Sunrise Reports Financial Results for Third Quarter 2008
"This quarter was very difficult as we incurred a significant net loss,"said Mark Ordan, Sunrise's chief executive officer. "Our team has been fullycommitted to grinding down cash outflows by reducing overhead, slashingdevelopment-related spending and selling or repositioning assets unsuited tothe combination of today's capital market environment and our financialcondition. We do not expect these efforts to distract us from our role asmanagers of senior living's leading brand portfolio and organization and wefully intend to become a leaner, stronger, growing company."
Financial Results for Third Quarter 2008
The Company reported revenues of $436.0 million for the third quarter of2008 as compared to $429.5 million for the third quarter of 2007. Net lossfor the third quarter 2008 was $68.7 million, or ($1.36) per fully dilutedshare, as compared to net income of $38.2 million, or $0.74 per fully dilutedshare, for the third quarter of 2007. The loss before income taxes andextraordinary loss for the third quarter was $90.1 million as compared toincome before income taxes for the third quarter of 2007 of $55.9 million.Included in the (loss) income before income taxes and extraordinary loss forthe three months ended September 30, 2008 and 2007 are the following largeand/or unusual items:
For additional information regarding the Company's results of operationsfor the third quarter, please refer to the Company's third quarter 2008 10-Qfiled today with the SEC.
Operating Data for Third-Quarter 2008
-- Revenue under management for the third quarter 2008 increased5.0 percent to $639.2 million as compared to $608.8 million for the prior-yearthird quarter. The measure "revenue under management" is derived by combiningthe revenues of Sunrise's consolidated communities, communities owned inunconsolidated ventures and communities owned by third parties that aremanaged by Sunrise (excluding communities managed by Greystone, the Company'sdeveloper and professional services provider for non-profit continuing careretirement communities). This increase relates to increased occupancy forcommunities in lease-up as well as average daily rate growth for stabilizedcommunities.
-- Same-community revenues for the third quarter 2008 increased4.9 percent to $350.3 million as compared to $333.8 million for the prior-yearthird quarter. The increase relates to growth in occupancy and average dailyrates. Sunrise's same-community portfolio consists of communities in whichSunrise has an ownership interest (i.e., consolidated communities andunconsolidated venture communities) that were stabilized in both the thirdquarter of 2008 and 2007, which Sunrise defines as being open for 12 months orhaving achieved 95 percent occupancy, whichever occurs first.
-- Average daily rate for the same-community portfolio for the thirdquarter 2008 increased 3.8 percent to $165.21 as compared to $159.10 for theprior-year third quarter. The Company's average daily rate includes roomrates, extended care fees and community fees. Rate growth was largely due toroom rate increases for new and existing residents as well as increases inextended care rate and utilization.
-- During the third quarter of 2008, Sunrise opened three new communitiesand began construction on one new community. As of September 30, 2008, theCompany had 34 communities under construction, with capacity for an additional4,300 residents. Five of these communities under construction are projectsbeing developed by Greystone.
-- As of September 30, 2008, Sunrise operated 448 communities located inthe United States, Canada, the United Kingdom and Germany, with residentcapacity for approximately 55,000 residents.
-- The same-community average occupancy rate for the third quarter of 2008was 89.9 percent as compared to 89.1 percent for the prior-year third quarter.Growth in occupancy was driven by both the consolidated and ventureportfolios. Across both portfolios, assisted living and memory care occupancyincreased, offset in part by a decline in independent living. During thethird quarter of 2008, seven European communities with lower than averageoccupancy were included in the same-community pool for the first time.U.S.-only occupancy for the same store portfolio was 90.9 percent, up from90.6 percent in the prior-year third quarter.
