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Executives

Meghan Lublin - IR

Julie Pangelinan - CFO

Greg Neeb - CIO

Mark Ordan - CEO

Analysts

Jerry Doctrow - Stifel Nicolaus

Sunrise Senior Living, Inc. (SRZ) Q2 2010 Earnings Call August 5, 2010 9:00 AM ET

Operator

Please stand by as we are about to begin. 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 Meghan Lublin, please go ahead ma'am.

Meghan Lublin

Good morning and welcome to Sunrise Senior Living Second Quarter Investor Conference Call, this is Meghan Lublin, Sunrise's Vice President of Investor Relation. Before we begin let me remind you this call is been recorded and that Safe Harbor Provisions at the Private Securities Litigation Reform Act of 1995 apply to this conference call.

During the course of the 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. 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.

I will now turn the call over the Julie Pangelinan, Sunrise's Chief Financial Officer.

Julie Pangelinan

Good morning, our occupancy for the second quarter 2010 in our comparable communities was 86.2%, which was down 10 basis points for comparable communities from the first quarter of 2010 and a decline of 30 basis points from the second quarter of 2009. Our slight decline in occupancy from the first to second quarters of 2010 was primarily driven by a decrease in the month of April.

Our occupancy for the month of June alone was up to 86.5%. Our average daily revenue per occupied unit in our comparable communities increased by 4.3% in the second quarter 2010 to $203.27 as compared to the prior year period. The increase in primarily driven by annual rate increases which for the majority of our occur in January of each year.

As a remainder 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 predominately in the U.S.

If we exclude the impact of foreign exchange rates on our average daily revenue per occupied unit, it was an increase of 2.8% year-over-year.

Our comparable community revenues were 489.6 million this quarter an increase of 3.9% as compared to the prior year period. Excluding the impact of foreign exchange rates, our second quarter revenues increased by 2.3% to 482.2 million year-over-year.

Our comparable communities expenses were 354.8 million this quarter, an increase of 3.5% as compared to the prior year period. Excluding the impact the foreign exchange rates these operating expenses increased 2.7% year-over-year. The increase in expenses in the quarter is primarily driven by an increase in wage rates between periods.

As in the first quarter we continue to experience favorable expense trends in the areas at utilities and bad debt expense.

Now I will turn to our financial results for the quarter. We reported revenues at 349.1 million for the second quarter of 2010 as compared to 359.7 million in the second quarter of 2009.

Net income attributable to common shareholders for 2010 was 46.3 million or $0.81 per fully diluted share as compared to a net loss of 81.8 million or $1.62 per fully diluted share for 2009.

The loss before discontinued operations for the second quarter was $5.2 million compared to $19.1 million in 2009. Included in discontinued operations for the second quarter of 2010 is a gain on German debt restructuring of 52 million compared to an impairment loss relating to our nine German communities of 52.4 million in the second quarter of 2009.

Under accounting rules impairment charges are recorded during the period when the carrying amount of assets are determined to be above fair value. However, the related debt must be carried at historical costs until the debt is modified or extinguished.

Debt restructuring agreements we executed in the second quarter was lenders to eight of our nine German communities triggered this non-cash gain.

Loss from operations excluding buyout fees for the second quarter of 2010 was 13.4 million, an improvement of 18.1 million compared to 31.5 million in 2009. Excluding SEC investigation costs, restructuring costs and non-cash charges including depreciation and amortization, allowance for uncollectible receivables from owners, stock compensation expense and impairment of long-lived assets.

Adjusted income from ongoing operations is 5 million in 2010 compared to 4.4 million in 2009. Adjusted income from ongoing operations is the 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 is used by management to focus on cash generated from the ongoing operations of the company and to help management assess if adjustments to trend spending decisions are needed.

In the second quarter 2010, management fees was 24.2 million, compared to 29.1 million in 2009, a decrease of 4.9 million. The decrease was driven by management contracts which were terminated in 2009 and expense related to settling certain management agreement disputes with one of our venture partners. In June 2010 we agreed to a termination of four long term management contracts and we recognized 12.5 million in five of these.

General and Administrative expenses for the second quarter of 2010 were 28.7 million, compared to 29.6 million in 2009. We incurred 2.2 million of costs in the second quarter of 2010 related to the HCP losses.

Excluding the HCP cost, our general and administrative expenses were 26.5 million. With staffing reductions that have already occurred through the end of the second quarter of 2010, reductions in our technology costs and reduction in insurance costs are annual recurring general and administrative expenses excluding any future costs relating to HCP litigation are on target to be below 100 million.

