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, 2008
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.)
|
|
|
111
Westwood Place, Suite 200, Brentwood, Tennessee
|
37027
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(615)
221-2250
(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, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer T
|
Accelerated
filer £
|
|
Non-accelerated
filer £ (Do not
check if a smaller reporting company)
|
Smaller
reporting company £
|
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 3, 2008, 101,385,058 shares of the registrant’s common stock, $0.01 par
value, were outstanding (excluding unvested restricted shares).
BROOKDALE
SENIOR LIVING INC.
FORM
10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2008
|
PAGE
|
PART
I. FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
BROOKDALE
SENIOR LIVING INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except stock amounts)
|
|
September
30,
|
|
|
December
31,
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
55,885 |
|
|
$ |
100,904 |
|
Cash
and escrow deposits — restricted
|
|
|
79,187 |
|
|
|
76,962 |
|
Accounts
receivable, net
|
|
|
85,839 |
|
|
|
66,807 |
|
Deferred
tax asset
|
|
|
13,040 |
|
|
|
13,040 |
|
Prepaid
expenses and other current assets, net
|
|
|
30,738 |
|
|
|
34,122 |
|
Total
current assets
|
|
|
264,689 |
|
|
|
291,835 |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
3,716,676 |
|
|
|
3,760,453 |
|
Cash
and escrow deposits — restricted
|
|
|
23,559 |
|
|
|
17,989 |
|
Investment
in unconsolidated ventures
|
|
|
33,214 |
|
|
|
41,520 |
|
Goodwill
|
|
|
325,267 |
|
|
|
325,453 |
|
Other
intangible assets, net
|
|
|
238,932 |
|
|
|
260,534 |
|
Other
assets, net
|
|
|
84,589 |
|
|
|
113,838 |
|
Total
assets
|
|
$ |
4,686,926 |
|
|
$ |
4,811,622 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
266,661 |
|
|
$ |
18,007 |
|
Line
of credit
|
|
|
84,757 |
|
|
|
— |
|
Trade
accounts payable
|
|
|
30,649 |
|
|
|
37,137 |
|
Accrued
expenses
|
|
|
173,924 |
|
|
|
156,253 |
|
Refundable
entrance fees and deferred revenue
|
|
|
251,827 |
|
|
|
254,582 |
|
Tenant
security deposits
|
|
|
30,646 |
|
|
|
31,891 |
|
Dividends
payable
|
|
|
25,759 |
|
|
|
51,897 |
|
Total
current liabilities
|
|
|
864,223 |
|
|
|
549,767 |
|
Long-term
debt, less current portion
|
|
|
2,115,905 |
|
|
|
2,119,217 |
|
Line
of credit
|
|
|
— |
|
|
|
198,000 |
|
Deferred
entrance fee revenue
|
|
|
75,958 |
|
|
|
77,477 |
|
Deferred
liabilities
|
|
|
132,144 |
|
|
|
119,726 |
|
Deferred
tax liability
|
|
|
208,918 |
|
|
|
266,583 |
|
Other
liabilities
|
|
|
54,576 |
|
|
|
61,314 |
|
Total
liabilities
|
|
|
3,451,724 |
|
|
|
3,392,084 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 50,000,000 shares authorized at September 30, 2008
and December 31, 2007; no shares issued and outstanding
|
|
|
— |
|
|
|
— |
|
Common
stock, $.01 par value, 200,000,000 shares authorized at September 30, 2008
and December 31, 2007; 106,404,179 and 104,962,211 shares issued and
105,192,878 and 104,962,211 shares outstanding (including 3,843,383 and
3,020,341 unvested restricted shares), respectively
|
|
|
1,052 |
|
|
|
1,050 |
|
Additional
paid-in-capital
|
|
|
1,689,177 |
|
|
|
1,752,581 |
|
Treasury
stock, at cost; 1,211,301 shares at September 30, 2008
|
|
|
(29,187 |
) |
|
|
— |
|
Accumulated
deficit
|
|
|
(424,651 |
) |
|
|
(332,692 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,189 |
) |
|
|
(1,401 |
) |
Total
stockholders’ equity
|
|
|
1,235,202 |
|
|
|
1,419,538 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
4,686,926 |
|
|
$ |
4,811,622 |
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
$ |
480,750 |
|
|
$ |
463,101 |
|
|
$ |
1,435,522 |
|
|
$ |
1,365,061 |
|
Management
fees
|
|
|
1,527 |
|
|
|
1,493 |
|
|
|
5,604 |
|
|
|
4,777 |
|
Total
revenue
|
|
|
482,277 |
|
|
|
464,594 |
|
|
|
1,441,126 |
|
|
|
1,369,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense (excluding depreciation and amortization of $45,670,
$58,913, $143,765 and $177,357, respectively)
|
|
|
322,601 |
|
|
|
294,997 |
|
|
|
934,186 |
|
|
|
861,672 |
|
General
and administrative expense (including non-cash stock-based compensation
expense of $6,737, $7,138, $23,368 and $26,150,
respectively)
|
|
|
32,948 |
|
|
|
34,733 |
|
|
|
109,633 |
|
|
|
111,144 |
|
Hurricane
and named tropical storms expense
|
|
|
3,613 |
|
|
|
— |
|
|
|
3,613 |
|
|
|
— |
|
Facility
lease expense
|
|
|
67,017 |
|
|
|
67,708 |
|
|
|
202,028 |
|
|
|
203,365 |
|
Depreciation
and amortization
|
|
|
67,066 |
|
|
|
79,235 |
|
|
|
207,882 |
|
|
|
234,690 |
|
Total
operating expense
|
|
|
493,245 |
|
|
|
476,673 |
|
|
|
1,457,342 |
|
|
|
1,410,871 |
|
Loss
from operations
|
|
|
(10,968 |
) |
|
|
(12,079 |
) |
|
|
(16,216 |
) |
|
|
(41,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,383 |
|
|
|
1,695 |
|
|
|
6,169 |
|
|
|
5,077 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(37,599 |
) |
|
|
(38,472 |
) |
|
|
(110,894 |
) |
|
|
(107,002 |
) |
Amortization
of deferred financing costs
|
|
|
(3,004 |
) |
|
|
(1,151 |
) |
|
|
(6,940 |
) |
|
|
(4,878 |
) |
Change
in fair value of derivatives and amortization
|
|
|
(8,454 |
) |
|
|
(43,731 |
) |
|
|
(17,344 |
) |
|
|
(30,893 |
) |
Loss
on extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
(3,052 |
) |
|
|
(803 |
) |
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
358 |
|
|
|
(309 |
) |
|
|
(750 |
) |
|
|
(2,362 |
) |
Other
non-operating income (expense)
|
|
|
69 |
|
|
|
— |
|
|
|
(424 |
) |
|
|
238 |
|
Loss
before income taxes
|
|
|
(58,215 |
) |
|
|
(94,047 |
) |
|
|
(149,451 |
) |
|
|
(181,656 |
) |
Benefit
for income taxes
|
|
|
22,338 |
|
|
|
35,125 |
|
|
|
54,996 |
|
|
|
68,408 |
|
Loss
before minority interest
|
|
|
(35,877 |
) |
|
|
(58,922 |
) |
|
|
(94,455 |
) |
|
|
(113,248 |
) |
Minority
interest
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
506 |
|
Net
loss
|
|
$ |
(35,877 |
) |
|
$ |
(58,927 |
) |
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.36 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.93 |
) |
|
$ |
(1.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing basic and diluted loss per
share
|
|
|
101,398 |
|
|
|
101,564 |
|
|
|
101,748 |
|
|
|
101,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.25 |
|
|
$ |
0.50 |
|
|
$ |
0.75 |
|
|
$ |
1.45 |
|
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
|
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Non-cash
portion of loss on extinguishment of debt
|
|
|
3,052 |
|
|
|
— |
|
Depreciation
and amortization
|
|
|
214,822 |
|
|
|
239,568 |
|
Minority
interest
|
|
|
— |
|
|
|
(506 |
) |
Gain
on sale of assets
|
|
|
— |
|
|
|
(457 |
) |
Equity
in loss of unconsolidated ventures
|
|
|
750 |
|
|
|
2,362 |
|
Change
in future service obligations
|
|
|
— |
|
|
|
1,320 |
|
Distributions
from unconsolidated ventures from cumulative share of net
earnings
|
|
|
1,918 |
|
|
|
1,429 |
|
Amortization
of deferred gain
|
|
|
(3,257 |
) |
|
|
(3,255 |
) |
Amortization
of entrance fees
|
|
|
(16,527 |
) |
|
|
(14,222 |
) |
Proceeds
from deferred entrance fee revenue
|
|
|
15,210 |
|
|
|
14,315 |
|
Deferred
income tax benefit
|
|
|
(57,243 |
) |
|
|
(68,715 |
) |
Change
in deferred lease liability
|
|
|
15,675 |
|
|
|
18,815 |
|
Change
in fair value of derivatives and amortization
|
|
|
17,344 |
|
|
|
30,893 |
|
Non-cash
stock-based compensation
|
|
|
23,368 |
|
|
|
26,150 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(18,165 |
) |
|
|
(5,607 |
) |
Prepaid
expenses and other assets, net
|
|
|
1,263 |
|
|
|
(1,133 |
) |
Accounts
payable and accrued expenses
|
|
|
3,051 |
|
|
|
8,368 |
|
Tenant
refundable fees and security deposits
|
|
|
(439 |
) |
|
|
5,404 |
|
Other
|
|
|
987 |
|
|
|
(3,578 |
) |
Net
cash provided by operating activities
|
|
|
107,354 |
|
|
|
138,409 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Decrease
in lease security deposits and lease acquisition deposits,
net
|
|
|
2,416 |
|
|
|
1,806 |
|
Increase
in cash and escrow deposits — restricted
|
|
|
(7,795 |
) |
|
|
(53,393 |
) |
Additions
to property, plant and equipment and leasehold intangibles, net of related
payables
|
|
|
(134,179 |
) |
|
|
(113,557 |
) |
Acquisition
of assets, net of related payables and cash received
|
|
|
(5,105 |
) |
|
|
(167,621 |
) |
Payment
on (issuance of) notes receivable, net
|
|
|
39,661 |
|
|
|
(13,714 |
) |
Investment
in unconsolidated ventures
|
|
|
(1,163 |
) |
|
|
(1,617 |
) |
Distributions
received from unconsolidated ventures
|
|
|
300 |
|
|
|
1,819 |
|
Proceeds
from sale of unconsolidated venture
|
|
|
4,165 |
|
|
|
— |
|
Net
cash used in investing activities
|
|
|
(101,700 |
) |
|
|
(346,277 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
467,769 |
|
|
|
395,276 |
|
Repayment
of debt and capital lease obligation
|
|
|
(229,210 |
) |
|
|
(54,246 |
) |
Buyout
of capital lease obligation
|
|
|
— |
|
|
|
(51,114 |
) |
Proceeds
from line of credit
|
|
|
264,757 |
|
|
|
451,500 |
|
Repayment
of line of credit
|
|
|
(378,000 |
) |
|
|
(384,000 |
) |
Payment
of dividends
|
|
|
(103,696 |
) |
|
|
(144,990 |
) |
Purchase
of treasury stock
|
|
|
(29,187 |
) |
|
|
— |
|
Payment
of financing costs, net of related payables
|
|
|
(13,720 |
) |
|
|
(10,248 |
) |
Other
|
|
|
(1,373 |
) |
|
|
(815 |
) |
Refundable
entrance fees:
|
|
|
|
|
|
|
|
|
Proceeds
from refundable entrance fees
|
|
|
15,185 |
|
|
|
17,018 |
|
Refunds
of entrance fees
|
|
|
(14,331 |
) |
|
|
(15,488 |
) |
Recouponing
and payment of swap termination
|
|
|
(27,627 |
) |
|
|
— |
|
Cash
portion of loss on extinguishment of debt
|
|
|
(1,240 |
) |
|
|
— |
|
Net
cash (used in) provided by financing activities
|
|
|
(50,673 |
) |
|
|
202,893 |
|
Net
decrease in cash and cash equivalents
|
|
|
(45,019 |
) |
|
|
(4,975 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
100,904 |
|
|
|
68,034 |
|
Cash
and cash equivalents at end of period
|
|
$ |
55,885 |
|
|
$ |
63,059 |
|
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”, “BSL” or the “Company”) is a leading owner and
operator of senior living communities 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. The
Company owns, leases and operates retirement centers, assisted living and
dementia-care communities and continuing care retirement centers
(“CCRCs”).
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, 2008, 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, 2007, 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 community from one of
the limited partnerships and the partnership was liquidated. During
2007, the Company purchased the remaining communities and the limited
partnerships were liquidated. As a result, the Company does not have
minority interest reflected on the condensed consolidated balance sheet as of
September 30, 2008.
Revenue
Recognition
Resident
Fees
Resident
fee revenue is recorded when services are rendered and consist of fees for basic
housing, support services and fees associated with additional services such as
personalized health and assisted living care. Residency agreements are generally
for a term of 30 days to one year, with resident fees billed monthly in advance.
Revenue for certain skilled nursing services and ancillary charges is recognized
as services are provided and is billed monthly in arrears.
Entrance
Fees
Certain
of the Company’s communities have residency agreements which require the
resident to pay an upfront fee prior to occupying the community. In
addition, in connection with the Company’s MyChoice program, new and existing
residents are allowed to pay additional entrance fee amounts in return for a
reduced monthly service fee. The non-refundable portion of the
entrance fee is recorded as deferred revenue and amortized over the estimated
stay of the resident based on an actuarial valuation. The refundable
portion of a resident’s entrance fee is generally refundable within a certain
number of months or days following contract termination or in certain
agreements, upon
the
resale of a comparable unit or 12 months after the resident vacates the
unit. In such instances the refundable portion of the fee is not
amortized and included in refundable entrance fees and deferred
revenue.
Certain
contracts require the refundable portion of the entrance fee plus a percentage
of the appreciation of the unit, if any, to be refunded only upon resale of a
comparable unit (“contingently refundable”). Upon resale the Company
may receive reoccupancy proceeds in the form of additional contingently
refundable fees, refundable fees, or non-refundable fees. The Company
estimates the amount of reoccupancy proceeds to be received from additional
contingently refundable fees or non-refundable fees and records such amount as
deferred revenue. The deferred revenue is amortized over the life of
the community and was approximately $66.7 million and $69.7 million at September
30, 2008 and December 31, 2007, respectively. All remaining
contingently refundable fees not recorded as deferred revenue and amortized are
included in refundable entrance fees and deferred revenue.
