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Executives

Mark Ordan – CEO

Julie Pangelinan – CFO and Treasurer

Greg Neeb – Chief Investment Officer

Analysts

Jerry Doctrow – Stifel Nicolaus

Sunrise Senior Living, Inc. (SRZ) Q1 2010 Earnings Call Transcript May 4, 2010 8:00 AM ET

Operator

Good day and welcome to the Sunrise Senior Living first 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 CFO, 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 quarter Form 10-Q, which will be filed in a coming date.

I will start by turning the call over to Julie Pangelinan, who will provide our operating and financial results for the quarter, and then to Greg Neeb, who will briefly discuss our recent progress in restructuring our debt with respect to our German subsidiaries and other matters. Then I will provide a bit more color on the matters both Julie and Greg did review with you how these relate to our restructuring process. Julie?

Julie Pangelinan

Thank you, Mark. Before I review our comparable community operating performance for the first quarter, I’d like to remind you that our comparable community set consists of communities that were open and operating for 24 months as of January 1, 2010. This quarter we added 16 communities to our comparable set that had previously been in the leased up phase. And we are seeing that our newer communities that historically had taken 24 months to stabilize are taking longer to fill.

To start, I will discuss our occupancy. Our occupancy for the first quarter of 2010 in our comparable communities was 86.2%, which is a decline of 150 basis points from the first quarter of 2009 and down 50 basis points compared to the fourth quarter of 2009. In addition to the slower filling pace of the 16 communities I just mentioned, we historically experienced a seasonal decline in occupancy from the fourth quarter to the first quarter.

Our average daily revenue per occupied unit in our comparable communities increased by 4.2% in the first quarter to $203.23 as compared to the prior year period. The majority of our residents received an annual rate increase in January, which favorably contributed to our overall increase in revenue per occupied unit. As a reminder, we share our results with and without the impact of foreign exchange rates to present our data in a manner consistent with others in the industry that operate predominantly in the US. If we exclude the impact of foreign exchange rates on our average daily revenue per occupied unit, it was an increase of 3.1% year-over-year.

Our comparable communities revenues were $495.3 million this quarter, an increase of 2.4% as compared to the prior year period, and excluding the impact of the foreign exchange rates, our first quarter revenues increased by 1.3% to $489.9 million year-over-year. With respect to comparable communities expenses, we experienced an increase of 2.1% to $366.5 million as compared to the first quarter of 2009, and excluding the impact of foreign exchange rates, an increase of 1.0% year-over-year.

Labor continues to be our largest expense. In this quarter, it was driven up in part by an increase in our acuity mix as well as due to an increase in wage rates. This quarter, we were also impacted with higher than average snow removal costs. Compared to the same period last year, however, expenses declined in the areas of utilities, insurance, bad debt, and food costs.

Now I’ll turn to our financial results for the quarter. We reported revenues of $355.2 million for the first quarter as compared to $374.7 million in the first quarter of 2009. Net loss attributable to common shareholders was $16 million or $0.29 per fully diluted share as compared to a net loss of $18.2 million or $0.36 per diluted share for 2009.

Loss from operations for the first quarter was $10.6 million compared to $41 million in 2009. 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 $5.6 million in 2010 compared to $3.7 million in 2009, an increase of 49%.

Adjusted income from ongoing operations is a measure of operating performance that is not calculated in accordance with US 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 the management to focus on cash generated from the ongoing operations of the company and to help management assess if adjustments for current spending decisions are needed.

In 2010, we no longer have any communities under active development and therefore both our professional fees from development, marketing and other, as well as the related development expenses are significantly reduced from the prior year. Our 2010 management fees were slightly higher than 2009, as our fees from communities and lease-ups offset the loss of management fees from terminated contracts.

General and administrative expenses for the first quarter were $33.8 million compared to $30.3 million in 2009. We incurred $5.9 million of costs related to the HCP lawsuit in the first quarter. Excluding the HCP costs, our general and administrative expenses were $27.9 million. With staffing reductions that have already occurred to date in 2010 and additional scheduled staffing reductions, our annual recurring general and administrative expenses, excluding any future cost to defend ourselves in the HCP litigation, are on target to be below $100 million.

