Executives
Lisa Mayr – Vice President, Investor Relations & Capital Markets
Paul J. Klaassen - Chief Executive Officer, Director
Lynn Krominga - Chair, Board of Directors
Tiffany L. Tomasso - Chief Operating Officer
Mark S. Ordan - Chief Investment and Administrative Officer
Richard J. Nadeau - Chief Financial Officer
John F. Gaul - General Counsel
Julie Pangelinan – Principal Accounting Officer
Analysts
Jerry Doctrow – Stifel Nicolaus & Company, Inc.
Frank Morgan – Jefferies & Company
Derrick Dagnan – Avondale Partners
Analyst for Ryan Daniels – William Blair
Doug Rothschild – [Stogen] Capital
Analyst for [Asid Hamin] – SG Asset Management
Marc Yukelson – J Goldman & Company
Adam Rashed – Eminence Capital
Sunrise Senior Living, Inc. (SRZ) Q4 2007 Update Call April 2, 2008 4:30 PM ET
Lisa Mayr
Good afternoon and welcome to Sunrise Senior Living’s investor conference call. This is Lisa Mayr, Vice President of Investor Relations for Sunrise. Before we begin let me remind you that this call is being recorded and that 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 2006 Form 10K that we filed with the SEC last week. 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 a further discussion on the company’s forward-looking statements we refer you to our 2006 Form 10K. During this call we will be discussing certain preliminary operating metrics for the fourth quarter of 2007 including total revenue under management and revenues, expenses and occupancy for our senior community portfolios, consolidated communities and unconsolidated ventures. While we believe these metrics are useful indicators of trends in our business they are not necessarily indicative of the results of operations of the company for the three and 12 months ended December 31st, 2007 that will be reported in the company’s 2007 10K when filed. Also please refer to our March 3rd press release and related AK filings for additional information regarding these metrics.
Financial information discussed during this call regarding 2007 and subsequent periods is preliminary and remains subject to audit. As such this information is not final or complete and remains subject to change possibly materially.
I would now like to turn the call over to Paul Klaassen, Sunrise’s founder and CEO.
Paul J. Klaassen
Good afternoon. Thank you for joining for this discussion of recent developments at Sunrise including the completion of our Restatement and the filing of our 2006 10K. Joining me this afternoon are Lynn Krominga, our new Board Chair; Tiffany Tomasso, our Chief Operating Officer; Mark Ordan, our new Chief Investments and Administrative Officer; Rick Nadeau, Chief Financial Officer; John Gaul, General Counsel; and Julie Pangelinan, our Principal Accounting Officer.
The past few weeks marks the beginning of a new chapter here at Sunrise and we’re going to cover several topics on this call. First I’m going to give you a brief overview of the completion of our Restatement. Next Lynn Krominga will discuss the corporate governance initiative that was adopted by our Board and we are implementing, then I’ll review our 2007 fourth quarter operating metrics and discuss our business strategy. Finally, Rick will walk through our 06 results as disclosed in our 2006 10K in an effort to help you understand some key items and he’ll also review our current liquidity. After our prepared remarks we’ll open the call for questions.
During the past 20 months the company was engaged in two important tasks in addition to of course executing on our ongoing core business. First we undertook a comprehensive and very labor intensive accounting review in connection with the Restatement of our financial statements for 2005 and prior years. Second, since December of 2006 we have been through a thorough investigation conducted by the Special Independent Committee of the Board and I’m pleased to say that those two tasks are now complete. Last week we filed our 2006 10K. I’m pleased that we filed the 10K by the New York Stock Exchange’s extended deadline which allowed us to remain listed on the Exchange and we’re grateful to the staff of the Stock Exchange for working with us to provide the few additional days that we needed to complete that Restatement. We all know our work is not done, however, and we are committed to becoming fully current in our SEC reporting. Specifically we are now hard at work to file our 2007 10K as soon as possible. Once that is complete we plan to file 08 10-Qs that are delayed followed by our 07 10-Qs which would bring us current in our financial reporting.
We are firmly committed to strong corporate governance throughout the organization and a culture that fosters the highest standard of business practice and ethical conduct. Towards that end we have announced significant steps to enhance our accounting and financial reporting processes and control. These measures are designed to ensure that once we are current in our SEC filings that we stay current. During the past year the Special Independent Committee of the Board oversaw a careful and critical assessment of the ways in which the company managed itself and ways that our corporate governance practices could be strengthened and in a moment Lynn will update you with more detail about the corporate governance enhancements unanimously adopted by the Board many of which have already been implemented. You can also find a more detailed discussion of these measures in the 2006 10K.
Now before I ask Lynn to say a few words let me just touch on a couple items. As you know the Special Independent Committee of the Board was engaged for many months in an internal investigation that covered several different areas. We previously disclosed the Committee’s factual findings in press releases and Form 8-Ks and we have included a brief summary of the factual findings in our 2006 10K. We will not be providing any additional comments beyond what we have disclosed in our public filings. Accordingly we ask that you refrain from asking questions on this topic during the Q&A session.
Second we announced last July a process to evaluate strategic alternatives. Clearly as you will hear today along with that process we have been very focused on running our core business and resolving our accounting issues. We have built a sector leading company and a field of tremendous opportunity and we are working for the best long term health for the company and for its shareholders.
With respect to our exploration of strategic alternatives we do not expect to disclose additional details unless and until the Board approves a specific transaction. Accordingly we ask that you also refrain from asking questions on this topic during the Q&A session.
Third having just completed the 2006 10K we are now turning our attention to filing our 07 10K. Therefore we’re not yet in a position to discuss our 07 financial results. However we will discuss today some items that we expect to report in 07 and in 08 which were described in our 06 Form 10K as well as some previously disclosed operating metrics for the fourth quarter of 07.
We appreciate the patience of our shareholders during this process and we’re pleased that we’re now in a position to return to more frequent communications with our investors. In addition to now again attending upcoming investor conferences we also plan to hold our own Investor Day once we are current. We appreciate your understanding.
Now it is my pleasure to turn the call over to Lynn Krominga, Chair of the Board of Sunrise.
Lynn Krominga
Good afternoon everyone. I am here today on behalf of the independent directors to emphasize directly to you our commitment to best practices of corporate governance and high standards of business ethics throughout Sunrise. Let me assure that this Board is focused on generating shareholder value. We believe we have a strong management team with steep experience and understanding of the senior living field. We have products and services that are in high demand and we have a business strategy to deliver to our shareholders. In our 10K we described in detail the governance and operating changes that support our efforts. These initiatives target a number of areas including governance, oversight, infrastructure and controls. Among other things we separated the Chairman and CEO positions and will add two new independent directors. Our Board committees have been reorganized and we have added a new committee dedicated to governance and compliance. The Board is unwavering in its commitment to implement and maintain these governance and operating changes so that Sunrise can move forward to capitalize on the opportunities that lie ahead. Our efforts are ongoing but we believe the measures we’ve already implemented will allow us to ensure strict compliance with accounting requirements and strict adherence to SEC rules and regulations.
As Paul mentioned in his opening remarks we are moving towards increased transparency. We are listening to our shareholders and will be increasingly available as we are able to do so. Most importantly we believe we are well on our way to having the quality of accounting and financial reporting controls needed to regain and maintain your confidence.
With that I’ll turn the call back over to Paul to review the 07 fourth quarter operating metrics and discuss our business strategy.
Paul J. Klaassen
We all appreciate the hard work that’s been done by the Board during this process and we look forward to working with you in your new role.
Now speaking of new roles we recently brought on Mark Ordan as the company's Chief Investment and Administrative Officer. Mark brings a wealth of experience to Sunrise and he’ll be focused on our real estate investments partner and shareholder relations, legal and governance matters and corporate administrative matters. We are delighted to have Mark join us and he’s here. Mark, would you like to say a few words?
Mark S. Ordan
For me this is a great opportunity to join an industry leader with a world class brand and a great team. I’m hopeful that my years of operations experience along with my real estate experience as Chairman of Federal Realty for five years and as CEO of the Mills Corporation will let me directly contribute to Sunrise very quickly.
