UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

or

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 001-32641

BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)

 
 
Delaware
20-3068069
(State or other jurisdiction
(I.R.S. Employer Identification No.)
 
of incorporation or organization)
 
111 Westwood Place, Suite 400, Brentwood, Tennessee
37027
 
(Address of principal executive offices)
(Zip Code)
 

(615) 221-2250
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  T  No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  T  No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer   T
Accelerated filer                   £
 
 
Non-accelerated filer     £ (Do not check if a smaller reporting company)
 
Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  £  No  T



As of November 5, 2012, 122,574,505 shares of the registrant's common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).





2



TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2012

 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)

 
 
September 30,
2012
   
December 31,
2011
 
Assets
 
(Unaudited)
   
 
Current assets
 
   
 
Cash and cash equivalents
 
$
42,504
   
$
30,836
 
Cash and escrow deposits — restricted
   
52,144
     
45,903
 
Accounts receivable, net
   
105,588
     
98,697
 
Deferred tax asset
   
11,776
     
11,776
 
Prepaid expenses and other current assets, net
   
89,343
     
93,663
 
Total current assets
   
301,355
     
280,875
 
Property, plant and equipment and leasehold intangibles, net
   
3,789,971
     
3,694,064
 
Cash and escrow deposits — restricted
   
52,454
     
52,980
 
Marketable securities — restricted
   
34,992
     
31,721
 
Investment in unconsolidated ventures
   
30,352
     
32,798
 
Goodwill
   
109,553
     
109,553
 
Other intangible assets, net
   
158,004
     
154,136
 
Other assets, net
   
110,740
     
109,934
 
Total assets
 
$
4,587,421
   
$
4,466,061
 
 
               
Liabilities and Stockholders' Equity
               
Current liabilities
               
Current portion of long-term debt
 
$
547,738
   
$
47,654
 
Trade accounts payable
   
45,745
     
54,134
 
Accrued expenses
   
202,638
     
183,634
 
Refundable entrance fees and deferred revenue
   
347,676
     
327,808
 
Tenant security deposits
   
6,510
     
7,720
 
Total current liabilities
   
1,150,307
     
620,950
 
Long-term debt, less current portion
   
1,947,573
     
2,350,971
 
Line of credit
   
80,000
     
65,000
 
Deferred entrance fee revenue
   
76,944
     
72,485
 
Deferred liabilities
   
159,325
     
161,185
 
Deferred tax liability
   
112,170
     
112,736
 
Other liabilities
   
39,635
     
42,526
 
Total liabilities
   
3,565,954
     
3,425,853
 
 
               
Stockholders' Equity
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized at September 30, 2012 and December 31, 2011; no shares issued and outstanding
   
     
 
Common stock, $0.01 par value, 200,000,000 shares authorized at September 30, 2012 and December 31, 2011; 128,965,494 and 127,782,538 shares issued and 126,537,093 and 125,354,137 shares outstanding (including 3,962,588 and 4,221,598 unvested restricted shares), respectively
   
1,265
     
1,254
 
Additional paid-in-capital
   
1,991,347
     
1,970,820
 
Treasury stock, at cost; 2,428,401 shares at September 30, 2012 and December 31, 2011
   
(46,800
)
   
(46,800
)
Accumulated deficit
   
(925,209
)
   
(884,051
)
Accumulated other comprehensive income (loss)
   
864
     
(1,015
)
Total stockholders' equity
   
1,021,467
     
1,040,208
 
Total liabilities and stockholders' equity
 
$
4,587,421
   
$
4,466,061
 

See accompanying notes to condensed consolidated financial statements.

BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2012
   
2011
   
2012
   
2011
 
Revenue
 
   
   
   
 
Resident fees
 
$
605,867
   
$
575,159
   
$
1,805,140
   
$
1,707,117
 
Management fees
   
7,407
     
3,336
     
22,350
     
6,246
 
Reimbursed costs incurred on behalf of managed communities
   
83,208
     
37,233
     
242,847
     
72,584
 
Total revenue
   
696,482
     
615,728
     
2,070,337
     
1,785,947
 
 
                               
Expense
                               
Facility operating expense (excluding depreciation and amortization of $56,956, $56,893, $172,982 and $173,660, respectively)
   
411,467
     
 
381,414
     
 
1,213,751
     
 
1,118,610
 
General and administrative expense (including non-cash stock-based compensation expense of $6,021, $5,221, $19,185 and $14,316, respectively)
   
43,158
     
38,711
     
 
134,202
     
105,935
 
Facility lease expense
   
71,167
     
68,314
     
213,240
     
200,694
 
Depreciation and amortization
   
62,876
     
64,071
     
189,781
     
206,430
 
Asset impairment
   
     
     
8,329
     
14,846
 
(Gain) loss on acquisition
   
     
(3,520
)
   
636
     
(3,520
)
Gain on facility lease termination
   
     
     
(2,780
)
   
 
Costs incurred on behalf of managed communities
   
83,208
     
37,233
     
242,847
     
72,584
 
Total operating expense
   
671,876
     
586,223
     
2,000,006
     
1,715,579
 
Income from operations
   
24,606
     
29,505
     
70,331
     
70,368
 
 
                               
Interest income
   
676
     
1,171
     
2,220
     
2,569
 
Interest expense:
                               
Debt
   
(32,262
)
   
(30,433
)
   
(96,743
)
   
(92,667
)
Amortization of deferred financing costs and debt discount
   
(4,543
)
   
(4,310
)
   
(13,602
)
   
(9,024
)
Change in fair value of derivatives and amortization
   
140
     
(1,508
)
   
(371
)
   
(4,151
)
Loss on extinguishment of debt
   
     
(715
)
   
(221
)
   
(18,863
)
Equity in (loss) earnings of unconsolidated ventures
   
(249
)
   
(117
)
   
(211
)
   
295
 
Other non-operating income (loss)
   
500
     
(116
)
   
392
     
260
 
Loss before income taxes
   
(11,132
)
   
(6,523
)
   
(38,205
)
   
(51,213
)
Provision for income taxes
   
(878
)
   
(513
)
   
(2,953
)
   
(2,087
)
   Net loss
 
$
(12,010
)
 
$
(7,036
)
 
$
(41,158
)
 
$
(53,300
)
 
                               
Basic and diluted net loss per share
 
$
(0.10
)
 
$
(0.06
)
 
$
(0.34
)
 
$
(0.44
)
 
Weighted average shares used in computing basic and diluted net loss per share
   
122,493
     
121,616
     
 
121,784
     
 
121,232
 
 
                               

See accompanying notes to condensed consolidated financial statements.

BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2012
   
2011
   
2012
   
2011
 
 
 
   
   
   
 
Net loss
 
$
(12,010
)
 
$
(7,036
)
 
$
(41,158
)
 
$
(53,300
)
Other comprehensive income (loss):
                               
Unrealized gain (loss) on marketable securities - restricted
   
980
     
(1,802
)
   
1,818
     
(1,581
)
Reclassification of net (loss) gain on derivatives into earnings
   
     
(15
)
   
(79
)
   
213
 
Amortization of payments from settlement of forward interest rate swaps
   
     
94
     
179
     
282
 
Other
   
     
56
     
(39
)
   
(194
)
Total other comprehensive income (loss), net of tax
   
980
     
(1,667
)
   
1,879
     
(1,280
)
Comprehensive loss
 
$
(11,030
)
 
$
(8,703
)
 
$
(39,279
)
 
$
(54,580
)
 
                               

See accompanying notes to condensed consolidated financial statements.

BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 (Unaudited, in thousands)
 
 
 
 
Common Stock
   
Additional
Paid-In-
Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
(Loss) Income
Total
 
Shares
Amount
Balances at January 1, 2012
   
125,354
   
$
1,254
   
$
1,970,820
   
$
(46,800
)
 
$
(884,051
)
 
$
(1,015
)
 
$
1,040,208
 
Compensation expense related to restricted stock grants
   
     
     
19,185
     
     
     
     
19,185
 
Net loss
   
     
     
     
     
(41,158
)
   
     
(41,158
)
Issuance of common stock under Associate Stock Purchase Plan
   
58
     
     
1,043
     
     
     
     
1,043
 
Restricted stock, net
   
1,125
     
11
     
(100
)
   
     
     
     
(89
)
Unrealized gain on marketable securities - restricted
   
     
     
     
     
     
1,818
     
1,818
 
Reclassification of net loss on derivatives into earnings
   
     
     
     
     
     
(79
)
   
(79
)
Amortization of payments from settlement of forward interest rate swaps
   
     
     
     
     
     
179
     
179
 
Other
   
     
     
399
     
     
     
(39
)
   
360
 
Balances at September 30, 2012
   
126,537
   
$
1,265
   
$
1,991,347
   
$
(46,800
)
 
$
(925,209
)
 
$
864
   
$
1,021,467
 



See accompanying notes to condensed consolidated financial statements.



BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

 
Nine Months Ended
September 30,
 
 
 
2012
   
2011
 
Cash Flows from Operating Activities
 
   
 
Net loss
 
$
(41,158
)
 
$
(53,300
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Loss on extinguishment of debt
   
221
     
18,863
 
Depreciation and amortization
   
203,383
     
215,454
 
Asset impairment
   
8,329
     
14,846
 
Equity in loss (earnings) of unconsolidated ventures
   
211
     
(295
)
Distributions from unconsolidated ventures from cumulative share of net earnings
   
1,435
     
700
 
Amortization of deferred gain
   
(3,279
)
   
(3,280
)
Amortization of entrance fees
   
(19,846
)
   
(18,865
)
Proceeds from deferred entrance fee revenue
   
30,303
     
26,475
 
Deferred income tax benefit
   
(41
)
   
 
Change in deferred lease liability
   
5,324
     
5,006
 
Change in fair value of derivatives and amortization
   
371
     
4,151
 
Loss (gain) on sale of assets
   
245
     
(1,180
)
Loss (gain) on acquisition
   
636
     
(3,520
)
Gain on facility lease termination
   
(2,780
)
   
 
Non-cash stock-based compensation
   
19,185
     
14,316
 
Other
   
(487
)
   
 
Changes in operating assets and liabilities:
               
Accounts receivable, net
   
(8,092
)
   
(2,375
)
Prepaid expenses and other assets, net
   
1,653
     
(9,488
)
Accounts payable and accrued expenses
   
9,552
     
2,826
 
Tenant refundable fees and security deposits
   
(1,556
)
   
(1,941
)
Deferred revenue
   
4,369
     
3,609
 
Net cash provided by operating activities
   
207,978
     
212,002
 
 
               
Cash Flows from Investing Activities
               
Increase in lease security deposits and lease acquisition deposits, net
   
(6,767
)
   
(1,591
)
(Increase) decrease in cash and escrow deposits — restricted
   
(2,402
)
   
56,244
 
Purchase of marketable securities — restricted
   
(1,453
)
   
(33,545
)
Sale of marketable securities — restricted
   
     
1,415
 
Additions to property, plant and equipment and leasehold intangibles, net of related payables
   
(151,381
)
   
(114,588
)
Acquisition of assets, net of related payables and cash received
   
(111,308
)
   
(54,597
)
Purchase of Horizon Bay Realty, L.L.C., net of cash acquired
   
     
5,516
 
(Issuance of) payment on notes receivable, net
   
(591
)
   
1,674
 
Investment in unconsolidated ventures
   
(571
)
   
(13,711
)
Distributions received from unconsolidated ventures
   
256
     
156
 
Proceeds from sale of assets, net
   
325
     
30,817
 
Other
   
487
     
 
Net cash used in investing activities
   
(273,405
)
   
(122,210
)
 
               
Cash Flows from Financing Activities
               
Proceeds from debt
   
193,607
     
477,525
 
Repayment of debt and capital lease obligations
   
(136,957
)
   
(879,573
)
Proceeds from line of credit
   
280,000
     
120,000
 
Repayment of line of credit
   
(265,000
)
   
(85,000
)
Proceeds from issuance of convertible notes, net
   
     
308,233
 
Issuance of warrants
   
     
45,066
 
Purchase of bond hedge
   
     
(77,007
)
Payment of financing costs, net of related payables
   
(2,810
)
   
(8,170
)
Other
   
(295
)
   
(454
)
Refundable entrance fees:
               
      Proceeds from refundable entrance fees
   
29,512
     
18,594
 
      Refunds of entrance fees
   
(19,555
)
   
(16,886
)
Cash portion of loss on extinguishment of debt
   
(118
)
   
(17,040
)
Recouponing and payment of swap termination
   
(1,289
)
   
(99
)
Purchase of treasury stock
   
     
(17,613
)
Net cash provided by (used in) financing activities
   
77,095
     
(132,424
)
   Net increase (decrease) in cash and cash equivalents
   
11,668
     
(42,632
)
8

 
 
   Cash and cash equivalents at beginning of period
   
30,836
     
81,827
 
   Cash and cash equivalents at end of period
 
$
42,504
   
$
39,195
 
See accompanying notes to condensed consolidated financial statements.


BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Description of Business

Brookdale Senior Living Inc. ("Brookdale" or the "Company") is a leading owner and operator of senior living communities throughout the United States.  The Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest quality service, care and living accommodations for residents.  The Company owns, leases and operates retirement centers, assisted living and dementia-care communities and continuing care retirement centers ("CCRCs").  Through its Innovative Senior Care ("ISC") program, the Company also offers a range of outpatient therapy, home health and hospice services, primarily to residents of its communities.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company as of September 30, 2012, 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, 2011, as filed with the Securities and Exchange Commission.

Revenue Recognition

Resident Fees

Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.

Entrance Fees

Certain of the Company's communities have residency agreements which require the resident to pay an upfront entrance fee prior to occupying the community.  In addition, in connection with the Company's MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return for a reduced monthly service fee.  The non-refundable portion of the entrance fee is recorded as deferred entrance fee revenue and amortized over the estimated stay of the resident based on an actuarial valuation.  The refundable portion of a resident's entrance fee is generally refundable within a certain number of months or days following contract termination or upon the sale of the unit, or in certain agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit.  In such instances the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.

Certain contracts require the refundable portion of the entrance fee plus a percentage of the appreciation of the unit, if any, to be refunded only upon resale of a comparable unit ("contingently refundable").  Upon resale the Company


may receive reoccupancy proceeds in the form of additional contingently refundable fees, refundable fees, or non-refundable fees.  The Company estimates the amount of reoccupancy proceeds to be received from additional contingently refundable fees or non-refundable fees and records such amount as deferred entrance fee revenue.  Such deferred entrance fee revenue was approximately $47.1 million and $48.1 million at September 30, 2012 and December 31, 2011, respectively, and is amortized over the life of the community.  All remaining contingently refundable fees not recorded as deferred entrance fee revenue and amortized are included in refundable entrance fees and deferred revenue.

All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue, are classified as current liabilities.

The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability.  The balance of the non-refundable portion is recorded as a long-term liability.

Community Fees

Substantially all community fees received are non-refundable and are recorded initially as deferred revenue.  The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the implied contractual terms of the resident lease.

Management Fees

Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage of gross revenues (as defined).  Incentives and penalties receivable or payable under management contracts containing such provisions (other than contractual termination fees) are recorded based on the amounts that would be due pursuant to the contractual arrangements if the contracts were terminated on the reporting date.

Reimbursed Costs Incurred on Behalf of Managed Communities

The Company manages certain communities under contracts which provide for payment to the Company of a monthly management fee plus reimbursement of certain operating expenses.  Where the Company is the primary obligor with respect to any such operating expenses, the Company recognizes revenue when the goods have been delivered or the service has been rendered and the Company is due reimbursement.  Such revenue is included in "reimbursed costs incurred on behalf of managed communities" on the condensed consolidated statements of operations.  The related costs are included in "costs incurred on behalf of managed communities" on the condensed consolidated statements of operations.

Fair Value of Financial Instruments

Cash and cash equivalents, cash and escrow deposits-restricted, derivative financial instruments and marketable securities - restricted are reflected in the accompanying condensed consolidated balance sheets at amounts considered by management to reasonably approximate fair value.  Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company's current borrowing rate for debt with similar maturities and collateral securing the indebtedness.  The Company had outstanding debt with a carrying value and estimated fair value of approximately $2.6 billion and $2.5 billion as of September 30, 2012 and December 31, 2011, respectively.

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 820 – Fair Value Measurements ("ASC 820"), which 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 cash and cash equivalents and cash and escrow deposits-restricted reported on its condensed consolidated balance sheets approximate fair value due to the short maturity.

The Company's marketable securities - restricted include marketable securities that are recorded in the financial statements at fair value. The fair value is based primarily on quoted market prices and is classified within Level 1 of the valuation hierarchy.  Changes in fair value are recorded, net of tax, as other comprehensive income and included as a component of stockholders' equity.

The Company's derivative assets and liabilities include interest rate swaps and caps that effectively convert a portion of the Company's variable rate debt to fixed rate debt.  The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations.

The Company's fair value of debt disclosure is determined based primarily on market interest rate assumptions of similar debt applied to future cash flows under the debt agreements and is 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 policy provides for deductibles for each and every claim ($150,000 effective January 1, 2010).  As a result, the Company is, in effect, self-insured for claims that are less than $150,000.  In addition, the Company maintains a self-insured workers compensation program and a self-insured employee medical program for amounts below excess loss coverage amounts, as defined. The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity.

Marketable Securities - Restricted

Marketable securities - restricted include amounts required to be held in reserve related to the Company's entrance fee CCRCs pursuant to various state insurance regulations and consist of mutual funds holding equities and fixed-income securities. The Company classifies its marketable securities - restricted as available-for-sale and accordingly, they are carried at their estimated fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income.  Realized gains and losses from the available-for-sale securities are determined on the specific identification method and are included in other non-operating income (loss) on the trade date.