Turning to cash flow, we had $46.5 million and $39.3 million of unrestricted cash at March 31, 2010 and December 31, 2009 respectively. We believe that our operations and sale of assets will generate sufficient cash to meet our obligations through December 2, 2010. We had $424.2 million of debt at March 31, 2010 compared to $440.2 million at year-end 2009. Of the $241.3 million of debt that is in default, $212.7 million relates to debt that has been restructured subsequent to quarter-end, which Greg will discuss in more detail. As a result of these restructurings, we expect to recognize a gain of approximately $50 million in the second and third quarters of 2010.

We have $152.9 million of debt that is due during 2010, including $33.4 million outstanding on our bank credit facility and additional financing sources will be required to refinance it. We are seeking to restructure the turns of our indebtedness, including the extension of scheduled maturity dates and the sale of selected assets.

Now I will turn the call over to Greg.

Greg Neeb

Thanks, Julie. Continuing with the process we began last quarter, our only update on recent restructuring events since the 10-Q last time. First of all – excuse me, 10-K last quarter. First of all, as announced last week and yesterday, we have not completed the restructuring of our German debt with lenders representing all nine German communities. Seven of these were completed by executing the final documentation consistent with the terms of our binding term sheet announced last week – last year, excuse me.

We settled with the remaining two lenders in 2010, one via a Euro 2.1 million payment for a full release of our operating deficit agreement. For the other, we agreed to a payment of 7.5 million euros for a full release of our recourse obligations payable as a promissory note. The note is interest free with a euro 1 million initial payment and the balance paid in equal bimonthly installments over the next four years.

These agreements require us to manage the properties through 2010 and diligently pursue a sale of the assets. We have kept the German operating team intact to continue to manage the properties and are obligated to pay any operating expenses that exceed revenues for the properties through 2010.

As a part of this settlement, we guarantee a payment of approximately $15 million to the three of our German lenders representing mortgages on seven properties as a part of the 21-property liquidating trust of assets to be sold for the benefit of the participating lenders. We have until October 2012 to sell the properties and reduce the guarantee.

To date, we have closed four properties and reduced our guarantee by $10 million. We have two additional transactions moving through documentation and due diligence that would if they close as currently contemplated, reduce our guarantee by another $2.4 million. Additionally, and unrelated, we continue to sell other incumbent land parcels, five fully owned and six in JV.

We continue to stabilize our revenue streams and reduce our management contract termination risk. The HCP court decision at Virginia confirms the long-term nature of our contracts. As we noted previously, we will defend these and all of our contracts vigorously and then file counterplans for damages against HCP in Delaware for the remaining 60 contracts. In the management contract before the Court of Virginia, the prevailing party can recover attorney’s costs in contract interpretation lawsuits. And we intend to seek recovery of our costs.

We continue to actively reduce the balance sheet of our defaulted loans, both consolidated and in joint venture. At March 31, 2010, we had $424 million of consolidated debt and $3.7 billion in joint venture debt. Of this, $241 million and approximately $1.1 billion respectively were in default and $153 million and $643 million respectively mature in 2010. Excluding Germany, the consolidated debt in default is approximately $28.6 million.

We have utilized the $20 million escrow agreed upon between us and our line lenders to achieve this objective and extend our consolidated loan maturity to beat those term rates with our line. With these defaults maturities, $33 million outstanding on our line and $19 million of outstanding letters of credit, we recognized the need and are exploring options to infuse capital into the business. This goes hand-in-hand with our overall goal of cost reduction, revenue stability, and profitability.

As I mentioned on our last call, we are focusing on refining our asset management efforts. This group provides commercial awareness and property and market knowledge to the operating teams in order to drive portfolio performance and contractual compliance for the benefit of our capital partners.

Each asset manager will have a thorough understanding of all sub-markets within the respective MSA and visit every Sunrise community competitive within the market. We believe that this will add value to Sunrise’s decision-making process. The group will also re-underwrite each Sunrise community and formulate portfolio outlooks for decisions about budgets, refinancing, contract negotiations, and whether or not to sell, acquire or develop assets.

With that, I would like to turn the call back over to Mark.

