Sunrise Senior Living Inc Q3 2009 Earnings Call Transcript

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Sunrise Senior Living, Inc. (SRZ) Q3 2009 Earnings Call November 9, 2009 9:00 AM ET


Mark Ordan - Chief Executive Officer

Julie Pangelinan - Chief Financial Officer & Treasurer

Greg Neeb - Chief Investment Officer


Christina Bradshaw - William Blair

Jerry Doctrow - Stifel Nicolaus


Good day and welcome to the Sunrise Senior Living third quarter earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mark Ordan, Chief Executive Officer; please go ahead.

Mark Ordan

Thank you. Welcome to Sunrise Senior Livings investor conference call. This is Mark Ordan, Sunrise’s Chief Executive Officer. Joining me on today’s call is Julie Pangelinan, Sunrise’s, Chief Financial Officer; and our Chief Investment Officer, Greg Neeb.

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 as a result of a variety of factors including those identified in our 2009 third quarter Form 10-Q. 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.

Further discussion on the company’s forward-looking statements please refer to our 2009 third quarter Form 10-Q, that we filed earlier today. Before I make my remarks this morning about our third quarter and the coming months, you will hear first from CFO Julie Pangelinan, who will provide highlights and commentary on the results we released this morning, then you will hear from Greg Neeb who will provide additional context on the restructuring process that we has been going through for several months. Julie.

Julie Pangelinan

Thank you, Mark. Let me start by discussing our comparable community operating performance for the quarter. First, on occupancy; as was stated on our last earnings call, we implemented new programs and targeted pricing strategies to convince more seniors to choose Sunrise. The result was an increase from the rate of converting leads to move in.

Unfortunately during the same period, we experienced an increase in move outs primarily due to non-financial reasons. As a result our occupancy for the quarter was 86.7%, which is a decline of 380 basis points from the third quarter 2008 and down 20 basis points as compared to the second quarter of 2009.

If we exclude the results from the three portfolios that either have exited or will exit Sunrise, our occupancy was 87.1% for the recent quarter. We have shared this number to give you a better indication of how our go forward business performed. Our average daily revenue for occupied unit and our comparable communities increased by 2.3% to $186.37 and if we exclude the impact of foreign exchange rates, it increased 3.1% year-over-year.

Looking at our results with and without the impact of foreign exchange rates presents our data in a manner consistent with others in the industry that operate predominantly in the US. As for our comparable community revenues this quarter, we reported a decline of 2.2% as compared to the prior year period. Excluding the impact of foreign exchange rates, revenues decreased 1.4% year-over-year.

With respect to our comparable community expenses, we experienced an increase of 0.7% as compared to the third quarter of 2008. When we exclude the impact of foreign exchange rates in addition to approximately $19 million in certain health and insurance credits received in the prior year period, our expenses decreased year-over-year by 3%.

We are managing these community expenses with a number of cost containment and reduction measures and saw declines year-over-year specifically in sales and marketing, repairs and maintenance, and other discretionary spending in the third quarter. Some of these declines will not be sustainable, as we historically see increases in repairs and maintenance and utilities towards the end of the year.

Now I’d like to review our financial results for the quarter. Overall, we are pleased that we have continued to improve our liquidity in the third quarter and throughout 2009, primarily from stronger cash management controls over receivables and payables and our curtailment of development activity. However, our revenues are decreasing and our costs are not decreasing proportionally.

Sunrise reported revenues of $383.6 million for the third quarter of 2009, as compared to $412.6 million for the third quarter of 2008. Net loss for the third quarter of 2009 was 44.4 million or $0.88 per fully diluted share as compared to net loss of $68.7 million, or $1.36 per fully diluted share for the third quarter of 2008.

The loss before income taxes and discontinued operations for the third quarter of 2009 was $37.8 million as compared to loss before income taxes not discontinued operations for the third quarter of 2008 of $70.9 million. Loss from operations for the three months ended September 30, 2009 was $33.9 million.

Excluding SEC investigation costs, restructuring costs, and non-cash charges including depreciation and amortization, the provision for doubtful accounts, write-off of capitalized project costs and impairment of long-lived assets, adjusted loss from ongoing operations is $1.3 million compared to adjusted income from ongoing operations of $14.5 million for the three months ended September 30, 2008.

Adjusted income or a loss from ongoing operations is a measure of operating performance that is not calculated in accordance with U.S. GAAP and should not be considered as a substitute from income or lost operations or net income or loss. Adjusted loss from ongoing operations is used by management to focus on cash generated from the ongoing operations of the company and to help management assess if adjustments to current spending decisions are needed.

