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| BKD > SEC Filings for BKD > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations regarding occupancy, the demand for senior housing, acquisition opportunities, our share repurchase program, and our dividend strategy; our belief regarding our growth prospects; our ability to secure financing or replace or extend existing debt as it matures (including our line of credit); our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity; our expectations regarding financings and refinancings of assets; our plans to generate growth organically through occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy and home health); our plans to expand existing facilities and develop new facilities; the expected project costs for our expansion and development program; our expected levels of expenditures and reimbursements (and the timing thereof); the anticipated cost and expense associated with the resolution of pending litigation and our expectations regarding the disposition thereof; our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as "anticipate(s)", "expect(s)", "intend(s)", "plan(s)", "target(s)", "project(s)", "predict(s)", "believe(s)", "may", "will", "would", "could", "should", "seek(s)", "estimate(s)" and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; our inability to extend (or refinance) debt as it matures or replace our credit facility when it expires; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; the risk that we may be required to post additional cash collateral in connection with our interest rate swaps; the risk that continued market deterioration could jeopardize certain of our counterparties' obligations; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; changes in governmental reimbursement programs; our limited operating history on a combined basis; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; our ability to integrate acquisitions into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; increased competition for skilled personnel; departure of our key officers; increases in market interest rates; environmental contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2007. Such forward-looking statements speak only as of the date of this Quarterly Report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Executive Overview
During the third quarter of 2008, we continued to make progress in implementing the long-term growth objectives outlined in our most recent Annual Report on Form 10-K, even given the difficult operating environment. The following is a summary discussion of our progress during the three and nine months ended September 30, 2008.
Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including the realization of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy and home health services); and (iii) expansion of our existing communities and, to a lesser extent, development of new communities. Although we continue to anticipate a reduced level of acquisition activity over the near term when compared with historical levels, given the potential opportunities that may arise as a result of the recent market disruption, we may also grow through the selective acquisition and consolidation of additional communities, asset portfolios and other senior living companies.
The tables below present a summary of our operating results and certain other financial metrics for the three and nine months ended September 30, 2008 and 2007 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).
Three Months Ended Increase
September 30, (Decrease)
2008(1) 2007 Amount Percent
Total revenue $ 482.3 $ 464.6 $ 17.7 3.8 %
Net loss $ (35.9 ) $ (58.9 ) $ 23.0 39.0 %
Adjusted EBITDA $ 67.4 $ 83.6 $ (16.2 ) (19.4 %)
Cash From Facility Operations $ 22.5 $ 41.8 $ (19.3 ) (46.2 %)
Facility Operating Income $ 149.8 $ 162.8 $ (13.0 ) (8.0 %)
Nine Months Ended Increase
September 30, (Decrease)
2008(1)(2) 2007 Amount Percent
Total revenue $ 1,441.1 $ 1,369.8 $ 71.3 5.2 %
Net loss $ (94.5 ) $ (112.7 ) $ 18.2 16.1 %
Adjusted EBITDA $ 227.0 $ 237.0 $ (10.0 ) (4.2 %)
Cash From Facility Operations $ 97.7 $ 115.9 $ (18.2 ) (15.7 %)
Facility Operating Income $ 481.2 $ 489.2 $ (8.0 ) (1.6 %)
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(1) The calculation of Adjusted EBITDA and Cash From Facility Operations for the three and nine months ended September 30, 2008 includes hurricane and named tropical storms expense totaling $3.6 million.
(2) The calculation of Adjusted EBITDA and Cash From Facility Operations for the nine months ended September 30, 2008 includes the effect of the $8.0 million reserve established for certain litigation (Note 7).
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See "Non-GAAP Financial Measures" below for an explanation of how we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities to Cash From Facility Operations.
During the third quarter of 2008, we achieved total revenue growth compared to the prior year period and a 0.8% increase in average occupancy over the second quarter of 2008. Although we made progress in certain areas of the business, current adverse credit market conditions and the economic environment had a negative impact on our
results for the three and nine months ended September 30, 2008, as discussed below. This negative impact primarily resulted in pressure on our occupancy rate and increased expenses.
