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Executives

Tim Smith – Investor Relations

Mark Ordan – Chief Executive Officer

Marc Richards – Chief Financial Officer

Greg Neeb – Chief Investment and Administrative Officer

Analysts

Daniel Bernstein – Stifel Nicolaus

Sunrise Senior Living, Inc. (SRZ) Q4 2011 Earnings Call March 1, 2012 9:00 AM ET

Operator

Please standby, we are about to begin. Good day. And welcome to the Sunrise Senior Living 2011 Year End Earnings Conference Call. Today’s conference is being recorded.

At this time, for opening remarks and introductions, I’d like to turn the conference over to Mr. Tim Smith. Please go ahead, sir.

Tim Smith

Thank you. And welcome to Sunrise Senior Living’s fourth quarter and full year 2011 investor conference call. This is Tim Smith, Sunrise’s Investor Relations. Before we begin, let me remind that you -- 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. 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 to Mark Ordan, Sunrise’s Chief Executive Officer. Mark?

Mark Ordan

Thanks Tim. Good morning, everybody. Our fourth quarter was a solid and with very positive year for Sunrise Senior Living. While we continue to restructure the many pieces of our company successfully, we have generated strong operating results reduced overhead and expenses, and build a very significant amount of net asset value.

Also, knowing that all we do is built on our 30-year strong mission of championing the quality of life for all of our seniors. We have been strengthening our operations, our regulatory pro-activeness and our care teams.

Let me start with our overall performance for the quarter. Overall trends at Sunrise communities continue to be positive, comparing fourth quarter 2011 to the fourth quarter of 2010 stabilized community occupancy is up 30 basis points to 88.2%, average revenue per occupied unit for stabilized communities increased 3% and NOI increased 0.5% for stabilized communities, and 3.2% for total communities.

Fourth quarter 2010 net operating income included a one-time management fee expense credit relating to the Ventas portfolio of approximately $6.2 million. Excluding approximately $4.7 million, the portion of this one-time credit adjustment that relates to prior period, NOI increased 3.8% for stabilized communities and 6.5% for total communities. Greg Neeb will shortly provide details on the components of these results.

We believe that the process of turning at risk contrast into valuable real assets but long-term revenue streams created an enormously more valuable Sunrise in 2011. We acquired a 100% of the 15 community AL US portfolio for $430 million. We capitalized 42 properties and three ventures representing over $900 million with CNL.

Here we stabilized and enhanced our management contract and added attractive buyout rights, and secured extension rights on our most significant and profitable lease contracts. The portfolios we own in combination with our ownership in many of our joint ventures in this cap rate environment are accretive to NAV level we believe is not widely appreciated.

As I said to you during 2011 as we effected these transactions, we believe that we cannot only solidify our long-term contracts, but knowhow to add demonstrable value by acquiring real-estate in a very best metropolitan areas with the assets themselves have great growth potential.

We have also shown as evidence for example by our performance announced by Ventas of their 79 communities which we manage but don’t own that we could perform as a manager regardless of our ownership position. We expect in 2012 to continue to maximize our value while providing strong operating results.

We’re very proud of our results and of our new reputation as a successful manager of a broad range of senior living communities. We are at the higher end of senior living and we have built our communities and our teams to provide great service and care, Sunrise devotion to our seniors.

While providing care to seniors is not a precise science and has built in challenges. We have done many things to increase consistency and to minimize deficiencies. Under the direction of our operations and HR leadership, we have bolstered our training and evaluating tools, and have significantly changed, we believe strengthened. Our team of 40 women and men, who each lead the operations eight to 10 of our communities, this group is supported by strong care, sales, regulatory and IT teams to promote better and better outcomes.

Again, all of this is aimed at making each Sunrise community a great place to live. Our team of over 300 executive directors in U.K. generation manager’s lead-teams that provide an extraordinary experience and a great value when you consider the care and living experience we provide.

We’ve told you that we’ve needed to do all this with lower head -- lower overhead matched to a smaller size. We have successfully reduced overhead in 2010 and 2011, and even with some planned additions to field base support we expect to operate the 2012 at decreasing recurring overhead levels.

