Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
|
[X]
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
or
|
[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 001-32641
BROOKDALE
SENIOR LIVING INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
20-3068069
(I.R.S.
Employer
Identification
No.)
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111
Westwood Place, Suite 200
Brentwood,
Tennessee 37027
(Address
of Principal Executive Offices)
|
(Registrant’s
telephone number including area code)
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(615)
221-2250
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title
of Each Class
Common
Stock, $0.01 Par Value Per Share
|
|
Name
of Each Exchange on Which Registered
New
York Stock Exchange
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [X] No
[ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer [
]
|
|
Accelerated
filer [X]
|
|
|
|
|
|
Non-accelerated
filer [ ] (Do not check if a smaller
reporting company)
|
|
Smaller
reporting
company [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of common stock held by non-affiliates of the registrant
on June 30, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $428.1 million. The market
value calculation was determined using a per share price of $9.74, the price at
which the registrant’s common stock was last sold on the New York Stock Exchange
on such date. For purposes of this calculation, shares held by non-affiliates
excludes only those shares beneficially owned by the registrant’s executive
officers, directors, and stockholders owning 10% or more of the outstanding
common stock (and, in each case, their immediate family members and
affiliates).
As of
February 18, 2010, 119,302,532 shares of the registrant’s common stock, $0.01
par value, were outstanding (excluding unvested restricted shares).
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
sections of the registrant’s Definitive Proxy Statement relating to its 2010
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K.
BROOKDALE
SENIOR LIVING INC.
FORM
10-K
FOR
THE YEAR ENDED DECEMBER 31, 2009
SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain
statements in this Annual Report on Form 10-K and other information we provide
from time to time may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Those forward-looking
statements include all statements that are not historical statements of fact and
those regarding our intent, belief or expectations, including, but not limited
to, statements relating to our operational initiatives and our expectations
regarding their effect on our results; our expectations regarding occupancy,
revenue, cash flow, expense levels, the demand for senior housing, expansion
activity, acquisition opportunities, asset dispositions and the impact of a
failure to reinstate therapy cap exceptions; our belief regarding our growth
prospects; our ability to secure financing or repay, replace or extend existing
debt at or prior to maturity; our ability to remain in compliance with all of
our debt and lease agreements (including the financial covenants contained
therein); our expectations regarding liquidity; our plans to deleverage; our
expectations regarding financings and refinancings of assets (including the
timing thereof); our plans to generate growth organically through occupancy
improvements, increases in annual rental rates and the achievement of operating
efficiencies and cost savings; our plans to expand our offering of ancillary
services (therapy and home health); our plans to expand existing communities;
the expected project costs for our expansion program; our plans to acquire
additional communities, asset portfolios, operating companies and home health
agencies; our expected levels of expenditures and reimbursements (and the timing
thereof); our expectations for the performance of our entrance fee communities;
our ability to anticipate, manage and address industry trends and their effect
on our business; our expectations regarding the payment of dividends; and our
ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility
Operations, and/or Facility Operating Income (as such terms are defined herein).
Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”,
“project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”, “could”,
“should”, “seek(s)”, “estimate(s)” and similar expressions are intended to
identify such forward-looking statements. These statements are based on
management’s current expectations and beliefs and are subject to a number of
risks and uncertainties that could lead to actual results differing materially
from those projected, forecasted or expected. Although we believe that the
assumptions underlying the forward-looking statements are reasonable, we can
give no assurance that our expectations will be attained. Factors which could
have a material adverse effect on our operations and future prospects or which
could cause actual results to differ materially from our expectations include,
but are not limited to, the risk associated with the current global economic
crisis and its impact upon capital markets and liquidity; our inability to
extend (or refinance) debt (including our credit and letter of credit
facilities) as it matures; the risk that we may not be able to satisfy the
conditions precedent to exercising the extension options associated with certain
of our debt agreements; the risk that therapy caps exceptions are not
reinstated; events which adversely affect the ability of seniors to afford our
monthly resident fees or entrance fees; the conditions of housing markets in
certain geographic areas; our ability to generate sufficient cash flow to cover
required interest and long-term operating lease payments; the effect of our
indebtedness and long-term operating leases on our liquidity; the risk of loss
of property pursuant to our mortgage debt and long-term lease obligations; the
possibilities that changes in the capital markets, including changes in interest
rates and/or credit spreads, or other factors could make financing more
expensive or unavailable to us; the risk that we may be required to post
additional cash collateral in connection with our interest rate swaps; the risk
that continued market deterioration could jeopardize the performance of certain
of our counterparties’ obligations; changes in governmental reimbursement
programs; our limited operating history on a combined basis; our ability to
effectively manage our growth; our ability to maintain consistent quality
control; delays in obtaining regulatory approvals; our ability to complete
acquisitions and integrate them into our operations; competition for the
acquisition of assets; our ability to obtain additional capital on terms
acceptable to us; a decrease in the overall demand for senior housing; our
vulnerability to economic downturns; acts of nature in certain geographic areas;
terminations of our resident agreements and vacancies in the living spaces we
lease; increased competition for skilled personnel; increased union activity;
departure of our key officers; increases in market interest rates; environmental
contamination at any of our facilities; failure to comply with existing
environmental laws; an adverse determination or resolution of complaints filed
against us; the cost and difficulty of complying with increasing and evolving
regulation; and other risks detailed from time to time in our filings with the
Securities and Exchange Commission, press releases and other communications,
including those set forth under “Risk Factors” included elsewhere in this Annual
Report on Form 10-K. Such forward-looking statements speak only as of the date
of this Annual Report. We expressly disclaim any obligation to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or change in events,
conditions or circumstances on which any statement is based.
Overview
As of
December 31, 2009, we are the largest operator of senior living communities in
the United States based on total capacity, with 565 communities in 35 states and
the ability to serve approximately 53,600 residents. We offer our residents
access to a full continuum of services across the most attractive sectors of the
senior living industry. As of December 31, 2009, we operated in four
business segments: retirement centers, assisted living, continuing
care retirement communities (“CCRCs”) and management services.
As of
December 31, 2009, we operated 80 retirement center communities with 14,867
units/beds, 430 assisted living communities with 22,954 units/beds, 36 CCRCs
with 12,017 units/beds and 19 communities with 3,788 units/beds where we provide
management services for third parties. The majority of our units/beds are
located in campus settings or communities containing multiple services,
including CCRCs. As of December 31, 2009, our owned/leased communities were
88.9% occupied. We generate approximately 83.0% of our revenues from private pay
customers. For the year ended December 31, 2009, 40.0% of our revenues were
generated from owned communities, 59.7% from leased communities and 0.3% from
management fees from communities we operate on behalf of third
parties.
The table
below presents a summary of our operating results and certain other financial
metrics for each of the years ended December 31, 2009, 2008 and 2007 (dollars in
millions):
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
2,023.1 |
|
|
$ |
1,928.1 |
|
|
$ |
1,839.3 |
|
|
Net
loss attributable to common stockholders(1)
|
|
$ |
(66.3 |
) |
|
$ |
(373.2 |
) |
|
$ |
(162.0 |
) |
|
Adjusted
EBITDA(2)
|
|
$ |
348.6 |
|
|
$ |
302.6 |
|
|
$ |
306.4 |
|
|
Cash
From Facility Operations(3)
|
|
$ |
196.8 |
|
|
$ |
130.1 |
|
|
$ |
143.2 |
|
|
Facility
Operating Income(2)
|
|
$ |
690.1 |
|
|
$ |
637.5 |
|
|
$ |
642.3 |
|
|
(1)
|
Net
loss for 2009 and 2008 include non-cash impairment charges of $10.1
million and $220.0 million,
respectively.
|
|
(2)
|
Adjusted
EBITDA and Facility Operating Income are non-GAAP financial measures we
use in evaluating our operating performance. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Non-GAAP Financial Measures” for an explanation of how we define each of
these measures, a detailed description of why we believe such measures are
useful and the limitations of each measure, and a reconciliation of net
loss to each of these measures.
|
|
(3)
|
Cash
From Facility Operations is a non-GAAP financial measure we use in
evaluating our liquidity. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Non-GAAP
Financial Measures” for an explanation of how we define this measure, a
detailed description of why we believe such measure is useful and the
limitations of such measure, and a reconciliation of net cash provided by
operating activities to such
measure.
|
Our
operating results for the year ended December 31, 2009 were favorably impacted
by an increase in our total revenues (primarily driven by an increase in average
monthly revenue per unit/bed including an increase in our ancillary services
revenue) and by the significant cost control measures that were implemented in
recent periods. The difficult operating environment during 2009 has
resulted in slightly lower occupancy and diminished growth in the rates we
charge our residents. We responded by controlling our expenses and
capital spending, and by increasing the reach of our ancillary services
programs. We also continue to aggressively focus on maintaining and
increasing occupancy.
During
the first half of the year, we took steps to preserve our liquidity and increase
our financial flexibility. For
example,
during the second quarter, we completed a public equity offering which yielded
$163.8 million of net proceeds, which were primarily used to repay the $125.0
million of indebtedness which was outstanding under our credit
facility. Furthermore, we have extended the maturity of a number of
mortgage loans and, factoring in contractual extension options, have no mortgage
debt maturities until 2011 (other than periodic, scheduled principal
payments). Finally, we have taken steps to reduce materially our
exposure to collateralization requirements associated with interest rate
swaps. As a result of these steps and our operating performance
during the year ended December 31, 2009, we ended the year with $66.4 million of
unrestricted cash and cash equivalents on our consolidated balance
sheet.
As
discussed in more detail elsewhere in the Annual Report on Form 10-K, subsequent
to December 31, 2009, we entered into a new revolving credit facility with
General Electric Capital Corporation, as administrative agent. The new facility
has a commitment of $100.0 million, with an option to increase the commitment to
$120.0 million, and matures on June 30, 2013. The new facility replaced the
$75.0 million revolving credit agreement with Bank of America, N.A. that was
scheduled to expire in August 2010.
During
the fourth quarter of 2009 we engaged in a limited and measured amount of
acquisition activity. We acquired 18 senior living communities from
affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net
purchase price of approximately $190.0 million. The portfolio of 18
communities is comprised of a total of 1,197 units, including 92 independent
living units, 746 assisted living units and 359 Alzheimer’s units. We
financed the transaction with approximately $98.8 million of non-recourse
mortgage debt (substantially through the assumption of existing debt), with the
balance of the purchase price paid from cash on hand.
We also
acquired the remaining interest in three retirement center communities that were
previously managed by us and in which we previously had a noncontrolling
interest. Our interest was accounted for under the equity method and
had a carrying value of zero prior to the acquisition. The aggregate
purchase price for the communities was $102.0 million. The portfolio
of three communities is comprised of 642 total units, including 504 independent
living units and 138 assisted living units. We financed the
transaction by obtaining a $75.4 million non-recourse mortgage loan with the
balance of the purchase price paid from cash on hand.
We
believe that we are positioned to take advantage of favorable demographic trends
and future supply-demand dynamics in the senior living industry. We
also believe that we operate in the most attractive sectors of the senior living
industry with significant opportunities to increase our revenues through
providing a combination of housing, hospitality services, ancillary services and
health care services. Our senior living communities offer residents a supportive
“home-like” setting, assistance with activities of daily living, or ADLs, and,
in several communities, licensed skilled nursing services. We also provide
ancillary services, including therapy and home health services, to our
residents. By providing residents with a range of service options as their needs
change, we provide greater continuity of care, enabling seniors to
“age-in-place” and thereby maintain residency with us for a longer period of
time. The ability of residents to age-in-place is also beneficial to our
residents and their families who are concerned with care decisions for their
elderly relatives.
We
believe that there are substantial organic growth opportunities inherent in our
existing portfolio. We intend to take advantage of those opportunities by
growing revenues, while tightening expense control, at our existing communities,
continuing the expansion and maturation of our ancillary services business,
expanding our existing communities, and acquiring additional operating companies
and communities.
Growth
Strategy
Our
primary growth objectives are to grow our revenues, Adjusted EBITDA, Cash From
Facility Operations and Facility Operating Income. Key elements of
our strategy to achieve these objectives include:
|
|
·
|
Organic
growth in our core business, including expense control and the realization
of economies of scale. We plan to grow our existing
operations by increasing revenues through a combination of occupancy
growth and monthly service fee increases as a result of our competitive
strength and growing demand for senior living communities. In addition, we
intend to take advantage of our sophisticated operating and marketing
expertise to retain existing residents and attract new residents to our
communities. We also plan to continue our efforts to achieve
cost savings through the realization of additional economies of
scale. The size of our business has allowed us to achieve
savings in the
|
|
|
|
procurement
of goods and services and increased efficiencies with respect to various
corporate functions, and we expect that we can achieve additional savings
and efficiencies.
|
|
|
·
|
Growth
through the continued expansion of our ancillary services programs
(including therapy services and home health). We plan to
grow our revenues by further expanding our Innovative Senior Care program
throughout our retirement centers, assisted living, CCRCs and management
services segments. This expansion includes expanding the scope of services
provided at the communities currently served and the continuing rollout of
home health to communities not currently serviced. Through the
Innovative Senior Care program, we currently provide therapy, home health
and other ancillary services, as well as education and wellness programs,
to residents of many of our communities. These programs are
focused on wellness and physical fitness to allow residents to maintain
maximum independence. These services provide many continuing education
opportunities for residents and their families through health fairs,
seminars, and other consultative interactions. The therapy services we
provide include physical, occupational, speech and other specialized
therapy and home health services. The home health services we
provide include skilled nursing, physical therapy, occupational therapy,
speech language pathology, home health aide services as well as social
services as needed. In addition to providing these in-house
therapy and wellness services at our communities, we also provide these
services to other senior living communities that we do not own or operate.
These services may be reimbursed under the Medicare program or paid
directly by residents from private pay sources and revenues are recognized
as services are provided. We believe that our Innovative Senior Care
program is unique in the senior living industry and that we have a
significant advantage over our competitors with respect to providing
ancillary services because of our established infrastructure and
experience. We believe there is a significant opportunity to
grow our revenues by continuing to expand the scope of services at
communities currently served and continuing the rollout of home health to
additional communities, which we believe will increase our revenue per
unit/bed in the future. As of December 31, 2009 we offered
therapy services to approximately 36,000 of our units and home health
services to approximately 23,000 of our
units.
|
|
|
·
|
Growth
through the expansion of existing communities. We intend
to grow our revenues and cash flows through the expansion of certain of
our existing communities where economically
advantageous. Certain of our communities with stabilized
occupancies and excess demand in their respective markets may benefit from
additions and expansions (which additions and expansions may be subject to
landlord, lender and other third party consents) offering increased
capacity. Additionally, the community, as well as our presence
in the market, may benefit from adding a new level of service for
residents.
|
|
|
·
|
Growth
through the acquisition and consolidation of asset portfolios and other
senior living companies. As
opportunities arise, we plan to continue to take advantage of the
fragmented continuing care, independent living and assisted living
sectors by selectively purchasing existing operating companies, asset
portfolios, home health agencies and communities. We may also
seek to acquire the fee interest in communities that we currently lease or
manage. Our acquisition strategy will continue to focus
primarily on communities where we can improve service delivery, occupancy
rates and cash flow.
|
The
Senior Living Industry
The
senior living industry is highly fragmented and characterized by numerous local
and regional operators. We are one of a limited number of national
operators that provide a broad range of community locations and service level
offerings at varying price levels. The industry has seen significant
growth in recent years and has been marked by the emergence of the assisted
living segment in the mid-1990’s.
Since the
beginning of 2007, the industry has been affected by the downturn in the housing
market and by the declining economy in general. In spite of these
factors, occupancy in the industry has only decreased by 120 basis points to
88.9% in the twelve months ended December 31, 2009 according to the National
Investment Center for the Seniors Housing & Care Industry
(“NIC”). Occupancy has declined 160 basis points to 89.0% in the
independent living sector and 70 basis points to 88.9% in the assisted living
sector in the twelve months ended December 31, 2009. Industry
occupancy rates have been declining after reaching a cyclic high in early 2007
of 92.3% according to NIC. New construction starts have slowed
dramatically since late 2008. Due to the continued impact of the
economic recession, locating financing for new projects has been very
difficult. For the
foreseeable
future, there will be very limited amounts of new construction in senior
living.
Despite
current economic conditions, we believe that a number of trends will contribute
to the continued growth of the senior living industry in coming
years. The primary market for senior living services is individuals
age 70 and older. According to U.S. Census data, the group is
expected to grow by 3.6 million through 2015. As a result of these
demographic trends, we expect an increase in the demand for senior living
services in future years.
We
believe the senior living industry has been and will continue to be impacted by
several other trends. The use of long-term care insurance is
increasing among current and future seniors as a means of planning for the costs
of senior living services. In addition, as a result of increased
mobility in society, reduction of average family size and increased number of
two-wage earner couples, more seniors are looking for alternatives outside of
their family for their care. Growing consumer awareness among seniors
and their families concerning the types of services provided by independent and
assisted living operators has further contributed to the opportunities in the
senior living industry. Also, seniors currently possess greater financial
resources than in the past, which makes it more likely that they are able to
afford to live in market-rate senior housing. Seniors in the geographic areas in
which we operate tend to have a significant amount of assets generated from
savings, pensions and, despite weakening in national housing markets, equity
from the sale of private homes.
Challenges
in our industry include increased state and local regulation of the assisted
living and skilled nursing sectors, which has led to an increase in the cost of
doing business. The regulatory environment continues to intensify in
the number and types of laws and regulations affecting us, accompanied by
increased enforcement activity by state and local officials. In addition, like
other companies, our financial results may be negatively impacted by increasing
employment costs including salaries, wages and benefits, such as health care,
for our employees. Increases in the costs of utilities, insurance, and real
estate taxes may also have a negative impact on our financial
results.
Certain
per person annual limits on Medicare reimbursement for therapy services became
effective in 2006, subject to certain exceptions. These exceptions expired on
December 31, 2009. Although legislation has been proposed in Congress to
reinstate the exceptions (and the exceptions have been repeatedly extended in
the past), this legislation has not yet been adopted. There can be no
assurance as to whether the exceptions will eventually be reinstated or the
timing thereof. A failure to reinstate these exceptions (or a delay
in their reinstatement) could have a material adverse impact on the revenues and
net operating income relating to our outpatient therapy services
program. While it is inherently difficult to quantify the impact of a
failure to reinstate the therapy cap exceptions (including, among other things,
possible changes by residents in accessing their Medicare benefits), we estimate
that such failure would have a recurring negative effect on the net operating
income from our outpatient therapy services program in the range of $5.0 million
to $10.0 million per year. In addition, the Company would likely
incur additional one-time charges (such as severance expense) in response
thereto.
In
addition, there continues to be various federal and state legislative and
regulatory proposals to implement cost containment measures that would limit
payments to healthcare providers in the future. Changes in the reimbursement
policies of the Medicare and Medicaid programs could have an adverse effect on
our results of operations and cash flow.
