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SRZ > SEC Filings for SRZ > Form 10-Q on 7-Nov-2011All Recent SEC Filings

Show all filings for SUNRISE SENIOR LIVING INC



Quarterly Report

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 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;

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 (in some cases, the expiration is as early as 2013);

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;

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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 operation of assisted living and independent living communities;

and other risk factors detailed in our Current Report on Form 8-K filed with the SEC on April 14, 2011, and as may be further 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.


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 September 30, 2011, we operated 311 communities, including 269 communities in the United States, 15 communities in Canada and 27 communities in the United Kingdom, with a total unit capacity of approximately 31,000.

The following table summarizes our portfolio of operating communities:

                                                                     As of                 Change
                                                                 September 30,            2011 vs.
                                                              2011           2010           2010

Total communities
Owned                                                             22             11           100.0 %
Leased                                                            26             26             0.0 %
Variable Interest Entity                                           1              1             0.0 %
Consolidated New York communities leased from a venture            6              0             n/a
Consolidated venture                                               1              1             0.0 %
Unconsolidated ventures                                          113            196           -42.3 %
Managed                                                          142            114            24.6 %

Total                                                            311            349           -10.9 %

Unit capacity                                                 30,723         34,704           -11.5 %

Effective in 2011, we revised our operating segments as a result of a change in the manner in which the key decision makers review the operating results and the cessation of all development activity. We now 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. In 2010, we had five operating segments, North American Management, North American Development (the residual activity which is now included with corporate costs), Equity Method Investments (whose community operations are now included either in North American Management or United Kingdom Management), Consolidated (Wholly-Owned/Leased) and United Kingdom.

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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 Communitiesincludes 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.

2011 Developments


During 2011, we have (i) restructured and recapitalized three ventures;
(ii) sold six assets in the liquidating trust and reduced our restructuring obligations by $11.3 million; (iii) raised $86.2 million under a convertible notes offering; (iv) acquired a venture partner's 80% interest in a 15 community portfolio; (v) secured a new $50 million bank credit facility; and (vi) further reduced our annual recurring general and administrative expense by eliminating 69 positions in 2011 (see below for a description of each transaction). In the remainder of 2011 and into 2012, we expect to continue to focus on: (a) seeking strategic investments in attractive real estate opportunities; (b) increasing occupancy and improving the operating efficiency of our communities;
(c) improving the operating efficiency of our corporate operations;
(d) restructuring certain of our venture, leasing and lender relationships to further stabilize our revenue stream and cash flow; (e) operating high-quality assisted living and memory care communities in the United States, Canada and the United Kingdom; and (f) reducing our operational and financial risk.

Venture Transactions with CNL

In January 2011, we contributed our 10% ownership interest in an existing venture in exchange for a 40% ownership interest in a new venture, CC3 Acquisition, LLC ("CC3"), organized to own the same portfolio of 29 communities that we manage. We recorded our new investment at its carryover basis. The portfolio was valued at approximately $630 million (excluding transaction costs). As part of our new venture agreement with a wholly-owned subsidiary of CNL Lifestyle Properties ("CNL"), from the start of year three to the end of year six following our January 2011 acquisition, we will have a buyout option to purchase CNL's remaining 60% interest in the venture. The purchase price provides a 13% internal rate of return to CNL if we exercise our option in years three and four and a 14% internal rate of return if we exercise our option in years five and six. Our share of the transaction costs for the first nine months of 2011 was approximately $5.3 million, of which $4.0 million was reflected as an expense in Sunrise's share of loss and return on investment in unconsolidated communities and $1.3 million was reflected as general and administrative expense. Six communities in the state of New York, whose real estate is owned by the venture, are being leased and operated by us and therefore, the operations are included in our consolidated financial statements.

