form10-q.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
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|
T
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2008
or
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|
£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _____________ to _____________
Commission
File Number: 001-32641
BROOKDALE
SENIOR LIVING INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
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|
20-3068069
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|
(State
or other jurisdiction
of
incorporation or organization)
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(I.R.S.
Employer Identification No.)
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111
Westwood Place, Suite 200, Brentwood, Tennessee
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37027
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|
(Address
of principal executive offices)
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(Zip
Code)
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(615)
221-2250
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “accelerated filer”, “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer T
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Accelerated
filer £
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Non-accelerated
filer £ (Do not
check if a smaller reporting company)
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Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
As of May
5, 2008, 102,230,615 shares of the registrant’s common stock, $0.01 par value,
were outstanding (excluding unvested restricted shares).
BROOKDALE
SENIOR LIVING INC.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2008
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PAGE
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PART
I. FINANCIAL INFORMATION
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| Item 1. |
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PART
II.
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OTHER
INFORMATION
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Item
1. Financial Statements
BROOKDALE
SENIOR LIVING INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except stock amounts)
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Assets
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(Unaudited)
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Current
assets
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Cash
and cash equivalents
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$ |
119,536 |
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$ |
100,904 |
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Cash
and escrow deposits – restricted
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76,649 |
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76,962 |
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Accounts
receivable, net
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72,448 |
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66,807 |
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Deferred
tax asset
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13,040 |
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13,040 |
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Prepaid
expenses and other current assets, net
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30,681 |
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34,122 |
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Total
current assets
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312,354 |
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291,835 |
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Property,
plant and equipment and leasehold intangibles, net
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3,744,647 |
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3,760,453 |
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Cash
and escrow deposits – restricted
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38,965 |
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17,989 |
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Investment
in unconsolidated ventures
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40,823 |
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41,520 |
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Goodwill
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329,597 |
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328,852 |
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Other
intangible assets, net
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248,237 |
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257,135 |
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Other
assets, net
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99,113 |
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113,838 |
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Total
assets
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$ |
4,813,736 |
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$ |
4,811,622 |
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Liabilities
and Stockholders’ Equity
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Current
liabilities
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Current
portion of long-term debt
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$ |
71,748 |
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$ |
18,007 |
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Trade
accounts payable
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45,565 |
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37,137 |
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Accrued
expenses
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143,486 |
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156,253 |
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Refundable
entrance fees and deferred revenue
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263,827 |
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254,582 |
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Tenant
security deposits
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32,393 |
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31,891 |
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Dividends
payable
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25,950 |
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51,897 |
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Total
current liabilities
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582,969 |
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549,767 |
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Long-term
debt, less current portion
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2,172,628 |
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2,119,217 |
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Line
of credit
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203,000 |
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198,000 |
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Deferred
entrance fee revenue
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66,301 |
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77,477 |
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Deferred
liabilities
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124,392 |
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119,726 |
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Deferred
tax liability
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235,669 |
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266,583 |
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Other
liabilities
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82,661 |
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61,314 |
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Total
liabilities
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3,467,620 |
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3,392,084 |
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Commitments
and contingencies
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Stockholders’
Equity
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Preferred
stock, $.01 par value, 50,000,000 shares authorized at March 31, 2008 and
December 31, 2007; no shares issued and outstanding
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- |
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- |
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Common
stock, $.01 par value, 200,000,000 shares authorized at March 31, 2008 and
December 31, 2007; 105,040,206 shares and 104,962,211 shares issued and
outstanding (including 2,849,167 and 3,020,341 unvested restricted
shares), respectively
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1,050 |
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1,050 |
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Additional
paid-in-capital
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1,734,646 |
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1,752,581 |
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Accumulated
deficit
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(387,785 |
) |
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(332,692 |
) |
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Accumulated
other comprehensive loss
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(1,795 |
) |
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(1,401 |
) |
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Total
stockholders’ equity
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1,346,116 |
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1,419,538 |
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Total
liabilities and stockholders’ equity
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$ |
4,813,736 |
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$ |
4,811,622 |
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See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited,
in thousands, except per share data)
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Three
Months Ended
March
31,
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Revenue
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Resident
fees
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$ |
478,835 |
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$ |
445,338 |
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Management
fees
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1,813 |
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1,496 |
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Total
revenue
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480,648 |
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446,834 |
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Expense
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Facility
operating expense (excluding depreciation and amortization of $50,890 and
$65,569, respectively)
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305,059 |
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280,809 |
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General
and administrative expense (including non-cash stock-based compensation
expense of $8,010 and $10,820, respectively)
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36,388 |
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40,653 |
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Facility
lease expense
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67,812 |
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68,481 |
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Depreciation
and amortization
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71,940 |
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72,984 |
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Total
operating expense
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481,199 |
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462,927 |
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Loss
from operations
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(551 |
) |
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(16,093 |
) |
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Interest
income
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1,626 |
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1,820 |
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Interest
expense
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Debt
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(35,871 |
) |
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|
(33,452 |
) |
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Amortization
of deferred financing costs
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|
(1,557 |
) |
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|
(1,618 |
) |
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Change
in fair value of derivatives and amortization
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|
(45,633 |
) |
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|
(4,781 |
) |
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Loss
on extinguishment of debt
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|
(2,821 |
) |
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|
— |
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Equity
in loss of unconsolidated ventures
|
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|
(173 |
) |
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(1,453 |
) |
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Loss
before income taxes
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|
(84,980 |
) |
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(55,577 |
) |
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Benefit
for income taxes
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|
29,887 |
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20,568 |
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Loss
before minority interest
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(55,093 |
) |
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|
(35,009 |
) |
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Minority
interest
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|
— |
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|
(131 |
) |
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Net
loss
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$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
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Basic
and diluted loss per share
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$ |
(0.54 |
) |
|
$ |
(0.35 |
) |
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Weighted
average shares used in computing basic and diluted loss per
share
|
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|
101,995 |
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|
101,302 |
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Dividends
declared per share
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$ |
0.25 |
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$ |
0.45 |
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
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|
Three
Months Ended
March
31,
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Cash
Flows from Operating Activities
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Net
loss
|
|
$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
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Loss
on extinguishment of debt
|
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|
2,821 |
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|
— |
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Depreciation
and amortization
|
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|
73,497 |
|
|
|
74,602 |
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Minority
interest
|
|
|
— |
|
|
|
131 |
|
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Equity
in loss of unconsolidated ventures
|
|
|
173 |
|
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|
1,453 |
|
|
Distributions
from unconsolidated ventures from cumulative share of net
earnings
|
|
|
190 |
|
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|
46 |
|
|
Amortization
of deferred gain
|
|
|
(1,085 |
) |
|
|
(1,085 |
) |
|
Amortization
of entrance fees
|
|
|
(6,691 |
) |
|
|
(4,259 |
) |
|
Proceeds
from deferred entrance fee revenue
|
|
|
2,780 |
|
|
|
3,916 |
|
|
Deferred
income tax benefit
|
|
|
(30,662 |
) |
|
|
(20,634 |
) |
|
Change
in deferred lease liability
|
|
|
5,751 |
|
|
|
6,336 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
45,633 |
|
|
|
4,781 |
|
|
Non-cash
stock-based compensation
|
|
|
8,010 |
|
|
|
10,820 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(6,392 |
) |
|
|
(4,796 |
) |
|
Prepaid
expenses and other assets, net
|
|
|
3,179 |
|
|
|
1,703 |
|
|
Accounts
payable and accrued expenses
|
|
|
(5,083 |
) |
|
|
(15,756 |
) |
|
Tenant
refundable fees and security deposits
|
|
|
1,184 |
|
|
|
(1,170 |
) |
|
Other
|
|
|
2,417 |
|
|
|
7,880 |
|
|
Net
cash provided by operating activities
|
|
|
40,629 |
|
|
|
28,828 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Decrease
in lease security deposits and lease acquisition deposits,
net
|
|
|
1,763 |
|
|
|
958 |
|
|
Increase
in cash and escrow deposits — restricted
|
|
|
(20,663 |
) |
|
|
(3,922 |
) |
|
Additions
to property, plant and equipment and leasehold intangibles, net of
related payables
|
|
|
(46,213 |
) |
|
|
(34,331 |
) |
|
Acquisition
of assets, net of related payables and cash received
|
|
|
(745 |
) |
|
|
(22,867 |
) |
|
Acquisition
deposit
|
|
|
— |
|
|
|
(10,116 |
) |
|
Payment
on (issuance of) notes receivable, net
|
|
|
10,112 |
|
|
|
(5,431 |
) |
|
Investment
in unconsolidated ventures
|
|
|
(356 |
) |
|
|
(785 |
) |
|
Distributions
received from unconsolidated ventures
|
|
|
— |
|
|
|
943 |
|
|
Net
cash used in investing activities
|
|
|
(56,102 |
) |
|
|
(75,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
|
288,479 |
|
|
|
135,346 |
|
|
Repayment
of debt and capital lease obligation
|
|
|
(181,327 |
) |
|
|
(11,895 |
) |
|
Proceeds
from line of credit
|
|
|
125,000 |
|
|
|
106,500 |
|
|
Repayment
of line of credit
|
|
|
(120,000 |
) |
|
|
(142,000 |
) |
|
Payment
of dividends
|
|
|
(51,897 |
) |
|
|
(46,588 |
) |
|
Payment
of financing costs, net of related payables
|
|
|
(853 |
) |
|
|
(4,072 |
) |
|
Other
|
|
|
(403 |
) |
|
|
(624 |
) |
|
Refundable
entrance fees:
|
|
|
|
|
|
|
|
|
|
Proceeds
from refundable entrance fees
|
|
|
3,492 |
|
|
|
4,258 |
|
|
Refunds
of entrance fees
|
|
|
(3,632 |
) |
|
|
(6,315 |
) |
|
Recouponing
and payment of swap termination
|
|
|
(23,942 |
) |
|
|
— |
|
|
Cash
portion of loss on extinguishment of debt
|
|
|
(812 |
) |
|
|
— |
|
|
Net
cash provided by financing activities
|
|
|
34,105 |
|
|
|
34,610 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
18,632 |
|
|
|
(12,113 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
100,904 |
|
|
|
68,034 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
119,536 |
|
|
$ |
55,921 |
|
See
accompanying notes to condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description
of Business
Brookdale
Senior Living Inc. (“Brookdale”, “BSL” or the “Company”) is a leading owner and
operator of senior living facilities throughout the United
States. The Company provides an exceptional living experience through
properties that are designed, purpose-built and operated to provide the highest
quality service, care and living accommodations for residents. The
Company owns, leases and operates retirement centers, assisted living and
dementia-care facilities and continuing care retirement centers
(“CCRCs”).
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited interim condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for quarterly reports on Form 10-Q. In the opinion of
management, these financial statements include all adjustments necessary to
present fairly the financial position, results of operations and cash flows of
the Company as of March 31, 2008, and for all periods presented. The condensed
consolidated financial statements are prepared on the accrual basis of
accounting. All adjustments made have been of a normal and recurring nature.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
disclosures included are adequate and provide a fair presentation of interim
period results. Interim financial statements are not necessarily indicative of
the financial position or operating results for an entire year. It is suggested
that these interim financial statements be read in conjunction with the audited
financial statements and the notes thereto, together with management’s
discussion and analysis of financial condition and results of operations,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, as filed with the Securities and Exchange
Commission.
In 2006,
the Company adopted EITF 04-5, Determining Whether a General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights, and as a
result, consolidated the operations of three limited partnerships controlled by
the Company. In 2006, the Company purchased a facility from one of
the limited partnerships and the partnership was liquidated. During
2007, the Company purchased the remaining facilities and the limited
partnerships were liquidated. As a result, the Company does not have
minority interest reflected on the condensed consolidated balance sheet in the
current period.
