Sunrise Senior Living Q4 2008 Earnings Call Transcript

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Sunrise Senior Living (SRZ) Q4 2008 Earnings Call March 2, 2009 9:00 AM ET


Mark Ordan – Chief Executive Officer

Richard Nadeau – Chief Financial Officer


Jerry Doctrow – Stifel Nicolaus


Welcome to the Sunrise Senior Living Q4 earnings conference call. At this time I would like to turn the conference over to Mark Ordan, Chief Executive Officer. Please go ahead, Sir.

Mark Ordan

Thank you. Welcome to Sunrise Senior Living’s Investor Conference Call. This is Mark Ordan, Sunrise’s Chief Executive Officer. Joining me today is our Chief Financial Officer, Rick Nadeau.

Before we being, let me remind you that this call is being recorded and the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call. During the course of this call the company will make various remarks concerning management's expectations, predictions, plans and prospects that may constitute forward-looking statements. Actual results may differ materially from those anticipated by these forward-looking statements as a result of a variety of factors including those identified in our 2008 Form 10K.

Any forward-looking statements reflect management's current view only and the company undertakes no obligation to revise or update such statements in the future. For a further discussion on the company's forward-looking statements please refer you to our 2008 Form 10K which we filed with the SEC earlier this morning.

I would like to start the call by turning it over to Rick who will review our financial results and some other key areas of our 2008 form 10K. I will then give you an overview of the steps we are taking currently to address our liquidity and strategic issues. Some questions you might logically have tie to discussions we are engaging in concerning liquidity and restructuring initiatives that are neither public nor definitive and we will not take questions on these topics.

Rick Nadeau

Thanks Mark. While 2008 was a very difficult year for Sunrise, as a whole our revenues have remained relatively stable throughout the year. Our full year occupancy revenues were up 7.1%. Operating revenues were up 7.1%. Management fees were up 9% and overall occupancy remained flat for the year in one of the worst housing markets in U.S. history.

With respect to occupancy calculations, the company has traditionally calculated resident occupancy by taking the number of resident days for the time period and dividing that figure by the resident day capacity for the same time period. Resident capacity is equal to the number of units plus a factor for the percentage of units designed to be sold as shared units.

Beginning in the first quarter of 2009 we will begin reporting additional operating metrics including unit occupancy and revenue per unit. Let me talk to the income statement broadly. I would also like to point you to page one of the press release or to the MD&A section of the 2008 form 10K. In it you will see a chart that discloses some of the large and unusual items included in our net loss figure. I will address the more significant of these items as I go through the income statement.

The operating results for the fourth quarter 2008 were $435.6 million as compared to $403 million for the fourth quarter 2007. As I just stated, management fees were also up for the year by 9% as compared to 2007 but management fees were flat in the fourth quarter of 2008 as compared to the fourth quarter of 2007. Resident fees were up 13% for the fourth quarter of 2008 as compared to the fourth quarter of 2007. This increase is due in large part to three consolidated communities in French speaking Canada we opened in 2008, the consolidation of our German communities on September 1, 2008 and some rate growth.

Our rates for consolidated communities were up 5.3% in the fourth quarter of 2008 as compared to the fourth quarter of 2007. In the fourth quarter of 2008 as part of our annual evaluation of the realizability of goodwill we recorded an impairment of goodwill of $122 million related to our North American business. In the fourth quarter of 2008 we wrote off $11.6 million of costs related to abandoned projects. The amount written off for the full year was $96 million. Our remaining balance of construction in progress at December 31, 2008 is $88.9 million consisting of $82.9 million related to three wholly owned projects under construction and $6 million relating to a condominium renovation project called The Carlisle.

Of the three wholly owned projects under construction one of them opened in January 2009 in Monterrey, California. The other two projects which have a carrying value of $38 million are in California and are suspended until we receive suitable construction financing. We do not anticipate any additional equity contributions for these projects nor do we anticipate any new construction starts in the United States in 2009. We expect only two construction starts in the United Kingdom this year.

In the fourth quarter of 2008 we had write down’s of $34.2 million for impairments of operating properties and undeveloped land. The amount of write down’s for the full year was $36.5 million. The full amount was comprised of $19.3 million for operating properties in the United States, $5.2 million in the fourth quarter for our German communities and $12 million related to undeveloped land.

In the fourth quarter of 2008 and for the full year we incurred $3.7 million and $30.2 million respectively for expenses related to the accounting restatement, special independent committee investigation, the SEC investigation and the shareholder litigation. As reported on February 19, 2009 the company and certain of its current and former officers and directors entered into an agreement to settle the company’s two stockholder derivative actions.