A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount of the security to fair market value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

The amortized cost basis of the marketable securities – restricted as of September 30, 2012 and December 31, 2011 was $34.2 million and $32.7 million, respectively.

Convertible Debt Instruments

Convertible debt instruments are accounted for under FASB ASC Topic 470-20, Debt – Debt with Conversion and Other Options.  This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion, including partial cash settlement, to separately account for the liability (debt) and equity (conversion option) components of the instruments in a manner that reflects the issuer's estimated non-convertible debt borrowing rate.

New Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update ("ASU") 2011-05, Presentation of Comprehensive Income ("ASU 2011-05").  The guidance in ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011 and requires the components of net income and other comprehensive income and total comprehensive income for each interim period. The Company adopted the provisions of this update as of January 1, 2012 and incorporated the provisions of this update to its condensed consolidated financial statements upon adoption. The adoption of this update did not have an impact on the Company's financial condition or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other ("ASU 2011-08").  ASU 2011-08 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  ASU 2011-08 applies to all companies that have goodwill reported in their financial statements.  The provisions of ASU 2011-08 are effective for the Company in 2012.  The adoption of this update did not have an impact on the Company's financial condition or results of operations.

In July 2012, the FASB issued ASU 2012-01, Continuing Care Retirement Communities — Refundable Advance Fees ("ASU 2012-01").  ASU 2012-01 amends the situations in which recognition of deferred revenue for refundable advance fees is appropriate.  Under this amendment, refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability.  The guidance in ASU 2012-01 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The Company is currently evaluating the impact this provision will have on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other ("ASU 2012-02").  ASU 2012-02 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the annual quantitative indefinite-lived intangible asset impairment test.  Under this amendment, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  ASU 2012-02 applies to all companies that have indefinite-lived intangible assets reported in their financial statements.  The provisions of ASU 2012-02 are effective for annual reporting periods beginning after September 15, 2012.  The Company has not yet adopted this pronouncement, but does not believe it will have an impact on the Company's consolidated financial statements.


Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company's consolidated financial position or results of operations.

3.  Earnings Per Share

Basic earnings per share ("EPS") is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents.  For purposes of calculating both basic and diluted earnings per share, vested restricted stock awards are considered outstanding.  Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock.  Potentially dilutive common stock equivalents include unvested restricted stock and restricted stock units and convertible debt instruments and warrants.

During the three and nine months ended September 30, 2012 and 2011, the Company reported a consolidated net loss.  As a result of the net loss, unvested restricted stock and restricted stock unit awards and convertible debt instruments and warrants were antidilutive for each period and were not included in the computation of diluted weighted average shares.  The weighted average restricted stock and restricted stock unit grants excluded from the calculations of diluted net loss per share were 1.1 million and 0.9 million for the three months ended September 30, 2012 and 2011, respectively, and 1.2 million and 1.4 million for the nine months ended September 30, 2012 and 2011, respectively.

4.  Acquisitions and Dispositions

Effective February 2, 2012, the Company acquired the underlying real estate associated with nine communities that were previously leased for an aggregate purchase price of $121.3 million. The results of operations of these communities, prior and subsequent to the acquisition, are reported in the Retirement Centers segment. The Company financed the transaction with $77.9 million of first mortgage financing secured by seven of the communities and $15.0 million of seller-financing secured by two of the communities (Note 8).

During the nine months ended September 30, 2012, the Company purchased three home health agencies and an existing skilled nursing facility as part of its growth strategy for an aggregate purchase price of approximately $6.6 million.  The purchase price of the acquisitions has primarily been ascribed to an indefinite useful life intangible asset and recorded on the condensed consolidated balance sheet under other intangible assets, net.

Horizon Bay/HCP Transactions

On September 1, 2011, the Company acquired 100% of the equity and voting interests in Horizon Bay Realty, L.L.C. ("Horizon Bay").  The results of Horizon Bay's operations have been included in the condensed consolidated financial statements since that date.  Horizon Bay is a seniors housing management company primarily focused on managing large portfolios of retirement communities across the United States for institutional real estate investors.  In connection with the acquisition, the Company also restructured Horizon Bay's existing relationship with HCP, Inc. ("HCP") relating to 33 communities that Horizon Bay leased from HCP. In particular, the Company (i) formed a joint venture with HCP to own and operate 21 communities (the "HCP RIDEA JV"), and (ii) leased the remaining 12 communities from HCP under long-term, triple net leases. Of these 12 communities, the Company assumed the pre-existing lease for eight communities and entered into a new lease for the remaining four communities.  The joint venture with HCP utilizes a RIDEA structure with the Company having acquired a 10% non-controlling interest in the joint venture. The Company also manages the communities under a ten-year management agreement with four five-year renewal options and retains all ancillary services operations.

As part of the transactions, the Company entered into an agreement to restructure Horizon Bay's management arrangements with Chartwell Seniors Housing Real Estate Investment Trust ("Chartwell").  Certain elements of the Chartwell management arrangement restructuring are subject to lender and other third party approvals.  Until such approvals are received, the Company will operate Chartwell's properties under the existing management contracts.


The Company purchased 100% of Horizon Bay in a transaction that involved the restructuring of certain leases and other elements of Horizon Bay's capital structure.  The fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred.  Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate.  As a result, the Company recognized a net non-cash gain of $2.0 million in 2011 which was subsequently reduced by approximately $0.6 million during the nine months ended September 30, 2012 due to adjustments related to pre-acquisition self-insurance reserves. 

The aggregate acquisition-date fair value of the purchase consideration transferred for the acquisition of Horizon Bay included $2.7 million of contingent consideration. The contingent consideration arrangement requires the Company to pay up to a maximum of approximately $3.4 million to Horizon Bay's former members.  The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumption in applying the income approach was the assignment of probabilities to the various possible outcomes.  During the nine months ended September 30, 2012, the Company paid approximately $1.2 million in contingent consideration.  As of September 30, 2012, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition of Horizon Bay.

5.  Stock-Based Compensation

The Company's compensation expense recorded in connection with grants of restricted stock and restricted stock units for the three and nine months ended September 30, 2012 and 2011 was calculated net of forfeitures estimated from 0% to 10% of the shares granted.  For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis (or if, applicable, on the accelerated method) 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 (amounts in thousands except for value per share):
 
 
Shares Granted
   
Value Per Share
   
Total Value
 
Three months ended March 31, 2012
   
1,286
   
 
$17.39 – $19.07           
    $ 24,524             
Three months ended June 30, 2012
   
85
   
 
$18.72 − $19.55           
    $ 1,666             
Three months ended September 30, 2012
   
128
   
 
$16.66 − $17.74           
   
 
$ 2,135             
 
6.  Goodwill and Other Intangible Assets, Net

Following is a summary of changes in the carrying amount of goodwill for the nine months ended September 30, 2012 and the year ended December 31, 2011 presented on an operating segment basis (dollars in thousands):


 
September 30, 2012
   
December 31, 2011
 
 
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment
and Other
Charges
   
Net
   
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment
and Other
Charges
   
Net
 
Retirement Centers
 
$
7,642
   
$
(34
)
 
$
(487
)
 
$
7,121
   
$
7,642
   
$
(34
)
 
$
(487
)
 
$
7,121
 
Assisted Living
   
102,680
     
(106
)
   
(142
)
   
102,432
     
102,680
     
(106
)
   
(142
)
   
102,432
 
CCRCs- Rental
   
56,281
     
     
(56,281
)
   
     
56,281
     
     
(56,281
)
   
 
CCRCs- Entry Fee
   
158,718
     
     
(158,718
)
   
     
158,718
     
     
(158,718
)
   
 
Total
 
$
325,321
   
$
(140
)
 
$
(215,628
)
 
$
109,553
   
$
325,321
   
$
(140
)
 
$
(215,628
)
 
$
109,553
 

Goodwill is tested for impairment annually with a test date of October 1 or sooner if indicators of impairment are present.  During the nine months ended September 30, 2012, the Company changed the composition of its operating segments as further discussed in Note 15.  The Company reevaluated goodwill under the new segment composition for impairment and determined that no impairment charge was necessary.

Community purchase options are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise. No indicators of impairment were present during the nine months ended September 30, 2012.  The following is a summary of other intangible assets at September 30, 2012 and December 31, 2011 (dollars in thousands):

 
September 30, 2012
   
December 31, 2011
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Community purchase options
 
$
147,610
   
$
(20,339
)
 
$
127,271
   
$
147,610
   
$
(17,566
)
 
$
130,044
 
Health care licenses
   
30,733
     
     
30,733
     
24,092
     
     
24,092
 
Total
 
$
178,343
   
$
(20,339
)
 
$
158,004
   
$
171,702
   
$
(17,566
)
 
$
154,136
 

Amortization expense related to definite-lived intangible assets for the three months ended September 30, 2012 and 2011 was $1.0 million and $2.9 million, respectively, and for the nine months ended September 30, 2012 and 2011 was $2.8 million and $20.4 million, respectively.  Health care licenses were determined to be indefinite-lived intangible assets and are not subject to amortization.

