Sunrise Senior Living, Inc. (SRZ) Q4 2009 Earnings Call February 25, 2010 9:00 AM ET
Mark Ordan - CEO
Julie Pangelinan - CFO & Treasurer
Greg Neeb - CIO
Daniel Bernstein - Stifel Nicolaus
Good day and welcome to the Sunrise Senior Living fourth quarter earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mark Ordan, Chief Executive Officer; please go ahead.
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 our Chief Financial Officer, Julie Pangelinan and Greg Neeb, our Chief Investment 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 Form 10-K. 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 further discussions on the company’s forward-looking statements, please refer to our 2009 Form 10-K, that we filed earlier today.
Before I make my remarks this morning about our fourth quarter and the coming year, you will first hear from Julie, who will provide highlights and commentary on our operating and financial results, and then from Greg Neeb, for an update on our restructuring progress and other corporate updates.
Thank you, Mark. I will start by reviewing our comparable community operating performance for the quarter, first on occupancy. Our occupancy for the quarter in our comparable communities was 86.5%, which is a decline of 350 basis points from the fourth quarter 2008 and down 10 basis points as compared to the third quarter of 2009.
If we exclude the results from the Fountains portfolio, 16 communities that we have or will discontinue managing in the coming months, our occupancy was 87.2% for the fourth quarter. This is a 10 basis point improvement from the third quarter of 2009. We believe this number provides a better indication of how our go forward business performed. We attribute this quarter-over-quarter increase to a series of efforts including more targeted marketing and instituting corrective rate changes.
Our average daily revenue per occupied unit in our comparable communities increased by 2.5% to $190.56, and excluding the impact of foreign exchange rates, it was $189.22, an increase of 1.8% year-over-year.
Looking at our results with and without the impact of foreign exchange rates presents our data in a manner consistent with others in the industry that operate predominantly in the U.S. Our comparable community revenues were $517 million this quarter, a decline of 1.6% as compared to the prior year period. Excluding the impact of foreign exchange rates, revenues of $513 million was a decrease of 2.3% year-over-year.
With respect to our comparable community expenses, we experienced a decrease of 3.9% as compared to the fourth quarter of 2008, and excluding the impact of foreign exchange rates and certain health and general expenses experienced in the fourth quarter of 2008, these operating expenses decreased 4.8% year-over-year.
In my role as CFO, I have become heavily involved in identifying ways to reduce expenses in our communities without impacting the excellent service our residents receive. I'm personally responsible for overseeing all of our purchasing initiatives and worked to engage in more natural purchasing contracts to take advantage of our buying power as a larger organization.
Moreover, much of my efforts are now focused directly with our operations leaders throughout Sunrise to ensure that everyone understands how all of the pieces fit together. We have seen success from these national agreements, particularly in the area of food cost and supplies.
With respect to food, which was one of our largest area of savings, we also have been more effective in reducing food waste. Other areas where we have seen expense reduction include non-productive labor, marketing, utilities, liability insurance and workers’ comp plan.
Now, I will review our financial results for the quarter and the year. Note that revenues on loss before income taxes and discontinued operations previously reported for 2008 have been reclassified to conform to the current year presentation. The amounts were reclassified to include the results of our German communities, our former Greystone subsidiary, 22 communities which were sold in 2009 and one community which was closed in 2009 in discontinued operations.
For the fourth quarter, Sunrise reported revenues of $364.4 million in 2009 as compared to $398.4 million in 2008. Net income attributable to common shareholders for 2009 was $10.4 million or $0.19 per fully diluted share as compared to net loss of $305.6 million or $6.07 per fully diluted share in the fourth quarter of 2008.
Of the net income attributable to common shareholders per fully diluted share in the fourth quarter of 2009, $0.77 came from discontinued operations, which was offset by a loss of $0.58 from continuing operations. That compares to a loss of $1.38 from discontinued operations and $4.69 from continuing operations in 2008.
During the fourth quarter of 2009, we sold 21 properties and recognized a gain of $48.9 million, which is included in discontinued operations. During the fourth quarter of 2008, we recorded an impairment charge of $121.8 million related to all of the goodwill for our North American business segment and we also determined that evaluation allowance from the net deferred tax assets as required.
