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Executives

Mark Ordan – CEO

Julie Pangelinan – CFO and Treasurer

Analysts

Roth Sharack [ph]

Larry Levy [ph] – High Capital [ph]

Jerry Doctrow – Stifel Nicolaus

Sunrise Senior Living, Inc. (SRZ) Q2 2009 Earnings Call Transcript August 6, 2009 9:00 AM ET

Operator

Good day and welcome to the Sunrise Senior Living second quarter earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. 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 on today’s call is Julie Pangelinan, our Chief Financial Officer.

Before we begin, 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 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 2009 second quarter Form 10-Q.

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 to our 2008 Form 10-Q, which we filed earlier today.

Before I turn the call over to Julie, for a review of our results for the quarter, I will first review some of the progress we have made over the last quarter.

In my last report to you, I expressed cautious optimism that we would continue our restructuring process to return our focus to our core operations. I also said that we would turn our attention to anything that detracts from profitability. We have been progressing on these fronts. As we reported in our 10-Q, we have continued to make progress in our restructuring efforts. In the quarter, we announced a restructuring plan to reduce overhead spending by $20 million. Under the plan, approximately 150 positions will be eliminated. As of June 30, 2009, we have eliminated 71 positions, and will be eliminating an additional 77 positions by the early 2010.

We have not just been cutting. We have been strengthening. Everybody knows that Sunrise has an extraordinary team of 38,000 people who give all they have for our residents. While streamlining, we have been steadily strengthening leadership in scores of key positions. Among our changes recently, we announced the promotion of Julie Pangelinan to Chief Financial Officer, and recently appointed Marc Richards as our new chief counting officer.

I'm also pleased to share that Lou Ferguson, a seasoned attorney, who bring years of experience to the company is serving as our general council, who has been deeply involved in our restructuring efforts, and is an important partner working very closely with me, Greg Neeb, Julie and our team.

We have reduced overheads steadily and have taken steps to improve our overall efficiency. We have reduced discretionary spending and we have already seen our G&A drop significantly due to our efforts in just one quarter. We predict that our 2009 annual run rate of 120 million is now reduced to approximately 109.6 million. We believe we are still on track to reduce our annual run rate to less than 100 million in 2010.

We are reducing spending in areas like consulting, temporary health, travel, information technology, and any other big or small category we can find. We have improved our cash position and we have strengthened our cash management processes. On July 31, 2009 our cash balance was approximately $25 million. We received approximately $9.8 million as a settlement agreement, as part of a settlement agreement with the former majority stockholders of Trinity Hospice. We also sold our ownership interest in Aston Gardens. We received 4.8 million of net proceeds for our equity interest.

We also announced that we are marketing a portfolio of 22 owned and 5 leased communities in which Sunrise is also the manager. These 27 communities have a book value of 185.4 million and related debt of 173.6 million. We are in the early stages of the sales process, but have already received strong interest in these properties. And we intend to sell 16 land parcels, which have a carrying value of 62.7 million and a related debt of 34.3 million.

I have heard that some are puzzled as to how our cash position has risen during this time. Not that hard, it is the result of non-recurring sales, holding certain debt payments, clearly improved cash management, and relatively steady cash flow from core operations. That is how.

In addition to improving our liquidity, we are also working to eliminate outstanding liabilities. As we announced in the first quarter, we hired a broker to market and sell all nine of our German communities. We have begun receiving bids. The cash from these sales will go directly to the lender of our German communities. We are also working to secure additional liquidity to satisfy the remaining German debt.

We are also working to resolve matters related to our Fountains venture, which is currently in default, and we believe we have made significant progress to this end with our venture partner and venture lender and the end result will have little cash exposure to Sunrise.

We have strengthened our vendor relationships and our accounts payable process restoring confidence in this vital part of Sunrise. We have worked hard to restore our credibility with our lenders. We have and continue to struggle with debts which are out of compliance, operating deficit guarantees, and loans on underperforming assets. We are dealing with many of these issues and we continue to hope that the lenders agree that they are best served in an out of court process. However, as we wrote in our 10-Q, this is a process whose outcome is not totally under our control. We look awfully hard at this, but we cannot assure you that we will be successful. As detailed in our 10-Q, we do have several upcoming financing deadlines to address.

We are very disappointed to announce a 270 basis points decline in occupancy for the second quarter. That are likely several factors that contribute to this, and in early June we enacted a determined program to reverse this slide. We have begun to see a reversal in our occupancy numbers, so far we attribute to a combination of this program that we enacted and an expected seasonal lift.