7.  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):



 
September 30,
2012
   
December 31,
2011
 
Land
 
$
291,012
   
$
275,277
 
Buildings and improvements
   
3,230,105
     
3,080,882
 
Leasehold improvements
   
408,854
     
429,133
 
Furniture and equipment
   
511,226
     
450,179
 
Resident and leasehold operating intangibles
   
163,366
     
163,366
 
Construction in progress
   
68,246
     
39,600
 
Assets under capital and financing leases
   
701,797
     
667,239
 
   
5,374,606
     
5,105,676
 
Accumulated depreciation and amortization
   
(1,584,635
)
   
(1,411,612
)
Property, plant and equipment and leasehold intangibles, net
 
$
3,789,971
   
$
3,694,064
 

Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise.

During the nine months ended September 30, 2012, there were indicators of impairment on certain long-lived assets.  The Company compared the estimated fair value of the assets (a Level 2 valuation) to their carrying value and recorded an impairment charge for the excess of carrying value over fair value.  A non-cash charge of $8.3 million within the Assisted Living and CCRCs - Entry Fee segments was recorded in the Company's operating results and reflected as asset impairment in the accompanying condensed consolidated statements of operations.  These charges are reflected as a decrease to the gross carrying value of the assets.  The impairment charges are primarily due to the amount by which the carrying values of the assets exceed the estimated fair value or estimated selling prices.

8.  Debt

Long-Term Debt, Capital Leases and Financing Obligations

Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):

 
September 30,
2012
   
December 31,
2011
 
 
Mortgage notes payable due 2013 through 2022; weighted average interest rate of 4.87% for the nine months ended September 30, 2012, net of debt discount of $0.4 million (weighted average interest rate of 5.04% in 2011)
 
$
1,563,660
   
$
1,470,462
 
 
$150,000 Series A notes payable, secured by five communities and by a $3.0 million cash collateral deposit, bearing interest at LIBOR plus 0.88%, payable in monthly installments of interest only until August 2011 and payable thereafter in monthly installments of principal and interest through maturity in August 2013
   
145,450
     
148,601
 
 
Discount mortgage note payable due June 2013, weighted average interest rate of 2.57% for the nine months ended September 30, 2012, net of debt discount of $1.5 million (weighted average interest rate of 2.52% in 2011)
   
80,379
     
79,911
 
 
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average interest rate of 1.70% for the nine months ended September 30, 2012 (weighted average interest rate of 1.65% in 2011), due 2032, payable in monthly installments of principal and interest through maturity, secured by the underlying assets of the portfolio
   
99,996
     
100,423
 
 
17

 
 
 
Capital and financing lease obligations payable through 2026; weighted average interest rate of 8.57% for the nine months ended September 30, 2012 (weighted average interest rate of 8.61% in 2011)
   
352,488
     
348,195
 
 
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount of $67.4 million, interest at 2.75% per annum, due June 2018
   
248,893
     
241,897
 
 
Construction financing due 2017 through 2024; weighted average interest rate of 8.0%
   
286
     
6,591
 
 
Notes payable issued to finance insurance premiums, weighted average interest rate of 2.68% for the nine months ended September 30, 2012 (weighted average interest rate of 3.11% in 2011), due 2013
   
4,159
     
2,545
 
 
Total debt
   
2,495,311
     
2,398,625
 
 
Less current portion
   
547,738
     
47,654
 
 
Total long-term debt
 
$
1,947,573
   
$
2,350,971
 

In accordance with applicable accounting pronouncements, as of September 30, 2012, the current portion of long-term debt within the Company's condensed consolidated financial statements reflects approximately $504.6 million of mortgage notes payable due within the next 12 months.  Although these debt obligations are scheduled to mature on or prior to September 30, 2013, the Company has the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $205.7 million of certain mortgages payable included in such debt until 2018 or later, as the instruments associated with such mortgages payable provide that the Company can extend the respective maturity dates for terms of five to seven years from the existing maturity dates.  The Company presently anticipates that it will exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations.

2011 Credit Facility

On January 31, 2011, the Company entered into an Amended and Restated Credit Agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The amended credit agreement amended and restated in its entirety the Company's existing Credit Agreement dated as of February 23, 2010, as previously amended.  The amended credit agreement increased the commitment under the credit facility from $120.0 million to $200.0 million and extended the maturity date to January 31, 2016.  Effective February 24, 2011, the commitment under the Amended and Restated Credit Agreement was further increased to $230.0 million.

The revolving line of credit can be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.

The facility is secured by a first priority lien on certain of the Company's communities.  The availability under the line will vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event will LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  The Company is also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

The credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth.  A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the credit agreement and all amounts owing under the credit agreement and certain other loan agreements becoming immediately due and payable.
18



As of September 30, 2012, the Company had an available secured line of credit with a $230.0 million commitment and $190.0 million of availability (of which $80.0 million had been drawn as of such date).  The Company also had secured and unsecured letter of credit facilities of up to $92.5 million in the aggregate as of September 30, 2012.  Letters of credit totaling $78.1 million had been issued under these facilities as of such date.

Financings

On January 5, 2012, the Company obtained a $63.0 million first mortgage loan, secured by the underlying community.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 300 basis points and matures in January 2017.  In connection with the transaction, the Company repaid $62.8 million of existing variable rate debt.

On February 29, 2012, the Company obtained a $20.0 million first mortgage loan, secured by the underlying community.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 275 basis points and matures in February 2017.

The $77.9 million first mortgage facility used to partially finance the acquisition of the underlying real estate of nine communities (Note 4) has a ten year term.  75% of the facility bears interest at a fixed rate of 4.2% and the remaining 25% of the facility bears interest at a variable rate of 30-day LIBOR plus a margin of 276 basis points.  The $15.0 million mortgage loan used to partially finance the acquisition has a two year term and bears interest at a fixed rate of 7.0%.

On June 29, 2012, the Company obtained a $15.0 million first mortgage loan, secured by two communities that the Company acquired in February 2012.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 425 basis points and matures in June 2017.  In connection with the transaction, the Company repaid $15.0 million of seller-financed debt that had been obtained at the time of closing of the acquisition (Note 4).

As of September 30, 2012, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.

Interest Rate Swaps and Caps

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk.  Interest rate protection and swap agreements were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions.

All derivative instruments are recognized as either assets or liabilities in the condensed consolidated balance sheets at fair value.  The change in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive loss depending upon whether it has been designated and qualifies as an accounting hedge.

Derivative contracts are not entered into for trading or speculative purposes.  Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors.  Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.

The following table summarizes the Company's swap instrument at September 30, 2012 (dollars in thousands):

19




Current notional balance
 
$
27,473
 
Highest possible notional
 
$
27,473
 
Lowest interest rate
   
5.49
%
Highest interest rate
   
5.49
%
Average fixed rate
   
5.49
%
Earliest maturity date
   
2016
 
Latest maturity date
   
2016
 
Weighted average original maturity
 
5.0 years
 
Estimated liability fair value (included in other liabilities at September 30, 2012)
 
$
(1,982
)
Estimated liability fair value (included in other liabilities at December 31, 2011)
 
$
(2,809
)

The following table summarizes the Company's cap instruments at September 30, 2012 (dollars in thousands):

Current notional balance
 
$
418,238
 
Highest possible notional
 
$
418,238
 
Lowest interest rate
   
5.00
%
Highest interest rate
   
6.06
%
Average fixed rate
   
5.49
%
Earliest maturity date
   
2012
 
Latest maturity date
   
2017
 
Weighted average original maturity
 
2.7 years
 
Estimated asset fair value (included in other assets, net at September 30, 2012)
 
$
 
Estimated asset fair value (included in other assets, net at December 31, 2011)
 
$
 

During the nine months ended September 30, 2012, the Company terminated one swap agreement with a total notional amount of $150.0 million. In conjunction with this transaction, $1.2 million was paid to the counterparty, which had been previously deposited as collateral. The Company also entered into two new cap agreements with an aggregate notional amount of $169.5 million.

