form10-q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes £ 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
October 30, 2009, 118,620,006 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, 2009
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
|
|
$ |
159,313 |
|
|
$ |
53,973 |
|
Cash
and escrow deposits — restricted
|
|
|
104,434 |
|
|
|
86,723 |
|
Accounts
receivable, net
|
|
|
81,583 |
|
|
|
91,646 |
|
Deferred
tax asset
|
|
|
14,677 |
|
|
|
14,677 |
|
Prepaid
expenses and other current assets, net
|
|
|
46,195 |
|
|
|
33,766 |
|
Total
current assets
|
|
|
406,202 |
|
|
|
280,785 |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
3,620,469 |
|
|
|
3,697,834 |
|
Cash
and escrow deposits — restricted
|
|
|
66,971 |
|
|
|
29,988 |
|
Investment
in unconsolidated ventures
|
|
|
22,180 |
|
|
|
28,420 |
|
Goodwill
|
|
|
109,967 |
|
|
|
109,967 |
|
Other
intangible assets, net
|
|
|
206,438 |
|
|
|
231,589 |
|
Other
assets, net
|
|
|
69,455 |
|
|
|
70,675 |
|
Total
assets
|
|
$ |
4,501,682 |
|
|
$ |
4,449,258 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
155,397 |
|
|
$ |
158,476 |
|
Current
portion of line of credit
|
|
|
― |
|
|
|
4,453 |
|
Trade
accounts payable
|
|
|
42,541 |
|
|
|
29,105 |
|
Accrued
expenses
|
|
|
184,873 |
|
|
|
170,366 |
|
Refundable
entrance fees and deferred revenue
|
|
|
256,061 |
|
|
|
253,647 |
|
Tenant
security deposits
|
|
|
14,920 |
|
|
|
29,965 |
|
Total
current liabilities
|
|
|
653,792 |
|
|
|
646,012 |
|
Long-term
debt, less current portion
|
|
|
2,304,168 |
|
|
|
2,235,000 |
|
Line
of credit, less current portion
|
|
|
― |
|
|
|
155,000 |
|
Deferred
entrance fee revenue
|
|
|
81,221 |
|
|
|
76,410 |
|
Deferred
liabilities
|
|
|
145,998 |
|
|
|
135,947 |
|
Deferred
tax liability
|
|
|
159,389 |
|
|
|
178,647 |
|
Other
liabilities
|
|
|
55,460 |
|
|
|
61,641 |
|
Total
liabilities
|
|
|
3,400,028 |
|
|
|
3,488,657 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 50,000,000 shares authorized at September 30, 2009
and December 31, 2008; no shares issued and outstanding
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.01 par value, 200,000,000 shares authorized at September 30,
2009 and December 31, 2008; 124,386,194 and 106,467,764 shares issued and
123,174,893 and 105,256,463 shares outstanding (including 4,556,436 and
3,542,801 unvested restricted shares), respectively
|
|
|
1,232 |
|
|
|
1,053 |
|
Additional
paid-in-capital
|
|
|
1,876,783 |
|
|
|
1,690,851 |
|
Treasury
stock, at cost; 1,211,301 shares at September 30, 2009 and December 31,
2008
|
|
|
(29,187 |
) |
|
|
(29,187 |
) |
Accumulated
deficit
|
|
|
(746,176 |
) |
|
|
(700,720 |
) |
Accumulated
other comprehensive loss
|
|
|
(998 |
) |
|
|
(1,396 |
) |
Total
stockholders’ equity
|
|
|
1,101,654 |
|
|
|
960,601 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
4,501,682 |
|
|
$ |
4,449,258 |
|
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
|
|
$ |
503,856 |
|
|
$ |
480,750 |
|
|
$ |
1,499,544 |
|
|
$ |
1,435,522 |
|
Management
fees
|
|
|
1,987 |
|
|
|
1,527 |
|
|
|
5,002 |
|
|
|
5,604 |
|
Total
revenue
|
|
|
505,843 |
|
|
|
482,277 |
|
|
|
1,504,546 |
|
|
|
1,441,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense (excluding depreciation and amortization of $45,851,
$45,670, $137,102 and $143,765, respectively)
|
|
|
328,939 |
|
|
|
322,601 |
|
|
|
963,637 |
|
|
|
934,186 |
|
General
and administrative expense (including non-cash stock-based compensation
expense of $7,869, $6,737, $21,549 and $23,368,
respectively)
|
|
|
34,720 |
|
|
|
32,948 |
|
|
|
100,148 |
|
|
|
109,633 |
|
Hurricane
and named tropical storms expense
|
|
|
― |
|
|
|
3,613 |
|
|
|
― |
|
|
|
3,613 |
|
Facility
lease expense
|
|
|
68,036 |
|
|
|
67,017 |
|
|
|
204,211 |
|
|
|
202,028 |
|
Depreciation
and amortization
|
|
|
66,983 |
|
|
|
67,066 |
|
|
|
202,378 |
|
|
|
207,882 |
|
Total
operating expense
|
|
|
498,678 |
|
|
|
493,245 |
|
|
|
1,470,374 |
|
|
|
1,457,342 |
|
Income
(loss) from operations
|
|
|
7,165 |
|
|
|
(10,968 |
) |
|
|
34,172 |
|
|
|
(16,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
623 |
|
|
|
1,383 |
|
|
|
1,771 |
|
|
|
6,169 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(30,574 |
) |
|
|
(37,599 |
) |
|
|
(96,845 |
) |
|
|
(110,894 |
) |
Amortization
of deferred financing costs
|
|
|
(2,167 |
) |
|
|
(3,004 |
) |
|
|
(7,099 |
) |
|
|
(6,940 |
) |
Change
in fair value of derivatives and amortization
|
|
|
(2,478 |
) |
|
|
(8,454 |
) |
|
|
1,137 |
|
|
|
(17,344 |
) |
Loss
on extinguishment of debt
|
|
|
(1,178 |
) |
|
|
― |
|
|
|
(2,918 |
) |
|
|
(3,052 |
) |
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
42 |
|
|
|
358 |
|
|
|
1,218 |
|
|
|
(750 |
) |
Other
non-operating (expense) income
|
|
|
(52 |
) |
|
|
69 |
|
|
|
4,172 |
|
|
|
(424 |
) |
Loss
before income taxes
|
|
|
(28,619 |
) |
|
|
(58,215 |
) |
|
|
(64,392 |
) |
|
|
(149,451 |
) |
Benefit
for income taxes
|
|
|
7,329 |
|
|
|
22,338 |
|
|
|
18,936 |
|
|
|
54,996 |
|
Net
loss
|
|
$ |
(21,290 |
) |
|
$ |
(35,877 |
) |
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$ |
(0.18 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.93 |
) |
Weighted
average shares used in
computing
basic and diluted loss per share
|
|
|
118,455 |
|
|
|
101,398 |
|
|
|
108,807 |
|
|
|
101,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
― |
|
|
$ |
0.25 |
|
|
$ |
― |
|
|
$ |
0.75 |
|
See
accompanying notes to condensed consolidated financial
statements.
BROOKDALE SENIOR LIVING INC.
CONDENSED
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited,
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In-
Capital
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
|
|
Balances
at January 1, 2009
|
|
|
105,256 |
|
|
$ |
1,053 |
|
|
$ |
1,690,851 |
|
|
$ |
(29,187 |
) |
|
$ |
(700,720 |
) |
|
$ |
(1,396 |
) |
|
$ |
960,601 |
|
Compensation
expense related to restricted stock and restricted stock unit
grants
|
|
|
― |
|
|
|
― |
|
|
|
21,549 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
21,549 |
|
Net
loss
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
(45,456 |
) |
|
|
― |
|
|
|
(45,456 |
) |
Issuance
of common stock under Associate Stock Purchase Plan
|
|
|
92 |
|
|
|
1 |
|
|
|
742 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
743 |
|
Restricted
stock, net
|
|
|
1,780 |
|
|
|
18 |
|
|
|
(18 |
) |
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
Reclassification
of net loss on derivatives into earnings
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
369 |
|
|
|
369 |
|
Amortization
of payments from settlement of forward interest rate swaps
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
282 |
|
|
|
282 |
|
Issuance
of common stock from equity offering, net
|
|
|
16,047 |
|
|
|
160 |
|
|
|
163,667 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
163,827 |
|
Other
|
|
|
― |
|
|
|
― |
|
|
|
(8 |
) |
|
|
― |
|
|
|
― |
|
|
|
(253 |
) |
|
|
(261 |
) |
Balances
at September 30, 2009
|
|
|
123,175 |
|
|
$ |
1,232 |
|
|
$ |
1,876,783 |
|
|
$ |
(29,187 |
) |
|
$ |
(746,176 |
) |
|
$ |
(998 |
) |
|
$ |
1,101,654 |
|
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
|
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Loss
on extinguishment of debt
|
|
|
2,918 |
|
|
|
3,052 |
|
Depreciation
and amortization
|
|
|
209,477 |
|
|
|
214,822 |
|
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(1,218 |
) |
|
|
750 |
|
Distributions
from unconsolidated ventures from cumulative share of net
earnings
|
|
|
455 |
|
|
|
1,918 |
|
Amortization
of deferred gain
|
|
|
(3,259 |
) |
|
|
(3,257 |
) |
Amortization
of entrance fees
|
|
|
(16,084 |
) |
|
|
(16,527 |
) |
Proceeds
from deferred entrance fee revenue
|
|
|
23,225 |
|
|
|
15,210 |
|
Deferred
income tax benefit
|
|
|
(19,440 |
) |
|
|
(57,243 |
) |
Change
in deferred lease liability
|
|
|
12,073 |
|
|
|
15,675 |
|
Change
in fair value of derivatives and amortization
|
|
|
(1,137 |
) |
|
|
17,344 |
|
Gain
on sale of assets
|
|
|
(4,352 |
) |
|
|
― |
|
Non-cash
stock-based compensation
|
|
|
21,549 |
|
|
|
23,368 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
11,234 |
|
|
|
(18,165 |
) |
Prepaid
expenses and other assets, net
|
|
|
(10,734 |
) |
|
|
1,263 |
|
Accounts
payable and accrued expenses
|
|
|
29,557 |
|
|
|
3,051 |
|
Tenant
refundable fees and security deposits
|
|
|
(14,297 |
) |
|
|
(439 |
) |
Deferred
revenue
|
|
|
1,811 |
|
|
|
(3,392 |
) |
Other
|
|
|
(10,350 |
) |
|
|
4,379 |
|
Net
cash provided by operating activities
|
|
|
185,972 |
|
|
|
107,354 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Decrease
in lease security deposits and lease acquisition deposits,
net
|
|
|
2,071 |
|
|
|
2,416 |
|
Increase
in cash and escrow deposits — restricted
|
|
|
(54,694 |
) |
|
|
(7,795 |
) |
Net
proceeds from the sale of property, plant and equipment
|
|
|
210 |
|
|
|
― |
|
Additions
to property, plant and equipment and leasehold intangibles, net of related
payables
|
|
|
(87,507 |
) |
|
|
(134,179 |
) |
Acquisition
of assets, net of related payables and cash received
|
|
|
(1,227 |
) |
|
|
(5,105 |
) |
(Issuance
of) payment on notes receivable, net
|
|
|
(590 |
) |
|
|
39,661 |
|
Investment
in unconsolidated ventures
|
|
|
(1,246 |
) |
|
|
(1,163 |
) |
Distributions
received from unconsolidated ventures
|
|
|
969 |
|
|
|
300 |
|
Proceeds
from sale leaseback transaction
|
|
|
9,166 |
|
|
|
― |
|
Proceeds
from sale of unconsolidated venture
|
|
|
8,831 |
|
|
|
4,165 |
|
Net
cash used in investing activities
|
|
|
(124,017 |
) |
|
|
(101,700 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
67,986 |
|
|
|
467,769 |
|
Repayment
of debt and capital lease obligation
|
|
|
(21,194 |
) |
|
|
(229,210 |
) |
Proceeds
from line of credit
|
|
|
60,446 |
|
|
|
264,757 |
|
Repayment
of line of credit
|
|
|
(219,899 |
) |
|
|
(378,000 |
) |
Payment
of dividends
|
|
|
― |
|
|
|
(103,696 |
) |
Purchase
of treasury stock
|
|
|
― |
|
|
|
(29,187 |
) |
Payment
of financing costs, net of related payables
|
|
|
(7,258 |
) |
|
|
(13,720 |
) |
Proceeds
from public equity offering, net
|
|
|
163,827 |
|
|
|
― |
|
Other
|
|
|
(713 |
) |
|
|
(1,373 |
) |
Refundable
entrance fees:
|
|
|
|
|
|
|
|
|
Proceeds
from refundable entrance fees
|
|
|
17,032 |
|
|
|
15,185 |
|
Refunds
of entrance fees
|
|
|
(16,842 |
) |
|
|
(14,331 |
) |
Recouponing
and payment of swap termination
|
|
|
― |
|
|
|
(27,627 |
) |
Cash
portion of loss on extinguishment of debt
|
|
|
― |
|
|
|
(1,240 |
) |
Net
cash provided by (used in) financing activities
|
|
|
43,385 |
|
|
|
(50,673 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
105,340 |
|
|
|
(45,019 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
53,973 |
|
|
|
100,904 |
|
Cash
and cash equivalents at end of period
|
|
$ |
159,313 |
|
|
$ |
55,885 |
|
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, 2009, 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, 2008, as filed with the Securities and Exchange
Commission.
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 the resident’s unit or 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 $62.2 million and $63.4 million at September 30,
2009 and December 31, 2008, 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
Substantially
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).
Fair
Value Measurements
Cash and
cash equivalents, cash and escrow deposits-restricted and derivative financial
instruments are reflected in the accompanying condensed consolidated balance
sheets at amounts considered by management to reasonably approximate fair
value. Management estimates the fair value of its long-term debt
using a discounted cash flow analysis based upon the Company’s current borrowing
rate for debt with similar maturities and collateral securing the
indebtedness. The Company had outstanding debt with a carrying value
of $2.5 billion and $2.6 billion as of September 30, 2009 and December 31, 2008,
respectively. The fair value of debt both as of September 30, 2009
and December 31, 2008 was $2.4 billion.