For the year, Sunrise reported revenues of $1.464 billion for 2009 as compared to $1.571 billion for 2008. Net loss attributable to common shareholders for 2009 was $133.9 million or $2.61 per fully diluted share as compared to a net loss of $439.2 million or $8.72 per fully diluted share in 2008.
Loss from operations for 2009 was $132 million. Excluding SEC investigation costs, restructuring costs for 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 $15 million in both 2009 and 2008.
Adjusted income from ongoing operations is a measure of operating performance that is not calculated in accordance with U.S GAAP and should not be considered as a substitute for income or loss from operations or net income or loss.
Adjusted income from ongoing operations is used by management to focus on cash generated from the ongoing operations of the company and to help management assess if adjustments to current spending decisions are needed.
Now I would like to adjust certain income statement line items with material fluctuations between years. Management fees were $112.5 million for 2009, a decrease of $19.1 million or 14.5% from 2008. The decrease is primarily due to a decrease in the management fees from our Fountains venture, a loss of fees from terminated management contracts and a reduction in fees due to lower community occupancy.
Professional fees from development marketing and other were $13.2 million in 2009, a decrease of $31.2 million or 70.3%. The decrease is due to the decrease in our development pipeline. As of the end of 2009, there are no communities under development and we currently do not have plans to commence any new projects. Related development expense decreased by $21.6 million, resulting in a net reduction of $9.6 million in cash flows from development.
General and administrative expenses for the year were $119.9 million, a decrease of $37.6 million or 23.9% from 2008. Through year-end, we have eliminated 154 physicians under the 2009 restructuring plan, in addition 182 physicians eliminated under the 2008 plan in both development and corporate overhead.
There are an additional 30 physicians that will be eliminated by early 2010. In addition to the reduction in salary and bonus costs, we also saw significant reductions in general corporate expenses including information technology costs, travel, training and education and temporary.
Loss from discontinued operations in 2009 was $20.3 million, a decrease of $97.3 million or 82.8% from 2008. Discontinued operations consists of the results from our German communities, which we are marketing for sale, our Greystone subsidiary sold in early 2009, 22 communities sold in 2009, one community closed in 2009, our Trinity subsidiary, which ceased operations in 2008 and two communities, which were sold in 2008.
In 2009, we recorded a loss of $81.8 million for our German operations, which included an impairment charge of $49.9 million to record the communities at fair market value. We have $23.7 million gain related to the sale of Greystone and finally we had a $48.9 million gain from the sale of the 21 communities to Brookdale in the fourth quarter of 2009.
Turning to cash flows, we had $39.3 million and $29.5 million of unrestricted cash at December 31, 2009 and 2008 respectively. We have financed our operations in 2009 primarily with cash generated from operations and sale of assets, including the sale of our Greystone subsidiary, the sale of our Aston Gardens’ equity interest and the sale of 21 communities to Brookdale.
We have $440.2 million of debt at December 31, 2009, compared to $636.1 million at December 31, 2008, a decrease of $195.9 million. All of our debt is either due in 2010 or in default. We eliminated approximately $140 million of mortgage debt in conjunction with the sale of the underlying assets during 2009 and made principal payments of $61.3 million on our bank credit facilities. We have reduced the outstanding balance on our bank credit facility from $95 million at the beginning of the year to $33.6 million at the end of 2009.
The balance is due on December 02, 2010. At December 31, 2009, $317.2 million of debt is in default, of which $224.3 million is due to the lenders of our nine German communities. Greg will provide an update on our restructuring agreement with the lenders, the seven of our nine German communities in a moment.
On February 12, 2010, we extended the maturity dates of $56.9 million of debt that was in default at December 31, 2009 to December 02, 2010. We will continue to work with the remaining lenders to reschedule current maturities and obtain waivers. I will now turn the call over to Greg.
Thank you, Julie. As I said on our last call, the process of restructuring the balance sheet is ongoing. We have completed a number of large transactions since the process began in mid-2008, and we are in better shape as a result, although the substantial work remains to be done in order to significantly reduce our financial risk. On this call, I will only update the recent restructuring events since the last call.