Our
History
We were
formed as a Delaware corporation in June 2005 for the purpose of combining two
leading senior living operating companies, Brookdale Living Communities, Inc.,
or BLC, and Alterra Healthcare Corporation, or Alterra. BLC and Alterra had been
operating independently since 1986 and 1981, respectively. On
November 22, 2005, we completed our initial public offering of common stock, and
on July 25, 2006, we acquired American Retirement Corporation, or ARC, another
leading senior living provider which had been operating independently since
1978.
Our
Product Offerings
We offer
a variety of senior living housing and service alternatives in communities
located across the United States. Our primary product offerings consist of (i)
retirement center communities; (ii) assisted living communities; and (iii)
CCRCs. As discussed below under “Segments”, we also operate certain communities
on behalf of third parties pursuant to management agreements.
Retirement
centers. Our retirement center communities are primarily
designed for middle to upper income seniors generally age 70 and older who
desire an upscale residential environment providing the highest quality of
service.
The
majority of our retirement center communities consist of both independent and
assisted living units in a single community, which allows residents to
“age-in-place” by providing them with a continuum of senior independent and
assisted living services. While the number varies depending upon the particular
community, approximately 79.2% of all of the units at our retirement center
communities are independent living units, with the balance of units licensed for
assisted living.
Our
retirement center communities are large multi-story buildings containing on
average 186 units/beds with extensive common areas and amenities. Residents may
choose from studio, one-bedroom and two-bedroom units, depending upon the
specific community.
Each
retirement center community provides residents with basic services such as meal
service, 24-hour emergency response, housekeeping, concierge services,
transportation and recreational activities. Most of these communities also offer
custom tailored supplemental care services at an additional charge, which may
include medication reminders, check-in services and escort and companion
services. In addition, our Innovative Senior Care program is currently available
in most of our retirement centers communities. Through the program, we are able
to offer our residents various education, wellness, therapy, home health and
other ancillary services.
In
addition to the basic services, our retirement center communities that include
assisted living also provide residents with supplemental care service options to
provide assistance with activities of daily living, or ADLs. The levels of care
provided to residents vary from community to community depending, among other
things, upon the licensing requirements of the state in which the community is
located.
Residents
in our retirement center communities are able to maintain their residency for an
extended period of time due to the range of service options available to
residents (not including skilled nursing) as their needs change. Residents with
cognitive or physical frailties and higher level service needs are accommodated
with supplemental services in their own units or, in certain communities, are
cared for in a more structured and supervised environment on a separate wing or
floor. These communities also generally have a dedicated assisted living staff,
including nurses at the majority of communities, and separate assisted living
dining rooms and activity areas.
The
communities in our Retirement Centers segment represent approximately 27.7% of
our total senior living capacity.
Assisted
Living. Our assisted living communities offer housing and
24-hour assistance with ADLs to mid-acuity frail and elderly
residents.
Our
assisted living communities include both freestanding, multi-story communities
with more than 50 beds and smaller, freestanding single story communities with
less than 50 beds. Depending upon the specific location, the community may
include (i) private studio, one-bedroom and one-bedroom deluxe apartments, or
(ii) individual rooms for one or two residents in wings or “neighborhoods”
scaled to a single-family home, which includes a living room, dining room, patio
or enclosed porch, laundry room and personal care area, as well as a caregiver
work station.
Under our
Clare Bridge brand, we also operate 86 memory care communities, which are
freestanding assisted living communities specially designed for residents with
Alzheimer’s disease and other dementias requiring the attention, personal care
and services needed to help cognitively impaired residents maintain a higher
quality of
life. Our
memory care communities have from 20 to 60 beds and some are part of a campus
setting which includes a freestanding assisted living community.
All
residents at our assisted living and memory care communities receive the basic
care level, which includes ongoing health assessments, three meals per day and
snacks, coordination of special diets planned by a registered dietitian,
assistance with coordination of physician care, social and recreational
activities, housekeeping and personal laundry services. In some locations we
offer our residents exercise programs and programs designed to address issues
associated with early stages of Alzheimer’s and other forms of dementia. In
addition, we offer at additional cost higher levels of personal care services to
residents at these communities who are very physically frail or experiencing
early stages of Alzheimer’s disease or other dementia and who require more
frequent or intensive physical assistance or increased personal care and
supervision due to cognitive impairments. We also offer our Innovative Senior
Care program at certain of our assisted living and memory care
communities.
As a
result of their progressive decline in cognitive abilities, residents at our
memory care communities typically require higher levels of personal care and
services and therefore pay higher monthly service fees. Specialized services
include assistance with ADLs, behavior management and an activities program, the
goal of which is to provide a normalized environment that supports residents’
remaining functional abilities. Whenever possible, residents participate in all
facets of daily life at the residence, such as assisting with meals, laundry and
housekeeping.
The
communities in our Assisted Living segment (including our memory care
communities) represent approximately 42.8% of our total senior living
capacity.
CCRCs. Our CCRCs
are large communities that offer a variety of living arrangements and services
to accommodate all levels of physical ability and health. Most of our CCRCs have
independent living, assisted living and skilled nursing available on one campus,
and some also include memory care/Alzheimer’s units.
Eleven of
our CCRCs are entry fee communities, in which residents in the independent
living apartment units pay a one-time upfront entrance fee, typically $100,000
to $400,000 or more, which fee is partially refundable in certain circumstances.
The amount of the entrance fee varies depending upon the type and size of the
dwelling unit, the type of contract plan selected, whether the contract contains
a lifecare benefit (i.e., a healthcare discount) for the resident, the amount
and timing of refund, and other variables. These agreements are subject to
regulations in various states. In addition to their initial entrance fee,
residents under all of our entrance fee agreements also pay a monthly service
fee, which entitles them to the use of certain amenities and services. Since we
receive entrance fees upon initial occupancy, the monthly fees are generally
less than fees at a comparable rental community.
The
refundable portion of a resident’s entrance fee is generally refundable within a
certain number of months or days following contract termination or upon the sale
of the unit, or in some agreements, upon the resale of a comparable unit or 12
months after the resident vacates the unit. In addition, some entrance fee
agreements entitle the resident to a refund of the original entrance fee paid
plus a percentage of the appreciation of the unit upon resale.
We also
offer a broad array of ancillary services, including therapy, home health, and
other services through our Innovative Senior Care program, to the residents of
each of our CCRCs.
The
communities in our CCRCs segment represent approximately 22.4% of our total
senior living capacity. The independent living units at our entrance
fee communities (those units on which entry fees are paid) represent 5.8% of our
total senior living capacity. Excluding managed communities and
equity homes (which are residences located on certain of our CCRC campuses that
we do not generally own), entrance fee communities represent 9.5% of our total
senior living capacity.
Competitive
Strengths
We
believe our nationwide network of senior living communities is well positioned
to benefit from the growth and increasing demand in the industry. Some of our
most significant competitive strengths are:
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Skilled
management team with extensive experience. Our senior
management team has extensive experience in acquiring, operating and
managing a broad range of senior living assets, including experience in
the senior living, healthcare, hospitality and real estate
industries.
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Geographically
diverse, high-quality, purpose-built communities. As of
December 31, 2009, we operate a nationwide base of 565 purpose-built
communities in 35 states, including 78 communities in nine of the top ten
standard metropolitan statistical
areas.
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Ability to
provide a broad spectrum of care. Given our diverse mix
of retirement centers, assisted living communities and CCRCs, we are able
to meet a wide range of our customers’ needs. We believe that we are one
of the few companies in the senior living industry with this capability.
We believe that our multiple product offerings create marketing synergies
and cross-selling opportunities.
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The size of
our business allows us to realize cost and operating
efficiencies. We are the largest operator of senior
living communities in the United States based on total capacity. The size
of our business allows us to realize cost savings and economies of scale
in the procurement of goods and services. Our scale also allows
us to achieve increased efficiencies with respect to various corporate
functions. We intend to utilize our expertise and size to capitalize on
economies of scale resulting from our national platform. Our geographic
footprint and centralized infrastructure provide us with a significant
operational advantage over local and regional operators of senior living
communities. In connection with our formation transactions and our
acquisitions, we negotiated new contracts for food, insurance and other
goods and services. In addition, we have and will continue to consolidate
corporate functions
such as accounting, finance, human resources, legal, information
technology and marketing. We began to realize these savings upon the
completion of our formation transactions in September 2005 and have
realized additional savings as we continued to consolidate and integrate
various corporate functions.
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Significant
experience in providing ancillary services. Through our
Innovative Senior Care program, we provide a range of education, wellness,
therapy, home health and other ancillary services to residents of certain
of our retirement centers, assisted living, and CCRC
communities. Having therapy clinics and home health agencies
located in our buildings to provide needed services to our residents is a
distinctive competitive difference. We have significant
experience in providing these ancillary services and expect to receive
additional revenues as we expand our ancillary service offerings to
additional communities.
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Segments
As of
December 31, 2009, we had four reportable segments: retirement centers; assisted
living; CCRCs; and management services. These segments were determined based on
the way that our chief operating decision makers organize our business
activities for making operating decisions and assessing
performance.
Our
management services segment includes the results of communities that we operate
on behalf of third parties pursuant to management agreements. Information
regarding the other segments is included above under “Our Product
Offerings”.
Operating
results from our four business segments are discussed further in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Note 24 to our consolidated financial statements included
herein.
Operations
Operations
Overview
We
believe that successful senior living operators must effectively combine the
expertise and business disciplines of housing, hospitality, health care,
marketing, finance and real estate.
We
continually review opportunities to expand the types of services we provide to
our residents. To date, we have been able to increase our monthly revenue per
unit each year and we have generally experienced increasing facility operating
margins through a combination of the implementation of efficient operating
procedures and the
economies
of scale associated with the size and number of our communities. Our operating
procedures include securing national vendor contracts to obtain the lowest
possible pricing for certain services such as food, energy and insurance,
implementing effective budgeting and financial controls at each community, and
establishing standardized training and operations procedures.
We have
implemented intensive standards, policies and procedures and systems, including
detailed staff manuals, which we believe have contributed to high levels of
customer service and to improved facility operating margins. We have centralized
accounting controls, finance and other operating functions in our support
centers so that, consistent with our operating philosophy, community-based
personnel can focus on resident care and efficient operations. We have
established company-wide policies and procedures relating to, among other
things: resident care; community design and community operations; billings and
collections; accounts payable; finance and accounting; risk management;
development of employee training materials and programs; marketing activities;
the hiring and training of management and other community-based personnel;
compliance with applicable local and state regulatory requirements; and
implementation of our acquisition, development and leasing plans.
Consolidated
Corporate Operations Support
We have
developed a centralized infrastructure and services platform, which provides us
with a significant operational advantage over local and regional operators of
senior living communities. The size of our business also allows us to achieve
increased efficiencies with respect to various corporate functions such as human
resources, finance, accounting, legal, information technology and marketing. We
are also able to realize cost efficiencies in the purchasing of food, supplies,
insurance, benefits, and other goods and services. In addition, we have
established centralized operations groups to support all of our product lines
and communities in areas such as training, regulatory affairs, asset management,
dining and procurement.
Community
Staffing and Training
Each
community has an Executive Director responsible for the overall day-to-day
operations of the community, including quality of service, social services and
financial performance. Each Executive Director receives specialized training
from us. In addition, a portion of each Executive Director’s compensation is
directly tied to the operating performance of the community and key service
quality measures. We believe that the quality of our communities, coupled with
our competitive compensation philosophy, has enabled us to attract high-quality,
professional community Executive Directors.
Depending
upon the size of the community, each Executive Director is supported by a
community staff member who is directly responsible for day-to-day care of the
residents and either community staff or regional support to oversee the
community’s marketing and community outreach programs. Other key positions
supporting each community may include individuals responsible for food service,
activities, housekeeping, and engineering.
We
believe that quality of care and operating efficiency can be maximized by direct
resident and staff contact. Employees involved in resident care, including the
administrative staff, are trained in the support and care needs of the residents
and emergency response techniques. We have adopted formal training and
evaluation procedures to help ensure quality care for our residents. We have
extensive policy and procedure manuals and hold frequent training sessions for
management and staff at each site.
Quality
Assurance
We
maintain quality assurance programs at each of our communities through our
corporate and regional staff. Our quality assurance program is designed to
achieve a high degree of resident and family member satisfaction with the care
and services that we provide. Our quality control measures include, among other
things, community inspections conducted by corporate staff on a regular basis.
These inspections cover the appearance of the exterior and grounds; the
appearance and cleanliness of the interior; the professionalism and friendliness
of staff; quality of resident care (including assisted living services, nursing
care, therapy and home health programs); the quality of activities and the
dining program; observance of residents in their daily living activities; and
compliance with government regulations. Our quality control measures also
include the survey of residents and family members on a regular basis to monitor
their perception of the quality of services provided to
residents.
In order
to foster a sense of community as well as to respond to residents’ desires, at
many of our communities, we have established a resident council or other
resident advisory committee that meets monthly with the Executive Director of
the community. Separate resident committees also exist at many of these
communities for food service, activities, marketing and hospitality. These
committees promote resident involvement and satisfaction and enable community
management to be more responsive to the residents’ needs and
desires.
Marketing
and Sales
Our
marketing strategy is intended to create awareness of us, our communities, our
products and our services among potential residents and their family members and
among referral sources, including hospital discharge planners, physicians,
clergy, area agencies for the elderly, skilled nursing facilities, home health
agencies and social workers. Our marketing staff develops overall strategies for
promoting our communities and monitors the success of our marketing efforts,
including outreach programs. In addition to direct contacts with prospective
referral sources, we also rely on internet inquiries, print advertising, yellow
pages advertising, direct mail, signage and special events, health fairs and
community receptions. Certain resident referral programs have been established
and promoted within the limitations of federal and state laws at many
communities.
In order
to mitigate the impact of weakness in the housing market, we have implemented
several sales and marketing initiatives designed to increase our entrance fee
sales results. These include the acceptance of short-term promissory
notes in satisfaction of a resident’s required entrance fee from certain
pre-qualified, prospective residents who are waiting for their homes to
sell. In addition, we have implemented the MyChoice program, which
allows new and existing residents in certain communities the option to pay
additional refundable entrance fee amounts in return for a reduced monthly
service fee, thereby offering choices to residents desiring a more affordable
ongoing monthly service fee.
Competition
The
senior living industry is highly competitive. We compete with numerous other
organizations that provide similar senior living alternatives, such as home
health care agencies, community-based service programs, retirement communities,
convalescent centers and other senior living providers. In general, regulatory
and other barriers to competitive entry in the retirement center and assisted
living sectors of the senior living industry are not substantial, except in the
skilled nursing area. Although new construction of senior living
communities has declined in recent years, we have experienced and expect to
continue to experience competition in our efforts to acquire and operate senior
living communities. Some of our present and potential senior living competitors
have, or may obtain, greater financial resources than us and may have a lower
cost of capital. Consequently, we may encounter competition that could limit our
ability to attract residents or expand our business, which could have a material
adverse effect on our revenues and earnings. Our major publicly-traded
competitors are Sunrise Senior Living, Inc., Emeritus Corporation and Capital
Senior Living Corporation and our major private competitors include Life Care
Services, LLC and Atria Senior Living Group, as well as a large number of
not-for-profit entities.
Customers
Our
target retirement center residents are senior citizens age 70 and older who
desire or need a more supportive living environment. The average retirement
center resident resides in a retirement center community for approximately 32
months. A number of our retirement center residents relocate to one of our
communities in order to be in a metropolitan area that is closer to their adult
children.
Our
target assisted living residents are predominantly senior citizens age 80 and
older who require daily assistance with two or three ADLs. The average assisted
living resident resides in an assisted living community for approximately 20
months. Residents typically enter an assisted living community due to a
relatively immediate need for services that might have been triggered by a
medical event or need.
Our
target CCRC residents are senior citizens who are seeking a community that
offers a variety of services and a continuum of care so that they can “age in
place.” These residents generally first enter the community as a resident of an
independent living unit and may later move into an assisted living or skilled
nursing unit as their needs change.
We
believe our combination of retirement center and assisted living operating
expertise and the broad base of customers that this enables us to target creates
a unique opportunity for us to invest in a broad spectrum of assets in the
senior living industry, including retirement center, assisted living, CCRC and
skilled nursing communities.
Employees
As of
December 31, 2009, we had approximately 23,500 full-time employees and
approximately 13,300 part-time employees, of which 210 work in our Nashville
headquarters office, 361 work in our Milwaukee office, 53 work in our Chicago
office and 81 work in a variety of field-based management
positions. We currently consider our relationship with our employees
to be good.
Government
Regulation
The
regulatory environment surrounding the senior living industry continues to
intensify in the number and type of laws and regulations affecting it. In
addition, federal, state and local officials are increasingly focusing their
efforts on enforcement of these laws and regulations. This is particularly true
for large for-profit, multi-community providers like us. Some of the laws and
regulations that impact our industry include: state and local laws impacting
licensure, protecting consumers against deceptive practices, and generally
affecting the communities’ management of property and equipment and how we
otherwise conduct our operations, such as fire, health and safety laws and
regulations and privacy laws; federal and state laws designed to protect
Medicare and Medicaid, which mandate what are allowable costs, pricing, quality
of services, quality of care, food service, resident rights (including abuse and
neglect) and fraud; federal and state residents’ rights statutes and
regulations; Anti-Kickback and physicians referral (“Stark”) laws; and safety
and health standards set by the Occupational Safety and Health Administration.
We are unable to predict the future course of federal, state and local
legislation or regulation. Changes in the regulatory framework could have a
material adverse effect on our business.
Many
senior living communities are also subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities.
Although requirements vary from state to state, these requirements may address,
among others, the following: personnel education, training and records;
community services, including administration of medication, assistance with
self-administration of medication and the provision of nursing, home health and
therapy services; staffing levels; monitoring of resident wellness; physical
plant specifications; furnishing of resident units; food and housekeeping
services; emergency evacuation plans; professional licensing and certification
of staff prior to beginning employment; and resident rights and
responsibilities, including in some states the right to receive health care
services from providers of a resident’s choice that are not our employees. In
several of the states in which we operate or may operate, we are prohibited from
providing certain higher levels of senior care services without first obtaining
the appropriate licenses. In addition, in several of the states in which we
operate or intend to operate, assisted living communities, home health agencies
and/or skilled nursing facilities require a certificate of need before the
community can be opened or the services at an existing community can be
expanded. Senior living communities may also be subject to state and/or local
building, zoning, fire and food service codes and must be in compliance with
these local codes before licensing or certification may be granted. These laws
and regulatory requirements could affect our ability to expand into new markets
and to expand our services and communities in existing markets. In addition, if
any of our presently licensed communities operates outside of its licensing
authority, it may be subject to penalties, including closure of the
community.