On August 2, 2011, we and our venture partner in a portfolio of six communities transferred ownership of the portfolio to a new joint venture owned 70% by a wholly-owned subsidiary of CNL different from the above subsidiary and 30% by us. As part of our new venture agreement with the CNL subsidiary, from the start of year four to the end of year six, we will have a buyout option to purchase CNL's 70% interest in the venture for a purchase price that provides a 16% internal rate of return to CNL. In addition, the new venture modified the existing mortgage loan in the amount of $133.2 million to provide for, among other things, (i) pay down of the loan by approximately $28.7 million and
(ii) an extension of the maturity date of the loan to April 2014 which may be extended by two additional years under certain conditions. In connection with the transaction, we contributed $8.1 million and CNL contributed $19.0 million to the new venture.

In October 2011, we closed the previously announced purchase and sale agreement with Master MorSun Acquisition LLC for its 80% ownership interest in a joint venture that owned seven senior living facilities to a new joint venture owned approximately 68% by CNL Income Partners, LP and approximately 32% by us. In connection with the transaction, we transferred our interest in the previous joint venture valued at approximately $16.7 million and CNL Income Partners, LP contributed approximately $35.4 million. The purchase was also funded by $120.0 million of new debt financing in the venture. We have the option to buy out CNL Income Partners, LP's interest during years four to six for a purchase price that provides a 13% internal rate of return to CNL Income Partners, LP.

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Liquidating Trust Asset Sales

In the first nine months of 2011, we sold three wholly owned operating communities and three land parcels which were part of the liquidating trust for approximately $12.8 million. We recognized a gain of approximately $1.7 million, $1.5 million of which is included in discontinued operations. Proceeds of $11.3 million were distributed to the electing lenders of the liquidating trust. To date, we have sold 10 properties in the liquidating trust for gross proceeds of approximately $26.7 million. We have one closed community and nine land parcels 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 minimum payment under the guarantee which was $26.3 million as of September 30, 2011 (refer to Note 8). Based on anticipated sale volume, we believe that we may be required to fund approximately $5.0 million under the guarantee.

Junior Subordinated Convertible Notes

In April 2011, we issued $86.25 million in aggregate principal amount of our 5.00% junior subordinated convertible notes due in 2041 in a private offering. See "Liquidity and Capital Resources" below. We used the net proceeds to purchase an additional 80% interest in a venture as described under "AL US Acquisition" below, to pay down the debt in the venture and for general corporate purposes.

AL US Acquisition

In June 2011, we closed on a purchase and sale agreement with Morgan Stanley Real Estate Fund VII Global-F (U.S.), L.P., Morgan Stanley Real Estate Fund VII Special Global (U.S.), L.P., MSREF VII Global-T Holding II, L.P., and Morgan Stanley Real Estate Fund VII Special Global-TE (U.S.), L.P. (collectively, the "MS Parties"). The MS Parties collectively owned 80% of the membership interest (the "MS Interest") in AL US and we owned the remaining 20% membership interest. Pursuant to the purchase and sale agreement, we purchased the MS Interest for an aggregate purchase price of $45 million. AL US indirectly owns 15 assisted and independent living facilities which we managed before the transaction. As a result of the transaction, the assets, liabilities and operating results of AL US are now consolidated.

In connection with the AL US transaction on June 2, 2011, we assumed $364.8 million of debt with an approximate fair value of $350.1 million (refer to Note
8). Immediately following the closing of the transaction, we entered into an amendment to the loan and paid down the principal balance by $25.0 million. The face amount balance of the loan as of September 30, 2011 was $336.6 million and is reflected on our balance sheet at $323.1 million.

Key Bank Credit Facility

In June 2011, we entered into a credit agreement for a $50.0 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 million sublimit to support standby letters of credit and is expandable to $65.0 million if (i) additional lenders commit to participate in the Credit Facility and (ii) there are no defaults. We will use the Credit Facility for working capital and general corporate purposes. We entered into a termination agreement with regards to our Bank of America credit facility at the time we entered into the Credit Facility.

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