10-K 1 esc10k2011.htm 10-K 2011 esc10k2011.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934
 
For the fiscal year ended December 31, 2011

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
Commission file number 1-14012

 
Logo
 
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011


Washington
91-1605464
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

3131 Elliott Avenue, Suite 500, Seattle, WA 98121
(Address of principal executive offices)

(206) 298-2909
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value
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 o No x
 
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 o 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 o
 
 
 
 

 

 
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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. x

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.
Large accelerated filer  o
Accelerated filer  x
   
Non-accelerated filer (Do not check if a smaller reporting company)  o
Smaller reporting company  o


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o        No  x 

Aggregate market value of common voting stock held by non-affiliates of the registrant as of June 30, 2011 was $567,090,760.

As of March 1, 2012, 45,030,636 shares of the Registrant’s Common Stock were outstanding.

 
DOCUMENTS INCORPORATED BY REFERENCE:
 
The information required to be reported in Part III of this Annual Report on Form 10-K is incorporated herein by reference to the Registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission with respect to the Registrant’s Annual Meeting of Shareholders scheduled to be held on May 9, 2012.

 
 

 

EMERITUS CORPORATION

TABLE OF CONTENTS
 
 
Page Number
 
     
BUSINESS                                                                                                                            
     
RISK FACTORS                                                                                                                            
     
UNRESOLVED STAFF COMMENTS                                                                                                                            
     
PROPERTIES                                                                                                                            
     
LEGAL PROCEEDINGS                                                                                                                            
     
MINE SAFETY DISCLOSURES                                                                                                                            
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                                                                            
     
 
SIGNATURES                                                                                                                            
     
 
Index to Exhibits                                                                                                                            



PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The disclosure and analysis in this Annual Report on Form 10-K contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.  They often include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “seek,” “should,” “will,” or the negative of those terms, or comparable terminology.  These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.  Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.

Any or all of our forward-looking statements in this report may turn out to be inaccurate.  Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements.  Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain.  Accordingly, you should not place undue reliance on our forward-looking statements.

Although we believe that the expectations and forecasts reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements.  Consequently, no forward-looking statement can be guaranteed and future events and actual or suggested results may differ materially.  We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements.  We expressly disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.  You are advised, however, to consult any further disclosures we make in our quarterly reports on Form 10-Q and current reports on Form 8-K.




ITEM 1.  BUSINESS

Unless the context otherwise requires, the terms “Emeritus,” the “Company,” “we,” “us,” and “our” refer to Emeritus Corporation and its consolidated subsidiaries.

Overview

Emeritus was founded in 1993 and is one of the largest and fastest-growing operators of senior living communities in the United States.  We own and operate a portfolio of high-quality, purpose-built communities providing services to our residents including independent living, assisted living, specialized memory care, and, to a lesser extent, skilled nursing care.  We strive to provide a wide variety of supportive living services in a professionally staffed environment that enables seniors to live with dignity and independence.  Our holistic approach enhances every aspect of our residents’ lives by assisting them with life enrichment activities including transportation, socialization and education, housing, and 24-hour personal support services, such as medication management, bathing, dressing, personal hygiene, and grooming.  The average age of our residents is 85.

As of December 31, 2011, we operated 478 senior living communities in 44 states.  The communities consisted of approximately 42,600 residential rooms or suites (collectively “units”) with a resident capacity for approximately 49,700 residents.  Our “Consolidated Portfolio” consists of owned and leased communities and our “Operated Portfolio” consists of our Consolidated Portfolio and the communities we manage.  As of December 31, 2011, our Operated Portfolio consisted of the following:

       
Units by Type of Service
 
Communities
Units (a)
Capacity (b)
AL (c)
MC (d)
IL (e)
SN (f)
Other (g)
Owned
                          187
            15,309
                  18,734
    11,284
       2,965
       726
          148
            186
Leased
                          141
            14,596
                  16,316
    10,803
       2,239
       671
          826
              57
Consolidated Portfolio
                          328
            29,905
                  35,050
    22,087
       5,204
    1,397
          974
            243
Managed
                              9
                933
                    1,045
        569
          183
       161
        –
              20
Managed - Joint Ventures
                          141
            11,809
                  13,611
      6,831
       1,372
    3,120
          195
            291
Operated Portfolio
                          478
            42,647
                  49,706
    29,487
       6,759
    4,678
       1,169
            554
                 
(a) Designed capacity units whether or not in use as a residential room or suite
(b) Maximum number of residents
(c) Assisted living
(d) Memory care
(e) Independent living
(f) Skilled nursing beds
(g) Units taken out of service

During 2011, we generated approximately 87.2% of our Consolidated Portfolio revenues from private payor sources, which limits our exposure to government reimbursement risk.

Our Consolidated Portfolio consists of high quality communities that offer a significant number of amenities to our residents and allows us to operate efficiently.  To be competitive in all markets, we maintain our communities and have significantly upgraded many of the older communities to enhance their appearance and functionality, making improvements to kitchens, emergency call systems, dining, lounge and recreation areas, landscaping, and electronic systems, including internet access and data transmission.

Our Operated Portfolio includes 297 communities that offer Alzheimer’s/dementia (“memory care”) services with approximately 6,800 units in a mix of both free-standing communities and as an attached wing of our senior living communities.  Dementia is a loss of or decline in memory and other cognitive abilities.  Alzheimer’s disease is the most common type of dementia, accounting for 60 to 80 percent of cases and is a



disease that is growing significantly in aging populations.  Memory care residents typically have declines in certain mental functions that prevent them from performing activities of daily living, such as dressing and feeding themselves.

We focus on providing service of the highest quality and value to our residents.  We also focus on maximizing our revenues, operating income, and cash flows through a combination of continuing initiatives:

·  
increase occupancy;
 
·  
optimize revenue per unit;
 
·  
increase capacity via selective acquisitions and expansions of existing communities;
 
·  
expand our memory care offerings to meet growing demand through expansions and conversions of existing communities and further acquisition of existing dementia care communities;
 
·  
establish and maintain quality assurance and risk management programs to maintain customer satisfaction and to reduce the cost of workers’ compensation and professional and general liability insurance;
 
·  
increase cost efficiencies through higher occupancy rates and greater economies of scale;
 
·  
increase the percentage of owned versus leased communities when it is financially advantageous to do so; and
 
·  
improve operating performance of joint venture communities, thereby increasing related management fee revenue and positioning us for distributions in excess of our ownership percentage.

As we have executed these growth initiatives, we have consistently improved our revenues.  Our Consolidated Portfolio occupancy has remained very stable through an extremely challenging economic period, demonstrating the needs-based nature of our business.  During 2011, our initiatives produced the following successful results, which include the impacts of acquisitions:

·  
Total consolidated operating revenues increased by approximately $247.7 million, or 24.6%, in 2011 to $1.3 billion;
 
·  
Average monthly revenue per occupied unit in our Consolidated Portfolio increased by 6.5% to $4,065 for 2011 compared to 2010; and
 
·  
The number of communities in our Consolidated Portfolio increased by a net of 22 communities during 2011, which increased our consolidated unit count by approximately 1,628 units.

The Senior Living and Memory Care Industry

The senior living industry offers various types of settings across a continuum of care for the senior population.  Our primary area of focus is assisted living, which provides a cost-effective and life-enriching alternative for seniors as compared to other settings such as skilled nursing or home healthcare.  We are one of a limited number of national operators of assisted living communities with a proven record of acquisition and development success across diverse geographic markets.  The assisted living industry is highly fragmented and characterized by numerous local and regional operators.  We believe the industry will be the focus of increased consolidation activity.

The term “assisted living” may also be known as residential care, adult living facility, supported care, adult foster home, retirement residence, etc. (collectively “assisted living”).  We believe that the assisted living and memory care industry is the preferred residential alternative for seniors who cannot live independently due to physical or cognitive frailties but who do not require the more intensive medical attention provided by a skilled nursing facility.
 
Assisted living provides housing and 24-hour personal support services designed to assist seniors with the activities of daily living, which include bathing, eating, personal hygiene, grooming, medication reminders,



ambulating, and dressing.  Certain of our assisted living communities offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia, in addition to our free-standing memory care communities.

We believe that our assisted living business, because it is needs-driven, has been relatively resistant to economic downturns and will continue to benefit from other trends and factors in the industry including growing consumer awareness of the types of services we provide and the increase in the number of seniors looking for care outside of their homes.  Other trends and factors include:

Consumer Preference.  We believe that assisted living is preferred by prospective residents as well as their families, who are often the decision makers for seniors.  Assisted living is a cost-effective alternative to other types of care, offering seniors greater independence while enabling them to reside in a more residential environment.

Cost-Effectiveness.  Assisted living services generally cost considerably less than skilled nursing services located in the same region.  We believe that the cost of assisted living services compares favorably with home healthcare, particularly when costs associated with housing, meals, and personal care assistance are taken into account.  According to the 2011 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs published in October 2011, the national annual average cost of a year in a skilled nursing home in 2011 was $87,235 for a private room and $78,110 for a semi-private room compared to an annual average cost of $41,724 in an assisted living facility.

Demographics.  Demographic trends are expected to increase the demand for the assisted living and memory care services in which we specialize.  The target market for our services is persons 75 years and older, which represents one of the fastest growing segments of the population in the United States.  The latest data from the United States Census Bureau predicts that the population in the United States will change in the next 19 years as follows:

Age over:
 
2011
 
2030
 
 D
 
% D
65
 
41.1 million
 
72.1 million
 
31.0 million
 
           75.4%
75
 
18.9 million
 
33.3 million
 
14.4 million
 
           76.2%
85
 
5.9 million
 
8.7 million
 
2.8 million
 
           47.5%

The U.S. Census Bureau’s prediction for the next 39 years is as follows:

Age over:
 
2011
 
2050
 
 D
 
% D
65
 
41.1 million
 
88.5 million
 
47.4 million
 
         115.3%
75
 
18.9 million
 
48.4 million
 
29.5 million
 
         156.1%
85
 
5.9 million
 
19.0 million
 
13.1 million
 
         222.0%

According to the 2011 Alzheimer’s Disease Facts and Figures report issued by the Alzheimer’s Association, an estimated 5.4 million Americans have Alzheimer’s disease, including approximately one in every eight Americans over age 65.  In 2012, nearly a half million Americans will develop Alzheimer’s disease, and by 2050 that number will double to nearly one million per year.  In 2011, the first baby boomers turned 65, and by 2029, all baby boomers will be at least 65 years old.  Absent breakthroughs in medical research, we believe the need for Alzheimer’s and dementia care will continue to increase in the future because of the steady growth in the senior population.

Changing Family Dynamics.  The geographical separation of senior family members from their adult children correlates with the geographic mobility of the U.S. population.  As a result, many families that may have provided care to senior family members in their homes are now unable to do so.  We believe that the number of seniors and their families who are able to afford high quality senior residential services, such as those we offer, has increased, despite recent weakness in the economy.  While the economic downturn since 2008 may



have had some impact on the financial resources of seniors and their families, we have yet to witness any significant occupancy declines.

Supply/Demand Imbalance.  While the senior population continues to grow significantly, the supply of assisted living units is not growing at a similarly rapid rate.  We believe that high construction costs, costs and availability of capital and credit, and the cost of liability insurance for smaller operators have constrained the growth in the supply of assisted living facilities.  New construction continued to be minimal throughout 2011.  We believe that growth in the senior population, increased affluence of this generation of senior citizens, baby boomers beginning to reach age 65 in 2011, and the diminished role of the family in providing senior care has led and will continue to lead to supply and demand imbalances.

Competitive Strengths

We believe that the following competitive strengths position us to capitalize on the favorable trends occurring within the healthcare industry and senior living markets.

Quality Care and Value.  We focus on providing service of the highest quality and value to our residents.

Proven Consolidator in Fragmented Industry.  The assisted living industry is highly fragmented with significant opportunities for consolidation.  As of January 1, 2011, the top ten operators in the industry controlled just one-third of the estimated investment grade assisted living units.