The
intensified regulatory and enforcement environment impacts providers like us
because of the increase in the number of inspections or surveys by governmental
authorities and consequent citations for failure to comply with regulatory
requirements. Unannounced surveys or inspections may occur annually or
bi-annually, or following a regulator’s receipt of a complaint about the
community. From time to time in the ordinary course of business, we receive
deficiency reports from state regulatory bodies resulting from such inspections
or surveys. Most inspection deficiencies are resolved through an agreed-to plan
of corrective action relating to the community’s operations, but the reviewing
agency typically has the authority to take further action against a licensed or
certified community, which could result in the imposition of fines, imposition
of a provisional or conditional license, suspension or revocation of a license,
suspension or denial of admissions, loss of certification as a provider under
federal health care programs or imposition of other sanctions, including
criminal penalties. Loss, suspension or modification of a license may also cause
us to default under our loan or lease agreements and/or trigger cross-defaults.
Sanctions may be taken against providers or facilities without regard to the
providers’ or facilities’ history of compliance. We may also expend considerable
resources to respond to federal and state
investigations
or other enforcement action under applicable laws or regulations. To date, none
of the deficiency reports received by us has resulted in a suspension, fine or
other disposition that has had a material adverse effect on our revenues.
However, any future substantial failure to comply with any applicable legal and
regulatory requirements could result in a material adverse effect to our
business as a whole. In addition, states Attorneys General vigorously enforce
consumer protection laws as those laws relate to the senior living industry.
State Medicaid Fraud and Abuse Units may also investigate assisted living
communities even if the community or any of its residents do not receive federal
or state funds.
Regulation
of the senior living industry is evolving at least partly because of the growing
interests of a variety of advocacy organizations and political movements
attempting to standardize regulations for certain segments of the industry,
particularly assisted living. Our operations could suffer if future regulatory
developments, such as federal assisted living laws and regulations, as well as
mandatory increases in the scope and severity of deficiencies determined by
survey or inspection officials or increase the number of citations that can
result in civil or criminal penalties. Certain current state laws and
regulations allow enforcement officials to make determinations on whether the
care provided by one or more of our communities exceeds the level of care for
which the community is licensed. A finding that a community is delivering care
beyond its license might result in the immediate transfer and discharge of
residents, which may create market instability and other adverse consequences.
Furthermore, certain states may allow citations in one community to impact other
communities in the state. Revocation or suspension of a license, or a citation,
at a given community could therefore impact our ability to obtain new licenses
or to renew existing licenses at other communities, which may also cause us to
be in default under our loan or lease agreements and trigger cross-defaults or
may also trigger defaults under certain of our credit agreements, or adversely
affect our ability to operate and/or obtain financing in the future. If a state
were to find that one community’s citation will impact another of our
communities, this will also increase costs and result in increased surveillance
by the state survey agency. If regulatory requirements increase, whether through
enactment of new laws or regulations or changes in the enforcement of existing
rules, including increased enforcement brought about by advocacy groups, in
addition to federal and state regulators, our operations could be adversely
affected. In addition, any adverse finding by survey and inspection officials
may serve as the basis for false claims lawsuits by private plaintiffs and may
lead to investigations under federal and state laws, which may result in civil
and/or criminal penalties against the community or individual.
There are
various extremely complex federal and state laws governing a wide array of
referrals, relationships and arrangements and prohibiting fraud by health care
providers, including those in the senior living industry, and governmental
agencies are devoting increasing attention and resources to such anti-fraud
initiatives. The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, and the Balanced Budget Act of 1997 expanded the penalties for health
care fraud. In addition, with respect to our participation in federal health
care reimbursement programs, the government or private individuals acting on
behalf of the government may bring an action under the False Claims Act alleging
that a health care provider has defrauded the government and seek treble damages
for false claims and the payment of additional monetary civil penalties.
Recently, other health care providers have faced enforcement action under the
False Claims Act. The False Claims Act allows a private individual with
knowledge of fraud to bring a claim on behalf of the federal government and earn
a percentage of the federal government’s recovery. Because of these incentives,
so-called “whistleblower” suits have become more frequent. Also, if any of our
communities exceeds its level of care, we may be subject to private lawsuits
alleging “transfer trauma” by residents. Such allegations could also lead to
investigations by enforcement officials, which could result in penalties,
including the closure of communities. The violation of any of these regulations
may result in the imposition of fines or other penalties that could jeopardize
our business.
Additionally,
we operate communities that participate in federal and/or state health care
reimbursement programs, including state Medicaid waiver programs for assisted
living communities, the Medicare skilled nursing facility benefit program and
other healthcare programs such as therapy and home health services, or other
federal and/or state health care programs. Consequently, we are subject to
federal and state laws that prohibit anyone from presenting, or causing to be
presented, claims for reimbursement which are false, fraudulent or are for items
or services that were not provided as claimed. Similar state laws vary from
state to state and we cannot be sure that these laws will be interpreted
consistently or in keeping with past practices. Violation of any of these laws
can result in loss of licensure, claims for recoupment, civil or criminal
penalties and exclusion of health care providers or suppliers from furnishing
covered items or services to beneficiaries of the applicable federal and/or
state health care reimbursement program. Loss of licensure may also cause us to
default under our leases and loan agreements and/or trigger
cross-defaults.
We are
also subject to certain federal and state laws that regulate financial
arrangements by health care providers, such as the Federal Anti-Kickback Law,
the Stark laws and certain state referral laws. The Federal Anti-Kickback Law
makes it unlawful for any person to offer or pay (or to solicit or receive) “any
remuneration ... directly or indirectly, overtly or covertly, in cash or in
kind” for referring or recommending for purchase any item or service
which is
eligible for payment under the Medicare and/or Medicaid programs. Authorities
have interpreted this statute very broadly to apply to many practices and
relationships between health care providers and sources of patient referral. If
we were to violate the Federal Anti-Kickback Law, we may face criminal penalties
and civil sanctions, including fines and possible exclusion from government
programs such as Medicare and Medicaid, which may also cause us to default under
our leases and loan agreements and/or trigger cross-defaults. Adverse
consequences may also result if we violate federal Stark laws related to certain
Medicare and Medicaid physician referrals. While we endeavor to comply with all
laws that regulate the licensure and operation of our senior living communities,
it is difficult to predict how our revenues could be affected if we were subject
to an action alleging such violations. We are also subject to federal and state
laws designed to protect the confidentiality of patient health information. The
U.S. Department of Health and Human Services, or HHS, has issued rules pursuant
to HIPAA relating to the privacy of such information. Rules that became
effective April 14, 2003 govern our use and disclosure of health information at
certain HIPAA covered communities. We established procedures to comply with
HIPAA privacy requirements at these communities. We were required to be in
compliance with the HIPAA rule establishing administrative, physical and
technical security standards for health information by April 2005. To the best
of our knowledge, we are in compliance with these rules.
Environmental
Matters
Under
various federal, state and local environmental laws, a current or previous owner
or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of certain
hazardous or toxic substances, including, among others, petroleum and materials
containing asbestos, that could be located on, in, at or under a property,
regardless of how such materials came to be located there. Additionally, such an
owner or operator of real property may incur costs relating to the release of
hazardous or toxic substances, including government fines and payments for
personal injuries or damage to adjacent property. The cost of any required
investigation, remediation, removal, mitigation, compliance, fines or personal
or property damages and our liability therefore could exceed the property’s
value and/or our assets’ value. In addition, the presence of such substances, or
the failure to properly dispose of or remediate the damage caused by such
substances, may adversely affect our ability to sell such property, to attract
additional residents and retain existing residents, to borrow using such
property as collateral or to develop or redevelop such property. In addition,
such laws impose liability for investigation, remediation, removal and
mitigation costs on persons who disposed of or arranged for the disposal of
hazardous substances at third-party sites. Such laws and regulations often
impose liability without regard to whether the owner or operator knew of, or was
responsible for, the presence, release or disposal of such substances as well as
without regard to whether such release or disposal was in compliance with law at
the time it occurred. Moreover, the imposition of such liability upon us could
be joint and several, which means we could be required to pay for the cost of
cleaning up contamination caused by others who have become insolvent or
otherwise judgment proof.
We do not
believe that we have incurred such liabilities that would have a material
adverse effect on our business, financial condition and results of
operations.
Our
operations are subject to regulation under various federal, state and local
environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at
our communities; identification and warning of the presence of
asbestos-containing materials in buildings, as well as removal of such
materials; the presence of other substances in the indoor environment; and
protection of the environment and natural resources in connection with
development or construction of our properties.
Some of
our communities generate infectious or other hazardous medical waste due to the
illness or physical condition of the residents, including, for example,
blood-contaminated bandages, swabs and other medical waste products and
incontinence products of those residents diagnosed with an infectious disease.
The management of infectious medical waste, including its handling, storage,
transportation, treatment and disposal, is subject to regulation under various
federal, state and local environmental laws. These environmental laws set forth
the management requirements for such waste, as well as related permit,
record-keeping, notice and reporting obligations. Each of our communities has an
agreement with a waste management company for the proper disposal of all
infectious medical waste. The use of such waste management companies does not
immunize us
from
alleged violations of such medical waste laws for operations for which we are
responsible even if carried out by such waste management companies, nor does it
immunize us from third-party claims for the cost to cleanup disposal sites at
which such wastes have been disposed. Any finding that we are not in compliance
with environmental laws could adversely affect our business operations and
financial condition.
Federal
regulations require building owners and those exercising control over a
building’s management to identify and warn, via signs and labels, their
employees and certain other employers operating in the building of potential
hazards posed by workplace exposure to installed asbestos-containing materials
and potential asbestos-containing materials in their buildings. The regulations
also set forth employee training, record-keeping requirements and sampling
protocols pertaining to asbestos-containing materials and potential
asbestos-containing materials. Significant fines can be assessed for violation
of these regulations. Building owners and those exercising control over a
building’s management may be subject to an increased risk of personal injury
lawsuits by workers and others exposed to asbestos-containing materials and
potential asbestos-containing materials. The regulations may affect the value of
a building containing asbestos-containing materials and potential
asbestos-containing materials in which we have invested. Federal, state and
local laws and regulations also govern the removal, encapsulation, disturbance,
handling and/or disposal of asbestos-containing materials and potential
asbestos-containing materials when such materials are in poor condition or in
the event of construction, remodeling, renovation or demolition of a building.
Such laws may impose liability for improper handling or a release to the
environment of asbestos-containing materials and potential asbestos-containing
materials and may provide for fines to, and for third parties to seek recovery
from, owners or operators of real properties for personal injury or improper
work exposure associated with asbestos-containing materials and potential
asbestos-containing materials.
The
presence of mold, lead-based paint, contaminants in drinking water, radon and/or
other substances at any of the communities we own or may acquire may lead to the
incurrence of costs for remediation, mitigation or the implementation of an
operations and maintenance plan. Furthermore, the presence of mold, lead-based
paint, contaminants in drinking water, radon and/or other substances at any of
the communities we own or may acquire may present a risk that third parties will
seek recovery from the owners, operators or tenants of such properties for
personal injury or property damage. In some circumstances, areas affected by
mold may be unusable for periods of time for repairs, and even after successful
remediation, the known prior presence of extensive mold could adversely affect
the ability of a community to retain or attract residents and could adversely
affect a community’s market value.
We
believe that we are in material compliance with applicable environmental
laws.
We are
unable to predict the future course of federal, state and local environmental
regulation and legislation. Changes in the environmental regulatory framework
(including legislative or regulatory efforts designed to address climate change,
such as the proposed “cap and trade” legislation) could have a material adverse
effect on our business. In addition, because environmental laws vary from state
to state, expansion of our operations to states where we do not currently
operate may subject us to additional restrictions on the manner in which we
operate our communities.
Available
Information
Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to these reports, are available free of charge through
our web site as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission, at the
following address: www.brookdaleliving.com. The information within, or that can
be accessed through, the web site is not part of this report.
We have
posted our Corporate Governance Guidelines, Code of Business Conduct and Ethics
and the charters of our Audit, Compensation, Investment and Nominating and
Corporate Governance Committees on our web site at www.brookdaleliving.com. In
addition, our Code of Ethics for Chief Executive and Senior Financial Officers,
which applies to our Chief Executive Officer, Co-Presidents, Chief Financial
Officer, Treasurer and Controller, is also available on our website. Our
corporate governance materials are available in print free of charge to any
stockholder upon request to our Corporate Secretary, Brookdale Senior Living
Inc., 111 Westwood Place, Suite 200, Brentwood, Tennessee
37027.
Risks
Related to Our Business
Recent
disruptions in the financial markets could affect our ability to obtain
financing or to extend or refinance debt as it matures, which could negatively
impact our liquidity, financial condition and the market price of our common
stock.
The
United States stock and credit markets have recently experienced significant
price volatility, dislocations and liquidity disruptions, which have caused
market prices of many stocks to fluctuate substantially and the spreads on
prospective debt financings to widen considerably. These circumstances have
materially impacted liquidity in the financial markets, making terms for certain
financings less attractive, and in some cases have resulted in the
unavailability of financing. Continued uncertainty in the stock and credit
markets may negatively impact our ability to access additional financing
(including any refinancing or extension of our existing debt) on reasonable
terms, which may negatively affect our business.
As of
December 31, 2009, we had an available secured line of credit of $75.0 million
(including a $25.0 million letter of credit sublimit) and separate letter of
credit facilities of up to $78.5 million in the aggregate. As of
February 26, 2010, we have an available secured line of credit with a $100.0
million commitment and separate letter of credit facilities of up to $78.5
million in the aggregate. As of December 31, 2009, we also had $166.2
million of debt that is scheduled to mature during the twelve months ending
December 31, 2010. Although these debt obligations are scheduled to
mature on or prior to December 31, 2010, we have the option, subject to the
satisfaction of customary conditions (such as the absence of a material adverse
change), to extend the maturity of approximately $126.0 million of non-recourse
mortgages payable included in such debt until 2011. If we are unable
to extend (or refinance, as applicable) any of our debt or credit or letter of
credit facilities prior to their scheduled maturity dates, our liquidity and
financial condition could be adversely impacted. In addition, even if we are
able to extend or refinance our other maturing debt or credit or letter of
credit facilities, the terms of the new financing may not be as favorable to us
as the terms of the existing financing.
A
prolonged downturn in the financial markets may cause us to seek alternative
sources of potentially less attractive financing, and may require us to further
adjust our business plan accordingly. These events also may make it more
difficult or costly for us to raise capital, including through the issuance of
common stock. Continued disruptions in the financial markets could have an
adverse effect on us and our business. If we are not able to obtain
additional financing on favorable terms, we also may have to delay or abandon
some or all of our growth strategies, which could adversely affect our revenues
and results of operations.
If
we are not able to satisfy the conditions precedent to exercising the extension
options associated with certain of our debt agreements, our liquidity and
financial condition could be negatively impacted.
Our
consolidated financial statements reflect approximately $166.2 million of debt
obligations due on or prior to December 31, 2010. Although these debt
obligations are scheduled to mature on or prior to December 31, 2010, we have
the option, subject to the satisfaction of customary conditions (such as the
absence of a material adverse change), to extend the maturity of approximately
$126.0 million of non-recourse mortgages payable included in such debt until
2011, as the instruments associated with these mortgages payable provide that we
can extend the respective maturity dates for one 12 month term each from the
existing maturity dates. We presently anticipate that we will
exercise the extension options and will satisfy the conditions precedent for
doing so with respect to each of these obligations. If we are not
able to satisfy the conditions precedent to exercising these extension options,
our liquidity and financial condition could be adversely impacted.
We
will rely on reimbursement from governmental programs for a greater portion of
our revenues than in the past, and will be subject to changes in reimbursement
levels, which could adversely affect our results of operations and cash
flow.
We will
rely on reimbursement from governmental programs for a greater portion of our
revenues than before, and we cannot assure you that reimbursement levels will
not decrease in the future, which could adversely affect our results of
operations and cash flow. Certain per person annual limits on Medicare
reimbursement for therapy services became effective in 2006, subject to certain
exceptions. These exceptions expired on December 31, 2009. Although
legislation has been proposed in Congress to reinstate the exceptions (and the
exceptions have
been
repeatedly extended in the past), this legislation has not yet been
adopted. There can be no assurance as to whether the exceptions will
eventually be reinstated or the timing thereof. A failure to
reinstate these exceptions (or a delay in their reinstatement) could have a
material adverse impact on the revenues and net operating income relating to our
outpatient therapy services program. In addition, there continue to
be various federal and state legislative and regulatory proposals to implement
cost containment measures that would limit payments to healthcare providers in
the future. Changes in the reimbursement policies of the Medicare program could
have an adverse effect on our results of operations and cash flow.
Due
to the dependency of our revenues on private pay sources, events which adversely
affect the ability of seniors to afford our monthly resident fees or entrance
fees (including downturns in the economy, housing market, consumer confidence or
the equity markets and unemployment among resident family members) could cause
our occupancy rates, revenues and results of operations to decline.
Costs to
seniors associated with independent and assisted living services are not
generally reimbursable under government reimbursement programs such as Medicare
and Medicaid. Only seniors with income or assets meeting or exceeding the
comparable median in the regions where our communities are located typically can
afford to pay our monthly resident fees. Economic downturns, softness in the
housing market, higher levels of unemployment among resident family members,
lower levels of consumer confidence, stock market volatility and/or changes in
demographics could adversely affect the ability of seniors to afford our
resident fees or entrance fees. If we are unable to retain and/or attract
seniors with sufficient income, assets or other resources required to pay the
fees associated with independent and assisted living services and other service
offerings, our occupancy rates, revenues and results of operations could
decline.
The
inability of seniors to sell real estate may delay their moving into our
communities, which could negatively impact our occupancy rates, revenues, cash
flows and results of operations.
Recent
housing price declines and reduced home mortgage availability have negatively
affected the U.S. housing market, with certain geographic areas experiencing
more acute deterioration than others. Downturns in the housing
markets, such as the one we have recently experienced, could adversely affect
the ability (or perceived ability) of seniors to afford our entrance fees and
resident fees as our customers frequently use the proceeds from the sale of
their homes to cover the cost of our fees. Specifically, if seniors have a
difficult time selling their homes, these difficulties could impact their
ability to relocate into our communities or finance their stays at our
communities with private resources. If the recent volatility in the
housing market continues for a protracted period, our occupancy rates, revenues,
cash flows and results of operations could be negatively impacted.
General
economic factors could adversely affect our financial performance and other
aspects of our business.
General
economic conditions, such as inflation, commodity costs, fuel and other energy
costs, costs of labor, insurance and healthcare, interest rates, and tax rates,
affect our community operating and general and administrative expenses, and we
have no control or limited ability to control such factors. In
addition, current global economic conditions and uncertainties, the potential
impact of a prolonged recession, the potential for failures or realignments of
financial institutions, and the related impact on available credit may affect us
and our business partners, landlords, counterparties and residents or
prospective residents in an adverse manner including, but not limited to,
reducing access to liquid funds or credit, increasing the cost of credit,
limiting our ability to manage interest rate risk, increasing the risk that
certain of our business partners, landlords or counterparties would be unable to
fulfill their obligations to us, and other impacts which we are unable to fully
anticipate.
