form10-q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended September 30, 2007
or
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from _____________ to _____________
Commission
File Number: 001-32641
BROOKDALE
SENIOR LIVING INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-3068069
|
(State
or other jurisdiction
of
incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
330
North Wabash Avenue, Suite 1400, Chicago,
Illinois
|
60611
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(312)
977-3700
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes T No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer T
|
Non-accelerated
filer £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
As
of
November 5, 2007, 101,615,992 shares of the registrant’s common stock, $0.01 par
value, were outstanding (excluding unvested restricted shares).
|
PAGE
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PART
I. FINANCIAL
INFORMATION
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Item
1. Financial Statements
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Item
2.
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Item
3.
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Item
4.
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Item
1A.
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Item
6.
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Signatures
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PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
BROOKDALE
SENIOR LIVING INC.
(In
thousands, except stock amounts)
|
|
|
|
|
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
63,059
|
|
|
$ |
68,034
|
|
Cash
and investments — restricted
|
|
|
93,337
|
|
|
|
61,116
|
|
Accounts
receivable, net
|
|
|
66,906
|
|
|
|
58,987
|
|
Deferred
tax asset
|
|
|
33,022
|
|
|
|
40,019
|
|
Prepaid
expenses and other current assets, net
|
|
|
|
|
|
|
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Total
current assets
|
|
|
|
|
|
|
|
|
Property,
plant, equipment and leasehold intangibles, net
|
|
|
3,749,843
|
|
|
|
3,658,788
|
|
Cash
and investments — restricted
|
|
|
40,005
|
|
|
|
22,083
|
|
Goodwill
|
|
|
335,729
|
|
|
|
324,750
|
|
Other
intangible assets, net
|
|
|
265,972
|
|
|
|
292,448
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|
Other
assets, net
|
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|
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Total
assets
|
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$ |
|
|
|
$ |
|
|
|
|
|
|
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Liabilities
and Stockholders’ Equity
|
|
|
|
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Current
liabilities
|
|
|
|
|
|
|
|
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Current
portion of long-term debt
|
|
$ |
25,933
|
|
|
$ |
20,869
|
|
Trade
accounts payable
|
|
|
14,006
|
|
|
|
15,860
|
|
Accrued
expenses
|
|
|
166,017
|
|
|
|
155,577
|
|
Refundable
entrance fees
|
|
|
200,624
|
|
|
|
198,613
|
|
Tenant
security deposits
|
|
|
30,897
|
|
|
|
24,342
|
|
Deferred
revenue and entrance fee revenue
|
|
|
43,521
|
|
|
|
47,056
|
|
Dividends
payable
|
|
|
|
|
|
|
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Total
current liabilities
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532,836
|
|
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|
508,905
|
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Long-term
debt, less current portion
|
|
|
1,978,484
|
|
|
|
1,690,570
|
|
Line
of credit
|
|
|
231,000
|
|
|
|
163,500
|
|
Deferred
entrance fee revenue
|
|
|
73,733
|
|
|
|
70,479
|
|
Deferred
tax liability
|
|
|
316,928
|
|
|
|
399,134
|
|
Deferred
liabilities
|
|
|
114,189
|
|
|
|
98,673
|
|
Other
liabilities
|
|
|
|
|
|
|
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Total
liabilities
|
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|
|
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Minority
interests
|
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Commitments
and contingencies
|
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Stockholders’
Equity
|
|
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|
|
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|
Preferred
stock, $.01 par value, 50,000,000 shares authorized at September
30, 2007
and December 31, 2006; no shares issued and outstanding
|
|
|
—
|
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|
—
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|
Common
stock, $.01 par value, 200,000,000 shares authorized at September
30, 2007
and December 31, 2006; 105,004,139 shares and 104,542,648 shares
issued
and outstanding (including 3,401,808 and 3,282,000 unvested restricted
shares), respectively
|
|
|
1,050
|
|
|
|
1,045
|
|
Additional
paid-in-capital
|
|
|
1,810,460
|
|
|
|
1,934,571
|
|
Accumulated
deficit
|
|
|
(283,455 |
) |
|
|
(170,713 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,690 |
) |
|
|
(891 |
) |
Total
stockholders’ equity
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to condensed consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited,
in thousands, except per share data)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
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Revenue
|
|
|
|
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|
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Resident
fees
|
|
$ |
463,101
|
|
|
$ |
385,617
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$ |
1,365,061
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$ |
874,495
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|
Management
fees
|
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Total
revenue
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Expense
|
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Facility
operating expense (excluding depreciation and amortization of $60,518,
$56,866, $187,959 and $109,888, respectively)
|
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|
294,997
|
|
|
|
245,192
|
|
|
|
861,672
|
|
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|
543,418
|
|
General
and administrative expense (including non-cash stock-based compensation
expense of $7,138, $5,852, $26,150 and $12,625,
respectively)
|
|
|
34,733
|
|
|
|
29,248
|
|
|
|
111,144
|
|
|
|
73,458
|
|
Facility
lease expense
|
|
|
67,708
|
|
|
|
63,623
|
|
|
|
203,365
|
|
|
|
155,980
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Loss
from operations
|
|
|
(12,079 |
) |
|
|
(11,903 |
) |
|
|
(41,033 |
) |
|
|
(9,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,695
|
|
|
|
2,032
|
|
|
|
5,077
|
|
|
|
3,709
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(38,472 |
) |
|
|
(29,287 |
) |
|
|
(107,002 |
) |
|
|
(68,521 |
) |
Amortization
of deferred financing costs
|
|
|
(1,151 |
) |
|
|
(1,141 |
) |
|
|
(4,878 |
) |
|
|
(3,179 |
) |
Change
in fair value of derivatives and amortization
|
|
|
(43,731 |
) |
|
|
(1,840 |
) |
|
|
(30,893 |
) |
|
|
(1,422 |
) |
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
(1,414 |
) |
|
|
(803 |
) |
|
|
(2,748 |
) |
Equity
in loss of unconsolidated ventures
|
|
|
(309 |
) |
|
|
(1,649 |
) |
|
|
(2,362 |
) |
|
|
(2,286 |
) |
Other
non-operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(94,047 |
) |
|
|
(45,202 |
) |
|
|
(181,656 |
) |
|
|
(83,779 |
) |
Benefit
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest
|
|
|
(58,922 |
) |
|
|
(31,056 |
) |
|
|
(113,248 |
) |
|
|
(70,292 |
) |
Minority
interest
|
|
|
(5 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
(438 |
) |
Net
loss
|
|
$ |
(58,927 |
) |
|
$ |
(31,145 |
) |
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.58 |
) |
|
$ |
(0.34 |
) |
|
$ |
(1.11 |
) |
|
$ |
(0.96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing basic and diluted loss per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to condensed consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited,
in thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash
portion of loss on extinguishment of debt
|
|
|
—
|
|
|
|
2,748
|
|
Depreciation
and amortization
|
|
|
239,568
|
|
|
|
117,308
|
|
Minority
interest
|
|
|
(506 |
) |
|
|
438
|
|
(Gain)
loss on sale of assets
|
|
|
(457 |
) |
|
|
123
|
|
Equity
in loss of unconsolidated ventures
|
|
|
2,362
|
|
|
|
2,286
|
|
Change
in future service obligations
|
|
|
1,320
|
|
|
|
—
|
|
Distributions
from unconsolidated ventures from cumulative share of net
earnings
|
|
|
1,429
|
|
|
|
—
|
|
Amortization
of deferred gain
|
|
|
(3,255 |
) |
|
|
(3,259 |
) |
Amortization
of entrance fees
|
|
|
(14,222 |
) |
|
|
(3,398 |
) |
Proceeds
from deferred entrance fee revenue
|
|
|
14,315
|
|
|
|
4,329
|
|
Deferred
income tax benefit
|
|
|
(68,715 |
) |
|
|
(14,457 |
) |
Change
in deferred lease liability
|
|
|
18,815
|
|
|
|
16,622
|
|
Change
in fair value of derivatives and amortization
|
|
|
30,893
|
|
|
|
1,422
|
|
Stock-based
compensation
|
|
|
26,150
|
|
|
|
12,625
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(5,607 |
) |
|
|
(24,131 |
) |
Prepaid
expenses and other assets, net
|
|
|
(1,133 |
) |
|
|
1,419
|
|
Accounts
payable and accrued expenses
|
|
|
8,368
|
|
|
|
18,665
|
|
Tenant
refundable fees and security deposits
|
|
|
5,404
|
|
|
|
2,709
|
|
Other
|
|
|
(3,578 |
) |
|
|
(11,042 |
) |
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Decrease
in lease security deposits and lease acquisition deposits,
net
|
|
|
1,806
|
|
|
|
1,433
|
|
(Increase)
decrease in cash and investments — restricted
|
|
|
(53,393 |
) |
|
|
18,278
|
|
Additions
to property, plant, equipment and leasehold intangibles, net of related
payables
|
|
|
(113,557 |
) |
|
|
(39,580 |
) |
Acquisition
of assets, net of related payables and cash received
|
|
|
(167,621 |
) |
|
|
(1,799,115 |
) |
Issuance
of notes receivable, net
|
|
|
(13,714 |
) |
|
|
(2,331 |
) |
Investment
in unconsolidated ventures
|
|
|
(1,617 |
) |
|
|
(637 |
) |
Distributions
received from unconsolidated ventures
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(346,277 |
) |
|
|
(1,820,597 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
395,276
|
|
|
|
739,221
|
|
Repayment
of debt and capital lease obligation
|
|
|
(54,246 |
) |
|
|
(221,616 |
) |
Buyout
of capital lease obligation
|
|
|
(51,114 |
) |
|
|
—
|
|
Proceeds
from line of credit
|
|
|
451,500
|
|
|
|
215,000
|
|
Repayment
of line of credit
|
|
|
(384,000 |
) |
|
|
(215,000 |
) |
Payment
of dividends
|
|
|
(144,990 |
) |
|
|
(62,881 |
) |
Payment
of financing costs, net of related payables
|
|
|
(10,248 |
) |
|
|
(19,014 |
) |
Other
|
|
|
(815 |
) |
|
|
—
|
|
Refundable
entrance fees:
|
|
|
|
|
|
|
|
|
Proceeds
from refundable entrance fees
|
|
|
17,018
|
|
|
|
6,900
|
|
Refunds
of entrance fees
|
|
|
(15,488 |
) |
|
|
(4,540 |
) |
Proceeds
from issuance of common stock, net
|
|
|
—
|
|
|
|
1,353,863
|
|
Costs
incurred related to follow-on equity offering
|
|
|
|
|
|
|
(2,435 |
) |
Net
cash provided by financing activities
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,975 |
) |
|
|
22,578
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
|
|
|
$ |
|
|
See
accompanying notes to condensed consolidated financial
statements.
BROOKDALE
SENIOR LIVING INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1. Description
of Business
Brookdale
Senior Living Inc. (“Brookdale” or the “Company”) is a leading owner and
operator of senior living facilities throughout the United
States. The Company provides an exceptional living experience through
properties that are designed, purpose-built and operated to provide the highest
quality service, care and living accommodations for
residents. Currently, the Company owns and operates independent
living, assisted living and dementia-care facilities and continuing care
retirement centers.
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim condensed consolidated financial statements
have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for quarterly reports on Form 10-Q. In the opinion of
management, these financial statements include all adjustments necessary to
present fairly the financial position, results of operations and cash flows
of
the Company as of September 30, 2007, and for all periods presented. The
condensed consolidated financial statements are prepared on the accrual basis
of
accounting. All adjustments made have been of a normal and recurring nature.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
disclosures included are adequate and provide a fair presentation of interim
period results. Interim financial statements are not necessarily indicative
of
the financial position or operating results for an entire year. It is suggested
that these interim financial statements be read in conjunction with the audited
financial statements and the notes thereto, together with management’s
discussion and analysis of financial condition and results of operations,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, as filed with the Securities and Exchange
Commission.
In
2006,
the Company adopted EITF 04-5, Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights, and as a result,
consolidated the operations of three limited partnerships controlled by the
Company. In 2006, the Company purchased a facility from one of the
limited partnerships and the partnership was liquidated. In May 2007,
the Company purchased another facility from one of the limited partnerships
and
the partnership was liquidated. The ownership interest in the
remaining limited partnership not owned by the Company has been reflected in
the
consolidated balance sheets as minority interests.
Purchase
Accounting
In
determining the allocation of the purchase price of companies and facilities
to
net tangible and identified intangible assets acquired and liabilities assumed,
the Company makes estimates of the fair value of the tangible and intangible
assets acquired and liabilities assumed using information obtained as a result
of pre-acquisition due diligence, marketing, leasing activities and independent
appraisals. The Company allocates the purchase price of facilities to net
tangible and identified intangible assets acquired and liabilities assumed
based
on their fair values in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, Business
Combinations. The determination of fair value involves the use
of significant judgment and estimation. The Company determines fair values
as
follows:
Current
assets and current liabilities assumed are valued at carryover basis which
approximates fair value.
Property,
plant and equipment are valued utilizing discounted cash flow projections that
assume certain future revenue and costs, and considers capitalization and
discount rates using current market conditions.
The
Company allocates a portion of the purchase price to the value of resident
leases acquired based on the difference between the facilities valued with
existing in-place leases adjusted to market rental rates and the facilities
valued with current leases in place based on current contractual terms. Factors
management considers in its analysis include an estimate of carrying costs
during the expected lease-up periods considering current market conditions
and
costs to execute similar resident leases. In estimating carrying costs,
management includes estimates of lost rentals during the lease-up period and
estimated costs to execute similar leases. The value of in-place leases is
amortized to expense over the remaining initial term of the respective
leases.
Leasehold
operating intangibles are valued utilizing discounted cash flow projections
that
assume certain future revenues and costs over the remaining lease term. The
value assigned to leasehold operating intangibles is amortized on a
straight-line basis over the lease term.
Facility
purchase options are valued at the estimated value of the underlying facility
less the cost of the option payment discounted at current market
rates. Management contracts and other acquired contracts are valued
at a multiple of management fees and operating income and amortized over the
estimated term of the agreement.
Long-term
debt assumed is recorded at fair market value based on the current market rates
and collateral securing the indebtedness.
Capital
lease obligations are valued based on the present value of the minimum lease
payments applying a discount rate equal to the Company’s estimated incremental
borrowing rate at the date of acquisition.
