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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) Q2 2012 Results Earnings Call August 3, 2012 9:00 AM ET

Operator

Good day. And welcome to the Sunrise Senior Living Second Quarter Earnings Conference Call. Today’s conference is being recorded.

At this time, I’ll turn the conference over to Mr. Tim Smith. Please go ahead, sir.

Tim Smith

Thank you. And welcome to Sunrise Senior Living’s second quarter 2012 investor conference call. This is Tim Smith of Sunrise’s Investor Relations.

Before we begin, let me remind you that this call is being recorded and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.

During the course of this call, the company will make various remarks concerning management’s expectations, predictions, plans and prospects that constitute forward-looking statements.

Actual results may differ materially from those anticipated by these forward-looking statements. 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. We are pleased to speak about another overall solid quarter for Sunrise Senior Living. Our quarter-over-quarter stabilized occupancy increased 90 basis points to 88.1%, which is even with our first quarter results.

Our current quarter is off to a strong start. Our results always vary regionally and we have even very pleased recently by strength in our West Coast communities where we have a large concentration.

Our average revenue per occupied unit grew 2.4% to the second quarter of 2012 over the same period in 2011 and 1.2% sequentially. NOI grew 1.6% quarter-over-quarter for stabilized communities and 2.9% overall.

General and administrative expenses were $25.2 million for the quarter, compared to $27.6 million for the same period in 2011. The decrease in the period is primarily due to $1.1 million of severance expense is paid in 2011 relating to the reduction of 20 positions at our corporate and regional offices, compared to $300,000 in severance cost in 2012.

As a result of those and additional staffing reductions at our corporate and regional offices in 2011, salary expenses decreased by approximately $900,000 in the second quarter of 2012, compared to the second quarter of 2011.

Our adjusted EBITDA for Q2 was $49.7 million versus $39 million for the same period last year. The difference was driven primarily by the 15 community acquisition, which occurred in the latter part of Q2 of 2011, along with our reduced overhead and NOI growth.

As you would expect with very few remaining workout completions to be done, our daily attention in Q2 and beyond is devoted primarily to increasing strength of our operations. While we are reducing our overhead spending, we have been and will continue to spend more on care.

Our costs of care delivery and oversight have increased and are budgeted to continue to grow. Our mission has always in group included the care seniors who are time quite frail. We continue to increase our investment in our care team, including a new quality assurance team and program.

Generally, an information system where we previously lacked resources of steady improvement, we invested more in 2012 and we plan to continue to invest heavily in 2013 and beyond. Here while our spending is broad we are especially focused on short and long-term health care imperatives.

We manage over 300 communities, thanks to the enormous care and efforts of our 30,000 team member. I hope you don’t find my emphasis on my team on an earnings call to mean that’s placed.

We at Sunrise want to do everything we practically can to maximize a happiness and engagement of our team members. In Q2, we launch a new engagement drive in which we spend a great deal of time and effort going around the field, listening to our team members to find better ways to do what we do.

We intend to also to reduce where possible the stress point that is typical on healthcare. Our goal in 2012 and every year forward is to make sure the team members know they are appreciated and their voice counts.

We believe that the benefit of these focus are manifold. Engaged team members stay with us, develop deep ties with our resident and their families, better attract new residents, are more attentive, more innovative and more prepared and eager for career advancement. We all read about the headline positive the senior housing and senior living. It’s our increasingly engaged team that will provide lasting substance to these headlines.

Greg Neeb will shortly describe several key transactions in the second quarter, but I’ll highlight the few of them now. We were pleased to settle our long outstanding litigation with Five Star and to finalize our transition plan for 10 communities to Five Star. While we prefer adding communities, we never want residential team members to be unnecessarily in limbo.

We strengthened Sunrise further with her latest venture with CNL including seven communities. With CNL’s investment, we successfully refinance the debt on these communities. Sunrise received $5 million, while of course, retaining management of these communities.

Next we are happy to have finally begun to make progress on our Fox Hill ventures in Bethesda. We successfully refinance our loans on the assisted living amenity side of this project. Thus closing out with the forked loan, and enabling us to have, we expect to be fruitful discussions with the new lenders on the condominium side.

Finally, while we have no definitive news today on our U.K. debt restructuring, we’ve had positive discussions with our partners and lenders which we hope to conclude very shortly.

I’ll now turn the call over to Marc Richards, our Chief Financial Officer.

