Sunrise Senior Living's CEO Discusses Q1 2011 Results - Earnings Call Transcript

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Sunrise Senior Living, Inc. (SRZ) Q1 2011 Earnings Call May 6, 2011 8:30 AM ET


Tim Smith - IR

Mark Ordan - CEO

Marc Richards - CFO

Greg Neeb - Chief Investment & Administrative Officer


Jerry Doctrow - Stifel Nicolaus


Good day everyone and welcome to the Sunrise Senior Living first quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Smith with Sunrise Senior Living. Please go ahead sir.

Tim Smith

Thank you and welcome to Sunrise Senior Living's investor conference call. This is Tim Smith, 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 applied 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 Ordan

Thank you. With me this morning are Greg Neeb, our Chief Investment and Administrative Officer and Marc Richards our Chief Financial Officer. I am very pleased that this morning we announced results which speak to our continuing improvement. Stabilized community occupancy of 88.3% for the first quarter of 2011 is a 70 basis point increase over the first quarter of 2010, and a 40 basis point decrease over the fourth quarter of 2010. This is a typical seasonal decline.

ADR for occupied units for stabilized communities in the first quarter of 2011 was $208.54 representing a 3.8% increase over the first quarter 2010 ADR. NOI is also higher, increasing almost 5.8% in the first quarter of 2011 over the first quarter of 2010 to stabilized properties, and 12.2% overall including lease up properties.

Our drive at Sunrise is focused on five strategic areas: number one, core operations that lead the sector in resident care and satisfaction; number two, increasing operating efficiency by controlling direct costs and increasing operating margins to maximize returns for both Sunrise and for our partners and owners from whom we manage; number three, we want to own as much as possible of what we manage, always with a strong bias towards best-in-class assets; number four, we want to rely on a strong balance sheet, capital markets opportunities and a solid financial reputation; number five, we want to grow earnings through additional profitability in current operations, new resident services, as well as development, acquisition, joint venture and last but not least brand expansion opportunities.

Our core operations as demonstrated by our announced results are growing nicely, although we have not yet done a sufficient job of steadily controlling costs including direct labor and overhead. We have been successfully focused on supporting the quality of the Sunrise team to rigorous hiring practices and a very strong management structure.

We have reduced yield overhead through a streamlining process which we believe will enable better control when needed, to new solid management tools. Our world is highly regulated and we are relied on to provide scepter leading care. We have been devoting great and increased resources to maintain our lead in this all important area, and we are humble when we see deficiencies.

We have shifted the recruiting balance at Sunrise and now it successful attracts top candidates who are also highly sought by competitors.

Our recently announced purchase agreement with a group of funds affiliated with Morgan Stanley on the heels of our purchase of a joint venture along with the CNL Lifestyle, it clips us in a vastly different position versus our announced ownership goal. These deals represent 44 class A communities. Of course our debt balance is higher as a result of these, but we want to remind you that these are essentially non-recourse obligations. I also want to assure everyone that we are not a buying spree. We will conservatively judge opportunities, weighing the upside of acquisitions against the cash and debt costs to Sunrise.

Also remember, in both of these transactions while we were enabling our upside, we were also protecting our long term status. Our capital markets and borrower status positively flipped in the past few months, with both the successful completion of our $86.5 million convertible debt offering, underwritten by Stifel Nicolaus and KeyBank, and our new $50 million credit facility commitment from KeyBank. Here again we hope you see that we don't incur debt for general corporate purposes. We raise money when we see an attractive opportunity or to defend our long term position.

Unfortunately, recent events in Pennsylvania compel me to comment. We had a shocking and (inaudible) incident where in an isolated incident three associates were arrested. We received a licensed revocation notice, as from the Pennsylvanian Department of Public Welfare for this community. A move which we consider totally unwanted and we immediately appealed.