Paul J. Klaassen
Now I’ll look at 2007. Despite all the challenges that we faced this past year we were still able to maintain our focus on a business plan and growth strategy during 2007. We opened 22 new communities during 07, we broke ground on an additional 16 bringing our total to 44 communities under construction at year end. This is a good indicator of both our own health and of our belief that this is an excellent time to build new communities and market share in major markets of North America and the United Kingdom. You also saw from our 10K filing that we have a solid development pipeline with over 100 additional real estate sites under option or contract.
During 2007 revenues under management increased to $2.4 billion up from $2.2 billion from 2006 even after the buyout of the 18 five star contracts that occurred in 06. For the fourth quarter of 07 revenue under management increased to $617 million compared to $576 million in the prior year fourth Q. As a reminder revenues under management are the combined revenues of our consolidated communities, our venture communities and communities owned by third parties that we manage. For revenues under management broken down by consolidated, venture and communities owned by third parties that we manage please refer to our March 3rd press release. Looking at our same community portfolio we grew same community revenues nicely again during the fourth quarter of 07 despite a dip in occupancy. Same community revenue growth from communities and ventures was just over 5% and growth from consolidated communities was approximately 8% compared the fourth quarter of 06. Same community occupancy for the fourth quarter was down about 1% over the prior year period for both the consolidated and venture portfolios. A portion of this decline is due to the integration for the first time of our Fountains portfolio into this metric which includes a number of entrance fee CCRCs or continuing care retirement communities. Now the vast majority of the rest of our portfolio is assisted living or is memory care focused and therefore we believe it is much less impacted overall by current developments in the housing market. However our entrance fee communities which require larger upfront fees are somewhat impacted by recent housing trends. We did record a $15.4 million expense credit in the fourth quarter of 07 related to our insurance program for the same store portfolio. Excluding this credit our same community operating expenses grew just over 4% for the fourth quarter of 07 compared to the fourth quarter of 06.
Let’s look at our core business and our four primary growth drivers. Those four primary growth drivers are one, growth from our existing operating portfolio, secondly growth through new construction, third growth from our hospice business and our other ancillary services and four, growth from our returns on our equity investment. I would like to comment on each of these for a moment.
Our first growth driver is revenue growth from our existing portfolio. Today Sunrise operates 459 communities. We plan to continue to growth revenues from these communities through both rate increases and occupancy growth. In addition we will continue to focus on controlling our expenses in order to enhance operating leverage.
Regarding our second growth driver that being new construction in 2008 our new construction goals are to increase resident capacity by approximately 3,000 in North America and 600 in the UK. Greystone our fully owned subsidiary that serves the nonprofit sector will have new construction that will add about 800 for a total resident capacity increase of 4,400 for new construction in 2008. We feel very good about our 2008 development plan. We believe we are the only major developer of new senior living communities active today and based on the data from the National Investment Center for the Senior Housing and Care industry or NIC there do not appear to be general risks of oversupply in the current market and we believe that demand remains strong. We are also pleased that in most of our major metro markets barriers to entry remain high as it typically takes four years or more to develop a senior living community. It has taken us years to build our development infrastructure in the field and it is both a core competency and a key asset for Sunrise.
You saw in our 2006 10K that as of December 31st 07 we had approximately $900 million of costs needed to complete 44 communities in various stages of construction. All of these projects have financing. Seven of these relate to Greystone and the remaining 37 have construction financing at an average loan to project cost ratio of 75%. 32 of these projects are included in development ventures with typically 80% of the required equity being funded by our venture partner. Those projects that are not currently in development ventures are expected to be sold to a venture at some point. Our strategy at this time is to perform most if not all of our development with development partners. As of December 31, 07 Sunrise’s required future funding for all projects currently under construction was just $13 million and as of today almost all of Sunrise’s required equity for these projects has been contributed.
Now this is not an unusual level of construction activity for us. You can see in our 10K that the assets in our unconsolidated ventures grew by more than $1 billion from 2004 to 05 and similar again from 2005 to 2006. We estimate that existing construction loan financing commitments and existing credit facilities together with cash generated from operations will be sufficient to fund all communities under construction at year end 2007. We also explained in the 10K that as of December 31, 07 we had entered into contracts to purchase 101 additional development sites for a total contracted purchase price of approximately $400 million. Generally our land purchase commitments are cancellable if we are unable to obtain zoning approval and the total purchase price for these sites will be paid overall several years partially with debt financing and partially with joint venture equity. We have contracts on these additional 101 pieces of property because this is a great time to be building new senior living communities. Now one reason we believe this is because the supply demand fundamentals are currently very favorable. On the supply side new construction is constrained for many reasons but I’ll list three. One being the long lease times that are required for zoning and permitting. Two the complexity of the business and the relatively few experienced developers and operators of this property type and third is actually the current credit margin. The difficulty in obtaining financing unless you are very well capitalized with significant equity and a good development track record is also somewhat constraining supply.
On the demand side we have the following favorable factors. One is the excellent demographics for the 80 plus population that can lay an increased acceptance of senior living solutions as is reported by seniors and their families to [inaudible]. Another reason is that we have a product which is need driven and therefore relatively resistant to housing and economic cycles. I might also add that assisted living in particular is a very good value compared to other long term care alternatives which are often more expensive. Other factors that encouraged us to build include the fact that much of the existing supply is dated and is often of lower quality in terms of design and construction. And for the first time in many years we see signs of land and construction costs moderating. We are fortunate to have the development infrastructure, the operating talent and depth, the proven building models and importantly the capital relationships to take advantage of this opportunity to build new communities and market share.
For our 2008 pipeline we plan to begin construction on another 30 to 40 communities as I mentioned earlier for an expected total cost of between $1 billion and $1.5 billion. We expect most of this development to occur in site venture and that construction financing will continue to be available. Of course this early in the year not all of the new projects have been committed to by capital partners or lenders yet but we continue to see strong interest from both. Sunrise’s portion of the required funding for $1 billion of development projects would be approximately $60 million assuming an 80/20 joint venture and 70% debt construction financing. This investment would generally be funded from cash flow from our operations but we also have borrowing capacity with assets that are under leveraged or that have no leverage. Again if you look at our statement of cash flows for 06 and 05 you can see that $60 million is not an unusual level of activity for Sunrise for investment in unconsolidated communities. We also believe our development pipeline has flexibility that permits us to slow down or speed up depending on the availability of construction debt and joint venture equity without substantial risk t Sunrise. And while we expect to be able to fully executive on the 08 development plan we do not plan to speculate and start construction before we have a construction lender in place and in most cases we will not start construction until we also have a joint venture to share the equity risk.
Today we have been able to obtain construction debt at reasonable rates that are consistent with the past few years. Obviously with the challenges in the current credit market we main cautious and we will continue to monitor closely any impact this would have on our pipeline. However we still believe that we will be able to obtain the funding that we need from lenders who both understand our strategy and our industry. Generally the biggest impacts we expect to see are the possibility of lower leverage ratios. I would note however that we already are modeling 25% to 30% equity in all of our projects. Directionally we intend to focus our development on our core management models in the major metropolitan markets of North America and the UK which is predominantly assisted living and memory care which is also usually done on the assisted living platform. Our long experience and success with our core management products allows us to control development costs, maintain consistency and quality and improve operational efficiency.
Now let’s look at our third growth driver which is predominantly hospice. Sunrise accorded Trinity Hospice in September of 2006 with the objective of entering into the hospice care industry to complement our current service offering. Now in addition to using third party hospice providers within our communities we can now offer tailored palliative care and support services directly to residents and their families in some of our communities. This allows us to extend a resident’s stay and also to earn revenue associated with the hospice services. Most importantly providing hospice care is consistent with Sunrise’s principals of service and allows us to fulfill our mission to champion senior’s quality of life. We are working to incorporate hospice care into our business model further and we expect to continue to grow these programs over the long term. We have however experienced a number of challenges integrating the Trinity acquisition that we discussed in our 2006 Form 10K and those include a pending OIG investigation and related Qui Tam litigation and a $50 million expected write down of our investment in Trinity for 07. Nonetheless hospice services and other ancillary services remain an important component of our growth strategy. You will notice that census has declined since are acquired Trinity. This decline in census was partially the result of the closing of certain operating locations in non-core Sunrise markets and Trinity’s focus on remediation efforts. Our 2008 goal includes increased penetration of existing Sunrise markets for the already established Trinity locations and the opening of new hospice provider locations in areas where we have clusters of Sunrise communities. We plan to invest approximately $10 million in 08 to open these new locations.