Revenue
Recognition
Resident
Fees
Resident
fee revenue is recorded when services are rendered and consist of fees for basic
housing, support services and fees associated with additional services such as
personalized health and assisted living care. Residency agreements are generally
for a term of 30 days to one year, with resident fees billed monthly in advance.
Revenue for certain skilled nursing services and ancillary charges is recognized
as services are provided and is billed monthly in arrears.
Entrance
Fees
Certain
of the Company’s communities have residency agreements which require the
resident to pay an upfront fee prior to occupying the facility. In
addition, in connection with the Company’s MyChoice program, new and existing
residents are allowed to pay additional entrance fee amounts in return for a
reduced monthly service fee. The non-refundable portion of the
entrance fee is recorded as deferred revenue and amortized over the estimated
stay of the resident based on an actuarial valuation. The refundable
portion of a resident’s entrance fee is generally refundable
within a
certain number of months or days following contract termination or in certain
agreements, upon the resale of a comparable unit or 12 months after the resident
vacates the unit. In such instances the refundable portion of the fee
is not amortized and included in refundable entrance fees and deferred
revenue.
Certain
contracts require the refundable portion of the entrance fee plus a percentage
of the appreciation of the unit, if any, to be refunded only upon resale of a
comparable unit (“contingently refundable”). Upon resale the Company
may receive reoccupancy proceeds in the form of additional contingently
refundable fees, refundable fees, or non-refundable fees. The Company
estimates the amount of reoccupancy proceeds to be received from additional
contingently refundable fees or non-refundable fees and records such amount as
deferred revenue. The deferred revenue is amortized over the life of
the facility and was approximately $67.5 million and $69.7 million at March 31,
2008 and December 31, 2007, respectively. All remaining contingently
refundable fees not recorded as deferred revenue and amortized are included in
refundable entrance fees and deferred revenue.
All
refundable amounts due to residents at any time in the future, including those
recorded as deferred revenue are classified as current liabilities.
The
non-refundable portion of entrance fees expected to be earned and recognized in
revenue in one year is recorded as a current liability. The balance
of the non-refundable portion is recorded as a long-term liability.
Community
Fees
All
community fees received are non-refundable and are recorded initially as
deferred revenue. The deferred amounts, including both the deferred
revenue and the related direct resident lease origination costs, are amortized
over the estimated stay of the resident which is consistent with the implied
contractual terms of the resident lease.
Management
Fees
Management
fee revenue is recorded as services are provided to the owners of the
communities. Revenues are determined by an agreed upon percentage of gross
revenues (as defined).
Purchase
Accounting
In
determining the allocation of the purchase price of companies and communities to
net tangible and identified intangible assets acquired and liabilities assumed,
the Company makes estimates of the fair value of the tangible and intangible
assets acquired and liabilities assumed using information obtained as a result
of pre-acquisition due diligence, marketing, leasing activities and independent
appraisals. The Company allocates the purchase price of communities to net
tangible and identified intangible assets acquired and liabilities assumed based
on their fair values in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, Business
Combinations. The determination of fair value involves the use
of significant judgment and estimation. The Company determines fair values as
follows:
Current
assets and current liabilities assumed are valued at carryover basis which
approximates fair value.
Property,
plant and equipment are valued utilizing discounted cash flow projections that
assume certain future revenue and costs, and considers capitalization and
discount rates using current market conditions.
The
Company allocates a portion of the purchase price to the value of resident
leases acquired based on the difference between the communities valued with
existing in-place leases adjusted to market rental rates and the communities
valued with current leases in place based on current contractual terms. Factors
management considers in its analysis include an estimate of carrying costs
during the expected lease-up periods considering current market conditions and
costs to execute similar resident leases. In estimating carrying costs,
management includes estimates of lost rentals during the lease-up period and
estimated costs to execute similar leases. The value of in-place leases is
amortized to expense over the remaining initial term of the respective
leases.
Leasehold
operating intangibles are valued utilizing discounted cash flow projections that
assume certain future revenues and costs over the remaining lease term. The
value assigned to leasehold operating intangibles is amortized on a
straight-line basis over the lease term.
Community
purchase options are valued at the estimated value of the underlying community
less the cost of the option payment discounted at current market
rates. Management contracts and other acquired contracts are valued
at a multiple of management fees and operating income and amortized over the
estimated term of the agreement.
Long-term
debt assumed is recorded at fair market value based on the current market rates
and collateral securing the indebtedness.
Capital
lease obligations are valued based on the present value of the minimum lease
payments applying a discount rate equal to the Company’s estimated incremental
borrowing rate at the date of acquisition.
Deferred
entrance fee revenue is valued at the estimated cost of providing services to
residents over the terms of the current contracts to provide such services.
Refundable entrance fees are valued at cost pursuant to the resident lease plus
the resident's share of any appreciation of the community unit at the date of
acquisition, if applicable.
A
deferred tax liability is recognized at statutory rates for the difference
between the book and tax bases of the acquired assets and
liabilities.
The
excess of the fair value of liabilities assumed and cash paid over the fair
value of assets acquired is allocated to goodwill.
Fair
Value Measurements
SFAS No.
157 establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The three levels are defined as follows:
Level 1 –
Inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2 –
Inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3 –
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The
Company’s derivative positions are valued using models developed internally by
the respective counterparty that use as their basis readily observable market
parameters (such as forward yield curves) and are classified within Level 2 of
the valuation hierarchy.
Self-Insurance
Liability Accruals
The
Company is subject to various legal proceedings and claims that arise in the
ordinary course of its business. Although the Company maintains general
liability and professional liability insurance policies for its owned, leased
and managed communities under a master insurance program, the Company’s current
policies provide for deductibles of $3.0 million for each claim. As a result,
the Company is, in effect, self-insured for most claims. In addition, the
Company maintains a self-insured workers compensation program and a self-insured
employee medical program for amounts below excess loss coverage amounts, as
defined. The Company reviews the adequacy of its accruals related to these
liabilities on an ongoing basis, using historical claims, actuarial valuations,
third party administrator estimates, consultants, advice from legal counsel and
industry data, and adjusts accruals periodically. Estimated costs related to
these self-insurance programs are accrued based on known claims and projected
claims incurred but not yet reported. Subsequent changes in actual experience
are monitored and estimates are updated as information is
available.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 157, Fair Value
Measurement (“SFAS 157”). SFAS 157 provides guidance
for using fair value to measure assets and liabilities. The standard also
responds to investors’ requests for expanded information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. The standard does not expand
the use of fair value in any new circumstances. The statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company adopted SFAS 157 in
the current period and provided certain disclosures to comply with its
provisions.
In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (“SFAS 159”). This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This Statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company adopted SFAS
159 in the current period and the adoption had no impact in the current quarter
condensed consolidated financial statements.
In June
2007, the Emerging Issues Task Force (“EITF”) ratified EITF 06-11, Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF
06-11 requires that a realized income tax benefit from dividends or dividend
equivalents that are charged to retained earnings and are paid to employees for
equity classified nonvested equity shares, nonvested equity share units, and
outstanding equity share options should be recognized as an increase to
additional paid-in-capital. The amount recognized in additional paid-in
capital for the realized income tax benefit from dividends on those awards
should be included in the pool of excess tax benefits available to absorb tax
deficiencies on share-based payment awards. EITF 06-11 is effective for
fiscal years after December 15, 2007 (note 11).
In December 2007, the FASB
issued FASB Statement No. 141 (revised 2007), Business
Combinations (“SFAS
141R”). SFAS 141R was issued to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. This Statement establishes principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The Statement is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.
In
December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 was issued to improve the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company does not expect the adoption of
SFAS 160 to have an impact on the consolidated financial
statements.
In March
2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 amends and expands the disclosure
requirements of Statement 133 with the intent to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after November 15, 2008. The Company will adopt SFAS 161 in January
2009.
Dividends
On March
19, 2008, the Company’s board of directors declared a quarterly cash dividend of
$0.25 per share of common stock, or an aggregate of $26.0 million, for the
quarter ended March 31, 2008. The $0.25 per share dividend was paid
on April 14, 2008 to holders of record of the Company’s common stock on March
31, 2008.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current financial
statement presentation, with no effect on the Company’s consolidated financial
position or results of operations.
3. Stock-Based
Compensation
Compensation
expense in connection with grants of restricted stock of $8.0 million and $10.8
million was recorded for the three months ended March 31, 2008 and 2007,
respectively. For the quarter ended March 31, 2008 and 2007,
compensation expense was calculated net of forfeitures estimated from 0% - 6%
and 5%, respectively, of the shares
granted.
On
February 7, 2008, the Company entered into a Separation Agreement and General
Release with an officer that accelerated the vesting provision of his restricted
stock grants as of March 3, 2008 upon satisfying certain
conditions. As a result of the modification, the previous
compensation expense related to these grants was reversed and a charge based on
the fair value of the stock at the modification date was recorded over the
modified vesting period. The net impact of the adjustment was $2.7
million of additional expense for the quarter ended March 31, 2008.
For all
awards with graded vesting other than awards with performance-based vesting
conditions, the Company records compensation expense for the entire award on a
straight-line basis over the requisite service period. For
graded-vesting awards with performance-based vesting conditions, total
compensation expense is recognized over the requisite service period for each
separately vesting tranche of the award as if the award is, in substance,
multiple awards once the performance target is deemed probable of
achievement. Performance goals are evaluated quarterly. If
such goals are not ultimately met or it is not probable the goals will be
achieved, no compensation expense is recognized and any previously recognized
compensation expense is reversed.
Current
year grants of restricted shares under the Company’s Omnibus Stock Incentive
Plan were as follows (dollars in thousands except for share and per share
amounts):
|
|
|
|
|
|
Three
months ended March 31, 2008
|
160,000
|
$23.17
– 25.95
|
$2,967
|
4. Goodwill
and Other Intangible Assets, Net
Following
is a summary of changes in the carrying amount of goodwill for the three months
ended March 31, 2008 presented on an operating segment basis (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$ |
7,642 |
|
|
$ |
102,812 |
|
|
$ |
218,398 |
|
|
$ |
328,852 |
|
|
Additions
|
|
|
— |
|
|
|
851 |
|
|
|
(106 |
) |
|
|
745 |
|
|
Balance
at March 31, 2008
|
|
$ |
7,642 |
|
|
$ |
103,663 |
|
|
$ |
218,292 |
|
|
$ |
329,597 |
|
The
additions to goodwill related to the current period acquisition of a home health
agency and to adjust the allocation of the purchase price for previously
acquired entities.
Intangible
assets with definite useful lives are amortized over their estimated lives and
are tested for impairment whenever indicators of impairment arise. The following
is a summary of other intangible assets at March 31, 2008 and December 31, 2007
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
purchase options
|
|
$ |
147,682 |
|
|
$ |
(3,698 |
) |
|
$ |
143,984 |
|
|
$ |
147,682 |
|
|
$ |
(2,773 |
) |
|
$ |
144,909 |
|
|
Management
contracts and other
|
|
|
158,048 |
|
|
|
(53,795 |
) |
|
|
104,253 |
|
|
|
158,048 |
|
|
|
(45,822 |
) |
|
|
112,226 |
|
|
Total
|
|
$ |
305,730 |
|
|
$ |
(57,493 |
) |
|
$ |
248,237 |
|
|
$ |
305,730 |
|
|
$ |
(48,595 |
) |
|
$ |
257,135 |
|
Amortization
expense related to definite-lived intangible assets for the three months ended
March 31, 2008 and 2007 was $8.9 million and $8.0 million,
respectively.