I will update you on the seven primary focus areas. Item one is to extend consolidated debt maturities and obligations with respect to certain recourse loans using the $20 million of escrow funds generated from the sale of 21 assets we completed last year to mature with our credit line on December 02, 2010. Specifically we paid down the lender on our Connecticut Avenue property in Washington D.C by $5 million on a loan with a principle balance of $35 million after the repayment.
Also, we paid down Wells Fargo $5 million on two land loans and a construction loan with a total balance of $52 million after the repayment. Finally, we paid an additional lender $1 million on two land loans with the balance of the $6.2 million after the repayment.
We are working with our two remaining German lenders who have not yet elected to participate in our German restructuring agreement to utilize a portion of the remaining $20 million escrow along with other consideration to sell our recourse obligations to them.
Item two, is to reduce and ultimately eliminate the guarantee of $58.2 million to three of our German lenders that we agreed to as part of our German restructuring agreement. Under that agreement, we created a liquidating trust of 21 properties to be sold for the benefit of the participating lenders.
The appraised value of these 21 properties was $72.8 million. We also agreed to guarantee the electing lenders a minimum payment of $58.2 million at the end of 30 months commencing on the date of the definitive documents reduced by asset sales from the liquidating trust. As we have not yet signed these agreements and are operating under a binding term sheet, the 30-month clock has not yet commenced.
To-date, we have closed three properties and reduced our guarantee by $10.5 million. We have six additional non-binding transactions moving through documentation and due-diligence that would if they close as currently contemplated reduce our guarantee by another $19 million. It is too early for us to form an opinion about any exposure we may have under the remaining guarantee and market conditions are difficult for asset sales of this variety.
Item three, is to reduce the remaining balance of defaulted loans in our joint ventures and extend our maturities. These loans are not principle recourse to Sunrise, but loss to the properties could eliminate our ownership interest in these properties and could result in the loss of management fee revenue derived from these properties and we may have obligations under operating deficit agreements.
Specifically, there are 42 loans in nine different ventures with total principal balances of approximately 700 million that are in default. This creates rate risk and funding risk. In addition, there are 23 loans in five different ventures maturing in 2010 with total principle balances of approximately 300 million that we will be seeking extensions for.
Since we cannot fund our share of any pay downs that may be required to restructure or extend these loans, we are at risk for full or partial dilution of our interest in these ventures. Item four, is to continue to stabilize the U.K.
Our venture with Morgan Stanley that had an obligation to purchase certain properties we developed in our venture with Primerica, a Prudential affiliate, has now completed its purchase obligations when it closed on the final three assets.
Sunrise has a 10% interest in the Morgan Stanley venture and a 20% interest in the Primerica venture. While these closings have substantially increased the stability of our platform in the U.K, we still have risks including the potential breach of a loan-to-value covenant and the bank loans to the Morgan Stanley venture.
We also have continued operating deficit agreements for five stabilizing properties in our Primerica ventures, two which are capped and three are uncapped. Item five relates to reducing our management contract termination risks. As disclosed in our 10-K, certain of our management contracts contain termination provisions that can be triggered by failures to meet operating performance targets, regulatory compliance failures and certain significant agreement defaults among others.
We have six significant concentrations of fees with three owners totaling approximately $62 million of fee revenue in 2009 or 55% of our total fees. Two owners alone, HCP and Ventas represent a total of $48 million or 43% of our total management fees in 2009. As you know, we are currently engaged in lawsuits in Delaware and Virginia with HCP in which among other things, HCP is seeking the right to terminate 64 of these contracts.
We are vigorously defending these lawsuits and have filed counter claims. We believe that only one HCP portfolio, the four asset portfolio that is in the subject of the Virginia lawsuit is subject to termination risk for a failure to achieve certain monetary performance thresholds and Sunrise can make a cash payment to cure this default at its option.
No other HCP portfolios are at risk of termination in our opinion under the current contracts. Interestingly, from what we can see from the public disclosure of HCP, our Sunrise Managed Assets performed quite well and outperformed other operators at HCP property for the last several years on an NOI basis.