Deferred
entrance fee revenue is valued at the estimated cost of providing services
to
residents over the terms of the current contracts to provide such services.
Refundable entrance fees are valued at cost pursuant to the resident lease
plus
the resident's share of any appreciation of the facility unit at the date of
acquisition, if applicable.
A
deferred tax liability is recognized at statutory rates for the difference
between the book and tax bases of the acquired assets and
liabilities.
The
excess of the fair value of liabilities assumed and cash paid over the fair
value of assets acquired is allocated to goodwill.
Self-Insurance
Liability Accruals
The
Company is subject to various legal proceedings and claims that arise in the
ordinary course of its business. Although the Company maintains general
liability and professional liability insurance policies for its owned, leased
and managed facilities under a master insurance program, the Company’s current
policies provide for deductibles of $3.0 million for each claim. As a result,
the Company is, in effect, self-insured for most claims. In addition, the
Company maintains a self-insured workers compensation program and a self-insured
employee medical program for amounts below excess loss coverage amounts, as
defined. The Company reviews the adequacy of its accruals related to these
liabilities on an ongoing basis, using historical claims, actuarial valuations,
third party administrator estimates, consultants, advice from legal counsel
and
industry data, and adjusts accruals periodically. Estimated costs related to
these self-insurance programs are accrued based on known claims and projected
claims incurred but not yet reported. Subsequent changes in actual experience
are monitored and estimates are updated as information is
available.
During
the three months ended June 30, 2007, the Company recorded a $4.2 million
receivable related to a collateral recovery from an insurance carrier for
amounts owed to Alterra Healthcare Corporation, a wholly-owned subsidiary,
pursuant to a pre-bankruptcy insurance policy. Such amount had not
previously been recognized by the Company due to the existence of
preconfirmation contingencies which were resolved prior to June 30,
2007. The receivable was recorded as a $3.8 million reduction of
general and administrative expense and $0.4 million of interest income in the
condensed consolidated statements of operations. The receivable was
collected in full in July 2007.
New
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The
interpretation clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with SFAS No.
109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation is effective for fiscal years beginning after December 15,
2006. The Company adopted FIN 48 in the current year. See
note 12 for a discussion of the impact of the adoption of FIN 48.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements. In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
("SFAS 159"). SFAS 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Both SFAS 157 and SFAS 159
are
effective for fiscal years beginning after November 15, 2007. The Company
does not believe that the adoption of SFAS 157 and SFAS 159 will materially
impact its financial position or results of operations.
Dividends
On
September 17, 2007, the Company’s board of directors declared a quarterly cash
dividend of $0.50 per share of common stock, or an aggregate of $51.8 million,
for the quarter ended September 30, 2007. The $0.50 per share
dividend was paid on October 12, 2007 to holders of record of the Company’s
common stock on September 28, 2007.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current financial
statement presentation, with no effect on the Company’s consolidated financial
position or results of operations.
3. Stock-Based
Compensation
Compensation
expense in connection with grants of restricted stock of $7.1 million and $5.9
million was recorded for the three months ended September 30, 2007 and 2006,
respectively, and $26.2 million and $12.6 million of such expense was recorded
for the nine months ended September 30, 2007 and 2006,
respectively. All amounts were net of forfeitures estimated at 5% of
the shares granted.
On
September 15, 2006, the Company entered into Separation and General Release
Agreements with two officers that accelerated the vesting provision of a portion
of their restricted stock grants upon satisfying certain conditions. As a result
of the modification, the previous compensation expense related to these grants
was reversed during the year ended December 31, 2006. The fair value
of the stock at the modification date was expensed over the modified service
period. The impact of the adjustment was $4.1 million of additional expense
for
the nine months ended September 30, 2007.
For
all
awards with graded vesting other than awards with performance-based vesting
conditions, the Company records compensation expense for the entire award on
a
straight-line basis over the requisite service period. For
graded-vesting awards with performance-based vesting conditions, total
compensation expense is recognized over the requisite service period for each
separately vesting tranche of the award as if the award is, in substance,
multiple awards once the performance target is deemed probable of
achievement. Performance goals are evaluated quarterly. If
such goals are not ultimately met or it is not probable the goals will be
achieved, no compensation expense is recognized and any previously recognized
compensation expense is reversed. During the current period, the
Company reversed approximately $1.4 million of previously recognized
compensation expense related to performance-based awards granted in
2007.
Current
year grants of restricted shares under the Company’s Omnibus Stock Incentive
Plan were as follows ($ in 000’s except for grants and per share
amounts):
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007
|
|
|
53,000
|
|
|
$ |
45.02
|
|
|
$ |
2,399
|
|
Three
months ended June 30, 2007
|
|
|
544,000
|
|
|
|
45.02
- 46.06
|
|
|
|
25,023
|
|
Three
months ended September 30, 2007
|
|
|
32,000
|
|
|
|
38.96
|
|
|
|
1,250
|
|
4. Goodwill
and Other Intangible Assets, Net
Following
is a summary of changes in the carrying amount of goodwill for the nine months
ended September 30, 2007 presented on an operating segment basis ($ in
000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
8,118
|
|
|
$ |
101,921
|
|
|
$ |
214,711
|
|
|
$ |
324,750
|
|
Additions
|
|
|
—
|
|
|
|
—
|
|
|
|
9,000
|
|
|
|
9,000
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The
additions to goodwill primarily related to adjusting the allocation of the
purchase price for an acquisition which occurred in the third quarter of fiscal
2006. The remaining additions resulted from an acquisition completed
in the first quarter of 2007. The adjustments primarily related to
the adoption of FIN 48 in the first quarter of 2007 and its impact on acquired
entities.
Intangible
assets with definite useful lives are amortized over their estimated lives
and
are tested for impairment whenever indicators of impairment arise. The following
is a summary of other intangible assets at September 30, 2007 and December
31,
2006 ($ in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
purchase options
|
|
$ |
147,682
|
|
|
$ |
(1,844 |
) |
|
$ |
145,838
|
|
|
$ |
147,682
|
|
|
$ |
—
|
|
|
$ |
147,682
|
|
Other
intangible assets, net
|
|
|
|
|
|
|
(37,907 |
) |
|
|
|
|
|
|
|
|
|
|
(14,083 |
) |
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
(39,751 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(14,083 |
) |
|
$ |
|
|
Amortization
expense related to definite-lived intangible assets for the three and nine
months ended September 30, 2007 was $8.9 million and $25.7 million,
respectively.
5. Property,
Plant, Equipment and Leasehold Intangibles, Net
Property,
plant, equipment and leasehold intangibles, net consist of the following ($
in
000’s):
|
|
|
|
|
|
|
Land
|
|
$ |
264,679
|
|
|
$ |
236,945
|
|
Buildings
and improvements
|
|
|
2,635,889
|
|
|
|
2,301,841
|
|
Furniture
and equipment
|
|
|
189,050
|
|
|
|
137,583
|
|
Resident
and operating lease intangibles
|
|
|
583,532
|
|
|
|
577,547
|
|
Assets
under capital and financing leases
|
|
|
|
|
|
|
|
|
|
|
|
4,185,074
|
|
|
|
3,908,253
|
|
Accumulated
depreciation and amortization
|
|
|
(435,231 |
) |
|
|
(249,465 |
) |
Property,
plant, equipment and leasehold intangibles, net
|
|
$ |
|
|
|
$ |
|
|
Financial
results are impacted by the timing, size and number of acquisitions the Company
completes in a period. During the nine months ended September 30, 2007, the
number of facilities owned or leased by the Company increased by
three. The number of facilities owned or leased was unchanged by the
Company’s acquisition of joint venture partner interests, its acquisition of
remaining portions of owned facilities and its acquisition of service
businesses. The results of facilities and companies acquired
are included in the condensed consolidated financial statements from the
effective date of the acquisition.
|
|
|
Purchase
Price, Excluding Fees, Expenses
and
Assumption
of Debt
($
in millions)
|
|
|
McClaren
Medical Management, Inc. and FP Flint, LLC
|
January
24, 2007
|
|
$ |
3.9
|
|
Assisted
Living
|
American
Senior Living of Jacksonville-SNF, LLC
|
February
1, 2007
|
|
|
6.8
|
|
Retirement
Centers/CCRCs
|
1st
Choice Home
Health, Inc.
|
February
15, 2007
|
|
|
3.0
|
|
Retirement
Centers/CCRCs, Assisted Living and Independent Living
|
Health
Care Property Investors, Inc.
|
February
28, 2007
|
|
|
9.5
|
|
Assisted
Living
|
Chancellor
Health Care of California L.L.C.
|
April
1, 2007
|
|
|
10.8
|
|
Independent
Living
|
Seminole
Nursing Pavilion and Seminole Properties
|
April
4, 2007
|
|
|
51.1
|
|
Retirement
Centers/CCRCs
|
Cleveland
Retirement Properties, LLC and Countryside ALF, LLC
|
April
18, 2007
|
|
|
102.0
|
|
Retirement
Centers/CCRCs
|
Paradise
Retirement Center, L.P.
|
May
31, 2007
|
|
|
15.3
|
|
Independent
Living
|
Darby
Square Property, Ltd and Darby Square Services, LLC
|
July
1, 2007
|
|
|
7.5
|
|
Retirement
Centers/CCRCs
|
Health
Care REIT, Inc.
|
August
31, 2007
|
|
|
|
|
Assisted
Living
|
Total
|
|
|
$ |
|
|
|
On
January 24, 2007, the Company acquired the interests held by its joint venture
partners in a facility located in Flint, Michigan for approximately $3.9
million. This facility is referred to as the “Flint
Facility”. In connection with the acquisition, the Company obtained
$12.6 million of first mortgage financing bearing interest at LIBOR plus 1.15%
payable interest only through February 1, 2012 and also entered into interest
rate swaps to convert the loan from floating to fixed (note 7).
On
February 1, 2007, the Company acquired the skilled nursing portion of a CCRC
facility located in Jacksonville, Florida for approximately $6.8
million. The assisted living and independent living portions of the
facility were acquired in 2006 by the Company. This facility is
referred to as the “Atrium SNF”. In connection with the
acquisition,
the Company assumed a first mortgage note secured by the property in the amount
of $3.7 million. The note bears interest at 6.10% with principal and
interest payable until maturity on September 1, 2039.
On
February 15, 2007, the Company acquired certain home health care assets for
approximately $3.0 million. The purchase price was assigned entirely
to goodwill. These operations are referred to as the “Home Health
Acquisition”.
On
February 28, 2007, the Company acquired a previously leased facility in Richmond
Heights, Ohio for approximately $9.5 million. This facility is
referred to as the “Richmond Heights Facility”.
Effective
as of April 1, 2007, the Company acquired the leasehold interests of three
assisted living facilities located in California for approximately $10.8
million. These facilities are referred to as the “Chancellor
Portfolio”.
On
April
4, 2007, the Company purchased the real property underlying an entrance fee
continuing care retirement community located in Tampa, Florida for an aggregate
purchase price of approximately $51.1 million. The community consists
of independent living retirement apartments, a skilled nursing facility and
an
assisted living facility. We previously managed this community
pursuant to a cash-flow management agreement and accounted for this community
as
a capital lease. These facilities are referred to as the “Freedom
Square Portfolio”.
On
April
18, 2007, the Company acquired two facilities located in Ohio and North Carolina
for approximately $102.0 million. The facilities were previously
operated by the Company under long term operating lease
agreements. These facilities are referred to as the “Saunders
Portfolio”.
On
May
31, 2007, the Company acquired a facility in Phoenix, Arizona in which we held
partnership interests for approximately $15.3 million. This facility
is referred to as “Grand Court Phoenix”.
On
July
1, 2007, the Company acquired the skilled nursing portion of a CCRC facility
located in Lexington, Kentucky for approximately $7.5 million. The
assisted living and independent living portions of the facility are operated
pursuant to an operating lease previously entered into by the
Company. This facility is referred to as the “Darby
Facility”.
On
August
31, 2007, the Company acquired three facilities located in South Carolina and
Oklahoma for approximately $9.8 million. The facilities were
previously operated by the Company under long term operating lease
agreements. These facilities are referred to as the “HCN
Portfolio”.
The
above
acquisitions were accounted for using the purchase method of accounting and
the
purchase prices were allocated to the associated assets and liabilities based
on
their estimated fair values. The Company has made preliminary
purchase price allocations for these transactions resulting in approximately
$3.4 million of goodwill being recorded in the Retirement Centers/CCRCs segment
and anticipates finalizing the purchase price allocations within one year of
each respective acquisition date.