Mark Ordan

Thanks, Greg. As I reported to you last quarter, we expect 2010 to be a time of restructuring not only of our balance sheet but of our operational results. We continued our efforts on both front in the first quarter, and I’m pleased by the progress we are making. Of course, I’m not pleased with the occupancy decline from last nor the 50 basis point decline from last quarter. Considering our re-organization, I’m also not surprised. We do continue to see signs of stabilization overall, but this is uneven.

We think we are taking the right measures in our operations to maximize occupancy, but these steps are part of a process that doesn’t yield instant results or positive surprises. Rather what we hope for is a continued building of our pipeline of prospects, people who are in the senior living decision process. Once we have those prospects, then we have to make certain that they understand the benefits of life in Sunrise balanced by the costs. There is no shortcut to this process other than an experience in unsustainable pricing strategy.

While we see signs of improvement in the economy overall, I remind you that Sunrise operates in many markets enjoying varying levels of recovery, and the total economy still scarred by very high unemployment and restricted mortgage lending. We are also a high class provider in this market. This environment makes the strength of each community’s leadership team absolutely critical, and this is why Sunrise’s leadership team is focused right here.

We have made many changes in our operations organization, including welcoming many new people to Sunrise while also continuing a tradition of promoting from within wherever possible. For example, our new co-heads of operations, sitting with me this morning, will work closely with me to lead our day-to-day business, are both Sunrise veterans who demonstrated business (inaudible) who consistently provide a fresh perspective on our opportunities and how to capture them. My strong optimism continues since we are fortunate to have the best brand in senior living, thanks to our sector-leading care. A stronger and stronger team continuing the Sunrise mission can, in my view, only succeed.

On the balance sheet, I’m so proud of what our team has accomplished in the now two-year process of (inaudible) Sunrise. Greg Neeb’s leadership has enabled much of this, and our recent announcement closing our German settlement highlights what we have done. We know that we have more to do, and I have said repeatedly that Sunrise will need to refinance our balance sheet.

In today’s environment, any refinancing is expensive for a company like Sunrise and is very likely to be dilutive in the near-term. However, the risk of operating without refinancing to us is very considerable. We need a balance sheet that provides the foundation of long-term support in strengthening and growing Sunrise. We believe that with the restructurings achieved thus far, we are now in a position to attract investment capital, and that process is very attractive to us.

I recently, unfortunately, had to include an HCP litigation update in my earnings conference. Today is no different. However, of course, we were very pleased by last week’s hearing in Virginia, in which the court stated from the bench that summary judgment will be entered in favor of Sunrise, dismissing HCP’s claim against us. While the ruling only applied to four communities we operate for HCP, it was a most significant outcome. Recent HCP comments suggest that great optimism for their case in Virginia. The trial sort of suit they brought against us in Delaware along with our counterplans is still many months away.

Now please don’t for a minute think I’m gloating because I am not. This matter has wasted precious time and money of Sunrise and HCP shareholders. Both companies have had to announce that their results have been materially affected by outsized litigation spending. Normal CapEx spending in other programs have stalled, impacting our communities.

I hope that HCP’s leadership will return to working with us to maximize results that will benefit all of our stakeholders. We have constructive relationships with others and we see no reason that it should be any difference with HCP. But we fight very hard at Sunrise and we don’t shrink from addressing challenges. We are very committed to defending and maintaining the value in the long-term management contracts we have with companies like HCP. Hopefully, we’ve proven that. We would prefer, however, to expand all of our efforts in cooperation with HCP since we are certain that that will maximize results for all. Maybe we can discuss this over a glass of scotch.

I am very appreciative of the Sunrise team (inaudible) so much change and has fought through so hard for our residents and in fact for all of our shareholders. The original Sunrise mission is so relevant today, and our guiding business principles are intact. We are in a period of organizational, asset management and financing change that we are most confident will lead to strengthening, both our long-term stability and results.

With that, I will now open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll take our first question from Jerry Doctrow at Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

Thanks. Good morning. Two things. I guess, one, just I was curious if you could give a little bit more color on outlook kind of on fundamentals. I mean, we’ve had Emeritus booked your report. I think both of them basically are talking about increased inquiries, some signs of improved occupancy, firming of rates perhaps as you move through the year. I was wondering if you could give me a little more color on things like inquiries, where you see things headed.