Marc Richards

Thank you, Mark. And thank you all for joining us today for Sunrise’s second quarter conference call. Today I will discuss Sunrise’s consolidated operating results for the three and six months ended June 30, 2012, including our recent transactions have impacted our consolidated financial results.

As Mark mentioned earlier, our 2012 second quarter adjusted EBITDA increased by $10.7 million compared to the same period last year. This increase is primarily due to approximately $8.5 million of incremental EBITDA generated from communities acquired in 2011 and 2012, and the decrease of $3 million in general and administrative expenses, excluding non-cash stock compensation expense.

We've adjusted net income before interest taxes, depreciation, amortization and rent expense to further exclude certain non-cash gains and losses, and certain items of income or expenses, and arriving at adjusted.

Net income attributable to common shareholders for the quarter was $9.6 million or $0.16 per fully diluted share, compared to $1.3 million or $0.02 per fully diluted share for the second quarter of 2011.

The change between periods was primarily driven by a $21.7 million return on investment resulting from the sale of 16 venture-owned assets to Ventas, a $5.1 million increase in our share of earnings and unconsolidated communities, which was primarily driven by NOI growth and transaction cost incurred for certain ventures in 2011, but not in 2012, and the $2.3 million reduction in general and administrative expenses in the second quarter of 2012.

The difference between the periods also reflects a $15.6 million impairment charge recorded in 2012 related to in-place leasehold improvements and furniture, fixtures and equipment at 10 communities whose leases are being terminated early, and an $11.3 million gain on fair value for business combinations relating to the acquisition of AL US recorded in the second quarter of 2011.

Management fees for the quarter were $25.3 million, which includes $400,000 of fee income for management contracts that have since been terminated. For the same period last year, management fees were $24.4 million, which includes $1.9 million of fee income for management contracts that have since been terminated or eliminated in consolidation, including $1 million from the 15 AL US communities.

Our second quarter 2012 consolidated and leased community net operating income, excluding the impact of the 15 AL US communities acquired in June of 2011, as well as Santa Monica and the five operating properties acquired from two unconsolidated joint ventures decreased $1 million quarter-or-quarter.

These 21 communities accounted for $23.5 million of incremental resident fee income and $15 million of incremental community expense in our second quarter 2012 consolidated results. 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 adjusted EBITDA of $93.4 million, as compared to $67.2 million last year. This increase was primarily due to approximately $17.3 million of incremental EBITDA generated from communities acquired in 2011 and 2012, and a decrease of $7.2 million in general and administrative expenses excluding non-cash stock compensation expense.

Net income attributable to common shareholders was $11.6 million or $0.20 per fully diluted share for the first six months of 2012, as compared with net loss of $16.4 million or $0.29 per fully diluted share for the first six months of 2011.

The change between periods was primarily driven by a $21.7 million return on investment, resulting from the sale of the 16 venture-owned assets to Ventas, a $7.5 million gain on fair value from business combinations relating to the acquisition of Santa Monica and the transfer of five operating properties to us from two unconsolidated joint ventures for no cash consideration, and $11.9 million increase in our share of earnings in unconsolidated communities, which was primarily driven by venture NOI growth and transaction costs incurred by certain ventures in 2011, but not in 2012, and a $6.1 million reduction in general and administrative expenses in the first six months of 2012.

The difference between periods also reflects a $15.6 million impairment charge recorded in 2012, relating to in-place leasehold improvements in furniture and fixture and equipment. At 10 communities, those leases are being terminated and an $11.3 million gain from business combinations, relating to the acquisition of AL US reported in 2011.

General and administrative expenses for the first six months of 2012 were $53.9 million, compared to $60 million in 2011. The decrease in the period is primarily due to $4.5 million of severance expenses recorded in 2011, relating to the reduction of 62 positions at our corporate and regional offices, compared to $500,000 in severance costs in 2012.

As a result of those and additional staffing reductions at our corporate and regional office in 2011, salary expenses decreased by approximately $3.8 million in the first half of 2012, compared to the first half of 2011. These decreases were partially offset by $3.7 million in expense, relating to the settlement of litigation with Five Star.

Management fees for the first six months of 2012 were $49.7 million, which includes $900,000 of fee income from management contracts that have since been terminated. For the same period last year, management fees were $48.6 million, which includes $4.3 million of fee income from management contracts that have since been terminated or eliminated in consolidation, including $2.4 million from the 15 AL US communities.

Our consolidated and leased community net operating income for the first six months of 2012, excluding the impact of the communities acquired in 2011 and 2012, which include the 15 AL US communities acquired in June 2011, and the six communities acquired in the first quarter of 2012 decreased $1.3 million year-over-year.

