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Executives

Meghan Lublin - VP, Corporate & Investor Communications

Julie Pangelinan - CFO

Mark Ordan - CEO

Greg Neeb - Chief Investment & Administrative Officer

Analysts

Jerry Doctrow - Stifel Nicolaus

Sunrise Senior Living Inc. (SRZ) Q3 2010 Earnings Call November 4, 2010 9:00 AM ET

Operator

Good day and welcome to the Sunrise Senior Living Third Quarter Earnings Conference Call, today's call is being recorded.

At this time I would like to turn the conference over to Ms. Meghan Lublin, please go ahead ma'am.

Meghan Lublin

Good morning and welcome to Sunrise Senior Living 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 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. 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. I'm CFO and I would lay out our financial results for the quarter. Today I am particularly happy to do so. Our occupancy for the third quarter 2010 in our comparable communities was 87%, which was up 80 basis points from comparable communities for the second quarter of 2010 and that’s 40 basis points from the third quarter of 2009. September experienced occupancy of 87.5% which is our highest occupancy level since February of 2009. Including October, we've had five consecutive months of positive occupancy growth.

Excluding the 27 communities owned by HCP on which we will be transitioning management on November 1 our occupancy with 87.8% for the quarter. Our average daily revenue per occupied unit in our comparable communities increased by 2.4% in the third quarter to $202.05 compared to $197.28 in 2009.

As a reminder we share our results with and without the impact of foreign exchange rate to prevent 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 increased 2.7% year-over-year.

Our comparable community revenue for our 495.1 million for the quarter an increase of 2.9% compared to the prior year period. Excluding the impact of foreign exchange rates our third quarter revenue increased by 3.2% to 496.6 million year-over-year.

Our comparable community expenses were 353.7 million this quarter an increase of 3.3% as compared to the prior year period. Excluding the impact of foreign exchange rates, these operating expenses increased 3.7% year-over-year. The increase in expenses this quarter was primarily driven by utilities and collective labor.

Now I will turn to our financial results for the quarter. We reported revenues of 383.3 million for the third quarter as compared to 351.5 million for the third quarter of 2009. Net income attributable to common shareholders for the third quarter of 2010 was 18.7 million or $0.33 per fully diluted share as compared to a net loss of 44.4 million or $0.88 per fully diluted share for 2009.

The change between period was primarily driven by the $40 million HCP biopsy. We received an additional 10 million when the communities transitioned on November 1, which will be entrusted in our fourth quarter results. Income from operations for the third quarter of 2010 was 24.8 million an improvement of 57.1 million compared to a loss of 32.3 million in 2009.

Excluding the biopsy from HCP which is non-recurring non-cash charges including depreciation and amortization allowance for uncollectible and receivables from owners, stock compensation expense write-off of capitalized project cost and impairment of long-lived assets and also excluding restructuring costs only residual costs with the SEC investigation.

Adjusted income from ongoing operations were 2 million for the quarter compared to a loss of 7.5 million for the same quarter 2009. 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 from operations or net income.

Adjust income from ongoing operations induced by management to focus on cash generated from the ongoing operation of the company and to help management determine if adjustments to current spending decisions are needed.

General and administrative expenses were 31.7 million for the third quarter of 2010 compared to 31 million in 2009. We incurred 4.5 million of costs relating to our transactions with HCP and Ventas them at their quarter, in addition to 1.4 million in severance costs and 900,000 of non-cash compensation expense. With staffing reductions that have already occurred to the end of the third quarter of 2010, annual recurring cash expenditures for general and administrative expenses are on target to be below 100 million. Had 41.5 million and 39.3 million of unrestricted cash of September 30, 2010 and December 31, 2008 respectively.

We had 267.2 million of outstanding debt at September 30, 2010 compared to 440.2 million at December 31, 2009, a reduction of $173 million. Subsequent to quarter end an additional 77.3 million of debt relating to our German communities was repaid and the remaining balance under our bank credit facility was repaid bringing our current outstanding debt balance above 200 million the majority of which is due in 2011 and beyond.

We believe our operations and sales assets will generate sufficient cash to meet our obligation into 2011.

Now I will turn the call over to Greg.

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, HCP settlements; number two, Ventas joint venture interest sale and management contract restructure; number three, Germany in a liquidity trust and number four loan balances maturities in the falls.

