Sunrise Senior Living' CEO Discusses Q2 2011 Results - Earnings Call Transcript

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Sunrise Senior Living, Inc. (SRZ) Q2 2011 Earnings Call August 4, 2011 9:00 AM ET


Tim Smith – IR

Mark Ordan – CEO

Marc Richards – CFO and Chief Accounting Officer

Gregory Neeb – Chief Investment and Administrative Officer


Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Vineeth Betty (ph)


Good day and welcome to the Sunrise Senior Living Quarter Two Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tim Smith. Please go ahead, sir.

Tim Smith

Thank you, and welcome to Sunrise Senior Living’s 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. Joining me this morning are Marc Richards and Greg Neeb who has dialed in remotely. Let me may begin my remarks. I’ve heard people talk here that it looks like they know how to restructure a company, but can they run the railroad?

I’m pleased that in our second quarter results and first half of 2011, we revealed an operation that can produce strong results in a difficult environment. As we announced last evening and Greg Neeb will review in greater detail, we achieved year-over-year gains in occupancy revenue per unit NOI and adjusted EBITDAR. While our second quarter occupancy dropped slightly from Q1 we have recouped a large portion of that in July.

While occupancy is the Holy Grail of our sector, I’ll remind you that Sunrise stands apart from the other senior living operators by running higher end, higher priced and overwhelmingly private pay communities. Our average daily rates are quite strong and we manage them carefully. When we saw others heavily price promoting in the spring, we held the line until the summer when we felt the economic conditions was so persistently poor that we had to act preemptively.

We provide the highest levels of service and care in our sector to truly make good on our mission to enable seniors to age in place. Our demand is need-driven and our target market is families who want the very best and understand that while Sunrise is not inexpensive, we actually provide great and irreplaceable value.

You’ll hear more and more about value from us at Sunrise because we don’t think that the market fully understands the extraordinary experience of living at Sunrise. Our 24-hour a day devotion to seniors has been in Sunrise’s DNA for 30 years really doesn’t cost much more than a typical senior housing experience. You see, while we’re very proud of the hundreds of special touches in our buildings, it’s that care and devotion to all seniors that’s uniquely Sunrise


This experience is not just more affordable than many think. It’s also, as I said earlier irreplaceable. I just received a letter, atypical of the letters that I’ve received and I’d like to read it to you because it expresses a common theme. Dear, Mr. Ordan, as you can see, I’m a resident of Sunrise of blank.

In June of this year, my wife passed away and I want to tell you about the personnel here, all of them. The employees here have been so kind and caring to me that I cannot find enough words to express my feelings. It has been a difficult time for me and they have made my life here so much more easier by just being with me. I thought you might like to know this, sincerely a resident.

This letter is just one of the many that I frequently receive and this is why that while we are pleased with the results of our financial restructuring activities we’re far more focused on the day-to-day managing of our over 300 very special communities.

We are actively working on strengthening every facet of the company while streamlining the way we operate and responding to market conditions. The core of our business is care and we are in the midst of a thoughtful reworking of our structure here. This by the way was prompted by direct feedback from our nurses and executive directors, a group we listen to very carefully.

Similarly in food, we have restructured our operations, recruited top culinary talent, rolled out a great new menu with much more to come. My mom is among the thousands who eat our own cooking at Sunrise and we want her and them to be very happy.

I’m also very happy to report to you that we are in the midst of the largest and broadest community remodel process in Sunrise history. This process is managed by a small, but very hard working group of assets and facilities managers along with very talented designers. For example, I would call out that our HCP portfolio under both the Sunrise and Brighton Gardens flats is part of the core of all we do and all of them are undergoing a thorough remodel.

I’m sure you all know that an updated physical plant really helps drive results and we are confident that this surge of well spent money will support positive trends. As you would hope, we have been heavily investing in CapEx in the portfolios we recently acquired and here too we think that this spending is the necessary foundation for ongoing success.

This remodeling effort is not only in portfolio (inaudible) Even our Ventas portfolio, which has always received careful attention is receiving renewed property-by-property focus.

Before hearing from Mark and Greg, I do want to tell you that as promised we are in the next few weeks taking active steps to reduce overhead. Today I am announcing, an overhead reduction effort, which we estimate will reduce spending by over $5 million annually by eliminating many physicians.

While we never like reduction plans they are necessary, as we have said often and publicly for the last several months. When we do take such a step, we do it with professionalism and sensitivity to the careers of the people, who will be leaving.