These 21 communities accounted for $46.8 million of incremental resident fee income and $29.6 million of incremental community expense in our year-to-date 2012 consolidated results.

Turning to our balance sheet, our unrestricted cash balance at June 30th was $54.8 million. The principal amount of our outstanding consolidating debt at June 30th was $531.2 million.

Since our last conference call, we’ve paid down our line of credit by $39 million and removed $175 million of mortgage debt from our balance sheet that was associated with seven communities that were contributed to a venture at the end of June.

I will now turn the call over to Greg Neeb. Greg?

Greg Neeb

Thank you, Mark. I’ll provide comments for our consolidated assets, our leased assets, our joint ventures and our management contracts for both stabilized and leased-up properties, which is a reflection of how we manage our business. I will also speak about key transactions within each segment, details are available in our supplemental 8-K filed yesterday.

Our consolidated community portfolio now consists of 23 communities, all of which are stabilized as of June 30, 2012. In the second quarter, our consolidated portfolio was reduced by seven communities and these communities were transferred to a newly formed venture. I will detail this shortly.

For the second quarter, the 23 consolidated communities produced $11.6 million of net operating income before management fees, resulting in a NOI increase of 1.5% for the second quarter of 2012 over the second quarter of 2011. For the same period, occupancy was up 170 basis points, and average revenue per occupied unit was up 1.7%.

NOI for leased communities was down 13.1% and occupancy was 87.7% for the second quarter of 2012 versus 88.3% for the second quarter of 2011. Within our leased community segment on May 29, 2012, we entered into an agreement to terminate 10 operating community leases with the lessor, Senior Housing Properties Trust.

The lessor lesser paid us $1 million as consideration for the in-place furniture, fixtures and equipment. Communities will be transitioned to a new manager over the next four to 12 months.

Excluding the 10 terminated leased communities, NOI decreased approximately 7.6% and occupancy was 89.4% for the second quarter of 2012 versus 90% for the second quarter of 2011. This decrease was due to lower run rate as discussed on previous calls and lower skilled nursing resident days.

Combining stabilized U.S. and U.K. joint venture communities, NOI was up 9.7% in the second quarter 2012 over the second quarter 2011, while stabilized management community NOI was up 0.9%.

Revenue per occupied unit for stabilized U.S. joint ventures, U.K. joint ventures and stabilized management communities increased 4%, 3.5% and 2.6%, respectively. Leased-up properties combining all 18 of the U.S. U.K. communities continued strong as evidenced by NOI increasing 30% over the prior year.

As we disclosed last quarter's, 16 assets have moved from venture communities to managed communities in the second quarter of 2012, due to the sale to Ventas of these assets.

Also on June 29, seven committees were transferred from consolidated to joint ventures with the formation of a new venture, CNL Healthcare Trust. Pursuing to the terms of this transaction, we contributed our ownership in the seven senior living facilities, along with our share of transaction and closing costs to the venture.

CNL contributed approximately $57 million along with its share of transaction and closing cost to the venture. The venture is owned approximately 55% by CNL and approximately 45% by us with the gross valuation of approximately $226 million.

Prior to and of the condition to closing, we and CNL obtained new financing for five other facilities and modified the existing financing on two other facilities. In connection with the refinancing, approximately $50 million of CNL’s contribution to the venture was used to pay down the existing financing on five other facilities that were refinanced.

The venture had approximately $125 million of indebtedness collateralized by the seven facilities. In addition, we received approximately $5 million cash distribution from the venture immediately following closing. These communities will continue to be managed by us under new agreements with a fee of 6% of community revenues.

We and CNL have entered into a new venture agreement that provides for our respective rights and obligations to the ventures, including our right at our option to purchase CNL interest in the venture subject to certain restrictions and conditions.

In the second quarter, we successfully refinance the assisted living amenities unit component of our senior living condominium project. In June 2012, the assisted living amenities’ venture refinanced at existing mortgage financing with new mortgage financing provided by Eagle bank.

The new loan has a principal amount of $26 million, a floor interest rate of 5.5% and a term of three years. As a result of the refinancing, we have been released from our obligation to fund operating deficits and to pay default interest previously accrued by us through December 31, 2011, totaling approximately $2.4 million to the prior mortgage lender.