All
refundable amounts due to residents at any time in the future, including those
recorded as deferred revenue are classified as current liabilities.
The
non-refundable portion of entrance fees expected to be earned and recognized in
revenue in one year is recorded as a current liability. The balance
of the non-refundable portion is recorded as a long-term liability.
Community
Fees
All
community fees received are non-refundable and are recorded initially as
deferred revenue. The deferred amounts, including both the deferred
revenue and the related direct resident lease origination costs, are amortized
over the estimated stay of the resident which is consistent with the implied
contractual terms of the resident lease.
Management
Fees
Management
fee revenue is recorded as services are provided to the owners of the
communities. Revenues are determined by an agreed upon percentage of gross
revenues (as defined).
Purchase
Accounting
In
determining the allocation of the purchase price of companies and communities 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 communities 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 communities valued with
existing in-place leases adjusted to market rental rates and the communities
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.
Community
purchase options are valued at the estimated value of the underlying community
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 community 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.
Fair
Value Measurements
FASB Statement No. 157,
Fair
Value Measurement (“SFAS 157”)
establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels are defined as follows:
Level 1 –
Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2 –
Inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3 –
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The
Company’s derivative positions are valued using models developed internally by
the respective counterparty that use as their basis readily observable market
parameters (such as forward yield curves) and are classified within Level 2 of
the valuation hierarchy.
The
Company considers its own credit risk as well as the credit risk of its
counterparties when evaluating the fair value of its derivatives. Any
adjustments resulting from credit risk are recorded as a change in fair value of
derivatives and amortization in the current period statement of operations (Note
13).
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 communities 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.
Treasury
Stock
The
Company accounts for treasury stock under the cost method and includes treasury
stock as a component of stockholders’ equity.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157. This Statement provides guidance for using fair value to measure
assets and liabilities. The standard also responds to investors’ requests for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at fair
value. The standard does not expand the use of fair value in any new
circumstances. The statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company adopted SFAS 157 in the current year and applied the
guidance in evaluating the fair value of its derivatives as well as provided
certain disclosures to comply with its provisions.
In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“SFAS 159”). This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company adopted SFAS
159 in the current year and the adoption had no impact in the current quarter
condensed consolidated financial statements.
In June
2007, the Emerging Issues Task Force (“EITF”) ratified EITF 06-11, Accounting for Income Tax Benefits
of Dividends on Share-Based Payment Awards. EITF 06-11 requires
that a realized income tax benefit from dividends or dividend equivalents that
are charged to retained earnings and are paid to employees for equity classified
nonvested equity shares, nonvested equity share units, and outstanding equity
share options should be recognized as an increase to additional paid-in-capital.
The amount recognized in additional paid-in capital for the realized
income tax benefit from dividends on those awards should be included in the pool
of excess tax benefits available to absorb tax deficiencies on share-based
payment awards. EITF 06-11 is effective for fiscal years after December
15, 2007 (note 11).
In December 2007, the FASB
issued FASB Statement No. 141 (revised 2007), Business
Combinations (“SFAS
141R”). SFAS 141R was issued to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. This Statement establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The Statement is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 was issued to improve the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company does not expect the adoption of
SFAS 160 to have an impact on the consolidated financial
statements.
In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 amends and expands the disclosure
requirements of Statement 133 with the intent to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and how
derivative instruments and
related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after November 15,
2008. The Company will adopt SFAS 161 in January 2009.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset and provides
for enhanced disclosures regarding intangible assets. The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset. The disclosure provisions are effective as of the
adoption date and the guidance for determining the useful life applies
prospectively to all intangible assets acquired after the effective
date. Early adoption is prohibited. The Company does not
expect the adoption of FSP FAS 142-3 to have an impact on the consolidated
financial statements.
In May
2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States. SFAS 162 will be effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The
Company does not expect that SFAS 162 will result in a change in current
practice.
In June
2008, the FASB issued Staff Position EITF 03-06-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
("FSP EITF 03-06-1"). FSP EITF 03-06-1 provides that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method in SFAS No. 128, Earnings per
Share. FSP EITF 03-06-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years and
requires all prior-period earnings per share data to be adjusted
retrospectively. The Company is currently assessing the potential
impact of FSP EITF 03-06-1 on the consolidated financial
statements.
Dividends
On
September 30, 2008, the Company’s board of directors declared a quarterly cash
dividend of $0.25 per share of common stock, or an aggregate of $25.8 million,
for the quarter ended September 30, 2008. The $0.25 per share
dividend was paid on October 17, 2008 to holders of record of the Company’s
common stock on October 10, 2008.
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 $6.7 million and $7.1
million was recorded for the three months ended September 30, 2008 and 2007,
respectively, and $23.4 million and $26.2 million of such expense was recorded
for the nine months ended September 30, 2008 and 2007,
respectively. For the quarters ended September 30, 2008 and 2007,
compensation expense was calculated net of forfeitures estimated from 0% - 6%
and 5%, respectively, of the shares granted.
On
February 7, 2008, the Company entered into a Separation Agreement and General
Release with an officer that accelerated the vesting provision of his restricted
stock grants as of March 3, 2008 upon satisfying certain
conditions. As a result of the modification, the previous
compensation expense related to these grants was reversed and a charge based on
the fair value of the stock at the modification date was recorded over the
modified vesting period. The net impact of the adjustment was $2.7
million of additional expense for the quarter ended March 31,
2008.
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 $1.2 million of previously recognized compensation expense related
to performance-based awards granted in 2006 and 2007.
Current
year grants of restricted shares under the Company’s Omnibus Stock Incentive
Plan were as follows (dollars in thousands except for shares and per share
amounts):
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2008
|
|
|
160,000
|
|
|
$ |
23.17
– 25.95 |
|
|
$ |
2,967 |
|
Three
months ended June 30, 2008
|
|
|
260,000 |
|
|
|
24.31 |
|
|
|
6,332 |
|
Three
months ended September 30, 2008
|
|
|
1,414,000 |
|
|
|
12.50
– 18.22 |
|
|
|
20,851 |
|
The
Company has an employee stock purchase plan for all eligible
employees. The plan became effective on October 1,
2008. Under the plan, eligible employees of the Company can purchase
shares of the Company’s common stock on a quarterly basis at a discounted price
through accumulated payroll deductions. Each eligible employee may
elect to deduct up to 15% of his or her base pay each
quarter. Subject to certain limitations specified in the plan, on the
last trading date of each calendar quarter, the amount deducted from each
participant’s pay over the course of the quarter will be used to purchase whole
shares of the Company’s common stock at a purchase price equal to 90% of the
closing market price on the New York Stock Exchange on such
date. Initially, the Company has reserved 1,000,000 shares of common
stock for issuance under the plan. The employee stock purchase plan
also contains an “evergreen” provision that automatically increases the number
of shares reserved for issuance under the plan by 200,000 shares on the first
day of each calendar year beginning January 1, 2010.
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, 2008 presented on an operating segment basis (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
7,642 |
|
|
$ |
102,812 |
|
|
$ |
214,999 |
|
|
$ |
325,453 |
|
Adjustments
|
|
|
(186 |
) |
|
|
— |
|
|
|
— |
|
|
|
(186 |
) |
Balance
at September 30, 2008
|
|
$ |
7,456 |
|
|
$ |
102,812 |
|
|
$ |
214,999 |
|
|
$ |
325,267 |
|
The
adjustment to goodwill is related to the deconsolidation of an entity pursuant
to FIN 46(R) Consolidation of
Variable Interest Entities – An Interpretation of ARB No. 51 (“FIN
46(R)”) during the three months ended September 30, 2008.
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, 2008 and December 31,
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
purchase options
|
|
$ |
147,682 |
|
|
$ |
(5,547 |
) |
|
$ |
142,135 |
|
|
$ |
147,682 |
|
|
$ |
(2,773 |
) |
|
$ |
144,909 |
|
Management
contracts and other
|
|
|
158,048 |
|
|
|
(69,755 |
) |
|
|
88,293 |
|
|
|
158,048 |
|
|
|
(45,822 |
) |
|
|
112,226 |
|
Home
health licenses
|
|
|
8,504 |
|
|
|
— |
|
|
|
8,504 |
|
|
|
3,399 |
|
|
|
— |
|
|
|
3,399 |
|
Total
|
|
$ |
314,234 |
|
|
$ |
(75,302 |
) |
|
$ |
238,932 |
|
|
$ |
309,129 |
|
|
$ |
(48,595 |
) |
|
$ |
260,534 |
|
Amortization
expense related to definite-lived intangible assets for the three and nine
months ended September 30, 2008 was $8.9 million and $26.7 million,
respectively. Amortization expense related to the same assets for the
three and nine months ended September 30, 2007 was $8.9 million and $25.7
million, respectively. Home health licenses were determined to be
indefinite-lived intangible assets and are not subject to
amortization.
5. Property,
Plant and Equipment and Leasehold Intangibles, Net
Property,
plant and equipment and leasehold intangibles, net, which include assets under
capital leases, consist of the following (dollars in thousands):
|
|
|
|
|
|
|
Land
|
|
$ |
254,038 |
|
|
$ |
259,336 |
|
Buildings
and improvements
|
|
|
2,693,931 |
|
|
|
2,651,630 |
|
Furniture
and equipment
|
|
|
266,106 |
|
|
|
223,475 |
|
Resident
and operating lease intangibles
|
|
|
607,004 |
|
|
|
596,623 |
|
Assets
under capital and financing leases
|
|
|
554,665 |
|
|
|
517,506 |
|
|
|
|
4,375,744 |
|
|
|
4,248,570 |
|
Accumulated
depreciation and amortization
|
|
|
(659,068 |
) |
|
|
(488,117 |
) |
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
3,716,676 |
|
|
$ |
3,760,453 |
|
6. Debt
Long-term
Debt, Capital Leases and Financing Obligations
Long-term
debt, capital leases and financing obligations consist of the following (dollars
in thousands):
|
|
|
|
|
|
|
Mortgage
notes payable due 2009 through 2039; weighted average interest rate of
5.41% for the nine months ended September 30, 2008 (weighted average
interest rate of 6.57% in 2007)
|
|
$ |
1,259,509 |
|
|
$ |
853,694 |
|
Mortgages
payable due 2009 through 2038; weighted average interest rate of 8.38% for
the four months ended April 30, 2008, the date of repayment (weighted
average interest rate of 7.01% in 2007)
|
|
|
— |
|
|
|
74,549 |
|
$150,000
Series A notes payable, secured by five communities and by a $3.0 million
letter of credit, bearing interest at LIBOR plus 0.88%, payable in monthly
installments of interest only until August 2011 and payable in monthly
installments of principal and interest through maturity in August
2013
|
|
|
150,000 |
|
|
|
150,000 |
|
Mortgages
payable due 2012; weighted average interest rate of 5.64% for the nine
months ended September 30, 2008 (weighted average interest rate of 5.64%
in 2007), payable interest only through July 2010 and payable in monthly
installments of principal and interest through maturity in July 2012,
secured by the underlying assets of the portfolio
|
|
|
212,407 |
|
|
|
212,407 |
|
Mortgages
payable due 2010, bearing interest at LIBOR plus 2.25%, payable in monthly
installments of interest only through the first quarter of 2008, the dates
of repayment, secured by the underlying assets of the
portfolio
|
|
|
— |
|
|
|
105,756 |
|
Variable
rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average
interest rate of 4.42% for the nine months ended September 30, 2008
(weighted average interest rate of 5.03% in 2007), due 2032, payable
interest only until maturity, secured by the underlying assets of the
portfolio
|
|
|
100,841 |
|
|
|
100,841 |
|
Capital
and financing lease obligations payable through 2020; weighted average
interest rate of 8.83% for the nine months ended September 30, 2008
(weighted average interest rate of 8.97% in 2007)
|
|
|
322,653 |
|
|
|
299,228 |
|
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 15 of the Company’s communities and an $11.5 million guaranty
by the Company
|
|
|
315,180 |
|
|
|
325,631 |
|
Construction
financing due 2010 through 2023; weighted average interest rate of 6.90%
for the nine months ended September 30, 2008 (weighted average interest
rate of 8.5% in 2007)
|
|
|
21,976 |
|
|
|
2,379 |
|
Mezzanine
loan payable to Brookdale Senior Housing, LLC joint venture with respect
to The Heritage at Gaines Ranch, payable to the extent of all available
cash flow (as defined)
|
|
|
— |
|
|
|
12,739 |
|
Total
debt
|
|
|
2,382,566 |
|
|
|
2,137,224 |
|
Less
current portion (see supplemental disclosure below)
|
|
|
266,661 |
|
|
|
18,007 |
|
Total
long-term debt
|
|
$ |
2,115,905 |
|
|
$ |
2,119,217 |
|
In
accordance with applicable accounting pronouncements, as of September 30, 2008,
the Company’s condensed consolidated financial statements reflect approximately
$266.7 million of debt obligations (excluding the line of credit) due within the
next 12 months and a total of approximately $305.2 million of debt obligations
(excluding the line of credit) due on or prior to December 31,
2010. The amount due within the next 12 months has been classified as
a current liability on the Company’s condensed consolidated balance
sheet.
Although
certain of the Company’s debt obligations are scheduled to mature on or prior to
December 31, 2010, the Company has the option, subject to the satisfaction of
customary conditions (such as the absence of a material adverse change), to
extend the maturity of approximately $224.6 million of certain mortgages payable
included in such debt until 2011, as the instruments associated with such
mortgages payable provide that the Company can extend the respective maturity
dates for up to two terms of 12 months each from the existing maturity
dates. The Company presently anticipates that it will exercise the
extension options and will satisfy the conditions precedent for doing so with
respect to each of these obligations. After giving effect to the
exercise of the extension options and to amounts repaid subsequent to quarter
end on the aforementioned debt (see note below), the Company anticipates that
only $5.3 million of the mortgages
payable
due on or prior to December 31, 2010 will actually become due and payable on or
prior to December 31, 2010.
