Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
|
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
or
|
[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 001-32641
BROOKDALE
SENIOR LIVING INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
20-3068069
(I.R.S.
Employer
Identification
No.)
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111
Westwood Place, Suite 200
Brentwood,
Tennessee 37027
(Address
of Principal Executive Offices)
|
(Registrant’s
telephone number including area code)
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(615)
221-2250
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title
of Each Class
Common
Stock, $0.01 Par Value Per Share
|
|
Name
of Each Exchange on Which Registered
New
York Stock Exchange
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [X] No
[ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
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 [X] 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer [
]
|
|
Accelerated
filer [X]
|
|
|
|
|
|
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 Act). Yes [ ] No [X]
The
aggregate market value of common stock held by non-affiliates of the registrant
on June 30, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $428.1 million. The market
value calculation was determined using a per share price of $9.74, the price at
which the registrant’s common stock was last sold on the New York Stock Exchange
on such date. For purposes of this calculation, shares held by non-affiliates
excludes only those shares beneficially owned by the registrant’s executive
officers, directors, and stockholders owning 10% or more of the outstanding
common stock (and, in each case, their immediate family members and
affiliates).
As of
February 18, 2010, 119,302,532 shares of the registrant’s common stock, $0.01
par value, were outstanding (excluding unvested restricted shares).
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
sections of the registrant’s Definitive Proxy Statement relating to its 2010
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K.
BROOKDALE
SENIOR LIVING INC.
FORM
10-K
FOR
THE YEAR ENDED DECEMBER 31, 2009
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
statements in this Annual Report on Form 10-K and other information we provide
from time to time may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Those forward-looking
statements include all statements that are not historical statements of fact and
those regarding our intent, belief or expectations, including, but not limited
to, statements relating to our operational initiatives and our expectations
regarding their effect on our results; our expectations regarding occupancy,
revenue, cash flow, expense levels, the demand for senior housing, expansion
activity, acquisition opportunities, asset dispositions and the impact of a
failure to reinstate therapy cap exceptions; 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 (including the
timing thereof); 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 plans to acquire
additional communities, asset portfolios, operating companies and home health
agencies; 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, the risk associated with the current global economic
crisis and its impact upon capital markets and liquidity; our inability to
extend (or refinance) debt (including our credit and letter of credit
facilities) as 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; the risk that therapy caps exceptions are not
reinstated; 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 complete
acquisitions and integrate them 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 elsewhere in this Annual
Report on Form 10-K. Such forward-looking statements speak only as of the date
of this Annual 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.
Overview
As of
December 31, 2009, we are the largest operator of senior living communities in
the United States based on total capacity, with 565 communities in 35 states and
the ability to serve approximately 53,600 residents. We offer our residents
access to a full continuum of services across the most attractive sectors of the
senior living industry. As of December 31, 2009, we operated in four
business segments: retirement centers, assisted living, continuing
care retirement communities (“CCRCs”) and management services.
As of
December 31, 2009, we operated 80 retirement center communities with 14,867
units/beds, 430 assisted living communities with 22,954 units/beds, 36 CCRCs
with 12,017 units/beds and 19 communities with 3,788 units/beds where we provide
management services for third parties. The majority of our units/beds are
located in campus settings or communities containing multiple services,
including CCRCs. As of December 31, 2009, our owned/leased communities were
88.9% occupied. We generate approximately 83.0% of our revenues from private pay
customers. For the year ended December 31, 2009, 40.0% of our revenues were
generated from owned communities, 59.7% from leased communities and 0.3% from
management fees from communities we operate on behalf of third
parties.
The table
below presents a summary of our operating results and certain other financial
metrics for each of the years ended December 31, 2009, 2008 and 2007 (dollars in
millions):
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,023.1 |
|
|
$ |
1,928.1 |
|
|
$ |
1,839.3 |
|
|
Net
loss attributable to common stockholders(1)
|
|
$ |
(66.3 |
) |
|
$ |
(373.2 |
) |
|
$ |
(162.0 |
) |
|
Adjusted
EBITDA(2)
|
|
$ |
348.6 |
|
|
$ |
302.6 |
|
|
$ |
306.4 |
|
|
Cash
From Facility Operations(3)
|
|
$ |
196.8 |
|
|
$ |
130.1 |
|
|
$ |
143.2 |
|
|
Facility
Operating Income(2)
|
|
$ |
690.1 |
|
|
$ |
637.5 |
|
|
$ |
642.3 |
|
|
(1)
|
Net
loss for 2009 and 2008 include non-cash impairment charges of $10.1
million and $220.0 million,
respectively.
|
|
(2)
|
Adjusted
EBITDA and Facility Operating Income are non-GAAP financial measures we
use in evaluating our operating performance. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Non-GAAP Financial Measures” 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, and a reconciliation of net
loss to each of these measures.
|
|
(3)
|
Cash
From Facility Operations is a non-GAAP financial measure we use in
evaluating our liquidity. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Non-GAAP
Financial Measures” for an explanation of how we define this measure, a
detailed description of why we believe such measure is useful and the
limitations of such measure, and a reconciliation of net cash provided by
operating activities to such
measure.
|
Our
operating results for the year ended December 31, 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 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
$163.8 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 have 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 have taken 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 year ended December 31, 2009, we ended the year with $66.4 million of
unrestricted cash and cash equivalents on our consolidated balance
sheet.
As
discussed in more detail elsewhere in the Annual Report on Form 10-K, subsequent
to December 31, 2009, we entered into a new revolving credit facility with
General Electric Capital Corporation, as administrative agent. The new facility
has a commitment of $100.0 million, with an option to increase the commitment to
$120.0 million, and matures on June 30, 2013. The new facility replaced the
$75.0 million revolving credit agreement with Bank of America, N.A. that was
scheduled to expire in August 2010.
During
the fourth quarter of 2009 we engaged in a limited and measured amount of
acquisition activity. We acquired 18 senior living communities from
affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net
purchase price of approximately $190.0 million. The portfolio of 18
communities is comprised of a total of 1,197 units, including 92 independent
living units, 746 assisted living units and 359 Alzheimer’s units. We
financed the transaction with approximately $98.8 million of non-recourse
mortgage debt (substantially through the assumption of existing debt), with the
balance of the purchase price paid from cash on hand.
We also
acquired the remaining interest in three retirement center communities that were
previously managed by us and in which we previously had a noncontrolling
interest. Our interest was accounted for under the equity method and
had a carrying value of zero prior to the acquisition. The aggregate
purchase price for the communities was $102.0 million. The portfolio
of three communities is comprised of 642 total units, including 504 independent
living units and 138 assisted living units. We financed the
transaction by obtaining a $75.4 million non-recourse mortgage loan with the
balance of the purchase price paid from cash on hand.
We
believe that we are positioned to take advantage of favorable demographic trends
and future supply-demand dynamics in the senior living industry. We
also believe that we operate in the most attractive sectors of the senior living
industry with significant opportunities to increase our revenues through
providing a combination of housing, hospitality services, ancillary services and
health care services. Our senior living communities offer residents a supportive
“home-like” setting, assistance with activities of daily living, or ADLs, and,
in several communities, licensed skilled nursing services. We also provide
ancillary services, including therapy and home health services, to our
residents. By providing residents with a range of service options as their needs
change, we provide greater continuity of care, enabling seniors to
“age-in-place” and thereby maintain residency with us for a longer period of
time. The ability of residents to age-in-place is also beneficial to our
residents and their families who are concerned with care decisions for their
elderly relatives.
We
believe that there are substantial organic growth opportunities inherent in our
existing portfolio. We intend to take advantage of those opportunities by
growing revenues, while tightening expense control, at our existing communities,
continuing the expansion and maturation of our ancillary services business,
expanding our existing communities, and acquiring additional operating companies
and communities.
Growth
Strategy
Our
primary growth objectives are to grow our revenues, Adjusted EBITDA, Cash From
Facility Operations and Facility Operating Income. Key elements of
our strategy to achieve these objectives include:
|
|
·
|
Organic
growth in our core business, including expense control and the realization
of economies of scale. We plan to grow our existing
operations by increasing revenues through a combination of occupancy
growth and monthly service fee increases as a result of our competitive
strength and growing demand for senior living communities. In addition, we
intend to take advantage of our sophisticated operating and marketing
expertise to retain existing residents and attract new residents to our
communities. We also plan to continue our efforts to achieve
cost savings through the realization of additional economies of
scale. The size of our business has allowed us to achieve
savings in the
|
|
|
|
procurement
of goods and services and increased efficiencies with respect to various
corporate functions, and we expect that we can achieve additional savings
and efficiencies.
|
|
|
·
|
Growth
through the continued expansion of our ancillary services programs
(including therapy services and home health). We plan to
grow our revenues by further expanding our Innovative Senior Care program
throughout our retirement centers, assisted living, CCRCs and management
services segments. This expansion includes expanding the scope of services
provided at the communities currently served and the continuing rollout of
home health to communities not currently serviced. Through the
Innovative Senior Care program, we currently provide therapy, home health
and other ancillary services, as well as education and wellness programs,
to residents of many of our communities. These programs are
focused on wellness and physical fitness to allow residents to maintain
maximum independence. These services provide many continuing education
opportunities for residents and their families through health fairs,
seminars, and other consultative interactions. The therapy services we
provide include physical, occupational, speech and other specialized
therapy and home health services. The home health services we
provide include skilled nursing, physical therapy, occupational therapy,
speech language pathology, home health aide services as well as social
services as needed. In addition to providing these in-house
therapy and wellness services at our communities, we also provide these
services to other senior living communities that we do not own or operate.
These services may be reimbursed under the Medicare program or paid
directly by residents from private pay sources and revenues are recognized
as services are provided. We believe that our Innovative Senior Care
program is unique in the senior living industry and that we have a
significant advantage over our competitors with respect to providing
ancillary services because of our established infrastructure and
experience. We believe there is a significant opportunity to
grow our revenues by continuing to expand the scope of services at
communities currently served and continuing the rollout of home health to
additional communities, which we believe will increase our revenue per
unit/bed in the future. As of December 31, 2009 we offered
therapy services to approximately 36,000 of our units and home health
services to approximately 23,000 of our
units.
|
|
|
·
|
Growth
through the expansion of existing communities. We intend
to grow our revenues and cash flows through the expansion of certain of
our existing communities where economically
advantageous. Certain of our communities with stabilized
occupancies and excess demand in their respective markets may benefit from
additions and expansions (which additions and expansions may be subject to
landlord, lender and other third party consents) offering increased
capacity. Additionally, the community, as well as our presence
in the market, may benefit from adding a new level of service for
residents.
|
|
|
·
|
Growth
through the acquisition and consolidation of asset portfolios and other
senior living companies. As
opportunities arise, we plan to continue 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. Our acquisition strategy will continue to focus
primarily on communities where we can improve service delivery, occupancy
rates and cash flow.
|
The
Senior Living Industry
The
senior living industry is highly fragmented and characterized by numerous local
and regional operators. We are one of a limited number of national
operators that provide a broad range of community locations and service level
offerings at varying price levels. The industry has seen significant
growth in recent years and has been marked by the emergence of the assisted
living segment in the mid-1990’s.
Since the
beginning of 2007, the industry has been affected by the downturn in the housing
market and by the declining economy in general. In spite of these
factors, occupancy in the industry has only decreased by 120 basis points to
88.9% in the twelve months ended December 31, 2009 according to the National
Investment Center for the Seniors Housing & Care Industry
(“NIC”). Occupancy has declined 160 basis points to 89.0% in the
independent living sector and 70 basis points to 88.9% in the assisted living
sector in the twelve months ended December 31, 2009. Industry
occupancy rates have been declining after reaching a cyclic high in early 2007
of 92.3% according to NIC. New construction starts have slowed
dramatically since late 2008. Due to the continued impact of the
economic recession, locating financing for new projects has been very
difficult. For the
foreseeable
future, there will be very limited amounts of new construction in senior
living.
Despite
current economic conditions, we believe that a number of trends will contribute
to the continued growth of the senior living industry in coming
years. The primary market for senior living services is individuals
age 70 and older. According to U.S. Census data, the group is
expected to grow by 3.6 million through 2015. As a result of these
demographic trends, we expect an increase in the demand for senior living
services in future years.
We
believe the senior living industry has been and will continue to be impacted by
several other trends. The use of long-term care insurance is
increasing among current and future seniors as a means of planning for the costs
of senior living services. In addition, as a result of increased
mobility in society, reduction of average family size and increased number of
two-wage earner couples, more seniors are looking for alternatives outside of
their family for their care. Growing consumer awareness among seniors
and their families concerning the types of services provided by independent and
assisted living operators has further contributed to the opportunities in the
senior living industry. Also, seniors currently possess greater financial
resources than in the past, which makes it more likely that they are able to
afford to live in market-rate senior housing. Seniors in the geographic areas in
which we operate tend to have a significant amount of assets generated from
savings, pensions and, despite weakening in national housing markets, equity
from the sale of private homes.
Challenges
in our industry include increased state and local regulation of the assisted
living and skilled nursing sectors, which has led to an increase in the cost of
doing business. The regulatory environment continues to intensify in
the number and types of laws and regulations affecting us, accompanied by
increased enforcement activity by state and local officials. In addition, like
other companies, our financial results may be negatively impacted by increasing
employment costs including salaries, wages and benefits, such as health care,
for our employees. Increases in the costs of utilities, insurance, and real
estate taxes may also have a negative impact on our financial
results.
Certain
per person annual limits on Medicare reimbursement for therapy services became
effective in 2006, subject to certain exceptions. These exceptions expired on
December 31, 2009. Although legislation has been proposed in Congress to
reinstate the exceptions (and the exceptions have been repeatedly extended in
the past), this legislation has not yet been adopted. There can be no
assurance as to whether the exceptions will eventually be reinstated or the
timing thereof. A failure to reinstate these exceptions (or a delay
in their reinstatement) could have a material adverse impact on the revenues and
net operating income relating to our outpatient therapy services
program. While it is inherently difficult to quantify the impact of a
failure to reinstate the therapy cap exceptions (including, among other things,
possible changes by residents in accessing their Medicare benefits), we estimate
that such failure would have a recurring negative effect on the net operating
income from our outpatient therapy services program in the range of $5.0 million
to $10.0 million per year. In addition, the Company would likely
incur additional one-time charges (such as severance expense) in response
thereto.
In
addition, there continues to be various federal and state legislative and
regulatory proposals to implement cost containment measures that would limit
payments to healthcare providers in the future. Changes in the reimbursement
policies of the Medicare and Medicaid programs could have an adverse effect on
our results of operations and cash flow.
Our
History
We were
formed as a Delaware corporation in June 2005 for the purpose of combining two
leading senior living operating companies, Brookdale Living Communities, Inc.,
or BLC, and Alterra Healthcare Corporation, or Alterra. BLC and Alterra had been
operating independently since 1986 and 1981, respectively. On
November 22, 2005, we completed our initial public offering of common stock, and
on July 25, 2006, we acquired American Retirement Corporation, or ARC, another
leading senior living provider which had been operating independently since
1978.
Our
Product Offerings
We offer
a variety of senior living housing and service alternatives in communities
located across the United States. Our primary product offerings consist of (i)
retirement center communities; (ii) assisted living communities; and (iii)
CCRCs. As discussed below under “Segments”, we also operate certain communities
on behalf of third parties pursuant to management agreements.
Retirement
centers. Our retirement center communities are primarily
designed for middle to upper income seniors generally age 70 and older who
desire an upscale residential environment providing the highest quality of
service.
The
majority of our retirement center communities consist of both independent 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. While the number varies depending upon the particular
community, approximately 79.2% of all of the units at our retirement center
communities are independent living units, with the balance of units licensed for
assisted living.
Our
retirement center communities are large multi-story buildings containing on
average 186 units/beds with extensive common areas and amenities. Residents may
choose from studio, one-bedroom and two-bedroom units, depending upon the
specific community.
Each
retirement center community provides residents with basic services such as meal
service, 24-hour emergency response, housekeeping, concierge services,
transportation and recreational activities. Most of these communities also offer
custom tailored supplemental care services at an additional charge, which may
include medication reminders, check-in services and escort and companion
services. In addition, our Innovative Senior Care program is currently available
in most of our retirement centers communities. Through the program, we are able
to offer our residents various education, wellness, therapy, home health and
other ancillary services.
In
addition to the basic services, our retirement center communities that include
assisted living also provide residents with supplemental care service options to
provide assistance with activities of daily living, or ADLs. The levels of care
provided to residents vary from community to community depending, among other
things, upon the licensing requirements of the state in which the community is
located.
Residents
in our retirement center communities are able to maintain their residency for an
extended period of time due to the range of service options available to
residents (not including skilled nursing) as their needs change. Residents with
cognitive or physical frailties and higher level service needs are accommodated
with supplemental services in their own units or, in certain communities, are
cared for in a more structured and supervised environment on a separate wing or
floor. These communities also generally have a dedicated assisted living staff,
including nurses at the majority of communities, and separate assisted living
dining rooms and activity areas.
The
communities in our Retirement Centers segment represent approximately 27.7% of
our total senior living capacity.
Assisted
Living. Our assisted living communities offer housing and
24-hour assistance with ADLs to mid-acuity frail and elderly
residents.
Our
assisted living communities include both freestanding, multi-story communities
with more than 50 beds and smaller, freestanding single story communities with
less than 50 beds. Depending upon the specific location, the community may
include (i) private studio, one-bedroom and one-bedroom deluxe apartments, or
(ii) individual rooms for one or two residents in wings or “neighborhoods”
scaled to a single-family home, which includes a living room, dining room, patio
or enclosed porch, laundry room and personal care area, as well as a caregiver
work station.
Under our
Clare Bridge brand, we also operate 86 memory care communities, which are
freestanding assisted living communities specially designed for residents with
Alzheimer’s disease and other dementias requiring the attention, personal care
and services needed to help cognitively impaired residents maintain a higher
quality of
life. Our
memory care communities have from 20 to 60 beds and some are part of a campus
setting which includes a freestanding assisted living community.
All
residents at our assisted living and memory care communities receive the basic
care level, which includes ongoing health assessments, three meals per day and
snacks, coordination of special diets planned by a registered dietitian,
assistance with coordination of physician care, social and recreational
activities, housekeeping and personal laundry services. In some locations we
offer our residents exercise programs and programs designed to address issues
associated with early stages of Alzheimer’s and other forms of dementia. In
addition, we offer at additional cost higher levels of personal care services to
residents at these communities who are very physically frail or experiencing
early stages of Alzheimer’s disease or other dementia and who require more
frequent or intensive physical assistance or increased personal care and
supervision due to cognitive impairments. We also offer our Innovative Senior
Care program at certain of our assisted living and memory care
communities.
As a
result of their progressive decline in cognitive abilities, residents at our
memory care communities typically require higher levels of personal care and
services and therefore pay higher monthly service fees. Specialized services
include assistance with ADLs, behavior management and an activities program, the
goal of which is to provide a normalized environment that supports residents’
remaining functional abilities. Whenever possible, residents participate in all
facets of daily life at the residence, such as assisting with meals, laundry and
housekeeping.
The
communities in our Assisted Living segment (including our memory care
communities) represent approximately 42.8% of our total senior living
capacity.
CCRCs. Our CCRCs
are large communities that offer a variety of living arrangements and services
to accommodate all levels of physical ability and health. Most of our CCRCs have
independent living, assisted living and skilled nursing available on one campus,
and some also include memory care/Alzheimer’s units.
Eleven of
our CCRCs are entry fee communities, in which residents in the independent
living apartment units pay a one-time upfront entrance fee, typically $100,000
to $400,000 or more, which fee is partially refundable in certain circumstances.
The amount of the entrance fee varies depending upon the type and size of the
dwelling unit, the type of contract plan selected, whether the contract contains
a lifecare benefit (i.e., a healthcare discount) for the resident, the amount
and timing of refund, and other variables. These agreements are subject to
regulations in various states. In addition to their initial entrance fee,
residents under all of our entrance fee agreements also pay a monthly service
fee, which entitles them to the use of certain amenities and services. Since we
receive entrance fees upon initial occupancy, the monthly fees are generally
less than fees at a comparable rental community.
The
refundable portion of a resident’s entrance fee is generally refundable within a
certain number of months or days following contract termination or upon the sale
of the unit, or in some agreements, upon the resale of a comparable unit or 12
months after the resident vacates the unit. In addition, some entrance fee
agreements entitle the resident to a refund of the original entrance fee paid
plus a percentage of the appreciation of the unit upon resale.
We also
offer a broad array of ancillary services, including therapy, home health, and
other services through our Innovative Senior Care program, to the residents of
each of our CCRCs.
The
communities in our CCRCs segment represent approximately 22.4% of our total
senior living capacity. The independent living units at our entrance
fee communities (those units on which entry fees are paid) represent 5.8% of our
total senior living capacity. Excluding managed communities and
equity homes (which are residences located on certain of our CCRC campuses that
we do not generally own), entrance fee communities represent 9.5% of our total
senior living capacity.
Competitive
Strengths
We
believe our nationwide network of senior living communities is well positioned
to benefit from the growth and increasing demand in the industry. Some of our
most significant competitive strengths are:
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Skilled
management team with extensive experience. Our senior
management team has extensive experience in acquiring, operating and
managing a broad range of senior living assets, including experience in
the senior living, healthcare, hospitality and real estate
industries.
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Geographically
diverse, high-quality, purpose-built communities. As of
December 31, 2009, we operate a nationwide base of 565 purpose-built
communities in 35 states, including 78 communities in nine of the top ten
standard metropolitan statistical
areas.
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Ability to
provide a broad spectrum of care. Given our diverse mix
of retirement centers, assisted living communities and CCRCs, we are able
to meet a wide range of our customers’ needs. We believe that we are one
of the few companies in the senior living industry with this capability.
We believe that our multiple product offerings create marketing synergies
and cross-selling opportunities.
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The size of
our business allows us to realize cost and operating
efficiencies. We are the largest operator of senior
living communities in the United States based on total capacity. The size
of our business allows us to realize cost savings and economies of scale
in the procurement of goods and services. Our scale also allows
us to achieve increased efficiencies with respect to various corporate
functions. We intend to utilize our expertise and size to capitalize on
economies of scale resulting from our national platform. Our geographic
footprint and centralized infrastructure provide us with a significant
operational advantage over local and regional operators of senior living
communities. In connection with our formation transactions and our
acquisitions, we negotiated new contracts for food, insurance and other
goods and services. In addition, we have and will continue to consolidate
corporate functions
such as accounting, finance, human resources, legal, information
technology and marketing. We began to realize these savings upon the
completion of our formation transactions in September 2005 and have
realized additional savings as we continued to consolidate and integrate
various corporate functions.
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Significant
experience in providing ancillary services. Through our
Innovative Senior Care program, we provide a range of education, wellness,
therapy, home health and other ancillary services to residents of certain
of our retirement centers, assisted living, and CCRC
communities. Having therapy clinics and home health agencies
located in our buildings to provide needed services to our residents is a
distinctive competitive difference. We have significant
experience in providing these ancillary services and expect to receive
additional revenues as we expand our ancillary service offerings to
additional communities.
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Segments
As of
December 31, 2009, we had four reportable segments: retirement centers; assisted
living; CCRCs; and management services. These segments were determined based on
the way that our chief operating decision makers organize our business
activities for making operating decisions and assessing
performance.
Our
management services segment includes the results of communities that we operate
on behalf of third parties pursuant to management agreements. Information
regarding the other segments is included above under “Our Product
Offerings”.
Operating
results from our four business segments are discussed further in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 24 to our consolidated financial statements included
herein.
Operations
Operations
Overview
We
believe that successful senior living operators must effectively combine the
expertise and business disciplines of housing, hospitality, health care,
marketing, finance and real estate.
We
continually review opportunities to expand the types of services we provide to
our residents. To date, we have been able to increase our monthly revenue per
unit each year and we have generally experienced increasing facility operating
margins through a combination of the implementation of efficient operating
procedures and the
economies
of scale associated with the size and number of our communities. Our operating
procedures include securing national vendor contracts to obtain the lowest
possible pricing for certain services such as food, energy and insurance,
implementing effective budgeting and financial controls at each community, and
establishing standardized training and operations procedures.
We have
implemented intensive standards, policies and procedures and systems, including
detailed staff manuals, which we believe have contributed to high levels of
customer service and to improved facility operating margins. We have centralized
accounting controls, finance and other operating functions in our support
centers so that, consistent with our operating philosophy, community-based
personnel can focus on resident care and efficient operations. We have
established company-wide policies and procedures relating to, among other
things: resident care; community design and community operations; billings and
collections; accounts payable; finance and accounting; risk management;
development of employee training materials and programs; marketing activities;
the hiring and training of management and other community-based personnel;
compliance with applicable local and state regulatory requirements; and
implementation of our acquisition, development and leasing plans.
Consolidated
Corporate Operations Support
We have
developed a centralized infrastructure and services platform, which provides us
with a significant operational advantage over local and regional operators of
senior living communities. The size of our business also allows us to achieve
increased efficiencies with respect to various corporate functions such as human
resources, finance, accounting, legal, information technology and marketing. We
are also able to realize cost efficiencies in the purchasing of food, supplies,
insurance, benefits, and other goods and services. In addition, we have
established centralized operations groups to support all of our product lines
and communities in areas such as training, regulatory affairs, asset management,
dining and procurement.
Community
Staffing and Training
Each
community has an Executive Director responsible for the overall day-to-day
operations of the community, including quality of service, social services and
financial performance. Each Executive Director receives specialized training
from us. In addition, a portion of each Executive Director’s compensation is
directly tied to the operating performance of the community and key service
quality measures. We believe that the quality of our communities, coupled with
our competitive compensation philosophy, has enabled us to attract high-quality,
professional community Executive Directors.
Depending
upon the size of the community, each Executive Director is supported by a
community staff member who is directly responsible for day-to-day care of the
residents and either community staff or regional support to oversee the
community’s marketing and community outreach programs. Other key positions
supporting each community may include individuals responsible for food service,
activities, housekeeping, and engineering.
We
believe that quality of care and operating efficiency can be maximized by direct
resident and staff contact. Employees involved in resident care, including the
administrative staff, are trained in the support and care needs of the residents
and emergency response techniques. We have adopted formal training and
evaluation procedures to help ensure quality care for our residents. We have
extensive policy and procedure manuals and hold frequent training sessions for
management and staff at each site.
Quality
Assurance
We
maintain quality assurance programs at each of our communities through our
corporate and regional staff. Our quality assurance program is designed to
achieve a high degree of resident and family member satisfaction with the care
and services that we provide. Our quality control measures include, among other
things, community inspections conducted by corporate staff on a regular basis.
These inspections cover the appearance of the exterior and grounds; the
appearance and cleanliness of the interior; the professionalism and friendliness
of staff; quality of resident care (including assisted living services, nursing
care, therapy and home health programs); the quality of activities and the
dining program; observance of residents in their daily living activities; and
compliance with government regulations. Our quality control measures also
include the survey of residents and family members on a regular basis to monitor
their perception of the quality of services provided to
residents.
In order
to foster a sense of community as well as to respond to residents’ desires, at
many of our communities, we have established a resident council or other
resident advisory committee that meets monthly with the Executive Director of
the community. Separate resident committees also exist at many of these
communities for food service, activities, marketing and hospitality. These
committees promote resident involvement and satisfaction and enable community
management to be more responsive to the residents’ needs and
desires.
Marketing
and Sales
Our
marketing strategy is intended to create awareness of us, our communities, our
products and our services among potential residents and their family members and
among referral sources, including hospital discharge planners, physicians,
clergy, area agencies for the elderly, skilled nursing facilities, home health
agencies and social workers. Our marketing staff develops overall strategies for
promoting our communities and monitors the success of our marketing efforts,
including outreach programs. In addition to direct contacts with prospective
referral sources, we also rely on internet inquiries, print advertising, yellow
pages advertising, direct mail, signage and special events, health fairs and
community receptions. Certain resident referral programs have been established
and promoted within the limitations of federal and state laws at many
communities.
In order
to mitigate the impact of weakness in the housing market, we have implemented
several sales and marketing initiatives designed to increase our entrance fee
sales results. These include the acceptance of short-term promissory
notes in satisfaction of a resident’s required entrance fee from certain
pre-qualified, prospective residents who are waiting for their homes to
sell. In addition, we have implemented the MyChoice program, which
allows new and existing residents in certain communities the option to pay
additional refundable entrance fee amounts in return for a reduced monthly
service fee, thereby offering choices to residents desiring a more affordable
ongoing monthly service fee.
Competition
The
senior living industry is highly competitive. We compete with numerous other
organizations that provide similar senior living alternatives, such as home
health care agencies, community-based service programs, retirement communities,
convalescent centers and other senior living providers. In general, regulatory
and other barriers to competitive entry in the retirement center and assisted
living sectors of the senior living industry are not substantial, except in the
skilled nursing area. Although new construction of senior living
communities has declined in recent years, we have experienced and expect to
continue to experience competition in our efforts to acquire and operate senior
living communities. Some of our present and potential senior living competitors
have, or may obtain, greater financial resources than us and may have a lower
cost of capital. Consequently, we may encounter competition that could limit our
ability to attract residents or expand our business, which could have a material
adverse effect on our revenues and earnings. Our major publicly-traded
competitors are Sunrise Senior Living, Inc., Emeritus Corporation and Capital
Senior Living Corporation and our major private competitors include Life Care
Services, LLC and Atria Senior Living Group, as well as a large number of
not-for-profit entities.
Customers
Our
target retirement center residents are senior citizens age 70 and older who
desire or need a more supportive living environment. The average retirement
center resident resides in a retirement center community for approximately 32
months. A number of our retirement center residents relocate to one of our
communities in order to be in a metropolitan area that is closer to their adult
children.
Our
target assisted living residents are predominantly senior citizens age 80 and
older who require daily assistance with two or three ADLs. The average assisted
living resident resides in an assisted living community for approximately 20
months. Residents typically enter an assisted living community due to a
relatively immediate need for services that might have been triggered by a
medical event or need.
Our
target CCRC residents are senior citizens who are seeking a community that
offers a variety of services and a continuum of care so that they can “age in
place.” These residents generally first enter the community as a resident of an
independent living unit and may later move into an assisted living or skilled
nursing unit as their needs change.
We
believe our combination of retirement center and assisted living operating
expertise and the broad base of customers that this enables us to target creates
a unique opportunity for us to invest in a broad spectrum of assets in the
senior living industry, including retirement center, assisted living, CCRC and
skilled nursing communities.
Employees
As of
December 31, 2009, we had approximately 23,500 full-time employees and
approximately 13,300 part-time employees, of which 210 work in our Nashville
headquarters office, 361 work in our Milwaukee office, 53 work in our Chicago
office and 81 work in a variety of field-based management
positions. We currently consider our relationship with our employees
to be good.
Government
Regulation
The
regulatory environment surrounding the senior living industry continues to
intensify in the number and type of laws and regulations affecting it. In
addition, federal, state and local officials are increasingly focusing their
efforts on enforcement of these laws and regulations. This is particularly true
for large for-profit, multi-community providers like us. Some of the laws and
regulations that impact our industry include: state and local laws impacting
licensure, protecting consumers against deceptive practices, and generally
affecting the communities’ management of property and equipment and how we
otherwise conduct our operations, such as fire, health and safety laws and
regulations and privacy laws; federal and state laws designed to protect
Medicare and Medicaid, which mandate what are allowable costs, pricing, quality
of services, quality of care, food service, resident rights (including abuse and
neglect) and fraud; federal and state residents’ rights statutes and
regulations; Anti-Kickback and physicians referral (“Stark”) laws; and safety
and health standards set by the Occupational Safety and Health Administration.
We are unable to predict the future course of federal, state and local
legislation or regulation. Changes in the regulatory framework could have a
material adverse effect on our business.
Many
senior living communities are also subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities.
Although requirements vary from state to state, these requirements may address,
among others, the following: personnel education, training and records;
community services, including administration of medication, assistance with
self-administration of medication and the provision of nursing, home health and
therapy services; staffing levels; monitoring of resident wellness; physical
plant specifications; furnishing of resident units; food and housekeeping
services; emergency evacuation plans; professional licensing and certification
of staff prior to beginning employment; and resident rights and
responsibilities, including in some states the right to receive health care
services from providers of a resident’s choice that are not our employees. In
several of the states in which we operate or may operate, we are prohibited from
providing certain higher levels of senior care services without first obtaining
the appropriate licenses. In addition, in several of the states in which we
operate or intend to operate, assisted living communities, home health agencies
and/or skilled nursing facilities require a certificate of need before the
community can be opened or the services at an existing community can be
expanded. Senior living communities may also be subject to state and/or local
building, zoning, fire and food service codes and must be in compliance with
these local codes before licensing or certification may be granted. These laws
and regulatory requirements could affect our ability to expand into new markets
and to expand our services and communities in existing markets. In addition, if
any of our presently licensed communities operates outside of its licensing
authority, it may be subject to penalties, including closure of the
community.
The
intensified regulatory and enforcement environment impacts providers like us
because of the increase in the number of inspections or surveys by governmental
authorities and consequent citations for failure to comply with regulatory
requirements. Unannounced surveys or inspections may occur annually or
bi-annually, or following a regulator’s receipt of a complaint about the
community. From time to time in the ordinary course of business, we receive
deficiency reports from state regulatory bodies resulting from such inspections
or surveys. Most inspection deficiencies are resolved through an agreed-to plan
of corrective action relating to the community’s operations, but the reviewing
agency typically has the authority to take further action against a licensed or
certified community, which could result in the imposition of fines, imposition
of a provisional or conditional license, suspension or revocation of a license,
suspension or denial of admissions, loss of certification as a provider under
federal health care programs or imposition of other sanctions, including
criminal penalties. Loss, suspension or modification of a license may also cause
us to default under our loan or lease agreements and/or trigger cross-defaults.
Sanctions may be taken against providers or facilities without regard to the
providers’ or facilities’ history of compliance. We may also expend considerable
resources to respond to federal and state
investigations
or other enforcement action under applicable laws or regulations. To date, none
of the deficiency reports received by us has resulted in a suspension, fine or
other disposition that has had a material adverse effect on our revenues.
However, any future substantial failure to comply with any applicable legal and
regulatory requirements could result in a material adverse effect to our
business as a whole. In addition, states Attorneys General vigorously enforce
consumer protection laws as those laws relate to the senior living industry.
State Medicaid Fraud and Abuse Units may also investigate assisted living
communities even if the community or any of its residents do not receive federal
or state funds.
Regulation
of the senior living industry is evolving at least partly because of the growing
interests of a variety of advocacy organizations and political movements
attempting to standardize regulations for certain segments of the industry,
particularly assisted living. Our operations could suffer if future regulatory
developments, such as federal assisted living laws and regulations, as well as
mandatory increases in the scope and severity of deficiencies determined by
survey or inspection officials or increase the number of citations that can
result in civil or criminal penalties. Certain current state laws and
regulations allow enforcement officials to make determinations on whether the
care provided by one or more of our communities exceeds the level of care for
which the community is licensed. A finding that a community is delivering care
beyond its license might result in the immediate transfer and discharge of
residents, which may create market instability and other adverse consequences.
Furthermore, certain states may allow citations in one community to impact other
communities in the state. Revocation or suspension of a license, or a citation,
at a given community could therefore impact our ability to obtain new licenses
or to renew existing licenses at other communities, which may also cause us to
be in default under our loan or lease agreements and trigger cross-defaults or
may also trigger defaults under certain of our credit agreements, or adversely
affect our ability to operate and/or obtain financing in the future. If a state
were to find that one community’s citation will impact another of our
communities, this will also increase costs and result in increased surveillance
by the state survey agency. If regulatory requirements increase, whether through
enactment of new laws or regulations or changes in the enforcement of existing
rules, including increased enforcement brought about by advocacy groups, in
addition to federal and state regulators, our operations could be adversely
affected. In addition, any adverse finding by survey and inspection officials
may serve as the basis for false claims lawsuits by private plaintiffs and may
lead to investigations under federal and state laws, which may result in civil
and/or criminal penalties against the community or individual.
There are
various extremely complex federal and state laws governing a wide array of
referrals, relationships and arrangements and prohibiting fraud by health care
providers, including those in the senior living industry, and governmental
agencies are devoting increasing attention and resources to such anti-fraud
initiatives. The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, and the Balanced Budget Act of 1997 expanded the penalties for health
care fraud. In addition, with respect to our participation in federal health
care reimbursement programs, the government or private individuals acting on
behalf of the government may bring an action under the False Claims Act alleging
that a health care provider has defrauded the government and seek treble damages
for false claims and the payment of additional monetary civil penalties.
Recently, other health care providers have faced enforcement action under the
False Claims Act. The False Claims Act allows a private individual with
knowledge of fraud to bring a claim on behalf of the federal government and earn
a percentage of the federal government’s recovery. Because of these incentives,
so-called “whistleblower” suits have become more frequent. Also, if any of our
communities exceeds its level of care, we may be subject to private lawsuits
alleging “transfer trauma” by residents. Such allegations could also lead to
investigations by enforcement officials, which could result in penalties,
including the closure of communities. The violation of any of these regulations
may result in the imposition of fines or other penalties that could jeopardize
our business.
Additionally,
we operate communities that participate in federal and/or state health care
reimbursement programs, including state Medicaid waiver programs for assisted
living communities, the Medicare skilled nursing facility benefit program and
other healthcare programs such as therapy and home health services, or other
federal and/or state health care programs. Consequently, we are subject to
federal and state laws that prohibit anyone from presenting, or causing to be
presented, claims for reimbursement which are false, fraudulent or are for items
or services that were not provided as claimed. Similar state laws vary from
state to state and we cannot be sure that these laws will be interpreted
consistently or in keeping with past practices. Violation of any of these laws
can result in loss of licensure, claims for recoupment, civil or criminal
penalties and exclusion of health care providers or suppliers from furnishing
covered items or services to beneficiaries of the applicable federal and/or
state health care reimbursement program. Loss of licensure may also cause us to
default under our leases and loan agreements and/or trigger
cross-defaults.