5. Property,
Plant and Equipment and Leasehold Intangibles, Net
Property,
plant and equipment and leasehold intangibles, net, which include assets under
capital leases, consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
258,624 |
|
|
$ |
259,336 |
|
|
Buildings
and improvements
|
|
|
2,685,424 |
|
|
|
2,651,630 |
|
|
Furniture
and equipment
|
|
|
240,299 |
|
|
|
223,475 |
|
|
Resident
and operating lease intangibles
|
|
|
598,284 |
|
|
|
596,623 |
|
|
Assets
under capital and financing leases
|
|
|
512,152 |
|
|
|
517,506 |
|
|
|
|
|
4,294,783 |
|
|
|
4,248,570 |
|
|
Accumulated
depreciation and amortization
|
|
|
(550,136 |
) |
|
|
(488,117 |
) |
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
3,744,647 |
|
|
$ |
3,760,453 |
|
6. Debt
Long-term
Debt, Capital Leases and Financing Obligations
Long-term
debt, capital leases and financing obligations consist of the following (dollars
in thousands):
|
|
|
|
|
|
|
|
|
Mortgage
notes payable due 2009 through 2039; weighted average interest rate of
5.57% at March 31, 2008 (weighted average interest rate of 6.59% at
December 31, 2007)
|
|
$ |
1,144,167 |
|
|
$ |
856,073 |
|
|
Mortgages
payable due 2009 through 2038; weighted average interest rate of 8.38% at
March 31, 2008 (weighted average interest rate of 7.01% at December 31,
2007)
|
|
|
3,333 |
|
|
|
74,549 |
|
|
$150,000
Series A notes payable, secured by five communities and by a $3.0 million
letter of credit, bearing interest at LIBOR plus 0.88%, payable in monthly
installments of interest only until August 2011 and payable in monthly
installments of principal and interest through maturity in August
2013
|
|
|
150,000 |
|
|
|
150,000 |
|
|
Mortgages
payable due 2012; weighted average interest rate of 5.64% at March 31,
2008 (weighted average interest rate of 5.64% at December 31, 2007),
payable interest only through July 2010 and payable in monthly
installments of principal and interest through maturity in July 2012,
secured by the FIT REN portfolio
|
|
|
212,407 |
|
|
|
212,407 |
|
|
Mortgages
payable due 2010, bearing interest at LIBOR plus 2.25%, payable in monthly
installments of interest only until April 2009 and payable in monthly
installments of principal and interest through maturity in April 2010,
secured by the Fortress CCRC Portfolio
|
|
|
— |
|
|
|
105,756 |
|
|
Variable
rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average
interest rate of 4.75% at March 31, 2008 (weighted average interest rate
of 5.03% at December 31, 2007), due 2032, payable interest only until
maturity, secured by the Chambrel portfolio
|
|
|
100,841 |
|
|
|
100,841 |
|
|
Capital
and financing lease obligations payable through 2020; weighted average
interest rate of 8.98% at March 31, 2008 (weighted average interest rate
of 8.97% at December 31, 2007)
|
|
|
295,258 |
|
|
|
299,228 |
|
|
Mortgage
note, bearing interest at a variable rate of LIBOR plus 0.70%, payable
interest only through maturity in August 2012. The note is
secured by 15 of the Company’s communities and an $11.5 million guaranty
by the Company
|
|
|
325,631 |
|
|
|
325,631 |
|
|
Mezzanine
loan payable to Brookdale Senior Housing, LLC joint venture with respect
to The Heritage at Gaines Ranch, payable to the extent of all available
cash flow (as defined)
|
|
|
12,739 |
|
|
|
12,739 |
|
|
Total
debt
|
|
|
2,244,376 |
|
|
|
2,137,224 |
|
|
Less
current portion
|
|
|
71,748 |
|
|
|
18,007 |
|
|
Total
long-term debt
|
|
$ |
2,172,628 |
|
|
$ |
2,119,217 |
|
As of
March 31, 2008, the Company had an available secured line of credit of $320.0
million ($70.0 million letter of credit sublimit) and a letter of credit
facility of up to $80.0 million. The line of credit bears interest at
the base rate plus 0.50% or LIBOR plus 1.50%, at the Company’s
election. The Company must also pay a fee equal to 1.50% of the
amount of any outstanding letters of credit issued under the
facilities. In connection with entering into the credit facility
agreement, the Company paid a commitment fee of 0.50% and is subject to a
non-use fee of 0.25% on all unutilized amounts. The credit facility
matures on November 15, 2008 subject to extension at the Company’s unilateral
option for two three-month extension periods and payment of a 0.1875% commitment
fee with respect to each extension. Accordingly, amounts drawn
against the line of credit at March 31, 2008 have been classified as long-term
on our condensed consolidated balance sheets. As of March 31, 2008,
$203.0 million was drawn on the revolving loan facility and $118.0 million of
letters of credit had been issued under the agreements. The
agreements are secured by a pledge of the Company’s tier one subsidiaries and,
subject to certain limitations, subsidiaries formed to consummate future
acquisitions.
On
January 25, 2008, the Company financed two previously acquired communities with
$47.3 million of first mortgage financing bearing interest at LIBOR plus 1.8%
payable interest only through January 25, 2011. The initial draw on
the loan was $37.6 million. The Company entered into interest rate
swaps to convert the loan from floating to fixed. The loan is secured
by the underlying properties.
On
February 15, 2008, the Company financed a previously acquired community with
$46.0 million of first mortgage financing bearing interest at 6.21% payable
interest only through August 5, 2012. The loan is secured by the
underlying property.
On March
13, 2008, the Company financed a previously acquired community with $64.1
million of first mortgage financing bearing interest initially at 5.5% and
adjusted monthly commencing on May 1, 2008. The adjusted rate is
calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The
note is payable interest only through April 1, 2011. The Company
entered into interest rate swaps to convert the loan from floating to
fixed. The loan is secured by the underlying property.
On March
27, 2008, the Company financed a previously acquired community with $20.0
million of first mortgage financing bearing interest initially at 5.5% and
adjusted monthly commencing on May 1, 2008. The adjusted rate is
calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The
note is payable interest only through April 1, 2011. The Company entered
into interest rate swaps to convert the loan from floating to
fixed. The loan is secured by the underlying property.
The
financings entered into on January 25, 2008, February 15, 2008, March 13, 2008
and March 27, 2008 were all related to the same portfolio. In
conjunction with these refinancings, the Company repaid $105.8 million of
existing debt.
On March
26, 2008, the Company obtained $119.4 million of first mortgage financing
bearing interest at 5.405%. The debt matures on April 1, 2013, with
one extension term of up to five years from the maturity date. The loan is
secured by 19 of the Company’s communities, with an additional loan
commitment not to exceed $6.0 million in connection with the addition of a
property into the collateral pool. In conjunction with the financing, the
Company repaid $71.2 million of existing debt. The net proceeds from the
transaction were used to pay down amounts drawn against the Company’s revolving
credit facility and fund other working capital needs. Subsequent to
March 31, 2008, the Company obtained the $6.0 million additional loan and repaid
$3.3 million of existing debt on the property added into the collateral
pool.
As of
March 31, 2008, the Company is in compliance with the financial covenants of its
outstanding debt and lease agreements.
In the
normal course of business, a variety of financial instruments are used to manage
or hedge interest rate risk. Interest rate protection and swap
agreements were entered into to effectively cap or convert floating rate debt to
a fixed rate basis, as well as to hedge anticipated future financing
transactions. Pursuant to the hedge agreements, the Company is
required to secure its obligation to the counterparty if the fair value
liability exceeds a specified threshold. Cash collateral pledged to
the Company’s counterparty was $25.0 million and $5.0 million as of March 31,
2008 and December 31, 2007, respectively.
All
derivative instruments are recognized as either assets or liabilities in the
condensed consolidated balance sheets at fair value. The change in
mark-to-market of the value of the derivative is recorded as an adjustment to
income.
Derivative
contracts are not entered into for trading or speculative
purposes. Furthermore, the Company has a policy of only entering into
contracts with major financial institutions based upon their credit rating and
other factors. Under certain circumstances, the Company may be
required to replace a counterparty in the event that the counterparty does not
maintain a specified credit rating.
The
following table summarizes the Company’s swap instruments at March 31, 2008
(dollars in thousands):
|
Current
notional balance
|
|
$ |
1,266,641 |
|
|
Highest
possible notional
|
|
$ |
1,266,641 |
|
|
Lowest
interest rate
|
|
|
3.04 |
% |
|
Highest
interest rate
|
|
|
5.00 |
% |
|
Average
fixed rate
|
|
|
3.84 |
% |
|
Earliest
maturity date
|
|
2010
|
|
|
Latest
maturity date
|
|
2014
|
|
|
Weighted
average original maturity
|
|
4.4
years
|
|
|
Estimated
liability fair value (included in other liabilities at March 31,
2008)
|
|
$ |
(34,948 |
) |
|
Estimated
asset fair value (included in other assets, net at March 31,
2008)
|
|
$ |
— |
|
During
the three months ended March 31, 2008, the fair value of the Company’s interest
rate swaps decreased $45.6 million which has been included as a component of
interest expense in the condensed consolidated statements of
operations.
During
the three month period ended March 31, 2008, the Company terminated a swap
agreement with a notional amount of approximately $45.4 million and recouponed,
at a more favorable interest rate, notional amounts of $726.5
million. In conjunction with these transactions, $23.9 million was
paid to the respective counterparties.
Subsequent
to March 31, 2008, the Company terminated a swap agreement with a notional
amount of $70.0 million. In conjunction with this transaction, $3.2
million was paid to the counterparty.
7. Legal
Proceedings
In
connection with the sale of certain communities to Ventas Realty Limited
Partnership (“Ventas”) in 2004, two legal actions have been filed. The first
action was filed on September 15, 2005, by current and former limited
partners in 36 investing partnerships in the United States District Court for
the Eastern District of New York captioned David T. Atkins et al. v. Apollo
Real Estate Advisors, L.P., et al. (the “Action”). On
March 17, 2006, a third amended complaint was filed in the Action. The
third amended complaint is brought on behalf of current and former limited
partners in 14 investing partnerships. It names as defendants, among others, the
Company, Brookdale Living Communities, Inc. (“BLC”), a subsidiary of the
Company, GFB-AS Investors, LLC (“GFB-AS”), a subsidiary of BLC, the general
partners of the 14 investing partnerships, which are alleged to be subsidiaries
of GFB-AS, Fortress Investment Group LLC (“Fortress”), an affiliate of the
Company’s largest stockholder, and R. Stanley Young, the Company’s former Chief
Financial Officer. The nine count third amended complaint alleges, among other
things, (i) that the defendants converted for their own use the property of the
limited partners of 11 partnerships, including through the failure to obtain
consents the plaintiffs contend were required for the sale of communities
indirectly owned by those partnerships to Ventas; (ii) that the defendants
fraudulently persuaded the limited partners of three partnerships to give up a
valuable property right based upon incomplete, false and misleading statements
in connection with certain consent solicitations; (iii) that certain defendants,
including GFB-AS, the general partners, and the Company’s former Chief Financial
Officer, but not including the Company, BLC, or Fortress, committed mail fraud
in connection with the sale of communities indirectly owned by the 14
partnerships at issue in the Action to Ventas; (iv) that certain defendants,
including GFB-AS and the Company’s former Chief Financial Officer, but not
including the Company, BLC, the general partners, or Fortress, committed wire
fraud in connection with certain communications with plaintiffs in the Action
and another investor in a limited partnership; (v) that the defendants, with the
exception of the Company, committed substantive violations of the Racketeer
Influenced and Corrupt Organizations Act (“RICO”); (vi) that the defendants
conspired to violate RICO; (vii) that GFB-AS and the general partners violated
the partnership agreements of the 14 investing partnerships; (viii) that GFB-AS,
the general partners, and the Company’s former Chief Financial Officer breached
fiduciary duties to the plaintiffs; and (ix) that the defendants were unjustly
enriched. The plaintiffs have asked for damages in excess of $100.0 million
on each of the counts described above, including treble damages for the RICO
claims. On April 18, 2006, the Company filed a motion to dismiss the
claims with prejudice. On April 30, 2008, the court granted the Company’s motion
to dismiss the third amended complaint, but granted the plaintiffs’ motion for
leave to amend, which must be filed within 30 days of the issuance of the
court’s order. The Company plans to continue to vigorously defend this Action if
the plaintiffs elect to file a further amended complaint.