The Financial Accounting
Standards Board (FASB) guidance on Fair Value Measurement 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
16).
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 for each claim ($3.0 million on or prior to
December 31, 2008 and $250,000 effective January 1, 2009). 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
The
Company follows accounting standards set by the FASB. The FASB sets
generally accepted accounting principles (“GAAP”) that the Company follows to
ensure consistent reporting of its financial condition, results of operations
and cash flows. References to GAAP issued by the FASB in these footnotes
are to the FASB Accounting Standards Codification, sometimes referred to as the
Codification or ASC. The FASB finalized the Codification effective for
periods ending on or after September 15, 2009. The Codification does not
change how the Company accounts for its transactions or the nature of related
disclosures made.
The FASB guidance on
Business Combinations was effective for business combinations with an
acquisition date on or after January 1, 2009 and is to be applied
prospectively. The guidance 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. Itestablishes 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. As of
September 30, 2009, this guidance has not had a material impact on the condensed
consolidated financial statements.
The
Company adopted the provisions of the FASB guidance on Consolidations relating
to the accounting for noncontrolling interests on January 1,
2009. This guidance amends previous authoritative guidance by
requiring companies to report a noncontrolling interest in a subsidiary as
equity in its consolidated financial statements. Disclosure of the
amounts of consolidated net income attributable to the parent and the
noncontrolling interest are required. This guidance also clarifies
that transactions that result in a change in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation will be treated as equity
transactions, while a gain or loss will be recognized by the parent when a
subsidiary is deconsolidated. Other than the required
disclosures, the adoption had no impact on the condensed consolidated financial
statements.
In
February 2008, the FASB issued guidance which delays the effective date of the
FASB guidance on Fair Value Measurements for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The
guidance partially defers the effective date of the FASB guidance to fiscal
years beginning after November 15, 2008 and as a result was effective for the
Company beginning January 1, 2009. The adoption of the guidance had
no impact on the condensed consolidated financial
statements.
The
Company adopted the provision of the FASB guidance on disclosures relating to
Derivatives and Hedging on January 1, 2009. This guidance requires
entities to provide enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedge items are
accounted for and how derivative
instruments
and related hedged items affect an entity’s financial position, results of
operations and cash flows. Other than the required disclosures, the
adoption had no impact on the condensed consolidated financial
statements.
The
Company adopted the provisions of the guidance relating to the Determination of
the Useful Life of Intangible Assets on January 1, 2009. This
guidance 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 guidance 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. The adoption had no impact on the
condensed consolidated financial statements.
The
Company adopted the provisions of Emerging Issues Task Force (“EITF”) guidance
on Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities on January 1, 2009. The EITF 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. The adoption did not have a material impact on the condensed
consolidated financial statements.
The
Company adopted the guidance relating to Interim Disclosures about Fair Value of
Financial Instruments on June 1, 2009. This guidance requires
disclosures about fair value of financial instruments for interim periods of
publicly traded companies as well as in annual financial
statements. Other than the required disclosures, the adoption had no
impact on the condensed consolidated financial statements.
The
Company adopted the guidance related to the Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from Contingencies
effective January 1, 2009. The guidance amends and clarifies guidance
previously issued on Business Combinations and addresses application issues on
initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The Company had no acquisitions during the nine months
ended September 30, 2009; therefore, the adoption of the guidance had no impact
on the condensed consolidated financial statements.
In May
2009, the FASB issued guidance on Subsequent Events. This guidance
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. Although the guidance is based on the same
principles as those that currently exist in the auditing standards, it includes
a new required disclosure of the date through which an entity has evaluated
subsequent events. The Company adopted this guidance in June 2009 and other than
the required disclosures, the adoption had no impact on the condensed
consolidated financial statements.
In June
2009, the FASB issued guidance which amends previously issued guidance on the
Consolidation of Variable Interest Entities. This guidance changes
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be
consolidated. The determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impacts the entity’s economic performance. The guidance
is effective for the Company beginning January 1, 2010. The Company
is currently evaluating the impact its provisions will have on its condensed
consolidated financial statements.
Dividends
On
December 30, 2008, the Company’s board of directors voted to suspend the
Company’s quarterly cash dividend indefinitely.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current financial
statement presentation, with no effect on the Company’s condensed consolidated
financial position or results of operations.
3. Earnings
Per Share
Basic
earnings per share (“EPS”) is calculated by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted EPS
includes the components of basic EPS and also gives effect to dilutive common
stock equivalents. For purposes of calculating basic and diluted
earnings per share, vested restricted stock awards are considered
outstanding. Under the treasury stock method, diluted EPS reflects
the potential dilution that could occur if securities or other instruments that
are convertible into common stock were exercised or could result in the issuance
of common stock. Potentially dilutive common stock equivalents
include unvested restricted stock and restricted stock units.
During
the three and nine months ended September 30, 2009 and September 30, 2008, the
Company reported a consolidated net loss. As a result of the net
loss, unvested restricted stock and restricted stock unit awards were
antidilutive for each period and were not included in the computation of diluted
weighted average shares. The weighted average restricted stock and
restricted stock unit grants excluded from the calculations of diluted net
loss per share was 2.0 million and 1.4 million for the three months ended
September 30, 2009 and 2008, respectively, and 1.2 million and 1.4 million for
the nine months ended September 30, 2009 and 2008, respectively.
4. Stock-Based
Compensation
The
Company recorded $7.9 million and $6.7 million of compensation expense in
connection with grants of restricted stock and restricted stock units for the
three months ended September 30, 2009 and 2008, respectively, and $21.5 million
and $23.4 million of such expense for the nine months ended September 30, 2009
and 2008, respectively. For the three and nine months ended September
30, 2009 and 2008, compensation expense was calculated net of forfeitures
estimated from 0% - 6% of the shares granted.
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 year, the Company issued restricted stock units to its Chief
Executive Officer. Under the terms of the award agreement, upon
vesting, each restricted stock unit represents the right to receive one share of
the Company’s common stock.
Current
year grants of restricted shares and restricted stock units under the Company’s
Omnibus Stock Incentive Plan were as follows (amounts in thousands except for
value per share):
|
|
Shares
/ Restricted
Stock
Units Granted
|
|
|
|
|
|
|
|
Three
months ended March 31, 2009
|
|
|
84 |
|
|
$ |
3.48
– $6.15 |
|
|
$ |
301 |
|
Three
months ended June 30, 2009
|
|
|
2,562 |
|
|
$ |
5.14
– $9.39 |
|
|
$ |
24,030 |
|
Three
months ended September 30, 2009
|
|
|
65 |
|
|
$ |
9.83
– $10.71 |
|
|
$ |
694 |
|
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. The impact on
the Company’s current year condensed consolidated financial statements is not
material.
5. Goodwill
and Other Intangible Assets, Net
There
were no changes in the carrying amount of goodwill for the nine months ended
September 30, 2009. Goodwill by operating segment as of September 30,
2009 and December 31, 2008 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
7,155 |
|
|
$ |
102,812 |
|
|
$ |
109,967 |
|
Goodwill
is tested for impairment annually with a test date of October 1 or sooner if
indicators of impairment are present. No indicators of impairment
were present during the nine months ended September 30, 2009.
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, 2009 and December 31,
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
purchase options
|
|
$ |
147,682 |
|
|
$ |
(9,245 |
) |
|
$ |
138,437 |
|
|
$ |
147,682 |
|
|
$ |
(6,457 |
) |
|
$ |
141,225 |
|
Management
contracts and other
|
|
|
158,041 |
|
|
|
(101,538 |
) |
|
|
56,503 |
|
|
|
158,041 |
|
|
|
(77,807 |
) |
|
|
80,234 |
|
Home
health licenses
|
|
|
11,498 |
|
|
|
— |
|
|
|
11,498 |
|
|
|
10,130 |
|
|
|
— |
|
|
|
10,130 |
|
Total
|
|
$ |
317,221 |
|
|
$ |
(110,783 |
) |
|
$ |
206,438 |
|
|
$ |
315,853 |
|
|
$ |
(84,264 |
) |
|
$ |
231,589 |
|
Amortization
expense related to definite-lived intangible assets for the three months ended
September 30, 2009 and 2008 was $8.7 million and $8.9 million, respectively, and
$26.5 million and $26.7 million of amortization expense was recorded for the
nine months ended September 30, 2009 and 2008, respectively. Home
health licenses were determined to be indefinite-lived intangible assets and are
not subject to amortization.
6. 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
|
|
$ |
252,297 |
|
|
$ |
253,453 |
|
Buildings
and improvements
|
|
|
2,736,184 |
|
|
|
2,626,079 |
|
Furniture
and equipment
|
|
|
301,577 |
|
|
|
277,680 |
|
Resident
and operating lease intangibles
|
|
|
625,228 |
|
|
|
607,256 |
|
Construction
in progress
|
|
|
16,741 |
|
|
|
98,418 |
|
Assets
under capital and financing leases
|
|
|
575,351 |
|
|
|
555,872 |
|
|
|
|
4,507,378 |
|
|
|
4,418,758 |
|
Accumulated
depreciation and amortization
|
|
|
(886,909 |
) |
|
|
(720,924 |
) |
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
3,620,469 |
|
|
$ |
3,697,834 |
|
7. Sale-Leaseback
Transaction
On March
2, 2009, the Company entered into a sale-leaseback transaction with a third
party lessor for the sale and leaseback of one of its skilled nursing
facilities. The Company sold the facility for a total of $10.0
million and immediately leased the facility back. Under the terms of
the lease agreement, the Company will continue to operate the facility until
December 31, 2019. The lease is accounted for as an operating
lease.
8. 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
4.64% for the nine months ended September 30, 2009 (weighted average
interest rate of 5.33% in 2008)
|
|
$ |
1,325,029 |
|
|
$ |
1,246,204 |
|
$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, 2009 (weighted average interest rate of 5.64%
in 2008), 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 |
|
Variable
rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average
interest rate of 1.91% for the nine months ended September 30, 2009
(weighted average interest rate of 4.40% in 2008), 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 8.82% for the nine months ended September 30, 2009
(weighted average interest rate of 8.81% in 2008)
|
|
|
323,474 |
|
|
|
318,440 |
|
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 |
|
|
|
315,180 |
|
Construction
financing due 2011 through 2023; weighted average interest rate of 7.63%
for the nine months ended September 30, 2009 (weighted average interest
rate of 6.02% in 2008)
|
|
|
32,634 |
|
|
|
50,404 |
|
Total
debt
|
|
|
2,459,565 |
|
|
|
2,393,476 |
|
Less
current portion
|
|
|
155,397 |
|
|
|
158,476 |
|
Total
long-term debt
|
|
$ |
2,304,168 |
|
|
$ |
2,235,000 |
|
Although
certain debt obligations are scheduled to mature on or prior to September 30,
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 $131.0 million of certain non-recourse mortgages
payable until 2011, as the instruments associated with these mortgages payable
provide that the Company can extend the respective maturity dates for one 12
month term each from the existing maturity dates.
Credit
Facilities
On
February 27, 2009, the Company entered into a Second Amended and Restated Credit
Agreement with Bank of America, N.A., as administrative agent, Banc of America
Securities LLC, as sole lead arranger and book manager, and the several lenders
from time to time parties thereto. The amended credit agreement amended and
restated the Company’s $245.0 million secured line of credit and terminated the
associated $80.0 million letter of credit facility.
The
amended credit agreement initially consisted of a $230.0 million revolving loan
facility with a $25.0 million letter of credit sublimit and is scheduled to
mature on August 31, 2010.
Pursuant
to the terms of the amended credit agreement, certain of the Company’s
subsidiaries, as guarantors, will guarantee obligations under the amended credit
agreement and the other loan documents. Further, in connection with
the amended credit agreement, (i) the Company and certain guarantors executed
and delivered a Pledge Agreement in favor of the administrative agent for the
banks and other financial institutions from time to time parties to the amended
credit agreement, pursuant to which such guarantors pledged certain assets for
the benefit of the secured parties as collateral security for the payment and
performance of the Company’s obligations under the amended credit agreement and
the other loan documents and (ii) certain guarantors granted mortgages and
executed and delivered a Security Agreement, in each case, in favor of the
administrative agent for the banks and other financial institutions from time to
time parties to the amended credit agreement encumbering certain real and
personal property of such guarantors. The collateral includes, among
other things, certain real property and related personal property owned by the
guarantors, equity interests in certain of the Company’s subsidiaries, all
related books and records and, to the extent not otherwise included, all
proceeds and products of any and all of the foregoing.
At the
option of the Company, amounts drawn under the revolving loan facility initially
bore interest at either (i) LIBOR plus a margin of 7.0% or (ii) the greater of
(a) the Bank of America prime rate or (b) the Federal Funds rate plus 0.5%, plus
a margin of 7.0%. For purposes of determining the interest rate, in
no event shall the base rate or LIBOR be less than 3.0%. In
connection with the loan commitments, the Company will pay a quarterly
commitment fee of 1.0% per annum on the average daily amount of undrawn
funds. The Company was initially required to pay a fee equal to 7.0%
of the amount of any issued and outstanding letters of credit; provided, with
respect to drawable amounts that have been cash collateralized, the letter of
credit fee shall be payable at a rate per annum equal to 2.0%.
The
amended credit agreement contains typical representations and covenants for
loans of this type, including restrictions on the Company’s ability to pay
dividends, make distributions, make acquisitions, incur capital expenditures,
incur new liens or repurchase shares of the Company’s common stock. The amended
credit agreement also contains financial covenants, including covenants with
respect to maximum consolidated adjusted leverage, minimum consolidated fixed
charge coverage, minimum tangible net worth, and maximum total capital
expenditures. 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 amended credit agreement, which would result
in termination of all commitments and loans under the amended credit agreement
and all other amounts owing under the amended credit agreement and certain other
loan agreements becoming immediately due and payable.