Also, in connection with the refinancing, we funded approximately $6 million on behalf of the venture, leading to a modification of the joint venture terms. Return of our new funding will have priority over existing equity and the venture’s partner’s total return will be capped at its initial contribution of $6.5 million.

Return of outstanding operating deficit and cost overruns of approximately $8.2 million to us will be subordinate to the return of capital of both venture partners. We are obligated to our partner on the condominium venture to fund operating shortfalls.

We have funded $2.2 million under the guarantee through June 30, 2012 of which $0.1 million was funded in 2012. In addition, we are required to fund sales and marketing costs associated with the sale of the condominium.

As previously reported, we believe the partners have no remaining equity in the condominium project. And we have informed our partner that we do not intend to fund future operating shortfalls.

As of June 30, 2012, the loan of $117.3 million for the residential condominium venture was in default. In June, the lender sold their note to a new lender who has suspended the previous lenders foreclosure plans. We are in discussion with the new lender about fresh agreements.

As I reported before and noted by Marc earlier, we have a venture in the U.K. with a $600 million loan that’s in default. We’ve had fruitful discussions with our lender and partner and hope to be able to report progress shortly.

In October 2012, our German restructure note will mature and we may be required to pay under the guarantee if we are unable to sell the mortgaged assets. As of June 30, 2012, the amount of this guarantee is $24.2 million. Since 2010 and through 2012, we sold or intend to sell certain communities and land parcels that are held as collateral for the German lenders.

We have one closed community and seven land parcels as of June 30, 2012, remaining to sell. The external estimate of likely property sales by October 2012, we believe that we may be required to fund the full amount due under the guarantee.

If we are required to fund the remaining minimum payment under the guarantee any assets held as collateral for the German lenders, at the time of payment will be released from liquidating trust and we will therefore be entitled to sell, develop, finance or otherwise transact such assets for our own account.

Two of the eight remaining assets included partially developed Sunrise community in Burlingame, California and a partially developed Sunrise community in Torrance, California. Both of these assets possess superior demographics and development potential.

In addition to the debt discussed above, Sunrise ventures have total debt of $2.3 billion with near-term scheduled maturities of $0.1 billion for the remainder of 2012 and there is $0.7 billion of debt that is in default as of June 30, 2012. The defaulted debt is primarily related to the condominium loan and U.K. project loan I described earlier.

The debt and ventures is non-recourse to us with respect to principal, payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant wavers and to extent maturity date and also changes in the construction loans of permanent financing provided by financial institutions secured by mortgage or deed of trust on the financed community.

We have provided operating deficit guarantees to the lenders or ventures with respect to $0.3 billion of the total venture debt. Under the operating deficit agreements, we are obligated to pay operating shortfalls, if any, with respect to these 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 on such venture debt that might become due as a result of acceleration of such indebtedness or maturity. We have non-controlling interests in these ventures.

Back to you Mark.

Mark Ordan

Thank you, Greg. Thank you, Marc. We will now take any questions.

Question-and-Answer Session

Operator

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

Daniel Bernstein – Stifel Nicolaus

Hi. Good morning, gentlemen. I just want to start off on the G&A which seems to continuing to come down do you have a sense of what your -- what you expect that run rate to be going forward that kind of annual mid-90s million dollar mark based on the 2Q, or do you expect G&A to come down a little further as we go throughout the year.

Mark Ordan

We have -- we don’t have a new run rate, Dan, to announce this morning. I would say that we continue to try to find ways to reduce overhead. And as I also said in my comments, we temper those reductions with what we think is necessary in fruitful spending in areas like care and systems. So we think we can be at this level or little bit lower but not prepared right now to throw out any number.

Daniel Bernstein – Stifel Nicolaus

Okay. When I look the U.K. lease of assets, it look like the occupancy declined a little bit and the rate declined a little bit sequentially. Obviously, there is some economic problems in Europe at this time in U.K. Can you talk about little bit about how your operations they are performing and especially on the lease of assets. And is that influencing the length of the negotiations to modify the U.K. loan covenant there?

Greg Neeb

Dan, it’s Greg. Let me talk a little bit about, sort of, operations in the U.K. As you'll see, the NOI for the U.K., including the large 15 asset portfolio increase even though occupancy -- unit occupancy decreased. What's happening there is a couple of things.

One is that we are doing more semi-private occupancy. So what we're doing is actually resident in account of the building has increased. And with that, we have actually more residents in the building paying rent.

Second thing that’s happening is that there's higher care utilization. The two sort of -- the impact of the two has the impact of actually increasing NOI year-over-year, even though we show a unit occupancy dip. So there is a sort of a phenomenon there that we think as the -- as productives of the bottom line.