Finally our fourth growth driver are the returns that we make on our equity investments in our ventures. Sunrise’s strategy has been to invest equity in unconsolidated ventures that develop our match and model for which we then also enter into long term management agreements and as you know typically we take a 20% equity interest and a venture partner takes an 80% equity interest in these ventures. When the majority equity partner in one of our ventures sells its equity interest to a third party the venture frequently refinances its senior debt and distributes the net proceeds to the equity partner. As described in our 10K we benefited from venture recapitalization during 2006 and 2007 which generated cash proceeds of $61 million and $177 million respectively. As a reminder although we usually only have 20% ownership interest in the ventures our promote structure has often allowed us to earn more than 20% of the returns upon a sale or refinancing transaction. We expect that our ability to develop communities with capital partners and then refinance or recapitalize ventures upon stabilization will continue to be a benefit of our business strategy.
Now let me finally address two other significant developments that we disclosed in the 2006 10K, that’s condominiums and our German venture. Regarding condominiums we will complete one project but we have decided to discontinue future development of other condominium projects for now. Although we still believe that there is market demand for a high end equity based senior living model we don’t think today’s current market conditions will allow us to succeed in developing this model. We feel that our capital can be better used by deploying it to develop our core match and model. Although we recorded losses of approximately $28 million in construction costs, overruns in 06 and 07 related to the current condo community under development the cash will actually be paid mostly during 08. On the other hand the 2007 and 2008 write offs for discontinued condo projects related to cash spent prior period.
Regarding Germany we are disappointed that our product has not had more success there. In connection with the development of our communities in Germany which are owned in an unconsolidated venture we provided operating deficit guarantees to cover cash shortfalls until the communities reached stabilization. We estimate that we may be required to pay up to an additional $60 million in cash through 2012 to support these communities.
On other hand in the United Kingdom we have been extremely successful. Market acceptance has been very and we are building new communities there as fast as we can.
Now I’d like to turn the call over to Rick to sort of discuss our financials.
Richard J. Nadeau
First let me echo Paul’s sentiment of how pleased I am to be here today. This has been a long and difficult process and I would also like to thank our corporate team who has worked countless hours to get this accounting Restatement behind us. My objective will be to provide information around the following five topics. One the work plan for Sunrise to get current with its SEC filings, two some observations about the impact of future periods from the accounting Restatement, three some information about the 2006 operating results, four a discussion of guarantees that Sunrise has entered into and five our current liquidity.
As Paul commented having just completed the 2006 10K we are now turning our attention to our 2007 financial statements and the 2007 10K. Accordingly we are not in a position to discuss our 2007 financial results.
First on becoming current in our SEC filings now that we have filed the 2006 10K we will next prepare and file our 2007 10K then file the outstanding 2008 quarters and finally complete the 2007 quarters. Our lenders have given us a deadline of July 31, 2008 and we have an automatic trading extension from the New York Stock Exchange until September 17th, 2008 to file the 2007 Form 10K. Our plans are to meet the deadline for filing our 2007 Form 10K that is currently provided for in our bank credit facility. If we are successful in achieving this milestone we will at that point also be behind in the filings of the Form 10-Q required for the first quarter of 2008. We intend to file the Form 10-Q for the first quarter of 2008 quickly after the Form 10K for 2007. In order to be current with our SEC filings we not only have to file our Form 10K for 2007 but also we will need to file all Form 10-Q filings that were required within the prior 12 months.
Regarding the accounting Restatement as you know we restated many years in our financial statements. You will find in Footnote 2 of the financial statements the details including adjustments by type and by period. Our total cumulative restatement impact to net income was $173 million on an after-tax basis or $274 million on a pre-tax basis. Of these adjustments we expect two significant categories to substantially reverse over a short period of time. Real estate sales and equity method investments with preferences or what is commonly referred to as HLBV or hypothetical liquidation at book value. The total adjustment for these two categories for the periods 2005 and prior is $161 million pre-tax. It is important to note that this income has been or is expected to be recorded as guarantees expire and ventures are recapitalized. So in other words $161 million in pre-tax adjustments related to the Restatement will be recorded as income in future periods as the guarantees expire and/or the ventures are refinanced or recapitalized. Much of this has already occurred. In 2006 $48 million of our pre-tax income relates to transactions that occurred in prior periods and in 2007 we estimate that an additional $70 million in pre-tax income will relate to transactions that occurred in prior periods. This is of course pending completion of our 2007 audit. That means that $118 million of the $161 million in adjustments related to these two categories will be recognized by the end of 2007. A large portion of the remaining real estate sales adjustments are expected to be recorded in 2008.
In addition revenue recognition for Greystone development fees was revised. As a reminder our Greystone subsidiary develops large projects for nonprofits which are usually bond financed. In 2005 we originally recognized approximately $13 million in development fees for Greystone based on the achievement of project milestones such as the achievement of bond financing for the project. We determined during the accounting Restatement that this revenue would need to be deferred despite the fact that we had collected the cash and in 2006 we deferred an additional $15 million of development fees. We will now recognize these fees upon completion of all services required under the development contracts. We have recorded as an expense the costs associated with producing these fees as the costs were incurred. To be clear Greystone has already received the cash for performing these development services and has no obligation to return these fees. In 2008 we will implement a labor tracking system that will enable us to recognize revenue from these services as the effort to earn the fees is incurred.
There is also one balance sheet item from the accounting Restatement I would like to point out. We have changed the classification of the cash that is held by our insurance captive to be restricted. Sunrise operates a wholly owned insurance captive for the benefit of our communities and capital partners. These restricted cash balances reflect premiums funded to cover estimated future liabilities. This reclassification is the reason the cash was reduced at December 31, 2005 as a result of the accounting Restatement.
Now I will briefly walk through the 2006 income statement and balance sheet as compared to the restated 2005 numbers. The 2006 operating results had some significant items that I will try to highlight. Revenues increased from $1.5 billion to $1.6 billion from 2005 to 2006. However approximately $135 million in buyout fees related to the five star contract and a few other contracts in 2006 and we received $83 million in buyout fees in 2005. Excluding these buyout fees revenue growth was approximately 6%. The growth in revenues from 2005 to 2006 is primarily attributable to rate increases at consolidated communities and ancillary fee revenues significantly due to the acquisition of Trinity Hospice in 2006. We had an increase in development and venture expense in 2006 of $28.5 million which is attributable to the acquisition of Greystone and an increase in the size of our development staff by 50% to enhance our capability to source site for development. You will not that development expense exceeded revenues due to the previously discussed deferrals of Greystone and North American development fees. We had an increase in G&A which included $3 million for the accounting Restatement and an accrual of $5 million for the Trinity Qui Tam lawsuit related to our hospice business and a general increase in the volume of our business. In 2007 we expect to see a high level of G&A even excluding the $42 million in Restatement expense. We have invested heavily in our accounting and information technology infrastructure and expect to make additional investments in this area as we implement the balance of the remedial measures intended to improve our internal controls over financial repotting. However we do recognize the need to control G&A growth and this remains an area of great focus for us.
Also in 2006 we recorded an impairment charge of $15.7 million related to seven small senior living communities all of which were acquired properties. You will also see that we had a write off of the intangible assets recorded in the Marriott acquisition related to the five star contract. Sunrise’s share of earnings and return on investment in unconsolidated communities benefited in 2006 from three venture recapitalizations. In addition $11 million of the amount recognized in 2006 relates to transactions that occurred in prior period. These amounts were partially offset by startup losses primarily incurred in our UK and German ventures. The gains recorded on the sale and development of real estate and equity interests was lower in 2006 by $30 million as compared to 2005. This is dependent on the timing of transactions and the types of guarantees that are provided which can impact the timing of revenue recognition. The 2006 gains include $37 million which relate to transactions that occurred in prior periods and that were deferred in the accounting Restatement. As I mentioned previously we also expect to record approximately $70 million in gains in 2007 related to transactions that occurred in earlier periods.
Finally you will notice in our 10K that we discussed our international revenues of $26 million in 2006 versus our international expenses of $31 million. This is largely due to the fact that a large portion of our international communities are in lease up and our management fees do not yet cover our G&A costs in Europe.