On June
1, 2009, in connection with the equity offering described in Note 15, the
Company entered into the First Amendment to the Second Amended and Restated
Credit Agreement (the “First Amendment”) pursuant to which the maximum revolving
loans that can be outstanding at any time under the amended credit agreement was
reduced to $75.0 million. In addition, the interest rate margin
on loans, as well as fees on letters of credit, as a result of the maximum
amount of the facility having been reduced to $75.0 million, was reduced to
6.0%.
Pursuant
to the First Amendment, the Company has been given greater flexibility to make
acquisitions by increasing aggregate permitted cash consideration from
$10.0 million to $100.0 million, to make capital expenditures up to
$30.0 million per quarter and to incur an additional $20.0 million in
liens and letters of credit.
As of
September 30, 2009, the Company has an available secured line of credit of $75.0
million (including a $25.0 million letter of credit sublimit) and separate
unsecured letter of credit facilities of up to $48.5 million in the
aggregate. As of September 30, 2009, there were no borrowings under
the revolving loan facility, $23.7 million of letters of credit had been issued
under the amended credit facility, and $48.5 million of letters of credit had
been issued under the separate unsecured letter of credit
facilities.
In late
2008, the Company began replacing some of its outstanding letters of credit with
restricted cash in order to reduce the Company’s letter of credit
needs.
On
January 30, 2009, the Company amended and restated a $52.6 million first
mortgage loan, secured by the underlying properties, which was payable interest
only through maturity in March 2009. Pursuant to the amendment, the
maturity date has been extended to March 31, 2011. The amended and
restated loan bears interest at LIBOR plus 4.0% and requires principal
amortization. In connection with the amendment, the Company made a
$3.0 million payment to reduce the outstanding principal amount of the
loan.
On
February 25, 2009, the Company amended a $41.0 million first mortgage loan,
secured by the underlying properties, which was payable interest only through
maturity in June 2009. Pursuant to the amendment, the maturity date
has been extended to June 2011. The amended loan is evidenced by two
promissory notes, the first of which is in the principal amount of $26.0 million
and bears interest at LIBOR plus 3.0%. The second promissory note is
in the amount of $15.0 million and bears interest at LIBOR plus
5.6%. Both notes require principal amortization. In
connection with the amendment, the Company made a $2.0 million payment to reduce
the outstanding principal amount of the $26.0 million loan.
Effective
May 11, 2009, the Company exercised its option to extend the maturity date of
$131.0 million of mortgage notes from May 11, 2009 to May 11,
2010. No other terms of the notes were changed in connection with the
extension.
As of
September 30, 2009, the Company is in compliance with the financial covenants of
its outstanding debt and lease agreements.
Interest
Rate Swaps and Caps
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 counterparties was $18.1 million and $13.9 million as of September
30, 2009 and December 31, 2008, 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 or other comprehensive loss depending on whether it has been designated
and qualifies as an accounting hedge.
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, 2009
(dollars in thousands):
Current
notional balance
|
|
$ |
351,840 |
|
Highest
possible notional
|
|
$ |
351,840 |
|
Lowest
interest rate
|
|
|
3.24 |
% |
Highest
interest rate
|
|
|
4.47 |
% |
Average
fixed rate
|
|
|
3.74 |
% |
Earliest
maturity date
|
|
|
2011 |
|
Latest
maturity date
|
|
|
2014 |
|
Weighted
average original maturity
|
|
4.7
years
|
|
Estimated
liability fair value (included in other liabilities at September 30,
2009)
|
|
$ |
(19,564 |
) |
Estimated
asset fair value (included in other assets, net at September 30,
2009)
|
|
$ |
— |
|
The
following table summarizes the Company’s cap instruments at September 30, 2009
(dollars in thousands):
Current
notional balance
|
|
$ |
734,621 |
|
Highest
possible notional
|
|
$ |
734,621 |
|
Lowest
interest rate
|
|
|
4.96 |
% |
Highest
interest rate
|
|
|
6.50 |
% |
Average
fixed rate
|
|
|
5.97 |
% |
Earliest
maturity date
|
|
|
2011 |
|
Latest
maturity date
|
|
|
2012 |
|
Weighted
average original maturity
|
|
3.8
years
|
|
Estimated
liability fair value (included in other liabilities at September 30,
2009)
|
|
$ |
— |
|
Estimated
asset fair value (included in other assets, net at September 30,
2009)
|
|
$ |
942 |
|
During
the three and nine months ended September 30, 2009, the fair value of the
Company’s interest rate swaps and caps decreased $2.5 million and increased $1.1
million, respectively. During the three and nine months ended
September 30, 2008, the fair value of the Company’s interest rate swaps and caps
decreased $8.5 million and $17.3 million, respectively. This is
included as a component of interest expense in the condensed consolidated
statements of operations.
9. Litigation
The
Company has been and is currently involved in 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 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. Effective January 1, 2009, the Company’s current policies
provide for deductibles of $250,000 for each claim. Accordingly, the
Company is, in effect, self-insured for most claims.
10. Supplemental
Disclosure of Cash Flow Information
(dollars
in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
99,460 |
|
|
$ |
110,998 |
|
Income
taxes paid
|
|
$ |
1,846 |
|
|
$ |
1,401 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Operating, Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Capital
leases:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
18,236 |
|
|
$ |
35,942 |
|
Long-term
debt
|
|
|
(18,236 |
) |
|
|
(35,942 |
) |
Net
|
|
$ |
— |
|
|
$ |
— |
|
Lease
Incentive:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
1,237 |
|
|
$ |
― |
|
Deferred
liabilities
|
|
|
(1,237 |
) |
|
|
― |
|
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:
|
|
|
|
|
|
|
|
|
Other
intangible assets, net
|
|
$ |
1,227 |
|
|
$ |
5,105 |
|
Reclassification
of other intangibles, net
|
|
$ |
141 |
|
|
$ |
— |
|
11. 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
|
|
$ |
65,331 |
|
|
$ |
63,394 |
|
|
$ |
195,397 |
|
|
$ |
189,610 |
|
Straight-line
expense
|
|
|
3,793 |
|
|
|
4,709 |
|
|
|
12,073 |
|
|
|
15,675 |
|
Amortization
of deferred gain
|
|
|
(1,088 |
) |
|
|
(1,086 |
) |
|
|
(3,259 |
) |
|
|
(3,257 |
) |
Facility
lease expense
|
|
$ |
68,036 |
|
|
$ |
67,017 |
|
|
$ |
204,211 |
|
|
$ |
202,028 |
|
12. 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
|
|
$ |
(21,290 |
) |
|
$ |
(35,877 |
) |
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
Reclassification
of net loss (gains) on derivatives out of (into) earnings
|
|
|
123 |
|
|
|
124 |
|
|
|
369 |
|
|
|
(492 |
) |
Amortization
of payments from settlement of forward interest rate swaps
|
|
|
94 |
|
|
|
94 |
|
|
|
282 |
|
|
|
282 |
|
Other
|
|
|
(84 |
) |
|
|
85 |
|
|
|
(253 |
) |
|
|
422 |
|
Total
comprehensive loss
|
|
$ |
(21,157 |
) |
|
$ |
(35,574 |
) |
|
$ |
(45,058 |
) |
|
$ |
(94,243 |
) |
13. Income
Taxes
The
Company’s effective tax rates for the three months ended September 30, 2009 and
2008 are 25.6% and 38.4%, respectively, and for the nine months ended September
30, 2009 and 2008 are 29.4 % and 36.8%, respectively. The difference
in the effective rate between these periods is primarily due to the decrease in
the calculated annualized effective rate for 2009 based on projected
improvements in the Company’s performance. The rate was also impacted
by the Company’s stock based compensation deduction as calculated under the FASB
guidance on Share-Based Payment for 2009 due to the movements in the stock price
between September 30, 2008 and September 30, 2009.
The
Company recorded additional interest charges related to its tax contingency
reserve and a new uncertain tax position for the nine months ended September 30,
2009. During the three months ended September 30, 2009, the Company
settled an uncertain tax position as a result of a state audit. Tax
returns for years 2005 through 2007 are subject to future examination by tax
authorities. In addition, tax returns are open from 1999 through 2004
to the extent of the net operating losses generated during those
periods.
14. Share
Repurchase Program
On March
19, 2008, the Company’s board of directors approved a share repurchase program
that authorized the Company to purchase up to $150.0 million in the aggregate of
the Company’s common stock. Purchases could be made from time to time
using a variety of methods, which could 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 was to be
based on business, market and other conditions and factors, including price,
regulatory and contractual requirements or consents, and capital
availability. The repurchase program did not obligate the Company to
acquire any particular amount of common stock and the program could be
suspended, modified or discontinued at any time at the Company’s discretion
without prior notice. Shares of stock repurchased under the program were to be
held as treasury shares.
On
February 25, 2009, the Company’s board of directors terminated this share
repurchase authorization. In addition, the Company’s amended credit
facility effectively prohibits the Company from repurchasing shares of its
common stock, paying dividends or making distributions.
15. Stockholders’
Equity
On June
8, 2009, the Company completed a public equity offering of 16,046,512 shares of
common stock. The offering yielded net proceeds of approximately
$163.7 million which was used primarily to repay the $125.0 million of
indebtedness which was outstanding under the Company’s amended credit
facility.
16. 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, 2009 (dollars
in thousands):
|
|
Total
Carrying
Value
at
September
30,
2009
|
|
|
Quoted
prices
in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
Derivative
assets
|
|
$ |
942 |
|
|
$ |
— |
|
|
$ |
942 |
|
|
$ |
— |
|
Derivative
liabilities
|
|
|
(19,564 |
) |
|
|
— |
|
|
|
(19,564 |
) |
|
|
— |
|
|
|
$ |
(18,622 |
) |
|
$ |
— |
|
|
$ |
(18,622 |
) |
|
$ |
— |
|
The Company’s derivative
assets and liabilities include interest rate swaps and caps 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.
17. 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 2008, five communities moved between segments to more
accurately reflect their current underlying product offering. The
movement did not change the Company’s reportable segments, but it did impact the
revenues and cost reported within each segment. The net impact of the
change was a decrease of one community to the CCRCs segment.
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
|
|
$ |
135,664 |
|
|
$ |
137,057 |
|
|
$ |
405,507 |
|
|
$ |
407,830 |
|
Assisted
Living
|
|
|
217,843 |
|
|
|
211,888 |
|
|
|
653,052 |
|
|
|
631,682 |
|
CCRCs
|
|
|
150,349 |
|
|
|
131,805 |
|
|
|
440,985 |
|
|
|
396,010 |
|
Management
Services
|
|
|
1,987 |
|
|
|
1,527 |
|
|
|
5,002 |
|
|
|
5,604 |
|
|
|
$ |
505,843 |
|
|
$ |
482,277 |
|
|
$ |
1,504,546 |
|
|
$ |
1,441,126 |
|
Segment
operating income(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
58,700 |
|
|
$ |
55,748 |
|
|
$ |
173,948 |
|
|
$ |
172,423 |
|
Assisted
Living
|
|
|
73,655 |
|
|
|
65,900 |
|
|
|
231,713 |
|
|
|
214,826 |
|
CCRCs
|
|
|
42,562 |
|
|
|
32,888 |
|
|
|
130,246 |
|
|
|
110,474 |
|
Management
Services
|
|
|
1,391 |
|
|
|
1,069 |
|
|
|
3,501 |
|
|
|
3,923 |
|
|
|
$ |
176,308 |
|
|
$ |
155,605 |
|
|
$ |
539,408 |
|
|
$ |
501,646 |
|
General
and administrative (including non-cash stock-based compensation
expense)(3)
|
|
$ |
34,124 |
|
|
$ |
32,490 |
|
|
$ |
98,647 |
|
|
$ |
107,952 |
|
Facility
lease expense
|
|
|
68,036 |
|
|
|
67,017 |
|
|
|
204,211 |
|
|
|
202,028 |
|
Deprecation
and amortization
|
|
|
66,983 |
|
|
|
67,066 |
|
|
|
202,378 |
|
|
|
207,882 |
|
Income
(loss) from operations
|
|
$ |
7,165 |
|
|
$ |
(10,968 |
) |
|
$ |
34,172 |
|
|
$ |
(16,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
2009
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
$ |
1,193,576 |
|
|
$ |
1,233,268 |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
1,273,855 |
|
|
|
1,393,223 |
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
1,666,573 |
|
|
|
1,476,206 |
|
Corporate
and Management Services
|
|
|
|
|
|
|
|
|
|
|
367,678 |
|
|
|
346,561 |
|
|
|
|
|
|
|
|
|
|
|
$ |
4,501,682 |
|
|
$ |
4,449,258 |
|
(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.
|
18. Subsequent
Events
On
October 7, 2009, the Company entered into an agreement with another senior
housing company to acquire 21 senior living communities for an aggregate
purchase price of $204.0 million. The portfolio has a total of 1,389
units, comprised of 92 independent living units, 876 assisted living units and
421 Alzheimer’s units. The Company
expects
to finance the transaction with approximately $134.0 million of mortgage debt
(substantially through the assumption of existing debt), with the balance of the
purchase price to be paid from cash on hand. The consummation of the
transaction is subject to the satisfaction of certain closing conditions and
contingencies and the receipt of certain lender approvals. The
transaction is expected to close in November 2009.
The
Company has evaluated all events subsequent to September 30, 2009 through the
time of filing on November 4, 2009 and determined that no events other than
those noted above have occurred which would require additional
disclosure.
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 regarding the consummation of the
Sunrise portfolio acquisition and the related financing and our expectations
regarding the future performance of the acquired communities and their effect on
our financial results; statements relating to our operational initiatives and
our expectations regarding their effect on our results; our expectations
regarding occupancy, revenue, expense levels, the demand for senior housing,
expansion activity, acquisition opportunities and asset dispositions; our belief
regarding our growth prospects; our ability to secure financing or repay,
replace or extend existing debt at or prior to maturity; 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 plans to
deleverage; 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 communities; the
expected project costs for our expansion program; our expected levels of
expenditures and reimbursements (and the timing 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; our
expectations regarding the payment of dividends; 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 satisfy the closing conditions and successfully complete the
Sunrise portfolio acquisition; our ability to assume and obtain the mortgage
debt financing for the Sunrise portfolio acquisition; the risk associated with
the current global economic crisis and its impact upon capital markets and
liquidity; our inability to extend (or refinance) debt as it matures or replace
our amended credit facility when it matures; 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; 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; our ability to generate
sufficient cash flow to cover required interest and long-term operating lease
payments; 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 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 the performance of certain of our counterparties’ obligations;
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; increased union activity;
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, 2008 and in this Quarterly Report.