A
putative class action lawsuit was also filed on March 22, 2006, by
certain limited partners in four of the same partnerships involved in the Action
in the Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS
Investors, LLC and Brookdale Living Communities, Inc. (the “Second
Action”). On November 21, 2006, an amended complaint was filed in the
Second Action. The putative class in the Second Action consists only of those
limited partners in the four investing partnerships who are not plaintiffs in
the Action. The Second Action names as defendants BLC and GFB-AS. The complaint
alleges a claim for breach of fiduciary duty arising out of the sale of
communities indirectly owned by the investing partnerships to Ventas and the
subsequent lease of those communities by Ventas to subsidiaries of BLC. The
plaintiffs seek, among other relief, an accounting, damages in an unspecified
amount, and disgorgement of unspecified amounts by which the defendants were
allegedly unjustly enriched. On December 12, 2006, the Company filed
an answer denying the claim asserted in the amended complaint and providing
affirmative defenses. On December 27, 2006, the plaintiffs moved to
certify the Second Action as a class action. Both the plaintiffs and defendants
have served document production requests and the Second Action is currently in
the beginning stages of document discovery. The Company also intends to
vigorously defend this Second Action.
Because
these actions are in an early stage, the Company cannot estimate the possible
range of loss, if any.
In
addition, the Company has been and is currently involved in other litigation and
claims incidental to the conduct of its business which are comparable to other
companies in the senior living industry. Certain claims and lawsuits allege
large damage amounts and may require significant legal costs to defend and
resolve. Similarly, the senior living industry is continuously subject to
scrutiny by governmental regulators, which could result in litigation related to
regulatory compliance matters. As a result, the Company maintains insurance
policies in amounts and with coverage and deductibles the Company believes are
adequate, based on the nature and risks of its business, historical experience
and industry standards. Because the Company’s current policies
provide for deductibles of $3.0 million for each claim, the Company is, in
effect, self-insured for most claims.
8. Supplemental
Disclosure of Cash Flow Information (dollars in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
36,453 |
|
|
$ |
32,595 |
|
|
Income
taxes paid
|
|
$ |
85 |
|
|
$ |
491 |
|
|
Write-off
of deferred costs
|
|
$ |
2,009 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Operating, Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
De-consolidation
of leased development property:
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
$ |
— |
|
|
$ |
(2,978 |
) |
|
Debt
|
|
|
— |
|
|
|
2,978 |
|
|
Net
|
|
$ |
— |
|
|
$ |
— |
|
|
Acquisition
of assets, net of related payables and cash received, net:
|
|
|
|
|
|
|
|
|
|
Cash
and escrow deposits-restricted
|
|
$ |
— |
|
|
$ |
247 |
|
|
Accounts
receivable, net
|
|
|
— |
|
|
|
40 |
|
|
Property,
plant and equipment and leasehold intangibles, net
|
|
|
— |
|
|
|
35,749 |
|
|
Investment
in unconsolidated ventures
|
|
|
— |
|
|
|
(1,342 |
) |
|
Goodwill
|
|
|
745 |
|
|
|
3,101 |
|
|
Other
intangible assets, net
|
|
|
— |
|
|
|
(667 |
) |
|
Trade
accounts payable, accrued expenses and other liabilities
|
|
|
— |
|
|
|
(407 |
) |
|
Debt
obligations
|
|
|
— |
|
|
|
(11,883 |
) |
|
Other,
net
|
|
|
— |
|
|
|
(1,971 |
) |
|
Net
|
|
$ |
745 |
|
|
$ |
22,867 |
|
9. Facility
Operating Leases
A summary
of facility lease expense and the impact of straight-line adjustment and
amortization of deferred gains are as follows (dollars in
thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Cash
basis payment
|
|
$ |
63,146 |
|
|
$ |
63,230 |
|
|
Straight-line
expense
|
|
|
5,751 |
|
|
|
6,336 |
|
|
Amortization
of deferred gain
|
|
|
(1,085 |
) |
|
|
(1,085 |
) |
|
Facility
lease expense
|
|
$ |
67,812 |
|
|
$ |
68,481 |
|
10. Other
Comprehensive Loss, Net
The
following table presents the after-tax components of the Company’s other
comprehensive loss for the periods presented (dollars in
thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
|
Reclassification
of net gains on derivatives into earnings
|
|
|
(739 |
) |
|
|
(393 |
) |
|
Amortization
of payments from settlement of forward interest swaps
|
|
|
94 |
|
|
|
94 |
|
|
Other
|
|
|
252 |
|
|
|
116 |
|
|
Total
comprehensive loss
|
|
$ |
(55,486 |
) |
|
$ |
(35,323 |
) |
11. Income
Taxes
The
Company’s effective tax rate for the three-month periods ended March 31, 2008
and 2007 are 35% and 37%, respectively. The difference between the
periods is primarily due to an increase in state taxes for Texas Margins Tax and
Michigan Gross Receipts tax, and a change in recording dividends paid on
unvested shares. Beginning January 1, 2008, dividends on unvested
shares are being recorded under FASB Statement No. 123 (revised 2004) (“SFAS
123(R)”), Share-Based
Payment in
accordance with EITF 06-11 as discussed in note 2.
The
Company recorded additional interest charges of $0.2 million related to its FIN
48 reserve for the quarter ended March 31, 2008, but is not aware of any new
uncertain tax positions to be recorded in the period. Tax returns for
years 2002 through 2006 are subject to future examination by tax
authorities. In addition, for Alterra Healthcare Corporation, tax
returns are open from 1999 through 2001 to the extent of the net operating
losses generated during those periods.
12. Share
Repurchase Program
On March
19, 2008, the Company’s board of directors approved a share repurchase program
that authorizes the Company to purchase up to $150 million in the aggregate of
the Company’s common stock. Purchases may be made from time to time
using a variety of methods, which may include open market purchases, privately
negotiated transactions or block trades, or by any combination of such methods,
in accordance with applicable insider trading and other securities laws and
regulations. The size, scope and timing of any purchases will be
based on business, market and other conditions and factors, including price,
regulatory and contractual requirements or consents, and capital
availability. The repurchase program does not obligate the Company to
acquire any particular amount of common stock and the program may be suspended,
modified or discontinued at any time at the Company’s discretion without prior
notice. Shares of stock repurchased under the program will be held as treasury
shares.
No shares
were purchased pursuant to this authorization during the three months ended
March 31, 2008.
13. Segment
Results
The
Company currently has four reportable segments: retirement centers; assisted
living; CCRCs; and management services. These segments were
determined based on the way that the Company’s chief operating decision makers
organize the Company’s business activities for making operating decisions and
assessing performance.
During
the fourth quarter of 2007, the Company completed an internal reorganization
which was intended to further improve the segment financial results and to more
accurately reflect the underlying product offering of each
segment. The reorganization did not change the Company’s reportable
segments, but it did impact the revenues and costs reported within each
segment. The change included the movement of communities between the
retirement centers, assisted living and CCRCs segments resulting in a net
increase of 16 communities to the retirement centers segment and a net decrease
of 16 communities to the CCRCs segment. These changes are reflected
in the Company’s results for the three months ended March 31,
2008. The Company has restated the March 31, 2007 results for
comparative purposes. In connection with this reorganization, the
Company renamed its reportable segments. The reportable segment
formerly known as independent living is now known as retirement centers and the
segment formerly known as retirement centers/CCRCs is now known as
CCRCs.
Retirement
Centers. Retirement center communities are primarily designed
for middle to upper income senior citizens age 70 and older who desire an
upscale residential environment providing the highest quality of
service. The majority of the Company’s retirement center communities
consist of both independent living and assisted living units in a single
community, which allows residents to “age-in-place” by providing them with a
continuum of senior independent and assisted living services.
Assisted
Living. Assisted living communities offer housing and 24-hour
assistance with activities of daily life to mid-acuity frail and elderly
residents. The Company’s assisted living communities include both
freestanding, multi-story communities and freestanding single story
communities. The Company also operates memory care communities, which
are freestanding assisted living communities specially designed for residents
with Alzheimer’s disease and other dementias.
CCRCs. CCRCs are
large communities that offer a variety of living arrangements and services to
accommodate all levels of physical ability and health. Most of the
Company’s CCRCs have retirement centers, assisted living and skilled nursing
available on one campus, and some also include memory care and Alzheimer’s
units.
Management
Services. The Company’s management services segment includes
communities owned by others and operated by the Company pursuant to management
agreements. Under the management agreements for these communities,
the Company receives management fees as well as reimbursed expenses, which
represent the reimbursement of certain expenses it incurs on behalf of the
owners. The accounting policies of reportable segments are the same
as those described in the summary of significant accounting
policies.
The
following table sets forth certain segment financial and operating data (dollars
in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Revenue(1)
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
139,440 |
|
|
$ |
132,866 |
|
|
Assisted
Living
|
|
|
209,697 |
|
|
|
194,424 |
|
|
CCRCs
|
|
|
129,698 |
|
|
|
118,048 |
|
|
Management
Services
|
|
|
1,813 |
|
|
|
1,496 |
|
|
|
|
$ |
480,648 |
|
|
$ |
446,834 |
|
|
Segment
operating income(2)
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
60,240 |
|
|
$ |
58,095 |
|
|
Assisted
Living
|
|
|
73,884 |
|
|
|
71,112 |
|
|
CCRCs
|
|
|
39,652 |
|
|
|
35,322 |
|
|
Management
Services
|
|
|
1,269 |
|
|
|
1,047 |
|
|
|
|
$ |
175,045 |
|
|
$ |
165,576 |
|
|
General
and administrative (including non-cash stock-based compensation
expense)(3)
|
|
$ |
36,388 |
|
|
$ |
40,653 |
|
|
Facility
lease expense
|
|
|
67,812 |
|
|
|
68,481 |
|
|
Deprecation
and amortization
|
|
|
71,940 |
|
|
|
72,984 |
|
|
Loss
from operations
|
|
$ |
(551 |
) |
|
$ |
(16,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
1,376,533 |
|
|
$ |
1,390,697 |
|
|
Assisted
Living
|
|
|
1,385,886 |
|
|
|
1,398,578 |
|
|
CCRCs
|
|
|
1,651,762 |
|
|
|
1,661,830 |
|
|
Corporate
and Management Services
|
|
|
399,555 |
|
|
|
360,517 |
|
|
|
|
$ |
4,813,736 |
|
|
$ |
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.
|
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
statements in this Quarterly Report on Form 10-Q and other information we
provide from time to time may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Those
forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations,
including, but not limited to, statements relating to our operational
initiatives; our ability to deploy capital; our expectations regarding
occupancy, the demand for senior housing and our share repurchase program; our
belief regarding the value of our common stock and our growth prospects; 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) and our expectations regarding their effect on our results; our
plans to expand existing facilities and develop new facilities; the expected
project costs for our expansion and development program; our expected levels of
expenditures; our expectations regarding liquidity; our expectations regarding
financings and refinancings of assets; our ability to secure financing; our
ability to acquire the fee interest in facilities that we currently operate at
attractive valuations; our ability to close accretive acquisitions; our ability
to close dispositions of underperforming facilities; 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 ability to pay
and grow dividends; and our ability to increase revenues, earnings, Adjusted
EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such
terms are defined herein). Words such as “anticipate(s)”, “expect(s)”,
“intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”,
“may”, “will”, “would”, “could”, “should”, “seek(s)”, “estimate(s)” and similar
expressions are intended to identify such forward-looking statements. These
statements are based on management’s current expectations and beliefs and are
subject to a number of risks and uncertainties that could lead to actual results
differing materially from those projected, forecasted or expected. Although we
believe that the assumptions underlying the forward-looking statements are
reasonable, we can give no assurance that our expectations will be attained.