-- Same-community operating expenses for the third quarter of 2008increased 3.1 percent to $231.6 million, as compared to $224.6 million for theprior-year third quarter. Included in the expense are credits due tofavorable loss experience related to the Company's insurance programs of$10.2 million and $3.6 million for the third quarter 2008 and 2007,respectively. Same-community operating expenses exclude management fees paidto Sunrise with respect to same-community ventures in order to makecomparisons between consolidated communities and unconsolidated venturecommunities consistent. Labor costs increased, largely due to the higherlevel of extended care services, which require additional labor hours.Same-community operating expense also included increases for repairs andmaintenance and utilities.
Sunrise's management believes that total revenue under management andtotal same-community revenues, average daily rate, average occupancy rate andtotal same-community expenses are useful indicators of trends in Sunrise'smanagement business. For such data broken down by consolidated communitiesand communities in unconsolidated ventures (and also broken down bycommunities managed for third-party owners, in the case of revenues undermanagement), please refer to the Supplemental Information attached.
Cash and Liquidity Update
As of September 30, 2008 there were $95 million in borrowings and$21.7 million in letters of credit outstanding under the Company's amendedBank Credit Facility. The Company had borrowing availability of approximately$43.3 million under the amended Bank Credit Facility. As of September 30,2008, the Company had approximately $52.8 million in unrestricted cash andcash equivalents and was in compliance with the minimum liquidity covenant of$50 million.
The Company's amended Bank Credit Facility contains various financialcovenants and restrictions, including provisions that require the Company tomeet certain financial tests. As part of a November 6, 2008 amendment to theBank Credit Facility, the lenders waived compliance by the Company as ofSeptember 30, 2008 with the net worth test under the Bank Credit Facility(which requires the Company's consolidated adjusted net worth to be at least$450 million). In July 2008, the lenders have also waived compliance by theCompany for the quarter ended September 30, 2008 with the following financialtest: (1) the leverage ratio provision of the Bank Credit Facility, whichrequires the Company's leverage ratio not to exceed 4.25 to 1.0 and (2) thefixed charge provision, which requires the Company's fixed charge coverageratio not to be less than 1.75 to 1.0. The Company does not expect to be ableto satisfy these financial covenants at the end of the fourth quarter of 2008.Accordingly, the Company expects that, on January 1, 2009, it may no longer beable to borrow under the amended Bank Credit Facility, unless it receives anadditional waiver from the lenders.
In the November 6, 2008 amendment, the Company and the lendersacknowledged that it was their intention to revise and restructure the BankCredit Facility by January 31, 2009 on terms acceptable to the Company and thelenders, including the granting by the Company of such tangible collateral tosecure its obligations as is acceptable to the lenders. As part of theNovember 6, 2008 amendment, the Company also paid fees of $0.2 million to thelenders and the borrowing cost under the line was increased to LIBOR plus3.75 percent, with a minimum rate of 5 percent.
In the event that the Company is unable to revise and restructure its BankCredit Facility by January 31, 2009, or in the event that the Company fails tocomply with the new liquidity covenants included in the July 2008 amendmentfor any calendar month (minimum liquidity of not less than $50 million,composed of availability under the amended Bank Credit Facility plus up to notmore than $50 million in unrestricted cash and cash equivalents), the lendersunder the amended Bank Credit Facility could, among other things, exercisetheir rights to accelerate the payment of all amounts then outstanding underthe amended Bank Credit Facility, exercise remedies against the collateralsecuring the amended Bank Credit Facility, require the Company to replace orprovide cash collateral for the outstanding letters of credit or pursuefurther modification with respect to the amended Bank Credit Facility. TheCompany is also seeking to refinance its Bank Credit Facility through newlenders and is discussing other potential sources of capital with other thirdparties.
The Company believes current availability under the Bank Credit Facilityand unrestricted cash balances of approximately $52.8 million at September 30,2008 will be sufficient to support its operations through January 31, 2009.