Number one: HCP, in august 2010 Sunrise entered into a settlement and restructuring agreement with HCP regarding certain senior living communities owned by HCP and operated by Sunrise. Pursuant to agreements, Sunrise gave HCP the right to terminate the company as manager of 27 communities owned by HCP. The agreement also provided for the release of all claims to an HCP Sunrise and third party tenant including the settlement of a ongoing litigation between the parties.

On funding agreement, HCP made a cash payment to Sunrise of $40 million. As of November 1, 2010 the management of all 27 committees has been transitioned to the new third-party operators and HCP has paid Sunrise the final $10 million due under documents. To the part of this agreement as noted in our 8-K filing on September 3 where they filed a settlement and restructuring agreement signed by HCP and us. We agree to co-operate with HCP to negotiate, to restructure the leasing and management structure of up to 35 facilities to implement possible alternative structures pursuant to their idea rules but no net adverse impact on us.

The 27 transition properties were generally lower performing and generally would not meet our ongoing underwriting standards of the 27 10 ha skilled nursing communities, eight were Maple Ridge communities with a less efficient multi-cottage design in a balance for Brighton Gardens communities many of which were in not for markets for us like Arkansas, Oklahoma and Kentucky.

Accordingly, the performance of these assets was below the Sunrise average. With negative NOI growth since 2008, 20% NOI margins in total NOI per unit at approximately 60% of the HCP retained portfolio average and approximately 7% lower occupancies than the HCP retained portfolio.

We have a right outlook with our newly defined HCP relationship, remaining portfolio of 48 communities are supported by highly performing assets. Apart from existing buyout rights based on a multiple of revenues on some of the assets we enjoyed long-term contracts with maturities ranging from 2028 to 2038 on these very solid assets. Their performance is generally in line with the balance of our overall portfolio with plus 3% NOI growth since 2008 annually, 28% NOI margins, NOI per unit generally in line with the overall Sunrise average and over 88% occupancy.

Number two, in Ventas. In October 2010, Sunrise entered into a purchase and sale agreement with Ventas and certain of its affiliates to sell Ventas all of Sunrise’s joint venture interest and entities owning 58 communities managed by Sunrise. The aggregate purchase price of the joint venture interest is approximately 41.5 million and is payable at closing, which is expected to occur before the end of 2010. After closing Sunrise will continue to manage the 58 Senior Living communities together with the other 21 Senior Living communities in the Ventas portfolio that are already holding on by Ventas.

As a condition of the purchase agreement Sunrise and Ventas will amend the existing master agreement and management agreements to set forth the revised rights and obligations with respect to the management and other matters related to these communities.

Additionally, Ventas lay certain existing right that have to terminate multiple management contracts for performance based reasons but imposed tighter performance, operating and reporting thresholds which we believe we can meet or exceed. The 79 management contracts have maturities of 2029 to 2031.

Number three, Germany. On August 31, 2010, Sunrise and certain of its affiliates closed into [Estero] the previously announced sale of the real property and related assets of eight of Sunrise’s nine German Assisted Living Facilities pursuant to a purchase and sale agreement dated May 27, 2010 as amended.

As of November 1, 2010, the liens have been discharged on the communities and the transaction is considered complete. On October 1, 2010 Sunrise entered into an agreement to sell its one remaining German community and as of November 1, 2010, Sunrise had closed in the sale of the this community. Just to be clear we have are now transitioned the management of all of our former German communities.

As a part of the German settlement, we created a liquidating trust of assets to be sold for the benefit of the participating banks. We guaranteed 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 four additional transactions moving through documentation and due diligence that would if closed as currently contemplated reduce our guarantee obligation by approximately $10 million.

Unrelated to the liquidity trust, we continue to market and sell our four remaining wholly owned land parcels, encumbered with approximately $8 million of recourse mortgages as of September 30, 2010 and six additional land parcels held in joint venture.

Number four, loan balances maturities in the falls. As of today our line of credit balances completely paid off, zero balance. Currently we have 17 million of outstanding letters of credit, with 6 million is cash secured. The maturity date of the credit facility is December 2011. We also modified two large consolidated mortgage loans.

At Connecticut Avenue, our stabilized four mansion in Washington D.C. repaid down the loan by 5 million and extended the maturity until December 2011. This loan has a balance of 29 million and will remain principle recourse.

