10-Q 1 a12-15150_110q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended June 30, 2012

 

Or

 

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

 

For the Transition Period From              to              

 

Commission file number: 1-16499

 

SUNRISE SENIOR LIVING, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

54-1746596

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

7900 Westpark Drive

McLean, Virginia 22102

(Address of principal executive offices)

 

(703) 273-7500

(Registrant’s telephone number, including area code)

 

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 periods 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

There were 58,250,839 shares of the Registrant’s common stock outstanding at July 20, 2012.

 

 

 



Table of Contents

 

SUNRISE SENIOR LIVING, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2012

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011

3

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)

5

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

PART II. OTHER INFORMATION

51

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

51

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3.

Defaults Upon Senior Securities

52

 

 

 

Item 4.

Mine Safety Disclosures

52

 

 

 

Item 5.

Other Information

52

 

 

 

Item 6.

Exhibits

52

 

 

 

Signatures

53

 

 

2



Table of Contents

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

(In thousands, except per share and share amounts)

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

54,773

 

$

49,549

 

Accounts receivable, net

 

38,869

 

38,251

 

Income taxes receivable

 

1,118

 

2,287

 

Due from unconsolidated communities

 

10,735

 

17,926

 

Deferred income taxes, net

 

21,230

 

19,912

 

Restricted cash

 

50,734

 

47,873

 

Assets held for sale

 

6,386

 

1,025

 

Prepaid expenses and other current assets

 

7,294

 

12,290

 

Total current assets

 

191,139

 

189,113

 

Property and equipment, net

 

555,149

 

624,585

 

Intangible assets, net

 

35,602

 

38,726

 

Investments in unconsolidated communities including accounted for under the profit-sharing method

 

42,548

 

42,925

 

Restricted cash

 

184,732

 

183,622

 

Restricted investments in marketable securities

 

2,661

 

2,479

 

Assets held in the liquidating trust

 

21,511

 

23,649

 

Other assets, net

 

10,853

 

13,269

 

Total assets

 

$

1,044,195

 

$

1,118,368

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current maturities of debt

 

$

24,595

 

$

77,861

 

Outstanding draws on bank credit facility

 

0

 

39,000

 

Liquidating trust notes, at fair value

 

24,161

 

26,255

 

Accounts payable and accrued expenses

 

128,448

 

134,157

 

Due to unconsolidated communities

 

253

 

404

 

Deferred revenue

 

10,628

 

11,804

 

Entrance fees

 

18,655

 

19,618

 

Self-insurance liabilities

 

43,443

 

42,004

 

Total current liabilities

 

250,183

 

351,103

 

Debt, less current maturities

 

471,318

 

450,549

 

Investments accounted for under the profit-sharing method

 

11,779

 

12,209

 

Self-insurance liabilities

 

40,326

 

43,611

 

Deferred gains on the sale of real estate and deferred revenues

 

0

 

8,184

 

Deferred income tax liabilities

 

21,230

 

19,912

 

Interest rate swap

 

20,611

 

21,359

 

Other long-term liabilities, net

 

110,197

 

109,548

 

Total liabilities

 

925,644

 

1,016,475

 

Equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding

 

0

 

0

 

Common stock, $0.01 par value, 120,000,000 shares authorized, 58,250,839 and 57,640,010 shares issued and outstanding, net of 651,653 and 509,577 treasury shares, at June 30, 2012 and December 31, 2011, respectively

 

583

 

576

 

Additional paid-in capital

 

492,311

 

487,277

 

Retained loss

 

(373,666

)

(385,294

)

Accumulated other comprehensive loss

 

(6,622

)

(5,932

)

Total stockholders’ equity

 

112,606

 

96,627

 

Noncontrolling interests

 

5,945

 

5,266

 

Total equity

 

118,551

 

101,893

 

Total liabilities and equity

 

$

1,044,195

 

$

1,118,368

 

 

See accompanying notes

 

3



Table of Contents

 

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Operating revenue:

 

 

 

 

 

 

 

 

 

Management fees

 

$

25,340

 

$

24,400

 

$

49,655

 

$

48,614

 

Buyout fee

 

250

 

0

 

250

 

0

 

Resident fees for consolidated communities

 

135,699

 

110,683

 

264,855

 

212,982

 

Ancillary fees

 

8,368

 

7,513

 

16,294

 

15,110

 

Professional fees from development, marketing and other

 

278

 

522

 

478

 

845

 

Reimbursed costs incurred on behalf of managed communities

 

167,808

 

178,265

 

341,881

 

364,130

 

Total operating revenues

 

337,743

 

321,383

 

673,413

 

641,681

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Community expense for consolidated communities

 

96,252

 

78,722

 

187,799

 

153,211

 

Community lease expense

 

19,187

 

19,108

 

38,423

 

37,805

 

Depreciation and amortization

 

11,464

 

8,694

 

22,222

 

16,024

 

Ancillary expenses

 

7,681

 

6,968

 

15,139

 

13,972

 

General and administrative

 

25,227

 

27,564

 

53,868

 

59,953

 

Carrying costs of liquidating trust assets and idle land

 

707

 

635

 

1,290

 

1,042

 

Provision for doubtful accounts

 

1,235

 

82

 

1,997

 

1,524

 

Impairment of long-lived assets

 

16,308

 

5,355

 

16,863

 

5,355

 

Gain on financial guarantees and other contracts

 

0

 

(12

)

0

 

(12

)

Costs incurred on behalf of managed communities

 

167,179

 

179,294

 

341,674

 

365,678

 

Total operating expenses

 

345,240

 

326,410

 

679,275

 

654,552

 

Loss from operations

 

(7,497

)

(5,027

)

(5,862

)

(12,871

)

Other non-operating income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

374

 

323

 

604

 

1,163

 

Interest expense

 

(8,682

)

(4,654

)

(16,489

)

(6,164

)

Gain on fair value resulting from business combinations

 

404

 

11,250

 

7,470

 

11,250

 

Other expense

 

(721

)

(961

)

(89

)

(28

)

Gain on fair value of liquidating trust note

 

0

 

88

 

0

 

88

 

Total other non-operating (expense) income

 

(8,625

)

6,046

 

(8,504

)

6,309

 

Gain on the sale and development of real estate and equity interests

 

3,399

 

2,598

 

4,457

 

3,090

 

Sunrise’s share of earnings (loss) and return on investment in unconsolidated communities

 

25,088

 

931

 

28,549

 

(6,758

)

Loss from investments accounted for under the profit-sharing method

 

(1,151

)

(1,740

)

(4,671

)

(4,764

)

Income (loss) before provision for income taxes and discontinued operations

 

11,214

 

2,808

 

13,969

 

(14,994

)

Provision for income taxes

 

(715

)

(773

)

(1,295

)

(1,503

)

Income (loss) before discontinued operations

 

10,499

 

2,035

 

12,674

 

(16,497

)

Discontinued operations, net of tax

 

(75

)

(217

)

344

 

1,071

 

Net income (loss)

 

10,424

 

1,818

 

13,018

 

(15,426

)

Less: Income attributable to noncontrolling interests, net of tax

 

(834

)

(540

)

(1,390

)

(1,001

)

Net income (loss) attributable to common shareholders

 

$

9,590

 

$

1,278

 

$

11,628

 

$

(16,427

)

 

 

 

 

 

 

 

 

 

 

Earnings per share data:

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

 

 

 

 

Income (loss) before discontinued operations

 

$

0.17

 

$

0.02

 

$

0.19

 

$

(0.31

)

Discontinued operations, net of tax

 

0.00

 

0.00

 

0.01

 

0.02

 

Net income (loss)

 

$

0.17

 

$

0.02

 

$

0.20

 

$

(0.29

)

 

 

 

 

 

 

 

 

 

 

Diluted net income (loss) per common share

 

 

 

 

 

 

 

 

 

Income (loss) before discontinued operations

 

$

0.16

 

$

0.02

 

$

0.19

 

$

(0.31

)

Discontinued operations, net of tax

 

0.00

 

0.00

 

0.01

 

0.02

 

Net income (loss)

 

$

0.16

 

$

0.02

 

$

0.20

 

$

(0.29

)

 

See accompanying notes

 

4



Table of Contents

 

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income (loss)

 

$

10,424

 

$

1,818

 

$

13,018

 

$

(15,426

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

1,145

 

133

 

45

 

(1,121

)

Equity interest in investee’s other comprehensive (loss) income

 

(442

)

(238

)

220

 

627

 

Unrealized (loss) gain on investments

 

(61

)

(6

)

120

 

62

 

Unrealized losses on interest rate swap

 

 

 

 

 

 

 

 

 

Unrealized holding losses arising during the period

 

(1,967

)

(2,181

)

(3,033

)

(2,181

)

Less: Reclassification for losses included in income

 

987

 

325

 

1,958

 

325

 

Unrealized losses on interest rate swap, net

 

(980

)

(1,856

)

(1,075

)

(1,856

)

Comprehensive income (loss)

 

10,086

 

(149

)

12,328

 

(17,714

)

Less: Comprehensive loss (income) attributable to noncontrolling interest

 

61

 

6

 

(120

)

(62

)

Comprehensive income (loss) attributable to common shareholders

 

$

10,147

 

$

(143

)

$

12,208

 

$

(17,776

)

 

See accompanying notes

 

5



Table of Contents

 

SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In thousands)

 

2012

 

2011

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

13,018

 

$

(15,426

)

Less: Net income from discontinued operations

 

(344

)

(1,071

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

Gain on sale and development of real estate and equity interests

 

(4,457

)

(3,090

)

Gain on fair value of liquidating trust notes

 

0

 

(88

)

Loss from investments accounted for under the profit-sharing method

 

4,671

 

4,764

 

Gain on fair value resulting from business combinations, including pre-existing investments

 

(7,470

)

(11,250

)

Sunrise’s share of (earnings) loss and return on investment in unconsolidated communities

 

(28,549

)

6,758

 

Distributions of earnings from unconsolidated communities

 

28,101

 

5,613

 

Gain on financial guarantees and other contracts

 

0

 

(12

)

Provision for doubtful accounts

 

1,997

 

1,524

 

Depreciation and amortization

 

22,222

 

16,024

 

Amortization of financing costs, debt discount and guarantee liabilities

 

3,281

 

1,090

 

Impairment of long-lived assets

 

16,863

 

5,355

 

Stock-based compensation

 

4,793

 

3,666

 

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in:

 

 

 

 

 

Accounts receivable

 

(2,689

)

745

 

Due from unconsolidated communities

 

7,762

 

(251

)

Prepaid expenses and other current assets

 

1,508

 

2,043

 

Captive insurance restricted cash

 

(141

)

2,174

 

Other assets

 

1,393

 

1,736

 

Increase (decrease) in:

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

(4,926

)

(18,883

)

Entrance fees

 

(963

)

(892

)

Self-insurance liabilities

 

(1,708

)

(3,122

)

Deferred gains on the sale of real estate and deferred revenues

 

(861

)

(1,795

)

Net cash used in discontinued operations

 

(98

)

(978

)

Net cash provided by (used in) operating activities

 

53,403

 

(5,366

)

Investing activities

 

 

 

 

 

Capital expenditures

 

(3,708

)

(4,877

)

Net proceeds for/from advances from investment accounted for under the profit-sharing method

 

(5,143

)

(101

)

Acquisition of communities, net of cash acquired

 

(29,188

)

(45,292

)

Dispositions of assets

 

137,206

 

3,840

 

Change in restricted cash

 

(5,073

)

1,153

 

Investments in unconsolidated communities

 

(1,243

)

(3,389

)

Net cash provided by discontinued operations

 

366

 

5,890

 

Net cash provided by (used in) investing activities

 

93,217

 

(42,776

)

Financing activities

 

 

 

 

 

Net proceeds from exercised options

 

717

 

1,364

 

Issuance of junior subordinated convertible debt

 

0

 

86,250

 

Additional borrowings of debt

 

55,125

 

0

 

Repayment of credit facility

 

(39,000

)

0

 

Repayment of debt

 

(154,529

)

(27,637

)

Repayment of liquidating trust notes

 

(2,094

)

(8,330

)

Financing costs paid

 

(904

)

(4,232

)

Distributions to noncontrolling interests

 

(711

)

(867

)

Net cash (used in) provided by financing activities

 

(141,396

)

46,548

 

Net increase (decrease) in cash and cash equivalents

 

5,224

 

(1,594

)

Cash and cash equivalents at beginning of period

 

49,549

 

66,720

 

Cash and cash equivalents at end of period

 

$

54,773

 

$

65,126

 

 

See accompanying notes.

 

6



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.  Interim Financial Presentation

 

Our accompanying unaudited consolidated financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the three and six months ended June 30, 2012 and 2011 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read together with our consolidated financial statements and the notes thereto for the year ended December 31, 2011 included in our 2011 Annual Report on Form 10-K, as amended on March 15, 2012.  Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  We have reclassified certain amounts to conform with the current period presentation.

 

2.  Amendments to the Accounting Standards Codification

 

The Financial Accounting Standards Board (“FASB”) issued the following Accounting Standards Updates (“ASU”) in 2011.

 

ASU 2011-10, Property, Plant and Equipment (Topic 360), Derecognition of in Substance Real Estate — a Scope Clarification, requires when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance of Subtopic 360-20 to determine whether it should derecognize the in substance real estate.  Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness.  That is, even if the reporting entity ceases to have a controlling financial interest, the reporting entity would continue to include the real estate, debt and results of the subsidiary’s operations in its consolidated financial statements until legal title of the real estate is transferred to legally satisfy the debt.  ASU 2011-10 is effective for us January 1, 2013 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

ASU 2011-11, Balance Sheet (Topic 210), Disclosure about Offsetting Assets and Liabilities, requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.  ASU 2011-11 is effective for us January 1, 2013 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

The following ASU was issued in 2012.

 

ASU 2012-01, Health Care Entities (Topic 954), Continuing Care Retirement Communities — Refundable Advance Fees, was developed with the objective of clarifying how refundable advance fees received by continuing care retirement communities should be reflected in financial statements.  The amendments to Topic 954 affect continuing care retirement communities that have resident contracts providing for a payment of a refundable advance fee upon reoccupancy of a unit by a subsequent resident.  Continuing care retirement communities should classify an advance fee as deferred revenue when there is a resident contract that provides for payment of the refundable advance fee upon reoccupancy by a subsequent resident, which is limited to the proceeds of reoccupancy.  Refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability.  ASU 2012-01 is effective for us January 1, 2013 and we are evaluating its impact on our consolidated financial position, results of operations or cash flows.

 

3.  Fair Value Measurements

 

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The ASC Fair Value Measurements Topic established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels.  These levels, in order of highest priority to lowest priority, are described below:

 

Level 1:  Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

 

Level 2:  Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3:  Unobservable inputs that are used when little or no market data is available.

 

7



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Interest Rate Swap

 

In connection with our purchase of our partner’s interest in AL US Development Venture, LLC (“AL US”) in 2011, we assumed the mortgage debt and an interest rate swap.  We then entered into a new interest rate swap arrangement that extended the term of the existing interest rate swap to be coterminous with the maturity extension of the mortgage debt (extended from June 2012 to June 2015).  We entered into the swap in order to hedge against changes in cash flows (interest payments) attributable to fluctuations in the one-month LIBOR rate.  As a result, we will pay a fixed rate of 3.2% plus the applicable spread of 175 basis points as opposed to a floating rate equal to the one-month LIBOR rate plus the applicable spread of 175 basis points on a notional amount of $259.4 million through the maturity date of the loan.  The agreement includes a credit-risk-related contingency feature whereby the derivative counterparty has incorporated the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparty.  The failure to comply with the loan covenant provisions would result in being in default on any derivative instrument obligations covered by the agreement.  We have not posted any collateral related to this agreement.  As of June 30, 2012, the derivative is in a liability position and has a fair value of $20.6 million.  If we had breached any of these loan covenant provisions at June 30, 2012, we could have been required to settle our obligations under the agreement at their termination value of approximately $21.1 million. The difference between the fair value liability and the termination liability represents an adjustment for accrued interest.

 

We have designated the derivative as a cash flow hedge.  The derivative value is based on the prevailing market yield curve on the date of measurement.  We also consider Sunrise’s credit risk in the calculation of the fair value of the swap.  We evaluate the hedge effectiveness of the derivative both at inception and on an on-going basis.  For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings.  Approximately $3.8 million of losses, which are included in accumulated other comprehensive (loss) income (“AOCI”), are expected to be reclassified into earnings in the next 12 months as an increase to interest expense.

 

The following table details the fair market value as of June 30, 2012 (in thousands):

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

June 30,

 

Identical Assets

 

Inputs

 

Inputs

 

Liabilities

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Interest rate swap

 

$

20,611

 

$

0

 

$

20,611

 

$

0

 

 

The following table details the impact of the derivative instrument on the consolidated statements of operations and other comprehensive income (loss) for the periods presented (in thousands):

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

 

 

Location

 

2012

 

2011

 

2012

 

2011

 

Loss on interest rate swap recognized in OCI

 

OCI

 

$

(1,967

)

$

(2,181

)

$

(3,033

)

$

(2,181

)

Loss reclassified from AOCI into income (effective portion)

 

Interest expense

 

(987

)

(325

)

(1,958

)

(325

)

Loss recognized in income (ineffective portion and amount excluded from effectiveness testing)

 

Other expense

 

(32

)

(303

)

(84

)

(303

)

 

Restricted Investments in Marketable Securities

 

The following table details the restricted investments in marketable securities measured at fair value as of June 30, 2012 (in thousands):

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

June 30,

 

Identical Assets

 

Inputs

 

Inputs

 

Assets

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Restricted investments in marketable securities

 

$

2,661

 

$

2,661

 

$

0

 

$

0

 

 

The restricted investments in marketable securities relate to a consolidated entity in which we have control but no ownership interest.  We consolidate this entity as we are the primary beneficiary.

 

Assets Held for Sale, Assets Held and Used and Liquidating Trust Assets

 

The following table details the assets held for sale and assets held and used that were impaired in 2012, excluding impairment charges of $1.3 million on sold assets (in thousands):

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

Total

 

 

 

June 30,

 

Identical Assets

 

Inputs

 

Inputs

 

Impairment

 

Assets

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Losses

 

Assets held for sale

 

$

1,657

 

$

0

 

$

1,000

 

$

657

 

$

9,814

 

Assets held and used

 

4,285

 

0

 

0

 

4,285

 

5,786

 

 

 

$

5,942

 

$

0

 

$

1,000

 

$

4,942

 

$

15,600

 

 

Assets Held for Sale

 

Assets held for sale with a lower of carrying value or fair value less estimated costs to sell consists of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Condominium units

 

$

657

 

$

1,025

 

Furniture, fixtures and equipment

 

1,000

 

0

 

Land

 

4,729

 

0

 

 

 

$

6,386

 

$

1,025

 

 

A land parcel, which was transferred to us in March 2012 (refer to Note 4), furniture, fixtures and equipment sold and to be transferred to Senior Housing Properties Trust in connection with the termination of 10 community leases (refer to Note 6) and a condominium project are classified as assets held for sale.  They are recorded at the lower of their carrying value or fair value less estimated costs to sell.  We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value.