Mark Ordan

Well, I’d say we see a lot of the things that they see. I didn’t include that in my comments only because – I don’t know what the future would bring. I think that the economy continues to strengthen. We will get our fair share, and we’re working hard with our team to make sure we capture that. We just don’t forecast what’s coming up. I think only Ben Bernanke can do that.

Jerry Doctrow – Stifel Nicolaus

Okay. Then inquiries, leaves, that kind of thing, you’re seeing some positive movements.

Mark Ordan

Yes.

Jerry Doctrow – Stifel Nicolaus

Okay. And then – and Greg sort of went through this, but I don’t think I could write as fast as he could talk. So just trying to think about the major remaining buckets. I mean, clearly Germany was a big one, the largest by far. If you could kind of just touch again on what the major pieces are that need to get restructured and a sense of maybe timing. And I was trying to get a little bit better understanding to market – kind of what you’re saying is, you are at the point now where you really have to do a kind of a comprehensive sort of recap rather than sort of maybe doing a piecemeal with each item of debt. But just – the buckets, maybe a little more color on sort of how you see it playing out.

Mark Ordan

Well, I think that what Greg outlined over the last few quarters is that we’ve essentially completed the restructuring imperatives that we faced in terms of really outsized debt problems, obviously the biggest one being Germany that took an awfully long time. And we are now focusing a lot of attention on our agreements with our capital partners to make sure that we have a mutually strong understanding of what our obligations are and how we are doing. So that process has gone very far along. We don’t see a lot of major issues going forward.

My comments about the need for restructuring, I would say it’s not – it may not, to some, be an imperative. I think that a company like Sunrise should always be secure, and you don’t operate in any other way. I think it’s imprudent. We think that it’s important to refinance. We have a bank maturity at the end of this year, and we respect the fact that our line matures at the end of the year. So we want to pay off our lenders and rebuild Sunrise. And as I said, that’s not an inexpensive prospect now, but sometimes you get what you pay for. And I think it’s for long-term stability, the ability to be able to grow, to invest on our operations. I think it’s the smart thing to do.

Jerry Doctrow – Stifel Nicolaus

Okay. And just in terms of the buckets, basically you’ve got the lines, you’ve got some debt, sort of maturities, a strong balance sheet and then you’ve got a bunch of JV debt that’s at least in technical default and (inaudible) maturing. Is that kind of the right way to think about it?

Mark Ordan

Yes, you’ve the line. There is letters of credit to go along with the line. There is multiple property – recourse property loans as well that have maturities that are coterminous with the line. A couple large operating asset loans and land loans. And then we have the joint ventures as well, which we continue to work to extend and bring out of default, some of which could require some principal pay-downs as we work through those with our partner’s participation.

Jerry Doctrow – Stifel Nicolaus

Okay. And there in default, because you have not honored sort of cash obligations or is there sort of intangible default on the JV side?

Mark Ordan

There are two forms. There is a – there can be a default because of a historic covenant violation as related to Sunrise, which we try to work through and we try to get quarter-to-quarter extensions and work through those. Some of those are – those come out of default when we – because they tie with the line and others haven’t modified their covenants the same as the line and continue to work independently. And then in some cases we have defaults at the joint venture level because of property, performance-related issues. And quite frankly, other matters. I mean, I’m just sort of like peppering some of the issues, but there are a lot of different kinds of issues when you have $1.1 billion of defaulted debt in certain cases. There could be other issues, including some technical defaults. In some of these cases, the defaults are caused by the original leveraging of portfolios, which can – the varying asset levels of the times that put you in default.

Jerry Doctrow – Stifel Nicolaus

But they tend to be technical, not financial. Is that –?

Mark Ordan

Yes. The –

Greg Neeb

We went into – we had payment defaults in Germany. We had a payment default (inaudible) which are resolved.

Jerry Doctrow – Stifel Nicolaus

Yes, okay. Okay. All right, thanks.

Operator

(Operator instructions)

Mark Ordan

I believe we have no further questions at this time. So with that, I thank everybody for your support during the turbulent period, and we look forward to sharing better and better results with you.

Operator

And that does conclude today’s conference. Thank you for your participation today.

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Source: Sunrise Senior Living, Inc. Q1 2010 Earnings Call Transcript
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