We have been working to improve our relationship with our capital partners. Our portfolio includes positives and challenges and we like working closely with our partners to play to our strength, while recognizing and addressing our weaknesses. I believe for example, that our relationship with Ventas is an eyes wide-open constructive one, where we consider strategies, tactics, and obligations that maximize returns for both organizations.

In one case, where we thought we had such a relationship we roughly learned that we are apparently wrong. Since joining Sunrise, I have enjoyed my frequent interactions with HCP leadership and hope that we would continue to work on ways to benefit both companies. HCP comments along the way, let me to think, we're on a positive path.

While the pending litigation suggests a very different situation, I certainly hope that we can return to a constructive relationship with HCP. We received the HCP lawsuit in June, which made serious, but we believe false accusations about our contractual relationship. We have fulfilled our obligations under these management contract and expect HCP to do the same. Furthermore, the management contracts themselves are legally sound and all of our actions have been and continue to be totally appropriate and consistent with both our contractual obligations and best practices in the industry.

Let me assure you that we intend to vigorously defend ourselves in this action. I heard some outside commentaries that Sunrise would lose sight of improving the business because of these matters. That will not happen. If anything, this sort of thing can galvanize our organization.

I would now like to turn the call over to Julie, who will review our operating metrics and financial results in greater detail.

Julie Pangelinan

Thanks, Mark. I would like to start by review our operating performance in our comparable communities for the quarter and the measures we took for addressing a difficult operating environment.

As we discussed in the first quarter, we expected the economy would continue putting pressure on community profitability due to its impact on occupancy and our ability to grow rate and revenue. We knew this would require us to place greater emphasis on improving our expense management and counteracting the potential decline in occupancy. Our efforts proved to be the right course of action given the challenges this quarter.

As we stated on our last earnings call, if we look at our results with and without the impact of foreign exchange rates, you'll get a better sense of how we actually performed. Excluding the impact of foreign exchange rates, also presents our data in a manner consistent with others in the industry that operate predominantly in the US.

In the second quarter of 2009, we experienced a decrease in expenses of 1.8% as compared to the second quarter of 2008. When we exclude the impact of foreign exchange rates, in addition to excluding a $5 million health and dental credit we received in the prior year, our expenses decreased year-over-year by 1.7%. These expense reductions are the results of a number of cost containment and reduction measures implemented by management, including reinforcing our variable labor guidelines, decreasing overtime, and focusing on cost reductions that do not affect resident care such as supplies, repairs and maintenance, advertising and other controllable costs.

There are some areas of our expenses that were lower in the second quarter such as repairs and maintenance and utilities that historically have increased towards the end of the year. We expect a similar trend in these categories later this year, but we anticipate that more than half of our expense savings will be sustained. As for our revenue this quarter, we reported a decline of 1.4%.

However, if you exclude the impact of foreign exchange rates revenue remained flat year-over-year. Specifically the decline in occupancy was offset in full by rate growth and increased extended care revenues.

Unit occupancy this quarter declined 270 basis points from 89.6% to 86.9% year-over-year. Our average daily revenue per occupied unit increased by 2%, and if we exclude the impact of foreign exchange rates it increased 3.5%. We do offer limited pricing incentives tailored to local competitive dynamics to sustain or expenses.

Now I would like to review our financial results for the quarter. We reported revenues of $380.9 million for the second quarter of 2009 as compared to $411.3 million for the second quarter of 2008. Net loss for the second quarter was $81.8 million or $1.62 per fully diluted share as compared to net loss of $31.8 million or $0.63 per fully diluted share for the second quarter of 2008.

Included in the loss from discontinued operations of $46.9 million for the three months ended June 30, 2009, is an operating loss of approximately $8 million from our nine German communities, and an impairment loss relating to the nine German communities of $52.4 million. As the communities are now considered held for sale, the results from the communities for the current and prior periods are included in discontinued operations. The fair value of the assets based on the average bid, price of initial bids received was less than the recorded book value and we accorded a charge of $52.4 million.

We expect to settle the German debt for an amount that is less than the recorded amount of 190 million as the debt is only partially recourse to us. Any difference between the recorded amount and the amount ultimately paid to the lenders to settle the debt will be recorded as gain on the extinguishment of debt on the date it is legally satisfied.