 

As a result of an agreement to terminate 10 operating community leases prior to the lease expiration date, we recorded an impairment charge of $9.8 million related to furniture, fixtures and equipment in those communities based on the consideration paid to us by the lessor (refer to Note 6).

 

Assets Held and Used

 

As a result of an agreement to terminate 10 operating community leases prior to the lease expiration date, we recorded an impairment charge of $5.8 million related to in place leasehold improvements and prepaid rent in those communities based on their shortened useful lives (refer to Note 6).

 

Liquidating Trust Assets

 

In connection with the restructuring of our German indebtedness (refer to Note 8), we granted mortgages for the benefit of the electing lenders on certain of our unencumbered North American properties (the “liquidating trust”).  As of June 30, 2012, the liquidating trust assets consist of seven land parcels and one closed community.  In the first six months of 2012, we recorded $0.5 million of impairment charges on one land parcel formerly held in the liquidating trust as the carrying value of the asset was in excess

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

of its estimated fair value.  We used recent comparable sales, market knowledge, brokers’ opinions of value and the income approach to estimate the fair value.  The impairment loss is included in operating expenses under impairment of long-lived assets.

 

Changes in assumptions or estimates could materially affect the determination of fair value of a land parcel or community and therefore could affect the amount of potential impairment of the asset.  We use assumptions that we believe represent those a market participant would use involving the same assets.  The following key assumptions to our income approach include:

 

·                  Business Projections — We make assumptions regarding the levels of revenue from communities and services.  We also make assumptions about our cost levels (e.g., capacity utilization, labor costs, etc.).  Finally, we make assumptions about the amount of cash flows that we will receive upon a future sale of the community or land parcel using estimated cap rates.  These assumptions are key inputs for developing our cash flow projections.  These projections are derived using our internal business plans and budgets;

 

·                  Growth Rate —The growth rate is based on the expected rate at which earnings are projected to grow beyond the planning period.  A cap rate is used to calculate the terminal value of a community or land parcel;

 

·                  Economic Projections — Assumptions regarding general economic conditions are included in and affect our assumptions regarding pricing estimates for our communities and services.  These macro-economic assumptions include, but are not limited to, industry projections, inflation, interest rates, price of labor, and foreign currency exchange rates; and

 

·                  Discount Rates — When measuring a possible impairment, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant.  The weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

 

The market approach is one of the other primary methods used for estimating fair value of an asset.  This assumption relies on the market value (market capitalization) of companies that are engaged in the same or similar line of business.

 

Debt

 

The fair value of our debt has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets and credit risk.  Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value.  We have applied Level 2 and Level 3 type inputs to determine the estimated fair value of our debt.  The following table details by category the principal amount, the average interest rate and the estimated fair market value of our debt (in thousands):

 

 

 

Fixed Rate

 

Variable Rate

 

 

 

Debt

 

Debt

 

Total Carrying Value

 

$

87,615

 

$

432,459

(1)

Average Interest Rate

 

5.03

%

3.95

%

Estimated Fair Market Value

 

$

87,646

 

$

424,407

 

 


(1) Includes $259.4 million of debt that has been fixed by a separate interest rate swap instrument (refer to Note 8).

 

Disclosure about fair value of financial instruments is based on pertinent information available to us at June 30, 2012.

 

Liquidating Trust Notes

 

We elected the fair value option to measure the financial liabilities associated with and which originated from the restructuring of our German loans (refer to Note 8).  The notes for the liquidating trust assets are accounted for under the fair value option.  The carrying value of the financial liabilities for which the fair value option was elected was estimated by applying certain data points

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

including the underlying value of the collateral and the expected timing and amount of repayment.  The notes are subject to our minimum payment guarantee.  The notes mature in October 2012.

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

(In thousands)

 

June 30,

 

Identical Assets

 

Inputs

 

Inputs

 

Total

 

Liabilities

 

2012

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Gain

 

Liquidating trust notes, at fair value

 

$

24,161

 

$

0

 

$

0

 

$

24,161

 

$

0

 

 

The following table reconciles the beginning and ending balances for the notes for the liquidating trust assets using fair value measurements based on significant unobservable inputs for 2012 (in thousands):

 

 

 

Liquidating

 

 

 

Trust Notes

 

Beginning balance - January 1, 2012

 

$

26,255

 

Total gains

 

0

 

Payments

 

(2,094

)

Ending balance - June 30, 2012

 

$

24,161

 

 

Other Fair Value Information

 

Cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses and other current assets and liabilities are carried at amounts which reasonably approximate their fair values.

 

4.  Asset Purchases, Transfers and Contribution to a New Venture

 

Santa Monica Purchase

 

On February 28, 2012, we closed on a purchase and sale agreement with our venture partner who owned an 85% membership interest (the “Partner Interest”) in Santa Monica AL, LLC (“Santa Monica”).  We owned the remaining 15% membership interest.  Pursuant to the purchase and sale agreement, we purchased the Partner Interest for an aggregate purchase price of $16.2 million.  Santa Monica indirectly owned one senior living facility located in Santa Monica, California.  As a result of the transaction, the assets, liabilities and operating results of Santa Monica were consolidated in our financial results beginning February 28, 2012 until June 29, 2012 (see below).

 

We acquired the assets in stages.  The fair value of our 15% equity interest immediately prior to the acquisition of the Partner Interest was approximately $2.9 million based on the estimated fair value of approximately $19.5 million for the total underlying equity in the venture.  The estimated fair value of the equity was calculated based on the acquisition date fair value of the assets and working capital of approximately $32.9 million less the payoff amount of the debt of $13.4 million.  As the carrying value of our investment in the venture prior to the acquisition was zero, we recognized a gain of approximately $2.9 million on our pre-existing membership interest as of the acquisition date.

 

Asset Transfer from Master MetSun Two, LP and Master MetSun Three, LP

 

On March 20, 2012, two of our existing joint ventures (the “MetSuns”) transferred their ownership interest in two venture subsidiaries to us for no cash consideration. The transferred venture subsidiaries indirectly owned five senior living facilities and one land parcel. Prior to the transfer, we had a 20% indirect ownership interest in the assets. As a result of the transfer, the assets were 100% indirectly owned by us and were consolidated in our financial results commencing March 20, 2012 until June 29, 2012 (see below).

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

We acquired the assets in stages.  We calculated the fair value of the total underlying equity of the assets based on the acquisition date fair value of the assets and working capital of approximately $122.3 million less the fair value of the debt assumed of $118.2 million. We recognized a gain of approximately $4.6 million, including a gain of $0.7 million on our pre-existing ownership interest, in connection with the acquisition of the assets.

 

The following table summarizes the recording, at fair value, of the assets and liabilities as of the acquisition date of Santa Monica and the transfer date of the MetSuns (in thousands):

 

 

 

Amounts

 

 

 

Recognized as of

 

 

 

Acquisition Date

 

Property and equipment

 

$

156,041

 

Other assets

 

3,883

 

Debt

 

(118,170

)

Other liabilities

 

(4,756

)

Net assets acquired

 

36,998

 

Gain on fair value resulting from business combinations

 

(7,470

)

Net transaction costs

 

157

 

Total consideration transferred

 

$

29,685

 

 

The estimated fair value of the real estate assets at acquisition was approximately $156.0 million.  To determine the fair value of the real estate, we examined various data points including (i) transactions with similar assets in similar markets and (ii) independent appraisals of the acquired assets.  As of the acquisition date, the fair value of working capital approximated its carrying value.

 

The estimated fair value of the assumed debt was approximately $118.2 million.  The fair value of the debt was estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets.

 

As described below, the assets from the Santa Monica acquisition and the MetSuns transfer were contributed to a new venture on June 29, 2012 and as a result were de-consolidated at that time (see below).  The impact of the acquisition and transfer of the assets prior to their contribution to the new venture on our consolidated operating revenues and net income was immaterial for the three and six months ended June 30, 2012.

 

Contribution of Assets to a New Venture

 

On June 29, 2012, we and CNL Healthcare Trust, Inc. (“CHT”) completed the formation of a new venture.  Pursuant to the terms of the transaction, we contributed our ownership interest in the six senior living facilities mentioned above and Connecticut Avenue (the “Facilities”) along with our share of transaction and closing costs to the venture. CHT contributed approximately $57 million along with its share of transaction and closing costs to the venture. The venture is owned approximately 55% by CHT and approximately 45% by us, with a gross valuation of approximately $226 million.

 

Prior to and as a condition to closing, we and CHT obtained new financing for five of the Facilities and modified the existing financing on two of the Facilities (the “Refinancing”).  In connection with the Refinancing, approximately $50 million of CHT’s contribution to the venture was used to pay down the existing financing on the five Facilities that were refinanced.  The venture has approximately $125 million of indebtedness collateralized by the seven Facilities.  In addition, we received an approximate $5 million cash distribution from the venture immediately following closing.

 

As of the closing, the venture owns the Facilities, which will continue to be managed by us under new management agreements that provide for a management fee of six percent of community revenues.  We and CHT have entered into a new venture agreement that provides for our respective rights and obligations in the venture, including our right, at our option, to purchase CHT’s interest in the venture, subject to certain restrictions and conditions.  Accordingly, as a result of our option to purchase CHT’s interest, we account for this venture under the profit-sharing method of accounting.  The carrying value of our investment at June 30, 2012 was $2.1 million and is reflected in “Investments in unconsolidated communities including accounted for under the profit-sharing method” on our consolidated balance sheets.

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

5. Investments in Unconsolidated Ventures

 

Venture Transactions

 

Asset Transfer from Certain Ventures and Subsequent Contribution of Those Assets to a New Venture

 

Refer to Note 4 regarding the purchase or transfer of certain assets and liabilities from Santa Monica AL, LLC, Master MetSun Two, LP and Master MetSun Three, LP. and the subsequent contribution of those and an additional asset to a new venture.

 

Venture Sale of 16 Communities

 

On May 1, 2012, the subsidiaries of ventures between an institutional investor and us sold 16 communities to Ventas Inc. for a purchase price of approximately $362 million.  We received approximately $28.7 million of cash at closing and recognized $21.7 million in return on investment which is included in Sunrise’s share of earnings and return on investment in unconsolidated communities on our consolidated statement of operations.  We are remaining the manager of the 16 communities under the same terms of the pre-existing management agreements with respect to management fees and contract length, which range from 18 to 27 years.

 

Summarized S-X Rule 3-09 Income Statement Information

 

The following is summarized income statement information for an equity investee, PS UK Investment (Jersey) LP, for which annual audited financial statements are expected to be required for the year 2012 under S-X Rule 3-09 (in thousands):

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total operating revenues

 

$

7,050

 

$

6,234

 

$

14,016

 

$

11,985

 

Net income before provision for income taxes

 

1,239

 

255

 

2,790

 

745

 

Net income

 

1,239

 

380

 

2,770

 

995

 

 

6.  Lease Terminations

 

On May 29, 2012, we entered into an agreement to terminate 10 operating community leases with a lessor, Senior Housing Properties Trust.  The lessor paid us $1.0 million as consideration for the in place leasehold improvements and furniture, fixtures and equipment.  The communities will be transitioned to the new manager over the next four to twelve months.  As a result, we recorded an impairment charge of approximately $15.6 million in the second quarter of 2012 related to the book value of the in place leasehold improvements, prepaid rent and furniture, fixtures and equipment.

 

7.  Accounts Payable and Accrued Expenses and Other Long-Term Liabilities

 

Accounts payable and accrued expenses consist of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Accounts payable and accrued expenses

 

$

35,784

 

$

36,920

 

Accrued salaries and bonuses

 

21,663

 

28,594

 

Accrued employee health and other benefits

 

38,511

 

33,498

 

Other accrued expenses

 

32,490

 

35,145

 

 

 

$

128,448

 

$

134,157

 

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Other long-term liabilities consist of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Deferred revenue from nonrefundable entrance fees

 

$

45,535

 

$

44,225

 

Lease liabilities

 

25,406

 

26,466

 

Executive deferred compensation

 

16,013

 

16,317

 

Uncertain tax positions

 

21,001

 

20,375

 

Other long-term liabilities

 

2,242

 

2,165

 

 

 

$

110,197

 

$

109,548

 

 

8. Debt

 

At June 30, 2012 and December 31, 2011, we had $520.1 million and $593.7 million, respectively, of outstanding debt with a weighted average interest rate of 4.13% and 4.12%, respectively, as follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

AL US debt (1)

 

$

329,152

 

$

334,567

 

Community mortgages

 

66,526

 

94,641

 

Liquidating trust notes

 

24,161

 

26,255

 

Convertible subordinated notes

 

86,250

 

86,250

 

Credit facility

 

0

 

39,000

 

Other

 

3,742

 

4,903

 

Variable interest entity

 

21,385

 

21,770

 

Total principal amount of debt

 

531,216

 

607,386

 

Less: Discount on loans assumed at fair value

 

(11,142

)

(13,721

)

 

 

$

520,074

 

$

593,665

 

 


(1) The carrying value of the debt at June 30, 2012 was $318.8 million.

 

Of the outstanding debt at June 30, 2012, we had $87.6 million of fixed-rate debt with a weighted average interest rate of 5.03% and $432.5 million of variable rate debt with a weighted average interest rate of 3.95%.  Consolidated debt of $1.4 million was in default as of June 30, 2012.  We are in compliance with the covenants on all our other consolidated debt and expect to remain in compliance in the near term.

 

Principal maturities of debt at June 30, 2012 are as follows (in thousands):

 

 

 

Mortgages,

 

Variable

 

Liquidating

 

Convertible

 

 

 

 

 

 

 

Wholly-Owned

 

Interest

 

Trust

 

Subordinated

 

 

 

 

 

 

 

Properties

 

Entity Debt

 

Note

 

Notes

 

Other

 

Total

 

Default

 

$

0

 

$

1,365

 

$

0

 

$

0

 

$

0

 

$

1,365

 

3rd Qtr. 2012

 

0

 

390

 

0

 

0

 

340

 

730

 

4th Qtr. 2012

 

0

 

0

 

24,161

 

0

 

680

 

24,841

 

2013

 

20,849

 

810

 

0

 

0

 

2,041

 

23,700

 

Thereafter

 

374,829

 

18,820

 

0

 

86,250

 

681

 

480,580

 

 

 

395,678

 

21,385

 

24,161

 

86,250

 

3,742

 

531,216

 

Discount on loans assumed at fair value

 

(10,317

)

0

 

0

 

0

 

(825

)

(11,142

)

 

 

$

385,361

 

$

21,385

 

$

24,161

 

$

86,250

 

$

2,917

 

$

520,074

 

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Santa Monica Debt, Connecticut Avenue Debt and Debt Transfer from Master MetSun Two, L.P. and Master MetSun Three, L.P.

 

On February 28, 2012, we closed on a purchase and sale agreement with our venture partner that owned an 85% Partner Interest in Santa Monica.  Simultaneously, with the closing of the transaction (refer to Note 4), we entered into new loans with Prudential Insurance Company of America to pool Santa Monica with the Connecticut Avenue community and financed the two assets with senior debt.  The principal amount of the new loans in the aggregate was $55.0 million with an interest rate of 4.66%.  The loans had a seven year term that would have matured on March 1, 2019.  The proceeds of the new loans were used (i) to pay off $27.8 million of debt on the Connecticut Avenue community; (ii) to pay off $13.4 million of debt on Santa Monica; and (iii) towards the $16.2 million purchase price of the Partner Interest.

 

On March 20, 2012, two of our existing joint ventures transferred their ownership interest in two venture subsidiaries to us for no cash consideration. The transferred venture subsidiaries indirectly owned five senior living facilities and one land parcel. The assets were encumbered by approximately $119.7 million of existing mortgage debt which was consolidated in our financial results commencing March 20, 2012 until June 29, 2012 (see below). This mortgage debt was non-recourse to us with respect to principal repayment, and no new obligations were required by the mortgage lenders as a result of the transfer. The assets were separated into two loan pools, with one lender financing a pool of three communities (“Pool A”) and another lender financing a pool of two communities plus the land parcel (“Pool B”).

 

On June 29, 2012, the debt relating to Santa Monica and the Connecticut Avenue community was transferred to a new venture between us and CHT along with the related assets.  The Pool A and Pool B debt was refinanced as part of the asset transfer to the new venture (refer to Note 4).

 

Canadian Debt

 

The loan on three communities in Canada matured in April 2011.  In February 2012, we entered into a loan modification that, among other things: (i) extended the loan on our three Canadian communities two years from the modification date; (ii) provided for a termination of our operating deficit guarantee in August 2015;  (iii) cross collateralized the three communities; (iv) increased the interest rate from the TD Bank Prime rate plus 175 bps to TD Bank Prime rate plus 200 bps; and (v) obligated us to complete a reminiscence conversion in a section of one of the communities.  The loan balance was $45.7 million as of June 30, 2012.

 

AL US Debt

 

In June 2011, we assumed $364.8 million of debt with an estimated fair value of $350.1 million in connection with our purchase of an 80% ownership interest in a joint venture entity, AL US, that owned 15 senior living communities.  Immediately following the closing of the transaction, we entered into an amendment to the loan.  The loan amendment, among other matters, (i) extended the maturity date to June 14, 2015; (ii) provided for a $25.0 million principal repayment; (iii) set the interest rate on amounts outstanding from the effective date of the amendment to LIBOR plus 1.75% with respect to LIBOR advances and the base rate (i.e. the higher of the Federal Funds Rate plus 0.50% or the prime rate announced daily by HSH Nordbank AG (“Nordbank”)) plus 1.25% with respect to base rate advances; (iv) instituted a permanent cash sweep of all excess cash at the communities securing the loan on an aggregated and consolidated basis, which will be used by Nordbank to pay down the outstanding principal balance; (v) released certain management fees that were escrowed and eliminated the requirement for any further subordination or deferral of management fees provided no event of default occurs under the loan; (vi) provided for a $5.0 million escrow for certain indemnification obligations; (vii) provided relief under current debt service coverage requirements; and (viii) modified certain other covenants and terms of the loan. In connection with the amendment, we entered into a new interest rate swap arrangement that extended an existing swap with a fixed notional amount of $259.4 million at 3.2% plus the applicable spread of 175 basis points, down from 5.61% on the previous swap. The new swap arrangement terminates at loan maturity in June 2015. The remaining outstanding balance on the loan will continue to float over LIBOR as described above. The amendment also contains representations, warranties, covenants and events of default customary for transactions of this type.  We recorded this loan on our consolidated balance sheet at its estimated fair value on the acquisition and assumption date. The fair value balance of the loan as of June 30, 2012 was $318.8 million and the face amount was $329.2 million.