At Monterey, California our stabilizing going on mansion we paid down the loan by $15 million and are now non-recourse. At the JVs we have worked our defaulted loan balance down to approximately 600 million at quarter end down from 1 billion earlier in the year.

In November, or just a few days ago, we modified the Fox Hill joint venture loan and removed the alleged default reducing the defaulted joint venture loan balance due 462 million. We continued to diligently work through the remaining defaults with our vendors and partners.

I will now turn the call over to Mark.

Mark Ordan

Julie and Greg described the company whose turnaround is underway and real. This is not an exercise in financial rebalancing but an across the board drives forward. Our team, thanks to the best brand in Senior Living, a very strong paying spirit as we determine long-term effort has steadily solidified our balance sheet restored our fighting culture and positioned our return to profitability and we expect growth.

Greg sighted the latest two transactions with both HCP and Ventas and their important effect on us. These are the two leading capital partners in Senior Housing and we are proud of both relationships. Well in both cases we had to work through difficulties, we have added and are determined to continue to add value to our portfolios and to our product. We are very pleased to be able to move forward and we do what we need to do to enjoy both a long-term relationship and one that maximizes value for both companies.

As Greg said with HCP, we now manage a very strong growing high margin portfolio. With Ventas, where we have always enjoyed a strong partner relationships, we are very pleased to continue to manage the entire portfolio and expect to do so for many years.

As Julie detailed, Sunrise has taken advantage of the stabilizing economy and the many organizational changes we've made to enjoy its 5 straight months of occupancy gains along with the overall revenue growth. Our overhead has steadily declined, with our transaction expenses as Julie mentioned is now approaching a forecast of $100 million run rate. Our overall and lead course debt levels have both declined great. Our line bank balance as Greg mentioned is now at 0, a 100% reduction from our recent high of $95 million.

Now that our only relationship with our bank group is a $16 million of letters of credit, we will seek to establish our full banking relationship based on a reputation as a solid client with those what it says we’ll do. We like most companies still have stresses on a portfolio. We hope that we have demonstrated in the unshakeable conviction to move Sunrise from tough to prosperous times. We have no magic wand to make problems disappear but we'll continue to fight hard of half of our residents, team members, capital partners and investors.

For the past two years, many have asked, “Where is Sunrise going?” Some who asks this assume that the answer was into the scrappy. Well, we don't think so and I would like to tell you why. Sunrise is the only company in Senior Living with an unbroken 30-year mission of service to seniors and we will continue that for a long time to come.

Our team, our supportive founders, our board and 35,000 dedicated team members grow stronger by the day. Last week we celebrated the success of 19 communities, who won huge awards in our simply the best contest, the grand prize went to a team in East Cobb in Atlanta, who proved that a committed Sunrise team can do amazing things. We have many examples of this. And that this led to our recent success. We are determined to have the very best people who in turn make our residents life special every day. We are moving slower as we said we would to be a strong profitable company. Over the coming months, we want you to learn more about Sunrise and about how our pieces stick together.

Today, we are 320 committees in many contractually distinct portfolios united under one brand. We are working to take every non-productive cost out of our system and our overhead at the community level but we're doing this without ever chipping into the things that have made Sunrise special.

At the same time, we have to make sure that Sunrise is very competitive market-by-market and community-by-community. We also operate in a highly regulated environment. And we look forward to one of our nation's foremost regulators joining the Sunrise team in a couple of weeks to help make us a stronger more competitive organization and at the forefront of revelatory compliance excellence.

We believe that the combination of our initiatives will drive us forward. We will strengthen our balance sheet and reach profitability. We intend to grow both inside and we are profitable by increasing our stake in the properties we manage. We'll continue to strengthen our brand and services while increasing our efficiency by driving down costs.

Let me assure you that we love the opportunity before us to merge our brand in strength, time-tested mission, financial stability, deferred demographics and a great supply demand imbalance.

In summary, we are far stronger and stable shape than in years. We are gearing Sunrise towards profitability, solid asset values and enhanced balance sheet for the future. My team and I are most excited and determined to move down this path. We thank you for your support.

Operetta will open the lines for questions.