If
we are unable to generate sufficient cash flow to cover required interest and
lease payments, this would result in defaults of the related debt or leases and
cross-defaults under other debt or leases, which would adversely affect our
ability to continue to generate income.
We have
significant indebtedness and lease obligations, and we intend to continue
financing our communities through mortgage financing, long-term leases and other
types of financing, including borrowings under our line of credit and future
credit facilities we may obtain. We cannot give any assurance that we will
generate sufficient cash flow from operations to cover required interest,
principal and lease payments. Any non-payment or other default under our
financing arrangements could, subject to cure provisions, cause the lender to
foreclose upon the community or communities securing such indebtedness or, in
the case of a lease, cause the lessor to terminate the lease, each with a
consequent loss of income and asset value to us. Furthermore, in some cases,
indebtedness is
secured
by both a mortgage on a community (or communities) and a guaranty by us and/or
one or more of our subsidiaries. In the event of a default under one of these
scenarios, the lender could avoid judicial procedures required to foreclose on
real property by declaring all amounts outstanding under the guaranty
immediately due and payable, and requiring the respective guarantor to fulfill
its obligations to make such payments. The realization of any of these scenarios
would have an adverse effect on our financial condition and capital structure.
Additionally, a foreclosure on any of our properties could cause us to recognize
taxable income, even if we did not receive any cash proceeds in connection with
such foreclosure. Further, because our mortgages and leases generally contain
cross-default and cross-collateralization provisions, a default by us related to
one community could affect a significant number of our communities and their
corresponding financing arrangements and leases.
Our
indebtedness and long-term leases could adversely affect our liquidity and our
ability to operate our business and our ability to execute our growth
strategy.
Our level
of indebtedness and our long-term leases could adversely affect our future
operations and/or impact our stockholders for several reasons, including,
without limitation:
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We
may have little or no cash flow apart from cash flow that is dedicated to
the payment of any interest, principal or amortization required with
respect to outstanding indebtedness and lease payments with respect to our
long-term leases;
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Increases
in our outstanding indebtedness, leverage and long-term leases will
increase our vulnerability to adverse changes in general economic and
industry conditions, as well as to competitive
pressure;
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Increases
in our outstanding indebtedness may limit our ability to obtain additional
financing for working capital, capital expenditures, expansions, new
developments, acquisitions, general corporate and other purposes;
and
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Our
ability to pay dividends to our stockholders may be
limited.
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Our
ability to make payments of principal and interest on our indebtedness and to
make lease payments on our leases depends upon our future performance, which
will be subject to general economic conditions, industry cycles and financial,
business and other factors affecting our operations, many of which are beyond
our control. Our business might not continue to generate cash flow at or above
current levels. If we are unable to generate sufficient cash flow from
operations in the future to service our debt or to make lease payments on our
leases, we may be required, among other things, to seek additional financing in
the debt or equity markets, refinance or restructure all or a portion of our
indebtedness, sell selected assets, reduce or delay planned capital expenditures
or delay or abandon desirable acquisitions. Such measures might not be
sufficient to enable us to service our debt or to make lease payments on our
leases. The failure to make required payments on our debt or leases or the delay
or abandonment of our planned growth strategy could result in an adverse effect
on our future ability to generate revenues and sustain profitability. In
addition, any such financing, refinancing or sale of assets might not be
available on economically favorable terms to us.
Our
existing credit facilities, mortgage loans and lease arrangements contain
covenants that restrict our operations and any default under such facilities,
loans or arrangements could result in the acceleration of indebtedness,
termination of the leases or cross-defaults, any of which would negatively
impact our liquidity and inhibit our ability to grow our business and increase
revenues.
Our
outstanding indebtedness and leases contain restrictions and covenants and
require us to maintain or satisfy specified financial ratios and coverage tests,
including maintaining prescribed net worth levels, leverage ratios and debt
service and lease coverage ratios on a consolidated basis, and on a community or
communities basis based on the debt or lease securing the communities. In
addition, certain of our leases require us to maintain lease coverage ratios on
a lease portfolio basis (each as defined in the leases) and maintain
stockholders’ equity or tangible net worth amounts. The debt service coverage
ratios are generally calculated as revenues less operating expenses, including
an implied management fee and a reserve for capital expenditures, divided by the
debt (principal and interest) or lease payment. Net worth is generally
calculated as stockholders’ equity as calculated in accordance with GAAP, and in
certain circumstances, reduced by intangible assets or liabilities or increased
by deferred gains from sale-leaseback transactions and deferred entrance fee
revenue. These restrictions and covenants may interfere with our ability to
obtain financing or to engage in other business activities, which
may
inhibit
our ability to grow our business and increase revenues. If we fail to comply
with any of these requirements, then the related indebtedness could become
immediately due and payable. We cannot assure you that we could pay this debt if
it became due.
Our
outstanding indebtedness and leases are secured by our communities and, in
certain cases, a guaranty by us and/or one or more of our subsidiaries.
Therefore, an event of default under the outstanding indebtedness or leases,
subject to cure provisions in certain instances, would give the respective
lenders or lessors, as applicable, the right to declare all amounts outstanding
to be immediately due and payable, terminate the lease, foreclose on collateral
securing the outstanding indebtedness and leases, and restrict our ability to
make additional borrowings under the outstanding indebtedness or continue to
operate the properties subject to the lease. Certain of our outstanding
indebtedness and leases contain cross-default provisions so that a default under
certain outstanding indebtedness would cause a default under certain of our
leases. Certain of our outstanding indebtedness and leases also restrict, among
other things, our ability to incur additional debt.
The
substantial majority of our lease arrangements are structured as master leases.
Under a master lease, we may lease a large number of geographically dispersed
properties through an indivisible lease. As a result, it is difficult to
restructure the composition of the portfolio or economic terms of the lease
without the consent of the landlord. Failure to comply with Medicare or Medicaid
provider requirements is a default under several of our master lease and debt
financing instruments. In addition, potential defaults related to an individual
property may cause a default of an entire master lease portfolio and could
trigger cross-default provisions in our outstanding indebtedness and other
leases, which would have a negative impact on our capital structure and our
ability to generate future revenues, and could interfere with our ability to
pursue our growth strategy.
Certain
of our master leases also contain radius restrictions, which limit our ability
to own, develop or acquire new communities within a specified distance from
certain existing communities covered by such master leases. These radius
restrictions could negatively affect our expansion, development and acquisition
plans.
Mortgage
debt and lease obligations expose us to increased risk of loss of property,
which could harm our ability to generate future revenues and could have an
adverse tax effect.
Mortgage
debt and lease obligations increase our risk of loss because defaults on
indebtedness secured by properties or pursuant to the terms of the lease may
result in foreclosure actions initiated by lenders or lessors and ultimately our
loss of the property securing any loans for which we are in default or cause the
lessor to terminate the lease. For tax purposes, a foreclosure of any of our
properties would be treated as a sale of the property for a purchase price equal
to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds, which could negatively impact our earnings and
liquidity. Further, our mortgage debt and leases generally contain cross-default
and cross-collateralization provisions and a default on one community could
affect a significant number of our communities, financing arrangements and
leases.
Increases
in market interest rates could significantly increase the costs of our unhedged
debt and lease obligations, which could adversely affect our liquidity and
earnings.
Our
unhedged floating-rate debt and lease payment obligations and any unhedged
floating-rate debt incurred in the future, exposes us to interest rate risk.
Therefore, increases in prevailing interest rates could increase our payment
obligations, which would negatively impact our liquidity and
earnings.
Changes
in the value of our interest rate swaps could require us to post additional cash
collateral with our counterparties, which could negatively impact our liquidity
and financial condition.
In the
normal course of our business, we use a variety of financial instruments to
manage or hedge interest rate risk. We have entered into certain interest rate
protection and swap agreements to effectively cap or convert floating rate debt
to a fixed rate basis, as well as to hedge anticipated future financing
transactions. Pursuant to certain of our hedge agreements, we are required to
secure our obligation to our counterparty if the fair value liability exceeds a
specified threshold by posting cash or other collateral. In periods
of significant volatility in the credit markets, the value of our swaps can
change significantly and, as a result, the amount of collateral we are required
to post can change significantly. If we are required to post
additional collateral due to changes in the fair
value
liability of our existing or future swaps, our liquidity and financial condition
could be negatively impacted.
We
have a limited operating history on a combined basis and we are therefore
subject to the risks generally associated with the formation of any new business
and the combination of existing businesses.
In June
2005, we were formed for the purpose of combining two leading senior living
operating companies, Brookdale Living Communities, Inc., or BLC, and Alterra
Healthcare Corporation, or Alterra, through a series of mergers that occurred in
September 2005. Prior to this combination, we had no operations or assets. We
are therefore subject to the risks generally associated with the formation of
any new business and the combination of existing businesses, including the risk
that we will not be able to realize expected efficiencies and economies of scale
or implement our business strategies. As such, we only have a brief combined and
consolidated operating history upon which investors may evaluate our performance
as an integrated entity and assess our future prospects. In addition, from the
date of our initial public offering in November 2005, we have purchased over 241
additional communities, including 83 communities from American Retirement
Corporation, or ARC. There can be no assurance that we will be able to
successfully integrate and oversee the combined operations of BLC, Alterra and
ARC and the additional communities purchased in these acquisitions. Accordingly,
our financial performance to date may not be indicative of our long-term future
performance and may not necessarily reflect what our results of operations,
financial condition and cash flows would have been had we operated as a combined
entity throughout the periods presented.
We
have a history of losses and we may not be able to achieve
profitability.
We have
incurred net losses in every quarter since our formation in June 2005. Given our
history of losses, there can be no assurance that we will be able to achieve
and/or maintain profitability in the future. If we do not effectively manage our
cash flow and combined business operations going forward or otherwise achieve
profitability, our stock price would be adversely affected.
If
we do not effectively manage our growth and successfully integrate new or
recently-acquired or initiated operations into our existing operations, our
business and financial results could be adversely affected.
Our
growth has and will continue to place significant demands on our current
management resources. Our ability to manage our growth effectively and to
successfully integrate new or recently-acquired or initiated operations
(including expansions, developments, acquisitions and the expansion of our
ancillary services program) into our existing business will require us to
continue to expand our operational, financial and management information systems
and to continue to retain, attract, train, motivate and manage key employees.
There can be no assurance that we will be successful in attracting qualified
individuals to the extent necessary, and management may expend significant time
and energy attracting the appropriate personnel to manage assets we purchase in
the future and our expansion and development activities. Also, the additional
communities and expansion activities will require us to maintain consistent
quality control measures that allow our management to effectively identify
deviations that result in delivering care and services that are substandard,
which may result in litigation and/or loss of licensure or certification. If we
are unable to manage our growth effectively, successfully integrate new or
recently-acquired or initiated operations into our existing business, or
maintain consistent quality control measures, our business, financial condition
and results of operations could be adversely affected.
Delays
in obtaining regulatory approvals could hinder our plans to expand our ancillary
services program, which could negatively impact our anticipated revenues,
results of operations and cash flows.
We plan
to continue to expand our offering of ancillary services (including therapy and
home health) to additional communities. In the current environment,
it is difficult to obtain certain required regulatory
approvals. Delays in obtaining required regulatory approvals could
impede our ability to expand to additional communities in accordance with our
plans, which could negatively impact our anticipated revenues, results of
operations and cash flows.
If
we are unable to expand our communities in accordance with our plans, our
anticipated revenues and results of operations could be adversely
affected.
We are
currently working on projects that will expand a number of our existing senior
living communities over the next several years. These projects are in
various stages of development and are subject to a number of
factors
over
which we have little or no control. Such factors include the necessity of
arranging separate leases, mortgage loans or other financings to provide the
capital required to complete these projects; difficulties or delays in obtaining
zoning, land use, building, occupancy, licensing, certificate of need and other
required governmental permits and approvals; failure to complete construction of
the projects on budget and on schedule; failure of third-party contractors and
subcontractors to perform under their contracts; shortages of labor or materials
that could delay projects or make them more expensive; adverse weather
conditions that could delay completion of projects; increased costs resulting
from general economic conditions or increases in the cost of materials; and
increased costs as a result of changes in laws and regulations. We cannot assure
you that we will elect to undertake or complete all of our proposed expansion
and development projects, or that we will not experience delays in completing
those projects. In addition, we may incur substantial costs prior to achieving
stabilized occupancy for each such project and cannot assure you that these
costs will not be greater than we have anticipated. We also cannot assure you
that any of our expansion or development projects will be economically
successful. Our failure to achieve our expansion and development plans could
adversely impact our growth objectives, and our anticipated revenues and results
of operations.
We
may encounter difficulties in acquiring communities at attractive prices or
integrating acquisitions with our operations, which may adversely affect our
operations and financial condition.
We will
continue to selectively target strategic acquisitions as opportunities arise.
The process of integrating acquired communities into our existing operations may
result in unforeseen operating difficulties, divert managerial attention or
require significant financial resources. These acquisitions and other future
acquisitions may require us to incur additional indebtedness and contingent
liabilities, and may result in unforeseen expenses or compliance issues, which
may limit our revenue growth, cash flows, and our ability to achieve
profitability. Moreover, any future acquisitions may not generate any additional
income for us or provide any benefit to our business. In addition, we cannot
assure you that we will be able to locate and acquire communities at attractive
prices in locations that are compatible with our strategy or that competition
for the acquisition of communities will not increase. Finally, when we are able
to locate communities and enter into definitive agreements to acquire or lease
them, we cannot assure you that the transactions will be completed. Failure to
complete transactions after we have entered into definitive agreements may
result in significant expenses to us.
Unforeseen
costs associated with the acquisition of communities could reduce our future
profitability.
Our
growth strategy contemplates selected future acquisitions of existing senior
living operating companies and communities. Despite our extensive underwriting
and due diligence procedures, communities that we have previously acquired or
may acquire in the future may generate unexpectedly low or no returns or may not
meet a risk profile that our investors find acceptable. In addition, we might
encounter unanticipated difficulties and expenditures relating to any of the
acquired communities, including contingent liabilities, or newly acquired
communities might require significant management attention that would otherwise
be devoted to our ongoing business. For example, a community may require capital
expenditures in excess of budgeted amounts, or it may experience management
turnover that is higher than we project. These costs may negatively affect our
future profitability.
Competition
for the acquisition of strategic assets from buyers with lower costs of capital
than us or that have lower return expectations than we do could limit our
ability to compete for strategic acquisitions and therefore to grow our business
effectively.
Several
real estate investment trusts, or REITs, have similar asset acquisition
objectives as we do, along with greater financial resources and lower costs of
capital than we are able to obtain. This may increase competition for
acquisitions that would be suitable to us, making it more difficult for us to
compete and successfully implement our growth strategy. There is significant
competition among potential acquirers in the senior living industry, including
REITs, and there can be no assurance that we will be able to successfully
implement our growth strategy or complete acquisitions, which could limit our
ability to grow our business effectively.
We
may need additional capital to fund our operations and finance our growth, and
we may not be able to obtain it on terms acceptable to us, or at all, which may
limit our ability to grow.
Continued
expansion of our business through the expansion of our existing communities, the
development of new communities and the acquisition of existing senior living
operating companies and communities will require
additional
capital, particularly if we were to accelerate our expansion and acquisition
plans. Financing may not be available to us or may be available to us only on
terms that are not favorable. In addition, certain of our outstanding
indebtedness and long-term leases restrict, among other things, our ability to
incur additional debt. If we are unable to raise additional funds or obtain them
on terms acceptable to us, we may have to delay or abandon some or all of our
growth strategies. Further, if additional funds are raised through the issuance
of additional equity securities, the percentage ownership of our stockholders
would be diluted. Any newly issued equity securities may have rights,
preferences or privileges senior to those of our common stock.
We
are susceptible to risks associated with the lifecare benefits that we offer the
residents of our lifecare entrance fee communities.
As of
December 31, 2009, we operated 11 lifecare entrance fee communities that offer
residents a limited lifecare benefit. Residents of these communities pay an
upfront entrance fee upon occupancy, of which a portion is generally refundable,
with an additional monthly service fee while living in the community. This
limited lifecare benefit is typically (a) a certain number of free days in the
community’s health center during the resident’s lifetime, (b) a discounted rate
for such services, or (c) a combination of the two. The lifecare benefit varies
based upon the extent to which the resident’s entrance fee is refundable. The
pricing of entrance fees, refundability provisions, monthly service fees, and
lifecare benefits are determined utilizing actuarial projections of the expected
morbidity and mortality of the resident population. In the event the entrance
fees and monthly service payments established for our communities are not
sufficient to cover the cost of lifecare benefits granted to residents, the
results of operations and financial condition of these communities could be
adversely affected.
Residents
of these entrance fee communities are guaranteed a living unit and nursing care
at the community during their lifetime, even if the resident exhausts his or her
financial resources and becomes unable to satisfy his or her obligations to the
community. In addition, in the event a resident requires nursing care and there
is insufficient capacity for the resident in the nursing facility at the
community where the resident lives, the community must contract with a third
party to provide such care. Although we screen potential residents to ensure
that they have adequate assets, income, and reimbursements from government
programs and third parties to pay their obligations to our communities during
their lifetime, we cannot assure you that such assets, income, and
reimbursements will be sufficient in all cases. If insufficient, we have rights
of set-off against the refundable portions of the residents’ deposits, and would
also seek available reimbursement under Medicaid or other available programs. To
the extent that the financial resources of some of the residents are not
sufficient to pay for the cost of facilities and services provided to them, or
in the event that our communities must pay third parties to provide nursing care
to residents of our communities, our results of operations and financial
condition would be adversely affected.
The
geographic concentration of our communities could leave us vulnerable to an
economic downturn, regulatory changes or acts of nature in those areas,
resulting in a decrease in our revenues or an increase in our costs, or
otherwise negatively impacting our results of operations.
We have a
high concentration of communities in various geographic areas, including the
states of Florida, Texas, North Carolina, California, Colorado, Ohio and
Arizona. As a result of this concentration, the conditions of local economies
and real estate markets, changes in governmental rules and regulations,
particularly with respect to assisted living communities, acts of nature and
other factors that may result in a decrease in demand for senior living services
in these states could have an adverse effect on our revenues, costs and results
of operations. In addition, given the location of our communities, we are
particularly susceptible to revenue loss, cost increase or damage caused by
other severe weather conditions or natural disasters such as hurricanes,
earthquakes or tornados. Any significant loss due to a natural disaster may not
be covered by insurance and may lead to an increase in the cost of
insurance.
Termination
of our resident agreements and vacancies in the living spaces we lease could
adversely affect our revenues, earnings and occupancy levels.