Adjusting for certain refunds and credits paid by Sunrise in 2008 to drive adjusted NOI, our HCP same property NOI increased 5.5% at 2009. Yes, occupancy was down 3%, but rate was up 4% and the expense statements accounted for the balance.
Turning now to Ventas, our management contract with them have a combined performance termination test to permit Ventas to terminate our contract for all communities doing a targeted NOI if there was a failure by more than 25% of the communities we managed for them, we may have failed this test in 2009.
Under the agreements, a 25% failure would also eliminate certain of our cure rights on the balance of the assets. We are working closely with Ventas today to restructure these contracts and have considered selling our joint venture interest in these assets to them.
Item six is to contemplate our transition obligations primarily at the Fountains in Germany. At the Fountains, eight properties have moved over to the new operator and we expect a balance to occur between now and July.
In Germany, our agreements require us to manage the properties through 2010 and diligently pursue to sell the assets. We have kept the German operating team in tact and continue to manage the properties and are obligated to pay any operating expenses that exceed revenues from the properties through the end of 2010.
Item seven involves a larger recapitalization whereby we are looking to infuse capital into the business and eliminate portions of our remaining recourse obligations. This goes hand-in-hand with the steps outlined above and our overall goal of cost reduction becoming more profitable. Mark will update you on this in a moment.
In addition to our restructuring program, we continue to focus on and respond to our asset management efforts. We have spotted a seasoned real estate veteran for our transaction team to run asset management and will work closely with our new heads of operation to create transparency for our capital partners. Group efforts commence with an ongoing review of our agreements in contracts to ensure we are and will continue to be compliant with their terms.
The goal of this mission is to increase revenue earnings and value in the real-estate. Techniques employed include utilizing our knowledge for managing our 400 assets to employ best in practice techniques across all of our properties, understanding keen differences in markets we operate, better understanding practices of our competitors and key distinctions in approach and formulating new business approaches to drive value and higher profitability.
With that, I would like to turn the call back over to Mark.
Thank you, Greg. As Greg has just described, Sunrise is in the middle of a restructuring process which began with a focus on our balance sheet imperatives and importantly includes all of our operations.
First, let me provide some detail on the state of our restructuring efforts. As you may recall, our board launched a strategic alternatives process two years ago which frankly has never ceased, I have said publicly and repeatedly that Sunrise must be recapitalized in some form and Greg’s comments hopefully continue to point to the reasons why.
Along with many other activities, we have looked at different recapitalization proposals; while none of these have been enacted, we are continuing this effort and we believe it’s a necessary part of a going forward Sunrise. We have been making many changes throughout our organization over the past month which we believe are strengthening our team and will provide a foundation for future profitability; we are actually very excited about these changes.
Both Julie and Greg just described the operation side of their responsibilities and as I’ve discussed on our last earnings call, operations now reports directly to me. We are doing all we can to be sure we are the senior living employer of choice; we believe that this reputation over the years provided Sunrise with a great competitive edge.
In recent weeks, people who previously left Sunrise for presumably greener pastures have happily found their way back to our meadows and we hope this continues. We are of course disappointed that we have not recovered the occupancy losses that we reported in the past quarters, but we are pleased that at least for now we have seen stability. We’re also pleased that we do seem to be doing well versus the recently published NIC averages.
We are the largest premium price provider in our segment, operating in the very difficult economy. We are encouraged that with this backdrop we are still able to continue growing rate and attracting customers who appreciate what has always made Sunrise the leader in Senior Living.
Investors should remember that Sunrise is not a monolith. We operated markets with varying economic strength and as we outlined in our 10-K, the portfolios we manage are different as well. We generally enjoy a strong working relationship with our capital partners and we work hard to make that better and better.
Let me size Ventas as a prime example of this. We have positives and shortcomings in this venture. The Ventas team is tough and vigilant in the oversight of their properties. However, we work together virtually on a daily basis to stay on track for producing increasingly positive results. Ventas is always careful to invest in our venture assets because they know that this always pays off in earnings and future value.