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 2009, we continued to make progress in implementing the
long-term growth objectives outlined in our most recent Annual Report on Form
10-K, in spite of the difficult operating environment. The following
is a summary discussion of our progress during the three and nine months ended
September 30, 2009.
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 expense
control and 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. Additionally, as
opportunities arise, we may also grow through the selective acquisition and
consolidation of additional communities, asset portfolios, home health agencies
and other senior living companies, as well as through the acquisition of the fee
interest in communities that we currently lease or manage.
Our
operating results for the three and nine months ended September 30, 2009 were
favorably impacted by an increase in our total revenues (primarily driven by an
increase in average monthly revenue per unit/bed including an increase in our
ancillary services revenue) and by the significant cost control measures that
were implemented in recent periods. The difficult operating
environment during the first nine months of 2009 has resulted in slightly
lower occupancy and diminished growth in the rates we charge our
residents. We responded by controlling our expenses and capital
spending, and by increasing the reach of our ancillary services
programs. We also continue to aggressively focus on maintaining and
increasing occupancy.
During
the first half of the year, we took steps to preserve our liquidity and increase
our financial flexibility. For example, during the second quarter, we
completed a public equity offering which yielded $163.7 million of net proceeds,
which were primarily used to repay the $125.0 million of indebtedness which was
outstanding under our credit facility. Furthermore, we extended the
maturity of a number of mortgage loans and, factoring in contractual extension
options, have no mortgage debt maturities until 2011 (other than periodic,
scheduled principal payments). Finally, we took steps to reduce
materially our exposure to collateralization requirements associated with
interest rate swaps. As a result of these steps and our operating
performance during the nine months ended September 30, 2009, we ended the third
quarter with $159.3 million of unrestricted cash and cash equivalents on our
condensed consolidated balance sheet.
We recently entered into an agreement to acquire 21 senior living
communities from affiliates of Sunrise Senior Living, Inc. for an aggregate
purchase price of $204.0 million plus customary transaction expenses. The
portfolio has a total of 1,389 units, comprised of 92 independent living units,
876 assisted living units and 421 Alzheimer’s units. We expect to
finance the transaction with approximately $134.0 million of mortgage debt
(substantially through the assumption of existing debt), with the balance of the
purchase price to be paid from cash on hand. The consummation of the
transaction is subject to the satisfaction of certain closing conditions and
contingencies and the receipt of certain lender approvals. The
transaction is expected to close in November 2009.
The
tables below present a summary of our operating results and certain other
financial metrics for the three and nine months ended September 30, 2009 and
2008 and the amount and percentage of increase or decrease of each applicable
item (dollars in millions).
|
|
Three
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
505.8 |
|
|
$ |
482.3 |
|
|
$ |
23.5 |
|
|
|
4.9 |
% |
Net
loss
|
|
$ |
(21.3 |
) |
|
$ |
(35.9 |
) |
|
$ |
14.6 |
|
|
|
40.7 |
% |
Adjusted
EBITDA
|
|
$ |
85.6 |
|
|
$ |
67.4 |
|
|
$ |
18.2 |
|
|
|
27.0 |
% |
Cash
From Facility Operations
|
|
$ |
48.2 |
|
|
$ |
22.5 |
|
|
$ |
25.7 |
|
|
|
114.2 |
% |
Facility
Operating Income
|
|
$ |
169.2 |
|
|
$ |
149.8 |
|
|
$ |
19.4 |
|
|
|
13.0 |
% |
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
1,504.5 |
|
|
$ |
1,441.1 |
|
|
$ |
63.4 |
|
|
|
4.4 |
% |
Net
loss
|
|
$ |
(45.5 |
) |
|
$ |
(94.5 |
) |
|
$ |
49.0 |
|
|
|
51.9 |
% |
Adjusted
EBITDA
|
|
$ |
263.6 |
|
|
$ |
227.0 |
|
|
$ |
36.6 |
|
|
|
16.1 |
% |
Cash
From Facility Operations
|
|
$ |
150.9 |
|
|
$ |
97.7 |
|
|
$ |
53.2 |
|
|
|
54.5 |
% |
Facility
Operating Income
|
|
$ |
519.8 |
|
|
$ |
481.2 |
|
|
$ |
38.6 |
|
|
|
8.0 |
% |
________
(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.
|
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.
Our
revenues for the three months ended September 30, 2009 increased to $505.8
million, an increase of $23.5 million, or approximately 4.9%, over our revenues
for the three months ended September 30, 2008. For the nine months
ended September 30, 2009, our revenues increased $63.4 million, or approximately
4.4%, to $1,504.5 million over the nine months ended September 30,
2008. The increase in revenues in the current year period was
primarily a result of an increase in the average revenue per unit/bed compared
to the prior year period, including growing revenues from our ancillary services
programs, partially offset by a decline in occupancy from the prior year
period. Our weighted average occupancy rate for the third quarter of
2009 was 89.0%, compared to 89.7% for the third quarter of 2008.
During
the three months ended September 30, 2009, our Adjusted EBITDA, Cash From
Facility Operations and Facility Operating Income increased by 27.0%, 114.2% and
13.0%, respectively, when compared to the three months ended September 30,
2008. During the nine months ended September 30, 2009, our Adjusted
EBITDA, Cash From Facility Operations, and Facility Operating Income increased
by 16.1%, 54.5% and 8.0%, respectively, when compared to the nine months ended
September 30, 2008.
During
the three months ended September 30, 2009, we continued to expand our ancillary
services offerings. As of September 30, 2009, we offered therapy
services to approximately 35,000 of our units and home health services to
approximately 18,800 of our units. We continue to see positive
results from the maturation of previously-opened therapy and home health
clinics. We also expect to continue to expand our ancillary services
programs to additional units and to open or acquire additional home health
agencies.
During
the third quarter of 2009, we opened two expansions with a total of 156
units. Our expansion program currently has two projects under
construction that will add an additional 205 units, which are expected to open
in the fourth quarter. Additionally, we recently opened the 240-unit
independent living component of our new entry fee CCRC in the Villages,
Florida. The 72-bed skilled nursing unit will open in the fourth
quarter.
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 and occupancy levels when compared to the prior year
period. We remain cautious about the economy and the adverse credit
and financial markets and their effect on our customers and our
business. 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. These factors also impact our potential independent
living customers to a significant extent. We expect occupancy and
entrance fee sales to normalize over the longer term.
Consolidated
Results of Operations
Three
Months Ended September 30, 2009 and 2008
The
following table sets forth, for the periods indicated, statements 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.
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
135,664 |
|
|
$ |
137,057 |
|
|
$ |
(1,393 |
) |
|
|
(1.0 |
%) |
Assisted
Living
|
|
|
217,843 |
|
|
|
211,888 |
|
|
|
5,955 |
|
|
|
2.8 |
% |
CCRCs
|
|
|
150,349 |
|
|
|
131,805 |
|
|
|
18,544 |
|
|
|
14.1 |
% |
Total
resident fees
|
|
|
503,856 |
|
|
|
480,750 |
|
|
|
23,106 |
|
|
|
4.8 |
% |
Management
fees
|
|
|
1,987 |
|
|
|
1,527 |
|
|
|
460 |
|
|
|
30.1 |
% |
Total
revenue
|
|
|
505,843 |
|
|
|
482,277 |
|
|
|
23,566 |
|
|
|
4.9 |
% |
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
76,964 |
|
|
|
81,309 |
|
|
|
(4,345 |
) |
|
|
(5.3 |
%) |
Assisted
Living
|
|
|
144,188 |
|
|
|
145,988 |
|
|
|
(1,800 |
) |
|
|
(1.2 |
%) |
CCRCs
|
|
|
107,787 |
|
|
|
98,917 |
|
|
|
8,870 |
|
|
|
9.0 |
% |
Total
facility operating expense
|
|
|
328,939 |
|
|
|
326,214 |
|
|
|
2,725 |
|
|
|
0.8 |
% |
General
and administrative expense
|
|
|
34,720 |
|
|
|
32,948 |
|
|
|
1,772 |
|
|
|
5.4 |
% |
Facility
lease expense
|
|
|
68,036 |
|
|
|
67,017 |
|
|
|
1,019 |
|
|
|
1.5 |
% |
Depreciation
and amortization
|
|
|
66,983 |
|
|
|
67,066 |
|
|
|
(83 |
) |
|
|
(0.1 |
%) |
Total
operating expense
|
|
|
498,678 |
|
|
|
493,245 |
|
|
|
5,433 |
|
|
|
1.1 |
% |
Income
(loss) from operations
|
|
|
7,165 |
|
|
|
(10,968 |
) |
|
|
18,133 |
|
|
|
165.3 |
% |
Interest
income
|
|
|
623 |
|
|
|
1,383 |
|
|
|
(760 |
) |
|
|
(55.0 |
%) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(30,574 |
) |
|
|
(37,599 |
) |
|
|
7,025 |
|
|
|
18.7 |
% |
Amortization
of deferred financing costs
|
|
|
(2,167 |
) |
|
|
(3,004 |
) |
|
|
837 |
|
|
|
27.9 |
% |
Change
in fair value of derivatives and amortization
|
|
|
(2,478 |
) |
|
|
(8,454 |
) |
|
|
5,976 |
|
|
|
70.7 |
% |
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
42 |
|
|
|
358 |
|
|
|
(316 |
) |
|
|
(88.3 |
%) |
Loss
on extinguishment of debt
|
|
|
(1,178 |
) |
|
|
― |
|
|
|
(1,178 |
) |
|
|
(100.0 |
%) |
Other
non-operating (expense) income
|
|
|
(52 |
) |
|
|
69 |
|
|
|
(121 |
) |
|
|
(175.4 |
%) |
Loss
before income taxes
|
|
|
(28,619 |
) |
|
|
(58,215 |
) |
|
|
29,596 |
|
|
|
50.8 |
% |
Benefit
for income taxes
|
|
|
7,329 |
|
|
|
22,338 |
|
|
|
(15,009 |
) |
|
|
(67.2 |
%) |
Net
loss
|
|
$ |
(21,290 |
) |
|
$ |
(35,877 |
) |
|
$ |
14,587 |
|
|
|
40.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
547 |
|
|
|
550 |
|
|
|
(3 |
) |
|
|
(0.5 |
%) |
Total
units/beds operated(2)
|
|
|
52,268 |
|
|
|
51,933 |
|
|
|
335 |
|
|
|
0.6 |
% |
Owned/leased
communities units/beds
|
|
|
47,836 |
|
|
|
47,640 |
|
|
|
196 |
|
|
|
0.4 |
% |
Owned/leased
communities occupancy rate (weighted average)
(3)
|
|
|
89.0 |
% |
|
|
89.7 |
% |
|
|
(0.7 |
%) |
|
|
(0.8 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,987 |
|
|
$ |
3,786 |
|
|
$ |
201 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
85 |
|
|
|
87 |
|
|
|
(2 |
) |
|
|
(2.3 |
%) |
Total
units/beds(2)
|
|
|
15,255 |
|
|
|
15,710 |
|
|
|
(455 |
) |
|
|
(2.9 |
%) |
Occupancy
rate (weighted average)
|
|
|
89.1 |
% |
|
|
90.6 |
% |
|
|
(1.5 |
%) |
|
|
(1.7 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,347 |
|
|
$ |
3,232 |
|
|
$ |
115 |
|
|
|
3.6 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
405 |
|
|
|
410 |
|
|
|
(5 |
) |
|
|
(1.2 |
%) |
Total
units/beds(2)
|
|
|
20,804 |
|
|
|
21,059 |
|
|
|
(255 |
) |
|
|
(1.2 |
%) |
Occupancy
rate (weighted average)
|
|
|
90.7 |
% |
|
|
90.2 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,850 |
|
|
$ |
3,723 |
|
|
$ |
127 |
|
|
|
3.4 |
% |
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
35 |
|
|
|
32 |
|
|
|
3 |
|
|
|
9.4 |
% |
Total
units/beds(2)
|
|
|
11,777 |
|
|
|
10,871 |
|
|
|
906 |
|
|
|
8.3 |
% |
Occupancy
rate (weighted average)
(3)
|
|
|
85.7 |
% |
|
|
87.4 |
% |
|
|
(1.7 |
%) |
|
|
(1.9 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
5,200 |
|
|
$ |
4,810 |
|
|
$ |
390 |
|
|
|
8.1 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
22 |
|
|
|
21 |
|
|
|
1 |
|
|
|
4.8 |
% |
Total
units/beds(2)
|
|
|
4,432 |
|
|
|
4,293 |
|
|
|
139 |
|
|
|
3.2 |
% |
Occupancy
rate (weighted average)
|
|
|
83.9 |
% |
|
|
85.3 |
% |
|
|
(1.4 |
%) |
|
|
(1.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
12,635 |
|
|
$ |
7,253 |
|
|
|
|
|
|
|
|
|
Refundable
entrance fees sales(5)
|
|
|
9,296 |
|
|
|
4,273 |
|
|
|
|
|
|
|
|
|
Total
entrance fee receipts(6)
|
|
|
21,931 |
|
|
|
11,526 |
|
|
|
|
|
|
|
|
|
Refunds
|
|
|
(4,649 |
) |
|
|
(5,856 |
) |
|
|
|
|
|
|
|
|
Net
entrance fees
|
|
$ |
17,282 |
|
|
$ |
5,670 |
|
|
|
|
|
|
|
|
|
__________
(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)
|
Excluding
the impact of current quarter expansion openings, for the three months
ended September 30, 2009, owned/leased communities occupancy rate was
89.2% and CCRCs occupancy rate was
86.4%.
|
(4)
|
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.
|
(5)
|
Refundable
entrance fee sales for the three months ended September 30, 2009 and 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 residents totaled
$0.1 million and $0.6 million for the three months ended September 30,
2009 and 2008, respectively.
|
(6)
|
Includes
$10.6 million of first generation entrance fee receipts which represent
initial entrance fees received from the sale of units at a newly opened
entrance fee CCRC.
|
As of
September 30, 2009, our total operations included 547 communities with a
capacity to serve 52,268 residents. Our resident capacity increased
by 424 units from June 30, 2009 as a result of the completion of a number of
community expansion projects and the addition of one new management
agreement.