Factors which could have a material adverse effect on our operations and future
prospects or which could cause actual results to differ materially from our
expectations include, but are not limited to, our determination from time to
time whether to purchase any shares under the repurchase program; our ability to
fund any repurchases; the risk that we may not be able to obtain any consents
necessary to effect the repurchase program; our ability to generate sufficient
cash flow to cover required interest and long-term operating lease payments; our
inability to extend or replace our credit facility when it expires; 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 we may not be able to pay or maintain dividends; events which adversely
affect the ability of seniors to afford our monthly resident fees or entrance
fees; the conditions of housing markets in certain geographic areas; changes in
governmental reimbursement programs; our limited operating history on a combined
basis; our ability to effectively manage our growth; our ability to maintain
consistent quality control; delays in obtaining regulatory approvals; our
ability to integrate acquisitions (including the acquisition of American
Retirement Corporation (“ARC”)) into our operations; unforeseen costs associated
with the acquisition of new facilities; competition for the acquisition of
assets; our ability to obtain additional capital on terms acceptable to us; a
decrease in the overall demand for senior housing; our vulnerability to economic
downturns; acts of nature in certain geographic areas; terminations of our
resident agreements and vacancies in the living spaces we lease; increased
competition for skilled personnel; departure of our key officers; increases in
market interest rates; environmental contamination at any of our facilities;
failure to comply with existing environmental laws; an adverse determination or
resolution of complaints filed against us; the cost and difficulty of complying
with increasing and evolving regulation; and other risks detailed from time to
time in our filings with the Securities and Exchange Commission, press releases
and other communications, including those set forth under “Risk Factors”
included in our Annual Report on Form 10-K for the year ended December 31, 2007.
Such forward-looking statements speak only as of the date of this Quarterly
Report. We expressly disclaim any obligation to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or change in events, conditions
or circumstances on which any statement is based.
Executive
Overview
During
the first quarter of 2008, we continued to make progress in implementing the
growth objectives outlined in our most recent Annual Report on Form
10-K. The following is a summary discussion of our progress during
the three months ended March 31, 2008.
Our
primary growth objectives are to continue to grow our revenues, Adjusted EBITDA,
Cash From Facility Operations and Facility Operating Income primarily through a
combination of: (i) organic growth in our core business, including the
realization of economies of scale; (ii) continued expansion of our ancillary
services programs (including therapy and home health services); and (iii)
expansion of our existing communities and development of new
communities. Given the current market environment, we are focusing on
integrating previous acquisitions and on the significant organic growth
opportunities inherent in our growth strategy. We continue to
anticipate a reduced level of acquisition activity over the near term when
compared with historical levels.
The table
below presents a summary of our operating results and certain other financial
metrics for the three months ended March 31, 2008 and 2007 and the amount and
percentage of increase or decrease of each applicable item (dollars in
millions).
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
480.6 |
|
|
$ |
446.8 |
|
|
$ |
33.8 |
|
|
|
7.6 |
% |
|
Net
loss
|
|
$ |
(55.1 |
) |
|
$ |
(35.1 |
) |
|
$ |
20.0 |
|
|
|
57.0 |
% |
|
Adjusted
EBITDA
|
|
$ |
80.0 |
|
|
$ |
70.6 |
|
|
$ |
9.4 |
|
|
|
13.3 |
% |
|
Cash
From Facility Operations
|
|
$ |
38.6 |
|
|
$ |
32.5 |
|
|
$ |
6.1 |
|
|
|
18.8 |
% |
|
Facility
Operating Income
|
|
$ |
167.1 |
|
|
$ |
160.3 |
|
|
$ |
6.8 |
|
|
|
4.2 |
% |
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 (used in) operating activities to Cash From Facility
Operations.
During
the first quarter of 2008, we increased our revenues and cash flows and achieved
positive same-store results. Our revenues for the three months ended
March 31, 2008 increased to $480.6 million, an increase of $33.8 million, or
approximately 7.6%, over our revenues for the three months ended March 31,
2007. The increase in revenues was primarily a result of a $270
increase in the average revenue per unit/bed compared to the prior period and
growing revenues from our ancillary services programs, partially offset by a
slight decline in occupancy during the quarter.
During
the three months ended March 31, 2008, we increased our Adjusted EBITDA, Cash
From Facility Operations, and Facility Operating Income by 13.3%, 18.8% and
4.2%, respectively, when compared to the three months ended March 31,
2007. In addition, during the quarter, our board of directors
authorized a $150 million stock repurchase program and adjusted our quarterly
dividend in order to partially fund the repurchase program.
During
the quarter, we continued to make progress in expanding our ancillary services
offerings by completing the roll-out of our ancillary services program to
approximately 1,500 additional units. In addition, we acquired a home
health agency in the Houston, Texas market. At March 31, 2008, we had
approximately 31,300 units served by our therapy services programs and
approximately 8,300 units served by our home health programs. While
we continue to work to expand our ancillary services programs to additional
Brookdale units, we also continue to see positive results from the maturation of
previously-opened therapy clinics.
During
the quarter, we made significant progress in our expansion and development
program, completing expansions at two communities which opened in early April
2008 (with a total of 60 units). We currently have 12
projects
under construction with a total of 391 units. In addition, the
results of expansions opened in 2007 continued to meet or exceed our
expectations.
During
the first quarter of 2008, we focused on responding to unfavorable market
conditions by continuing to enhance our sales and marketing
programs. For example, we expanded our major market management
program that integrates the sales and marketing efforts of all of our products
in a given market. Additionally, we are in the process of rolling out a new
loyalty program for our residents and prospects which is designed to take
advantage of our continuum of products in each market.
Although
we made significant progress in the first quarter of 2008, our growth
initiatives and operating results have continued to be negatively impacted by
unfavorable conditions in the housing, credit and financial
markets. We believe that the deteriorating housing market and general
economic uncertainty have caused some potential customers (or their adult
children) to delay or reconsider moving into our facilities, thus hindering our
ability to increase occupancy above current levels. We remain
cautious about the economy and its effect on our customers. In
addition, we continued to experience volatility in the entrance fee portion of
our business. The timing of entrance fee sales is subject to a number
of different factors (including the ability of potential customers to sell their
existing homes) and is also inherently subject to variability (positively or
negatively) when measured over the short-term. We expect occupancy to
remain relatively flat over the near term and we expect entrance fee sales to
normalize over the longer term.
Consolidated
Results of Operations
Three
Months Ended March 31, 2008 and 2007
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of increase or decrease of these items. The
results of operations for any particular period are not necessarily indicative
of results for any future period. The following data should be read in
conjunction with our condensed consolidated financial statements and the notes
thereto, which are included herein. Our results reflect the inclusion of
acquisitions that occurred during the respective reporting
periods. Refer to our most recent Annual Report on Form 10-K for the
year ended December 31, 2007, filed February 29, 2008, for additional
information regarding acquisitions.
(in
thousands)
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
139,440 |
|
|
$ |
132,866 |
|
|
$ |
6,574 |
|
|
|
4.9 |
% |
|
Assisted
Living
|
|
|
209,697 |
|
|
|
194,424 |
|
|
|
15,273 |
|
|
|
7.9 |
% |
|
CCRCs
|
|
|
129,698 |
|
|
|
118,048 |
|
|
|
11,650 |
|
|
|
9.9 |
% |
|
Total
resident fees
|
|
|
478,835 |
|
|
|
445,338 |
|
|
|
33,497 |
|
|
|
7.5 |
% |
|
Management
fees
|
|
|
1,813 |
|
|
|
1,496 |
|
|
|
317 |
|
|
|
21.2 |
% |
|
Total
revenue
|
|
|
480,648 |
|
|
|
446,834 |
|
|
|
33,814 |
|
|
|
7.6 |
% |
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
79,200 |
|
|
|
74,771 |
|
|
|
4,429 |
|
|
|
5.9 |
% |
|
Assisted
Living
|
|
|
135,813 |
|
|
|
123,312 |
|
|
|
12,501 |
|
|
|
10.1 |
% |
|
CCRCs
|
|
|
90,046 |
|
|
|
82,726 |
|
|
|
7,320 |
|
|
|
8.8 |
% |
|
Total
facility operating expense
|
|
|
305,059 |
|
|
|
280,809 |
|
|
|
24,250 |
|
|
|
8.6 |
% |
|
General
and administrative expense
|
|
|
36,388 |
|
|
|
40,653 |
|
|
|
(4,265 |
) |
|
|
(10.5 |
%) |
|
Facility
lease expense
|
|
|
67,812 |
|
|
|
68,481 |
|
|
|
(669 |
) |
|
|
(1.0 |
%) |
|
Depreciation
and amortization
|
|
|
71,940 |
|
|
|
72,984 |
|
|
|
(1,044 |
) |
|
|
(1.4 |
%) |
|
Total
operating expense
|
|
|
481,199 |
|
|
|
462,927 |
|
|
|
18,272 |
|
|
|
3.9 |
% |
|
Loss
from operations
|
|
|
(551 |
) |
|
|
(16,093 |
) |
|
|
15,542 |
|
|
|
(96.6 |
%) |
|
Interest
income
|
|
|
1,626 |
|
|
|
1,820 |
|
|
|
(194 |
) |
|
|
(10.7 |
%) |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(35,871 |
) |
|
|
(33,452 |
) |
|
|
(2,419 |
) |
|
|
(7.2 |
%) |
|
Amortization
of deferred financing costs
|
|
|
(1,557 |
) |
|
|
(1,618 |
) |
|
|
61 |
|
|
|
3.8 |
% |
|
Change
in fair value of derivatives and amortization
|
|
|
(45,633 |
) |
|
|
(4,781 |
) |
|
|
(40,852 |
) |
|
|
(854.5 |
%) |
|
Loss
on extinguishment of debt
|
|
|
(2,821 |
) |
|
|
- |
|
|
|
(2,821 |
) |
|
|
(100.0 |
%) |
|
Equity
in loss of unconsolidated ventures
|
|
|
(173 |
) |
|
|
(1,453 |
) |
|
|
1,280 |
|
|
|
88.1 |
% |
|
Loss
before income taxes
|
|
|
(84,980 |
) |
|
|
(55,577 |
) |
|
|
(29,403 |
) |
|
|
(52.9 |
%) |
|
Benefit
for income taxes
|
|
|
29,887 |
|
|
|
20,568 |
|
|
|
9,319 |
|
|
|
45.3 |
% |
|
Loss
before minority interest
|
|
|
(55,093 |
) |
|
|
(35,009 |
) |
|
|
(20,084 |
) |
|
|
(57.4 |
%) |
|
Minority
interest
|
|
|
- |
|
|
|
(131 |
) |
|
|
131 |
|
|
|
100.0 |
% |
|
Net
loss
|
|
$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
|
$ |
(19,953 |
) |
|
|
(56.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
550 |
|
|
|
546 |
|
|
|
4 |
|
|
|
0.7 |
% |
|
Total
units/beds operated(1)
|
|
|
51,857 |
|
|
|
51,421 |
|
|
|
436 |
|
|
|
0.8 |
% |
|
Owned/leased
communities units/beds
|
|
|
47,451 |
|
|
|
46,982 |
|
|
|
469 |
|
|
|
1.0 |
% |
|
Owned/leased
communities occupancy rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
89.7 |
% |
|
|
91.0 |
% |
|
|
(1.3 |
%) |
|
|
(1.4 |
%) |
|
Weighted
average
|
|
|
90.0 |
% |
|
|
90.8 |
% |
|
|
(0.8 |
%) |
|
|
(0.9 |
%) |
|
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,759 |
|
|
$ |
3,489 |
|
|
$ |
270 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Segment Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
87 |
|
|
|
85 |
|
|
|
2 |
|
|
|
2.4 |
% |
|
Total
units/beds(1)
|
|
|
15,932 |
|
|
|
15,741 |
|
|
|
191 |
|
|
|
1.2 |
% |
|
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
90.0 |
% |
|
|
92.7 |
% |
|
|
(2.7 |
%) |
|
|
(2.9 |
%) |
|
Weighted
average
|
|
|
90.5 |
% |
|
|
92.8 |
% |
|
|
(2.3 |
%) |
|
|
(2.5 |
%) |
|
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,244 |
|
|
$ |
3,004 |
|
|
$ |
240 |
|
|
|
8.0 |
% |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
409 |
|
|
|
406 |
|
|
|
3 |
|
|
|
0.7 |
% |
|
Total
units/beds(1)
|
|
|
20,981 |
|
|
|
20,874 |
|
|
|
107 |
|
|
|
0.5 |
% |
|
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
89.5 |
% |
|
|
89.7 |
% |
|
|
(0.2 |
%) |
|
|
(0.2 |
%) |
|
Weighted
average
|
|
|
89.8 |
% |
|
|
89.6 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
Average
monthly revenue per unit/bed(2)
|
|
$ |
3,710 |
|
|
$ |
3,460 |
|
|
$ |
250 |
|
|
|
7.2 |
% |
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
32 |
|
|
|
32 |
|
|
|
— |
|
|
|
— |
|
|
Total
units/beds(1)
|
|
|
10,538 |
|
|
|
10,367 |
|
|
|
171 |
|
|
|
1.6 |
% |
|
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
89.6 |
% |
|
|
90.8 |
% |
|
|
(1.2 |
%) |
|
|
(1.3 |
%) |
|
Weighted
average
|
|
|
89.4 |
% |
|
|
90.0 |
% |
|
|
(0.6 |
%) |
|
|
(0.7 |
%) |
|
Average
monthly revenue per unit/bed(2)
|
|
$ |
4,716 |
|
|
$ |
4,400 |
|
|
$ |
316 |
|
|
|
7.2 |
% |
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
22 |
|
|
|
23 |
|
|
|
(1 |
) |
|
|
(4.3 |
%) |
|
Total
units/beds(1)
|
|
|
4,406 |
|
|
|
4,439 |
|
|
|
(33 |
) |
|
|
(0.7 |
%) |
|
Occupancy
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
end
|
|
|
83.5 |
% |
|
|
92.3 |
% |
|
|
(8.8 |
%) |
|
|
(9.5 |
%) |
|
Weighted
average
|
|
|
83.4 |
% |
|
|
91.6 |
% |
|
|
(8.2 |
%) |
|
|
(9.0 |
%) |
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
2,780 |
|
|
$ |
3,916 |
|
|
$ |
(1,136 |
) |
|
|
(29.0 |
%) |
|
Refundable
entrance fees sales(3)
|
|
|
3,492 |
|
|
|
4,258 |
|
|
|
(766 |
) |
|
|
(18.0 |
%) |
|
Total
entrance fee receipts
|
|
|
6,272 |
|
|
|
8,174 |
|
|
|
(1,902 |
) |
|
|
(23.3 |
%) |
|
Refunds
|
|
|
(3,632 |
) |
|
|
(6,315 |
) |
|
|
2,683 |
|
|
|
42.5 |
% |
|
Net
entrance fees
|
|
$ |
2,640 |
|
|
$ |
1,859 |
|
|
$ |
781 |
|
|
|
42.0 |
% |
__________
|
(1)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
(2)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
|
(3)
|
Refundable
entrance fee sales for the three months ended March 31, 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
$0.4 million for the three months ended March 31, 2008. We did
not receive any MyChoice amounts from existing residents during the first
quarter of 2007.