In the last five years, we have increased our Consolidated and Operated Portfolios as follows:

 
December 31, 2011
 
December 31, 2006
 
D in
 
Community Count
 
Unit Count
 
Community Count
 
Unit Count
 
Community Count
Owned
            187
 
           15,309
 
               10
 
                808
 
              177
Leased
            141
 
           14,596
 
             155
 
            12,881
 
             (14)
Consolidated Portfolio
            328
 
           29,905
 
             165
 
            13,689
 
              163
Managed
                9
 
                933
 
               11
 
              1,232
 
               (2)
Managed - Joint Ventures
            141
 
           11,809
 
               21
 
              1,652
 
              120
Operated Portfolio
            478
 
           42,647
 
             197
 
            16,573
 
              281
                   

Significant Scale with Broad Geographic Footprint.  We are the largest operator of assisted living and memory care communities in the United States in terms of resident capacity, operating in 44 states across the country.  The scope and scale of our operations and the services we offer enable us to provide our residents with a comprehensive range of healthcare and related services in a cost-effective manner not available to smaller operators.  As a result, we believe the breadth of our platform is a competitive advantage in the marketplace enabling us to attract residents and clinical staff while also providing significant economies of scale and increasing our importance to our suppliers.  Additionally, we believe our geographic diversification makes us less vulnerable to adverse economic developments and industry factors, such as overbuilding, employment, and regulatory and competitive conditions that may affect a particular region.

Scalable Oversight Systems and Information Technology Infrastructure.  Our advanced information technology infrastructure further provides operational efficiencies and our scalability serves as a base for further expansion.

Purpose-Built High-Quality Communities with Substantial Ownership.  We have increased the number of communities that we own from ten at the end of 2006 to 187 as of December 31, 2011, primarily through the acquisition of communities we formerly operated under long-term leases or management contracts.  As a percentage of total consolidated communities, our owned communities have grown from approximately 6% to 57% during this time period.




Experienced Multidisciplinary Management with Industry Relationships.  Our 16 senior management team members collectively have over 300 years of management experience in the healthcare industry, ranging from independent living to skilled nursing care facilities.

Successful Joint Venture Relationships.  Our acquisitions of communities through joint ventures provide current cash flow as well as pathways to ownership of the communities.  In 2006, we entered into a joint venture with an affiliate of Blackstone Real Estate Advisors (“Blackstone”), which we refer to as the “Blackstone JV”.  The Blackstone JV owned 24 communities, which Emeritus managed for a fee.  In addition to earning management fees, we recovered our original investment through cash equity distributions.  Under the terms of the joint venture agreement, we were entitled to distributions in excess of our 19.0% ownership percentage based upon specified performance criteria (the “Promote Incentive”).  In June 2011, we purchased Blackstone’s 81.0% equity interest in the Blackstone JV and added these communities to our Consolidated Portfolio.  We earned a Promote Incentive of $26.6 million, which was applied to the purchase price of our acquisition of Blackstone's equity interest.  For further information, see Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition in Notes to Consolidated Financial Statements.

In 2010, we entered into a second joint venture (the “Sunwest JV”) with an affiliate of Blackstone, as well as an entity controlled by Daniel R. Baty, a founder of Emeritus and our Chairman (“Columbia Pacific”).  The Sunwest JV purchased 144 communities in 2010, of which 139 are included in our Operated Portfolio and which we manage for a fee.  In addition to the $19.0 million in cash we paid for our 6.0% ownership interest, we will be required to make a $2.0 million capital contribution before August 2012.  Similar to the Blackstone JV, the agreement with the Sunwest JV provides that we have the right of first refusal to purchase these communities and the opportunity to earn a promote incentive.  For further information, see Note 2, Investments in Unconsolidated Joint Ventures—Sunwest Joint Venture in Notes to Consolidated Financial Statements.

Business Strategy

Our business strategies include the following:

Continued Focus on Improving Customer Satisfaction.  Our approach to care and our commitment and ability to address all of our residents’ needs, ranging from their physical health to their social well-being, have helped drive operating improvements in our business.  We believe that this “holistic approach” enriches the quality of life and care for our residents.  By providing alternatives like non-related companion living, diabetes management, unique memory care programs, and other flexible programming designed to meet the needs of the individual in our communities, we increase customer satisfaction and thereby increase occupancy and enhance revenue.  We believe that our ongoing focus on customer satisfaction, rates, and occupancy will generate the incremental growth in margins we are striving to achieve.

Focus on Appeal to the Middle Market. The market segment most attractive to us is middle to upper-middle income seniors aged 75 and older who live in smaller cities and suburbs with populations of 50,000 to 150,000 persons.  We believe that this segment of the senior community is relatively large and geographically broad and is generally composed of seniors who are financially capable of purchasing our services.

 
Expand Memory Care Markets.  The demand for memory care services continues to grow.  As of December 31, 2011, we operated approximately 5,200 units in our Consolidated Portfolio and 6,800 units in our Operated Portfolio that offer this type of care in a mix of both free-standing communities and as part of our standard assisted living communities.  The dementia care wings within many of our assisted living communities enable us to retain residents who may require dementia care services in the future, and who would otherwise be required to move to an alternative care setting.  Where appropriate, memory care residents and/or their families may choose to share “companion living” apartments for therapeutic reasons as well as to provide a lower cost alternative for those residents.

We will continue to explore new and existing markets where there is a significant demand for memory care services, including the addition of memory care units to existing communities.  We believe our memory care programs, such as our signature Join Their Journey® and Brain Health Lifestyle® programs, are unique and appeal to this market segment.  For example, our Join Their Journey® program focuses on care that creates a



familiar environment with individualized service and care plans to enhance the residents’ overall quality of life.  In 2010, we appointed nationally recognized neuropsychologist Dr. Paul Nussbaum as Director of Brain Health as part of our commitment to improving brain health in our residents, their families and our employees.

 
Selective Acquisitions and Developments. We will continue to pursue strategic opportunities to purchase, lease, or manage communities that will allow us to increase our capacity and improve our operating efficiencies, with a particular focus on acquiring local and regional operators of assisted living communities.  In addition, we will selectively evaluate development opportunities, including adding units to existing communities, in strong markets where our existing occupancy is high and rates are favorable.  We recently entered into a consulting agreement with an affiliate of Columbia Pacific under the terms of which we are providing systems, programmatic and operational support in connection with the affiliate’s senior housing investment activities in China, including the development of a rehabilitation care center that is scheduled to open in Shanghai in mid-2012.  We anticipate that we will enter into a joint venture with Columbia Pacific during the first half of 2012 to pursue additional senior housing investment opportunities in China.

 
Expand Our Ancillary Services. We plan to increase the scope of the ancillary services we offer to our residents, including rehabilitation services.  While a majority of our communities currently offer rehabilitation services, all of these services are currently outsourced to third-party providers.  Entering the rehabilitation services market as a provider would allow us to expand the rehabilitation services that we provide directly to our residents, resulting in increased revenues from these services, and potentially enable our residents to stay in our community homes longer.  In October 2011, we acquired a 51.0% stake in a company that sells durable medical equipment and personal care supplies.

Develop Post-Acute Care Business.  Various healthcare reform provisions became law upon enactment of the Patient Protection and Affordable Care Act and the Healthcare Education and Reconciliation Act, both enacted in 2010 (collectively, the “ACA”).  The ACA will significantly impact Medicare reimbursement to hospitals because it expands the scope of accountability from hospital-based care to a continuum of care that includes pre-acute, inpatient acute, and post-acute care.  The ACA transitions the Medicare provider payment system from pay-per-service to pay-per-episode, or “bundled” payments, making hospitals, physicians, and post-acute providers collectively responsible for the cost and quality of entire episodes of care.  Beginning in October 2012, hospitals will be penalized for 30-day readmissions related to certain conditions.

We believe that we are well positioned to be a leader in the post-acute transitional care continuum, due to our national footprint and provision of all levels of post-acute care, and believe that this will result in increased occupancy and revenue.  Currently, we are focusing on transitional care awareness, building hospital partnerships and program development.

Resident Services

Our assisted living communities offer residents a full range of services based on individual resident needs in a supportive “home-like” environment.  The services we provide to our residents are designed to respond to their individual needs and to improve their quality of life.
 
Basic Services.  All of our residents receive basic services that include meals and snacks, social and recreational activities, weekly housekeeping and linen service, apartment maintenance, a 24-hour emergency response system, and transportation to appointments and excursions.  We make licensed nurses available to evaluate the residents’ care needs and promote wellness.

Assisted Living Services.  Our residents may purchase additional services based on the recommended level of care or assistance required for the activities of daily living (“ADLs”), which are dining, bathing, dressing, grooming, and personal hygiene.  A thorough evaluation of each resident’s needs, in collaboration with the resident’s physician and family, determines the recommended level of care.  In addition to assistance with ADLs, we also provide assistance with medication management, recreational activities and social support, behavior modification and management, and diabetes management, among other services.

Memory Care Program.  We have designed our memory care program to meet the health, psychological, and social needs of our residents diagnosed with Alzheimer’s or related dementia.  In a manner consistent with our



assisted living services, we help structure a service plan for each resident based on his/her individual needs.  Some of the key service areas providing individualized care to our residents with Alzheimer’s or related dementias center around a personalized environment, activities planned to support meaningful interactions, specialized dining and hydration programs, and partnerships with families and significant others through support groups, one-on-one meetings, educational forums, and understanding behavior as a form of communication.  We endeavor to provide residents with an optimal quality of life, which includes life enrichment by giving each resident a sense of purpose.

Respite Care.  Most of our communities offer short-stay respite care, whereby a resident may live with us temporarily while transitioning from a hospital or nursing home stay or when a family member or caregiver is on vacation.  We also offer the opportunity for a prospective resident to stay with us for a short time before making a final decision to move in.  Short-stay residents receive all of the same services as our permanent residents.  For seniors living on their own or with family members, we offer adult day programs, which provide individual adult care plans that include recreational and social activities as well as meals.

Skilled Nursing.  Our Consolidated Portfolio includes 974 licensed skilled nursing beds, which are included in certain of our assisted living communities.  In addition to assistance with ADLs, these communities provide 24-hour nursing care, rehabilitation therapy, post-surgical care, infusion therapy, dialysis care and hospice care, among other specialty services.

Financial Services.  We help seniors meet their financial needs by partnering with senior financial solution providers such as:

·  
Elderlife Financial Services (“Elderlife”).  Elderlife provides lines of credit to help prospective residents pay for our services.  An Elderlife line of credit provides seniors and their families an alternative way to finance senior living.  For some, this eliminates a significant obstacle to moving into a senior living community.
 
·  
Life Care Funding Group.  The Life Care Funding Group helps prospective residents raise funds to pay for our services through the life settlement market.  A “life settlement” is the sale of an in-force life insurance policy for an amount much greater than the cash surrender value from the insurance company.

Personal Care Program.  In the latter half of 2011, we launched our Personal Care Program.  Through this program, we offer personal care and hygiene products such as diabetic supplies, incontinence and ostomy supplies, and other items to residents.

Service Revenue Sources

We rely primarily on our residents’ ability to pay our charges for services from their own or family resources and expect that we will continue to do so for the foreseeable future.  Although care in an assisted living community is typically much less expensive than in a skilled nursing facility, we believe that only seniors with income or assets meeting or exceeding the regional median can afford to reside in our communities.

As third-party reimbursement programs and other forms of payment continue to grow, we will evaluate and selectively participate in these alternative forms of payment depending on the level of reimbursement provided in relation to the level of care provided.  We also believe that private long-term care insurance will increasingly become a revenue source in the future, although it is currently not significant.  Our primary source of community revenue comes from residents’ private resources; all other service revenue sources constituted approximately 12.8% of our Consolidated Portfolio revenues in 2011.