Resident
Fees
The
increase in resident fees occurred primarily in the Assisted Living and CCRC
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 including 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 for our communities in the Retirement Centers and CCRCs
segments. During the current period, revenues grew 4.5% at the 517
communities we operated during both periods with a 5.1% increase in the average
monthly revenue per unit/bed and a 0.5% decrease in occupancy.
Retirement
Centers revenue declined slightly, primarily due to a decrease in occupancy at
the communities we operated during both periods, partially offset by an increase
in the average monthly revenue per unit/bed at those same communities period
over period.
Assisted
Living revenue increased $6.0 million, or 2.8%, due to an increase in the
average monthly revenue per unit/bed and an increase in occupancy at the
communities we operated during both periods.
CCRCs
revenue increased $18.5 million, or 14.1%, 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 communities
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 2008 and 2009.
Management
Fees
Management
fees increased $0.5 million, or 30.1%, primarily due to a reclassification
between management fees and facility operating expense.
Facility
Operating Expense
Facility
operating expense increased over the prior-year period primarily due to an
increase in salaries and wages, increased insurance expense, higher deferred
community fee expense recognition, and additional current year expense incurred
in connection with the continued expansion of our ancillary services programs
during 2009. These increases were partially offset by significant
cost control measures that were implemented in recent
periods. Facility operating expense during the third quarter of 2008
was negatively impacted by hurricane and named tropical storms
expense.
Retirement
Centers operating expenses decreased $4.3 million, or 5.3%, period
over period, primarily due to expenses incurred related to hurricane and named
tropical storms during the third quarter of 2008, as well as decreases in public
relations and advertising expenses, partially offset by additional expense
incurred in connection with the continued expansion of our ancillary services
programs.
Assisted
Living operating expenses decreased $1.8 million, or 1.2%, primarily due to
significant cost control measures implemented in recent periods, including
reductions in overtime hours worked and reduced public relations and advertising
expenses. These decreases were partially offset by additional expense
incurred in connection with the continued expansion of our ancillary services
programs. Facility operating expense during the third quarter of 2008
was negatively impacted by hurricane and named tropical storms
expense.
CCRCs
operating expenses increased $8.9 million, or 9.0%, primarily due to an increase
in expense incurred in connection with the continued expansion of our ancillary
services programs, as well as increased salaries and wages due to filling vacant
positions and wage rate increases. These increases were partially
offset by significant cost control measures that were implemented in recent
periods. Facility operating expense during the third quarter of 2008
was negatively impacted by hurricane and named tropical storms
expense.
General
and Administrative Expense
General
and administrative expense increased $1.8 million, or 5.4%, primarily as a
result of increases in bonus expense and non-cash stock-based compensation
expense in the current period in connection with restricted stock grants,
partially offset by decreases in employee benefits expenses and travel and
entertainment expenses. General and administrative expense as a
percentage of total revenue, including revenue generated by the communities we
manage and excluding non-cash compensation, integration and acquisition-related
costs, was 4.5% and 4.3% for the three months ended September 30, 2009 and 2008,
respectively, calculated as follows (dollars in thousands):
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
503,856 |
|
|
|
92.8 |
% |
|
$ |
480,750 |
|
|
|
92.9 |
% |
Resident
fee revenues under management
|
|
|
39,021 |
|
|
|
7.2 |
% |
|
|
36,739 |
|
|
|
7.1 |
% |
Total
|
|
$ |
542,877 |
|
|
|
100.0 |
% |
|
$ |
517,489 |
|
|
|
100.0 |
% |
General
and administrative expenses (excluding non-cash compensation, integration
and acquisition-related costs)
|
|
$ |
24,651 |
|
|
|
4.5 |
% |
|
$ |
22,311 |
|
|
|
4.3 |
% |
Non-cash
compensation expense
|
|
|
7,869 |
|
|
|
1.4 |
% |
|
|
6,737 |
|
|
|
1.3 |
% |
Integration
and acquisition-related costs
|
|
|
2,200 |
|
|
|
0.4 |
% |
|
|
3,900 |
|
|
|
0.8 |
% |
General
and administrative expenses (including non-cash compensation, integration
and acquisition-related costs)
|
|
$ |
34,720 |
|
|
|
6.4 |
% |
|
$ |
32,948 |
|
|
|
6.4 |
% |
Facility
Lease Expense
Lease
expense remained relatively constant period over period.
Depreciation
and Amortization
Depreciation
and amortization expense remained relatively constant period over
period.
Interest
Income
Interest
income decreased $0.8 million, or 55.0%, primarily due to the recognition of
interest income in the third quarter of 2008 upon collection of a long-term note
receivable, which interest income had been deferred as the interest was
accumulating unpaid.
Interest
Expense
Interest
expense decreased $13.8 million, or 28.2%, primarily due to the change in fair
value of our interest rate swaps and caps. During the three months
ended September 30, 2009, we recognized approximately $2.5 million of interest
expense on our interest rate swaps and caps due to unfavorable changes in the
LIBOR yield curve which resulted in a change in the fair value of the swaps and
caps, as compared to approximately $8.5 million of interest expense on our
interest rate swaps for the three months ended September 30, 2008, representing
a $6.0 million decrease in interest expense period over
period. Additionally, interest expense on our mortgage debt decreased
due to a decline in market interest rates period over period.
Income
Taxes
Our
effective tax rates for the three months ended September 30, 2009 and 2008 are
25.6% and 38.4%, respectively. The difference in the effective rate
between these periods is primarily due to the decrease in the calculated
annualized effective rate for 2009 based on projected improvements in our
performance.
An
additional interest charge related to our tax contingency reserve was recorded
during the three months ended September 30, 2009. Additionally, we
settled an uncertain tax position as a result of a state audit during the three
months ended September 30, 2009. Tax returns for years 2005 through
2007 are subject to future examination by tax authorities. In
addition, tax returns are open from 1999 through 2004 to the extent of the net
operating losses generated during those periods.
Nine
Months Ended September 30, 2009 and 2008
The
following table sets forth, for the periods indicated, statements 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.
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
405,507 |
|
|
$ |
407,830 |
|
|
$ |
(2,323 |
) |
|
|
(0.6 |
%) |
Assisted
Living
|
|
|
653,052 |
|
|
|
631,682 |
|
|
|
21,370 |
|
|
|
3.4 |
% |
CCRCs
|
|
|
440,985 |
|
|
|
396,010 |
|
|
|
44,975 |
|
|
|
11.4 |
% |
Total
resident fees
|
|
|
1,499,544 |
|
|
|
1,435,522 |
|
|
|
64,022 |
|
|
|
4.5 |
% |
Management
fees
|
|
|
5,002 |
|
|
|
5,604 |
|
|
|
(602 |
) |
|
|
(10.7 |
%) |
Total
revenue
|
|
|
1,504,546 |
|
|
|
1,441,126 |
|
|
|
63,420 |
|
|
|
4.4 |
% |
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
231,559 |
|
|
|
235,407 |
|
|
|
(3,848 |
) |
|
|
(1.6 |
%) |
Assisted
Living
|
|
|
421,339 |
|
|
|
416,856 |
|
|
|
4,483 |
|
|
|
1.1 |
% |
CCRCs
|
|
|
310,739 |
|
|
|
285,536 |
|
|
|
25,203 |
|
|
|
8.8 |
% |
Total
facility operating expense
|
|
|
963,637 |
|
|
|
937,799 |
|
|
|
25,838 |
|
|
|
2.8 |
% |
General
and administrative expense
|
|
|
100,148 |
|
|
|
109,633 |
|
|
|
(9,485 |
) |
|
|
(8.7 |
%) |
Facility
lease expense
|
|
|
204,211 |
|
|
|
202,028 |
|
|
|
2,183 |
|
|
|
1.1 |
% |
Depreciation
and amortization
|
|
|
202,378 |
|
|
|
207,882 |
|
|
|
(5,504 |
) |
|
|
(2.6 |
%) |
Total
operating expense
|
|
|
1,470,374 |
|
|
|
1,457,342 |
|
|
|
13,032 |
|
|
|
0.9 |
% |
Income
(loss) from operations
|
|
|
34,172 |
|
|
|
(16,216 |
) |
|
|
50,388 |
|
|
|
310.7 |
% |
Interest
income
|
|
|
1,771 |
|
|
|
6,169 |
|
|
|
(4,398 |
) |
|
|
(71.3 |
%) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(96,845 |
) |
|
|
(110,894 |
) |
|
|
14,049 |
|
|
|
12.7 |
% |
Amortization
of deferred financing costs
|
|
|
(7,099 |
) |
|
|
(6,940 |
) |
|
|
(159 |
) |
|
|
(2.3 |
%) |
Change
in fair value of derivatives and amortization
|
|
|
1,137 |
|
|
|
(17,344 |
) |
|
|
18,481 |
|
|
|
106.6 |
% |
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
1,218 |
|
|
|
(750 |
) |
|
|
1,968 |
|
|
|
262.4 |
% |
Loss
on extinguishment of debt
|
|
|
(2,918 |
) |
|
|
(3,052 |
) |
|
|
134 |
|
|
|
4.4 |
% |
Other
non-operating income (expense)
|
|
|
4,172 |
|
|
|
(424 |
) |
|
|
4,596 |
|
|
|
1,084.0 |
% |
Loss
before income taxes
|
|
|
(64,392 |
) |
|
|
(149,451 |
) |
|
|
85,059 |
|
|
|
56.9 |
% |
Benefit
for income taxes
|
|
|
18,936 |
|
|
|
54,996 |
|
|
|
(36,060 |
) |
|
|
(65.6 |
%) |
Net
loss
|
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
|
$ |
48,999 |
|
|
|
51.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
547 |
|
|
|
550 |
|
|
|
(3 |
) |
|
|
(0.5 |
%) |
Total
units/beds operated(2)
|
|
|
52,268 |
|
|
|
51,933 |
|
|
|
335 |
|
|
|
0.6 |
% |
Owned/leased
communities units/beds
|
|
|
47,836 |
|
|
|
47,640 |
|
|
|
196 |
|
|
|
0.4 |
% |
Owned/leased
communities occupancy rate (weighted average)
(3)
|
|
|
88.7 |
% |
|
|
89.5 |
% |
|
|
(0.8 |
%) |
|
|
(0.9 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,979 |
|
|
$ |
3,778 |
|
|
$ |
201 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
85 |
|
|
|
87 |
|
|
|
(2 |
) |
|
|
(2.3 |
%) |
Total
units/beds(2)
|
|
|
15,255 |
|
|
|
15,710 |
|
|
|
(455 |
) |
|
|
(2.9 |
%) |
Occupancy
rate (weighted average)
|
|
|
88.9 |
% |
|
|
90.2 |
% |
|
|
(1.3 |
%) |
|
|
(1.4 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,344 |
|
|
$ |
3,216 |
|
|
$ |
128 |
|
|
|
4.0 |
% |
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
405 |
|
|
|
410 |
|
|
|
(5 |
) |
|
|
(1.2 |
%) |
Total
units/beds(2)
|
|
|
20,804 |
|
|
|
21,059 |
|
|
|
(255 |
) |
|
|
(1.2 |
%) |
Occupancy
rate (weighted average)
|
|
|
90.0 |
% |
|
|
89.6 |
% |
|
|
0.4 |
% |
|
|
0.4 |
% |
Average
monthly revenue per unit/bed(4)
|
|
$ |
3,877 |
|
|
$ |
3,738 |
|
|
$ |
139 |
|
|
|
3.7 |
% |
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
35 |
|
|
|
32 |
|
|
|
3 |
|
|
|
9.4 |
% |
Total
units/beds(2)
|
|
|
11,777 |
|
|
|
10,871 |
|
|
|
906 |
|
|
|
8.3 |
% |
Occupancy
rate (weighted average)
(3)
|
|
|
86.2 |
% |
|
|
88.3 |
% |
|
|
(2.1 |
%) |
|
|
(2.4 |
%) |
Average
monthly revenue per unit/bed(4)
|
|
$ |
5,115 |
|
|
$ |
4,759 |
|
|
$ |
356 |
|
|
|
7.5 |
% |
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
22 |
|
|
|
21 |
|
|
|
1 |
|
|
|
4.8 |
% |
Total
units/beds(2)
|
|
|
4,432 |
|
|
|
4,293 |
|
|
|
139 |
|
|
|
3.2 |
% |
Occupancy
rate (weighted average)
|
|
|
84.9 |
% |
|
|
84.1 |
% |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
23,225 |
|
|
$ |
15,210 |
|
|
|
|
|
|
|
|
|
Refundable
entrance fees sales(5)
|
|
|
17,032 |
|
|
|
15,185 |
|
|
|
|
|
|
|
|
|
Total
entrance fee receipts(6)
|
|
|
40,257 |
|
|
|
30,395 |
|
|
|
|
|
|
|
|
|
Refunds
|
|
|
(16,842 |
) |
|
|
(14,331 |
) |
|
|
|
|
|
|
|
|
Net
entrance fees
|
|
$ |
23,415 |
|
|
$ |
16,064 |
|
|
|
|
|
|
|
|
|
__________
(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)
|
Excluding
the impact of current quarter expansion openings, for the nine months
ended September 30, 2009, owned/leased communities occupancy rate was
88.8% and CCRCs occupancy rate was
86.4%.
|
(4)
|
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.
|
(5)
|
Refundable
entrance fee sales for the nine months ended September 30, 2009 and 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 residents totaled
$0.7 million and $1.8 million for the nine months ended September 30, 2009
and 2008, respectively.
|
(6)
|
Includes
$10.6 million of first generation entrance fee receipts which represent
initial entrance fees received from the sale of units at a newly opened
entrance fee CCRC.
|
As of
September 30, 2009, our total operations included 547 communities with a
capacity to serve 52,268 residents. Our resident capacity increased
by 464 units from December 31, 2008 as a result of the completion of a number of
community renovation and expansion projects and the addition of one new
management agreement, partially offset by the sale of one community and the
termination of a management agreement with another community.