We are
also subject to certain federal and state laws that regulate financial
arrangements by health care providers, such as the Federal Anti-Kickback Law,
the Stark laws and certain state referral laws. The Federal Anti-Kickback Law
makes it unlawful for any person to offer or pay (or to solicit or receive) “any
remuneration ... directly or indirectly, overtly or covertly, in cash or in
kind” for referring or recommending for purchase any item or service
which is
eligible for payment under the Medicare and/or Medicaid programs. Authorities
have interpreted this statute very broadly to apply to many practices and
relationships between health care providers and sources of patient referral. If
we were to violate the Federal Anti-Kickback Law, we may face criminal penalties
and civil sanctions, including fines and possible exclusion from government
programs such as Medicare and Medicaid, which may also cause us to default under
our leases and loan agreements and/or trigger cross-defaults. Adverse
consequences may also result if we violate federal Stark laws related to certain
Medicare and Medicaid physician referrals. While we endeavor to comply with all
laws that regulate the licensure and operation of our senior living communities,
it is difficult to predict how our revenues could be affected if we were subject
to an action alleging such violations. We are also subject to federal and state
laws designed to protect the confidentiality of patient health information. The
U.S. Department of Health and Human Services, or HHS, has issued rules pursuant
to HIPAA relating to the privacy of such information. Rules that became
effective April 14, 2003 govern our use and disclosure of health information at
certain HIPAA covered communities. We established procedures to comply with
HIPAA privacy requirements at these communities. We were required to be in
compliance with the HIPAA rule establishing administrative, physical and
technical security standards for health information by April 2005. To the best
of our knowledge, we are in compliance with these rules.
Environmental
Matters
Under
various federal, state and local environmental laws, a current or previous owner
or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of certain
hazardous or toxic substances, including, among others, petroleum and materials
containing asbestos, that could be located on, in, at or under a property,
regardless of how such materials came to be located there. Additionally, such an
owner or operator of real property may incur costs relating to the release of
hazardous or toxic substances, including government fines and payments for
personal injuries or damage to adjacent property. The cost of any required
investigation, remediation, removal, mitigation, compliance, fines or personal
or property damages and our liability therefore could exceed the property’s
value and/or our assets’ value. In addition, the presence of such substances, or
the failure to properly dispose of or remediate the damage caused by such
substances, may adversely affect our ability to sell such property, to attract
additional residents and retain existing residents, to borrow using such
property as collateral or to develop or redevelop such property. In addition,
such laws impose liability for investigation, remediation, removal and
mitigation costs on persons who disposed of or arranged for the disposal of
hazardous substances at third-party sites. Such laws and regulations often
impose liability without regard to whether the owner or operator knew of, or was
responsible for, the presence, release or disposal of such substances as well as
without regard to whether such release or disposal was in compliance with law at
the time it occurred. Moreover, the imposition of such liability upon us could
be joint and several, which means we could be required to pay for the cost of
cleaning up contamination caused by others who have become insolvent or
otherwise judgment proof.
We do not
believe that we have incurred such liabilities that would have a material
adverse effect on our business, financial condition and results of
operations.
Our
operations are subject to regulation under various federal, state and local
environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at
our communities; identification and warning of the presence of
asbestos-containing materials in buildings, as well as removal of such
materials; the presence of other substances in the indoor environment; and
protection of the environment and natural resources in connection with
development or construction of our properties.
Some of
our communities generate infectious or other hazardous medical waste due to the
illness or physical condition of the residents, including, for example,
blood-contaminated bandages, swabs and other medical waste products and
incontinence products of those residents diagnosed with an infectious disease.
The management of infectious medical waste, including its handling, storage,
transportation, treatment and disposal, is subject to regulation under various
federal, state and local environmental laws. These environmental laws set forth
the management requirements for such waste, as well as related permit,
record-keeping, notice and reporting obligations. Each of our communities has an
agreement with a waste management company for the proper disposal of all
infectious medical waste. The use of such waste management companies does not
immunize us
from
alleged violations of such medical waste laws for operations for which we are
responsible even if carried out by such waste management companies, nor does it
immunize us from third-party claims for the cost to cleanup disposal sites at
which such wastes have been disposed. Any finding that we are not in compliance
with environmental laws could adversely affect our business operations and
financial condition.
Federal
regulations require building owners and those exercising control over a
building’s management to identify and warn, via signs and labels, their
employees and certain other employers operating in the building of potential
hazards posed by workplace exposure to installed asbestos-containing materials
and potential asbestos-containing materials in their buildings. The regulations
also set forth employee training, record-keeping requirements and sampling
protocols pertaining to asbestos-containing materials and potential
asbestos-containing materials. Significant fines can be assessed for violation
of these regulations. Building owners and those exercising control over a
building’s management may be subject to an increased risk of personal injury
lawsuits by workers and others exposed to asbestos-containing materials and
potential asbestos-containing materials. The regulations may affect the value of
a building containing asbestos-containing materials and potential
asbestos-containing materials in which we have invested. Federal, state and
local laws and regulations also govern the removal, encapsulation, disturbance,
handling and/or disposal of asbestos-containing materials and potential
asbestos-containing materials when such materials are in poor condition or in
the event of construction, remodeling, renovation or demolition of a building.
Such laws may impose liability for improper handling or a release to the
environment of asbestos-containing materials and potential asbestos-containing
materials and may provide for fines to, and for third parties to seek recovery
from, owners or operators of real properties for personal injury or improper
work exposure associated with asbestos-containing materials and potential
asbestos-containing materials.
The
presence of mold, lead-based paint, contaminants in drinking water, radon and/or
other substances at any of the communities we own or may acquire may lead to the
incurrence of costs for remediation, mitigation or the implementation of an
operations and maintenance plan. Furthermore, the presence of mold, lead-based
paint, contaminants in drinking water, radon and/or other substances at any of
the communities we own or may acquire may present a risk that third parties will
seek recovery from the owners, operators or tenants of such properties for
personal injury or property damage. In some circumstances, areas affected by
mold may be unusable for periods of time for repairs, and even after successful
remediation, the known prior presence of extensive mold could adversely affect
the ability of a community to retain or attract residents and could adversely
affect a community’s market value.
We
believe that we are in material compliance with applicable environmental
laws.
We are
unable to predict the future course of federal, state and local environmental
regulation and legislation. Changes in the environmental regulatory framework
(including legislative or regulatory efforts designed to address climate change,
such as the proposed “cap and trade” legislation) could have a material adverse
effect on our business. In addition, because environmental laws vary from state
to state, expansion of our operations to states where we do not currently
operate may subject us to additional restrictions on the manner in which we
operate our communities.
Available
Information
Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to these reports, are available free of charge through
our web site as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission, at the
following address: www.brookdaleliving.com. The information within, or that can
be accessed through, the web site is not part of this report.
We have
posted our Corporate Governance Guidelines, Code of Business Conduct and Ethics
and the charters of our Audit, Compensation, Investment and Nominating and
Corporate Governance Committees on our web site at www.brookdaleliving.com. In
addition, our Code of Ethics for Chief Executive and Senior Financial Officers,
which applies to our Chief Executive Officer, Co-Presidents, Chief Financial
Officer, Treasurer and Controller, is also available on our website. Our
corporate governance materials are available in print free of charge to any
stockholder upon request to our Corporate Secretary, Brookdale Senior Living
Inc., 111 Westwood Place, Suite 200, Brentwood, Tennessee
37027.
Risks
Related to Our Business
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
December 31, 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 $78.5 million in the aggregate. As of
February 26, 2010, we have an available secured line of credit with a $100.0
million commitment and separate letter of credit facilities of up to $78.5
million in the aggregate. As of December 31, 2009, we also had $166.2
million of debt that is scheduled to mature during the twelve months ending
December 31, 2010. Although these debt obligations are scheduled to
mature on or prior to December 31, 2010, we have the option, subject to the
satisfaction of customary conditions (such as the absence of a material adverse
change), to extend the maturity of approximately $126.0 million of non-recourse
mortgages payable included in such debt until 2011. If we are unable
to extend (or refinance, as applicable) any of our debt or credit 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 refinance our other maturing debt or credit 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 $166.2 million of debt
obligations due on or prior to December 31, 2010. Although these debt
obligations are scheduled to mature on or prior to December 31, 2010, we have
the option, subject to the satisfaction of customary conditions (such as the
absence of a material adverse change), to extend the maturity of approximately
$126.0 million of 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. 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.
We
will rely on reimbursement from governmental programs for a greater portion of
our revenues than in the past, and will be subject to changes in reimbursement
levels, which could adversely affect our results of operations and cash
flow.
We will
rely on reimbursement from governmental programs for a greater portion of our
revenues than before, and we cannot assure you that reimbursement levels will
not decrease in the future, which could adversely affect our results of
operations and cash flow. Certain per person annual limits on Medicare
reimbursement for therapy services became effective in 2006, subject to certain
exceptions. These exceptions expired on December 31, 2009. Although
legislation has been proposed in Congress to reinstate the exceptions (and the
exceptions have
been
repeatedly extended in the past), this legislation has not yet been
adopted. There can be no assurance as to whether the exceptions will
eventually be reinstated or the timing thereof. A failure to
reinstate these exceptions (or a delay in their reinstatement) could have a
material adverse impact on the revenues and net operating income relating to our
outpatient therapy services program. In addition, there continue to
be various federal and state legislative and regulatory proposals to implement
cost containment measures that would limit payments to healthcare providers in
the future. Changes in the reimbursement policies of the Medicare program could
have an adverse effect on our results of operations and cash flow.
Due
to the dependency of our revenues on private pay sources, events which adversely
affect the ability of seniors to afford our monthly resident fees or entrance
fees (including downturns in the economy, housing market, consumer confidence or
the equity markets and unemployment among resident family members) could cause
our occupancy rates, revenues and results of operations to decline.
Costs to
seniors associated with independent and assisted living services are not
generally reimbursable under government reimbursement programs such as Medicare
and Medicaid. Only seniors with income or assets meeting or exceeding the
comparable median in the regions where our communities are located typically can
afford to pay our monthly resident fees. Economic downturns, softness in the
housing market, higher levels of unemployment among resident family members,
lower levels of consumer confidence, stock market volatility and/or changes in
demographics could adversely affect the ability of seniors to afford our
resident fees or entrance fees. If we are unable to retain and/or attract
seniors with sufficient income, assets or other resources required to pay the
fees associated with independent and assisted living services and other service
offerings, our occupancy rates, revenues and results of operations could
decline.
The
inability of seniors to sell real estate may delay their moving into our
communities, which could negatively impact our occupancy rates, revenues, cash
flows and results of operations.
Recent
housing price declines and reduced home mortgage availability have negatively
affected the U.S. housing market, with certain geographic areas experiencing
more acute deterioration than others. Downturns in the housing
markets, such as the one we have recently experienced, could adversely affect
the ability (or perceived ability) of seniors to afford our entrance fees and
resident fees as our customers frequently use the proceeds from the sale of
their homes to cover the cost of our fees. Specifically, if seniors have a
difficult time selling their homes, these difficulties could impact their
ability to relocate into our communities or finance their stays at our
communities with private resources. If the recent volatility in the
housing market continues for a protracted period, our occupancy rates, revenues,
cash flows and results of operations could be negatively impacted.
General
economic factors could adversely affect our financial performance and other
aspects of our business.
General
economic conditions, such as inflation, commodity costs, fuel and other energy
costs, costs of labor, insurance and healthcare, interest rates, and tax rates,
affect our community operating and general and administrative expenses, and we
have no control or limited ability to control such factors. In
addition, current global economic conditions and uncertainties, the potential
impact of a prolonged recession, the potential for failures or realignments of
financial institutions, and the related impact on available credit may affect us
and our business partners, landlords, counterparties and residents or
prospective residents in an adverse manner including, but not limited to,
reducing access to liquid funds or credit, increasing the cost of credit,
limiting our ability to manage interest rate risk, increasing the risk that
certain of our business partners, landlords or counterparties would be unable to
fulfill their obligations to us, and other impacts which we are unable to fully
anticipate.
If
we are unable to generate sufficient cash flow to cover required interest and
lease payments, this would result in defaults of the related debt or leases and
cross-defaults under other debt or leases, which would adversely affect our
ability to continue to generate income.
We have
significant indebtedness and lease obligations, and we intend to continue
financing our communities through mortgage financing, long-term leases and other
types of financing, including borrowings under our line of credit and future
credit facilities we may obtain. We cannot give any assurance that we will
generate sufficient cash flow from operations to cover required interest,
principal and lease payments. Any non-payment or other default under our
financing arrangements could, subject to cure provisions, cause the lender to
foreclose upon the community or communities securing such indebtedness or, in
the case of a lease, cause the lessor to terminate the lease, each with a
consequent loss of income and asset value to us. Furthermore, in some cases,
indebtedness is
secured
by both a mortgage on a community (or communities) and a guaranty by us and/or
one or more of our subsidiaries. In the event of a default under one of these
scenarios, the lender could avoid judicial procedures required to foreclose on
real property by declaring all amounts outstanding under the guaranty
immediately due and payable, and requiring the respective guarantor to fulfill
its obligations to make such payments. The realization of any of these scenarios
would have an adverse effect on our financial condition and capital structure.
Additionally, a foreclosure on any of our properties could cause us to recognize
taxable income, even if we did not receive any cash proceeds in connection with
such foreclosure. Further, because our mortgages and leases generally contain
cross-default and cross-collateralization provisions, a default by us related to
one community could affect a significant number of our communities and their
corresponding financing arrangements and leases.
Our
indebtedness and long-term leases could adversely affect our liquidity and our
ability to operate our business and our ability to execute our growth
strategy.
Our level
of indebtedness and our long-term leases could adversely affect our future
operations and/or impact our stockholders for several reasons, including,
without limitation:
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We
may have little or no cash flow apart from cash flow that is dedicated to
the payment of any interest, principal or amortization required with
respect to outstanding indebtedness and lease payments with respect to our
long-term leases;
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Increases
in our outstanding indebtedness, leverage and long-term leases will
increase our vulnerability to adverse changes in general economic and
industry conditions, as well as to competitive
pressure;
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Increases
in our outstanding indebtedness may limit our ability to obtain additional
financing for working capital, capital expenditures, expansions, new
developments, acquisitions, general corporate and other purposes;
and
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Our
ability to pay dividends to our stockholders may be
limited.
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Our
ability to make payments of principal and interest on our indebtedness and to
make lease payments on our leases depends upon our future performance, which
will be subject to general economic conditions, industry cycles and financial,
business and other factors affecting our operations, many of which are beyond
our control. Our business might not continue to generate cash flow at or above
current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt or to make lease payments on our
leases, we may be required, among other things, to seek additional financing in
the debt or equity markets, refinance or restructure all or a portion of our
indebtedness, sell selected assets, reduce or delay planned capital expenditures
or delay or abandon desirable acquisitions. Such measures might not be
sufficient to enable us to service our debt or to make lease payments on our
leases. The failure to make required payments on our debt or leases or the delay
or abandonment of our planned growth strategy could result in an adverse effect
on our future ability to generate revenues and sustain profitability. In
addition, any such financing, refinancing or sale of assets might not be
available on economically favorable terms to us.
Our
existing credit facilities, mortgage loans and lease arrangements contain
covenants that restrict our operations and any default under such facilities,
loans or arrangements could result in the acceleration of indebtedness,
termination of the leases or cross-defaults, any of which would negatively
impact our liquidity and inhibit our ability to grow our business and increase
revenues.
Our
outstanding indebtedness and leases contain restrictions and covenants and
require us to maintain or satisfy specified financial ratios and coverage tests,
including maintaining prescribed net worth levels, leverage ratios and debt
service and lease coverage ratios on a consolidated basis, and on a community or
communities basis based on the debt or lease securing the communities. In
addition, certain of our leases require us to maintain lease coverage ratios on
a lease portfolio basis (each as defined in the leases) and maintain
stockholders’ equity or tangible net worth amounts. The debt service coverage
ratios are generally calculated as revenues less operating expenses, including
an implied management fee and a reserve for capital expenditures, divided by the
debt (principal and interest) or lease payment. Net worth is generally
calculated as stockholders’ equity as calculated in accordance with GAAP, and in
certain circumstances, reduced by intangible assets or liabilities or increased
by deferred gains from sale-leaseback transactions and deferred entrance fee
revenue. These restrictions and covenants may interfere with our ability to
obtain financing or to engage in other business activities, which
may
inhibit
our ability to grow our business and increase revenues. If we fail to comply
with any of these requirements, then the related indebtedness could become
immediately due and payable. We cannot assure you that we could pay this debt if
it became due.
Our
outstanding indebtedness and leases are secured by our communities and, in
certain cases, a guaranty by us and/or one or more of our subsidiaries.
Therefore, an event of default under the outstanding indebtedness or leases,
subject to cure provisions in certain instances, would give the respective
lenders or lessors, as applicable, the right to declare all amounts outstanding
to be immediately due and payable, terminate the lease, foreclose on collateral
securing the outstanding indebtedness and leases, and restrict our ability to
make additional borrowings under the outstanding indebtedness or continue to
operate the properties subject to the lease. Certain of our outstanding
indebtedness and leases contain cross-default provisions so that a default under
certain outstanding indebtedness would cause a default under certain of our
leases. Certain of our outstanding indebtedness and leases also restrict, among
other things, our ability to incur additional debt.
The
substantial majority of our lease arrangements are structured as master leases.
Under a master lease, we may lease a large number of geographically dispersed
properties through an indivisible lease. As a result, it is difficult to
restructure the composition of the portfolio or economic terms of the lease
without the consent of the landlord. Failure to comply with Medicare or Medicaid
provider requirements is a default under several of our master lease and debt
financing instruments. In addition, potential defaults related to an individual
property may cause a default of an entire master lease portfolio and could
trigger cross-default provisions in our outstanding indebtedness and other
leases, which would have a negative impact on our capital structure and our
ability to generate future revenues, and could interfere with our ability to
pursue our growth strategy.
Certain
of our master leases also contain radius restrictions, which limit our ability
to own, develop or acquire new communities within a specified distance from
certain existing communities covered by such master leases. These radius
restrictions could negatively affect our expansion, development and acquisition
plans.
Mortgage
debt and lease obligations expose us to increased risk of loss of property,
which could harm our ability to generate future revenues and could have an
adverse tax effect.
Mortgage
debt and lease obligations increase our risk of loss because defaults on
indebtedness secured by properties or pursuant to the terms of the lease may
result in foreclosure actions initiated by lenders or lessors and ultimately our
loss of the property securing any loans for which we are in default or cause the
lessor to terminate the lease. For tax purposes, a foreclosure of any of our
properties would be treated as a sale of the property for a purchase price equal
to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds, which could negatively impact our earnings and
liquidity. Further, our mortgage debt and leases generally contain cross-default
and cross-collateralization provisions and a default on one community could
affect a significant number of our communities, financing arrangements and
leases.
Increases
in market interest rates could significantly increase the costs of our unhedged
debt and lease obligations, which could adversely affect our liquidity and
earnings.
Our
unhedged floating-rate debt and lease payment obligations and any unhedged
floating-rate debt incurred in the future, exposes us to interest rate risk.
Therefore, increases in prevailing interest rates could increase our payment
obligations, which would negatively impact our liquidity and
earnings.
Changes
in the value of our interest rate swaps could require us to post additional cash
collateral with our counterparties, which could negatively impact our liquidity
and financial condition.
In the
normal course of our business, we use a variety of financial instruments to
manage or hedge 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, as well as to hedge anticipated future financing
transactions. Pursuant to certain of our hedge agreements, we are required to
secure our obligation to our counterparty if the fair value liability exceeds a
specified threshold by posting cash or other collateral. In periods
of significant volatility in the credit markets, the value of our swaps can
change significantly and, as a result, the amount of collateral we are required
to post can change significantly. If we are required to post
additional collateral due to changes in the fair
value
liability of our existing or future swaps, our liquidity and financial condition
could be negatively impacted.
We
have a limited operating history on a combined basis and we are therefore
subject to the risks generally associated with the formation of any new business
and the combination of existing businesses.
In June
2005, we were formed for the purpose of combining two leading senior living
operating companies, Brookdale Living Communities, Inc., or BLC, and Alterra
Healthcare Corporation, or Alterra, through a series of mergers that occurred in
September 2005. Prior to this combination, we had no operations or assets. We
are therefore subject to the risks generally associated with the formation of
any new business and the combination of existing businesses, including the risk
that we will not be able to realize expected efficiencies and economies of scale
or implement our business strategies. As such, we only have a brief combined and
consolidated operating history upon which investors may evaluate our performance
as an integrated entity and assess our future prospects. In addition, from the
date of our initial public offering in November 2005, we have purchased over 241
additional communities, including 83 communities from American Retirement
Corporation, or ARC. There can be no assurance that we will be able to
successfully integrate and oversee the combined operations of BLC, Alterra and
ARC and the additional communities purchased in these acquisitions. Accordingly,
our financial performance to date may not be indicative of our long-term future
performance and may not necessarily reflect what our results of operations,
financial condition and cash flows would have been had we operated as a combined
entity throughout the periods presented.
We
have a history of losses and we may not be able to achieve
profitability.
We have
incurred net losses in every quarter since our formation in June 2005. Given our
history of losses, there can be no assurance that we will be able to achieve
and/or maintain profitability in the future. If we do not effectively manage our
cash flow and combined business operations going forward or otherwise achieve
profitability, our stock price would be adversely affected.
If
we do not effectively manage our growth and successfully integrate new or
recently-acquired or initiated operations into our existing operations, our
business and financial results could be adversely affected.
Our
growth has and will continue to place significant demands on our current
management resources. Our ability to manage our growth effectively and to
successfully integrate new or recently-acquired or initiated operations
(including expansions, developments, acquisitions and the expansion of our
ancillary services program) into our existing business will require us to
continue to expand our operational, financial and management information systems
and to continue to retain, attract, train, motivate and manage key employees.
There can be no assurance that we will be successful in attracting qualified
individuals to the extent necessary, and management may expend significant time
and energy attracting the appropriate personnel to manage assets we purchase in
the future and our expansion and development activities. Also, the additional
communities and expansion activities will require us to maintain consistent
quality control measures that allow our management to effectively identify
deviations that result in delivering care and services that are substandard,
which may result in litigation and/or loss of licensure or certification. If we
are unable to manage our growth effectively, successfully integrate new or
recently-acquired or initiated operations into our existing business, or
maintain consistent quality control measures, our business, financial condition
and results of operations could be adversely affected.
Delays
in obtaining regulatory approvals could hinder our plans to expand our ancillary
services program, which could negatively impact our anticipated revenues,
results of operations and cash flows.
We plan
to continue to expand our offering of ancillary services (including therapy and
home health) to additional communities. In the current environment,
it is difficult to obtain certain required regulatory
approvals. Delays in obtaining required regulatory approvals could
impede our ability to expand to additional communities in accordance with our
plans, which could negatively impact our anticipated revenues, results of
operations and cash flows.
If
we are unable to expand our communities in accordance with our plans, our
anticipated revenues and results of operations could be adversely
affected.
We are
currently working on projects that will expand a number of our existing senior
living communities over the next several years. These projects are in
various stages of development and are subject to a number of
factors
over
which we have little or no control. Such factors include the necessity of
arranging separate leases, mortgage loans or other financings to provide the
capital required to complete these projects; difficulties or delays in obtaining
zoning, land use, building, occupancy, licensing, certificate of need and other
required governmental permits and approvals; failure to complete construction of
the projects on budget and on schedule; failure of third-party contractors and
subcontractors to perform under their contracts; shortages of labor or materials
that could delay projects or make them more expensive; adverse weather
conditions that could delay completion of projects; increased costs resulting
from general economic conditions or increases in the cost of materials; and
increased costs as a result of changes in laws and regulations. We cannot assure
you that we will elect to undertake or complete all of our proposed expansion
and development projects, or that we will not experience delays in completing
those projects. In addition, we may incur substantial costs prior to achieving
stabilized occupancy for each such project and cannot assure you that these
costs will not be greater than we have anticipated. We also cannot assure you
that any of our expansion or development projects will be economically
successful. Our failure to achieve our expansion and development plans could
adversely impact our growth objectives, and our anticipated revenues and results
of operations.
We
may encounter difficulties in acquiring communities at attractive prices or
integrating acquisitions with our operations, which may adversely affect our
operations and financial condition.
We will
continue to selectively target strategic acquisitions as opportunities arise.
The process of integrating acquired communities into our existing operations may
result in unforeseen operating difficulties, divert managerial attention or
require significant financial resources. These acquisitions and other future
acquisitions may require us to incur additional indebtedness and contingent
liabilities, and may result in unforeseen expenses or compliance issues, which
may limit our revenue growth, cash flows, and our ability to achieve
profitability. Moreover, any future acquisitions may not generate any additional
income for us or provide any benefit to our business. In addition, we cannot
assure you that we will be able to locate and acquire communities at attractive
prices in locations that are compatible with our strategy or that competition
for the acquisition of communities will not increase. Finally, when we are able
to locate communities and enter into definitive agreements to acquire or lease
them, we cannot assure you that the transactions will be completed. Failure to
complete transactions after we have entered into definitive agreements may
result in significant expenses to us.
Unforeseen
costs associated with the acquisition of communities could reduce our future
profitability.
Our
growth strategy contemplates selected future acquisitions of existing senior
living operating companies and communities. Despite our extensive underwriting
and due diligence procedures, communities that we have previously acquired or
may acquire in the future may generate unexpectedly low or no returns or may not
meet a risk profile that our investors find acceptable. In addition, we might
encounter unanticipated difficulties and expenditures relating to any of the
acquired communities, including contingent liabilities, or newly acquired
communities might require significant management attention that would otherwise
be devoted to our ongoing business. For example, a community may require capital
expenditures in excess of budgeted amounts, or it may experience management
turnover that is higher than we project. These costs may negatively affect our
future profitability.
Competition
for the acquisition of strategic assets from buyers with lower costs of capital
than us or that have lower return expectations than we do could limit our
ability to compete for strategic acquisitions and therefore to grow our business
effectively.
Several
real estate investment trusts, or REITs, have similar asset acquisition
objectives as we do, along with greater financial resources and lower costs of
capital than we are able to obtain. This may increase competition for
acquisitions that would be suitable to us, making it more difficult for us to
compete and successfully implement our growth strategy. There is significant
competition among potential acquirers in the senior living industry, including
REITs, and there can be no assurance that we will be able to successfully
implement our growth strategy or complete acquisitions, which could limit our
ability to grow our business effectively.
We
may need additional capital to fund our operations and finance our growth, and
we may not be able to obtain it on terms acceptable to us, or at all, which may
limit our ability to grow.
Continued
expansion of our business through the expansion of our existing communities, the
development of new communities and the acquisition of existing senior living
operating companies and communities will require
additional
capital, particularly if we were to accelerate our expansion and acquisition
plans. Financing may not be available to us or may be available to us only on
terms that are not favorable. In addition, certain of our outstanding
indebtedness and long-term leases restrict, among other things, our ability to
incur additional debt. If we are unable to raise additional funds or obtain them
on terms acceptable to us, we may have to delay or abandon some or all of our
growth strategies. Further, if additional funds are raised through the issuance
of additional equity securities, the percentage ownership of our stockholders
would be diluted. Any newly issued equity securities may have rights,
preferences or privileges senior to those of our common stock.
We
are susceptible to risks associated with the lifecare benefits that we offer the
residents of our lifecare entrance fee communities.
As of
December 31, 2009, we operated 11 lifecare entrance fee communities that offer
residents a limited lifecare benefit. Residents of these communities pay an
upfront entrance fee upon occupancy, of which a portion is generally refundable,
with an additional monthly service fee while living in the community. This
limited lifecare benefit is typically (a) a certain number of free days in the
community’s health center during the resident’s lifetime, (b) a discounted rate
for such services, or (c) a combination of the two. The lifecare benefit varies
based upon the extent to which the resident’s entrance fee is refundable. The
pricing of entrance fees, refundability provisions, monthly service fees, and
lifecare benefits are determined utilizing actuarial projections of the expected
morbidity and mortality of the resident population. In the event the entrance
fees and monthly service payments established for our communities are not
sufficient to cover the cost of lifecare benefits granted to residents, the
results of operations and financial condition of these communities could be
adversely affected.
Residents
of these entrance fee communities are guaranteed a living unit and nursing care
at the community during their lifetime, even if the resident exhausts his or her
financial resources and becomes unable to satisfy his or her obligations to the
community. In addition, in the event a resident requires nursing care and there
is insufficient capacity for the resident in the nursing facility at the
community where the resident lives, the community must contract with a third
party to provide such care. Although we screen potential residents to ensure
that they have adequate assets, income, and reimbursements from government
programs and third parties to pay their obligations to our communities during
their lifetime, we cannot assure you that such assets, income, and
reimbursements will be sufficient in all cases. If insufficient, we have rights
of set-off against the refundable portions of the residents’ deposits, and would
also seek available reimbursement under Medicaid or other available programs. To
the extent that the financial resources of some of the residents are not
sufficient to pay for the cost of facilities and services provided to them, or
in the event that our communities must pay third parties to provide nursing care
to residents of our communities, our results of operations and financial
condition would be adversely affected.
The
geographic concentration of our communities could leave us vulnerable to an
economic downturn, regulatory changes or acts of nature in those areas,
resulting in a decrease in our revenues or an increase in our costs, or
otherwise negatively impacting our results of operations.
We have a
high concentration of communities in various geographic areas, including the
states of Florida, Texas, North Carolina, California, Colorado, Ohio and
Arizona. As a result of this concentration, the conditions of local economies
and real estate markets, changes in governmental rules and regulations,
particularly with respect to assisted living communities, acts of nature and
other factors that may result in a decrease in demand for senior living services
in these states could have an adverse effect on our revenues, costs and results
of operations. In addition, given the location of our communities, we are
particularly susceptible to revenue loss, cost increase or damage caused by
other severe weather conditions or natural disasters such as hurricanes,
earthquakes or tornados. Any significant loss due to a natural disaster may not
be covered by insurance and may lead to an increase in the cost of
insurance.
Termination
of our resident agreements and vacancies in the living spaces we lease could
adversely affect our revenues, earnings and occupancy levels.
State
regulations governing assisted living communities require written resident
agreements with each resident. Several of these regulations also require that
each resident have the right to terminate the resident agreement for any reason
on reasonable notice. Consistent with these regulations, many of our assisted
living resident agreements allow residents to terminate their agreements upon 0
to 30 days’ notice. Unlike typical apartment leasing or independent living
arrangements that involve lease agreements with specified leasing periods of up
to a
year or
longer, in many instances we cannot contract with our assisted living residents
to stay in those living spaces for longer periods of time. Our retirement center
resident agreements generally provide for termination of the lease upon death or
allow a resident to terminate his or her lease upon the need for a higher level
of care not provided at the community. If multiple residents
terminate their resident agreements at or around the same time, our revenues,
earnings and occupancy levels could be adversely affected. In addition, because
of the demographics of our typical residents, including age and health, resident
turnover rates in our communities are difficult to predict. As a result, the
living spaces we lease may be unoccupied for a period of time, which could
adversely affect our revenues and earnings.
Increases
in the cost and availability of labor, including increased competition for or a
shortage of skilled personnel or increased union activity, would have an adverse
effect on our profitability and/or our ability to conduct our business
operations.
Our
success depends on our ability to retain and attract skilled management
personnel who are responsible for the day-to-day operations of each of our
communities. Each community has an Executive Director responsible for the
overall day-to-day operations of the community, including quality of care,
social services and financial performance. Depending upon the size of the
community, each Executive Director is supported by a community staff member who
is directly responsible for day-to-day care of the residents and either
community staff or regional support to oversee the community’s marketing and
community outreach programs. Other key positions supporting each community may
include individuals responsible for food service, healthcare services, therapy
services, activities, housekeeping and engineering. We compete with various
health care service providers, including other senior living providers, in
retaining and attracting qualified and skilled personnel. Increased competition
for or a shortage of nurses, therapists or other trained personnel, or general
inflationary pressures may require that we enhance our pay and benefits package
to compete effectively for such personnel. We may not be able to offset such
added costs by increasing the rates we charge to our residents or our service
charges, which would negatively impact our results of operations. Turnover rates
and the magnitude of the shortage of nurses, therapists or other trained
personnel varies substantially from market to market. Although reliable
industry-wide data on key employee retention does not exist, we believe that our
employee retention rates are consistent with those of other national senior
housing operators. If we fail to attract and retain qualified and skilled
personnel, our ability to conduct our business operations effectively, our
ability to implement our growth strategy, and our overall operating results
could be harmed.
In
addition, efforts by labor unions to unionize any of our community personnel
could divert management attention, lead to increases in our labor costs and/or
reduce our flexibility with respect to certain workplace
rules. Recently proposed legislation known as the Employee Free
Choice Act, or card check, could make it significantly easier for union
organizing drives to be successful, leading to increased organizational
activity, and could give third-party arbitrators the ability to impose terms of
collective bargaining agreements upon us and a labor union if we and such union
are unable to agree to the terms of a collective bargaining
agreement. If we experience an increase in organizing activity, if
onerous collective bargaining agreement terms are imposed upon us, or if we
otherwise experience an increase in our staffing and labor costs, our
profitability and cash flows from operations would be negatively
affected.
Departure
of our key officers could harm our business.
Our
future success depends, to a significant extent, upon the continued service of
our senior management personnel, particularly: W.E. Sheriff, our Chief Executive
Officer; Mark W. Ohlendorf, our Co-President and Chief Financial Officer; John
P. Rijos, our Co-President and Chief Operating Officer; and T. Andrew Smith, our
Executive Vice President, General Counsel and Secretary. If we were to lose the
services of any of these individuals, our business and financial results could
be adversely affected.
Environmental
contamination at any of our communities could result in substantial liabilities
to us, which may exceed the value of the underlying assets and which could
materially and adversely effect our liquidity and earnings.
Under
various federal, state and local environmental laws, a current or previous owner
or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of, or
related to the release of, certain hazardous or toxic substances, that could be
located on, in, at or under a property, regardless of how such materials came to
be located there. The cost of any required
investigation,
remediation, removal, mitigation, compliance, fines or personal or property
damages and our liability therefore could exceed the property’s value and/or our
assets’ value. In addition, the presence of such substances, or the failure to
properly dispose of or remediate the damage caused by such substances, may
adversely affect our ability to sell such property, to attract additional
residents and retain existing residents, to borrow using such property as
collateral or to develop or redevelop such property. In addition, such laws
impose liability, which may be joint and several, for investigation,
remediation, removal and mitigation costs on persons who disposed of or arranged
for the disposal of hazardous substances at third party sites. Such laws and
regulations often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence, release or disposal of
such substances as well as without regard to whether such release or disposal
was in compliance with law at the time it occurred. Although we do not believe
that we have incurred such liabilities as would have a material adverse effect
on our business, financial condition and results of operations, we could be
subject to substantial future liability for environmental contamination that we
have no knowledge about as of the date of this report and/or for which we may
not be at fault.
Failure
to comply with existing environmental laws could result in increased
expenditures, litigation and potential loss to our business and in our asset
value, which would have an adverse effect on our earnings and financial
condition.
Our
operations are subject to regulation under various federal, state and local
environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at
our communities; identification and warning of the presence of
asbestos-containing materials in buildings, as well as removal of such
materials; the presence of other substances in the indoor environment; and
protection of the environment and natural resources in connection with
development or construction of our properties.
Some of
our communities generate infectious or other hazardous medical waste due to the
illness or physical condition of the residents. Each of our communities has an
agreement with a waste management company for the proper disposal of all
infectious medical waste, but the use of such waste management companies does
not immunize us from alleged violations of such laws for operations for which we
are responsible even if carried out by such waste management companies, nor does
it immunize us from third-party claims for the cost to cleanup disposal sites at
which such wastes have been disposed.
Federal
regulations require building owners and those exercising control over a
building’s management to identify and warn their employees and certain other
employers operating in the building of potential hazards posed by workplace
exposure to installed asbestos-containing materials and potential
asbestos-containing materials in their buildings. Significant fines can be
assessed for violation of these regulations. Building owners and those
exercising control over a building’s management may be subject to an increased
risk of personal injury lawsuits. Federal, state and local laws and regulations
also govern the removal, encapsulation, disturbance, handling and/or disposal of
asbestos-containing materials and potential asbestos-containing materials when
such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for improper handling or a release to the environment of
asbestos-containing materials and potential asbestos-containing materials and
may provide for fines to, and for third parties to seek recovery from, owners or
operators of real properties for personal injury or improper work exposure
associated with asbestos-containing materials and potential asbestos-containing
materials.
The
presence of mold, lead-based paint, contaminants in drinking water, radon and/or
other substances at any of the communities we own or may acquire may lead to the
incurrence of costs for remediation, mitigation or the implementation of an
operations and maintenance plan and may result in third party litigation for
personal injury or property damage. Furthermore, in some circumstances, areas
affected by mold may be unusable for periods of time for repairs, and even after
successful remediation, the known prior presence of extensive mold could
adversely affect the ability of a community to retain or attract residents and
could adversely affect a community’s market value.
Although
we believe that we are currently in material compliance with applicable
environmental laws, if we fail to comply with such laws in the future, we would
face increased expenditures both in terms of fines and remediation of the
underlying problem(s), potential litigation relating to exposure to such
materials, and potential decrease in value to our business and in the value of
our underlying assets. Therefore, our failure to comply with existing
environmental laws would have an adverse effect on our earnings, our financial
condition and our ability to pursue our growth strategy.
We are
unable to predict the future course of federal, state and local environmental
regulation and legislation. Changes in the environmental regulatory framework
(including legislative or regulatory efforts designed to address climate change,
such as the proposed “cap and trade” legislation) could have a material adverse
effect on our business. In addition, because environmental laws vary from state
to state, expansion of our operations to states where we do not currently
operate may subject us to additional restrictions on the manner in which we
operate our communities.
We
are subject to risks associated with complying with Section 404 of the
Sarbanes-Oxley Act of 2002.