Question-and-Answer Session

(Operator Instructions) And well take our first question today from Jerry Doctrow at Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Thanks and congratulations on a good quarter and a lot of progress. I just had a couple things. On the debt, you went through it and there's still something else, sort of yet to close. So do you have a sense as to where you're going to end up at year-end in terms of remaining debt balances? I was trying to do the adds and subtract.

Greg Neeb

The remaining debt balances?

Jerry Doctrow - Stifel Nicolaus

Yes.

Greg Neeb

Where we are today with the line at the end of the quarter was $8 million and that’s a zero. And the other things that we had anticipated doing are reflected just looking down the list to make sure this is accurate. I believe are reflected into our consolidated debt balances.

Jerry Doctrow - Stifel Nicolaus

Okay.

Julie Pangelinan

With the pay downs that we have subsequent to year end, we are below $200 million and we close that when the Ventas transactions closes we expect to use some of those proceeds to further pay down debts.

Jerry Doctrow - Stifel Nicolaus

Okay. So the only thing is yet to be done that we know of is Ventas. Okay. And just I was wondering if we could get a little more color on the off balance sheet again. You have made a lot of progress there. If I heard you, Fox Hill is now done; you're down to $462 million or so that's in very in default or whatever on the off balance sheet stuff, any big chunk there or just its sort of kind of JV by JV. Any more color there would be helpful?

Greg Neeb

It is a few JVs and we have a couple of loan pools in this joint ventures that we are working through. But an aggregate now as I said earlier on the call or just ramp $460 million. And we keep chipping away at those.

Jerry Doctrow - Stifel Nicolaus

Okay.

Greg Neeb

And just push them through and extend and remove the defaults.

Jerry Doctrow - Stifel Nicolaus

Okay and I guess I was wondering just about, obviously there's been the Ventas sort of atria and also HCN Merrill, so the JV's valuations certainly based on those couple deals probably look more attractive than they have been. Are there opportunities to basically sell or refi JVs and not only maybe restructure debt but perhaps generate, I think you alluded to increased ownership or generate some further gains out of that kind of stuff?

Mark Ordan

As we've said now for a few quarters we are looking at opportunities where we can own more of our assets. And we think that there are possible opportunities in some of our JVs to reconstruct where we are, so we are possible where we are going to look to do that if we think we have a proven record of adding value to real assets. So we like that part of the business.

Jerry Doctrow - Stifel Nicolaus

And basically, I mean, I guess I'm reading the capital environment that kind of opportunity which you know you had done in the past may be reopening. Is that sort of an accurate read do you think?

Mark Ordan

Well certainly like to the atria and other transactions we see we see like in the capital markets just the other thing that’s great is that we have. We have pools of extremely high performing, high-margin assets. So that certainly makes it a lot easier. We think some of our portfolios are absolutely best of class.

Jerry Doctrow - Stifel Nicolaus

Okay. And just wanted some words quick from you, Mark. Is the portfolio we're looking at now pretty much sort of what you are going to run with for the of 320, any other sort of assets that might move out of that or is it relatively stabilized at this point?

Mark Ordan

We don’t anticipate any exchange in that number so we think this is the size of the company and unless we get there.

Jerry Doctrow - Stifel Nicolaus

Sure. And then just last thing, I guess I was wondering if we can get a little more color on sort of occupancy rate, your competitive environment. I mean certainly by the tone of your comments, you know, a lot of the restructuring now behind you, you're getting sort of more combative, or whatever, I don't know if that was your word but something like that, fighting spirit. You know, how do you see Sunrise in kind of a competitive position at this point and just kind of the sense of occupancy rate, where do we see it sort of going forward?

Mark Ordan

I can’t forecast where occupancy is going to go. My point is that when a company gets stronger, it gets stronger overall. Its not enough to be stronger in pockets. And I think that’s true to Sunrise and I think that that does in a competitive world, I'm not ashamed to say lead to a fighting spirit and we should be competing for market share based on our brand, based on the care that we give to our residence, based on the 30 years of mission that was well articulated and built by Paul and Terry and many of the people. So we just think that that leads to increasing strength and if the economy is stable to growing we think we will atleast get our share of the pie.

Operator

(Operator Instructions) And it appear we have no further questions at this time.

Mark Ordan

Great then we thank everybody for as I said earlier on behalf of the team your support and we wish you all a great day and holiday season.

Operator

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

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