Having said that, we see strong avenues for growth, which will not countermand our efficiency increases. Let me point areas we are currently developing, which we think and in combination add materially to our bottom line; One, increased community efficiency including unit conversions. Number two, ancillary services, three, community redevelopment, four brand expansion and five targeted major market ground up developments.

In summary, our results are solid and growing. Our market positioning and community investments are very strong. Our focus on talent and operating profitability is unwavering and our growth opportunities are diverse and strong.

I will now turn the call over to, Marc Richards.

Marc Richards

Thank you, Mark. Good morning, everyone. And thank you all for joining our second quarter conference call. I will focus my discussion this morning on Sunrise’s consolidated operating results for three and six months ended June 30th, 2011, as well as the impact our 2011 transactions have had on our recently filed financial statements.

During the second quarter, we reported net income attributable to common shareholders of $1.3 million or $0.02 per fully diluted share, as compared to net income of $46.3 million or $0.81 per fully diluted share in 2010. The change between periods was primarily driven by a $52 million gain associated with our German debt restructuring and $12.7 million of management contract buyout fees recognized during the second quarter of 2010.

Adjusted EBITDAR for the quarter was $39.1 million as compared to $32 million for the same period last year. This increase is primarily due to incremental EBITDAR resulting from our AL US and CC3 acquisitions and lower general and administrative expenses.

We have adjusted net income before interest, taxes, depreciation, amortization and rent expense to further exclude certain non-cash gains and losses and other items of income or expense including cost related to our restructuring efforts and arriving at adjusted EBITDAR.

General and administrative expenses were $27.6 million for the quarter compared to $28.3 million for the same period in 2010. Our Q2, 2011 G&A includes $1.1 million of severance expenses, $1 million of professional fees associated with our recently announced transactions and $2 million of non-cash stock compensation expense.

Our Q2, 2010 G&A included $1.1 million of stock compensation expense and $2.2 million of legal fees incurred associated with our HCP litigation that was resolved later in 2010.

Management fees for the quarter were $24.4 million and included $1 million of fee income from the AL US Venture which we will no longer earn as a result of acquiring a 100% interest in the venture. Accordingly, these fees will be eliminated going forward.

Before I move on to net operating income from our consolidated and leased communities I’d like to mention that we began consolidating the operating results from the 15 AL US communities on June 2nd, 2011.

Our consolidated results include $6.7 million of resident fee income and $4.2 million of community expense for consolidated communities associated with the AL US portfolio. And as I mentioned last quarter, we consolidated six of the 29 communities within the new CNL venture as of January 2011.

Accordingly, we have reflected $10.2 million in resident fee income, $5.9 million of community expense for consolidated communities and $4.2 million of community lease expense on our consolidated statement of operations for the second quarter of 2011.

In our supplemental 8-K disclosure, we have reflected the net operating income from these six consolidated CNL communities in the appropriate joint venture pool rather than in our consolidated leased NOI.

As the mortgage debt and related assets are all held within the venture.

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

Our second quarter 2011 consolidated and leased community net operating income, excluding the impact of the six CNL consolidated venture communities and the 15 AL US communities increased $2.7 million quarter-over-quarter. This is primarily due to continued lease up at our Québec communities and higher average daily rates on our stabilized communities. Net operating income is income from operations, excluding depreciation, lease expense and impairment charges related to these communities.

Turning to our year-over-year results, we reported a net loss attributable to common shareholders of $16.4 million or $0.29 per fully diluted share as compared to net income of $30.3 million or $0.53 per fully diluted share in the first six months of 2010. This significant year-over-year change was driven by a $52 million gain associated with our German debt restructuring and $13.5 million of buyout fees earned in the first half of 2010.

Adjusted EBITDAR for the first six months of 2011 were $67.1 million as compared to $63 million last year. This increase of $4.1 million is primarily due to incremental EBITDAR from our AL US and CC3 acquisitions and lower G&A.

These positive results were partially offset by lower management and professional fee income due to terminated management contracts. General and administrative expenses for the first six months of 2011 were $60 million compared to $61.6 million in 2010.

Our 2011 G&A includes $2.1 million in professional fees associated with our CNL and AL US transactions and $3.7 million of stock compensation expense. Further, G&A expense included $4.5 million in severance costs related to the reduction of 62 physicians at our corporate and regional offices as well as a $2 million retention bonus.