 

15



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Germany Restructure Notes

 

We previously owned nine communities in Germany which were subject to substantial debt.  During 2010 and 2009, we restructured or paid a significant portion of the debt.  As part of the restructuring, we granted mortgages for the benefit of certain lenders on certain of our unencumbered North American properties (the “liquidating trust”).

 

In April 2010, we executed the definitive documentation with the lenders party to the restructuring agreements.  As part of the restructuring agreements, we also guaranteed that, within 30 months of the execution of the definitive documentation, October 2012, for the restructuring, the lenders would receive a minimum of $49.6 million from the net proceeds of the sale of the liquidating trust, which equals 80 percent of the appraised value of these properties at the time of the restructuring agreement. If the electing lenders did not receive at least $49.6 million by such date, we would make payment to cover any shortfall or, at such lenders’ option, convey to them the remaining unsold properties in satisfaction of our remaining obligation to fund the minimum payments.  We have sold 12 North American properties in the liquidating trust for gross proceeds of approximately $28.5 million through June 30, 2012. As of June 30, 2012, the electing lenders have received net proceeds of $25.5 million as a result of sales from the liquidating trust.

 

We elected the fair value option to measure the financial liabilities associated with and which originated from the restructuring of our German loans.  The fair value option was elected for these liabilities to provide an accurate economic reflection of the offsetting changes in fair value of the underlying collateral.  As a result of our election of the fair value option, all changes in fair value of the elected liabilities are recorded with changes in fair value recognized through earnings.  As of June 30, 2012, the notes for the liquidating trust assets are accounted for under the fair value option.  The carrying value of the financial liabilities for which the fair value option was elected was estimated applying certain data points including the value of the underlying collateral. The notes are subject to our minimum payment guarantee.  The balance as of June 30, 2012 was $24.2 million.

 

In April 2010, we entered into a settlement agreement with another lender who was not party to the restructuring agreement mentioned above of one of our German communities.  The settlement released us from certain of our operating deficit funding and payment guarantee obligations in connection with the loans.  Upon execution of the agreement, the lender’s recourse, with respect to the community mortgage, was limited to the assets owned by the German subsidiaries associated with the community.  In exchange for the release of these obligations, we agreed to pay the lender approximately $9.9 million over four years, with $1.3 million of the amount paid at signing.  The payment is secured by a non-interest bearing note.  We have recorded the note at a discount by imputing interest on the note using an estimated market interest rate.  The balance on the note was recorded at $5.3 million and is being accreted to the note’s stated amount over the remaining term of the note. The balance of the note as of June 30, 2012 was $2.9 million.

 

KeyBank Credit Facility

 

On June 16, 2011, we entered into a credit agreement for a $50 million senior revolving line of credit (“Credit Facility”) with KeyBank National Association (“KeyBank”), as administrative agent and lender, and other lenders which may become parties thereto from time to time. The Credit Facility includes a $20.0 million sublimit to support standby letters of credit and it is also expandable to $65.0 million if (i) additional lenders commit to participate in the Credit Facility and (ii) there are no defaults.

 

The Credit Facility is secured by our 40% equity interest in CC3, our joint venture with a wholly owned subsidiary of CNL, that owns 29 senior living communities managed by us.

 

The Credit Facility matures on June 16, 2014, subject to our one-time right to extend the maturity date for one year, with ninety days’ notice, provided no material event of default has occurred and we pay a 25 basis point extension fee. Payments on the Credit Facility will be interest only, payable monthly, with outstanding principal and interest due at maturity. Prepayment is permitted at any time, subject to make whole provisions for breakage of certain LIBOR contracts. Pricing for the Credit Facility is KeyBank’s base rate or LIBOR plus an applicable margin depending on our leverage ratio. The LIBOR margins range from 5.25% to 3.25%, and the base rate margins range from 3.75% to 1.75%. We are obligated to pay a fee, payable quarterly in arrears, equal to 0.45% per annum of the average unused portion of the Credit Facility, or 0.35% per annum of the average unused portion for any quarter in which usage is greater than or equal to 50% throughout the quarter. In addition, at closing, we paid KeyBank a commitment fee of 1.0% of the Credit Facility and certain other administrative fees. The Credit Facility requires us to use KeyBank and its affiliates as our primary relationship bank, including for primary depository and cash management purposes, except as required by agreements with other entities.

 

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Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

The Credit Facility requires us to meet several covenants which include:

 

·                  Maximum corporate leverage ratio of 5.25 to 1.0;

·                  Minimum corporate fixed charge coverage ratio of 1.25 to 1.0 in 2012 and 1.45 to 1.0 in 2013 and thereafter;

·                  Minimum liquidity of $15.0 million;

·                  Minimum collateral loan to value of 75%; and

·                  Maximum permitted development obligations of $60.0 million per year.

 

In addition to the covenants stated above, the Credit Facility also contains various covenants and events of default which could trigger early repayment obligations and early termination of the lenders’ commitment obligations. Events of default include, among others: nonpayment, failure to perform certain covenants beyond a cure period, incorrect or misleading representations or warranties, cross-default to any recourse indebtedness of ours in an aggregate amount outstanding in excess of $30.0 million, and a change of control. Our ability to borrow under the Credit Facility is subject to these covenants.

 

The Credit Facility also includes limitations and prohibitions on our ability to incur or assume liens and debt except in specified circumstances, make investments except in specified circumstances, make restricted payments except in certain circumstances, make dispositions except in specified situations, incur recourse indebtedness in connection with the development of a new senior living project in excess of specified threshold amounts, use the proceeds to purchase or carry margin stock, enter into business combination transactions or liquidate us and engage in new lines of business and transactions with affiliates except in specified circumstances.

 

As of June 30, 2012, there were no draws against the Credit Facility and $10.2 million in letters of credit outstanding.  We have $39.8 million borrowing availability under the Credit Facility at June 30, 2012.

 

Other

 

In addition to the debt discussed above, Sunrise ventures have total debt of $2.3 billion with near-term scheduled debt maturities of $0.1 billion for the remainder of 2012, and $0.7 billion of debt that is in default as of June 30, 2012.  The debt in the ventures is non-recourse to us with respect to principal payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant waivers and to extend the maturity dates.  In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. We have provided operating deficit guarantees to the lenders or ventures with respect to $0.3 billion of the total venture debt.  Under the operating deficit agreements, we are obligated to pay operating shortfalls, if any, with respect to these ventures. Any such payments could include amounts arising in part from the venture’s obligations for payment of monthly principal and interest on the venture debt. These operating deficit agreements would not obligate us to repay the principal balance on such venture debt that might become due as a result of acceleration of such indebtedness or maturity.  We have non-controlling interests in these ventures.

 

One of the venture mortgage loans described above is in default at June 30, 2012 due to a violation of certain loan covenants.  The mortgage loan balance was $0.6 billion as of June 30, 2012.  The loan is collateralized by 15 communities owned by the venture located in the United Kingdom.  The lender has rights which include foreclosure on the communities and/or termination of our management agreements.  The venture is in discussions with the lender regarding the possibility of entering into a loan modification.  During 2011, we recognized $9.0 million in management fees from this venture and $4.3 million for the six months ended June 30, 2012.  Our United Kingdom Management segment reported $1.6 million in income from operations in 2011 and $1.1 million and $1.9 million for the three and six months ended June 30, 2012, respectively.  Our investment balance in this venture was zero at June 30, 2012.

 

9. Gains on the Sale of Real Estate

 

In the second quarter of 2012, in connection with the sale of 16 venture-owned communities to Ventas, Inc., the associated debt was repaid in full.  As a result, our continuing involvement in those ventures ended as we were released from our operating deficit guarantee obligations to the lender.  We recognized $3.0 million in previously deferred gains as the result of the release.  The remaining gains in 2012 primarily resulted from transactions which occurred in prior years for which recognition of gain had been deferred due to various forms of continuing involvement.

 

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Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

In addition, we sold two land parcels which were part of the liquidating trust for approximately $1.8 million in 2012.  No gains were recognized.  Proceeds of $2.1 million, including $0.3 million paid by us, were distributed to the electing lenders of the liquidating trust (refer to Note 8).

 

In June 2012, we sold a land parcel located in Pasadena, California for $9.5 million.  No gain or loss was recognized on this sale.

 

10.  Income Taxes

 

The provision for income taxes related to continuing operations was $0.7 million and $0.8 million for the three months ended June 30, 2012 and 2011, respectively, and $1.3 million and $1.5 million for the six months ended June 30, 2012 and 2011, respectively. We determined that deferred tax assets in excess of reversing tax liabilities were not likely to be realized and we have recorded a valuation allowance on net deferred tax assets.  Our effective tax rate for continuing operations was 6.4% and 26.0% for the three months ended June 30, 2012 and 2011, respectively, and 9.3% and (10.3)% for the six months ended June 30, 2012 and 2011, respectively.  Our tax expense related primarily to tax contingences, tax to the government of the United Kingdom and state income taxes.  As of June 30, 2012, we are continuing to offset our net deferred tax asset by a full valuation allowance.

 

11. Stock-Based Compensation

 

On May 2, 2012, our stockholders approved a proposed 3,000,000 share increase in the shares available for issuance under our 2008 Omnibus Incentive Plan, as amended (the “2008 Plan”).

 

On March 16, 2012, the Compensation Committee of our Board of Directors made grants of performance units for the period 2012-2014 and of restricted stock units (with an aggregate dollar value of approximately $3.7 million) to five executive officers and 55 other employees, with the number of performance and restricted stock units to be determined based on the closing price of our common stock on the date our stockholders approved the proposed 3,000,000 share increase in the shares available for issuance under the 2008 Plan. An aggregate of 957,442 performance units at maximum achievement and 523,465 restricted stock units were granted based on the closing price of our common stock of $7.13 per share on May 2, 2012.

 

The performance unit awards are based:

 

·                  60% on achievement of adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) targets for each year allocated 25% for 2012, 25% for 2013 and 50% for 2014 (with the 2012 adjusted EBITDA targets having been fixed on March 16, 2012 and the 2013 and 2014 adjusted EBITDA targets to be fixed within the first 90 days of those years); and

 

·                  40% on achievement of relative total stockholder return (“TSR”) goals measured against our peer group companies over the three-year period ending December 31, 2014 (with maximum achievement at the 80th percentile, target achievement at the 50th percentile and threshold achievement at the 40th percentile).

 

The performance units are further subject to continued employment through March 16, 2015.

 

The restricted stock units vest one-third on each of March 16, 2013, 2014 and 2015, subject to continued employment on the applicable vesting date.

 

We recorded a total of $35,000 in stock compensation expense with regard to the 2012 adjusted EBITDA performance units in the quarter ended June 30, 2012 based upon the probable outcome of the adjusted EBITDA performance condition for 2012.  For accounting purposes, May 2, 2012 is deemed the grant date for the 2012 adjusted EBITDA based performance units.  As of June 30, 2012, the unrecognized compensation expense for the 2012 adjusted EBITDA performance units totaled $0.6 million, and is expected to be recognized over the remaining service period of 2.75 years, subject to any change in the probable outcome of the performance condition which is evaluated quarterly.  No compensation expense for the 2013 and 2014 adjusted EBITDA performance units was recorded in the quarter ended June 30, 2012 because the grant dates for these awards are not deemed to occur until the respective adjusted EBITDA targets for these performance units have been established. Once the adjusted EBITDA targets for 2013 and 2014 are established (within the first 90 days of those years), the 2013 and 2014 adjusted EBITDA performance units will be accounted for using the same methodology as applied to the 2012 adjusted EBITDA performance units.

 

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Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

We recorded a total of $0.1 million in stock compensation expense with regard to the TSR based performance units in the quarter ended June 30, 2012 based upon the probable outcome of the TSR performance condition.  For accounting purposes, May 2, 2012 is deemed the grant date for the TSR based performance units.  As of June 30, 2012, the unrecognized compensation expense for these awards totaled $1.5 million, and is expected to be recognized over the remaining service period of 2.75 years, subject to any change in the probable outcome of the performance condition which is evaluated quarterly.

 

We recorded a total of $0.2 million in stock compensation expense with regard to the restricted stock units in the quarter ended June 30, 2012.  For accounting purposes, May 2, 2012 is deemed the grant date for the restricted stock units.  As of June 30, 2012, the unrecognized compensation expense for these awards totaled $3.5 million, and is expected to be recognized over the remaining service period of 2.75 years.

 

On March 16, 2012, the Compensation Committee also established the 2012 adjusted EBITDA performance criteria for the 2012 portion (160,430 performance units at maximum) of the 2011-2013 adjusted EBITDA performance units that were granted in 2011.  We recorded a total of $0.1 million in stock compensation expense with regard to the 2012 adjusted EBITDA based performance units in the three and six months ended June 30, 2012 based upon the probable outcome of the 2012 adjusted EBITDA performance condition.  As of June 30, 2012, the unrecognized compensation expense for these units totalled $0.6 million, and is expected to be recognized over the remaining service period of 1.9 years, subject to any change in the probable outcome of the performance condition which is evaluated quarterly.

 

In 2012, we have granted two employees non-qualified stock options to purchase 70,000 shares of common stock at a grant price of $7.74.  One-third of the options vest yearly beginning in 2013.  We also granted 111,303 shares of restricted stock to 11 employees at a grant date fair values ranging from $6.22 to $7.74.  The grants vest yearly over three years beginning in 2013.

 

As part of the 2012 non-employee directors’ compensation, 69,984 restricted stock units were granted to our six non-employee directors.  One-quarter of the restricted stock units vested immediately with the remainder to vest quarterly during 2012.

 

Through June 30, 2012, 512,496 stock options have been exercised and 120,543 shares of restricted stock and 149,048 restricted stock units vested.

 

12. Commitments and Contingencies

 

Guarantees

 

We have provided operating deficit guarantees to certain venture lenders, whereby after depletion of established reserves, we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee and have provided guarantees to certain ventures to fund operating shortfalls. The terms of the guarantees generally match the terms of the underlying venture debt and generally range from three to five years, to the extent we are able to refinance the venture debt. Fundings under the operating deficit guarantees and debt repayment guarantees are generally recoverable either out of future cash flows of the venture or from proceeds of the sale of communities.

 

Excluding the impact of our senior living condominium project, which is accounted for under the profit sharing method, the maximum potential amount of future fundings for outstanding guarantees, the carrying amount of the liability for expected future fundings at June 30, 2012 was zero and there were no fundings in 2012.

 

Senior Living Condominium and Assisted Living/Amenities Project

 

In 2006, we sold a majority interest in two separate ownership entities to two separate partners related to a project consisting of a residential condominium component and an assisted living/amenities component with each component owned by a different venture.  In connection with the equity sale and related financings, we undertook certain obligations to support the operations of the project for an extended period of time.  We account for the condominium and assisted living/amenities ventures under the profit-sharing method of accounting, and our liability carrying value at June 30, 2012 was $11.8 million for the two ventures.  We recorded losses of $0.5 million and $1.7 million for the three months ended June 30, 2012 and 2011, respectively, and $4.0 million and $4.8 million for the six months ended June 30, 2012 and 2011, respectively.

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Condominium Venture

 

We are obligated to our partner on the condominium venture to fund operating shortfalls.  We have funded $2.2 million under the guarantee through June 30, 2012, of which $0.1 million was funded in 2012.  In addition, we are required to fund sales and marketing costs associated with the sale of the condominiums.  We have experienced lower sales and pricing than had been forecasted and we believe the partners have no remaining equity in the condominium project.  Accordingly, we have informed our partner that we do not intend to fund future operating shortfalls. As of June 30, 2012, the loan of $117.3 million for the residential condominium venture was in default.  We have accrued $3.5 million in default interest, late fees and other lender-related fees relating to these loans.  In February 2012, the lenders for the residential condominium venture commenced legal proceedings necessary to foreclose on the assets of the residential condominium venture.  Without terminating the foreclosure proceedings, the lenders sold their interest in the debt to a new lender in June 2012.  The debt remains in default and we are in discussions with the new lender.  We have no basis in the assets.

 

Assisted Living/Amenities Venture

 

In June 2012, the assisted living/amenities venture refinanced its existing mortgage financing with new mortgage financing provided by Eagle Bank.  The new loan has a principal amount of $26.0 million, a floor interest rate of 5.5% and a term of three years.  As a result of the refinancing, we have been released from our obligation to fund operating deficits and to pay default interest previously accrued by us through December 31, 2011 totaling approximately $2.4 million to the prior mortgage lender.  Also, in connection with the refinancing, we funded approximately $6.0 million on behalf of the venture, leading to a modification of joint venture terms.  Return of our new funding will have priority over existing equity and the venture partner’s total return will be capped at its capital contribution of $6.5 million.  Return of outstanding operating deficit and cost overruns of approximately $8.2 million to us will be subordinate to the return of capital of both venture partners.

 

Other

 

Generally, the financing obtained by our ventures is non-recourse to the venture members, with the exception of the debt repayment guarantees discussed above. However, we have entered into guarantees with the lenders with respect to acts which we believe are in our control, such as fraud or voluntary bankruptcy of the venture. If such acts were to occur, the full amount of the venture debt could become recourse to us. The combined amount of venture debt underlying these guarantees is approximately $1.3 billion at June 30, 2012. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

 

To the extent that a third party fails to satisfy an obligation with respect to two continuing care retirement communities we manage, we would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of entrance fees as new residents enter the communities. At June 30, 2012, the remaining liability under this obligation is $28.9 million.  We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

 

Legal Proceedings

 

Purnell and Miller Lawsuits

 

On May 14, 2010, Plaintiff LaShone Purnell filed a lawsuit on behalf of herself and others similarly situated in the Superior Court of the State of California, Orange County, against Sunrise Senior Living Management, Inc., captioned LaShone Purnell as an individual and on behalf of all employees similarly situated v. Sunrise Senior Living Management, Inc. and Does 1 through 50, Case No. 30-2010-00372725 (Orange County Superior Court). Plaintiff’s complaint was styled as a class action and alleged that Sunrise failed to properly schedule the purported class of care givers and other related positions so that they would be able to take meal and rest breaks as provided for under California law. The complaint asserted claims for: (1) failure to pay overtime wages; (2) failure to provide meal periods; (3) failure to provide rest periods; (4) failure to pay wages upon ending employment; (5) failure to keep accurate payroll records; (6) unfair business practices; and (7) unfair competition. Plaintiff sought unspecified compensatory damages, statutory penalties provided for under the California Labor Code, injunctive relief, and costs and attorneys’ fees. On June 17, 2010, Sunrise removed this action to the United States District Court for the Central District of California (Case No. SACV 10-897 CJC (MLGx)). On July 16, 2010, plaintiff filed a motion to remand the case to state court, which the Court denied. The parties completed briefing on class certification, and the Court held a hearing on plaintiff’s motion for class certification on January 23, 2012. On February 27, 2012, the Court denied plaintiff’s motion for class certification.  On July 18, 2012, pursuant to the parties Joint Stipulation of Dismissal, all of plaintiff’s individual claims were dismissed with prejudice, thereby disposing of the action.