Management Activities

We provide management services to independent and related-party owners of assisted living communities, including our joint ventures.  We managed 150 communities as of December 31, 2011 and 173 communities as of December 31, 2010.  Of the 150 managed communities, 141 are owned by joint ventures in which we have an interest and nine are owned by third parties.  Most of our management agreements provide for fees equal to 5.0% of collected community revenues.  Our management agreements with the Sunwest JV, representing a



combined total of 139 managed communities as of December 31, 2011, are automatically renewed for successive one-year periods after the end of the initial term unless (a) notice of non-renewal is given by either party 90 days prior to the expiration of the then-current term or (b) an agreement is otherwise cancelled upon the occurrence of certain events specified in the agreement.  Terms of our other management agreements range from two to five years and may be renewed or renegotiated at the expiration of the term.

Total management fees were approximately $21.1 million for 2011, $11.9 million for 2010, and $5.7 million for 2009.  For further discussion, see Management’s Discussion and Analysis of Operations and Financial Condition—Results of Operations.

Marketing and Referral Relationships

Our operating strategy is designed to integrate our senior living communities into the continuum of healthcare services offered in the geographic markets in which we operate.  One objective of this strategy is to enable residents who require additional healthcare services to benefit from our relationships with local hospitals, physicians, home healthcare agencies, and skilled nursing facilities in order to obtain the most appropriate level of care.  Thus, we seek to establish relationships with local hospitals, through joint marketing efforts where appropriate, home healthcare agencies, alliances with visiting nurses associations and priority transfer agreements with local, high quality skilled nursing facilities.  In addition to benefiting residents, the implementation of this operating strategy has strengthened and expanded our network of referral sources.

As part of our Safely Somewhere initiative, we offer free home visits to seniors.  The objective of this program is to determine and work with potential residents, their families and physicians on an outcome that will meet their needs.  Our home visit services include social visits, safety checks and evaluations to identify home and care needs.  We offer post-hospital or nursing facility discharge follow-up and coordination with families and referral sources.  We believe that by working with them to resolution, potential residents are more willing to view Emeritus as an option while also improving our community network.

Quality Assurance

We have an ongoing quality assurance process that occurs in each of our communities.  Our program is designed to achieve resident and family member satisfaction with the care and services we provide.  We perform quality assurance audits of care and operational systems on an ongoing basis using the Comprehensive Process Review (“CPR”) auditing tool.  Our quality and risk management team developed the CPR auditing tool in collaboration with other departments at the community, regional, and divisional levels.  We review and evaluate all areas of community operations and care systems using this comprehensive process.  The audit includes an inspection of the community that evaluates three major areas: quality of care, quality of life, and community practices and behavior.  On a regular basis, we monitor our customer and employee satisfaction and their perception of the quality of our services through surveys and our Ethics First compliance and anonymous reporting program.

Our communities have established ongoing resident and/or family meetings through care conferences and/or family night meetings.  We obtain feedback, recommendations, and suggestions to improve overall quality performance of the community from the residents, responsible parties, and staff.  The CPR, Ethics First compliance program, resident care conferences, and family night meetings are significant components of our continuous quality improvement program.  We use these processes to benchmark our ongoing efforts to improve quality, enhance customer satisfaction, and minimize risk exposure.

Administration

We employ an integrated structure of management, financial systems, and controls to support quality services at our communities and to maximize operating efficiency and contain costs.  In addition, we have developed the internal procedures, policies, and standards we believe are necessary for effective operation and management of our communities.  We have recruited seasoned key employees with years of experience in the senior living services field and believe we have assembled the administrative, operational, and financial personnel who will enable us to continue to manage our operating strategies effectively.




Our operating group currently consists of eight divisions.  Our management approach is the same across all divisions.  An operational vice president heads each division in a collaborative team system that includes a vice president of sales and marketing and a vice president of quality service and risk management.  Each divisional team oversees several operating regions headed by a regional director of operations, who provides management support services for each of the communities in his/her respective region, along with the respective regional director of sales and marketing and director of quality service and risk management.  An on-site executive director supervises day-to-day community operations, and in certain jurisdictions, must satisfy various licensing requirements.  We provide management support services to each of our communities, including operating systems and standards, recruiting, training, and financial and accounting services.  Our automated resident assessment system helps to ensure that our communities maintain a quality standard of care, meet state compliance requirements, and capture charges associated with services provided in a flexible and customizable manner.

We have centralized finance and other operational support functions at our executive offices in Seattle, Washington, in order to allow community-based personnel to focus on resident care.  At our executive offices, we establish policies and procedures that we disseminate to the entire Company, oversee our financial and marketing functions, manage our acquisition and development activities, and determine our overall strategic direction.

We use a combination of centralized and decentralized accounting and computer systems that link each community with our executive offices.  Through these systems, we are able to monitor occupancy rates and operating costs and distribute financial and operating information to appropriate levels of management in a cost effective manner.  In 2011, we replaced or upgraded our systems for resident care evaluation, labor tracking, rate management, and employee training.  We believe that our data systems provide the flexibility to meet the requirements of our operations.  Our financial and accounting software platform is state-of-the-art and scalable, which positions us for future growth and has enabled us to respond quickly and cost effectively to changes in our business arising from mergers and acquisitions, regulatory and compliance matters, and changes in financial reporting requirements.  We use high quality hardware and operating systems from current and proven technologies to support our technology infrastructure.

Competition

The number of assisted living communities continues to grow in the United States, although the number of assisted living units is not growing as rapidly as the growth of the senior population.  During recent years, new construction has been significantly constrained due, in part, to a lack of available financing.  We believe that quality of service, reputation, community location, physical appearance, and price will continue to be significant competitive factors.
 
The assisted living industry is highly competitive and fragmented.  Our competition comes from local, regional, and national assisted living companies that operate, manage, and develop residences within the geographic areas in which we operate, as well as retirement housing communities, home healthcare agencies, not-for-profit or charitable operators and, to a lesser extent, skilled nursing facilities and convalescent centers.  In general, regulatory and other barriers to competitive entry in the assisted living industry are not substantial, except in the skilled nursing segment.  Although new construction of assisted living communities has declined in recent years, we have experienced and expect to continue to experience competition in our efforts to acquire and operate assisted living communities.  Some of our present and potential competitors have, or may obtain, greater financial resources than we have 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 financial position, results of operations or cash flows.  Our publicly traded competitors include Brookdale Senior Living, Inc., Sunrise Senior Living, Inc., Five Star Quality Care, Inc., Capital Senior Living Corporation, and Assisted Living Concepts, Inc.




Government Regulation

Federal, state, and local authorities heavily regulate the healthcare industry.  While these regulations and licensing requirements often vary significantly from state to state, they typically include:

·  
state and local laws impacting licensure;
 
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consumer protection against deceptive practices;
 
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laws affecting the management of property and equipment, including living accommodations such as room size, number of bathrooms, ventilation, furnishing of resident units, and other physical plant specifications;
 
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laws affecting how we conduct our operations, such as staffing, staff training, personnel education, records management, admission and discharge criteria, documentation and reporting requirements, privacy laws, and fire, health, and safety laws and regulations;
 
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federal and state laws designed to protect Medicare and Medicaid, which mandate and define allowable costs, pricing, billing and claims submission, quality of services, quality of care, food service, resident rights (including abuse and neglect) and responsibilities, and fraud; and
 
·  
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.

Changes in applicable laws and new interpretations of existing laws can significantly affect our operations, as well as our revenues and expenses.  Our communities are subject to varying degrees of regulation and licensing by local and state health and social service agencies and other regulatory authorities.  In addition, federal, state, and local officials increasingly are focusing their efforts on enforcement of these laws.

As of December 31, 2011, our Operated Portfolio consisted of 478 communities in 44 states.  Each of these states has its own business licensure requirements and, depending on the type of assisted living or related service we provide in each of our communities, additional licensure requirements (including, in some cases, a Certificate of Need).  Our Operated Portfolio 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.  Assisted living communities are subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory requirements.  Such unannounced surveys or inspections occur annually or biannually, or may occur following a state’s receipt of a complaint about the community.  As a result of any such survey or inspection, authorities may allege that the senior living community has not complied with all applicable regulatory requirements.  Typically, assisted living communities then have the opportunity to correct alleged deficiencies by implementing a plan of correction, but the reviewing agency typically has the authority to take further action against a licensed or certified facility.  Authorities may enforce compliance through 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.  From time to time, in the ordinary course of business, we receive deficiency reports from state regulatory bodies resulting from regulatory inspections or surveys.

We are subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Federal Anti-Kickback Law and the False Claims Act.  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 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 an entity were to violate the Anti-Kickback Law, it may face criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid.  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.  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.  Many states have enacted similar anti-kickback and false claims laws that may have a broad impact on providers and their payor sources.  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 has issued rules pursuant to HIPAA relating to the privacy of such information.  In addition, many states have confidentiality laws, which in some cases may exceed the federal standard.

We believe that we are in compliance with applicable government regulations.

Environmental Matters

Under various federal, state, and local environmental laws, a current or previous owner or operator of real property, such as Emeritus, 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, payments for personal injuries or damage to adjacent 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 without regard to whether such release or disposal was in compliance with law at the time it occurred.  Moreover, the imposition of such liability 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 any such liabilities that would have a material adverse effect on our financial condition, results of operations, or cash flows.

Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents 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 clean up disposal sites at which such wastes have been disposed.  Any finding that we are not in compliance with environmental laws could have a material adverse effect on our financial condition, results of operations, or cash flows.

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 (together, “asbestos materials”) in their buildings.  The regulations also set forth employee training, record-keeping requirements, and sampling protocols pertaining to asbestos 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 materials.  The regulations may affect the value of a building containing asbestos 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 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



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 these 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, or 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 compliance with applicable environmental laws.

Employees

As of December 31, 2011, Emeritus had approximately 28,100 employees, including approximately 19,400 full-time employees.  We employed approximately 560 full-time employees in our executive and regional offices.  Of our approximately 28,100 total employees, approximately 6,950 work at our managed communities.  We believe our relationship with our employees is satisfactory.
 
On September 25, 2009, a majority of employees at one community voted to be represented by a labor union.  We believe and we have alleged that the labor union engaged in objectionable conduct affecting the results of the election and the election results should be set aside.  This matter is currently pending before the United States Court of Appeals for the Sixth Circuit and the outcome of the election remains uncertain.  As of March 1, 2012, we are unaware of any labor union representing any of our other employees or if any employees were attempting to organize a labor union.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, filed with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder are made available free of charge on our web site (www.emeritus.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The information contained on our web site is not being incorporated herein.  These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C., 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Emeritus.

We have posted our Corporate Governance Guidelines, Code of Conduct, Code of Ethics and the charters of our Audit, Compensation, and Nominating and Corporate Governance Committees on our web site.




ITEM 1A.  RISK FACTORS

Our financial condition, results of operations, and cash flows are subject to many risks, including, but not limited to, those set forth below:

Emeritus has incurred losses since it began doing business, except for 2005, and may continue to incur losses for the foreseeable future.  Emeritus organized and began operations in July 1993 and has operated at a loss since it began doing business, except for 2005.  For December 31, 2011, 2010, and 2009, we recorded losses of $71.9 million, $57.0 million, and $53.9 million, respectively.  We believe that the historically aggressive growth of our Consolidated Portfolio through acquisitions and developments and related financing activities, as well as our inability (along with most of the assisted living industry) to significantly increase occupancy rates at our communities, were among the causes of these losses.  To date, at many of our communities, we have generally been able to stabilize occupancy and rate structures to levels that have resulted in positive cash flows from operating activities but not overall Company earnings.  Our ongoing results of operations may not become profitable in line with our current expectations or may not become profitable at all.
 