The
following table summarizes the principal amount due at maturity for mortgages
scheduled to mature during the remainder of fiscal 2008, fiscal 2009 and fiscal
2010 both on a financial statement reporting basis (without taking into account
the exercise of the extension options) and on a basis that reports the latest
maturity after giving effect to the exercise of each extension option (dollars
in thousands):
|
|
Earliest
Maturity
Exclusive
of
Extension
Options(1)
|
|
|
Latest
Maturity
Inclusive
of
Extension
Options(1)
|
|
Three
Months Ending December 31, 2008
|
|
$ |
— |
|
|
$ |
— |
|
Twelve
Months Ending December 31, 2009
|
|
|
224,572 |
|
|
|
— |
|
Twelve
Months Ending December 31, 2010
|
|
|
26,400 |
(2) |
|
|
26,400 |
(2) |
Total
|
|
$ |
250,972 |
|
|
$ |
26,400 |
|
________
(1)
|
Excludes
an aggregate of $8.7 million of periodic principal amortization payments
due during the remainder of fiscal 2008, fiscal 2009 and fiscal 2010 on
all of the Company’s mortgages payable ($0.7 million in 2008, $3.6 million
in 2009 and $4.4 million in 2010).
|
(2)
|
Subsequent
to quarter end, the Company repaid approximately $21.1 million of this
amount and as a result, $5.3 million is now scheduled to mature during the
twelve months ending December 31, 2010. As this debt was repaid
prior to its original maturity, it has been classified as current on the
condensed consolidated balance
sheet.
|
In
addition to the foregoing maturities, the Company had an available secured line
of credit of $249.4 million ($70.0 million letter of credit sublimit) and a
letter of credit facility of up to $80.0 million. The Company’s
corporate line of credit is scheduled to mature on May 15, 2009. As
of September 30, 2008, $84.8 million was drawn on the revolving loan facility
and $119.8 million of letters of credit had been issued under the line of
credit.
On May
12, 2008, the Company entered into an amendment to its line of credit agreement
to permit the Company to repurchase up to $150 million of its common stock from
time to time, to reduce the revolving loan commitment from $320 million to $270
million effective as of the date of the amendment, to provide that the line of
credit will bear interest at the base rate plus 3.0% or LIBOR plus 4.0%, at the
Company's election, and to revise certain financial covenants. In
addition, pursuant to the terms of the amendment, the revolving loan commitments
will be further reduced on the last day of each fiscal quarter (determined on a
cumulative basis as of such date) by the greater of the following amounts (if
positive): (a) 50% of the amount equal to the aggregate net proceeds to the
Company from refinancings minus $50 million; and (b) the aggregate amount of
share repurchases by the Company minus $50 million, provided that the revolving
loan commitments shall be further reduced, if applicable, to $245 million on
December 31, 2008 and $220 million on March 31, 2009. In addition,
the Company exercised each of its two options to extend the credit facility
maturity date to May 15, 2009. As a result of the May 15, 2009
maturity date, amounts drawn against the line of credit at September 30, 2008
have been classified as a current liability on the Company’s condensed
consolidated balance sheet. The Company must also pay a fee equal to
1.50% of the amount of any outstanding letters of credit issued under the
facility. 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.
Effective
October 27, 2008, the Company entered into an additional amendment to the line
of credit agreement. Pursuant to the amendment, Lehman Commercial
Paper Inc., the original administrative agent under the line of credit, was
replaced by Bank of America, N.A., the swing line subfacility was deleted, and
certain other administrative amendments were made.
Subsequent
to quarter end, the Company entered into a First Modification Agreement which
extends the maturity date on $33.0 million of debt due on June 30, 2009 as of
September 30, 2008 to June 30, 2011 and obtained the right
to extend
the maturity date for two additional one-year periods. As such, the
Company has recorded the debt as long-term as of September 30,
2008.
On
January 25, 2008, the Company financed two previously acquired communities with
$47.3 million of first mortgage financing bearing interest at LIBOR plus 1.8%
payable interest only through January 25, 2011. The initial draw on
the loan was $37.6 million. The Company entered into interest rate
swaps to convert the loan from floating to fixed. The loan is secured
by the underlying properties.
On
February 15, 2008, the Company financed a previously acquired community with
$46.0 million of first mortgage financing bearing interest at 6.21% payable
interest only through August 5, 2012. The loan is secured by the
underlying property.
On March
13, 2008, the Company financed a previously acquired community with $64.1
million of first mortgage financing bearing interest initially at 5.5% and
adjusted monthly commencing on May 1, 2008. The adjusted rate is
calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The
note is payable interest only through April 1, 2011. The Company
entered into interest rate swaps to convert the loan from floating to
fixed. The loan is secured by the underlying property.
On March
27, 2008, the Company financed a previously acquired community with $20.0
million of first mortgage financing bearing interest initially at 5.5% and
adjusted monthly commencing on May 1, 2008. The adjusted rate is
calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The
note is payable interest only through April 1, 2011. The Company entered
into interest rate swaps to convert the loan from floating to
fixed. The loan is secured by the underlying property.
The
financings entered into on January 25, 2008, February 15, 2008, March 13, 2008
and March 27, 2008 were all related to the same portfolio. In
conjunction with these refinancings, the Company repaid $105.8 million of
existing debt.
On March
26, 2008, the Company obtained $119.4 million of first mortgage financing
bearing interest at 5.41%. The debt matures on April 1, 2013, with one
extension term of up to five years from the maturity date. The loan is secured
by 19 of the Company’s communities, with an additional loan commitment not
to exceed $6.0 million in connection with the addition of a property into the
collateral pool. In conjunction with the financing, the Company repaid
$71.2 million of existing debt. The net proceeds from the transaction were used
to pay down amounts drawn against the Company’s revolving credit facility and
fund other working capital needs.
On April
4, 2008, the Company entered into a loan agreement for up to $99.0 million to
finance a portion of the cost of renovations for a previously acquired
community. As of September 30, 2008, $9.0 million has been drawn
against this loan. Future advances will be disbursed based on
satisfaction of agreed upon conditions. The note bears interest at
the LIBOR rate or a base rate plus an applicable margin and is payable interest
only with the principal due on April 4, 2013. The loan is secured
by the underlying property, with an additional loan commitment not to
exceed $10.0 million. In conjunction with the financing, the Company
repaid $10.5 million of existing debt.
On April
30, 2008, the Company obtained an additional $6.0 million loan related to the
March 26, 2008 financing and repaid $3.3 million of existing debt on the
property added into the collateral pool. All terms of the debt remain
the same as the original first mortgage financing.
On June
3, 2008, the Company obtained $50.0 million of third mortgage financing bearing
interest at 6.07%. The debt matures on May 1, 2013 and is secured by
the underlying properties. The net proceeds from the transaction were
used to pay down amounts drawn against the Company’s revolving credit facility
and fund other working capital needs.
On June
12, 2008, the Company obtained $87.1 million of second mortgage financing
bearing interest at 6.20%. The debt matures on August 1,
2013. The loan is secured by the underlying property. The
net proceeds from the transaction were used to pay down amounts drawn against
the Company’s revolving credit facility and fund other working capital
needs.
On June
30, 2008, the Company entered into a 15 year lease agreement related to a
community previously managed by the Company. The Company has the
right to renew the lease for an additional 15 year term upon satisfaction of
certain conditions. The lease contains a purchase option deemed to be
a bargain purchase option. Consequently, the lease has been
categorized as a capital lease, which resulted in the recognition of $34.5
million of property, plant and equipment and leasehold intangibles, net, and a
corresponding $34.5 million capital lease obligation.
On August
28, 2008, the Company obtained $8.4 million of second mortgage financing bearing
interest at 6.49%. The debt matures on February 1, 2013. The loan is
secured by the underlying property. The net proceeds from the
transaction were used to pay down amounts drawn against the Company’s revolving
credit facility and fund other working capital needs.
As of
September 30, 2008, the Company is in compliance with the financial covenants of
its outstanding debt and lease agreements.
In the
normal course of business, a variety of financial instruments are used to manage
or hedge interest rate risk. Interest rate protection and swap
agreements were entered into 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 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 $8.3 million and $5.0 million as of September 30,
2008 and December 31, 2007, respectively.
All
derivative instruments are recognized as either assets or liabilities in the
condensed consolidated balance sheets at fair value. The change in
mark-to-market of the value of the derivative is recorded as an adjustment to
income.
Derivative
contracts are not entered into 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 specified credit rating.
The
following table summarizes the Company’s swap instruments at September 30, 2008
(dollars in thousands):
Current
notional balance
|
|
$ |
1,128,841 |
|
Highest
possible notional
|
|
$ |
1,128,841 |
|
Lowest
interest rate
|
|
|
3.05 |
% |
Highest
interest rate
|
|
|
4.96 |
% |
Average
fixed rate
|
|
|
3.82 |
% |
Earliest
maturity date
|
|
2011
|
|
Latest
maturity date
|
|
2014
|
|
Weighted
average original maturity
|
|
4.0
Years
|
|
Estimated
asset fair value (included in other assets, net at September 30,
2008)
|
|
$ |
7,248 |
|
Estimated
liability fair value (included in other liabilities at September 30,
2008)
|
|
$ |
(9,247 |
) |
During
the three and nine months ended September 30, 2008, the fair value of the
Company’s interest rate swaps decreased $8.5 million and $17.3 million,
respectively, which has been included as a component of interest expense in the
condensed consolidated statements of operations.
During
the nine months ended September 30, 2008, the Company terminated six swap
agreements with a total notional amount of $259.7 million. Notional
amounts of $726.5 million were recouponed at a more favorable interest rate and
one new swap agreement with a notional amount of $108.5 million was entered
into. In conjunction with these transactions, $27.6 million was paid
to the respective counterparties and the Company recorded a $1.6 million
receivable and a $0.4 million payable. The Company recorded a $1.6
million reserve on the aforementioned receivable as the counterparty to the swap
which originated the receivable has filed for protection under Chapter 11 of the
Bankruptcy Code. The reserve was included in the change in fair value
of derivatives and amortization in the condensed consolidated statement of
operations.
7. Legal
Proceedings
In
connection with the sale of certain communities 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 LLC
(“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 communities 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 communities 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. On April
30, 2008, the court granted the Company’s motion to dismiss the third amended
complaint, but granted the plaintiffs’ motion for leave to amend. Subsequently,
the parties agreed to settle the case and the case was formally dismissed by the
court on November 3, 2008.
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
communities indirectly owned by the investing partnerships to Ventas and the
subsequent lease of those communities 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
Second Action as a class action. Both the plaintiffs and defendants have served
document production requests and the Second Action is currently in the beginning
stages of document discovery. The Company intends to vigorously defend this
Second Action.
Based on
a review of the current status of the foregoing matters with counsel (taking
into account settlement discussions with the plaintiffs), for the quarter ended
June 30, 2008, the Company established a reserve in the amount of $8.0 million,
which the Company believes is a reasonable estimate of the aggregate loss
exposure for these matters (including the costs and expenses to settle and/or
defend each of these matters). However, because litigation is
inherently uncertain and determining the amount of reserves required to fully
resolve these matters involves significant judgments and estimates, it is
possible that the actual outcomes of these matters could vary significantly from
the amount reserved.
In
addition to the foregoing matters, 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.
8. Supplemental
Disclosure of Cash Flow Information (dollars in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
110,998 |
|
|
$ |
105,759 |
|
Income
taxes paid
|
|
$ |
1,401 |
|
|
$ |
637 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Operating, Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
De-consolidation
of leased development property:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
— |
|
|
$ |
(2,978 |
) |
Long-term
debt
|
|
|
— |
|
|
|
2,978 |
|
Net
|
|
$ |
— |
|
|
$ |
— |
|
Capital
leases:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
35,942 |
|
|
$ |
— |
|
Long-term
debt
|
|
|
(35,942 |
) |
|
|
— |
|
Net
|
|
$ |
— |
|
|
$ |
— |
|
De-consolidation
of an entity pursuant to FIN 46(R):
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
92 |
|
|
$ |
— |
|
Prepaid
expenses and other current assets
|
|
|
1,861 |
|
|
|
— |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
35,268 |
|
|
|
— |
|
Other
assets, net
|
|
|
7 |
|
|
|
— |
|
Investment
in unconsolidated ventures
|
|
|
186 |
|
|
|
— |
|
Long-term
debt
|
|
|
(29,159 |
) |
|
|
— |
|
Accrued
expenses
|
|
|
(1,252 |
) |
|
|
— |
|
Trade
accounts payable
|
|
|
(20 |
) |
|
|
— |
|
Tenant
security deposits
|
|
|
(173 |
) |
|
|
— |
|
Refundable
entrance fees and deferred revenue
|
|
|
(89 |
) |
|
|
— |
|
Additional
paid-in-capital
|
|
|
(9,217 |
) |
|
|
— |
|
Accumulated
deficit
|
|
|
2,496 |
|
|
|
— |
|
Net
|
|
$ |
— |
|
|
$ |
— |
|
Acquisition
of assets, net of related payables and cash received, net:
|
|
|
|
|
|
|
|
|
Cash
and escrow deposits-restricted
|
|
$ |
— |
|
|
$ |
387 |
|
Accounts
receivable
|
|
|
— |
|
|
|
64 |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
— |
|
|
|
173,609 |
|
Investment
in unconsolidated ventures
|
|
|
— |
|
|
|
(1,342 |
) |
Goodwill
|
|
|
— |
|
|
|
3,395 |
|
Other
intangible assets, net
|
|
|
5,105 |
|
|
|
(668 |
) |
Trade
accounts payable, accrued expenses and other
|
|
|
— |
|
|
|
(1,458 |
) |
Debt
obligations
|
|
|
— |
|
|
|
(5,273 |
) |
Minority
interest
|
|
|
— |
|
|
|
650 |
|
Other,
net
|
|
|
— |
|
|
|
(1,743 |
) |
Acquisition
of assets, net of related payables and cash received
|
|
$ |
5,105 |
|
|
$ |
167,621 |
|
9. Facility
Operating Leases
A summary
of facility lease expense and the impact of straight-line adjustment and
amortization of deferred gains are as follows (dollars in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
basis payment
|
|
$ |
63,394 |
|
|
$ |
62,342 |
|
|
$ |
189,610 |
|
|
$ |
187,805 |
|
Straight-line
expense
|
|
|
4,709 |
|
|
|
6,451 |
|
|
|
15,675 |
|
|
|
18,815 |
|
Amortization
of deferred gain
|
|
|
(1,086 |
) |
|
|
(1,085 |
) |
|
|
(3,257 |
) |
|
|
(3,255 |
) |
Facility
lease expense
|
|
$ |
67,017 |
|
|
$ |
67,708 |
|
|
$ |
202,028 |
|
|
$ |
203,365 |
|
10. Other
Comprehensive Loss, Net
The
following table presents the after-tax components of the Company’s other
comprehensive loss for the periods presented (dollars in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(35,877 |
) |
|
$ |
(58,927 |
) |
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
Reclassification
of net gains on derivatives out of (into)
earnings
|
|
|
124 |
|
|
|
(393 |
) |
|
|
(492 |
) |
|
|
(1,179 |
) |
Amortization
of payments from settlement of forward interest swaps
|
|
|
94 |
|
|
|
94 |
|
|
|
282 |
|
|
|
282 |
|
Other
|
|
|
85 |
|
|
|
(134 |
) |
|
|
422 |
|
|
|
98 |
|
Total
comprehensive loss
|
|
$ |
(35,574 |
) |
|
$ |
(59,360 |
) |
|
$ |
(94,243 |
) |
|
$ |
(113,541 |
) |
11. Income
Taxes
The
Company’s effective tax rates for the three months ended September 30, 2008 and
2007 are 38.4% and 37.3%, respectively, and for the nine months ended September
30, 2008 and 2007 are 36.8% and 37.7%, respectively. The variance in
the three month period is primarily the additional benefit recorded in the
quarter due to the increase in the annualized rate, offset by the dividends on
unvested shares, while the nine month decrease is primarily due to the change in
recording the dividends on unvested shares. Beginning January 1,
2008, dividends on unvested shares are being recorded under FASB Statement No.