Our 2010 G&A for the six month period includes $2 million of stock compensation expense and $8.1 million of legal fees incurred associated with the HCP litigation that was resolved later in 2010.

Management fees for the first six months of 2011 were $48.6 million which includes $2.4 million in fee income related to AL US that will be eliminated on a go-forward basis.

For the same period last year, management fees were $52.8 million which included a $11.4 million of fee income from management contracts that have since been terminated.

Our year-to-date 2011 consolidated operating results were also impacted by $59.6 million in net operating income from our consolidated and leased communities as compared to $44.8 million during 2010 an increase of $14.8 million.

The 2011 consolidation of the six New York CC3 communities accounts for $8.4 million of the increase and the consolidation of the AL US portfolio accounts for an additional $2.5 million of the increase.

Moving onto the balance sheet, our outstanding consolidated debt has increased from a $163 million at the end of 2010 to $565 million at the end of June, 2011. We issued $86.3 million of junior subordinated convertible notes in April of 2011.

This increase also reflects the now consolidated debt of the AL US portfolio in the amount of $325 million. The principal amount of the debt was $340 million at the end of June, however, our balance sheet reflects the estimated fair value of the debt at the date of acquisition as required under the accounting rules.

The asset side of the balance sheet also reflects the consolidation of this portfolio, including a corresponding increase in property and equipment of approximately $412 million, representing the estimated fair value of the acquired real estate assets.

I will now turn the call over to our Chief Investment and Administrative Officer, Greg Neeb. Greg?

Gregory Neeb

Thanks, Marc. Continuing our goal of providing transparency into our principal business lines, we will provide useful operations data within each of our asset groups, as well as describe how those operations affect our asset valuation and financial performance.

Mainly we will focus on our consolidated assets, our leased assets, our joint ventures and our management agreements which is a reflection of how we manage our business. In addition I will elaborate on a number of key transactions within each business line to enhance visibility on the impact to overall value.

The supplemental 8-K filed yesterday provides additional information and breaks down these business lines into further detail. You may also continue to reference our comparable community data, which is disclosed as part of our Supplemental Information contained in our 8-K.

I will now turn to our overall performance for the quarter. As, Marc mentioned earlier, overall trends for Sunrise communities continue to be positive. Comparing the second quarter 2011 to the second quarter of 2010, stabilized community occupancy is up 40 basis points, average revenue per occupied unit for stabilized community increased 5.2% and NOI increased 10.3% for stabilized properties and 14.4% overall.

When we break the results down on a regional level for which we have nine regions plus the United Kingdom, all regions reported positive NOI growth and average revenue per occupied unit growth for the second quarter 2011 over the second quarter 2010.

Operating trends for the Sunrise leased communities were positive for the quarter. NOI for stabilized leased communities was up 10.1% for the second quarter 2011 over the second quarter 2010. Occupancy was slightly lower or 88.3% for the second quarter 2011 versus 88.6% for the second quarter 2010.

As mentioned on our last call, these properties contain approximately 13% skilled nursing where we had a 32% increase in ancillary revenue due to increased rates in resident days. This revenue stream will be affected by the Center for Medicare & Medicaid services CMS announced last week that it is reducing payments for skilled nursing facilities by $3.87 billion in fiscal 2012.

Based on preliminary analysis and the limited information contained in the CMS announcement and assuming that the payment reduction have been in place for all of the first quarter of 2011, the company estimates that reported first quarter 2000 – consolidated net income and adjusted EBITDAR and EBITDA would have each been reduced by approximately $1 million.

Skilled nursing units comprise approximately 3% of the total unit capacity of the 316 senior living facilities operated by the company. Most of this impact is in our leased community portfolio. Our 25 consolidated communities consists a variety of asset types and other properties we consolidate but don’t own 100%. Specific information about important individual assets including Connecticut Avenue and Monterey are available in our 8-K.

Of note this quarter the recently purchased 16 asset AL US portfolio is now included in our consolidated community totals in our 8-K as discussed by, Mark earlier.

As I stated in my first quarter remarks this high quality portfolio has nine communities concentrated in Southern California that have lagged the recovery due to local economic conditions driving flat year-over-year results. We believe that as condition improves so will the performance in these properties.

Three communities in Montreal that are wholly owned have lagged their expectations, but we now believe that with our focus on these properties, we can overtime create significant value. The outstanding loan balance relating to these communities is non-recourse to us. But we have provided operating deficit guarantees to the lender. We are not currently funding under these operating deficit guarantee.