 

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Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

In addition, on January 31, 2012, the same counsel filed what that counsel characterized as a related lawsuit captioned Cheryl Miller, an individual on behalf of herself and others similarly situated v. Sunrise Senior Living Management, Inc., a Virginia corporation; and Does 1 through 100, Case No. BC478075 in the Superior Court of the State of California, County of Los Angeles.  On or about February 8, 2012, Plaintiff Cheryl Miller filed a First Amended Complaint (“FAC”), which was served on Sunrise on February 15, 2012.  Plaintiff’s FAC was styled as a class action and alleged that Sunrise failed to pay all wages owed to employees as a result of allegedly improper “rounding” of time to the nearest quarter hour and that Sunrise failed to comply with the California Labor Code by issuing “debit cards” to pay wages.  The FAC asserted claims for: (1) failure to pay all wages due to illegal rounding; (2) unfair, unlawful and fraudulent business practices; (3) failure to provide accurate pay stubs, (4) failure to pay wages upon ending employment; (5) failure to comply with Labor Code section 212 regarding payment of wages, and (6) seeking penalties under the California Labor Code Private Attorney Generals Act. Plaintiff sought unspecified compensatory damages, statutory penalties provided for under the California Labor Code, injunctive relief, and costs and attorneys’ fees.  On March 23, 2012, Plaintiff filed a Notice of Dismissal with Prejudice pursuant to Federal Rule of Civil Procedure 41(a) which dismissed all individual claims with prejudice and the class action allegations without prejudice thereby disposing of the action.

 

Five Star Lawsuit

 

On July 10, 2008, Five Star Quality Care, Inc. filed a complaint against Sunrise (and other Sunrise-related entities and affiliates, as well as certain executives thereof) in Superior Court for the Commonwealth of Massachusetts, Five Star Quality Care, Inc. v. Sunrise Senior Living, Inc., et al., Civ. A. No. MICV2008-02641.  In that action, Five Star Quality Care alleged, among other things, that Sunrise improperly retained payments made by communities owned by Five Star Quality Care in connection with the participation of such communities in the insurance and health benefit programs.  The complaint asserted claims for (1) an accounting, (2) conversion, (3) aiding and abetting conversion, (4) unjust enrichment, (5) breach of contract, (6) breach of fiduciary duty, and (7) violation of Mass. Gen Law Chapter 93A.  The complaint did not specify a quantum of damages and sought an accounting, actual damages, treble damages, interest, costs and attorneys’ fees.  Sunrise filed a motion for summary judgment on all claims asserted, which the Court denied in a written decision dated August 23, 2011.  The Court also denied Five Star Quality Care, Inc.’s motion for partial summary judgment on its conversion claim.

 

On November 15, 2010, subsidiaries of Five Star Quality Care filed a new action, FS Tenant Pool I Trust, et al. v. Sunrise Senior Living, Inc., et al., Civ. A. No. MICV2010-04318, in Superior Court for the Commonwealth of Massachusetts, in which they asserted claims against Sunrise similar to those asserted by Five Star Quality Care.

 

The Court consolidated the two actions and held a pretrial conference on December 6, 2011.  On May 29, 2012, the parties signed a Settlement and Release Agreement, pursuant to which Sunrise paid Five Star Quality Care $4.0 million to settle and dismiss the litigation.  The action was disposed upon settlement.

 

Subpoena From the U.S. Attorney’s Office

 

The U.S. Attorney’s Office for the Eastern District of Pennsylvania has issued a subpoena to us for certain documents relating to resident care at one of our Pennsylvania communities.  This community has experienced significant publicity due to an incident occurring in the spring of 2011.  We are cooperating with the U.S. Attorney’s Office and are in the process of producing the requested documents.

 

Other Pending Lawsuits and Claims

 

In addition to the matters described above, we are involved in various lawsuits and claims and regulatory and other governmental audits and investigations arising in the normal course of business. In the opinion of management, although the outcomes of these other suits and claims are uncertain, in the aggregate they are not expected to have a material adverse effect on our business, financial condition, and results of operations.

 

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Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

13. Discontinued Operations

 

Discontinued operations consists of businesses and communities sold prior to 2012.  The following amounts related to those communities and businesses that have been segregated from continuing operations and reported as discontinued operations (in thousands):

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenue

 

$

0

 

$

627

 

$

0

 

$

1,480

 

Expenses

 

(199

)

(871

)

(96

)

(2,757

)

Gain on sale

 

124

 

27

 

440

 

2,348

 

(Loss) income from discontinued operations

 

$

(75

)

$

(217

)

$

344

 

$

1,071

 

 

14. Net Income (Loss) per Common Share

 

The following table summarizes the computation of basic and diluted net income (loss) per share amounts presented in the accompanying consolidated statements of operations (in thousands, except per share data):

 

 

 

For the Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Income (loss) attributable to common shareholders:

 

 

 

 

 

Income before discontinued operations, net of noncontrolling interests

 

$

9,665

 

$

1,495

 

Loss from discontinued operations

 

(75

)

(217

)

Net income

 

$

9,590

 

$

1,278

 

 

 

 

 

 

 

Weighted-average shares outstanding - basic

 

57,612

 

56,818

 

Effect of dilutive securities - Employee stock options, restricted stock, restricted units and performance units

 

1,870

 

2,506

 

 

 

59,482

 

59,324

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

Income before discontinued operations, net of noncontrolling interests

 

$

0.17

 

$

0.02

 

Loss from discontinued operations

 

0.00

 

0.00

 

Net income per share attributable to common shareholders

 

$

0.17

 

$

0.02

 

 

 

 

 

 

 

Diluted net income (loss) per common share

 

 

 

 

 

Income before discontinued operations, net of noncontrolling interests

 

$

0.16

 

$

0.02

 

Loss from discontinued operations

 

0.00

 

0.00

 

Net income per share attributable to common shareholders

 

$

0.16

 

$

0.02

 

 

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Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

For the Six Months Ended

 

 

 

 

June 30,

 

 

 

2012

 

2011

 

Income (loss) attributable to common shareholders:

 

 

 

 

 

Income (loss) before discontinued operations, net of noncontrolling interests

 

$

11,284

 

$

(17,498

)

Income from discontinued operations

 

344

 

1,071

 

Net income (loss)

 

$

11,628

 

$

(16,427

)

 

 

 

 

 

 

Weighted-average shares outstanding - basic

 

57,343

 

56,467

 

Effect of dilutive securities - Employee stock options, restricted stock, restricted units and performance units

 

2,128

 

0

 

 

 

59,471

 

56,467

 

 

 

 

 

 

 

Basic net income (loss) per common share

 

 

 

 

 

Income (loss) before discontinued operations, net of noncontrolling interests

 

$

0.19

 

$

(0.31

)

Income from discontinued operations

 

0.01

 

0.02

 

Net income (loss) per share attributable to common shareholders

 

$

0.20

 

$

(0.29

)

 

 

 

 

 

 

Diluted net income (loss) per common share

 

 

 

 

 

Income (loss) before discontinued operations, net of noncontrolling interests

 

$

0.19

 

$

(0.31

)

Income from discontinued operations

 

0.01

 

0.02

 

Net income (loss) per share attributable to common shareholders

 

$

0.20

 

$

(0.29

)

 

Options and restricted stock are included under the treasury stock method to the extent they are dilutive.  Shares issuable upon exercise of stock options of 1,922,152 for the six months ended June 30, 2011 have been excluded from the computation because the effect of their inclusion would be anti-dilutive.  Shares issuable upon the conversion of junior subordinated convertible notes are excluded.

 

15. Information about Sunrise’s Segments

 

We have three operating segments: North American Management, Consolidated Communities and United Kingdom Management.  The operations of the communities we own or manage are reviewed on a community by community basis by our key decision makers.  The communities managed for third parties, communities in ventures or communities that are consolidated but held in ventures or variable interest entities, are aggregated by location into either our North American Management segment or our United Kingdom Management segment.  Communities that are wholly owned or leased are included in our Consolidated Communities segment.

 

North American Management includes the results from the management of third party and venture senior living communities, including six communities in New York owned by a venture but whose operations are included in our consolidated financial statements, a community owned by a variable interest entity and a community owned by a venture which we consolidate, in the United States and Canada.

 

Consolidated Communities includes the results from the operation of wholly-owned and leased Sunrise senior living communities in the United States and Canada, excluding allocated management fees from our North American Management segment of $4.6 million and $2.8  million for the three months ended June 30, 2012 and 2011, respectively, and $8.5 million and $5.0 million for the six months ended June 30, 2012 and 2011, respectively.  Total assets were $985.2 million and $649.5 million as of June 30, 2012 and December 31, 2011, respectively.

 

United Kingdom Management includes the results from management of Sunrise senior living communities in the United Kingdom owned in ventures.

 

We have a community support office located in McLean, Virginia, with a smaller regional center located in the U.K.  Our community support office provides centralized operational functions.

 

23



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Segment results are as follows (in thousands):

 

 

 

Three Months Ended June 30, 2012

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

21,019

 

$

0

 

$

4,321

 

$

0

 

$

25,340

 

Buyout fees

 

250

 

0

 

0

 

0

 

250

 

Resident fees

 

17,414

 

118,285

 

0

 

0

 

135,699

 

Ancillary fees

 

8,368

 

0

 

0

 

0

 

8,368

 

Professional fees from development, marketing and other

 

0

 

0

 

53

 

225

 

278

 

Reimbursed costs incurred on behalf of managed communities

 

165,857

 

0

 

1,951

 

0

 

167,808

 

Total operating revenues

 

212,908

 

118,285

 

6,325

 

225

 

337,743

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

10,352

 

85,900

 

0

 

0

 

96,252

 

Community lease expense

 

4,943

 

14,244

 

0

 

0

 

19,187

 

Depreciation and amortization

 

1,139

 

9,362

 

0

 

963

 

11,464

 

Ancillary expenses

 

7,681

 

0

 

0

 

0

 

7,681

 

General and administrative

 

0

 

0

 

3,242

 

21,985

 

25,227

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

707

 

707

 

Provision for doubtful accounts

 

310

 

925

 

0

 

0

 

1,235

 

Impairment of long-lived assets

 

0

 

15,589

 

0

 

719

 

16,308

 

Costs incurred on behalf of managed communities

 

165,211

 

0

 

1,968

 

0

 

167,179

 

Total operating expenses

 

189,636

 

126,020

 

5,210

 

24,374

 

345,240

 

Income (loss) from operations

 

$

23,272

 

$

(7,735

)

$

1,115

 

$

(24,149

)

$

(7,497

)

 

 

 

Three Months Ended June 30, 2011

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

20,791

 

$

0

 

$

3,609

 

$

0

 

$

24,400

 

Resident fees

 

16,398

 

94,285

 

0

 

0

 

110,683

 

Ancillary fees

 

7,513

 

0

 

0

 

0

 

7,513

 

Professional fees from development, marketing and other

 

0

 

0

 

368

 

154

 

522

 

Reimbursed costs incurred on behalf of managed communities

 

176,517

 

0

 

1,748

 

0

 

178,265

 

Total operating revenues

 

221,219

 

94,285

 

5,725

 

154

 

321,383

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

9,977

 

68,745

 

0

 

0

 

78,722

 

Community lease expense

 

4,540

 

14,568

 

0

 

0

 

19,108

 

Depreciation and amortization

 

635

 

5,766

 

0

 

2,293

 

8,694

 

Ancillary expenses

 

6,968

 

0

 

0

 

0

 

6,968

 

General and administrative

 

0

 

0

 

2,108

 

25,456

 

27,564

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

635

 

635

 

Provision for doubtful accounts

 

141

 

298

 

0

 

(357

)

82

 

Impairment of long-lived assets

 

0

 

4,460

 

0

 

895

 

5,355

 

Gain on financial guarantees and other contracts

 

(12

)

0

 

0

 

0

 

(12

)

Costs incurred on behalf of managed communities

 

177,502

 

0

 

1,792

 

0

 

179,294

 

Total operating expenses

 

199,751

 

93,837

 

3,900

 

28,922

 

326,410

 

Income (loss) from operations

 

$

21,468

 

$

448

 

$

1,825

 

$

(28,768

)

$

(5,027

)

 

24



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

Six Months Ended June 30, 2012

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

41,427

 

$

0

 

$

8,228

 

$

0

 

$

49,655

 

Buyout fees

 

250

 

0

 

0

 

0

 

250

 

Resident fees

 

34,455

 

230,400

 

0

 

0

 

264,855

 

Ancillary fees

 

16,294

 

0

 

0

 

0

 

16,294

 

Professional fees from development, marketing and other

 

0

 

0

 

106

 

372

 

478

 

Reimbursed costs incurred on behalf of managed communities

 

338,537

 

0

 

3,344

 

0

 

341,881

 

Total operating revenues

 

430,963

 

230,400

 

11,678

 

372

 

673,413

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

20,991

 

166,808

 

0

 

0

 

187,799

 

Community lease expense

 

9,539

 

28,884

 

0

 

0

 

38,423

 

Depreciation and amortization

 

2,360

 

17,559

 

0

 

2,303

 

22,222

 

Ancillary expenses

 

15,139

 

0

 

0

 

0

 

15,139

 

General and administrative

 

0

 

0

 

6,425

 

47,443

 

53,868

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

1,290

 

1,290

 

Provision for doubtful accounts

 

649

 

1,323

 

0

 

25

 

1,997

 

Impairment of long-lived assets

 

0

 

15,589

 

0

 

1,274

 

16,863

 

Costs incurred on behalf of managed communities

 

338,282

 

0

 

3,392

 

0

 

341,674

 

Total operating expenses

 

386,960

 

230,163

 

9,817

 

52,335

 

679,275

 

Income (loss) from operations

 

$

44,003

 

$

237

 

$

1,861

 

$

(51,963

)

$

(5,862

)

 

 

 

Six Months Ended June 30, 2011

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

41,541

 

$

0

 

$

7,073

 

$

0

 

$

48,614

 

Resident fees

 

32,085

 

180,897

 

0

 

0

 

212,982

 

Ancillary fees

 

15,110

 

0

 

0

 

0

 

15,110

 

Professional fees from development, marketing and other

 

0

 

0

 

441

 

404

 

845

 

Reimbursed costs incurred on behalf of managed communities

 

360,437

 

0

 

3,693

 

0

 

364,130

 

Total operating revenues

 

449,173

 

180,897

 

11,207

 

404

 

641,681

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

19,884

 

133,327

 

0

 

0

 

153,211

 

Community lease expense

 

8,737

 

29,068

 

0

 

0

 

37,805

 

Depreciation and amortization

 

1,270

 

10,074

 

0

 

4,680

 

16,024

 

Ancillary expenses

 

13,972

 

0

 

0

 

0

 

13,972

 

General and administrative

 

0

 

0

 

4,884

 

55,069

 

59,953

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

1,042

 

1,042

 

Provision for doubtful accounts

 

691

 

433

 

0

 

400

 

1,524

 

Impairment of long-lived assets

 

0

 

4,460

 

0

 

895

 

5,355

 

Gain on financial guarantees and other contracts

 

(12

)

0

 

0

 

0

 

(12

)

Costs incurred on behalf of managed communities

 

361,907

 

0

 

3,771

 

0

 

365,678

 

Total operating expenses

 

406,449

 

177,362

 

8,655

 

62,086

 

654,552

 

Income (loss) from operations

 

$

42,724

 

$

3,535

 

$

2,552

 

$

(61,682

)

$

(12,871

)

 

25



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

16. Capital Structure

 

The following table details changes in stockholders’ equity, including changes in equity attributable to common shareholders and changes in equity attributable to the noncontrolling interests.

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Equity

 

 

 

 

 

Shares of

 

 

 

Additional

 

 

 

Other

 

Attributable to

 

 

 

 

 

Common

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Noncontrolling

 

Total

 

(in thousands)

 

Stock

 

Stock

 

Capital

 

Loss

 

Income(Loss)

 

Interests

 

Equity

 

Balance at Dececember 31, 2011

 

57,640

 

$

576

 

$

487,277

 

$

(385,294

)

$

(5,932

)

$

5,266

 

$

101,893

 

Net income

 

0

 

0

 

0

 

11,628

 

0

 

1,390

 

13,018

 

Foreign currency translation, net of tax

 

0

 

0

 

0

 

0

 

45

 

0

 

45

 

Sunrise’s share of investee’s other comprehensive income

 

0

 

0

 

0

 

0

 

220

 

0

 

220

 

Unrealized gain on investments

 

0

 

0

 

0

 

0

 

120

 

0

 

120

 

Unrealized loss on interest rate swap

 

0

 

0

 

0

 

0

 

(1,075

)

0

 

(1,075

)

Issuance of restricted stock

 

249

 

3

 

(3

)

0

 

0

 

0

 

0

 

Exercise of stock options

 

513

 

6

 

711

 

0

 

0

 

0

 

717

 

Forfeiture of stock

 

(81

)

(1

)

1

 

0

 

0

 

0

 

0

 

Shares surrendered for taxes

 

(70

)

(1

)

(468

)

0

 

0

 

0

 

(469

)

Stock compensation expense

 

0

 

0

 

4,793

 

0

 

0

 

0

 

4,793

 

Distributions to noncontrolling interests

 

0

 

0

 

0

 

0

 

0

 

(711

)

(711

)

Balance at June 30, 2012

 

58,251

 

$

583

 

$

492,311

 

$

(373,666

)

$

(6,622

)

$

5,945

 

$

118,551

 

 

17. Supplemental Cash Flow Information

 

Interest paid was $12.5 million and $2.9 million for the six months ended June 30, 2012 and 2011, respectively.  No interest was capitalized in either 2012 or 2011.  Income tax payments to the United Kingdom for the six months ended June 30, 2012 and 2011 were approximately $55,738 and $0.3 million, respectively.  Domestic tax refunds or payments were not significant.

 

On March 20, 2012, a partner in two of our existing joint ventures transferred their ownership interest in two venture subsidiaries to us for no cash consideration and $118.2 million of debt was assumed (refer to Note 4).