7. Debt
Long-term
Debt, Capital Leases and Financing Obligations
Long-term
debt, capital leases and financing obligations consist of the following ($
in
000’s):
|
|
|
|
|
|
|
Mortgage
notes payable due 2008 through 2039; weighted average interest rate
of
6.85% in 2007 (weighted average interest rate of 6.98% in
2006)
|
|
$ |
709,810
|
|
|
$ |
490,997
|
|
Mortgages
payable due 2009 through 2038; weighted average interest rate of
7.12% in
2007 (weighted average interest rate of 6.57% in 2006)
|
|
|
74,555
|
|
|
|
74,571
|
|
$150,000
Series A notes payable, secured by five facilities, bearing interest
at
LIBOR plus 0.88% effective August 2006 (3.05% prior to that date),
payable
in monthly installments of interest only until August 2011 and payable
in
monthly installments of principal and interest through maturity in
August
2013, and secured by a $3.0 million letter of credit
|
|
|
150,000
|
|
|
|
150,000
|
|
Mortgages
payable due 2012, weighted average interest rate of 5.64% and 5.37%
in
2007 and 2006, respectively, payable interest only through July 2010
and
payable in monthly installments of principal and interest through
maturity
in July 2012, secured by the FIT REN portfolio(1)
|
|
|
212,407
|
|
|
|
171,000
|
|
Mortgages
payable due 2010, bearing interest at LIBOR plus 2.25% effective
May 1,
2006 (3.0% prior to that date), payable in monthly installments of
interest only until April 2009 and payable in monthly installments
of
principal and interest through maturity in April 2010, secured by
the
Fortress CCRC Portfolio(1)
|
|
|
105,756
|
|
|
|
105,756
|
|
Variable
rate tax-exempt bonds credit-enhanced by Fannie Mae (weighted average
interest rates of 5.04% and 4.91% in 2007 and 2006, respectively),
due
2032, payable interest only until maturity, secured by the Chambrel
portfolio(1)
|
|
|
100,841
|
|
|
|
100,841
|
|
Capital
and financing lease obligations payable through 2020; weighted average
interest rate of 9.18% in 2007 (weighted average interest rate of
8.91% in
2006)
|
|
|
302,318
|
|
|
|
371,346
|
|
Mortgage
note, bearing interest at a variable rate of LIBOR plus 0.70%, payable
interest only through maturity in August 2012; the note is secured
by 16
of the Company’s facilities and an $11.5 million guaranty by the
Company
|
|
|
333,500
|
|
|
|
225,000
|
|
Mezzanine
loan payable to Brookdale Senior Housing, LLC joint venture with
respect
to The Heritage at Gaines Ranch facility, payable to the extent of
all
available cash flow (as defined)
|
|
|
12,739
|
|
|
|
12,739
|
|
Mortgages
payable due 2010; interest rate of 7.20%, secured by the limited
partnerships consolidated pursuant to EITF 04-5 (weighted average
interest
rate of 6.81% in 2006)
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
2,004,417
|
|
|
|
1,711,439
|
|
Less
current portion of long-term debt
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$ |
|
|
|
$ |
|
|
________
(1)
|
See
the Company’s Annual Report on Form 10-K for the year ended December 31,
2006 for a description of the referenced
portfolios.
|
As
of
September 30, 2007, the Company had an available secured line of credit of
$320.0 million ($70.0 million letter of credit sublimit) and a letter of credit
facility of up to $80.0 million. The line of credit bears interest at
the
base
rate
plus 0.50% or LIBOR plus 1.50%, at the Company’s election. The
Company must also pay a fee equal to 1.50% of the amount of any outstanding
letters of credit issued under the facilities. In connection with
entering into the credit facility agreement, the Company paid a commitment
fee
of 0.50% and is subject to a non-use fee of 0.25% on all unutilized
amounts. On October 10, 2007, the Company amended the credit facility
agreement to, among other things, revise certain financial covenants and to
address certain administrative matters. The amended agreement matures
on November 15, 2008 subject to extension at the Company’s option for two
three-month extension periods and payment of a 0.1875% commitment fee with
respect to each extension. As of September 30, 2007, $231.0 million
was drawn on the revolving loan facility and $110.0 million of letters of credit
had been issued under the agreements. The agreements are secured by a
pledge of the Company’s tier one subsidiaries and, subject to certain
limitations, subsidiaries formed to consummate future
acquisitions. As discussed in note 14, subsequent to September 30,
2007, the Company completed a $140.0 million financing and repaid $49.0 million
of existing debt. Net proceeds from the transaction were used to
reduce amounts drawn on the revolving credit facility. In addition,
subsequent to September 30, 2007, the Company obtained $80.3 million
of first mortgage financing bearing interest
at 6.32%. Approximately $53.6 million of the proceeds were
disbursed at closing, with the remaining $26.7 million to be disbursed in
connection with the construction of two new skilled nursing facilities and
the renovation of an existing skilled nursing facility. The net
proceeds disbursed at closing were used to pay down amounts drawn
against the Company’s revolving credit facility (note 14).
On
January 16, 2007 and January 24, 2007, the Company financed a previous
acquisition and the Flint Facility with $130.0 million of first mortgage
financing bearing interest at LIBOR plus 1.15% payable interest only through
February 1, 2012. The Company also entered into interest rate swaps
to convert the loan from floating to fixed. The loan is secured by 27
previously acquired facilities and the Flint Facility and is partially secured
by a $7.4 million letter of credit that will be released upon achievement of
certain debt service coverage ratios.
On
April
18, 2007, the Company financed a previously acquired facility as well as the
Saunders Portfolio with $108.5 million of first mortgage financing bearing
interest at LIBOR plus 0.70% payable interest only through August 1,
2012. The Company has entered into interest rate swaps to convert the
loan from floating to fixed.
The
financings entered into on January 16, 2007, January 24, 2007 and April 18,
2007
are all part of the same master loan agreement whereby the amounts are secured
by all properties under the master agreement.
On
July
27, 2007, the Company financed one of its facilities with $30.0 million of
first
mortgage financing. The note payable bears interest at 5.65% payable
interest only through August 5, 2012 and is secured by the underlying
property. In conjunction with the refinancing, the Company repaid
$16.1 million of existing debt.
On
August
15, 2007, the Company financed the Freedom Square Portfolio with a $70.0 million
note payable. The note bears interest at 5.77% payable interest only
through September 5, 2012 and is secured by the underlying
property.
On
September 25, 2007, the Company entered into a $41.4 million note
payable. The note bears interest at 6.69% payable interest only
through July 2010, matures in July 2012 and is secured by six
facilities.
In
the
normal course of business, the Company uses a variety of financial instruments
to manage or hedge interest rate risk. The Company entered into certain interest
rate protection and swap agreements to effectively cap or convert floating
rate
debt to a fixed rate basis, as well as to hedge anticipated future financing
transactions. Pursuant to the Company’s hedge agreements, the Company is
required to secure its obligation to the counterparty if the fair value
liability exceeds a specified threshold. Cash collateral pledged to
the Company’s counterparty was $26.1 million and $41.0 million as of September
30, 2007 and October 31, 2007, respectively.
The
Company does not enter into derivative contracts for trading or speculative
purposes. Furthermore, the Company has a policy of only entering into contracts
with major financial institutions based upon their credit rating and other
factors. Under certain circumstances, the Company may be required to
replace a counterparty in the event that the counterparty does not maintain
a
certain credit rating.
The
following table summarizes the Company’s swap instruments at September 30, 2007
($ in 000’s):
Current
notional balance
|
|
$ |
1,729,120
|
|
Highest
possible notional
|
|
$ |
1,729,120
|
|
Lowest
interest rate
|
|
|
3.62 |
% |
Highest
interest rate
|
|
|
5.51 |
% |
Average
fixed rate
|
|
|
5.05 |
% |
Earliest
maturity date
|
|
2008
|
|
Latest
maturity date
|
|
2014
|
|
Weighted
average original maturity
|
|
5.6
years
|
|
Estimated
asset fair value (included in other assets, net at September 30,
2007)
|
|
$ |
973
|
|
Estimated
liability fair value (included in other liabilities at September
30,
2007)
|
|
$ |
(31,172 |
) |
Prior
to
October 1, 2006, the Company qualified for hedge accounting on designated swap
instruments pursuant to SFAS No. 133, Accounting for Derivative Instruments
and Certain Hedging Activities, with the effective portion of the change in
fair value of the derivative recorded in other comprehensive income and the
ineffective portion included in the change in fair value of derivatives and
amortization in the statement of operations.
On
October 1, 2006, the Company elected to discontinue hedge accounting
prospectively for the previously designated swap instruments. Consequently,
the
net gains and losses accumulated in other comprehensive income at that date
of
$1.3 million related to the previously designated swap instruments are being
amortized to interest expense over the life of the underlying hedged debt
payments. In the future, if the underlying hedged debt is extinguished or
refinanced, the remaining unamortized gain or loss in accumulated other
comprehensive income will be recognized in the statements of operations.
Although hedge accounting was discontinued on October 1, 2006, the swap
instruments remain outstanding and are carried at fair value in the consolidated
balance sheet and the change in fair value beginning October 1, 2006 has been
included in the statements of operations.
In
April
2007, the Company entered into two separate treasury rate locks for notional
amounts of $70.0 million and $50.0 million in anticipation of the Company’s
planned future issuance of $120.0 million of fixed-rate debt. Both
rate locks expired in May 2007 and resulted in a cash receipt to the Company
of
approximately $0.4 million which has been included in the results from
operations.
In
July
2007, the Company entered into a series of forward starting interest rate swaps
in the aggregate notional amount of $553.1 million in anticipation of planned
future financing transactions as well as the replacement of certain existing
hedges that will be expiring. The swaps are being carried at fair
value in the consolidated balance sheet and the change in fair value is included
in the statements of operations.
8. Legal
Proceedings
In
connection with the sale of certain facilities to Ventas Realty Limited
Partnership (“Ventas”) in 2004, two legal actions have been filed. The first
action was filed on September 15, 2005, by current and former limited
partners in 36 investing partnerships in the United States District Court for
the Eastern District of New York captioned David T. Atkins et al. v. Apollo
Real Estate Advisors, L.P., et al. (the “Action”). On
March 17, 2006, a third amended complaint was filed in the Action. The
third amended complaint is brought on behalf of current and former limited
partners in 14 investing partnerships. It names as defendants, among others,
the
Company, Brookdale Living Communities, Inc. (“BLC”), a subsidiary of the
Company, GFB-AS Investors, LLC (“GFB-AS”), a subsidiary of BLC, the general
partners of the 14 investing partnerships, which are alleged to be subsidiaries
of GFB-AS, Fortress Investment Group (“Fortress”), an affiliate of the Company’s
largest stockholder, and R. Stanley Young, the Company’s former Chief Financial
Officer. The nine count third amended complaint alleges, among other things,
(i)
that the defendants converted for their own use the property of the limited
partners of 11 partnerships, including through the failure to obtain consents
the plaintiffs contend were required for the sale of facilities indirectly
owned
by those partnerships to Ventas; (ii) that the defendants fraudulently persuaded
the limited partners of three partnerships to give up a valuable property right
based upon incomplete, false and misleading statements in connection with
certain consent solicitations; (iii) that certain defendants, including GFB-AS,
the general partners, and the Company’s former Chief Financial Officer, but not
including the Company, BLC, or Fortress, committed mail fraud in connection
with
the sale of facilities indirectly owned by the 14 partnerships at issue in
the
Action to
Ventas;
(iv) that certain defendants, including GFB-AS and the Company’s former Chief
Financial Officer, but not including the Company, BLC, the general partners,
or
Fortress, committed wire fraud in connection with certain communications with
plaintiffs in the Action and another investor in a limited partnership; (v)
that
the defendants, with the exception of the Company, committed substantive
violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”);
(vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the
general partners violated the partnership agreements of the 14 investing
partnerships; (viii) that GFB-AS, the general partners, and the Company’s former
Chief Financial Officer breached fiduciary duties to the plaintiffs; and (ix)
that the defendants were unjustly enriched. The plaintiffs have asked for
damages in excess of $100.0 million on each of the counts described above,
including treble damages for the RICO claims. On April 18, 2006, the
Company filed a motion to dismiss the claims with prejudice, which remains
pending before the court, and plans to continue to vigorously defend this
Action. A putative class action lawsuit was also filed on
March 22, 2006, by certain limited partners in four of the same
partnerships involved in the Action in the Court of Chancery for the State
of
Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and
Brookdale Living Communities, Inc. (the “Second Action”). On
November 21, 2006, an amended complaint was filed in the Second
Action. The putative class in the Second Action consists only of those limited
partners in the four investing partnerships who are not plaintiffs in the
Action. The Second Action names as defendants BLC and GFB-AS. The complaint
alleges a claim for breach of fiduciary duty arising out of the sale of
facilities indirectly owned by the investing partnerships to Ventas and the
subsequent lease of those facilities by Ventas to subsidiaries of BLC. The
plaintiffs seek, among other relief, an accounting, damages in an unspecified
amount, and disgorgement of unspecified amounts by which the defendants were
allegedly unjustly enriched. On December 12, 2006, the Company filed
an answer denying the claim asserted in the amended complaint and providing
affirmative defenses. On December 27, 2006, the plaintiffs moved to certify
the
Action as a class action. Both the plaintiffs and defendants have served
document production requests and the Action is currently in the beginning stages
of document discovery. The Company also intends to vigorously defend this Second
Action. Because these actions are in an early stage, the Company cannot estimate
the possible range of loss, if any.
In
addition, the Company has been and is currently involved in other litigation
and
claims incidental to the conduct of its business which are comparable to other
companies in the senior living industry. Certain claims and lawsuits allege
large damage amounts and may require significant legal costs to defend and
resolve. Similarly, the senior living industry is continuously subject to
scrutiny by governmental regulators, which could result in litigation related
to
regulatory compliance matters. As a result, the Company maintains insurance
policies in amounts and with coverage and deductibles the Company believes
are
adequate, based on the nature and risks of its business, historical experience
and industry standards. Because the Company’s current policies
provide for deductibles of $3.0 million for each claim, the Company is, in
effect, self-insured for most claims.