Our revenues for the three months ended September 30, 2008 increased to $482.3 million, an increase of $17.7 million, or approximately 3.8%, over our revenues for the three months ended September 30, 2007. For the nine months ended September 30, 2008, our revenues increased $71.3 million, or approximately 5.2%, to $1.4 billion over the nine months ended September 30, 2007. The increase in revenues in the current year periods was primarily a result of an increase in the average revenue per unit/bed compared to the prior year periods and growing revenues from our ancillary services programs, partially offset by a decline in occupancy from the prior year periods. Our weighted average occupancy rate for the third quarter of 2008 was 89.7%, compared to 90.6% for the third quarter of 2007.
Although our revenues increased period over period, our overall financial results for the three and nine months ended September 30, 2008 were negatively impacted by a higher than usual level of expense growth.
During the three months ended September 30, 2008, our Adjusted EBITDA, Cash From Facility Operations, and Facility Operating Income decreased by 19.4%, 46.2% and 8.0%, respectively, when compared to the three months ended September 30, 2007. During the nine months ended September 30, 2008, our Adjusted EBITDA, Cash From Facility Operations, and Facility Operating Income decreased by 4.2%, 15.7% and 1.6%, respectively, when compared to the nine months ended September 30, 2007. Adjusted EBITDA and Cash From Facility Operations for the three and nine month periods ended September 30, 2008 were negatively impacted by $3.6 million of hurricane and named tropical storms expense. Additionally, Adjusted EBITDA and Cash From Facility Operations for the nine month period ended September 30, 2008 were negatively impacted by an $8.0 million charge to general and administrative expense relating to the establishment of a reserve for certain litigation (Note 7).
During the third quarter of 2008, we repurchased 431,758 shares of our common stock at a cost of approximately $9.2 million.
During the quarter, we continued to make progress in expanding our ancillary services offerings. At September 30, 2008, we had almost 34,000 units served by our therapy services programs and over 15,000 units served by our home health agencies. While we continue to work to expand our ancillary services programs to additional Brookdale units and to open or acquire additional home health agencies, we also continue to see positive results from the maturation of previously-opened therapy clinics.
During the quarter, we also made progress in our expansion and development program, completing expansions at three communities (with a total of 50 units). We currently have eight projects under construction with a total of approximately 803 units.
Our growth initiatives and operating results have continued to be negatively impacted by unfavorable conditions in the housing, credit and financial markets. We believe that the deteriorating housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates when compared to the prior year periods. We remain cautious about the economy and its effect on our customers. In addition, we continue to experience volatility in the entrance fee portion of our business. The timing of entrance fee sales is subject to a number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively or negatively) when measured over the short-term. We expect occupancy to remain relatively flat over the near term and we expect entrance fee sales to normalize over the longer term.
Consolidated Results of Operations
Three Months Ended September 30, 2008 and 2007
The following table sets forth, for the periods indicated, statement of
operations items and the amount and percentage of increase or decrease of these
items. The results of operations for any particular period are not necessarily
indicative of results for any future period. The following data should be read
in conjunction with our condensed consolidated financial statements and the
notes thereto, which are included herein. Our results reflect the inclusion of
acquisitions that occurred during the respective reporting periods. Refer to our
most recent Annual
Report on Form 10-K for the year ended December 31, 2007, filed February 29, 2008, for additional information regarding acquisitions.