Now let me discuss guarantees for a minute. We have provided guarantees for construction cost overruns, operating deficits, income support and occasionally principal guarantees. Although the vast majority of our venture levels debt is generally non-recourse to Sunrise as described in the 10-K. Prior to 2006 Sunrise rarely experienced material losses under these guarantees. However in 2006 we recorded $90 million of losses related to three significant guarantees. First, we are funding under a completion guarantee with respect to the single condominium project we have under construction. Second, we expect to fund losses due to operating deficit guarantees related to our nine properties in Germany which are experiencing a slower than expected fill up. And third, we are funding under an income support arrangement related to a management agreement for the Fountains a portfolio we acquired in 2005 with a partner. We own 20% of the Fountains venture.
We do not currently have any condominiums under construction with the exception of the one just noted above. We do not have any current plans to expand into new countries and at this time we do not have any acquisitions in our 2008 business plan. Going forward our future growth plans are to grow by our own development and construction activities within our core products and markets where our experience with this type of product allows us to control development costs more effectively, maintain consistency and quality and improve operational efficiency.
Finally you saw in our 10-K that we had disclosed $2.4 billion in non-recourse property level debt that can potentially become recourse to Sunrise. Generally in our venture transactions long term debt that is advanced by a lender is secured by a specific property or portfolio of properties with each property or portfolio being owned by an entity with no other assets. As indicated in the 2006 Form 10-K Sunrise has entered into guarantees with lenders of this debt with respect to certain specified acts that create exceptions to the non-recourse nature of this debt. These acts which Sunrise believes are in its control include such things as fraudulent statements with respect to the loan, voluntary bankruptcy of the borrowing entity, misapplication of rents or insurance premium proceeds at the community, etcetera. The objective of such guarantees is to provide comfort to the lenders that the borrower and certain related parties do not engage in prohibited acts that may impair the value of the lender’s collateral, that is the real restate or impede the lender’s ability to foreclose on the real estate. These carve out guarantees are standard for real estate financing transactions involving non-recourse debt. We have never funded any such guarantees and do not expect to fund under such guarantees in the future.
Regarding our current liquidity as disclosed previously our unrestricted cash balance at February 29, 208 was $79 million as compared to $82 million 14 months earlier at December 31, 2006. During that time we received proceeds from recapitalizations of approximately $177 million and we had additional borrowings of $58 million under our bank credit facility. Some uses of these proceeds include $44 million for the Restatement Special Investigation and Trinity related legal fees, $11 million related to our condo cost overruns, $7 million for the Fountains guarantee and $29 millions for loans to our German properties. These amounts total approximately $90 million. We have spent a significant portion of the rest of this cash in investing in development and construction in progress at our CIP. Before its upcoming cash needs for Germany we have paid $29 million through the first two months of 2008 for the properties and we expect to pay an additional $60 million. Of this amount we expect to pay approximately $30 million in 2008 and the remaining amounts through 2012. For our guarantee under the Fountains agreement we paid $7 million in 2007 and we expect to pay up to $7 million in each of 2008, 2009 and 2010 at which point the guarantee expires. We also need to pay an additional approximately $25 million related to construction cost overruns for our condo project. Finally we still expect significant legal and accounting fees throughout 2008 as we get caught up in our filings.
Overall we believe availability under our bank credit facility, unrestricted cash balances and borrowings against unlevered real estate assets will be sufficient to support our operation and our share of the development pipeline during 2008.
Now we’ll take any questions you have. Operator you may proceed.
Question-And-Answer Session
Operator
(Operator Instructions) We’ll take our first question from Jerry Doctrow with Stifel Nicolaus.
Jerry Doctrow – Stifel Nicolaus
We’re all delighted as you are to be on this call I’m sure so just a couple quick things, I was wondering if you can separate maintenance cap ex from your total cap ex spending because it looked like there was more than just maintenance in there based on the unit cost and I was also curious if any of the issues in the tax exempt market like auction rate securities are causing you any potential risk in terms of the guarantees whether in Greystone – where I guess really coming out of Greystone?
Paul J. Klaassen
Going in reverse order we do have some auction rate securities but the auction rate securities that we have in our inside the insurance captive and are included in the unrestricted cash balances.
Jerry Doctrow – Stifel Nicolaus
But there’s been no disruption at Greystone with their tax exempt borrowings for some of their projects?
Paul J. Klaassen
Not to date. Jerry, we’d have to get back to you on that cap ex question.
Operator
Our next question will come from Frank Morgan with Jeffries & Company.
Frank Morgan – Jefferies & Company
Quick question here on your operating results that you talked about for the fourth quarter of 07, I’m curious if you could maybe give us a good run rate on facility operating margins in your consolidated and in your joint venture portfolios? I know that margin has bounced around quite a bit and you did mention the $15.4 million credit you got in the fourth quarter, so in terms of just giving us a good idea of where the run rate is on margins given the $15.4 million credit, what should we be thinking about in terms of margins and of the $15.4 million how much of that would you allocate to your consolidated portfolio versus the JV portfolio?
Paul J. Klaassen
A lot of questions there, Frank. Take a stab at –
Frank Morgan – Jefferies & Company
It’s been a long time.
Paul J. Klaassen
One of the things though that I’ve been a broken record on is trying to urge people to look at your sector to look at EBITDA per unit, to look at growth in EBITDA and not to focus on margins partially because the portfolios change number two and most importantly perhaps you can’t eat margin. People really should be focused on I believe cash flow. Independent living has a higher margin than say assisted living but frankly multi-family housing has the highest margins. That doesn’t really to us and our capital partners, that isn’t the right metric.
Frank Morgan – Jefferies & Company
What would be a good NOI for occupied unit for the consolidated versus the joint venture understanding that there’s $15 million of unusual stuff in the fourth quarter, how about that?
Paul J. Klaassen
Well, I don’t have that number right in front of me right here. I think one of the – does anybody else want to take a stab on that one. I mean you can get to that margin by obviously.
Frank Morgan – Jefferies & Company
We came to it, it just kind of popped up a lot in the fourth quarter and I was just having a problem trying to allocate because of that $15 million credit you got I guess on that liability accrual reversals. I’m just for calculating a NAV of the company and doing a calculation I’m just curious about how much of that $15.4 million should we allocate to the consolidated portfolio versus the JV portfolio.
Richard J. Nadeau
Generally, when we look at a credit like that something between 25 and 30% generally follows back to the consolidated. Now, that does get complicated because you do have incentive management fees that can wind up giving us a greater percentage of that. But generally when we go through and we have an item like that that runs through all the different pieces 25 to 30% comes back to our consolidated community.
Frank Morgan – Jefferies & Company
Okay.
Richard J. Nadeau
Now, by margins I think that you’re talking about the same community revenues, right?
Frank Morgan – Jefferies & Company
Yeah. That’s correct. We had just put a note out doing a NAV analysis and yeah it was on the same community results. When you look at the margins it definitely – the consolidated margins it seemed to have an impact there the $15.4 million.
Richard J. Nadeau
Well yes, I think if you look at what we’ve reported over the last several quarters I think those are margins that we think will be representative going forward. There was a benefit in that fourth quarter as a result of that margin and I think in that press release we tried to show the margin without that particular credit in it.
Frank Morgan – Jefferies & Company
Okay. But, once again is there anyway – I’m looking at that press release and it was looking at results on the consolidated portfolio you had like a 31% margin and it had been like 23% in the previous quarter. Then for the communities in venture it was 38.9 for an average of those two of 26.3% and I think you said in that press release excluding the add back that the results of the total same store were 31% taking out the $15 million. I was just curious if you tried to allocate how much of the margin change occurs from the $15 million, how much would the margin change in the consolidated versus the communities in venture? If that makes any sense?
Paul J. Klaassen
Good question.
Richard J. Nadeau
I think I’m following you, I think that the third quarter of 07 is what we would consider to be a reasonable proxy for where we go. I think with respect to our consolidated communities we’re generally in the mid 20s on the margin but that when you get into the ventures you’ll have more of the mansion products and you’ll be in the mid 30s, let’s say 35 to 38% on those margins is what you ought to be expecting.
Frank Morgan – Jefferies & Company
Okay. And really given that the consolidated portfolio is kind of going to be the non mansion stuff and it may from time-to-time include development activity that you’re actually carrying on in your own books and not JVing out, is it pretty fair to say that there’s no reason to really expect that to go up a lot if it’s running in the low to mid 20s there’s no reason to expect that ever getting much higher?