9. Supplemental
Disclosure of Cash Flow Information ($ in 000’s)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
|
|
|
$ |
|
|
Income
taxes paid
|
|
$ |
|
|
|
$ |
|
|
Write-off
of deferred costs
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Operating, Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Consolidation
of limited partnerships pursuant to EITF 04-5 on January 1,
2006:
|
|
|
|
|
|
|
|
|
Property,
plant, equipment and leasehold intangibles, net
|
|
$ |
—
|
|
|
$ |
31,645
|
|
Accounts
receivable and other
|
|
|
—
|
|
|
|
1,410
|
|
Cash
and investments-restricted
|
|
|
—
|
|
|
|
1,204
|
|
Accrued
expenses and other
|
|
|
—
|
|
|
|
(2,245 |
) |
Tenant
refundable fees and security deposits
|
|
|
—
|
|
|
|
(177 |
) |
Debt
|
|
|
—
|
|
|
|
(19,723 |
) |
Minority
interest
|
|
|
|
|
|
|
(12,114 |
) |
Net
|
|
$ |
|
|
|
$ |
|
|
De-consolidation
of leased development property:
|
|
|
|
|
|
|
|
|
Property,
plant, equipment and leasehold intangibles, net
|
|
$ |
(2,978 |
) |
|
$ |
—
|
|
Debt
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
|
|
|
$ |
|
|
Acquisition
of assets, net of related payables and cash received, net:
|
|
|
|
|
|
|
|
|
Cash
and investments-restricted
|
|
$ |
387
|
|
|
$ |
50,059
|
|
Accounts
receivable
|
|
|
64
|
|
|
|
25,302
|
|
Property,
plant, equipment and leasehold intangibles, net
|
|
|
173,609
|
|
|
|
2,362,413
|
|
Investment
in unconsolidated ventures
|
|
|
(1,342 |
) |
|
|
—
|
|
Goodwill
|
|
|
3,395
|
|
|
|
272,422
|
|
Other
intangible assets, net
|
|
|
(668 |
) |
|
|
306,531
|
|
Trade
accounts payable, accrued expenses and other
|
|
|
(1,458 |
) |
|
|
—
|
|
Debt
obligations
|
|
|
(5,273 |
) |
|
|
(291,264 |
) |
Capital
and financing lease obligations
|
|
|
—
|
|
|
|
(308,855 |
) |
Deferred
tax liability
|
|
|
—
|
|
|
|
(420,925 |
) |
Minority
interest
|
|
|
650
|
|
|
|
—
|
|
Other,
net
|
|
|
(1,743 |
) |
|
|
(196,568 |
) |
Acquisition
of assets, net of related payables and cash received
|
|
$ |
|
|
|
$ |
|
|
10. Facility
Leases
A
summary
of facility lease expense and the impact of straight-line adjustment and
amortization of deferred gains are as follows ($ in 000’s):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
basis payment
|
|
$ |
62,342
|
|
|
$ |
58,585
|
|
|
$ |
187,805
|
|
|
$ |
142,617
|
|
Straight-line
expense
|
|
|
6,451
|
|
|
|
6,124
|
|
|
|
18,815
|
|
|
|
16,622
|
|
Amortization
of deferred gain
|
|
|
(1,085 |
) |
|
|
(1,086 |
) |
|
|
(3,255 |
) |
|
|
(3,259 |
) |
Facility
lease expense
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
11. Other
Comprehensive Loss, Net
The
following table presents the after-tax components of the Company’s other
comprehensive loss for the periods presented ($ in 000’s):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(58,927 |
) |
|
$ |
(31,145 |
) |
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
Unrealized
gain on derivatives
|
|
|
—
|
|
|
|
(13,261 |
) |
|
|
—
|
|
|
|
(4,070 |
) |
Reclassification
of net gains on derivatives into earnings
|
|
|
(393 |
) |
|
|
—
|
|
|
|
(1,179 |
) |
|
|
—
|
|
Amortization
of payments from settlement of forward interest swaps
|
|
|
94
|
|
|
|
94
|
|
|
|
282
|
|
|
|
282
|
|
Other
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
$ |
(59,360 |
) |
|
$ |
(44,312 |
) |
|
$ |
(113,541 |
) |
|
$ |
(74,518 |
) |
12. Income
Taxes
The
Company’s effective tax rate for the three months ended September 30, 2007 and
2006 was 37.3% and 31.3%, respectively, and for the nine months ended September
30, 2007 and 2006 was 37.7% and 16.1%, respectively. The difference
between the periods is primarily due to the ability to tax benefit book losses
in the first two quarters of 2007 compared to the same period in
2006. In the third quarter of 2007, the Company adjusted its deferred
tax assets as of December 31, 2006, based on the actual tax returns
filed. As a result of filing the returns, the Company has increased
its net operating losses by $23.0 million. Approximately $8.0 million
of the increase is related to pre-merger activity and is recorded against
goodwill, the remaining $15.0 million is primarily due to additional tax
depreciation deducted and is offset in other deferred tax liabilities, and
therefore no additional impact on tax expense was recorded in the
period. The Company’s adjusted federal net operating loss at December
31, 2006 was $201.5 million, which is available to offset future taxable income
through 2025. The Company continues to recognize this tax asset on
its balance sheet as it is more likely than not to utilize this loss prior
to
any expiration. Also as part of filing the returns, the Company
adjusted its pre-merger state tax losses and related valuation allowances,
impacting goodwill.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The
adoption of FIN 48 resulted in a transition adjustment to goodwill of $1.6
million, comprised of $1.4 million in taxes and $0.2 million in interest and
penalties. The adoption impacted goodwill versus retained earnings as
the original benefit recorded on these positions was recorded to goodwill in
previous purchase accounting transactions. Interest and penalties
related to these tax positions are classified as tax expense in the Company’s
financial statements. Tax returns for all wholly owned subsidiaries
for the years 2002 through 2006 are subject to future examination by tax
authorities. In addition, for one wholly owned subsidiary, Alterra
Healthcare Corporation, tax returns are open from 1999 through 2001 to the
extent of the net operating losses generated during those
periods. The Company has reviewed its FIN 48 position as of September
30, 2007 and has adjusted its reserve for additional interest and some minor
changes to its uncertain positions, based on the current returns
filed.
13. Segment
Results
Under
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, the Company determined that it has four reportable segments
based on the way that its chief operating decision makers organize the Company’s
business activities for making operating decisions and assessing
performance. The four segments are independent living; assisted
living; retirement centers/CCRCs; and management services.
§
|
Independent
Living. The Company’s independent living facilities
are primarily designed for middle to upper income senior citizens
age 70
and older who desire an upscale residential environment providing
the
highest quality of service. The majority of the Company’s independent
living facilities consist of both independent living and assisted
living
units in a single facility, which allows residents to “age-in-place” by
providing them with a continuum of senior independent and assisted
living
services.
|
§
|
Assisted
Living. The Company’s assisted living facilities
offer housing and 24-hour assistance with activities of daily life
to
mid-acuity frail and elderly residents. The Company’s assisted living
facilities include both freestanding, multi-story facilities and
freestanding, single-story facilities. The Company also operates
memory
care facilities, which are freestanding assisted living facilities
specially designed for residents with Alzheimer's disease and other
dementias.
|
§
|
Retirement
Centers/CCRCs. The Company’s retirement
centers/CCRCs are large communities that offer a variety of living
arrangements and services to accommodate all levels of physical ability
and health. Most of the Company’s retirement centers/CCRCs have
independent living, assisted living and skilled nursing available
on one
campus, and some also include memory care and Alzheimer's
units.
|
§
|
Management
Services. The Company’s management services segment
includes facilities owned by others and operated by the Company pursuant
to management agreements. Under the Company’s management agreements for
these facilities, the Company receives management fees as well as
reimbursed expenses, which represent the reimbursement of certain
expenses
the Company incurs on behalf of the
owners.
|
The
following table sets forth certain segment financial and operating data ($
in
000’s)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
$ |
114,251
|
|
|
$ |
101,816
|
|
|
$ |
333,558
|
|
|
$ |
288,220
|
|
Assisted
Living
|
|
|
197,975
|
|
|
|
175,937
|
|
|
|
588,289
|
|
|
|
434,034
|
|
Retirement
Centers/CCRCs
|
|
|
150,875
|
|
|
|
107,864
|
|
|
|
443,214
|
|
|
|
152,241
|
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Segment
operating income(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
$ |
48,595
|
|
|
$ |
40,939
|
|
|
$ |
145,594
|
|
|
$ |
123,768
|
|
Assisted
Living
|
|
|
68,274
|
|
|
|
65,211
|
|
|
|
212,134
|
|
|
|
164,474
|
|
Retirement
Centers/CCRCs
|
|
|
51,235
|
|
|
|
34,275
|
|
|
|
145,661
|
|
|
|
42,835
|
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
General
and administrative (including non-cash stock-based compensation
expense)(3)
|
|
$ |
34,285
|
|
|
$ |
28,820
|
|
|
$ |
109,711
|
|
|
$ |
72,511
|
|
Facility
lease expense
|
|
|
67,708
|
|
|
|
63,623
|
|
|
|
203,365
|
|
|
|
155,980
|
|
Deprecation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
$ |
(12,079 |
) |
|
$ |
(11,903 |
) |
|
$ |
(41,033 |
) |
|
$ |
(9,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
living
|
|
|
|
|
|
|
|
|
|
$ |
1,149,070
|
|
|
$ |
1,177,943
|
|
Assisted
living
|
|
|
|
|
|
|
|
|
|
|
1,300,754
|
|
|
|
1,198,495
|
|
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
2,092,058
|
|
|
|
1,951,078
|
|
Corporate
and Management Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(1)
|
All
revenue is earned from external third parties in the United
States.
|
(2)
|
Segment
operating income is defined as segment revenues less segment operating
expenses (excluding depreciation and
amortization).
|
(3)
|
Net
of general and administrative costs allocated to management services
reporting segment.
|
14. Subsequent
Events
On
October 31, 2007, the Company obtained $140.0 million of first
mortgage financing bearing interest at 5.84%. The debt matures on
November 1, 2014, subject to extension at the Company’s option. The
loan is secured by 21 of the Company's facilities. In conjunction with the
financing, the Company repaid $49.0 million of existing debt. The net
proceeds from the transaction were used to pay down amounts drawn against
the Company’s revolving credit facility (note 7).
On November
5, 2007, the Company obtained $80.3 million of first mortgage
financing bearing interest at 6.32%. Approximately $53.6 million
of the proceeds were disbursed at closing, with the remaining $26.7 million
to
be disbursed in connection with the construction of two new skilled
nursing facilities and the renovation of an existing skilled nursing facility.
The debt matures on August 5, 2012. The loan is
secured by five of the Company’s existing facilities and the two facilities
under construction. The net proceeds disbursed at closing were
used to pay down amounts drawn against the Company’s revolving credit
facility (note 7).
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
statements in this Quarterly Report on Form 10-Q and other information we
provide from time to time may constitute forward-looking statements within
the
meaning of the Private Securities Litigation Reform Act of 1995. Those
forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations,
including, but not limited to, statements relating to our ability to deploy
capital, close accretive transactions, anticipate, manage and address industry
trends and their effect on our business, grow dividends, generate growth
organically or through acquisitions, achieve operating efficiencies and cost
savings, expand our offering of ancillary services (therapy and home health)
to
additional facilities, expand existing facilities, develop new facilities,
secure financing and increase revenues, earnings, Adjusted EBITDA, Cash From
Facility Operations, and/or Facility Operating Income (as such terms are defined
herein) and add residents and statements relating to our expectations for the
performance of our entrance fee communities and our expected levels of
expenditures. Words such as “anticipate(s)”, “expect(s)”, “intend(s)”,
“plan(s)”, “target(s)”, “project(s)”, “believe(s)”, “will”, “would”, “seek(s)”,
“estimate(s)” and similar expressions are intended to identify such
forward-looking statements. These statements are based on management’s current
expectations and beliefs and are subject to a number of risks and uncertainties
that could lead to actual results differing materially from those projected,
forecasted or expected. Although we believe that the assumptions underlying
the
forward-looking statements are reasonable, we can give no assurance that our
expectations will be attained. Factors that could cause actual results to differ
materially from our expectations include, but are not limited to, our ability
to
integrate the facilities of American Retirement Corporation (“ARC”) or other
acquisitions into our operations; our continued ability to acquire facilities
at
attractive prices which will generate returns consistent with expectations;
the
possibility that the facilities that we have recently acquired and will acquire
may not generate sufficient additional income to justify their acquisition;
possibilities that conditions to closing of certain transactions will not be
satisfied; the possibilities that changes in the capital markets, including
changes in interest rates and/or credit spreads, or other factors could make
financing more expensive or unavailable to us; a decrease in the overall demand
for senior housing; general economic conditions and economic conditions in
the
markets in which we operate; downturns in the real estate markets in the regions
where our facilities are located; competitive pressures within the industry
and/or markets in which we operate; the creditworthiness of our residents;
interest rate fluctuations; licensing risks (including delays in obtaining
regulatory approvals); our failure to comply with federal, state and local
laws
and regulations; our failure to comply with environmental laws; the effect
of
future legislation or regulatory changes on our operations; and other risks
detailed from time to time in our filings with the Securities and Exchange
Commission, press releases and other communications, including those set forth
under “Risk Factors” included in our Annual Report on Form 10-K for the year
ended December 31, 2006. Such forward-looking statements speak only as
of the date of this Quarterly Report. We expressly disclaim any obligation
to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto
or change in events, conditions or circumstances on which any statement is
based.
During
the third quarter, we continued to focus on implementing the growth strategy
outlined in our most recent Annual Report on Form 10-K. As previously
disclosed, we are focusing on increasing our revenues, cash flows and dividends
per share through a combination of: (i) organic growth in our existing
operations; (ii) expansion of our ancillary service programs (including therapy
and home health services); (iii) selected acquisitions of additional operating
companies and facilities; and (iv) expansion of our existing facilities. The
following is a brief discussion of our progress during the quarter and nine
months ended September 30, 2007.
Our
revenues for the quarter ended September 30, 2007 increased to $464.6 million,
an increase of $77.6 million, or approximately 20.0%, over the third quarter
of
2006. The increase in revenues was primarily a result of a $281
increase in the average revenue per unit/bed over the prior year quarter, as
occupancy remained relatively flat across our portfolio. The number
of acquisitions we completed in the fourth quarter of 2006 and the first nine
months of 2007 also contributed to our revenue growth in the current
period. Including the effect of the historical results of the ARC
facilities only partially included in our results of operations in the
prior-year quarter, same store revenues grew 6.3%.
In
addition, we declared a dividend of $0.50 per share for the third quarter,
an
increase of 25.0% over the $0.40 per share dividend declared for the third
quarter of 2006.
During
the third quarter, we acquired a skilled nursing facility adjacent to one of
our
facilities and purchased three facilities that were previously leased by
us. Year-to-date, we have completed expansions at five facilities and
had eight expansion projects under construction as of September 30,
2007. As a result of our acquisition and expansion activity, the
number of units we operated as of the end of the third quarter increased to
52,082, an increase of 992 units, or 1.9%, over the same prior year
quarter.
We
also
continued to make progress in expanding our ancillary services programs to
additional facilities during the third quarter. For the nine months ended
September 30, 2007, we have completed the roll-out of our ancillary services
program to over 11,000 additional units. Although the roll-out of
ancillary services has been ahead of our original plan, we have faced some
regulatory delays in expanding the home health portion of our
business.
We
have
increased our revenues, cash flows and dividends per share during 2007 and
have
achieved positive same-store results. Nevertheless, our growth initiatives
have
been negatively impacted by unfavorable conditions in the housing, credit and
financial markets. For example, we believe that the difficult housing
market and general economic uncertainty have caused some potential customers
(or
their adult children) to delay or reconsider moving into our facilities, thus
hindering our ability to increase occupancy above the current 91%
level. In addition, we continue to experience volatility in the
entrance fee portion of our business. Although our third quarter net
entrance fees sales increased over the previous quarter, they continued to
be
negatively impacted by softness in the housing markets in certain of the markets
in which we operate (primarily certain areas of Florida and
Arizona). The timing of entrance fee sales is subject to a number of
different factors and is also inherently subject to variability (positively
or
negatively) when measured over the short-term. We continue to expect
entrance fee sales to normalize over the longer term.