Let me now take a few minutes to tell you specifically what we at Sunrise are focusing on, because again the reorganization of Sunrise has broadly two components, one is our financial restructuring and the other is operational. Those of us with operations leader roles which by the way includes me, Julie, Greg, our clinical team, our asset management team, communications, legal and sales and marketing have been and will continue to spend much of our time in the field.
We believe our style at Sunrise is both very hands-on and based on very open and frequent communications and feedback, and of course based on the mission that has sustained Sunrise for almost 30 years.
Some of the initiatives that have come from this working relationship include simplifying our sales process, reinforcing our management ratio of eight communities for every director of operations to ensure close monitoring of results and the ability to react quickly to the market.
Three, providing each region with the necessary support in clinical operations, sales and communications matters to ensure consistency and to provide the backup required for our important 24/7 business, enhancing our human resources team to both to recruiting, hiring and our evaluating practices. We are determined to have a very best team in Senior Living.
We're insisting that when properly managed, our mission of championing the quality of life of our seniors is fully compatible with the expectations of responsible capital partners and we are identifying more ways to operate as efficiently and profitably if possible at all levels, all the while as we continue to provide consistent sector leading care.
In addition, five people who report directly to me are entirely focused on driving these initiatives. They are our two new co-heads of operations, our head of care and clinical services and our head of sales and marketing along with our head of human resources.
Our heads of operations are Sunrise veterans with both extensive field and capital partner portfolio experience. Our head of sales joined Sunrise with a long track record of success in multi-site operation. Our head of care and clinical services came to us through our Marriott acquisition many years ago and is a real gem in the Sunrise crown. And our head of human resources, who worked with me before brings an amazing level of dedication and professionalism to our 38,000 team member organization.
We continue to reorganize and right size the organization, which is a difficult, and in many cases a painful process, however, we hope that everyone understands that any organization must operate with a team that matches the current size and needs of the company. We’re also undertaking many initiatives in 2010 to bolster occupancy and show that we continue to provide sector leading care and to demonstrate our appreciation of the vital contribution made by our team members.
We’re very focused on accelerating our moving pace in building a strong foundation, so that we may return to our industry leading occupancy position. I know many of you must be asking yourselves, when will we see the results of these changes? While I don't foresee a big jump in occupancy immediately, I do believe that if the economy remains stable that the efforts we have undertaken along with tight management controls and full transparency will lift results. 2010, we all expect to be a rebuilding year, but we stand both determined and very optimistic about Sunrise in the future.
In summary, on this call, we have tried to consistently remind you that this is a great platform, but one with many embedded risks. We have a determined, and I'm happy to say thus far, a very successful de-risking team, but as always elements of this de-risking are out of our control. We’re very exited about the strengths we have and very optimistic about the changes we are making. And while we don't see rebuilding as a quick process, we certainly think it will lead to a stronger and stronger company with stronger results.
We have an extraordinary team of people who are working hard to build a very strong future for Sunrise and all of its stakeholders. And I want to take a minute to thank them for the efforts that they are expending 24/7 on behalf of all of our stakeholders.
Now, I'd love to open the call for any questions.
Thank you. (Operator Instructions). Your first question comes from Daniel Bernstein - Stifel Nicolaus.
Daniel Bernstein - Stifel Nicolaus
This is Dan filling in for Jerry Doctrow. I guess the first question I have is, I'm trying to reconcile some comments from two different REITs that commented on Sunrise portfolios. One, had some pretty good comments about Sunrise performance and the other not so good comments about Sunrise performance. And I was wondering if you could talk a little bit about the differences between those portfolios and just your general thoughts about the performance of those portfolios?
We were puzzled also by some of the things we heard, not actually on the part of Ventas, I think the comment that we made on the Ventas call were fairly straight forward and talked about the fact that we’ve seen improvements in results in the Ventas portfolio and they commented rightly, so that we have terrific assets that look great and are very attractive to potential residents.
So we are not surprised that we are seeing a lift in Ventas portfolio and as I mentioned before, we have a strong relationship and I think the numbers they reported and the attitude they used made sense to us and we are happy that we have the kind of relationship that we have.