If the Company cannot generate sufficient cash flows to cover required interest, principal, and lease payments, it risks defaults on its debt agreements and leases.  As of December 31, 2011, we had total debt, including interest, of $2.2 billion, with minimum annual payments of $172.3 million due in 2012, and have both long-term operating and capital lease and financing obligations requiring minimum annual payments of $177.0 million in 2012.  If the Company is unable to generate sufficient cash flows to make such payments as required and we are unable to renegotiate payments or obtain additional equity or debt financing, a lender could foreclose on the communities secured by the respective indebtedness or, in the case of a lease, could terminate our lease, resulting in loss of income and asset value.  In some cases, our indebtedness is secured by a particular community and a pledge of our interests in a subsidiary entity that owns that community.  In the event of a default, a lender could avoid judicial procedures required to foreclose on real property by foreclosing on our pledge instead, thus accelerating the foreclosure of that community.  Furthermore, because of cross-default and cross-collateralization provisions in certain of our mortgage and lease agreements, if we default on one of our payment obligations, we could adversely affect a significant number of our communities.
 
Because the Company is highly leveraged, we may not be able to respond to changing business and economic conditions or continue with selected acquisitions.  A substantial portion of our future cash flows will be designated to debt service and lease payments.  In the past, we have occasionally been dependent on third-party financing and disposition of assets to fund these obligations in full and we may be required to do so in the future.  In addition, we are periodically required to refinance these obligations as they mature.  As of December 31, 2011, our total debt, including interest, was $2.2 billion, and our payment obligations, including interest, under long-term operating and capital leases were $2.0 billion.  These circumstances could reduce our flexibility and ability to respond to our business needs, including changing business and financial conditions such as increasing interest rates and opportunities to expand our business through selected acquisitions.

We may be unable to increase or stabilize our occupancy rates at levels that would result in positive earnings.  In previous years, we have been unable to increase our occupancy to levels that would result in net income on a sustained basis.  Our historical losses have resulted, in part, from occupancy levels that were lower than anticipated when we acquired or developed our communities.  While occupancy levels increased in 2011 in our Same Community Portfolio (the 262 communities we have operated continuously since January 1, 2010), our historical performance has been mixed.  Our occupancy levels may not increase in the future and may never reach levels necessary to achieve net income.

We may not find additional funding through public or private financing on acceptable terms.  We may not find adequate equity, debt, or sale-leaseback financing when we need it or on terms acceptable to us.  This could affect our ability to finance our operations or refinance our communities to avoid the consequences of default and foreclosure under our existing financing as described elsewhere.  In addition, if we raise additional funds by issuing equity securities, our shareholders may experience dilution in their investment.

If we fail to comply with financial covenants contained in our debt instruments, our lenders may accelerate the repayment of the related debt.  From time to time, we have failed to comply with certain covenants in our financing



and lease agreements relating generally to matters such as cash flow, debt, and lease coverage ratios, and certain other performance standards.  In the future, we may be unable to comply with these or other covenants.  If we fail to comply with any of these requirements and are not able to obtain waivers, our lenders could accelerate the repayment of the related indebtedness so that it becomes due and payable prior to its stated due date, and/or the lessors could terminate lease agreements.  We may be unable to repay or refinance this debt if it becomes due.

We self-insure many of our liabilities.  In recent years, participants in the long-term care industry have experienced an increasing number of lawsuits alleging negligence, malpractice, or other related legal theories.  Many of these suits involve large claims and significant legal costs.  We expect that we will occasionally face such suits because of the nature of our business.  For 237 of the 328 communities in our Consolidated Portfolio, we are self-insured and, as such, are responsible for the full loss of any professional liability claims.  Claims against us, regardless of their merit or eventual outcome, may also undermine our ability to attract residents or expand our business and would require management to devote time to matters unrelated to the operation of our business.  Except on a limited basis (covering 91 of our consolidated communities), we currently do not carry professional liability insurance and, although we review our liability insurance annually, we may not be able to obtain third-party liability insurance coverage in the future or, if available, on acceptable terms.

We face risks associated with selective acquisitions.  We intend to continue to seek selective acquisition opportunities.  However, we may not succeed in identifying any future acquisition opportunities or completing any identified acquisitions.  The acquisition of communities presents a number of risks.  Existing communities available for acquisition may frequently serve or target different market segments than those we presently serve.  It may be necessary in these cases to reposition and renovate acquired communities or turn over the existing resident population to achieve a resident care level and income profile that is consistent with our objectives.  In some cases in the past, these obstacles have delayed the achievement of acceptable occupancy levels and increased operating and capital expenditures.  As a consequence, we currently plan to target assisted living communities with established operations, which could reduce the number of acquisitions we can complete and increase the expected cost.  Even in these acquisitions, however, we may need to make staff and operating management personnel changes to successfully integrate acquired communities into our existing operations.  We may not succeed in repositioning acquired communities or in effecting any necessary operational or structural changes and improvements on a timely basis.  We also may face unforeseen liabilities attributable to the prior operator of the acquired communities, against whom we may have little or no recourse.  We also face risks associated with acquiring ancillary services businesses, especially since we do not have a history of operating such businesses.

If the Company is unable to refinance its debt that is scheduled to come due in 2012 on reasonable terms, it may have an adverse effect on the Company and the market price of our common stock.  The Company has principal payments on long-term debt of $74.2 million due in 2012, including balloon payments on debt maturing totaling $43.5 million.  If the Company is not able to generate sufficient cash flows to make the required payments or refinance this debt on reasonable terms, it may have a material adverse effect on the market value of our common stock and other adverse effects on our business, financial condition, results of operations, and cash flows.
 
We expect competition in our industry to increase, which could cause our occupancy rates and resident fees to decline.  The senior living industry is highly competitive, and given the relatively low barriers to entry and continuing healthcare cost containment pressures, we expect that our industry will become increasingly competitive in the future.  It is possible that market saturation in some locales could have an adverse effect on our communities and their ability to reach and maintain stabilized occupancy levels.  Moreover, the senior housing services industry has been subject to pressures that have resulted in the consolidation of many small, local operations into larger regional and national multi-facility operations.  We compete with other companies providing assisted living services as well as numerous other companies providing similar service and care alternatives, such as home healthcare agencies, independent living facilities, retirement communities, and skilled nursing facilities.  We expect that competition from new market entrants will increase as senior living residences achieve increased market awareness.  Some of these competitors may have substantially greater financial resources than we do.  Increased competition may limit our ability to attract or retain residents or maintain our existing rate structures.  This could lead to lower occupancy rates or lower rate structures in our communities.
 
If development of new senior living facilities outpaces demand, we may experience decreased occupancy, depressed margins, and diminished operating results.  In the future, some senior living markets in which we operate could become overbuilt.  The barriers to entry in the senior living industry are low.  Consequently, the development of



new senior living facilities could outpace demand.  Overbuilding in the markets in which we operate could thus cause the Company to experience decreased occupancy and depressed margins and could otherwise adversely affect our results of operations.

 
Market forces could undermine our efforts to attract seniors with sufficient resources.  We rely on the ability of our residents to pay our fees from their own or family financial resources.  We believe that only seniors with income or assets meeting or exceeding the comparable median in the region where our senior living communities are located can afford our fees.  The economic recession, the depressed housing market, inflation, or other circumstances may undermine the ability of seniors to pay for our services.  If we encounter difficulty in attracting seniors with adequate resources to pay for our services, our occupancy rates may decline or we may be forced to lower our rental and service rates.
 
Our labor costs may increase and may not be matched by corresponding increases in rates we charge to our residents.  We compete with other providers of assisted living services and long-term care in attracting and retaining qualified and skilled personnel.  We depend on our ability to attract and retain management personnel responsible for the day-to-day operations of each of our communities.  If we are unable to attract or retain qualified community management personnel, our results of operations may suffer.  In addition, possible shortages of nurses or trained personnel may require us to enhance our wage and benefits packages to compete in the hiring and retention of personnel.  We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate.  From time to time we are the subject of union organizing activity that, if successful, could impact our labor costs.  As a result of these and other factors, our labor costs may increase and may not be matched by corresponding increases in rates we charge to our residents.

If the Company is removed as the Administrative Member of the Sunwest JV, the maximum level of cash distributions to which we could be entitled would be reduced and we would no longer enjoy the right of first opportunity in connection with a sale by Blackstone of a specified portion of the underlying properties.  As the Administrative Member under the Sunwest JV, we are entitled to, among other things, cash distributions at increasing levels in excess of our ownership percentage if the Sunwest JV achieves certain performance criteria and a right of first opportunity to purchase properties or membership interest, as applicable, in the event Blackstone desires to sell a specified portion of the properties under the Sunwest JV.  Upon the occurrence of certain events, which include a material breach of our obligations, or our failure to provide reasonably effective management to the Sunwest JV, Blackstone may remove us as the Administrative Member, which would deprive us of revenue from the JV and the additional rights described above.

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, California, Washington, Oregon 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.

 
Some of our communities generate infectious medical waste due to the illness or physical condition of the residents.  The management of infectious medical waste, including handling, storage, transportation, treatment, and disposal, is subject to regulation under various laws, including federal and state environmental laws, as described above under Business—Environmental Matters.  These environmental laws set forth the management requirements, as well as 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 clean up disposal sites at which such wastes have been disposed.  Any finding that we are not in compliance with these environmental laws could adversely affect our business and financial condition.  While we are not aware of non-compliance with environmental laws related to infectious medical waste at our communities,



these environmental laws are amended from time to time and we cannot predict when and to what extent liability may arise.  In addition, because these 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.
 
The Chairman of our board of directors, Daniel R. Baty, has personal interests that may conflict with ours.  Mr. Baty has engaged in a number of transactions with us, each of which has been approved by a committee of our independent directors.  For example, Mr. Baty is the principal owner of Columbia Pacific, a private company engaged in the development and operation of senior living communities and hospitals in India and other parts of Asia.  Columbia Pacific and certain of its affiliated partnerships also own assisted living communities, memory care facilities, and independent living facilities in the United States, some of which we manage under various management agreements.  These financial interests and management and financing responsibilities of Mr. Baty with respect to Columbia Pacific and certain of their affiliated partnerships could present conflicts of interest with us, including potential competition for residents in markets where both companies operate and competing demands for the time and efforts of Mr. Baty.
 
Mr. Baty’s potentially competitive activities are limited by a shared opportunities agreement between him and the Company.  Under the terms of this agreement, Mr. Baty and Columbia Pacific must immediately present to the Company all investment opportunities in senior living communities and ancillary businesses in the United States, Canada, and China.  For transactions in the United States and Canada, we will then have the option to participate in the investment opportunity through an ownership interest and/or management contract as set forth in the agreement.  For transactions in China, we will have the option to invest in the opportunity up to 50% of the equity value and provide management or consulting services.

Mr. Baty financially supports some of our recent transactions and the operations of certain communities that we manage with limited guarantees and through his direct and indirect ownership of such communities; we would be unable to benefit from these transactions and managed communities without this support.  As of December 31, 2011, we manage five communities owned by Mr. Baty or Columbia Pacific.  Mr. Baty was also the guarantor of a portion of our obligations under a 24-community lease with an entity in which Mr. Baty has an ownership interest.  We acquired these properties in February 2007 in a transaction in which the entity affiliated with Mr. Baty provided the Company with financing in the amount of $18.0 million for two years, which financing was paid off in July 2007.  In 2004, Mr. Baty personally guaranteed $3.0 million of our obligations under a long-term lease with Health Care Property Investors, Inc., an independent REIT, which terminated with the purchase of these communities in August 2007.  Also in 2004, Mr. Baty guaranteed our obligations under a long-term lease relating to 20 communities.  As part of this arrangement, which, as of December 31, 2011, continues to be in effect for nine of the communities (the “Cash Flow Sharing Communities”), he shares in 50.0% of the positive cash flow (as defined) and is responsible for 50.0% of the cash deficiency for these communities.  In 2008, we entered into a 50-50 joint venture with Mr. Baty to purchase the real estate of eight of the Cash Flow Sharing Communities, into which Mr. Baty contributed approximately $1.2 million in 2010 related to debt refinancings and $1.1 million in 2009.  In 2009, we borrowed $3.2 million from Columbia Pacific to finance the purchases of two communities that we previously managed for Columbia Pacific.  We subsequently paid off these loans in January 2011.  We believe that we would have been unable to take advantage of these transactions and management opportunities without Mr. Baty’s individual and financial support.  The ongoing administration of these transactions, however, could adversely affect these continuing relationships because our interests and those of Mr. Baty may not be congruent at all times.  In addition, we cannot guarantee that his support will be available in the future.