Consolidated
Results of Operations
Three
Months Ended September 30, 2007 and 2006
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of increase or decrease of these items.
The
results of operations for any particular period are not necessarily indicative
of results for any future period. The following data should be read in
conjunction with our condensed consolidated financial statements and the notes
thereto, which are included herein. Our results reflect the inclusion of
acquisitions that occurred during the respective reporting
periods. Refer to our most recent Annual Report on Form 10-K for the
year ended December 31, 2006, filed March 16, 2007, and Quarterly Reports on
Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, filed May
8,
2007 and August 8, 2007, respectively, and the notes to our condensed
consolidated financial statements included herein for additional information
regarding these acquisitions ($ in 000’s):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
$ |
114,251
|
|
|
$ |
101,816
|
|
|
$ |
12,435
|
|
|
|
12.2 |
% |
Assisted
Living
|
|
|
197,975
|
|
|
|
175,937
|
|
|
|
22,038
|
|
|
|
12.5 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.9 |
% |
Total
resident fees
|
|
|
463,101
|
|
|
|
385,617
|
|
|
|
77,484
|
|
|
|
20.1 |
% |
Management
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.7 |
% |
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.0 |
% |
Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
|
65,656
|
|
|
|
60,877
|
|
|
|
4,779
|
|
|
|
7.9 |
% |
Assisted
Living
|
|
|
129,701
|
|
|
|
110,726
|
|
|
|
18,975
|
|
|
|
17.1 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.4 |
% |
Total
facility operating expense
|
|
|
294,997
|
|
|
|
245,192
|
|
|
|
49,805
|
|
|
|
20.3 |
% |
General
and administrative expense
|
|
|
34,733
|
|
|
|
29,248
|
|
|
|
5,485
|
|
|
|
18.8 |
% |
Facility
lease expense
|
|
|
67,708
|
|
|
|
63,623
|
|
|
|
4,085
|
|
|
|
6.4 |
% |
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30.1 |
% |
Total
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5 |
% |
Loss
from operations
|
|
|
(12,079 |
) |
|
|
(11,903 |
) |
|
|
(176 |
) |
|
|
(1.5 |
%) |
Interest
income
|
|
|
1,695
|
|
|
|
2,032
|
|
|
|
(337 |
) |
|
|
(16.6 |
%) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(38,472 |
) |
|
|
(29,287 |
) |
|
|
(9,185 |
) |
|
|
(31.4 |
%) |
Amortization
of deferred financing costs
|
|
|
(1,151 |
) |
|
|
(1,141 |
) |
|
|
(10 |
) |
|
|
(0.9 |
%) |
Change
in fair value of derivatives and amortization
|
|
|
(43,731 |
) |
|
|
(1,840 |
) |
|
|
(41,891 |
) |
|
|
(2,276.7 |
%) |
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
(1,414 |
) |
|
|
1,414
|
|
|
|
100.0 |
% |
Equity
in loss of unconsolidated ventures
|
|
|
(309 |
) |
|
|
(1,649 |
) |
|
|
|
|
|
|
81.3 |
% |
Loss
before income taxes
|
|
|
(94,047 |
) |
|
|
(45,202 |
) |
|
|
(48,845 |
) |
|
|
(108.1 |
%) |
Benefit
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148.3 |
% |
Loss
before minority interest
|
|
|
(58,922 |
) |
|
|
(31,056 |
) |
|
|
(27,866 |
) |
|
|
(89.7 |
%) |
Minority
interest
|
|
|
(5 |
) |
|
|
(89 |
) |
|
|
|
|
|
|
94.4 |
% |
Net
loss
|
|
$ |
(58,927 |
) |
|
$ |
(31,145 |
) |
|
$ |
(27,782 |
) |
|
|
(89.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of facilities (at end of period)
|
|
|
550
|
|
|
|
545
|
|
|
|
5
|
|
|
|
0.9 |
% |
Total
units/beds operated(1)
|
|
|
52,082
|
|
|
|
51,090
|
|
|
|
992
|
|
|
|
1.9 |
% |
Owned/leased
facilities units/beds
|
|
|
47,553
|
|
|
|
46,566
|
|
|
|
987
|
|
|
|
2.1 |
% |
Owned/leased
facilities occupancy rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
91.0 |
% |
|
|
91.1 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
Weighted
average
|
|
|
90.8 |
% |
|
|
91.1 |
% |
|
|
(0.3 |
%) |
|
|
(0.3 |
%) |
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,600
|
|
|
$ |
3,319
|
|
|
$ |
281
|
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
70
|
|
|
|
65
|
|
|
|
5
|
|
|
|
7.7 |
% |
Total
units/beds(1)
|
|
|
12,331
|
|
|
|
11,824
|
|
|
|
507
|
|
|
|
4.3 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
92.2 |
% |
|
|
92.8 |
% |
|
|
(0.6 |
%) |
|
|
(0.6 |
%) |
Weighted
average
|
|
|
92.5 |
% |
|
|
92.7 |
% |
|
|
(0.2 |
%) |
|
|
(0.2 |
%) |
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,297
|
|
|
$ |
3,050
|
|
|
$ |
247
|
|
|
|
8.1 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
409
|
|
|
|
408
|
|
|
|
1
|
|
|
|
0.2 |
% |
Total
units/beds(1)
|
|
|
21,086
|
|
|
|
20,974
|
|
|
|
112
|
|
|
|
0.5 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.1 |
% |
|
|
90.4 |
% |
|
|
(0.3 |
%) |
|
|
(0.3 |
%) |
Weighted
average
|
|
|
90.0 |
% |
|
|
90.3 |
% |
|
|
(0.3 |
%) |
|
|
(0.3 |
%) |
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,465
|
|
|
$ |
3,259
|
|
|
$ |
206
|
|
|
|
6.3 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
48
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
Total
units/beds(1)
|
|
|
14,136
|
|
|
|
13,768
|
|
|
|
368
|
|
|
|
2.7 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
91.4 |
% |
|
|
91.4 |
% |
|
|
—
|
|
|
|
—
|
|
Weighted
average
|
|
|
90.7 |
% |
|
|
90.8 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
Average
monthly revenue per unit/bed(2)
|
|
$ |
4,102
|
|
|
$
|
3,867 |
|
|
$ |
235 |
|
|
|
6.1 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
23
|
|
|
|
24
|
|
|
|
(1 |
) |
|
|
(4.2 |
)% |
Total
units/beds(1)
|
|
|
4,529
|
|
|
|
4,524
|
|
|
|
5
|
|
|
|
0.1 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
83.2 |
% |
|
|
92.0 |
% |
|
|
(8.8 |
%) |
|
|
(9.6 |
%) |
Weighted
average
|
|
|
82.9 |
% |
|
|
92.1 |
% |
|
|
(9.2 |
%) |
|
|
(10.0 |
%) |
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
5,673
|
|
|
$ |
3,716
|
|
|
$ |
1,957
|
|
|
|
52.66 |
% |
Refundable
entrance fees sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109.85 |
% |
Total
entrance fee receipts
|
|
|
14,369
|
|
|
|
7,860
|
|
|
|
6,509
|
|
|
|
82.81 |
% |
Refunds
|
|
|
(5,084 |
) |
|
|
(3,529 |
) |
|
|
(1,555 |
) |
|
|
(44.06 |
)% |
Net
entrance fees
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
114.38 |
% |
__________
(1)
|
Total
units/beds operated represent the total units/beds operated as of
the end
of the period.
|
(2)
|
Average
monthly revenue per unit/bed represents the average of the total
monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds. Including as revenue community fee
receipts deferred under generally accepted accounting principles
and
excluding amortization of community fees and entrance fees, the average
monthly revenue per unit for the three months ended was $3,639 and
$3,331,
$3,347 and $3,050, $3,525 and $3,259, and $4,099 and $3,916 for Total
Units/Beds, Independent Living, Assisted Living and Retirement
Centers/CCRCs, respectively.
|
The
increase in resident fees was driven by revenue growth across all business
segments. Resident fees increased over the prior-year third quarter
mainly due to the number of acquisitions that we completed during the latter
part of 2006 and the first half of 2007, as resident fees from these
acquisitions are partially or entirely excluded from the prior period
results. Including the full effect of the historical results of the
ARC facilities only partially included in our results of operations in the
third
quarter of 2006, same store revenues grew 6.3% over the third quarter of
2006.
Independent
living revenue increased $12.4 million, or 12.2%, primarily due to an increase
in the average monthly revenue per unit/bed at the facilities we operated during
both periods. Occupancy at these same-store facilities remained
fairly constant period over period. Revenue growth was also impacted
by the inclusion of facilities acquired during 2006 and 2007, as resident fees
from these acquisitions are partially or entirely excluded from the prior period
results.
Assisted
living revenue increased $22.0 million, or 12.5%, primarily due to the 2006
and
2007 acquisitions. Additionally, resident fees increased as a result
of an increase in the average monthly revenue per unit/bed at the facilities
we
operated during both periods, partially offset by a slight decrease in occupancy
as compared to the same period in the prior-year.
Retirement
Centers/CCRCs revenue increased $43.0 million, or 39.9%, primarily due to the
acquisition of ARC in the third quarter of 2006 and other 2007
acquisitions. Additionally, the average monthly revenue per unit/bed
increased period over period when including the effect of the historical results
of the ARC facilities.
Management
Fees
Management
fees were comparable period over period as the number of management contracts
maintained was fairly consistent during both periods.
Facility
Operating Expense
Facility
operating expense increased over the prior-year same period mainly due to the
ARC acquisition as well as other 2006 and 2007 acquisitions. The
increase was primarily due to salaries, wages and benefits.
Independent
living operating expenses increased $4.8 million, or 7.9%, primarily due to
the
2006 and 2007 acquisitions. The remaining increase is primarily due
to an increase in operating expenses for facilities we operated during both
periods, mainly for salaries, wages and benefits.
Assisted
living operating expenses increased $19.0 million, or 17.1%, primarily due
to
increased salaries, wages and benefits resulting from the 2006 acquisitions
and
additional 2007 acquisitions.
Retirement
Centers/CCRC operating expenses increased $26.1 million, or 35.4%, primarily
due
to the acquisition of ARC during July 2006 and additional 2007
acquisitions.
General
and Administrative Expense
General
and administrative expenses increased $5.5 million, or 18.8%, primarily as
a
result of an increase in salaries, wages and benefits and an increase in the
number of employees in connection with the 2006 acquisition of
ARC. The increase was partially offset by a decreased in non-cash
stock based compensation expense. General and administrative expense
as a percentage of total revenue, including revenue generated by the facilities
we manage, was 4.7% and 4.8% for the three months ended September 30, 2007
and
2006, respectively, calculated as follows ($ in 000’s):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
463,101
|
|
|
$ |
385,617
|
|
Resident
fee revenues under management
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
General
and administrative expenses (excluding merger and integration expenses
and
non-cash stock compensation expense totaling $11.2 million and $9.4
million in 2007 and 2006, respectively)
|
|
$ |
|
|
|
$ |
|
|
General
and administrative expenses as a percent of total revenues
|
|
|
4.7 |
% |
|
|
4.8 |
% |
Facility
Lease Expense
Lease
expense increased by $4.1 million, or 6.4%, primarily due to the 2007 and 2006
acquisitions. The increase was slightly offset by a decrease in lease
expense as a result of the acquisition of certain facilities which were
previously leased. Lease expense includes straight-line rent expense
of $6.5 million and $6.1 million for the three months ended September 30, 2007
and 2006, respectively, and is partially offset by $1.1 million of additional
deferred gain amortization for both periods.
Depreciation
and Amortization
Total
depreciation and amortization expense increased by $18.4 million, or 30.1%,
primarily due to the acquisition of ARC as well as other 2006 and 2007
acquisitions. The increase was partially offset by a decrease in
expense for certain resident in-place lease intangibles which were fully
depreciated at the end of 2006.
Interest
Income
Interest
income remained constant period over period.
Interest
Expense
Interest
expense increased $51.1 million, or 158.3%, primarily due to the change in
fair
value of our interest rate swaps as well as interest expense on additional
debt
incurred in connection with our acquisitions and refinancings. During
the current quarter, we recognized approximately $43.7 million of interest
expense on our interest rate swaps due to unfavorable changes in the LIBOR
yield
curve which resulted in a change in the fair value of the swaps. The
effective portion of the change in fair value of derivatives was excluded from
interest expense and was included in other comprehensive loss for the three
months ended September 30, 2006. On October 1, 2006, we discontinued
hedge accounting prospectively. Changes in fair value of derivatives
are now included in interest expense.
Income
Taxes
Our
effective tax rates for the three months ended September 30, 2007 and 2006
were
37.3% and 31.3%, respectively. The difference between the periods is
primarily due to purchase accounting adjustments recorded in 2006, generated
in
connection with the ARC acquisition.
Nine
Months Ended September 30, 2007 and 2006
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of increase or decrease of these items.