In the case of HCP, I would say over time their comments are always eloquent, but sometimes confusing. We see some sort of a pattern of different tone when we’re in litigation or not in litigation. So it seems that when we are not in litigation, the comments are fairly positive and then suddenly they turned negative. There was an implication, as Greg pointed out in you’re their comments that we underperformed our peers, yet in the numbers they provide, it seems we can’t fully decide for what they report. But it seems that we actually outperformed, and so not really quite sure that’s been the basis of that.
We noticed that they comment on the difference in performance, but not performance, but the income they drive from Sunrise based on where LIBOR is which we also were confused about, so but that’s an accounting question, I guess I would ask them.
As I have said on many calls, we like the people at HCP and we regret the fact we are in litigation. Litigation in new to me in my career and we have done everything that we can do to end it and I think this is a perfect example here in litigation and suddenly the tone changes, every comments seems to change. I don’t think the facts changed, but the tone seems to have changed. So I did scratch my head at the end of that call, as I guess you did too there.
Daniel Bernstein - Stifel Nicolaus
Are there actual portfolio differences between the two, looks like quality differences, maybe not quality, but big differences in the size of the properties or locations?
Well, there are differences in size of the properties, but it consistently, since Sunrise, and no pride of authorship, and Sunrise took over the HCP portfolio, since HCP has been a partner of ours. NOI has consistently increased and it’s been a strong performing portfolio. They are mostly Marriott built properties that are larger than a typical Sunrise mansion, but I would say that any property of capital partners investing responsibly in CapEx, those are great building that really could look terrific. It’s been unfortunate that there has been less investment in that than we would like, but there is no reason that those properties shouldn’t do very well and they have done well.
Daniel Bernstein - Stifel Nicolaus
I think I have a very broad question here, and I kind of sense from both the press release and the comments you’ve made that you are getting more optimistic and more focused on the operations. So in terms of tone, are you still thinking -- and you said in the past is like a triage, if it is still triage or are you now moving more towards the recovery room, is the way you are thinking about the company or the turnaround, is that changing at all?
Yeah, it’s both. I think the answer to that is yes. We are more optimistic, I mean just being straight by the fact, the list of things that we had to accomplish from a financial restructuring point of view has diminished and we’ve done well and we hoped really on that lenders and partners would see that working with us was better than working against us and for the most part with the exception probably of HCP that seems to be the case.
So we do feel better, Greg was absolutely right to point out that we still have many hurdles to get over and we can’t be assured of our success in those and they are not immaterial. So, it will be a long time before we are completely out of triage, but I do think that the more you succeed at these things, I think the more you have a reputation for being straight shooters who are adding value.
Certainly on the operations side, we are much more optimistic. We are optimistic because we see stability in the economy. We see continued demand for the Sunrise difference and we have a great group of managers who are working very closely with the field to make sure that we’ve given the support they need. So, I think when you do things like that, it tends to payoff. I don’t think they’re immediate payoffs, but I do think that, we feel like we are in our rising tide if all else stays the same.
Daniel Bernstein - Stifel Nicolaus
And just one real quick question on operations, do you need to add any back office systems or labor management service management computer systems to, I guess, improve your operational results, all things equal?
We are always looking at ways, there is no broad initiative that we have planned, that we think we need to plan to accomplish what you said, I think we are trying to improve our systems and we are constantly rolling out new systems. We recently added a new head of IT to our organization to help bolster our strength in that area. As I mentioned earlier, in the last several months, both in the field and in our corporate office, we have recruited some terrific new talent. We have also promoted new talent. More than anything Dan, I would say that what Sunrise has been doing and will continue to do is become more efficient. Make sure that we are spending our precious dollars very wisely.
It seems that, Dan, you did such an effective job of asking the questions that are on people’s mind that it looks like there are no other question, right? We’ve been so comprehensive.
Well, with that then, I thank everybody for taking the time out this morning and we will go back to building Sunrise and we thank you for your confidence in our company.
Once again, that does conclude our conference for today. Thank you again for our participation.
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