Contrary to some claims I've heard, I'd like to offer a few facts: one, we were immediately and totally co-operative with the Regulators and Police, and we work closely with our residents and families, including my reaching out to the families that were involved in spending a lot of time at the community myself; number two, nobody wants justice here more than we do. If somebody violates our trust or our residents, we want to see that justice is done. Number three, a Department of Public Welfare spokesperson made harsh comments about our corporate culture. These comments were ridiculous and damaging and made by someone who knows nothing about our fine corporate culture.

Until this, we had full licenses from that very same Department of Public Welfare in 16 of 17 communities, with only one provisional license. And the five communities that they referred to that we had sold many months ago were part of an overall restructuring where we sold over 50 communities worldwide.

Now please don't misunderstand. We, like all companies have deficiencies at times and we will always respond to those sincerely and vigorously. And that’s exactly what we've offered to the Department of Public Welfare here, and that offer from us stands. Though this situation is isolated and it is not financially material, it is of huge importance to all of us in the Sunrise family who care very deeply about the well being of our residents and about our deservedly great reputation built over 30 years.

And this brings them to my last point, our reputation. The Sunrise brand and the Sunrise signature experience are all important and is strong and growing. As we celebrate 30 years of champing the quality of all seniors, we have introduced a fresh new logo, not because we had nothing else to do, but because we want everyone to take a fresh look at Sunrise and know as I do, and everyone here knows that there is no better place for a senior you love.

Marc Richards will now provide more detail about our operating results for the first quarter.

Marc Richards

Thank you, Mark. Good morning everyone. Earlier today we filed our 10-Q and consistent with year-end reporting, we filed an 8-K containing supplemental disclosure regarding various operating results and liquidity metrics related to our communities and consolidated operating results. We will continue to furnish this information on a go-forward basis to provide enhanced visibility into our community operating activity.

My discussion this morning will be focused on our consolidated operating results and the various components of Sunrise's earnings for the first quarter of 2011. Greg Neeb will address our community operating results in more detail later in the call.

Turning to our consolidated operating results. During the quarter, we reported a net loss attributable to common shareholders of $17.7 million or $0.32 per fully diluted share, as compared to a net loss of $16 million or $0.29 per fully diluted share for the first quarter of 2010. The change between periods was primarily driven by lower management fees and transaction expenses related to our venture investments, which were partially offset by lower salary expense in 2011, and restructuring costs that we incurred in 2010 but not in 2011. I'll address each of these areas later on the call.

As I mentioned on our last call, we began utilizing adjusted EBITDA and adjusted EBITDAR among other metrics to evaluate our operating performance. We have adjusted net income before interest, taxes, depreciation, amortization and rent expense and further excludes certain non-cash gains and losses, and other items of income or expense, including costs related to our 2010 restructuring efforts.

Adjusted EBITDA declined from $16.2 million to $11.7 million quarter-over-quarter, and adjusted EBITDAR declined from $30.9 million to $28.1 million. The decline for the period was primarily due to lower fee income.

General and administrative expenses declined at $32.4 million for the quarter, compared to $33.3 million for the same period in 2010. Our first quarter 2011 G&A includes $1.5 million of professional fees associated with two venture transactions. These transactions resulted in the formation of a 29 community venture with CNL, and our forthcoming purchase of an 80% interest in a 15 community portfolio.

Further, G&A expense included $3.2 million in severance costs related to the reduction of 42 physicians at our corporate and regional offices, as well as a $2 million retention bonus. Our first quarter 2010 G&A included $5.9 million of professional fees associated with the litigation that was resolved during 2010.

As we previously disclosed, we sold or terminated management contracts relating to 32 communities during 2010. As a result, our management fees for the quarter declined from $29.4 million during the first quarter of 2010 to $24.2 million this period. Additionally, Sunrise's share of losses on investments and unconsolidated communities increased by $6.2 million quarter-over-quarter. This line item includes our share of transaction and refinancing costs of $4 million associated with the formation and type of structuring costs of our new venture with CNL.