We are
subject to various regulatory requirements, including the Sarbanes-Oxley Act of
2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is
required to include a report with each Annual Report on Form 10-K regarding our
internal control over financial reporting. We have implemented processes
documenting and evaluating our system of internal controls. Complying with these
requirements is expensive, time consuming and subject to changes in regulatory
requirements. The existence of one or more material weaknesses, management’s
conclusion that its internal control over financial reporting is not effective,
or the inability of our auditors to express an opinion that our internal control
over financial reporting is effective, could result in a loss of investor
confidence in our financial reports, adversely affect our stock price and/or
subject us to sanctions or investigation by regulatory authorities.
Risks
Related to Pending Litigation
Complaints
filed against us could, if adversely determined, subject us to a material
loss.
We have
been and are currently involved in litigation and claims incidental to the
conduct of our 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, we maintain insurance policies in amounts and with coverage and
deductibles we believe are adequate, based on the nature and risks of our
business, historical experience and industry standards. Effective January 1,
2009 through December 31, 2009, our policies provided for deductibles of
$250,000 for each claim on a claims-made basis. Effective January 1,
2010, our current policies are also written on a claims-made basis and provide
for deductibles of $150,000 for each claim. Accordingly, we are, in
effect, self-insured for claims that are less than $150,000. If we
experience a greater number of losses than we anticipate, or if certain claims
are not ultimately covered by insurance, our results of operation and financial
condition could be adversely affected.
Risks
Related to Our Industry
The
cost and difficulty of complying with increasing and evolving regulation and
enforcement could have an adverse effect on our business operations and
profits.
The
regulatory environment surrounding the senior living industry continues to
evolve and intensify in the amount and type of laws and regulations affecting
it, many of which vary from state to state. In addition, many senior living
communities are subject to regulation and licensing by state and local health
and social service agencies and other regulatory authorities. In several of the
states in which we operate or may operate, we are prohibited from providing
certain higher levels of senior care services without first obtaining the
appropriate licenses. Also, in several of the states in which we operate or
intend to operate, assisted living communities and/or skilled nursing facilities
require a certificate of need before the community can be opened or the services
at an existing community can be expanded. Furthermore, federal, state and local
officials are increasingly focusing their efforts on enforcement of these laws,
particularly with respect to large for-profit, multi-community providers like
us. These requirements, and the increased enforcement thereof, could affect our
ability to expand into new markets, to expand our services and communities in
existing markets and, if any of our presently licensed communities were to
operate outside of its licensing authority, may subject us to penalties
including closure of the community. Future regulatory developments as well as
mandatory increases in the scope and severity of deficiencies determined by
survey or inspection officials could cause our operations to suffer. We are
unable to predict the future course of federal, state and local legislation or
regulation. If regulatory requirements increase, whether through enactment of
new laws or regulations or changes in the enforcement of existing
rules,
our
earnings and operations could be adversely affected.
The
intensified regulatory and enforcement environment impacts providers like us
because of the increase in the number of inspections or surveys by governmental
authorities and consequent citations for failure to comply with regulatory
requirements. We also expend considerable resources to respond to federal and
state investigations or other enforcement action. From time to time in the
ordinary course of business, we receive deficiency reports from state and
federal regulatory bodies resulting from such inspections or surveys. Although
most inspection deficiencies are resolved through an agreed-to plan of
corrective action, the reviewing agency typically has the authority to take
further action against a licensed or certified facility, which could result in
the imposition of fines, imposition of a provisional or conditional license,
suspension or revocation of a license, suspension or denial of admissions, loss
of certification as a provider under federal health care programs or imposition
of other sanctions, including criminal penalties. Furthermore, certain states
may allow citations in one community to impact other communities in the state.
Revocation of a license at a given community could therefore impact our ability
to obtain new licenses or to renew existing licenses at other communities, which
may also cause us to be in default under our leases, trigger cross-defaults,
trigger defaults under certain of our credit agreements or adversely affect our
ability to operate and/or obtain financing in the future. If a state were to
find that one community’s citation would impact another of our communities, this
would also increase costs and result in increased surveillance by the state
survey agency. To date, none of the deficiency reports received by us has
resulted in a suspension, fine or other disposition that has had a material
adverse effect on our revenues. However, the failure to comply with applicable
legal and regulatory requirements in the future could result in a material
adverse effect to our business as a whole.
There are
various extremely complex federal and state laws governing a wide array of
referral relationships and arrangements and prohibiting fraud by health care
providers, including those in the senior living industry, and governmental
agencies are devoting increasing attention and resources to such anti-fraud
initiatives. Some examples are the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997, and the
False Claims Act, which gives private individuals the ability to bring an action
on behalf of the federal government. The violation of any of these laws or
regulations may result in the imposition of fines or other penalties that could
increase our costs and otherwise jeopardize our business. Under the Deficit
Reduction Act of 2005, or DRA 2005, every entity that receives at least $5
million annually in Medicaid payments must have established written policies for
all employees, contractors or agents, providing detailed information about false
claims, false statements and whistleblower protections under certain federal
laws, including the federal False Claims Act, and similar state laws. Failure to
comply with this new compliance requirement may potentially give rise to
potential liability. DRA 2005 also creates an incentive for states to enact
false claims laws that are comparable to the federal False Claims
Act.
Additionally,
we provide services and operate communities that participate in federal and/or
state health care reimbursement programs, which makes us subject to federal and
state laws that prohibit anyone from presenting, or causing to be presented,
claims for reimbursement which are false, fraudulent or are for items or
services that were not provided as claimed. Similar state laws vary from state
to state and we cannot be sure that these laws will be interpreted consistently
or in keeping with past practice. Violation of any of these laws can result in
loss of licensure, civil or criminal penalties and exclusion of health care
providers or suppliers from furnishing covered items or services to
beneficiaries of the applicable federal and/or state health care reimbursement
program. Loss of licensure may also cause us to default under our leases and/or
trigger cross-defaults.
We are
also subject to certain federal and state laws that regulate financial
arrangements by health care providers, such as the Federal Anti-Kickback Law,
the Stark laws and certain state referral laws. Authorities have interpreted the
Federal Anti-Kickback Law very broadly to apply to many practices and
relationships between health care providers and sources of patient referral.
This could result in criminal penalties and civil sanctions, including fines and
possible exclusion from government programs such as Medicare and Medicaid, which
may also cause us to default under our leases and/or trigger cross-defaults.
Adverse consequences may also result if we violate federal Stark laws related to
certain Medicare and Medicaid physician referrals. While we endeavor to comply
with all laws that regulate the licensure and operation of our business, it is
difficult to predict how our revenues could be affected if we were subject to an
action alleging such violations.
Compliance
with the Americans with Disabilities Act (especially as recently amended), Fair
Housing Act and fire, safety and other regulations may require us to make
unanticipated expenditures, which could increase our costs and therefore
adversely affect our earnings and financial condition.
All of
our communities are required to comply with the Americans with Disabilities Act,
or ADA. The ADA has separate compliance requirements for “public accommodations”
and “commercial properties,” but generally requires that buildings be made
accessible to people with disabilities. Compliance with ADA requirements could
require removal of access barriers and non-compliance could result in imposition
of government fines or an award of damages to private litigants.
We must
also comply with the Fair Housing Act, which prohibits us from discriminating
against individuals on certain bases in any of our practices if it would cause
such individuals to face barriers in gaining residency in any of our
communities. Additionally, the Fair Housing Act and other state laws require
that we advertise our services in such a way that we promote diversity and not
limit it. We may be required, among other things, to change our marketing
techniques to comply with these requirements.
In
addition, we are required to operate our communities in compliance with
applicable fire and safety regulations, building codes and other land use
regulations and food licensing or certification requirements as they may be
adopted by governmental agencies and bodies from time to time. Like other health
care facilities, senior living communities are subject to periodic survey or
inspection by governmental authorities to assess and assure compliance with
regulatory requirements. Surveys occur on a regular (often annual or bi-annual)
schedule, and special surveys may result from a specific complaint filed by a
resident, a family member or one of our competitors. We may be required to make
substantial capital expenditures to comply with those requirements.
Capital
expenditures we have made to comply with any of the above to date have been
immaterial, however, the increased costs and capital expenditures that we may
incur in order to comply with any of the above would result in a negative effect
on our earnings, and financial condition.
Significant
legal actions and liability claims against us in excess of insurance limits
could subject us to increased operating costs and substantial uninsured
liabilities, which may adversely affect our financial condition and operating
results.
The
senior living business entails an inherent risk of liability, particularly given
the demographics of our residents, including age and health, and the services we
provide. In recent years, we, as well as other participants in our industry,
have been subject to an increasing number of claims and lawsuits alleging that
our services have resulted in resident injury or other adverse effects. Many of
these lawsuits involve large damage claims and significant legal costs. Many
states continue to consider tort reform and how it will apply to the senior
living industry. We may continue to be faced with the threat of large jury
verdicts in jurisdictions that do not find favor with large senior living
providers. We maintain liability insurance policies in amounts and with the
coverage and deductibles we believe are adequate based on the nature and risks
of our business, historical experience and industry standards. We have formed a
wholly-owned “captive” insurance company for the purpose of insuring certain
portions of our risk retention under our general and professional liability
insurance programs. There can be no guarantee that we will not have
any claims that exceed our policy limits in the future.
If a
successful claim is made against us and it is not covered by our insurance or
exceeds the policy limits, our financial condition and results of operations
could be materially and adversely affected. In some states, state law may
prohibit or limit insurance coverage for the risk of punitive damages arising
from professional liability and general liability claims and/or litigation. As a
result, we may be liable for punitive damage awards in these states that either
are not covered or are in excess of our insurance policy limits. Also, the above
deductibles, or self-insured retention, are accrued based on an actuarial
projection of future liabilities. If these projections are inaccurate and if
there are an unexpectedly large number of successful claims that result in
liabilities in excess of our self-insured retention, our operating results could
be negatively affected. Claims against us, regardless of their merit or eventual
outcome, also could have a material adverse effect on our ability to attract
residents or expand our business and could require our management to devote time
to matters unrelated to the day-to-day operation of our business. We also have
to renew our policies every year and negotiate acceptable terms for coverage,
exposing us to the volatility of the insurance markets, including the
possibility of rate increases. There can be no assurance that we will be able to
obtain liability insurance in the future or, if available, that such coverage
will be available on acceptable terms.
Overbuilding
and increased competition may adversely affect our ability to generate and
increase our revenues and profits and to pursue our business
strategy.
The
senior living industry is highly competitive, and we expect that it may become
more competitive in the future. We compete with numerous other companies that
provide long-term care alternatives such as home healthcare agencies, therapy
services, life care at home, community-based service programs, retirement
communities, convalescent centers and other independent living, assisted living
and skilled nursing providers, including not-for-profit entities. In general,
regulatory and other barriers to competitive entry in the independent living and
assisted living sectors of the senior living industry are not substantial. We
have experienced and expect to continue to experience increased competition in
our efforts to acquire and operate senior living communities. Consequently, we
may encounter increased competition that could limit our ability to attract new
residents, raise resident fees or expand our business, which could have a
material adverse effect on our revenues and earnings.
In
addition, overbuilding in the late 1990’s in the senior living industry reduced
the occupancy rates of many newly constructed buildings and, in some cases,
reduced the monthly rate that some newly built and previously existing
communities were able to obtain for their services. This resulted in lower
revenues for certain of our communities during that time. While we believe that
overbuilt markets have stabilized and should continue to be stabilized for the
immediate future, we cannot be certain that the effects of this period of
overbuilding will not effect our occupancy and resident fee rate levels in the
future, nor can we be certain that another period of overbuilding in the future
will not have the same effects. Moreover, while we believe that the new
construction dynamics and the competitive environments in the states in which we
operate are substantially similar to the national market, taken as a whole, if
the dynamics or environment were to be significantly adverse in one or more of
those states, it would have a disproportionate effect on our revenues (due to
the large portion of our revenues that are generated in those
states).
Risks
Related to Our Organization and Structure
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
December 31, 2009, funds managed by affiliates of Fortress Investment Group LLC
(“Fortress”) and various principals of Fortress, in the aggregate, beneficially
own 43,116,426 shares, or approximately 36.1% of our outstanding common stock
(excluding unvested restricted shares). In addition, two of our directors are
associated with Fortress and, pursuant to our Stockholders Agreement, Fortress
currently has the ability to require us to nominate five individuals designated
by Fortress for election as members of our nine-member Board of Directors
(subject to their election by our stockholders). As a result,
Fortress may be able to effectively 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 effective
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.
Anti-takeover
provisions in our amended and restated certificate of incorporation and our
amended and restated by-laws may discourage, delay or prevent a merger or
acquisition that you may consider favorable or prevent the removal of our
current board of directors and management.
Certain
provisions of our amended and restated certificate of incorporation and our
amended and restated by-laws may discourage, delay or prevent a merger or
acquisition that you may consider favorable or prevent the removal of our
current board of directors and management. We have a number of anti-takeover
devices in place that will hinder takeover attempts, including:
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a
staggered board of directors consisting of three classes of directors,
each of whom serve three-year
terms;
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removal
of directors only for cause, and only with the affirmative vote of at
least 80% of the voting interest of stockholders entitled to
vote;
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blank-check
preferred stock;
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provisions
in our amended and restated certificate of incorporation and amended and
restated by-laws preventing stockholders from calling special
meetings;
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advance
notice requirements for stockholders with respect to director nominations
and actions to be taken at annual meetings;
and
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no
provision in our amended and restated certificate of incorporation for
cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of our common stock can
elect all the directors standing for
election.
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Additionally,
our amended and restated certificate of incorporation provides that Section 203
of the Delaware General Corporation Law, which restricts certain business
combinations with interested stockholders in certain situations, will not apply
to us. This may make it easier for a third party to acquire an interest in some
or all of us with Fortress’ approval, even though our other stockholders may not
deem such an acquisition beneficial to their interests.
We
are a holding company with no operations and rely on our operating subsidiaries
to provide us with funds necessary to meet our financial
obligations.
We are a
holding company with no material direct operations. Our principal assets are the
equity interests we directly or indirectly hold in our operating subsidiaries.
As a result, we are dependent on loans, dividends and other payments from our
subsidiaries to generate the funds necessary to meet our financial obligations.
Our subsidiaries are legally distinct from us and have no obligation to make
funds available to us.
Risks
Related to Our Common Stock
The
market price and trading volume of our common stock may be volatile, which could
result in rapid and substantial losses for our stockholders.
The
market price of our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common stock may
fluctuate and cause significant price variations to occur. If the market price
of our common stock declines significantly, you may be unable to resell your
shares at or above your purchase price. We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our common stock
include:
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variations
in our quarterly operating results;
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changes
in our earnings estimates;
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the
contents of published research reports about us or the senior living
industry or the failure of securities analysts to cover our common
stock;
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additions
or departures of key management
personnel;
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any
increased indebtedness we may incur or lease obligations we may enter into
in the future;
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actions
by institutional stockholders;
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changes
in market valuations of similar
companies;
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announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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speculation
or reports by the press or investment community with respect to the
Company or the senior living industry in
general;
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increases
in market interest rates that may lead purchasers of our shares to demand
a higher yield;
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changes
or proposed changes in laws or regulations affecting the senior living
industry or enforcement of these laws and regulations, or announcements
relating to these matters; and
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general
market and economic conditions.
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Future
offerings of debt or equity securities by us may adversely affect the market
price of our common stock.
In the
future, we may attempt to increase our capital resources by offering debt or
additional equity securities, including commercial paper, medium-term notes,
senior or subordinated notes, series of preferred shares or shares of our common
stock. Upon liquidation, holders of our debt securities and preferred stock, and
lenders with respect to other borrowings, would receive a distribution of our
available assets prior to the holders of our common stock. Additional equity
offerings may dilute the economic and voting rights of our existing stockholders
or reduce the market price of our common stock, or both. Shares of
our preferred stock, if issued, could have a preference with respect to
liquidating distributions or a preference with respect to dividend payments that
could limit our ability to pay dividends to the holders of our common stock.
Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, holders of
our common stock bear the risk of our future offerings reducing the market price
of our common stock and diluting their share holdings in us.
We may
issue all of the shares of our common stock that are authorized but unissued and
not otherwise reserved for issuance under our stock incentive or purchase plans
without any action or approval by our stockholders. We intend to continue to
pursue selected acquisitions of senior living communities and may issue shares
of common stock in connection with these acquisitions. Any shares issued in
connection with our acquisitions or otherwise would dilute the holdings of our
current stockholders.
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
December 31, 2009, 119,291,309 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 and 18,205,000
shares owned by affiliates of Fortress were sold pursuant to the registration
statement in November 2009.
In
addition, as of December 31, 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
1B. Unresolved Staff
Comments.
None.
Facilities
At
December 31, 2009, we operated 565 communities across 35 states, with the
capacity to serve approximately 53,600 residents. Of the communities we operated
at December 31, 2009, we owned 187, we leased 359 pursuant to operating and
capital leases, and 19 were managed by us and fully or majority owned by third
parties.
The
following table sets forth certain information regarding our communities at
December 31, 2009 :
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
1,112
|
|
87.3%
|
|
2
|
|
5
|
|
-
|
|
7
|
|
|
Arizona
|
2,152
|
|
88.6%
|
|
3
|
|
11
|
|
2
|
|
16
|
|
|
California
|
3,297
|
|
89.9%
|
|
14
|
|
7
|
|
1
|
|
22
|
|
|
Colorado
|
2,954
|
|
88.3%
|
|
6
|
|
19
|
|
2
|
|
27
|
|
|
Connecticut
|
427
|
|
82.1%
|
|
2
|
|
2
|
|
-
|
|
4
|
|
|
Delaware
|
54
|
|
100.0%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Florida
|
9,123
|
|
84.7%
|
|
35
|
|
39
|
|
3
|
|
77
|
|
|
Georgia
|
525
|
|
86.5%
|
|
4
|
|
-
|
|
1
|
|
5
|
|
|
Idaho
|
228
|
|
94.1%
|
|
2
|
|
1
|
|
-
|
|
3
|
|
|
Illinois
|
2,465
|
|
90.5%
|
|
1
|
|
10
|
|
-
|
|
11
|
|
|
Indiana
|
1,321
|
|
81.1%
|
|
7
|
|
10
|
|
-
|
|
17
|
|
|
Iowa
|
139
|
|
89.2%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Kansas
|
1,405
|
|
85.7%
|
|
10
|
|
11
|
|
2
|
|
23
|
|
|
Kentucky
|
268
|
|
97.0%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Louisiana
|
84
|
|
94.2%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Massachusetts
|
280
|
|
86.8%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Michigan
|
2,575
|
|
92.1%
|
|
7
|
|
26
|
|
1
|
|
34
|
|
|
Minnesota
|
759
|
|
87.4%
|
|
-
|
|
16
|
|
1
|
|
17
|
|
|
Mississippi
|
54
|
|
46.9%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Missouri
|
928
|
|
88.6%
|
|
2
|
|
1
|
|
-
|
|
3
|
|
|
Nevada
|
306
|
|
86.8%
|
|
-
|
|
3
|
|
-
|
|
3
|
|
|
New
Jersey
|
534
|
|
88.0%
|
|
2
|
|
6
|
|
-
|
|
8
|
|
|
New
Mexico
|
432
|
|
88.8%
|
|
1
|
|
2
|
|
-
|
|
3
|
|
|
New
York
|
1,196
|
|
92.8%
|
|
6
|
|
10
|
|
-
|
|
16
|
|
|
North
Carolina
|
4,081
|
|
98.1%
|
|
4
|
|
50
|
|
-
|
|
54
|
|
|
Ohio
|
2,950
|
|
85.3%
|
|
20
|
|
19
|
|
-
|
|
39
|
|
|
Oklahoma
|
1,139
|
|
89.0%
|
|
2
|
|
24
|
|
1
|
|
27
|
|
|
Oregon
|
828
|
|
93.7%
|
|
4
|
|
8
|
|
-
|
|
12
|
|
|
Pennsylvania
|
998
|
|
86.8%
|
|
5
|
|
3
|
|
-
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Carolina
|
563
|
|
87.3%
|
|
4
|
|
7
|
|
-
|
|
11
|
|
|
Tennessee
|
1,414
|
|
89.4%
|
|
14
|
|
8
|
|
-
|
|
22
|
|
|
Texas
|
5,946
|
|
90.1%
|
|
18
|
|
33
|
|
5
|
|
56
|
|
|
Virginia
|
1,439
|
|
93.5%
|
|
3
|
|
3
|
|
-
|
|
6
|
|
|
Washington
|
1,176
|
|
88.2%
|
|
4
|
|
9
|
|
-
|
|
13
|
|
|
Wisconsin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes the impact of managed properties.
A
significant majority of our owned properties are subject to
mortgages.
Corporate
Offices
Our main
corporate offices are all leased, including our 55,296 square foot facility in
Nashville, Tennessee, our 99,374 square foot facility in Milwaukee, Wisconsin
and our 30,314 square foot facility in Chicago, Illinois.
Item
3. Legal
Proceedings.
The
information contained in Note 23 to the consolidated financial statements
contained in Part II, Item 8 of this Annual Report on Form 10-K is incorporated
herein by reference.
Item
4. Submission of
Matters to a Vote of Security Holders.
Not
applicable.
Executive
Officers of the Registrant
The
following table sets forth certain information concerning our executive officers
as of February 18, 2010:
|
|
|
|
|
W.E.
Sheriff
|
67
|
Chief
Executive Officer
|
|
Mark
W. Ohlendorf
|
49
|
Co-President
and Chief Financial Officer
|
|
John
P. Rijos
|
57
|
Co-President
and Chief Operating Officer
|
|
T.
Andrew Smith
|
49
|
Executive
Vice President, General Counsel and Secretary
|
|
Bryan
D. Richardson
|
51
|
Executive
Vice President and Chief Administrative Officer
|
|
Kristin
A. Ferge
|
36
|
Executive
Vice President and Treasurer
|
|
George
T. Hicks
|
52
|
Executive
Vice President – Finance
|
|
H.
Todd Kaestner
|
54
|
Executive
Vice President – Corporate Development
|
|
Gregory
B. Richard
|
55
|
Executive
Vice President – Field Operations
|
W.E. Sheriff has served
as our Chief Executive Officer since February 2008 and as a member of our
Board of Directors since January 2010. He previously served as our
Co-Chief Executive Officer from July 2006 until February 2008. Previously, Mr.
Sheriff served as Chairman and Chief Executive Officer of ARC and its
predecessors since April 1984 and as its President since November 2003. From
1973 to 1984, Mr. Sheriff served in various capacities for Ryder System, Inc.,
including as President and Chief Executive Officer of its Truckstops of America
division. Mr. Sheriff also serves on the boards of various educational and
charitable organizations and in varying capacities with several trade
organizations.
Mark W. Ohlendorf became our
Co-President in August 2005 and our Chief Financial Officer in March 2007. Mr.
Ohlendorf previously served as Chief Executive Officer and President of Alterra
from December 2003 until August 2005. From January 2003 through December 2003,
Mr. Ohlendorf served as Chief Financial Officer and President of Alterra, and
from 1999 through 2002 he served as Senior Vice President and Chief Financial
Officer of Alterra. Mr. Ohlendorf has over 25 years of experience in the health
care and long-term care industries, having held leadership positions with such
companies as Sterling House Corporation, Vitas Healthcare Corporation
and
Horizon/CMS
Healthcare Corporation. He is a member of the board of directors of the Assisted
Living Federation of America.
John P. Rijos became our
Co-President in August 2005 and our Chief Operating Officer in January 2008.
Previously, Mr. Rijos served as President and Chief Operating Officer and as a
director of BLC since August 2000. Prior to joining BLC in August 2000, Mr.
Rijos spent 16 years with Lane Hospitality Group, owners and operators of over
40 hotels and resorts, as its President and Chief Operating Officer. From 1981
to 1985 he served as President of High Country Corporation, a Denver-based hotel
development and management company. Prior to that time, Mr. Rijos was Vice
President of Operations and Development of several large real estate trusts
specializing in hotels. Mr. Rijos has over 25 years of experience in the
acquisition, development and operation of hotels and resorts. He serves on many
tourist-related operating boards and committees, as well as advisory committees
for Holiday Inns, Sheraton Hotels and the City of Chicago and the Board of
Trustees for Columbia College. Mr. Rijos is a certified hospitality
administrator.
T. Andrew Smith became our
Executive Vice President, General Counsel and Secretary in October 2006.
Previously, Mr. Smith was with Bass, Berry & Sims PLC in Nashville,
Tennessee from 1985 to 2006. Mr. Smith was a member of that firm’s corporate and
securities group, and served as the chair of the firm’s healthcare
group.
Bryan D. Richardson became our
Executive Vice President in July 2006 and our Chief Administrative Officer in
January 2008. Mr. Richardson also served as our Chief Accounting
Officer from September 2006 through April 2008. Previously, Mr.
Richardson served as Executive Vice President – Finance and Chief Financial
Officer of ARC since April 2003 and previously served as its Senior Vice
President – Finance since April 2000. Mr. Richardson was formerly with a
national graphic arts company from 1984 to 1999 serving in various capacities,
including Senior Vice President of Finance of a digital prepress division from
May 1994 to October 1999, and Senior Vice President of Finance and Chief
Financial Officer from 1989 to 1994. Mr. Richardson was previously with the
national public accounting firm PriceWaterhouseCoopers.
Kristin A. Ferge became our
Executive Vice President and Treasurer in August 2005. Ms. Ferge also
served as our Chief Administrative Officer from March 2007 through December
2007. She previously served as Vice President, Chief Financial Officer and
Treasurer of Alterra from December 2003 until August 2005. From April 2000
through December 2003, Ms. Ferge served as Alterra’s Vice President of Finance
and Treasurer. Prior to joining Alterra, she worked in the audit division of
KPMG LLP. Ms. Ferge is a certified public accountant.
George T. Hicks became our
Executive Vice President – Finance in July 2006. Previously, Mr. Hicks served as
Executive Vice President – Finance and Internal Audit, Secretary and Treasurer
of ARC since September 1993. Mr. Hicks had served in various capacities for
ARC’s predecessors since 1985, including Chief Financial Officer from September
1993 to April 2003 and Vice President – Finance and Treasurer from November 1989
to September 1993.
H. Todd Kaestner became our
Executive Vice President – Corporate Development in July 2006. Previously, Mr.
Kaestner served as Executive Vice President – Corporate Development of ARC since
September 1993. Mr. Kaestner served in various capacities for ARC’s predecessors
since 1985, including Vice President – Development from 1988 to 1993 and Chief
Financial Officer from 1985 to 1988.
Gregory B. Richard has served
as our Executive Vice President – Field Operations since January
2008. He previously served as our Executive Vice President –
Operations from July 2006 through December 2007. Previously, Mr. Richard served
as Executive Vice President and Chief Operating Officer of ARC since January
2003 and previously served as its Executive Vice President-Community Operations
since January 2000. Mr. Richard was formerly with a pediatric practice
management company from May 1997 to May 1999, serving as President and Chief
Executive Officer from October 1997 to May 1999. Prior to this, Mr. Richard was
with Rehability Corporation, a publicly traded outpatient physical
rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September
1992 to October 1996.
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Market
Information
Our
common stock is traded on the New York Stock Exchange, or the NYSE, under the
symbol “BKD”. The following table sets forth the range of high and
low sales prices of our common stock and dividend information for each quarter
for the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
7.16 |
|
|
$ |
2.50 |
|
|
$ |
― |
|
|
Second
Quarter
|
|
$ |
14.87 |
|
|
$ |
4.66 |
|
|
$ |
― |
|
|
Third
Quarter
|
|
$ |
20.41 |
|
|
$ |
8.39 |
|
|
$ |
― |
|
|
Fourth
Quarter
|
|
$ |
20.69 |
|
|
$ |
15.14 |
|
|
$ |
― |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
28.29 |
|
|
$ |
20.46 |
|
|
$ |
0.25 |
|
|
Second
Quarter
|
|
$ |
27.22 |
|
|
$ |
20.15 |
|
|
$ |
0.25 |
|
|
Third
Quarter
|
|
$ |
27.05 |
|
|
$ |
14.06 |
|
|
$ |
0.25 |
|
|
Fourth
Quarter
|
|
$ |
21.84 |
|
|
$ |
3.03 |
|
|
$ |
— |
|
The
closing sale price of our common stock as reported on the NYSE on February 18,
2010 was $18.55 per share. As of that date, there were approximately
515 holders of record of our common stock.
Dividend
Policy
On
December 30, 2008, our Board of Directors voted to suspend our quarterly cash
dividend indefinitely. Although we anticipate that, over the
longer-term, we will pay regular quarterly dividends to the holders of our
common stock, over the near term we are focused on preserving
liquidity. Accordingly, we do not expect to pay cash dividends on our
common stock for the foreseeable future. In addition, our amended
credit facility currently prohibits us from paying dividends or making cash
distributions on our common stock.
Our
ability to pay and maintain cash dividends in the future will be based on many
factors, including then-existing contractual restrictions or limitations, our
ability to execute our growth strategy, our ability to negotiate favorable lease
and other contractual terms, anticipated operating expense levels, the level of
demand for our units/beds, occupancy rates, entrance fee sales results, the
rates we charge, our liquidity position and actual results that may vary
substantially from estimates. Some of the factors are beyond our control and a
change in any such factor could affect our ability to pay or maintain dividends.
We can give no assurance as to our ability to pay or maintain dividends in the
future. We also cannot assure you that the level of dividends will be maintained
or increase over time or that increases in demand for our units/beds and monthly
resident fees will increase our actual cash available for dividends to
stockholders. As we have done in the past, we may also pay dividends in the
future that exceed our net income for the relevant period as calculated in
accordance with U.S. GAAP.
Recent
Sales of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item
6. Selected Financial
Data.
The
selected financial data should be read in conjunction with the sections entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” “Business” and our historical consolidated financial statements and
the related notes included elsewhere herein. The consolidated
financial data includes Brookdale Living Communities, Inc. and Alterra
Healthcare Corporation for all periods presented and the acquisition of American
Retirement Corporation, effective July 25, 2006. Other acquisitions
are discussed in Note 4 in the notes to the consolidated financial
statements. Our historical statement of operations data and balance
sheet data as of and for each of the years in the five-year period ended
December 31, 2009 have been derived from our audited financial
statements.
|
|
|
For the Years Ended December
31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year ended December 31,
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
2,023,068 |
|
|
$ |
1,928,054 |
|
|
$ |
1,839,296 |
|
|
$ |
1,309,913 |
|
|
$ |
790,577 |
|
|
Facility
operating expense
|
|
|
1,302,277 |
|
|
|
1,261,581 |
|
|
|
1,170,937 |
|
|
|
819,801 |
|
|
|
493,887 |
|
|
General
and administrative expense
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
138,013 |
|
|
|
117,897 |
|
|
|
81,696 |
|
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
271,628 |
|
|
|
228,779 |
|
|
|
189,339 |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
|
188,129 |
|
|
|
47,048 |
|
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
operating expense
|
|
|
1,993,288 |
|
|
|
2,168,197 |
|
|
|
1,880,503 |
|
|
|
1,354,606 |
|
|
|
811,970 |
|
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
|
(44,693 |
) |
|
|
(21,393 |
) |
|
Interest
income
|
|
|
2,354 |
|
|
|
7,618 |
|
|
|
7,519 |
|
|
|
6,810 |
|
|
|
3,788 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(128,869 |
) |
|
|
(147,389 |
) |
|
|
(143,991 |
) |
|
|
(97,694 |
) |
|
|
(46,248 |
) |
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,505 |
) |
|
|
(9,707 |
) |
|
|
(7,064 |
) |
|
|
(5,061 |
) |
|
|
(2,835 |
) |
|
Change
in fair value of derivatives and amortization
|
|
|
3,765 |
|
|
|
(68,146 |
) |
|
|
(73,222 |
) |
|
|
(38 |
) |
|
|
3,992 |
|
|
Loss
on extinguishment of debt, net
|
|
|
(1,292 |
) |
|
|
(3,052 |
) |
|
|
(2,683 |
) |
|
|
(1,526 |
) |
|
|
(3,996 |
) |
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
440 |
|
|
|
(861 |
) |
|
|
(3,386 |
) |
|
|
(3,705 |
) |
|
|
(838 |
) |
|
Other
non-operating income
|
|
|
4,146 |
|
|
|
1,708 |
|
|
|
402 |
|
|
|
— |
|
|
|
— |
|
|
Loss
before taxes
|
|
|
(99,181 |
) |
|
|
(459,972 |
) |
|
|
(263,632 |
) |
|
|
(145,907 |
) |
|
|
(67,530 |
) |
|
Benefit
for income taxes
|
|
|
32,926 |
|
|
|
86,731 |
|
|
|
101,260 |
|
|
|
38,491 |
|
|
|
97 |
|
|
Loss
from continuing operations
|
|
|
(66,255 |
) |
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
|
(107,416 |
) |
|
|
(67,433 |
) |
|
Loss
on discontinued operations
|
|
|
― |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(128 |
) |
|
Net
loss
|
|
|
(66,255 |
) |
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
|
(107,416 |
) |
|
|
(67,561 |
) |
|
Net
loss (income) attributable to noncontrolling interest
|
|
|
― |
|
|
|
— |
|
|
|
393 |
|
|
|
(671 |
) |
|
|
16,575 |
|
|
Net
loss attributable to common stockholders
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(161,979 |
) |
|
$ |
(108,087 |
) |
|
$ |
(50,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from operations attributable to common
stockholders
|
|
$ |
(0.60 |
) |
|
$ |
(3.67 |
) |
|
$ |
(1.60 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.35 |
) |
|
Weighted
average shares of common stock used in computing basic and diluted loss
per share
|
|
|
111,288 |
|
|
|
101,667 |
|
|
|
101,511 |
|
|
|
80,842 |
|
|
|
37,636 |
|
|
Dividends
declared per share of common stock
|
|
$ |
― |
|
|
$ |
0.75 |
|
|
$ |
1.95 |
|
|
$ |
1.55 |
|
|
$ |
0.50 |
|
|
|
|
For the Years Ended December
31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of facilities (at end of period)
|
|
|
565 |
|
|
|
548 |
|
|
|
550 |
|
|
|
546 |
|
|
|
383 |
|
|
Total
units/beds operated(2)
|
|
|
53,626 |
|
|
|
51,804 |
|
|
|
52,086 |
|
|
|
51,271 |
|
|
|
30,057 |
|
|
Occupancy
rate at period end
|
|
|
89.3 |
% |
|
|
89.5 |
% |
|
|
90.6 |
% |
|
|
91.1 |
% |
|
|
89.6 |
% |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,985 |
|
|
$ |
3,791 |
|
|
$ |
3,577 |
|
|
$ |
3,247 |
|
|
$ |
2,991 |
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
66,370 |
|
|
$ |
53,973 |
|
|
$ |
100,904 |
|
|
$ |
68,034 |
|
|
$ |
77,682 |
|
|
Total
assets
|
|
$ |
4,645,943 |
|
|
$ |
4,449,258 |
|
|
$ |
4,811,622 |
|
|
$ |
4,756,000 |
|
|
$ |
1,697,811 |
|
|
Total
debt
|
|
$ |
2,625,526 |
|
|
$ |
2,552,929 |
|
|
$ |
2,335,224 |
|
|
$ |
1,874,939 |
|
|
$ |
754,301 |
|
|
Noncontrolling
interest
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
4,601 |
|
|
$ |
36 |
|
|
Total
stockholders equity
|
|
$ |
1,086,582 |
|
|
$ |
960,601 |
|
|
$ |
1,419,538 |
|
|
$ |
1,764,012 |
|
|
$ |
630,403 |
|
|
|
(1)
|
Prior
to October 1, 2006, the effective portion of the change in fair value of
derivatives was recorded in other comprehensive income and the ineffective
portion was included in the change in fair value of derivatives in the
consolidated statements of operations. On October 1, 2006, we
elected to discontinue hedge accounting prospectively for the previously
designated swap instruments. Gains and losses accumulated in
other comprehensive income at that date of $1.3 million related to the
previously designated swap instruments are being amortized to interest
expense over the life of the underlying hedged debt
payments. Although hedge accounting was discontinued on October
1, 2006, the swap instruments remained outstanding and are carried at fair
value in the consolidated balance sheets and the change in fair value
beginning October 1, 2006 has been included in the consolidated statements
of operations.
|
|
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
|
(3)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following information should be read in conjunction with our “Selected Financial
Data” and our consolidated financial statements and related notes,
included elsewhere in this Annual Report on Form 10-K. In
addition to historical information, this discussion and analysis may contain
forward-looking statements that involve risks, uncertainties and assumptions,
which could cause actual results to differ materially from management’s
expectations. Please see additional risks and uncertainties described
in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995” for more information. Factors that could cause such differences include
those described in “Risk Factors” which appears elsewhere in this Annual Report
on Form 10-K.
Executive
Overview
During
2009, we continued to make progress in implementing our long-term growth
strategy, integrating our previous acquisitions, and building a platform for
future growth. 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); (iii) expansion of our existing communities;
and (iv) acquisitions of additional operating companies and
communities.
Our
operating results for the year ended December 31, 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 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 $163.8 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 have 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 have taken 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 year ended December 31, 2009, we ended the year
with $66.4 million of unrestricted cash and cash equivalents on our consolidated
balance sheet.
As
discussed in more detail under “Credit Facilities - 2010 Credit Facility” below,
subsequent to December 31, 2009, we entered into a new revolving credit facility
with General Electric Capital Corporation, as administrative agent. The new
facility has a commitment of $100.0 million, with an option to increase the
commitment to $120.0 million, and matures on June 30, 2013. The new facility
replaced the $75.0 million revolving credit agreement with Bank of America, N.A.
that was scheduled to expire in August 2010.
During
the fourth quarter of 2009, we engaged in a limited and measured amount of
acquisition activity. We acquired 18 senior living communities from
affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net
purchase price of approximately $190.0 million. The portfolio of 18
communities is comprised of a total of 1,197 units, including 92 independent
living units, 746 assisted living units and 359 Alzheimer’s units. We
financed the transaction with approximately $98.8 million of non-recourse
mortgage debt (substantially through the assumption of existing debt), with the
balance of the purchase price paid from cash on hand.