You’ll now hear from our Chief Financial Officer, Marc Richards?

Marc Richards

Thank you, Mark. Good morning, everyone. I will focus my discussion this morning on Sunrise’s consolidated operating results for the fourth quarter and full year of 2011, as well as the impact our 2011 transactions have had on recently filed financial statements.

Adjusted EBITDAR for the fourth quarter was $43.5 million, as compared to a $25.1 million for the same period last year. This increase is primarily due to incremental EBITDAR from our AL US and CC3 acquisitions, and lower general and administrative expenses, net of non-cash stock compensation expense.

Adjusted EBITDAR is net income before interest, taxes, depreciation, amortization and rent expense, and further excludes certain non-cash gains and losses, and certain items of income or expense in arriving at adjusted EBITDAR.

During the fourth quarter, we reported net income attributable to common shareholders of $1.8 million or $0.03 per fully diluted share, as compared to net income of $50 million or $0.87 per fully diluted share for the fourth quarter of 2010.

The change between periods was primarily driven by a $10 million buyout fee paid to us by HCP and a $25 million gain resulting from the sale of venture interest in certain communities to Ventas in the fourth quarter of 2010.

General and administrative expenses were $26.3 million for the quarter, compared to $33.7 million for the same period in 2010. Our Q4 2011 G&A includes $1.5 million of severance expense and $1.7 million of non-cash stock compensation expense. Our Q4 2010 G&A included $1.4 million of severance expense, $1.1 million of stock comp expense and a $3 million retention bonus.

Management fees for the quarter were $24 million, for the same period last year, management fees were $26.4 million, which included $3.1 million of fee income from management contracts that have since been terminated.

Before I move on to net operating income from our consolidated and lease communities, I’d like to remind you that we began consolidating the operating results from the 15 AL US communities on June 2, 2011. Our fourth quarter consolidated results include $21.4 million of resident fee income and $13.1 million of community expense for consolidated communities associated with the AL US portfolio.

Also, we consolidate six of the 29 communities within the new CNL venture as of January 2011. Accordingly, we have reflected $10.9 million in resident fee income, $5.9 million of community expense for consolidated communities and $4.3 million of community lease expense on our consolidated statement of operations for the fourth quarter of 2011.

In our supplemental disclosure, we have reflected that NOI from these six consolidated CNL communities in the appropriate joint venture pool rather than in our consolidated leased NOI, as the mortgage debt and related all -- related assets are all held within the venture.

And for comparability purposes, our supplemental disclosures reflect the quarter-over-quarter and year-over-year operating results of the AL US communities in the aggregate for the periods prior to June 2, 2011, and our consolidated leased NOI rather than as a venture.

Our fourth quarter 2011 consolidated and leased community net operating income, excluding the impact of the six CNL consolidated venture communities and the 15 AL US communities, decreased by $200,000 million quarter-over-quarter, in line with our expectations, the October 2011 reduction in Medicare reimbursement rates contributed approximately $1 million to our lower consolidated quarter-over-quarter NOI.

Net operating income is income from operations excluding depreciation, lease expense and impairment charges related to these communities.

Turning to our year-over-year results, we reported a net loss attributable to common shareholders of $23.4 million or $0.41 per fully diluted share, as compared to net income of $99.1 million or $0.73 per fully diluted share.

This significant year-over-year change was driven by $63.3 million in buyout fees earned in 2010 and $67.8 million of income associated with our discontinued operations in 2010, as compared to $3.7 million of buyout fees and $1.1 million of losses associated with our discontinued operation in 2011.

Adjusted EBITDAR for the year was $147.1 million, as compared to a $117.8 million last year. The increase of $29.3 million is primarily due to the incremental EBITDAR from our AL US and CC3 acquisitions, lower G&A net of non-cash stock compensation expense. These positive results were partially offset by lower management fee income to the terminated management contracts.

General and administrative expenses for year were $114.5 million, compared to a $126.6 million in 2010. Our 2011 G&A includes $2.8 million in professional fees associated with our venture transactions and $7.6 million of stock compensation expense.