Resident
Fees
The
increase in resident fees occurred in the Assisted Living and CCRC
segments. Resident fees increased over the prior-year period mainly
due to an increase in average monthly revenue per unit/bed during the current
period including 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 for our communities in the Retirement Centers and CCRCs
segments. During the current period, revenues grew 4.4% at the 516
properties we operated in both periods with a 5.2% increase in the average
monthly revenue per unit/bed and a 0.7% decrease in occupancy.
Retirement
Centers revenue decreased slightly, primarily due to a decrease in occupancy at
the communities we operated during both periods, partially offset by an increase
in the average monthly revenue per unit/bed at those same communities period
over period.
Assisted
Living revenue increased $21.4 million, or 3.4%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods, as well as a slight increase in occupancy at these same
communities period over period.
CCRCs
revenue increased $45.0 million, or 11.4%, 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 communities
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 2008 and 2009.
Management
Fees
Management
fees decreased $0.6 million, or 10.7%, primarily due to a one-time fee paid by
one of the managed communities during the second quarter of 2008.
Facility
Operating Expense
Facility
operating expense increased over the prior-year period primarily due to an
increase in salaries and wages due to wage increases occurring during 2008,
increases in insurance expense, as well as higher deferred community fee expense
recognition. Also there was an increase in expense incurred in
connection with the continued expansion of our ancillary services programs
during 2009. These increases were partially offset by significant
cost control measures that were implemented in recent
periods. Facility operating expense during the nine months ended
September 30, 2008 was negatively impacted by hurricane and named tropical
storms expense.
Retirement
Centers operating expenses decreased $3.8 million, or 1.6%, primarily due to
expenses incurred related to hurricane and named tropical storms during 2008, as
well as decreases in public relations and advertising expenses, partially offset
by additional expense incurred in connection with the continued expansion of our
ancillary services programs.
Assisted
Living operating expenses increased $4.5 million, or 1.1%, primarily due to
increased salaries and wages, higher deferred community fee expense recognition,
and an increase in expense incurred in connection with the continued expansion
of our ancillary services programs. These increases were partially
offset by reduced overtime
hours
worked and decreased public relations and advertising
expenses. Facility operating expense during the nine months ended
September 30, 2008 was negatively impacted by hurricane and named tropical
storms expense.
CCRCs
operating expenses increased $25.2 million, or 8.8%, primarily due to an
increase in expense incurred in connection with the continued expansion of our
ancillary services programs, as well as increased insurance expense and salaries
and wages. These increases were partially offset by significant cost
control measures that were implemented in recent periods. Facility
operating expense during the nine months ended September 30, 2008 was negatively
impacted by hurricane and named tropical storms expense.
General
and Administrative Expense
General
and administrative expense decreased $9.5 million, or 8.7%, primarily as a
result of a decrease in non-controllable expenses period over period related to
an $8.0 million reserve established for certain litigation during the nine
months ended September 30, 2008, as well as decreases in non-cash stock-based
compensation expense in connection with restricted stock grants, employee
benefits expenses and travel and entertainment expenses. These
decreases were partially offset by increased bonus expense in the current
period. General and administrative expense as a percentage of total
revenue, including revenue generated by the communities we manage and excluding
non-cash compensation, integration, non-recurring and acquisition-related
costs, was 4.7% and 4.5% for the nine months ended September 30, 2009 and 2008,
respectively, calculated as follows (dollars in thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
1,499,544 |
|
|
|
92.7 |
% |
|
$ |
1,435,522 |
|
|
|
92.7 |
% |
Resident
fee revenues under management
|
|
|
118,018 |
|
|
|
7.3 |
% |
|
|
112,539 |
|
|
|
7.3 |
% |
Total
|
|
$ |
1,617,562 |
|
|
|
100.0 |
% |
|
$ |
1,548,061 |
|
|
|
100.0 |
% |
General
and administrative expenses (excluding non-cash compensation, integration,
non-recurring and acquisition-related costs)
|
|
$ |
75,900 |
|
|
|
4.7 |
% |
|
$ |
69,038 |
|
|
|
4.5 |
% |
Non-cash
compensation expense
|
|
|
21,549 |
|
|
|
1.3 |
% |
|
|
23,368 |
|
|
|
1.5 |
% |
Integration,
non-recurring and acquisition-related costs
|
|
|
2,699 |
|
|
|
0.2 |
% |
|
|
17,227 |
|
|
|
1.1 |
% |
General
and administrative expenses (including non-cash compensation, integration,
non-recurring and acquisition-related costs)
|
|
$ |
100,148 |
|
|
|
6.2 |
% |
|
$ |
109,633 |
|
|
|
7.1 |
% |
Facility
Lease Expense
Lease
expense remained relatively constant period over period.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $5.5 million, or 2.6%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
late 2008.
Interest
Income
Interest
income decreased $4.4 million, or 71.3%, primarily due to the recognition of
interest income upon collection of a long-term note receivable, which interest
income had been deferred as the interest was accumulating unpaid, during the
nine months ended September 30, 2008.
Interest
Expense
Interest
expense decreased $32.4 million, or 23.9%, primarily due to the change in fair
value of our interest rate swaps and caps. During the nine months
ended September 30, 2009, we recognized approximately $1.1 million
of
interest
income on our interest rate swaps and caps due to favorable changes in the LIBOR
yield curve which resulted in a change in the fair value of the swaps and caps,
as compared to approximately $17.3 million of interest expense on our interest
rate swaps for the nine months ended September 30, 2008. Interest
expense on our mortgage debt also decreased due to a decline in market interest
rates period over period.
Other
Non-operating Income (Expense)
Other
non-operating income (expense) increased $4.6 million primarily due to the gain
on sale of a joint venture interest during the nine months ended September 30,
2009.
Income
Taxes
Our
effective tax rates for the nine months ended September 30, 2009 and 2008 are
29.4% and 36.8%, respectively. The difference in the effective rate
between these periods is primarily due to the decrease in the calculated
annualized effective rate for 2009 based on projected improvements in our
performance. The rate was also impacted by our stock based
compensation deduction as calculated under the FASB guidance on Share-Based
Payment for 2009 due to the movements in the stock price between September 30,
2008 and September 30, 2009.
An
additional interest charge related to our tax contingency reserve and a new
uncertain tax position were recorded during the nine months ended September 30,
2009. Additionally, we settled an uncertain tax position as a result
of a state audit during the nine months ended September 30, 2009. Tax
returns for years 2005 through 2007 are subject to future examination by tax
authorities. In addition, tax returns are open from 1999 through 2004
to the extent of the net operating losses generated during those
periods.
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, 2008.
Liquidity
and Capital Resources
The
following is a summary of cash flows from operating, investing and financing
activities, as reflected in the condensed consolidated statements of cash flows
(dollars in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
185,972 |
|
|
$ |
107,354 |
|
Cash
used in investing activities
|
|
|
(124,017 |
) |
|
|
(101,700 |
) |
Cash
provided by (used in) financing activities
|
|
|
43,385 |
|
|
|
(50,673 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
105,340 |
|
|
|
(45,019 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
53,973 |
|
|
|
100,904 |
|
Cash
and cash equivalents at end of period
|
|
$ |
159,313 |
|
|
$ |
55,885 |
|
The
increase in cash provided by operating activities was attributable to improved
operating performance period over period as well as working capital management,
partially offset by security deposits returned to prospective residents on a
discontinued development project.
The
increase in cash used in investing activities was primarily attributable to an
increase in restricted cash balances funded (in order to reduce our letter of
credit needs) related to the renegotiation of the line of credit in the current
year which was partially offset by a reduction on spending on property, plant
and equipment and leasehold improvements period over period, as well as cash
received on a sale-leaseback transaction and for the sale of a joint venture
interest in the current period. The prior year period also includes a
cash payment received on outstanding notes receivable.
The
increase in cash provided by financing activities period over period was
primarily attributable to proceeds received from the public equity offering in
the current period as well as a decrease in dividend payments due to
the
suspension
of the dividend during the fourth quarter of 2008 and a decrease in swap
termination payments during the current period, partially offset by a decrease
in net borrowings in the current year period.
Our
principal sources of liquidity have historically been from:
|
·
|
cash
flows from operations;
|
|
·
|
proceeds
from our credit facilities;
|
|
·
|
proceeds
from mortgage financing or refinancing of various
assets;
|
|
·
|
funds
generated through joint venture arrangements or sale-leaseback
transactions; and
|
|
·
|
with
somewhat lesser frequency, funds raised in the debt or equity markets and
proceeds from the selective disposition of underperforming
assets.
|
Over the
longer-term, we expect to continue to fund our business through these principal
sources of liquidity. Over the near-term, however, we expect a reduced level of
mortgage refinancing activity. We also anticipate a reduced level of
reliance on proceeds from our credit facility over the near-term compared to
historical levels.
Our
liquidity requirements have historically arisen 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 previous share repurchase authorization;
and
|
|
·
|
other
corporate initiatives (including integration and
branding).
|
Over the
near-term, we expect that our liquidity requirements will primarily arise
from:
|
·
|
operating
costs such as employee compensation and related benefits, general and
administrative expense and supply
costs;
|
|
·
|
debt
service and lease payments;
|
|
·
|
capital
expenditures and improvements, including the expansion of our current
communities and the development of new
communities;
|
|
·
|
other
corporate initiatives (including
systems);
|
|
·
|
acquisition
consideration and transaction costs;
and
|
|
·
|
to
a lesser extent, cash collateral required to be posted in connection with
our interest rate swaps and related financial
instruments.
|
We are
highly leveraged and have significant debt and lease obligations. We
have two principal corporate-level indebtednesses: our $75.0 million
amended credit facility (including a $25.0 million letter of credit sublimit)
and our unsecured facilities providing for up to $48.5 million of letters of
credit in the aggregate. The remainder of our indebtedness is
generally comprised of non-recourse property-level mortgage
financings.
During
the nine months ended September 30, 2009, we completed a public equity offering
which yielded $163.7 million of net proceeds. In conjunction with the
completion of the offering, we entered into an amendment to our credit facility
which, among other things, reduced the maximum revolving loan commitment to
$75.0 million as discussed below. Proceeds from the offering were
primarily used to repay the $125.0 million of indebtedness which was outstanding
under the credit facility.
At
September 30, 2009, we had $2.1 billion of debt outstanding, excluding capital
lease obligations, at a weighted-average interest rate of 3.89%. At
September 30, 2009, we had $323.5 million of capital and financing lease
obligations, $23.7 million of letters of credit had been issued under the
amended credit facility, and $48.5 million of letters of credit had been issued
under our unsecured letter of credit facilities. Approximately $155.4
million of our debt obligations are due on or before September 30,
2010. We also have substantial operating lease obligations and
capital expenditure requirements. For the year ending September 30,
2010, we will be required to make approximately $262.1 million of payments in
connection with our existing operating leases.
We had
$159.3 million of cash and cash equivalents at September 30, 2009, excluding
cash and escrow deposits-restricted and lease security deposits of $189.4
million. Additionally, as of September 30, 2009, we had $51.3 million
available under our corporate credit facility, of which $1.3 million can be
drawn as letters of credit.
In late
2008, we began replacing some of our outstanding letters of credit with
restricted cash in order to reduce our letter of credit needs.
As of
September 30, 2009, we had $155.4 million of current debt
maturities. Although certain of our debt obligations are scheduled to
mature on or prior to September 30, 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 $131.0 million of certain
non-recourse mortgages payable included in such debt until 2011, as the
instruments associated with these mortgages payable provide that we can extend
the respective maturity dates for one 12 month term each from the existing
maturity dates.
At
September 30, 2009, we had $247.6 million of negative working capital, which
includes the classification of $208.5 million of refundable entrance fees and
$14.9 million in tenant deposits as current liabilities. Based upon
our historical operating experience, we anticipate that only 9.0% to 12.0% 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 $23.4 million of cash for the nine months ended
September 30, 2009.
For the
year ending December 31, 2009, we anticipate that we will make investments of
approximately $50.0 million to $55.0 million for capital expenditures (net of
approximately $90.0 million expected to be reimbursed from lenders/lessors or
funded through construction financing), comprised of approximately $21.0 million
to $23.0 million of net recurring capital expenditures, approximately $2.0
million to $3.0 million of net capital expenditures in connection with our
community expansion and development program, and approximately $27.0 million to
$29.0 million of expenditures relating to other major projects (including
corporate initiatives). These 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), systems related expenditures, and expenditures supporting the
expansion of our ancillary services programs. For the nine months ended
September 30, 2009, we spent approximately $12.0 million for net recurring
capital expenditures and approximately $11.9 million for expenditures relating
to other major projects and corporate initiatives and had a net receipt of cash
of approximately $6.4 million (consisting of $61.6 million for capital
expenditures net of $68.0 million that had been reimbursed as of September 30,
2009) in connection with our expansion and development program.
During
2009, we anticipate funding the majority of capital expenditures relating to our
expansion and development program through debt and lease financings for those
projects (approximately $88.0 million in the aggregate). We expect that
our other capital expenditures will be funded from cash on hand, cash flows from
operations, and amounts drawn on our credit facility.
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 market
environment and limitations imposed by our credit facility, we have recently
been focusing on integrating previous acquisitions and on the significant
organic growth opportunities inherent in our growth strategy and have engaged in
a reduced level of acquisition activity. Over the longer-term (and as
opportunities arise over the near-term), we plan to take advantage of the
fragmented continuing care, independent living and assisted living sectors by
selectively purchasing existing operating companies, asset portfolios, home
health agencies and communities. We may also seek to acquire the fee
interest in communities that we currently lease or manage.