 9.  Litigation

The Company has been and is currently involved in litigation and claims incidental to the conduct of its business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, the Company maintains general liability and professional liability 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.
20




10.  Supplemental Disclosure of Cash Flow Information

(dollars in thousands):

 
Nine Months Ended
September 30,
 
 
2012
   
2011
 
Supplemental Disclosure of Cash Flow Information:
       
Interest paid
 
$
95,795
   
$
90,581
 
Income taxes paid
 
$
1,954
   
$
2,283
 
Write-off of deferred costs
 
$
744
   
$
2,080
 
               
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
               
Acquisition of assets, net of related payables and cash received:
               
Cash and escrow deposits-restricted
 
$
3,313
   
$
 
Prepaid expenses and other current assets
   
(2,817
)
   
 
Property, plant and equipment and leasehold intangibles, net
   
123,450
     
50,350
 
Other intangible assets, net
   
6,641
     
4,247
 
Other assets, net
   
(7,327
)
   
 
Accrued expenses
   
(580
)
   
 
Other liabilities
   
3,628
     
 
Long-term debt, less current portion
   
(15,000
)
   
 
Net
 
$
111,308
   
$
54,597
 
Purchase of Horizon Bay Realty, L.L.C., net of cash acquired:
               
Property, plant and equipment and leasehold intangibles, net
 
$
   
$
8,201
 
Cash and escrow deposits—restricted
   
     
10,702
 
Accounts receivable, net
   
     
2,507
 
Long-term debt, less current portion
   
     
(1,821
)
Accrued expenses
   
     
(13,911
)
Other liabilities
   
     
(6,136
)
Common stock
   
     
(1
)
Additional paid-in capital
   
     
(1,537
)
Accumulated earnings
   
     
(3,520
)
Net
 
$
   
$
(5,516
)
Capital leases:
               
Property, plant and equipment and leasehold intangibles, net
 
$
13,852
   
$
 
Long-term debt
   
(13,852
)
   
 
Net
 
$
   
$
 
 
11.  Facility Operating Leases

A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains is as follows (dollars in thousands):
 
21

 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
2012
   
2011
   
2012
   
2011
 
Cash basis payment
 
$
70,142
   
$
67,584
   
$
211,195
   
$
198,968
 
Straight-line expense
   
2,118
     
1,824
     
5,324
     
5,006
 
Amortization of deferred gain
   
(1,093
)
   
(1,094
)
   
(3,279
)
   
(3,280
)
Facility lease expense
 
$
71,167
   
$
68,314
   
$
213,240
   
$
200,694
 

12.  Income Taxes

The Company's effective tax rates for the three months ended September 30, 2012 and 2011 were each (7.9%) and for the nine months ended September 30, 2012 and 2011 were (7.7%) and (4.1%), respectively.  The effective rates are reflective of the Company's decision to record a valuation allowance against the deferred tax benefit for the three and nine months ended September 30, 2012 and 2011.   The Company concluded that the additional benefits generated during the period did not meet the more likely than not criteria for realization.  The conclusion was determined solely based on the reversal of current timing differences and did not consider future taxable income to be generated by the Company, as required under generally accepted accounting principles.  The Company continues to maintain that the deferred tax assets recorded as of December 31, 2011, primarily related to net operating losses generated prior to December 31, 2010, are more likely than not to be realized based on the reversal of deferred tax liabilities recorded as of December 31, 2011.  The difference in the effective rate for the nine month periods ended September 30, 2012 and 2011 was primarily due to the impact of tax credits recorded in the nine months ended September 30, 2011.

The Company recorded additional interest charges related to its tax contingency reserve for the nine months ended September 30, 2012.  Tax returns for years 2008 through 2011 are subject to future examination by tax authorities.  The Company's consolidated federal income tax return for 2010 is currently under audit by the Internal Revenue Service.  In addition, certain tax returns are open from 2000 through 2007 to the extent of the net operating losses generated during those periods.

13.
Share Repurchase Program

On August 11, 2011, the Company's board of directors approved a share repurchase program that authorizes the Company to purchase up to $100.0 million in the aggregate of the Company's common stock.  Purchases may be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of these 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 and nine months ended September 30, 2012.  As of September 30, 2012, approximately $82.4 million remains available under this share repurchase authorization.

14.
Fair Value Measurements

The following table provides the Company's derivative assets and liabilities and marketable securities - restricted carried at fair value as measured on a recurring basis as of September 30, 2012 (dollars in thousands):
22

 
 
 
 
Total Carrying
Value at
September 30, 2012
   
 
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
 
Significant
unobservable
inputs
(Level 3)
 
Marketable securities - restricted
 
$
34,992
   
$
34,992
   
$
   
$
 
Derivative liabilities
   
(1,982
)
   
     
(1,982
)
   
 
 
$
33,010
   
$
34,992
   
$
(1,982
)
 
$
 

15.
Segment Information

Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.

During the second quarter of 2012, the Company changed the composition of its operating segments from four reportable segments to six reportable segments.  This change was made to align operating segments with the basis that the chief operating decision maker uses to review financial information to make operating decisions, assess performance, develop strategy and allocate capital resources.  All prior period disclosures below have been recast to present results on a comparable basis.

Retirement Centers.  The Company's Retirement Centers segment includes owned or leased communities that are primarily designed for middle to upper income senior citizens age 75 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.  The Company's Assisted Living segment includes owned or leased communities that offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents.  Assisted living communities include both freestanding, multi-story communities and freestanding single story communities.  The Company also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer's disease and other dementias.

CCRCs - Rental.  The Company's CCRCs - Rental segment includes large owned or leased 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 independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also include memory care/Alzheimer's units.

CCRCs - Entry Fee.  The communities in the Company's CCRCs - Entry Fee segment are similar to those in the Company's CCRCs - Rental segment but allow for residents in the independent living apartment units to pay a one-time upfront entrance fee, which is partially refundable in certain circumstances.  The amount of the entrance fee varies depending upon the type and size of the dwelling unit, the type of contract plan selected, whether the contract contains a lifecare benefit for the resident, the amount and timing of refund, and other variables.  In addition to the initial entrance fee, residents under all entrance fee agreements also pay a monthly service fee, which entitles them to the use of certain amenities and services.  Since entrance fees are received upon initial occupancy, the monthly fees are generally less than fees at a comparable rental community.

ISC.  The Company's ISC segment includes the outpatient therapy, home health and hospice services provided to residents of many of the Company's communities, to other senior living communities that the Company does not own or operate and to seniors living outside of the Company's communities.  The ISC segment does not include the therapy services provided in the Company's skilled nursing units, which are included in the Company's CCRCs - Rental and CCRCs - Entry Fee segments.
23



Management Services.  The Company's management services segment includes communities operated by the Company pursuant to management agreements.  In some of the cases, the community is owned by third parties and, in other cases, the community is owned in a joint venture structure in which the Company has an ownership interest.  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 the Company's 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):
24


 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Revenue(1)
 
   
   
   
 
Retirement Centers
 
$
126,401
   
$
119,548
   
$
376,726
   
$
350,993
Assisted Living
   
254,179
     
241,037
     
757,930
     
719,930
 
CCRCs - Rental
   
96,681
     
91,628
     
287,051
     
270,444
 
CCRCs - Entry Fee
   
71,750
     
71,571
     
215,001
     
213,804
 
ISC
   
56,856
     
51,375
     
168,432
     
151,946
 
Management Services(2)
   
90,615
     
40,569
     
265,197
     
78,830
 
 
 
$
696,482
   
$
615,728
   
$
2,070,337
   
$
1,785,947
 
Segment operating income(3)
                               
Retirement Centers
 
$
50,722
   
$
49,947
   
$
154,388
   
$
147,448
 
Assisted Living
   
91,162
     
82,104
     
271,891
     
253,826
 
CCRCs - Rental
   
25,100
     
28,957
     
79,883
     
88,661
 
CCRCs - Entry Fee
   
15,501
     
18,339
     
48,497
     
54,117
 
ISC
   
11,915
     
14,398
     
36,730
     
44,455
 
Management Services
   
7,407
     
3,336
     
22,350
     
6,246
 
 
 
 
201,807
   
 
197,081
   
 
613,739
   
 
594,753
 
General and administrative (including non-cash stock-based compensation expense)
   
43,158
     
38,711
     
 
134,202
     
105,935
 
Facility lease expense
   
71,167
     
68,314
     
213,240
     
200,694
 
Depreciation and amortization
   
62,876
     
64,071
     
189,781
     
206,430
 
Asset impairment
   
     
     
8,329
     
14,846
 
(Gain) loss on acquisition
   
     
(3,520
)
   
636
     
(3,520
)
Gain on facility lease termination
   
     
     
(2,780
)
   
 
Income from operations
 
$
24,606
   
$
29,505
   
$
70,331
   
$
70,368
 
 
 
 
As of
 
 
September 30,
2012
   
December 31,
2011
 
Total assets
 
   
 
Retirement Centers
 
$
1,179,203
   
$
1,047,388
 
Assisted Living
   
1,428,812
     
1,451,612
 
CCRCs - Rental
   
557,318
     
546,867
 
CCRCs - Entry Fee
   
966,470
     
994,064
 
ISC
   
95,604
     
78,137
 
Corporate and Management Services
   
360,014
     
347,993
 
   Total assets
 
$
4,587,421
   
$
4,466,061
 

 
(1) All revenue is earned from external third parties in the United States.
(2) Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of managed communities.
(3) Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).