123 (revised 2004) (“SFAS 123(R)”), Share-Based Payment in
accordance with EITF 06-11 as discussed in Note 2, and are therefore no longer
reflected in the effective tax rate.
The
Company recorded additional interest charges of $0.1 million related to its
reserve required under FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) for the quarter ended September 30, 2008, but is not
aware of any new uncertain tax positions to be recorded in the
period. Tax returns for years 2002 through 2006 are subject to future
examination by tax authorities. In addition, for Alterra Healthcare
Corporation, tax returns are open from 1999 through 2001 to the extent of the
net operating losses generated during those periods.
12. Share
Repurchase Program
On March
19, 2008, the Company’s board of directors approved a share repurchase program
that authorizes the Company to purchase up to $150.0 million in the aggregate of
the Company’s common stock. Purchases may be made from time to time
using a variety of methods, which may include open market purchases, privately
negotiated transactions or block trades, or by any combination of such methods,
in accordance with applicable insider trading and other securities laws and
regulations. The size, scope and timing of any purchases will be
based on business, market and other conditions and factors, including price,
regulatory and contractual requirements or consents, and capital
availability. The repurchase program does not obligate the Company to
acquire any particular amount of common stock and the program may be suspended,
modified or discontinued at any time at the Company’s discretion without prior
notice. Shares of stock repurchased under the program will be held as treasury
shares.
Pursuant
to this authorization, during the three and nine months ended September 30,
2008, the Company purchased 431,758 and 1,211,301 shares at a cost of
approximately $9.2 and $29.2 million, respectively. As of September
30, 2008, approximately $120.9 million remains available under this share
repurchase authorization.
13. Fair
Value Measurements
The
following table provides the Company’s derivative assets and liabilities carried
at fair value as measured on a recurring basis as of September 30, 2008 (dollars
in thousands):
|
|
Total
Carrying
Value
at
September
30,
2008
|
|
|
Quoted
prices
in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
Derivative
assets
|
|
$ |
7,248 |
|
|
$ |
— |
|
|
$ |
7,248 |
|
|
$ |
— |
|
Derivative
liabilities
|
|
|
(9,247 |
) |
|
|
— |
|
|
|
(9,247 |
) |
|
|
— |
|
|
|
$ |
(1,999 |
) |
|
$ |
— |
|
|
$ |
(1,999 |
) |
|
$ |
— |
|
The Company’s derivative
assets and liabilities include interest rate swaps that effectively convert a
portion of the Company’s variable rate debt to fixed rate
debt. The derivative positions are valued using models
developed internally by the respective counterparty that use as their basis
readily observable market parameters (such as forward yield curves) and are
classified within Level 2 of the valuation hierarchy.
The
Company considers its own credit risk as well as the credit risk of its
counterparties when evaluating the fair value of its derivatives. Any
adjustments resulting from credit risk are recorded as a change in fair value of
derivatives and amortization in the current period statement of
operations.
14. Segment
Results
The
Company currently has four reportable segments: retirement centers; assisted
living; CCRCs; and management services. These segments were
determined based on the way that the Company’s chief operating decision makers
organize the Company’s business activities for making operating decisions and
assessing performance.
During
the fourth quarter of 2007, the Company completed an internal reorganization
which was intended to further improve the segment financial results and to more
accurately reflect the underlying product offering of each
segment. The reorganization did not change the Company’s reportable
segments, but it did impact the revenues and costs reported within each
segment. The change included the movement of communities between the
retirement centers, assisted living and CCRCs segments resulting in a net
increase of 16 communities to the retirement centers segment and a net decrease
of 16 communities to the CCRCs segment. These changes are reflected
in the Company’s results for the three and nine months ended September 30,
2008. The Company has restated the results of the three and
nine month periods ended September 30, 2007 for comparative
purposes. In connection with this reorganization, the Company renamed
its reportable segments. The reportable segment formerly known as
independent living is now known as retirement centers and the segment formerly
known as retirement centers/CCRCs is now known as CCRCs.
Retirement
Centers. Retirement center communities 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 retirement center communities
consist of both independent living and assisted living units in a single
community, which allows residents to “age-in-place” by providing them with a
continuum of senior independent and assisted living services.
Assisted
Living. Assisted living communities offer housing and 24-hour
assistance with activities of daily life to mid-acuity frail and elderly
residents. The Company’s assisted living communities include both
freestanding, multi-story communities and freestanding single story
communities. The Company also operates memory care communities, which
are freestanding assisted living communities specially designed for residents
with Alzheimer’s disease and other dementias.
CCRCs. 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 CCRCs have retirement centers, 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
communities owned by others and operated by the Company pursuant to management
agreements. Under the management agreements for these communities,
the Company receives management fees as well as reimbursed expenses, which
represent the reimbursement of certain expenses it incurs on behalf of the
owners. The accounting policies of reportable segments are the same
as those described in the summary of significant accounting
policies.
The
following table sets forth certain segment financial and operating data (dollars
in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
140,937 |
|
|
$ |
138,009 |
|
|
$ |
419,543 |
|
|
$ |
408,023 |
|
Assisted
Living
|
|
|
210,900 |
|
|
|
200,157 |
|
|
|
628,735 |
|
|
|
593,969 |
|
CCRCs
|
|
|
128,913 |
|
|
|
124,935 |
|
|
|
387,244 |
|
|
|
363,069 |
|
Management
Services
|
|
|
1,527 |
|
|
|
1,493 |
|
|
|
5,604 |
|
|
|
4,777 |
|
|
|
$ |
482,277 |
|
|
$ |
464,594 |
|
|
$ |
1,441,126 |
|
|
$ |
1,369,838 |
|
Segment
operating income(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
57,907 |
|
|
$ |
61,524 |
|
|
$ |
178,641 |
|
|
$ |
181,500 |
|
Assisted
Living
|
|
|
65,205 |
|
|
|
71,250 |
|
|
|
212,883 |
|
|
|
214,987 |
|
CCRCs
|
|
|
31,424 |
|
|
|
35,330 |
|
|
|
106,199 |
|
|
|
106,902 |
|
Management
Services
|
|
|
1,069 |
|
|
|
1,045 |
|
|
|
3,923 |
|
|
|
3,344 |
|
|
|
$ |
155,605 |
|
|
$ |
169,149 |
|
|
$ |
501,646 |
|
|
$ |
506,733 |
|
General
and administrative (including non-cash stock-based compensation
expense)(3)
|
|
$ |
32,490 |
|
|
$ |
34,285 |
|
|
$ |
107,952 |
|
|
$ |
109,711 |
|
Facility
lease expense
|
|
|
67,017 |
|
|
|
67,708 |
|
|
|
202,028 |
|
|
|
203,365 |
|
Deprecation
and amortization
|
|
|
67,066 |
|
|
|
79,235 |
|
|
|
207,882 |
|
|
|
234,690 |
|
Loss
from operations
|
|
$ |
(10,968 |
) |
|
$ |
(12,079 |
) |
|
$ |
(16,216 |
) |
|
$ |
(41,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
$ |
1,362,261 |
|
|
$ |
1,388,991 |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
1,400,927 |
|
|
|
1,401,958 |
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
1,644,599 |
|
|
|
1,629,324 |
|
Corporate
and Management Services
|
|
|
|
|
|
|
|
|
|
|
279,139 |
|
|
|
425,480 |
|
|
|
|
|
|
|
|
|
|
|
$ |
4,686,926 |
|
|
$ |
4,845,753 |
|
(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). Included in
segment operating income is hurricane and named tropical storms expense of
$3.6 million for the three and nine months ended September 30, 2008
consisting of $1.1 million in Retirement Centers, $1.3 million in Assisted
Living and $1.2 million in CCRCs.
|
(3)
|
Net
of general and administrative costs allocated to management services
reporting segment.
|
15. Subsequent
Events
Subsequent
to September 30, 2008, the Company terminated seven swaps and five cap
agreements with a total notional amount of $414.3 million. In
conjunction with these transactions, $12.4 million was paid to the respective
counterparties.
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 operational
initiatives and our expectations regarding their effect on our results; our
expectations regarding occupancy, the demand for senior housing, acquisition
opportunities, our share repurchase program, and our dividend strategy; our
belief regarding our growth prospects; our ability to secure financing or
replace or extend existing debt as it matures (including our line of credit);
our ability to remain in compliance with all of our debt and lease agreements
(including the financial covenants contained therein); our expectations
regarding liquidity; our expectations regarding financings and refinancings of
assets; our plans to generate growth organically through occupancy improvements,
increases in annual rental rates and the achievement of operating efficiencies
and cost savings; our plans to expand our offering of ancillary services
(therapy and home health); our plans to expand existing facilities and develop
new facilities; the expected project costs for our expansion and development
program; our expected levels of expenditures and reimbursements (and the timing
thereof); the anticipated cost and expense associated with the resolution of
pending litigation and our expectations regarding the disposition thereof; our
expectations for the performance of our entrance fee communities; our ability to
anticipate, manage and address industry trends and their effect on our business;
and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From
Facility Operations, and/or Facility Operating Income (as such terms are defined
herein). Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”,
“target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”,
“could”, “should”, “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 which could
have a material adverse effect on our operations and future prospects or which
could cause actual results to differ materially from our expectations include,
but are not limited to, our ability to generate sufficient cash flow to cover
required interest and long-term operating lease payments; our inability to
extend (or refinance) debt as it matures or replace our credit facility when it
expires; the risk that we may not be able to satisfy the conditions precedent to
exercising the extension options associated with certain of our debt agreements;
the effect of our indebtedness and long-term operating leases on our liquidity;
the risk of loss of property pursuant to our mortgage debt and long-term lease
obligations; 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; the risk associated with the
current global economic crisis and its impact upon capital markets and
liquidity; the risk that we may be required to post additional cash collateral
in connection with our interest rate swaps; the risk that continued market
deterioration could jeopardize certain of our counterparties’ obligations;
events which adversely affect the ability of seniors to afford our monthly
resident fees or entrance fees; the conditions of housing markets in certain
geographic areas; changes in governmental reimbursement programs; our limited
operating history on a combined basis; our ability to effectively manage our
growth; our ability to maintain consistent quality control; delays in obtaining
regulatory approvals; our ability to integrate acquisitions into our operations;
competition for the acquisition of assets; our ability to obtain additional
capital on terms acceptable to us; a decrease in the overall demand for senior
housing; our vulnerability to economic downturns; acts of nature in certain
geographic areas; terminations of our resident agreements and vacancies in the
living spaces we lease; increased competition for skilled personnel; departure
of our key officers; increases in market interest rates; environmental
contamination at any of our facilities; failure to comply with existing
environmental laws; an adverse determination or resolution of complaints filed
against us; the cost and difficulty of complying with increasing and evolving
regulation; 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, 2007. 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.
Executive
Overview
During
the third quarter of 2008, we continued to make progress in implementing the
long-term growth objectives outlined in our most recent Annual Report on Form
10-K, even given the difficult operating environment. The following
is a summary discussion of our progress during the three and nine months ended
September 30, 2008.
Our
primary long-term growth objectives are to grow our revenues, Adjusted EBITDA,
Cash From Facility Operations and Facility Operating Income primarily through a
combination of: (i) organic growth in our core business, including the
realization of economies of scale; (ii) continued expansion of our ancillary
services programs (including therapy and home health services); and (iii)
expansion of our existing communities and, to a lesser extent, development of
new communities. Although we continue to anticipate a reduced level
of acquisition activity over the near term when compared with historical levels,
given the potential opportunities that may arise as a result of the recent
market disruption, we may also grow through the selective acquisition and
consolidation of additional communities, asset portfolios and other senior
living companies.
The
tables below present a summary of our operating results and certain other
financial metrics for the three and nine months ended September 30, 2008 and
2007 and the amount and percentage of increase or decrease of each applicable
item (dollars in millions).
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
482.3 |
|
|
$ |
464.6 |
|
|
$ |
17.7 |
|
|
|
3.8 |
% |
Net
loss
|
|
$ |
(35.9 |
) |
|
$ |
(58.9 |
) |
|
$ |
23.0 |
|
|
|
39.0 |
% |
Adjusted
EBITDA
|
|
$ |
67.4 |
|
|
$ |
83.6 |
|
|
$ |
(16.2 |
) |
|
|
(19.4 |
%) |
Cash
From Facility Operations
|
|
$ |
22.5 |
|
|
$ |
41.8 |
|
|
$ |
(19.3 |
) |
|
|
(46.2 |
%) |
Facility
Operating Income
|
|
$ |
149.8 |
|
|
$ |
162.8 |
|
|
$ |
(13.0 |
) |
|
|
(8.0 |
%) |
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
1,441.1 |
|
|
$ |
1,369.8 |
|
|
$ |
71.3 |
|
|
|
5.2 |
% |
Net
loss
|
|
$ |
(94.5 |
) |
|
$ |
(112.7 |
) |
|
$ |
18.2 |
|
|
|
16.1 |
% |
Adjusted
EBITDA
|
|
$ |
227.0 |
|
|
$ |
237.0 |
|
|
$ |
(10.0 |
) |
|
|
(4.2 |
%) |
Cash
From Facility Operations
|
|
$ |
97.7 |
|
|
$ |
115.9 |
|
|
$ |
(18.2 |
) |
|
|
(15.7 |
%) |
Facility
Operating Income
|
|
$ |
481.2 |
|
|
$ |
489.2 |
|
|
$ |
(8.0 |
) |
|
|
(1.6 |
%) |
________
(1)
|
The
calculation of Adjusted EBITDA and Cash From Facility Operations for the
three and nine months ended September 30, 2008 includes hurricane and
named tropical storms expense totaling $3.6
million.
|
(2)
|
The
calculation of Adjusted EBITDA and Cash From Facility Operations for the
nine months ended September 30, 2008 includes the effect of the $8.0
million reserve established for certain litigation (Note
7).
|
Adjusted
EBITDA and Facility Operating Income are non-GAAP financial measures we use in
evaluating our operating performance. Cash From Facility Operations is a
non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP
Financial Measures” below for an explanation of how we define each of these
measures, a detailed description of why we believe such measures are useful and
the limitations of each measure, a reconciliation of net loss to each of
Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash
provided by operating activities to Cash From Facility Operations.