State
regulations governing assisted living communities require written resident
agreements with each resident. Several of these regulations also require that
each resident have the right to terminate the resident agreement for any reason
on reasonable notice. Consistent with these regulations, many of our assisted
living resident agreements allow residents to terminate their agreements upon 0
to 30 days’ notice. Unlike typical apartment leasing or independent living
arrangements that involve lease agreements with specified leasing periods of up
to a
year or
longer, in many instances we cannot contract with our assisted living residents
to stay in those living spaces for longer periods of time. Our retirement center
resident agreements generally provide for termination of the lease upon death or
allow a resident to terminate his or her lease upon the need for a higher level
of care not provided at the community. If multiple residents
terminate their resident agreements at or around the same time, our revenues,
earnings and occupancy levels could be adversely affected. In addition, because
of the demographics of our typical residents, including age and health, resident
turnover rates in our communities are difficult to predict. As a result, the
living spaces we lease may be unoccupied for a period of time, which could
adversely affect our revenues and earnings.
Increases
in the cost and availability of labor, including increased competition for or a
shortage of skilled personnel or increased union activity, would have an adverse
effect on our profitability and/or our ability to conduct our business
operations.
Our
success depends on our ability to retain and attract skilled management
personnel who are responsible for the day-to-day operations of each of our
communities. Each community has an Executive Director responsible for the
overall day-to-day operations of the community, including quality of care,
social services and financial performance. Depending upon the size of the
community, each Executive Director is supported by a community staff member who
is directly responsible for day-to-day care of the residents and either
community staff or regional support to oversee the community’s marketing and
community outreach programs. Other key positions supporting each community may
include individuals responsible for food service, healthcare services, therapy
services, activities, housekeeping and engineering. We compete with various
health care service providers, including other senior living providers, in
retaining and attracting qualified and skilled personnel. Increased competition
for or a shortage of nurses, therapists or other trained personnel, or general
inflationary pressures may require that we enhance our pay and benefits package
to compete effectively for such personnel. We may not be able to offset such
added costs by increasing the rates we charge to our residents or our service
charges, which would negatively impact our results of operations. Turnover rates
and the magnitude of the shortage of nurses, therapists or other trained
personnel varies substantially from market to market. Although reliable
industry-wide data on key employee retention does not exist, we believe that our
employee retention rates are consistent with those of other national senior
housing operators. If we fail to attract and retain qualified and skilled
personnel, our ability to conduct our business operations effectively, our
ability to implement our growth strategy, and our overall operating results
could be harmed.
In
addition, efforts by labor unions to unionize any of our community personnel
could divert management attention, lead to increases in our labor costs and/or
reduce our flexibility with respect to certain workplace
rules. Recently proposed legislation known as the Employee Free
Choice Act, or card check, could make it significantly easier for union
organizing drives to be successful, leading to increased organizational
activity, and could give third-party arbitrators the ability to impose terms of
collective bargaining agreements upon us and a labor union if we and such union
are unable to agree to the terms of a collective bargaining
agreement. If we experience an increase in organizing activity, if
onerous collective bargaining agreement terms are imposed upon us, or if we
otherwise experience an increase in our staffing and labor costs, our
profitability and cash flows from operations would be negatively
affected.
Departure
of our key officers could harm our business.
Our
future success depends, to a significant extent, upon the continued service of
our senior management personnel, particularly: W.E. Sheriff, our Chief Executive
Officer; Mark W. Ohlendorf, our Co-President and Chief Financial Officer; John
P. Rijos, our Co-President and Chief Operating Officer; and T. Andrew Smith, our
Executive Vice President, General Counsel and Secretary. If we were to lose the
services of any of these individuals, our business and financial results could
be adversely affected.
Environmental
contamination at any of our communities could result in substantial liabilities
to us, which may exceed the value of the underlying assets and which could
materially and adversely effect our liquidity and earnings.
Under
various federal, state and local environmental laws, a current or previous owner
or operator of real property, such as us, may be held liable in certain
circumstances for the costs of investigation, removal or remediation of, or
related to the release of, certain hazardous or toxic substances, that could be
located on, in, at or under a property, regardless of how such materials came to
be located there. The cost of any required
investigation,
remediation, removal, mitigation, compliance, fines or personal or property
damages and our liability therefore could exceed the property’s value and/or our
assets’ value. In addition, the presence of such substances, or the failure to
properly dispose of or remediate the damage caused by such substances, may
adversely affect our ability to sell such property, to attract additional
residents and retain existing residents, to borrow using such property as
collateral or to develop or redevelop such property. In addition, such laws
impose liability, which may be joint and several, for investigation,
remediation, removal and mitigation costs on persons who disposed of or arranged
for the disposal of hazardous substances at third party sites. Such laws and
regulations often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence, release or disposal of
such substances as well as without regard to whether such release or disposal
was in compliance with law at the time it occurred. Although we do not believe
that we have incurred such liabilities as would have a material adverse effect
on our business, financial condition and results of operations, we could be
subject to substantial future liability for environmental contamination that we
have no knowledge about as of the date of this report and/or for which we may
not be at fault.
Failure
to comply with existing environmental laws could result in increased
expenditures, litigation and potential loss to our business and in our asset
value, which would have an adverse effect on our earnings and financial
condition.
Our
operations are subject to regulation under various federal, state and local
environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at
our communities; identification and warning of the presence of
asbestos-containing materials in buildings, as well as removal of such
materials; the presence of other substances in the indoor environment; and
protection of the environment and natural resources in connection with
development or construction of our properties.
Some of
our communities generate infectious or other hazardous medical waste due to the
illness or physical condition of the residents. Each of our communities has an
agreement with a waste management company for the proper disposal of all
infectious medical waste, but the use of such waste management companies does
not immunize us from alleged violations of such laws for operations for which we
are responsible even if carried out by such waste management companies, nor does
it immunize us from third-party claims for the cost to cleanup disposal sites at
which such wastes have been disposed.
Federal
regulations require building owners and those exercising control over a
building’s management to identify and warn their employees and certain other
employers operating in the building of potential hazards posed by workplace
exposure to installed asbestos-containing materials and potential
asbestos-containing materials in their buildings. Significant fines can be
assessed for violation of these regulations. Building owners and those
exercising control over a building’s management may be subject to an increased
risk of personal injury lawsuits. Federal, state and local laws and regulations
also govern the removal, encapsulation, disturbance, handling and/or disposal of
asbestos-containing materials and potential asbestos-containing materials when
such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for improper handling or a release to the environment of
asbestos-containing materials and potential asbestos-containing materials and
may provide for fines to, and for third parties to seek recovery from, owners or
operators of real properties for personal injury or improper work exposure
associated with asbestos-containing materials and potential asbestos-containing
materials.
The
presence of mold, lead-based paint, contaminants in drinking water, radon and/or
other substances at any of the communities we own or may acquire may lead to the
incurrence of costs for remediation, mitigation or the implementation of an
operations and maintenance plan and may result in third party litigation for
personal injury or property damage. Furthermore, in some circumstances, areas
affected by mold may be unusable for periods of time for repairs, and even after
successful remediation, the known prior presence of extensive mold could
adversely affect the ability of a community to retain or attract residents and
could adversely affect a community’s market value.
Although
we believe that we are currently in material compliance with applicable
environmental laws, if we fail to comply with such laws in the future, we would
face increased expenditures both in terms of fines and remediation of the
underlying problem(s), potential litigation relating to exposure to such
materials, and potential decrease in value to our business and in the value of
our underlying assets. Therefore, our failure to comply with existing
environmental laws would have an adverse effect on our earnings, our financial
condition and our ability to pursue our growth strategy.
We are
unable to predict the future course of federal, state and local environmental
regulation and legislation. Changes in the environmental regulatory framework
(including legislative or regulatory efforts designed to address climate change,
such as the proposed “cap and trade” legislation) could have a material adverse
effect on our business. In addition, because environmental laws vary from state
to state, expansion of our operations to states where we do not currently
operate may subject us to additional restrictions on the manner in which we
operate our communities.
We
are subject to risks associated with complying with Section 404 of the
Sarbanes-Oxley Act of 2002.
We are
subject to various regulatory requirements, including the Sarbanes-Oxley Act of
2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is
required to include a report with each Annual Report on Form 10-K regarding our
internal control over financial reporting. We have implemented processes
documenting and evaluating our system of internal controls. Complying with these
requirements is expensive, time consuming and subject to changes in regulatory
requirements. The existence of one or more material weaknesses, management’s
conclusion that its internal control over financial reporting is not effective,
or the inability of our auditors to express an opinion that our internal control
over financial reporting is effective, could result in a loss of investor
confidence in our financial reports, adversely affect our stock price and/or
subject us to sanctions or investigation by regulatory authorities.
Risks
Related to Pending Litigation
Complaints
filed against us could, if adversely determined, subject us to a material
loss.
We have
been and are currently involved in litigation and claims incidental to the
conduct of our business which are comparable to other companies in the senior
living industry. Certain claims and lawsuits allege large damage amounts and may
require significant costs to defend and resolve. Similarly, the senior living
industry is continuously subject to scrutiny by governmental regulators, which
could result in litigation related to regulatory compliance matters. As a
result, we maintain insurance policies in amounts and with coverage and
deductibles we believe are adequate, based on the nature and risks of our
business, historical experience and industry standards. Effective January 1,
2009 through December 31, 2009, our policies provided for deductibles of
$250,000 for each claim on a claims-made basis. Effective January 1,
2010, our current policies are also written on a claims-made basis and provide
for deductibles of $150,000 for each claim. Accordingly, we are, in
effect, self-insured for claims that are less than $150,000. If we
experience a greater number of losses than we anticipate, or if certain claims
are not ultimately covered by insurance, our results of operation and financial
condition could be adversely affected.
Risks
Related to Our Industry
The
cost and difficulty of complying with increasing and evolving regulation and
enforcement could have an adverse effect on our business operations and
profits.
The
regulatory environment surrounding the senior living industry continues to
evolve and intensify in the amount and type of laws and regulations affecting
it, many of which vary from state to state. In addition, many senior living
communities are subject to regulation and licensing by state and local health
and social service agencies and other regulatory authorities. In several of the
states in which we operate or may operate, we are prohibited from providing
certain higher levels of senior care services without first obtaining the
appropriate licenses. Also, in several of the states in which we operate or
intend to operate, assisted living communities and/or skilled nursing facilities
require a certificate of need before the community can be opened or the services
at an existing community can be expanded. Furthermore, federal, state and local
officials are increasingly focusing their efforts on enforcement of these laws,
particularly with respect to large for-profit, multi-community providers like
us. These requirements, and the increased enforcement thereof, could affect our
ability to expand into new markets, to expand our services and communities in
existing markets and, if any of our presently licensed communities were to
operate outside of its licensing authority, may subject us to penalties
including closure of the community. Future regulatory developments as well as
mandatory increases in the scope and severity of deficiencies determined by
survey or inspection officials could cause our operations to suffer. We are
unable to predict the future course of federal, state and local legislation or
regulation. If regulatory requirements increase, whether through enactment of
new laws or regulations or changes in the enforcement of existing
rules,
our
earnings and operations could be adversely affected.
The
intensified regulatory and enforcement environment impacts providers like us
because of the increase in the number of inspections or surveys by governmental
authorities and consequent citations for failure to comply with regulatory
requirements. We also expend considerable resources to respond to federal and
state investigations or other enforcement action. From time to time in the
ordinary course of business, we receive deficiency reports from state and
federal regulatory bodies resulting from such inspections or surveys. Although
most inspection deficiencies are resolved through an agreed-to plan of
corrective action, the reviewing agency typically has the authority to take
further action against a licensed or certified facility, which could result in
the imposition of fines, imposition of a provisional or conditional license,
suspension or revocation of a license, suspension or denial of admissions, loss
of certification as a provider under federal health care programs or imposition
of other sanctions, including criminal penalties. Furthermore, certain states
may allow citations in one community to impact other communities in the state.
Revocation of a license at a given community could therefore impact our ability
to obtain new licenses or to renew existing licenses at other communities, which
may also cause us to be in default under our leases, trigger cross-defaults,
trigger defaults under certain of our credit agreements or adversely affect our
ability to operate and/or obtain financing in the future. If a state were to
find that one community’s citation would impact another of our communities, this
would also increase costs and result in increased surveillance by the state
survey agency. To date, none of the deficiency reports received by us has
resulted in a suspension, fine or other disposition that has had a material
adverse effect on our revenues. However, the failure to comply with applicable
legal and regulatory requirements in the future could result in a material
adverse effect to our business as a whole.
There are
various extremely complex federal and state laws governing a wide array of
referral relationships and arrangements and prohibiting fraud by health care
providers, including those in the senior living industry, and governmental
agencies are devoting increasing attention and resources to such anti-fraud
initiatives. Some examples are the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997, and the
False Claims Act, which gives private individuals the ability to bring an action
on behalf of the federal government. The violation of any of these laws or
regulations may result in the imposition of fines or other penalties that could
increase our costs and otherwise jeopardize our business. Under the Deficit
Reduction Act of 2005, or DRA 2005, every entity that receives at least $5
million annually in Medicaid payments must have established written policies for
all employees, contractors or agents, providing detailed information about false
claims, false statements and whistleblower protections under certain federal
laws, including the federal False Claims Act, and similar state laws. Failure to
comply with this new compliance requirement may potentially give rise to
potential liability. DRA 2005 also creates an incentive for states to enact
false claims laws that are comparable to the federal False Claims
Act.
Additionally,
we provide services and operate communities that participate in federal and/or
state health care reimbursement programs, which makes us subject to federal and
state laws that prohibit anyone from presenting, or causing to be presented,
claims for reimbursement which are false, fraudulent or are for items or
services that were not provided as claimed. Similar state laws vary from state
to state and we cannot be sure that these laws will be interpreted consistently
or in keeping with past practice. Violation of any of these laws can result in
loss of licensure, civil or criminal penalties and exclusion of health care
providers or suppliers from furnishing covered items or services to
beneficiaries of the applicable federal and/or state health care reimbursement
program. Loss of licensure may also cause us to default under our leases and/or
trigger cross-defaults.
We are
also subject to certain federal and state laws that regulate financial
arrangements by health care providers, such as the Federal Anti-Kickback Law,
the Stark laws and certain state referral laws. Authorities have interpreted the
Federal Anti-Kickback Law very broadly to apply to many practices and
relationships between health care providers and sources of patient referral.
This could result in criminal penalties and civil sanctions, including fines and
possible exclusion from government programs such as Medicare and Medicaid, which
may also cause us to default under our leases and/or trigger cross-defaults.
Adverse consequences may also result if we violate federal Stark laws related to
certain Medicare and Medicaid physician referrals. While we endeavor to comply
with all laws that regulate the licensure and operation of our business, it is
difficult to predict how our revenues could be affected if we were subject to an
action alleging such violations.
Compliance
with the Americans with Disabilities Act (especially as recently amended), Fair
Housing Act and fire, safety and other regulations may require us to make
unanticipated expenditures, which could increase our costs and therefore
adversely affect our earnings and financial condition.
All of
our communities are required to comply with the Americans with Disabilities Act,
or ADA. The ADA has separate compliance requirements for “public accommodations”
and “commercial properties,” but generally requires that buildings be made
accessible to people with disabilities. Compliance with ADA requirements could
require removal of access barriers and non-compliance could result in imposition
of government fines or an award of damages to private litigants.
We must
also comply with the Fair Housing Act, which prohibits us from discriminating
against individuals on certain bases in any of our practices if it would cause
such individuals to face barriers in gaining residency in any of our
communities. Additionally, the Fair Housing Act and other state laws require
that we advertise our services in such a way that we promote diversity and not
limit it. We may be required, among other things, to change our marketing
techniques to comply with these requirements.
In
addition, we are required to operate our communities in compliance with
applicable fire and safety regulations, building codes and other land use
regulations and food licensing or certification requirements as they may be
adopted by governmental agencies and bodies from time to time. Like other health
care facilities, senior living communities are subject to periodic survey or
inspection by governmental authorities to assess and assure compliance with
regulatory requirements. Surveys occur on a regular (often annual or bi-annual)
schedule, and special surveys may result from a specific complaint filed by a
resident, a family member or one of our competitors. We may be required to make
substantial capital expenditures to comply with those requirements.
Capital
expenditures we have made to comply with any of the above to date have been
immaterial, however, the increased costs and capital expenditures that we may
incur in order to comply with any of the above would result in a negative effect
on our earnings, and financial condition.
Significant
legal actions and liability claims against us in excess of insurance limits
could subject us to increased operating costs and substantial uninsured
liabilities, which may adversely affect our financial condition and operating
results.
The
senior living business entails an inherent risk of liability, particularly given
the demographics of our residents, including age and health, and the services we
provide. In recent years, we, as well as other participants in our industry,
have been subject to an increasing number of claims and lawsuits alleging that
our services have resulted in resident injury or other adverse effects. Many of
these lawsuits involve large damage claims and significant legal costs. Many
states continue to consider tort reform and how it will apply to the senior
living industry. We may continue to be faced with the threat of large jury
verdicts in jurisdictions that do not find favor with large senior living
providers. We maintain liability insurance policies in amounts and with the
coverage and deductibles we believe are adequate based on the nature and risks
of our business, historical experience and industry standards. We have formed a
wholly-owned “captive” insurance company for the purpose of insuring certain
portions of our risk retention under our general and professional liability
insurance programs. There can be no guarantee that we will not have
any claims that exceed our policy limits in the future.
If a
successful claim is made against us and it is not covered by our insurance or
exceeds the policy limits, our financial condition and results of operations
could be materially and adversely affected. In some states, state law may
prohibit or limit insurance coverage for the risk of punitive damages arising
from professional liability and general liability claims and/or litigation. As a
result, we may be liable for punitive damage awards in these states that either
are not covered or are in excess of our insurance policy limits. Also, the above
deductibles, or self-insured retention, are accrued based on an actuarial
projection of future liabilities. If these projections are inaccurate and if
there are an unexpectedly large number of successful claims that result in
liabilities in excess of our self-insured retention, our operating results could
be negatively affected. Claims against us, regardless of their merit or eventual
outcome, also could have a material adverse effect on our ability to attract
residents or expand our business and could require our management to devote time
to matters unrelated to the day-to-day operation of our business. We also have
to renew our policies every year and negotiate acceptable terms for coverage,
exposing us to the volatility of the insurance markets, including the
possibility of rate increases. There can be no assurance that we will be able to
obtain liability insurance in the future or, if available, that such coverage
will be available on acceptable terms.
Overbuilding
and increased competition may adversely affect our ability to generate and
increase our revenues and profits and to pursue our business
strategy.
The
senior living industry is highly competitive, and we expect that it may become
more competitive in the future. We compete with numerous other companies that
provide long-term care alternatives such as home healthcare agencies, therapy
services, life care at home, community-based service programs, retirement
communities, convalescent centers and other independent living, assisted living
and skilled nursing providers, including not-for-profit entities. In general,
regulatory and other barriers to competitive entry in the independent living and
assisted living sectors of the senior living industry are not substantial. We
have experienced and expect to continue to experience increased competition in
our efforts to acquire and operate senior living communities. Consequently, we
may encounter increased competition that could limit our ability to attract new
residents, raise resident fees or expand our business, which could have a
material adverse effect on our revenues and earnings.