We have 42.8 million and 39.3 million of unrestricted cash at June 30th 2010 and December 31st 2009 respectively. We believe that our operations and sale of assets will generate sufficient cash to meet our obligations through December 2nd 2010.

Now I will turn the call over to Greg Neeb.

Greg Neeb

Thanks Julie. Continuing with our previous quarterly investor call precedent I will only update you on our ongoing restructuring events arising since the last quarter. The main topics for this call are number one, Germany and the liquidity trust and number two loan balances maturities in the falls. Germany liquidity trust and asset sales.

As announced in early June, we executed a purchase and sale agreement to sell and transfer management of eight of our nine German properties. This transaction is subject to certain conditions and could be completed as early as August 31st.

As for the ninth property, we are still in negotiations with the lender for the transfer of assets and management to a new operator. Our goal is to wind down all German operations by December 31st. As a part of the settlement, we created a liquidating trust of assets to be sold for the benefit of the participating banks. We guarantee a minimum payment recovery under the agreement of approximately $50 million.

We have sold four properties in the trust in 2010 and reduced that $50 million guarantee by 11.5 million. We have two additional transactions moving through documentation and due diligence that would if closed as currently contemplated reduce our guarantee obligation by an additional 2.8 million

Unrelated to the liquidity trust, we continue to market and sell our four remaining wholly owned land parcels, encumbered with approximately $24 million of recourse mortgages at June 30th 2010. So far in 2010 we have sold two wholly owned parcels with a total gross value of approximately $12 million, relieving approximately $10 million of recourse mortgage debt. In addition, we are also continuing to market and sell land parcels held in joint venture.

Finally, in June 2010, a property owner brought out four management contracts for which we were the manager for 12.5 million. 6.3 million of the proceeds went to pay down our bank credit facility. We consider transactions of this type with their owners and partners on a case by case basis.

Loan balances maturities in the falls; we continue to actively restructure the balance sheet by reducing the balance of defaulted loans and extending the maturities, both consolidated and in joint ventures. Our bank credit facility outstanding balance was 25.5 million at June 30 with an additional 16.8 million of letters of credit outstanding under this facility.

The facility matures December 2nd, 2010. We also have 58 million of recourse community mortgages and land loans maturing before the end of the year with an additional $36 million recourse community mortgage due in April, 2011.

We believe the communities in land sale assets securing this 94 million in combined recourse mortgage loans have valuations in excess of the current loan amounts but the valuations are not sufficient to support a non-recourse refinancing today.

We also have $42 million of mortgage debt relating to our three Canadian communities that was due on April 30th, 2010. This debt is non-recourse to Sunrise but does have operating deficit agreements which I will elaborate on in one minute.

Sunrise joint ventures have total debt of 3.6 billion with near-term scheduled maturities of 400 million in 2010. This debt is non-recourse to Sunrise but does have certain operating deficit funding agreements with respect to $900 million of bad debt. Generally, these agreements obligate Sunrise to fund any operating shortfalls including recurring principal and interest but not entire principal balance at maturity or as a result of an acceleration.

Also $600 million of this joint venture debt was in default as of July 30th, 2010, down from approximately 1.1 billion at March 31st, 2010. We are actively engaged with our line of property lenders to obtain default waivers as necessary and extend maturities. In 2009, we established a $20 million escrow out the proceeds of our 21 pool assets sale with a stated purpose of extending maturities through the end of 2010.

We have now utilized all of these funds for their intended use. As we have previously stated, we continue to restructure the Sunrise balance sheet and consider different refinancing alternatives to de-risk the company and eliminate recourse obligations.

I'll now turn the call over to Mark.

Mark Ordan

Thanks, Greg. I am pleased that today's release and call reflects further progress along the path we have reported to you over the past few quarters. We have said that 2010 would be a year of restructuring Sunrise, a year to turnaround our trajectory. We see this happening on many levels throughout the company and we are very confident in our future. We have seen occupancy trends flatten from previous decline and as Julie reported, we've seen gains in recent weeks.

Sunrise has always led our sector in care and care is not an expense to provide. Recent net data show that many operators have been trying to find the right balance of occupancy in pricing and so do we. We want to be certain that we are responsive to economic and market realities without ever eroding our ability to be the sector leader in care. We believe that during a very tough economy, being able to charge appropriately and maintain our occupancy, positions us very well to build a profitable long-term occupancy gain.

Turning to the cost of running Sunrise, here again we've made important progress. As Julie noted, our recurring overhead run rate is now at the projected $100 million level and we are working hard to bring this down further.