The
results of operations for any particular period are not necessarily indicative
of results for any future period. The following data should be read in
conjunction with our condensed consolidated financial statements and the notes
thereto, which are included herein. Our results reflect the inclusion of
acquisitions that occurred during the respective reporting
periods. Refer to our Annual Report on Form 10-K for the year ended
December 31, 2006, filed March 16, 2007, our Quarterly Reports on Form 10-Q
for
the quarters ended March 31, 2007 and June 30, 2007, filed May 8, 2007 and
August 8, 2007, respectively, and the notes to our condensed consolidated
financial statements included herein for additional information regarding these
acquisitions ($ in 000’s):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
$ |
333,558
|
|
|
$ |
288,220
|
|
|
$ |
45,338
|
|
|
|
15.7 |
% |
Assisted
Living
|
|
|
588,289
|
|
|
|
434,034
|
|
|
|
154,255
|
|
|
|
35.5 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191.1 |
% |
Total
resident fees
|
|
|
1,365,061
|
|
|
|
874,495
|
|
|
|
490,566
|
|
|
|
56.1 |
% |
Management
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.3 |
% |
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.1 |
% |
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
|
187,964
|
|
|
|
164,452
|
|
|
|
23,512
|
|
|
|
14.3 |
% |
Assisted
Living
|
|
|
376,155
|
|
|
|
269,560
|
|
|
|
106,595
|
|
|
|
39.5 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172.0 |
% |
Total
facility operating expense
|
|
|
861,672
|
|
|
|
543,418
|
|
|
|
318,254
|
|
|
|
58.6 |
% |
General
and administrative expense
|
|
|
111,144
|
|
|
|
73,458
|
|
|
|
37,686
|
|
|
|
51.3 |
% |
Facility
lease expense
|
|
|
203,365
|
|
|
|
155,980
|
|
|
|
47,385
|
|
|
|
30.4 |
% |
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105.6 |
% |
Total
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59.1 |
% |
Loss
from operations
|
|
|
(41,033 |
) |
|
|
(9,332 |
) |
|
|
(31,701 |
) |
|
|
(339.7 |
%) |
Interest
income
|
|
|
5,077
|
|
|
|
3,709
|
|
|
|
1,368
|
|
|
|
36.9 |
% |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(107,002 |
) |
|
|
(68,521 |
) |
|
|
(38,481 |
) |
|
|
(56.2 |
%) |
Amortization
of deferred financing costs
|
|
|
(4,878 |
) |
|
|
(3,179 |
) |
|
|
(1,699 |
) |
|
|
(53.4 |
%) |
Change
in fair value of derivatives and amortization
|
|
|
(30,893 |
) |
|
|
(1,422 |
) |
|
|
(29,471 |
) |
|
|
(2,072.5 |
%) |
Loss
on extinguishment of debt
|
|
|
(803 |
) |
|
|
(2,748 |
) |
|
|
1,945
|
|
|
|
70.8 |
% |
Equity
in loss of unconsolidated ventures
|
|
|
(2,362 |
) |
|
|
(2,286 |
) |
|
|
(76 |
) |
|
|
(3.3 |
%) |
Other
non-operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(181,656 |
) |
|
|
(83,779 |
) |
|
|
(97,877 |
) |
|
|
(116.8 |
%) |
Benefit
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407.2 |
% |
Loss
before minority interest
|
|
|
(113,248 |
) |
|
|
(70,292 |
) |
|
|
(42,956 |
) |
|
|
(61.1 |
%) |
Minority
interest
|
|
|
|
|
|
|
(438 |
) |
|
|
|
|
|
|
215.5 |
% |
Net
loss
|
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
|
$ |
(42,012 |
) |
|
|
(59.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of facilities (at end of period)
|
|
|
550
|
|
|
|
545
|
|
|
|
5
|
|
|
|
0.9 |
% |
Total
units/beds operated(1)
|
|
|
52,082
|
|
|
|
51,090
|
|
|
|
992
|
|
|
|
1.9 |
% |
Owned/leased
facilities units/beds
|
|
|
47,553
|
|
|
|
46,566
|
|
|
|
987
|
|
|
|
2.1 |
% |
Owned/leased
facilities occupancy rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
91.0 |
% |
|
|
91.1 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
Weighted
average
|
|
|
90.8 |
% |
|
|
90.3 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,553
|
|
|
$ |
3,197
|
|
|
$ |
356
|
|
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
70
|
|
|
|
65
|
|
|
|
5
|
|
|
|
7.7 |
% |
Total
units/beds(1)
|
|
|
12,331
|
|
|
|
11,824
|
|
|
|
507
|
|
|
|
4.3 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
92.2 |
% |
|
|
92.8 |
% |
|
|
(0.6 |
%) |
|
|
(0.6 |
%) |
Weighted
average
|
|
|
92.6 |
% |
|
|
92.6 |
% |
|
|
—
|
|
|
|
—
|
|
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,247
|
|
|
$ |
3,004
|
|
|
$ |
243
|
|
|
|
8.1 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
409
|
|
|
|
408
|
|
|
|
1
|
|
|
|
0.2 |
% |
Total
units/beds(1)
|
|
|
21,086
|
|
|
|
20,974
|
|
|
|
112
|
|
|
|
0.5 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.1 |
% |
|
|
90.4 |
% |
|
|
(0.3 |
%) |
|
|
(0.3 |
%) |
Weighted
average
|
|
|
89.6 |
% |
|
|
89.7 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,451
|
|
|
$ |
3,190
|
|
|
$ |
261
|
|
|
|
8.2 |
% |
Retirement
Centers/CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
48
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
Total
units/beds(1)
|
|
|
14,136
|
|
|
|
13,768
|
|
|
|
368
|
|
|
|
2.7 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
91.4 |
% |
|
|
91.4 |
% |
|
|
—
|
|
|
|
—
|
|
Weighted
average
|
|
|
91.0 |
% |
|
|
87.5 |
% |
|
|
3.5 |
% |
|
|
4.0 |
% |
Average
monthly revenue per unit/bed(2)
|
|
$ |
4,006
|
|
|
$ |
3,778
|
|
|
$ |
228
|
|
|
|
65.0 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of facilities (period end)
|
|
|
23
|
|
|
|
24
|
|
|
|
(1 |
) |
|
|
(4.2 |
%) |
Total
units/beds(1)
|
|
|
4,529
|
|
|
|
4,524
|
|
|
|
5
|
|
|
|
0.1 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
83.2 |
% |
|
|
92.0 |
% |
|
|
(8.8 |
%) |
|
|
(9.6 |
%) |
Weighted
average
|
|
|
88.0 |
% |
|
|
92.4 |
% |
|
|
(4.4 |
%) |
|
|
(4.8 |
%) |
Selected
Entrance Fee Data:
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
3,916
|
|
|
$ |
4,726
|
|
|
$ |
5,673
|
|
|
$ |
14,315
|
|
Refundable
entrance fees sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
entrance fee receipts
|
|
|
8,174
|
|
|
|
8,790
|
|
|
|
14,369
|
|
|
|
31,333
|
|
Refunds
|
|
|
(6,315 |
) |
|
|
(4,089 |
) |
|
|
(5,084 |
) |
|
|
(15,488 |
) |
Net
entrance fees
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
448
|
|
|
$ |
165
|
|
|
$ |
3,716
|
|
|
$ |
4,329
|
|
Refundable
entrance fees sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
entrance fee receipts
|
|
|
2,069
|
|
|
|
1,300
|
|
|
|
7,860
|
|
|
|
11,229
|
|
Refunds
|
|
|
(703 |
) |
|
|
(308 |
) |
|
|
(3,529 |
) |
|
|
(4,540 |
) |
Net
entrance fees
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
__________
(1)
|
Total
units/beds operated represent the total units/beds operated as of
the end
of the period.
|
(2)
|
Average
monthly revenue per unit/bed represents the average of the total
monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds. Including as revenue community fee
receipts deferred under generally accepted accounting principles
and
excluding amortization of community fees and entrance fees, the average
monthly revenue per unit/bed for the nine months ended September
30, 2007
and 2006 was $3,574 and $3,206, $3,263 and $3,004, $3,471 and $3,190,
and
$4,031 and $3,838 for Total units/beds, Independent Living, Assisted
Living and Retirement Centers/CCRCs,
respectively.
|
The
increase in resident fees was driven by revenue growth across all business
segments. Resident fees increased over the prior-year same period
mainly due to the number of acquisitions that the Company completed during
2006
and 2007, as resident fees from these acquisitions are partially or entirely
excluded from the prior period results. Additionally, resident fees
increased approximately $77.4 million, or 7.6%, at the 424 facilities we
operated during both periods, driven primarily by an increase of 7.5% in the
average monthly revenue per unit/bed.
Independent
living revenue increased $45.3 million, or 15.7%, primarily due to the inclusion
of facilities acquired during 2006 and 2007, as resident fees from these
acquisitions are partially or entirely excluded from the prior period
results. Revenue growth was also impacted by an increase in the
average monthly revenue per unit/bed at the facilities we operated during both
periods. Occupancy at these facilities remained fairly constant
period over period.
Assisted
living revenue increased $154.3 million, or 35.5%, primarily due to the 2006
and
2007 acquisitions. In addition, resident fees increased as a result of an
increase in the average monthly revenue per unit/bed, coupled with relatively
constant occupancy as compared to the same period in the
prior-year.
Retirement
Centers/CCRCs revenue increased $291.0 million, or 191.1%, primarily due to
the
acquisition of ARC in the third quarter of 2006.
Management
Fees
The
increase in management fees over the prior-year same period is mainly due to
the
acquisition of management contracts in conjunction with the ARC acquisition
in
July 2006. The increase is partially offset by the termination of
nine management agreements during 2006.
Facility
Operating Expense
Facility
operating expense increased over the prior-year same period mainly due to the
ARC acquisition as well as other 2006 and 2007 acquisitions. The
increase was primarily due to salaries, wages and benefits.
Independent
living operating expenses increased $23.5 million, or 14.3%, primarily due
to
the 2006 acquisitions and additional 2007 acquisitions. The balance was
primarily due to increases in salaries, wages and benefits.
Assisted
living operating expenses increased $106.6 million, or 39.5%, primarily due
to
increased salaries, wages and benefits primarily as a result of the 2006
acquisitions and additional 2007 acquisitions.
Retirement
Centers/CCRCs operating expenses increased $188.1 million, or 172%, primarily
due to the 2006 acquisition of ARC.
General
and Administrative Expense
General
and administrative expenses increased $37.7 million, or 51.3%, primarily as
a
result of a $13.5 million increase in non-cash compensation expense in
connection with restricted stock grants (including $4.1 million of expense
related to the accelerated vesting of restricted stock grants in conjunction
with modifications of certain awards), an increase in salaries, wages and
benefits, and an increase in the number of employees in connection with the
2006
acquisition of ARC. Additionally, general and administrative expense
was positively impacted during the year by a receivable related to a collateral
recovery from an insurance carrier recorded in the second quarter which was
largely offset by other insurance activity.General and administrative expense
as
a percentage of total revenue, including revenue generated by the facilities
we
manage, was 5.0% and 5.5% for the nine months ended September 30, 2007 and
2006,
respectively, calculated as follows ($ in 000’s):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
1,365,061
|
|
|
$ |
874,495
|
|
Resident
fee revenues under management
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
|
|
General
and administrative expenses (excluding merger and integration expenses
and
non-cash stock compensation expense totaling $37.1 million and $22.9
million in 2007 and 2006, respectively)
|
|
$ |
|
|
|
$ |
|
|
General
and administrative expenses as a percent of total revenues
|
|
|
5.0 |
% |
|
|
5.5 |
% |
Facility
Lease Expense
Lease
expense increased by $47.4 million, or 30.4%, primarily due to the ARC
acquisition in July 2006 as well as other 2006 and 2007
acquisitions. The increase in expense is partially offset by a
decrease in lease expense resulting from the purchase of previously leased
assets in the fourth quarter of 2006. Lease expense includes
straight-line rent expense of $18.8 million and $16.6 million for the nine
months ended September 30, 2007 and 2006, respectively, and is partially offset
by $3.3 million of additional deferred gain amortization for both
periods.
Depreciation
and Amortization
Total
depreciation and amortization expense increased by $120.6 million, or 105.6%,
primarily due to the acquisition of ARC as well as other 2006 and 2007
acquisitions. The increase was partially offset by a decrease in
expense for resident in-place lease intangibles which were fully depreciated
at
the end of 2006.
Interest
Income
Interest
income increased $1.4 million, or 36.9%, primarily due to the acquisition of
ARC
in July 2006.
Interest
Expense
Interest
expense increased $69.7 million, or 95.3%, primarily due to additional debt
incurred in connection with our acquisitions as well as the change in fair
value
of our interest rate swaps for the nine months ended September 30,
2007. During the current year period, we recognized approximately
$30.9 million of interest expense on our interest rate swaps due to unfavorable
changes in the LIBOR yield curve which resulted in a change in the fair value
of
the swaps. The effective portion of the change in fair value of
derivatives was excluded from interest expense and was included in other
comprehensive loss for the nine months ended September 30, 2006. On
October 1, 2006, we discontinued hedge accounting
prospectively. Changes in fair value of derivatives are now included
in interest expense.
Income
Taxes
Our
effective tax rates for the nine months ended September 30, 2007 and 2006 were
37.7% and 16.1%, respectively. The difference between the periods is
primarily due to the ability to benefit book losses in the first three quarters
of 2007 compared to the same period in 2006 as a result of the deferred tax
liabilities generated in connection with the acquisitions of ARC and Southern
Assisted Living, Inc.
Critical
Accounting Policies and Estimates
For
a
description of our critical accounting policies and estimates, see our Annual
Report on Form 10-K for the fiscal year ended December 31, 2006.
Liquidity
and Capital Resources
To
date,
we have financed our operations primarily with cash generated from operations
and both short- and long-term borrowings. We financed our acquisitions with
long-term borrowings, draws on our credit facility and proceeds from our equity
offerings. The following is a summary of cash flow information for the nine
months ended September 30, 2007 and 2006 ($ in 000’s):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
138,409
|
|
|
$ |
53,677
|
|
Cash
used in investing activities
|
|
|
(346,277 |
) |
|
|
(1,820,597 |
) |
Cash
provided by financing activities
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(4,975 |
) |
|
|
22,578
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
|
|
|
$ |
|
|
We
had
$63.1 million of cash and cash equivalents at September 30, 2007, excluding
cash
and investments-restricted and lease security deposits of $157.2
million. Additionally, we had $49.2 million available under our
credit facility and $9.5 million of unused capacity under our letter of credit
facility.
The
increase in cash provided by operating activities was primarily due to the
acquisition of ARC in July 2006 and other 2006 and 2007 acquisitions as well
as
strength of the performance of the facilities we operated during both
periods.
The
decrease in cash used in investing activities was primarily due to the size
of
prior year acquisitions funded as compared to the current year. This
decrease was partially offset by an increase in additions to property, plant,
equipment and leasehold intangibles at our existing facilities and those under
development in conjunction with our expansion of some of our existing
facilities, as well as an increase in restricted cash in the current year for
our swap
collateral
deposits and the substitution of letters of credit for cash previously securing
our obligations in the prior year.
The
decrease in cash provided by financing activities was primarily due to cash
received from the issuance of common stock in the prior year period and a
decrease in net proceeds from debt primarily as a result of a decrease in
acquisitions in the current year period, partially offset by an increase in
the
payment of dividends. In addition, during the current year, we bought
out a capital lease obligation in conjunction with the
acquisition of the Freedom Square Portfolio.
We
believe that cash on hand, together with funds from operations, other current
assets, and existing credit facilities will satisfy our expected working
capital, contractual obligations, capital expenditures, and investment
requirements for at least the next 12 months and the foreseeable
future.