 

18. Variable Interest Entities

 

GAAP requires that a variable interest entity (“VIE”), defined as an entity subject to consolidation according to the provisions of the ASC Consolidation Topic, must be consolidated by the primary beneficiary.  The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could both potentially be significant to the VIE.  We perform ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE.  At June 30, 2012, we are the primary beneficiary of one VIE and therefore consolidate that entity.

 

VIEs where Sunrise is the Primary Beneficiary

 

We have a management agreement with a not-for-profit corporation established to own and operate a continuing care retirement community (“CCRC”) in New Jersey.  This entity is a VIE.  The CCRC contains a 60-bed skilled nursing unit, a 32-bed assisted living unit, a 27-bed Alzheimer’s care unit and 252 independent living apartments.  We have included $15.6 million and $16.1 million, respectively, of net property and equipment and debt of $21.4 million and $21.8 million, of which $1.4 million was in default as of June 30, 2012, in our June 30, 2012 and December 31, 2011 consolidated balance sheets, respectively, for this entity.  The majority of the debt is bonds that are secured by a pledge of and lien on revenues, a letter of credit with the Bank of New York and by a leasehold mortgage and security agreement.  We guarantee the letter of credit. Proceeds from the bonds’ issuance were used to acquire and renovate the CCRC.  As of June 30, 2012 and December 31, 2011, we guaranteed $20.0 million and $20.4 million, respectively, of the bonds.  Management fees earned by us were $0.2 million for both the three months ended June 30, 2012 and 2011 and $0.4 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.  The management agreement also provides for

 

26



Table of Contents

 

Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

reimbursement to us for all direct cost of operations.  Payments to us for direct operating expenses were $3.1 million and $3.0 million for the three months ended June 30, 2012 and 2011, respectively, and $5.9 million and $5.8 million for the six months ended June 30, 2012 and 2011, respectively.  The entity obtains professional and general liability coverage through our affiliate, Sunrise Senior Living Insurance, Inc.  The entity incurred approximately $46,500 and $34,515 for the three months ended June 30, 2012 and 2011, respectively, and $0.1 million for both the six months ended June 30, 2012 and 2011, related to the professional and general liability coverage.  The entity also has a ground lease with us.  Rent expense is recognized on a straight-line basis at $0.7 million per year.  Deferred rent relating to this agreement was $7.2 million and $7.0 million at June 30, 2012 and December 31, 2011, respectively.  These amounts are eliminated in our consolidated financial statements.

 

VIEs Where Sunrise Is Not the Primary Beneficiary but Holds a Significant Variable Interest in the VIEs

 

In July 2007, we formed a venture with a third party which purchased 17 communities from our first U.K. development venture.  The entity has £437.9 million ($683.8 million) of debt of which $627.5 million is in default.  This debt is non-recourse to us.  Our equity investment in the venture is zero at June 30, 2012.  The line item “Due from unconsolidated communities” on our consolidated balance sheet as of June 30, 2012 contains $1.7 million due from the venture.  Our maximum exposure to loss is $1.7 million.  We calculated the maximum exposure to loss as the maximum loss (regardless of probability of being incurred) that we could be required to record in our consolidated statements of operations as a result of our involvement with the VIE.

 

This VIE is a limited partnership in which the general partner (“GP”) is owned by our venture partner and us in proportion to our equity investment of 90% and 10%, respectively.  The GP is supervised and managed under a board of directors and all of the powers of the GP are vested in the board of directors.  The board of directors is made up of six directors.  Four directors are appointed by our venture partner and two directors are appointed by us.  Actions that require the approval of the board of directors include approval and amendment of the annual operating budget.  Material decisions, such as the sale of any facility, require approval by 75% of the board of directors.  We have determined that the board of directors has power over financing decisions, capital decisions and operating decisions.  These are the activities that most impact the entity’s economic performance, and therefore, neither equity holder has power over the venture.  We have determined that power is shared within this venture as no one partner has the ability to unilaterally make significant decisions and therefore we are not the primary beneficiary.

 

In 2007, we formed another venture with a third party which owned 13 communities.  In August 2011, the venture transferred ownership of six communities to another entity and the venture was deemed a VIE, in which we were not the primary beneficiary.  In March 2012, the venture transferred ownership of three of those communities to us (refer to Note 4).  As a result of this transaction, the venture is no longer a VIE.  In May 2012, the venture sold its remaining four communities to Ventas, Inc. (refer to Note 5).

 

27



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read together with the information contained in our consolidated financial statements, including the related notes, and other financial information appearing elsewhere herein. This management’s discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Although we believe the expectations reflected in such forward looking statements are based on reasonable assumptions, there can be no assurance that our expectations will be realized. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to:

 

·      the risk that we may not be able to successfully execute our plan to sell certain assets mortgaged pursuant to our German restructure transaction or the net sale proceeds of the mortgaged North American properties may not be sufficient to pay the minimum amount guaranteed by Sunrise to the lenders that are party to the German restructure transactions when such payment is required in October 2012;

 

·      the risk that we may be unable to reduce expenses and generate positive operating cash flows;

 

·      the risk of future obligations to fund guarantees to some of our ventures and lenders to the ventures;

 

·      the risk of further write-downs or impairments of our assets;

 

·      the risk that we are unable to obtain waivers, cure or reach agreements with respect to existing or future defaults under our loan, venture and construction agreements;

 

·      the risk that we will be unable to repay, extend or refinance our indebtedness as it matures, or that we will not comply with loan covenants;

 

·      the risk that our ventures will be unable to repay, extend or refinance their indebtedness as it matures, or that they will not comply with loan covenants creating a foreclosure risk to our venture interest and a termination risk to our management agreements;

 

·      the risk that we are unable to continue to recognize income from refinancings and sales of communities by ventures;

 

·      the risk of declining occupancies in existing communities or slower than expected leasing of newer communities;

 

·      the risk that we are unable to extend leases on our operating properties at expiration;

 

·      the risk that some of our management agreements, subject to early termination provisions based on various performance measures, could be terminated due to failure to achieve the performance measures;

 

·      the risk that our management agreements can be terminated in certain circumstances due to our failure to comply with the terms of the management agreements or to fulfill our obligations thereunder;

 

·      the risk that ownership of the communities we manage is heavily concentrated in a limited number of business partners;

 

·      the risk that our current and future investments in ventures could be adversely affected by our lack of sole decision-making authority, our reliance on venture partners’ financial condition, any disputes that may arise between us and our venture partners and our exposure to potential losses from the actions of our venture partners;

 

·      the risk related to operating international communities that could adversely affect those operations and thus our profitability and operating results;

 

·      the risk from competition and our response to pricing and promotional activities of our competitors;

 

·      the risk that liability claims against us in excess of insurance limits could adversely affect our financial condition and results of operations including publicity surrounding some claims that may damage our reputation, which would not be covered by insurance;

 

28



Table of Contents

 

·      the risk of not complying with government regulations;

 

·      the risk of new legislation or regulatory developments;

 

·      the risk of changes in interest rates;

 

·      the risk of unanticipated expenses;

 

·      the risks of further downturns in general economic conditions including, but not limited to, financial market performance, downturns in the housing market, consumer credit availability, interest rates, inflation, energy prices, unemployment and consumer sentiment about the economy in general;

 

·      the risks associated with the ownership and operations of assisted living and independent living communities;

 

and other risk factors detailed in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2012, as amended on March 15, 2012, and as may be amended or supplemented in our Form 10-Q filings.  We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Unless the context suggests otherwise, references herein to “Sunrise,” the “Company,” “we,” “us” and “our” mean Sunrise Senior Living, Inc. and our consolidated subsidiaries.

 

Overview

 

Operating Communities and Segments

 

We are a Delaware corporation and a provider of senior living services in the United States, Canada and the United Kingdom.

 

At June 30, 2012, we operated 307 communities, including 265 communities in the United States, 15 communities in Canada and 27 communities in the United Kingdom, with a total unit capacity of approximately 29,839.

 

The following table summarizes our portfolio of operating communities:

 

 

 

As of

 

Percent

 

 

 

June 30,

 

Change

 

 

 

 

 

 

 

2012 vs.

 

 

 

2012

 

2011

 

2011

 

Total communities

 

 

 

 

 

 

 

Owned

 

21

 

23

 

-8.7

%

Leased (1)

 

26

 

26

 

0.0

%

Variable Interest Entity

 

1

 

1

 

0.0

%

Consolidated New York communities leased from a venture

 

6

 

6

 

0.0

%

Consolidated venture

 

1

 

1

 

0.0

%

Unconsolidated ventures

 

98

 

115

 

-14.8

%

Managed

 

154

 

144

 

6.9

%

Total

 

307

 

316

 

-2.8

%

Unit capacity

 

29,839

 

30,962

 

-3.6

%

 


(1) Includes 10 communities whose leases are being terminated and are in the process of being transitioned to a new manager.

 

We have three operating segments: North American Management, Consolidated Communities and United Kingdom Management.  The operations of the communities we own or manage are reviewed on a community by community basis by our key decision makers.  The communities managed for third parties, communities in ventures or communities that are consolidated but held in ventures or

 

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variable interest entities, are aggregated by location into either our North American Management segment or our United Kingdom Management segment.  Communities that are wholly owned or leased are included in our Consolidated Communities segment.

 

North American Management includes the results from the management of third party and venture senior living communities, including six communities in New York owned by a venture but whose operations are included in our consolidated financial statements, a community owned by a variable interest entity and a community owned by a venture which we consolidate, in the United States and Canada.

 

Consolidated Communities includes the results from the operation of wholly-owned and leased Sunrise senior living communities in the United States and Canada.

 

United Kingdom Management includes the results from management of Sunrise senior living communities in the United Kingdom owned in ventures.

 

2012 Developments

 

Overview

 

In 2012, we expect to continue to focus on (a) operating high-quality assisted living and memory care communities in the United States, Canada and the United Kingdom; (b) increasing occupancy and improving the operating efficiency of our communities; (c) restructuring certain of our venture, leasing and lender relationships to further stabilize our revenue stream and cash flow; (d) seeking strategic investments in attractive real estate opportunities; (e) improving the operating efficiency of our corporate operations; and  (f) reducing our operational and financial risk.

 

Asset Purchase and Transfers from Certain Ventures and Subsequent Contribution of Those Assets to a New Venture

 

Santa Monica Purchase

 

On February 28, 2012, we closed on a purchase and sale agreement with our venture partner who owned an 85%  membership interest (the “Partner Interest”) in Santa Monica AL, LLC (“Santa Monica”).   We owned the remaining 15% membership interest.  Pursuant to the purchase and sale agreement, we purchased the Partner Interest for an aggregate purchase price of $16.2 million.  Santa Monica indirectly owned one senior living facility located in Santa Monica, California.  As a result of the transaction, the assets, liabilities and operating results of Santa Monica were consolidated in our financial results beginning February 28, 2012 until June 29, 2012 (see below).

 

We acquired the assets in stages.  The fair value of our 15% equity interest immediately prior to the acquisition of the Partner Interest was approximately $2.9 million based on the estimated fair value of approximately $19.5 million for the total underlying equity in the venture.  The estimated fair value of the equity was calculated based on the acquisition date fair value of the assets and working capital of approximately $32.9 million less the payoff amount of the debt of $13.4 million.  As the carrying value of our investment in the venture prior to the acquisition was zero, we recognized a gain of approximately $2.9 million on our pre-existing membership interest as of the acquisition date.

 

Asset Transfer from Master MetSun Two, LP and Master MetSun Three, LP

 

On March 20, 2012, two of our existing joint ventures (the “MetSuns”) transferred their ownership interest in two venture subsidiaries to us for no cash consideration. The transferred venture subsidiaries indirectly owned five senior living facilities and one land parcel. Prior to the transfer, we had a 20% indirect ownership interest in the assets. As a result of the transfer, the assets were 100% indirectly owned by us and were consolidated in our financial results commencing March 20, 2012 until June 29, 2012 (see below).

 

We acquired the assets in stages.  We calculated the fair value of the total underlying equity of the assets based on the acquisition date fair value of the assets and working capital of approximately $122.3 million less the fair value of the debt assumed of $118.2 million. We recognized a gain of approximately $4.6 million, including a gain of $0.7 million on our pre-existing ownership interest, in connection with the acquisition of the assets.

 

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Table of Contents

 

Contribution of Assets to a New Venture

 

On June 29, 2012, we and CNL Healthcare Trust, Inc. (“CHT”) completed the formation of a new venture.  Pursuant to the terms of the transaction, we contributed our ownership interest in the six senior living facilities mentioned above and Connecticut Avenue (the “Facilities”) along with our share of transaction and closing costs to the venture. CHT contributed approximately $57 million along with its share of transaction and closing costs to the venture. The venture is owned approximately 55%  by CHT and approximately 45% by us, with a gross valuation of approximately $226 million.

 

Prior to and as a condition to closing, we and CHT obtained new financing for five of the Facilities and modified the existing financing on two of the Facilities (the “Refinancing”).  In connection with the Refinancing, approximately $50 million of CHT’s contribution to the venture was used to pay down the existing financing on the five Facilities that were refinanced.  The venture has approximately $125 million of indebtedness collateralized by the seven Facilities.  In addition, we received an approximate $5 million cash distribution from the venture immediately following closing.

 

As of the closing, the venture owns the Facilities, which will continue to be managed by us under new management agreements that provide for a management fee of six percent of community revenues.  We and CHT have entered into a new venture agreement that provides for our respective rights and obligations in the venture, including our right, at our option, to purchase CHT’s interest in the venture, subject to certain restrictions and conditions.  Accordingly, as a result of our option to purchase CHT’s interest, we account for this venture under the profit-sharing method of accounting. The carrying value of our investment at June 30, 2012 was $2.1 million and is reflected in “Investments in unconsolidated communities including accounted for under the profit-sharing method” on our consolidated balance sheets.

 

Land Sales

 

In 2012, we sold two land parcels which were part of the liquidating trust in connection with the refinancing of our German debt for approximately $1.8 million in 2012.  No gains were recognized.  Proceeds of $2.1 million, including $0.3 million paid by us, were distributed to the electing lenders of the liquidating trust, reducing our guarantee to $24.2 million.

 

In June 2012, we sold a land parcel located in Pasadena, California for $9.5 million.  We will use the proceeds from the sale for general corporate purposes and no gain or loss was recognized on this sale.

 

Venture Sale of 16 Communities

 

On May 1, 2012, the subsidiaries of ventures between an institutional investor and us sold 16 communities to Ventas Inc. for a purchase price of approximately $362 million.  We received approximately $28.7 million of cash at closing and recognized $21.7 million in return on investment which is included in Sunrise’s share of earnings and return on investment in unconsolidated communities on our consolidated statement of operations.  We are remaining the manager of the 16 communities under the same terms of the pre-existing management agreements with respect to management fees and contract length, which range from 18 to 27 years.

 

Lease Terminations

 

On May 29, 2012, we entered into an agreement to terminate 10 operating community leases with the lessor, Senior Housing Properties Trust.  The lessor paid us $1.0 million as consideration for the in place leasehold improvements and furniture, fixtures and equipment.  The communities will be transitioned to the new manager over the next four to twelve months.  As a result, we recorded an impairment charge of approximately $15.6  million in the second quarter of 2012 related to the book value of the leasehold improvements, prepaid rent and furniture, fixtures and equipment.

 

Assisted Living Venture

 

In June 2012, an assisted living/amenities venture in which we hold an interest, refinanced its existing mortgage financing with new mortgage financing provided by Eagle Bank (refer to Note 12).  The new loan has a principal amount of $26.0 million, a floor interest rate of 5.5% and a term of three years.  As a result of the refinancing, we have been released from our obligation to fund operating deficits and to pay default interest previously accrued by us through December 31, 2011 totaling approximately $2.4 million to the prior mortgage lender.  Also, in connection with the refinancing, we funded approximately $6 million on behalf of the venture, leading to a modification of joint venture terms.  Return of our new funding will have priority over existing equity and the venture partner’s total return will be capped at its capital contribution of $6.5 million. Return of outstanding operating deficit and cost overruns of approximately $8.2 million to us will be subordinate to the return of capital of both venture partners.

 

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Table of Contents

 

Results of Operations

 

Our results of operations for each of the three and six months ended June 30, 2012 and 2011 were as follows:

 

 

 

 

 

 

 

Percent

 

 

 

 

 

For the Three Months Ended

 

Variance

 

Change

 

 

 

 

 

June 30,

 

2012 vs.

 

2012 vs.

 

Favorable/

 

(In thousands)

 

2012

 

2011

 

2011

 

2011

 

(Unfavorable)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

25,340

 

$

24,400

 

$

940

 

3.9

%

F

 

Buyout fees

 

250

 

0

 

250

 

N/A

 

F

 

Resident fees for consolidated communities

 

135,699

 

110,683

 

25,016

 

22.6

%

F

 

Ancillary fees

 

8,368

 

7,513

 

855

 

11.4

%

F

 

Professional fees from development, marketing and other

 

278

 

522

 

(244

)

46.7

%

U

 

Reimbursed costs incurred on behalf of managed communities

 

167,808

 

178,265

 

(10,457

)

5.9

%

U

 

Total operating revenue

 

337,743

 

321,383

 

16,360

 

5.1

%

F

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense for consolidated communities

 

96,252

 

78,722

 

17,530

 

22.3

%

U

 

Community lease expense

 

19,187

 

19,108

 

79

 

0.4

%

U

 

Depreciation and amortization

 

11,464

 

8,694

 

2,770

 

31.9

%

U

 

Ancillary expenses

 

7,681

 

6,968

 

713

 

10.2

%

U

 

General and administrative

 

25,227

 

27,564

 

(2,337

)

8.5

%

F

 

Carrying costs of liquidating trust assets and idle land

 

707

 

635

 

72

 

11.3

%

U

 

Provision for doubtful accounts

 

1,235

 

82

 

1,153

 

1406.1

%

U

 

Impairment of long-lived assets

 

16,308

 

5,355

 

10,953

 

204.5

%

U

 

Gain on financial guarantees and other contracts

 

0

 

(12

)

12

 

N/A

 

U

 

Costs incurred on behalf of managed communities

 

167,179

 

179,294

 

(12,115

)

6.8

%

F

 

Total operating expenses

 

345,240

 

326,410

 

18,830

 

5.8

%

U

 

Loss from operations

 

(7,497

)

(5,027

)

(2,470

)

NM

 

U

 

Other non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

374

 

323

 

51

 

15.8

%

F

 

Interest expense

 

(8,682

)

(4,654

)

(4,028

)

86.5

%

U

 

Gain on fair value resulting from business combinations

 

404

 

11,250

 

(10,846

)

96.4

%

U

 

Gain on fair value of liquidating trust note

 

0

 

88

 

(88

)

N/A

 

U

 

Other expense

 

(721

)

(961

)

240

 

25.0

%

F

 

Total other non-operating (expense) income

 

(8,625

)

6,046

 

(14,671

)

NM

 

U

 

Gain on the sale and development of real estate and equity interests

 

3,399

 

2,598

 

801

 

30.8

%

F

 

Sunrise’s share of earnings and return on investment in unconsolidated communities

 

25,088

 

931

 

24,157

 

2594.7

%

F

 

Loss from investments accounted for under the profit sharing method

 

(1,151

)

(1,740

)

589

 

33.9

%

F

 

Income before provision for income taxes and discontinued operations

 

11,214

 

2,808

 

8,406

 

299.4

%

F

 

Provision for income taxes

 

(715

)

(773

)

58

 

7.5

%

F

 

Income before discontinued operations

 

10,499

 

2,035

 

8,464

 

415.9

%

F

 

Discontinued operations, net of tax

 

(75

)

(217

)

142

 

65.4

%

F

 

Net income

 

10,424

 

1,818

 

8,606

 

473.4

%

F

 

Less: Net income attributable to noncontrolling interests

 

(834

)

(540

)

(294

)

54.4

%

U

 

Net income attributable to common shareholders

 

$

9,590

 

$

1,278

 

$

8,312

 

650.4

%

F

 

 

Note: Not Meaningful (NM) is used when there is a positive number in one period and a negative number in another period.