|
Resident
Fees
The
increase in resident fees was driven by revenue growth across all business
segments. Resident fees increased over the prior-year first quarter
mainly due to an increase in average monthly revenue per unit/bed during the
current period as well as an increase in our ancillary services revenue as we
continue to roll out therapy and home health services to our
communities. This increase was partially offset by a decrease in
occupancy across all segments for our same store communities. During
the current period, same store revenues grew 5.8% at the 522 properties we
operated in both periods with an average rate increase of 7.5% and a decrease in
occupancy of 1.4%.
Retirement
center revenue increased $6.6 million, or 4.9%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods. Occupancy at these same-store communities decreased
period over period. Revenue growth was also impacted by an increase
in revenue related to the expansion of our ancillary services business to these
communities during 2007 and the first quarter of 2008.
Assisted
living revenue increased $15.3 million, or 7.9%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both periods. Occupancy at these same-store
communities decreased slightly period over period. Revenue
growth was also positively impacted by an increase in revenue related to the
rollout of our ancillary services business to these communities during 2007 and
the first quarter of 2008 as well as the inclusion of acquisitions that are
partially or entirely excluded from prior period results.
CCRCs
revenue increased $11.7 million, or 9.9%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
periods. Occupancy at these same-store communities decreased period
over period. Revenue growth was also impacted by an increase in
revenue related to the expansion of our ancillary services business to these
communities during 2007 and the first quarter of 2008.
Management
Fees
Management
fees were comparable period over period as the number of management contracts
maintained was fairly consistent during both periods.
Facility
Operating Expense
Facility
operating expense increased over the prior-year same period primarily due to an
increase in salaries, wages and benefits due to normal salary increases and
increased employee count, as well as an overall increase in group health
insurance costs.
Retirement
center operating expenses increased $4.4 million, or 5.9%, primarily due to an
increase in salaries, wages and benefits due to normal salary increases and
increased employee count, as well as an overall increase in group health
insurance costs.
Assisted
living operating expenses increased $12.5 million, or 10.1%, primarily due to an
increase in salaries, wages and benefits due to normal salary increases,
increased employee count and an overall increase in group health insurance
costs, as well as an increase in expenses incurred in connection with the
continued rollout of our ancillary services program.
CCRCs
operating expenses increased $7.3 million, or 8.8%, primarily due to an increase
in salaries, wages and benefits due to normal salary increases and increased
employee count (primarily from the rollout of new programs in the latter part of
2007), as well as an overall increase in group health insurance
costs.
General
and Administrative Expense
General
and administrative expenses decreased $4.3 million, or 10.5%, primarily as a
result of a decrease in non-cash stock-based compensation expense period over
period due to the acceleration of an award in the first quarter of 2007 and a
decrease in professional fees during the first quarter of 2008. The
decrease in expense was partially offset by an increase in salaries, wages and
benefits in connection with normal salary increases as well as an increase
in the annual bonus accruals. General and administrative expense as a
percentage of total revenue, including revenue generated by the communities we
manage, was 4.9% and 5.5% for the three months ended March 31, 2008 and 2007,
respectively, calculated as follows (dollars in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
478,835 |
|
|
$ |
445,338 |
|
|
Resident
fee revenues under management
|
|
|
37,531 |
|
|
|
37,601 |
|
|
Total
|
|
$ |
516,366 |
|
|
$ |
482,939 |
|
|
General
and administrative expense (excluding merger and integration expenses and
non-cash stock compensation expense totaling $10.9 million and $13.9
million for the three months ended March 31, 2008 and 2007,
respectively)
|
|
$ |
25,498 |
|
|
$ |
26,708 |
|
|
General
and administrative expenses as a percent of total revenues
|
|
|
4.9 |
% |
|
|
5.5 |
% |
Facility
Lease Expense
Lease
expense decreased by $0.7 million, or 1.0%, primarily due to a decrease in lease
expense as a result of the acquisition of certain facilities which were
previously leased, partially offset by annual rent increases. Lease
expense includes straight-line rent expense of $5.8 million and $6.3 million for
the three months ended March 31, 2008 and 2007, respectively, and is partially
offset by $1.1 million of additional deferred gain amortization for both
periods.
Depreciation
and Amortization
Total
depreciation and amortization expense remained relatively constant period over
period.
Interest
Income
Interest
income remained constant period over period.
Interest
Expense
Interest
expense increased $43.2 million, or 108.4%, primarily due to the change in fair
value of our interest rate swaps as well as interest expense on additional debt
incurred in connection with our acquisition of previously leased entities and
additional borrowings. During the quarter ended March 31, 2008, we
recognized approximately $45.6 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.
Income
Taxes
Our
effective tax rate for the periods ended March 31, 2008 and 2007 are 35% and
37%, respectively. The difference between the periods is primarily
due to an increase in state taxes for Texas Margins Tax and Michigan Gross
Receipts tax, and a change in recording dividends paid on unvested
shares. Beginning January 1, 2008, dividends on unvested shares are
being recorded under SFAS 123(R) in accordance with EITF 06-11.
We
recorded additional interest charges related to our FIN 48 reserve for the
quarter ended March 31, 2008, but are not aware of any new uncertain tax
positions to be recorded in the period. Tax returns for years 2002
through 2006 are subject to future examination by tax authorities. In
addition, for Alterra Healthcare Corporation, tax returns are open from 1999
through 2001 to the extent of the net operating losses generated during those
periods.
Critical
Accounting Policies and Estimates
For a
description of our critical accounting policies and estimates, see our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007.
Liquidity
and Capital Resources
The
following is a summary of cash flows from operating, investing and financing
activities, as reflected in the Condensed Consolidated Statements of Cash Flows
(dollars in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
40,629 |
|
|
$ |
28,828 |
|
|
Cash
used in investing activities
|
|
|
(56,102 |
) |
|
|
(75,551 |
) |
|
Cash
provided by financing activities
|
|
|
34,105 |
|
|
|
34,610 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
18,632 |
|
|
|
(12,113 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
100,904 |
|
|
|
68,034 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
119,536 |
|
|
$ |
55,921 |
|
The
increase in cash provided by operating activities was primarily attributable to
the cash flow generated from the impact of increased revenue per unit/bed across
all business segments period over period which is partially offset by the
increase in operating expense.
The
decrease in cash used in investing activities was primarily attributable to a
decrease in acquisition activity in the current year as well as cash received on
an outstanding note receivable. This decrease was partially offset by
an increase in restricted cash for our swap collateral deposits in the current
year as well as an increase in additions to property, plant and equipment and
leasehold intangibles period over period.
The
decrease in cash provided by financing activities was primarily due to a
increase in borrowings net of repayments on debt related to refinancing
activities period over period which was offset by an increase in
cash
payments
made on swap terminations and recouponings completed during the quarter as well
as an increase in dividends paid period over period.
Our
principal sources of liquidity are expected to be from:
|
|
·
|
cash
flows from operations;
|
|
|
·
|
proceeds
from our credit facility;
|
|
|
·
|
proceeds
from mortgage financing or refinancing of various
assets;
|
|
|
·
|
proceeds
from the selective disposition of underperforming
assets;
|
|
|
·
|
funds
raised in the debt or equity markets;
and
|
|
|
·
|
funds
generated through joint venture arrangements or sale-leaseback
transactions.
|
Our
liquidity requirements have historically arisen from, and we expect they will
continue to arise from:
|
|
·
|
operating
costs such as employee compensation and related benefits, general and
administrative expense and supply
costs;
|
|
|
·
|
debt
service and lease payments;
|
|
|
·
|
acquisition
consideration and transaction
costs;
|
|
|
·
|
cash
collateral required to be posted in connection with our interest rate
swaps and related financial
instruments;
|
|
|
·
|
capital
expenditures and improvements, including the expansion of our current
communities and the development of new
communities;
|
|
|
·
|
purchases
of common stock under our recently-announced $150 million share repurchase
authorization; and
|
|
|
·
|
other
corporate initiatives (including integration and
branding).
|
We are
highly leveraged, and have significant debt and lease obligations. At
March 31, 2008, we had $1.9 billion of debt outstanding, excluding our line of
credit and capital lease obligations, at a weighted-average interest rate of
5.24%. At March 31, 2008, we had $2.2 billion of total debt
outstanding, excluding our line of credit, of which $71.7 million was due on or
before March 31, 2009. We also have substantial operating lease
obligations and capital expenditure requirements. For the year ending
December 31, 2008, we will be required to make approximately $254.0 million of
payments in connection with our existing operating leases.