Before I move on to net operating income from our consolidated lease communities, I'd like to mention that we now consolidate the operating results from six of the 29 communities within the new CNL venture. In connection with this transaction, we entered into operating leases with these six communities and accordingly have reflected $9.7 million in resident fee income, $5.6 million of community expense for consolidated communities and $3.9 million of community lease expense on our consolidated statement of operations for the first quarter of 2011.

In our supplemental disclosure we have reflected this net operating income in the appropriate joint venture pool rather than in our consolidated leased NOI, as the mortgage debt in related assets are all held within the venture. On our first quarter 2011 consolidated operating results, excluding the impact of the six CNL venture communities, were also impacted by $2.8 million in net operating income from our consolidated and lease communities, as compared to $2.7 million in NOI from these communities in the first quarter of 2010. Net operating income is income from operations excluding depreciation, lease expense and impairment charges related to these communities.

Moving on to the balance sheet. Our unrestricted cash decreased from $66.7 million at December 31, 2010 to $41.5 million at March 31, 2011. The decrease in cash is primarily due to the payment of annual bonuses in the first quarter of 2011, our initial investment in the CNL venture and a principal debt pay down to extend the community mortgage. Our outstanding consolidated debt is now $154.7 million, compared to $163 million at the end of 2010.

Further, current maturities of debt have declined from $80.2 million at year end to $53 million at the end of March 2011 due to extending the mortgage on our Connecticut Avenue community.

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

Greg Neeb

Thanks Marc. Beginning this on our fourth quarter conference call, we have modified our call format, our goals to provide transparency into our principal business lines, namely our consolidated assets, our leased assets, our joint ventures and our management agreements. We intend to accomplish this by providing useful operations data within each group, as well as describe how those operations affect our asset evaluation and financial performance.

In addition, I will elaborate on a number of key transactions within each business line to enhance visibility on the impact to overall value. Supplemental 8-K filed this morning, provides information broken down by these business lines and is a reflection on how we manage our business.

Before I get started with an overview, I would like to stress that we believe the new community concept, the group's assets by joint venture better captures the financial arrangements and incorporates our loans and joint venture documents. These generally pool cash flows and cross-collateralize the assets. You may also continue to reference our comparable community data which is disclosed as part of our supplemental information contained in our 8-K.

Turning now to our overall performance for the quarter. As Mark mentioned earlier, overall trends for Sunrise communities continues to improve. For the first quarter of 2011 over the first quarter of 2010, stabilized community occupancy is up 70 basis points, ADR per occupied unit for stabilized communities increased 3.8% and NOI has increased almost 5.8% for stabilized properties and 12.2% overall.

When we break the results down on a regional level for which we have nine regions plus the United Kingdom, seven reported positive NOI for the first quarter of 2011 over the first quarter of 2010, with six of nine reporting growth of 6.4% or higher. ADR increased in all regions for first quarter 2011 over first quarter 2010. Operating trends for the Sunrise lease communities were positive for the quarter. NOI for stabilized lease communities was up 7.4% for the first quarter of 2011 over first quarter 2010. Occupancy was slightly lower or 88.8% for the first quarter of 2011 versus 89.2% for first quarter of 2010. These properties contain approximately 13% skilled nursing where we had an approximately 25% increase in ancillary revenue due to increased rates and resident days.

Our 10 consolidated communities consist of a variety of asset types and other properties we consolidate, but don't know on 100%. As a result, trends are not necessarily revealing on an ongoing basis. Specific information about important individual assets including Connecticut Avenue and Monterey, which both trending positively is available on our 8-K. Three communities in Montreal that are wholly-owned have not leased up according to our expectations. The outstanding principal balance is not recourse to us, but we have provided operating debts of guarantees to the lender. The principal balance of $48.1 million was due on April 30th, 2011. We are seeking a loan extension, while we market the communities for sale and explore other alternatives.

Operating trends for the venture and managed communities for the first quarter of 2011 were strong, with ADR occupancy and NOI, all up. Net operating income for joint ventures was up 6.3% while NOI for managed stabilized communities was up 5.5%. Now I want to highlight a major announcement that occurred relating to one of our ventures. In April 2011, we announced that we had entered into a purchase and sale agreement with Morgan Stanley to purchase their 80% ownership interest and an entity that owns 15 senior living facilities for a purchase price of approximately $45 million.