With principal balance of approximately $48 million was due on April 30th, 2011. We intend to reconfigure a significant portion of the adaptable real estate in suite buildings from assisted living to memory care where our demand is quite strong. The lender has sent not binding indicative terms and conditions that we are generally agreeable to for a loan extension underwriting this revised business plan.

Operating trends for venture and managed communities for the second quarter of 2011 were strong with average revenue per occupied unit our occupancy and NOI are all up over the second quarter of 2010. Net operating income for stabilized joint ventures was up 13.9% while NOI for stabilized managed communities was up 8.3%.

On our last call I discussed the mortgage maturity of one of our joint venture portfolios that occurred in April 2011 and on May 4th, 2011 a JV was notified by the lender that in event a default had occurred the loan is a $133 million and it’s collateralized by six communities in the venture. On August 2nd, 2011, we and our venture partner transferred ownership of the portfolio to a new joint venture owned 70% by a wholly owned subsidiary of CNL Lifestyle Properties and 30% by us.

As part of our new venture agreement, from the start of year ‘04 to the end year of ‘06 we will have a buyout option to purchase CNL 70% interest for a 16% IRR. In addition, the new venture modified the existing loan in the amount of $133 million to provide for among other things, one, the pay down of the loan by approximately $28.7 million and two, secure of the existing maturity default by extending the maturity date of the loan to April 2014 subject to two one-year extension rights under certain circumstances. In connection with the transaction, we contributed $8.1 million and CNL contributed $19 million for the venture.

In the UK one venture with 15 communities has mortgage loans to value covenants and debt service covenants. It is uncertain, whether the venture will continue to be in compliance with these covenants. The mortgage loan had a balance of $644 million on June 30th.

Operating statistics for this portfolio are described in our supplemental 8-K. If the venture does breach one or both of these covenants and the default is not cured, the lender could pursue options which are adverse to the venture, including foreclosure and/or cancellation of our management contracts. However, we have not guaranteed the principal balance of this loan or provided, an operating deficit guarantee.

During the six months ended June 30th, 2011, we recognized $3.7 million in management fees from this venture and our entire UK segment recorded $2.6 million in income from operations. The venture is working with the lender to initiate a preemptive waiver and satisfactory outcome for all the parties.

Overall, Sunrise venture have total debt of $2.6 billion as of June 30th, 2011. Of this $2.6 billion, there is approximately $300 million of debt that is in default. This is down from the $635 million at the end of the first quarter, primarily attributable to our work with respect to our AL US portfolio.

We are in active discussions with both our venture partners and our lenders to work through these remaining defaults and achieve a mutually satisfactory outcome for all parties.

Back to you Mark.

Mark Ordan

Thanks, Greg and Marc. Operator, we will now respond to any questions.

Question-and-Answer Session


Thank you sir (Operator instructions) we’ll go first to Jerry Doctrow from Stifel Nicolaus.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Thanks, good morning. A handful of things, on the G&A maybe first, and I don’t know which Mark wants to answer this, but do you have a sense as to sort of the ramp I mean, I think what you said is you would say, $5 million annually, if I heard you correctly. And I was just trying to get a sense of how much that we see, say next quarter versus sort of over time?

Mark Ordan

Well, the – this is Mark Ordan. The reduction that we’re talking about are mostly hitting in the – starting in the next few week. So you’ll see both in this quarter severance expense and the start of those savings. That’s an annualized run rate savings that we’re projecting. So obviously, the bulk of that which you’ll see – starting in the fourth quarter and 2012.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. That’s great. And then just, Mark on a little more color on sort of the sequential occupancy and then you said it was sort of rebounding, so I guess what I was trying to think about is kind of for modeling purposes where we should be thinking about occupancy for the third quarter and you’ve talked about perhaps doing some discounting and that sort of things. So what should we be thinking about in terms of just rate growth and that sort of stuff as we think about third?

Mark Ordan

Yes, well sort of going back to my comment in the spring, we felt pretty good about things. We saw others fairly steeply discounting and we didn’t see a great reason to do it. And our results in the spring were off a little bit, but not a lot.

So we felt comfortable as we approach the summer and the economic news was so dispiriting, we felt that we ought to make sure that we don’t lag behind. The discounting was very selective, it was really on units that had been in inventory for a while in many cases, in many parts of the country we didn’t have to adjust rates down at all. So it really was a very minor hit. Our ADRs continued to be strong.