We had
$119.5 million of cash and cash equivalents at March 31, 2008, excluding cash
and escrow deposits-restricted and lease security deposits of $136.9
million. Additionally, we had $74.7 million available under our
corporate credit facility and $4.3 million of unused capacity under our letter
of credit facility.
At March
31, 2008, we had $270.6 million of negative working capital, which includes the
classification of $263.8 million of refundable entrance fees and $32.4 million
in tenant deposits as current liabilities. Based upon our historical operating
experience, we anticipate that only 9% to 12% of those entrance fee liabilities
will actually come due, and be required to be settled in cash, during the next
12 months. We expect that any entrance fee liabilities due within the next 12
months will be fully offset by the proceeds generated by subsequent entrance fee
sales. Entrance fee sales, net of refunds paid, provided $2.6 million
of cash for the three months ended March 31, 2008.
For the
year ending December 31, 2008, we anticipate that we will make investments of
approximately $100 million to $115 million for capital expenditures, comprised
of approximately $21 million to $26 million of net recurring capital
expenditures, approximately $35 million to $40 million of net capital
expenditures in connection with our community expansion and development program,
and approximately $44 million to $49 million of expenditures relating to other
major projects (including corporate initiatives). Other major
projects include unusual or non-recurring capital projects, projects which
create new or enhanced economics, such as major renovations or repositioning
projects at our communities (including deferred expenditures in connection with
recently acquired communities), integration related expenditures, and
expenditures supporting the expansion of our ancillary services
programs. For the quarter ended March 31, 2008, we spent
approximately $6.0 million on net recurring capital expenditures, approximately
$21.2 million on net capital expenditures in connection with our expansion and
development program, and approximately $17.8 million on expenditures relating to
other major projects and corporate initiatives. We anticipate funding our
expansion and development program primarily through debt and lease financings
for those projects. We expect
that our
other anticipated capital expenditures will be funded from cash on hand, cash
flows from operations, amounts drawn on our credit facility and proceeds from
the refinancing of various assets. There can be no assurance that any
such financings or refinancings will be available to us or on terms that are
acceptable to us.
Through
2007, we focused on growth primarily through acquisition, spending approximately
$2.2 billion during 2007 and 2006 on acquiring communities and companies,
excluding fees, expenses and assumption of debt. Given the current
market environment, we anticipate a reduced level of acquisition activity over
the near term, and consequently reduced acquisition spending, as we focus on
integrating previous acquisitions and the other components of our growth
strategy.
In the
normal course of business, we use a variety of financial instruments to mitigate
interest rate risk. We have entered into certain interest rate
protection and swap agreements to effectively cap or convert floating rate debt
to fixed rate. Pursuant to certain of our hedge agreements, we are
required to secure our obligation to the counterparty by posting cash or other
collateral if the fair value liability exceeds specified
thresholds. In periods of significant volatility in the credit
markets, the value of these swaps can change significantly and as a result, the
amount of collateral we are required to post can change
significantly. For example, cash collateral posted as of December 31,
2007 and March 31, 2008 was approximately $5.0 million and $25.0 million,
respectively. If we are required to post additional collateral in
connection with our interest rate swaps, our liquidity could be negatively
impacted.
We expect
to continue to fund our business through our principal sources of liquidity.
Primarily, during 2008, we anticipate that our liquidity will come from cash on
hand, cash flows from operations, amounts drawn on our credit facility and
proceeds from the refinancing of various assets. We expect to continue to assess
our financing alternatives periodically and access the capital markets
opportunistically. If our existing resources are insufficient to
satisfy our liquidity requirements, or if we enter into an acquisition or
strategic arrangement with another company, we may need to sell additional
equity or debt securities. Any such sale of additional equity securities will
dilute the interests of our existing stockholders, and we cannot be certain that
additional public or private financing will be available in amounts or on terms
acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities or to reduce our dividends,
any of which could harm our business.
We
currently estimate that our existing cash flows from operations, together with
existing working capital, amounts drawn under our credit facility and proceeds
from anticipated refinancings of various assets, will be sufficient to fund our
liquidity needs for at least the next 12 months.
Our
actual liquidity and capital funding requirements depend on numerous factors,
including our operating results, the actual level of capital expenditures, our
expansion, development and acquisition activity, general economic conditions and
the cost of capital. Shortfalls in cash flows from operating results
or other principal sources of liquidity may have an adverse impact on our
ability to execute our business and growth strategies. As a result,
this may impact our ability to grow our business, pay dividends, maintain
capital spending levels, expand certain communities, or execute other aspects of
our business strategy. In order to continue some of these activities
at historical or planned levels, we may incur additional indebtedness or lease
financing to provide additional funding. There can be no assurance
that any such additional financing will be available or on terms that are
acceptable to us.
As of
March 31, 2008, we are in compliance with the financial covenants of our
outstanding debt and lease agreements.
Credit
Facility
As of
March 31, 2008, we had available a secured line of credit of $320.0 million
($70.0 million letter of credit sublimit) and a separate letter of credit
facility of up to $80.0 million. The line of credit bears interest at
the base rate plus 0.50% or LIBOR plus 1.50%, at our election. We
must also pay an annual fee equal to 1.50% of the amount of any outstanding
letters of credit issued under the facilities. In connection with
entering into the credit facility agreement, we paid a commitment fee of 0.50%
and are subject to a non-use fee of 0.25% on all unutilized
amounts. The credit facility matures on November 15, 2008 subject to
extension at our unilateral option for two three-month extension periods and
payment of a 0.1875% commitment fee with respect to each
extension. As a result of our unilateral extension rights, amounts
drawn against the credit agreement at March 31, 2008 have been classified as
long-term on our condensed consolidated balance sheets.
In
connection with the credit agreement, we and certain of our subsidiaries, as
guarantors, entered into a guarantee and pledge agreement in favor of
Lehman Commercial Paper Inc., as administrative agent for the banks and other
financial institutions from time to time parties to the credit agreement,
pursuant to which certain of the guarantors guarantee the prompt and complete
payment and performance when due by us of our obligations under the credit
agreement and certain of the guarantors pledge certain assets for the benefit of
the secured parties as collateral security for the payment and performance of
our obligations under the credit agreement and under the guarantee. The pledged
assets include, among other things, equity interests in certain of our
subsidiaries, all related books and records and, to the extent not otherwise
included, all proceeds and products of any and all of the foregoing, all
supporting obligations in respect of any of the foregoing and all collateral
security and guarantees given by any person with respect to any of the
foregoing.
The
credit agreement contains typical representations and covenants for loans of
this type. A violation of any of these covenants could result in a default under
the credit agreement, which would result in termination of all commitments and
loans under the credit agreement and all other amounts owing under the credit
agreement and certain other loan and lease agreements becoming immediately due
and payable.
Contractual
Commitments
Significant
ongoing commitments consist primarily of leases, debt, purchase commitments and
certain other long-term liabilities. For a summary and complete presentation and
description of our ongoing commitments and contractual obligations, see the
“Contractual Commitments” section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007.
During
the quarter ended March 31, 2008, our long-term debt obligations increased by
$157.6 million to $2.8 billion at March 31, 2008 from $2.6 billion at December
31, 2007 in connection with financing transactions we completed during the
quarter. There have been no other material changes in our contractual
commitments during the three months ended March 31, 2008.
Off-Balance
Sheet Arrangements
The
equity method of accounting has been applied in the accompanying financial
statements with respect to our investment in unconsolidated ventures that are
not considered variable interest entities and in which we do not possess a
controlling financial interest. We do not believe these off-balance
sheet arrangements have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that 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 before:
|
|
·
|
provision
(benefit) for income taxes;
|
|
|
·
|
non-operating
(income) loss items;
|
|
|
·
|
depreciation
and amortization;
|
|
|
·
|
straight-line
lease expense (income);
|
|
|
·
|
amortization
of deferred gain;
|
|
|
·
|
amortization
of deferred entrance fees; and
|
|
|
·
|
non-cash
compensation expense;
|
and including:
|
|
·
|
entrance
fee receipts and refunds.
|
Management’s
Use of Adjusted EBITDA
We use
Adjusted EBITDA to assess our overall financial and operating
performance. We believe this non-GAAP measure, as we have defined it,
is helpful in identifying trends in our day-to-day performance because the items
excluded have little or no significance on our day-to-day
operations. This measure provides an assessment of controllable
expenses and affords management the ability to make decisions which are expected
to facilitate meeting current financial goals as well as achieve optimal
financial performance. It provides an indicator for management to
determine if adjustments to current spending decisions are needed.
Adjusted
EBITDA provides us with a measure of financial performance, independent of items
that are beyond the control of management in the short-term, such as
depreciation and amortization, straight-line 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 facilities and
extinguishment of debt activities generally represent charges (gains),
which may significantly affect our financial results;
and
|
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
An
investor or potential investor may find this item important in evaluating our
performance, results of operations and financial position. We use
non-GAAP financial measures to supplement our GAAP results in order to provide a
more complete understanding of the factors and trends affecting our
business.
Adjusted
EBITDA is not an alternative to net income, income from operations or cash flows
provided by or used in operations as calculated and presented in accordance with
GAAP. You should not rely on Adjusted EBITDA as a substitute for any
such GAAP financial measure. We strongly urge you to review the
reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our
consolidated financial statements included herein. We also strongly
urge you to not rely on any single financial measure to evaluate our
business. In addition, because Adjusted EBITDA is not a measure of
financial performance under GAAP and is susceptible to varying calculations, the
Adjusted EBITDA measure, as presented in this report, may differ from and may
not be comparable to similarly titled measures used by other
companies.
The table
below shows the reconciliation of net loss to Adjusted EBITDA for the three
months ended March 31, 2008 and 2007 (dollars in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
|
Minority
interest
|
|
|
- |
|
|
|
131 |
|
|
Benefit
for income taxes
|
|
|
(29,887 |
) |
|
|
(20,568 |
) |
|
Equity
in loss of unconsolidated ventures
|
|
|
173 |
|
|
|
1,453 |
|
|
Loss
on extinguishment of debt
|
|
|
2,821 |
|
|
|
- |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
28,987 |
|
|
|
25,239 |
|
|
Capitalized
lease obligation
|
|
|
6,884 |
|
|
|
8,213 |
|
|
Amortization
of deferred financing costs
|
|
|
1,557 |
|
|
|
1,618 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
45,633 |
|
|
|
4,781 |
|
|
Interest
income
|
|
|
(1,626 |
) |
|
|
(1,820 |
) |
|
Loss
from operations
|
|
|
(551 |
) |
|
|
(16,093 |
) |
|
Depreciation
and amortization
|
|
|
71,940 |
|
|
|
72,984 |
|
|
Straight-line
lease expense
|
|
|
5,751 |
|
|
|
6,336 |
|
|
Amortization
of deferred gain
|
|
|
(1,085 |
) |
|
|
(1,085 |
) |
|
Amortization
of entrance fees
|
|
|
(6,691 |
) |
|
|
(4,259 |
) |
|
Non-cash
compensation expense
|
|
|
8,010 |
|
|
|
10,820 |
|
|
Entrance
fee receipts(2)
|
|
|
6,272 |
|
|
|
8,174 |
|
|
Entrance
fee disbursements
|
|
|
(3,632 |
) |
|
|
(6,315 |
) |
|
Adjusted
EBITDA
|
|
$ |
80,014 |
|
|
$ |
70,562 |
|
|
|
(1)
|
The
calculation of Adjusted EBITDA includes merger, integration, and certain
other non-recurring expenses, as well as acquisition transition costs,
totaling $2.9 million and $3.1 million for the three months ended March
31, 2008 and 2007, respectively.
|
|
|
(2)
|
Includes
the receipt of refundable and non-refundable entrance
fees.
|
Cash
From Facility Operations
Definition
of Cash From Facility Operations
We define
Cash From Facility Operations (CFFO) as follows:
Net cash
provided by (used in) operating activities adjusted for:
|
|
·
|
changes
in operating assets and
liabilities;
|
|
|
·
|
deferred
interest and fees added to
principal;
|
|
|
·
|
refundable
entrance fees received;
|
|
|
·
|
entrance
fee refunds disbursed;
|
|
|
·
|
lease
financing debt amortization with fair market value or no purchase
options;
|
|
|
·
|
recurring
capital expenditures.
|
Recurring
capital expenditures include expenditures capitalized in accordance with GAAP
that are funded from CFFO. Amounts excluded from recurring capital expenditures
consist primarily of unusual or non-recurring capital items (including
integration capital expenditures), facility purchases and/or major projects or
renovations that are funded using financing proceeds and/or proceeds from the
sale of facilities that are held for sale.