 

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Table of Contents

 

 

 

 

 

 

 

Percent

 

 

 

 

 

For the Six Months Ended

 

Variance

 

Change

 

 

 

 

 

June 30,

 

2012 vs.

 

2012 vs.

 

Favorable/

 

(In thousands)

 

2012

 

2011

 

2011

 

2011

 

(Unfavorable)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

49,655

 

$

48,614

 

$

1,041

 

2.1

%

F

 

Buyout fees

 

250

 

0

 

250

 

N/A

 

F

 

Resident fees for consolidated communities

 

264,855

 

212,982

 

51,873

 

24.4

%

F

 

Ancillary fees

 

16,294

 

15,110

 

1,184

 

7.8

%

F

 

Professional fees from development, marketing and other

 

478

 

845

 

(367

)

43.4

%

U

 

Reimbursed costs incurred on behalf of managed communities

 

341,881

 

364,130

 

(22,249

)

6.1

%

U

 

Total operating revenue

 

673,413

 

641,681

 

31,732

 

4.9

%

F

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense for consolidated communities

 

187,799

 

153,211

 

34,588

 

22.6

%

U

 

Community lease expense

 

38,423

 

37,805

 

618

 

1.6

%

U

 

Depreciation and amortization

 

22,222

 

16,024

 

6,198

 

38.7

%

U

 

Ancillary expenses

 

15,139

 

13,972

 

1,167

 

8.4

%

U

 

General and administrative

 

53,868

 

59,953

 

(6,085

)

10.1

%

F

 

Carrying costs of liquidating trust assets and idle land

 

1,290

 

1,042

 

248

 

23.8

%

U

 

Provision for doubtful accounts

 

1,997

 

1,524

 

473

 

31.0

%

U

 

Impairment of long-lived assets

 

16,863

 

5,355

 

11,508

 

214.9

%

U

 

Gain on financial guarantees and other contracts

 

0

 

(12

)

12

 

N/A

 

U

 

Costs incurred on behalf of managed communities

 

341,674

 

365,678

 

(24,004

)

6.6

%

F

 

Total operating expenses

 

679,275

 

654,552

 

24,723

 

3.8

%

U

 

Loss from operations

 

(5,862

)

(12,871

)

7,009

 

NM

 

F

 

Other non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

604

 

1,163

 

(559

)

48.1

%

U

 

Interest expense

 

(16,489

)

(6,164

)

(10,325

)

167.5

%

U

 

Gain on fair value resulting from business combinations,

 

7,470

 

11,250

 

(3,780

)

33.6

%

U

 

Gain on fair value of liquidating trust note

 

0

 

88

 

(88

)

N/A

 

U

 

Other expense

 

(89

)

(28

)

(61

)

217.9

%

U

 

Total other non-operating (expense) income

 

(8,504

)

6,309

 

(14,813

)

NM

 

U

 

Gain on the sale and development of real estate and equity interests

 

4,457

 

3,090

 

1,367

 

44.2

%

F

 

Sunrise’s share of earnings (loss) and return on investment in unconsolidated communities

 

28,549

 

(6,758

)

35,307

 

NM

 

F

 

Loss from investments accounted for under the profit sharing method

 

(4,671

)

(4,764

)

93

 

2.0

%

F

 

Income (loss) before provision for income taxes and discontinued operations

 

13,969

 

(14,994

)

28,963

 

NM

 

F

 

Provision for income taxes

 

(1,295

)

(1,503

)

208

 

13.8

%

F

 

Income (loss) before discontinued operations

 

12,674

 

(16,497

)

29,171

 

NM

 

F

 

Discontinued operations, net of tax

 

344

 

1,071

 

(727

)

67.9

%

U

 

Net income (loss)

 

13,018

 

(15,426

)

28,444

 

NM

 

F

 

Less: Net income attributable to noncontrolling interests

 

(1,390

)

(1,001

)

(389

)

38.9

%

U

 

Net income (loss) attributable to common shareholders

 

$

11,628

 

$

(16,427

)

$

28,055

 

NM

 

F

 

 

Note: Not Meaningful (NM) is used when there is a positive number in one period and a negative number in another period.

 

33



Table of Contents

 

Segment results are as follows (in thousands):

 

 

 

Three Months Ended June 30, 2012

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

21,019

 

$

0

 

$

4,321

 

$

0

 

$

25,340

 

Buyout fees

 

250

 

0

 

0

 

0

 

250

 

Resident fees

 

17,414

 

118,285

 

0

 

0

 

135,699

 

Ancillary fees

 

8,368

 

0

 

0

 

0

 

8,368

 

Professional fees from development, marketing and other

 

0

 

0

 

53

 

225

 

278

 

Reimbursed costs incurred on behalf of managed communities

 

165,857

 

0

 

1,951

 

0

 

167,808

 

Total operating revenues

 

212,908

 

118,285

 

6,325

 

225

 

337,743

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

10,352

 

85,900

 

0

 

0

 

96,252

 

Community lease expense

 

4,943

 

14,244

 

0

 

0

 

19,187

 

Depreciation and amortization

 

1,139

 

9,362

 

0

 

963

 

11,464

 

Ancillary expenses

 

7,681

 

0

 

0

 

0

 

7,681

 

General and administrative

 

0

 

0

 

3,242

 

21,985

 

25,227

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

707

 

707

 

Provision for doubtful accounts

 

310

 

925

 

0

 

0

 

1,235

 

Impairment of long-lived assets

 

0

 

15,589

 

0

 

719

 

16,308

 

Costs incurred on behalf of managed communities

 

165,211

 

0

 

1,968

 

0

 

167,179

 

Total operating expenses

 

189,636

 

126,020

 

5,210

 

24,374

 

345,240

 

Income (loss) from operations

 

$

23,272

 

$

(7,735

)

$

1,115

 

$

(24,149

)

$

(7,497

)

 

 

 

Three Months Ended June 30, 2011

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

20,791

 

$

0

 

$

3,609

 

$

0

 

$

24,400

 

Resident fees

 

16,398

 

94,285

 

0

 

0

 

110,683

 

Ancillary fees

 

7,513

 

0

 

0

 

0

 

7,513

 

Professional fees from development, marketing and other

 

0

 

0

 

368

 

154

 

522

 

Reimbursed costs incurred on behalf of managed communities

 

176,517

 

0

 

1,748

 

0

 

178,265

 

Total operating revenues

 

221,219

 

94,285

 

5,725

 

154

 

321,383

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

9,977

 

68,745

 

0

 

0

 

78,722

 

Community lease expense

 

4,540

 

14,568

 

0

 

0

 

19,108

 

Depreciation and amortization

 

635

 

5,766

 

0

 

2,293

 

8,694

 

Ancillary expenses

 

6,968

 

0

 

0

 

0

 

6,968

 

General and administrative

 

0

 

0

 

2,108

 

25,456

 

27,564

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

635

 

635

 

Provision for doubtful accounts

 

141

 

298

 

0

 

(357

)

82

 

Impairment of long-lived assets

 

0

 

4,460

 

0

 

895

 

5,355

 

Gain on financial guarantees and other contracts

 

(12

)

0

 

0

 

0

 

(12

)

Costs incurred on behalf of managed communities

 

177,502

 

0

 

1,792

 

0

 

179,294

 

Total operating expenses

 

199,751

 

93,837

 

3,900

 

28,922

 

326,410

 

Income (loss) from operations

 

$

21,468

 

$

448

 

$

1,825

 

$

(28,768

)

$

(5,027

)

 

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Table of Contents

 

 

 

Six Months Ended June 30, 2012

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

41,427

 

$

0

 

$

8,228

 

$

0

 

$

49,655

 

Buyout fees

 

250

 

0

 

0

 

0

 

250

 

Resident fees

 

34,455

 

230,400

 

0

 

0

 

264,855

 

Ancillary fees

 

16,294

 

0

 

0

 

0

 

16,294

 

Professional fees from development, marketing and other

 

0

 

0

 

106

 

372

 

478

 

Reimbursed costs incurred on behalf of managed communities

 

338,537

 

0

 

3,344

 

0

 

341,881

 

Total operating revenues

 

430,963

 

230,400

 

11,678

 

372

 

673,413

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

20,991

 

166,808

 

0

 

0

 

187,799

 

Community lease expense

 

9,539

 

28,884

 

0

 

0

 

38,423

 

Depreciation and amortization

 

2,360

 

17,559

 

0

 

2,303

 

22,222

 

Ancillary expenses

 

15,139

 

0

 

0

 

0

 

15,139

 

General and administrative

 

0

 

0

 

6,425

 

47,443

 

53,868

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

1,290

 

1,290

 

Provision for doubtful accounts

 

649

 

1,323

 

0

 

25

 

1,997

 

Impairment of long-lived assets

 

0

 

15,589

 

0

 

1,274

 

16,863

 

Costs incurred on behalf of managed communities

 

338,282

 

0

 

3,392

 

0

 

341,674

 

Total operating expenses

 

386,960

 

230,163

 

9,817

 

52,335

 

679,275

 

Income (loss) from operations

 

$

44,003

 

$

237

 

$

1,861

 

$

(51,963

)

$

(5,862

)

 

 

 

Six Months Ended June 30, 2011

 

 

 

North

 

 

 

United

 

 

 

 

 

 

 

American

 

Consolidated

 

Kingdom

 

 

 

 

 

 

 

Management

 

Communities

 

Management

 

Corporate

 

Total

 

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

41,541

 

$

0

 

$

7,073

 

$

0

 

$

48,614

 

Resident fees

 

32,085

 

180,897

 

0

 

0

 

212,982

 

Ancillary fees

 

15,110

 

0

 

0

 

0

 

15,110

 

Professional fees from development, marketing and other

 

0

 

0

 

441

 

404

 

845

 

Reimbursed costs incurred on behalf of managed communities

 

360,437

 

0

 

3,693

 

0

 

364,130

 

Total operating revenues

 

449,173

 

180,897

 

11,207

 

404

 

641,681

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Community expense

 

19,884

 

133,327

 

0

 

0

 

153,211

 

Community lease expense

 

8,737

 

29,068

 

0

 

0

 

37,805

 

Depreciation and amortization

 

1,270

 

10,074

 

0

 

4,680

 

16,024

 

Ancillary expenses

 

13,972

 

0

 

0

 

0

 

13,972

 

General and administrative

 

0

 

0

 

4,884

 

55,069

 

59,953

 

Carrying costs of liquidating trust assets

 

0

 

0

 

0

 

1,042

 

1,042

 

Provision for doubtful accounts

 

691

 

433

 

0

 

400

 

1,524

 

Impairment of long-lived assets

 

0

 

4,460

 

0

 

895

 

5,355

 

Gain on financial guarantees and other contracts

 

(12

)

0

 

0

 

0

 

(12

)

Costs incurred on behalf of managed communities

 

361,907

 

0

 

3,771

 

0

 

365,678

 

Total operating expenses

 

406,449

 

177,362

 

8,655

 

62,086

 

654,552

 

Income (loss) from operations

 

$

42,724

 

$

3,535

 

$

2,552

 

$

(61,682

)

$

(12,871

)

 

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

 

Operating Revenue

 

Management fees and buyout fees

 

Management fees were $25.6 million in the second quarter of 2012 compared to $24.4 million in the second quarter of 2011, an increase of $1.2 million or 4.9%.

 

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Table of Contents

 

North American Management variance

 

·             $1.5 million increase as a result of contractual management fee increases for one of our venture partners;

 

·             $0.6 million increase from stabilized communities;

 

·             $0.6 million increase from incentive management fees;

 

·             $0.3 million increase as a result of a management contract buyout fee;

 

·             $1.0 million decrease as a result of purchases of majority interests in 15 communities formerly held in ventures which were previously unconsolidated;

 

·             $0.6 million decrease from six communities that were consolidated during the second quarter of 2012 and sold on June 29, 2012;

 

·             $0.6 million decrease as a result of terminated management contracts;

 

·             $0.2 million decrease related to communities in lease-up;

 

United Kingdom Management variance

 

·             $0.3 million increase related to continued lease-up in certain communities;

 

·             $0.2 million increase from stabilized communities in the U.K;

 

·             $0.2 million increase in incentive management fees.

 

Resident fees for consolidated communities

 

Resident fees for consolidated communities were $135.7 million in the second quarter of 2012 compared to $110.7  million in the second quarter of 2011, an increase of $25.0 million or 22.6%.

 

Consolidated Communities variance

 

·             $15.1 million increase as a result of the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities;

 

·           $6.8 million increase as a result of the March 2012 asset transfers from two ventures of five communities which became wholly-owned;

 

·             $1.6 million increase as a result of the February 2012 purchase of our partner’s 85% interest in a venture owning one community;

 

·             $0.5 million increase from three Canadian communities;

 

·             $0.3 million increase due to higher average occupancy;

 

·             $0.3 million decrease from decreases in average daily rates;

 

North American Management variance

 

·             $1.0 million increase in average daily rates from six New York venture communities.

 

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Table of Contents

 

Ancillary fees

 

Ancillary fees, included in our North American Management segment,  were $8.4 million in the second quarter of 2012 compared to $7.5 million in the second quarter of 2011, an increase of $0.9 million or 12.0%.

 

The increase in ancillary revenue is primarily attributable to higher care service fees from our New York health care properties.

 

Professional fees from development, marketing and other

 

Professional fees from development, marketing and other were $0.3 million in the second quarter of 2012 compared to $0.5 million in the second quarter of 2012.

 

Reimbursed costs incurred on behalf of managed communities

 

Reimbursed costs incurred on behalf of managed communities were $167.8 million in the second quarter of 2012 compared to $178.3 million in the second quarter of 2011, a decrease of $10.5 million or 5.9%.

 

North American Management variance

 

·        $10.7 million decrease due to 14 fewer communities being managed in 2012;

 

United Kingdom Management variance

 

·        $0.2 million decrease due to the types of costs being incurred.

 

Operating Expenses

 

Community expense for consolidated communities

 

Community expense for consolidated communities was $96.3 million in the second quarter of 2012 compared to $78.7 million in the second quarter of 2011, an increase of $17.6 million or 22.4%.

 

Consolidated Communities variance

 

·             $9.4 million increase as a result of the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities;

 

·             $5.7 million increase from communities acquired from ventures which became wholly-owned;

 

·             $2.1 million increase from overall higher expenses in existing communities;

 

North American Management variance

 

·             $0.2 million increase in operating costs from six New York venture communities.

 

Community lease expense

 

Community lease expense increased $0.1 million from $19.1 million in the second quarter of 2011 to $19.2 million in the second quarter of 2012.  This increase in lease expense relates primarily to an increase in contingent rent for two communities (North American Management).

 

Depreciation and amortization

 

Depreciation and amortization expense was $11.5 million in the second quarter of 2012 and $8.7 million in the second quarter of 2011, an increase of $2.8 million or 32.2%.

 

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Table of Contents

 

Consolidated Communities variance

 

·           $3.6 million increase associated with the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities;

 

North American Management variance

 

·             $0.5 million increase primarily related to the accelerated amortization of a management contract due to termination;

 

Corporate variance

 

·             $1.3 million decrease primarily related to certain computer hardware and software becoming fully depreciated.

 

Ancillary expenses

 

Ancillary expenses, included in our North American Management segment, were $7.7 million in the second quarter of 2012 compared to $7.0 million in the second quarter of 2011, an increase of $0.7 million or 10.0%.  The increase in ancillary expenses is primarily attributable to higher care service fees from our New York health care properties.

 

General and administrative

 

General and administrative expense was $25.2 million in the second quarter of 2012 compared to $27.6 million in the second quarter of 2011, a decrease of $2.4 million or 8.7%.

 

Corporate variance

 

·           $2.0 million decrease in legal and professional fees;

 

·           $1.7 million decrease in salaries, bonuses and severance expense;

 

·    $1.5 million decrease in costs related to general corporate expense including travel, training and other general office expenses;

 

·    $0.7 million increase due to the payment of a litigation settlement;

 

·           $0.6 million increase in stock compensation expense;

 

United Kingdom variance

 

·           $1.3 million increase related to higher allocated costs;

 

·           $0.2 million increase in salaries and contract labor.

 

Carrying costs of liquidating trust assets and idle land

 

Carrying costs of liquidating trust assets were $0.7 million and $0.6 million in the second quarter of 2012 and 2011, respectively.  The $0.1 million increase in 2012 was related to increased real estate taxes.

 

Provision for doubtful accounts

 

The provision for doubtful accounts was $1.2 million in the second quarter of 2012 compared to $0.1 million in the second quarter of 2011.   The increase of $1.1 million was primarily due to increases in reserves related to advances to ventures and ten operating communities leased from Senior Housing Properties Trust.

 

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Table of Contents

 

Impairment of long-lived assets

 

Impairment of long-lived assets was $16.3 million in the second quarter of 2012 related to ten communities leased from Senior Housing Properties Trust (refer to Note 6) and one land parcel.  In the second quarter of 2011, impairment of long-lived assets was $5.4 million relating to two land parcels and one community.

 

Costs incurred on behalf of managed communities

 

Costs incurred on behalf of managed communities were $167.2 million in the second quarter of 2012 compared to $179.3 million in the second quarter of 2011, a decrease of $12.1 million or 6.7%.

 

North American Management variance

 

·        $11.9 million decrease due to 14 fewer communities being managed in 2012;

 

United Kingdom Management variance

 

·        $0.2 million decrease due to the types of costs being incurred on behalf of the communities.