Also included in discontinued operations is a $7.1 million gain from the settlement between us and the previous owners of Trinity. Cost from operations for the three months ended June 30, 2009 was $43.2 million. Excluding SEC investigation costs, restructuring costs, and non-cash charges including depreciation and amortization, the provision for doubtful accounts, write-off of capitalized project costs, and impairment of long-lived assets, adjusted income from ongoing operations is 10 million.

Adjusted income from operations is a measure of operating performance that is not calculated in accordance with US GAAP, and should not be considered a substitute for income or loss from operations or net income or loss. Adjusted income from operations is used by management to focus on cash generated from the ongoing operations of the company, and to help management assess its adjustments to current spending decisions as needed.

Now I would like to address certain income statement line items with material fluctuations between the three months ended June 30, 2009 and June 30, 2008. The decrease in management fees of $2.2 million or 7% for the three months ended June 30, 2009 is primarily due to a decrease in the management fees for the Fountains venture and the loss of fees from terminated management contracts.

The decrease in professional fees from development, marketing and other of 9.3 million or 71% for the three months ended June 30, 2009 is due to the decrease in our development pipeline. There are currently only nine communities under development in the US and the UK and there is a corresponding decrease in development expense.

The decrease in general and administrative expenses of 17.5 million or 39% for the three months ended June 30, 2009, as Mark stated, is primarily due to the implementation of our cost-cutting plan. We have reduced spending through a number of cost containment initiatives. Our G&A for the quarter of 27.4 million indicates an annual run rate of approximately 109.6 million, down from an annual run rate of approximately 120 million based on first-quarter results.

There will continue to be a decrease in this annual run rate as we continue to execute on our 2009 restructuring plan. Restructuring costs of 9.2 million were incurred in the three months ended June 30, 2009 with no comparable expense in the prior year. This amount represents severance costs incurred related to the execution of our 2008 and 2009 restructuring plans as well as legal and professional fees relating to corporate restructuring.

Impairment of long-lived assets was 25 million for the quarter relating to 6 operating communities and 9 land parcels.

Finally turning to cash flows, we had 37 million of cash at June 30, 2009 compared to 29.5 million of unrestricted cash at December 31, 2008. Net cash provided by operating activities was 29.2 million for the six months ended June 30, 2009 compared to net cash used in operating activities of 18.5 million for the six months ended June 30, 2008, an increase in cash of 47.7 million. The increase was primarily due to a decrease in our loss before non-cash impairment charges and working capital changes. Changes in working capital provided cash of 19.2 million for the six months ended June 30, 2009 as compared to only 3.8 million in the corresponding period in 2008.

Net cash provided by investing activities was 4.8 million for the six months ended June 30, 2009 compared to net cash used in investing activities of 172.9 million for the six months ended 2008, an increase in cash of 177.7 million. The change was primarily due to a decrease of 116.4 million in net advances to communities under development and net receivable, a decrease in 81.4 million in capital expenditures and a 15.7 million decrease in proceeds from the sale of assets.

Finally, net cash used in financing activities was 26.6 million for the six months ended June 30, 2009 compared to net cash provided by financing activities of 128.1 million for the six months ended June 30, 2008, a decrease in cash of 154.7 million. The decrease was primarily due to a decrease in net borrowings of 150 million.

Now I will turn the call back over to Mark.

Mark Ordan

Thanks, Julie. The turnarounds and workouts are tough on everybody, perhaps especially on our team who lives it 24 x 7. I'm so grateful to peoples’ professionalism and endurance and to those who have chosen to join us recently to build Sunrise’s future. We will now open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will move to Roth Sharack [ph].

Roth Sharack

Hi. I live in a Sunrise residence in May, and have for seven years. I followed Sunrise for years, and I guess, I'm the cheerleader of sorts. So I want to offer this friendly comment. I'm curious about the new silence or maybe even the headline silence from the New York Times and the Washington Post. Times was brutal to Sunrise as opposed to highly critical, some appropriate. When the over expense and problems were hurting the company, but now that we have a new aggressive management that has cut projects and cut back expenses et cetera, I have seen no good news stories or analysis by either newspaper. The recent profile of Mr. Ordan looked very nice, doesn't really qualify, was more of a puff piece and didn’t express the progress that has been made by him.

Now, I don't know what you can do about it, how about some fairness in reporting if not analysis. Thanks.

Mark Ordan

This is Mark. First of all the person who just spoke is not related to me in any way. But I like it. We have been frustrated, I guess bad news helps more newspapers than good news, but we have been frustrated by the newspapers, certainly our hometown paper, but I can't control your editorial decisions. But thank you very much. I'm glad you are a happy resident of Sunrise.