Richard J. Nadeau
Yeah, I would attribute it to the first comment you made, it’s really more the type of product that is in those consolidated communities is really the reason those margins are less.
Frank Morgan – Jefferies & Company
Okay. Let me ask one more and I’ll jump back in the queue. In the – I guess it was page 82 of the release you went through all your 1045 potential exposures and I know that there were some of those that were like unlimited exposure and I don’t know if that refers to the comments you made right there at the very end. But, as a practical matter other than the operating deficit you disclose on Germany what has been in your experience otherwise on a practical basis related to operating deficit agreements or on those income guarantee levels?
Richard J. Nadeau
Well, I think if you look over in the far right column on that chart that you’re referring to we did not fund anything in 2006 on the operating deficit guarantees and less than $1 million on the income support. We have had some funding in prior years but they have not been significant. This was three very significant items that hit us and as I tried to explain three discreet and different reasons for them. One, the condominium project a new type of project for us. Two, Germany entering into a new country and as Paul said we have been disappointed with the slowness of the product acceptance. And, the last one The Fountains’ acquisition.
Paul J. Klaassen
Previous to 2006 a number one or two small, the money that we advanced were loans in the area of construction guarantees but previous to 2006 I think the word that you used Rick they were non-material or very small and I believe we were paid back on those.
Richard J. Nadeau
Most of those funds on operating deficits or guarantees or income support are considered loans and we’re able to recover them from future operations of the community to which they were lent.
Frank Morgan – Jefferies & Company
Right. So, unless you just run in to some really structural bad market I guess kind of like Germany, maybe you call that one or maybe you’re not ready to throw in the towel there but unless you run into any more Germanys the odds are that you’re not going to see significant funding requirements and if you do eventually you can recoup those. Am I following you correctly?
Richard J. Nadeau
That is what I’m trying to say.
Paul J. Klaassen
On top of which is you know, with now a thorough understand of the [inaudible] guarantees clearly they’re some of the things that triggered the accounting restatement. We are simply also just changing our policies to the kind of guarantees we’ll give or won’t give and unlimited guarantees in terms of scope and time we’re just not giving.
Richard J. Nadeau
To complete the answer we are entitled to get those loans we’re making in to Germany back. Our projection is we will not have significant cash flow in that investment in the short enough period of time to realize those receivables back and we will not be entitled to get the cash back on The Fountains’, that one is different. That’s why they’ve been expensed as a corresponding asset.
Frank Morgan – Jefferies & Company
Hey, have you actually provided your preliminary unaudited 07 financials to your bank groups yet? I know their deadline is coming up in April for preliminary results and I’m just curious have they already seen those? Do you have those to them yet, the preliminary unaudited 07?
Richard J. Nadeau
Not yet. We are in the process of closing the books for 2007 and that timeline is consistent with our internal work plans.
Operator
(Operator Instructions) We’ll next go to Derrick Dagnan with Avondale Partners.
Derrick Dagnan – Avondale Partners
I wanted to ask a question about you just recently mentioned the change in the policy with respect to guarantees and when you look at the capital partners that you have how significant is that when you look forward into the development portfolio and do you think that change will have a major impact on our ability to bring partners into some of the properties that you’re currently under construction on?
Paul J. Klaassen
No, it really doesn’t. We have done a good amount of development, we have a great group of capital partners, candidly it’s a growing group of capital partners. People want to be in the senior living space and have some exposure to what’s going on there usually end up calling frankly the structure that we have in place on those are not requiring these types of guarantees. Number two, if you look at the three areas that Rick mentioned those are not typical. One was an acquisition and an unusually structured one in a way that we don’t typically structure the other one has to do with a condo project. There were a host of reasons why the construction costs which I think we covered on previous calls, construction delays, problems with the permits, construction costs that were committed to before we got the contract finalized. And, Germany has its own – we would today not do an operating deficit agreement like that which is disproportionate to our ownership percentage. We have successfully signed up a good number of new joint ventures with development partners without those being necessary.
Derrick Dagnan – Avondale Partners
Good. I’ll ask one other question and I’ll jump back. Two or three years ago when you started working on the condos and moving into Germany and you mentioned this on the call that you significantly ramped up your development team throwing significant resources in there and bringing on a number of new people and I guess when you look at the pipeline now while it’s still robust it seems like obviously you’re going back to the basics here on what’s worked in the past. So, when you talk about potential reductions in costs in the future is there room in your development staff or development efforts where you can pair back some costs? Or, is that not a hope?
Paul J. Klaassen
Well, what we did 18 months ago or so is we increased our commitment to our development infrastructure because we saw a period going ahead for the next several years to as positive as I’ve seen where in terms of a market for developing our mansion product and we are seeing that. The numbers I gave earlier, the increased count in revenue capacity, the 44 projects under construction now, the number of buildings we have completed and we expect. Our three year plan that we announced previously the only way to get that done was to increase our development infrastructure and that part of our business is working very, very well and I’m really happy that we made that commitment because our expectations were 08, 09 and 2010 all of which we’re working on right now, we saw 4,400 resident capacity increase this year alone is just over 52,000 that’s right there alone a very significant 8% plus increase in resident capacities just by new construction. So, we have no plans to slow that down in fact, our 09 numbers which I haven’t given out in great detail, they’ll be up from these. This is a fantastic time to be building brand new senior living product in the major metros and you can see that in our commitment to 101 properties that we’ve taken down and have under contract. By the way that 101 properties that’s not all in one year that’s probably a two and a half years given the two years it takes to get zoning and permitting, that will take several years to build out.
Derrick Dagnan – Avondale Partners
Alright. I was just concerned that maybe you had invested significant resources in development in to Germany that you frankly you no longer can use and that’s not the case.
Paul J. Klaassen
That’s correct. We’ve stopped our construction and we have reduced our development infrastructure in Germany some time ago. That’s not where we’re – we stopped that a good while back.
Operator
Our next question will come from Ryan Daniels with William Blair.
Analyst for Ryan Daniels – William Blair
First, I have a follow up question on the bank dates for delivery of the 2007 and 2008 financials. Can you provide a little more color on those dates and whether you think it will take that long to deliver the financial statements? Or, did you simply just want some extra cushion?
Richard J. Nadeau
2007 Form 10K according to our bank credit facility is due on or before July 31, 2008. The New York Stock Exchange deadline would be September 17, 2008. The Form 10Q for the first quarter I believe is due August 20th and the second quarter 10K for 2008 is due September 10th. Those are the dates under the bank credit facility. Obviously, the SEC deadlines are earlier for those. I believe that we will not be needing to go to September 17th but I do believe it will not be done significantly before December 31.
Analyst for Ryan Daniels – William Blair
Thank you, that’s very helpful. Moving on to the international front what is it in your view with Germany that makes this market less successful especially giving how overwhelmingly successful your UK experience has been? And, given the build in the UK and the land now that you have in the US should we assume that the bulk of future growth will be in the US and UK related?
Paul J. Klaassen
The last part of that is real easy, 100% of our 101 sites are in the UK and the United States and Canada. If we had a really easy answer or understood exactly why we’ve been less successful in Germany you can be sure we would have implemented an initiative to take advantage of it. I will say that we have had challenges in new markets before as we have to train local nationals. In this case translate concepts, educate a population and referral network, there’s a lot of – understand how we fit into the regulatory and existing healthcare system. In this particular case we built a very high quality product in Germany, we’re having more success in certain regions than others. We have got several initiatives underway right now. We are by no means walking away here from this. We have several new initiatives underway, we hope to do much better. We did open because we were a lot bigger when we went in to other countries maybe we should have in hindsight just opened one or two communities and waited for a few years but we opened a good number of them about the same time which was a challenge as well. So, it’s got a lot of our attention, I’m proud of the work we do there. We have some very, very happy customers, some beautiful communities. For whatever reason and we are getting betters at openings. The more recent openings have done better than the first ones. We’re hard at work at this. Tiff do you want to add anything from an operating perspective?