25


 
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 the consummation of the restructuring of the management agreements with Chartwell Seniors Housing Real Estate Investment Trust; statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations regarding the economy, occupancy, revenue, cash flow, expenses, capital expenditures, Program Max opportunities, cost savings, the demand for senior housing, the home resale market, expansion and development activity, acquisition opportunities, asset dispositions, our share repurchase program, capital deployment and taxes; our belief regarding the value of our common stock and our growth prospects; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity; our plans to deleverage; our expectations regarding financings and refinancings of assets (including the timing thereof) and their effect on our results; our expectations regarding changes in government reimbursement programs and their effect on our results; 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, home health and hospice); our plans to expand, redevelop and reposition existing communities; our plans to acquire additional communities, asset portfolios, operating companies and home health agencies; the expected project costs for our expansion, redevelopment and repositioning program; our expected levels of expenditures and reimbursements (and the timing thereof); our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as "anticipate(s)", "expect(s)", "intend(s)", "plan(s)", "target(s)", "project(s)", "predict(s)", "believe(s)", "may", "will", "would", "could", "should", "seek(s)", "estimate(s)" and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, the risk that we may not be able to satisfy the conditions and successfully complete the Chartwell management agreement restructuring; the risk that we may not be able to successfully integrate the new Horizon Bay communities into our operations; our determination from time to time to purchase any shares under the repurchase program; our ability to fund any repurchases; the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; changes in governmental reimbursement programs; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be able to expand, redevelop and reposition our communities in accordance with our plans; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewal of management agreements; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates; environmental

contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011 and in this Quarterly Report.  Such forward-looking statements speak only as of the date of this Quarterly Report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Executive Overview

Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including occupancy growth, increases in the average monthly revenue per unit, expense control and the realization of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy, home health and hospice services); (iii) expansion, redevelopment and repositioning of existing communities; and (iv) acquisition and consolidation of asset portfolios and other senior living companies.

The tables below present a summary of our operating results and certain other financial metrics for the three and nine months ended September 30, 2012 and 2011 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).

 
 
Three Months Ended
September 30,
   
Increase
(Decrease)
 
 
 
2012
   
2011
   
Amount
   
Percent
 
Total revenues
 
$
696.5
   
$
615.7
   
$
80.8
     
13.1
%
Net loss
 
$
(12.0
)
  $
(7.0
)
 
$
5.0
     
70.7
%
Adjusted EBITDA
 
$
106.8
   
99.8
   
$
7.1
     
7.1
%
Cash From Facility Operations
 
$
61.5
   
60.1
   
$
1.4
     
2.3
%
Facility Operating Income
 
$
187.6
    $
187.2
   
$
0.4
     
0.2
%


 
Nine Months Ended
September 30,
   
Increase
(Decrease)
 
 
2012
   
2011
   
Amount
   
Percent
 
Total revenues
 
$
2,070.3
   
$
1,785.9
   
$
284.4
     
15.9
%
Net loss
 
$
(41.2
)
 
(53.3
)
 
$
(12.1
)
   
(22.8
%)
Adjusted EBITDA
 
$
307.9
    $
306.3
   
$
1.6
     
0.5
%
Cash From Facility Operations
 
$
177.5
   
183.2
   
$
(5.6
)
   
(3.1
%)
Facility Operating Income
 
$
571.5
    $
569.6
   
$
1.9
     
0.3
%

Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See "Non-GAAP Financial Measures" below for an explanation of how we define each of these measures,
a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities to Cash From Facility Operations.

During the nine months ended September 30, 2012, we experienced an increase in our total revenues, primarily due to the addition of leased and managed communities from the Horizon Bay and HCP transactions in the third quarter of 2011, along with increases in occupancy and average monthly revenue per unit, including an increase in our ancillary services revenue.  Total revenues for the nine months ended September 30, 2012 increased to $2.1 billion, an increase of $284.4 million, or 15.9%, over our total revenues for the nine months ended September 30, 2011.  Resident and management fee revenue for the nine months ended September 30, 2012 increased $114.1 million, or 6.7%, from the nine months ended September 30, 2011.  Revenue from reimbursed costs incurred on behalf of

managed communities increased $170.3 million, or 234.6%, during the nine months ended September 30, 2012, primarily due to the management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions during the third quarter of 2011.  In connection with these transactions, we added to our portfolio 12 leased communities and 78 managed communities (after giving effect to our subsequent acquisition of one of the managed communities in the fourth quarter of 2011).

The increase in resident fees during the nine months ended September 30, 2012 was primarily a result of an increase in the average monthly revenue per unit compared to the prior year period, including growing revenues from our ancillary services programs, an increase in occupancy and a 2.9% increase in consolidated units operated.  Our weighted average occupancy rate for the nine months ended September 30, 2012 and 2011 was 87.8% and 87.1%, respectively.  Although we have made significant progress in many areas of our business, the difficult operating environment has continued to result in occupancy rates that are lower than historical levels and diminished growth in the rates we charge our residents.

Beginning October 1, 2011, we were impacted by a reduction in the reimbursement rates for Medicare skilled nursing patients and home health patients, as well as a negative change in the allowable method for delivering therapy services to skilled nursing patients (resulting in increased therapy labor expense).  The cumulative negative financial impact of these changes increased our expense and decreased our revenue, Facility Operating Income, Adjusted EBITDA and Cash From Facility Operations for the nine months ended September 30, 2012.

During the three months ended September 30, 2012, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 7.1%, 2.3% and 0.2%, respectively, when compared to the three months ended September 30, 2011.  During the nine months ended September 30, 2012, our Adjusted EBITDA and Facility Operating Income increased by 0.5% and 0.3%, respectively, and Cash From Facility Operations decreased by 3.1%, when compared to the nine months ended September 30, 2011.

During the second quarter of 2012, we changed the composition of our operating segments from four reportable segments to six reportable segments (Retirement Centers, Assisted Living, CCRCs - Rental, CCRCs - Entry Fee, ISC and Management Services) (Note 15).  This change was made to align operating segments with the basis that the chief operating decision maker uses to review financial information to make operating decisions, assess performance, develop strategy and allocate capital resources.  All prior period disclosures below have been recast to present results on a comparable basis.

During the nine months ended September 30, 2012, we acquired the underlying real estate associated with nine Retirement Center communities that were previously leased for an aggregate purchase price of $121.3 million.  During the period, we also acquired three home health agencies and an existing skilled nursing facility for an aggregate purchase price of approximately $6.6 million.

During the nine months ended September 30, 2012, we continued to expand our ancillary services offerings.  As of September 30, 2012, we offered therapy services to approximately 50,600 of our units and home health services to over 45,200 of our units (approximately 38,000 and 32,700 of these units, respectively, are in our consolidated portfolio).   We expect to continue to expand our ancillary services programs to additional units and to open or acquire additional home health agencies.

We believe that the recent challenge in the housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates and occupancy levels when compared to historical levels.  We remain cautious about the economy and the adverse credit and financial markets and their effect on our customers and our business.  In addition, we continue to experience volatility in the entrance fee portion of our business.  The timing of entrance fee sales is subject to a number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively or negatively) when measured over the short-term.  These factors also impact our potential independent living customers to a significant extent.  We expect occupancy and entrance fee sales to normalize over the longer term.

Consolidated Results of Operations

Three Months Ended September 30, 2012 and 2011

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 related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 (dollars in thousands, except average monthly revenue per unit)
 
 
Three Months Ended
September 30,
         
 
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
               
Statement of Operations Data:
               
Revenue
 
   
   
   
 
Resident fees
 
   
   
   
 
Retirement Centers
 
$
126,401
   
$
119,548
   
$
6,853
     
5.7
%
Assisted Living
   
254,179
     
241,037
     
13,142
     
5.5
%
CCRCs - Rental
   
96,681
     
91,628
     
5,053
     
5.5
%
CCRCs - Entry Fee
   
71,750
     
71,571
     
179
     
0.3
%
ISC
   
56,856
     
51,375
     
5,481
     
10.7
%
Total resident fees
   
605,867
     
575,159
     
30,708
     
5.3
%
Management services(1)
   
90,615
     
40,569
     
50,046
     
123.4
%
Total revenue
   
696,482
     
615,728
     
80,754
     
13.1
%
Expense
                               
Facility operating expense
                               
Retirement Centers
   
75,679
     
69,601
     
6,078
     
8.7
%
Assisted Living
   
163,017
     
158,933
     
4,084
     
2.6
%
CCRCs - Rental
   
71,581
     
62,671
     
8,910
     
14.2
%
CCRCs - Entry Fee
   
56,249
     
53,232
     
3,017
     
5.7
%
ISC
   
44,941
     
36,977
     
7,964
     
21.5
%
Total facility operating expense
   
411,467
     
381,414
     
30,053
     
7.9
%
General and administrative expense
   
43,158
     
38,711
     
4,447
     
11.5
%
Facility lease expense
   
71,167
     
68,314
     
2,853
     
4.2
%
Depreciation and amortization
   
62,876
     
64,071
     
(1,195
)
   