During
the third quarter of 2008, we achieved total revenue growth compared to the
prior year period and a 0.8% increase in average occupancy over the second
quarter of 2008. Although we made progress in certain areas of the
business, current adverse credit market conditions and the economic environment
had a negative impact on our
results
for the three and nine months ended September 30, 2008, as discussed
below. This negative impact primarily resulted in pressure on our
occupancy rate and increased expenses.
Our
revenues for the three months ended September 30, 2008 increased to $482.3
million, an increase of $17.7 million, or approximately 3.8%, over our revenues
for the three months ended September 30, 2007. For the nine months
ended September 30, 2008, our revenues increased $71.3 million, or approximately
5.2%, to $1.4 billion over the nine months ended September 30,
2007. The increase in revenues in the current year periods was
primarily a result of an increase in the average revenue per unit/bed compared
to the prior year periods and growing revenues from our ancillary services
programs, partially offset by a decline in occupancy from the prior year
periods. Our weighted average occupancy rate for the third quarter of
2008 was 89.7%, compared to 90.6% for the third quarter of 2007.
Although
our revenues increased period over period, our overall financial results for the
three and nine months ended September 30, 2008 were negatively impacted by a
higher than usual level of expense growth.
During
the three months ended September 30, 2008, our Adjusted EBITDA, Cash From
Facility Operations, and Facility Operating Income decreased by 19.4%, 46.2% and
8.0%, respectively, when compared to the three months ended September 30,
2007. During the nine months ended September 30, 2008, our Adjusted
EBITDA, Cash From Facility Operations, and Facility Operating Income decreased
by 4.2%, 15.7% and 1.6%, respectively, when compared to the nine months ended
September 30, 2007. Adjusted EBITDA and Cash From Facility Operations for the
three and nine month periods ended September 30, 2008 were negatively impacted
by $3.6 million of hurricane and named tropical storms expense. Additionally,
Adjusted EBITDA and Cash From Facility Operations for the nine month period
ended September 30, 2008 were negatively impacted by an $8.0 million charge to
general and administrative expense relating to the establishment of a reserve
for certain litigation (Note 7).
During
the third quarter of 2008, we repurchased 431,758 shares of our common stock at
a cost of approximately $9.2 million.
During
the quarter, we continued to make progress in expanding our ancillary services
offerings. At September 30, 2008, we had almost 34,000 units served
by our therapy services programs and over 15,000 units served by our home health
agencies. While we continue to work to expand our ancillary services
programs to additional Brookdale units and to open or acquire additional home
health agencies, we also continue to see positive results from the maturation of
previously-opened therapy clinics.
During
the quarter, we also made progress in our expansion and development program,
completing expansions at three communities (with a total of 50
units). We currently have eight projects under construction with a
total of approximately 803 units.
Our
growth initiatives and operating results have continued to be negatively
impacted by unfavorable conditions in the housing, credit and financial
markets. We believe that the deteriorating housing market, credit
crisis and general economic uncertainty have caused some potential customers (or
their adult children) to delay or reconsider moving into our communities,
resulting in a decrease in occupancy rates when compared to the prior year
periods. We remain cautious about the economy and its effect on our
customers. In addition, we continue to experience volatility in the
entrance fee portion of our business. The timing of entrance fee
sales is subject to a number of different factors (including the ability of
potential customers to sell their existing homes) and is also inherently subject
to variability (positively or negatively) when measured over the
short-term. We expect occupancy to remain relatively flat over the
near term and we expect entrance fee sales to normalize over the longer
term.
Consolidated
Results of Operations
Three
Months Ended September 30, 2008 and 2007
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, 2007, filed February 29, 2008, for
additional information regarding acquisitions.
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
140,937 |
|
|
$ |
138,009 |
|
|
$ |
2,928 |
|
|
|
2.1 |
% |
Assisted
Living
|
|
|
210,900 |
|
|
|
200,157 |
|
|
|
10,743 |
|
|
|
5.4 |
% |
CCRCs
|
|
|
128,913 |
|
|
|
124,935 |
|
|
|
3,978 |
|
|
|
3.2 |
% |
Total
resident fees
|
|
|
480,750 |
|
|
|
463,101 |
|
|
|
17,649 |
|
|
|
3.8 |
% |
Management
fees
|
|
|
1,527 |
|
|
|
1,493 |
|
|
|
34 |
|
|
|
2.3 |
% |
Total
revenue
|
|
|
482,277 |
|
|
|
464,594 |
|
|
|
17,683 |
|
|
|
3.8 |
% |
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
83,030 |
|
|
|
76,485 |
|
|
|
6,545 |
|
|
|
8.6 |
% |
Assisted
Living
|
|
|
145,695 |
|
|
|
128,907 |
|
|
|
16,788 |
|
|
|
13.0 |
% |
CCRCs
|
|
|
97,489 |
|
|
|
89,605 |
|
|
|
7,884 |
|
|
|
8.8 |
% |
Total
facility operating expense
|
|
|
326,214 |
|
|
|
294,997 |
|
|
|
31,217 |
|
|
|
10.6 |
% |
General
and administrative expense
|
|
|
32,948 |
|
|
|
34,733 |
|
|
|
(1,785 |
) |
|
|
(5.1 |
%) |
Facility
lease expense
|
|
|
67,017 |
|
|
|
67,708 |
|
|
|
(691 |
) |
|
|
(1.0 |
%) |
Depreciation
and amortization
|
|
|
67,066 |
|
|
|
79,235 |
|
|
|
(12,169 |
) |
|
|
(15.4 |
%) |
Total
operating expense
|
|
|
493,245 |
|
|
|
476,673 |
|
|
|
16,572 |
|
|
|
3.5 |
% |
Loss
from operations
|
|
|
(10,968 |
) |
|
|
(12,079 |
) |
|
|
1,111 |
|
|
|
9.2 |
% |
Interest
income
|
|
|
1,383 |
|
|
|
1,695 |
|
|
|
(312 |
) |
|
|
(18.4 |
%) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(37,599 |
) |
|
|
(38,472 |
) |
|
|
873 |
|
|
|
2.3 |
% |
Amortization
of deferred financing costs
|
|
|
(3,004 |
) |
|
|
(1,151 |
) |
|
|
(1,853 |
) |
|
|
(161.0 |
%) |
Change
in fair value of derivatives and amortization
|
|
|
(8,454 |
) |
|
|
(43,731 |
) |
|
|
35,277 |
|
|
|
80.7 |
% |
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
358 |
|
|
|
(309 |
) |
|
|
667 |
|
|
|
215.9 |
% |
Other
non-operating income
|
|
|
69 |
|
|
|
— |
|
|
|
69 |
|
|
|
100.0 |
% |
Loss
before income taxes
|
|
|
(58,215 |
) |
|
|
(94,047 |
) |
|
|
35,832 |
|
|
|
38.1 |
% |
Benefit
for income taxes
|
|
|
22,338 |
|
|
|
35,125 |
|
|
|
(12,787 |
) |
|
|
(36.4 |
%) |
Loss
before minority interest
|
|
|
(35,877 |
) |
|
|
(58,922 |
) |
|
|
23,045 |
|
|
|
39.1 |
% |
Minority
interest
|
|
|
— |
|
|
|
(5 |
) |
|
|
5 |
|
|
|
100.0 |
% |
Net
loss
|
|
$ |
(35,877 |
) |
|
$ |
(58,927 |
) |
|
$ |
23,050 |
|
|
|
39.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
550 |
|
|
|
550 |
|
|
|
— |
|
|
|
— |
|
Total
units/beds operated(2)
|
|
|
51,933 |
|
|
|
52,082 |
|
|
|
(149 |
) |
|
|
(0.3 |
%) |
Owned/leased
communities units/beds
|
|
|
47,640 |
|
|
|
47,553 |
|
|
|
87 |
|
|
|
0.2 |
% |
Owned/leased
communities occupancy rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.3 |
% |
|
|
90.8 |
% |
|
|
(0.5 |
%) |
|
|
(0.6 |
%) |
Weighted
average
|
|
|
89.7 |
% |
|
|
90.6 |
% |
|
|
(0.9 |
%) |
|
|
(1.0 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,786 |
|
|
$ |
3,609 |
|
|
$ |
177 |
|
|
|
4.9 |
% |
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
87 |
|
|
|
86 |
|
|
|
1 |
|
|
|
0.2 |
% |
Total
units/beds(2)
|
|
|
15,895 |
|
|
|
15,869 |
|
|
|
26 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.7 |
% |
|
|
91.9 |
% |
|
|
(1.2 |
%) |
|
|
(1.3 |
%) |
Weighted
average
|
|
|
90.6 |
% |
|
|
92.2 |
% |
|
|
(1.6 |
%) |
|
|
(1.7 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,288 |
|
|
$ |
3,148 |
|
|
$ |
140 |
|
|
|
4.4 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
410 |
|
|
|
409 |
|
|
|
1 |
|
|
|
1.2 |
% |
Total
units/beds(2)
|
|
|
21,134 |
|
|
|
21,091 |
|
|
|
43 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.9 |
% |
|
|
90.0 |
% |
|
|
0.9 |
% |
|
|
1.0 |
% |
Weighted
average
|
|
|
90.2 |
% |
|
|
89.9 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,690 |
|
|
$ |
3,520 |
|
|
$ |
170 |
|
|
|
4.8 |
% |
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
32 |
|
|
|
32 |
|
|
|
— |
|
|
|
— |
|
Total
units/beds(2)
|
|
|
10,611 |
|
|
|
10,593 |
|
|
|
18 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
88.7 |
% |
|
|
90.8 |
% |
|
|
(2.1 |
%) |
|
|
(2.3 |
%) |
Weighted
average
|
|
|
87.4 |
% |
|
|
89.7 |
% |
|
|
(2.3 |
%) |
|
|
(2.6 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
4,828 |
|
|
$ |
4,565 |
|
|
$ |
263 |
|
|
|
5.8 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
21 |
|
|
|
23 |
|
|
|
(2 |
) |
|
|
(8.7 |
%) |
Total
units/beds(2)
|
|
|
4,293 |
|
|
|
4,529 |
|
|
|
(236 |
) |
|
|
(5.2 |
%) |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
85.6 |
% |
|
|
83.2 |
% |
|
|
2.4 |
% |
|
|
2.9 |
% |
Weighted
average
|
|
|
85.3 |
% |
|
|
82.9 |
% |
|
|
2.4 |
% |
|
|
2.9 |
% |
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
7,253 |
|
|
$ |
5,673 |
|
|
$ |
1,580 |
|
|
|
27.9 |
% |
Refundable
entrance fees sales(4)
|
|
|
4,273 |
|
|
|
8,696 |
|
|
|
(4,423 |
) |
|
|
(50.9 |
%) |
Total
entrance fee receipts
|
|
|
11,526 |
|
|
|
14,369 |
|
|
|
(
2,843 |
) |
|
|
(19.8 |
%) |
Refunds
|
|
|
(5,856 |
) |
|
|
(5,084 |
) |
|
|
(772 |
) |
|
|
(15.2 |
%) |
Net
entrance fees
|
|
$ |
5,670 |
|
|
$ |
9,285 |
|
|
$ |
(3,615 |
) |
|
|
(38.9 |
%) |
__________
(1)
|
Segment
facility operating expense for the three months ended September 30, 2008
includes hurricane and named tropical storms expense totaling $3.6 million
consisting of $1.1 million for Retirement Centers, $1.3 million for
Assisted Living and $1.2 million for
CCRCs.
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
(3)
|
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.
|
(4)
|
Refundable
entrance fee sales for the three months ended September 30, 2008 include
amounts received from residents participating in the MyChoice program,
which allows new and existing residents the option to pay additional
refundable entrance fee amounts in return for a reduced monthly service
fee. MyChoice amounts received from existing residents totaled
$0.6 million and $3.6 million for the three months ended September 30,
2008 and 2007, respectively.
|
Resident
Fees
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 an increase in average monthly revenue per unit/bed during the
current period as well as an increase in our ancillary services revenue as we
continue to roll out therapy and home health services to many of our
communities. This increase was partially offset by a decrease in
occupancy across all segments for our same-store communities. During
the current period, same-store revenues grew 3.7% at the 527 properties we
operated in both periods with a 4.9% increase in the average monthly revenue per
unit/bed and a 1.1% decrease in occupancy.
Retirement
Centers revenue increased $2.9 million, or 2.1%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods, partially offset by a decrease in occupancy at these same-store
communities period over period.
Assisted
Living revenue increased $10.7 million, or 5.4%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods. Occupancy at these same-store communities increased
slightly period over period. Revenue growth was also positively
impacted by an increase in revenue related to the rollout of our ancillary
services business to these communities during 2007 and 2008.
CCRCs
revenue increased $4.0 million, or 3.2%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
periods partially offset by a decrease in occupancy at these same-store
communities period over period.
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 period primarily due to an
increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, expense
incurred related to hurricanes and other named tropical storms, as well as an
increase in expense incurred in connection with the continued rollout of our
ancillary services during the third quarter of 2008.
Retirement
Centers operating expenses increased $6.5 million, or 8.6%, primarily due to an
increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, $1.1 million of
expense incurred in connection with hurricanes and other named tropical storms,
an increase in insurance and utility expenses period over period as well as an
increase in expense incurred in connection with the continued rollout of our
ancillary services program.
Assisted
Living operating expenses increased $16.8 million, or 13.0%, due to an increase
in salaries, wages and benefits related to normal salary increases, increased
employee hours worked and reduced open positions, $1.3 million of expense
incurred in connection with hurricanes and other named tropical storms as well
as an increase in expense incurred in connection with the continued rollout of
our ancillary services program.
CCRCs
operating expenses increased $7.9 million, or 8.8%, primarily due to an increase
in salaries, wages and benefits due to normal salary increases and increased
employee count, as well as $1.2 million of expense incurred in connection with
hurricanes and other named tropical storms.