We also
acquired the remaining interest in three retirement center communities that were
previously managed by us and in which we previously had a noncontrolling
interest. Our interest was accounted for under the equity method and
had a carrying value of zero prior to the acquisition. The aggregate
purchase price for the communities was $102.0 million. The portfolio
of three communities is comprised of 642 total units, including 504 independent
living units and 138 assisted living units. We financed the
transaction by obtaining a $75.4 million non-recourse mortgage loan with the
balance of the purchase price paid from cash on hand.
The table
below presents a summary of our operating results and certain other financial
metrics for the years ended December 31, 2009 and 2008 and the amount and
percentage of increase or decrease of each applicable item (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
2,023.1 |
|
|
$ |
1,928.1 |
|
|
$ |
95.0 |
|
|
|
4.9 |
% |
|
Net
loss attributable to common stockholders(1)
|
|
$ |
(66.3 |
) |
|
$ |
(373.2 |
) |
|
$ |
(306.9 |
) |
|
|
(82.2 |
)% |
|
Adjusted
EBITDA
|
|
$ |
348.6 |
|
|
$ |
302.6 |
|
|
$ |
46.0 |
|
|
|
15.2 |
% |
|
Cash
From Facility Operations
|
|
$ |
196.8 |
|
|
$ |
130.1 |
|
|
$ |
66.7 |
|
|
|
51.3 |
% |
|
Facility
Operating Income
|
|
$ |
690.1 |
|
|
$ |
637.5 |
|
|
$ |
52.6 |
|
|
|
8.3 |
% |
(1) Net
loss for 2009 and 2008 includes non-cash impairment charges of $10.1 million and
$220.0 million, respectively.
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 year ended December 31, 2009 increased to $2.0 billion, an
increase of $95.0 million, or approximately 4.9%, over our revenues for the year
ended December 31, 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 year ended
December 31, 2009 was 88.8%, compared to 89.6% for the year ended December 31,
2008.
During
the year ended December 31, 2009, our Adjusted EBITDA, Cash From Facility
Operations and Facility Operating Income increased by 15.2%, 51.3% and 8.3%,
respectively, when compared to the year ended December 31,
2008. Adjusted EBITDA and Cash From Facility Operations for the year
ended December 31, 2008 were negatively impacted by $4.8 million of hurricane
and named tropical storms expense and an $8.0 million charge to general and
administrative expense relating to the establishment of a reserve for certain
litigation.
During
the year ended December 31, 2009, we continued to expand our ancillary services
offerings. As of December 31, 2009, we offered therapy services to
approximately 36,000 of our units and home health services to approximately
23,000 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 year ended December 31, 2009, we opened ten expansions with a total of 685
units. Additionally, during the third and fourth quarters we opened
the 240-unit independent living component and the 72-bed skilled nursing unit of
our new entry fee CCRC in the Villages, Florida.
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
Year
Ended December 31, 2009 and 2008
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of change 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
consolidated financial statements and the notes thereto, which are included
herein. Our results reflect the inclusion of acquisitions that occurred
during the respective reporting periods.
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
496,744 |
|
|
$ |
497,453 |
|
|
$ |
(709 |
) |
|
|
(0.1 |
%) |
|
Assisted
Living
|
|
|
925,917 |
|
|
|
890,075 |
|
|
|
35,842 |
|
|
|
4.0 |
% |
|
CCRCs
|
|
|
593,688 |
|
|
|
533,532 |
|
|
|
60,156 |
|
|
|
11.3 |
% |
|
Total
resident fees
|
|
|
2,016,349 |
|
|
|
1,921,060 |
|
|
|
95,289 |
|
|
|
5.0 |
% |
|
Management
fees
|
|
|
6,719 |
|
|
|
6,994 |
|
|
|
(275 |
) |
|
|
(3.9 |
%) |
|
Total
revenue
|
|
|
2,023,068 |
|
|
|
1,928,054 |
|
|
|
95,014 |
|
|
|
4.9 |
% |
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
283,136 |
|
|
|
286,035 |
|
|
|
(2,899 |
) |
|
|
(1.0 |
%) |
|
Assisted
Living
|
|
|
600,948 |
|
|
|
590,644 |
|
|
|
10,304 |
|
|
|
1.7 |
% |
|
CCRCs
|
|
|
418,193 |
|
|
|
384,902 |
|
|
|
33,291 |
|
|
|
8.6 |
% |
|
Total
facility operating expense
|
|
|
1,302,277 |
|
|
|
1,261,581 |
|
|
|
40,696 |
|
|
|
3.2 |
% |
|
General
and administrative expense
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
(6,055 |
) |
|
|
(4.3 |
%) |
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
2,627 |
|
|
|
1.0 |
% |
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
(4,267 |
) |
|
|
(1.5 |
%) |
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
2,043 |
|
|
|
100.0 |
% |
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
(209,953 |
) |
|
|
(95.4 |
%) |
|
Total
operating expense
|
|
|
1,993,288 |
|
|
|
2,168,197 |
|
|
|
(174,909 |
) |
|
|
(8.1 |
%) |
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
269,923 |
|
|
|
112.4 |
% |
|
Interest
income
|
|
|
2,354 |
|
|
|
7,618 |
|
|
|
(5,264 |
) |
|
|
(69.1 |
%) |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(128,869 |
) |
|
|
(147,389 |
) |
|
|
18,520 |
|
|
|
12.6 |
% |
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,505 |
) |
|
|
(9,707 |
) |
|
|
202 |
|
|
|
2.1 |
% |
|
Change
in fair value of derivatives and amortization
|
|
|
3,765 |
|
|
|
(68,146 |
) |
|
|
71,911 |
|
|
|
105.5 |
% |
|
Loss
on extinguishment of debt, net
|
|
|
(1,292 |
) |
|
|
(3,052 |
) |
|
|
1,760 |
|
|
|
57.7 |
% |
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
440 |
|
|
|
(861 |
) |
|
|
1,301 |
|
|
|
151.1 |
% |
|
Other
non-operating income
|
|
|
4,146 |
|
|
|
1,708 |
|
|
|
2,438 |
|
|
|
142.7 |
% |
|
Loss
before income taxes
|
|
|
(99,181 |
) |
|
|
(459,972 |
) |
|
|
360,791 |
|
|
|
78.4 |
% |
|
Benefit
for income taxes
|
|
|
32,926 |
|
|
|
86,731 |
|
|
|
(53,805 |
) |
|
|
(62.0 |
%) |
|
Net
loss
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(306,986 |
) |
|
|
(82.2 |
%) |
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
565 |
|
|
|
548 |
|
|
|
17 |
|
|
|
3.1 |
% |
|
Total
units/beds operated(2)
|
|
|
53,626 |
|
|
|
51,804 |
|
|
|
1,822 |
|
|
|
3.5 |
% |
|
Owned/leased
communities units/beds
|
|
|
49,838 |
|
|
|
47,455 |
|
|
|
2,383 |
|
|
|
5.0 |
% |
|
Owned/leased
communities occupancy rate (weighted average)
|
|
|
88.8 |
% |
|
|
89.6 |
% |
|
|
(0.8 |
%) |
|
|
(0.9 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,985 |
|
|
$ |
3,791 |
|
|
|
194 |
|
|
|
5.1 |
% |
|
Selected
Segment Operating and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
80 |
|
|
|
77 |
|
|
|
3 |
|
|
|
3.9 |
% |
|
Total
units/beds(2)
|
|
|
14,867 |
|
|
|
14,229 |
|
|
|
638 |
|
|
|
4.5 |
% |
|
Occupancy
rate (weighted average)
|
|
|
88.8 |
% |
|
|
90.3 |
% |
|
|
(1.5 |
%) |
|
|
(1.7 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,285 |
|
|
$ |
3,171 |
|
|
|
114 |
|
|
|
3.6 |
% |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
430 |
|
|
|
417 |
|
|
|
13 |
|
|
|
3.1 |
% |
|
Total
units/beds(2)
|
|
|
22,954 |
|
|
|
22,043 |
|
|
|
911 |
|
|
|
4.1 |
% |
|
Occupancy
rate (weighted average)
|
|
|
90.3 |
% |
|
|
89.9 |
% |
|
|
0.4 |
% |
|
|
0.4 |
% |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,890 |
|
|
$ |
3,752 |
|
|
|
138 |
|
|
|
3.7 |
% |
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
36 |
|
|
|
32 |
|
|
|
4 |
|
|
|
12.5 |
% |
|
Total
units/beds(2)
|
|
|
12,017 |
|
|
|
11,183 |
|
|
|
834 |
|
|
|
7.5 |
% |
|
Occupancy
rate (weighted average)
|
|
|
85.7 |
% |
|
|
87.9 |
% |
|
|
(2.2 |
%) |
|
|
(2.5 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
5,139 |
|
|
$ |
4,759 |
|
|
|
380 |
|
|
|
8.0 |
% |
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
19 |
|
|
|
22 |
|
|
|
(3 |
) |
|
|
(13.6 |
%) |
|
Total
units/beds(2)
|
|
|
3,788 |
|
|
|
4,349 |
|
|
|
(561 |
) |
|
|
(12.9 |
%) |
|
Occupancy
rate (weighted average)
|
|
|
84.8 |
% |
|
|
84.9 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
4,872 |
|
|
$ |
5,718 |
|
|
$ |
12,635 |
|
|
$ |
15,264 |
|
|
$ |
38,489 |
|
|
Refundable
entrance fees sales(4)
|
|
|
3,638 |
|
|
|
4,098 |
|
|
|
9,296 |
|
|
|
13,354 |
|
|
|
30,386 |
|
|
Total
entrance fee receipts(5)
|
|
|
8,510 |
|
|
|
9,816 |
|
|
|
21,931 |
|
|
|
28,618 |
|
|
|
68,875 |
|
|
Refunds
|
|
|
(5,836 |
) |
|
|
(6,357 |
) |
|
|
(4,649 |
) |
|
|
(6,074 |
) |
|
|
(22,916 |
) |
|
Net
entrance fees
|
|
$ |
2,674 |
|
|
$ |
3,459 |
|
|
$ |
17,282 |
|
|
$ |
22,544 |
|
|
$ |
45,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
2,780 |
|
|
$ |
5,177 |
|
|
$ |
7,253 |
|
|
$ |
7,391 |
|
|
$ |
22,601 |
|
|
Refundable
entrance fees sales(4)
|
|
|
3,492 |
|
|
|
7,420 |
|
|
|
4,273 |
|
|
|
4,686 |
|
|
|
19,871 |
|
|
Total
entrance fee receipts
|
|
|
6,272 |
|
|
|
12,597 |
|
|
|
11,526 |
|
|
|
12,077 |
|
|
|
42,472 |
|
|
Refunds
|
|
|
(3,632 |
) |
|
|
(4,843 |
) |
|
|
(5,856 |
) |
|
|
(4,819 |
) |
|
|
(19,150 |
) |
|
Net
entrance fees
|
|
$ |
2,640 |
|
|
$ |
7,754 |
|
|
$ |
5,670 |
|
|
$ |
7,258 |
|
|
$ |
23,322 |
|
__________
|
(1)
|
Segment
facility operating expense for the year ended December 31, 2008 includes
hurricane and named tropical storms expense totaling $4.8 million
consisting of $1.3 million for Retirement Centers, $2.0 million for
Assisted Living and $1.5 million for
CCRCs.
|
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
(3)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
|
(4)
|
Refundable
entrance fee sales for the years ended December 31, 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 existing residents totaled
$0.6 million, $0.1 million and $0.4 million in the first, third and fourth
quarters of 2009, respectively, and $0.4 million, $0.8 million, $0.6
million and $0.5 million in the first, second, third and fourth quarters
of 2008, respectively. My Choice amounts for the second quarter
of 2009 were not material.
|
|
(5)
|
Includes
$25.7 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 where the Company is required to apply such entrance fee
proceeds to satisfy debt.
|
As of
December 31, 2009, our total operations included 565 communities with a capacity
to serve 53,626 residents. During 2009, our total portfolio increased
by 17 communities, net with our resident capacity increasing by 1,912 units, net
as a result of current year acquisitions offset by the disposition of two
communities.
Our 2009
results were also affected by our continuing implementation of our ancillary
services programs at a number of our locations as described above.
Resident
Fees
Total
resident fees increased over the prior-year primarily due to an increase in
average monthly revenue per unit/bed during the current year which includes 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 in the Retirement Centers and
CCRCs segments. During the current year, same-store revenues grew
4.1% at the 514 properties we operated in both years with a 4.9% increase in the
average monthly revenue per unit/bed and a 0.7% decrease in
occupancy.
Retirement
Center revenue decreased slightly, primarily due to a decrease in occupancy at
the communities we operated during both years, partially offset by an increase
in the average monthly revenue per unit/bed at those same communities year over
year.
Assisted
Living revenue increased $35.8 million, or 4.0%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both years as well as an increase in revenues related to the expansion of our
ancillary service programs.
CCRCs
revenue increased $60.2 million, or 11.3%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
years as well as an increase in revenues related to increased capacity in the
current year and the expansion of our ancillary services. This
increase was partially offset by a decrease in occupancy at our same-store
communities year over year.
Management
Fees
Management
fees decreased year over year as one management agreement terminated early in
the current year, which was partially offset by the acquisition of a new
management agreement mid-year in the current year.
Facility
Operating Expense
Facility
operating expense increased over the prior-year 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 year ended December 31, 2008 was negatively
impacted by hurricane and named tropical storms expense.
Retirement
Center operating expenses decreased $2.9 million, or 1.0%, primarily due to cost
control measures implemented in recent periods, including reductions in overtime
hours worked and reduced advertising. These decreases were offset by
additional expense incurred in connection with the continued expansion of our
ancillary services programs, higher deferred community fee expense recognition
and an increase in insurance expense in the current year. Also,
facility operating expense during the year ended December 31, 2008 was
negatively impacted by hurricane and named tropical storms expense.
Assisted
Living operating expenses increased $10.3 million, or 1.7%, due to an increase
in expense incurred in connection with the continued rollout of our ancillary
services program, increased occupancy in the current year, an increase in
salaries and wages related to normal salary increases, increased employee hours
worked and reduced open positions, higher deferred community fee expense
recognition and increased insurance costs. These increases were
partially offset by cost control measures implemented in recent periods,
including reductions in overtime hours worked and public relations and travel
expenses. Also, facility operating expense during the year ended
December 31, 2008 was negatively impacted by hurricane and named tropical storms
expense.
CCRCs
operating expenses increased $33.3 million, or 8.6%, primarily due to an
increase in expense incurred in connection with the continued expansion of our
ancillary services programs, increased salaries and wages due to filling vacant
positions and wage rate increases, higher deferred community fee expense
recognition and an increase in insurance costs. These increases were
partially offset by significant cost control measures that were implemented in
recent periods. Also, facility operating expense during the year
ended December 31, 2008 was negatively impacted by hurricane and named tropical
storms expense.
General
and Administrative Expense
General
and administrative expense decreased $6.1 million, or 4.3%, primarily as a
result of a decrease in non-controllable expenses related to the $8.0 million
reserve established for certain litigation during the year ended December 31,
2008, as well as a decrease in non-cash stock-based compensation expense in
connection with restricted stock grants and cost control measures implemented in
recent periods. These decreases were partially offset by increased
bonus expense and transaction-related costs in the current
year. General and administrative expense as a percentage of total
revenue, including revenue generated by the communities we manage, was 4.7% and
4.5% for the years ended December 31, 2009 and 2008, respectively, calculated as
follows (dollars in thousands):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
2,016,349 |
|
|
|
92.7 |
% |
|
$ |
1,921,060 |
|
|
|
92.6 |
% |
|
Resident
fee revenues under management
|
|
|
157,618 |
|
|
|
7.3 |
% |
|
|
152,970 |
|
|
|
7.4 |
% |
|
Total
|
|
$ |
2,173,967 |
|
|
|
100 |
% |
|
$ |
2,074,030 |
|
|
|
100.0 |
% |
|
General
and administrative expenses (excluding non-cash compensation, integration
and transaction-related costs)
|
|
$ |
101,676 |
|
|
|
4.7 |
% |
|
$ |
92,473 |
|
|
|
4.5 |
% |
|
Non-cash
compensation expense
|
|
|
26,935 |
|
|
|
1.2 |
% |
|
|
28,937 |
|
|
|
1.4 |
% |
|
Integration
and transaction-related costs
|
|
|
6,253 |
|
|
|
0.3 |
% |
|
|
19,509 |
|
|
|
0.9 |
% |
|
General
and administrative expenses (including non-cash compensation, integration
and transaction-related costs)
|
|
$ |
134,864 |
|
|
|
6.2 |
% |
|
$ |
140,919 |
|
|
|
6.8 |
% |
Facility
Lease Expense
Facility
lease expense increased by $2.6 million, or 1.0%, primarily due to the impact of
lease escalators.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $4.3 million, or 1.5%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
late 2008.
Goodwill
and Asset Impairment
During
the year we recognized $10.1 million of impairment charges related to asset
impairments for property, plant and equipment and leasehold intangibles for
certain communities within the Assisted Living segment. The non-cash
impairment charges are primarily due to lower than expected performance of the
underlying communities. During 2008 we recognized $220.0 million of
impairment charges mainly related to the CCRCs operating segment. The
non-cash charges consisted of $215.0 million of goodwill impairment related to
the CCRCs segment and $5.0 million of asset impairment for property, plant and
equipment and leasehold intangibles for certain communities within the Assisted
Living segment. The impairment charge was primarily driven by adverse
equity market conditions intensifying in the fourth quarter of 2008 that caused
a decrease in current market multiples and our stock price at December 31, 2008
compared with our stock price at September 30, 2008.
Interest
Income
Interest
income decreased $5.3 million, or 69.1%, 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
year ended December 31, 2008.
Interest
Expense
Interest
expense decreased $90.6 million, or 40.2%, primarily due to the change in fair
value of our interest rate swaps and caps. During the year ended
December 31, 2009, we recognized approximately $3.8 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 $68.1 million of interest expense on our interest rate
swaps and caps for the year ended December 31, 2008. Interest expense
on our mortgage debt and credit facility also decreased due to a decline in
market interest rates period over period as well as the payoff of the credit
facility during 2009.
Income
Taxes
The
reduction in the income tax benefit over the same prior year period is due to an
increase in the effective tax rate from 18.9 % in 2008 to 33.2% in
2009. This increase is primarily due to the impact of the
impairment charge taken for financial statement purposes in 2008, which was not
deductible for tax purposes. The rate was also impacted by our stock based
compensation tax deduction as compared to the financial expense for 2009 and by
an increase in nondeductible officer’s compensation recorded in the
year.
Year
Ended December 31, 2008 and 2007
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of change 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
consolidated financial statements and the notes thereto, which are included
herein. Our results reflect the inclusion of acquisitions that occurred during
the respective reporting periods.
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
497,453 |
|
|
$ |
489,931 |
|
|
$ |
7,522 |
|
|
|
1.5 |
% |
|
Assisted
Living
|
|
|
890,075 |
|
|
|
841,819 |
|
|
|
48,256 |
|
|
|
5.7 |
% |
|
CCRCs
|
|
|
533,532 |
|
|
|
500,757 |
|
|
|
32,775 |
|
|
|
6.5 |
% |
|
Total
resident fees
|
|
|
1,921,060 |
|
|
|
1,832,507 |
|
|
|
88,553 |
|
|
|
4.8 |
% |
|
Management
fees
|
|
|
6,994 |
|
|
|
6,789 |
|
|
|
205 |
|
|
|
3.0 |
% |
|
Total
revenue
|
|
|
1,928,054 |
|
|
|
1,839,296 |
|
|
|
88,758 |
|
|
|
4.8 |
% |
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
286,035 |
|
|
|
273,350 |
|
|
|
12,685 |
|
|
|
4.6 |
% |
|
Assisted
Living
|
|
|
590,644 |
|
|
|
539,866 |
|
|
|
50,778 |
|
|
|
9.4 |
% |
|
CCRCs
|
|
|
384,902 |
|
|
|
357,721 |
|
|
|
27,181 |
|
|
|
7.6 |
% |
|
Total
facility operating expense
|
|
|
1,261,581 |
|
|
|
1,170,937 |
|
|
|
90,644 |
|
|
|
7.7 |
% |
|
General
and administrative expense
|
|
|
140,919 |
|
|
|
138,013 |
|
|
|
2,906 |
|
|
|
2.1 |
% |
|
Facility
lease expense
|
|
|
269,469 |
|
|
|
271,628 |
|
|
|
(2,159 |
) |
|
|
(0.8 |
%) |
|
Depreciation
and amortization
|
|
|
276,202 |
|
|
|
299,925 |
|
|
|
(23,723 |
) |
|
|
(7.9 |
%) |
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and asset impairment
|
|
|
220,026 |
|
|
|
— |
|
|
|
220,026 |
|
|
|
100.0 |
% |
|
Total
operating expense
|
|
|
2,168,197 |
|
|
|
1,880,503 |
|
|
|
287,694 |
|
|
|
15.3 |
% |
|
Loss
from operations
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
|
(198,936 |
) |
|
|
(482.8 |
%) |
|
Interest
income
|
|
|
7,618 |
|
|
|
7,519 |
|
|
|
99 |
|
|
|
1.3 |
% |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(147,389 |
) |
|
|
(143,991 |
) |
|
|
(3,398 |
) |
|
|
(2.4 |
%) |
|
Amortization
of deferred financing costs
|
|
|
(9,707 |
) |
|
|
(7,064 |
) |
|
|
(2,643 |
) |
|
|
(37.4 |
%) |
|
Change
in fair value of derivatives and amortization
|
|
|
(68,146 |
) |
|
|
(73,222 |
) |
|
|
5,076 |
|
|
|
6.9 |
% |
|
Loss
on extinguishment of debt, net
|
|
|
(3,052 |
) |
|
|
(2,683 |
) |
|
|
(369 |
) |
|
|
(13.8 |
%) |
|
Equity
in loss of unconsolidated ventures
|
|
|
(861 |
) |
|
|
(3,386 |
) |
|
|
2,525 |
|
|
|
74.6 |
% |
|
Other
non-operating income
|
|
|
1,708 |
|
|
|
402 |
|
|
|
1,306 |
|
|
|
324.9 |
% |
|
Loss
before income taxes
|
|
|
(459,972 |
) |
|
|
(263,632 |
) |
|
|
(196,340 |
) |
|
|
(74.5 |
%) |
|
Benefit
for income taxes
|
|
|
86,731 |
|
|
|
101,260 |
|
|
|
(14,529 |
) |
|
|
(14.3 |
%) |
|
Net
loss
|
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
|
(210,869 |
) |
|
|
(129.9 |
%) |
|
Net
loss attributable to noncontrolling interest
|
|
|
— |
|
|
|
393 |
|
|
|
(393 |
) |
|
|
(100.0 |
%) |
|
Net
loss attributable to common stockholders
|
|
$ |
(373,241 |
) |
|
$ |
(161,979 |
) |
|
$ |
(211,262 |
) |
|
|
(130.4 |
%) |
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
548 |
|
|
|
550 |
|
|
|
(2 |
) |
|
|
(0.4 |
%) |
|
Total
units/beds operated(2)
|
|
|
51,804 |
|
|
|
52,086 |
|
|
|
(282 |
) |
|
|
(0.5 |
%) |
|
Owned/leased
communities units/beds
|
|
|
47,455 |
|
|
|
47,670 |
|
|
|
(215 |
) |
|
|
(0.5 |
%) |
|
Owned/leased
communities occupancy rate (weighted average)
|
|
|
89.6 |
% |
|
|
90.7 |
% |
|
|
(1.1 |
%) |
|
|
(1.2 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,791 |
|
|
$ |
3,577 |
|
|
|
214 |
|
|
|
6.0 |
% |
|
Selected
Segment Operating and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
77 |
|
|
|
79 |
|
|
|
(2 |
) |
|
|
(2.5 |
%) |
|
Total
units/beds(2)
|
|
|
14,229 |
|
|
|
14,802 |
|
|
|
(573 |
) |
|
|
(3.9 |
%) |
|
Occupancy
rate (weighted average)
|
|
|
90.3 |
% |
|
|
92.5 |
% |
|
|
(2.2 |
%) |
|
|
(2.4 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,171 |
|
|
$ |
3,012 |
|
|
|
159 |
|
|
|
5.3 |
% |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
417 |
|
|
|
417 |
|
|
|
— |
|
|
|
— |
|
|
Total
units/beds(2)
|
|
|
22,043 |
|
|
|
22,015 |
|
|
|
28 |
|
|
|
0.1 |
% |
|
Occupancy
rate (weighted average)
|
|
|
89.9 |
% |
|
|
89.8 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,752 |
|
|
$ |
3,553 |
|
|
|
199 |
|
|
|
5.6 |
% |
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
32 |
|
|
|
32 |
|
|
|
— |
|
|
|
— |
|
|
Total
units/beds(2)
|
|
|
11,183 |
|
|
|
10,853 |
|
|
|
330 |
|
|
|
3.0 |
% |
|
Occupancy
rate (weighted average)
|
|
|
87.9 |
% |
|
|
90.0 |
% |
|
|
(2.1 |
%) |
|
|
(2.3 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
4,759 |
|
|
$ |
4,481 |
|
|
|
278 |
|
|
|
6.2 |
% |
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
22 |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
Total
units/beds(2)
|
|
|
4,349 |
|
|
|
4,416 |
|
|
|
(67 |
) |
|
|
(1.5 |
%) |
|
Occupancy
rate (weighted average)
|
|
|
84.9 |
% |
|
|
87.1 |
% |
|
|
(2.2 |
%) |
|
|
(2.5 |
%) |
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
2,780 |
|
|
$ |
5,177 |
|
|
$ |
7,253 |
|
|
$ |
7,391 |
|
|
$ |
22,601 |
|
|
Refundable
entrance fees sales(4)
|
|
|
3,492 |
|
|
|
7,420 |
|
|
|
4,273 |
|
|
|
4,686 |
|
|
|
19,871 |
|
|
Total
entrance fee receipts
|
|
|
6,272 |
|
|
|
12,597 |
|
|
|
11,526 |
|
|
|
12,077 |
|
|
|
42,472 |
|
|
Refunds
|
|
|
(3,632 |
) |
|
|
(4,843 |
) |
|
|
(5,856 |
) |
|
|
(4,819 |
) |
|
|
(19,150 |
) |
|
Net
entrance fees
|
|
$ |
2,640 |
|
|
$ |
7,754 |
|
|
$ |
5,670 |
|
|
$ |
7,258 |
|
|
$ |
23,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
3,916 |
|
|
$ |
4,726 |
|
|
$ |
5,673 |
|
|
$ |
5,015 |
|
|
$ |
19,330 |
|
|
Refundable
entrance fees sales(4)
|
|
|
4,258 |
|
|
|
4,064 |
|
|
|
8,696 |
|
|
|
8,901 |
|
|
|
25,919 |
|
|
Total
entrance fee receipts
|
|
|
8,174 |
|
|
|
8,790 |
|
|
|
14,369 |
|
|
|
13,916 |
|
|
|
45,249 |
|
|
Refunds
|
|
|
(6,315 |
) |
|
|
(4,089 |
) |
|
|
(5,084 |
) |
|
|
(4,069 |
) |
|
|
(19,557 |
) |
|
Net
entrance fees
|
|
$ |
1,859 |
|
|
$ |
4,701 |
|
|
$ |
9,285 |
|
|
$ |
9,847 |
|
|
$ |
25,692 |
|
__________
|
(1)
|
Segment
facility operating expense for the year ended December 31, 2008 includes
hurricane and named tropical storms expense totaling $4.8 million
consisting of $1.3 million for Retirement Centers, $2.0 million for
Assisted Living and $1.5 million for CCRCs. There was no
hurricane and named tropical storms expense in 2007. Facility
operating expense for the year ended December 31, 2007 includes $7.0
million of charges comprised of $5.9 million of estimated uncollectible
accounts and $1.1 million of accounting conformity adjustments pertaining
to inventory and certain accrual
policies.
|
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
(3)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
|
(4)
|
Refundable
entrance fee sales for the years ended December 31, 2008 and 2007 include
amounts received from residents participating in the MyChoice program,
which allows new and existing residents the option to pay additional
refundable entrance fee amounts in return for a reduced monthly service
fee. MyChoice amounts received from existing residents totaled
$0.4 million, $0.8 million, $0.6 million and $0.5 million in the first,
second, third and fourth quarters of 2008, respectively, and $0.2 million,
$3.6 million and $4.7 million in the second, third and fourth quarters of
2007, respectively. We did not receive any MyChoice amounts
from existing residents during the first quarter of
2007.
|
As of
December 31, 2008, our total operations included 548 communities with a capacity
to serve 51,804 residents. During 2008, our total portfolio decreased
by two communities with our resident capacity decreasing by 282 units as a
result of a terminated management agreement and the consolidation of two
communities into one.
Our 2008
results were also affected by our continuing implementation of our ancillary
services programs at a number of our locations as described above.
Resident
Fees
The
increase in resident fees occurred across all business
segments. Resident fees increased over 2007 primarily due to an
increase in average monthly revenue per unit/bed during 2008 which includes an
increase in our ancillary services revenue as we continued to roll out therapy
and home health services to many of our communities. This increase
was partially offset by a decrease in occupancy in the Retirement Centers and
CCRCs segments. During 2008, same-store revenues grew 4.4% at the 515
properties we operated in both years with a 6.0% increase in the average monthly
revenue per unit/bed and a 1.4% decrease in occupancy.
Retirement
Centers revenue increased $7.5 million, or 1.5%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both years as well as an increase in revenues related to the expansion of our
ancillary service. This increase was partially offset by a decrease
in occupancy at our same-store communities year over year.
Assisted
Living revenue increased $48.3 million, or 5.7%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both years as well as an increase in revenues relate to the expansion of our
ancillary service programs. Occupancy at our same-store communities
was approximately flat year over year.
CCRCs
revenue increased $32.8 million, or 6.5%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
years as well as an increase in revenues related to the expansion of our
ancillary services. This increase was partially offset by a decrease
in occupancy at our same-store communities year over year.
Management
Fees
Management
fees were comparable year over year as the number of management contracts
maintained was largely consistent during both years.
Facility
Operating Expense
Facility
operating expense increased over 2007 primarily due to an increase in salaries,
wages and benefits related to normal salary increases, increased employee hours
worked and reduced open positions, as well as an increase in expenses incurred
in connection with the continued rollout of our ancillary services program
during 2008.
Retirement
Centers operating expenses increased $12.7 million, or 4.6%, primarily due to an
increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, $1.3 million of
expense incurred in connection with hurricanes and other named tropical storms,
an increase in insurance and utility expenses period over period as well as an
increase in expense incurred in connection with the continued rollout of our
ancillary services program.
Assisted
Living operating expenses increased $50.8 million, or 9.4%, due to an increase
in salaries, wages and benefits related to normal salary increases, increased
employee hours worked and reduced open positions, $2.0 million of expense
incurred in connection with hurricanes and other named tropical storms as well
as an increase in expense incurred in connection with the continued rollout of
our ancillary services program.
CCRCs
operating expenses increased $27.2 million, or 7.6%, due to an increase in
salaries, wages and benefits due to normal salary increases and increased
employee count, increased pharmacy, medical, and other health care supplies, as
well as $1.5 million of expense incurred in connection with hurricanes and other
named tropical storms.
General
and Administrative Expense
General
and administrative expense increased $2.9 million, or 2.1%, primarily as a
result of an increase in non-controllable expenses related to the $8.0 million
reserve established for certain litigation during the second quarter of
2008 and non-cash stock-based compensation expense in connection with
restricted stock grants period over period offset by a decrease in integration
and merger costs that were significantly higher in the prior
year. General and administrative expense as a percentage of total
revenue, including revenue generated by the communities we manage, was 4.5% and
5.0% for the years ended December 31, 2008 and 2007, respectively, calculated as
follows (dollars in thousands):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
1,921,060 |
|
|
|
92.6 |
% |
|
$ |
1,832,507 |
|
|
|
92.4 |
% |
|
Resident
fee revenues under management
|
|
|
152,970 |
|
|
|
7.4 |
% |
|
|
150,204 |
|
|
|
7.6 |
% |
|
Total
|
|
$ |
2,074,030 |
|
|
|
100.0 |
% |
|
$ |
1,982,711 |
|
|
|
100.0 |
% |
|
General
and administrative expenses (excluding non-cash compensation, integration
and acquisition-related costs)
|
|
$ |
92,473 |
|
|
|
4.5 |
% |
|
$ |
98,858 |
|
|
|
5.0 |
% |
|
Non-cash
compensation expense
|
|
|
28,937 |
|
|
|
1.4 |
% |
|
|
20,113 |
|
|
|
1.0 |
% |
|
Integration
and acquisition-related costs
|
|
|
19,509 |
|
|
|
0.9 |
% |
|
|
19,042 |
|
|
|
1.0 |
% |
|
General
and administrative expenses (including non-cash compensation, integration
and acquisition-related costs)
|
|
$ |
140,919 |
|
|
|
6.8 |
% |
|
$ |
138,013 |
|
|
|
7.0 |
% |
Facility
Lease Expense
Facility
lease expense decreased by $2.2 million, or 0.8%, primarily as a result of lower
variable interest rates within certain lease agreements.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $23.7 million, or 7.9%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
the year ended December 31, 2008, which was partially offset by an increase in
depreciation expense related to depreciation on capital expenditures that we
made during the latter part of 2007.
Goodwill
and Asset Impairment
During
2008, we recognized $220.0 million of impairment charges mainly related to the
CCRCs operating segment. The non-cash charges consisted of $215.0
million of goodwill impairment related to the CCRCs segment and $5.0 million of
asset impairment for property, plant and equipment and leasehold intangibles for
certain communities within the Assisted Living segment. The
impairment charge was primarily driven by adverse equity market conditions
intensifying in the fourth quarter of 2008 that caused a decrease in current
market multiples and our stock price at December 31, 2008 compared with our
stock price at September 30, 2008.
Interest
Income
Interest
income remained relatively constant year over year.
Interest
Expense
Interest
expense remained relatively constant period over period. During the
year ended December 31, 2008, we recognized approximately $68.1 million of
interest expense on our interest rate swaps due to unfavorable changes in the
LIBOR yield curve which resulted in a change in the fair value of the swaps, as
compared to approximately $73.2 million of interest expense on our interest rate
swaps for the year ended December 31, 2007. Interest expense incurred
on debt remained relatively consistent year over year as interest from
additional borrowings was offset by a reduction in interest from refinancing
outstanding debt at a more favorable rate as well as the payoff of certain debt
during the current year.
Income
Taxes
The
decrease in the income tax benefit over the same prior year period is due to a
decrease in the effective tax rate from 38.4 % in 2007 to 18.9 % in
2008. This decrease is primarily due to the impact of the
impairment charge taken for financial statement purposes, which is not
deductible for tax. The rate was also impacted by
our stock
based compensation tax deduction as compared to the financial expense for 2008,
and for an additional valuation allowance recorded in the year.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States, or GAAP, requires us to make estimates
and judgments that affect our reported amounts of assets and liabilities,
revenues and expenses. We consider an accounting estimate to be critical if it
requires assumptions to be made that were uncertain at the time the estimate was
made and changes in the estimate, or different estimates that could have been
selected, could have a material impact on our consolidated results of operations
or financial condition. We have identified the following critical accounting
policies that affect significant estimates and judgments.
Revenue
Recognition and Assumptions at Entrance Fee Communities
Our
eleven entrance fee communities provide housing and healthcare services through
entrance fee agreements with residents. Under certain of these agreements,
residents pay an entrance fee upon entering into the contract and are
contractually guaranteed certain limited lifecare benefits in the form of
healthcare discounts. The recognition of entrance fee income requires the use of
various actuarial estimates. We recognize this revenue by recording the
nonrefundable portion of the residents’ entrance fees as deferred entrance fee
income and amortizing it into revenue using the straight-line method over the
estimated remaining life expectancy of each resident or couple. In
addition, certain entrance fee agreements entitle the resident to a refund of
the original entrance fee paid plus a percentage of the appreciation of the unit
contingent upon resale. We estimate the portion of such entrance fees
that will be repaid to the resident from other contingently refundable entrance
fees received or non-refundable entrance fees received and record that portion
as deferred revenue with the remainder classified as refundable entrance
fees. The portion recorded as deferred revenue is amortized over the
life of the entrance fee building. We periodically assess the
reasonableness of these mortality tables and other actuarial assumptions, and
measurement of future service obligations.
Obligation
to Provide Future Services
Annually,
we calculate the present value of the net cost of future services and the use of
communities to be provided to current residents of certain of our CCRCs and
compare that amount with the balance of non-refundable deferred revenue from
entrance fees received. If the present value of the net cost of future services
and the use of communities exceeds the non-refundable deferred revenue from
entrance fees, a liability is recorded (obligation to provide future services
and use of communities) with a corresponding charge to income.
Self-Insurance
Liability Accruals
We are
subject to various legal proceedings and claims that arise in the ordinary
course of our business. Although we maintain general liability and professional
liability insurance policies for our owned, leased and managed communities under
a master insurance program, our current policy provides for deductibles for each
and every claim ($3.0 million on or prior to December 31, 2008, $250,000
effective January 1, 2009 and $150,000 effective January 1,
2010). The amount of liquid assets separately available to satisfy
these deductible obligations is $10.9 million (classified as cash and escrow
deposits – restricted in the consolidated balance sheets). As a
result, we are effectively self-insured for claims that are less than
$150,000. In addition, we maintain a self-insured workers
compensation program (with excess loss coverage generally above $0.5 million per
individual claim on or prior to December 31, 2009 and $1.0 million effective
January 1, 2010) and a self-insured employee medical program (with excess loss
coverage above $0.3 million per individual claim). We are self-insured for
amounts below these excess loss coverage amounts. We have formed a
wholly-owned “captive” insurance company, Senior Services Insurance Limited
(“SSIL”) for the purpose of insuring certain portions of our risk retention
under our general and professional liability insurance programs. SSIL
issues policies of insurance to and receives premiums from Brookdale Senior
Living Inc. that are reimbursed through expense allocation to each operated
community and us. SSIL pays the costs for each claim above a deductible up to a
per claim limit. Third-party insurers are responsible for claim costs above this
limit. These third-party insurers carry an A.M. Best rating of A-/VII or
better.