The decrease from the prior year is primarily due to a decrease in revenue from management fees and professional fees from development without a proportionate decrease in development costs to general and administrative expenses. We will continue to focus on reducing our corporate overhead costs throughout the remainder of 2009 and into 2010.

Now I would like to address certain income statement line items with material fluctuations between the three months ended September 30, 2009 and September 30, 2008. Decrease in management fees of $9.4 million or 25.9% is primarily due to a decrease in the management fees from the Fountains venture and a loss of fees from other terminated management contracts.

The decrease in professional fees from development, marketing and other of $11.8 million or 93.6% is due to the decrease in our development pipeline. We are currently only five communities under development in the U.S. and the U.K. Related development expense decreased by $6.2 million, resulting in a net reduction of $5.6 million in cash flows from development in the quarter.

General and administrative expenses decreased $3.1 million or 8.4% for the three months ended September 30, 2009. Through the end of the quarter, we have eliminated 114 physicians under the 2009 plan, in addition to 165 physicians eliminated under the 2008 restructuring plan in both development and corporate overhead.

There are an additional 49 physicians that will be eliminated by early 2010. We continue to look at opportunities to cut non-employee costs, including marketing, technology, and travel. We continue to expect to reduce our recurring run rate for general and administrative expenses to approximately $100 million during 2010.

Write-off of capitalized project costs decreased by $46.9 million, in the third and fourth quarters of 2008, we ceased all new development and write-off of capitalized cost for projects, where construction had not yet started. Impairment of long-lived assets was $9.9 million for the quarter related to six operating communities, one, land parcel and two, discontinued development projects.

Turning to cash flows, we had $43.4 million and $29.5 million of unrestricted cash at September 30, 2009 and December 31, 2008 respectively. Net cash provided by operating activities was $38.8 million for the nine months ended September 30, 2009 as compared to net cash used in operating activities of a $117 million for the nine months ended September 30, 2008. The increase of $155.8 million was primarily due to an increase of cash from networking capital of $122.8 million and a decrease in cash used in discontinued operations of $9.9 million.

Net cash provided by investing activities was $4.4 million for the nine months compared to net cash used in investing activities of $149.9 million for the nine months ended 2008. The increase of $154.3 million was primarily due to a decrease of $196.3 million in capital expenditures and condominium fundings, offset by a decrease of $45.8 million in proceeds from the sale of assets.

Net cash used in financing activities was $29.3 million for the nine months ended September 30, 2009 compared to net cash provided by financing activities of $181.5 million for the nine months ended September 30, 2008, a decrease in cash of 210 million, primarily due to a decrease of net borrowing.

We have $624.6 million of debt at September 30, 2009, of which $411.9 million is in default and an additional $192.8 million is due within one year. In conjunction with the 13 Amendment to our Bank Credit Facility that we entered into in October, we repaid $6 million of the $68.9 million balance outstanding under the bank credit facility and the due date for the remaining balance of $62.9 million has been extended until December 2010 under certain conditions, which Greg will describe in more detail.

We will use $25 million of the proceeds from the anticipated sale of 21 Communities in November to further pay down the facility. An additional $20 million of proceeds will be placed into a collateral account for the benefit of other creditors. Also in conjunction with the anticipated sale of 21 Communities, approximately $130 million of our debt will be assumed or repaid by the purchaser, most of which is currently in default.

In October, we signed a binding term sheet with two of our German lenders, which will release us from all obligations relating to the debt, which Greg will describe in more detail. We continue to work with the remaining lenders to reschedule current maturities and obtain waivers.

Now, we will turn the call over to Greg, who’ll review our recent restructuring process.

Greg Neeb

Thank you, Julie. The process of restructuring the balance sheet is ongoing and incomplete. We’ve completed several large transactions since the process began in mid-2008, which I will recap eight of the significant transactions: Number one, we closed our Trinity Hospice business and eliminated the ongoing startup costs and operating funding requirements.

Number two, we sold Greystone, our capital intensive CCRC development arm that was heavily reliant on the boutique tax exempt bond market, while retaining some of upside in the Sea Capital investments we had already made. Number three, we sold Aston Gardens, our lender defaulted, Florida independent living venture, where we had operating debts and obligations to both our partner and lender. Funding’s under the operating deficit were $6 million prior to the sale.