(1.9
%)
Gain on acquisition
   
−−
     
(3,520
)
   
(3,520
)
   
(100.0
%)
Costs incurred on behalf of managed communities
   
83,208
     
37,233
     
45,975
     
123.5
%
Total operating expense
   
671,876
     
586,223
     
85,653
     
14.6
%
Income from operations
   
24,606
     
29,505
     
(4,899
)
   
(16.6
%)
Interest income
   
676
     
1,171
     
(495
)
   
(42.3
%)
Interest expense
                               
Debt
   
(32,262
)
   
(30,433
)
   
1,829
     
6.0
%
Amortization of deferred financing costs and debt discount
   
(4,543
)
   
(4,310
)
   
233
     
5.4
%
Change in fair value of derivatives and amortization
   
140
     
(1,508
)
   
(1,648
   
(109.3
%)
Loss on extinguishment of debt
   
−−
     
(715
)
   
(715
)
   
(100.0
%)
Equity in loss of unconsolidated ventures
   
(249
)
   
(117
)
   
132
     
112.8
%
Other non-operating income (loss)
   
500
     
(116
)
   
616
     
531.0
%
 
29

 
 
Three Months Ended
September 30,
                 
   
2012
     
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
Loss before income taxes
   
(11,132
)
   
(6,523
)
   
4,609
     
70.7
%
Provision for income taxes
   
(878
)
   
(513
)
   
365
     
71.2
%
Net loss
 
$
(12,010
)
 
$
(7,036
)
 
$
4,974
     
70.7
%
 
                               
Selected Operating and Other Data:
                               
Total number of communities (period end)
   
648
     
647
     
1
     
0.2
%
Total units operated(2)
                               
Period end
   
66,110
     
66,178
     
(68
)
   
(0.1
%)
Weighted average
   
66,090
     
55,440
     
10,650
     
19.2
%
Owned/leased communities units(2)
                               
Period end
   
48,013
     
47,752
     
261
     
0.5
%
Weighted average
   
48,009
     
46,791
     
1,218
     
2.6
%
Owned/leased communities occupancy rate  (weighted average)
   
88.0
%
   
87.4
%
   
0.6
%
   
0.7
%
Senior Housing average monthly revenue per unit (3)
 
$
4,279
   
$
4,214
   
$
65
     
1.5
%
 
                               
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
   
76
     
76
     
     
 
Total units (2)
                               
Period end
   
14,438
     
14,464
     
(26
)
   
(0.2
%)
Weighted average
   
14,445
     
14,131
     
314
     
2.2
%
Occupancy rate (weighted average)
   
89.1
%
   
88.4
%
   
0.7
%
   
0.8
%
Senior Housing average monthly revenue per unit (3)
 
$
3,275
   
$
3,186
   
$
89
     
2.8
%
Assisted Living
                               
Number of communities (period end)
   
434
     
433
     
1
     
0.2
%
Total units (2)
                               
Period end
   
21,655
     
21,524
     
131
     
0.6
%
Weighted average
   
21,652
     
21,265
     
387
     
1.8
%
Occupancy rate (weighted average)
   
89.1
%
   
88.4
%
   
0.7
%
   
0.8
%
Senior Housing average monthly revenue per unit (3)
 
$
4,393
   
$
4,274
   
$
119
     
2.8
%
CCRCs - Rental
                               
Number of communities (period end)
   
27
     
26
     
1
     
3.8
%
Total units (2)
                               
Period end
   
6,691
     
6,607
     
84
     
1.3
%
Weighted average
   
6,691
     
6,243
     
448
     
7.2
%
Occupancy rate (weighted average)
   
85.8
%
   
86.3
%
   
(0.5
%)
   
(0.6
%)
Senior Housing average monthly revenue per unit (3)
 
$
5,619
   
$
5,672
   
$
(53
)
   
(0.9
%)
CCRCs - Entry Fee
                               
Number of communities (period end)
   
14
     
14
     
     
 
Total units (2)
                               
Period end
   
5,229
     
5,157
     
72
     
1.4
%
Weighted average
   
5,221
     
5,152
     
69
     
1.3
%
Occupancy rate (weighted average)
   
83.4
%
   
82.2
%
   
1.2
%
   
1.5
%
Senior Housing average monthly revenue per unit (3)
 
$
4,975
   
$
5,124
   
$
(149
)
   
(2.9
%)



 
 
Three Months Ended
September 30,
   
   
 
 
 
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
Other Entry Fee Data
 
   
   
   
 
Non-refundable entrance fees sales
 
$
12,926
   
$
10,815
   
$
2,111
     
19.5
%
Refundable entrance fees sales(4)
   
12,206
     
7,204
     
5,002
     
69.4
%
Total entrance fee receipts
   
25,132
     
18,019
     
7,113
     
39.5
%
Refunds
   
(6,024
)
   
(5,475
)
   
549
     
10.0
%
Net entrance fees(5)
 
$
19,108
   
$
12,544
   
$
6,564
     
52.3
%
Management Services
                               
Number of communities (period end)
   
97
     
98
     
(1
)
   
(1.0
%)
Total units (2)
                               
Period end
   
18,097
     
18,426
     
(329
)
   
(1.8
%)
Weighted average
   
18,081
     
8,649
     
9,432
     
109.1
%
Occupancy rate (weighted average)
   
84.3
%
   
84.3
%
   
0.0
%
   
0.0
%
 
                               
ISC
                               
Brookdale units served
                               
Outpatient Therapy (total)
   
50,556
     
41,783
     
8,773
     
21.0
%
Outpatient Therapy (consolidated)
   
38,016
     
35,761
     
2,255
     
6.3
%
Home Health (total)
   
45,247
     
31,322
     
13,925
     
44.5
%
Home Health (consolidated)
   
32,650
     
28,347
     
4,303
     
15.2
%
Outpatient Therapy treatment codes
   
939,241
     
848,205
     
91,036
     
10.7
%
Home Health average census
   
3,651
     
3,379
     
272
     
8.0
%
__________
(1) Management services segment revenue includes reimbursements for which we are the primary obligor of costs incurred on behalf of managed communities.
(2) Period end units operated excludes equity homes.  Weighted average units operated represents the average units operated during the period, excluding equity homes.
(3) Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of entrance fees and ISC segment revenue, divided by average occupied units.
(4) Refundable entrance fee sales for the three months ended September 30, 2012 and 2011 include amounts received from residents participating in the MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee.  MyChoice amounts received from residents totaled $2.4 million and $2.3 million for the three months ended September 30, 2012 and 2011, respectively.
(5) Includes $1.6 million and $2.3 million of first generation net entrance fee receipts (which represent initial entrance fees received from the sale of units, net of first generation entrance fee refunds not replaced by second generation entrance fee receipts, at a recently opened entrance fee CCRC) during the three months ended September 30, 2012 and 2011, respectively.

As of September 30, 2012, our total operations included 648 communities with a capacity of 66,948 units, including equity homes.

Resident Fees

Resident fees increased over the prior year period primarily as a result of an increase in the average monthly revenue per unit compared to the prior year period, including growing revenues from our ancillary services programs, an

increase in occupancy and a 2.6% increase in consolidated units operated.  During the current period, revenues grew 2.0% at the 535 communities we operated during both periods with a 1.3% increase in the average monthly revenue per unit (excluding amortization of entrance fees in both instances).  Occupancy increased 0.7% in these communities period over period.

Retirement Centers revenue increased $6.9 million, or 5.7%, primarily due to the inclusion of revenue from communities acquired during the prior year period and increases in occupancy and average monthly revenue per unit at the communities we operated during both periods.

Assisted Living revenue increased $13.1 million, or 5.5%, primarily due to the inclusion of revenue from communities acquired during the prior year period and increases in occupancy and average monthly revenue per unit at the communities we operated during both periods.

CCRCs - Rental revenue increased $5.1 million, or 5.5%, primarily due to the inclusion of revenues from communities acquired during the prior year period.  The increase was partially offset by decreases in the average monthly revenue per unit and occupancy at the communities we operated during both periods.  Revenue for the CCRCs - Rental segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

CCRCs - Entry Fee revenue increased $0.2 million, or 0.3%, primarily due to an increase in occupancy at the communities we operated during both periods.  The increase was partially offset by a decrease in the average monthly revenue per unit at the communities we operated during both periods.  Revenue for the CCRCs - Entry Fee segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

ISC revenue increased $5.5 million, or 10.7%, primarily due to the roll-out of our ancillary services programs to additional units subsequent to the prior year period.  The increase was partially offset by a reduction in Medicare reimbursement rates.

Management Services

Management services revenue, including reimbursed costs incurred on behalf of managed communities, increased $50.0 million, or 123.4%, primarily due to the management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions that occurred during the third quarter of 2011.