Tiffany L. Tomasso
No, I think you’ve covered it well. I’d say that I think some of the differences between Germany and maybe some of the other international markets we’ve opened is we are dealing with a different language so the team having to assimilate the knowledge of the product and then translate that particularly in the first three or four took some time. As they’ve gained that experience we’ve been able to move team members from the original communities to some of the newer communities. We’ve seen their ability to be able to communicate and articulate that to the marketplace better. We’ve seen some better lease ups or early commitments in the later communities. The southern markets in Germany, Frankfurt and Munich have responded better to the product than the northern markets. As Paul said we are putting in and we’ve done some pricing changes and we’re not giving up. The communities in the south are leasing better than what we’re seeing the ones in the north and we are continuing to stay focused on it.
Paul J. Klaassen
One difference between the countries and I’m not sure how significant it is but in the United States and in the UK particularly we have seen tremendous appreciation of home value that’s provided a very significant source of wealth and income for the private pay senior living resident. That same level of appreciation has not occurred in Germany. It appears to be, and we have yet to crack people’s willingness to spend the kind of dollars on high quality senior living options that we have seen people willing to do in the United States and certainly in the UK.
Tiffany L. Tomasso
The other big difference I should mention in Germany compared to all of the other markets that we operate in is we have the flexibility in the UK, Canada and the US obviously to adjust pricing based on market conditions and consumer acceptance, based on unit type, based on supply and demand factors. We don’t have that same degree of flexibility to do that in Germany. There’s rate regulation on rents and it’s a more complicated process that has longer term financial impact. So, that’s been a factor, we’ve taken that into account, we’re doing some discounting now. We are starting to see some acceptance as a result of that.
Analyst for Ryan Daniels – William Blair
Then I have one final question related to hospice caps, how many of Sunrises’ sites are impacted by the hospice caps? And, more specific how are you controlling this and does the lawsuit impact at all?
Tiffany L. Tomasso
Well, I will deal with the first two and then maybe turn it over – and the lawsuit one last. As it relates to Medicare cap it’s isolated to a few of the existing centers. We have 21 programs, it’s isolated to a few so it’s not across the board. It tends to be in the states that are more heavily impacted, more competition less dense. How we’re dealing with it is twofold. One, we have been more selective in both our admission criteria and in the recertification criteria to really look at and focus on length of stay so the appropriateness at the onset and then at the 90 day mark. If a patient is not hospice appropriate or decline discharge them off service. The second big focus area is really on our marketing and sales efforts to increase referral streams from referral sources that are going to result in a patient mix with a different diagnosis code and shorter length of stay. So, those are the two main priorities that we’re focused on. Your last question if you could repeat it related to the lawsuit.
Analyst for Ryan Daniels – William Blair
Yes. Does the lawsuit impact any of this?
Tiffany L. Tomasso
I don’t think directly. I think it’s more that we’ve looked at why have we had cap exposure in certain markets, looking at the length of stay and really redirecting and recalibrating the admission criteria, getting our medical directors more consistently involved particularly at the regional medical director level in those decisions both at the admission process and then at the certification process.
Operator
Our next question is from Doug Rothschild with [Stogen] Capital.
Doug Rothschild – [Stogen] Capital
A question about the financing for your projects, I wanted to know if Fanny Mae is active in the assisted living sector?
Richard J. Nadeau
Yes, they are one of the lenders that we frequently talk to.
Doug Rothschild – [Stogen] Capital
Then you had mentioned in terms of the use of cash part of it was to fund construction in progress, are you able to update the construction in progress number?
Richard J. Nadeau
We haven’t closed the books for 2007 but I do know the number is bigger than it was in 2006.
Doug Rothschild – [Stogen] Capital
Okay. Then lastly, on the G&A you had mentioned that you guys are focused on the growth in G&A and it’s not lost on you. Can you talk a little bit more on what you guys see happening to G&A in the future, how you plan on cutting costs?
Richard J. Nadeau
Well, we look at G&A in two components a portion that is fixed and will grow with inflation and a portion that is stair stepped that grows as we add communities. One thing we do is if we had 20 communities we know that there’s an additional G&A load that comes in with that. But, more importantly, I think we’ve made some investment in our accounting infrastructure and in our IT infrastructure that we’re hoping will pay off for us as we become more efficient. We have got to replace people with technology in some cases in our accounting shop in our home office. So, those are the types of things we’re looking at but that is something now that we’re through the accounting restatement and the special committee investigation that we will be spending some time as a management group looking at real hard.
Operator
We’ll next go to Jerry Doctrow with Stifel Nicolaus.
Jerry Doctrow – Stifel Nicolaus & Company, Inc.
Just a follow up, I think Paul you touched on this earlier but there is a reference in the K to increasing somewhat your focus on IL, rental IL including maybe cottages and that sort of thing and I wondered if you could give us just a little more color as to the magnitude of that and how it’s sort of affecting your relative focus on the ALZ versus that part of the market?
Paul J. Klaassen
Tiffany can join me in a second on this as she’s very focused on the development pipeline and what we’re building and where and that’s very aligned with operations. One of the things first of all if we gave you that impression that is not the case. The realty is the reverse we are very much focused on where do we absolutely do the best, where do we have the best results we built and that is on our core management products. Now, we do build that in different sizes, shapes and flavors. By the way cottages are also assisted living. We have more memory care product, about 50% of our population, all of our communities is either living in one of our memory care neighborhoods or has memory care needs. Our population is probably – well, you’re the one guy who would really understand it because you’ve followed us the most but, for most people it’s a frailer population and a more need driven population than people believe or know. Less than 20% of our residents live in IL and our IL still is quite service intensive and we’re providing a lot of ala carte services into our independent living. We’ve done a really good job there, we know it well, we think that’s where the depth in the market is, that’s where the existing supply is the most stale and old and that’s where we’re going to be predominately focused with our 08 and 09 pipeline.
Jerry Doctrow – Stifel Nicolaus & Company, Inc.
So, you know again there’s a reference in the K, is it in terms of just development pipeline, in terms of something that would be sort of an IL product like the one in Toronto that you opened, is that like 10% of the total or 20% of the total?
Tiffany L. Tomasso
In 2007 about 80% of the units that we broke ground on in North America and Europe where our core mansion and the pipeline for 08 and 09 I’d say probably 80 to 85% core mansion units.
Operator
Our next question is from [Asid Hamin] with SG Asset Management.
Analyst for [Asid Hamin] – SG Asset Management
I have two questions, the first is related to liquidity, you mentioned that you have unleveraged assets, can you describe what those are?
Richard J. Nadeau
We’ve got about 20 to 25 consolidated properties that don’t have mortgages on them and I think we will be looking to place mortgage debt on some of those during 2008.
Analyst for [Asid Hamin] – SG Asset Management
How many rooms total approximately?
Richard J. Nadeau
I’m not sure. It will be a financing that will be greater than $100 million.
Analyst for [Asid Hamin] – SG Asset Management
Right. Which means that in order to continue with your expansion plan you will need to put some debt on those?
Richard J. Nadeau
Yeah, we’ll put the debt on it but we will use that money to pay down our draw on the credit facility. I will project that when that financing comes in we will take our draws on our bank credit facility to zero.
Analyst for [Asid Hamin] – SG Asset Management
Okay. Out of curiosity notes receivable, you haven’t really discussed that, loans that you’ve made outstanding as of February 29th approximately how much is that?
Richard J. Nadeau
I’d have to get back to you on that. That number has gotten smaller over time.
Analyst for [Asid Hamin] – SG Asset Management
Okay. Finally, Mark Ordan, it seems like just judging from recent activity in the past it sounds like just based on the resume you got somebody in here who can operationally turnaround and someone who can help out a lot. It seems like based on how much stock he’s getting that he’s somebody highly valuable. Can you describe what his mission is? What do you hope he can achieve for Sunrise? And, if he’d like to speak that would be great too.
Mark S. Ordan
I think there are a variety of areas that I think I can help with. I think I understand the real estate business, I understand operations, I understand the capital markets and I understand governance and just the nuts and bolts of running a business. So, I hope that I can work quickly to become part of the team and help in all of those areas to support Paul and Tiffany and Rick and the team to help build the company. That’s why I’m here. And, I appreciate your compliment on my resume.
Analyst for [Asid Hamin] – SG Asset Management
I guess then it sounds – I’m very happy that we can build this business but I guess operationally were there any targets that you came in to solve XYZ problems? Or, is it just supporting Paul? What is fundamental objective of you coming to Sunrise?