We may be unable to attract and retain key management personnel.  We depend upon, and will continue to depend upon, the services of Mr. Baty and Granger Cobb, our President and Chief Executive Officer.  Mr. Baty has financial interests and management responsibilities with respect to Columbia Pacific and its related partnerships that require a considerable amount of Mr. Baty’s time.  As a result, he does not devote his full time and efforts to Emeritus.  The loss of Mr. Baty’s services, or those of Mr. Cobb, could adversely affect our business and our results of operations.  We also may be unable to attract and retain other qualified executive personnel critical to the success of our business.

Our costs of compliance with government regulations may significantly increase in the future.  Federal, state, and local authorities heavily regulate the healthcare industry, as described above under Business—Government Regulation.  Regulations change frequently, and sometimes require us to make expensive changes in our operations.



We cannot predict to what extent legislative or regulatory initiatives will be enacted or adopted or what effect any initiative would have on our business and operating results.  Changes in applicable laws and new interpretations of existing laws can significantly affect our operations, as well as our revenues, particularly those from governmental sources, and our expenses.  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 financial or other penalties, including closure of the community and/or liability to residents if injury occurs.  Our residential communities are subject to varying degrees of regulation and licensing by local and state health and social service agencies and other regulatory authorities.  In addition, our skilled nursing facilities and certain of our senior living communities are subject to extensive federal regulation.  Federal, state, and local governments occasionally conduct unannounced investigations, audits, and reviews to determine whether violations of applicable rules and regulations exist.  Devoting management and staff time and legal resources to such investigations, as well as any material violation by the Company that is discovered in any such investigation, audit, or review, could strain our resources and affect our results of operations.  In addition, regulatory oversight of construction efforts associated with refurbishment could cause us to lose residents and disrupt community operations.

We may be unable to satisfy all regulations and requirements or to acquire and maintain any required licenses on a cost-effective basis.  We have occasionally received notices of regulatory violations, which we have resolved by paying fines or taking other measures such as limiting our business activities at a particular community.  Failure to comply with applicable requirements could lead to enforcement action that could materially and adversely affect business and revenues.  Loss, suspension, or modification of a license may also cause a default under certain of our leases and financing agreements and/or trigger cross-defaults.

The federal and state laws governing assisted living are various and complex.  While we endeavor to comply with all laws that regulate the licensure and operation of our communities, it is difficult to predict how our business could be affected if it were subject to an action alleging such violations.

The Company is also subject to federal and state regulations regarding government-funded public assistance that prohibit certain business practices and relationships.  Because we accept residents who receive financial assistance from governmental sources for their senior living services, we are subject to federal and state regulations that prohibit certain business practices and relationships.  Failure to comply with these regulations could prevent reimbursement for our healthcare services under Medicare or Medicaid or similar state reimbursement programs.  Our failure to comply with such regulations also could result in substantial financial penalties and/or the suspension or inability to renew our operating licenses.  Acceptance of federal or state funds could subject the Company to potential false claims actions or whistleblower claims.

Our intention to enter the rehabilitation services business would subject the Company to additional federal and state laws and regulations and, if the Company fails to comply with these laws and regulations, could subject the Company to substantial financial and other penalties.  We previously announced our intention to acquire businesses that provide rehabilitative care and contract rehabilitation services to the senior living industry.  For example, in October 2011, we acquired a Medicare-certified durable medical equipment products company.  These services are subject to enhanced federal and state laws and regulations, including those regarding acquisition and maintenance of provider and supplier numbers, services provided, quality of care, provision of medically necessary items and services, and billing and claims submission.  Failure to comply with these laws and regulations could subject the Company to substantial financial and other penalties, which could materially and adversely affect our business and revenues.

We face possible environmental liabilities at each of our communities.  Under various federal, state, and local environmental laws, ordinances, and regulations, as described above under Business—Environmental Matters, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances, including asbestos materials that could be located on, in, or under our community.  These laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances.  We could face substantial costs of any required remediation or removal of these substances, and our liability typically is not limited under applicable laws and regulations.  Our liability could exceed our communities’ value or the value of our assets.  We may be unable to sell or rent our communities, or borrow using our communities as collateral, if any of these substances are present or if we fail to remediate them properly.  Under these laws and regulations, if we arrange for the disposal of hazardous or



toxic substances such as asbestos materials at a disposal site, we also may be liable for the costs of the removal or destruction of the hazardous or toxic substances at the disposal site.  In addition to liability for these costs, we could be liable for governmental fines and injuries to persons or properties.

Significant reforms to the United States healthcare system could have an adverse effect on our financial position, results of operations and liquidity.  The healthcare reforms contained in the ACA will impact us in some manner, including increasing our costs to provide healthcare benefits to our employees.  The specific provisions of the ACA will be phased in over time through 2018, unless modifying legislation is passed before some of the provisions become effective.  Based on our current assessment, although there are additional expenses that will be incurred in 2012, we do not expect that the ACA will result in a material increase in our operating expenses in 2012.  However, we could see significant cost increases beginning in 2014 when certain provisions of the legislation are required to be implemented.

The ACA creates a series of robust transparency and reporting requirements for skilled nursing facilities, including requirements to disclose information on organizational structures, financial, clinical and other related data as well as information on officers, directors, trustees or managing employees. Skilled nursing facilities are required to certify to the Secretary of the U.S. Department of Health and Human Services and the U.S. Department of Health and Human Services Office of Inspector General that the information submitted is accurate and current. In addition, a primary goal of healthcare reform is to reduce costs, which includes reductions in the reimbursement paid to us and other healthcare providers. Although 87.2% of our 2011 revenues came from private pay sources, these healthcare reforms or other similar healthcare reforms could have an adverse effect on our financial position, results of operations and liquidity.

Changes in the reimbursement rates or methods or timing of payment from third party payors, including the Medicare and Medicaid programs, or the implementation of other measures to reduce reimbursement for our services and products could result in a reduction in our revenues and operating margins or otherwise adversely affect our business, financial position, results of operations, and liquidity.  We depend on reimbursement from third-party payors, including the Medicare and Medicaid programs, for a portion of our revenues. For the year ended December 31, 2011, we derived approximately 12.8% of our total revenues from the Medicare and Medicaid programs.  The Medicare and Medicaid programs are highly regulated and subject to frequent and substantial changes.

There are continuing efforts to reform governmental healthcare programs, both as part of the ACA enacted in 2010 and otherwise, that could result in major changes in the healthcare delivery and reimbursement system on a national and state level.  Reforms or other changes to the payment systems may be proposed or could be adopted by Congress or Centers for Medicare and Medicaid Services (“CMS”). This could result in attempts to reduce or eliminate payments for federal and state healthcare programs, including Medicare and Medicaid. Moreover, weak economic conditions are also adversely affecting the budgets of individual states and of the federal government.

CMS issued a final rule on July 29, 2011 updating Medicare payment rates for skilled nursing centers effective October 1, 2011.  CMS has projected the impact of the rule changes will result in an average 11.1% decrease in payments to skilled nursing facilities.  We believe that these changes could reduce our annual revenues by approximately $8.0 million.

The Budget Control Act of 2011, enacted on August 2, 2011, increased the United States debt ceiling in connection with deficit reductions over the next ten years. The Budget Control Act of 2011 also established a 12-member joint committee of Congress known as the Joint Select Committee on Deficit Reduction. The goal of the Joint Select Committee on Deficit Reduction was to propose legislation to reduce the United States federal deficit by $1.5 trillion for fiscal years 2012-2021.  Since such legislation was not enacted by December 23, 2011, approximately $1.2 trillion in domestic and defense spending reductions will automatically begin on January 1, 2013, split evenly between domestic and defense spending. Payments to Medicare providers would be subject to these automatic spending reductions, subject to a 2% cap. At this time, it is unclear how this automatic reduction may be applied to various Medicare healthcare programs.

Although we cannot predict what other reform proposals will be adopted or finally implemented, healthcare reform and regulations, such as those described above, could have an adverse effect on our business, financial position,



results of operations and liquidity through, among other things, decreasing funds available for our services or increased operating costs.

In addition to the risks described above, investing in Emeritus common stock involves the following risks:

We may experience volatility in the market price of Emeritus common stock due to the lower trading volume and lower public ownership of Emeritus common stock.  The market price of our common stock has fluctuated significantly in the past and is likely to continue to be highly volatile.  In particular, the volatility of our share price is influenced by lower trading volume and lower public ownership relative to some of our publicly-held competitors, as well as recent turmoil in the stock market.  For example, our closing stock price ranged from $13.64 per share to $25.90 per share during 2011.  Because approximately 40.5% of our outstanding shares were owned by affiliates as of December 31, 2011, our stock is relatively less liquid and, therefore, more susceptible to large price fluctuations than many other companies’ shares.

Many factors could cause the market price of our common stock to significantly rise and fall, including:

·  
fluctuations in our results of operations;
·  
changes in our business, operations, or prospects;
·  
changes in the regulatory environment;
·  
sales of Emeritus common stock by affiliates;
·  
the hiring or departure of key personnel;
·  
announcements or activities by our competitors;
·  
proposed acquisitions by us or our competitors;
·  
financial results that fail to meet public market analysts’ expectations and changes in stock market analysts’ recommendations regarding us, other healthcare companies, or the healthcare industry in general;
·  
adverse judgments or settlements obligating us to pay damages;
·  
acts of war, terrorism, or national calamities;
·  
industry, domestic and international market and economic conditions; and
·  
decisions by investors to de-emphasize investment categories, groups, or strategies that include our Company or industry.

In addition, the stock market has recently experienced significant price and volume fluctuations.  These fluctuations are often unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the market price of Emeritus common stock.  When the market price of a company’s stock drops significantly, shareholders may institute securities class action litigation against that company.  Any litigation against us could cause us to incur substantial costs, divert our time and attention and other resources, or otherwise harm our business.

Insiders have substantial control over the Company and are able to influence corporate matters.  We entered into a shareholders’ agreement in connection with the acquisition of Summerville Senior Living, Inc. (“Summerville”), dated March 29, 2007, as amended April 30, 2010, between us, AP Summerville, LLC, AP Summerville II, LLC, Apollo Real Estate Investment Fund III, L.P., and Apollo Real Estate Investment Fund IV, L.P. (collectively, the “Apollo shareholders”), Saratoga Partners IV, L.P., Saratoga Coinvestment IV, LLC, and Saratoga Management Company LLC (collectively, the “Saratoga shareholders”), and Mr. Baty and certain of his affiliates (collectively, the “Baty shareholders”).  Under the terms of this shareholders’ agreement, a representative of each of the Baty shareholders, the Saratoga shareholders and the Apollo shareholders was elected or appointed to our board of directors.  However, in 2010, the representative of the Saratoga shareholders resigned from our board of directors and has not been replaced.  While the Saratoga shareholders have elected to not designate a new board representative, they have not permanently waived their right to designate a representative under the amended shareholders’ agreement.  Our directors and executive officers and their affiliates, including the Baty shareholders, the Apollo shareholders, and the Saratoga shareholders and their affiliates owned, in the aggregate, approximately 40.5% of our outstanding common stock as of December 31, 2011. As a result, these shareholders are able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our Company or its assets.  This



concentration of ownership could limit a shareholder’s ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Future sales of shares by existing shareholders could cause our stock price to decline.  As of December 31, 2011, the Company has outstanding approximately 44,989,861 shares of common stock, of which our executive officers and directors, affiliates controlled by them, and other affiliates of ours beneficially own 18,228,305 shares.
 