Number four, we shutdown our development pipeline and eliminated 70 plus development positions, this included stopping the three projects that were under construction. We’ll open all five remaining unfinished projects this year. All vacant land as enlisted for sale with unencumbered property serving as collateral for the settlement with our German lenders.

Number five, we exited our lender defaulted Fountains joint venture, where we had operating deficit obligations and income support guarantees to our lenders and partner. Prior to discontinuing funding our default interest and guaranteed partner returns in January 2009, we had funded approximately $27 million under these recourse arrangements.

We exchanged land with a $12.9 million book value and agreed to transition management for a low fee to facilitate this exit. Number six, we agreed with our majority lenders representing seven of the nine loans in Germany to a restructuring agreement effectively severing Sunrise from its corporate recourse obligations. As these lenders had significant claims, the settlement consideration provided by Sunrise was material to the company.

We transferred all of our unencumbered assets for interest in 21 properties over to these lenders via mortgage interest against the properties, with up to 5 million shares of common stock, for a released of our monetary obligations. The appraised value of the 21 land parcels and buildings was $71 million and we agreed to guarantee 80% of that was repaid over 30 months.

We also agreed to manage and fund the operations of the properties for the earlier of December 31, 2010 or until they were sold. We reserve places for two other lenders and couple of other creditors in the restructure agreement. The unsecured claims for these two lenders could approach $15 million. Final documentation is not yet complete and will be complex.

Number seven, we executed a purchase of sale agreement for 21 operating properties with Brookdale for $240 million or will generate approximately $60 million in cash proceeds. We expect this deal to close later this month, if it closes as expected, $25 million will repay our line of credit, $20 million will be escrowed to settle other claims of the company and the balance will be available for working capital. This sale also eliminates approximately $3 million of credit currently outstanding under letters of credit.

Number eight, we have also amended our line of credit. Assuming the Brookdale transaction closes and we make the $25 million required pay down. Our line of credit will extend through December 2010, if Brookdale does not close, we may up to June 30, 2010 provide a leading against the 21 Brookdale properties with a pay down on the line of $5 million and a fee and still obtain the extension, otherwise the loan will default on June 30, 2010.

So, a number of material restructurings have been completed and we have had success with our plan. However, the balance sheet is complex and other recourse obligations remain. Excluding the debt related to the two German lenders who have agreed to our restructuring, $238 million consolidated debt remains in default and $1.4 billion of joint venture debt is also in default.

Sunrise has recourse property loans of $102 million that is due within the next 12 months on raw land, one stabilizing property and one property highly leveraged by today’s underwriting standards. We also have other non-loan related obligations we are working through.

Our plan is to utilize the German restructure assets and the proceeds of the Brookdale transaction to secure defaults and extend the loan maturities, consistent with our line of credit. We believe our plan is reasonable, we have demonstrated that we are able to work with our many lenders to achieve a mutually accessible outcome and we will record our progress as the outcomes are complete.

Now I’d like to turn the call back over to Mark.

Mark Ordan

Thank you, Greg and thank you, Julie. You just heard a tale of two cities with operating results clearly lagging the progress we have been making in our restructuring. During the quarter while we saw a leveling of occupancy, we were hoping for a clear gain. During this period, we were trying to meet the needs of perspectives residence by providing incentives to move into a Sunrise community, but again, this helps stem the decline, but not reverse it.

We did experience gains in some of our markets and some of our assets classes, but not across the board, as we had intended. While Julie said we continue to expect to be able to operate our company at $100 million overhead spending level in 2010, we are not yet where we need to be. Since we have gone through a fairly turbulent few years, we want to balance reductions with the need for increased stability.

We certainly think that relative strength provided by our recent restructuring achievements, will allow us the cushion to be able to pick up the pace in our cost reduction efforts. On the expense side of our operations, while we have seen areas where newly implemented expense reduction initiatives and controls are clearly working, for example, in direct labor these are not yet material enough to claim victory.

Having said all of this and after equaling the disappointment felt by my colleagues, we stand both determined and quite optimistic. Many people bid against the future Sunrise during the past month and even years, assuming we could not survive the challenges we faced in our restructuring. Many also felt that our core business could dissolve during this time when we had so much on our plate.

We are pleased on the other hand, by the patience of many of our stakeholders who have seen clear reasons for hope. I believe strongly that the reasons we have not only survived have kept our core business quite intact is due to three things. One, a sector-leading brand owned over 28 years to stands at the very best in senior living and with the DNA to always put our residents first.