General
and Administrative Expense
General
and administrative expense decreased $1.8 million, or 5.1%, primarily as a
result of a decrease in non-recurring integration expenses and non-cash
stock-based compensation expense in connection with restricted stock grants
which were partially offset by an increase in professional fees paid period over
period, benefits paid, systems maintenance and travel expenses related to new training
programs and meetings associated with our recent divisional
realignment. General and administrative expense as a percentage of
total revenue, including revenue generated by the communities we manage, was
5.0% and 4.7% for the three months ended September 30, 2008 and 2007,
respectively, calculated as follows (dollars in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
480,750 |
|
|
$ |
463,101 |
|
Resident
fee revenues under management
|
|
|
36,739 |
|
|
|
37,404 |
|
Total
|
|
$ |
517,489 |
|
|
$ |
500,505 |
|
General
and administrative expenses (excluding merger and integration expenses and
non-cash stock compensation expense totaling $10.6 million and $11.2
million in 2008 and 2007, respectively)
|
|
$ |
25,924 |
|
|
$ |
23,579 |
|
General
and administrative expenses as a percent of total revenues
|
|
|
5.0 |
% |
|
|
4.7 |
% |
Facility
Lease Expense
Lease
expense remained relatively constant period over period.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $12.2 million, or 15.4%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
the three month period ended September 30, 2008 which was partially offset by an
increase in depreciation expense related to capital expenditures subsequent to
September 30, 2007 where a full period of depreciation is included in the
current period.
Interest
Income
Interest
income remained relatively constant period over period.
Interest
Expense
Interest
expense decreased $34.3 million, or 41.1%, primarily due to the change in fair
value of our interest rate swaps. During the quarter ended September
30, 2008, we recognized approximately $8.5 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, as compared to
approximately $43.7 million of interest expense on our interest rate swaps for
the quarter ended September 30, 2007. This was partially offset by an
increase in our amortization of deferred financing costs related to additional
borrowings in the current period.
Income
Taxes
The
effective tax rate for the three months ended September 30, 2008 and 2007 are
38.4% and 37.3%, respectively. The difference between the periods is
primarily due to an increase in the annualized effective rate as calculated
through September 30, 2008.
Nine
Months Ended September 30, 2008 and 2007
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, 2007, filed February 29, 2008, for additional
information regarding acquisitions.
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
419,543 |
|
|
$ |
408,023 |
|
|
$ |
11,520 |
|
|
|
2.8 |
% |
Assisted
Living
|
|
|
628,735 |
|
|
|
593,969 |
|
|
|
34,766 |
|
|
|
5.9 |
% |
CCRCs
|
|
|
387,244 |
|
|
|
363,069 |
|
|
|
24,175 |
|
|
|
6.7 |
% |
Total
resident fees
|
|
|
1,435,522 |
|
|
|
1,365,061 |
|
|
|
70,461 |
|
|
|
5.2 |
% |
Management
fees
|
|
|
5,604 |
|
|
|
4,777 |
|
|
|
827 |
|
|
|
17.3 |
% |
Total
revenue
|
|
|
1,441,126 |
|
|
|
1,369,838 |
|
|
|
71,288 |
|
|
|
5.2 |
% |
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
240,902 |
|
|
|
226,523 |
|
|
|
14,379 |
|
|
|
6.3 |
% |
Assisted
Living
|
|
|
415,852 |
|
|
|
378,982 |
|
|
|
36,870 |
|
|
|
9.7 |
% |
CCRCs
|
|
|
281,045 |
|
|
|
256,167 |
|
|
|
24,878 |
|
|
|
9.7 |
% |
Total
facility operating expense
|
|
|
937,799 |
|
|
|
861,672 |
|
|
|
76,127 |
|
|
|
8.8 |
% |
General
and administrative expense
|
|
|
109,633 |
|
|
|
111,144 |
|
|
|
(1,511 |
) |
|
|
(1.4 |
%) |
Facility
lease expense
|
|
|
202,028 |
|
|
|
203,365 |
|
|
|
(1,337 |
) |
|
|
(0.7 |
%) |
Depreciation
and amortization
|
|
|
207,882 |
|
|
|
234,690 |
|
|
|
(26,808 |
) |
|
|
(11.4 |
%) |
Total
operating expense
|
|
|
1,457,342 |
|
|
|
1,410,871 |
|
|
|
46,471 |
|
|
|
3.3 |
% |
Loss
from operations
|
|
|
(16,216 |
) |
|
|
(41,033 |
) |
|
|
24,817 |
|
|
|
60.5 |
% |
Interest
income
|
|
|
6,169 |
|
|
|
5,077 |
|
|
|
1,092 |
|
|
|
21.5 |
% |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(110,894 |
) |
|
|
(107,002 |
) |
|
|
(3,892 |
) |
|
|
(3.6 |
%) |
Amortization
of deferred financing costs
|
|
|
(6,940 |
) |
|
|
(4,878 |
) |
|
|
(2,062 |
) |
|
|
(42.3 |
%) |
Change
in fair value of derivatives and amortization
|
|
|
(17,344 |
) |
|
|
(30,893 |
) |
|
|
13,549 |
|
|
|
43.9 |
% |
Loss
on extinguishment of debt
|
|
|
(3,052 |
) |
|
|
(803 |
) |
|
|
(2,249 |
) |
|
|
(280.1 |
%) |
Equity
in loss of unconsolidated ventures
|
|
|
(750 |
) |
|
|
(2,362 |
) |
|
|
1,612 |
|
|
|
68.2 |
% |
Other
non-operating (loss) income
|
|
|
(424 |
) |
|
|
238 |
|
|
|
(662 |
) |
|
|
(278.2 |
%) |
Loss
before income taxes
|
|
|
(149,451 |
) |
|
|
(181,656 |
) |
|
|
32,205 |
|
|
|
17.7 |
% |
Benefit
for income taxes
|
|
|
54,996 |
|
|
|
68,408 |
|
|
|
(13,412 |
) |
|
|
(19.6 |
%) |
Loss
before minority interest
|
|
|
(94,455 |
) |
|
|
(113,248 |
) |
|
|
18,793 |
|
|
|
16.6 |
% |
Minority
interest
|
|
|
— |
|
|
|
506 |
|
|
|
(506 |
) |
|
|
(100.0 |
%) |
Net
loss
|
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
|
$ |
18,287 |
|
|
|
16.2 |
% |
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
550 |
|
|
|
550 |
|
|
|
— |
|
|
|
— |
|
Total
units/beds operated(2)
|
|
|
51,933 |
|
|
|
52,082 |
|
|
|
(149 |
) |
|
|
(0.3 |
%) |
Owned/leased
communities units/beds
|
|
|
47,640 |
|
|
|
47,553 |
|
|
|
87 |
|
|
|
0.2 |
% |
Owned/leased
communities occupancy rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.3 |
% |
|
|
90.8 |
% |
|
|
(0.5 |
%) |
|
|
(0.6 |
%) |
Weighted
average
|
|
|
89.5 |
% |
|
|
90.7 |
% |
|
|
(1.2 |
%) |
|
|
(1.3 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,778 |
|
|
$ |
3,557 |
|
|
$ |
221 |
|
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
87 |
|
|
|
86 |
|
|
|
1 |
|
|
|
1.2 |
% |
Total
units/beds(2)
|
|
|
15,895 |
|
|
|
15,869 |
|
|
|
26 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.7 |
% |
|
|
91.9 |
% |
|
|
(1.2 |
%) |
|
|
(1.3 |
%) |
Weighted
average
|
|
|
90.2 |
% |
|
|
92.6 |
% |
|
|
(2.4 |
%) |
|
|
(2.6 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,270 |
|
|
$ |
3,092 |
|
|
$ |
178 |
|
|
|
5.8 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
410 |
|
|
|
409 |
|
|
|
1 |
|
|
|
0.2 |
% |
Total
units/beds(2)
|
|
|
21,134 |
|
|
|
21,091 |
|
|
|
43 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.9 |
% |
|
|
90.0 |
% |
|
|
0.9 |
% |
|
|
1.0 |
% |
Weighted
average
|
|
|
89.6 |
% |
|
|
89.6 |
% |
|
|
— |
|
|
|
— |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,706 |
|
|
$ |
3,498 |
|
|
$ |
208 |
|
|
|
5.9 |
% |
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
32 |
|
|
|
32 |
|
|
|
— |
|
|
|
— |
|
Total
units/beds(2)
|
|
|
10,611 |
|
|
|
10,593 |
|
|
|
18 |
|
|
|
0.2 |
% |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
88.7 |
% |
|
|
90.8 |
% |
|
|
(2.1 |
%) |
|
|
(2.3 |
%) |
Weighted
average
|
|
|
88.2 |
% |
|
|
89.9 |
% |
|
|
(1.7 |
%) |
|
|
(1.9 |
%) |
Average
monthly revenue per unit/bed(3)
|
|
$ |
4,777 |
|
|
$ |
4,467 |
|
|
$ |
310 |
|
|
|
6.9 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
21 |
|
|
|
23 |
|
|
|
(2 |
) |
|
|
(8.7 |
%) |
Total
units/beds(2)
|
|
|
4,293 |
|
|
|
4,529 |
|
|
|
(236 |
) |
|
|
(5.2 |
%) |
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
85.6 |
% |
|
|
83.2 |
% |
|
|
2.4 |
% |
|
|
2.9 |
% |
Weighted
average
|
|
|
84.1 |
% |
|
|
88.4 |
% |
|
|
(4.3 |
%) |
|
|
(4.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
15,210 |
|
|
$ |
14,315 |
|
|
$ |
895 |
|
|
|
6.3 |
% |
Refundable
entrance fees sales(4)
|
|
|
15,185 |
|
|
|
17,018 |
|
|
|
(1,833 |
) |
|
|
(10.8 |
%) |
Total
entrance fee receipts
|
|
|
30,395 |
|
|
|
31,333 |
|
|
|
(938 |
) |
|
|
(3.0 |
%) |
Refunds
|
|
|
(14,331 |
) |
|
|
(15,488 |
) |
|
|
1,157 |
|
|
|
7.5 |
% |
Net
entrance fees
|
|
$ |
16,064 |
|
|
$ |
15,845 |
|
|
$ |
219 |
|
|
|
1.4 |
% |
(1)
|
Segment
facility operating expense for the nine months ended September 30, 2008
includes hurricane and named tropical storms expense totaling $3.6 million
consisting of $1.1 million for Retirement Centers, $1.3 million for
Assisted Living and $1.2 million for
CCRCs.
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
(3)
|
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.
|
(4)
|
Refundable
entrance fee sales for the nine months ended September 30, 2008 and 2007
include amounts received from residents participating in the MyChoice
program, which allows new and existing residents the option to pay
additional refundable entrance fee amounts in return for a reduced monthly
service fee. MyChoice amounts received from existing residents
totaled $1.8 million and $3.8 million for the nine months ended September
30, 2008 and 2007, respectively.
|
Resident
Fees
The
increase in resident fees was driven by revenue growth across all business
segments. Resident fees increased over the prior-year nine month
period primarily due to an increase in average monthly revenue per unit/bed
during the current period as well as an increase in our ancillary services
revenue as we continue to roll out therapy and home health services to many of
our communities and was partially offset by a decrease in occupancy across all
segments for our same-store communities. During the current period,
same-store revenues grew 4.4% at the 522 properties we operated in both periods
with an average rate increase of 6.2% and a decrease in occupancy of
1.6%.
Retirement
Centers revenue increased $11.5 million, or 2.8%, primarily due to an increase
in the average monthly revenue per unit/bed at the communities we operated
during both periods and revenue related to the expansion of our ancillary
services business to these communities during 2007 and 2008 which was partially
offset by a decrease in occupancy at our same-store communities period over
period.
Assisted
Living revenue increased $34.8 million, or 5.9%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods and revenue related to the expansion of our ancillary services
business to these communities during 2007 and 2008 which was offset by a slight
decrease in occupancy at our same-store communities period over
period.
CCRCs
revenue increased $24.2 million, or 6.7%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
periods and revenue related to the expansion of our ancillary services business
to these communities during 2007 and 2008 which was offset by a slight decrease
in occupancy at our same-store communities period over period.
Management
Fees
The
increase in management fees over the prior-year same period is due to an
increase in rates charged for management services during the current
period.
Facility
Operating Expense
Facility
operating expense increased over the prior-year same period primarily due to an
increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, as well as an
increase in expenses incurred in connection with the continued rollout of our
ancillary services program during the current period.
Retirement
Centers operating expenses increased $14.4 million, or 6.3%, primarily due to an
increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, $1.1 million of
expense incurred in connection with hurricanes and other named tropical storms,
an increase in insurance and utility expenses period over period as well as an
increase in expense incurred in connection with the continued rollout of our
ancillary services program.
Assisted
Living operating expenses increased $36.9 million, or 9.7%, due to an increase
in salaries, wages and benefits related to normal salary increases, increased
employee hours worked and reduced open positions, $1.3 million of expense
incurred in connection with hurricanes and other named tropical storms as well
as an increase in expense incurred in connection with the continued rollout of
our ancillary services program.
CCRCs
operating expenses increased $24.9 million, or 9.7%, due to an increase in
salaries, wages and benefits due to normal salary increases and increased
employee count, as well as $1.2 million of expense incurred in connection with
hurricanes and other named tropical storms.
General
and Administrative Expense
General
and administrative expense decreased $1.5 million, or 1.4%, primarily as a
result of a decrease in non-recurring expenses and non-cash stock-based
compensation expense in connection with restricted stock grants period over
period offset by an increase in non-controllable expenses related to the $8.0
million reserve established for certain litigation during the three months ended
June 30, 2008 (Note 7). General and administrative expense as a
percentage of total revenue, including revenue generated by the communities we
manage, was 4.7% and 5.0% for the nine months ended September 30, 2008 and 2007,
respectively, calculated as follows (dollars in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
1,435,522 |
|
|
$ |
1,365,061 |
|
Resident
fee revenues under management
|
|
|
112,539 |
|
|
|
113,605 |
|
Total
|
|
$ |
1,548,061 |
|
|
$ |
1,478,666 |
|
General
and administrative expenses (excluding merger and integration expenses and
non-cash stock compensation expense totaling $40.6 million and $37.1
million in 2008 and 2007, respectively)
|
|
$ |
72,651 |
|
|
$ |
74,022 |
|
General
and administrative expenses as a percent of total revenues
|
|
|
4.7 |
% |
|
|
5.0 |
% |
Facility
Lease Expense
Lease
expense remained relatively constant period over period.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $26.8 million, or 11.4%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
the nine month period ended September 30, 2008 which was partially offset by an
increase in depreciation expense related to capital expenditures subsequent to
September 30, 2007 where a full period of depreciation is included in the
current period.