The cost
of our employee health and dental benefits, net of employee contributions, is
shared by us and our communities based on the respective number of participants
working directly either at our corporate headquarters
or at the
communities. Cash received is used to pay the actual costs of administering the
program which include paid claims, third-party administrative fees, network
provider fees, communication costs, and other related administrative costs
incurred by us. Claims are paid as they are submitted to the plan
administrator.
Outstanding
losses and expenses for general liability and professional liability and workers
compensation are estimated based on the recommendations of independent actuaries
and management’s estimates. Outstanding losses and expenses for our
self-insured medical program are estimated based on the recommendation of our
third party administrator.
We review
the adequacy of our 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 adjust
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.
Income
Taxes
We
account for income taxes under the provisions of ASC 740 Income Taxes. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using tax rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts that are expected to be
realized. As of December 31, 2009 and 2008, we have a valuation allowance
against deferred tax assets of approximately $10.7 million and $9.7 million,
respectively. When we determine that it is more likely than not that we will be
able to realize our deferred tax assets in the future in excess of our net
recorded amount, an adjustment to the deferred tax asset would be made and
reflected in income. This determination will be made by considering
various factors, including our expected future results, that in our judgment
will make it more likely than not that these deferred tax assets will be
realized.
Lease
Accounting
We
determine whether to account for our leases as either operating or capital
leases depending on the underlying terms. As of December 31, 2009, we operated
359 communities under long-term leases with operating, capital and financing
lease obligations. The determination of this classification is complex and in
certain situations requires a significant level of judgment. Our classification
criteria is based on estimates regarding the fair value of the leased
communities, minimum lease payments, effective cost of funds, the economic life
of the community and certain other terms in the lease agreements as stated in
our consolidated financial statements included elsewhere in this Annual Report
on Form 10-K. Communities under operating leases are accounted for in our
statement of operations as lease expenses for actual rent paid plus or minus
straight-line adjustments for fixed or estimated minimum lease escalators and
amortization of deferred gains. For communities under capital lease and lease
financing obligation arrangements, a liability is established on our balance
sheet and a corresponding long-term asset is recorded. Lease payments are
allocated between principal and interest on the remaining base lease obligations
and the lease asset is depreciated over the shorter of its useful life or the
term of the lease. In addition, we amortize leasehold improvements purchased
during the term of the lease over the shorter of their economic life or the
lease term. Sale-leaseback transactions are recorded as lease financing
obligations when the transactions include a form of continuing involvement, such
as purchase options.
One of
our leases provides for various additional lease payments based on changes in
the interest rates on the debt underlying the lease. All of our leases contain
fixed or formula based rent escalators. To the extent that the escalator
increases are tied to a fixed index or rate, lease payments are accounted for on
a straight-line basis over the life of the lease. In addition, we recognize all
rent-free or rent holiday periods in operating leases on a straight-line basis
over the lease term, including the rent holiday period.
For
leases in which the Company is involved with the construction of the building,
the Company accounts for the lease during the construction period under the
provisions of ASC 840. If the Company concludes that it has
substantively all of the risks of ownership during construction of a leased
property and therefore is deemed the owner of the project for accounting
purposes, it records an asset and related financing obligation for the amount of
total project costs related to construction in progress and the pre-existing
asset. Once construction is complete, the Company considers the
requirements under ASC 840-40 – Leases – Sale-Leaseback
Transactions. If the
arrangement
does not qualify for sale-leaseback accounting, the Company continues to
amortize the financing obligation and depreciate the building over the lease
term.
Allowance
for Doubtful Accounts
Accounts
receivable are reported net of an allowance for doubtful accounts, and represent
our estimate of the amount that ultimately will be realized in cash. The
allowance for doubtful accounts was $10.6 million, and $13.3 million as of
December 31, 2009 and 2008, respectively. The adequacy of our
allowance for doubtful accounts is reviewed on an ongoing basis, using
historical payment trends, write-off experience, analyses of receivable
portfolios by payor source and aging of receivables, as well as a review of
specific accounts, and adjustments are made to the allowance as necessary.
Changes in legislation are not expected to have a material impact on
collections; however, changes in economic conditions could have an impact on the
collection of existing receivable balances or future allowance
considerations.
Approximately
83.0% and 86.2% of the Company’s resident and healthcare revenues for the year
ended December 31, 2009 and 2008, respectively, were derived from private pay
customers and 17.0% and 13.8% of the Company’s resident and healthcare revenues
for the year ended December 31, 2009 and 2008, respectively, were derived from
services covered by various third-party payor programs, including Medicare and
Medicaid. Billings for services under third-party payor programs are
recorded net of estimated retroactive adjustments, if any, under reimbursement
programs. Retroactive adjustments are accrued on an estimated basis in the
period the related services are rendered and adjusted in future periods or as
final settlements are determined. We accrue contractual or cost related
adjustments from Medicare or Medicaid when assessed (without regard to when the
assessment is paid or withheld), even if we have not agreed to or are appealing
the assessment. Subsequent positive or negative adjustments to these accrued
amounts are recorded in net revenues when known.
Long-Lived
Assets, Goodwill and Purchase Accounting
As of
December 31, 2009 and 2008, our long-lived assets were comprised primarily of
$3.9 billion and $3.7 billion, respectively, of property, plant and equipment
and leasehold intangibles. In accounting for our long-lived assets, other than
goodwill, we apply the provisions of ASC 360 Property, Plant and
Equipment. In connection with our formation transactions, for
financial reporting purposes we recorded the non-controlling stockholders’
interest at fair value. Acquisitions are accounted for using the purchase method
of accounting and the purchase prices are allocated to acquired assets and
liabilities based on their estimated fair values. Goodwill associated with our
acquisition of ARC and our formation transactions was allocated to the
reportable segment and included in our application of the provisions of ASC 350
Intangibles – Goodwill and
Other. We account for goodwill under the provisions of ASC
350. During the year ended December 31, 2008, we recorded a $215.0
million goodwill impairment charge in connection with our annual impairment
test. The impairment charge was primarily driven by adverse equity
market conditions intensifying in the fourth quarter of 2008 that caused a
decrease in current market multiples and our stock price at December 31, 2008
compared with our stock price at September 30, 2008. As of December
31, 2009 and 2008, we had $109.8 million and $110.0 million of goodwill,
respectively.
We test
long-lived assets other than goodwill for recoverability annually during our
fourth quarter or whenever changes in circumstances indicate the carrying value
may not be recoverable. Recoverability of an asset group is estimated by
comparing its carrying value to the future net undiscounted cash flows expected
to be generated by the asset group. If this comparison indicates that the
carrying value of an asset group is not recoverable, we are required to
recognize an impairment loss. The impairment loss is measured by the amount by
which the carrying amount of the asset group exceeds its estimated fair value.
When an impairment loss is recognized for assets to be held and used, the
carrying amount of those assets is permanently adjusted and depreciated over its
remaining useful life. During the years ended December 31, 2009 and
2008, we evaluated long-lived depreciable assets using the same cash flow data
used to evaluate goodwill and determined that the undiscounted cash flows
exceeded the carrying value of these assets for all except for a small number of
communities. As a result, we recorded a non-cash asset impairment
charge of $10.1 million and $5.0 million for the quarters ended December 31,
2009 and 2008, respectively, for five and four communities, respectively, within
the Retirement Center and Assisted Living segment.
Goodwill
is not amortized, but is subject to annual or more frequent impairment
testing. We test goodwill for impairment annually during our fourth
quarter, or whenever indicators exist that our goodwill may not
be
recoverable. The
recoverability of goodwill is required to be assessed using a two-step process.
The first step requires a comparison of the estimated fair value of a reporting
unit with its carrying value. If the carrying value of the reporting unit
exceeds its estimated fair value, the second step requires a comparison of the
implied fair value of goodwill (based on a putative purchase price allocation
methodology) with its carrying value. If the carrying value of the reporting
unit’s goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to the excess.
In
estimating the fair value of a reporting unit or long-lived assets other than
goodwill, we generally use the income approach. The income approach
utilizes future cash flow projections that are developed
internally. Any estimates of future cash flow projections necessarily
involve predicting an unknown future and require significant management
judgments and estimates. In arriving at our cash flow
projections, we consider our historic operating results, approved
budgets and business plans, future demographic factors, expected growth rates,
and other factors. Future events may indicate differences from
management’s current judgments and estimates, which could, in turn, result in
future impairments. Future events that may result in impairment
charges include increases in interest rates, which could impact discount rates,
differences in the projected occupancy rates and changes in the cost structure
of existing communities.
In using
the income approach to estimate fair value of a reporting unit or long-lived
assets other than goodwill, we make certain key assumptions. Those
assumptions include assumptions related to future revenues, future facility
operating expenses, future cash flows that we would receive upon a future sale
of the communities using estimated cap rates. We attempt to corroborate the cap
rates we use in these calculations with cap rates observable from recent market
transactions.
Where
required, future cash flows are discounted at a rate that is consistent with a
weighted average cost of capital for a potential market participant. The
weighted average cost of capital is an estimate of the overall after-tax rate of
return required by equity and debt holders of a business
enterprise.
Although
we make every reasonable effort to ensure the accuracy of our estimate of the
fair value of our reporting units, future changes in the assumptions used to
make these estimates could result in the recording of an impairment
loss.
Hedging
We
periodically enter into certain interest rate swap or cap agreements to
effectively convert floating rate debt to a fixed rate basis or to hedge
anticipated future financings. Amounts paid or received under these agreements
are recognized as an adjustment to interest expense when such amounts are
incurred or earned. For effective cash flow hedges, settlement amounts paid or
received in connection with settled or unwound interest rate swap agreements are
deferred and recorded to accumulated other comprehensive income. For effective
fair value hedges, changes in the fair value of the derivative will be offset
against the corresponding change in fair value of the hedged asset or liability
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative’s change
in fair value will be recognized in earnings. All derivative instruments are
recorded at fair value. Derivatives that do not qualify for hedge accounting are
recorded at fair value through earnings.
On
October 1, 2006, we elected to discontinue hedge accounting prospectively for
the previously designated swap instruments. Consequently, the net gain
accumulated in other comprehensive income at that date of approximately $1.3
million related to the previously designated swap instruments is being
reclassified to interest expense over the life of the underlying hedged debt. In
the future, if the underlying hedged debt is extinguished or refinanced, the
remaining unamortized gain or loss in accumulated other comprehensive income
will be recognized in net income.
In
measuring our derivative instruments at fair value, we have considered
nonperformance risk in our valuation. In so doing, we review the
netting arrangement and collateral requirements of each instrument and
counterparty to determine appropriate reductions of credit
exposure. Remaining credit exposure is estimated by reference to
market prices for credit default swaps and/or other methods of estimating
probabilities of default.
Stock-Based
Compensation
We
adopted ASC 718 Compensation –
Stock Compensation in connection with initial grants of restricted stock
effective August 2005, which were converted into shares of our restricted stock
on September 30, 2005 in connection with our formation transaction. This
Statement requires measurement of the cost of employee services received in
exchange for stock compensation based on the grant-date fair value of the
employee stock awards. Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be recognized when
incurred.
Certain
of our employee stock awards vest only upon the achievement of performance
targets. ASC 718 requires recognition of compensation cost only when
achievement of performance conditions is considered probable. Consequently, our
determination of the amount of stock compensation expense requires a significant
level of judgment in estimating the probability of achievement of these
performance targets. Additionally, we must make estimates regarding employee
forfeitures in determining compensation expense. Subsequent changes in actual
experience are monitored and estimates are updated as information is
available.
Litigation
is inherently uncertain and the outcome of individual litigation matters is not
predictable with assurance. We are involved in various legal actions
and claims incidental to the conduct of our business which are comparable to
other companies in the senior living industry, some for specific matters as
described in Note 23 to the consolidated financial statements and others
arising in the ordinary course of business. We have established loss provisions
for matters in which losses are probable and can be reasonably estimated. In
other instances, we may not be able to make a reasonable estimate of any
liability because of uncertainties related to the outcome and/or the amount or
range of losses. Changes in our current estimates, due to unanticipated events
or otherwise, could have a material impact on our financial condition and
results of operations.
New
Accounting Pronouncements
The
information required by this Item is provided in Note 2 of the notes to the
consolidated financial statements contained in “Item 8. Financial Statements and
Supplementary Data”.
Liquidity
and Capital Resources
The
following is a summary of cash flows from operating, investing and financing
activities, as reflected in the Consolidated Statements of Cash Flows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
237,220 |
|
|
$ |
136,767 |
|
|
Cash
used in investing activities
|
|
|
(351,432 |
) |
|
|
(166,439 |
) |
|
Cash
provided by (used in) financing activities
|
|
|
126,609 |
|
|
|
(17,259 |
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
12,397 |
|
|
|
(46,931 |
) |
|
Cash
and cash equivalents at beginning of year
|
|
|
53,973 |
|
|
|
100,904 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
66,370 |
|
|
$ |
53,973 |
|
The
increase in cash provided by operating activities was attributable to improved
operating performance period over period, working capital management and
increased proceeds from deferred revenue related to the opening of a new
entrance fee community in the third quarter of 2009, 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 cash used to acquire assets in two acquisition transactions which
closed in the fourth quarter of 2009, 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 of
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.
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 postings required 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 information
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. As
of February 26, 2010, we have two principal corporate-level debt
obligations: our $100.0 million revolving credit facility and our
secured and unsecured facilities providing for up to $78.5 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 year ended December 31, 2009, we completed a public equity offering which
yielded $163.8 million of net proceeds. In conjunction with the
completion of the offering, we entered into an amendment to our previous credit
facility which, among other things, reduced the maximum revolving loan
commitment to $75.0
million
as discussed below under “Credit Facilities – 2009 Credit
Facility”. Proceeds from the offering were primarily used to repay
the $125.0 million of indebtedness which was outstanding under the previous
credit facility.
At
December 31, 2009, we had $2.3 billion of debt outstanding, excluding our line
of credit and capital lease obligations, at a weighted-average interest rate of
3.85%. At December 31, 2009, we had $351.7 million of capital and
financing lease obligations, there were no borrowings on the revolving loan
facility, $17.3 million of letters of credit had been issued under the credit
facility, and $48.8 million of letters of credit had been issued under separate
secured and unsecured letter of credit facilities. Approximately
$166.2 million of our debt obligations are due on or before December 31,
2010. Although these debt obligations are scheduled to mature on or
prior to December 31, 2010, we have the option, subject to the satisfaction of
customary conditions (such as the absence of a material adverse change), to
extend the maturity of approximately $126.0 million of non-recourse mortgages
payable included in such debt until 2011. We also have substantial
operating lease obligations and capital expenditure requirements. For
the year ending December 31, 2010, we will be required to make approximately
$265.5 million of payments in connection with our existing operating
leases.
We had
$66.4 million of cash and cash equivalents at December 31, 2009, excluding cash
and escrow deposits-restricted and lease security deposits of $200.7
million. Additionally, as of December 31, 2009, we had $57.7 million
available under our previous credit facility, of which $7.7 million could be
drawn as letters of credit.
In late
2008, we began replacing some of our outstanding letters of credit with
restricted cash deposits in order to reduce our letter of credit
needs.
At
December 31, 2009, we had $371.9 million of negative working capital, which
includes the classification of $216.3 million of refundable entrance fees, $13.5
million in tenant deposits and $126.0 million of debt for which we have
extension rights 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 $46.0 million of cash for the year ended December 31,
2009. This includes $25.7 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.
For the
year ending December 31, 2010, we anticipate that we will make investments of
approximately $75.0 million to $100.0 million for capital expenditures,
comprised of approximately $25.0 million to $35.0 million of net recurring
capital expenditures and approximately $50.0 million to $65.0 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), integration
related expenditures (including the cost of developing information systems), and
expenditures supporting the expansion of our ancillary services programs.
We do not anticipate material expenditures in 2010 in connection with our
community expansion and development program. For the year ended
December 31, 2009, we spent approximately $19.5 million for net recurring
capital expenditures, approximately $22.2 million for expenditures relating to
other major projects and corporate initiatives and had a net receipt of cash of
approximately $7.1 million (consisting of $73.1 million for capital expenditures
net of $80.2 million that had been reimbursed as of December 31, 2009) in
connection with our expansion and development program.
During
2010, we anticipate that our capital expenditures will be funded from cash on
hand, cash flows from operations, and amounts drawn on our new 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
during 2008 and the first half of 2009, we focused on integrating previous
acquisitions and on the significant organic growth opportunities inherent in our
growth strategy and engaged in a reduced level of acquisition
activity. As noted elsewhere, we completed two separate acquisitions
during the fourth quarter of 2009. As opportunities arise, we plan to
continue 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 year
ended December 31, 2009, we terminated a number of interest rate
swaps with an aggregate notional amount of $1.1 billion and purchased and
assumed $140.8 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
December 31, 2009, we have $811.4 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 $111.0 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 previous credit facility. We
currently estimate that our existing cash flows from operations, together with
existing working capital, amounts available under our new 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
December 31, 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 were 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.
2009
Credit Facility
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 the $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 was scheduled to
mature on August 31, 2010.
Pursuant
to the terms of the amended credit agreement, certain of our subsidiaries, as
guarantors, guaranteed 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 included, 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 was
the base rate or LIBOR to be less than 3.0%. In connection with the
loan commitments, we paid 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 were cash
collateralized, the letter of credit fee was payable at a rate per annum equal
to 2.0%.
The
amended credit agreement contained 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
contained 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.
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 could 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
December 31, 2009, we had an available secured line of credit of $75.0 million
(including a $25.0 million letter of credit sublimit) and secured and unsecured
letter of credit facilities of up to $78.5 million in the
aggregate. As of December 31, 2009, there were no borrowings under
the revolving loan facility, $17.3 million of letters of credit has been issued
under the amended credit facility, and $48.8 million of letters of credit had
been issued under our secured and unsecured letter of credit
facilities.
2010
Credit Facility
Effective
February 23, 2010, we terminated the $75.0 million revolving credit facility
with Bank of America, N.A. and entered into a credit agreement with General
Electric Capital Corporation, as administrative agent and lender, and the other
lenders from time to time parties thereto. The new facility has a commitment of
$100.0 million, with an option to increase the commitment to $120.0 million, and
is scheduled to mature on June 30, 2013.
The
revolving line of credit may be used to finance acquisitions and fund working
capital and capital expenditures and for other general corporate
purposes.
The new
facility is secured by a first priority lien on certain of our
communities. The availability under the line may vary from time to
time as it is based on borrowing base calculations related to the value and
performance of the communities securing the facility.
Amounts
drawn under the facility will bear interest at 90-day LIBOR plus an applicable
margin, as described below. For purposes of determining the interest
rate, in no event shall LIBOR be less than 2.0%. The applicable
margin varies with the percentage of the total commitment drawn, with a 4.5%
margin at 35% or lower utilization, a 5.0% margin at utilization greater than
35% but less than or equal to 50%, and a 5.5% margin at greater than 50%
utilization. We are also required to pay a quarterly commitment fee
of 1.0% per annum on the unused portion of the facility.
The
credit agreement contains typical affirmative and negative covenants, including
financial covenants with respect to minimum consolidated fixed charge coverage
and minimum consolidated tangible net worth. A violation of any of
these covenants could result in a default under the credit agreement, which
would result in termination of all commitments under the credit agreement and
all amounts owing under the credit agreement and certain other loan agreements
becoming immediately due and payable.
After
giving effect to the new credit facility, as of February 26, 2010, we have an
available secured line of credit with a $100.0 million commitment and separate
letter of credit facilities of up to $78.5 million in the
aggregate.
Contractual
Commitments
The
following table presents a summary of our material indebtedness, including the
related interest payments, lease and other contractual commitments, as of
December 31, 2009.
|
|
|
|
|
|
Payments
Due by Twelve Months Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations(1)(2)
|
|
$ |
2,623,836 |
|
|
$ |
120,535 |
|
|
$ |
497,004 |
|
|
$ |
947,166 |
|
|
$ |
668,628 |
|
|
$ |
155,446 |
|
|
$ |
235,057 |
|
|
Capital
lease obligations(1)
|
|
|
572,425 |
|
|
|
51,109 |
|
|
|
52,528 |
|
|
|
52,888 |
|
|
|
50,529 |
|
|
|
51,844 |
|
|
|
313,527 |
|
|
Operating
lease obligations(3)
|
|
|
2,272,452 |
|
|
|
265,471 |
|
|
|
266,679 |
|
|
|
263,842 |
|
|
|
253,526 |
|
|
|
227,845 |
|
|
|
995,089 |
|
|
Refundable
entrance fee obligations(4)
|
|
|
216,256 |
|
|
|
27,032 |
|
|
|
27,032 |
|
|
|
27,032 |
|
|
|
27,032 |
|
|
|
27,032 |
|
|
|
81,096 |
|
|
Total
contractual obligations
|
|
$ |
5,684,969 |
|
|
$ |
464,147 |
|
|
$ |
843,243 |
|
|
$ |
1,290,928 |
|
|
$ |
999,715 |
|
|
$ |
462,167 |
|
|
$ |
1,624,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial construction commitments
|
|
$ |
4,998 |
|
|
$ |
4,998 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
― |
|
|
$ |
— |
|
|
(1)
|
Includes
contractual interest for all fixed-rate obligations and assumes interest
on variable rate instruments at the December 31, 2009 rate after giving
effect to in-place interest rate
swaps.
|
|
(2)
|
$126.0
million has been classified beyond its 2010 initial maturity date to 2011
due to our option to extend the initial maturity date to 2011, subject to
the satisfaction of customary conditions (such as the absence of a
material adverse change).
|
|
(3)
|
Reflects
future cash payments after giving effect to non-contingent lease
escalators and assumes payments on variable rate instruments at the
December 31, 2009 rate.
|
|
(4)
|
Future
refunds of entrance fees are estimated based on historical payment trends.
These refund obligations are generally offset by proceeds received from
resale of the vacated apartment units. Historically, proceeds from resales
of entrance fee units each year generally offset refunds paid and generate
excess cash to us.
|
The
foregoing amounts exclude outstanding letters of credit of $66.1 million as of
December 31, 2009.
Company
Indebtedness, Long-term Leases and Hedging Agreements
Indebtedness
As of
February 26, 2010, we have two principal corporate-level debt
obligations: our $100.0 million revolving credit facility and
separate letter of credit facilities of up to $78.5 million in the
aggregate. The remainder of our indebtedness is generally comprised
of non-recourse property-level mortgage financings.
As of
December 31, 2009, 2008 and 2007, our outstanding property-level secured debt
and capital leases were $2.6 billion, $2.4 billion, and $2.1 billion,
respectively.
During
2009, we incurred $157.0 million of additional property-level debt primarily
related to the financing of acquisitions, the expansion of certain communities
and the releveraging of certain assets. Approximately $53.0 million
of the new debt was issued at a variable interest rate and the remaining $104.0
million was issued at a fixed interest rate. Refer to the notes to
the consolidated financial statements for a detailed discussion of the new debt
and related terms.
We have
secured our self-insured retention risk under our workers’ compensation and
general liability and professional liability programs and our lease security
deposits with cash and letters of credit aggregating $13.9 million and $46.5
million, and $10.9 and $64.3 million as of December 31, 2009 and 2008,
respectively.
As of December 31, 2009, we are in
compliance with the financial covenants of our outstanding debt, including those
covenants measuring facility operating income to gauge debt
coverage.
Long-Term
Leases
As of
December 31, 2009, we have 359 communities operated under long-term leases. The
leases relating to these communities are generally fixed rate leases with annual
escalators that are either fixed or tied to changes in leased property revenue
or the consumer price index.
Two
portfolio leases have or had a floating-rate debt component built into the lease
payments. We acquired one of the portfolios on December 30,
2005. Prior to the acquisition, the lease payment was a pass through
of debt service, which includes $100.8 million of floating rate tax-exempt debt
that was credit enhanced by Fannie Mae. Our variable rate exposure
under this lease is partially hedged through an interest rate
cap. The second lease includes $80.0 million of variable rate
mortgages and/or tax exempt debt that is credit enhanced by Freddie
Mac.
For the
year ended December 31, 2009, our minimum annual cash lease payments for our
capital/financing leases and operating leases were $46.8 million and $258.9
million, respectively.
As of
December 31, 2009, we are in compliance with the financial covenants of our
capital and operating leases, including those covenants measuring facility
operating income to gauge lease coverage.
Hedging
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 year
ended December 31, 2009, we terminated a number of interest rate
swaps with an aggregate notional amount of $1.1 billion and purchased and
assumed $140.8 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 December 31, 2009, we have $811.4 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
$111.0 million of variable rate debt that is not subject to any cap or swap
agreements.
All
derivative instruments are recognized as either assets or liabilities in the
consolidated balance sheet at fair value.
The
following table summarizes the Company’s swap instruments at December 31, 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 December 31,
2009)
|
|
$ |
(16,950 |
) |
|
Estimated
liability fair value (included in other liabilities at December 31,
2008)
|
|
$ |
(20,931 |
) |
|
Estimated
asset fair value (included in other assets at December 31,
2009)
|
|
$ |
— |
|
|
Estimated
asset fair value (included in other assets at December 31,
2008)
|
|
$ |
— |
|
The
following table summarizes the Company’s cap instruments at December 31, 2009
(dollars in thousands):
|
Current
notional balance
|
|
$ |
811,365 |
|
|
Highest
possible notional
|
|
$ |
811,365 |
|
|
Lowest
interest cap rate
|
|
|
4.96 |
% |
|
Highest
interest cap rate
|
|
|
6.50 |
% |
|
Average
fixed cap rate
|
|
|
5.94 |
% |
|
Earliest
maturity date
|
|
|
2011 |
|
|
Latest
maturity date
|
|
|
2012 |
|
|
Weighted
average original maturity
|
|
3.6
years
|
|
|
Estimated
liability fair value (included in other liabilities at December 31,
2009)
|
|
$ |
— |
|
|
Estimated
liability fair value (included in other liabilities at December 31,
2008)
|
|
$ |
— |
|
|
Estimated
asset fair value (included in other assets at December 31,
2009)
|
|
$ |
1,221 |
|
|
Estimated
asset fair value (included in other assets at December 31,
2008)
|
|
$ |
350 |
|
Impacts
of Inflation
Resident
fees from the communities we own or lease and management fees from communities
we manage for third parties are our primary sources of revenue. These revenues
are affected by the amount of monthly resident fee rates and community occupancy
rates. The rates charged are highly dependent on local market conditions and the
competitive environment in which our communities operate. Substantially all of
our retirement center, assisted living, and CCRC residency agreements allow for
adjustments in the monthly fee payable thereunder not less frequently than every
12 or 13 months thereby enabling us to seek increases in monthly fees due to
inflation, increased levels of care or other factors. Any pricing increase would
be subject to market and competitive conditions and could result in a decrease
in occupancy in the communities. We believe, however, that we would be able to
periodically adjust the monthly fee serves to reduce the adverse effect of
inflation. In addition, employee compensation expense is a principal cost
element of facility operations and is also dependent upon local market
conditions. There can be no assurance that resident fees will increase or that
costs will not increase due to inflation or other causes.
At
December 31, 2009, approximately $1.3 billion of our indebtedness, excluding our
line of credit, bears interest at floating rates. We have mitigated our exposure
to floating rates by using interest rate swaps and interest rate caps under our
debt/lease arrangements. Inflation, and its impact on floating interest rates,
could affect the amount of interest payments due on our line of
credit.
Off-Balance
Sheet Arrangements
The
equity method of accounting has been applied in the accompanying financial
statements with respect to our investment in unconsolidated ventures that are
not considered VIEs 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 is 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;
|
|
|
·
|
loss
on sale of communities;
|
|
|
·
|
depreciation
and amortization (including non-cash impairment
charges);
|
|
|
·
|
straight-line
rent expense (income);
|
|
|
·
|
amortization
of deferred gain;
|
|
|
·
|
amortization
of deferred entrance fees;
|
|
|
·
|
non-cash
compensation expense; and
|
|
|
·
|
change
in future service obligation;
|
and including:
|
|
·
|
entrance
fee receipts and refunds (excluding first generation entrance fee receipts
on a newly opened entrance fee
CCRC).
|
In the
current year, we clarified the definition of Adjusted EBITDA to exclude (a)
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, (b) the change in liability for the obligation to provide future
services under existing lifecare contracts and (c) loss on sale of
communities.
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 the change
in the liability for the obligation to provide future services under existing
lifecare contracts, 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
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 our net loss to Adjusted EBITDA for the years
ended December 31, 2009, 2008 and 2007 (dollars in thousands):
|
|
|
Years
Ended December 31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(162,372 |
) |
|
Benefit
for income taxes
|
|
|
(32,926 |
) |
|
|
(86,731 |
) |
|
|
(101,260 |
) |
|
Other
non-operating income
|
|
|
(4,146 |
) |
|
|
(1,708 |
) |
|
|
(402 |
) |
|
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(440 |
) |
|
|
861 |
|
|
|
3,386 |
|
|
Loss
on extinguishment of debt, net
|
|
|
1,292 |
|
|
|
3,052 |
|
|
|
2,683 |
|
| Interest
expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
99,653 |
|
|
|
119,853 |
|
|
|
114,518 |
|
|
Capitalized
lease obligation
|
|
|
29,216 |
|
|
|
27,536 |
|
|
|
29,473 |
|
|
Amortization
of deferred financing costs and debt discount
|
|
|
9,505 |
|
|
|
9,707 |
|
|
|
7,064 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
(3,765 |
) |
|
|
68,146 |
|
|
|
73,222 |
|
|
Interest
income
|
|
|
(2,354 |
) |
|
|
(7,618 |
) |
|
|
(7,519 |
) |
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
Straight-line
lease expense
|
|
|
15,851 |
|
|
|
20,585 |
|
|
|
25,439 |
|
|
Amortization
of deferred gain
|
|
|
(4,345 |
) |
|
|
(4,342 |
) |
|
|
(4,342 |
) |
|
Amortization
of entrance fees
|
|
|
(21,661 |
) |
|
|
(22,025 |
) |
|
|
(19,241 |
) |
|
Non-cash
compensation expense
|
|
|
26,935 |
|
|
|
28,937 |
|
|
|
20,113 |
|
|
Change
in future service obligation
|
|
|
(2,342 |
) |
|
|
― |
|
|
|
― |
|
|
Entrance
fee receipts(4)
|
|
|
68,875 |
|
|
|
42,472 |
|
|
|
45,249 |
|
|
First
generation entrance fees received(5)
|
|
|
(25,673 |
) |
|
|
― |
|
|
|
― |
|
|
Entrance
fee disbursements
|
|
|
(22,916 |
) |
|
|
(19,150 |
) |
|
|
(19,557 |
) |
|
Adjusted
EBITDA
|
|
$ |
348,555 |
|
|
$ |
302,562 |
|
|
$ |
306,379 |
|
__________
|
(1)
|
The
calculation of Adjusted EBITDA includes transaction-related costs for the
year ended December 31, 2009 of $5.8 million. Integration and
hurricane and named tropical storms expense as well as other non-recurring
costs were $24.3 million and $19.0 million for the year ended December 31,
2008 and December 31, 2007, respectively. The amount for the
year ended December 31, 2008 includes the effect of an $8.0 million
reserve established for certain
litigation.
|
|
(2)
|
Adjusted
EBITDA for the year ended December 31, 2007 includes a non-cash benefit of
$0.3 million related to a reversal of an accrual established in connection
with Alterra’s emergence from bankruptcy in December
2003.
|
|
(3)
|
Adjusted
EBITDA for the year ended December 31, 2007 includes $7.0 million of
charges to facility operating expenses in the quarter ended December 31,
2007, which relates to our desire to conform our policies across all of
our platforms including $5.9 million related to estimated uncollectible
accounts and $1.1 million of accounting conformity adjustments pertaining
to inventory and certain accrual
policies.
|
|
(4)
|
Includes
the receipt of refundable and nonrefundable entrance
fees.
|
|
(5)
|
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;
|
|
|
·
|
first
generation entrance fee receipts on a newly opened entrance fee
CCRC;
|
|
|
·
|
entrance
fee refunds disbursed;
|
|
|
·
|
lease
financing debt amortization with fair market value or no purchase
options;
|
|
|
·
|
recurring
capital expenditures.
|
In the
current year, we clarified the definition of CFFO to exclude 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.
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 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 years ended December 31, 2009, 2008 and 2007 (dollars in
thousands):
|
|
|
Years
Ended December 31,(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
237,220 |
|
|
$ |
136,767 |
|
|
$ |
199,662 |
|
|
Changes
in operating assets and liabilities
|
|
|
4,532 |
|
|
|
25,865 |
|
|
|
(36,571 |
) |
|
Refundable
entrance fees received (4)(5)
|
|
|
30,386 |
|
|
|
19,871 |
|
|
|
25,919 |
|
|
First
generation entrance fees received(6)
|
|
|
(25,673 |
) |
|
|
― |
|
|
|
― |
|
|
Entrance
fee refunds disbursed
|
|
|
(22,916 |
) |
|
|
(19,150 |
) |
|
|
(19,557 |
) |
|
Recurring
capital expenditures
|
|
|
(19,522 |
) |
|
|
(27,312 |
) |
|
|
(25,048 |
) |
|
Lease
financing debt amortization with fair market value or no purchase
options
|
|
|
(7,195 |
) |
|
|
(6,691 |
) |
|
|
(5,594 |
) |
|
Reimbursement
of operating expenses and other
|
|
|
― |
|
|
|
794 |
|
|
|
4,430 |
|
|
Cash
From Facility Operations
|
|
$ |
196,832 |
|
|
$ |
130,144 |
|
|
$ |
143,241 |
|
|
(1)
|
The
calculation of CFFO includes transaction-related costs for the year ended
December 31, 2009 of $5.8 million. Integration and hurricane
and named tropical storms expense as well as other non-recurring costs
were $24.3 million and $19.0 million for the year ended December 31, 2008
and December 31, 2007, respectively. The amount for the year
ended December 31, 2008 includes the effect of an $8.0 million reserve
established for certain litigation.
|
|
(2)
|
The
December 31, 2007 amounts have been reclassified to conform to the
modified definition of CFFO used during the year ended December 31, 2009
and 2008.
|
|
(3)
|
CFFO
for the year ended December 31, 2007 includes $7.0 million of charges to
facility operating expenses in the quarter ended December 31, 2007, which
relates to our desire to conform our policies across all of our platforms
including $5.9 million of estimated uncollectible accounts and $1.1
million of accounting conformity adjustments pertaining to inventory and
certain accrual policies.
|
|
(4)
|
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 year ended December 31, 2009 were $9.3
million. Notes issued (net of collections) for the years ended
December 31, 2008 and 2007 were not
material.
|
|
(5)
|
Total
entrance fee receipts for the year ended December 31, 2009, 2008 and 2007
were $68.9 million, $42.5 million and $45.2 million, respectively,
including $38.5 million, $22.6 million and $19.3 million, respectively, of
nonrefundable entrance fee receipts included in net cash provided by
operating activities.
|
|
(6)
|
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;
|
|
|
·
|
loss
on sale of communities;
|
|
|
·
|
depreciation
and amortization (including non-cash impairment
charges);
|
|
|
·
|
facility
lease expense;
|
|
|
·
|
general
and administrative expense, including non-cash stock compensation
expense;
|
|
|
·
|
change
in future service obligation;
|
|
|
·
|
amortization
of deferred entrance fee revenue;
and
|
In the
current year, we clarified the definition of Facility Operating Income to
exclude (a) the change in the liability for the obligation to provide future
services under existing lifecare contracts and (b) loss on sale of
communities.
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 the change in the liability for the obligation to provide
future services under existing lifecare contracts, 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 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 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
years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(162,372 |
) |
|
Benefit
for income taxes
|
|
|
(32,926 |
) |
|
|
(86,731 |
) |
|
|
(101,260 |
) |
|
Other
non-operating income
|
|
|
(4,146 |
) |
|
|
(1,708 |
) |
|
|
(402 |
) |
|
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(440 |
) |
|
|
861 |
|
|
|
3,386 |
|
|
Loss
on extinguishment of debt, net
|
|
|
1,292 |
|
|
|
3,052 |
|
|
|
2,683 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
99,653 |
|
|
|
119,853 |
|
|
|
114,518 |
|
|
Capitalized
lease obligation
|
|
|
29,216 |
|
|
|
27,536 |
|
|
|
29,473 |
|
|
Amortization
of deferred financing costs and debt discount
|
|
|
9,505 |
|
|
|
9,707 |
|
|
|
7,064 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
(3,765 |
) |
|
|
68,146 |
|
|
|
73,222 |
|
|
Interest
income
|
|
|
(2,354 |
) |
|
|
(7,618 |
) |
|
|
(7,519 |
) |
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
271,628 |
|
|
General
and administrative (including non-cash stock compensation
expense)
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
138,013 |
|
|
Change
in future service obligation
|
|
|
(2,342 |
) |
|
|
― |
|
|
|
― |
|
|
Amortization
of entrance fees
|
|
|
(21,661 |
) |
|
|
(22,025 |
) |
|
|
(19,241 |
) |
|
Management
fees
|
|
|
(6,719 |
) |
|
|
(6,994 |
) |
|
|
(6,789 |
) |
|
Facility
Operating Income
|
|
$ |
690,069 |
|
|
$ |
637,454 |
|
|
$ |
642,329 |
|
__________
|
|
(1)
|
Facility
Operating Income for the year ended December 31, 2007 includes a non-cash
benefit of $0.3 million related to a reversal of an accrual established in
connection with Alterra’s emergence from bankruptcy in December
2003.
|
|
|
(2)
|
Facility
operating income for the year ended December 31, 2007 includes $7.0
million of charges to facility operating expenses in the quarter ended
December 31, 2007, which relates to our desire to conform our policies
across all of our platforms including $5.9 million of estimated
uncollectible accounts and $1.1 million of accounting conformity
adjustments pertaining to inventory and certain accrual
policies.
|
Item
7A. 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 December 31, 2009, we had approximately $993.6 million of
long-term fixed rate debt, $1.1 billion of long-term variable rate debt and
$351.7 million of capital and financing lease obligations. As of December 31,
2009, our total fixed-rate debt and variable-rate debt outstanding had
weighted-average interest rates of 3.85%.