 

Other Non-Operating (Expense) Income

 

Total other non-operating (expense) income was $(8.6) million and $6.0 million for the second quarter of 2012 and 2011, respectively.  The increase in other non-operating expense was primarily due to:

 

·                        $0.1 million increase in interest income;

 

·                        $4.0 million increase in interest expense primarily due to the AL US debt assumed in June 2011 and the debt related to 2012 acquisition transactions;

 

·                        $10.8 million decrease in gain on fair value resulting from a business combination related to the AL US transaction in 2011;

 

·                        $0.6 million increase in net foreign exchange losses detailed in the following table (in millions):

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Canadian Dollar

 

$

(1.3

)

$

(0.2

)

British Pound

 

0.1

 

0.0

 

Euro

 

0.2

 

(0.2

)

Total

 

$

(1.0

)

$

(0.4

)

 

Gain on the Sale and Development of Real Estate and Equity Interests

 

Gain on the sale and development of real estate and equity interests was $3.4 million and $2.6 million for the second quarter of 2012 and 2011, respectively. In the second quarter of 2012, in connection with the sale of 16 venture-owned communities to Ventas, Inc., the associated debt was repaid in full.  As a result, our continuing involvement in those ventures ended as we were released from our operating deficit guarantee obligations to the lender.  We recognized $3.0 million in previously deferred gains as the result of the release.  In the second quarter of 2011, a $2.0 million gain was recognized when we received final payment on a land parcel from a buyer following zoning approval on the land.  The remaining gains in 2012 and 2011 primarily resulted from transactions which occurred in prior years for which recognition of gain had been deferred due to various forms of continuing involvement.

 

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Table of Contents

 

Sunrise’s Share of Earnings (Loss) and Return on Investment in Unconsolidated Communities

 

 

 

Three Months Ended

 

 

 

June 30,

 

(in millions)

 

2012

 

2011

 

Sunrise’s share of earnings (losses) in unconsolidated communities

 

$

2.6

 

$

(2.5

)

Return on investment in unconsolidated communities

 

22.5

 

3.4

 

 

 

$

25.1

 

$

0.9

 

 

The increase in our share of earnings in unconsolidated communities of $5.1 million was primarily due to a $2.0 million decrease in our share of losses from one of our ventures which incurred recapitalization and transaction costs in 2011 when we increased our ownership percentage.  We also had smaller operating losses from our ventures, of which $2.1 million related to our communities in the U.K.

 

In May 2012, three ventures in which we hold an interest sold substantially all of their remaining assets to Ventas, Inc.  As a result of this transaction, we received $28.7 million in cash and recognized $21.7 million in return on investment.  In the second quarter of 2011, we recognized $2.7 million of gain when certain contractual obligations expired.

 

Loss from Investments Accounted for Under the Profit-Sharing Method

 

Loss from investments accounted for under the profit-sharing method was $1.2 million and $1.7 million for the second quarter of 2012 and 2011, respectively.  These losses are being generated from a condominium community where profits associated with condominium sales are being deferred until a certain sales threshold is met and from the new venture with CHT.  The decrease in losses in 2012 is primarily the result of the reversal of default interest accrued through the end of 2011in the second quarter of 2012 for which payment was waived by the lender in June 2012.

 

Provision for Income Taxes

 

The provision for income taxes allocated to continuing operations was $0.7 million and $0.8 million for the second quarter of 2012 and 2011, respectively. The expense relates primarily to state, local and international taxes. Our effective tax rate from continuing operations was 6.4% and 26.0% for the three months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, we are continuing to offset our net deferred tax asset by a full valuation allowance.

 

Discontinued Operations

 

Loss from discontinued operations was $0.1 million and $0.2 million for the second quarter of  2012 and 2011, respectively.  Discontinued operations consists primarily of businesses and communities sold prior to 2012.

 

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 

Operating Revenue

 

Management fees and buyout fees

 

Management fees were $49.9 million for the first six months of 2012 compared to $48.6 million for the first six months of 2011, an increase of $1.3 million or 2.7%.

 

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Table of Contents

 

North American Management variance

 

·             $2.4 million increase as a result of contractual management fee increases for one of our venture partners;

 

·             $1.0 million increase from stabilized communities;

 

·             $0.9 million increase from incentive management fees;

 

·             $0.3 million increase as a result of a management contract buyout fee;

 

·             $2.4 million decrease as a result of purchases of majority interests in 16 communities formerly held in ventures which were previously unconsolidated;

 

·             $1.0 million decrease as a result of terminated management contracts;

 

·             $0.6 million decrease from six communities that were consolidated during the second quarter of 2012 and sold on June 29, 2012;

 

·             $0.3 million decrease from communities in lease-up;

 

United Kingdom Management variance

 

·             $0.5 million increase from stabilized communities;

 

·             $0.4 million increase in incentive management fees;

 

·             $0.3 million increase related to continued lease-up in certain communities.

 

Resident fees for consolidated communities

 

Resident fees for consolidated communities were $264.9 million for the first six months of 2012 compared to $213.0 million for the first six months of 2011, an increase of $51.9 million or 24.4%.

 

Consolidated Communities variance

 

·             $36.9 million increase as a result of the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities;

 

·             $7.7 million increase as a result of the March 2012 asset transfers from two ventures of five communities which became wholly-owned;

 

·             $2.2 million increase as a result of the February 2012 purchase of our partner’s 85% interest in a venture owning one community;

 

·             $1.4 million increase due to higher average occupancy;

 

·             $1.2 million increase from three Canadian communities;

 

·             $0.1 million increase from increases in average daily rates;

 

North American Management variance

 

·             $2.3 million increase primarily due to an increase in average daily rates from six New York venture communities.

 

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Table of Contents

 

Ancillary fees

 

Ancillary fees, included in our North American Management segment, were $16.3 million for the first six months of 2012 compared to $15.1 million for the first six months of 2011, an increase of $1.2 million or 7.9%.

 

The increase in ancillary revenue is primarily attributable to an increase of $1.5 million from higher care service fees from our New York health care properties partially offset by a $0.3 million decrease from the leasing of the six communities in a venture whose operations are now consolidated effective January 2011.

 

Professional fees from development, marketing and other

 

Professional fees from development, marketing and other were $0.5 million for the first six months of 2012 compared to $0.8 million for the first six months of 2012.

 

Reimbursed costs incurred on behalf of managed communities

 

Reimbursed costs incurred on behalf of managed communities were $341.9 million for the first six months of 2012 compared to $364.1 million for the first six months of 2011, a decrease of $22.2 million or 6.1%.

 

North American Management variance

 

·        $21.9 million decrease due to 14 fewer communities being managed in 2012;

 

United Kingdom Management variance

 

·        $0.3 million decrease due to the types of costs being incurred.

 

Operating Expenses

 

Community expense for consolidated communities

 

Community expense for consolidated communities was $187.8 million for the first six months of 2012 compared to $153.2 million for the first six months of 2011, an increase of $34.6 million or 22.6%.

 

Consolidated Communities variance

 

·             $23.0 million increase as a result of the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities;

 

·             $6.5 million increase from communities acquired from ventures which became wholly-owned;

 

·             $4.6 million increase from overall higher expenses in existing communities;

 

·             $0.6 million decrease as a result of one domestic community’s prior year excess profit transfer to a capital reserve trust that did not reoccur during 2012;

 

North American Management variance

 

·             $0.9 million increase in operating costs from six New York venture communities.

 

Community lease expense

 

Community lease expense increased $0.6 million from $37.8 million for the first six months of 2011 to $38.4 million for the first six months of 2012.  This increase in lease expense relates primarily an increase in contingent rent for two communities.

 

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Table of Contents

 

Depreciation and amortization

 

Depreciation and amortization expense was $22.2 million for the first six months of 2012 and $16.0 million for the first six months of 2011, an increase of $6.2 million or 38.8%.

 

Consolidated Communities variance

 

·             $7.5 million increase associated with the June 2011 purchase of our partner’s 80% interest in a venture owning 15 communities and the communities transferred from ventures in March 2012;

 

North American Management variance

 

·             $1.1 million increase was primarily related to the accelerated amortization of a management contract due to termination;

 

Corporate variance

 

·             $2.4 million decrease was primarily related to certain computer hardware and software becoming fully depreciated.

 

Ancillary expenses

 

Ancillary expenses, included in our North American Management segment, were $15.1 million for the first six months of 2012 compared to $14.0 million for the first six months of 2011, an increase of $1.1 million or 7.9%.

 

The increase in ancillary expenses is primarily attributable to an increase of $1.4 million from higher care service fees from our New York health care properties partially offset by a $0.3 million decrease from the leasing of the six communities in a venture whose operations were consolidated effective January 2011.

 

General and administrative

 

General and administrative expense was $53.9 million for the first six months of 2012 compared to $60.0 million for the first six months of 2011, a decrease of $6.1 million or 10.2%.

 

Corporate variance

 

·             $4.0 million decrease in severance expense;

 

·             $3.8 million decrease in salaries and bonuses;

 

·             $2.8 million decrease in costs related to general corporate expense including travel, training and other general office expenses;

 

·             $2.2 million decrease in legal and professional fees;

 

·             $3.8 million increase due to the accrual of a loss contingency reserve;

 

·             $1.1 million increase in stock compensation expense;

 

United Kingdom variance

 

·             $2.2 million increase primarily related to higher allocated costs;

 

·             $0.5 million decrease in salaries and contract labor.

 

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Table of Contents

 

Carrying costs of liquidating trust assets and idle land

 

Carrying costs of liquidating trust assets were $1.3 million and $1.0 million for the first six months of 2012 and 2011, respectively.  The $0.3 million increase in 2012 was related to increased maintenance costs and higher real estate taxes.

 

Provision for doubtful accounts

 

The provision for doubtful accounts was $2.0 million for the first six months of 2012 compared to $1.5 million for the first six months of 2011.  The increase of $0.5 million or 33.3% was primarily due an increase in the reserves for ten communities leased from Senior Housing Properties Trust.

 

Impairment of long-lived assets

 

Impairment of long-lived assets was $16.9 million for the first six months of 2012 related to ten operating communities leased from Senior Housing Properties Trust (refer to Note 6), two land parcels and a condominium development project.  Impairment of long-lived assets was $5.4 million for the first six months of 2011 related to two land parcels and one community.

 

Costs incurred on behalf of managed communities

 

Costs incurred on behalf of managed communities were $341.7 million for the first six months of 2012 compared to $365.7 million for the first six months of 2011, a decrease of $24.0 million or 6.6%.

 

North American Management variance

 

·                        $23.7 million decrease due to 14 fewer communities being managed in 2012;

 

United Kingdom Management variance

 

·                        $0.3 million decrease due to the types of costs being incurred on behalf of the communities.

 

Other Non-Operating (Expense) Income

 

Total other non-operating (expense) income was $(8.5) million and $6.3 million for the first six months of 2012 and 2011, respectively.  The increase in other non-operating expense was primarily due to:

 

·                        $0.6 million decrease in interest income;

 

·                        $10.3 million increase in interest expense primarily due to the issuance of junior subordinated convertible notes in April 2011, the AL US debt assumed in June 2011, draws on the Credit Facility and the debt related to 2012 acquisition transactions;

 

·                        $3.8 million decrease in gain on fair value resulting from business combinations related to more gain recognized from the 2011 transactions compared to the 2012 transactions;

 

·                        $0.8 million decrease in net foreign exchange gains detailed in the following table (in millions):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Canadian Dollar

 

$

(0.3

)

$

1.2

 

British Pound

 

0.0

 

(0.1

)

Euro

 

0.1

 

(0.5

)

Total

 

$

(0.2

)

$

0.6

 

 

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Table of Contents

 

Gain on the Sale and Development of Real Estate and Equity Interests

 

Gain on the sale and development of real estate and equity interests was $4.5 million and $3.1 million for the first six months of 2012 and 2011, respectively. In the second quarter of 2012, in connection with the sale of 16 venture-owned communities to Ventas, Inc., the associated debt was repaid in full.  As a result, our continuing involvement in those ventures ended as we were released from our operating deficit guarantee obligations to the lender.  We recognized $3.0 million in previously deferred gains as the result of the release.  In the second quarter of 2011, a $2.0 million gain was recognized when we received final payment on a land parcel from a buyer following zoning approval on the land.  The remaining gains in 2012 and 2011 primarily resulted from transaction which occurred in prior years for which recognition of gain had been deferred due to various forms of continuing involvement.

 

Sunrise’s Share of Earnings (Loss) and Return on Investment in Unconsolidated Communities

 

 

 

Six Months Ended

 

 

 

June 30,

 

(in millions)

 

2012

 

2011

 

Sunrise’s share of earnings (losses) in unconsolidated communities

 

$

2.6

 

$

(9.3

)

Return on investment in unconsolidated communities

 

25.9

 

4.5

 

Impairment of investment

 

0.0

 

(2.0

)

 

 

$

28.5

 

$

(6.8

)

 

The increase in our share of earnings in unconsolidated communities of $11.9 million was primarily due to a $6.9 million decrease in our share of losses from one of our ventures which incurred recapitalization and transaction costs in 2011 when we increased our ownership percentage.  We also had smaller operating losses from our ventures, of which $3.6 million related to our communities in the U.K.

 

In May 2012, three ventures in which we hold interests sold substantially all of their property to Ventas, Inc.  As a result of this transaction, we received $28.7 million in cash and recognized $21.7 million return on investment.  In 2011, we recognized $2.7 million of gain when certain contractual obligations expired.

 

Distributions from investments where the equity method has been suspended were $2.4 million higher in 2012 than 2011.

 

In 2011, we considered our equity investment in one of our ventures to be impaired, based on economic challenges and defaults under the venture’s construction loan agreements, and wrote down the equity investment by $2.0 million.

 

Loss from Investments Accounted for Under the Profit-Sharing Method

 

Loss from investments accounted for under the profit-sharing method was $4.7 million and $4.8 million for the first six months of 2012 and 2011, respectively.  These losses are being generated from a condominium community where profits associated with condominium sales are being deferred until a certain sales threshold is met and from the new venture with CHT.  The decrease in losses in 2012 is primarily the result of the reversal of default interest accrued through the end of 2011 for which payment was waived by the lender in June 2012.

 

Provision for Income Taxes

 

The provision for income taxes allocated to continuing operations was $1.3 million and $1.5 million for the first six months of 2012 and 2011, respectively. The expense relates primarily to state, local and international taxes. Our effective tax rate from continuing operations was 9.3% and (10.3)% for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, we are continuing to offset our net deferred tax asset by a full valuation allowance.

 

Discontinued Operations

 

Income from discontinued operations was $0.3 million and $1.1 million for the first six months of 2012 and 2011, respectively.  Discontinued operations consists primarily of businesses and communities sold prior to 2012.

 

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Liquidity and Capital Resources

 

Overview

 

We had $54.8 million and $49.5 million of unrestricted cash and cash equivalents at June 30, 2012 and December 31, 2011, respectively.  As of June 30, 2012, we have no draws and $10.2 million in letters of credit outstanding against our Credit Facility.

 

In October 2012, our German restructure note will mature and we may be required to pay under the guarantee if we are unable to sell the mortgaged assets.  As of June 30, 2012, the amount of this guarantee is $24.2 million.  Since 2010 and through 2012, we sold or intend to sell certain communities and land parcels that are held as collateral for the German lenders (the “liquidating trust” more fully described under “Debt – Germany Restructure Notes” below).  We have one closed community and seven land parcels as of June 30, 2012 remaining to sell in the liquidating trust which are reflected in our consolidated balance sheets in “Assets held in the liquidating trust”.  To the extent we are unable to sell all of these assets at their estimated value by October 2012, we may be required to fund the remaining minimum payment under the guarantee which was $24.2 million as of June 30, 2012.  Based on our estimate of likely property sales by October 2012, we believe that we may be required to fund the full amount due under the guarantee.  We believe that our operations, available cash and asset sales will generate sufficient cash to meet any such obligation.  If we are required to fund the remaining minimum payment under the guarantee, any assets held as collateral for the German lenders at the time of payment will be released from the liquidating trust and we will thereafter be entitled to sell, develop, finance or otherwise transact such assets for our own account.  As of June 30, 2012, the remaining assets in the liquidating trust are comprised of: a closed Sunrise community in Lorton, VA, a partially developed Sunrise community in Burlingame, CA, a partially developed Sunrise community in Torrance, CA, a 1.5 acre land parcel in Holbrook, NY, a 5.3 acre land parcel in Boynton Beach, FL, a 5 acre land parcel in Beaconsfield, Ontario, a 3.1 acre land parcel in Farmington Hills, MI, and a 2 acre land parcel in Aurora, CO.

 

Debt

 

At June 30, 2012 and December 31, 2011, we had $520.1 million and $593.7 million, respectively, of outstanding debt with a weighted average interest rate of 4.13% and 4.12%, respectively, as follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

AL US debt (1)

 

$

329,152

 

$

334,567

 

Community mortgages

 

66,526

 

94,641

 

Liquidating trust notes

 

24,161

 

26,255

 

Convertible subordinated notes

 

86,250

 

86,250

 

Credit facility

 

0

 

39,000

 

Other

 

3,742

 

4,903

 

Variable interest entity

 

21,385

 

21,770

 

Total principal amount of debt

 

531,216

 

607,386

 

Less: Discount on loans assumed at fair value

 

(11,142

)

(13,721

)

 

 

$

520,074

 

$

593,665

 

 


(1) The carrying value of the debt at June 30, 2012 was $318.8 million.

 

Of the outstanding debt at June 30, 2012, we had $87.6 million of fixed-rate debt with a weighted average interest rate of 5.03% and $432.5 million of variable rate debt with a weighted average interest rate of 3.95%.  Consolidated debt of $1.4 million was in default as of June 30, 2012.  We are in compliance with the covenants on all our other consolidated debt and expect to remain in compliance in the near term.

 

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Principal maturities of debt at June 30, 2012 are as follows (in thousands):

 

 

 

Mortgages,

 

Variable

 

Liquidating

 

Convertible

 

 

 

 

 

 

 

Wholly-Owned

 

Interest

 

Trust

 

Subordinated

 

 

 

 

 

 

 

Properties

 

Entity Debt

 

Note

 

Notes

 

Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Default

 

$

0

 

$

1,365

 

$

0

 

$

0

 

$

0

 

$

1,365

 

3rd Qtr. 2012

 

0

 

390

 

0

 

0

 

340

 

730

 

4th Qtr. 2012

 

0

 

0

 

24,161

 

0

 

680

 

24,841

 

2013

 

20,849

 

810

 

0

 

0

 

2,041

 

23,700

 

Thereafter

 

374,829

 

18,820

 

0

 

86,250

 

681

 

480,580

 

 

 

395,678

 

21,385

 

24,161

 

86,250

 

3,742

 

531,216

 

Discount on loans assumed at fair value

 

(10,317

)

0

 

0

 

0

 

(825

)

(11,142

)

 

 

$

385,361

 

$

21,385

 

$

24,161

 

$

86,250

 

$

2,917

 

$

520,074

 

 

Santa Monica Debt, Connecticut Avenue Debt and Debt Transfer from Master MetSun Two, L.P. and Master MetSun Three, L.P.