Operator

And we will move next to Larry Levy [ph] with High Capital [ph].

Larry Levy – High Capital

Hi, you mentioned your problems with HCP. Do you have any comments on the recent Green Street [ph] report they put out about to the HCP litigation?

Mark Ordan

Actually, we were very puzzled by that piece, and what I've heard from others unrelated to Sunrise where too. Apparently they had no consideration to what the judge in the case said even though a transcript was and is readily available for anybody who wants it. Clearly the writer read neither the court filings nor the agreements he opined on. It looks like the information came from only one source. But we have already spoken to this writer, who by the way has a great reputation, and since then we have been assured that in the future he will talk with us whenever he talks about us.

And I would also add, we spend a lot of time on this. This is not a groundbreaking case. The contract case where one party, HCP, is unhappy with the contracts it bought, and is looking for a free or cheap way out. You know the judge ruled in part of this matter and said that this is not going to be an expedited case. So it is likely this will go on for years. Not that we hope that, but that is where we are.

Operator

(Operator instructions) Next, we will move next to Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

Hello all. I just had a couple of things Mark in that I'm sure some of the specifics, you know, are still obviously in negotiations, but just wanted to think about it. You identified I think 360 million or so of debt that is in default. And I just wanted to understand sort of the big buckets there. I am assuming about 200 million or so, 190 million is the German, can you just sort of touch on what else there is?

Mark Ordan

I will let Julie go through that and then I may comment a little bit further.

Julie Pangelinan

Okay, so included in the debt, you are right. There is 190 million of debt on our books relating to the German communities. We are obviously working with those lenders to restructure. We also have debt relating to a portfolio of properties that is being currently marketed for sale, and we have a debt relating to some land parcels, and those of the primary pieces of our corporate debt.

Jerry Doctrow – Stifel Nicolaus

Okay. And so, Fountains is not in that category?

Julie Pangelinan

No, Fountains is a venture for us, so that debt is not on our balance sheet.

Jerry Doctrow – Stifel Nicolaus

Okay, great.

Mark Ordan

Referring to that earlier that we have been working very closely with our bank and our capital partner, and I am confident that we will have a solution, which again would have minimal cost to Sunrise. So that is on the Fountains. The only thing I would just comment Jerry that it is just to say a complicated company with many pieces. So it takes time working with lots of different banks and different ventures to sort through this to come up with a solution that is comfortable for everybody, and so we have to treat everybody fairly and that is what we are doing.

Jerry Doctrow – Stifel Nicolaus

And just in terms of the process obviously, it is not exactly predictable, it is about how it all plays out, but you know is thinking about the December 2 I think expiration date if I remember correctly on the bank line, kind of target for getting it kind of settled, hopefully out of court in one way or the other.

Mark Ordan

Sure. We spend a great deal of time until December 2. We have many maturities over the next many months, and our relationship with our line group is extremely important to us. So we are very mindful, and we said it several times that this company is to be refinanced and restructured. So we keep that date in mind, but don't anticipate on November 30, scratching the head and saying what are we going to do. So we're working on this now. A little hot in August in Washington, but we're here.

Jerry Doctrow – Stifel Nicolaus

Of course they have conditioning, but are there any other buckets, major buckets of things, you know you have talked about the properties and parcels to be sold. You touched on France, you touched on Germany. You know I guess the other thing that I heard was negotiating with a variety of partners to perhaps raise some additional capital. Are there other sorts of kind of just major chunks of his that you know we should be keeping in mind, just trying to think through what might play out?

Mark Ordan

Well, just the ones you mentioned, you know we have ownership interest in some of our ventures, and it is not obviously completely up to us whether they can be turned into cash. I do think and I think we commented recently that we do discuss these matters with our capital partners, and as I said earlier, if there were things that we can do that are good for us and our cash position that still represents a fair value, that are also good for our capital partners, and then we look for ways to do that. So, you know, with Ventas or anybody, we work closely with them and we do try to find ways that can help us and help them.

Jerry Doctrow – Stifel Nicolaus

Okay, great thanks.

Mark Ordan

Thank you, Jerry.

Operator

And Mr. Ordan, there are no further questions at this time.

Mark Ordan

Okay, great. Everybody enjoy your summer, and thank you very much for your support.

Operator

That concludes this conference. We thank you for your participation.

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Source: Sunrise Senior Living, Inc. Q2 2009 Earnings Call Transcript
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