In
addition, overbuilding in the late 1990’s in the senior living industry reduced
the occupancy rates of many newly constructed buildings and, in some cases,
reduced the monthly rate that some newly built and previously existing
communities were able to obtain for their services. This resulted in lower
revenues for certain of our communities during that time. While we believe that
overbuilt markets have stabilized and should continue to be stabilized for the
immediate future, we cannot be certain that the effects of this period of
overbuilding will not effect our occupancy and resident fee rate levels in the
future, nor can we be certain that another period of overbuilding in the future
will not have the same effects. Moreover, while we believe that the new
construction dynamics and the competitive environments in the states in which we
operate are substantially similar to the national market, taken as a whole, if
the dynamics or environment were to be significantly adverse in one or more of
those states, it would have a disproportionate effect on our revenues (due to
the large portion of our revenues that are generated in those
states).
Risks
Related to Our Organization and Structure
If
the ownership of our common stock continues to be highly concentrated, it may
prevent you and other stockholders from influencing significant corporate
decisions and may result in conflicts of interest.
As of
December 31, 2009, funds managed by affiliates of Fortress Investment Group LLC
(“Fortress”) and various principals of Fortress, in the aggregate, beneficially
own 43,116,426 shares, or approximately 36.1% of our outstanding common stock
(excluding unvested restricted shares). In addition, two of our directors are
associated with Fortress and, pursuant to our Stockholders Agreement, Fortress
currently has the ability to require us to nominate five individuals designated
by Fortress for election as members of our nine-member Board of Directors
(subject to their election by our stockholders). As a result,
Fortress may be able to effectively control fundamental and significant
corporate matters and transactions, including: the election of directors;
mergers, consolidations or acquisitions; the sale of all or substantially all of
our assets and other decisions affecting our capital structure; the amendment of
our amended and restated certificate of incorporation and our amended and
restated by-laws; and the dissolution of the Company. Fortress’s interests,
including its ownership of the North American operations of Holiday Retirement
Corp., one of our competitors, may conflict with your interests. Their effective
control of the Company could delay, deter or prevent acts that may be favored by
our other stockholders such as hostile takeovers, changes in control of the
Company and changes in management. As a result of such actions, the market price
of our common stock could decline or stockholders might not receive a premium
for their shares in connection with a change of control of the
Company.
Anti-takeover
provisions in our amended and restated certificate of incorporation and our
amended and restated by-laws may discourage, delay or prevent a merger or
acquisition that you may consider favorable or prevent the removal of our
current board of directors and management.
Certain
provisions of our amended and restated certificate of incorporation and our
amended and restated by-laws may discourage, delay or prevent a merger or
acquisition that you may consider favorable or prevent the removal of our
current board of directors and management. We have a number of anti-takeover
devices in place that will hinder takeover attempts, including:
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a
staggered board of directors consisting of three classes of directors,
each of whom serve three-year
terms;
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removal
of directors only for cause, and only with the affirmative vote of at
least 80% of the voting interest of stockholders entitled to
vote;
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blank-check
preferred stock;
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provisions
in our amended and restated certificate of incorporation and amended and
restated by-laws preventing stockholders from calling special
meetings;
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advance
notice requirements for stockholders with respect to director nominations
and actions to be taken at annual meetings;
and
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no
provision in our amended and restated certificate of incorporation for
cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of our common stock can
elect all the directors standing for
election.
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Additionally,
our amended and restated certificate of incorporation provides that Section 203
of the Delaware General Corporation Law, which restricts certain business
combinations with interested stockholders in certain situations, will not apply
to us. This may make it easier for a third party to acquire an interest in some
or all of us with Fortress’ approval, even though our other stockholders may not
deem such an acquisition beneficial to their interests.
We
are a holding company with no operations and rely on our operating subsidiaries
to provide us with funds necessary to meet our financial
obligations.
We are a
holding company with no material direct operations. Our principal assets are the
equity interests we directly or indirectly hold in our operating subsidiaries.
As a result, we are dependent on loans, dividends and other payments from our
subsidiaries to generate the funds necessary to meet our financial obligations.
Our subsidiaries are legally distinct from us and have no obligation to make
funds available to us.
Risks
Related to Our Common Stock
The
market price and trading volume of our common stock may be volatile, which could
result in rapid and substantial losses for our stockholders.
The
market price of our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common stock may
fluctuate and cause significant price variations to occur. If the market price
of our common stock declines significantly, you may be unable to resell your
shares at or above your purchase price. We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our common stock
include:
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variations
in our quarterly operating results;
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changes
in our earnings estimates;
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the
contents of published research reports about us or the senior living
industry or the failure of securities analysts to cover our common
stock;
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additions
or departures of key management
personnel;
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any
increased indebtedness we may incur or lease obligations we may enter into
in the future;
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actions
by institutional stockholders;
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changes
in market valuations of similar
companies;
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announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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speculation
or reports by the press or investment community with respect to the
Company or the senior living industry in
general;
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increases
in market interest rates that may lead purchasers of our shares to demand
a higher yield;
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changes
or proposed changes in laws or regulations affecting the senior living
industry or enforcement of these laws and regulations, or announcements
relating to these matters; and
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general
market and economic conditions.
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Future
offerings of debt or equity securities by us may adversely affect the market
price of our common stock.
In the
future, we may attempt to increase our capital resources by offering debt or
additional equity securities, including commercial paper, medium-term notes,
senior or subordinated notes, series of preferred shares or shares of our common
stock. Upon liquidation, holders of our debt securities and preferred stock, and
lenders with respect to other borrowings, would receive a distribution of our
available assets prior to the holders of our common stock. Additional equity
offerings may dilute the economic and voting rights of our existing stockholders
or reduce the market price of our common stock, or both. Shares of
our preferred stock, if issued, could have a preference with respect to
liquidating distributions or a preference with respect to dividend payments that
could limit our ability to pay dividends to the holders of our common stock.
Because our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, holders of
our common stock bear the risk of our future offerings reducing the market price
of our common stock and diluting their share holdings in us.
We may
issue all of the shares of our common stock that are authorized but unissued and
not otherwise reserved for issuance under our stock incentive or purchase plans
without any action or approval by our stockholders. We intend to continue to
pursue selected acquisitions of senior living communities and may issue shares
of common stock in connection with these acquisitions. Any shares issued in
connection with our acquisitions or otherwise would dilute the holdings of our
current stockholders.
The
market price of our common stock could be negatively affected by sales of
substantial amounts of our common stock in the public markets.
At
December 31, 2009, 119,291,309 shares of our common stock were outstanding
(excluding unvested restricted shares). All of the shares of our common stock
are freely transferable, except for any shares held by our “affiliates,” as that
term is defined in Rule 144 under the Securities Act of 1933, as amended, or the
Securities Act, or any shares otherwise subject to the limitations of Rule
144.
Pursuant
to our Stockholders Agreement, Fortress and certain of its affiliates and
permitted third-party transferees have the right, in certain circumstances, to
require us to register their shares of our common stock under the Securities Act
for sale into the public markets. Upon the effectiveness of such a registration
statement, all shares covered by the registration statement will be freely
transferable. In connection with our obligations under the Stockholders
Agreement, we received a request from Fortress to file a registration statement
on Form S-3 to permit the resale, from time to time, of up to 60,875,826 shares
of common stock owned by certain affiliates of Fortress. The registration
statement on Form S-3 was declared effective on May 22, 2009 and 18,205,000
shares owned by affiliates of Fortress were sold pursuant to the registration
statement in November 2009.
In
addition, as of December 31, 2009, we had registered under the Securities Act an
aggregate of 12,100,000 shares for issuance under our Omnibus Stock Incentive
Plan, an aggregate of 1,000,000 shares for issuance under our Associate Stock
Purchase Plan and an aggregate of 100,000 shares for issuance under our Director
Stock Purchase Plan. In accordance with the terms of the Omnibus
Stock Incentive Plan, the number of shares available for issuance automatically
increases by 400,000 shares on January 1 of each year. Pursuant to the terms of
the Associate Stock Purchase Plan, the number of shares available for purchase
under the plan will automatically increase by 200,000 shares on the first day of
each calendar year beginning January 1, 2010.
Subject
to any restrictions imposed on the shares and options granted under our stock
incentive programs, shares registered under these registration statements will
be available for sale into the public markets.
Our
ability to use net operating loss carryovers to reduce future tax payments may
be limited.
Section
382 of the Internal Revenue Code contains rules that limit the ability of a
company that undergoes an ownership change, which is generally any change in
ownership of more than 50% of its stock over a three-year period, to utilize its
net operating loss carryforwards and certain built-in losses recognized in years
after the ownership change. These rules generally operate by focusing on
ownership changes involving stockholders owning directly or indirectly 5% or
more of the stock of a company and any change in ownership arising from a new
issuance of stock by the company. The determination of whether an ownership
change occurs is complex and not within the control of the company.
Consequently, no assurance can be provided as to whether an ownership change has
occurred or will occur in the future. Generally, if an ownership change occurs,
the yearly limitation is equal to the product of the applicable long term tax
exempt rate and the value of the Company’s stock immediately before the
ownership change.
Item
1B. Unresolved Staff
Comments.
None.
Facilities
At
December 31, 2009, we operated 565 communities across 35 states, with the
capacity to serve approximately 53,600 residents. Of the communities we operated
at December 31, 2009, we owned 187, we leased 359 pursuant to operating and
capital leases, and 19 were managed by us and fully or majority owned by third
parties.
The
following table sets forth certain information regarding our communities at
December 31, 2009 :
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
1,112
|
|
87.3%
|
|
2
|
|
5
|
|
-
|
|
7
|
|
|
Arizona
|
2,152
|
|
88.6%
|
|
3
|
|
11
|
|
2
|
|
16
|
|
|
California
|
3,297
|
|
89.9%
|
|
14
|
|
7
|
|
1
|
|
22
|
|
|
Colorado
|
2,954
|
|
88.3%
|
|
6
|
|
19
|
|
2
|
|
27
|
|
|
Connecticut
|
427
|
|
82.1%
|
|
2
|
|
2
|
|
-
|
|
4
|
|
|
Delaware
|
54
|
|
100.0%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Florida
|
9,123
|
|
84.7%
|
|
35
|
|
39
|
|
3
|
|
77
|
|
|
Georgia
|
525
|
|
86.5%
|
|
4
|
|
-
|
|
1
|
|
5
|
|
|
Idaho
|
228
|
|
94.1%
|
|
2
|
|
1
|
|
-
|
|
3
|
|
|
Illinois
|
2,465
|
|
90.5%
|
|
1
|
|
10
|
|
-
|
|
11
|
|
|
Indiana
|
1,321
|
|
81.1%
|
|
7
|
|
10
|
|
-
|
|
17
|
|
|
Iowa
|
139
|
|
89.2%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Kansas
|
1,405
|
|
85.7%
|
|
10
|
|
11
|
|
2
|
|
23
|
|
|
Kentucky
|
268
|
|
97.0%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Louisiana
|
84
|
|
94.2%
|
|
1
|
|
-
|
|
-
|
|
1
|
|
|
Massachusetts
|
280
|
|
86.8%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Michigan
|
2,575
|
|
92.1%
|
|
7
|
|
26
|
|
1
|
|
34
|
|
|
Minnesota
|
759
|
|
87.4%
|
|
-
|
|
16
|
|
1
|
|
17
|
|
|
Mississippi
|
54
|
|
46.9%
|
|
-
|
|
1
|
|
-
|
|
1
|
|
|
Missouri
|
928
|
|
88.6%
|
|
2
|
|
1
|
|
-
|
|
3
|
|
|
Nevada
|
306
|
|
86.8%
|
|
-
|
|
3
|
|
-
|
|
3
|
|
|
New
Jersey
|
534
|
|
88.0%
|
|
2
|
|
6
|
|
-
|
|
8
|
|
|
New
Mexico
|
432
|
|
88.8%
|
|
1
|
|
2
|
|
-
|
|
3
|
|
|
New
York
|
1,196
|
|
92.8%
|
|
6
|
|
10
|
|
-
|
|
16
|
|
|
North
Carolina
|
4,081
|
|
98.1%
|
|
4
|
|
50
|
|
-
|
|
54
|
|
|
Ohio
|
2,950
|
|
85.3%
|
|
20
|
|
19
|
|
-
|
|
39
|
|
|
Oklahoma
|
1,139
|
|
89.0%
|
|
2
|
|
24
|
|
1
|
|
27
|
|
|
Oregon
|
828
|
|
93.7%
|
|
4
|
|
8
|
|
-
|
|
12
|
|
|
Pennsylvania
|
998
|
|
86.8%
|
|
5
|
|
3
|
|
-
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
Carolina
|
563
|
|
87.3%
|
|
4
|
|
7
|
|
-
|
|
11
|
|
|
Tennessee
|
1,414
|
|
89.4%
|
|
14
|
|
8
|
|
-
|
|
22
|
|
|
Texas
|
5,946
|
|
90.1%
|
|
18
|
|
33
|
|
5
|
|
56
|
|
|
Virginia
|
1,439
|
|
93.5%
|
|
3
|
|
3
|
|
-
|
|
6
|
|
|
Washington
|
1,176
|
|
88.2%
|
|
4
|
|
9
|
|
-
|
|
13
|
|
|
Wisconsin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes the impact of managed properties.
A
significant majority of our owned properties are subject to
mortgages.
Corporate
Offices
Our main
corporate offices are all leased, including our 55,296 square foot facility in
Nashville, Tennessee, our 99,374 square foot facility in Milwaukee, Wisconsin
and our 30,314 square foot facility in Chicago, Illinois.
Item
3. Legal
Proceedings.
The
information contained in Note 23 to the consolidated financial statements
contained in Part II, Item 8 of this Annual Report on Form 10-K is incorporated
herein by reference.
Item
4. Submission of
Matters to a Vote of Security Holders.
Not
applicable.
Executive
Officers of the Registrant
The
following table sets forth certain information concerning our executive officers
as of February 18, 2010:
|
|
|
|
|
W.E.
Sheriff
|
67
|
Chief
Executive Officer
|
|
Mark
W. Ohlendorf
|
49
|
Co-President
and Chief Financial Officer
|
|
John
P. Rijos
|
57
|
Co-President
and Chief Operating Officer
|
|
T.
Andrew Smith
|
49
|
Executive
Vice President, General Counsel and Secretary
|
|
Bryan
D. Richardson
|
51
|
Executive
Vice President and Chief Administrative Officer
|
|
Kristin
A. Ferge
|
36
|
Executive
Vice President and Treasurer
|
|
George
T. Hicks
|
52
|
Executive
Vice President – Finance
|
|
H.
Todd Kaestner
|
54
|
Executive
Vice President – Corporate Development
|
|
Gregory
B. Richard
|
55
|
Executive
Vice President – Field Operations
|
W.E. Sheriff has served
as our Chief Executive Officer since February 2008 and as a member of our
Board of Directors since January 2010. He previously served as our
Co-Chief Executive Officer from July 2006 until February 2008. Previously, Mr.
Sheriff served as Chairman and Chief Executive Officer of ARC and its
predecessors since April 1984 and as its President since November 2003. From
1973 to 1984, Mr. Sheriff served in various capacities for Ryder System, Inc.,
including as President and Chief Executive Officer of its Truckstops of America
division. Mr. Sheriff also serves on the boards of various educational and
charitable organizations and in varying capacities with several trade
organizations.
Mark W. Ohlendorf became our
Co-President in August 2005 and our Chief Financial Officer in March 2007. Mr.
Ohlendorf previously served as Chief Executive Officer and President of Alterra
from December 2003 until August 2005. From January 2003 through December 2003,
Mr. Ohlendorf served as Chief Financial Officer and President of Alterra, and
from 1999 through 2002 he served as Senior Vice President and Chief Financial
Officer of Alterra. Mr. Ohlendorf has over 25 years of experience in the health
care and long-term care industries, having held leadership positions with such
companies as Sterling House Corporation, Vitas Healthcare Corporation
and
Horizon/CMS
Healthcare Corporation. He is a member of the board of directors of the Assisted
Living Federation of America.
John P. Rijos became our
Co-President in August 2005 and our Chief Operating Officer in January 2008.
Previously, Mr. Rijos served as President and Chief Operating Officer and as a
director of BLC since August 2000. Prior to joining BLC in August 2000, Mr.
Rijos spent 16 years with Lane Hospitality Group, owners and operators of over
40 hotels and resorts, as its President and Chief Operating Officer. From 1981
to 1985 he served as President of High Country Corporation, a Denver-based hotel
development and management company. Prior to that time, Mr. Rijos was Vice
President of Operations and Development of several large real estate trusts
specializing in hotels. Mr. Rijos has over 25 years of experience in the
acquisition, development and operation of hotels and resorts. He serves on many
tourist-related operating boards and committees, as well as advisory committees
for Holiday Inns, Sheraton Hotels and the City of Chicago and the Board of
Trustees for Columbia College. Mr. Rijos is a certified hospitality
administrator.
T. Andrew Smith became our
Executive Vice President, General Counsel and Secretary in October 2006.
Previously, Mr. Smith was with Bass, Berry & Sims PLC in Nashville,
Tennessee from 1985 to 2006. Mr. Smith was a member of that firm’s corporate and
securities group, and served as the chair of the firm’s healthcare
group.
Bryan D. Richardson became our
Executive Vice President in July 2006 and our Chief Administrative Officer in
January 2008. Mr. Richardson also served as our Chief Accounting
Officer from September 2006 through April 2008. Previously, Mr.
Richardson served as Executive Vice President – Finance and Chief Financial
Officer of ARC since April 2003 and previously served as its Senior Vice
President – Finance since April 2000. Mr. Richardson was formerly with a
national graphic arts company from 1984 to 1999 serving in various capacities,
including Senior Vice President of Finance of a digital prepress division from
May 1994 to October 1999, and Senior Vice President of Finance and Chief
Financial Officer from 1989 to 1994. Mr. Richardson was previously with the
national public accounting firm PriceWaterhouseCoopers.
Kristin A. Ferge became our
Executive Vice President and Treasurer in August 2005. Ms. Ferge also
served as our Chief Administrative Officer from March 2007 through December
2007. She previously served as Vice President, Chief Financial Officer and
Treasurer of Alterra from December 2003 until August 2005. From April 2000
through December 2003, Ms. Ferge served as Alterra’s Vice President of Finance
and Treasurer. Prior to joining Alterra, she worked in the audit division of
KPMG LLP. Ms. Ferge is a certified public accountant.
George T. Hicks became our
Executive Vice President – Finance in July 2006. Previously, Mr. Hicks served as
Executive Vice President – Finance and Internal Audit, Secretary and Treasurer
of ARC since September 1993. Mr. Hicks had served in various capacities for
ARC’s predecessors since 1985, including Chief Financial Officer from September
1993 to April 2003 and Vice President – Finance and Treasurer from November 1989
to September 1993.