After the transaction Sunrise will own 100% of the equity interest of these assets. These 15 Sunrise purpose-built mansions, owned by the venture, generated an unleveraged NOI yield of 6.2% based on 2010 actuals which includes a deduction for Sunrise's 7% management fee. From an asset performance perspective, average unit occupancy for the portfolio, this portfolio in 2010 was 87.3% as compared to a peak occupancy level of 91.6% in 2008. The portfolio has nine communities concentrated in Southern California that have lagged in recovery due to economic conditions there and have not yet rebounded as quickly as other parts of the portfolio.

In conjunction with this purchase transaction, we have a non-binding term fee with the mortgage lender to modify the existing debt with a $25 million partial pay down and a cash sweep through maturity. The modification is significant on several fronts: first, the modified loan would provide relief under the existing debt service covered requirements and alleviate concern of the existing debt default. Second, the term of the loan would be extended from June 14, 2012 to June 14, 2015 and provide the runway necessary to optimizing value. Third, since October 2009, Sunrise has subordinated 3% of its 7% management fee, and as required, under the existing loan documents. Under the modified terms, Sunrise expects to earn its full 7% management fee.

Lastly, regarding this portfolio, the asset quality is high. Ranging in age from 5-8 years, these assets are clustered in major metropolitan areas and possess characteristics that will outperform this sector over time we believe. Both ADR and NOI margin significantly exceed our North American averages.

The Morgan Stanley partner buyout is expected to be financed with the proceeds of our issuance of $86.25 million; a 5% junior subordinated convertible notes. These notes were issued in April 2011 and are due in 2041. Also in April, we entered into a commitment letter with KeyBank regarding the terms of a new $50 million senior revolving line of credit, the closing of subject to customary closing conditions and the preparation of definitive documents. The line will contain customary financial covenants and will be secured by our partnership interest in the pool of 29 Sunrise properties.

Now I will turn to a discussion of non-core assets. As a part of the German settlement, we created a liquidating trust of assets to be sold for the benefit of participating banks. Initially we guaranteed a minimum payment recovery under the agreement of approximately $50 million. In the first quarter of 2011, we sold two wholly-owned operating communities and one land parcel which were part of the liquidating trust for approximately $8.4 million, further reducing the guarantee to approximately $29.9 million at quarter end.

Moving on to loan balance maturities in defaults. As of today, our line of credit balance under our (inaudible) line of credit is completely paid off and we have $13.5 million in letters of credit outstanding which are fully cash collateralized. At the joint ventures, we have $635 million of long-term debt that is in default as of March 31, 2011. As of today, an additional $134 million of joint venture debt is in default, and $48 million consolidated debt is in default. The $134 million lender has notified the venture of its intent to pursue remedies under the loan documents, including cooperation and a foreclosure.

Alternatively, we are in active discussions with both our partner and lender to find a more satisfactory outcome. Of this total $769 million of defaulted joint venture debt today which includes the $134 million I just referenced, $365 million relates to the mortgage loan which we contemplate to modify upon closing of the purchase agreement with Morgan Stanley. We continue to work through the remaining defaults with our lenders and partners. Back to you Mark.

Mark Ordan

Thank you, Greg, thank you, Marc. As you can see, we are determined, we are optimistic, we are pleased with our recent results and we look forward to continued improvement in the coming quarters. With that, we are ready to begin the questions.

Question-and-Answer Session


Thank you, sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. And our first question will come from Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Mark, I guess I just wanted to start with kind of expenses sort of overall. You've had some severance, I think you identified both in your press release and you touched on the call that bringing down expenses is sort of one of those items. So, can you give me a little more color I guess, on sort of two levels; one is on the property level, I think on lease same-store I think it's still in the 20's rather than maybe the 30's on operating margin, and then on G&A you kind of had this goal again under 100. Where are some of those opportunities to go forward?