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 a fixed rate basis. 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. We have recently taken a number of steps to reduce our
collateral posting risk. In particular, during 2008 and the nine
months ended September 30, 2009, we terminated a number of interest rate swaps
with an aggregate notional amount of $1.1 billion and purchased $509.3 million
in aggregate notional amount of interest rate caps, which do not require the
posting of cash collateral. Furthermore, during 2008, we obtained
$37.6 million of swaps that are secured by underlying mortgaged assets and,
hence, do not require cash collateralization. As of September 30, 2009, we have
$734.6 million in aggregate notional amount of interest rate caps, $37.6 million
in aggregate notional amount of swaps secured by underlying mortgaged assets,
$314.2 million in aggregate notional amount of swaps that require cash
collateralization and $93.0 million of variable rate debt that is not subject to
any cap or swap agreements.
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 (particularly given current
market conditions). 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, any of which could reduce the growth of our
business.
During
late 2008 and the first half of 2009, we took steps to preserve our
liquidity and increase our financial flexibility. For example, we
suspended our quarterly dividend payments, terminated our share repurchase
program and initiated a number of cost control measures (including limitations
on our capital expenditures). In addition, we completed the public
equity offering described above and repaid the outstanding borrowings on our
corporate credit facility. We currently estimate that our existing
cash flows from operations, together with existing working capital, amounts
available under our credit facility and, to a lesser extent, proceeds from
anticipated financings and refinancings of various assets, will be sufficient to
fund our liquidity needs for at least the next 12 months, assuming that the
overall economy does not substantially deteriorate further.
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
on 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, 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, 2009, we are in compliance with the financial covenants of our
outstanding debt and lease agreements.
Credit
Facilities
As of
January 1, 2009, we had an available secured line of credit of $245.0 million
(including a $70.0 million letter of credit sublimit), an associated letter of
credit facility of up to $80.0 million, and separate letter of credit facilities
of up to $42.5 million in the aggregate. The line of credit bore
interest at the base rate plus 3.0% or LIBOR plus 4.0%, at our election, and was
scheduled to mature on May 15, 2009. We were required to pay fees
ranging from 2.5% to 4.0% of the amount of any outstanding letters of credit
issued under the associated letter of credit facility and are required to pay a
fee of 2.5% of the amount of any outstanding letters of credit issued under the
separate letter of credit facilities.
Refinancing
of Line of Credit
During
late 2008 and early 2009, we entered into unsecured facilities with a financial
institution, maturing in November 2011, providing for up to $48.5 million of
letters of credit in the aggregate and entered into a Second Amended and
Restated Credit Agreement, dated February 27, 2009, with Bank of America, N.A.,
as administrative agent, Banc of America Securities LLC, as sole lead arranger
and book manager, and the several lenders from time to time parties thereto. The
amended credit agreement amended and restated our previous $245.0 million
secured line of credit and terminated the associated $80.0 million letter of
credit facility.
The
amended credit agreement initially consisted of a $230.0 million revolving loan
facility with a $25.0 million letter of credit sublimit and is scheduled to
mature on August 31, 2010.
Pursuant
to the terms of the amended credit agreement, certain of our subsidiaries, as
guarantors, will guarantee our obligations under the amended credit agreement
and the other loan documents. Further, in connection with the amended
credit agreement, (i) the company and certain guarantors executed and delivered
a Pledge Agreement in favor of the administrative agent for the banks and other
financial institutions from time to time parties to the amended credit
agreement, pursuant to which such guarantors pledged certain assets for the
benefit of the secured parties as collateral security for the payment and
performance of our obligations under the amended credit agreement and the other
loan documents and (ii) certain guarantors granted mortgages and executed and
delivered a Security Agreement, in each case, in favor of the administrative
agent for the banks and other financial institutions
from time
to time parties to the amended credit agreement encumbering certain real and
personal property of such guarantors. The collateral includes, among
other things, certain real property and related personal property owned by the
guarantors, 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.
At our
option, amounts drawn under the revolving loan facility initially bore interest
at either (i) LIBOR plus a margin of 7.0% or (ii) the greater of (a) the Bank of
America prime rate or (b) the Federal Funds rate plus 0.5%, plus a margin of
7.0%. For purposes of determining the interest rate, in no event
shall the base rate or LIBOR be less than 3.0%. In connection with
the loan commitments, we will pay a quarterly commitment fee of 1.0% per annum
on the average daily amount of undrawn funds. We were initially
required to pay a fee equal to 7.0% of the amount of any issued and outstanding
letters of credit; provided, with respect to drawable amounts that have been
cash collateralized, the letter of credit fee shall be payable at a rate per
annum equal to 2.0%.
The
amended credit agreement contains typical representations and covenants for
loans of this type, including restrictions on our ability to pay dividends, make
distributions, make acquisitions, incur capital expenditures, incur new liens,
or repurchase shares of our common stock. The amended credit agreement also
contains financial covenants, including covenants with respect to maximum
consolidated adjusted leverage, minimum consolidated fixed charge coverage,
minimum tangible net worth, and maximum total capital expenditures. 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 amended credit agreement, which would result in termination of
all commitments and loans under the amended credit agreement and all other
amounts owing under the amended credit agreement and certain other loan
agreements becoming immediately due and payable.
On June
1, 2009, in connection with the equity offering described above, we entered into
the First Amendment to the Second Amended and Restated Credit Agreement (the
“First Amendment”) pursuant to which the maximum revolving loans that can be
outstanding at any time under the amended credit agreement was reduced to
$75.0 million. In addition, the interest rate margin on loans,
as well as fees on letters of credit, as a result of the maximum amount of the
facility having been reduced to $75.0 million, was reduced to 6.0%.
Pursuant
to the First Amendment, we were given greater flexibility to make acquisitions
by increasing aggregate permitted cash consideration from $10.0 million to
$100.0 million, to make capital expenditures up to $30.0 million per
quarter and to incur an additional $20.0 million in liens and letters of
credit.
As of
September 30, 2009, we have an available secured line of credit of $75.0 million
(including a $25.0 million letter of credit sublimit) and separate unsecured
letter of credit facilities of up to $48.5 million in the
aggregate. As of September 30, 2009, there were no borrowings under
the revolving loan facility, $23.7 million of letters of credit has been issued
under the amended credit facility, and $48.5 million of letters of credit had
been issued under our unsecured letter of credit facilities.
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, 2008.
There
have been no material changes in our contractual commitments during the nine
months ended September 30, 2009 other than with respect to the repayment of the
entire outstanding balance on our line of credit in connection with the public
equity offering discussed above.
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 as 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) expense items;
|
|
·
|
depreciation
and amortization (including non-cash impairment
charges);
|
|
·
|
straight-line
lease expense (income);
|
|
·
|
amortization
of deferred gain;
|
|
·
|
amortization
of deferred entrance fees; and
|
|
·
|
non-cash
compensation expense;
|
and including:
|
·
|
entrance
fee receipts and refunds (excluding certain first generation entrance fee
receipts on newly opened entrance fee
CCRCs).
|
In the
current period, we clarified the definition of Adjusted EBITDA to exclude
initial entrance fees received from the sale of units at newly opened entrance
fee CCRCs where the Company is required to apply such entrance fee proceeds to
satisfy debt.
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 (including non-cash impairment charges),
straight-line lease 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
condensed 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, 2009 and 2008 (dollars in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(21,290 |
) |
|
$ |
(35,877 |
) |
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
Benefit
for income taxes
|
|
|
(7,329 |
) |
|
|
(22,338 |
) |
|
|
(18,936 |
) |
|
|
(54,996 |
) |
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(42 |
) |
|
|
(358 |
) |
|
|
(1,218 |
) |
|
|
750 |
|
Loss
on extinguishment of debt
|
|
|
1,178 |
|
|
|
— |
|
|
|
2,918 |
|
|
|
3,052 |
|
Other
non-operating expense (income)
|
|
|
52 |
|
|
|
(69 |
) |
|
|
(4,172 |
) |
|
|
424 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
23,276 |
|
|
|
30,743 |
|
|
|
75,071 |
|
|
|
90,365 |
|
Capitalized
lease obligation
|
|
|
7,298 |
|
|
|
6,856 |
|
|
|
21,774 |
|
|
|
20,529 |
|
Amortization
of deferred financing costs
|
|
|
2,167 |
|
|
|
3,004 |
|
|
|
7,099 |
|
|
|
6,940 |
|
Change
in fair value of derivatives and amortization
|
|
|
2,478 |
|
|
|
8,454 |
|
|
|
(1,137 |
) |
|
|
17,344 |
|
Interest
income
|
|
|
(623 |
) |
|
|
(1,383 |
) |
|
|
(1,771 |
) |
|
|
(6,169 |
) |
Income
(loss) from operations
|
|
|
7,165 |
|
|
|
(10,968 |
) |
|
|
34,172 |
|
|
|
(16,216 |
) |
Depreciation
and amortization
|
|
|
66,983 |
|
|
|
67,066 |
|
|
|
202,378 |
|
|
|
207,882 |
|
Straight-line
lease expense
|
|
|
3,793 |
|
|
|
4,709 |
|
|
|
12,073 |
|
|
|
15,675 |
|
Amortization
of deferred gain
|
|
|
(1,088 |
) |
|
|
(1,086 |
) |
|
|
(3,259 |
) |
|
|
(3,257 |
) |
Amortization
of entrance fees
|
|
|
(5,742 |
) |
|
|
(4,707 |
) |
|
|
(16,084 |
) |
|
|
(16,527 |
) |
Non-cash
compensation expense
|
|
|
7,869 |
|
|
|
6,737 |
|
|
|
21,549 |
|
|
|
23,368 |
|
Entrance
fee receipts(2)
|
|
|
21,931 |
|
|
|
11,526 |
|
|
|
40,257 |
|
|
|
30,395 |
|
First
generation entrance fees received(3)
|
|
|
(10,626 |
) |
|
|
― |
|
|
|
(10,626 |
) |
|
|
― |
|
Entrance
fee disbursements
|
|
|
(4,649 |
) |
|
|
(5,856 |
) |
|
|
(16,842 |
) |
|
|
(14,331 |
) |
Adjusted
EBITDA
|
|
$ |
85,636 |
|
|
$ |
67,421 |
|
|
$ |
263,618 |
|
|
$ |
226,989 |
|
|
(1)
|
The
calculation of Adjusted EBITDA includes integration and
acquisition-related costs for the three and nine months ended September
30, 2009 of $2.2 million and $2.7 million,
respectively. Integration and hurricane and named tropical
storms expense as well as other non-recurring costs were $7.5 million for
the three months ended September 30, 2008 and $20.8 million for the nine
months ended September 30, 2008. The amount for the nine months
ended September 30, 2008 includes the effect of an $8.0 million reserve
established for certain litigation.
|
|
(2)
|
Includes
the receipt of refundable and nonrefundable entrance
fees.
|
|
(3)
|
First
generation entrance fees received represents initial entrance fees
received from the sale of units at a newly opened entrance fee CCRC where
the Company is required to apply such entrance fee proceeds to satisfy
debt.
|
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;
|
|
·
|
certain
first generation entrance fee receipts on newly opened entrance fee
CCRCs;
|
|
·
|
entrance
fee refunds disbursed;
|
|
·
|
lease
financing debt amortization with fair market value or no purchase
options;
|
|
·
|
recurring
capital expenditures.
|
In the
current period, we clarified the definition of CFFO to exclude initial entrance
fees received from the sale of units at newly opened entrance fee CCRCs where
the Company is required to apply such entrance fee proceeds to satisfy
debt.
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.
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) to review our ability to pay dividends to stockholders, (iii) to review 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, (v) in making compensation
determinations for certain of our associates (including our named executive
officers) and (vi) 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 condensed 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, 2009 and 2008 (dollars in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
72,900 |
|
|
$ |
30,630 |
|
|
$ |
185,972 |
|
|
$ |
107,354 |
|
Changes
in operating assets and liabilities
|
|
|
(11,438 |
) |
|
|
2,062 |
|
|
|
(7,221 |
) |
|
|
13,303 |
|
Refundable
entrance fees received(2)(3)
|
|
|
9,296 |
|
|
|
4,273 |
|
|
|
17,032 |
|
|
|
15,185 |
|
First
generation entrance fees received(4)
|
|
|
(10,626 |
) |
|
|
― |
|
|
|
(10,626 |
) |
|
|
― |
|
Entrance
fee refunds disbursed
|
|
|
(4,649 |
) |
|
|
(5,856 |
) |
|
|
(16,842 |
) |
|
|
(14,331 |
) |
Recurring
capital expenditures, net
|
|
|
(5,495 |
) |
|
|
(6,965 |
) |
|
|
(12,038 |
) |
|
|
(19,616 |
) |
Lease
financing debt amortization with fair market value or no purchase
options
|
|
|
(1,793 |
) |
|
|
(1,688 |
) |
|
|
(5,371 |
) |
|
|
(4,975 |
) |
Reimbursement
of operating expenses and other
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
794 |
|
Cash
From Facility Operations
|
|
$ |
48,195 |
|
|
$ |
22,456 |
|
|
$ |
150,906 |
|
|
$ |
97,714 |
|
|
(1)
|
The
calculation of CFFO includes integration and acquisition-related costs for
the three and nine months ended September 30, 2009 of $2.2 million and
$2.7 million, respectively. Integration and hurricane and named
tropical storms expense as well as other non-recurring costs were $7.5
million for the three months ended September 30, 2008 and $20.8 million
for the nine months ended September 30, 2008. The amount for
the nine months ended September 30, 2008 includes the effect of an $8.0
million reserve established for certain
litigation.
|
|
(2)
|
Entrance
fee receipts include promissory notes issued to the Company by the
resident in lieu of a portion of the entrance fees due. Notes
issued (net of collections) for the three and nine months ended September
30, 2009 were $3.3 million and $6.8 million,
respectively. Notes issued (net of collections) for the three
and nine months ended September 30, 2008 were not
material.
|
|
(3)
|
Total
entrance fee receipts for the three months ended September 30, 2009 and
2008 were $21.9 million and $11.5 million, respectively, including $12.6
million and $7.3 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, 2009 and 2008 were $40.3 million and $30.4 million,
respectively, including $23.2 million and $15.2 million, respectively, of
nonrefundable entrance fee receipts included in net cash provided by
operating activities.
|
|
(4)
|
First
generation entrance fees received represents initial entrance fees
received from the sale of units at a newly opened entrance fee CCRC where
the Company is required to apply such entrance fee proceeds to satisfy
debt.
|
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) expense items;
|
|
·
|
depreciation
and amortization (including non-cash impairment
charges);
|
|
·
|
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
community.