H. Todd Kaestner became our
Executive Vice President – Corporate Development in July 2006. Previously, Mr.
Kaestner served as Executive Vice President – Corporate Development of ARC since
September 1993. Mr. Kaestner served in various capacities for ARC’s predecessors
since 1985, including Vice President – Development from 1988 to 1993 and Chief
Financial Officer from 1985 to 1988.
Gregory B. Richard has served
as our Executive Vice President – Field Operations since January
2008. He previously served as our Executive Vice President –
Operations from July 2006 through December 2007. Previously, Mr. Richard served
as Executive Vice President and Chief Operating Officer of ARC since January
2003 and previously served as its Executive Vice President-Community Operations
since January 2000. Mr. Richard was formerly with a pediatric practice
management company from May 1997 to May 1999, serving as President and Chief
Executive Officer from October 1997 to May 1999. Prior to this, Mr. Richard was
with Rehability Corporation, a publicly traded outpatient physical
rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September
1992 to October 1996.
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Market
Information
Our
common stock is traded on the New York Stock Exchange, or the NYSE, under the
symbol “BKD”. The following table sets forth the range of high and
low sales prices of our common stock and dividend information for each quarter
for the last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
7.16 |
|
|
$ |
2.50 |
|
|
$ |
― |
|
|
Second
Quarter
|
|
$ |
14.87 |
|
|
$ |
4.66 |
|
|
$ |
― |
|
|
Third
Quarter
|
|
$ |
20.41 |
|
|
$ |
8.39 |
|
|
$ |
― |
|
|
Fourth
Quarter
|
|
$ |
20.69 |
|
|
$ |
15.14 |
|
|
$ |
― |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
28.29 |
|
|
$ |
20.46 |
|
|
$ |
0.25 |
|
|
Second
Quarter
|
|
$ |
27.22 |
|
|
$ |
20.15 |
|
|
$ |
0.25 |
|
|
Third
Quarter
|
|
$ |
27.05 |
|
|
$ |
14.06 |
|
|
$ |
0.25 |
|
|
Fourth
Quarter
|
|
$ |
21.84 |
|
|
$ |
3.03 |
|
|
$ |
— |
|
The
closing sale price of our common stock as reported on the NYSE on February 18,
2010 was $18.55 per share. As of that date, there were approximately
515 holders of record of our common stock.
Dividend
Policy
On
December 30, 2008, our Board of Directors voted to suspend our quarterly cash
dividend indefinitely. Although we anticipate that, over the
longer-term, we will pay regular quarterly dividends to the holders of our
common stock, over the near term we are focused on preserving
liquidity. Accordingly, we do not expect to pay cash dividends on our
common stock for the foreseeable future. In addition, our amended
credit facility currently prohibits us from paying dividends or making cash
distributions on our common stock.
Our
ability to pay and maintain cash dividends in the future will be based on many
factors, including then-existing contractual restrictions or limitations, our
ability to execute our growth strategy, our ability to negotiate favorable lease
and other contractual terms, anticipated operating expense levels, the level of
demand for our units/beds, occupancy rates, entrance fee sales results, the
rates we charge, our liquidity position and actual results that may vary
substantially from estimates. Some of the factors are beyond our control and a
change in any such factor could affect our ability to pay or maintain dividends.
We can give no assurance as to our ability to pay or maintain dividends in the
future. We also cannot assure you that the level of dividends will be maintained
or increase over time or that increases in demand for our units/beds and monthly
resident fees will increase our actual cash available for dividends to
stockholders. As we have done in the past, we may also pay dividends in the
future that exceed our net income for the relevant period as calculated in
accordance with U.S. GAAP.
Recent
Sales of Unregistered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item
6. Selected Financial
Data.
The
selected financial data should be read in conjunction with the sections entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” “Business” and our historical consolidated financial statements and
the related notes included elsewhere herein. The consolidated
financial data includes Brookdale Living Communities, Inc. and Alterra
Healthcare Corporation for all periods presented and the acquisition of American
Retirement Corporation, effective July 25, 2006. Other acquisitions
are discussed in Note 4 in the notes to the consolidated financial
statements. Our historical statement of operations data and balance
sheet data as of and for each of the years in the five-year period ended
December 31, 2009 have been derived from our audited financial
statements.
|
|
|
For the Years Ended December
31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year ended December 31,
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
2,023,068 |
|
|
$ |
1,928,054 |
|
|
$ |
1,839,296 |
|
|
$ |
1,309,913 |
|
|
$ |
790,577 |
|
|
Facility
operating expense
|
|
|
1,302,277 |
|
|
|
1,261,581 |
|
|
|
1,170,937 |
|
|
|
819,801 |
|
|
|
493,887 |
|
|
General
and administrative expense
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
138,013 |
|
|
|
117,897 |
|
|
|
81,696 |
|
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
271,628 |
|
|
|
228,779 |
|
|
|
189,339 |
|
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
299,925 |
|
|
|
188,129 |
|
|
|
47,048 |
|
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total
operating expense
|
|
|
1,993,288 |
|
|
|
2,168,197 |
|
|
|
1,880,503 |
|
|
|
1,354,606 |
|
|
|
811,970 |
|
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
(41,207 |
) |
|
|
(44,693 |
) |
|
|
(21,393 |
) |
|
Interest
income
|
|
|
2,354 |
|
|
|
7,618 |
|
|
|
7,519 |
|
|
|
6,810 |
|
|
|
3,788 |
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(128,869 |
) |
|
|
(147,389 |
) |
|
|
(143,991 |
) |
|
|
(97,694 |
) |
|
|
(46,248 |
) |
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,505 |
) |
|
|
(9,707 |
) |
|
|
(7,064 |
) |
|
|
(5,061 |
) |
|
|
(2,835 |
) |
|
Change
in fair value of derivatives and amortization
|
|
|
3,765 |
|
|
|
(68,146 |
) |
|
|
(73,222 |
) |
|
|
(38 |
) |
|
|
3,992 |
|
|
Loss
on extinguishment of debt, net
|
|
|
(1,292 |
) |
|
|
(3,052 |
) |
|
|
(2,683 |
) |
|
|
(1,526 |
) |
|
|
(3,996 |
) |
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
440 |
|
|
|
(861 |
) |
|
|
(3,386 |
) |
|
|
(3,705 |
) |
|
|
(838 |
) |
|
Other
non-operating income
|
|
|
4,146 |
|
|
|
1,708 |
|
|
|
402 |
|
|
|
— |
|
|
|
— |
|
|
Loss
before taxes
|
|
|
(99,181 |
) |
|
|
(459,972 |
) |
|
|
(263,632 |
) |
|
|
(145,907 |
) |
|
|
(67,530 |
) |
|
Benefit
for income taxes
|
|
|
32,926 |
|
|
|
86,731 |
|
|
|
101,260 |
|
|
|
38,491 |
|
|
|
97 |
|
|
Loss
from continuing operations
|
|
|
(66,255 |
) |
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
|
(107,416 |
) |
|
|
(67,433 |
) |
|
Loss
on discontinued operations
|
|
|
― |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(128 |
) |
|
Net
loss
|
|
|
(66,255 |
) |
|
|
(373,241 |
) |
|
|
(162,372 |
) |
|
|
(107,416 |
) |
|
|
(67,561 |
) |
|
Net
loss (income) attributable to noncontrolling interest
|
|
|
― |
|
|
|
— |
|
|
|
393 |
|
|
|
(671 |
) |
|
|
16,575 |
|
|
Net
loss attributable to common stockholders
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(161,979 |
) |
|
$ |
(108,087 |
) |
|
$ |
(50,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from operations attributable to common
stockholders
|
|
$ |
(0.60 |
) |
|
$ |
(3.67 |
) |
|
$ |
(1.60 |
) |
|
$ |
(1.34 |
) |
|
$ |
(1.35 |
) |
|
Weighted
average shares of common stock used in computing basic and diluted loss
per share
|
|
|
111,288 |
|
|
|
101,667 |
|
|
|
101,511 |
|
|
|
80,842 |
|
|
|
37,636 |
|
|
Dividends
declared per share of common stock
|
|
$ |
― |
|
|
$ |
0.75 |
|
|
$ |
1.95 |
|
|
$ |
1.55 |
|
|
$ |
0.50 |
|
|
|
|
For the Years Ended December
31,
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of facilities (at end of period)
|
|
|
565 |
|
|
|
548 |
|
|
|
550 |
|
|
|
546 |
|
|
|
383 |
|
|
Total
units/beds operated(2)
|
|
|
53,626 |
|
|
|
51,804 |
|
|
|
52,086 |
|
|
|
51,271 |
|
|
|
30,057 |
|
|
Occupancy
rate at period end
|
|
|
89.3 |
% |
|
|
89.5 |
% |
|
|
90.6 |
% |
|
|
91.1 |
% |
|
|
89.6 |
% |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,985 |
|
|
$ |
3,791 |
|
|
$ |
3,577 |
|
|
$ |
3,247 |
|
|
$ |
2,991 |
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
66,370 |
|
|
$ |
53,973 |
|
|
$ |
100,904 |
|
|
$ |
68,034 |
|
|
$ |
77,682 |
|
|
Total
assets
|
|
$ |
4,645,943 |
|
|
$ |
4,449,258 |
|
|
$ |
4,811,622 |
|
|
$ |
4,756,000 |
|
|
$ |
1,697,811 |
|
|
Total
debt
|
|
$ |
2,625,526 |
|
|
$ |
2,552,929 |
|
|
$ |
2,335,224 |
|
|
$ |
1,874,939 |
|
|
$ |
754,301 |
|
|
Noncontrolling
interest
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
― |
|
|
$ |
4,601 |
|
|
$ |
36 |
|
|
Total
stockholders equity
|
|
$ |
1,086,582 |
|
|
$ |
960,601 |
|
|
$ |
1,419,538 |
|
|
$ |
1,764,012 |
|
|
$ |
630,403 |
|
|
|
(1)
|
Prior
to October 1, 2006, the effective portion of the change in fair value of
derivatives was recorded in other comprehensive income and the ineffective
portion was included in the change in fair value of derivatives in the
consolidated statements of operations. On October 1, 2006, we
elected to discontinue hedge accounting prospectively for the previously
designated swap instruments. Gains and losses accumulated in
other comprehensive income at that date of $1.3 million related to the
previously designated swap instruments are being amortized to interest
expense over the life of the underlying hedged debt
payments. Although hedge accounting was discontinued on October
1, 2006, the swap instruments remained outstanding and are carried at fair
value in the consolidated balance sheets and the change in fair value
beginning October 1, 2006 has been included in the consolidated statements
of operations.
|
|
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
|
(3)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following information should be read in conjunction with our “Selected Financial
Data” and our consolidated financial statements and related notes,
included elsewhere in this Annual Report on Form 10-K. In
addition to historical information, this discussion and analysis may contain
forward-looking statements that involve risks, uncertainties and assumptions,
which could cause actual results to differ materially from management’s
expectations. Please see additional risks and uncertainties described
in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995” for more information. Factors that could cause such differences include
those described in “Risk Factors” which appears elsewhere in this Annual Report
on Form 10-K.
Executive
Overview
During
2009, we continued to make progress in implementing our long-term growth
strategy, integrating our previous acquisitions, and building a platform for
future growth. Our primary long-term growth objectives are to grow
our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility
Operating Income primarily through a combination of: (i) organic growth in our
core business, including expense control and the realization of economies of
scale; (ii) continued expansion of our ancillary services programs (including
therapy and home health services); (iii) expansion of our existing communities;
and (iv) acquisitions of additional operating companies and
communities.
Our
operating results for the year ended December 31, 2009 were favorably impacted
by an increase in our total
revenues
(primarily driven by an increase in average monthly revenue per unit/bed
including an increase in our ancillary services revenue) and by the significant
cost control measures that were implemented in recent periods. The
difficult operating environment during 2009 has resulted in slightly lower
occupancy and diminished growth in the rates we charge our
residents. We responded by controlling our expenses and capital
spending, and by increasing the reach of our ancillary services
programs. We also continue to aggressively focus on maintaining and
increasing occupancy.
During
the first half of the year, we took steps to preserve our liquidity and increase
our financial flexibility. For example, during the second quarter, we
completed a public equity offering which yielded $163.8 million of net proceeds,
which were primarily used to repay the $125.0 million of indebtedness which was
outstanding under our credit facility. Furthermore, we have extended
the maturity of a number of mortgage loans and, factoring in contractual
extension options, have no mortgage debt maturities until 2011 (other than
periodic, scheduled principal payments). Finally, we have taken steps
to reduce materially our exposure to collateralization requirements associated
with interest rate swaps. As a result of these steps and our
operating performance during the year ended December 31, 2009, we ended the year
with $66.4 million of unrestricted cash and cash equivalents on our consolidated
balance sheet.
As
discussed in more detail under “Credit Facilities - 2010 Credit Facility” below,
subsequent to December 31, 2009, we entered into a new revolving credit facility
with General Electric Capital Corporation, as administrative agent. The new
facility has a commitment of $100.0 million, with an option to increase the
commitment to $120.0 million, and matures on June 30, 2013. The new facility
replaced the $75.0 million revolving credit agreement with Bank of America, N.A.
that was scheduled to expire in August 2010.
During
the fourth quarter of 2009, we engaged in a limited and measured amount of
acquisition activity. We acquired 18 senior living communities from
affiliates of Sunrise Senior Living, Inc. (“Sunrise”) for an aggregate net
purchase price of approximately $190.0 million. The portfolio of 18
communities is comprised of a total of 1,197 units, including 92 independent
living units, 746 assisted living units and 359 Alzheimer’s units. We
financed the transaction with approximately $98.8 million of non-recourse
mortgage debt (substantially through the assumption of existing debt), with the
balance of the purchase price paid from cash on hand.
We also
acquired the remaining interest in three retirement center communities that were
previously managed by us and in which we previously had a noncontrolling
interest. Our interest was accounted for under the equity method and
had a carrying value of zero prior to the acquisition. The aggregate
purchase price for the communities was $102.0 million. The portfolio
of three communities is comprised of 642 total units, including 504 independent
living units and 138 assisted living units. We financed the
transaction by obtaining a $75.4 million non-recourse mortgage loan with the
balance of the purchase price paid from cash on hand.
The table
below presents a summary of our operating results and certain other financial
metrics for the years ended December 31, 2009 and 2008 and the amount and
percentage of increase or decrease of each applicable item (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
2,023.1 |
|
|
$ |
1,928.1 |
|
|
$ |
95.0 |
|
|
|
4.9 |
% |
|
Net
loss attributable to common stockholders(1)
|
|
$ |
(66.3 |
) |
|
$ |
(373.2 |
) |
|
$ |
(306.9 |
) |
|
|
(82.2 |
)% |
|
Adjusted
EBITDA
|
|
$ |
348.6 |
|
|
$ |
302.6 |
|
|
$ |
46.0 |
|
|
|
15.2 |
% |
|
Cash
From Facility Operations
|
|
$ |
196.8 |
|
|
$ |
130.1 |
|
|
$ |
66.7 |
|
|
|
51.3 |
% |
|
Facility
Operating Income
|
|
$ |
690.1 |
|
|
$ |
637.5 |
|
|
$ |
52.6 |
|
|
|
8.3 |
% |
(1) Net
loss for 2009 and 2008 includes non-cash impairment charges of $10.1 million and
$220.0 million, respectively.
Adjusted
EBITDA and Facility Operating Income are non-GAAP financial measures we use in
evaluating our operating performance. Cash From Facility Operations is a
non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP
Financial Measures” below for an explanation of how we define each of these
measures, a detailed description of why we believe such measures are useful and
the limitations of each measure, a reconciliation of net loss to each of
Adjusted EBITDA and Facility Operating Income and a reconciliation
of
net cash
provided by operating activities to Cash From Facility Operations.
Our
revenues for the year ended December 31, 2009 increased to $2.0 billion, an
increase of $95.0 million, or approximately 4.9%, over our revenues for the year
ended December 31, 2008. The increase in revenues in the current year
period was primarily a result of an increase in the average revenue per unit/bed
compared to the prior year period, including growing revenues from our ancillary
services programs, partially offset by a decline in occupancy from the prior
year period. Our weighted average occupancy rate for the year ended
December 31, 2009 was 88.8%, compared to 89.6% for the year ended December 31,
2008.
During
the year ended December 31, 2009, our Adjusted EBITDA, Cash From Facility
Operations and Facility Operating Income increased by 15.2%, 51.3% and 8.3%,
respectively, when compared to the year ended December 31,
2008. Adjusted EBITDA and Cash From Facility Operations for the year
ended December 31, 2008 were negatively impacted by $4.8 million of hurricane
and named tropical storms expense and an $8.0 million charge to general and
administrative expense relating to the establishment of a reserve for certain
litigation.
During
the year ended December 31, 2009, we continued to expand our ancillary services
offerings. As of December 31, 2009, we offered therapy services to
approximately 36,000 of our units and home health services to approximately
23,000 of our units. We continue to see positive results from
the maturation of previously-opened therapy and home health
clinics. We also expect to continue to expand our ancillary services
programs to additional units and to open or acquire additional home health
agencies.
During
the year ended December 31, 2009, we opened ten expansions with a total of 685
units. Additionally, during the third and fourth quarters we opened
the 240-unit independent living component and the 72-bed skilled nursing unit of
our new entry fee CCRC in the Villages, Florida.
We
believe that the deteriorating housing market, credit crisis and general
economic uncertainty have caused some potential customers (or their adult
children) to delay or reconsider moving into our communities, resulting in a
decrease in occupancy rates and occupancy levels when compared to the prior year
period. We remain cautious about the economy and the adverse credit
and financial markets and their effect on our customers and our
business. In addition, we continue to experience volatility in the
entrance fee portion of our business. The timing of entrance fee
sales is subject to a number of different factors (including the ability of
potential customers to sell their existing homes) and is also inherently subject
to variability (positively or negatively) when measured over the
short-term. These factors also impact our potential independent
living customers to a significant extent. We expect occupancy and
entrance fee sales to normalize over the longer term.
Consolidated
Results of Operations
Year
Ended December 31, 2009 and 2008
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of change of these items. The results of
operations for any particular period are not necessarily indicative of results
for any future period. The following data should be read in conjunction with our
consolidated financial statements and the notes thereto, which are included
herein. Our results reflect the inclusion of acquisitions that occurred
during the respective reporting periods.