The second part of your question relating to the U.K. loan modification. I tried to do give some guidance on this at the end of the last year that this was going to be a lengthy process based on what we had seen others in the market do and sort of how complex this particular negotiation was going to be. I think its proceeding as we expected. And as we indicated, we’re hopeful that we’ll have some progress to report soon.

Daniel Bernstein – Stifel Nicolaus

Okay. It sounded like the tone of negotiation were positive but I was just wondering whether all of the problems in Europe and U.K. is just kind of hindering their decision process. Is that the sense you get or is it just simply progressing as it is?

Mark Ordan

We think it’s just as Greg said it’s a practice that we expect. I don’t know whether that was directly tied to Europe. But again we're very hopeful that we will conclude this one.

Daniel Bernstein – Stifel Nicolaus

And when we look at the occupancy on the stabilized assets, they were really flat. Sequentially, you had very good rate growth on your stabilized assets. If you could talk a little bit more about the trends in the quarter, was there a point where the occupancy trough and continued to trend up when you talked about July being very good.

So although that an average number of occupancy was flat, what could you tell us about the trends in occupancy in the quarter?

Mark Ordan

I made a comment in my comments, that we see differences regionally and that varies by quarter. So there was no particular trend to call out during the quarter. It was mentioned we were very pleased. We have a big investment in footprint on the West Coast and we had increased strength there.

So it does vary quarter-by-quarter regionally as there are different changes. Our first quarter was a little bit stronger than we expected. We were really disappointed by the results in the second quarter. We were pleased as you noted that that we’ve achieved our results with increased rates.

And yeah, we are also very pleased that that the third quarter was off to a very strong start. We had several positive weeks and we have a terrific sales team and leader. And I think they are doing a great job, making sure that everybody knows what a strong value it is to have your mom and dad at Sunrise.

Daniel Bernstein – Stifel Nicolaus

Are you able to provide the occupancy at the end of the quarter on those assets and may be where they are today. Just putting some more numbers on the trends that you noted?

Mark Ordan

In which the…

Daniel Bernstein – Stifel Nicolaus

You could just do to stabilize it, where you ended the quarter and where you’re today or where you’re at the end of July?

Mark Ordan

We don’t break that out separately but we could think about that.

Daniel Bernstein – Stifel Nicolaus

Okay. And then in terms of the rate growth you absolutely did push the rate growth in the second quarter. If you could talk about -- is that something that level, something we continue to expect the rest of the year in response to the higher acuity that you may be having in your facilities just trying to understand the push in rate?

Mark Ordan

Well, I’d say a few things. It’s obviously a composite number. We are very need driven, number one. So a lot of this has to do with the care that we provide for our residents. The second is, as I said all these things are regionally driven. We don't set rates as a company. We look at our first-off market and within our markets, we look at our communities.

So there were times, when it's not advantageous at all to increase rate. There were times when it makes sense. So I don't have a projection for the year. I think we -- I think we’d become fairly good at managing this part of -- this part of our business. And I think because over 30 years now, we understand what it takes to take care of seniors who whose needs are more acute. I think it put us in a good position.

But -- so we balance the factor if it’s need driven by the factor would be their economic realities. And those vary market-by-market.

Daniel Bernstein – Stifel Nicolaus

Okay. But generally, as your occupancy has improved, you’ve been able to push rate a little bit better?

Mark Ordan

No indication of that change.

Daniel Bernstein – Stifel Nicolaus

Okay. And on recurring CapEx, I guess, it was about $3 million or so in the quarter. Is that expected to trend up a little bit in the next coming quarters. I would think it would be, may be, more of $4 million, $5 million a quarter range but how was that to you to. Tell me whether I think that characterization is right or wrong?

Marc Richards

Hey, David. It’s Marc Richards. You’re correct. We typically, historically incurred the bulk of our CapEx in the third and fourth quarters of the year. So I would expect an upward trend moving through the remainder of 2012.

Daniel Bernstein – Stifel Nicolaus

I guess, that’s all for me at this point. I’ll see if anyway. I don’t have any questions.

Mark Ordan

Dan, thanks very much.

Operator

(Operator Instructions) Okay. And it appears that we have no further questions at this time.

Mark Ordan

I will let everybody go to Hamptons with the beach and we’ll continue to manage our communities. So thank you everybody for your support and for listening this morning and we’ll talk to you soon.

Operator

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

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