In addition, as of Friday, February 27, 2009 we have also settled the pending Class Action shareholder lawsuit. All of these settlements are subject to Court approval. We are pleased that this shareholder litigation is resolved. These are significant steps to putting many of our legal issues that arose from the accounting restatement behind us.

Also, if you look at item 9 in our 2008 10K you will see that the company disclosed it has successfully remediated the material weaknesses and internal controls that were disclosed in the 2006 form 10K and the 2007 form 10K. This is also an important step for the company to have addressed. The SEC investigation is now the only unresolved matter relating to this difficult part of Sunrise’s history.

At the end of the third quarter of 2008 we reported we had purchased an option to acquire the remaining stake in our German venture and that we intended to exercise that option. Accordingly we are consolidating those communities. Prior to that purchase our minority ownership position left us with no control over the portfolio but exposed us to all of the financial risk associated with the portfolio. When we consolidate these communities into our financial results the account results require that assets and liabilities of the German venture be consolidated at estimated current fair value.

Because our liabilities in the German venture exceeded our assets we recorded a non-cash extraordinary pre-tax loss for 2008 of $22 million. We have also taken steps to reduce the amount we are spending on G&A and that includes reducing some non-care related positions and non-payroll expenses. Throughout 2008 we eliminated 165 positions from our corporate and development groups. The severance charges were $15.2 million for the full year of 2008 and $9.7 million for the fourth quarter 2008.

Based on our actions to date we expect severance costs of $2 million in 2009 but we expect further restructuring and severance costs will be required in 2009 and that these costs may be significant. We do not expect these changes to impact the care we provide to any of our residents.

We recorded $15.9 million in foreign exchange losses in 2008. More specifically we had $14.2 million in losses related to foreign exchange rates for the Canadian dollar and $1.7 million in losses related to foreign exchange rates for the Euro and British Pound. This is compared to a $2.3 million loss due to exchange rates in 2007.

Now let me give you a brief overview of our balance sheet. At December 31, 2008 we had stockholder’s equity of $139 million which reflects the difference between our reported assets and liabilities. Included in our liabilities is $636 million of consolidated debt. On page four of the 2008 form 10K you will see a chart that lists the components of our debt. $472 million of the consolidated debt is classified as current either based on scheduled maturities or because of covenant or payment defaults.

As Mark will describe we are working with our lenders to restructure some of our more significant obligations. We have explained to our lenders and our venture partners it is our firm belief that it is in their best interest to continue funding construction and lease-up activities as their collateral is worth more if projects under construction are completed and filled with residents.

We are also engaged in discussions with various venture partners and third parties regarding the possible sale of certain assets with the purpose of increasing liquidity and reducing obligations to enable us to continue operations. In the form 10Q for the third quarter of 2008 we discussed the debt default for The Fountains portfolio and the fact that we were making payments under the related operating deficit guarantee to the lenders. The operating performance of these communities continued to deteriorate in the fourth quarter of 2008 and in January 2009.

We have been unable to restructure this debt. In January 2009 we determined that we would be unable to continue funding this significant cash outflow required by the operating deficit guarantee to our lender and the income support obligation to our venture partner. We informed our venture partner we would cease income support payments in January 2009. Also in January 2009 we informed the lender that we would not honor our operating deficit agreement to the extent of shortfalls resulting from penalty interest being charged to the venture.

We are in discussions with our venture partner and our lenders to attempt to resolve these matters.

Our cash flow from operating activities was negative $124 million in 2008. A large portion of this was due to poor operating results but there was also a significant impact from the reduction of accounts payable and accruals which had built up during the accounting restatement due to large billings from outside professionals.

Now I would like to take a few minutes to review some operating metrics for the quarter.

For the fourth quarter of 2008 same store revenues were up 1.7% to $366 million and revenue in the U.S. was up 2.4%. Average daily rate also grew by 1.7% as compared to the prior year. Both same store revenues and fourth quarter ADR growth were suppressed in part due to the unfavorable exchange rates for our Canadian, U.K. and German communities. You should remember that beginning in 2007 we raised rates on January 1 for the majority of our new assisted living and memory care move-ins. This change resulted in a much higher than expected ADR and revenue growth in Q1 2008 which had an impact on Q4 2008.

A third factor impacting year-over-year ADR growth in Q4 was the pricing incentives offered on select inventory in several markets to support our move-in pace in light of the tightened economic conditions. Occupancy in our same store portfolio was 89.9% at December 31, 2008. This is the same figure as the prior period. Last quarter we talked about the continued opportunity in the same store assisted living portfolio in North America. That grouping continues to do well at 92% occupancy in Q4 which was up 0.7% from the prior period.