We enter
into certain interest rate swap agreements with major financial institutions to
manage our risk on variable rate debt. Additionally, during 2009 and
2008, we entered into certain cap agreements to effectively manage our risk
above certain interest rates. As of December 31, 2009, $1.4 billion,
or 59.4%, of our debt, excluding capital and financing lease obligations, either
has fixed rates or variable rates that are subject to swap
agreements. As of December 31, 2009, $811.4 million, or 35.7%, of our
debt, excluding capital and financing lease obligations, is subject to cap
agreements. The remaining $111.0 million, or 4.9%, 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 $8.4 million, $44.0 million and $59.1 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
8. Financial
Statements and Supplementary Data.
BROOKDALE
SENIOR LIVING INC.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
71
|
| |
|
|
Report
of Independent Registered Public Accounting Firm
|
72
|
| |
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
73
|
| |
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
74
|
| |
|
|
Consolidated
Statements of Equity for the Years Ended December 31, 2009, 2008 and
2007
|
75
|
| |
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
76
|
| |
|
|
Notes
to Consolidated Financial Statements
|
78
|
| |
|
|
Schedule
II — Valuation and Qualifying Accounts
|
109
|
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Brookdale Senior Living Inc.
We have
audited the accompanying consolidated balance sheets of Brookdale Senior Living
Inc. (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 2009. Our audits also included the
financial statement schedule listed in the accompanying index to the financial
statements. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
February 25, 2010 expressed an unqualified opinion thereon.
|
|
|
/s/
Ernst & Young LLP
|
|
|
Chicago,
Illinois
|
|
|
|
|
25
February, 2010
|
|
|
|
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of Brookdale Senior Living Inc.
We have
audited Brookdale Senior Living Inc.’s (the “Company”) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Assessment of Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2009 and 2008 and the related consolidated statements of
operations, equity, and cash flows for each of the three years in the period
ended December 31, 2009, and our report dated February 25, 2010 expressed an
unqualified opinion thereon.
|
|
|
/s/
Ernst & Young LLP
|
|
|
Chicago,
Illinois
|
|
|
|
|
25
February, 2010
|
|
|
|
BROOKDALE
SENIOR LIVING INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except stock amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
66,370 |
|
|
$ |
53,973 |
|
|
Cash
and escrow deposits – restricted
|
|
|
109,977 |
|
|
|
86,723 |
|
|
Accounts
receivable, net
|
|
|
82,604 |
|
|
|
91,646 |
|
|
Deferred
tax asset
|
|
|
7,688 |
|
|
|
14,677 |
|
|
Prepaid
expenses and other current assets, net
|
|
|
50,782 |
|
|
|
33,766 |
|
|
Total
current assets
|
|
|
317,421 |
|
|
|
280,785 |
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
3,857,774 |
|
|
|
3,697,834 |
|
|
Cash
and escrow deposits – restricted
|
|
|
73,090 |
|
|
|
29,988 |
|
|
Investment
in unconsolidated ventures
|
|
|
20,512 |
|
|
|
28,420 |
|
|
Goodwill
|
|
|
109,835 |
|
|
|
109,967 |
|
|
Other
intangible assets, net
|
|
|
198,043 |
|
|
|
231,589 |
|
|
Other
assets, net
|
|
|
69,268 |
|
|
|
70,675 |
|
|
Total
assets
|
|
$ |
4,645,943 |
|
|
$ |
4,449,258 |
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
166,185 |
|
|
$ |
158,476 |
|
|
Current
portion of line of credit
|
|
|
― |
|
|
|
4,453 |
|
|
Trade
accounts payable
|
|
|
51,612 |
|
|
|
29,105 |
|
|
Accrued
expenses
|
|
|
170,044 |
|
|
|
170,366 |
|
|
Refundable
entrance fees and deferred revenue
|
|
|
287,953 |
|
|
|
256,080 |
|
|
Tenant
security deposits
|
|
|
13,515 |
|
|
|
29,965 |
|
|
Total
current liabilities
|
|
|
689,309 |
|
|
|
648,445 |
|
|
Long-term
debt, less current portion
|
|
|
2,459,341 |
|
|
|
2,235,000 |
|
|
Line
of credit, less current portion
|
|
|
― |
|
|
|
155,000 |
|
|
Deferred
entrance fee revenue
|
|
|
72,026 |
|
|
|
73,977 |
|
|
Deferred
liabilities
|
|
|
148,690 |
|
|
|
135,947 |
|
|
Deferred
tax liability
|
|
|
140,313 |
|
|
|
178,647 |
|
|
Other
liabilities
|
|
|
49,682 |
|
|
|
61,641 |
|
|
Total
liabilities
|
|
|
3,559,361 |
|
|
|
3,488,657 |
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 50,000,000 shares authorized at December 31, 2009
and 2008; no shares issued and outstanding
|
|
|
― |
|
|
|
— |
|
|
Common
stock, $0.01 par value, 200,000,000 shares authorized at December 31, 2009
and 2008; 124,417,940 and 106,467,764 shares issued and 123,206,639 and
105,256,463 shares outstanding (including 3,915,330 and 3,542,801 unvested
restricted shares), respectively
|
|
|
1,232 |
|
|
|
1,053 |
|
|
Additional
paid-in-capital
|
|
|
1,882,377 |
|
|
|
1,690,851 |
|
|
Treasury
stock, at cost; 1,211,301 shares at December 31, 2009 and
2008
|
|
|
(29,187 |
) |
|
|
(29,187 |
) |
|
Accumulated
deficit
|
|
|
(766,975 |
) |
|
|
(700,720 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(865 |
) |
|
|
(1,396 |
) |
|
Total
stockholders’ equity
|
|
|
1,086,582 |
|
|
|
960,601 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
4,645,943 |
|
|
$ |
4,449,258 |
|
See
accompanying notes to consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
$ |
2,016,349 |
|
|
$ |
1,921,060 |
|
|
$ |
1,832,507 |
|
|
Management
fees
|
|
|
6,719 |
|
|
|
6,994 |
|
|
|
6,789 |
|
|
Total
revenue
|
|
|
2,023,068 |
|
|
|
1,928,054 |
|
|
|
1,839,296 |
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense (excluding depreciation and amortization of $184,780,
$195,517 and $222,315, respectively)
|
|
|
1,302,277 |
|
|
|
1,256,781 |
|
|
|
1,170,937 |
|
|
General
and administrative expense (including non-cash stock-based compensation
expense of $26,935, $28,937 and $20,113, respectively)
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
138,013 |
|
|
Hurricane
and named tropical storms expense
|
|
|
― |
|
|
|
4,800 |
|
|
|
— |
|
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
271,628 |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
Total
operating expense
|
|
|
1,993,288 |
|
|
|
2,168,197 |
|
|
|
1,880,503 |
|
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,354 |
|
|
|
7,618 |
|
|
|
7,519 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(128,869 |
) |
|
|
(147,389 |
) |
|
|
(143,991 |
) |
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,505 |
) |
|
|
(9,707 |
) |
|
|
(7,064 |
) |
|
Change
in fair value of derivatives and amortization
|
|
|
3,765 |
|
|
|
(68,146 |
) |
|
|
(73,222 |
) |
|
Loss
on extinguishment of debt, net
|
|
|
(1,292 |
) |
|
|
(3,052 |
) |
|
|
(2,683 |
) |
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
440 |
|
|
|
(861 |
) |
|
|
(3,386 |
) |
|
Other
non-operating income
|
|
|
4,146 |
|
|
|
1,708 |
|
|
|
402 |
|
|
Loss
before income taxes
|
|
|
(99,181 |
) |
|
|
(459,972 |
) |
|
|
(263,632 |
) |
|
Benefit
for income taxes
|
|
|
32,926 |
|
|
|
86,731 |
|
|
|
101,260 |
|
|
Net
loss
|
|
|
(66,255 |
) |
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
Net
loss attributable to noncontrolling interest
|
|
|
― |
|
|
|
— |
|
|
|
393 |
|
|
Net
loss attributable to common stockholders
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(161,979 |
) |
|
Basic
and diluted net loss per share attributable to common
stockholders
|
|
$ |
(0.60 |
) |
|
$ |
(3.67 |
) |
|
$ |
(1.60 |
) |
|
Weighted
average shares used in computing basic and diluted net loss per share
attributable to common stockholders
|
|
|
111,288 |
|
|
|
101,667 |
|
|
|
101,511 |
|
|
Dividends
declared per share
|
|
$ |
― |
|
|
$ |
0.75 |
|
|
$ |
1.95 |
|
See
accompanying notes to consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
CONSOLIDATED
STATEMENTS OF EQUITY
For
the Years Ended December 31, 2009, 2008 and 2007
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In-
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2007
|
|
|
104,543 |
|
|
$ |
1,046 |
|
|
$ |
1,934,570 |
|
|
$ |
— |
|
|
$ |
(170,713 |
) |
|
$ |
(891 |
) |
|
$ |
1,764,012 |
|
|
$ |
4,601 |
|
|
$ |
1,768,613 |
|
|
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
(202,136 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(202,136 |
) |
|
|
— |
|
|
|
(202,136 |
) |
|
Compensation
expense related to restricted stock grants
|
|
|
— |
|
|
|
— |
|
|
|
20,113 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,113 |
|
|
|
— |
|
|
|
20,113 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(161,979 |
) |
|
|
— |
|
|
|
(161,979 |
) |
|
|
(393 |
) |
|
|
(162,372 |
) |
|
Purchase
of noncontrolling interest
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,208 |
) |
|
|
(4,208 |
) |
|
Reclassification
of net gains on derivatives into earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,680 |
) |
|
|
(1,680 |
) |
|
|
— |
|
|
|
(1,680 |
) |
|
Amortization
of payments from settlement of forward interest rate swaps
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
376 |
|
|
|
376 |
|
|
|
— |
|
|
|
376 |
|
|
Unrealized
loss on derivative, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
125 |
|
|
|
125 |
|
|
|
— |
|
|
|
125 |
|
|
Other
|
|
|
419 |
|
|
|
4 |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
669 |
|
|
|
707 |
|
|
|
— |
|
|
|
707 |
|
|
Balances
at December 31, 2007
|
|
|
104,962 |
|
|
|
1,050 |
|
|
|
1,752,581 |
|
|
|
— |
|
|
|
(332,692 |
) |
|
|
(1,401 |
) |
|
|
1,419,538 |
|
|
|
— |
|
|
|
1,419,538 |
|
|
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
(77,559 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(77,559 |
) |
|
|
— |
|
|
|
(77,559 |
) |
|
Compensation
expense related to restricted stock grants
|
|
|
— |
|
|
|
— |
|
|
|
28,937 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,937 |
|
|
|
— |
|
|
|
28,937 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(373,241 |
) |
|
|
— |
|
|
|
(373,241 |
) |
|
|
— |
|
|
|
(373,241 |
) |
|
Reclassification
of net gains on derivatives into earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
262 |
|
|
|
262 |
|
|
|
— |
|
|
|
262 |
|
|
Amortization
of payments from settlement of forward interest rate swaps
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
376 |
|
|
|
376 |
|
|
|
— |
|
|
|
376 |
|
|
Purchase
of Treasury Stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(29,187 |
) |
|
|
— |
|
|
|
— |
|
|
|
(29,187 |
) |
|
|
— |
|
|
|
(29,187 |
) |
|
Deconsolidation
of an entity pursuant to FIN 46(R)
|
|
|
— |
|
|
|
— |
|
|
|
(13,287 |
) |
|
|
— |
|
|
|
5,212 |
|
|
|
— |
|
|
|
(8,075 |
) |
|
|
— |
|
|
|
(8,075 |
) |
|
Other
|
|
|
294 |
|
|
|
3 |
|
|
|
179 |
|
|
|
— |
|
|
|
1 |
|
|
|
(633 |
) |
|
|
(450 |
) |
|
|
— |
|
|
|
(450 |
) |
|
Balances
at December 31, 2008
|
|
|
105,256 |
|
|
|
1,053 |
|
|
|
1,690,851 |
|
|
|
(29,187 |
) |
|
|
(700,720 |
) |
|
|
(1,396 |
) |
|
|
960,601 |
|
|
|
— |
|
|
|
960,601 |
|
|
Compensation
expense related to restricted stock and restricted stock unit
grants
|
|
|
― |
|
|
|
― |
|
|
|
26,935 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
26,935 |
|
|
|
— |
|
|
|
26,935 |
|
|
Net
loss
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
(66,255 |
) |
|
|
― |
|
|
|
(66,255 |
) |
|
|
— |
|
|
|
(66,255 |
) |
|
Issuance
of common stock under Associate Stock Purchase Plan
|
|
|
109 |
|
|
|
1 |
|
|
|
1,006 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
1,007 |
|
|
|
— |
|
|
|
1,007 |
|
|
Restricted
stock, net
|
|
|
1,794 |
|
|
|
18 |
|
|
|
(18 |
) |
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
Reclassification
of net loss on derivatives into earnings
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
493 |
|
|
|
493 |
|
|
|
— |
|
|
|
493 |
|
|
Amortization
of payments from settlement of forward interest rate swaps
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
376 |
|
|
|
376 |
|
|
|
— |
|
|
|
376 |
|
|
Issuance
of common stock from equity offering, net
|
|
|
16,047 |
|
|
|
160 |
|
|
|
163,611 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
163,771 |
|
|
|
— |
|
|
|
163,771 |
|
|
Other
|
|
|
― |
|
|
|
― |
|
|
|
(8 |
) |
|
|
― |
|
|
|
― |
|
|
|
(338 |
) |
|
|
(346 |
) |
|
|
— |
|
|
|
(346 |
) |
|
Balances
at December 31, 2009
|
|
|
123,206 |
|
|
$ |
1,232 |
|
|
$ |
1,882,377 |
|
|
$ |
(29,187 |
) |
|
$ |
(766,975 |
) |
|
$ |
(865 |
) |
|
$ |
1,086,582 |
|
|
$ |
— |
|
|
$ |
1,086,582 |
|
See
accompanying notes to consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(162,372 |
) |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
portion of loss on extinguishment of debt
|
|
|
1,292 |
|
|
|
3,052 |
|
|
|
2,683 |
|
|
Depreciation
and amortization
|
|
|
281,440 |
|
|
|
285,909 |
|
|
|
306,989 |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
Gain
on sale of assets
|
|
|
(2,241 |
) |
|
|
(2,131 |
) |
|
|
(457 |
) |
|
Equity
in (earnings) loss of unconsolidated ventures
|
|
|
(440 |
) |
|
|
861 |
|
|
|
3,386 |
|
|
Distributions
from unconsolidated ventures from cumulative share of net
earnings
|
|
|
405 |
|
|
|
3,752 |
|
|
|
1,521 |
|
|
Amortization
of deferred gain
|
|
|
(4,345 |
) |
|
|
(4,342 |
) |
|
|
(4,342 |
) |
|
Amortization
of entrance fees
|
|
|
(21,661 |
) |
|
|
(22,025 |
) |
|
|
(19,241 |
) |
|
Proceeds
from deferred entrance fee revenue
|
|
|
38,489 |
|
|
|
22,601 |
|
|
|
19,330 |
|
|
Deferred
income tax benefit
|
|
|
(31,684 |
) |
|
|
(89,498 |
) |
|
|
(103,180 |
) |
|
Change
in deferred lease liability
|
|
|
15,851 |
|
|
|
20,585 |
|
|
|
25,439 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
(3,765 |
) |
|
|
68,146 |
|
|
|
73,222 |
|
|
Change
in future service obligation
|
|
|
(2,342 |
) |
|
|
― |
|
|
|
― |
|
|
Non-cash
stock-based compensation
|
|
|
26,935 |
|
|
|
28,937 |
|
|
|
20,113 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
11,784 |
|
|
|
(25,150 |
) |
|
|
(6,134 |
) |
|
Prepaid
expenses and other assets, net
|
|
|
(28,426 |
) |
|
|
(12,664 |
) |
|
|
3,333 |
|
|
Accounts
payable and accrued expenses
|
|
|
21,287 |
|
|
|
15,428 |
|
|
|
21,512 |
|
|
Tenant
refundable fees and security deposits
|
|
|
(16,770 |
) |
|
|
(1,293 |
) |
|
|
6,410 |
|
|
Deferred
revenue
|
|
|
7,593 |
|
|
|
(2,186 |
) |
|
|
11,450 |
|
|
Net
cash provided by operating activities
|
|
|
237,220 |
|
|
|
136,767 |
|
|
|
199,662 |
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in lease security deposits and lease acquisition deposits,
net
|
|
|
2,441 |
|
|
|
3,481 |
|
|
|
2,620 |
|
|
Increase
in cash and escrow deposits – restricted
|
|
|
(64,540 |
) |
|
|
(21,760 |
) |
|
|
(15,002 |
) |
|
Net
proceeds from sale of assets
|
|
|
14,941 |
|
|
|
2,935 |
|
|
|
6,700 |
|
|
Distributions
received from unconsolidated ventures
|
|
|
1,061 |
|
|
|
3,916 |
|
|
|
2,038 |
|
|
Additions
to property, plant and equipment, and leasehold intangibles, net of
related payables
|
|
|
(117,453 |
) |
|
|
(189,028 |
) |
|
|
(169,556 |
) |
|
Acquisition
of assets, net of related payables and cash received
|
|
|
(204,137 |
) |
|
|
(6,731 |
) |
|
|
(172,101 |
) |
|
(Issuance
of) payment on notes receivable, net
|
|
|
(508 |
) |
|
|
39,362 |
|
|
|
(11,133 |
) |
|
Investment
in unconsolidated ventures
|
|
|
(1,246 |
) |
|
|
(2,779 |
) |
|
|
(1,985 |
) |
|
Proceeds
from sale leaseback transaction
|
|
|
9,166 |
|
|
|
― |
|
|
|
― |
|
|
Proceeds
from sale of unconsolidated venture
|
|
|
8,843 |
|
|
|
4,165 |
|
|
|
— |
|
|
Net
cash used in investing activities
|
|
|
(351,432 |
) |
|
|
(166,439 |
) |
|
|
(358,419 |
) |
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
157,039 |
|
|
|
511,344 |
|
|
|
591,524 |
|
|
Repayment
of debt and capital lease obligation
|
|
|
(32,587 |
) |
|
|
(255,489 |
) |
|
|
(115,253 |
) |
|
Buyout
of capital lease obligation
|
|
|
― |
|
|
|
— |
|
|
|
(51,114 |
) |
|
Proceeds
from line of credit
|
|
|
60,446 |
|
|
|
339,453 |
|
|
|
671,500 |
|
|
Repayment
of line of credit
|
|
|
(219,899 |
) |
|
|
(378,000 |
) |
|
|
(637,000 |
) |
|
Payment
of dividends
|
|
|
― |
|
|
|
(129,455 |
) |
|
|
(196,827 |
) |
|
Payment
of financing costs, net of related payables
|
|
|
(8,700 |
) |
|
|
(14,292 |
) |
|
|
(14,012 |
) |
|
Proceeds
from public equity offering, net
|
|
|
163,771 |
|
|
|
― |
|
|
|
― |
|
|
Cash
portion of loss on extinguishment of debt
|
|
|
― |
|
|
|
(1,240 |
) |
|
|
(2,040 |
) |
|
Other
|
|
|
(931 |
) |
|
|
(2,974 |
) |
|
|
(1,010 |
) |
|
Refundable
entrance fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from refundable entrance fees
|
|
|
30,386 |
|
|
|
19,871 |
|
|
|
25,919 |
|
|
Refunds
of entrance fees
|
|
|
(22,916 |
) |
|
|
(19,150 |
) |
|
|
(19,557 |
) |
|
Recouponing
and payment of swap termination
|
|
|
― |
|
|
|
(58,140 |
) |
|
|
(60,503 |
) |
|
Purchase
of treasury stock
|
|
|
― |
|
|
|
(29,187 |
) |
|
|
— |
|
|
Net
cash provided by (used in) financing activities
|
|
|
126,609 |
|
|
|
(17,259 |
) |
|
|
191,627 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
12,397 |
|
|
|
(46,931 |
) |
|
|
32,870 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
53,973 |
|
|
|
100,904 |
|
|
|
68,034 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
66,370 |
|
|
$ |
53,973 |
|
|
$ |
100,904 |
|
See
accompanying notes to consolidated financial statements.
BROOKDALE
SENIOR LIVING INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and Organization
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”).
The
Company was formed as a Delaware corporation on June 28, 2005. Under its
Certificate of Incorporation, the Company was initially authorized to issue up
to 5,000,000 shares of common stock and 5,000,000 shares of preferred stock. On
September 30, 2005, the Company’s Certificate of Incorporation was amended and
restated to authorize up to 200,000,000 shares of common stock and 50,000,000
shares of preferred stock.
2.
Summary of Significant Accounting Policies
The
consolidated financial statements have been prepared on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles
(“GAAP”). The significant accounting policies are summarized
below:
Principles
of Consolidation
The
consolidated financial statements include BSL and its wholly-owned subsidiaries
Brookdale Living Communities, Inc. (“BLC”), Brookdale Senior Living Communities,
Inc. (formerly known as Alterra Healthcare Corporation) (“Alterra”), Fortress
CCRC Acquisition LLC (“Fortress CCRC”) and American Retirement Corporation
(“ARC”). In December 2003, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Codification (“ASC”) 810 - Consolidation of Variable Interest
Entities (“ASC 810”). ASC 810 addresses the consolidation by
business enterprises of primary beneficiaries in variable interest entities
(“VIE”) as defined in the guidance. A company that holds variable
interests in an entity will need to consolidate the entity if its interest in
the VIE is such that it will absorb a majority of the VIE’s losses and/or
receive a majority of expected residual returns, if they occur. As of December
31, 2009 and 2008, the Company had no communities considered VIEs which were
consolidated pursuant to ASC 810. Investments in affiliated companies
that the Company does not control, but has the ability to exercise significant
influence over governance and operations, are accounted for by the equity
method.
The
results of facilities and companies acquired are included in the consolidated
financial statements from the effective date of the respective acquisition. All
significant intercompany balances and transactions have been
eliminated.
Use
of Estimates
The
preparation of the financial statements and related disclosures in conformity
with U.S. generally accepted accounting principles (“GAAP”) requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Estimates
are used for, but not limited to, the evaluation of goodwill and asset
impairments, the accounting for future service obligations, self-insurance
reserves, performance-based compensation, the allowance for doubtful accounts,
depreciation and amortization, income taxes and other
contingencies. Although these estimates are based on management’s
best knowledge of current events and actions that the Company may undertake in
the future, actual results may be different from the estimates.
Revenue
Recognition
Resident
Fees
Resident
fee revenue is recorded when services are rendered and consists 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 upon the sale of the
unit, or in certain agreements, upon the resale of a comparable unit or 12
months after the resident vacates the unit. In such instances the
refundable portion of the fee is not amortized and included in refundable
entrance fees and deferred revenue.
Certain
contracts require the refundable portion of the entrance fee plus a percentage
of the appreciation of the unit, if any, to be refunded only upon resale of a
comparable unit (“contingently refundable”). Upon resale the Company
may receive reoccupancy proceeds in the form of additional contingently
refundable fees, refundable fees, or non-refundable fees. The Company
estimates the amount of reoccupancy proceeds to be received from additional
contingently refundable fees or non-refundable fees and records such amount as
deferred revenue. The deferred revenue is amortized over the life of
the community and was approximately $61.8 million and $63.4 million at December
31, 2009 and 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).
Purchase
Accounting
In
determining the allocation of the purchase price of companies and communities to
net tangible and identified intangible assets acquired and liabilities assumed,
the Company makes estimates of the fair value of the tangible and intangible
assets acquired and liabilities assumed using information obtained as a result
of pre-acquisition due diligence, marketing, leasing activities and independent
appraisals. The Company allocates the purchase price of communities to net
tangible and identified intangible assets acquired and liabilities assumed based
on their fair values in accordance with the provisions of ASC 805 - Business Combinations (“ASC
805”). The
determination of fair value involves the use of significant judgment and
estimation. The Company determines fair
values as
follows:
Current
assets and current liabilities assumed are valued at carryover basis which
approximates fair value.
Property,
plant and equipment are valued utilizing discounted cash flow projections that
assume certain future revenue and costs, and consider capitalization and
discount rates using current market conditions.
The
Company allocates a portion of the purchase price to the value of resident
leases acquired based on the difference between the communities valued with
existing in-place leases adjusted to market rental rates and the communities
valued with current leases in place based on current contractual terms. Factors
management considers in its analysis include an estimate of carrying costs
during the expected lease-up periods considering current market conditions and
costs to execute similar resident leases. In estimating carrying costs,
management includes estimates of lost rentals during the lease-up period and
estimated costs to execute similar leases. The value of in-place leases is
amortized to expense over the remaining initial term of the respective
leases.
Leasehold
operating intangibles are valued utilizing discounted cash flow projections that
assume certain future revenues and costs over the remaining lease term. The
value assigned to leasehold operating intangibles is amortized on a
straight-line basis over the lease term.
Community
purchase options are valued at the estimated value of the underlying community
less the cost of the option payment discounted at current market
rates. Management contracts and other acquired contracts are valued
at a multiple of management fees and operating income and amortized over the
estimated term of the agreement.
Long-term
debt assumed is recorded at fair market value based on the current market rates
and collateral securing the indebtedness. Any debt premium or
discount recorded is amortized over the related debt maturity
period.
Capital
lease obligations are valued based on the present value of the minimum lease
payments applying a discount rate equal to the Company’s estimated incremental
borrowing rate at the date of acquisition.
Deferred
entrance fee revenue is valued at the estimated cost of providing services to
residents over the terms of the current contracts to provide such services.
Refundable entrance fees are valued at cost pursuant to the resident lease plus
the resident's share of any appreciation of the community unit at the date of
acquisition, if applicable.
A
deferred tax liability is recognized at statutory rates for the difference
between the book and tax bases of the acquired assets and
liabilities.
The
excess of the fair value of liabilities assumed and cash paid over the fair
value of assets acquired is allocated to goodwill.
Deferred
Costs
Deferred
financing and lease costs are recorded in other assets and amortized on a
straight-line basis, which approximates the level yield method, over the term of
the related debt or lease.
Income
Taxes
Income
taxes are accounted for under the asset and liability approach which requires
recognition of deferred tax assets and liabilities for the differences between
the financial reporting and tax bases of assets and liabilities. A valuation
allowance reduces deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. To the extent
the Company’s valuation allowance is reduced or eliminated as a result of a
business combination, the reduction in the valuation allowance is recorded as
part of the purchase price allocation.
Fair
Value of Financial Instruments
Cash and
cash equivalents, cash and escrow deposits-restricted and derivative financial
instruments are reflected in the accompanying 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 $2.6 billion as of December 31, 2009 and 2008. As of December 31,
2009 and 2008, the fair value of debt was $2.6 billion and $2.4 billion,
respectively.
ASC 820 - Fair
Value Measurement (“ASC 820”)
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
18).
Cash
and Cash Equivalents
The
Company defines cash and cash equivalents as cash and investments with
maturities of 90 days or less when purchased.
Cash
and Escrow Deposits - Restricted
Cash and
escrow deposits - restricted consist principally of deposits required by certain
lenders and lessors pursuant to the applicable agreement and consist of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Real
estate taxes
|
|
$ |
26,909 |
|
|
$ |
35,855 |
|
|
Tenant
security deposits
|
|
|
6,861 |
|
|
|
10,175 |
|
|
Insurance
reserves
|
|
|
7,578 |
|
|
|
― |
|
|
Replacement
reserve and other
|
|
|
68,629 |
|
|
|
40,693 |
|
|
Subtotal
|
|
|
109,977 |
|
|
|
86,723 |
|
|
Long
term:
|
|
|
|
|
|
|
|
|
|
Insurance
reserves
|
|
|
6,865 |
|
|
|
11,346 |
|
|
Debt
service and other deposits
|
|
|
66,225 |
|
|
|
18,642 |
|
|
Subtotal
|
|
|
73,090 |
|
|
|
29,988 |
|
|
Total
|
|
$ |
183,067 |
|
|
$ |
116,711 |
|
As of
December 31, 2009 and 2008, ten communities located in Illinois are required to
make escrow deposits under the Illinois Life Care Facility Act. As of
December 31, 2009 and 2008, required deposits were $16.5 million and $20.8
million, respectively, all of which were made in the form of letters of
credit.
Accounts
Receivable
Accounts
receivable are reported net of an allowance for doubtful accounts, to represent
the Company’s estimate of the amount that ultimately will be realized in cash.
The allowance for doubtful accounts was $10.6 million and $13.3 million as of
December 31, 2009 and 2008, respectively. The adequacy of the
Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using
historical payment trends, write-off experience, analyses of receivable
portfolios by payor source and aging of receivables, as well as a review of
specific accounts, and adjustments are made to the allowance as
necessary.
Approximately
83.0% and 86.2% of the Company’s resident and healthcare revenues for the year
ended December 31, 2009 and 2008, respectively, were derived from private pay
customers and 17.0% and 13.8% of the Company’s resident and healthcare revenues
for the year ended December 31, 2009 and 2008, respectively, were derived from
services covered by various third-party payor programs, including Medicare and
Medicaid. Billings for services under third-party payor programs are
recorded net of estimated retroactive adjustments, if any, under reimbursement
programs. Retroactive adjustments are accrued on an estimated basis in the
period the related services are rendered and adjusted in future periods or as
final settlements are determined. Contractual or cost related adjustments from
Medicare or Medicaid are accrued when assessed (without regard to when the
assessment is paid or withheld). Subsequent positive or negative
adjustments to these accrued amounts are recorded in net revenues when
known.
Property,
Plant and Equipment and Leasehold Intangibles
Property,
plant and equipment and leasehold intangibles, which include amounts recorded
under capital leases, are recorded at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets, which are as follows:
|
|
Estimated
Useful
Life
(in
years)
|
|
Buildings
and improvements
|
40
|
|
Leasehold
improvements
|
1 –
18
|
|
Furniture
and equipment
|
3 –
7
|
|
Resident
lease intangibles
|
1 –
4
|
|
Leasehold
operating intangibles
|
1 –
18
|
Expenditures
for ordinary maintenance and repairs are expensed to operations as incurred.
Renovations and improvements, which improve and/or extend the useful life of the
asset, are capitalized and depreciated over their estimated useful life, or if
the renovations or improvements are made with respect to communities subject to
an operating lease, over the shorter of the estimated useful life of the
renovations or improvements, or the term of the operating lease. Facility
operating expense excludes depreciation and amortization directly attributable
to the operation of the facility.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets held for use are
assessed by a comparison of the carrying amount of the asset to the estimated
future undiscounted net cash flows expected to be generated by the
asset. If estimated future undiscounted net cash flows are less than
the carrying amount of the asset then the fair value of the asset is
estimated. The impairment expense is determined by comparing the
estimated fair value of the asset to its carrying value, with any shortfall from
fair value recognized as an expense in the current period.
Goodwill
and Intangible Assets
Goodwill
is not amortized but is reviewed for impairment annually or more frequently if
indicators arise. The evaluation is based upon a comparison of the
estimated fair value of the reporting unit to which the goodwill has been
assigned with the reporting unit’s carrying value. The fair values
used in this evaluation are estimated based upon discounted future cash flow
projections for the reporting unit. These cash flow projections are
based upon a number of estimates and assumptions such as revenue and expense
growth rates, capitalization rates and discount rates. Acquired
intangible assets are initially valued at fair market value using generally
accepted valuation
methods
appropriate for the type of intangible asset. Intangible assets with
definite lives are amortized over their estimated useful lives and all
intangible assets are reviewed for impairment if indicators of impairment
arise. The evaluation of impairment is based upon a comparison of the
carrying amount of the asset to the estimated future undiscounted net cash flows
expected to be generated by the asset. If estimated future
undiscounted net cash flows are less than the carrying amount of the asset, then
the fair value of the asset is estimated. The impairment expense is
determined by comparing the estimated fair value of the intangible asset to its
carrying value, with any shortfall from fair value recognized as an expense in
the current period.
Amortization
of the Company’s definite lived intangible assets is computed using the
straight-line method over the estimated useful lives of the assets, which are as
follows:
|
|
Estimated
Useful
Life
(in
years)
|
|
Facility
purchase options
|
40
|
|
Management
contracts and other
|
3 –
5
|
Stock-Based
Compensation
The
Company adopted the FASB guidance on Accounting for Share-based Payments in
connection with initial grants of restricted stock effective August 2005, which
were converted into shares of the Company’s restricted stock on September 30,
2005 in connection with the Company’s formation transaction. This guidance
requires measurement of the cost of employee services received in exchange for
stock compensation based on the grant-date fair value of the employee stock
awards. Such cost is recognized as compensation expense ratably over the
employee’s requisite service period. Incremental compensation costs
arising from subsequent modifications of awards after the grant date must be
recognized when incurred.
Certain
of the Company’s employee stock awards vest only upon the achievement of
performance targets. ASC 718 - Stock Compensation (“ASC
718”) requires recognition of compensation cost only when achievement of
performance conditions is considered probable. Consequently, the Company’s
determination of the amount of stock compensation expense requires a significant
level of judgment in estimating the probability of achievement of these
performance targets. Additionally, the Company must make estimates regarding
employee forfeitures in determining compensation expense. Subsequent changes in
actual experience are monitored and estimates are updated as information is
available.
Derivative
Financial Instruments
In the
normal course of business, a variety of financial instruments are used to manage
or hedge interest rate risk. The Company entered into certain interest rate
protection and swap agreements to effectively cap or convert floating rate debt
to a fixed rate basis, as well as to hedge anticipated future financing
transactions. All derivative instruments are recognized as either assets or
liabilities in the 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 income (loss) depending upon whether it has been
designated and qualifies as an accounting hedge.
Prior to
October 1, 2006, the Company qualified for hedge accounting on designated swap
instruments pursuant to ASC 815 - Derivatives and Hedging (“ASC
815”) with the effective portion of the change in fair value of the derivative
recorded in other comprehensive income and the ineffective portion included in
the change in fair value of derivatives in the statement of
operations.
On
October 1, 2006, the Company elected to discontinue hedge accounting
prospectively for the previously designated swap instruments. Consequently, the
net gains and losses accumulated in other comprehensive income at that date of
$1.3 million related to the previously designated swap instruments are being
amortized to interest expense over the life of the underlying hedged debt
payments. In the future, if the underlying hedged debt is extinguished or
refinanced, the remaining unamortized gain or loss in accumulated other
comprehensive income will be recognized in net income. Although hedge accounting
was discontinued on October 1, 2006, some of the swap instruments remain
outstanding and are carried at fair value in the consolidated balance sheet and
the change in fair value beginning October 1, 2006 has been included in the
statements of operations.
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.
Obligation
to Provide Future Services
Annually,
the Company calculates the present value of the estimated net cost of future
services and the use of communities to be provided to current residents of
certain of its CCRCs and compares that amount with the balance of non-refundable
deferred revenue from entrance fees received. If the present value of the
estimated net cost of future services and the use of communities exceeds the
non-refundable deferred revenue from entrance fees, a liability is recorded
(obligation to provide future services and use of communities) with a
corresponding charge to income.
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
policy provides for deductibles for each and every claim ($3.0 million on or
prior to December 31, 2008, $250,000 effective January 1, 2009 and $150,000
effective January 1, 2010). As a result, the Company is, in effect,
self-insured for claims that are less than $150,000. 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.
Community
Leases
The
Company, as lessee, makes a determination with respect to each of the community
leases whether each should be accounted for as operating leases or capital
leases. The classification criteria is based on estimates regarding the fair
value of the leased community, minimum lease payments, effective cost of funds,
the economic life of the community and certain other terms in the lease
agreements. In a business combination, the Company assumes the lease
classification previously determined by the prior lessee absent a modification,
as determined by ASC 840 – Leases (“ASC 840”), in the
assumed lease agreement. Payments made under operating leases are accounted for
in the Company’s statement of operations as lease expense for actual rent paid
plus or minus a straight-line adjustment for estimated minimum lease escalators
and amortization of deferred gains in situations where sale-leaseback
transactions have occurred. For communities under capital lease and lease
financing obligation arrangements, a liability is established on the Company’s
balance sheet representing the present value of the future minimum lease
payments and a corresponding long-term asset is recorded in property, plant and
equipment and leasehold intangibles in the consolidated balance sheet. The asset
is depreciated over the remaining lease term unless there is a bargain purchase
option in which case the asset is depreciated over the useful life. Leasehold
improvements purchased during the term of the lease are amortized over the
shorter of their economic life or the lease term.
All of
the Company’s leases contain fixed or formula based rent escalators. To the
extent that the escalator increases are tied to a fixed index or rate, lease
payments are accounted for on a straight-line basis over the life of the lease.
In addition, all rent-free or rent holiday periods are recognized in lease
expense on a straight-line basis over the leased term, including the rent
holiday period.
Sale-leaseback
accounting is applied to transactions in which an owned community is sold and
leased back from the buyer. Under sale-leaseback accounting, the Company removes
the community and related liabilities from the balance sheet. Gain on the sale
is deferred and recognized as a reduction of rent expense for operating leases
and a reduction of interest expense for capital leases.
For
leases in which the Company is involved with the construction of the building,
the Company accounts for the lease during the construction period under the
provisions of ASC 840. If the Company concludes that it has
substantively all of the risks of ownership during construction of a leased
property and therefore is deemed the owner of the project for accounting
purposes, it records an asset and related financing obligation for the amount of
total project costs related to construction in progress. Once
construction is complete, the Company considers the requirements under ASC
840-40 – Leases –
Sale-Leaseback Transactions. If the arrangement does not
qualify for sale-leaseback accounting, the Company continues to amortize the
financing obligation and depreciate the building over the lease
term.
Treasury
Stock
The
Company accounts for treasury stock under the cost method and includes treasury
stock as a component of stockholders’ equity.
Dividends
On
December 30, 2008, the Company’s board of directors voted to suspend the
Company’s quarterly cash dividend indefinitely.