Our legal costs have continued to be high, driven foremost by our on-going litigation with HCP along with legal expenses for our other restructuring activities. I am pleased that we have had active discussions with all of our capital partners and owners and I am hopeful that we will try in mutually beneficial ways to settle differences without on-going litigation.

I very much appreciated HCP's quartile tone on Tuesday, which accurately reflects the nature of our recent discussions. Of course we are very happy that we have cleared so many restructuring hurdles over the past several quarters and we have a first rate team here focusing on such matters.

Our settlement with our lenders in Germany, the steady reduction of our recourse debt and our recent settlement agreement with the SEC, which is subject to court approval are the latest examples of reducing risk at Sunrise and reflect positive steps in rebuilding the organization.

What is not either Julie or Greg's comments are the organizational strides we've made at Sunrise. We've had restructuring imparities, which we've meet and we're doing the same in on our field operations. We have new leaders in operations and sales we've promoted from within Sunrise. We've also recruited highly effective leaders from outside Sunrise, including our Chief Accounting Officer, our head of IT, our head of Human Resources, along with leaders in operations, analytics, sales and last but not least in resident care.

You may wonder why I'm highlighting these people in an earnings call. Sunrise over its 29 years has enjoyed a reputation as the sector leader because of its people, this over the years has enabled Sunrise to grow and going forward this team does not intend to sit still.

While either of necessity or to strengthen our core, we have reduced our size. We see a bright future for Sunrise by growing our core, which is operating communities and wherever possible owing more of what we operate.

To us our path is clear and based on creating on a strong and lasting platform. Our platform built on, one an improved balance sheet, two, solid counter party relationships, three, a team dedicated to our enduring mission along with a constant push for increasing efficiency and profitability and four, a legacy of innovation understanding and responsiveness to the evolving needs of our residents.

At Sunrise we feel that we have lots of work in front of us, but we really believe we are well on this path. I would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you sir, the question and answer sessions will be conducted electronically, (Operator Instructions). And we'll take our first question from Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Thanks good morning, so I mean can see a nice progress in the quarter, I guess a couple of things that I had -- a couple of nit-pick first, just Julie what was the number for the HCP litigation I just didn't pick it up as you were -- you said it.

Julie Pangelinan

Alright, the costs in the second quarter were $2.2 million.

Jerry Doctrow - Stifel Nicolaus

And I guess, Mark just in terms of -- well two things, one I'm trying to just think through timing, it sounds like getting a number of things done before this 12, 2nd date is still important, so your sort of -- I guess I hear a couple different things, one is, you have enough cash to get you through sort of -- well to sort of the next date by which we would see something major in terms of say a, restructuring of bank line or some additional capital raise, that sort of the next target date we focused on?

Mark Ordan

I think we've said over the last few quarters and I'd say it again today that we view our restructuring as an ongoing process. We work very closely with our line banks we are obviously mindful of the December 2nd maturity but we think that this everything else we are doing to make the company stronger and we are confident that well before December 2nd we will have a solution for that date and other things.

We certainly are not an organization and wait till we get close to a date say do what we are going to do about this, so we think that we are actively today working on ways to refinance the company with an eye toward that date and many other things.

Jerry Doctrow - Stifel Nicolaus

Okay I guess the other things just in terms of sort of thing about the operating enterprise and I didn't have that much time this morning to sort peek through the numbers but in terms of operating stats we have now. Is that pool of assets sort of a relatively good pool going forward, I mean you tried that selling some land and that sort of thing but in terms of the operating stats that you got out in this quarter is kind of – I think Germany is out, Fountain is out. If we are trying to think about sort of the modeling the company go forward does, at least in terms of the operating stats you know is that sort of a good net kind of number or they are moving pieces stuff coming in and out of size that we need to think.

Greg Neeb

Well it would be hard to eliminate the confidence of moving pieces. When a company is a looking to refinance we have to balance obviously many considerations of availability of outside capital either equity or debt.

I have said in the past that this is a company that needs more equity and there are many ways to do that either to outside financing or by looking at the asset you have. So, we are still in formation I think in that regard we have accomplished a lot of obviously non-core deal to improve our balance sheet and we continue to look at all possibilities.

Jerry Doctrow - Stifel Nicolaus

Okay. Great, I mean I do think again good progress in the quarter. Thanks.

Greg Neeb

We appreciate that. Thanks Jerry.

Operator

(Operator Instructions). And at this time there are no further questions.

Mark Ordan

Great well with that we appreciate everybody's support and dialing in this morning and we look forward to updating you as we make future progress. Thank you very much. Enjoy your summer.

Operator

That does conclude today's conference and we thank you for your participation.

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