Interest
Income
Interest
income increased $1.1 million, or 21.5%, primarily due to the recognition of
interest income upon collection of a long-term note receivable, previously
reserved for as interest was accumulating unpaid.
Interest
Expense
Interest
expense decreased $7.6 million, or 5.3%, primarily due to the change in fair
value of our interest rate swaps. During the nine months ended September 30,
2008, we recognized approximately $17.3 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, as compared to
approximately $30.9 million of interest expense on our interest rate swaps for
the nine months ended September 30, 2007, representing a $13.5 million decrease
in interest expense period over period. This decrease was partially offset by
additional interest expense incurred on debt from additional
borrowings.
Income
Taxes
The
effective tax rate for the nine month periods ended September 30, 2008 and 2007
are 36.8% and 37.7%, respectively. The difference between the periods
is primarily due to a change in recording dividends paid on
unvested
shares. Beginning January 1, 2008, dividends on unvested shares are
being recorded under FASB Statement No. 123 (revised 2004) (“SFAS 123(R)”),
Share-Based Payment in
accordance with EITF 06-11.
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, 2007.
Liquidity
and Capital Resources
The
following is a summary of cash flow information for the nine months ended
September 30, 2008 and 2007 (dollars in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
107,354 |
|
|
$ |
138,409 |
|
Cash
used in investing activities
|
|
|
(101,700 |
) |
|
|
(346,277 |
) |
Cash
(used in) provided by financing activities
|
|
|
(50,673 |
) |
|
|
202,893 |
|
Net
decrease in cash and cash equivalents
|
|
|
(45,019 |
) |
|
|
(4,975 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
100,904 |
|
|
|
68,034 |
|
Cash
and cash equivalents at end of period
|
|
$ |
55,885 |
|
|
$ |
63,059 |
|
The
decrease in cash provided by operating activities was attributable to an
increase in accounts receivable due to the timing of billings and payments and
an increase in billings in conjunction with the rollout of our therapy and home
health services to many of our communities as well as an increase in
operating expenses period over period.
The
decrease in cash used in investing activities was primarily attributable to a
decrease in acquisition activity in the current year as well as cash received on
outstanding notes receivable. This decrease was partially offset by
an increase in additions to our property, plant and equipment and leasehold
intangibles period over period.
The
change in cash related to financing activities period over period was primarily
attributable to an increase in repayments on debt related to financing
activities net of borrowings and an increase in cash payments made on swap
terminations and recouponings during the current year partially offset by a
decrease in the payment of dividends in the current
year. Additionally, during the nine months ended September 30, 2008,
we repurchased 1,211,301 shares of our common stock at an aggregate cost of
$29.2 million.
Our
principal sources of liquidity are expected to be from:
|
·
|
cash
flows from operations;
|
|
·
|
proceeds
from our credit facility;
|
|
·
|
proceeds
from mortgage financing or refinancing of various
assets;
|
|
·
|
proceeds
from the selective disposition of underperforming
assets;
|
|
·
|
funds
raised in the debt or equity markets;
and
|
|
·
|
funds
generated through joint venture arrangements or sale-leaseback
transactions.
|
Our
liquidity requirements have historically arisen from, and we generally expect
they will continue to arise from:
|
·
|
operating
costs such as employee compensation and related benefits, general and
administrative expense and supply
costs;
|
|
·
|
debt
service and lease payments;
|
|
·
|
acquisition
consideration and transaction
costs;
|
|
·
|
cash
collateral required to be posted in connection with our interest rate
swaps and related financial
instruments;
|
|
·
|
capital
expenditures and improvements, including the expansion of our current
communities and the development of new
communities;
|
|
·
|
purchases
of common stock under our $150 million share repurchase authorization;
and
|
|
·
|
other
corporate initiatives (including integration and
branding).
|
We are
highly leveraged, and have significant debt and lease obligations. At
September 30, 2008, we had $2.1 billion of debt outstanding, excluding our line
of credit and capital and financing lease obligations, at a weighted-average
interest rate of 4.99%. At September 30, 2008, we had $323.9 million
of capital and financing lease obligations, $84.8 million was drawn on our
revolving loan facility and $119.8 million of letters of credit had been issued
under our line of credit. Approximately $266.7 million of our debt
obligations (excluding our line of credit) are due on or before September 30,
2009, subject in certain instances to extension at our option, as described
below under “Contractual Commitments”. We also have substantial
operating lease obligations and capital expenditure requirements. For
the year ending December 31, 2008, we will be required to make approximately
$254.0 million of payments in connection with our existing operating
leases.
We had
$55.9 million of cash and cash equivalents at September 30, 2008, excluding cash
and investments-restricted and lease security deposits of $123.4
million. Additionally, we had $94.7 million available under our
corporate credit facility and $30.2 million of unused capacity under our letter
of credit facility.
At
September 30, 2008, we had $599.5 million of negative working capital, which
includes the classification of $251.8 million of refundable entrance fees and
$30.6 million in tenant deposits as current liabilities. 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 $16.1 million of cash for the nine months
ended September 30, 2008.
For the
year ending December 31, 2008, we anticipate that we will make investments of
approximately $115.0 million to $130.0 million for capital expenditures (net of
approximately $75.0 million in the aggregate previously reimbursed or expected
to be reimbursed from lenders/lessors or funded through construction financing),
comprised of approximately $25.0 million to $30.0 million of net recurring
capital expenditures, approximately $40.0 million to $45.0 million of net
capital expenditures in connection with our community expansion and development
program, and approximately $50.0 million to $55.0 million of expenditures
relating to other major projects (including corporate initiatives). Other
major projects include unusual or non-recurring capital projects, projects which
create new or enhanced economics, such as major renovations or repositioning
projects at our communities (including deferred expenditures in connection with
recently acquired communities), integration related expenditures, and
expenditures supporting the expansion of our ancillary services programs.
For the nine months ended September 30, 2008, we spent approximately $19.6
million for net recurring capital expenditures, approximately $43.1 million for
capital expenditures in connection with our expansion and development program
(net of $26.8 million that had been reimbursed as of September 30, 2008) and
approximately $42.2 million for expenditures relating to other major projects
and corporate initiatives. We anticipate funding the majority of
capital expenditures relating to our expansion and development program through
debt and lease financings for those projects. We expect that our other
anticipated capital expenditures will be funded from cash on hand, cash flows
from operations, amounts drawn on our credit facility and proceeds from the
refinancing of various assets. There can be no assurance that any such
financings or refinancings will be available to us or on terms that are
acceptable to us.
Through
2007, we focused on growth primarily through acquisition, spending approximately
$2.2 billion during 2007 and 2006 on acquiring communities and companies,
excluding fees, expenses and assumption of debt. Given the current
market environment, we anticipate a reduced level of acquisition activity over
the near term, and consequently reduced acquisition spending. However, given the
potential opportunities that may arise as a result of the recent market
disruption, we may also grow through the selective acquisition and consolidation
of additional communities, asset portfolios and other senior living
companies.
In the
normal course of business, we use a variety of financial instruments to mitigate
interest rate risk. We have entered into certain interest rate
protection and swap agreements to effectively cap or convert floating rate debt
to fixed rate. 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 specified
thresholds. In periods of significant volatility in the credit
markets, the value of these swaps can change significantly and as a result, the
amount of collateral we are required to post can change
significantly. For example, cash collateral posted as of December 31,
2007 and September 30, 2008 was approximately $5.0 million and $8.3 million,
respectively. If we are required to post additional collateral in
connection with our interest rate swaps, our liquidity could be negatively
impacted.
We expect
to continue to fund our business through our principal sources of liquidity.
Principally, during 2008, we anticipate that our liquidity will come from cash
on hand, cash flows from operations, amounts drawn on our credit facility and
proceeds from the refinancing of various assets. 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 or to reduce our dividends,
any of which could harm our business.
We
presently anticipate that we will be able to refinance or extend our existing
credit facility prior to its May 2009 maturity. Given the current
uncertainty in the credit market, however, there can be no assurance that we
will be able to do so. Assuming that we are able to refinance or
extend the credit facility in accordance with our expectations and on terms that
are acceptable to us, we currently estimate that our existing cash flows from
operations, together with existing working capital, amounts drawn under our
credit facility and proceeds from anticipated refinancings of various assets,
will be sufficient to fund our liquidity needs for at least the next 12
months.
Our
actual liquidity and capital funding requirements depend on numerous factors,
including our operating results, the actual level of capital expenditures, our
expansion, development and acquisition activity, general economic conditions and
the cost of capital. Shortfalls in cash flows from operating results
or other principal sources of liquidity may have an adverse impact on our
ability to execute our business and growth strategies. The current
volatility in the credit and financial markets may also have an adverse impact
our liquidity by making it more difficult for us to obtain financing or
refinancing. As a result, this may impact our ability to grow our
business, pay dividends, maintain capital spending levels, expand certain
communities, or execute other aspects of our business strategy. In
order to continue some of these activities at historical or planned levels, we
may incur additional indebtedness or lease financing to provide additional
funding. There can be no assurance that any such additional financing
will be available or on terms that are acceptable to us (particularly in light
of current adverse conditions in the credit market).
As of
September 30, 2008, we are in compliance with the financial covenants of our
outstanding debt and lease agreements.
Credit
Facility
As of
September 30, 2008, we had an available secured line of credit of $249.4 million
($70.0 million letter of credit sublimit) and a letter of credit facility of up
to $80.0 million.
On May
12, 2008, we entered into an amendment to our line of credit agreement to permit
us to repurchase up to $150 million of our common stock from time to time, to
reduce the revolving loan commitment from $320 million to $270 million effective
as of the date of the amendment, to provide that the line of credit will bear
interest at the base rate plus 3.0% or LIBOR plus 4.0%, at our election, and to
revise certain financial covenants. In addition, pursuant to the
terms of the amendment, the revolving loan commitments will be further reduced
on the last day of each fiscal quarter (determined on a cumulative basis as of
such date) by the greater of the following amounts (if positive): (a) 50% of the
amount equal to the aggregate net proceeds to us from refinancings minus $50
million; and (b) the aggregate amount of share repurchases by us minus $50
million, provided that the revolving loan commitments shall be further reduced,
if applicable, to $245 million on December 31, 2008 and $220 million on March
31, 2009. In addition, we exercised each of our two options to extend
the credit facility maturity date to May
15,
2009. As a result of the May 15, 2009 maturity date, amounts drawn
against the line of credit at September 30, 2008 have been classified as a
current liability on our condensed consolidated balance sheet. We
must also pay a fee equal to 1.50% of the amount of any outstanding letters of
credit issued under the facility. As of September 30, 2008, $84.8
million was drawn on the revolving loan facility and $119.8 million of letters
of credit had been issued under the agreements. The agreements are
secured by a pledge of our tier one subsidiaries and, subject to certain
limitations, subsidiaries formed to consummate future acquisitions.
Effective
October 27, 2008, we entered into an additional amendment to our line of credit
agreement. Pursuant to the amendment, Lehman Commercial Paper Inc.,
the original administrative agent under the line of credit, was replaced by Bank
of America, N.A., the swing line subfacility was deleted, and certain other
administrative amendments were made.
In
connection with the credit agreement, we and certain of our subsidiaries, as
guarantors, entered into a guarantee and pledge agreement with the
administrative agent, pursuant to which certain of the guarantors guarantee the
prompt and complete payment and performance when due by us of our obligations
under the credit agreement and certain of the guarantors pledge certain assets
for the benefit of the secured parties as collateral security for the payment
and performance of our obligations under the credit agreement and under the
guarantee. The pledged assets include, among other things, equity interests in
certain of our subsidiaries, all related books and records and, to the extent
not otherwise included, all proceeds and products of any and all of the
foregoing, all supporting obligations in respect of any of the foregoing and all
collateral security and guarantees given by any person with respect to any of
the foregoing.
The
credit agreement contains typical representations and covenants for loans of
this type. A violation of any of these covenants (including any failure to
remain in compliance with any financial covenants contained therein) could
result in a default under the credit agreement, which would result in
termination of all commitments and loans under the credit agreement and all
other amounts owing under the credit agreement and certain other loan and lease
agreements becoming immediately due and payable.
As stated
above, we presently anticipate that we will be able to refinance or extend our
existing credit facility prior to its May 2009 maturity. Given the
current uncertainty in the credit market, however, there can be no assurance
that we will be able to do so.
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, 2007.
During
the nine months ended September 30, 2008, our long-term debt obligations,
including the related interest payments, increased by $144.6 million to $2.7
billion at September 30, 2008 from $2.6 billion at December 31, 2007 in
connection with financing transactions we completed during the nine months ended
September 30, 2008. There have been no other material changes in our
contractual commitments during the nine months ended September 30,
2008.
In
accordance with applicable accounting pronouncements, as of September 30, 2008,
our condensed consolidated financial statements reflect approximately $266.7
million of debt obligations (excluding the line of credit) due within the next
12 months and a total of approximately $305.2 million of debt obligations
(excluding the line of credit) due on or prior to December 31,
2010. The amount due within the next 12 months has been classified as
a current liability on our condensed consolidated balance sheet.
Although
these debt obligations are scheduled to mature on or prior to December 31, 2010,
we have the option, subject to the satisfaction of customary conditions (such as
the absence of a material adverse change), to extend the maturity of
approximately $224.6 million of certain mortgages payable included in such debt
until 2011, as the instruments associated with such mortgages payable provide
that we can extend the respective maturity dates for up to two terms of 12
months each from the existing maturity dates. We presently anticipate
that we will exercise the
extension
options and will satisfy the conditions precedent for doing so with respect to
each of these obligations. After giving effect to the exercise of the
extension options and to amounts repaid subsequent to quarter end on the
aforementioned debt (see note below), we anticipate that only $5.3 million of
the mortgages payable due on or prior to December 31, 2010 will actually become
due and payable on or prior to December 31, 2010.