Mark Ordan

Sure. On the operating side I would, I don't mean to be too glib but I would call it pilot error. I would say that we have not done a good job of controlling expenses overall, especially direct labor. I think that’s something that we are very focused on in tackling. I think clear savings that are achievable were also rolling out a new labor management tool which I think is going to make that much more practical and reliable.

On the overhead side, I am in a way less concerned because I see a clear path of bringing our head down from where it is and we've made many changes which will bear fruit in the coming months. So certainly on the latter issue, I know that we can manage that number down without fracturing what we do. And again on the first, I think you should expect in the coming months to see improvement on the expenses and margins.

Jerry Doctrow - Stifel Nicolaus

And on G&A, is there kind of a target that’s sort of below this kind of $100 million. I think you're already well below the $100 million run rate or we need to wait and see?

Mark Ordan

We haven’t announced a firm target, but our goal is to get it well below that number.

Jerry Doctrow - Stifel Nicolaus

And I just wanted to maybe touch on the sort of the debt. I think Greg maybe talked about the fact that there is sort of an increase now on sort of [AB debt]. Can we get a little bit more color on, I know its Morgan Stanley, so, where is kind of the rest of it and are there operating guarantees at issue, just a little more color, sort of the mechanics there. Is that stuff likely to get resolved? How long it will get resolved, that kind of thing?

Greg Neeb

If you look at the Morgan Stanley purchase, I mean that by itself of the $769 million of joint venture debt that’s in the fall. That’s $365 million. So that takes the number down to a little over $400 million. And then we've got a couple of other things that we are actively working on, and you can see from our joint venture debt scheduled that we've had some maturity defaults and some other defaults that have been outstanding, leaving some for sometime as late as last year. But we are certainly working on those and are optimistic about the majority of those. There is a new default that I specifically mentioned and that one is for $134 million, and that one is a more difficult discussion at this point.

Jerry Doctrow - Stifel Nicolaus

And the defaults, are you sort of violating covenants or is it the fact that the terms are due or may be any other color as to what's [different]?

Greg Neeb

The default that we had on the Morgan Stanley venture is a default that was a debt service coverage base default that occurred at the end of the quarter. Of course we are in deep negotiation with them to pay down and extend on the terms that I referenced earlier. So, that was one that was a debt service coverage issue. We do have several however, that are more maturity defaults, including the $134 million and a couple others. So, we have a $66 million, so I am just looking at the scale of $66 million joint venture debt that is a maturity default. So, we are working on those too. Obviously, for our purpose the goal is to get those extended and give ourselves the ability to work on the assets and put them to a place that’s refinanceable.

Jerry Doctrow - Stifel Nicolaus

And I guess just coming back, Mark to you, or any of you actually. We are well in to the second quarter, any just sense of sort of move-in, enquiries and sort of how you're feeling about rates and occupancy go forward. I mean you had very good year-over-year numbers. How are we sensing sort of this spring?

Mark Ordan

I've heard what our competitors have said I would say in the [comments] I've gotten from Nick and I would say we are in line with it, I think it seemed pretty good, not a very clear path, but we are pretty optimistic. We see good demand and I couldn’t give you a forward-looking projection, but I feel pretty good about demand and rate stability.

Jerry Doctrow - Stifel Nicolaus

I've a got a lot of little details, maybe we'll take them offline just in terms of some of the other specific moving parts, but I'll jump off. Thanks.


[Operator Instructions].

Mark Ordan



Yes, sir?

Mark Ordan

If there are no further questions, I will close the call and thank everybody for their continued support and confidence in Sunrise Senior Living.


We do just have a gentlemen queue up. Do you want to take that caller sir?

Mark Ordan



Okay. Go ahead sir.

Jerry Doctrow - Stifel Nicolaus

It's just Jerry. I'll come back and talk to you offline. That’s fine. Thanks.

Mark Ordan

No problem Jerry. Thank you everybody.


Thank you. That does conclude today's conference. Thank you for your participation.

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