The shares received by the Apollo shareholders in the Summerville acquisition were eligible for sale in the public market beginning September 1, 2008, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended.  However, pursuant to a registration rights agreement entered into on March 29, 2007, as amended on March 31, 2010, with the Apollo shareholders, the Baty shareholders, the Saratoga shareholders, and Mr. Cobb, we agreed to register shares of common stock beneficially owned by certain of the Apollo shareholders and Saratoga shareholders under certain circumstances.  In particular, we filed a shelf registration statement, which was declared effective by the SEC on January 16, 2008, to permit public resale of 4,859,008 shares beneficially owned by Apollo shareholders and 1,800,000 shares beneficially owned by certain Saratoga shareholders.  Pursuant to this registration statement, these shareholders are able to publicly resell the identified Emeritus shares without restriction.  Moreover, if one or more parties to the registration rights agreement exercise their rights with respect to the shares they own, additional shares may become eligible for public resale without restriction.  In November 2010, we sold 5,575,000 shares of Emeritus common stock in a public offering, of which 1,000,000 shares were sold by Apollo shareholders.

As of December 31, 2011, options for a total of 4,470,939 shares of common stock were outstanding under our equity incentive plans, of which a total of 2,358,563 shares were then exercisable.  Of the shares exercisable, 1,562,870 shares were exercisable at a price in excess of our stock trading price as of December 31, 2011.  All of the shares issuable on exercise of such vested options are eligible for sale in the public market.  If our executive officers, directors, or significant shareholders sell, or indicate an intention to sell, substantial amounts of Emeritus common stock in the public market, the trading price of our stock could decline.

In addition, we may issue equity securities in the future, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock.  Sales of a substantial number of shares of our common stock or other equity securities, including sales of shares in connection with any future acquisitions, could be substantially dilutive to our shareholders.  These sales may have a harmful effect on prevailing market prices for our common stock and our ability to raise additional capital in the financial markets at a time and price favorable to us.  Moreover, to the extent that we issue restricted stock units, stock appreciation rights, options, or warrants to purchase our common stock in the future and those stock appreciation rights, options, or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution.  In December 2011, we issued a total of 435,000 shares of restricted stock to certain of our executive officers, which will vest over four years if specified Company performance criteria are met.

Holders of our shares of common stock have no preemptive rights that entitle holders to purchase a pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders.  Our certificate of incorporation provides that we have authority to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock.  As of December 31, 2011, 44,989,861 shares of common stock and no shares of preferred or other capital stock were issued and outstanding.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.  The trading market for our common stock may depend in part on any research reports that securities or industry analysts publish about the Company or our business.  We currently have limited research coverage by securities and industry analysts.  Lack of research coverage could negatively impact the market for our stock.  In the event additional securities or industry analysts do initiate coverage of our Company and one or more of these analysts downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline.

We do not anticipate paying any cash dividends in the foreseeable future.  We have never declared or paid any dividends on our common stock.  We expect to retain any future earnings to finance the operation and expansion of our business.  Future dividend payments will depend on our results of operations, financial condition, capital expenditure plans and other obligations and circumstances, and will be at the sole discretion of our board of



directors.  Some of our existing leases and lending arrangements contain provisions that restrict our ability to pay dividends, and we anticipate that the terms of future leases and debt financing arrangements may contain similar restrictions.  Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
Our issuance of preferred stock could adversely affect holders of our common stock.  Our board of directors is authorized to issue preferred stock without any action on the part of our holders of common stock.  Our board of directors also has the power, without shareholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends, or if we liquidate, dissolve, or wind up our business, and other terms.  If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock, or the price of our common stock, could be adversely affected.

Antitakeover provisions of Washington law, our restated articles of incorporation and our restated bylaws may prevent or delay an acquisition of us that shareholders may consider favorable or may prevent or delay attempts to replace or remove our board of directors.  Our restated articles of incorporation and restated bylaws contain provisions, such as the right of our directors to issue preferred stock from time to time with voting, economic, and other rights superior to those of our common stock without the consent of our shareholders, and prohibitions on cumulative voting in the election of directors, all of which could make it more difficult for a third party to acquire us without the consent of our board of directors.  In addition, our restated articles of incorporation provide for our board of directors to be divided into three classes serving staggered terms of three years each, permit removal of directors only for cause by the holders of not less than two-thirds of the shares entitled to elect the director whose removal is sought, and require two-thirds shareholder approval of certain matters, including business combination transactions not approved by our incumbent board of directors and the amendment of our restated bylaws.  Furthermore, our restated bylaws require advance notice of shareholder proposals and nominations and impose restrictions on the persons who may call special shareholder meetings.  In addition, Chapter 23B.19 of the Washington Business Corporation Act prohibits certain business combinations between us and certain significant shareholders unless certain conditions are met.  These provisions may have the effect of delaying or preventing a change of control of our Company even if this change of control would benefit our shareholders.

ITEM 1B.  UNRESOLVED SEC STAFF COMMENTS

None.


ITEM 2.  PROPERTIES

Communities

We operate 478 senior living communities in 44 states, most of which consist of one-story to three-story buildings and include common dining and social areas.  Frequently, a community provides multiple types of service.  Of the 478 communities we operate, 297 offer memory care services, 82 offer some independent living services, and 26 offer skilled nursing services.  The table below summarizes information regarding our Operated Portfolio as of December 31, 2011.
   
Number of
   
Communities
 
 States
 
Communities
   
Units
   
Beds
   
Own
   
Lease
   
Manage
 
Arizona
    20       1,778       1,984       11       4       5  
Arkansas
    5       496       502       4       1        
California
    59       5,953       6,769       15       37       7  
Colorado
    8       851       910       3       3       2  
Connecticut
    6       474       529             4       2  
Delaware
    2       152       173       1       1        
Florida
    43       4,614       5,431       25       17       1  
Georgia
    20       1,177       1,443       5       1       14  
Idaho
    5       368       418       5              
Illinois
    8       810       939       4       4        
Indiana
    6       513       652       3       3        
Iowa
    3       224       255       2             1  
Kansas
    4       269       308       3       1        
Kentucky
    4       326       368       1       1       2  
Louisiana
    6       526       609       5       1        
Maryland
    7       656       718       1       5       1  
Massachusetts
    11       1,143       1,224       4       7        
Michigan
    2       216       240       1       1        
Minnesota
    2       211       409                   2  
Mississippi
    7       552       624       5       1       1  
Missouri
    2       286       324             1       1  
Montana
    4       396       447       1       1       2  
Nebraska
    5       454       516                   5  
Nevada
    5       438       526       2       1       2  
New Hampshire
    1       90       100       1              
New Jersey
    10       1,004       1,089       5       5        
New Mexico
    4       408       501                   4  
New York
    14       1,172       1,304       11             3  
North Carolina
    8       651       713       6       1       1  
North Dakota
    1       85       85                   1  
Ohio
    17       1,532       1,843       3       11       3  
Oklahoma
    7       534       632             2       5  
Oregon
    34       2,614       2,927       1             33  
Pennsylvania
    6       459       590       5             1  
South Carolina
    15       1,473       1,643       3       4       8  
Tennessee
    11       687       783       1       4       6  
Texas
    52       4,626       5,990       33       6       13  
Utah
    4       370       418             2       2  
Vermont
    1       101       113       1              
Virginia
    12       993       1,308       5       6       1  
Washington
    28       2,163       2,429       10       5       13  
West Virginia
    3       276       334       1             2  
Wisconsin
    4       412       463                   4  
Wyoming
    2       114       123                   2  
      478       42,647       49,706       187       141       150  




Executive Offices

Our executive offices are located in Seattle, Washington, where we lease approximately 77,000 square feet of space.  Our lease agreement has a term of 15 years, expiring in September 2025.

ITEM 3.  LEGAL PROCEEDINGS

The Company has been and is currently involved in litigation and claims incidental to the conduct of its business that are comparable to other companies in the senior living industry, including professional and general liability claims.  Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve.  As a result, we maintain a combination of self-insurance reserves and commercial insurance policies in amounts and with coverage and deductibles that we believe are adequate, based on the nature and risks of our business, historical experience and industry standards.  

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable



PART II

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol ESC.  The following table sets forth for the periods indicated the high and low closing prices for Emeritus common stock as reported on the NYSE.

   
2011
   
2010
 
 
 
High
   
Low
   
High
   
Low
 
First Quarter
  $ 25.90     $ 18.91     $ 20.77     $ 17.54  
Second Quarter
    25.89       19.75       23.48       16.31  
Third Quarter
    22.40       13.71       18.40       14.89  
Fourth Quarter
    18.61       13.64       20.72       16.73  

As of March 1, 2012, we had 79 holders of record of Emeritus common stock, although there is a much larger number of beneficial owners.

We have never declared or paid any dividends on our common stock, and we currently expect to retain any future earnings to finance the operation and expansion of our business.  Future dividend payments will depend on our financial condition, results of operations, capital expenditure plans, and other obligations and will be at the sole discretion of our board of directors.  Certain of our existing leases and lending arrangements contain provisions that restrict our ability to pay dividends, and we anticipate that the terms of future leases and debt financing arrangements may contain similar restrictions.  Therefore, we do not anticipate paying any cash dividends on Emeritus common stock in the foreseeable future.

Stock Performance Graph

The following graph compares the cumulative five-year total return provided to shareholders on shares of Emeritus common stock relative to the cumulative total returns of the S&P 500 Index, S&P Smallcap 600 Index, NYSE Composite Index, and a customized peer group selected by us for the period beginning on December 31, 2006 and ending on December 31, 2011.  In making this comparison, an investment of $100 with reinvestment of all dividends is assumed to have been made in our common stock in each index and in the peer group.  Stock price performance shown below for our common stock is historical and not necessarily indicative of future price performance.
 
 
 
25

 
 
 
Performance Graph
 
   
December 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
   
2011
 
Emeritus Corporation
    100.00       101.21       40.36       75.45       79.32       70.46  
S&P Smallcap 600 Index
    100.00       99.70       68.72       86.29       108.99       110.10  
S&P 500 Index
    100.00       105.49       66.46       84.05       96.71       98.75  
NYSE Composite Index
    100.00       108.87       66.13       84.83       96.19       92.50  
Peer Group
    100.00       72.61       14.02       35.52       44.64       37.79  

Our peer group consists of Brookdale Senior Living, Inc., Capital Senior Living Corporation, Five Star Quality Care, Inc., Sunrise Senior Living, Inc. and Assisted Living Concepts, Inc.  We added Assisted Living Concepts, Inc. to our peer group in 2008.

Securities Authorized for Issuance under Equity Compensation Plans

The information called for by this Item is contained in the Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters section of this Form 10-K.



ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
 
The selected data presented below under the captions “Consolidated Statements of Operations Data” and “Consolidated Balance Sheet Data” for or as of each of the years in the five-year period ended December 31, 2011, are derived from the consolidated financial statements of Emeritus Corporation.  The consolidated balance sheets as of December 31, 2011 and 2010 and consolidated statements of operations for each of the years in the three-year period ended December 31, 2011, are included in the Exhibits, Financial Statements and Schedules section of this Form 10-K.
 