We then saw in July which is normally a strong month for us that there was a significant pick up which recouped most of the loss that we experienced before and it’s one month, one week into August, we continue to be up. I can’t prophecy what the rest of the third quarter will be.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

But just in terms of directionally say so you were – what you’re saying is sort of if you look at the world today you’ve kind of recouped that 50 basis point sequential decline you had back to where you were...?

Mark Ordan

Partly yes.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. And then let’s see is there – are there potential for any more JV buyouts there may be you have talked about a couple of – you’ve done two now, anything else sort of on the horizon?

Mark Ordan

Yes I’m glad you asked that, Jerry because when I was reading my script I left that off of my list. So there are still potential additional JV buyout opportunities and we look at other possible acquisitions. In a consolidating environment we think that there could be other opportunities for us both within our current portfolio and perhaps even outside.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. And there is few leases and some management contracts that start maturing 2013, I think one with basically SNH or HRP you may call it. And then you have also some other management contracts. Is that stuff that creates risk you think of re negotiation or loss or are you thinking that sort of that far ahead?

Mark Ordan

In reverse order, we are absolutely thinking out far ahead, and I’m sure, when there’s a maturity, there’s renewal risk. We think they’re great managers of these properties and we hope that we’ll continue to be, but there is always that chance.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. And then, just CapEx, I think you talked about the investment and properties and that sort of thing. Is the current sort of rate for CapEx sort of the right one or what – how should we think about CapEx spending as we go forward?

Marc Richards

Yes, I think what’s happening now by – on our part and on our capital partners or landlords’ part I think is really – I don’t know how to put it but terrific. I think across the board, we are investing in our physical plants. And I think that in one cases where that had lagged, it made it that much harder for somebody – to get somebody to move in. So I think we’re spending carefully but briskly really across the portfolio and I think and to me wearing my sales hat, I think it should have a significant effect on the company.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. But in terms of just the overall volume or sort of CapEx spending is the second quarter kind of run-rate number sort of a good number or is it going to move up from there materially or?

Marc Richards

It will move up. We’ll be spending more, but and a lot of that spending is from our – is on our ambulance part.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. Your CapEx on the balance sheet sort to speak or on the income statement is not going to move up that materially?

Marc Richards

Correct. It will move up because a lot of the spending started in the last few weeks. So we’ll move up from what you see in the second quarter.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. And any sense? Just magnitude or...

Marc Richards

I have to get back to that.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

Okay. And last one from me and I’ll jump off. Just on the CNL deal I think the one item we just want to clarify. So your percentage ownership stake in that is still the same after you moved into the new venture or was there a change in sort of your ownership stake?

Mark Ordan

No it went from 20% to 30%.

Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

It went from 20% to 30%?

Mark Ordan


Jerry Doctrow – Stifel, Nicolaus & Co., Inc.

All right, thanks. That’s all for me.

Mark Ordan

Okay, Jerry. Thank you.


(Operator Instructions)

Mark Ordan

Okay, operator well it seems like that’s it. So everybody – okay, we do have one more question, go ahead.


We’ll go next to Vineeth Betty (ph).

Vineeth Betty

Hey, guys. I wanted to ask a quick question on the joint venture that you guys announced. So it sounds that you guys are paying about $8 million bucks out-of-pocket to preserve the management contract.

Can you talk a little bit about what you think the normalized management fees on that’s going to be, and what your view of the stabilized value of the venture might be as it reaches stabilization? Because it sounds like you’re not putting much money out for what could be a very high value creating venture and preserving the loan management contract, but I think we’re just trying to wrap our hands around the numbers around that. If you could provide some guidance it’d will be very helpful.

Mark Ordan

Well, the 15 is going from about 1.8 up and as we lease up the portfolio, we expect it to increase. I couldn’t give you a hard number. I do think that we’re putting up relative to little to protect the growing management fees theme and I think these are very strong properties. So we think this is a careful and good use of our capital to back up a strong portfolio.

Vineeth Betty

And any view on kind of where NOI should be, on stabilization given the properties are only 62% occupied.

Mark Ordan

I’d come back to you. Again, I don’t want to throw out a number but we’ll come back with something.

Vineeth Betty

Okay, thanks.


At this time we have no further questions.

Mark Ordan

Okay, thank you everybody. We appreciate your support, and we look forward to updating you in the coming months and quarters.


And that does conclude today’s conference. We thank you for your participation.

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