Paul J. Klaassen
Let me take a stab at that too for a second. With the departure of Tom Newell we lost a senior executive. The whole area of capital markets we are a large consumer of debt and equity, capital partner relationships, the whole area of admin work, governance. We clearly could use an executive around here that has public company experience, the experience of course that Mark had at The Mills where he worked with Rick closely paralleled in some ways the things that we’ve been dealing with in terms of dealing with a lengthy restatement. Mark has been an entrepreneur, he [inaudible], he’s grown companies. I’ve known Mark personally and by reputation by living in the Washington market for a long time. I’ve seen the respect that he has in the business community. It was frankly not a very difficult decision to make. We have a lot going on here, we’re a multibillion company and growing and lots of opportunity and Mark was looking for a place to leave his mark, to make a bad pun and this was a good home for him and I wouldn’t read much more in to it than just that. We’re delighted he’s on the team, he’s been here a week and his to-do list, his inbox is already overflowing. There’s just a lot of opportunity here particularly as we have the restatement behind us now and we focus on implementing a growth plan. Think about it, we just announced we have $1 billion under construction, we have about $1 billion $1.5 billion next year. There’s a lot to do here and we’re delighted to have an extra set of shoulders around here to help carry the load.
Operator
Our next question is from Frank Morgan, Jefferies & Company.
Frank Morgan – Jefferies & Company
A question on the land purchases or options, I think it was like a $400 million of value there. What percentage of that can you get out of without any kind – and how much capital have you already committed to those purchases? And, what percentage can you actually get out free and clear without any incremental capital contributions?
Paul J. Klaassen
First of all let me make that real clearly, we don’t want to get out of any of them. I sure hope we get the zoning on all 101 of them. So, number two if we don’t get the zoning on them we lose very, very little a few million bucks, some deposits that we’d lose if we just walked away from them but we have no plans of walking away and in almost all these cases are cancelable if we don’t get the zoning. Let me jump to [inaudible] one of the deals which is the $400 million for 101 sites first of all, that would be built out over several years as part of a multibillion build out f course. I think one question I’ve received was, “Isn’t that expensive?” Well let me just say a word on that first of all land is a percentage of the cost to the resident. I think it works out to be a little bit less than 5% or so of the total charge to the resident. And, we have discovered that often times if you were to rank order our 20 most expensive sites that we’ve ever paid for they’re arguable 20 of our best Sunrises.
This sector has not learned yet enough about this but even businesses as diverse as Starbucks and McDonalds with the best real estate, you travel anywhere in the world you’ll see the smart companies know that having primo locations and paying up for it is good business. Our sector, I’ll say senior living has not – I think in the past it has been too focused on building cheap square footage and trying to get land cheap. But, I think that’s a false economy. To put it another way, if we only paid $200 million for those 101 sites it would not affect much the rate we charge the resident but I will tell you that if we only paid $200 million for those 100 sites it would dramatically lessen the quality of where we would be building. So don’t count on us to go and look for the cheapest land in town.
Frank Morgan – Jefferies & Company
Well, I guess on that same subject, if you could kind of update us, I know it’s been a while where you on average if you had to segregate in your three major markets US, Canada and the UK, where are the construction costs running these days either per building or per unit given how the world has changed over the last couple of years? If you could update us there. Then, one final question is just time frames on the OIG side, the SEC investigation and finally the IRS audit and is there any likelihood that you’ll be filing amended returns perhaps seeking refunds as you restate all these earnings?
Richard J. Nadeau
Yes, we will have to file some amended tax returns and yes the IRS is auditing us but we don’t see any particular issues that we did not anticipate. We haven’t had at this point anything that has surprised us in that regard. John, do you want to handle the OIG question.
John F. Gaul
Sure. With respect to the OIG and the SEC on those two separate matters we are working with both of them on those two fronts although it’s impossible to speculate as to an end date on either of those right now.
Paul J. Klaassen
To your first question, you know it varies by geography predominately but $250 a square foot wouldn’t be a bad number to kind of pencil us in at. Again, by the way I feel the same way about square footage costs as we do about land. Could we build them for $50 a square foot less? Sure we could but you’d see it, you’d really notice it and Sunrise didn’t get here by trying to put in cheap drop in ceiling tile and build cheap square footage. In general what we are seeing out there the few contractors that I’ve spoken with the last 45 days is an expectation that in some markets you’re seeing particularly with the earliest [inaudible] subcontractors with foundation people, with some steel, we build as you know full institutional I2 buildings which are typically structural steel, that we are seeing a bit of moderating, a little more aggressiveness, more subs willing to bid. I’m getting more land thrown at us, opportunities than ever before because of the softening in other real estate sectors. So, it’s too early to tell really but from our perspective trending the right way compared to say a year ago.
Frank Morgan – Jefferies & Company
In that $250 a foot could you just do the math? In terms of a building what would that translate in to of an average Sunrise prototype mansion?
Paul J. Klaassen
They really range from $20 to $40 million. I mean, literally depending all in costs and depending what we pay for land, where it is. If you were to use a $25 to $30 million you’d capture most of them.
Tiffany L. Tomasso
That’s the total project costs.
Paul J. Klaassen
That’s a total project everything from fill up reserves, marketing, land, development fees, all of that.
Operator
Our next question is from Marc Yukelson with J Goldman & Company.
Marc Yukelson – J Goldman & Company
I just have two questions for you guys first, just on G&A I guess if you look at it as a percentage of revenue under management it has kind of spiked up the past two years. I was wondering if you could speak to that and how you think about that going forward?
Paul J. Klaassen
We’ve touched on that before and then the question that Rick answered. Frankly, we’ll probably have some more focus on that when we do our investor day later this year. It’s a good question, we’re very focused on it, we’re looking at what areas of our infrastructure that we make investments in could be scalable, that don’t need to grow as much. We did see it come down over the years from say the last seven or eight years in general as a percentage of revenue under management. We’re making some significant investments now particularly in our finance and accounting area and we’ll give you more color on what kind of number to put in going forward in the months to come maybe as soon as next month on our May call.
Marc Yukelson – J Goldman & Company
Other than the one-time things you [inaudible] in the 10K though, are there any other explanation for why it’s gone up? Any other obvious explanations why it’s gone up?
Paul J. Klaassen
Well, a lot of it is also our investment in growth. We probably have to – we’ll take a look at how we split this out going forward. Obviously, a lot of our infrastructure is not just for the Sunrise we have today but it’s to build the Sunrise and the training programs and the development infrastructure and capacity for tomorrow.
Marc Yukelson – J Goldman & Company
Right. Then just lastly, other than the than the Greystone revenue that are deferred are there any sort of leveraged development related – are there any sort of developmental profits that you aren’t sort of recognizing that you use to? Or, that perhaps one could argue that you should be recognizing that we should think about?
Richard J. Nadeau
You’re talking about Greystone?
Marc Yukelson – J Goldman & Company
Well yeah, I think you defer some of the revenues of that.
Richard J. Nadeau
We’re deferring most of the revenue and actually in 2005 it was 99% of the revenues that Greystone had in the particular development class that was an issue. Then, we deferred $15 million of development fee but it really was the entire fee that they get and it’s being recognized on the backend despite the fact that we have collected the cash based on the milestones that have occurred. So, we do the billings based on milestones. Originally we had done the accounting as a company based on the milestones and as we worked it through with the auditors the determination that we made was that we couldn’t measure the revenue with sufficient specificity so it had to be deferred to the end. So, we are going to be putting in a labor tracking system on a going forward basis so that we can demonstrate the amount of the revenue that we’ve actually earned and get it into a more proportional revenue recognition scheme.
Marc Yukelson – J Goldman & Company
Right. I mean can you give any sense of did you recognize any revenue that was deferred in 05 and 06?
Richard J. Nadeau
We had $13 million that we deferred in 05 and incremental another $15 million of deferral in 06 so we had $28 million in deferred revenue at the end of 06. We also did have some North American development fees that were deferred as a result of our accounting restatement, you know on real estate sales accounts.
Marc Yukelson – J Goldman & Company
Right. Could you maybe just provide a little color on thinking about the magnitude of development fees that you’re not going to be recognizing that you might have recognized earlier previously?
Richard J. Nadeau
Well, that’s the revenue I was referring to that will come flipping back to us. In 2006 we had $70 million of gains on sales that will come in in 2007, that’s a pre-audited number obviously. Then, we should have another significant chunk in 2008 and then most of that accounting restatement will have come back to us at that point.