The
following table summarizes the principal amount due at maturity for mortgages
scheduled to mature during the remainder of fiscal 2008, fiscal 2009 and fiscal
2010 both on a financial statement reporting basis (without taking into account
the exercise of the extension options) and on a basis that reports the latest
maturity after giving effect to the exercise of each extension option (dollars
in thousands):
|
|
Earliest
Maturity
Exclusive
of
Extension
Options(1)
|
|
|
Latest
Maturity
Inclusive
of
Extension
Options(1)
|
|
Three
Months Ending December 31, 2008
|
|
$ |
— |
|
|
$ |
— |
|
Twelve
Months Ending December 31, 2009
|
|
|
224,572 |
|
|
|
— |
|
Twelve
Months Ending December 31, 2010
|
|
|
26,400 |
(2) |
|
|
26,400 |
(2) |
Total
|
|
$ |
250,972 |
|
|
$ |
26,400 |
|
________
(1)
|
Excludes
an aggregate of $8.7 million of periodic principal amortization payments
due during the remainder of fiscal 2008, fiscal 2009 and fiscal 2010 on
all of our mortgages payable ($0.7 million in 2008, $3.6 million in 2009
and $4.4 million in 2010).
|
(2)
|
Subsequent
to quarter end, we repaid approximately $21.1 million of this amount and
as a result, $5.3 million is now scheduled to mature during the twelve
months ending December 31, 2010.
|
In
addition to the foregoing maturities, our corporate line of credit is scheduled
to mature on May 15, 2009. As of September 30, 2008, $84.8 million
was drawn on the revolving loan facility and $119.8 million of letters of credit
had been issued under the line of credit.
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 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 (loss) before:
|
·
|
provision
(benefit) for income taxes;
|
|
·
|
non-operating
(income) loss items;
|
|
·
|
depreciation
and amortization;
|
|
·
|
straight-line
lease expense (income);
|
|
·
|
amortization
of deferred gain;
|
|
·
|
amortization
of deferred entrance fees; and
|
|
·
|
non-cash
compensation expense;
|
|
·
|
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 communities 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 communities,
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, 2008 and 2007 (dollars in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(35,877 |
) |
|
$ |
(58,927 |
) |
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
Minority
interest
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
(506 |
) |
Benefit
for income taxes
|
|
|
(22,338 |
) |
|
|
(35,125 |
) |
|
|
(54,996 |
) |
|
|
(68,408 |
) |
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(358 |
) |
|
|
309 |
|
|
|
750 |
|
|
|
2,362 |
|
Loss
on extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
3,052 |
|
|
|
803 |
|
Other
non-operating (income) expense
|
|
|
(69 |
) |
|
|
— |
|
|
|
424 |
|
|
|
(238 |
) |
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
30,743 |
|
|
|
31,290 |
|
|
|
90,365 |
|
|
|
84,482 |
|
Capitalized
lease obligation
|
|
|
6,856 |
|
|
|
7,182 |
|
|
|
20,529 |
|
|
|
22,520 |
|
Amortization
of deferred financing costs
|
|
|
3,004 |
|
|
|
1,151 |
|
|
|
6,940 |
|
|
|
4,878 |
|
Change
in fair value of derivatives and amortization
|
|
|
8,454 |
|
|
|
43,731 |
|
|
|
17,344 |
|
|
|
30,893 |
|
Interest
income
|
|
|
(1,383 |
) |
|
|
(1,695 |
) |
|
|
(6,169 |
) |
|
|
(5,077 |
) |
Loss
from operations
|
|
|
(10,968 |
) |
|
|
(12,079 |
) |
|
|
(16,216 |
) |
|
|
(41,033 |
) |
Depreciation
and amortization
|
|
|
67,066 |
|
|
|
79,235 |
|
|
|
207,882 |
|
|
|
234,690 |
|
Straight-line
lease expense
|
|
|
4,709 |
|
|
|
6,451 |
|
|
|
15,675 |
|
|
|
18,815 |
|
Amortization
of deferred gain
|
|
|
(1,086 |
) |
|
|
(1,085 |
) |
|
|
(3,257 |
) |
|
|
(3,255 |
) |
Amortization
of entrance fees
|
|
|
(4,707 |
) |
|
|
(5,322 |
) |
|
|
(16,527 |
) |
|
|
(14,222 |
) |
Non-cash
compensation expense
|
|
|
6,737 |
|
|
|
7,138 |
|
|
|
23,368 |
|
|
|
26,150 |
|
Entrance
fee receipts(2)
|
|
|
11,526 |
|
|
|
14,369 |
|
|
|
30,395 |
|
|
|
31,333 |
|
Entrance
fee disbursements
|
|
|
(5,856 |
) |
|
|
(5,084 |
) |
|
|
(14,331 |
) |
|
|
(15,488 |
) |
Adjusted
EBITDA
|
|
$ |
67,421 |
|
|
$ |
83,623 |
|
|
$ |
226,989 |
|
|
$ |
236,990 |
|
|
(1)
|
The
calculation of Adjusted EBITDA includes merger, integration, and hurricane
and named tropical storms expense as well as other non-recurring and
acquisition transition costs totaling $7.5 million and $4.0 million for
the three months ended September 30, 2008 and 2007, respectively, and
$12.8 million and $11.0 million for the nine months ended September 30,
2008 and 2007, respectively. Additionally, the calculation of
Adjusted EBITDA for the nine months ended September 30, 2008 includes the
effect of the $8.0 million reserve established for certain litigation
(Note 7).
|
|
(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 (CFFO) 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;
|
|
·
|
lease
financing debt amortization with fair market value or no purchase
options;
|
|
·
|
recurring
capital expenditures.
|
Recurring
capital expenditures include expenditures capitalized in accordance with GAAP
that are funded from CFFO. Amounts excluded from recurring capital expenditures
consist primarily of unusual or non-recurring capital items (including
integration capital expenditures), community purchases and/or major projects or
renovations that are funded using financing proceeds and/or proceeds from the
sale of communities that are held for sale. Beginning in 2008, our
calculation of CFFO was modified to subtract principal amortization related to
capital leases that contain fair market value or no purchase
options.
Management’s
Use of Cash From Facility Operations
We use
CFFO 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. CFFO 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 communities
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
CFFO 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. CFFO 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 CFFO, 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 communities 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 communities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
We
believe CFFO 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
communities.
CFFO 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 CFFO as
a substitute for any such GAAP financial measure. We strongly urge
you to review the reconciliation of CFFO 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 CFFO is not a
measure of financial performance under GAAP and is susceptible to varying
calculations, the CFFO 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
CFFO for the three and nine months ended September 30, 2008 and 2007 (dollars in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
30,630 |
|
|
$ |
53,499 |
|
|
$ |
107,354 |
|
|
$ |
138,409 |
|
Changes
in operating assets and liabilities
|
|
|
2,062 |
|
|
|
(8,796 |
) |
|
|
13,303 |
|
|
|
(3,454 |
) |
Refundable
entrance fees received(3)
|
|
|
4,273 |
|
|
|
8,696 |
|
|
|
15,185 |
|
|
|
17,018 |
|
Entrance
fee refunds disbursed
|
|
|
(5,856 |
) |
|
|
(5,084 |
) |
|
|
(14,331 |
) |
|
|
(15,488 |
) |
Recurring
capital expenditures, net
|
|
|
(6,965 |
) |
|
|
(6,213 |
) |
|
|
(19,616 |
) |
|
|
(19,487 |
) |
Lease
financing debt amortization with fair market value or no purchase
options
|
|
|
(1,688 |
) |
|
|
(1,456 |
) |
|
|
(4,975 |
) |
|
|
(4,174 |
) |
Reimbursement
of operating expenses and other
|
|
|
— |
|
|
|
1,168 |
|
|
|
794 |
|
|
|
3,110 |
|
Cash
From Facility Operations
|
|
$ |
22,456 |
|
|
$ |
41,814 |
|
|
$ |
97,714 |
|
|
$ |
115,934 |
|
|
(1)
|
The
calculation of CFFO includes merger, integration, and hurricane and named
tropical storms expense as well as non-recurring and acquisition
transition costs totaling $7.5 million and $4.0 million for the three
months ended September 30, 2008 and 2007, respectively, and $12.8 million
and $11.0 million for the nine months ended September 30, 2008 and 2007,
respectively. Additionally, the calculation of CFFO for the
nine months ended September 30, 2008 includes the effect of the $8.0
million reserve established for certain litigation (Note
7).
|
|
(2)
|
The
September 30, 2007 amounts have been reclassified to conform to the
modified definition of CFFO used for the current
period.
|
|
(3)
|
Total
entrance fee receipts for the three months ended September 30, 2008 and
2007 were $11.5 million and $14.4 million, respectively, including $7.3
million and $5.7 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, 2008 and 2007 were $30.4 million and $31.3 million,
respectively, including $15.2 million and $14.3 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 (loss) 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 communities 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 communities 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 communities,
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, 2008 and 2007 (dollars in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(35,877 |
) |
|
$ |
(58,927 |
) |
|
$ |
(94,455 |
) |
|
$ |
(112,742 |
) |
Minority
interest
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
(506 |
) |
Provision
(benefit) for income taxes
|
|
|
(22,338 |
) |
|
|
(35,125 |
) |
|
|
(54,996 |
) |
|
|
(68,408 |
) |
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(358 |
) |
|
|
309 |
|
|
|
750 |
|
|
|
2,362 |
|
Loss
on extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
3,052 |
|
|
|
803 |
|
Other
non-operating (income) expense
|
|
|
(69 |
) |
|
|
— |
|
|
|
424 |
|
|
|
(238 |
) |
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
30,743 |
|
|
|
31,290 |
|
|
|
90,365 |
|
|
|
84,482 |
|
Capitalized
lease obligation
|
|
|
6,856 |
|
|
|
7,182 |
|
|
|
20,529 |
|
|
|
22,520 |
|
Amortization
of deferred financing costs
|
|
|
3,004 |
|
|
|
1,151 |
|
|
|
6,940 |
|
|
|
4,878 |
|
Change
in fair value of derivatives and amortization
|
|
|
8,454 |
|
|
|
43,731 |
|
|
|
17,344 |
|
|
|
30,893 |
|
Interest
income
|
|
|
(1,383 |
) |
|
|
(1,695 |
) |
|
|
(6,169 |
) |
|
|
(5,077 |
) |
Loss
from operations
|
|
|
(10,968 |
) |
|
|
(12,079 |
) |
|
|
(16,216 |
) |
|
|
(41,033 |
) |
Depreciation
and amortization
|
|
|
67,066 |
|
|
|
79,235 |
|
|
|
207,882 |
|
|
|
234,690 |
|
Facility
lease expense
|
|
|
67,017 |
|
|
|
67,708 |
|
|
|
202,028 |
|
|
|
203,365 |
|
General
and administrative (including non-cash stock compensation
expense)
|
|
|
32,948 |
|
|
|
34,733 |
|
|
|
109,633 |
|
|
|
111,144 |
|
Amortization
of entrance fees
|
|
|
(4,707 |
) |
|
|
(5,322 |
) |
|
|
(16,527 |
) |
|
|
(14,222 |
) |
Management
fees
|
|
|
(1,527 |
) |
|
|
(1,493 |
) |
|
|
(5,604 |
) |
|
|
(4,777 |
) |
Facility
Operating Income
|
|
$ |
149,829 |
|
|
$ |
162,782 |
|
|
$ |
481,196 |
|
|
$ |
489,167 |
|
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, other 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, 2008, excluding our line of credit, we had
approximately $917.9 million of long-term fixed rate debt, $892.5 million of
long-term variable rate debt and $323.9 million of capital and financing lease
obligations. As of September 30, 2008, our total fixed-rate debt and
variable-rate debt outstanding had weighted-average interest rates of
4.99%.
We do not
expect changes in interest rates to have a material effect on cash flows from
operating activities since approximately 99.9% of our debt and lease payments,
excluding our line of credit, either have fixed rates or variable rates that are
subject to swap agreements with major financial institutions to manage our
risk. As of September 30, 2008, we had entered into interest rate
swaps for a majority of our outstanding variable rate debt and as a result, a
change in short-term interest rates would not materially affect our cash flows
from operating activities.
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.
During
the nine months ended September 30, 2008, we terminated six swap agreements with
a total notional amount of $259.7 million, and recouponed at a more favorable
interest rate, notional amounts of $726.5 million. In conjunction
with these transactions, $27.6 million was paid to the respective counterparties
and we recorded a $1.6 million receivable and a $0.4 million
payable. We recorded a $1.6 million reserve on the aforementioned
receivable as the counterparty to the swap which originated the receivable has
filed for protection under Chapter 11 of the Bankruptcy Code.
Item 4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer each concluded that, as of September 30, 2008, 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, 2008 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 7 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,
2007.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
The
following table contains information regarding purchases of our common stock
made during the quarter ended September 30, 2008 by or on behalf of the
Company or any ‘‘affiliated purchaser,’’ as defined by Rule 10b-18(a)(3) of the
Exchange Act:
|
|
Total
Number
of
Shares
|
|
|
Average
Price
Paid
per
|
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans
|
|
|
Approximate
Dollar
Value
of Shares that
May
Yet Be Purchased
Under
the Plans
|
|
07/01/08
– 07/31/08
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
130,011,000 |
|
08/01/08
– 08/31/08
|
|
|
431,758 |
|
|
|
21.19 |
|
|
|
431,758 |
|
|
$ |
120,862,000 |
|
09/01/08
– 09/30/08
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
120,862,000 |
|
Total
|
|
|
431,758 |
|
|
$ |
21.19 |
|
|
|
431,758 |
|
|
$ |
120,862,000 |
|
(1) All
share repurchases were made in open market transactions pursuant to the publicly
announced repurchase program summarized in Note 2.
(2) On
March 19, 2008, we announced that our board of directors had approved a share
repurchase program that authorizes us to purchase up to $150.0 million in the
aggregate of our common stock. Purchases may be made from time to
time using a variety of methods, which may include open market purchases,
privately negotiated transactions or block trades, or by any combination of such
methods, in accordance with applicable insider trading and other securities laws
and regulations. The size, scope and timing of any purchases will be
based on business, market and other conditions and factors, including price,
regulatory and contractual requirements or consents, and capital
availability. The repurchase program does not obligate us to acquire
any particular amount of common stock, does not have an expiration date, and may
be suspended, modified or discontinued at any time at our discretion
without
prior
notice. We did not have any repurchase plan or program that expired
during the third quarter of 2008, nor have we determined to terminate the
current plan.
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:
|
|
Co-President
and Chief Financial Officer
|
|
|
|
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
Date:
|
|
November
6, 2008
|
|
|
|
|
|
|
|
|
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 Bylaws of the Company (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K filed on December 20,
2007).
|
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
|
|
Third Amendment,
effective as of October 27, 2008, to the Amended and Restated Credit
Agreement, dated as of November 15, 2006, among Brookdale Senior Living
Inc., the several lenders parties thereto, and Bank of America, N.A., as
successor administrative agent (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on October 31, 2008).
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32
|
|
Certification of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
47