Number two, we have 38,000 people, largely caregivers, who never let up in their devotion to our residents and number three, we have a team of smart, relentless leaders and advisors who do it takes to push through challenges and take advantage of opportunities.

As Greg said, our restructuring process, though so far successful, is certainly not complete. However, the progress we have made allows me to make the turnaround of our operations my overarching priority. I will directly lead this effort with a team that includes new roles in operations and new and great strength in our human resources leadership.

I’m also taking full advantage of the active support and guidance of our founders, Paul and Terry Klaassen, who are helping us back to the non-bureaucratic company, it was for many years. With all of this, as with our restructuring process, I believe the changes we need to make to create a lean and profitable Sunrise will take sometime, but they are changes we will make and this process is already begun.

We are stronger than we were and we are now also able to recruit strong and dedicated professionals to physicians around the company to increase our strength. Anyone who joins Sunrise and soon everyone who works at Sunrise will understand fully that profitability and our admission are 100% mutually dependent. To avoid falling short by staying at 30,000 feet, we will direct our progress at the eight community area levels.

Whatever we stand to achieve going forward will be in part due to the continued support of our lenders ands capital partners. We continue to expect that our lenders to see, they’re working with our team will strengthen both their physician and ours. Likewise, we believe there are capital partners largely see, there are interest and theirs are aligned. We were very pleased by the recent very positive comments made by Ventas’s Chairman and CEO, who still clearly expect improving results from the Sunrise portfolio.

Senior Living as an investment sector seems to us to be further opportunities. I believe our brand and property portfolio was first rate, but was great opportunities for increase occupancy and financial efficiency. These gains will make the real estate we manage, the real estate we own and/or management contracts more profitable and more valuable and as I look forward to the future of Sunrise, I hope that we well both manage and own a larger piece of the Senior Living real estate and management pie.

We will now open the line for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Christina Bradshaw - William Blair.

Christina Bradshaw - William Blair

It’s Christina Bradshaw for Ryan this morning. Can you provide a little bit more color on the 21 properties you’re selling to Brookdale? I don’t know if you can talk to it, but more specific, if you can discuss occupancy of those properties and the annual impact of loss EBITDA, which will post the sale would be helpful.

Mark Ordan

Let us track down here and comeback to you in a minute with the occupancy of those properties. As we look at it on a sort of an EBITDA basis, these properties are probably I think the eight kind of cap rate range, which gives you sort of some sense of what the impact is from the sale of the properties.

Christina Bradshaw - William Blair

Mark, you also reference some programs or incentives you talk about to drive occupancy rates going forward and throughout the quarter. Can you talk a little bit more about that, please?

Mark Ordan

We like, I would say everybody in the senior living sectors, where there’s a difficult time in the economy. So we’re trying to work with prospective residents on a variety of incentives to make them feel more comfortable that they can afford to live in a Sunrise and it’s very market-by-market sensitive.

Christina Bradshaw - William Blair

Is there any particular market that you think is doing better than others right now or some that are worse?

Mark Ordan

Yes, I mean rather than break it out. I’d say that we have some markets, which would probably be the obvious ones, looking at today’s economy where it’s a little bit more difficult, but we also have pockets of strength. Partially the reason I pointed that out is we see that where there’s strength in the market, we’ve been relatively strong. So we’re just trying to meet the needs in other markets.

Christina Bradshaw - William Blair

Then another question, you talked about move outs during your prepared remarks. Is there anything that you can do specifically to reduce that going forward? Do you think it was isolated to the third quarter? Have you continued to see that going into the fourth quarter at all?

Mark Ordan

We think we are taking steps and we have taken steps to reduce that. In some cases, that’s hard to do. They’re just financial reasons that are out of our hands. On the other hand, the good organization, which I think we have, gets to know its residents and the needs very well, so you can anticipate better as problems are looming and try to find solutions that can work well for both the company and for our residents.

We certainly hate like anything to lose somebody, whose part of the Sunrise family. So we’re just going to work harder as I’ve said really at the area level to know that our communities are all they can to people in place and obviously unfortunately some people leave us because of a death and that’s something we can’t predict.

Christina Bradshaw - William Blair

Then one final question, if I may Julie, you walked through some of the position reductions during your prepared remarks. I miss some of those numbers. Could you provide those again for us, please?

Julie Pangelinan

So through the third quarter, we had eliminated 114 positions under our 209 restructuring plan. We previously announced a 150% reduction, so we have 49 positions that will be eliminated in the fourth quarter and through the first quarter of 2010, and that was in addition to the 165 positions that we eliminated under our 2008 restructuring plan.

