' opinion involved a number
of possible scenarios, including (i) a possible merger of the Company and its
affiliate, ILM II Senior Living, Inc. ("ILM II"), and the implied enterprise
value of such combined entities as a real estate investment trust (a "REIT") to
be valued either on a basis comparable to health care REITs or as a company
which might be sold to a health care REIT, (ii) a possible merger of the Company
and ILM II and their associated operating companies (ILM I Lease Corporation and
ILM II Lease Corporation), to the end that such combined entities would be
valued in a sale or exchange as a senior living operating company, and (iii) an
early dissolution and liquidation of the Company and ILM II following the
disposition of their properties.
Schroders' opinion was provided at the request and for the information of
the Board of Directors in evaluating the Offer Price and does not constitute a
recommendation as to any action any shareholder should take or refrain from
taking in connection with the tender offer or any aspect thereof or alternatives
thereto. Specifically, Schroders' opinion does not constitute a recommendation
that any shareholder not tender stock and should not be relied on by any
shareholder as such. In rendering its opinion, Schroders was not engaged as an
agent or fiduciary of and shall have no duties or liabilities to the
shareholders of the Company and Schroders' opinion does not confer any rights or
remedies upon the shareholders. Because of the foregoing express disclaimers in
the agreement between Schroders and the Company pursuant to which Schroders was
engaged to render its opinion, and the inclusion of similar disclaimers in
Schroders' opinion, Schroders believes that the shareholders cannot rely upon
its opinion. The availability to Schroders of such a defense would be resolved
by a court, and such resolution would have no effect on the rights and
responsibilities of the Board under applicable state law. The availability of
such a state law defense would have no effect on the rights and responsibilities
of the Board under the federal securities laws.
The Company shall pay Schroders fees in the amount of $90,000 for the
preparation and delivery of its opinion. The Company also agreed to reimburse
Schroders for its out-of-pocket expenses and to indemnify Schroders against
certain expense and liabilities in connection with its engagement.
Schroders previously had been retained by the Company as its financial
advisor (the "Engagement") in connection with an examination of various
alternatives for maximizing shareholder values, and in connection therewith any
sale of the Company to a third party which the Company may determine to pursue.
Contingent upon the consummation of such a transaction, the Company agreed to
pay to Schroders a customary success fee. Schroders is an internationally
recognized investment banking firm with experience in the valuation of companies
and their securities in connection with mergers, acquisitions, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The extensive experience of
Schroders' health care investment banking group in providing corporate finance
and advisory services to companies in the long-term care industry and, more
2
specifically, to the Company were the significant factors in the Company's
decision to select Schroders to render its opinion in connection with the Offer.
Schroders could have a conflict of interest in evaluating the fairness of the
Offer if Redwood were to become a significant shareholder of the Company and if
Redwood disagreed with the alternative selected by the Company to enhance
shareholder value. The Board has reason to believe based on, among other things,
Redwood's disclosures in its Offer to Purchase, that Redwood supports management
and would support alternatives which would enhance shareholder value. In fact,
it may be easier for the Company to obtain the super-majority vote required to
enter into certain of these transactions with the support of a significant
shareholder, as opposed to attempting to obtain the vote of many individual
shareholders.
Before making a decision to tender your Shares to Redwood, you should
carefully read the enclosed Schedule 14D-9/A in its entirety and consider all
the information that we have previously provided to you, including our most
recent quarterly report. Bear in mind especially the following:
o The Offer Price offered by Redwood is inadequate from a financial
point of view based on the Schroders opinion.
o Redwood did not retain an independent person to evaluate or render
any opinion with respect to the fairness of the Offer Price or the
terms of the Offer.
o The Offer Price offered by Redwood is significantly below the 1996
year-end estimated net asset valuation that was prepared by
PaineWebber Properties Incorporated of $9.41 per Share. This
estimated net asset value is based on the Company's interests in its
real estate investments and was reviewed by an independent
appraiser. Although this valuation is not recent, based on the
improved financial performance of the Company as described below,
the Company believes that the Share value has increased since the
PaineWebber valuation. Even taking into account that this is an
estimate and is not necessarily indicative of the amount you would
receive upon a liquidation of the Company's assets, Redwood's Offer
Price of $7.00 per Share is so significantly below this estimate
that we believe that the Offer Price is inadequate.
o The Purchaser's Offer Price is also lower than recent secondary
market resale prices. According to information cited in Redwood's
Offer to Purchase, the Company's Shares were sold between March 1,
and April 30, 1998 at a high of $8.82, a low of $7.00 and a weighted
average of $8.70. Because these numbers are based on only 6,570
Shares being traded in 7 transactions, prices obtained from such
secondary market transactions, may not reflect a current estimated
value of the Shares nor what shareholders would receive upon
liquidation of the Company.
o Shareholders who sell their Shares to Redwood will be foregoing the
possibility of participating in any future dividends or other
distributions from the Company
3
or in any appreciation in the value of the Shares, even though there
can be no assurance that Redwood will pay for the Shares on a timely
basis.
o Other options may be available to you if you are interested in
selling your Shares. To sell your Shares, you should contact a
registered securities broker who may assist you in listing your
Shares for sale on a secondary resale market or you could contact
other secondary market sources of sale such as so-called
"partnership exchanges" to sell your Shares in the secondary resale
market. There can, however, be no assurance as to whether, when or
at what price you will be able to sell your Shares through a
secondary market resale.
You should weigh these factors against the following:
- If you need immediate liquidity, a sale of your Shares to Redwood may be
your fastest means of liquidating your investment because there is no
public market for the Shares and there are very few trades.
- Continuing to hold the Shares subjects you to the risk of loss or
decrease in value of your investment. The Company is subject to, among
other things, the risks related to the health care industry and the risks
resulting from pending litigation which could affect the value of the
Shares, although the Company believes these claims are without merit and
is appealing certain decisions.
The Company has achieved increases in cash flow and value for ILM
shareholders during fiscal year 1997:
o Property revenues were up by more than 5%;
o Cash flow from the properties after capital expenditures improved by
more than 5%;
o Property management fees were 2% lower than the fees for the
previous year;
o The dividend rate has been increased by 15% since the end of fiscal
year 1996.
As reported in its quarterly reports, the Company is implementing several
programs which are designed to further increase cash flow and value for the
shareholders. As a result, the Company expects to achieve further dividend
increases during the current fiscal year.
Please consider all of the factors discussed in this letter before
deciding how to respond to the Offer. On balance your Board of Directors
recommends that you not tender your Shares to Redwood pursuant to the Offer.
If you tender your Shares according to the agreement of sale which you
would be entering into with Redwood, all dividend payments and distributions
following May 1, 1998 will be payable to Redwood even though you may not receive
full payment from Redwood for your
4
Shares until a later date. You should consult your personal tax and legal
advisors as to your personal situation prior to accepting the Offer and
tendering your Shares. No action regarding the Offer is necessary if you wish to
retain your Shares.
Your Board of Directors will continue to act in the manner that it
believes is in the best interests of the Company and the shareholders. We
encourage you to call our Information Agent, D.F. King & Co. Inc., at
800-431-9629, with any questions you may have.
Sincerely,
The Board of Directors of
ILM Senior Living, Inc.
5