Additional financing resources will be required to refinance existingindebtedness that comes due within the next 12 months. The Company's debtmaturities for 2009 of $213.5 million are as follows:
-- $95 million for draws on the amended Bank Credit Facility, which areclassified as short-term debt in the Company's consolidated financialstatements;
-- $34.3 million in land loans due in the third and fourth quarters of2009, related to properties the Company intends to sell;
-- $20 million margin loan collateralized by auction rate securities witha book value of $36 million;
-- $48 million related to two consolidated communities (one loan for$40 million and one for $8 million), due in the third quarter 2009. TheCompany is currently working with its lenders to refinance these loans, butestimates that a partial paydown of up to $10 million may be required; and
-- principal payments of $12.5 million related to the debt of the Germanventure as described below.
In addition, the Company will be required to repay or refinance anyletters of credit that are outstanding under the Bank Credit Facility uponmaturity on the Facility.
During October and November, the Company received income tax refunds of$30.1 million. Additional tax refunds of up to $27 million are anticipated tobe received by mid-2009, subject to the filing of the Company's tax returnsfor 2008.
The Company is currently pursuing the following additional sources ofcash:
-- potential refinancings related to the Company's ventures resulting inestimated net proceeds of $8 million projected to occur in the fourth quarterof 2008;
-- sale of 15 land parcels related to abandoned development project with abook value of $74 million and related debt of $31 million projected to occurthroughout 2009;
-- sales of properties that are currently wholly-owned to a venture withnet proceeds of approximately $10 million projected during 2009; and
-- successful completion of bond financing for non-profit developmentprojects being developed by the Company's subsidiary Greystone, of which atleast two are forecasted to close in late 2008 or early 2009, generatinganticipated net proceeds of $11 million.
No assurance can be given that these additional potential sources of cashwill be realized.
Corporate Expenses and Operating Cost Structure
As previously announced, in light of the difficult financial environment,the Company has initiated a plan to reduce its general and administrativeheadcount and certain non-payroll costs with the expectation of reducing theCompany's general and administrative spending level by at least $20.0 million.To date, Sunrise has identified approximately 160 non-care related positionsin overhead and development that will be eliminated in 2008 and 2009. Thesereductions are anticipated to generate annual savings of approximately$17 million. The Company does not expect its cost reduction initiative toresult in any reduction to the level of service it provides to residents. Withits now smaller workforce, Sunrise has engaged an outside real estate firm tosublet portions of its McLean, Virginia office.
In addition to the $7.2 million of severance expense recorded in the thirdquarter of 2008, the Company expects to record $7.5 million and $2.0 millionin the fourth quarter of 2008 and the first and second quarters of 2009,respectively, based on actions taken to date.
Development Pipeline Update
The Company's previously disclosed development plan for 2008 included adevelopment pipeline of 1,200 to 1,400 units. As of September 30, 2008, dueto continued lack of financing availability and market conditions, the Companydoes not expect any construction starts in the fourth quarter of 2008 andaccordingly the Company now expects its 2008 construction starts to be fivenew communities consisting of 530 units, which were begun in the first threequarters of 2008. The Company abandoned 54 projects in the quarter endedSeptember 30, 2008 and has taken a charge of $47.5 million related to theseprojects. Additional charges could be incurred as the Company continues toassess the Company's development pipeline in light of capital marketconditions and the Company's underwriting requirements.
The Company has determined that there are a number of land parcels whichit will not develop in the future due to the Company's more stringentunderwriting criteria. The Company intends to sell 15 land parcels which havea carrying value of $74 million and related debt of $31 million.
As of September 30, 2008, the Company had contracts to purchase or lease15 development sites which it intends to develop in the future, subject tocredit market conditions, for a total contracted purchase price ofapproximately $60 million. Generally, the Company's land purchase commitmentsare terminable by Sunrise and the $13.1 million in land deposits (included inother assets on the Company's consolidated balance sheet) are refundable.
The Company has not yet determined its development goals for 2009. TheCompany does not intend to begin construction on new projects withoutcommitted construction debt financing. Based on current credit marketconditions, the Company anticipates only limited construction starts in 2009.The Company plans to continue future development once market conditionsimprove and the cost of capital for development projects is reduced forcurrent expectations in the market.