Further, G&A expense included $8.1 million in severance costs. We eliminated 69 G&A related positions in 2011. Our 2010 G&A included $4 million of stock compensation expense, $2.7 million of severance expense and $8.4 million of legal fees incurred associated with the HCP litigation that was resolved in the third quarter of 2010.

Management fees for the year were $96.1 million, which includes $2.4 million of fee income from management contracts for the 15 AL US communities, which are now consolidated. For 2010, management fees were $107.8 million, which includes $20.4 million of fee income from management contracts that have since been terminated.

Our 2011 consolidated operating results were also impacted by $130.6 million of NOI from our consolidated and leased communities, as compared to $91.8 million during 2010, an increase of $38.8 million. The 2011 consolidation of the AL US portfolio accounts for $18.8 million of this increase and the consolidation of the six New York CC3 communities accounts for an additional $17.9 million of the increase.

Looking at the balance sheet, our unrestricted cash balance at December 31st was $49.5 billion. Our outstanding consolidated debt at the year end was $593.7 million, compared to a $163 million at the end of 2010.

In December, we drew down $39 million on our line of credit to facilitate funding an $85 million cash collateralized letter of credit for Marriott. We issued $86.3 million of junior subordinated convertible notes in 2011 and this increase also reflects the now consolidated debt of the AL US portfolio in the amount of $322 million.

The asset side of the balance sheet also reflects the consolidation of this portfolio, but of course funding increase of approximately $412 million, representing the estimated fair value of the acquired real estate assets.

I will now turn the call over to Greg Neeb to discuss our operating results. Note that our supplemental reporting package is fully transitioned to our stabilized and lease-up definition, and we have eliminated the comparable community statistics. Greg?

Greg Neeb

Thank you, Marc. Now let’s review Sunrise’s operating results. Marc reviewed our overall trends, so let me give some color behind those. I’ll provide comments for our consolidated assets, our leased assets, our joint ventures and our management agreements both stabilized and lease-up properties, which is a reflection of how we manage our business. I will also elaborate on a number of key transactions within each business line. This information is available on our supplemental 8-K filed this morning.

Operating trends for the Sunrise leased communities trended lower for the quarter. NOI for the stabilized leased communities was down 5.2% quarter-over-quarter. Occupancy was lower or 88% for the fourth quarter of 2011 versus 89.3% for the fourth quarter 2010.

These declines were driven by two factors, number one, lower independent living occupancy in a couple of buildings and number two, Medicare average rates being lower. Excluding the 10, lease communities that we’ll terminate in 2013, NOI and occupancy in this portfolio were effectively flat.

Our 24 consolidated communities consist of variety of asset types and other properties, we consolidate but don’t own 100%. Included in our consolidated communities are the 15 mansion AL US portfolio we acquired in 2011 are three Quebec communities and Connecticut Avenue, stabilized consolidated communities reported significant increase in NOI of 13.6% for the fourth quarter of 2011 versus the fourth quarter of 2010.

Operating trends for venture and managed communities were generally positive in the fourth quarter of 2011. In the U.S. occupancy was slight -- was down slightly 4.2% while rate was up approximately 4%. For net operating income, stabilized joint ventures were up 7.6%, while stabilized managed communities were down 4.2%, excluding the one-time management fee expense credit for the Ventas portfolio ranked in the fourth quarter of 2010 as part of our modified management agreement, managed community NOI growth for the fourth quarter of 2011 versus the fourth quarter of 2010 was up approximately 2.5%.

Joint venture lease-up properties continued to improve as evidenced by NOI increasing 55%. We continue to work through our two primary workout situations, our condominium building in Bethesda and our $621 million defaulted loan in the U.K.

Let me start with our condominium, in 2006 we sold the majority interest in two separate entities related to our condominium and assisted living project in Bethesda, and agreed to provide guarantees to support the operations and debt service for the entities for an extended period of time.

We are obligated to a lender and our partner on the assisted living venture to fund operating shortfalls. We are also obligated to our partner on the condominium venture to fund operating shortfalls, including sales and marketing costs.