 

On February 28, 2012, we closed on a purchase and sale agreement with our venture partner that owned an 85% Partner Interest in Santa Monica.  Simultaneously, with the closing of the transaction (refer to Note 4), we entered into new loans with Prudential Insurance Company of America to pool Santa Monica with the Connecticut Avenue community and financed the two assets with senior debt.  The principal amount of the new loans in the aggregate was $55.0 million with an interest rate of 4.66%.  The loans had a seven year term that would have matured on March 1, 2019.  The proceeds of the new loans were used (i) to pay off $27.8 million of debt on the Connecticut Avenue community; (ii) to pay off $13.4 million of debt on Santa Monica; and (iii) towards the $16.2 million purchase price of the Partner Interest.

 

On March 20, 2012, two of our existing joint ventures transferred their ownership interest in two venture subsidiaries to us for no cash consideration. The transferred venture subsidiaries indirectly owned five senior living facilities and one land parcel. The assets were encumbered by approximately $119.7 million of existing mortgage debt which was consolidated in our financial results commencing March 20, 2012 until June 29, 2012 (see below). This mortgage debt was non-recourse to us with respect to principal repayment, and no new obligations were required by the mortgage lenders as a result of the transfer. The assets were separated into two loan pools, with one lender financing a pool of three communities (“Pool A”) and another lender financing a pool of two communities plus the land parcel (“Pool B”).

 

On June 29, 2012, the debt relating to Santa Monica and the Connecticut Avenue community was transferred to a new venture between us and CHT along with the related assets.  The Pool A and Pool B debt was refinanced as part of the asset transfer to the new venture (refer to Note 4).

 

Canadian Debt

 

The loan on three communities in Canada matured in April 2011.  In February 2012, we entered into a loan modification that, among other things: (i) extended the loan on our three Canadian communities two years from the modification date; (ii) provided for a termination of our operating deficit guarantee in August 2015;  (iii) cross collateralized the three communities; (iv) increased the interest rate from the TD Bank Prime rate plus 175 bps to TD Bank Prime rate plus 200 bps; and (v) obligated us to complete a reminiscence conversion in a section of one of the communities.  The loan balance was $45.7 million as of June 30, 2012.

 

AL US Debt

 

In June 2011, we assumed $364.8 million of debt with an estimated fair value of $350.1 million in connection with our purchase of an 80% ownership interest in a joint venture entity, AL US, that owned 15 senior living communities.  Immediately following the closing of the transaction, we entered into an amendment to the loan.  The loan amendment, among other matters, (i) extended the maturity date to June 14, 2015; (ii) provided for a $25.0 million principal repayment; (iii) set the interest rate on amounts outstanding from the effective date of the amendment to LIBOR plus 1.75% with respect to LIBOR advances and the base rate (i.e. the higher of the Federal Funds Rate plus 0.50% or the prime rate announced daily by HSH Nordbank AG (“Nordbank”)) plus 1.25% with respect to base rate advances; (iv) instituted a permanent cash sweep of all excess cash at the communities securing

 

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the loan on an aggregated and consolidated basis, which will be used by Nordbank to pay down the outstanding principal balance; (v) released certain management fees that were escrowed and eliminated the requirement for any further subordination or deferral of management fees provided no event of default occurs under the loan; (vi) provided for a $5.0 million escrow for certain indemnification obligations; (vii) provided relief under current debt service coverage requirements; and (viii) modified certain other covenants and terms of the loan. In connection with the amendment, we entered into a new interest rate swap arrangement that extended an existing swap with a fixed notional amount of $259.4 million at 3.2% plus the applicable spread of 175 basis points, down from 5.61% on the previous swap. The new swap arrangement terminates at loan maturity in June 2015. The remaining outstanding balance on the loan will continue to float over LIBOR as described above. The amendment also contains representations, warranties, covenants and events of default customary for transactions of this type.  We recorded this loan on our consolidated balance sheet at its estimated fair value on the acquisition and assumption date. The fair value balance of the loan as of June 30, 2012 was $318.8 million and the face amount was $329.2 million.

 

Germany Restructure Notes

 

We previously owned nine communities in Germany which were subject to substantial debt.  During 2010 and 2009, we restructured or paid a significant portion of the debt.  As part of the restructuring, we granted mortgages for the benefit of certain lenders on certain of our unencumbered North American properties (the “liquidating trust”).

 

In April 2010, we executed the definitive documentation with the lenders party to the restructuring agreements.  As part of the restructuring agreements, we also guaranteed that, within 30 months of the execution of the definitive documentation, October 2012, for the restructuring, the lenders would receive a minimum of $49.6 million from the net proceeds of the sale of the liquidating trust, which equals 80 percent of the appraised value of these properties at the time of the restructuring agreement. If the electing lenders did not receive at least $49.6 million by such date, we would make payment to cover any shortfall or, at such lenders’ option, convey to them the remaining unsold properties in satisfaction of our remaining obligation to fund the minimum payments.  We have sold 12 North American properties in the liquidating trust for gross proceeds of approximately $28.5 million through June 30, 2012. As of June 30, 2012, the electing lenders have received net proceeds of $25.5 million as a result of sales from the liquidating trust.

 

We elected the fair value option to measure the financial liabilities associated with and which originated from the restructuring of our German loans.  The fair value option was elected for these liabilities to provide an accurate economic reflection of the offsetting changes in fair value of the underlying collateral.  As a result of our election of the fair value option, all changes in fair value of the elected liabilities are recorded with changes in fair value recognized through earnings.  As of June 30, 2012, the notes for the liquidating trust assets are accounted for under the fair value option.  The carrying value of the financial liabilities for which the fair value option was elected was estimated applying certain data points including the value of the underlying collateral. The notes are subject to our minimum payment guarantee (Refer to “Liquidity and Capital Resources — Overview”).  The balance as of June 30, 2012 was $24.2 million.

 

In April 2010, we entered into a settlement agreement with another lender who was not party to the restructuring agreement mentioned above of one of our German communities.  The settlement released us from certain of our operating deficit funding and payment guarantee obligations in connection with the loans.  Upon execution of the agreement, the lender’s recourse, with respect to the community mortgage, was limited to the assets owned by the German subsidiaries associated with the community.  In exchange for the release of these obligations, we agreed to pay the lender approximately $9.9 million over four years, with $1.3 million of the amount paid at signing.  The payment is secured by a non-interest bearing note.  We have recorded the note at a discount by imputing interest on the note using an estimated market interest rate.  The balance on the note was recorded at $5.3 million and is being accreted to the note’s stated amount over the remaining term of the note. The balance of the note as of June 30, 2012 was $2.9 million.

 

KeyBank Credit Facility

 

On June 16, 2011, we entered into a credit agreement for a $50 million senior revolving line of credit (“Credit Facility”) with KeyBank National Association (“KeyBank”), as administrative agent and lender, and other lenders which may become parties thereto from time to time. The Credit Facility includes a $20.0 million sublimit to support standby letters of credit and it is also expandable to $65.0 million if (i) additional lenders commit to participate in the Credit Facility and (ii) there are no defaults.

 

The Credit Facility is secured by our 40% equity interest in CC3, our joint venture with a wholly owned subsidiary of CNL, that owns 29 senior living communities managed by us.

 

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The Credit Facility matures on June 16, 2014, subject to our one-time right to extend the maturity date for one year, with ninety days’ notice, provided no material event of default has occurred and we pay a 25 basis point extension fee. Payments on the Credit Facility will be interest only, payable monthly, with outstanding principal and interest due at maturity. Prepayment is permitted at any time, subject to make whole provisions for breakage of certain LIBOR contracts. Pricing for the Credit Facility is KeyBank’s base rate or LIBOR plus an applicable margin depending on our leverage ratio. The LIBOR margins range from 5.25% to 3.25%, and the base rate margins range from 3.75% to 1.75%. We are obligated to pay a fee, payable quarterly in arrears, equal to 0.45% per annum of the average unused portion of the Credit Facility, or 0.35% per annum of the average unused portion for any quarter in which usage is greater than or equal to 50% throughout the quarter. In addition, at closing, we paid KeyBank a commitment fee of 1.0% of the Credit Facility and certain other administrative fees. The Credit Facility requires us to use KeyBank and its affiliates as our primary relationship bank, including for primary depository and cash management purposes, except as required by agreements with other entities.

 

The Credit Facility requires us to meet several covenants which include:

 

·                  Maximum corporate leverage ratio of 5.25 to 1.0;

·                  Minimum corporate fixed charge coverage ratio of 1.25 to 1.0 in 2012 and 1.45 to 1.0 in 2013 and thereafter;

·                  Minimum liquidity of $15.0 million;

·                  Minimum collateral loan to value of 75%; and

·                  Maximum permitted development obligations of $60.0 million per year.

 

In addition to the covenants stated above, the Credit Facility also contains various covenants and events of default which could trigger early repayment obligations and early termination of the lenders’ commitment obligations. Events of default include, among others: nonpayment, failure to perform certain covenants beyond a cure period, incorrect or misleading representations or warranties, cross-default to any recourse indebtedness of ours in an aggregate amount outstanding in excess of $30.0 million, and a change of control. Our ability to borrow under the Credit Facility is subject to these covenants.

 

The Credit Facility also includes limitations and prohibitions on our ability to incur or assume liens and debt except in specified circumstances, make investments except in specified circumstances, make restricted payments except in certain circumstances, make dispositions except in specified situations, incur recourse indebtedness in connection with the development of a new senior living project in excess of specified threshold amounts, use the proceeds to purchase or carry margin stock, enter into business combination transactions or liquidate us and engage in new lines of business and transactions with affiliates except in specified circumstances.

 

As of June 30, 2012, there were no draws against the Credit Facility and $10.2 million in letters of credit outstanding.  We have $39.8 million borrowing availability under the Credit Facility at June 30, 2012.

 

Other

 

In addition to the debt discussed above, Sunrise ventures have total debt of $2.3 billion with near-term scheduled debt maturities of $0.1 billion for the remainder of 2012, and $0.7 billion of debt that is in default as of June 30, 2012.  The debt in the ventures is non-recourse to us with respect to principal payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant waivers and to extend the maturity dates.  In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. We have provided operating deficit guarantees to the lenders or ventures with respect to $0.3 billion of the total venture debt.  Under the operating deficit agreements, we are obligated to pay operating shortfalls, if any, with respect to these ventures. Any such payments could include amounts arising in part from the venture’s obligations for payment of monthly principal and interest on the venture debt. These operating deficit agreements would not obligate us to repay the principal balance on such venture debt that might become due as a result of acceleration of such indebtedness or maturity.  We have non-controlling interests in these ventures.

 

One of the venture mortgage loans described above is in default at June 30, 2012 due to a violation of certain loan covenants.  The mortgage loan balance was $0.6 billion as of June 30, 2012.  The loan is collateralized by 15 communities owned by the venture located in the United Kingdom.  The lender has rights which include foreclosure on the communities and/or termination of our management agreements.  The venture is in discussions with the lender regarding the possibility of entering into a loan modification.  During 2011, we recognized $9.0 million in management fees from this venture and $4.3 million for the six months ended June 30, 2012.  Our United Kingdom Management segment reported $1.6 million in income from operations in 2011 and $1.1 million and $1.9

 

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million for the three and six months ended June 30, 2012, respectively.  Our investment balance in this venture was zero at June 30, 2012.

 

Senior Living Condominium and Assisted Living/Amenities Project

 

In 2006, we sold a majority interest in two separate ownership entities to two separate partners related to a project consisting of a residential condominium component and an assisted living/amenities component with each component owned by a different venture.  In connection with the equity sale and related financings, we undertook certain obligations to support the operations of the project for an extended period of time.  We account for the condominium and assisted living/amenities ventures under the profit-sharing method of accounting, and our liability carrying value at June 30, 2012 was $11.8 million for the two ventures.  We recorded losses of $0.5 million and $1.7 million for the three months ended June 30, 2012 and 2011, respectively, and $4.0 million and $4.8 million for the six months ended June 30, 2012 and 2011, respectively.

 

Condominium Venture

 

We are obligated to our partner on the condominium venture to fund operating shortfalls.  We have funded $2.2 million under the guarantee through June 30, 2012, of which $0.1 million was funded in 2012.  In addition, we are required to fund sales and marketing costs associated with the sale of the condominiums.  We have experienced lower sales and pricing than had been forecasted and we believe the partners have no remaining equity in the condominium project.  Accordingly, we have informed our partner that we do not intend to fund future operating shortfalls. As of June 30, 2012, the loan of $117.3 million for the residential condominium venture was in default.  We have accrued $3.5 million in default interest, late fees and other lender-related fees relating to these loans.  In February 2012, the lenders for the residential condominium venture commenced legal proceedings necessary to foreclose on the assets of the residential condominium venture.  Without terminating the foreclosure proceedings, the lenders sold their interest in the debt to a new lender in June 2012.  The debt remains in default and we are in discussions with the new lender.  We have no basis in the assets.

 

Assisted Living/Amenities Venture

 

In June 2012, the assisted living/amenities venture refinanced its existing mortgage financing with new mortgage financing provided by Eagle Bank.  The new loan has a principal amount of $26.0 million, a floor interest rate of 5.5% and a term of three years.  As a result of the refinancing, we have been released from our obligation to fund operating deficits and to pay default interest previously accrued by us through December 31, 2011 totaling approximately $2.4 million to the prior mortgage lender.  Also, in connection with the refinancing, we funded approximately $6.0 million on behalf of the venture, leading to a modification of joint venture terms.  Return of our new funding will have priority over existing equity and the venture partner’s total return will be capped at its capital contribution of $6.5 million.  Return of outstanding operating deficit and cost overruns of approximately $8.2 million to us will be subordinate to the return of capital of both venture partners.

 

Off-Balance Sheet Arrangements

 

We have had no material changes in our off-balance sheet arrangements since December 31, 2011.

 

Guarantees

 

Refer to Note 12, Commitments and Contingencies, for a discussion of guarantees outstanding at June 30, 2012.

 

Cash Flows

 

Net cash provided by (used in) operating activities was $53.4 million and $(5.4)  million for the six months ended June 30, 2012 and 2011, respectively, an increase of $58.8 million.  This change in cash provided by operations was primarily due to higher net income, net of adjusting items, of $40.3 million, a decrease of cash used in working capital of $17.6 million and a decrease in cash used in discontinued operations of $0.9 million.

 

Net cash provided by (used in) investing activities was $93.2 million and $(42.8) million for the six months ended June 30, 2012 and 2011, respectively, an increase of $136.0 million.  The change in cash provided by investing activities was primarily due to the sale of assets, including seven communities sold to a venture, of $137.2 million in 2012.

 

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Net cash (used in) provided by financing activities was $(141.4) million and $46.5 million for the six months ended June 30, 2012 and 2011, respectively, a decrease of $187.9 million.  This change was primarily due to increased repayments of debt of $159.7 million associated with transactions and decreased debt borrowings of $31.1 million.

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures.  We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our 2011 Annual Report on Form 10-K.  Since the date of our 2011 Annual Report on Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Our exposure to market risk has not materially changed since December 31, 2011.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report.  These controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to all timely decisions regarding required disclosure.  Based on that evaluation, these officers concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.

 

Internal Control Over Financial Reporting

 

There were no changes in internal control over financial reporting that occurred during the first six months of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

Information regarding pending and resolved or settled legal proceedings is contained in the “Legal Proceedings” subsection of Note 12 to the condensed consolidated financial statements and is incorporated herein by reference.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors disclosed in Part I, “Item 1A. Risk Factors” of our 2011 Annual Report on Form 10-K for the year ended December 31, 2011, as amended.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Repurchase of Shares of Common Stock

 

Our repurchases of shares of our common stock for the three months ended June 30, 2012 were as follows:

 

 

 

Total Number
of Shares
Purchased(1)

 

Average
Price Paid
per Share

 

Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Maximum Number
of Shares that May
Yet be Purchased
Under the Plans

 

April 1 – April 30, 2012

 

0

 

$

0.00

 

0

 

0

 

May 1 – May 31, 2012

 

16,905

 

$

6.69

 

0

 

0

 

June 1 – June 30, 2012

 

28,235

 

$

5.68

 

0

 

0

 

Total

 

45,140

 

$

6.06

 

0

 

0

 

 


(1) Represents the number of shares acquired by us from employees as payment of applicable statutory withholding taxes owed upon vesting of restricted stock.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

The exhibits required by this Item are set forth on the Index of Exhibits attached hereto.

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 2nd day of August 2012.

 

SUNRISE SENIOR LIVING, INC.

 

(Registrant)

 

 

 

/s/ C. Marc Richards

 

C. Marc Richards

 

Chief Financial Officer

 

 

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INDEX OF EXHIBITS

 

 

 

 

 

INCORPORATED BY REFERENCE

Exhibit
Number

 

Description

 

Form

 

Filing Date with SEC

 

Exhibit
Number

2.1

 

Transfer Agreement dated June 4, 2012 by and among Sunrise Senior Living Investments, Inc., CHT Partners, LP and Sunrise Senior Living Management, Inc. (Schedules and exhibits to the Transfer Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits to the Securities and Exchange Commission upon request.)

 

8-K

 

July 6, 2012

 

2.1

 

 

 

 

 

 

 

 

 

10.1

 

2008 Omnibus Incentive Plan, as amended.+

 

Def 14A

 

March 23, 2012

 

A

 

 

 

 

 

 

 

 

 

10.2

 

Form of Executive Restricted Stock Unit Agreement for Executive Officers with Employment Agreement (2008 Omnibus Incentive Plan, as amended).*+

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

10.3

 

Form of Executive Performance Unit Agreement for Executive Officers with Employment Agreement (2008 Omnibus Incentive Plan, as amended).*+

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

N/A

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

Furnished with this report

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

Submitted electronically with this report

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Document Linkbase Document

 

Submitted electronically with this report

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Submitted electronically with this report

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

Submitted electronically with this report

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

Submitted electronically with this report

 


*       Filed herewith.

+       Represents management contract or compensatory plan or arrangement.

 

We have attached the following documents formatted in XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report: (i) the Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011, respectively; (ii) the Consolidated Balance Sheets at June 30, 2012, and December 31, 2011; and (iii) the Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, respectively, and (iv) the Notes to the Consolidated Financial Statements, tagged as blocks of text.. We advise users of this data that pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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