Germany Venture Update
As previously disclosed, on September 1, 2008, the Company paid Euro 3.0million ($4.4 million) to the majority partner in its Germany venture for anoption to purchase its entire equity interest in the venture through atwo-step transaction in 2009. The Company expects to exercise its option inJanuary 2009. Also on September 1, the Company entered into an agreement withits partner that gives the Company permission to immediately pursue potentialrestructuring of loans with venture lenders, pursue potential sales of some orall of the nine communities in the venture and to merge certain subsidiariesof the venture to improve operational efficiencies and reduce VAT taxes paid.The Company's decision to purchase this option was based on the fact that ithad 100% of the risk for the Germany venture but did not have control and hadonly 20% of the equity ownership. Neither the purchase of the option nor theexercise of the option planned for January 2009 alters the Company'sobligation under any financial guarantees for which it is responsible oralters any of the recourse/non-recourse provisions in any of the loans. Thepurchase of the equity interest in the Germany venture will enable theCompany's shareholders to benefit from 100% of any appreciation of thecommunities as they become stabilized. Previously, while the Company wasresponsible for funding 100% of the losses under the operating deficitguarantees, it had limited benefit from any future appreciation of the assets.This is a significant non-cash transaction affecting the Company's balancesheet but has no effect on its statement of cash flows.
As of September 1, 2008, the venture was consolidated, resulting in anon-cash after-tax extraordinary loss of $13.3 million. The assets for theventure are recorded at $168.5 million and the debt is recorded at$216.7 million. Of this debt, $191.2 million is non-recourse to Sunrise and$25.5 million is guaranteed by the Company. In addition, to the extent thatfour properties that collateralize the loan are sold for less than thespecified release price, approximately Euro 50 million for four properties,the Company could be required to make additional payments to cover anyshortfall in the release price. The current estimated fair value of the fourproperties approximates the release price.
Sunrise expects to close or sell two communities within the next severalmonths. It is possible that a loss in excess of the estimated fair valuecould occur and that the Company may be required to fund a loss greater thanthe difference between the fair value and release price disclosed above. Forthe remaining communities in Germany, based on continuing realized occupancygrowth, the Company believes that the operations can achieve stabilization andeventually be profitable.
Upon consolidation, the Company's existing receivables from the ventureand guarantee liabilities are eliminated for financial reporting purposes.Guarantee liabilities are considered in the valuation of the debt andaccordingly, are also eliminated for financial reporting purposes. TheCompany is still responsible for guarantee liabilities to the lenders.
Future fundings to Sunrise's German operations for operating losses andinterest payments excluding principal payments prior to the closure or sale ofany communities are estimated to be as follows (in thousands):
In October 2008, the Company determined not to provide any additionalfunding for ongoing operations to our Trinity subsidiary due to the continuedlosses experienced by that subsidiary. As a result, the Company expects towrite-off the remaining goodwill and other intangible assets related toTrinity of approximately $9.8 million in the fourth quarter of 2008. As aresult of this decision to cease funding by the Company, Trinity's board ofdirectors has decided it will discontinue operations by the end of the year.
The Company has determined not to fund new development capital projects ofits Greystone subsidiary until the bond financing markets open up again.
Conference Call and Webcast
Sunrise will host a conference call and webcast to discuss the thirdquarter 2008 financial results and selected financial and operating data, andthe other matters discussed in this press release at 9:00 a.m. ET on Friday,November 7, 2008. The call-in number for the conference call is1-888-726-2470 or (913) 312-1390 (no password required). Those interested mayalso go to the Investor Relations section of the Company's Web site(http://www.sunriseseniorliving.com) to listen to the earnings call. Atelephone replay of the call will be available until November 21, 2008, bydialing 1-888-203-1112 or (719) 457-0820 (passcode 7482660); a replay willalso be available on Sunrise's Web site until December 7, 2008.