The assisted living venture contains the amenity unit for the condominium owners to pay monthly fees for these services. We have funded $8 million under the guarantee through December 31, 2011 at which $1.2 million was funded in 2011.

We believe the partners have no remaining equity in the condominium venture. Accordingly, we have informed our partner that we do not intend to fund the future operating shortfalls in the condominium venture.

At December 2011, loans of approximately $116 million for the condominium venture and $30 million for the assisted living venture are both in default. We have accrued $3.3 million in default interest relating to these ventures. We are in discussions with the lenders regarding these defaults.

The lender group to the condominium venture has begun marketing, the loan for sale and has initiated for closer proceeding against the assets for condominium venture.

Let me jump to the United Kingdom. In U.K. one venture’s mortgage loan is in default at December 31, 2011 due to a violation of certain loan covenant. The mortgage loan balance was $621 million as of December 31, 2011. The loan was collateralized by 15 communities owned by the venture. The lender has rights, which includes foreclosure of the community. The venture is in discussions with the lender regarding the possibility of entering into a loan modification.

Lender is currently reviewing the Ventas business plans and has verbally expressed their desire to work with the venture and the manager to extend and modify the loan terms. The 4609 Overbook stand still agreement with a goal to refinance the -- to goal to negotiate a final loan modification.

During the 12 months ended December 31, 2011 we recognized approximately $8 billion in management fees from the 15 communities in this venture. Our United Kingdom management segment reported $1.6 million in income from operations for the 12 months ended December 31, 2011. Our investment balance in this venture was zero at December 31, 2011.

In 2011 we sold three wholly-owned operating communities and three land parcels which we -- which were part of the liquidating trust for approximately $12.8 million. The trust was formed in connection with the restructuring of our German indebtness. We have one closed community and nine land parcels remaining to sell in the liquidating trust, which are reflected in our consolidated balance sheet under assets held under liquidating trust.

To the extent we are able -- unable to sell all of these assets at their estimate value by October 2012, we may be required to fund the minimum payment under the guarantee which was $26.3 million as of December 31, 2011.

As discussed on previous calls, three communities in Canada, which are wholly-owned have been fully leased-up. The outstanding loan balance related to these communities non-recourse to us, but we have provided operating deficit guarantees to the lender. We are not currently funding under these operating deficit guarantees. The loan matured in April 2011 and had a balance of $45.9 million as of December 31, 2011.

In February 2012, we entered into a loan modification that among other things, number one, extended the loan on our three Canadian communities two years from the modification date, number two, provided for a termination of our operating deficit guarantee 42 months after the modification date and number three, cross collateralize the three communities, and number four, increase the interest rate by 25 bips. And lastly, obligated us to complete the ruminations conversion in a section of one of the communities.

As discussed in our 10-K, in the first quarter of 2012 Sunrise purchased its partners 85% interest in a joint venture that don’t have property in Santa Monica for $16.2 million and refinance the asset together with our Connecticut Avenue property a wholly-owned asset in Washington D.C. Sunrise obtained a $55 million non-recourse mortgage for the combined assets.

Regarding our $50 million senior revolving line of credit with KeyBanc, we have no borrowing availability under the credit facility as of December 31, 2011. As of December 31, 2011 we have outstanding draws of $39 million and $10.2 million in letters of credits.

In total, Sunrise ventures have total debt of $2.5 million with near-term scheduled debt maturity of $0.3 billion in 2012 and there is $0.9 billion of debt that’s been as of December 31, 2011. The debt in the venture is non-recourse to us with respective principal guarantees and the interventure partners are working with the venture lenders to obtain covenant waivers and to extend the maturity dates.

In all such instances, the construction loans are permits financing provided by financial institutions to secure by a mortgage or data trust on the finance community. We have provided operating deficit guarantees to the lenders or ventures with respect to $0.6 billion of the total venture debt.

Under the operating deficit agreements, we have obligated, we are obligated to pay operating shortfalls if any with respect to the ventures. Any such payments could include amounts arising in part from the venture’s obligations for payment of monthly principal and interest on the venture debt.

These operating deficit agreements would not obligate us to repay the principal balance of such venture debt that might become due as a result of acceleration of such indebtedness or maturity. We have non-controlling interest in these ventures.