 
 
Year Ended December 31,
 
 
 
2011
   
2010
   
2009
   
2008
   
2007
 
   
(In thousands, except per share data)
 
Consolidated Statements of Operations Data:
                             
Total operating revenues
  $ 1,254,770     $ 1,007,065     $ 898,732     $ 772,443     $ 538,874  
Total operating expenses
    1,193,083       947,449       849,866       773,362       521,904  
Operating income (loss) from continuing operations
    61,687       59,616       48,866       (919 )     16,970  
Net other expense
    (111,361 )     (116,875 )     (102,013 )     (100,957 )     (60,509 )
Loss from continuing operations before income taxes
    (49,674 )     (57,259 )     (53,147 )     (101,876 )     (43,539 )
Benefit of (provision for) income taxes
    (1,019 )     762       (336 )     (1,020 )     (812 )
Loss from continuing operations
    (50,693 )     (56,497 )     (53,483 )     (102,896 )     (44,351 )
Loss from discontinued operations
    (21,570 )     (1,345 )     (1,335 )     (2,043 )     (4,390 )
Net loss
    (72,263 )     (57,842 )     (54,818 )     (104,939 )     (48,741 )
Net loss attributable to the noncontrolling interest
    354       883       943       188        
Net loss attributable to Emeritus Corporation common shareholders
  $ (71,909 )   $ (56,959 )   $ (53,875 )   $ (104,751 )   $ (48,741 )
                                         
Basic and diluted loss per common share attributable to
                                       
Emeritus Corporation common shareholders:
                                       
Continuing operations
  $ (1.14 )   $ (1.39 )   $ (1.34 )   $ (2.63 )   $ (1.64 )
Discontinued operations
    (0.49 )     (0.03 )     (0.03 )     (0.05 )     (0.16 )
    $ (1.63 )   $ (1.42 )   $ (1.37 )   $ (2.68 )   $ (1.80 )
                                         
Weighted average number of common shares outstanding:
                                       
Basic and diluted
    44,312       39,974       39,183       39,075       27,152  
                                         
   
December 31,
 
      2011       2010       2009       2008       2007  
Consolidated Operating Data:
                                       
Communities Emeritus Corporation owns or leases
    328       306       266       262       248  
Number of units
    29,905       28,277       24,055       23,719       21,819  
                                         
 
 
December 31,
 
 
    2011       2010       2009       2008       2007  
   
(In thousands)
 
Consolidated Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 43,670     $ 110,124     $ 46,070     $ 27,254     $ 67,710  
Working capital deficit
    (100,079 )     (17,728 )     (7,482 )     (15,209 )     (31,433 )
Total assets
    2,810,328       2,613,792       2,089,940       2,095,193       1,885,480  
Long-term debt, less current portion
    1,528,710       1,305,757       1,375,088       1,355,149       711,664  
Capital lease and financing obligations, less current portion
    619,088       629,797       165,372       180,684       497,039  
Total Emeritus Corporation shareholders’ equity
    279,100       344,345       312,082       359,401       458,507  



ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

Emeritus is the nation’s largest provider of assisted living and Alzheimer’s/memory care services.  As of December 31, 2011, we operated 478 senior living communities in 44 states.

Fiscal 2011 in Review

Emeritus’ results for fiscal 2011 reflect the resiliency of our business model, the needs-driven nature of our primarily assisted living business and the talent and dedication of our employees. Our business has performed well this year despite the ongoing economic downturn.  We continued to execute our business strategy, which includes acquisitions, as discussed in detail in Business—Business Strategy, in this Form 10-K.  Our business fundamentals remain consistent, as evidenced by growth in 2011 revenue, revenue per unit, and average occupancy rate in our Same Community Portfolio (as defined below under Same Community Portfolio).

In 2011, total operating revenues increased to $1.3 billion from $1.0 billion in 2010 and $898.7 million in 2009.  Operating income from continuing operations was $61.7 million in 2011 compared to $59.6 million in 2010 and $48.9 million in 2009.  We recorded a net loss attributable to our common shareholders of $71.9 million in 2011 compared to net losses of $57.0 million in 2010 and $53.9 million in 2009.  Positive cash flows generated by operating activities amounted to $74.1 million in 2011 compared to $83.7 million in 2010 and $64.0 million in 2009.

Looking Ahead to 2012

The United States economy remains sluggish and we cannot predict future economic conditions or their impact on our financial condition and results of operations.  However, we continue to believe that the needs-driven nature of our business, potential pent-up demand and reduced supply of new senior housing construction in our sector will support improved operating performance, especially if combined with economic recovery.

For 2012, we expect moderate revenue growth driven by increased Same Community Portfolio revenues and 2011 community acquisitions that will reflect a full year of revenue in 2012.  We expect modest consolidated operating margin improvement, given our current revenue and expense expectations, and we expect that general and administrative expenses as a percentage of total operated revenue will be consistent with 2011.

As part of our long-term strategy, we intend to continue to selectively pursue acquisitions.

Our Portfolios

As of December 31, 2011, our Consolidated Portfolio had a capacity of approximately 35,100 beds in 38 states, and our Operated Portfolio had a capacity of approximately 49,700 beds in 44 states.  The following table shows a three-year comparison of our Consolidated and Operated Portfolios.
 
 
December 31, 2011
 
December 31, 2010
 
December 31, 2009
 
Community Count
 
Unit
Count (b)
 
Community Count
 
Unit
Count (b)
 
Community Count
 
Unit
Count (b)
Owned
                   187
 
          15,309
 
                   165
 
            13,683
 
               163
 
        13,401
Leased
                   141
(a)
          14,596
 
                   141
 
            14,594
 
               103
 
        10,654
Consolidated Portfolio
                   328
 
          29,905
 
                   306
 
            28,277
 
               266
 
        24,055
Managed
                       9
 
               933
 
                     10
 
             1,034
 
                 12
 
         1,325
Managed - Joint Ventures
                   141
 
          11,809
 
                   163
 
            13,401
 
                 24
 
         1,818
Operated Portfolio
                   478
 
          42,647
 
                   479
 
            42,712
 
               302
 
        27,198
                       

 
28

 
 
EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009



(a)  
We account for 80 of the 141 leased communities as operating leases, 58 as capital leases, and the remaining three as financing leases.  We do not include the assets and liabilities of the 80 operating lease communities on our consolidated balance sheets.
(b)  
Skilled nursing units are represented in terms of beds.


Our Portfolios as of December 31, 2011 consisted of the following types of service:

   
Units by Type of Service
 
   
AL (a)
   
MC (b)
   
IL (c)
   
SN (d)
   
Other (e)
   
Total
 
Owned
    11,284       2,965       726       148       186       15,309  
Leased
    10,803       2,239       671       826       57       14,596  
Consolidated Portfolio
    22,087       5,204       1,397       974       243       29,905  
Managed
    569       183       161             20       933  
Managed - Joint Ventures
    6,831       1,372       3,120       195       291       11,809  
Operated Portfolio
    29,487       6,759       4,678       1,169       554       42,647  
                                                 
(a) Assisted living
                                               
(b) Memory care
                                               
(c) Independent living
                                               
(d) Skilled nursing beds
                                               
(e) Units taken out of service
                                               

The units taken out of service represent rooms that are under renovation or have been converted for alternative uses, such as additional office space, and are not available for immediate resident occupancy.  We have excluded units taken out of service from our calculation of occupancy percentage.  We may put these units back into service as resident demand dictates.
Significant Transactions

During 2011, 2010, and 2009, we entered into a number of transactions that affected the number of communities we own, lease, and manage, our financing arrangements, and our capital structure.  These transactions are summarized below.  Our most significant transaction in recent years affecting the number of communities that we operate was our participation in the Sunwest JV, which commenced operations in August 2010.  In January 2010, we entered into the Sunwest JV with affiliates of Blackstone and Columbia Pacific.  During the last half of 2010, the Sunwest JV acquired 144 communities previously operated by Sunwest, of which we currently manage 139 communities.  We entered into management agreements with the Sunwest JV to manage the portfolio of communities for a fee equal to 5.0% of gross collected revenues.  In June 2011, we acquired Blackstone’s ownership interest in 24 communities that we managed on behalf of the Blackstone JV, a previously unconsolidated joint venture in which Emeritus owned 19.0% and Blackstone owned 81.0% of the ownership interests.

For details on significant transactions that affected the comparability of the financial statements included in this Form 10-K, see Note 4, Acquisitions and Other Significant Transactions.

 
29

 
EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009



Transactions affecting our Operated Portfolio for the three years ended December 31, 2011 are summarized in the following table:

   
Transaction Period
Unit Count
 
Transaction Type
D in Owned Count
Purchase Price (a)
(000) (b)
Amount Financed
(000) (b)
D in Leased Count
 
D in Managed Count
Count as of December 31, 2008
       
160
   
102
 
38
                       
2009 Activity
                   
Autumn Ridge
Jan 2009
94
 
Disposition
(1)
 N/A
 N/A
  –
 
  –
Emeritus at Broadmoor
Jan 2009
40
 
Expansion
  –
 N/A
 N/A
  –
 
  –
Emeritus at Northdale
Jan 2009
84
 
Operating lease
  –
 N/A
 N/A
1
 
  –
Emeritus at Urbandale
Jan 2009
38
 
Development
1
  6,632
  5,461
  –
 
  –
Sunwest Management
Jan 2009
210
 
Third party (c)
  –
 N/A
 N/A
  –
 
2
Emeritus at College Park
Jun 2009
85
 
Acquisition (d)
1
  10,579
  9,010
  –
 
(1)
Emeritus at Trace Pointe
Oct 2009
100
 
Acquisition (d)
1
  15,783
  14,100
  –
 
(1)
Isle at Emerald Court
Oct 2009
96
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Emeritus at Merced
Oct 2009
83
 
Acquisition (d)
1
  6,250
  5,000
  –
 
(1)
Count as of December 31, 2009
       
163
   
103
 
36
                       
2010 Activity
                   
Cottonbloom Assisted Living
Jan 2010
45
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Emeritus at Westwind Gardens
Jan 2010
46
 
Managed
  –
 N/A
 N/A
(1)
 
1
National Health Investors, Inc.
Jan 2010
336
 
Capital lease
  –
 N/A
 N/A
8
 
  –
Emeritus at Eastover
Feb 2010
88
 
Financing lease
  –
 N/A
 N/A
1
 
  –
Emeritus at Laurelwood
Jun 2010
115
 
Disposition
  –
 N/A
 N/A
(1)
 
  –
HCP, Inc.
Jun 2010
548
 
Operating leases
  –
 N/A
 N/A
4
 
  –
Peachtree Village Retirement
Jun 2010
61
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Rainbow Assisted Living
Jun 2010
106
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Columbia Pacific
Aug 2010
168
 
Managed
  –
 N/A
 N/A
  –
 
2
Sunwest Management
Aug 2010
63
 
Managed (e)
  –
 N/A
 N/A
  –
 
2
Sunwest JV
Aug 2010
10,740
 
Joint venture
  –
 N/A
 N/A
  –
 
128
Emeritus at Marlton Crossing
Sep 2010
110
 
Financing lease
  –
 N/A
 N/A
1
 
  –
Sunwest JV
Sep 2010
470
 
Joint venture
  –
 N/A
 N/A
  –
 
8
Emeritus at Heritage House
Oct 2010
100
 
Financing lease
  –
 N/A
 N/A
1
 
  –
Emeritus at Westwind Gardens
Oct 2010
46
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Columbia Pacific
Oct 2010
100
 
Disposition
  –
 N/A
 N/A
  –
 
(1)
Emeritus at Altamonte Springs
Nov 2010
118
 
Disposition
(1)
 N/A
 N/A
  –
 
  –
HCP, Inc.
Nov 2010
3,239
 
Capital leases
  –
 N/A
 N/A
27
 
  –
Emeritus at Mandarin
Nov 2010
147
 
Acquisition (f)
1
  10,500
  12,040
(1)
 
  –
Emeritus at Clearwater
Dec 2010
173
 
Acquisition (f)
1
  11,000
  6,440
(1)
 
  –
Emeritus at Chenal Heights
Dec 2010
80
 
Acquisition
1
  11,200
  9,520
  –
 
  –
Sunwest JV
Dec 2010
163
 
Joint venture
  –
 N/A
 N/A
  –
 
1
Count as of December 31, 2010
       
165
   
141
 
173
                       
 
 
 
30

EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009
 
 
   
Transaction Period
Unit Count
 
Transaction Type
D in Owned Count
Purchase Price (a)
(000) (b)
Amount Financed
(000) (b)
D in Leased Count
 