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
496,744 |
|
|
$ |
497,453 |
|
|
$ |
(709 |
) |
|
|
(0.1 |
%) |
|
Assisted
Living
|
|
|
925,917 |
|
|
|
890,075 |
|
|
|
35,842 |
|
|
|
4.0 |
% |
|
CCRCs
|
|
|
593,688 |
|
|
|
533,532 |
|
|
|
60,156 |
|
|
|
11.3 |
% |
|
Total
resident fees
|
|
|
2,016,349 |
|
|
|
1,921,060 |
|
|
|
95,289 |
|
|
|
5.0 |
% |
|
Management
fees
|
|
|
6,719 |
|
|
|
6,994 |
|
|
|
(275 |
) |
|
|
(3.9 |
%) |
|
Total
revenue
|
|
|
2,023,068 |
|
|
|
1,928,054 |
|
|
|
95,014 |
|
|
|
4.9 |
% |
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
operating expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
283,136 |
|
|
|
286,035 |
|
|
|
(2,899 |
) |
|
|
(1.0 |
%) |
|
Assisted
Living
|
|
|
600,948 |
|
|
|
590,644 |
|
|
|
10,304 |
|
|
|
1.7 |
% |
|
CCRCs
|
|
|
418,193 |
|
|
|
384,902 |
|
|
|
33,291 |
|
|
|
8.6 |
% |
|
Total
facility operating expense
|
|
|
1,302,277 |
|
|
|
1,261,581 |
|
|
|
40,696 |
|
|
|
3.2 |
% |
|
General
and administrative expense
|
|
|
134,864 |
|
|
|
140,919 |
|
|
|
(6,055 |
) |
|
|
(4.3 |
%) |
|
Facility
lease expense
|
|
|
272,096 |
|
|
|
269,469 |
|
|
|
2,627 |
|
|
|
1.0 |
% |
|
Depreciation
and amortization
|
|
|
271,935 |
|
|
|
276,202 |
|
|
|
(4,267 |
) |
|
|
(1.5 |
%) |
|
Loss
on sale of communities, net
|
|
|
2,043 |
|
|
|
― |
|
|
|
2,043 |
|
|
|
100.0 |
% |
|
Goodwill
and asset impairment
|
|
|
10,073 |
|
|
|
220,026 |
|
|
|
(209,953 |
) |
|
|
(95.4 |
%) |
|
Total
operating expense
|
|
|
1,993,288 |
|
|
|
2,168,197 |
|
|
|
(174,909 |
) |
|
|
(8.1 |
%) |
|
Income
(loss) from operations
|
|
|
29,780 |
|
|
|
(240,143 |
) |
|
|
269,923 |
|
|
|
112.4 |
% |
|
Interest
income
|
|
|
2,354 |
|
|
|
7,618 |
|
|
|
(5,264 |
) |
|
|
(69.1 |
%) |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
(128,869 |
) |
|
|
(147,389 |
) |
|
|
18,520 |
|
|
|
12.6 |
% |
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,505 |
) |
|
|
(9,707 |
) |
|
|
202 |
|
|
|
2.1 |
% |
|
Change
in fair value of derivatives and amortization
|
|
|
3,765 |
|
|
|
(68,146 |
) |
|
|
71,911 |
|
|
|
105.5 |
% |
|
Loss
on extinguishment of debt, net
|
|
|
(1,292 |
) |
|
|
(3,052 |
) |
|
|
1,760 |
|
|
|
57.7 |
% |
|
Equity
in earnings (loss) of unconsolidated ventures
|
|
|
440 |
|
|
|
(861 |
) |
|
|
1,301 |
|
|
|
151.1 |
% |
|
Other
non-operating income
|
|
|
4,146 |
|
|
|
1,708 |
|
|
|
2,438 |
|
|
|
142.7 |
% |
|
Loss
before income taxes
|
|
|
(99,181 |
) |
|
|
(459,972 |
) |
|
|
360,791 |
|
|
|
78.4 |
% |
|
Benefit
for income taxes
|
|
|
32,926 |
|
|
|
86,731 |
|
|
|
(53,805 |
) |
|
|
(62.0 |
%) |
|
Net
loss
|
|
$ |
(66,255 |
) |
|
$ |
(373,241 |
) |
|
$ |
(306,986 |
) |
|
|
(82.2 |
%) |
|
Selected
Operating and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of communities (at end of period)
|
|
|
565 |
|
|
|
548 |
|
|
|
17 |
|
|
|
3.1 |
% |
|
Total
units/beds operated(2)
|
|
|
53,626 |
|
|
|
51,804 |
|
|
|
1,822 |
|
|
|
3.5 |
% |
|
Owned/leased
communities units/beds
|
|
|
49,838 |
|
|
|
47,455 |
|
|
|
2,383 |
|
|
|
5.0 |
% |
|
Owned/leased
communities occupancy rate (weighted average)
|
|
|
88.8 |
% |
|
|
89.6 |
% |
|
|
(0.8 |
%) |
|
|
(0.9 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,985 |
|
|
$ |
3,791 |
|
|
|
194 |
|
|
|
5.1 |
% |
|
Selected
Segment Operating and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
80 |
|
|
|
77 |
|
|
|
3 |
|
|
|
3.9 |
% |
|
Total
units/beds(2)
|
|
|
14,867 |
|
|
|
14,229 |
|
|
|
638 |
|
|
|
4.5 |
% |
|
Occupancy
rate (weighted average)
|
|
|
88.8 |
% |
|
|
90.3 |
% |
|
|
(1.5 |
%) |
|
|
(1.7 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,285 |
|
|
$ |
3,171 |
|
|
|
114 |
|
|
|
3.6 |
% |
|
Assisted
Living
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
430 |
|
|
|
417 |
|
|
|
13 |
|
|
|
3.1 |
% |
|
Total
units/beds(2)
|
|
|
22,954 |
|
|
|
22,043 |
|
|
|
911 |
|
|
|
4.1 |
% |
|
Occupancy
rate (weighted average)
|
|
|
90.3 |
% |
|
|
89.9 |
% |
|
|
0.4 |
% |
|
|
0.4 |
% |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
3,890 |
|
|
$ |
3,752 |
|
|
|
138 |
|
|
|
3.7 |
% |
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCRCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
36 |
|
|
|
32 |
|
|
|
4 |
|
|
|
12.5 |
% |
|
Total
units/beds(2)
|
|
|
12,017 |
|
|
|
11,183 |
|
|
|
834 |
|
|
|
7.5 |
% |
|
Occupancy
rate (weighted average)
|
|
|
85.7 |
% |
|
|
87.9 |
% |
|
|
(2.2 |
%) |
|
|
(2.5 |
%) |
|
Average
monthly revenue per unit/bed(3)
|
|
$ |
5,139 |
|
|
$ |
4,759 |
|
|
|
380 |
|
|
|
8.0 |
% |
|
Management
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of communities (period end)
|
|
|
19 |
|
|
|
22 |
|
|
|
(3 |
) |
|
|
(13.6 |
%) |
|
Total
units/beds(2)
|
|
|
3,788 |
|
|
|
4,349 |
|
|
|
(561 |
) |
|
|
(12.9 |
%) |
|
Occupancy
rate (weighted average)
|
|
|
84.8 |
% |
|
|
84.9 |
% |
|
|
(0.1 |
%) |
|
|
(0.1 |
%) |
|
Selected
Entrance Fee Data:
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
4,872 |
|
|
$ |
5,718 |
|
|
$ |
12,635 |
|
|
$ |
15,264 |
|
|
$ |
38,489 |
|
|
Refundable
entrance fees sales(4)
|
|
|
3,638 |
|
|
|
4,098 |
|
|
|
9,296 |
|
|
|
13,354 |
|
|
|
30,386 |
|
|
Total
entrance fee receipts(5)
|
|
|
8,510 |
|
|
|
9,816 |
|
|
|
21,931 |
|
|
|
28,618 |
|
|
|
68,875 |
|
|
Refunds
|
|
|
(5,836 |
) |
|
|
(6,357 |
) |
|
|
(4,649 |
) |
|
|
(6,074 |
) |
|
|
(22,916 |
) |
|
Net
entrance fees
|
|
$ |
2,674 |
|
|
$ |
3,459 |
|
|
$ |
17,282 |
|
|
$ |
22,544 |
|
|
$ |
45,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
|
Q2 |
|
|
|
Q3 |
|
|
|
Q4 |
|
|
|
|
|
Non-refundable
entrance fees sales
|
|
$ |
2,780 |
|
|
$ |
5,177 |
|
|
$ |
7,253 |
|
|
$ |
7,391 |
|
|
$ |
22,601 |
|
|
Refundable
entrance fees sales(4)
|
|
|
3,492 |
|
|
|
7,420 |
|
|
|
4,273 |
|
|
|
4,686 |
|
|
|
19,871 |
|
|
Total
entrance fee receipts
|
|
|
6,272 |
|
|
|
12,597 |
|
|
|
11,526 |
|
|
|
12,077 |
|
|
|
42,472 |
|
|
Refunds
|
|
|
(3,632 |
) |
|
|
(4,843 |
) |
|
|
(5,856 |
) |
|
|
(4,819 |
) |
|
|
(19,150 |
) |
|
Net
entrance fees
|
|
$ |
2,640 |
|
|
$ |
7,754 |
|
|
$ |
5,670 |
|
|
$ |
7,258 |
|
|
$ |
23,322 |
|
__________
|
(1)
|
Segment
facility operating expense for the year ended December 31, 2008 includes
hurricane and named tropical storms expense totaling $4.8 million
consisting of $1.3 million for Retirement Centers, $2.0 million for
Assisted Living and $1.5 million for
CCRCs.
|
|
(2)
|
Total
units/beds operated represent the total units/beds operated as of the end
of the period.
|
|
(3)
|
Average
monthly revenue per unit/bed represents the average of the total monthly
revenues, excluding amortization of entrance fees, divided by average
occupied units/beds.
|
|
(4)
|
Refundable
entrance fee sales for the years ended December 31, 2009 and 2008 include
amounts received from residents participating in the MyChoice program,
which allows new and existing residents the option to pay additional
refundable entrance fee amounts in return for a reduced monthly service
fee. MyChoice amounts received from existing residents totaled
$0.6 million, $0.1 million and $0.4 million in the first, third and fourth
quarters of 2009, respectively, and $0.4 million, $0.8 million, $0.6
million and $0.5 million in the first, second, third and fourth quarters
of 2008, respectively. My Choice amounts for the second quarter
of 2009 were not material.
|
|
(5)
|
Includes
$25.7 million of first generation entrance fee receipts which represent
initial entrance fees received from the sale of units at a newly opened
entrance fee CCRC where the Company is required to apply such entrance fee
proceeds to satisfy debt.
|
As of
December 31, 2009, our total operations included 565 communities with a capacity
to serve 53,626 residents. During 2009, our total portfolio increased
by 17 communities, net with our resident capacity increasing by 1,912 units, net
as a result of current year acquisitions offset by the disposition of two
communities.
Our 2009
results were also affected by our continuing implementation of our ancillary
services programs at a number of our locations as described above.
Resident
Fees
Total
resident fees increased over the prior-year primarily due to an increase in
average monthly revenue per unit/bed during the current year which includes an
increase in our ancillary services revenue as we continue to roll out therapy
and home health services to many of our communities. This increase
was partially offset by a decrease in occupancy in the Retirement Centers and
CCRCs segments. During the current year, same-store revenues grew
4.1% at the 514 properties we operated in both years with a 4.9% increase in the
average monthly revenue per unit/bed and a 0.7% decrease in
occupancy.
Retirement
Center revenue decreased slightly, primarily due to a decrease in occupancy at
the communities we operated during both years, partially offset by an increase
in the average monthly revenue per unit/bed at those same communities year over
year.
Assisted
Living revenue increased $35.8 million, or 4.0%, primarily due to an increase in
the average monthly revenue per unit/bed at the communities we operated during
both years as well as an increase in revenues related to the expansion of our
ancillary service programs.
CCRCs
revenue increased $60.2 million, or 11.3%, primarily due to an increase in the
average monthly revenue per unit/bed at the communities we operated during both
years as well as an increase in revenues related to increased capacity in the
current year and the expansion of our ancillary services. This
increase was partially offset by a decrease in occupancy at our same-store
communities year over year.
Management
Fees
Management
fees decreased year over year as one management agreement terminated early in
the current year, which was partially offset by the acquisition of a new
management agreement mid-year in the current year.
Facility
Operating Expense
Facility
operating expense increased over the prior-year primarily due to an increase in
salaries and wages, increased insurance expense, higher deferred community fee
expense recognition, and additional current year expense incurred in connection
with the continued expansion of our ancillary services programs during
2009. These increases were partially offset by significant cost
control measures that were implemented in recent periods. Facility
operating expense during the year ended December 31, 2008 was negatively
impacted by hurricane and named tropical storms expense.
Retirement
Center operating expenses decreased $2.9 million, or 1.0%, primarily due to cost
control measures implemented in recent periods, including reductions in overtime
hours worked and reduced advertising. These decreases were offset by
additional expense incurred in connection with the continued expansion of our
ancillary services programs, higher deferred community fee expense recognition
and an increase in insurance expense in the current year. Also,
facility operating expense during the year ended December 31, 2008 was
negatively impacted by hurricane and named tropical storms expense.
Assisted
Living operating expenses increased $10.3 million, or 1.7%, due to an increase
in expense incurred in connection with the continued rollout of our ancillary
services program, increased occupancy in the current year, an increase in
salaries and wages related to normal salary increases, increased employee hours
worked and reduced open positions, higher deferred community fee expense
recognition and increased insurance costs. These increases were
partially offset by cost control measures implemented in recent periods,
including reductions in overtime hours worked and public relations and travel
expenses. Also, facility operating expense during the year ended
December 31, 2008 was negatively impacted by hurricane and named tropical storms
expense.
CCRCs
operating expenses increased $33.3 million, or 8.6%, primarily due to an
increase in expense incurred in connection with the continued expansion of our
ancillary services programs, increased salaries and wages due to filling vacant
positions and wage rate increases, higher deferred community fee expense
recognition and an increase in insurance costs. These increases were
partially offset by significant cost control measures that were implemented in
recent periods. Also, facility operating expense during the year
ended December 31, 2008 was negatively impacted by hurricane and named tropical
storms expense.
General
and Administrative Expense
General
and administrative expense decreased $6.1 million, or 4.3%, primarily as a
result of a decrease in non-controllable expenses related to the $8.0 million
reserve established for certain litigation during the year ended December 31,
2008, as well as a decrease in non-cash stock-based compensation expense in
connection with restricted stock grants and cost control measures implemented in
recent periods. These decreases were partially offset by increased
bonus expense and transaction-related costs in the current
year. General and administrative expense as a percentage of total
revenue, including revenue generated by the communities we manage, was 4.7% and
4.5% for the years ended December 31, 2009 and 2008, respectively, calculated as
follows (dollars in thousands):
|
|
|
Year
Ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fee revenues
|
|
$ |
2,016,349 |
|
|
|
92.7 |
% |
|
$ |
1,921,060 |
|
|
|
92.6 |
% |
|
Resident
fee revenues under management
|
|
|
157,618 |
|
|
|
7.3 |
% |
|
|
152,970 |
|
|
|
7.4 |
% |
|
Total
|
|
$ |
2,173,967 |
|
|
|
100 |
% |
|
$ |
2,074,030 |
|
|
|
100.0 |
% |
|
General
and administrative expenses (excluding non-cash compensation, integration
and transaction-related costs)
|
|
$ |
101,676 |
|
|
|
4.7 |
% |
|
$ |
92,473 |
|
|
|
4.5 |
% |
|
Non-cash
compensation expense
|
|
|
26,935 |
|
|
|
1.2 |
% |
|
|
28,937 |
|
|
|
1.4 |
% |
|
Integration
and transaction-related costs
|
|
|
6,253 |
|
|
|
0.3 |
% |
|
|
19,509 |
|
|
|
0.9 |
% |
|
General
and administrative expenses (including non-cash compensation, integration
and transaction-related costs)
|
|
$ |
134,864 |
|
|
|
6.2 |
% |
|
$ |
140,919 |
|
|
|
6.8 |
% |
Facility
Lease Expense
Facility
lease expense increased by $2.6 million, or 1.0%, primarily due to the impact of
lease escalators.
Depreciation
and Amortization
Depreciation
and amortization expense decreased by $4.3 million, or 1.5%, primarily as a
result of resident in-place lease intangibles becoming fully amortized during
late 2008.
Goodwill
and Asset Impairment
During
the year we recognized $10.1 million of impairment charges related to asset
impairments for property, plant and equipment and leasehold intangibles for
certain communities within the Assisted Living segment. The non-cash
impairment charges are primarily due to lower than expected performance of the
underlying communities. During 2008 we recognized $220.0 million of
impairment charges mainly related to the CCRCs operating segment. The
non-cash charges consisted of $215.0 million of goodwill impairment related to
the CCRCs segment and $5.0 million of asset impairment for property, plant and
equipment and leasehold intangibles for certain communities within the Assisted
Living segment. The impairment charge was primarily driven by adverse
equity market conditions intensifying in the fourth quarter of 2008 that caused
a decrease in current market multiples and our stock price at December 31, 2008
compared with our stock price at September 30, 2008.
Interest
Income
Interest
income decreased $5.3 million, or 69.1%, primarily due to the recognition of
interest income upon collection of a long-term note receivable, which interest
income had been deferred as the interest was accumulating unpaid, during the
year ended December 31, 2008.
Interest
Expense
Interest
expense decreased $90.6 million, or 40.2%, primarily due to the change in fair
value of our interest rate swaps and caps. During the year ended
December 31, 2009, we recognized approximately $3.8 million of interest income
on our interest rate swaps and caps due to favorable changes in the LIBOR yield
curve which resulted in a change in the fair value of the swaps and caps, as
compared to approximately $68.1 million of interest expense on our interest rate
swaps and caps for the year ended December 31, 2008. Interest expense
on our mortgage debt and credit facility also decreased due to a decline in
market interest rates period over period as well as the payoff of the credit
facility during 2009.
Income
Taxes
The
reduction in the income tax benefit over the same prior year period is due to an
increase in the effective tax rate from 18.9 % in 2008 to 33.2% in
2009. This increase is primarily due to the impact of the
impairment charge taken for financial statement purposes in 2008, which was not
deductible for tax purposes. The rate was also impacted by our stock based
compensation tax deduction as compared to the financial expense for 2009 and by
an increase in nondeductible officer’s compensation recorded in the
year.
Year
Ended December 31, 2008 and 2007
The
following table sets forth, for the periods indicated, statement of operations
items and the amount and percentage of change of these items. The results of
operations for any particular period are not necessarily indicative of results
for any future period. The following data should be read in conjunction with our
consolidated financial statements and the notes thereto, which are included
herein. Our results reflect the inclusion of acquisitions that occurred during
the respective reporting periods.
Certain
prior period amounts have been reclassified to conform to the current year
presentation.
|
(dollars
in thousands, except average monthly revenue per unit/bed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$ |
497,453 |
|
|
$ |
489,931 |
|
|
$ |
7,522 |
|
|
|
1.5 |
% |
|
Assisted
Living
|
|
|
890,075 |
|
|
|
841,819 |
|
|
|
48,256 |
|
|