Operator
We do have one question remaining. (Operator Instructions) We’ll next go to Adam Rashed with Eminence Capital.
Adam Rashed – Eminence Capital
Just one quick question, I noticed that you restated downwards the reimbursable contract services revenue and I know that had no impact to profits because the costs are also restated down by the same exact amount. But, I’m just wondering how does that affect the relationship with the ventures, or the property owners? Is that restatement a function of a different assessment of the costs to be passed through?
Richard J. Nadeau
No, that was a mechanical error that had been made. Those are cost plus types of contracts and what we’re suppose to be putting in the cost and the reimbursable revenue is for the costs that are items that we are primarily responsible there. Therefore, that would be Sunrises’ payroll, that would be food costs and other costs that come through on the national contracts that we are actually the primary obligor for then are reimbursed for by the venture communities. What we had done in the past was if there were additional costs that we really were not the primary obligor for and we were recording it as expense and revenue incorrectly so. So, you are right we gross that back down but that was fore costs that never really should have gone through our income statement.
Paul J. Klaassen
But the impacts to the partner were zero. You saw an example of something like this would be real estate taxes. We still paid it but it shouldn’t have been run through our books and then reimbursed. It should have just been paid directly by the venture. This is not an issue between s and our capital partners at all. Candidly, we should have done it that way before that’s why it just showed up as an equal dollar-for-dollar change on both sides of the ledger.
Adam Rashed – Eminence Capital
But on the restatement are the partners now going to have to bear these costs themselves?
Richard J. Nadeau
No, no, no. Completely unrelated to our relations, our contractual relationship with the venture partners. It was just an accounting mistake. We had grossed up too much expense and too much revenue. It was a bookkeeping error.
Paul J. Klaassen
The net impact to the capital partner is zero as well. For example, my example here of the real estate taxes I’m not going to pay it twice or one way they pay it and the other way they don’t. The real estate taxes are paid by the community and when it ran through our books we got reimbursed by them. So, the NOI of the property doesn’t change either way so the impact to the capital partner is zero and frankly, the impact to Sunrise is zero.
Adam Rashed – Eminence Capital
And the $900 million of costs to complete the 44 communities, so that financing is all completely in place?
Paul J. Klaassen
That’s correct.
Richard J. Nadeau
Yes. And in fact, Sunrise only has $13 million of our particular money to put in. The rest of it will be coming from joint venture partners and from construction lending.
Adam Rashed – Eminence Capital
And given the recent turmoil in the credit markets have the terms on that changed at all either higher rates or stricter covenants or stricter loan-to-value ratios?
Richard J. Nadeau
We have seen some pressure on the loan-to-cost ratios, they have moved. I think that we’re actually modeling something more like 72% loan-to-cost at this point. And, we’ve seen some movement on spreads but we’ve found construction financing is available at reasonable terms.
Paul J. Klaassen
I asked some of our debt folks that the other day when I was on a conference with a bunch of lenders and the net effect of rates to us have not changed much even though the spreads have a little bit because clearly LIBOR has gone down some. So, the net effect is actually below what we’ve been modeling in our pro forma’s for some time. We’ll see what happens to the rate environment. We don’t expect that we’ll being paying more for construction debt than we’re modeling or frankly, more than what we have been for the last period of time. Given the fact that we are always modeling 25 to 30% equity anyway paying a little bit more equity – I think I’m very cautious about the credit markets but I have to say that I’m much happier with these kind of credit markets than easy capital credit markets. In markets like these, take $10 million of cash to do a $30 million building. The number of people who are going to be able to get financing is limited and the worst environments for us would be when you get high loan-to-value, non recourse, easy construction and easy equity. I hope actually we have a relatively constrained tight credit market selfishly because I think it’s good for our shareholders and it will be good for the demand supply fundamentals. So only good projects will get financed and only experienced developers with a good track record will get their projects up and that’s a good market for all of us.
Adam Rashed – Eminence Capital
Just one quick clarification, I think you mentioned before that the 2007 10K is due by July 31st for the bank lenders and for the NYC the deadline is September 17th. It sounded like you expected to meet the September 17th date but the July 31st would you expect to meet that too?
Richard J. Nadeau
Yes.
Operator
We do have a follow up from Doug Rothschild with [Stogen] Capital
Doug Rothschild – [Stogen] Capital
I had two quick questions for Rick and I guess one for Paul. Rick is it safe to assume going through the process to file your 2006 10K that while you’re doing that you had to focus a lot on the 2007 issues as well and therefore should be a lot easier to go through the 07 10K.
Richard J. Nadeau
Yes. We did have to go through a lot of those transactions for 2007. If you look in the front of the 10K we did make good disclosure of the significant transactions. We also had one of the remediation items that had been put in there before I got here. And, September 07 was – the Chief Accounting officer had hired an accounting policy group vice president and had actually hired other people into that group. So, they did a good job throughout 2007 of keeping up with the transaction memos. We actually have a policy here where if we write the transaction memos and understand the accounting before we close transactions and that started early in 2007. So, we do have a good running start on 2007. The other thing is that due to some of the material weaknesses that we admitted to in the 2006 10K we did put in some very extensive reconciliation processes and all of our accounts. So, I do believe we’re starting with a pretty good balance sheet going in to 2007. I don’t think we have a lot of – we know what’s in the accounts.
The other thing that we have going for us is that I do believe that in 2007 we have fewer transactions, they may have been bigger transactions but there are actually fewer in number and less in complexity than some of the things that we had. Plus the fact , I don’t want to make this job too easy for the accounting group but I certainly think they will prefer to close one year as opposed to going back and trying to close six or seven years.
Doug Rothschild – [Stogen] Capital
Right. Then, just so I understand on the Germany guarantees you’re saying technical there’s a possibility that you guys can get the money back? Have you assumed that you can’t because that’s the way the auditors treat it? Or, in your own opinion do you think there’s no way Germany could ever recover to get that money back?
Richard J. Nadeau
The issue is that a vast majority of that cash goes in property by property. So, it’s not actually crossed among the nine properties and some of it is falling and some of the properties that as Tiffany indicated are in the north and so our chances of recovery of those particular receivables is less than it is in the south. We made the determination on that ourselves and the auditor did agree with us.
Doug Rothschild – [Stogen] Capital
Then lastly for Paul, if you don’t mind you haven’t spoken much about the management business, how that’s looking, the profitability and the outlook?
Paul J. Klaassen
I’m not quite sure what you mean by the management business. In terms of –
Doug Rothschild – [Stogen] Capital
The management fee business where you guys – you know for third parties.
Paul J. Klaassen
Yeah, we don’t – our growth, our real focus is growing our management business through new construction. There will be an occasional property here or there that someone will give us a contract for, there always are a few every year. But, we don’t model in – we’re not modeling the pickup of management business through acquisition. We’ll look at opportunities as they come up as a leader in the field should but we’ve done a really good job in the area of growing our management business through new construction. Our development officers jokingly say they’re kind of in the business of building management contracts for Tiffany and the operations group and that’s the way we kind of see it. Because of course, one of the most important benefits that come from a ground breaking is a 30 year management contract.
Doug Rothschild – [Stogen] Capital
Right. I guess what I’m asking is we haven’t heard from you in a while but how are the margins and the profitability of that business be it from a third party or through construction. Is that still a viable and good business at this point?
Paul J. Klaassen
Sure. This is clearly why we’re building and that’s why I’m so glad we’re sticking to the top markets that we’re in now. The margin on a 15th community in Boston is clearly higher margin than the first one. So, as we continue to build out these major metro areas, the infrastructure that we have in place becomes – you know, we have to add less and less additional infrastructure which is one reason why we’ve seen our G&A which we’ve spent some time talking about. But, come down from where it was five, six, seven years ago north of 10% down more into the middle single digits. We hope as we continue to grow and add hundreds of millions of dollars of revenue every year that we will be able to continue to see that go the right direction. But, clearly management contracts are profitable for us today and we expect they will be in the future.
Operator
With that there are no further questions in the queue. I’d like to turn the call to Paul Klaassen for our closing comments.
Paul J. Klaassen
Well, I want to thank everybody for their questions and their patience particularly during this process the last year and you’re ongoing support of Sunrise Senior Living. We look forward to updating you as soon as possible about our 07 filing status and we will be providing you regularly quarterly updates again in May. Till next month.
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