D in Managed Count
2011 Activity
                   
Plaza on the River
Jan 2011
64
 
Joint venture (h)
  –
 N/A
 N/A
  –
 
  –
Emeritus at Baywood
Jan 2011
126
 
Acquisition
1
12,855
10,000
  –
 
  –
Emeritus at Steel Lake
Mar 2011
87
 
Managed
  –
N/A
N/A
   
1
Emeritus at Mandeville
Mar 2011
84
 
Acquisition
1
10,400
7,800
  –
 
  –
Palmer Ranch Healthcare
Apr 2011
160
 
Joint venture (h)
  –
 N/A
 N/A
  –
 
1
Emeritus at Spruce Wood
May 2011
90
 
Acquisition
1
19,065
14,115
  –
 
  –
Emeritus at New Port Richey
May 2011
70
 
Disposition
(1)
 N/A
 N/A
  –
 
  –
Emeritus at Venice
May 2011
78
 
Disposition
(1)
 N/A
 N/A
  –
 
  –
Blackstone JV
Jun 2011
1,897
 
Acquisition (g)
24
144,130
58,608
  –
 
(24)
Emeritus at Fillmore Pond
Jul 2011
101
 
Acquisition
1
20,935
15,825
  –
 
  –
Emeritus at Vista Oaks and
                   
Emeritus at Summer Ridge
Jul 2011
135
 
Acquisition
2
19,700
14,700
  –
 
  –
Emeritus at Lakeland Hills
Aug 2011
170
 
Disposition
(1)
N/A
N/A
  –
 
  –
Emeritus at Long Cove Pointe
Sep 2011
81
 
Joint venture
  –
N/A
N/A
  –
 
1
Emeritus at Bayside Terrace
Oct 2011
154
 
Disposition
         
(1)
Colonial Gardens
Oct 2011
47
 
Disposition
         
(1)
Emeritus at Pavillion
Dec 2011
174
 
Disposition
(1)
 N/A
 N/A
  –
 
  –
Emeritus at Cambria
Dec 2011
79
 
Disposition
(1)
 N/A
 N/A
   
  –
Emeritus at Palisades
Dec 2011
158
 
Disposition
(1)
 N/A
 N/A
   
  –
Emeritus at Cielo Vista
Dec 2011
66
 
Disposition
(1)
 N/A
 N/A
   
  –
Emeritus at Desert Springs
Dec 2011
30
 
Disposition
(1)
 N/A
 N/A
   
  –
                       
Count as of December 31, 2011
       
187
   
141
 
150
                       
(a)
Purchase price exclusive of closing costs.
(b)
Purchase price and amount financed are not applicable for new lease and management agreements or expansions and dispositions.
(c)
We managed these communities for Sunwest Management until the Sunwest JV acquired them in August 2010. We now manage them for
 
 the Sunwest JV.
                   
(d)
Acquisition of communities previously operated under management agreements.
         
(e)
We manage these communities for Sunwest Management.  They are not included in the Sunwest JV.
     
(f)
Acquisition of communities previously operated under lease agreements.
           
(g)
Represents the purchase of Blackstone's 81% ownership interest in the joint venture.  See Note 4, Acquisitions and Other Significant Transactions ̶
 
2011 Blackstone JV Acquisition.
                 
(h)
Management of units previously operated by an unrelated third party.
           



Results of Operations

Sources of Revenues

As described in detail in Item 1—Business, we generate revenues by providing senior housing and related healthcare services to the senior population.  We are the largest provider of assisted living and memory care services in the United States, with a capacity for approximately 50,000 residents.  Assisted living and memory care units comprise approximately 85% of our total Operated Portfolio.
 
 
 
31

Table of Contents
EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009
 

 
The two basic drivers of our community revenues are the rates we charge our residents and the occupancy levels we achieve in our communities.  In evaluating the rate component, we utilize the average monthly revenue per occupied unit, computed by dividing the total operating revenue for a particular period by the average number of occupied units for the same period.  In evaluating the occupancy component, we track the average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period.

We rely primarily on our residents’ ability to pay our charges from their own or family resources and expect that we will do so for the foreseeable future.  Private pay residents represent 87.2% of our payor mix.  We believe that only residents with income or assets meeting or exceeding the regional median can afford to reside in our communities, and that the rates we charge and our occupancy levels are interrelated.  Therefore, we continuously evaluate rate and occupancy in each community to find the optimal balance so that we can benefit from our increasing capacity and anticipated future occupancy increases.  Although our business is primarily needs-driven, we believe that our occupancy growth has been slowed due to the ongoing economic downturn, as some seniors and their families have postponed moves for financial reasons, and we believe that high unemployment has enabled family members and others to provide home care for seniors.

Revenues from government reimbursement programs, which are the federal Medicare and state Medicaid programs, represented 12.8% of our community revenues in 2011 compared to 11.3% in 2010 and 9.9% in 2009.  This increase is due primarily to the lease acquisition of 27 communities in November 2010 that included 450 skilled nursing units, most of which receive Medicare reimbursement.  Future changes in revenues from Medicare and Medicaid programs in our existing communities will depend upon factors that include resident mix, levels of acuity among our residents, overall occupancy and government reimbursement rates.  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.  On July 29, 2011, CMS issued its final rule reducing Medicare reimbursement rates by an average of 11.1%, which took effect on October 1, 2011.  Although we believe that we can offset a portion of the decrease through cost savings and improved occupancy in our skilled nursing operations, the potential impact of the lower reimbursement levels totals approximately $8.0 million annually, beginning with the October 1, 2011 effective date.  We are currently unable to estimate the potential impact of other possible governmental cost containment measures.

We also earn management fee revenues by managing certain communities for third parties, including communities owned by related parties and by joint ventures in which we have an ownership interest.  The majority of our management agreements provide for fees equal to 5.0% of gross collected revenues.

Same Community Portfolio

Of the 328 communities included in our Consolidated Portfolio as of December 31, 2011, we include 262 communities in our “Same Community Portfolio.”  Our Same Community Portfolio consists of communities that we have continuously operated from January 1, 2010 to December 31, 2011 and does not include properties where new expansion projects were opened during the comparable periods, communities in which we substantially changed the service category offered, or communities accounted for as discontinued operations.

 
32

 
 
EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009



Selected data from our Same Community Portfolio is as follows:

   
Year Ended December 31,
 
   
2011
   
2010
    $D      % D (a) (b)  
   
(in thousands, except percentages)
 
                             
Community revenue
  $ 928,172     $ 916,148     $ 12,024       1.3 %
Community operations expense
    (610,309 )     (593,320 )     (16,989 )     (2.9 )%
Community operating income
  $ 317,863     $ 322,828     $ (4,965 )     (1.5 )%
                                 
Average monthly revenue per occupied unit
  $ 3,829     $ 3,783     $ 46       1.2 %
Average occupancy rate
    87.8 %     87.7 %          
0.1 ppt
 

(a) "N/M" indicates percentages that are not meaningful in this analysis.  Applies to all subsequent tables in this section.
(b) "ppt" refers to percentage points.  Applies to all subsequent tables in this section.

Revenues from our Same Community Portfolio represented 75.2% of our total community revenue for the year ended December 31, 2011.

Of the $12.0 million increase in same community revenues, $11.1 million was due to improvements in average revenue per occupied unit and $873,000 was due to improved occupancy.  Although the average occupancy rate in our Same Community Portfolio for 2011 was relatively flat compared to 2010, the number of residents increased due to more residents opting for companion living arrangements, particularly in our memory care units.  This contributed to the increase in revenues, as did increased required levels of resident care.

The increase of $17.0 million in community operating expense from the Same Community Portfolio included a $5.8 million, or 2.1%, increase in total labor, a $1.6 million increase in payroll taxes, and a $1.7 million increase in workers compensation expenses as compared to 2010.  These increases in total labor and benefits were offset somewhat by decreased expenses in other categories.  Most of the increase in salaries and wages was due to the increase in the number of residents compared to the prior year.  Salaries and wages on a per-resident-day basis increased by 1.2%.  The remaining increase of $7.9 million in same community operating expense included increases in bad debt, raw food, maintenance, professional liability, and other general expense increases across various operating expense categories.

For purposes of analyzing our results of operations for 2010 compared to 2009, we define our Same Community Portfolio 2010 as those communities that we have continuously operated from January 1, 2009 to December 31, 2010, which comprised 254 of our 306 consolidated communities as of December 31, 2010.  Selected data from our Same Community Portfolio 2010 is as follows:

   
Year Ended December 31,
 
   
2010
   
2009
    $D      % D  
                             
Community revenue
  $ 902,185     $ 871,648     $ 30,537       3.5 %
Community operations expense
    (584,132 )     (565,954 )     (18,178 )     (3.2 %)
Community operating income
  $ 318,053     $ 305,694     $ 12,359       4.0 %
                                 
Average month revenue per occupied unit
  $ 3,761     $ 3,656     $ 105       2.9 %
Average occupancy rate
    87.7 %     87.2 %             0.5ppt  
                                 

 
33

EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009
 
 
 
Revenues from our Same Community Portfolio 2010 represented 90.7% of our total community revenue for the year ended December 31, 2010.  Of the $30.5 million increase in same community revenue from 2009 to 2010, $24.8 million was due to improvements in average revenue per occupied unit and $5.7 million was due to improved occupancy.

The increase of $18.2 million in community operating expense from the Same Community Portfolio 2010 included a $9.7 million increase in total labor and benefits, of which payroll taxes increased $2.6 million and salaries and wages expense increased $7.7 million, or 2.9%, as compared to 2009.  These increases were offset somewhat by lower health insurance expenses that resulted from changes we made to our health insurance plan during 2010.  Most of the increase in salaries and wages was due to the increase in the number of residents compared to the prior year.  Salaries and wages on a per-resident-day basis increased by 0.1%.  The remaining increase of $8.5 million in same community operating expense included increases in bad debt, raw food, maintenance, real estate taxes, and other expenses across various operating expense categories.

Consolidated Results of Operations:  2011 Compared to 2010

Net Loss Attributable to Emeritus Corporation Common Shareholders:

We reported a net loss attributable to Emeritus Corporation common shareholders of $71.9 million for 2011 compared to $57.0 million for 2010.  As discussed below in the section Liquidity and Capital Resources, the Company has incurred significant losses since its inception but has generated positive cash flow from operating activities since 2001.

The $14.9 million increase in net loss is due primarily to non-operating items, including a $20.2 million increase in loss from discontinued operations, which represents impairment charges and costs to sell certain underperforming communities.  Non-operating income and expense included a $42.3 million increase in interest expense, due primarily to community acquisitions, and a $42.1 million gain on the acquisition of the Blackstone JV communities.
 
Operating income from continuing operations increased by $2.1 million to $61.7 million in 2011.  The increase in operating income reflects the acquisition of communities and an increase in management fee revenues, offset by an increase in transaction costs.

A summary of activity during 2011 compared to 2010 is as follows:

·  
Total operating revenues increased $247.7 million, or 24.6%, to $1.3 billion for 2011 from $1.0 billion for 2010.
·  
Operating income from continuing operations increased $2.1 million, or 3.5%, to $61.7 million for 2011.
·  
Net loss attributable to Emeritus Corporation common shareholders was $71.9 million for 2011 compared to $57.0 million for 2010.
·  
Average occupancy decreased to 86.3% for 2011 from 86.9% for 2010.
·  
Average rate per occupied unit increased 6.5% to $4,065 for 2011 from $3,817 for 2010.
·  
Net cash provided by operating activities was $74.1 million for 2011 compared to $83.7 million for 2010.
·  
During 2011, we added 30 new communities to our Consolidated Portfolio and disposed of eight.

The details of each of the components of net loss are set forth below.

 
34

 
 
EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Continued
Years ended December 31, 2011, 2010, and 2009



Total Operating Revenues
   
Year Ended December 31,
 
   
2011
   
2010
    $D      % D  
   
(in thousands, except percentages)
 
Same Community Portfolio
  $ 928,172     $ 916,148     $ 12,024       1.3 %
Acquisitions, development and expansion
    308,095