Julie Pangelinan

I just wanted to point out to you probably saw it in our press release, we did report numbers that excluded, we didn’t isolate the 21 Communities being sold to Brookdale separately, but we reported numbers excluding the those communities leaving our portfolio, as well as EdenCare and Fountain and our occupancy excluding those three portfolios was 87.1% for the quarter.


Your next question comes from Jerry Doctrow - Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

I wanted to just touch on a couple things, and again, Julie, sort of following up on that, you provided the good information on the properties to be left it for the various divestitures. The stuff that’s there, if remain it rise just seems poor. So I was curious in terms of just thinking what all Sunrise is going to look like from kind of an operating basis have you done? In addition to this, you’ve got how many properties sort of in lease up that aren’t on that list and maybe I think it was five more coming out of the ground still?

Julie Pangelinan

We have about 35 properties that are currently in lease up and that’s right. Five more will be opened in the fourth quarter.

Jerry Doctrow - Stifel Nicolaus

Do you have, or maybe you can get to it separately sort of second quarter comps. So, I was curious with this kind of remaining piece what they look like quarter-over-quarter as well as year-over-year or just if you have a sense of what’s occupancy on that group. What maybe you talked about that occupancy was down 20 basis points was that this group or that was everything?

Julie Pangelinan

That was everything. So quarter-over-quarter, our occupancy was relatively flat, declined 20 basis points.

Mark Ordan

Are you asking Jerry about the lease up communities specifically?

Jerry Doctrow - Stifel Nicolaus

I’m actually two things, one I was just trying to get of the stuff that the remaining comparable communities, so that 307 that you got at the end, I was just curious about how they behave kind of quarter-to-quarter and…?

Julie Pangelinan

We didn’t calculate the second quarter results excluding those portfolios.

Jerry Doctrow - Stifel Nicolaus

What I’m trying to get a sense of Mark, maybe just ask it in a broader way instead of specifics, is you’ll have those 307, plus 35, plus 5 coming out of the ground, my suspicion is there’s still some of that stuff that may yet end up, being divested for one reason or another or I know there’s couple lease properties one of that we could talked about and, just trying to get a sense of the, where that’s headed.

I mean, obviously you’ve got progress you can make on leased properties or properties still in lease up and under development. It sounds like this is a stronger portfolio based on pricing, based on occupancy levels and what you’ve got, maybe just a little color as to how the company kind of looks to you operationally, kind of from a bricks and motors standpoint going forward?

Mark Ordan

I’d say a few things first of all, we’re in the middle of the process, as Greg described, so I think the future company broadly is going to be a company where we’re working to make sure that our remaining assets were really driving our financial results and our NOI and remaining assets, focusing on our lease up properties and obviously working on, on balancing that with the need to get to, really fully restructure the company.

That’s a process that’s still not completed. So, we couldn’t pinpoint today what that future, future Sunrise is going to look like, but we’re confident that we can make sure that our costs are inline so that we have what we’ve said the last several months, which is a strong core operating business, with overhead that matches the size of our revenues and as we get further, we can update people.

Jerry Doctrow - Stifel Nicolaus

So, of this remaining portfolio, the 307, 355 how much of that is kind of Sunrise mansion do you think versus other stuff, because at some point you had said you were interested in getting back to kind of the Sunrise mansion was the thing that you did best and focusing on that was kind of the future direction?

Mark Ordan

Our core includes the properties that we manage, which include both Sunrise management and non-management properties that we’ve acquired. There have been times that for corporate finance imperatives or balance sheet imperatives that we would have loved to keep, but didn’t to assure the future of the company in the success of the company we made change, but we certainly have assets.

For example, our Brighton Gardens that switch a very much a core part of our company and we’re very proud of them and they are very successful assets. So I wouldn’t want anyone to think that only a Sunrise built mansion is or core, our core are the communities that we manage on behalf of 50,000 residents who live at Sunrise.


(Operator Instructions) At this time, there are no further questions.

Greg Neeb

This is Greg. I want to go back to a question that was asked about the Blackjack portfolio or 21 portfolios, the occupancy at September 30, it was 92.7. Okay, Robert. I think we’re set.


I’ll turn it back to you for closing remarks.

Mark Ordan

Well, again, I thank everybody for their patience and their support and we look forward to updating you on our future progress.


Thank you. This concludes today’s conference call. We thank you for your participation, and have a wonderful day.

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