At
September 30, 2007, we had $2,004.4 million of debt outstanding, including
capital lease obligations and excluding our line of credit, at a
weighted-average interest rate of 6.94%, of which $25.9 million was due in
the
next 12 months.
At
September 30, 2007, we had $237.9 million of negative working capital, which
includes the classification of $200.6 million of refundable entrance fees and
$30.9 million in tenant deposits as current liabilities as required by
applicable accounting pronouncements. Based upon our historical
operating experience, we anticipate that only approximately 9% to 12% of those
entrance fee liabilities will actually come due, and be required to be settled
in cash, during the next 12 months. We expect that any entrance fee
liabilities due within the next 12 months will be fully offset by the proceeds
generated by subsequent entrance fee sales. Entrance fee sales, net
of refunds paid, provided $15.8 million of cash for the nine months ended
September 30, 2007.
Our
liquidity requirements have historically arisen from, and we expect they will
continue to arise from, working capital, general and administrative costs,
debt
service and lease payments, acquisition costs, employee compensation and related
benefits, capital improvements and dividend payments. In the past, we have
met
our cash requirements for operations using cash flows from operating revenues,
the receipt of resident fees and the receipt of management fees from third-party
managed facilities. In addition to using cash flows from operating revenues,
we
use available funds from our indebtedness and long-term leasing of our
facilities to meet our cash obligations. The primary use of our cash
is for operating costs, which includes debt service and lease payments and
capital expenditures. We currently estimate that our existing cash
flows from operations, together with existing working capital and the proceeds
of our credit facility will be sufficient to fund our short-term liquidity
needs. For the year ending December 31, 2007, in addition to normal
recurring capital expenditures and expenditures in connection with our expansion
and development program, we expect to spend approximately $75.0 million for
major capital projects and renovations at our existing and recently acquired
facilities (including projects related to the implementation of our ancillary
services program). We presently estimate that we will also spend
approximately $25.0 million during the year ending December 31, 2007 for
corporate branding, integration of corporate functions and enhancement of our
infrastructure operations. The source of these funds is expected to be cash
on
hand and cash generated from operations and financings. We anticipate funding
our expansion and development program through debt and lease financing. There
can be no assurance that financing or refinancing will be available to us or
available on acceptable terms.
We
expect
to continue to fund the growth of our business through cash flows from
operations and cash flows from financing activities, such as equity offerings,
and through the incurrence of additional indebtedness or leasing arrangements.
We expect to continue to assess our financing alternatives periodically and
access the capital markets opportunistically. If our existing resources are
insufficient to satisfy our liquidity requirements, or if we enter into an
acquisition or strategic arrangement with another company, we may need to sell
additional equity or debt securities. Any such sale of additional equity
securities will dilute the interests of our existing stockholders, and we cannot
be certain that additional public or private financing will be available in
amounts or on terms acceptable to us, if at all. If we are unable to obtain
this
additional financing, we may be required to delay, reduce the scope of, or
eliminate one or more aspects of our business development activities, which
could harm the growth of our business. We may incur additional
indebtedness or lease financing to fund such acquisitions. In addition, we
may
incur additional indebtedness or lease financing to fund future
dividends.
In
July
2007, we entered into a series of forward starting interest rate swaps in the
aggregate notional amount of $553.1 million in anticipation of planned future
financing transactions as well as the replacement of certain existing hedges
that will be expiring. Pursuant to our hedge agreements, we are
required to secure our obligation to the counterparty if the fair value
liability exceeds a specified threshold. Cash collateral pledged to
our counterparty with respect to our existing swaps was $26.1 million and $41.0
million as of September 30, 2007 and October 31, 2007,
respectively.
Our
actual liquidity and capital funding requirements depend on numerous factors,
including our operating results, our ability to acquire new facilities, general
economic conditions and the cost of capital.
Contractual
Commitments
Significant
ongoing commitments consist primarily of leases, debt, purchase commitments
and
certain other long-term liabilities. For a summary and complete presentation
and
description of our ongoing commitments and contractual obligations, see the
“Contractual Commitments” section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2006. The following table
presents a summary of our material indebtedness, lease and other contractual
commitments as of September 30, 2007 ($ in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$ |
6,455,174
|
|
|
$ |
432,886
|
|
|
$ |
602,713
|
|
|
$ |
760,585
|
|
|
$ |
574,168
|
|
|
$ |
542,546
|
|
|
$ |
3,542,276
|
|
The
change in total contractual obligations from December 31, 2006 was primarily
as
a result of an increase in long-term debt obligations incurred in connection
with financing transactions we completed during the nine months ended September
30, 2007. Our total long-term debt obligations increased by $454.4 million
to
$2,495.6 million at September 30, 2007 from $2,041.2 million at December 31,
2006. There have been no other material changes in our contractual
commitments during the nine months ended September 30, 2007.
Off-Balance
Sheet Arrangements
The
equity method of accounting has been applied in the accompanying financial
statements with respect to our investment in unconsolidated ventures that are
not considered variable interest entities and in which we do not possess a
controlling financial interest. We do not believe these off-balance
sheet arrangements have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues
or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Non-GAAP
Financial Measures
A
non-GAAP financial measure is generally defined as one that purports to measure
historical or future financial performance, financial position or cash flows,
but excludes or includes amounts that would not be so adjusted in the most
comparable GAAP measure. In this report, we define and use the
non-GAAP financial measures Adjusted EBITDA, Cash From Facility Operations
and
Facility Operating Income, as set forth below.
Adjusted
EBITDA
Definition
of Adjusted EBITDA
We
define
Adjusted EBITDA as follows:
Net
income before:
|
·
|
provision
(benefit) for income taxes;
|
|
·
|
non-operating
(income) loss items;
|
|
·
|
depreciation
and amortization;
|
|
·
|
straight-line
rent expense (income);
|
|
·
|
amortization
of deferred gain;
|
|
·
|
amortization
of deferred entrance fees; and
|
|
·
|
non-cash
compensation expense;
|
and
including:
|
·
|
entrance
fee receipts and refunds.
|
Management’s
Use of Adjusted EBITDA
We
use
Adjusted EBITDA to assess our overall financial and operating
performance. We believe this non-GAAP measure, as we have defined it,
is helpful in identifying trends in our day-to-day performance because the
items
excluded have little or no significance on our day-to-day
operations. This measure provides an assessment of controllable
expenses and affords management the ability to make decisions which are expected
to facilitate meeting current financial goals as well as achieve optimal
financial performance. It provides an indicator for management to
determine if adjustments to current spending decisions are needed.
Adjusted
EBITDA provides us with a measure of financial performance, independent of
items
that are beyond the control of management in the short-term, such as
depreciation and amortization, straight-line rent expense (income), taxation
and
interest expense associated with our capital structure. This metric
measures our financial performance based on operational factors that management
can impact in the short-term, namely the cost structure or expenses of the
organization. Adjusted EBITDA is one of the metrics used by senior
management and the board of directors to review the financial performance of
the
business on a monthly basis. Adjusted EBITDA is also used by research
analysts and investors to evaluate the performance of and value companies in
our
industry.
Limitations
of Adjusted EBITDA
Adjusted
EBITDA has limitations as an analytical tool. It should not be viewed
in isolation or as a substitute for GAAP measures of
earnings. Material limitations in making the adjustments to our
earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure
as compared to GAAP net income (loss), include:
|
·
|
the
cash portion of interest expense, income tax (benefit) provision
and
non-recurring charges related to gain (loss) on sale of facilities
and
extinguishment of debt activities generally represent charges (gains),
which may significantly affect our financial results;
and
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash
position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
An
investor or potential investor may find this item important in evaluating our
performance, results of operations and financial position. We use
non-GAAP financial measures to supplement our GAAP results in order to provide
a
more complete understanding of the factors and trends affecting our
business.
Adjusted
EBITDA is not an alternative to net income, income from operations or cash
flows
provided by or used in operations as calculated and presented in accordance
with
GAAP. You should not rely on Adjusted EBITDA as a substitute for any
such GAAP financial measure. We strongly urge you to review the
reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our
consolidated financial statements included herein. We also strongly
urge you to not rely on any single financial measure to evaluate our
business. In addition, because Adjusted EBITDA is not a measure of
financial performance under GAAP and is susceptible to varying calculations,
the
Adjusted EBITDA measure, as presented in this report, may differ from and may
not be comparable to similarly titled measures used by other
companies.
The
table
below shows the reconciliation of net loss to Adjusted EBITDA for the three
and
nine months ended September 30, 2007 and 2006 ($ in 000’s):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(58,927 |
) |
|
$ |
(31,145 |
) |
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
Minority
interest
|
|
|
5
|
|
|
|
89
|
|
|
|
(506 |
) |
|
|
438
|
|
Benefit
for income taxes
|
|
|
(35,125 |
) |
|
|
(14,146 |
) |
|
|
(68,408 |
) |
|
|
(13,487 |
) |
Equity
in loss of unconsolidated ventures
|
|
|
309
|
|
|
|
1,649
|
|
|
|
2,362
|
|
|
|
2,286
|
|
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
1,414
|
|
|
|
803
|
|
|
|
2,748
|
|
Other
non-operating income
|
|
|
—
|
|
|
|
—
|
|
|
|
(238 |
) |
|
|
—
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
31,290
|
|
|
|
21,201
|
|
|
|
84,482
|
|
|
|
51,694
|
|
Capitalized
lease obligation
|
|
|
7,182
|
|
|
|
8,086
|
|
|
|
22,520
|
|
|
|
16,827
|
|
Amortization
of deferred financing costs
|
|
|
1,151
|
|
|
|
1,141
|
|
|
|
4,878
|
|
|
|
3,179
|
|
Change
in fair value of derivatives and amortization
|
|
|
43,731
|
|
|
|
1,840
|
|
|
|
30,893
|
|
|
|
1,422
|
|
Interest
income
|
|
|
(1,695 |
) |
|
|
(2,032 |
) |
|
|
(5,077 |
) |
|
|
(3,709 |
) |
Loss
from operations
|
|
|
(12,079 |
) |
|
|
(11,903 |
) |
|
|
(41,033 |
) |
|
|
(9,332 |
) |
Depreciation
and amortization
|
|
|
79,235
|
|
|
|
60,883
|
|
|
|
234,690
|
|
|
|
114,129
|
|
Straight-line
lease expense
|
|
|
6,451
|
|
|
|
6,124
|
|
|
|
18,815
|
|
|
|
16,622
|
|
Amortization
of deferred gain
|
|
|
(1,085 |
) |
|
|
(1,086 |
) |
|
|
(3,255 |
) |
|
|
(3,259 |
) |
Amortization
of entrance fees
|
|
|
(5,322 |
) |
|
|
(3,253 |
) |
|
|
(14,222 |
) |
|
|
(3,398 |
) |
Non-cash
compensation expense
|
|
|
7,138
|
|
|
|
5,852
|
|
|
|
26,150
|
|
|
|
12,625
|
|
Entrance
fee receipts(2)
|
|
|
14,369
|
|
|
|
7,860
|
|
|
|
31,333
|
|
|
|
11,229
|
|
Entrance
fee disbursements
|
|
|
(5,084 |
) |
|
|
(3,529 |
) |
|
|
(15,488 |
) |
|
|
(4,540 |
) |
Adjusted
EBITDA
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1)
|
The
calculation of Adjusted EBITDA includes merger, integration, and
certain
other non-recurring expenses, as well as acquisition transition costs,
totaling $4.0 million and $3.6 million for the three months ended
September 30, 2007 and 2006, respectively, and $11.0 million and
$10.2
million for the nine months ended September 30, 2007 and 2006,
respectively.
|
|
(2)
|
Includes
the receipt of refundable and nonrefundable entrance
fees.
|
Cash
From Facility Operations
Definition
of Cash From Facility Operations
We
define
Cash From Facility Operations as follows:
Net
cash
provided by (used in) operating activities adjusted for:
|
·
|
changes
in operating assets and
liabilities;
|
|
·
|
deferred
interest and fees added to
principal;
|
|
·
|
refundable
entrance fees received;
|
|
·
|
entrance
fee refunds disbursed;
|
|
·
|
recurring
capital expenditures.
|
Recurring
capital expenditures include expenditures capitalized in accordance with GAAP
that are funded from Cash From Facility Operations. Amounts excluded from
recurring capital expenditures consist primarily of unusual or non-recurring
capital items and facility purchases and/or major renovations that are funded
using financing proceeds and/or proceeds from the sale of facilities that are
held for sale.
Management’s
Use of Cash From Facility Operations
We
use
Cash From Facility Operations to assess our overall liquidity. This
measure provides an assessment of controllable expenses and affords management
the ability to make decisions which are expected to facilitate meeting current
financial and liquidity goals as well as to achieve optimal financial
performance. It provides an indicator for management to determine if
adjustments to current spending decisions are needed.
This
metric measures our liquidity based on operational factors that management
can
impact in the short-term, namely the cost structure or expenses of the
organization. Cash From Facility Operations is one of the metrics
used by our senior management and board of directors (i) to review our ability
to service our outstanding indebtedness (including our credit facilities and
long-term leases), (ii) our ability to pay dividends to stockholders, (iii)
our
ability to make regular recurring capital expenditures to maintain and improve
our facilities on a period-to-period basis, (iv) for planning purposes,
including preparation of our annual budget and (v) in setting various covenants
in our credit agreements. These agreements generally require us to
escrow or spend a minimum of between $250 and $450 per unit/bed per
year. Historically, we have spent in excess of these per unit/bed
amounts; however, there is no assurance that we will have funds available to
escrow or spend these per unit/bed amounts in the future. If we do
not escrow or spend the required minimum annual amounts, we would be in default
of the applicable debt or lease agreement which could trigger cross default
provisions in our outstanding indebtedness and lease arrangements.