New
Accounting Pronouncements
The
Company follows accounting standards set by the FASB. The FASB sets 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.
ASC 805 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. It establishes
principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. For the year ended December 31, 2009 the Company
recognized approximately $4.9 million of acquisition-related costs as general
and administrative expense in the consolidated statement of operations which
would previously have been capitalizable as part of the acquisition purchase
price.
The
Company adopted ASC 810 – Consolidations (“ASC 810”)
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. The adoption had an impact
on the presentation of prior year consolidated financial statements included
herein.
In
February 2008, the FASB issued ASC 820 – Fair Value Measurements and
Disclosures (“ASC 820”) 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. Other than
the required disclosures, the adoption of the guidance had no impact on the
consolidated financial statements.
The
Company adopted the provision of the ASC 815 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 an immaterial impact on the consolidated
financial statements.
The
Company adopted the provisions of ASC 250 – Intangibles—Goodwill and
Other (“ASC 250”) 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 an immaterial impact on the consolidated
financial statements.
The
Company adopted the provisions of ASC 260 – Earnings per Share (“ASC
260”) as they relate to the Emerging Issues Task Force (“EITF”) guidance on
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities on January 1, 2009. ASC 260 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
consolidated financial statements.
The
Company adopted ASC 825 – Financial Instruments (“ASC
825”) 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 consolidated financial
statements.
The
Company adopted the provisions of ASC 805 relating 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 adopted
this guidance in the current year and accordingly accounted for the current-year
acquisitions under the provisions of the guidance.
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 consolidated
financial statements.
In
January 2010, the FASB issued Accounting Standard Updated (“ASU”) 2010-6, Improving Disclosures About Fair
Value Measurements (“ASU 2010-6”), which requires reporting entities to
make new disclosures about recurring or nonrecurring fair-value measurements
including significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair- value measurements. ASU
2010-6 is effective for annual reporting periods beginning after December 15,
2009, except for Level 3 reconciliation disclosures which are effective for
annual periods beginning after December 15, 2010. The Company does not expect
the adoption of ASU 2010-6 to have a material impact on its consolidated
financial statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current financial
statement presentation, with no effect on the Company’s consolidated financial
position or results of operations. Operating results of communities
are reflected in the results of the segment in which they are classified as of
the end of the period. Prior period results are recast to conform to
the current period-end roll-up of communities by segment.
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
fiscal 2009, 2008 and 2007, the Company reported a consolidated net
loss. As a result of the net loss, unvested restricted stock awards
and restricted stock units were antidilutive for the year and were not included
in the computation of diluted weighted average shares. The weighted
average unrestricted restricted stock grants and restricted stock units excluded
from the calculations of diluted net loss per share was 1.3 million, 1.7 million
and 1.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
4.
Acquisitions
The
Company’s financial results are impacted by the timing, size and number of
acquisitions and leases the Company completes in a period. The number of
facilities owned or leased by the Company increased by a net 20 communities
during the year ended December 31, 2009. The results of facilities
and companies acquired are included in the consolidated financial statements
from the effective date of the acquisition.
2009
Acquisitions
Effective
November 18, 2009, the Company acquired 18 senior living communities in an asset
acquisition from affiliates of Sunrise Senior Living, Inc.
(“Sunrise”). The aggregate net purchase price for the 18 communities
acquired was $190.0 million. Transaction expenses of approximately
$2.4 million were incurred and were recorded as general and administrative
expense in the current year. In connection with the acquisition, the
Company assumed approximately $98.8 million of non-recourse mortgage debt which
had an acquisition date fair value of approximately $92.0 million, with the
balance of the purchase price paid from cash on hand. The results of
operations of the acquired communities are included in the Assisted Living
segment.
Effective
December 17, 2009, the Company acquired the remaining interest in three
retirement center communities that were previously managed by the Company and in
which the Company previously had a noncontrolling interest. The
Company’s interest was previously accounted for under the equity method and had
a fair value and carrying value of zero prior to the acquisition. The
aggregate purchase price for the communities was $102.0
million. Transaction expenses of $0.3 million were incurred and were
recorded as general and administrative expense in the current
year. The Company financed the transaction by obtaining a $75.4
million non-recourse mortgage loan with the balance of the purchase price paid
from cash on hand. The mortgage debt has a ten year term and bears
interest at a fixed rate of 6.09%. The results of operations of the
acquired communities are included in the Retirement Center segment.
During
the year ended December 31, 2009, the Company purchased three home health
agencies as part of its growth strategy for an aggregate purchase price of
approximately $1.5 million. The entire purchase price of the
acquisitions has been ascribed to an indefinite useful life intangible and
recorded on the consolidated balance sheet under other intangible assets,
net.
2008
Acquisitions
During
the year ended December 31, 2008, the Company purchased 11 home health agencies
as part of its growth strategy for an aggregate purchase price of approximately
$6.7 million. The entire purchase price of the acquisitions has been
ascribed to an indefinite useful life intangible and recorded on the
consolidated balance sheet under other intangible assets, net.
5.
Investment in Unconsolidated Ventures
The
Company had investments in unconsolidated joint ventures of 20% in each of five
entities at December 31, 2009. The Company sold its 10% investment in
one joint venture during the first quarter of 2009 for $14.3
million. During the fourth quarter of 2009 the Company purchased the
majority interest of one of its joint ventures from the other partner (Note
4).
At
December 31, 2008, the Company had investments in unconsolidated joint ventures
ranging from 10% to 25% in seven entities. The Company sold its 49%
investment in one joint venture during the third quarter of 2008 for $4.2
million, the loss on sale of which is reported in other non-operating income in
the consolidated statements of operations.
Combined
summarized financial information of the unconsolidated joint ventures accounted
for using the equity method as of December 31, and for the years then ended are
as follows (including the results of acquired joint venture prior to the
effective date of the acquisition and divested joint venture through the
effective date of the divestiture) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
100,854 |
|
|
$ |
113,246 |
|
|
$ |
133,103 |
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense
|
|
|
63,068 |
|
|
|
73,126 |
|
|
|
88,641 |
|
|
Depreciation
and amortization
|
|
|
15,726 |
|
|
|
17,186 |
|
|
|
21,557 |
|
|
Interest
expense
|
|
|
19,616 |
|
|
|
17,975 |
|
|
|
22,347 |
|
|
Other
expense
|
|
|
1,684 |
|
|
|
2,475 |
|
|
|
2,959 |
|
|
Total
expense
|
|
|
100,094 |
|
|
|
110,762 |
|
|
|
135,504 |
|
|
Interest
income
|
|
|
3,834 |
|
|
|
3,932 |
|
|
|
1,717 |
|
|
Net
income (loss)
|
|
$ |
4,594 |
|
|
$ |
6,416 |
|
|
$ |
(684 |
) |
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,912 |
|
|
$ |
5,662 |
|
|
Property,
plant and equipment, net
|
|
|
327,914 |
|
|
|
492,920 |
|
|
Other
|
|
|
120,356 |
|
|
|
132,261 |
|
|
Total
assets
|
|
$ |
450,182 |
|
|
$ |
630,843 |
|
|
Accounts
payable and accrued expenses
|
|
$ |
47,412 |
|
|
$ |
108,441 |
|
|
Long-term
debt
|
|
|
267,173 |
|
|
|
335,678 |
|
|
Members’
equity
|
|
|
135,597 |
|
|
|
186,724 |
|
|
Total
liabilities and members’ equity
|
|
$ |
450,182 |
|
|
$ |
630,843 |
|
|
Members’
equity consists of:
|
|
|
|
|
|
|
|
|
|
Invested
capital
|
|
$ |
281,077 |
|
|
$ |
288,376 |
|
|
Cumulative
net (loss) income
|
|
|
(17,288 |
) |
|
|
16,572 |
|
|
Cumulative
distributions
|
|
|
(128,192 |
) |
|
|
(118,224 |
) |
|
Members’
equity
|
|
$ |
135,597 |
|
|
$ |
186,724 |
|
6. Property,
Plant and Equipment and Leasehold Intangibles, Net
As of
December 31, 2009 and 2008, net property, plant and equipment and leasehold
intangibles, which include assets under capital leases, consisted of the
following (dollars in thousands):
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
272,737 |
|
|
$ |
253,453 |
|
|
Buildings
and improvements
|
|
|
2,968,659 |
|
|
|
2,626,079 |
|
|
Furniture
and equipment
|
|
|
334,553 |
|
|
|
277,680 |
|
|
Resident
and operating lease intangibles
|
|
|
599,618 |
|
|
|
607,256 |
|
|
Construction
in progress
|
|
|
17,702 |
|
|
|
98,418 |
|
|
Assets
under capital and financing leases
|
|
|
606,224 |
|
|
|
555,872 |
|
|
|
|
|
4,799,493 |
|
|
|
4,418,758 |
|
|
Accumulated
depreciation and amortization
|
|
|
(941,719 |
) |
|
|
(720,924 |
) |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
3,857,774 |
|
|
$ |
3,697,834 |
|
Long-lived
assets with definite useful lives are depreciated or amortized on a
straight-line basis over their estimated useful lives and are tested for
impairment whenever indicators of impairment arise.
During
the years ended December 31, 2009 and 2008, the Company evaluated property,
plant and equipment and leasehold intangibles for impairment. Through
December 31, 2009 and 2008, $10.1 million and $5.0 million, respectively, of
non-cash charges were recorded in the Company’s operating results and shown
within goodwill and asset impairment in the accompanying consolidated statements
of operations. These charges are reflected as a decrease to the gross
carrying value of the asset. The impairment charges are primarily due
to lower than expected performance of the underlying business. Fair
value of the assets was determined based upon estimates of future cash flows
developed by management using Level 3 inputs or based on an estimated fair value
per unit of the underlying communities.
For the
years ended December 31, 2009, 2008 and 2007, the Company recognized
depreciation and amortization expense on its property, plant and equipment and
leasehold intangibles of $233.9 million, $242.8 million and $251.2
million, respectively.
Future
amortization expense for resident and operating lease intangibles is estimated
to be as follows (dollars in thousands):
|
|
|
|
|
|
2010
|
|
$ |
50,106 |
|
|
2011
|
|
|
42,098 |
|
|
2012
|
|
|
41,213 |
|
|
2013
|
|
|
39,415 |
|
|
2014
|
|
|
35,495 |
|
|
Thereafter
|
|
|
126,841 |
|
|
Total
|
|
$ |
335,168 |
|
7.
Goodwill and Other Intangible Assets, Net
The
Company adopted ASC 350 - Goodwill and Other Intangible
Assets, on October 1, 2002 and tests goodwill for impairment annually or
whenever indicators of impairment arise. During 2009, the Company
performed its annual impairment review of goodwill allocated to its operating
segments and determined that no impairment charge was necessary. As a
result of the 2008 annual impairment review, the Company recorded a charge of
$215.0 million related to goodwill recorded on the CCRC segment which is
recorded as a component of operating results and shown within goodwill and asset
impairment in the accompanying consolidated statement of
operations. The impairment charge is non-cash in
nature. The Company determined the fair value of the reporting unit
based on estimates of future cash flows developed by management. In
determining the amount of goodwill impairment, the Company estimated fair value
using estimated cash flows of the underlying businesses
to value
significant assets of the reporting unit. The impairment charge was
primarily driven by adverse equity market conditions intensifying in the fourth
quarter of 2008 that caused a decrease in current market multiples and the
Company’s stock price at December 31, 2008 compared with the Company’s stock
price at September 30, 2008. During the year ended December 31, 2007
no goodwill impairment was recognized.
Following
is a summary of changes in the carrying amount of goodwill for the year ended
December 31, 2009 and 2008 presented on an operating segment basis (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Impairment
and Other Charges
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
and Other Charges
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
7,642 |
|
|
$ |
— |
|
|
$ |
(487 |
) |
|
$ |
7,155 |
|
|
$ |
7,642 |
|
|
$ |
(487 |
) |
|
$ |
— |
|
|
$ |
7,155 |
|
|
Assisted
Living
|
|
|
102,812 |
|
|
|
(132 |
) |
|
|
— |
|
|
|
102,680 |
|
|
|
102,812 |
|
|
|
— |
|
|
|
— |
|
|
|
102,812 |
|
|
CCRCs
|
|
|
214,999 |
|
|
|
— |
|
|
|
(214,999 |
) |
|
|
— |
|
|
|
214,999 |
|
|
|
— |
|
|
|
(214,999 |
) |
|
|
— |
|
|
Total
|
|
$ |
325,453 |
|
|
$ |
(132 |
) |
|
$ |
(215,486 |
) |
|
$ |
109,835 |
|
|
$ |
325,453 |
|
|
$ |
(487 |
) |
|
$ |
(214,999 |
) |
|
$ |
109,967 |
|
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 December 31, 2009 and 2008 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
purchase options
|
|
$ |
147,682 |
|
|
$ |
(10,169 |
) |
|
$ |
137,513 |
|
|
$ |
147,682 |
|
|
$ |
(6,457 |
) |
|
$ |
141,225 |
|
|
Management
contracts and other
|
|
|
158,041 |
|
|
|
(109,323 |
) |
|
|
48,718 |
|
|
|
158,041 |
|
|
|
(77,807 |
) |
|
|
80,234 |
|
|
Home
health licenses
|
|
|
11,812 |
|
|
|
— |
|
|
|
11,812 |
|
|
|
10,130 |
|
|
|
— |
|
|
|
10,130 |
|
|
Total
|
|
$ |
317,535 |
|
|
$ |
(119,492 |
) |
|
$ |
198,043 |
|
|
$ |
315,853 |
|
|
$ |
(84,264 |
) |
|
$ |
231,589 |
|
Amortization
expense related to definite-lived intangible assets for the twelve months ended
December 31, 2009, 2008 and 2007 was $35.2 million, $35.7 million and $34.5
million, respectively.
Estimated
amortization expense related to intangible assets with definite lives at
December 31, 2009, for each of the years in the five-year period ending December
31, 2014 and thereafter is as follows (dollars in thousands):
|
|
|
|
|
|
2010
|
|
$ |
34,829 |
|
|
2011
|
|
|
21,268 |
|
|
2012
|
|
|
3,690 |
|
|
2013
|
|
|
3,690 |
|
|
2014
|
|
|
3,690 |
|
|
Thereafter
|
|
|
119,064 |
|
|
Total
|
|
$ |
186,231 |
|
8. Other
Assets
Other
assets consist of the following components as of December 31, (dollars in
thousands):
|
|
|
|
|
|
|
|
|
Notes
receivable
|
|
$ |
24,418 |
|
|
$ |
22,168 |
|
|
Deferred
costs
|
|
|
21,635 |
|
|
|
23,729 |
|
|
Lease
security deposits
|
|
|
17,603 |
|
|
|
19,561 |
|
|
Other
|
|
|
5,612 |
|
|
|
5,217 |
|
|
Total
|
|
$ |
69,268 |
|
|
$ |
70,675 |
|
9. 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.
10.
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 2010 through 2039; weighted average interest at rates of
4.70% in 2009 (weighted average interest rate 5.33% in
2008)
|
|
$ |
1,416,732 |
|
|
$ |
1,246,204 |
|
|
$150,000
Series A notes payable, secured by five facilities, bearing interest at
LIBOR plus 0.88% effective August 2006 (3.05% prior to that date), payable
in monthly installments of interest only until August 2011 and payable in
monthly installments of principal and interest through maturity in August
2013, and secured by a $7.0 million guaranty by BLC and a $3.0 million
letter of credit
|
|
|
150,000 |
|
|
|
150,000 |
|
|
Mortgages
payable due 2012, weighted average interest rate of 5.64% in 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 |
|
|
Discount
mortgage note payable due 2013, weighted average interest rate of 2.45%,
net of debt discount of $6.8 million
|
|
|
78,631 |
|
|
|
— |
|
|
Variable
rate tax-exempt bonds credit-enhanced by Fannie Mae (weighted average
interest rates of 1.84% and 4.40% at December 31, 2009 and 2008,
respectively), due 2032 secured by the underlying assets of the portfolio,
payable interest only until maturity
|
|
|
100,841 |
|
|
|
100,841 |
|
|
Capital
and financing lease obligations payable through 2020; weighted average
interest rate of 8.74% in 2009 (weighted average interest rate of 8.84% in
2008)
|
|
|
351,735 |
|
|
|
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 facilities and a $11.5 million guaranty by the
Company
|
|
|
315,180 |
|
|
|
315,180 |
|
|
Construction
financing due 2011 through 2023; weighted average interest rate of 5.12%
in 2009 (weighted average interest rate of 6.02% in 2008)
|
|
|
― |
|
|
|
50,404 |
|
|
Total
debt
|
|
|
2,625,526 |
|
|
|
2,393,476 |
|
|
Less
current portion
|
|
|
166,185 |
|
|
|
158,476 |
|
|
Total
long-term debt
|
|
$ |
2,459,341 |
|
|
$ |
2,235,000 |
|
The
annual aggregate scheduled maturities of long-term debt obligations outstanding
as of December 31, 2009 are as follows (dollars in thousands):
|
|
|
|
|
|
Capital
and Financing Lease
Obligations
|
|
|
|
|
|
2010
|
|
$ |
147,476 |
|
|
$ |
51,109 |
|
|
$ |
198,585 |
|
|
2011
|
|
|
287,027 |
|
|
|
52,528 |
|
|
|
339,555 |
|
|
2012
|
|
|
884,970 |
|
|
|
52,888 |
|
|
|
937,858 |
|
|
2013
|
|
|
642,392 |
|
|
|
50,529 |
|
|
|
692,921 |
|
|
2014
|
|
|
141,820 |
|
|
|
51,844 |
|
|
|
193,664 |
|
|
Thereafter
|
|
|
176,797 |
|
|
|
313,527 |
|
|
|
490,324 |
|
|
Total
obligations
|
|
|
2,280,482 |
|
|
|
572,425 |
|
|
|
2,852,907 |
|
|
Less
amount representing debt discount
|
|
|
(6,691 |
) |
|
|
― |
|
|
|
(6,691 |
) |
|
Less
amount representing interest (8.74%)
|
|
|
― |
|
|
|
(220,690 |
) |
|
|
(220,690 |
) |
|
Total
|
|
$ |
2,273,791 |
|
|
$ |
351,735 |
|
|
$ |
2,625,526 |
|
In
accordance with applicable accounting pronouncements, as of December 31, 2009,
the Company’s consolidated financial statements reflect approximately $166.2
million of non-recourse debt obligations due within the next 12
months.
Although
certain of the Company’s debt obligations are scheduled to mature on or prior to
December 31, 2010, the Company has the option, subject to the satisfaction of
customary conditions (such as the absence of a material adverse change), to
extend the maturity of approximately $126.0 million of certain non-recourse
mortgages payable included in current maturities of debt 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
As of
December 31, 2008, the Company 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 the
Company’s election, and was scheduled to mature on May 15, 2009. The
Company was 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 is 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.
As of
December 31, 2008, $159.5 million was drawn on the revolving loan facility and
$149.7 million of letters of credit had been issued under letter of credit
facilities. Included in the $149.7 million of letters of credit
outstanding at December 31, 2008 was $32.2 million of duplicative letters of
credit posted with counterparties that were in process of being
returned. As of December 31, 2009, these duplicative letters of
credit were returned and are no longer outstanding.
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 17, 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.
On
December 7, 2009, the Company entered into an agreement to establish a letter of
credit facility for up to $30.0 million. The facility expires on May
31, 2012. The Company is required to pay a fee of 0.75% of the amount
of any letters of credit issued and is required to cash collateralize any
outstanding letters of credit issued under the facility.
As of
December 31, 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
secured and unsecured letter of credit facilities of up to $78.5 million in the
aggregate. As of December 31, 2009, there were no borrowings under
the revolving loan facility, $17.3 million of letters of credit had been issued
under the amended credit facility, and $48.8 million of letters of credit had
been issued under the separate secured and unsecured letter of credit
facilities.
In late
2008, the Company began replacing some of its outstanding letters of credit with
restricted cash deposits in order to reduce the Company’s letter of credit
needs.
Effective
February 23, 2010, the Company entered into a new revolving credit facility. The
new facility has a commitment of $100.0 million, with an option to increase the
commitment to $120.0 million. Refer to Note 26 for additional
disclosure.
Financings
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.
On
November 17, 2009, the Company entered into a Participation and Servicing
Agreement whereby the Company acquired an undivided participation interest of
16.95% in a $29.5 million loan where the Company is the borrower under the
loan. In 2009, the Company paid $3.5 million to obtain its 16.95%
interest, representing unpaid principal of $5.0 million, thereby recognizing a
gain on extinguishment of debt of $1.5 million.
On
November 18, 2009, the Company assumed $98.8 million of debt in connection with
the acquisition of 18 senior living communities. The Company recorded
a debt discount of $6.8 million in connection with the acquisition as the debt
assumed had a fair value of approximately $92.0 million at the acquisition
date. Approximately $13.4 million of the debt matures in June 2010
and $78.6 million of the debt matures in June 2013.
On
December 7, 2009, the Company entered into two Note Modification Agreements
which extended the maturity date on the aggregate debt of $47.3 million due on
January 25, 2011 to January 25, 2013.
On
December 18, 2009, the Company obtained $75.4 million of first mortgage
financing on three communities that bears interest at 6.09%. The
debt matures on December 18, 2019 and is secured by the underlying
properties. The net proceeds from the transaction were used to
acquire the remaining interest in three retirement center communities that were
previously managed by the Company and in which the Company had a noncontrolling
interest.
As of
December 31, 2009, the Company is in compliance with the financial covenants of
its outstanding debt.
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 $16.2 million and $13.9
million as of December 31, 2009 and 2008, respectively.
All
derivative instruments are recognized as either assets or liabilities in the
consolidated balance sheet 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 upon 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 December 31, 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 December 31,
2009)
|
|
$ |
(16,950 |
) |
|
Estimated
liability fair value (included in other liabilities at December 31,
2008)
|
|
$ |
(20,931 |
) |
|
Estimated
asset fair value (included in other assets at December 31,
2009)
|
|
$ |
— |
|
|
Estimated
asset fair value (included in other assets at December 31,
2008)
|
|
$ |
— |
|
The
following table summarizes the Company’s cap instruments at December 31, 2009
(dollars in thousands):
|
Current
notional balance
|
|
$ |
811,365 |
|
|
Highest
possible notional
|
|
$ |
811,365 |
|
|
Lowest
interest cap rate
|
|
|
4.96 |
% |
|
Highest
interest cap rate
|
|
|
6.50 |
% |
|
Average
fixed cap rate
|
|
|
5.94 |
% |
|
Earliest
maturity date
|
|
|
2011 |
|
|
Latest
maturity date
|
|
|
2012 |
|
|
Weighted
average original maturity
|
|
3.6
years
|
|
|
Estimated
liability fair value (included in other liabilities at December 31,
2009)
|
|
$ |
— |
|
|
Estimated
liability fair value (included in other liabilities at December 31,
2008)
|
|
$ |
— |
|
|
Estimated
asset fair value (included in other assets at December 31,
2009)
|
|
$ |
1,221 |
|
|
Estimated
asset fair value (included in other assets at December 31,
2008)
|
|
$ |
350 |
|
Prior to
October 1, 2006, the Company qualified for hedge accounting on designated swap
instruments pursuant to ASC 815, with the effective portion of the change in
fair value of the derivative recorded in other comprehensive income and the
ineffective portion included in the change in fair value of derivatives in the
statement of operations.
On
October 1, 2006, the Company elected to discontinue hedge accounting
prospectively for the previously designated swap instruments. Consequently, the
net gains and losses accumulated in other comprehensive income at that date of
$1.3 million related to the previously designated swap instruments are being
amortized to interest expense over the life of the underlying hedged debt
payments. In the future, if the underlying hedged debt is extinguished or
refinanced, the remaining unamortized gain or loss in accumulated other
comprehensive income will be recognized in net income. Although hedge accounting
was discontinued on October 1, 2006, some of the swap instruments remain
outstanding and are carried at fair value in the consolidated balance sheet and
the change in fair value beginning October 1, 2006 has been included in the
statements of operations.
During
the year ended December 31, 2009, the Company purchased and assumed $140.8
million in aggregate notional amount of interest rate caps. In
conjunction with these transactions, $0.1 million was paid to the
counterparty.
11. Accrued
Expenses
Accrued
expenses consist of the following components as of December 31, (dollars in
thousands):
|
|
|
|
|
|
|
|
|
Salaries
and wages
|
|
$ |
50,385 |
|
|
$ |
43,346 |
|
|
Insurance
reserves
|
|
|
30,036 |
|
|
|
27,516 |
|
|
Real
estate taxes
|
|
|
23,480 |
|
|
|
30,829 |
|
|
Vacation
|
|
|
20,033 |
|
|
|
18,504 |
|
|
Lease
payable
|
|
|
8,350 |
|
|
|
7,952 |
|
|
Interest
|
|
|
6,878 |
|
|
|
7,397 |
|
|
Income
taxes
|
|
|
1,519 |
|
|
|
2,005 |
|
|
Other
|
|
|
29,363 |
|
|
|
32,817 |
|
|
Total
|
|
$ |
170,044 |
|
|
$ |
170,366 |
|
12.
Facility Operating Leases
The
Company has entered into sale leaseback and lease agreements with certain real
estate investment trusts (REITs). Under these agreements communities are either
sold to the REIT and leased back or a long-term lease agreement is entered into
for the communities. The initial lease terms vary from 10 to 20 years and
include renewal options ranging from 5 to 30 years. The Company is
responsible for all operating costs, including repairs, property taxes and
insurance. The substantial majority of the Company’s lease arrangements are
structured as master leases. Under a master lease, numerous communities are
leased through an indivisible lease. The Company typically guarantees
its performance and the lease payments under the master lease and is subject to
net worth, minimum capital expenditure requirements per community per annum and
minimum lease coverage ratios. Failure to comply with these covenants
could result in an event of default. Certain leases contain cure
provisions generally requiring the posting of an additional lease security
deposit if the required covenant is not met.
As of
December 31, 2009 and 2008, the Company operated 359 and 358 communities,
respectively, under long-term leases (298 operating leases and 61 capital and
financing leases at December 31, 2009). The remaining base lease
terms vary from 4 months to 38 years and generally provide for renewal,
extension and purchase options. The Company expects to renew, extend or exercise
purchase options in the normal course of business; however, there can be no
assurance that these rights will be exercised in the future.
One lease
required posting of a lease security deposit in an interest bearing account at
closing. The lease security deposit will be released upon achieving
certain lease coverage ratios. The Company agreed to spend a minimum
of $450 per unit per year on capital improvements of which the lessor will
reduce the security deposit by the same amount up to $600 per unit, or $2.7
million per year. For the years ended December 31, 2009, 2008 and 2007, a
release of $2.2 million, $2.7 million and $2.4 million, respectively, was
received from the lease security deposit.
A summary
of facility lease expense and the impact of straight-line adjustment and
amortization of deferred gains are as follows (dollars in thousands):
|
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
basis payment
|
|
$ |
260,590 |
|
|
$ |
253,226 |
|
|
$ |
250,531 |
|
|
Straight-line
expense
|
|
|
15,851 |
|
|
|
20,585 |
|
|
|
25,439 |
|
|
Amortization
of deferred gain
|
|
|
(4,345 |
) |
|
|
(4,342 |
) |
|
|
(4,342 |
) |
|
Facility
lease expense
|
|
$ |
272,096 |
|
|
$ |
269,469 |
|
|
$ |
271,628 |
|
13.
Self-Insurance
The
Company obtains various insurance coverages from commercial carriers at stated
amounts as defined in the applicable policy. Losses related to deductible
amounts are accrued based on the Company’s estimate of expected losses plus
incurred but not reported claims. As of December 31, 2009 and 2008, the Company
accrued $59.2
million
and $56.7 million for the self-insured portions of programs of which $29.2
million is classified as long-term for both December 31, 2009 and
2008. During 2007, the Company received a $4.2 million collateral
recovery from an insurance carrier relating to an adjustment of an Alterra
bankruptcy preconfirmation contingency.
The
Company has secured self-insured retention risk under workers’ compensation and
general liability and professional liability programs with cash and letters of
credit aggregating $13.9 million and $33.7 million, and $10.9 million and $64.3
million as of December 31, 2009 and 2008, respectively.
14.
Retirement Plans
The
Company maintains 401(k) Retirement Savings Plans for all employees that meet
minimum employment criteria. The plan provides that the participants may defer
eligible compensation on a pre-tax basis subject to certain Internal Revenue
Code maximum amounts. For the year ended December 31, 2008, the
Company made matching contributions in amounts equal to 50% of the employee’s
contribution to the plan, up to a maximum of 4.0% of contributed
compensation. Employees are always 100% vested in their own
contributions and vest in the Company’s contributions over five
years. Contributions to these plans were $4.8 million and $3.6
million for the years ended December 31, 2008 and 2007,
respectively. These amounts are included in facility operating
expense and general and administrative expense in the accompanying consolidated
statements of operations. In 2009, the Company suspended the matching
contribution. Effective January 1, 2010, the Company began making
matching contributions in amounts equal to 12.5% of the employee’s contribution
to the plan, up to a maximum of 4.0% of contributed compensation. An
additional matching contribution of 12.5%, subject to the same limit on
contributed compensation, may be made at the discretion of the board of
directors, based upon the Company’s performance.
15.
Related Party Transactions
Pursuant
to the terms of his employment agreement, in October 2000, BLC loaned
approximately $2.0 million to Mark J. Schulte, the Company’s former Co-Chief
Executive Officer and a current member of the Company’s Board of
Directors. In exchange, BLC received a ten-year, secured,
non-recourse promissory note, which note bears interest at a rate of 6.09% per
annum, 2.0% of which is payable in cash and the remainder of which accrues and
is due at maturity on October 2, 2010. The note is secured by a
portion of the Company’s common stock owned by Mr. Schulte. There has been
no modification to the terms of the loan since the date of enactment of the
Sarbanes-Oxley Act of 2002.
During
2008, the Company learned that certain funds affiliated with Fortress
Investment Group LLC became participating lenders under the Company’s previous
revolving credit facility. Immediately prior to the date that the Company
entered into an amended and restated credit facility on February 27, 2009, such
funds, in the aggregate, were committed for $136.4 million of the $245.0 million
line of credit limit. Based on actual borrowings in effect
immediately prior to the date that the Company entered into the 2009 amended and
restated credit facility, the Company was indebted to these funds in the
aggregate amount of $108.6 million. These Fortress funds were also
participating lenders under the Company’s 2009 amended and restated credit
facility. In the aggregate, as of December 31, 2009, these funds were
committed for approximately $32.4 million of the $75.0 million line of credit
limit. As of December 31, 2009, there were no outstanding borrowings
under the revolving loan facility and $17.3 million of letters of credit had
been issued under the credit facility.
Under the
terms of the registration rights provisions of the Company’s Stockholders
Agreement, the Company is generally obligated to pay all fees and expenses
incurred in connection with certain public offerings by affiliates of Fortress
(other than underwriting discounts, commissions and transfer
taxes). In connection with the Company’s obligations thereunder, the
Company incurred approximately $0.8 million of expenses in the fourth quarter of
2009 related to a public equity offering by Fortress affiliates.
16.
Stock-Based Compensation
In
December 2004, the FASB issued guidance on accounting for share-based payment
transactions, which addresses the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, with a primary focus on
transactions in which an entity obtains employee services in share-based payment
transactions. This guidance requires measurement of the cost of
employee services received in
exchange
for stock compensation based on the grant-date fair value of the employee stock
awards. Incremental compensation costs arising from subsequent modifications of
awards after the grant date must be recognized when incurred. The Company
adopted this guidance in connection with its initial grants of restricted stock
effective August 2005, which were converted into BSL restricted stock on
September 30, 2005.
On August
5, 2005, BLC and Alterra adopted employee restricted stock plans to attract,
motivate, and retain key employees. The plans provide for the grant of
restricted securities to those participants selected by their board of
directors. At September 30, 2005 these restricted shares were converted into a
total of 2.6 million shares of restricted stock in BSL at a value of $19.00 per
share. Pursuant to the plans, the awards vest through
2010. As of December 31, 2009, 255,000 shares of unvested restricted
stock issued under the plans were outstanding.
On
October 14, 2005, the Company adopted a new equity incentive plan for its
employees, the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan
(“Incentive Plan”), which was approved by its stockholders on October 14, 2005.
A total of 2,000,000 shares of common stock were initially reserved for issuance
under the Incentive Plan; provided, however, that commencing on the first day of
the fiscal year beginning in calendar year 2006, the number of shares reserved
and available for issuance was increased by an amount equal to the lesser of (1)
400,000 shares or (2) 2% of the number of outstanding shares of common stock on
the last day of the immediately preceding fiscal year. The maximum
aggregate number of shares subject to stock options or stock appreciation rights
that may be granted to any individual during any fiscal year may not exceed
500,000, and the maximum aggregate number of shares that will be subject to
awards of restricted stock, deferred shares, unrestricted shares or other
stock-based awards that may be granted to any individual during any fiscal year
will be 500,000.
In
connection with the ARC Merger, the Company’s board of directors approved an
amendment to the Incentive Plan (the “Plan Amendment”) to reserve an additional
2,500,000 shares of common stock for issuance thereunder to satisfy (i)
obligations to provide for certain purchases of common stock by ARC officers and
employees and (ii) obligations to make corresponding grants of restricted shares
of common stock under the Incentive Plan to those ARC officers and employees who
purchased such shares of common stock pursuant to employment agreements and
optionee agreements entered into in connection with the ARC Merger, and for such
other grants that may be made from time to time pursuant to the Incentive Plan.
Upon completion of the ARC Merger, the Company issued 475,681 shares of common
stock to certain officers of ARC at $38.07 per share for aggregate proceeds of
$18.1 million and granted the officers 475,681 shares of restricted stock at
$48.00 per share. On May 12, 2006, funds managed by affiliates of Fortress
Investment Group, which then held approximately 65% of the Company’s common
stock, executed a written consent approving the Plan Amendment effective upon
consummation of the ARC Merger. This consent constituted the consent of a
majority of the total number of shares of outstanding common stock and was
sufficient to approve the Plan Amendment.
On June
15, 2006, the Company registered 2,900,000 shares of common stock (2,500,000
shares of common stock in connection with the ARC Merger and 400,000 shares of
common stock resulting from the automatic annual increase for fiscal year 2006),
under the Incentive Plan. On June
26, 2008, the Company registered an additional 800,000 shares under the
Incentive Plan (representing the automatic annual increases that occurred on
January 1, 2007 and January 1, 2008). On June 23, 2009, the Company
registered an additional 6,400,000 shares under the Incentive Plan (representing
a 6,000,000 share increase approved by the Company’s stockholders on June 23,
2009 and the automatic annual increase that occurred on January 1,
2009).
Certain
participants received dividends on unvested shares. Where participants did not
receive dividends on unvested shares during the vesting period, the grant-date
per share fair value was reduced for the present value of the expected dividend
stream during the vesting period. The shares are subject to certain transfer
restrictions and may be forfeited upon termination of a participant's employment
for any reason, absent a change in control of the Company.
On
September 15, 2006, the Company entered into Separation and General Release
Agreements (“Agreements”) with two officers that accelerated the vesting
provision of a portion of their restricted stock grants upon satisfying certain
conditions. As a result of the modification, the previous compensation expense
related to these grants was reversed and a charge based on the fair value of the
stock at the modification date will be recorded over the modified vesting
period. The net impact of the adjustment was $4.1 million of additional expense
for the year ended December 31, 2007.
On
February 7, 2008, the Company entered into a Separation Agreement and General
Release with an officer that accelerated the vesting provision of his restricted
stock grants as of March 3, 2008 upon satisfying certain
conditions. As
a result of the modification, the previous compensation expense related to these
grants was reversed and a charge based on the fair value of the stock at the
modification date was recorded over the modified vesting period. The
net impact of the adjustment was $2.7 million of additional expense for the year
ended December 31, 2008.
For all
awards with graded vesting other than awards with performance-based vesting
conditions, the Company records compensation expense for the entire award on a
straight-line basis over the requisite service period. For
graded-vesting awards with performance-based vesting conditions, total
compensation expense is recognized over the requisite service period for each
separately vesting tranche of the award as if the award is, in substance,
multiple awards once the performance target is deemed probable of
achievement. Performance goals are evaluated quarterly. If
such goals are not ultimately met or it is not probable the goals will be
achieved, no compensation expense is recognized and any previously recognized
compensation expense is reversed. During the current year the Company reversed
approximately $0.1 million of previously recognized compensation expense related
to performance-based awards granted in 2007.
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.
The
following table sets forth information about the Company’s restricted stock
awards (excludes restricted stock units) (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
on January 1,
|
|
|
3,543 |
|
|
|
3,020 |
|
|
|
3,282 |
|
|
Granted
|
|
|
2,326 |
|
|
|
1,975 |
|
|
|
662 |
|
|
Vested
|
|
|
(1,321 |
) |
|
|
(944 |
) |
|
|
(680 |
) |
|
Cancelled/forfeited
|
|
|
(633 |
) |
|
|
(508 |
) |
|
|
(244 |
) |
|
Outstanding
on December 31,
|
|
|
3,915 |
|
|
|
3,543 |
|
|
|
3,020 |
|
The
weighted-average grant-date fair value of restricted shares and restricted stock
units granted during the years 2009, 2008, and 2007 was $9.55, $16.10, and
$35.92, respectively. As of December 31, 2009, there was $39.3
million of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted. That cost is expected to be
recognized over a period of 2.6 years.
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 |
|
|
Three
months ended December 31, 2009
|
|
|
115 |
|
|
$ |
16.84
– 18.46 |
|
|
$ |
1,988 |
|
Compensation
expense of $26.9 million, $28.9 million and $20.1 million in connection with the
grants of restricted stock and restricted stock units was recorded for the years
ended December 31, 2009, 2008 and 2007, respectively. For the years
ended December 31, 2009, 2008 and 2007 compensation expense was calculated net
of forfeitures estimated from 0% - 5%, 0% - 6% and 5%, respectively, of the
shares granted.
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 that 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 consolidated financial
statements is de minimis.