(dollars in thousands, except average monthly revenue per unit/bed)
Three Months Ended
September 30,
Increase % Increase
2008 2007 (Decrease) (Decrease)
Statement of Operations Data:
Revenue
Resident fees
Retirement Centers $ 140,937 $ 138,009 $ 2,928 2.1 %
Assisted Living 210,900 200,157 10,743 5.4 %
CCRCs 128,913 124,935 3,978 3.2 %
Total resident fees 480,750 463,101 17,649 3.8 %
Management fees 1,527 1,493 34 2.3 %
Total revenue 482,277 464,594 17,683 3.8 %
Expense
Facility operating expense(1)
Retirement Centers 83,030 76,485 6,545 8.6 %
Assisted Living 145,695 128,907 16,788 13.0 %
CCRCs 97,489 89,605 7,884 8.8 %
Total facility operating expense 326,214 294,997 31,217 10.6 %
General and administrative
expense 32,948 34,733 (1,785 ) (5.1 %)
Facility lease expense 67,017 67,708 (691 ) (1.0 %)
Depreciation and amortization 67,066 79,235 (12,169 ) (15.4 %)
Total operating expense 493,245 476,673 16,572 3.5 %
Loss from operations (10,968 ) (12,079 ) 1,111 9.2 %
Interest income 1,383 1,695 (312 ) (18.4 %)
Interest expense
Debt (37,599 ) (38,472 ) 873 2.3 %
Amortization of deferred
financing costs (3,004 ) (1,151 ) (1,853 ) (161.0 %)
Change in fair value of
derivatives and amortization (8,454 ) (43,731 ) 35,277 80.7 %
Equity in earnings (loss) of
unconsolidated ventures 358 (309 ) 667 215.9 %
Other non-operating income 69 - 69 100.0 %
Loss before income taxes (58,215 ) (94,047 ) 35,832 38.1 %
Benefit for income taxes 22,338 35,125 (12,787 ) (36.4 %)
Loss before minority interest (35,877 ) (58,922 ) 23,045 39.1 %
Minority interest - (5 ) 5 100.0 %
Net loss $ (35,877 ) $ (58,927 ) $ 23,050 39.1 %
Selected Operating and Other
Data:
Total number of communities (at
end of period) 550 550 - -
Total units/beds operated(2) 51,933 52,082 (149 ) (0.3 %)
Owned/leased communities
units/beds 47,640 47,553 87 0.2 %
Owned/leased communities
occupancy rate:
Period end 90.3 % 90.8 % (0.5 %) (0.6 %)
Weighted average 89.7 % 90.6 % (0.9 %) (1.0 %)
Average monthly revenue per
unit/bed(3) $ 3,786 $ 3,609 $ 177 4.9 %
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Selected Segment Operating and Other Data:
Retirement Centers Number of communities (period end) 87 86 1 0.2 % Total units/beds(2) 15,895 15,869 26 0.2 % Occupancy rate: Period end 90.7 % 91.9 % (1.2 %) (1.3 %) Weighted average 90.6 % 92.2 % (1.6 %) (1.7 %) Average monthly revenue per unit/bed(3) $ 3,288 $ 3,148 $ 140 4.4 % Assisted Living Number of communities (period end) 410 409 1 1.2 % Total units/beds(2) 21,134 21,091 43 0.2 % Occupancy rate: Period end 90.9 % 90.0 % 0.9 % 1.0 % Weighted average 90.2 % 89.9 % 0.3 % 0.3 % Average monthly revenue per unit/bed(3) $ 3,690 $ 3,520 $ 170 4.8 % CCRCs Number of communities (period end) 32 32 - - Total units/beds(2) 10,611 10,593 18 0.2 % Occupancy rate: Period end 88.7 % 90.8 % (2.1 %) (2.3 %) Weighted average 87.4 % 89.7 % (2.3 %) (2.6 %) Average monthly revenue per unit/bed(3) $ 4,828 $ 4,565 $ 263 5.8 % Management Services Number of communities (period end) 21 23 (2 ) (8.7 %) Total units/beds(2) 4,293 4,529 (236 ) (5.2 %) Occupancy rate: Period end 85.6 % 83.2 % 2.4 % 2.9 % Weighted average 85.3 % 82.9 % 2.4 % 2.9 % Selected Entrance Fee Data: Non-refundable entrance fees sales $ 7,253 $ 5,673 $ 1,580 27.9 % Refundable entrance fees sales(4) 4,273 8,696 (4,423 ) (50.9 %) Total entrance fee receipts 11,526 14,369 ( 2,843 ) (19.8 %) Refunds (5,856 ) (5,084 ) (772 ) (15.2 %) Net entrance fees $ 5,670 $ 9,285 $ (3,615 ) (38.9 %) |
(1) Segment facility operating expense for the three months ended September 30, 2008 includes hurricane and named tropical storms expense totaling $3.6 million consisting of $1.1 million for Retirement Centers, $1.3 million for Assisted Living and $1.2 million for CCRCs.