Limitations
of Cash From Facility Operations
Cash
From
Facility Operations has limitations as an analytical tool. It should
not be viewed in isolation or as a substitute for GAAP measures of cash flow
from operations. Cash From Facility Operations does not represent
cash available for dividends or discretionary expenditures, since we may have
mandatory debt service requirements or other non-discretionary expenditures
not
reflected in the measure. Material limitations in making the
adjustment to our cash flow from operations to calculate Cash From Facility
Operations, and using this non-GAAP financial measure as compared to GAAP
operating cash flows, include:
|
·
|
the
cash portion of interest expense, income tax (benefit) provision
and
non-recurring charges related to gain (loss) on sale of facilities
and
extinguishment of debt activities generally represent charges (gains),
which may significantly affect our financial results;
and
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash
position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
We
believe Cash From Facility Operations is useful to investors because it assists
their ability to meaningfully evaluate (1) our ability to service our
outstanding indebtedness, including our credit facilities and capital and
financing leases, (2) our ability to pay dividends to stockholders and (3)
our
ability to make regular recurring capital expenditures to maintain and improve
our facilities.
Cash
From
Facility Operations is not an alternative to cash flows provided by or used
in
operations as calculated and presented in accordance with GAAP. You
should not rely on Cash From Facility Operations as a substitute for any such
GAAP financial measure. We strongly urge you to review the
reconciliation of Cash From Facility Operations to GAAP net cash provided by
(used in) operating activities, along with our consolidated financial statements
included herein. We also strongly urge you to not rely on any single
financial measure to evaluate our business. In addition, because Cash
From Facility Operations is not a measure of financial performance under GAAP
and is susceptible to varying calculations, the Cash From Facility Operations
measure, as presented in this report, may differ from and may not be comparable
to similarly titled measures used by other companies.
The
table
below shows the reconciliation of net cash provided by operating activities
to
Cash From Facility Operations for the three and nine months ended September
30,
2007 and 2006 ($ in 000’s):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
53,499
|
|
|
$ |
30,438
|
|
|
$ |
138,409
|
|
|
$ |
53,677
|
|
Changes
in operating assets and liabilities
|
|
|
(8,796 |
) |
|
|
2,452
|
|
|
|
(3,454 |
) |
|
|
12,380
|
|
Refundable
entrance fees received(2)
|
|
|
8,696
|
|
|
|
4,144
|
|
|
|
17,018
|
|
|
|
6,900
|
|
Entrance
fee refunds disbursed
|
|
|
(5,084 |
) |
|
|
(3,529 |
) |
|
|
(15,488 |
) |
|
|
(4,540 |
) |
Recurring
capital expenditures, net
|
|
|
(6,213 |
) |
|
|
(7,658 |
) |
|
|
(19,487 |
) |
|
|
(15,018 |
) |
Reimbursement
of operating expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
From Facility Operations
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
calculation of Cash From Facility Operations includes merger, integration
and certain other non-recurring expenses, as well as acquisition
transition costs, totaling $4.0 million and $3.6 million for the
three
months ended September 30, 2007 and 2006, respectively, and $11.0
million
and $10.2 million for the nine months ended September 30, 2007 and
2006,
respectively.
|
|
(2)
|
Total
entrance fee receipts for the three months ended September 30, 2007
and
2006 were $14.4 million and $7.9 million, respectively, including
$5.7
million and $3.7 million, respectively, of nonrefundable entrance
fee
receipts included in net cash provided by operating
activities. Total entrance fee receipts for the nine months
ended September 30, 2007 and 2006 were $31.3 million and $11.2 million,
respectively, including $14.3 million and $4.3 million, respectively,
of
nonrefundable entrance fee receipts included in net cash provided
by
operating activities.
|
Facility
Operating Income
Definition
of Facility Operating Income
We
define
Facility Operating Income as follows:
Net
income before:
|
·
|
provision
(benefit) for income taxes;
|
|
·
|
non-operating
(income) loss items;
|
|
·
|
depreciation
and amortization;
|
|
·
|
facility
lease expense;
|
|
·
|
general
and administrative expense, including non-cash stock compensation
expense;
|
|
·
|
amortization
of deferred entrance fee revenue;
and
|
Management’s
Use of Facility Operating Income
We
use
Facility Operating Income to assess our facility operating
performance. We believe this non-GAAP measure, as we have defined it,
is helpful in identifying trends in our day-to-day facility performance because
the items excluded have little or no significance on our day-to-day facility
operations. This measure provides an assessment of revenue generation
and expense management and affords management the ability to make decisions
which are expected to facilitate meeting current financial goals as well as
to
achieve optimal facility financial performance. It provides an
indicator for management to determine if adjustments to current spending
decisions are needed.
Facility
Operating Income provides us with a measure of facility financial performance,
independent of items that are beyond the control of management in the
short-term, such as depreciation and amortization, lease expense, taxation
and
interest expense associated with our capital structure. This metric
measures our facility financial performance based on operational factors that
management can impact in the short-term, namely the cost structure or expenses
of the organization. Facility Operating Income is one of the metrics
used by our senior management and board of directors to review the financial
performance of the business on a monthly basis. Facility Operating
Income is also used by research analysts and investors to evaluate the
performance of and value companies in our industry by investors, lenders and
lessors. In addition, Facility Operating Income is a common measure
used in the industry to value the acquisition or sales price of facilities
and
is used as a measure of the returns expected to be generated by a
facility.
A
number
of our debt and lease agreements contain covenants measuring Facility Operating
Income to gauge debt or lease coverages. The debt or lease coverage
covenants are generally calculated as facility net operating income (defined
as
total operating revenue less operating expenses, all as determined on an accrual
basis in accordance with GAAP). For purposes of the coverage
calculation, the lender or lessor will further require a pro forma adjustment
to
facility operating income to include a management fee (generally 4% to 5% of
operating revenue) and an annual capital reserve (generally $250 to $450 per
unit/bed). An investor or potential investor may find this item
important in evaluating our performance, results of operations and financial
position, particularly on a facility-by-facility basis.
Limitations
of Facility Operating Income
Facility
Operating Income has limitations as an analytical tool. It should not
be viewed in isolation or as a substitute for GAAP measures of
earnings. Material limitations in making the adjustments to our
earnings to calculate Facility Operating Income, and using this non-GAAP
financial measure as compared to GAAP net income (loss), include:
|
·
|
interest
expense, income tax (benefit) provision and non-recurring charges
related
to gain (loss) on sale of facilities and extinguishment of debt activities
generally represent charges (gains), which may significantly affect
our
financial results; and
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash
position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
An
investor or potential investor may find this item important in evaluating our
performance, results of operations and financial position on a
facility-by-facility basis. We use non-GAAP financial measures to
supplement our GAAP results in order to provide a more complete understanding
of
the factors and trends affecting our business. Facility Operating
Income is not an alternative to net income, income from operations or cash
flows
provided by or used in operations as calculated and presented in accordance
with
GAAP. You should not rely on Facility Operating Income as a
substitute for any such GAAP financial measure. We strongly urge you
to review the reconciliation of Facility Operating Income to GAAP net income
(loss), along with our consolidated financial statements included
herein. We also strongly urge you to not rely on any single financial
measure to evaluate our business. In addition, because Facility
Operating Income is not a measure of financial performance under GAAP and is
susceptible to varying calculations, the Facility Operating Income measure,
as
presented in this report, may differ from and may not be comparable to similarly
titled measures used by other companies.
The
table
below shows the reconciliation of net loss to Facility Operating Income for
the
three and nine months ended September 30, 2007 and 2006 ($ in
000’s):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(58,927 |
) |
|
$ |
(31,145 |
) |
|
$ |
(112,742 |
) |
|
$ |
(70,730 |
) |
Minority
interest
|
|
|
5
|
|
|
|
89
|
|
|
|
(506 |
) |
|
|
438
|
|
Benefit
for income taxes
|
|
|
(35,125 |
) |
|
|
(14,146 |
) |
|
|
(68,408 |
) |
|
|
(13,487 |
) |
Equity
in loss of unconsolidated ventures
|
|
|
309
|
|
|
|
1,649
|
|
|
|
2,362
|
|
|
|
2,286
|
|
Loss
on extinguishment of debt
|
|
|
—
|
|
|
|
1,414
|
|
|
|
803
|
|
|
|
2,748
|
|
Other
non-operating income
|
|
|
—
|
|
|
|
—
|
|
|
|
(238 |
) |
|
|
—
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
31,290
|
|
|
|
21,201
|
|
|
|
84,482
|
|
|
|
51,694
|
|
Capitalized
lease obligation
|
|
|
7,182
|
|
|
|
8,086
|
|
|
|
22,520
|
|
|
|
16,827
|
|
Amortization
of deferred financing costs
|
|
|
1,151
|
|
|
|
1,141
|
|
|
|
4,878
|
|
|
|
3,179
|
|
Change
in fair value of derivatives and amortization
|
|
|
43,731
|
|
|
|
1,840
|
|
|
|
30,893
|
|
|
|
1,422
|
|
Interest
income
|
|
|
(1,695 |
) |
|
|
(2,032 |
) |
|
|
(5,077 |
) |
|
|
(3,709 |
) |
Loss
from operations
|
|
|
(12,079 |
) |
|
|
(11,903 |
) |
|
|
(41,033 |
) |
|
|
(9,332 |
) |
Depreciation
and amortization
|
|
|
79,235
|
|
|
|
60,883
|
|
|
|
234,690
|
|
|
|
114,129
|
|
Facility
lease expense
|
|
|
67,708
|
|
|
|
63,623
|
|
|
|
203,365
|
|
|
|
155,980
|
|
General
and administrative (including non-cash stock compensation
expense)
|
|
|
34,733
|
|
|
|
29,248
|
|
|
|
111,144
|
|
|
|
73,458
|
|
Amortization
of entrance fees
|
|
|
(5,322 |
) |
|
|
(3,253 |
) |
|
|
(14,222 |
) |
|
|
(3,398 |
) |
Management
fees
|
|
|
(1,493 |
) |
|
|
(1,426 |
) |
|
|
(4,777 |
) |
|
|
(3,158 |
) |
Facility
Operating Income
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Item
3. Quantitative and Qualitative Disclosures
About Market Risk
We
are
subject to market risks from changes in interest rates charged on our credit
facilities used to finance acquisitions on an interim basis, floating-rate
indebtedness and lease payments subject to floating rates. The impact on
earnings and the value of our long-term debt and lease payments are subject
to
change as a result of movements in market rates and prices. As of September
30,
2007, we had approximately $435.0 million of long-term fixed rate debt, $1,267.1
million of long-term variable-rate debt, and $302.3 million of capital lease
obligations. As of September 30, 2007, our total fixed-rate debt and
variable-rate debt outstanding had weighted-average interest rates of
6.94%.
We
do not
expect changes in interest rates to have a material effect on cash flows since
approximately 97% of our debt, excluding credit facilities, and lease payments
either have fixed rates or variable rates that are subject to swap or interest
rate cap agreements with major financial institutions to manage our
risk. As of September 30, 2007, a 100 basis point change in
short-term interest rates would affect our operating cash flow no more than
$1.8
million per annum.
As
noted
above, we have entered into certain interest rate protection and swap agreements
to effectively cap or convert floating rate debt to a fixed rate basis, as
well
as to hedge anticipated future financing transactions. Pursuant to certain
of
our hedge agreements, we are required to secure our obligation to the
counterparty by posting cash or other collateral if the fair value liability
exceeds a specified threshold.
Item
4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Co-Chief Executive Officers and
Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered
by this report. Based on such evaluation, our Co-Chief Executive Officers
and
Chief Financial Officer each concluded that, as of September 30, 2007, our
disclosure controls and procedures were effective.
Changes
in Internal Control over Financial Reporting
There
has
not been any change in our internal control over financial reporting (as
such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during
the fiscal quarter ended September 30, 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal
Proceedings
The
information contained in Note 8 to the Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this Form 10-Q is incorporated herein
by this reference.
There
have been no material changes to the risk factors set forth in Part I, Item
1A
of our Annual Report on Form 10-K for the year ended December 31,
2006.
See
Exhibit Index immediately following the signature page hereto, which Exhibit
Index is incorporated by reference as if fully set forth herein.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
BROOKDALE
SENIOR LIVING INC.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Mark W. Ohlendorf
|
|
|
|
Name:
|
|
Mark
W. Ohlendorf
|
|
|
|
Title:
|
|
Duly
authorized officer and
|
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
Date:
|
|
November
8, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Bryan D. Richardson
|
|
|
|
Name:
|
|
Bryan
D. Richardson
|
|
|
|
Title:
|
|
Duly
authorized officer and
|
|
|
|
|
|
Chief
Accounting Officer
|
|
|
|
Date:
|
|
November
8, 2007
|
|
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Amended
and Restated
Certificate of Incorporation of the Company (incorporated by reference
to
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on
August 14, 2006).
|
3.2
|
|
Amended
and Restated
By-laws of the Company (incorporated by reference to Exhibit 3.2
to the
Company’s Registration Statement on Form S-1 (Amendment No. 2)
(No. 333-127372) filed on
October 11, 2005).
|
4.1
|
|
Form
of Certificate for
common stock (incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 (Amendment No. 3) (No. 333-127372)
filed on November 7, 2005).
|
4.2
|
|
Stockholders
Agreement,
dated as of November 28, 2005, by and among Brookdale Senior
Living Inc., FIT-ALT Investor LLC, Fortress Brookdale Acquisition
LLC,
Fortress Investment Trust II and Health Partners (incorporated by
reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed
on March 31, 2006).
|
4.3
|
|
Amendment
No. 1 to
Stockholders Agreement, dated as of July 26, 2006, by and among
Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Registered
Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings
LLC, and FIT Holdings LLC (incorporated by reference to Exhibit 4.3
to the
Company’s Quarterly Report on Form 10-Q filed on
August 14, 2006).
|
10.1
|
|
First
Amendment, Consent and Waiver, dated as of October 10, 2007, to the
Amended and Restated Credit Agreement, dated as of November 15, 2006,
among Brookdale Senior Living Inc., the several lenders from time
to time
parties thereto, Lehman Brothers Inc. and Citigroup Global Markets
Inc.,
as joint lead arrangers and joint bookrunners, Goldman Sachs Credit
Partners L.P., LaSalle Bank National Association and Banc of America
Securities LLC, as co-arrangers, LaSalle Bank National Association
and
Bank of America, N.A., as co-syndication agents, Goldman Sachs Credit
Partners L.P. and Citicorp North America, Inc., as co-documentation
agents, and Lehman Commercial Paper Inc., as administrative agent
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on October 16, 2007).
|
31.1
|
|
Certification
of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
31.2
|
|
Certification
of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
31.3
|
|
Certification
of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
32
|
|
Certification
of Chief
Executive Officers and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002.
|
40