Back to you, Mark.

Mark Ordan

Thank you, Greg. Thank you, Marc. We’ll now take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Daniel Bernstein with Stifel Nicolaus.

Daniel Bernstein – Stifel Nicolaus

Good morning. How are you?

Mark Ordan

Good morning.

Daniel Bernstein – Stifel Nicolaus

I guess, we’ll start on the, that the core fundamentals of the company, the occupancy and rate seem to be moving in the right direction. So maybe if you could talk a little bit more about what you’re seeing from incoming residents, their attitudes towards moving in and in terms of your leads and it just seems to be filling in the right direction, want to hear a little bit more about that?

Mark Ordan

Well, I would say that the numbers kind to speak for themselves, we’re seeing good flow of new leads, I think we’re doing a very good job of watching our pricing and making sure that we’re meeting the markets. I think that’s been a big advance for the company, I sense no better than anybody else’s is that is, there is some more optimism in the economy so people feel little bit better.

I think that what we’ve been stressing Dan as you know is that Senior Living and we think Sunrise particularly is a very good value of that moving into a Sunrise or forth somebody a level of care and daily life, that they just can’t get any place also anywhere near the prices we charge. So I think our pitch to people is really about the value and the care that we provide.

Daniel Bernstein – Stifel Nicolaus

Okay. And obviously the first quarter is always seasonally weak but are you still seeing some of the same kind of trends that we used in terms of again at least leads, how you are feeling about the first quarter so far?

Mark Ordan

Yeah. Our trends are not the similar from the past.

Daniel Bernstein – Stifel Nicolaus

Okay. And I wonder if you could also talk about a little bit about in terms of your capital needs, obviously you have lot of cash that’s unrestricted. But you also have tied up the credit facility with the Marriott guarantee and as well as you mentioned that you may have to fund some of that liquidating trust notes in Germany. So are you looking to refinance the credit facility at this point or raise some other type of capital? How you feel about the capital situation?

Mark Ordan

Well, I would be -- we are comfortable with our capital situation. We the -- what we did with Marriott enables us to -- there are many variables around that. So I think we can manage the business properly. That was the reason to do that deal and we look forward to seeing how we can navigate that going forward. But I’m comfortable with our cash position. I’m comfortable looking out through 2012 at our source of usage.

Daniel Bernstein – Stifel Nicolaus

And you’re looking to refinance the credit facility at all given you kind of reach the limit of what you can draw on that or?

Mark Ordan

Dan, at this time, that’s not something that we are thinking about.

Daniel Bernstein – Stifel Nicolaus

Okay. And do you have any expect -- what are your expectations for G&A for 2012, obviously you’ve -- you’re bringing that down consistently over the last couple of years? What are your thoughts and how G&A will look?

Mark Ordan

Yeah. I wouldn’t -- I’m not going to throw out a specific number…

Daniel Bernstein – Stifel Nicolaus

Okay.

Mark Ordan

… but I’d say that we continue to look at ways to reduce our overall spending. We have significantly reduced our run rate, so we’d continue to try to find ways to be more and more efficient.

Daniel Bernstein – Stifel Nicolaus

Okay. And the last question I have is, any thoughts on comments that you can make about [the appeal] that was disclosed in the 10-K about the Pennsylvania property, I’m not sure something that…

Mark Ordan

Nor really…

Daniel Bernstein – Stifel Nicolaus

Normally, but? Okay.

Mark Ordan

I can’t add really more to it. I think we spoke to the nature of it in our filing and obviously, we’re cooperating with the property adjustments, but now nothing better than that?

Daniel Bernstein – Stifel Nicolaus

Okay. All right. I’ll jump off and see if there is anybody else has questions.

Operator

(Operator Instructions)

Mark Ordan

Well, Operator, it seems that there are no further questions. So, with that, I’d like to thank everybody for their continued support and interest in Sunrise, and we will be updating you soon on further progress. Thank you.

Operator

And ladies and gentlemen this does conclude today’s conference. We appreciate your participation. You may disconnect at this time.

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