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 condensed 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, 2009 and 2008 (dollars in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(21,290 |
) |
|
$ |
(35,877 |
) |
|
$ |
(45,456 |
) |
|
$ |
(94,455 |
) |
Benefit
for income taxes
|
|
|
(7,329 |
) |
|
|
(22,338 |
) |
|
|
(18,936 |
) |
|
|
(54,996 |
) |
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(42 |
) |
|
|
(358 |
) |
|
|
(1,218 |
) |
|
|
750 |
|
Loss
on extinguishment of debt
|
|
|
1,178 |
|
|
|
― |
|
|
|
2,918 |
|
|
|
3,052 |
|
Other
non-operating expense (income)
|
|
|
52 |
|
|
|
(69 |
) |
|
|
(4,172 |
) |
|
|
424 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
23,276 |
|
|
|
30,743 |
|
|
|
75,071 |
|
|
|
90,365 |
|
Capitalized
lease obligation
|
|
|
7,298 |
|
|
|
6,856 |
|
|
|
21,774 |
|
|
|
20,529 |
|
Amortization
of deferred financing costs
|
|
|
2,167 |
|
|
|
3,004 |
|
|
|
7,099 |
|
|
|
6,940 |
|
Change
in fair value of derivatives and amortization
|
|
|
2,478 |
|
|
|
8,454 |
|
|
|
(1,137 |
) |
|
|
17,344 |
|
Interest
income
|
|
|
(623 |
) |
|
|
(1,383 |
) |
|
|
(1,771 |
) |
|
|
(6,169 |
) |
Income
(loss) from operations
|
|
|
7,165 |
|
|
|
(10,968 |
) |
|
|
34,172 |
|
|
|
(16,216 |
) |
Depreciation
and amortization
|
|
|
66,983 |
|
|
|
67,066 |
|
|
|
202,378 |
|
|
|
207,882 |
|
Facility
lease expense
|
|
|
68,036 |
|
|
|
67,017 |
|
|
|
204,211 |
|
|
|
202,028 |
|
General
and administrative (including non-cash stock
compensation expense)
|
|
|
34,720 |
|
|
|
32,948 |
|
|
|
100,148 |
|
|
|
109,633 |
|
Amortization
of entrance fees
|
|
|
(5,742 |
) |
|
|
(4,707 |
) |
|
|
(16,084 |
) |
|
|
(16,527 |
) |
Management
fees
|
|
|
(1,987 |
) |
|
|
(1,527 |
) |
|
|
(5,002 |
) |
|
|
(5,604 |
) |
Facility
Operating Income
|
|
$ |
169,175 |
|
|
$ |
149,829 |
|
|
$ |
519,823 |
|
|
$ |
481,196 |
|
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, 2009, we had approximately $953.1 million of
long-term fixed rate debt, $1.0 billion of long-term variable rate debt and
$323.5 million of capital and financing lease obligations. As of September 30,
2009, our total fixed-rate debt and variable-rate debt outstanding had
weighted-average interest rates of 3.89%.
We enter
into certain interest rate swap agreements with major financial institutions to
manage our risk on variable rate debt. Additionally, during 2008 and
2009, we entered into certain cap agreements to effectively manage our risk
above certain interest rates. As of September 30, 2009, $1.3 billion,
or 61.3%, of our debt, excluding capital and financing lease obligations, either
has fixed rates or variable rates that are subject to swap
agreements. As of September 30, 2009, $734.6 million, or 34.4%, of
our debt, excluding capital and financing lease obligations, is subject to cap
agreements. The remaining $93.0 million, or 4.4%, of our debt is
variable rate debt, not subject to any cap or swap agreements. A
change in interest rates would have impacted our interest rate expense related
to all outstanding variable rate debt, excluding capital and financing lease
obligations, as follows: a one, five and ten percent change in interest rates
would have an impact of $7.5 million, $39.0 million and $52.5 million,
respectively.
As noted
above, we have entered into certain interest rate protection and swap agreements
to effectively cap or convert floating rate debt to a fixed rate basis, as well
as to hedge anticipated future financing transactions. Pursuant to certain of
our hedge agreements, we are required to secure our obligation to the
counterparty by posting cash or other collateral if the fair value liability
exceeds a specified threshold.
Item 4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our 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, 2009, 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, 2009 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 9 to the Condensed Consolidated Financial
Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is
incorporated herein by this reference. See the Company’s Quarterly
Report on 10-Q for the quarter ended June 30, 2009 for a summary of certain
litigation that was settled during that period.
For
information regarding the most significant risks facing the Company, please see
the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2008, filed with the SEC on March 2, 2009,
as well as the risks discussed below. There have been no
material changes to the risk factors contained in our Form 10-K other than as
set forth below.
Recent
disruptions in the financial markets could affect our ability to obtain
financing or to extend or refinance debt as it matures, which could negatively
impact our liquidity, financial condition and the market price of our common
stock.
The
United States stock and credit markets have recently experienced significant
price volatility, dislocations and liquidity disruptions, which have caused
market prices of many stocks to fluctuate substantially and the spreads on
prospective debt financings to widen considerably. These circumstances have
materially impacted liquidity in the financial markets, making terms for certain
financings less attractive, and in some cases have resulted in the
unavailability of financing. Continued uncertainty in the stock and credit
markets may negatively impact our ability to access additional financing
(including any refinancing or extension of our existing debt) on reasonable
terms, which may negatively affect our business.
As of
September 30, 2009, we had an available secured line of credit of $75.0 million
(including a $25.0 million letter of credit sublimit) and separate letter of
credit facilities of up to $48.5 million in the aggregate. As of
September 30, 2009, we also had $155.4 million of debt that is scheduled to
mature during the twelve months ending September 30, 2010. If we are
unable to extend our credit facility, or enter into a new credit facility, at or
prior to its August 31, 2010 maturity date or extend (or refinance, as
applicable) any of our other debt or letter of credit facilities prior to their
scheduled maturity dates, our liquidity and financial condition could be
adversely impacted. In addition, even if we are able to extend or replace our
credit facility at or prior to its maturity or extend or refinance our other
maturing debt or letter of credit facilities, the terms of the new financing may
not be as favorable to us as the terms of the existing financing.
A
prolonged downturn in the financial markets may cause us to seek alternative
sources of potentially less attractive financing, and may require us to further
adjust our business plan accordingly. These events also may make it more
difficult or costly for us to raise capital, including through the issuance of
common stock. Continued disruptions in
the
financial markets could have an adverse effect on us and our
business. If we are not able to obtain additional financing on
favorable terms, we also may have to delay or abandon some or all of our growth
strategies, which could adversely affect our revenues and results of
operations.
If
we are not able to satisfy the conditions precedent to exercising the extension
options associated with certain of our debt agreements, our liquidity and
financial condition could be negatively impacted.
Our
consolidated financial statements reflect approximately $155.4 million of debt
obligations due on or prior to September 30, 2010. Although these
debt obligations are scheduled to mature on or prior to September 30, 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 $131.0 million of certain non-recourse 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 one 12
month term 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. If we are not able to satisfy the conditions precedent
to exercising these extension options, our liquidity and financial condition
could be adversely impacted.
If
the ownership of our common stock continues to be highly concentrated, it may
prevent you and other stockholders from influencing significant corporate
decisions and may result in conflicts of interest.
As of
September 30, 2009, funds managed by affiliates of Fortress beneficially own
60,875,826 shares, or approximately 51.3% of our outstanding common stock
(excluding unvested restricted shares). In addition, two of our directors are
associated with Fortress. As a result, funds managed by affiliates of Fortress
are able to control fundamental and significant corporate matters and
transactions, including: the election of directors; mergers, consolidations or
acquisitions; the sale of all or substantially all of our assets and other
decisions affecting our capital structure; the amendment of our amended and
restated certificate of incorporation and our amended and restated by-laws; and
the dissolution of the Company. Fortress’s interests, including its ownership of
the North American operations of Holiday Retirement Corp., one of our
competitors, may conflict with your interests. Their control of the Company
could delay, deter or prevent acts that may be favored by our other stockholders
such as hostile takeovers, changes in control of the Company and changes in
management. As a result of such actions, the market price of our common stock
could decline or stockholders might not receive a premium for their shares in
connection with a change of control of the Company.
The
market price of our common stock could be negatively affected by sales of
substantial amounts of our common stock in the public markets.
At
September 30, 2009, 118,618,457 shares of our common stock were outstanding
(excluding unvested restricted shares). All of the shares of our common stock
are freely transferable, except for any shares held by our “affiliates,” as that
term is defined in Rule 144 under the Securities Act of 1933, as amended, or the
Securities Act, or any shares otherwise subject to the limitations of Rule
144.
Pursuant
to our Stockholders Agreement, Fortress and certain of its affiliates and
permitted third-party transferees have the right, in certain circumstances, to
require us to register their shares of our common stock under the Securities Act
for sale into the public markets. Upon the effectiveness of such a registration
statement, all shares covered by the registration statement will be freely
transferable. In connection with our obligations under the Stockholders
Agreement, we received a request from Fortress to file a registration statement
on Form S-3 to permit the resale, from time to time, of up to 60,875,826 shares
of common stock owned by certain affiliates of Fortress. The registration
statement on Form S-3 was declared effective on May 22, 2009.
In
addition, as of Sept 30, 2009, we had registered under the Securities Act an
aggregate of 12,100,000 shares for issuance under our Omnibus Stock Incentive
Plan, an aggregate of 1,000,000 shares for issuance under our Associate Stock
Purchase Plan and an aggregate of 100,000 shares for issuance under our Director
Stock Purchase Plan. In accordance with the terms of the Omnibus
Stock Incentive Plan, the number of shares available for issuance automatically
increases by 400,000 shares on January 1 of each year. Pursuant to the terms of
the Associate Stock Purchase Plan, the number of shares available for purchase
under the plan will automatically increase by 200,000 shares on the first day of
each calendar year beginning January 1, 2010. Subject to any
restrictions imposed on the shares and options granted under our stock incentive
programs, shares registered under these registration statements will be
available for sale into the public markets.
Our
ability to use net operating loss carryovers to reduce future tax payments may
be limited.
Section
382 of the Internal Revenue Code contains rules that limit the ability of a
company that undergoes an ownership change, which is generally any change in
ownership of more than 50% of its stock over a three-year period, to utilize its
net operating loss carryforwards and certain built-in losses recognized in years
after the ownership change. These rules generally operate by focusing on
ownership changes involving stockholders owning directly or indirectly 5% or
more of the stock of a company and any change in ownership arising from a new
issuance of stock by the company. The determination of whether an ownership
change occurs is complex and not within the control of the company.
Consequently, no assurance can be provided as to whether an ownership change has
occurred or will occur in the future. Generally, if an ownership change occurs,
the yearly limitation is equal to the product of the applicable long term tax
exempt rate and the value of the Company’s stock immediately before the
ownership change.
Item 5. Other Information
Our
Board of Directors has unanimously approved an amendment to our Amended and
Restated Certificate of Incorporation to effectuate an increase in the
authorized number of directors from not more than eight members to not more than
nine members, so that we may offer W.E. Sheriff, our Chief Executive Officer,
the opportunity to join our Board. On November 4, 2009, certain
stockholders (including funds managed by affiliates of Fortress Investment Group
LLC) who are party to the Stockholders Agreement dated November 28, 2005, as
amended, executed a written consent approving the foregoing amendment. This
consent constitutes the consent of a majority of the total number of shares of
our outstanding common stock entitled to vote in the election of directors and
is sufficient to approve the amendment to our Certificate of
Incorporation.
The
amendment to our Certificate of Incorporation will become effective
approximately 20 days after we send notice of the action taken by written
consent to our stockholders. Promptly following the effective date of
the amendment, our Board intends to approve a corresponding amendment to our
Amended and Restated Bylaws increasing the maximum size of our
Board. The Board then intends to formally increase the allowed number
of directors to nine and appoint Mr. Sheriff as a Class I director, to serve
until the annual meeting of stockholders to be held in 2011 and until his
successor is duly elected and qualified. Mr. Sheriff’s appointment to
our Board has been unanimously recommended by our Nominating and Corporate
Governance Committee.
In
connection with the amendment to our Certificate of Incorporation discussed
above, on November 4, 2009, we and the Fortress stockholders entered into
Amendment Number Two to our Stockholders Agreement, dated as of November 28,
2005. Among other things, the amendment amended our Stockholders
Agreement to provide that our Board will consist of not more than nine directors
and that FIG LLC, an affiliate of Fortress Investment Group LLC, will be able to
designate four directors, or if the Board is composed of eight or nine
directors, five directors, for so long as the Fortress stockholders and their
permitted transferees beneficially own more than 35% of the voting power of our
common stock (as compared to the 50% ownership threshold in place prior to the
amendment). The foregoing summary of certain provisions of the
amendment to our Stockholders Agreement does not purport to be complete and is
qualified in its entirety by reference to the full text of the amendment filed
as Exhibit 4.4 hereto, which is incorporated herein by
reference.
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.
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|
|
|
|
|
|
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
4, 2009
|
|
|
|
|
|
|
|
|
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).
|
4.4 |
|
Amendment
Number Two to Stockholders Agreement, dated as of November 4,
2009. |
10.1
|
|
First
Amendment to Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as
amended and restated, effective as of October 30, 2009.
|
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.
|
50