(2) Total units/beds operated represent the total units/beds operated as of the end of the period.
(3) Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units/beds.
(4) Refundable entrance fee sales for the three months ended September 30, 2008 include amounts received from residents participating in the MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee. MyChoice amounts received from existing residents totaled $0.6 million and $3.6 million for the three months ended September 30, 2008 and 2007, respectively.
Resident Fees
The increase in resident fees was driven by revenue growth across all business segments. Resident fees increased over the prior-year third quarter mainly due to an increase in average monthly revenue per unit/bed during the current period as well as an increase in our ancillary services revenue as we continue to roll out therapy and home health services to many of our communities. This increase was partially offset by a decrease in occupancy across all segments for our same-store communities. During the current period, same-store revenues grew 3.7% at the 527 properties we operated in both periods with a 4.9% increase in the average monthly revenue per unit/bed and a 1.1% decrease in occupancy.
Retirement Centers revenue increased $2.9 million, or 2.1%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both periods, partially offset by a decrease in occupancy at these same-store communities period over period.
Assisted Living revenue increased $10.7 million, or 5.4%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both periods. Occupancy at these same-store communities increased slightly period over period. Revenue growth was also positively impacted by an increase in revenue related to the rollout of our ancillary services business to these communities during 2007 and 2008.
CCRCs revenue increased $4.0 million, or 3.2%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated during both periods partially offset by a decrease in occupancy at these same-store communities period over period.
Management Fees
Management fees were comparable period over period as the number of management contracts maintained was fairly consistent during both periods.
Facility Operating Expense
Facility operating expense increased over the prior-year period primarily due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, expense incurred related to hurricanes and other named tropical storms, as well as an increase in expense incurred in connection with the continued rollout of our ancillary services during the third quarter of 2008.
Retirement Centers operating expenses increased $6.5 million, or 8.6%, primarily due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, $1.1 million of expense incurred in connection with hurricanes and other named tropical storms, an increase in insurance and utility expenses period over period as well as an increase in expense incurred in connection with the continued rollout of our ancillary services program.
Assisted Living operating expenses increased $16.8 million, or 13.0%, due to an increase in salaries, wages and benefits related to normal salary increases, increased employee hours worked and reduced open positions, $1.3 million of expense incurred in connection with hurricanes and other named tropical storms as well as an increase in expense incurred in connection with the continued rollout of our ancillary services program.
CCRCs operating expenses increased $7.9 million, or 8.8%, primarily due to an increase in salaries, wages and benefits due to normal salary increases and increased employee count, as well as $1.2 million of expense incurred in connection with hurricanes and other named tropical storms.
General and Administrative Expense
General and administrative expense decreased $1.8 million, or 5.1%, primarily as a result of a decrease in non-recurring integration expenses and non-cash stock-based compensation expense in connection with restricted stock grants which were partially offset by an increase in professional fees paid period over period, benefits paid, systems maintenance and travel expenses related to new training programs and meetings associated with our recent divisional realignment. General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage, was 5.0% and 4.7% for the three months ended September 30, 2008 and 2007, respectively, calculated as follows (dollars in thousands):
Three Months Ended
September 30,
2008 2007
Resident fee revenues $ 480,750 $ 463,101
Resident fee revenues under management 36,739 37,404
Total $ 517,489 $ 500,505
General and administrative expenses (excluding merger and
integration expenses and non-cash stock compensation expense
totaling $10.6 million and $11.2 million in 2008 and 2007,
. . .
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