Facility Operating Expense

Facility operating expense increased over the prior-year period primarily due to the inclusion of expenses from communities acquired during the prior year period and additional current year expense incurred in connection with the continued expansion of our ancillary services programs during 2012 and 2011, as well as an increase in salaries and wages.  These increases were partially offset by a decrease in workers compensation expense recorded in the current year period.

Retirement Centers operating expenses increased $6.1 million, or 8.7%, primarily due to the inclusion of expenses from communities acquired during the prior year period, as well as increases in salaries and wages due to wage rate increases and an increase in hours worked period over period.  There was also an increase in real estate tax expense.  These increases were partially offset by decreases in workers compensation and bonus expense in the current year period.

Assisted Living operating expenses increased $4.1 million, or 2.6%, primarily due to the inclusion of expenses from communities acquired during the prior year period. There was also an increase in salaries and wages and an increase in employee benefits expense.

CCRCs - Rental operating expenses increased $8.9 million, or 14.2%, primarily due to the inclusion of expenses from communities acquired during the prior year period, as well as an increase in salaries and wages due to wage rate increases and an increase in skilled therapy services expense due to a negative change in the allowable method

for delivering therapy services to skilled nursing patients.  These increases were partially offset by a decrease in workers compensation expense recorded in the current year period.

CCRCs - Entry Fee operating expenses increased $3.0 million, or 5.7%, primarily driven by an increase in salaries and wages due to wage rate increases and an increase in hours worked period over period. There were also increases in overtime expense and real estate tax expense.  These increases were partially offset by a decrease in deferred community fee expense from the prior year period.

ISC operating expenses increased $8.0 million, or 21.5%, primarily due to an increase in expenses incurred in connection with the continued expansion of our ancillary services programs and an increase in therapy direct labor expenses.

General and Administrative Expense

General and administrative expense increased $4.4 million, or 11.5%, primarily as a result of an increase in the number of employees in connection with the Horizon Bay and HCP transactions that occurred during the third quarter of 2011 and an increase in non-cash stock-based compensation expense.  The increase was partially offset by a decrease in integration, transaction-related and electronic medical records ("EMR") roll-out costs. General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs, was 4.3% and 4.3% for the three months ended September 30, 2012 and 2011, respectively, calculated as follows (dollars in thousands):
 

 
Three Months Ended September 30,
 
 
2012
   
2011
 
               
Resident fee revenues
 
$
605,867
     
79.6
%
 
$
575,159
     
88.3
%
Resident fee revenues under management
   
154,875
     
20.4
%
   
76,187
     
11.7
%
Total
 
$
760,742
     
100.0
%
 
$
651,346
     
100.0
%
General and administrative expenses (excluding non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
32,513
     
4.3
%
 
$
28,022
     
4.3
%
Non-cash stock-based compensation expense
   
6,021
     
0.8
%
   
5,221
     
0.8
%
Integration, transaction-related and EMR roll-out costs
   
4,624
     
0.6
%
   
5,468
     
0.8
%
General and administrative expenses (including non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
43,158
     
5.7
%
 
$
38,711
     
5.9
%

Facility Lease Expense

Facility lease expense increased $2.9 million, or 4.2%, primarily as a result of the acquisition of 12 leased communities in connection with the Horizon Bay and HCP transactions that occurred in the third quarter of 2011, as well as increases due to normal rent escalators. These increases were partially offset by decreased lease expense as a result of the purchase of nine previously leased communities in the first quarter of 2012.

Depreciation and Amortization

Depreciation and amortization expense decreased $1.2 million, or 1.9%, primarily as a result of management contracts and therapy services intangibles related to a 2006 acquisition becoming fully amortized during the prior year period.


Gain on Acquisition

During the three months ended September 30, 2011, we recognized $3.5 million as a gain on acquisition related to the acquisition of Horizon Bay.

Costs Incurred on Behalf of Managed Communities

Costs incurred on behalf of managed communities increased $46.0 million primarily due to new management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions.

Interest Income

Interest income decreased by $0.5 million, or 42.3%, primarily due to decreased interest earned on our restricted cash accounts.

Interest Expense

Interest expense increased $0.4 million, or 1.1%, primarily due to increased interest expense related to our line of credit, which had a higher average outstanding balance drawn period over period.  This increase was partially offset by a decrease in interest expense recorded from the change in the fair value of interest rate swaps due to fewer swap instruments in place during the current period.

Income Taxes

Our effective tax rates for the three months ended September 30, 2012 and 2011 were each (7.9%).  The rates reflect our decision to record a valuation allowance against the deferred tax benefit for the three months ended September 30, 2012 and 2011.  We concluded that the additional benefits generated during the period did not meet the more likely than not criteria for realization.  The conclusion was determined solely based on the reversal of current timing differences and did not consider future taxable income to be generated by the Company, as required under generally accepted accounting principles.  We continue to maintain that the deferred tax assets recorded as of December 31, 2011, primarily related to net operating losses generated prior to December 31, 2010, are more likely than not to be realized based on the reversal of deferred tax liabilities recorded as of December 31, 2011.

An additional interest charge related to our tax contingency reserve was recorded for the three months ended September 30, 2012.  Tax returns for years 2008 through 2011 are subject to future examination by tax authorities.  Our consolidated federal income tax return for 2010 is currently under audit by the Internal Revenue Service.  In addition, certain tax returns are open from 2000 through 2007 to the extent of the net operating losses generated during those periods.

Nine Months Ended September 30, 2012 and 2011

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 related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.


 (dollars in thousands, except average monthly revenue per unit)
 
 
Nine Months Ended
September 30,
         
 
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
               
Statement of Operations Data:
               
Revenue
 
   
   
   
 
Resident fees
 
   
   
   
 
Retirement Centers
 
$
376,726
   
$
350,993
   
$
25,733
     
7.3
%
Assisted Living
   
757,930
     
719,930
     
38,000
     
5.3
%
CCRCs - Rental
   
287,051
     
270,444
     
16,607
     
6.1
%
CCRCs - Entry Fee
   
215,001
     
213,804
     
1,197
     
0.8
%
ISC
   
168,432
     
151,946
     
16,486
     
10.8
%
Total resident fees
   
1,805,140
     
1,707,117
     
98,023
     
5.7
%
Management services(1)
   
265,197
     
78,830
     
186,367
     
236.4
%
Total revenue
   
2,070,337
     
1,785,947
     
284,390
     
15.9
%
Expense
                               
Facility operating expense
                               
Retirement Centers
   
222,338
     
203,545
     
18,793
     
9.2
%
Assisted Living
   
486,039
     
466,104
     
19,935
     
4.3
%
CCRCs - Rental
   
207,168
     
181,783
     
25,385
     
14.0
%
CCRCs - Entry Fee
   
166,504
     
159,687
     
6,817
     
4.3
%
ISC
   
131,702
     
107,491
     
24,211
     
22.5
%
Total facility operating expense
   
1,213,751
     
1,118,610
     
95,141
     
8.5
%
General and administrative expense
   
134,202
     
105,935
     
28,267
     
26.7
%
Facility lease expense
   
213,240
     
200,694
     
12,546
     
6.3
%
Depreciation and amortization
   
189,781
     
206,430
     
(16,649
)
   
(8.1
%)
Asset impairment
   
8,329
     
14,846
     
(6,517
)
   
(43.9
%)
Loss (gain) on acquisition
   
636
     
(3,520
)
   
4,156
     
118.1
%
Gain on facility lease termination
   
(2,780
)
   
     
2,780
     
100.0
%
Costs incurred on behalf of managed communities
   
242,847
     
72,584
     
170,263
     
234.6
%
Total operating expense
   
2,000,006
     
1,715,579
     
284,427
     
16.6
%
Income from operations
   
70,331
     
70,368
     
(37
)
   
(0.1
%)
Interest income
   
2,220
     
2,569
     
(349
)
   
(13.6
%)
Interest expense
                               
Debt
   
(96,743
)
   
(92,667
)
   
4,076
     
4.4
%
Amortization of deferred financing costs and debt discount
   
(13,602
)
   
(9,024
)
   
4,578
     
50.7
%
Change in fair value of derivatives and amortization
   
(371
)
   
(4,151
)
   
(3,780
)
   
(91.1
%)
Loss on extinguishment of debt
   
(221
)
   
(18,863
)
   
(18,642
)
   
(98.8
%)
Equity in (loss) earnings of unconsolidated ventures
   
(211
)
   
295
     
(506
)
   
(171.5
%)
Other non-operating income
   
392
     
260
     
132
     
50.8
%
Loss before income taxes
   
(38,205
)
   
(51,213
)
   
(13,008
)
   
(25.4
%)
Provision for income taxes
   
(2,953
)
   
(2,087
)
   
866
     
41.5
%
Net loss
 
$
(41,158
)
 
$
(53,300
)
 
$
(12,142
)
   
(22.8
%)