While difficult to quantify the economy is having a significant negative impact on the decision to move into senior living as seniors and their families face declining savings and challenges in selling their homes. In particular, our independent living segment is most impacted by the housing market exhibiting year-over-year decline in occupancy of 2.7 points. Since independent living apartments are usually populated by residents who require little care it makes sense that they are more likely to delay a move than ones who need more assistance.

Going forward in 2009 we would expect maintaining occupancy to be extremely challenging and we anticipate very modest rate growth during these economic times. You will also see in the press release we reported that same community operating expenses for the fourth quarter increased to $262 million as compared to $234 million for the prior year fourth quarter. These results include $19.6 million for insurance credits due to favorable loss experience in 2007. Excluding this adjustment our same community expenses increased 3.5% over the fourth quarter of the prior year.

Further, for same store consolidated communities expenses increased 9% year-over-year after excluding the insurance credits. We do continue to focus on managing all expenses more prudently.

Now I’d like to turn the call back over to Mark.

Mark Ordan

Thanks Rick. We are fully engaged in a process to restructure Sunrise, our obligations and how we operate. While we clearly think all of our stakeholders benefit from such restructuring we don’t control this process and we cannot assure anyone we will succeed. Of course people listening to this call in this economic environment are wondering if we can successfully restructure this company without filing for bankruptcy protection. Let me assure you that as of now we believe we are working on viable initiatives to accomplish an out of court restructuring. We will keep you informed of any material changes.

We are engaged in active discussions with our largest lenders and our capital partners to restructure our debt and to provide additional liquidity to Sunrise. We are also continuing to downsize the company to reverse cash drain and restore a then smaller Sunrise to profitability. I have been meeting continually with many of our stakeholders who see that an in-court process would be extremely expensive and potentially volatile. They are also aware of our liquidity constraints and timing under our ten bank amendment. We hope that this understanding will prompt parties to do all that is necessary to accomplish this restructuring in the coming weeks.

This restructuring would not be an end of a process but the beginning of one that would later address future maturities in place, operating deficit agreements, defaults and completion guarantees. You should also be assured we are actively managing our core operations through this period. As Rick noted, our occupancy remains roughly flat overall without a decline in ADR. Our communities are led by passionate managers who as I meet them continue to reinforce what a special culture exists at Sunrise.

We still have a lot of progress to make on expense reductions and controls and I look forward to returning Sunrise to a company whose profitability matches its reputation for resident care. In this economy however, I do not perceive progress as a straight line and maintaining occupancy will be a challenge.

In our back office we are working hard to control our processes, measure our business results and to make sure that our very important vendors see how committed we are to working through this period. On behalf of my fellow board members I am grateful to everyone inside and outside Sunrise who is working hard to get through this period. We are comforted that while the outcome is uncertain and out of our control that many people are determined to do all they can to achieve a positive result.

Finally, I hope you can appreciate that through my prepared remarks and Rick’s we have given you as full an update as possible on our restructuring activities. As I mentioned earlier we will not be taking questions on this topic. Now Rick and I will take questions that you may have.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Jerry Doctrow – Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

I appreciate there are things you can’t talk about. I just wanted to focus on the expense controls. We just got off the Brookdale call where they are making some good progress on that and talking about more going on. Do you have any additional color you can give us there? Any sense of maybe where you see expense growth coming or more on the initiatives?

Mark Ordan

I probably couldn’t be more specific except to tell you that I think that Sunrise, as I said, what we foresee is a very broad restructuring of what we do. I think there are many elements of expense control that go into that really across the board. I think like any company, and I know what Brookdale said earlier, any company at a time like this you look at every area you possibly can and you just want to make obviously sure that you are not doing anything that could affect resident care and we don’t think that we have a risk of that at all.

Jerry Doctrow – Stifel Nicolaus

Maybe just a little more color then on discounting? How much are you using? Where do you see it headed?

Mark Ordan

As Rick said it is done selectively. I think like any normal company you price relative to the market or you don’t succeed. We are careful about that. As Rick noted we have more issues in our independent living than assisted living area. I can’t be more specific than that but it is selective and we are very careful of that.

It looks to me like there are no other questions at this time. Again I thank everybody for participating this morning and for listening to us. I look forward to being in touch as there are material changes as I said earlier. Thank you.


This does conclude our call. We would like to thank everyone for their participation. Have a great day.

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