Management’s
Use of Cash From Facility Operations
We use
CFFO to assess our overall liquidity. This measure provides an
assessment of controllable expenses and affords management the ability to make
decisions which are expected to facilitate meeting current financial and
liquidity goals as well as to achieve optimal financial
performance. It provides an indicator for management to determine if
adjustments to current spending decisions are needed.
This
metric measures our liquidity based on operational factors that management can
impact in the short-term, namely the cost structure or expenses of the
organization. CFFO is one of the metrics used by our senior
management and board of directors (i) to review our ability to service our
outstanding indebtedness (including our credit facilities and long-term leases),
(ii) our ability to pay dividends to stockholders, (iii) our ability to make
regular recurring capital expenditures to maintain and improve our facilities on
a period-to-period basis, (iv) for planning purposes, including preparation of
our annual budget and (v) in setting various covenants in our credit
agreements. These agreements generally require us to escrow or spend
a minimum of between $250 and $450 per unit/bed per
year. Historically, we have spent in excess of these per unit/bed
amounts; however, there is no assurance that we will have funds available to
escrow or spend these per unit/bed amounts in the future. If we do
not escrow or spend the required minimum annual amounts, we would be in default
of the applicable debt or lease agreement which could trigger cross default
provisions in our outstanding indebtedness and lease arrangements.
Limitations
of Cash From Facility Operations
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 facilities and
extinguishment of debt activities generally represent charges (gains),
which may significantly affect our financial results;
and
|
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
We
believe 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
facilities.
CFFO is
not an alternative to cash flows provided by or used in operations as calculated
and presented in accordance with GAAP. You should not rely on CFFO as
a substitute for any such GAAP financial measure. We strongly urge
you to review the reconciliation of CFFO to GAAP net cash provided by (used in)
operating activities, along with our consolidated financial statements included
herein. We also strongly urge you to not rely on any single financial
measure to evaluate our business. In addition, because CFFO is not a
measure of financial performance under GAAP and is susceptible to varying
calculations, the CFFO measure, as presented in this report, may differ from and
may not be comparable to similarly titled measures used by other
companies.
The table
below shows the reconciliation of net cash provided by operating activities to
CFFO for the three months ended March 31, 2008 and 2007 (dollars in
thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
40,629 |
|
|
$ |
28,828 |
|
|
Changes
in operating assets and liabilities
|
|
|
4,695 |
|
|
|
12,139 |
|
|
Refundable
entrance fees received(2)
|
|
|
3,492 |
|
|
|
4,258 |
|
|
Entrance
fee refunds disbursed
|
|
|
(3,632 |
) |
|
|
(6,315 |
) |
|
Recurring
capital expenditures, net
|
|
|
(6,037 |
) |
|
|
(6,225 |
) |
|
Lease
financing debt amortization with fair market value or no purchase
options
|
|
|
(1,625 |
) |
|
|
(1,296 |
) |
|
Reimbursement
of operating expenses and other
|
|
|
1,063 |
|
|
|
1,130 |
|
|
Cash
From Facility Operations
|
|
$ |
38,585 |
|
|
$ |
32,519 |
|
|
|
(1)
|
The
calculation of CFFO includes merger, integration and certain other
non-recurring expenses, as well as acquisition transition costs, totaling
$2.9 million and $3.1 million for the three months ended March 31, 2008
and 2007, respectively.
|
|
|
(2)
|
Total
entrance fee receipts for the three months ended March 31, 2008 and 2007
were $6.3 million and $8.2 million, respectively, including $2.8 million
and $3.9 million, respectively, of non-refundable entrance fee receipts
included in net cash provided by operating
activities.
|
Facility
Operating Income
Definition
of Facility Operating Income
We define
Facility Operating Income as follows:
Net
income before:
|
|
·
|
provision
(benefit) for income taxes;
|
|
|
·
|
non-operating
(income) loss items;
|
|
|
·
|
depreciation
and amortization;
|
|
|
·
|
facility
lease expense;
|
|
|
·
|
general
and administrative expense, including non-cash stock compensation
expense;
|
|
|
·
|
amortization
of deferred entrance fee revenue;
and
|
Management’s
Use of Facility Operating Income
We use
Facility Operating Income to assess our facility operating
performance. We believe this non-GAAP measure, as we have defined it,
is helpful in identifying trends in our day-to-day facility performance because
the items excluded have little or no significance on our day-to-day facility
operations. This measure provides an assessment of revenue generation
and expense management and affords management the ability to make decisions
which are expected to facilitate meeting current financial goals as well as to
achieve optimal facility financial performance. It provides an
indicator for management to determine if adjustments to current spending
decisions are needed.
Facility
Operating Income provides us with a measure of facility financial performance,
independent of items that are beyond the control of management in the
short-term, such as depreciation and amortization, lease expense,
taxation
and interest expense associated with our capital structure. This
metric measures our facility financial performance based on operational factors
that management can impact in the short-term, namely the cost structure or
expenses of the organization. Facility Operating Income is one of the
metrics used by our senior management and board of directors to review the
financial performance of the business on a monthly basis. Facility
Operating Income is also used by research analysts and investors to evaluate the
performance of and value companies in our industry by investors, lenders and
lessors. In addition, Facility Operating Income is a common measure
used in the industry to value the acquisition or sales price of facilities and
is used as a measure of the returns expected to be generated by a
facility.
A number
of our debt and lease agreements contain covenants measuring Facility Operating
Income to gauge debt or lease coverages. The debt or lease coverage
covenants are generally calculated as facility net operating income (defined as
total operating revenue less operating expenses, all as determined on an accrual
basis in accordance with GAAP). For purposes of the coverage
calculation, the lender or lessor will further require a pro forma adjustment to
facility operating income to include a management fee (generally 4% to 5% of
operating revenue) and an annual capital reserve (generally $250 to $450 per
unit/bed). An investor or potential investor may find this item
important in evaluating our performance, results of operations and financial
position, particularly on a facility-by-facility basis.
Limitations
of Facility Operating Income
Facility
Operating Income has limitations as an analytical tool. It should not
be viewed in isolation or as a substitute for GAAP measures of
earnings. Material limitations in making the adjustments to our
earnings to calculate Facility Operating Income, and using this non-GAAP
financial measure as compared to GAAP net income (loss), include:
|
|
·
|
interest
expense, income tax (benefit) provision and non-recurring charges related
to gain (loss) on sale of facilities and extinguishment of debt activities
generally represent charges (gains), which may significantly affect our
financial results; and
|
|
|
·
|
depreciation
and amortization, though not directly affecting our current cash position,
represent the wear and tear and/or reduction in value of our facilities,
which affects the services we provide to our residents and may be
indicative of future needs for capital
expenditures.
|
An
investor or potential investor may find this item important in evaluating our
performance, results of operations and financial position on a
facility-by-facility basis. We use non-GAAP financial measures to
supplement our GAAP results in order to provide a more complete understanding of
the factors and trends affecting our business. Facility Operating
Income is not an alternative to net income, income from operations or cash flows
provided by or used in operations as calculated and presented in accordance with
GAAP. You should not rely on Facility Operating Income as a
substitute for any such GAAP financial measure. We strongly urge you
to review the reconciliation of Facility Operating Income to GAAP net income
(loss), along with our consolidated financial statements included
herein. We also strongly urge you to not rely on any single financial
measure to evaluate our business. In addition, because Facility
Operating Income is not a measure of financial performance under GAAP and is
susceptible to varying calculations, the Facility Operating Income measure, as
presented in this report, may differ from and may not be comparable to similarly
titled measures used by other companies.
The table
below shows the reconciliation of net loss to Facility Operating Income for the
three months ended March 31, 2008 and 2007 (dollars in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(55,093 |
) |
|
$ |
(35,140 |
) |
|
Minority
interest
|
|
|
- |
|
|
|
131 |
|
|
Benefit
for income taxes
|
|
|
(29,887 |
) |
|
|
(20,568 |
) |
|
Equity
in loss of unconsolidated ventures
|
|
|
173 |
|
|
|
1,453 |
|
|
Loss
on extinguishment of debt
|
|
|
2,821 |
|
|
|
- |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
28,987 |
|
|
|
25,239 |
|
|
Capitalized
lease obligation
|
|
|
6,884 |
|
|
|
8,213 |
|
|
Amortization
of deferred financing costs
|
|
|
1,557 |
|
|
|
1,618 |
|
|
Change
in fair value of derivatives and amortization
|
|
|
45,633 |
|
|
|
4,781 |
|
|
Interest
income
|
|
|
(1,626 |
) |
|
|
(1,820 |
) |
|
Loss
from operations
|
|
|
(551 |
) |
|
|
(16,093 |
) |
|
Depreciation
and amortization
|
|
|
71,940 |
|
|
|
72,984 |
|
|
Facility
lease expense
|
|
|
67,812 |
|
|
|
68,481 |
|
|
General
and administrative (including non-cash stock compensation
expense)
|
|
|
36,388 |
|
|
|
40,653 |
|
|
Amortization
of entrance fees
|
|
|
(6,691 |
) |
|
|
(4,259 |
) |
|
Management
fees
|
|
|
(1,813 |
) |
|
|
(1,496 |
) |
|
Facility
Operating Income
|
|
$ |
167,085 |
|
|
$ |
160,270 |
|
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We are
subject to market risks from changes in interest rates charged on our credit
facilities, other floating-rate indebtedness and lease payments subject to
floating rates. The impact on earnings and the value of our long-term debt and
lease payments are subject to change as a result of movements in market rates
and prices. As of March 31, 2008, excluding our line of credit, we had
approximately $779.9 million of long-term fixed rate debt, $1.1 billion of
long-term variable rate debt and $295.3 million of capital and financing lease
obligations. As of March 31, 2008, our total fixed-rate debt and variable-rate
debt outstanding had weighted-average interest rates of 5.24%.
We do not
expect changes in interest rates to have a material effect on cash flows from
operating activities since approximately 100% of our debt and lease payments,
excluding our line of credit, either have fixed rates or variable rates that are
subject to swap agreements with major financial institutions to manage our
risk. As of March 31, 2008, we had entered into interest rate swaps
for all of our outstanding variable rate debt and as a result, a change in
short-term interest rates would not materially affect our cash flows from
operating activities.
As noted
above, we have entered into certain interest rate protection and swap agreements
to effectively cap or convert floating rate debt to a fixed rate basis, as well
as to hedge anticipated future financing transactions. Pursuant to certain of
our hedge agreements, we are required to secure our obligation to the
counterparty by posting cash or other collateral if the fair value liability
exceeds a specified threshold.
During
the three month period ended March 31, 2008, we terminated a swap agreement with
a notional amount of approximately $45.4 million and recouponed, at a more
favorable interest rate, notional amounts of $726.5 million. In
conjunction with these transactions, $23.9 million was paid to the respective
counterparties. Subsequent to March 31, 2008, we terminated a swap
agreement with a notional amount of $70.0 million. In conjunction
with this transaction, $3.2 million was paid to the counterparty.