17.
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
$163.8 million which was used primarily to repay the $125.0 million of
indebtedness which was outstanding under the Company’s amended credit
facility.
18.
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 December 31, 2009 (dollars
in thousands):
|
|
|
Total
Carrying
Value
at
December
31,
2009
|
|
|
Quoted
prices
in
active
markets
(Level
1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
|
Derivative
assets
|
|
$ |
1,221 |
|
|
$ |
— |
|
|
$ |
1,221 |
|
|
$ |
— |
|
|
Derivative
liabilities
|
|
|
(16,950 |
) |
|
|
— |
|
|
|
(16,950 |
) |
|
|
— |
|
|
|
|
$ |
(15,729 |
) |
|
$ |
— |
|
|
$ |
(15,729 |
) |
|
$ |
— |
|
The Company’s derivative
assets and liabilities include interest rate caps and interest rate swaps that
effectively convert a portion of the Company’s variable rate debt to fixed rate
debt. The derivative positions are valued using models
developed internally by the respective counterparty that use as their basis
readily observable market parameters (such as forward yield curves) and are
classified within Level 2 of the valuation hierarchy.
The
Company considers its own credit risk as well as the credit risk of its
counterparties when evaluating the fair value of its derivatives. Any
adjustments resulting from credit risk are recorded as a change in fair value of
derivatives and amortization in the current period statement of
operations.
19.
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.
20.
Income Taxes
The
benefit for income taxes is comprised of the following (dollars in thousands):
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
2,795 |
|
|
$ |
(77 |
) |
|
$ |
(339 |
) |
|
Deferred
|
|
|
31,684 |
|
|
|
89,498 |
|
|
|
103,180 |
|
|
|
|
|
34,479 |
|
|
|
89,421 |
|
|
|
102,841 |
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
(1,553 |
) |
|
$ |
(2,690 |
) |
|
$ |
(1,581 |
) |
|
Deferred
(included in Federal above)
|
|
|
― |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
(1,553 |
) |
|
|
(2,690 |
) |
|
|
(1,581 |
) |
|
Total
|
|
$ |
32,926 |
|
|
$ |
86,731 |
|
|
$ |
101,260 |
|
A
reconciliation of the benefit for income taxes to the amount computed at the
U.S. Federal statutory rate of 35% is as follows (dollars in thousands):
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit at U.S. statutory rate
|
|
$ |
34,713 |
|
|
$ |
160,990 |
|
|
$ |
92,271 |
|
|
State
taxes, net of federal income tax
|
|
|
3,002 |
|
|
|
16,449 |
|
|
|
9,521 |
|
|
Credits
|
|
|
2,088 |
|
|
|
— |
|
|
|
— |
|
|
FIN
48
|
|
|
1,892 |
|
|
|
— |
|
|
|
— |
|
|
Goodwill
impairment
|
|
|
― |
|
|
|
(83,850 |
) |
|
|
— |
|
|
Stock
compensation
|
|
|
(5,550 |
) |
|
|
(3,682 |
) |
|
|
— |
|
|
Officer’s
compensation
|
|
|
(2,147 |
) |
|
|
— |
|
|
|
— |
|
|
Valuation
allowance
|
|
|
(973 |
) |
|
|
(3,328 |
) |
|
|
— |
|
|
Other,
net
|
|
|
(99 |
) |
|
|
152 |
|
|
|
(532 |
) |
|
Total
|
|
$ |
32,926 |
|
|
$ |
86,731 |
|
|
$ |
101,260 |
|
The
Company adopted ASC 810 as of December 31, 2003 and consolidated the VIEs for
financial reporting purposes. For federal and state income tax purposes, the
Company is not the legal owner of the entities and is not entitled to receive
tax benefits generated from the losses associated with these VIEs. By
December 31, 2007, all of these entities had been acquired by the
Company.
Significant
components of the Company’s deferred tax assets and liabilities at December 31
are as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
Operating
loss carryforwards
|
|
$ |
197,520 |
|
|
$ |
183,331 |
|
|
Capital
lease obligations
|
|
|
100,551 |
|
|
|
106,872 |
|
|
Prepaid
revenue
|
|
|
42,604 |
|
|
|
43,693 |
|
|
Deferred
lease liability
|
|
|
42,048 |
|
|
|
35,988 |
|
|
Accrued
expenses
|
|
|
40,788 |
|
|
|
49,816 |
|
|
Deferred
gain on sale leaseback
|
|
|
14,312 |
|
|
|
15,755 |
|
|
Tax
credits
|
|
|
8,048 |
|
|
|
5,239 |
|
|
Fair
value of interest rate swaps
|
|
|
5,884 |
|
|
|
8,339 |
|
|
Other
|
|
|
― |
|
|
|
2,407 |
|
|
Total
gross deferred income tax asset
|
|
|
451,755 |
|
|
|
451,440 |
|
|
Valuation
allowance
|
|
|
(10,708 |
) |
|
|
(9,735 |
) |
|
Net
deferred income tax assets
|
|
|
441,047 |
|
|
|
441,705 |
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
(564,868 |
) |
|
|
(602,913 |
) |
|
Other
|
|
|
(8,804 |
) |
|
|
(2,762 |
) |
|
Total
gross deferred income tax liability
|
|
|
(573,672 |
) |
|
|
(605,675 |
) |
|
Net
deferred tax liability
|
|
$ |
(132,625 |
) |
|
$ |
(163,970 |
) |
A
reconciliation of the net deferred tax liability to the consolidated balance
sheets at December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
Deferred
tax asset – current
|
|
$ |
7,688 |
|
|
$ |
14,677 |
|
|
Deferred
tax liability – noncurrent
|
|
|
(140,313 |
) |
|
|
(178,647 |
) |
|
Net
deferred tax liability
|
|
$ |
(132,625 |
) |
|
$ |
(163,970 |
) |
In
connection with Alterra’s emergence from bankruptcy in December 2003, its assets
and liabilities were recorded at their respective fair market values. Deferred
tax assets and liabilities were recognized for the tax effect of the difference
between the fair values and the tax bases of Alterra’s assets and liabilities.
In addition, deferred tax assets were recognized for the future use of net
operating losses. The valuation allowance established to reduce deferred tax
assets as of December 31, 2004 was $28.4 million. The reduction in this
valuation allowance relating to net deferred tax items existing at the Effective
Date will increase additional paid in capital.
At
December 31, 2004, Alterra increased additional paid-in capital by $4.8 million
as a result of a reduction in valuation allowance related to net deferred tax
assets not benefited under fresh-start accounting, but realized in the year
ended December 31, 2004. During 2005, Alterra reduced additional paid-in capital
by $0.9 million due to a reversal of the valuation allowance, related to net
deferred tax asset.
As of
December 31, 2009 and 2008, the Company had net operating loss carryforwards of
approximately $504.9 million and $468.6 million, respectively, which are
available to offset future taxable income through 2029. The Company
believes it is more likely than not that it will utilize all of its federal
losses prior to expiration. The Company has recorded valuation
allowances of $8.5 million and $8.2 million at December 31, 2009 and 2008,
respectively against its state net operating losses, as the Company anticipates
these losses will not be utilized prior to expiration. The
carryforward period for some states is considerably shorter than the period
which is allowed for Federal purposes. The Company also recorded
valuation allowances of $2.2 million and $1.5 million at December 31, 2009 and
2008, respectively, against 2008 state credits. Included in the
Company’s net operating loss carryforward is $10.8 million of losses relating to
restricted stock grants. Under ASC 718-10, this
loss will
be recorded in additional paid-in capital in the period in which the loss is
effectively used to reduce taxes payable. The impact to the income
tax expense relating to the dividends on the unvested shares for the period
ended December 31, 2008 is now included in the stock based compensation
computation under ASC 718-10. No dividends were paid in
2009.
The
formation of BSL, reorganization of Alterra, and the acquisitions of ARC and
SALI constitute ownership changes under Section 382 of the Internal Revenue
Code, as amended. As a result, BSL’s ability to utilize the net operating loss
carryforward to offset future taxable income is subject to certain limitations
and restrictions.
The
Company adopted ASC 740 - Income Taxes (“ASC 740”) as
of January 1, 2007. At December 31, 2009, the Company had gross tax
affected unrecognized tax benefits of $2.4 million, which, if recognized,
would result in an income tax benefit in accordance with ASC
805. Interest and penalties related to these tax positions are
classified as tax expense in the Company’s financial
statements. Total interest and penalties reserved is $1.6 million at
December 31, 2009. Tax returns for years 2007 through 2008 are
subject to future examination by tax authorities. In addition, tax
returns are open from 1999 through 2006 to the extent of the net operating
losses generated during those periods. The Company does not expect
that unrecognized tax benefits for tax positions taken with respect to 2009 and
prior years will significantly change in 2010.
A
reconciliation of the unrecognized tax benefits for the year 2009 is as follows
(dollars in thousands):
|
Balance
at January 1, 2009
|
|
$ |
4,424 |
|
|
Additions
for tax positions related to the current year
|
|
|
— |
|
|
Additions
for tax positions related to prior years
|
|
|
464 |
|
|
Reductions
for tax positions related to prior years
|
|
|
(2,351 |
) |
|
Settlements
|
|
|
(139 |
) |
|
Balance
at December 31, 2009
|
|
$ |
2,398 |
|
21.
Supplemental Disclosure of Cash Flow Information
|
(dollars
in thousands)
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
131,347 |
|
|
$ |
148,377 |
|
|
$ |
143,930 |
|
|
Income
taxes paid
|
|
$ |
1,682 |
|
|
$ |
1,591 |
|
|
$ |
1,415 |
|
|
Supplemental
Schedule of Noncash Operating, Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
De-consolidation
of leased development property:
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
(3,887 |
) |
|
$ |
(6,387 |
) |
|
$ |
(2,978 |
) |
|
Long-term
debt
|
|
|
3,887 |
|
|
|
6,387 |
|
|
|
2,978 |
|
|
Net
|
|
$ |
― |
|
|
$ |
— |
|
|
$ |
— |
|
|
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
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Acquisitions
of assets, net of related payables and cash received, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and escrow deposits-restricted
|
|
$ |
1,404 |
|
|
$ |
— |
|
|
$ |
387 |
|
|
Account
receivable, net
|
|
|
— |
|
|
|
— |
|
|
|
64 |
|
|
Prepaid
expenses and other current assets
|
|
|
10,573 |
|
|
|
— |
|
|
|
— |
|
|
Property,
plant and equipment and leasehold intangibles
|
|
|
285,488 |
|
|
|
— |
|
|
|
172,074 |
|
|
Investment
in unconsolidated ventures
|
|
|
― |
|
|
|
— |
|
|
|
(1,342 |
) |
|
Goodwill
|
|
|
― |
|
|
|
— |
|
|
|
3,395 |
|
|
Other
intangible assets, net
|
|
|
1,543 |
|
|
|
6,731 |
|
|
|
(668 |
) |
|
Other
assets, net
|
|
|
40 |
|
|
|
— |
|
|
|
(173 |
) |
|
Other
liabilities
|
|
|
(2,900 |
) |
|
|
— |
|
|
|
(3,201 |
) |
|
Long-term
debt and capital and financing lease obligations
|
|
|
(92,011 |
) |
|
|
— |
|
|
|
(2,786 |
) |
|
Noncontrolling
interest
|
|
|
― |
|
|
|
— |
|
|
|
4,351 |
|
|
Net
|
|
$ |
204,137 |
|
|
$ |
6,731 |
|
|
$ |
172,101 |
|
|
De-consolidation
of an entity pursuant to FIN 46(R):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
— |
|
|
$ |
92 |
|
|
$ |
— |
|
|
Prepaid
expenses and other current assets
|
|
|
— |
|
|
|
1,870 |
|
|
|
— |
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
— |
|
|
|
36,613 |
|
|
|
— |
|
|
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
|
|
|
— |
|
|
|
(13,287 |
) |
|
|
— |
|
|
Accumulated
deficit
|
|
|
— |
|
|
|
5,212 |
|
|
|
— |
|
|
Net
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Reclassification
of other intangibles, net
|
|
$ |
141 |
|
|
$ |
— |
|
|
$ |
— |
|
22.
Commitments and Contingencies
The
Company has three operating lease agreements for 30,314, 55,296 and 99,374
square feet (unaudited) of corporate office space that extend through 2012, 2019
and 2014, respectively. The leases require the payment of base rent which
escalates annually, plus operating expenses (as defined). The Company
incurred rent expense of $3.9 million, $4.0 million and $4.5 million for the
years ended December 31, 2009, 2008 and 2007, respectively, under the corporate
office leases.
The
aggregate amounts of all future minimum operating lease payments, including
community and office leases, as of December 31, 2009, are as follows (dollars in
thousands):
|
|
|
|
|
|
2010
|
|
$ |
265,471 |
|
|
2011
|
|
|
266,679 |
|
|
2012
|
|
|
263,842 |
|
|
2013
|
|
|
253,526 |
|
|
2014
|
|
|
227,845 |
|
|
Thereafter
|
|
|
995,089 |
|
|
Total
|
|
$ |
2,272,452 |
|
The
Company has employment agreements with certain officers of the Company that
grant these employees the right to receive their base salary and continuation of
certain benefits, for a defined period of time, in the event of certain
terminations of the officers’ employment, as described in those
agreements.
23.
Litigation
The
Company has settled the litigation specifically described
below.
In
connection with the sale of certain communities to Ventas Realty Limited
Partnership in 2004, two legal actions were filed against the Company, certain
of its subsidiaries and affiliates and the Company’s former Chief Financial
Officer. During the year ended December 31, 2008, the Company
recorded an $8.0 million reserve related to the foregoing
matters. The first action, captioned David T. Atkins et al. v. Apollo
Real Estate Advisors, L.P., et al., was settled by the parties and
formally dismissed in 2008. The second action, captioned Edith Zimmerman et al. v. GFB-AS
Investors, LLC and Brookdale Living Communities, Inc., was settled by the
parties and formally dismissed in 2009.
In
addition, the Company has been and is currently involved in other litigation and
claims incidental to the conduct of its business which are comparable to other
companies in the senior living industry. Certain claims and lawsuits allege
large damage amounts and may require significant 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, 2010, the Company’s current
policies provide for deductibles of $150,000 for each
claim. Accordingly, the Company is, in effect, self-insured for
claims that are less than $150,000.
24.
Segment Information
The
Company has four reportable segments: retirement centers; assisted living;
CCRCs; and management services. These segments were determined based on the way
that the chief operating decision makers organize the Company’s business
activities for making operating decisions and assessing
performance.
During
the year ended December 31, 2009, eight communities moved between segments to
more accurately reflect the underlying product offering of each
segment. The movement did not change the Company’s reportable
segments, but it did impact the revenues and cost reported within each
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. 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 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 the Company’s reporting 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):
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
496,744 |
|
|
$ |
497,453 |
|
|
$ |
489,931 |
|
|
Assisted
Living
|
|
|
925,917 |
|
|
|
890,075 |
|
|
|
841,819 |
|
|
CCRCs
|
|
|
593,688 |
|
|
|
533,532 |
|
|
|
500,757 |
|
|
Management
Services
|
|
|
6,719 |
|
|
|
6,994 |
|
|
|
6,789 |
|
|
|
|
$ |
2,023,068 |
|
|
$ |
1,928,054 |
|
|
$ |
1,839,296 |
|
|
Segment
Operating Income(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
213,608 |
|
|
$ |
211,418 |
|
|
$ |
216,581 |
|
|
Assisted
Living
|
|
|
324,969 |
|
|
|
299,431 |
|
|
|
301,953 |
|
|
CCRCs
|
|
|
175,495 |
|
|
|
148,630 |
|
|
|
143,036 |
|
|
Management
Services
|
|
|
4,703 |
|
|
|
4,896 |
|
|
|
4,752 |
|
|
|
|
|
718,775 |
|
|
|
664,375 |
|
|
|
666,322 |
|
|
General
and administrative (including non-cash stock compensation expense)(3)
|
|
|
132,848 |
|
|
|
138,821 |
|
|
|
135,976 |
|
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
271,628 |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
Income
(loss) from operations
|
|
$ |
29,780 |
|
|
$ |
(240,143 |
) |
|
$ |
(41,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
2008 |
|
|
|
2007 |
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
1,109,794 |
|
|
$ |
1,094,180 |
|
|
$ |
1,226,802 |
|
|
Assisted
Living
|
|
|
1,519,693 |
|
|
|
1,532,311 |
|
|
|
1,547,902 |
|
|
CCRCs
|
|
|
1,685,832 |
|
|
|
1,476,206 |
|
|
|
1,651,467 |
|
|
Corporate
and Management Services
|
|
|
330,624 |
|
|
|
346,561 |
|
|
|
385,451 |
|
|
|
|
$ |
4,645,943 |
|
|
$ |
4,449,258 |
|
|
$ |
4,811,622 |
|
__________
|
(1)
|
All
revenue is earned from external third parties in the United
States.
|
|
(2)
|
Segment
operating income is defined as segment revenues less segment operating
expenses (excluding depreciation and
amortization).
|
|
(3)
|
Net
of general and administrative costs allocated to management services
reporting segment.
|
25.
Quarterly Results of Operations (Unaudited)
The
following is a summary of quarterly results of operations for each of the fiscal
quarters in 2009 and 2008 (dollars in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
497,946 |
|
|
$ |
500,757 |
|
|
$ |
505,843 |
|
|
$ |
518,522 |
|
|
Income
(loss) from operations(1)
|
|
|
10,253 |
|
|
|
16,754 |
|
|
|
7,165 |
|
|
|
(4,392 |
) |
|
Loss
before income taxes
|
|
|
(22,748 |
) |
|
|
(13,025 |
) |
|
|
(28,619 |
) |
|
|
(34,789 |
) |
|
Net
loss
|
|
|
(13,636 |
) |
|
|
(10,530 |
) |
|
|
(21,290 |
) |
|
|
(20,799 |
) |
|
Weighted
average basic and diluted loss per share
|
|
$ |
(0.13 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.18 |
) |
|
Weighted
average shares used in computing basic and diluted loss per
share
|
|
|
101,738 |
|
|
|
106,042 |
|
|
|
118,455 |
|
|
|
118,653 |
|
|
Cash
dividends declared per share
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
480,648 |
|
|
$ |
478,201 |
|
|
$ |
482,277 |
|
|
$ |
486,928 |
|
|
Loss
from operations(1)
|
|
|
(551 |
) |
|
|
(4,697 |
) |
|
|
(10,968 |
) |
|
|
(223,927 |
) |
|
Loss
before income taxes
|
|
|
(84,980 |
) |
|
|
(6,256 |
) |
|
|
(58,215 |
) |
|
|
(310,521 |
) |
|
Net
loss
|
|
|
(55,093 |
) |
|
|
(3,485 |
) |
|
|
(35,877 |
) |
|
|
(278,786 |
) |
|
Weighted
average basic and diluted loss per share
|
|
$ |
(0.54 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.36 |
) |
|
$ |
(2.75 |
) |
|
Weighted
average shares used in computing basic and diluted loss per
share
|
|
|
101,995 |
|
|
|
101,856 |
|
|
|
101,398 |
|
|
|
101,424 |
|
|
Cash
dividends declared per share
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
$ |
0.25 |
|
|
$ |
— |
|
|
(1)
|
Fourth
quarter 2009 and 2008 results include non-cash impairment charges of $10.1
million and $220.0 million,
respectively.
|
26.
Subsequent Events
On
February 22, 2010, the Company entered into an agreement to acquire four
independent living communities that the Company currently leases for an
aggregate purchase price of $22.5 million. In connection therewith, the
remaining leases between the Company and the seller/lessor were amended to
modify and clarify certain of the terms thereof, including various financial and
non-financial covenants. The Company anticipates that the purchase of the
four communities will close in April 2010.
Effective
February 23, 2010, the Company terminated the $75.0 million revolving credit
facility with Bank of America, N.A. and entered into a credit agreement with
General Electric Capital Corporation, as administrative agent and lender, and
the other lenders from time to time parties thereto. The new facility has a
commitment of $100.0 million, with an option to increase the commitment to
$120.0 million, and is scheduled to mature on June 30, 2013.
The
revolving line of credit may be used to finance acquisitions and fund working
capital and capital expenditures and for other general corporate
purposes.
The new
facility is secured by a first priority lien on certain of the Company’s
communities. The availability under the line may vary from time to
time as it is based on borrowing base calculations related to the value and
performance of the communities securing the facility.
Amounts
drawn under the facility will bear interest at 90-day LIBOR plus an applicable
margin, as described below. For purposes of determining the interest
rate, in no event shall LIBOR be less than 2.0%. The applicable
margin varies with the percentage of the total commitment drawn, with a 4.5%
margin at 35% or lower
utilization,
a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and
a 5.5% margin at greater than 50% utilization. The Company is also
required to pay a quarterly commitment fee of 1.0% per annum on the unused
portion of the facility.
Effective
February 25, 2010, the Company obtained a $44.6 million first mortgage loan,
secured by five communities that the Company acquired in November 2009.
The loan bears interest at a fixed rate of 6.33% and matures in March
2020. In connection with the transaction, the Company repaid $13.4 million
of debt that had been assumed at the time of closing of the
acquisition.
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
December
31, 2009
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to
costs
and
expenses
|
|
|
Charged
To
other
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
$ |
6,000 |
|
|
$ |
— |
|
|
$ |
407 |
(1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,407 |
|
|
Year
ended December 31, 2008
|
|
$ |
6,407 |
|
|
$ |
— |
|
|
$ |
3,328 |
(2) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,735 |
|
|
Year
ended December 31, 2009
|
|
$ |
9,735 |
|
|
$ |
― |
|
|
$ |
973 |
(3) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,708 |
|
|
(1)
|
Adjustment
to valuation allowance based on final
returns.
|
|
(2)
|
Adjustment
to valuation allowance for state net operating losses of
$1,800. Establishment of valuation allowance against federal
tax credits of $1,528.
|
|
(3)
|
Adjustment
to valuation allowance for state net operating losses of
$264. Establishment of valuation allowance against state tax
credit of $709.
|
See
accompanying report of independent registered public accounting
firm.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A. Controls and
Procedures.
Management’s
Assessment of Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule
13a-15(f). Management conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, management concluded that
our internal control over financial reporting was effective as of
December 31, 2009. Management reviewed the results of their
assessment with our Audit Committee. The effectiveness of our internal control
over financial reporting as of December 31, 2009 has been audited by
Ernst & Young LLP, the independent registered public accounting firm
that audited our consolidated financial statements included in this Annual
Report on Form 10-K, as stated in their report which is included in Item 8
of this Annual Report on Form 10-K and incorporated herein by
reference.
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 Exchange Act) 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 December 31, 2009, our
disclosure controls and procedures were effective.
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 December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information.
The
disclosure regarding the termination of our $75.0 million revolving credit
facility with Bank of America, N.A. and our new $100.0 million revolving credit
facility contained under “Credit Facilities – 2010 Credit Facility” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” is incorporated herein by reference. The summary
contained therein of certain provisions of the new credit agreement with General
Electric Capital Corporation does not purport to be complete and is qualified in
its entirety by reference to the full text of the credit agreement filed as
Exhibit 10.29 hereto, which is incorporated herein by reference.
Item
10. Directors, Executive
Officers and Corporate Governance.
The
information required by this item is incorporated by reference from the
discussions under the headings “Proposal Number One - Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive
Proxy Statement for the 2010 Annual Meeting of Stockholders. Pursuant to General
Instruction G(3), certain information concerning our executive officers is
contained in the discussion entitled “Executive Officers of the Registrant”
under Item 4 of Part I of this report.
We have
adopted a Code of Business Conduct and Ethics that applies to all employees,
directors and officers, including our principal executive officer, our principal
financial officer, our principal accounting officer or controller, or persons
performing similar functions, as well as a Code of Ethics for Chief Executive
and Senior Financial Officers, which applies to our Chief Executive Officer,
Co-Presidents, Chief Financial Officer, Executive Vice Presidents of Finance and
Controller, both of which are available on our website at
www.brookdaleliving.com.
Any amendment to, or waiver from, a provision of such codes of ethics granted to
a principal executive officer, principal financial officer, principal accounting
officer or controller, or person performing similar functions, will be posted on
our website.
Item
11. Executive
Compensation.
The
information required by this item is incorporated by reference from the
discussions under the headings “Compensation of Directors” and “Compensation of
Executive Officers” in our Definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
information required by this item regarding security ownership of certain
beneficial owners and management is incorporated by reference from the
discussion under the heading “Security Ownership of Certain Beneficial Owners
and Management” in our Definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
The
following table provides certain information as of December 31, 2009 with
respect to our equity compensation plans (after giving effect to shares issued
and/or vesting on such date):
Equity
Compensation Plan Information
|
|
|
Number
of securities
to
be issued upon
exercise
of outstanding
options,
warrants and
rights
(a)(1)
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and,
rights
(b)
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
(c)(2)
|
|
|
Equity
compensation plans approved by security holders(3)
|
|
|
— |
|
|
|
— |
|
|
|
6,626,312 |
|
|
Equity
compensation plans not approved by security holders(4)
|
|
|
— |
|
|
|
— |
|
|
|
95,189 |
|
|
Total
|
|
|
— |
|
|
|
— |
|
|
|
6,721,501 |
|
|
(1)
|
In
addition to options, warrants, and rights, our Omnibus Stock Incentive
Plan allows awards to be made in the form of shares of restricted stock,
restricted stock units or other forms of equity-based compensation. As of
December 31, 2009, 3,660,112 shares of unvested restricted stock and
400,000 restricted stock units issued under our Omnibus Stock Incentive
Plan were outstanding. In addition, as of such date, 255,218 shares of
unvested restricted stock issued under the plans of our predecessor
entities were outstanding. Such shares and restricted stock units are not
reflected in the table above.
|
|
(2)
|
The
number of shares remaining available for future issuance under equity
compensation plans approved by security holders consists of 5,775,375
shares remaining available for future issuance under our Omnibus Stock
Incentive Plan and 850,937 shares remaining available for future issuance
under our Associate Stock Purchase
Plan.
|
|
(3)
|
Under
the terms of our Omnibus Stock Incentive Plan, the number of shares
reserved and available for issuance will increase annually each January 1
by an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the
number of outstanding shares of our common stock on the last day of the
immediately preceding fiscal year. Under the terms of our
Associate Stock Purchase Plan, the number of shares reserved and available
for issuance will automatically increase by 200,000 shares on the first
day of each calendar year beginning January 1,
2010.
|
|
(4)
|
Represents
shares remaining available for future issuance under our Director Stock
Purchase Plan. Under the existing compensation program for the
members of our Board of Directors, each non-affiliated
director
|
|
|
has
the opportunity to elect to receive either immediately vested shares or
restricted stock units in lieu of up to 50% of his or her quarterly cash
compensation. Any immediately vested shares that are elected to
be received will be issued pursuant to the Director Stock Purchase
Plan. Under the director compensation program, all cash amounts
are payable quarterly in arrears, with payments to be made on April 1,
July 1, October 1 and January 1. Any immediately vested shares
that a director elects to receive under the Director Stock Purchase Plan
will be issued at the same time that cash payments are
made. The number of shares to be issued will be based on the
closing price of our common stock on the date of issuance (i.e., April 1,
July 1, October 1 and January 1), or if such date is not a trading date,
on the previous trading day’s closing price. Fractional amounts
will be paid in cash. The Board of Directors initially reserved
100,000 shares of our common stock for issuance under the Director Stock
Purchase Plan.
|
Item
13. Certain
Relationships and Related Transactions, and Director
Independence.
The
information required by this item is incorporated by reference from the
discussions under the headings “Certain Relationships and Related Transactions”
and “Director Independence” in our Definitive Proxy Statement for the 2010
Annual Meeting of Stockholders.
Item
14. Principal
Accounting Fees and Services.
The
information required by this item is incorporated by reference from the
discussion under the heading “Proposal Number Two – Ratification of Appointment
of Ernst & Young LLP as Independent Registered Public Accounting Firm” in
our Definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
Item
15. Exhibits
and Financial Statement Schedules.
The
following documents are filed as part of this report:
|
|
1)
|
Our
Audited Consolidated Financial
Statements
|
|
|
Balance
Sheets as of December 31, 2009 and
2008
|
|
|
Statements
of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
|
|
Statements
of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and
2007
|
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
|
|
Notes
to Consolidated Financial
Statements
|
|
|
Schedule
II – Valuation and Qualifying
Accounts
|
|
|
2)
|
Exhibits
– See Exhibit Index immediately following the signature page hereto, which
Exhibit Index is incorporated by reference as if fully set forth
herein.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
BROOKDALE
SENIOR LIVING INC.
|
|
|
|
|
|
|
By:
|
/s/
W.E. Sheriff
|
|
|
|
Name:
|
W.E.
Sheriff
|
|
|
|
Title:
|
Chief
Executive Officer
|
|
|
|
Date:
|
February
26, 2010
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
Date
|
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board
|
February
26, 2010
|
|
|
Wesley
R. Edens
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer and Director
|
February
26, 2010
|
|
|
W.E.
Sheriff
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-President
and Chief Financial Officer
|
February
26, 2010
|
|
|
Mark
W. Ohlendorf
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Frank
M. Bumstead
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Jackie
M. Clegg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Tobia
Ippolito
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Jeffrey
R. Leeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Mark
J. Schulte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
James
R. Seward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
February
26, 2010
|
|
|
Samuel
Waxman
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the
Company.
|
|
3.2
|
Amended
and Restated Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Company’s Current Report on Form 8-K filed on January 19,
2010).
|
|
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 25, 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
(incorporated by reference to Exhibit 4.4 to the Company’s Quarterly
Report on Form 10-Q filed on November 4, 2009).
|
|
10.1
|
Employment
Agreement dated September 8, 2005, by and between Brookdale Senior Living
Inc., Alterra Healthcare Corporation and Mark W. Ohlendorf (incorporated
by reference to Exhibit 10.70 to the Company’s Registration Statement on
Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21,
2005).*
|
|
10.2
|
Employment
Agreement dated August 9, 2005, by and between Brookdale Senior Living
Inc., Brookdale Living Communities, Inc. and John P. Rijos (incorporated
by reference to Exhibit 10.71 to the Company’s Registration Statement on
Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21,
2005).*
|
|
10.3
|
Employment
Agreement dated September 8, 2005, by and between Brookdale Senior Living
Inc., a Delaware corporation, Alterra Healthcare Corporation and Kristin
A. Ferge (incorporated by reference to Exhibit 10.73 to the Company’s
Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372)
filed on September 21, 2005).*
|
|
10.4
|
Brookdale
Living Communities, Inc. Employee Restricted Stock Plan (incorporated by
reference to Exhibit 10.75 to the Company’s Registration Statement on Form
S-1 (Amendment No. 1) (No. 333-127372) filed on September 21,
2005).*
|
|
10.5
|
Award
Agreement dated August 9, 2005, by and between Brookdale Living
Communities, Inc. and John P. Rijos (incorporated by reference to Exhibit
10.77 to the Company’s Registration Statement on Form S-1 (Amendment No.
1) (No. 333-127372) filed on September 21, 2005).*
|
|
10.6
|
FEBC-ALT
Investors LLC Employee Restricted Securities Plan (incorporated by
reference to Exhibit 10.80 to the Company’s Registration Statement on Form
S-1 (Amendment No. 1) (No. 333-127372) filed on September 21,
2005).*
|
|
10.7
|
Award
Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and
Mark W. Ohlendorf (incorporated by reference to Exhibit 10.81 to the
Company’s Registration Statement on Form S-1 (Amendment No. 1) (No.
333-127372) filed on September 21, 2005).*
|
|
10.8
|
Award
Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and
Kristin A. Ferge (incorporated by reference to Exhibit 10.82 to the
Company’s Registration Statement on Form S-1 (Amendment No. 1) (No.
333-127372) filed on September 21, 2005).*
|
|
10.9
|
Exchange
and Stockholder Agreement, dated September 30, 2005, by and among
Brookdale Senior Living Inc., Fortress Brookdale Acquisition LLC and Mark
J. Schulte (incorporated by reference to Exhibit 10.86 to the Company’s
Registration Statement on Form S-1 (Amendment No. 2) (No. 333-127372)
filed on October 11, 2005).*
|
|
10.10
|
Consent
to Change of Control and Third Amendment to Master Lease, dated April 1,
2006, by and between Health Care Property Investors, Inc., Texas HCP
Holding, L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland
Real Estate Holdings, LLC, ARC Sun City Center Real Estate Holdings, LLC,
and ARC LaBarc Real Estate Holdings, LLC, on the one hand, and Fort Austin
Limited Partnership, ARC Santa Catalina, Inc., ARC Richmond Place, Inc.,
Freedom Village of Holland, Michigan, Freedom Village of Sun City Center,
Ltd., LaBarc, L.P. and Park Place Investments, LLC, on the other hand, and
ARCPI Holdings, Inc. and American Retirement Corporation (incorporated by
reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q
filed on August 14, 2006).
|
|
10.11
|
Second
Amended and Restated Master Lease Agreement, dated as of April 7, 2006,
among Health Care REIT, Inc., HCRI North Carolina Properties III, Limited
Partnership, HCRI Tennessee Properties, Inc., HCRI Indiana Properties,
LLC, HCRI Wisconsin Properties, LLC, and HCRI Texas Properties, Ltd., and
Alterra Healthcare Corporation (incorporated by reference to Exhibit 10.32
to the Company’s Registration Statement on Form S-1 (No. 333-135030) filed
on June 14, 2006).
|
|
10.12
|
Form
of Employment Agreement for Gregory B. Richard, George T. Hicks, Bryan D.
Richardson and H. Todd Kaestner (incorporated by reference to Exhibit 10.4
to the Company’s Current Report on Form 8-K filed on May 12,
2006).*
|
|
10.13
|
Separation
Agreement and General Release, dated September 15, 2006, between Brookdale
Senior Living Inc. and R. Stanley Young (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
September 18, 2006).*
|
|
10.14
|
Separation
Agreement and General Release dated September 15, 2006 between Brookdale
Senior Living Inc. and Deborah C. Paskin (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
September 18, 2006).*
|
|
10.15
|
Employment
Agreement, dated September 25, 2006, by and between Brookdale Senior
Living Inc. and T. Andrew Smith (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on September 26,
2006).*
|
|
10.16.1
|
Form
of Restricted Share Agreement under the Brookdale Senior Living Inc.
Omnibus Stock Incentive Plan (Time-Vesting; No Dividends) (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
filed on August 8, 2007).*
|
|
10.16.2
|
Form
of Restricted Share Agreement under the Brookdale Senior Living Inc.
Omnibus Stock Incentive Plan (Time-Vesting; With Dividends) (incorporated
by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form
10-Q filed on August 8, 2007).*
|
|
10.16.3
|
Form
of Restricted Share Agreement under the Brookdale Senior Living Inc.
Omnibus Stock Incentive Plan (Performance/Time-Vesting; With Dividends)
(incorporated by reference to Exhibit 10.4 to the Company’s Quarterly
Report on Form 10-Q filed on August 8, 2007).*
|
|
10.16.4
|
Form
of Restricted Share Agreement under the Brookdale Senior Living Inc.
Omnibus Stock Incentive Plan (Performance/Time-Vesting; No Dividends)
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q filed on August 8, 2007).*
|
|
10.17
|
Separation
Agreement and General Release, dated February 7, 2008, between Brookdale
Senior Living Inc. and Mark J. Schulte (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February
11, 2008).*
|
|
10.18
|
Separation
Agreement and General Release and Consulting Agreement, dated February 11,
2008, between Brookdale Senior Living Inc. and Paul A. Froning
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on February 11, 2008).*
|
|
10.19
|
Brookdale Senior Living
Inc. Associate Stock Purchase Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June
11, 2008).*
|
|
10.20
|
Second
Amended and Restated Credit Agreement, dated as of February 27, 2009,
among Brookdale
Senior Living Inc., certain of its subsidiaries, the several lenders
parties thereto, and Bank of America, N.A., as administrative agent
(incorporated by reference to Exhibit 10.30 to the Company’s Annual Report
on Form 10-K filed on March 2, 2009).
|
|
10.21
|
Pledge
Agreement, dated as of February 27, 2009, among Brookdale Senior Living
Inc., certain of its subsidiaries, and Bank of America, N.A., as
administrative agent (incorporated by
reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K
filed on March 2, 2009).
|
|
10.22
|
Security
Agreement, dated as of February 27, 2009, among certain subsidiaries of
Brookdale Senior Living Inc. and Bank of America, N.A., as administrative
agent (incorporated by
reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K
filed on March 2, 2009).
|
|
10.23
|
First
Amendment, dated as of June 1, 2009, to the Second Amended and Restated
Credit Agreement, dated as of February 27, 2009, among the Company,
certain of its subsidiaries, the several lenders parties thereto, and Bank
of America, N.A., as administrative agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 2,
2009).
|
|
10.24
|
Brookdale
Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated
effective June 23, 2009 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on June 23,
2009).*
|
|
10.25
|
Employment
Agreement, dated as of June 23, 2009, by and between Brookdale Senior
Living Inc. and W.E. Sheriff (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on June 26,
2009).*
|
|
10.26
|
Restricted
Stock Unit Agreement, dated as of June 23, 2009, by and between Brookdale
Senior Living Inc. and W.E. Sheriff (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on June 26,
2009).*
|
|
10.27
|
Summary
of Brookdale Senior Living Inc. Director Stock Purchase Plan (incorporated
by reference to Exhibit 99.1 to the Company’s Registration Statement on
Form S-8 (No. 333-160354) filed on June 30, 2009).*
|
|
10.28
|
First
Amendment to Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as
amended and restated, effective as of October 30, 2009 (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q
filed on November 4, 2009).*
|
|
10.29
|
Credit
Agreement, dated as of February 23, 2010, among certain subsidiaries of
Brookdale Senior Living Inc., General Electric Capital Corporation, as
administrative agent and lender, and the other lenders from time to time
parties thereto.
|
|
21
|
Subsidiaries
of the Registrant.
|
|
23
|
Consent
of Ernst & Young LLP.
|
|
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.
|
|
*
|
Management
Contract or Compensatory Plan
|
116