About Sunrise Senior Living
Sunrise Senior Living, a McLean, Va.-based company, employs approximately40,000 people. As of September 30, 2008, Sunrise operated 448 communities inthe United States, Canada, Germany and the United Kingdom, with a combinedcapacity for approximately 55,000 residents. At quarter end, Sunrise also had34 communities under construction in these countries with a combined capacityfor 4,277 additional residents. Sunrise offers a full range of personalizedsenior living services, including independent living, assisted living, carefor individuals with Alzheimer's and other forms of memory loss, as well asnursing, rehabilitative and hospice care. Sunrise's senior living services aredelivered by staff trained to encourage the independence, preserve thedignity, enable freedom of choice and protect the privacy of residents. Tolearn more about Sunrise, please visit http://www.sunriseseniorliving.com.
Certain matters discussed in this press release may be forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Although Sunrise believes the expectations reflected in suchforward-looking statements are based on reasonable assumptions, there can beno assurances that its expectations will be realized. Sunrise's actualresults could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limitedto, the Company's ability to obtain a covenant waiver or further modificationof its Bank Credit Facility; the Company's ability to refinance its BankCredit Facility and other debt due in 2009 and/or raise funds from othercapital sources; the Company's ability to achieve the anticipated savings fromthe Company's cost-savings program; the outcome of the SEC's investigation;the outcomes of pending putative class action and derivative litigation; theoutcome of the Trinity OIG investigation and qui tam proceeding; the outcomeof the IRS audit of the Company's tax return for the tax year ended December31, 2006 and employment tax returns for 2004, 2005 and 2006; the status of theexploration of strategic alternatives; the Company's ability to continue torecognize income from refinancings and sales of communities by ventures; riskof changes in the Company's critical accounting estimates; risk of furtherwrite-downs or impairments of the Company's assets; risk of future fundings ofguarantees and other support arrangements to some of the Company's ventures,lenders to the ventures or third party owners; risk of declining occupanciesin existing communities or slower than expected leasing of new communities;risk resulting from any international expansion; risk associated with any newservice offerings; development and construction risks; risks associated withpast or any future acquisition; compliance with government regulations; riskof new legislation or regulatory developments; business conditions;competition; changes in interest rates; unanticipated expenses; market factorsthat could affect the value of the Company's properties; the risks of furtherdownturns in general economic conditions; availability of financing fordevelopment; and other risks detailed in the Company's amended 2007 AnnualReport on Form 10-K filed with the SEC, as may be amended or supplemented inthe Company's Form 10-Q filings. The Company assumes no obligation to updateor supplement forward-looking statements that become untrue because ofsubsequent events.
Financial information provided in this press release for periodssubsequent to September 30, 2008 is preliminary and remains subject to reviewby Ernst & Young LLP. As such, this information is not final or complete, andremains subject to change, possibly materially.
(2) Same-community portfolio consists of all communities in which Sunrisehas an ownership interest in and that were open for at least 12 months or hadachieved 95% occupancy (whichever was sooner) as of the third quarter of 2008.This includes consolidated communities and communities in ventures.
(3) Community operating expense excludes management fees paid to Sunrisewith respect to same-community ventures in order to make comparisons betweenconsolidated and venture communities consistent.
(4) Average daily rate includes resident room fees, extended care feesand community fees. Average daily rate was adjusted retroactively to includecommunity fees, which are amortized over a one-year period.Three Months Ended September 30, (In millions) 2008 2007 Severance costs $ (7.2) $ - Accounting Restatement, Special Independent Committee inquiry, SEC investigation and pending stockholder litigation (5.1) (12.0) Impairment of long-lived assets - (3.6) Write-off of abandoned development projects (47.5) (15.6) Gain on sale and development of real estate and equity interests 4.7 52.7 Gain on sale of seven communities within one UK venture - 82.9 Impairment loss on four communities in a Fountains venture (7.4) - Recapitalizations 0.2 - -------- -------- $ (62.3) $ 104.4
SOURCE Sunrise Senior Living, Inc.
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