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SRZ > SEC Filings for SRZ > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for SUNRISE SENIOR LIVING INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SUNRISE SENIOR LIVING INC


7-Nov-2012

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 the proposed merger with Health Care REIT, Inc. ("HCN") and Management Business Sale will not close due to failure to satisfy the various conditions precedent thereto or have such conditions waived; the occurrence of any event, change or circumstances that could give rise to the termination of the Merger Agreement; the ability to obtain stockholder and regulatory approvals of the Merger on the timing and terms thereof; the risk that we may not be able to complete the Reorganization on the expected timing and terms thereof; completion of the Management Business Sale (or, if such sale does not occur and HCN requests that we spin off our management business, the spin-off of) the management business; unanticipated difficulties and/or expenditures relating to the Merger; the ability to extend leases on our operation properties at expiration; or the possibility that we will be unable to obtain certain third party consents, any of which events would likely have a material adverse effect on the market value of our common stock;

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;

the risk of not complying with government regulations;


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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 September 30, 2012, we operated 303 communities, including 261 communities in the United States, 15 communities in Canada and 27 communities in the United Kingdom, with a total unit capacity of approximately 29,500.

The following table summarizes our portfolio of operating communities:

                                                                            Percent
                                                               As of         Change
                                                           September 30,    2012 vs.
                                                           2012     2011      2011
Total communities
Owned                                                         21       22       -4.5 %
Leased (1)                                                    23       26      -11.5 %
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                                       93      113      -17.7 %
Managed                                                      158      142       11.3 %
Total                                                        303      311       -2.6 %
Unit capacity                                             29,382   30,723       -4.4 %



(1) Includes 7 communities whose leases were terminated in the fourth quarter.

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.


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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 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

Proposed Merger with HCN and Management Business Sale

On August 21, 2012, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Health Care REIT, Inc. ("HCN"), pursuant to which the parties agreed that, upon satisfaction of the terms and subject to the conditions set forth in the Merger Agreement, HCN would acquire us in an all-cash merger in which our stockholders would receive $14.50 in cash for each share of Sunrise common stock.

The transaction will occur through two mergers. First, we will engage in a holding company merger (the "Holding Company Merger") involving Brewer Holdco, Inc., a newly formed wholly owned subsidiary of Sunrise ("Holdco"), and Brewer Holdco Sub, Inc., a newly formed wholly owned subsidiary of Holdco ("Holdco Sub"). In the Holding Company Merger, Holdco Sub will merge with and into Sunrise, with Sunrise surviving as a wholly owned subsidiary of Holdco. Each issued and outstanding share of Sunrise common stock will convert into one share of Holdco common stock in the Holding Company Merger.

Second, promptly after the Holding Company Merger, Red Fox, Inc., a newly formed wholly owned subsidiary of HCN ("Merger Sub"), will merge with and into Holdco, with Holdco surviving as a wholly owned subsidiary of HCN (the "Merger"). In the Merger, each share of Holdco common stock will convert into the right to receive $14.50 in cash, subject to possible increase in the circumstances described below (the "Merger Consideration").

The closing of the Merger (the "Closing") is conditioned on (1) adoption of the Merger Agreement by holders of a majority of the outstanding shares of Sunrise common stock; (2) expiration or termination of applicable waiting periods for the Merger under the Hart Scott Rodino Act; (3) completion of certain reorganization transactions in all material respects so that Sunrise's real estate assets and equity interests in subsidiaries and joint ventures that hold real estate (the "real estate business") and Sunrise's subsidiaries that operate and manage senior living facilities (the "management business") are held in separate Sunrise subsidiaries (the "Reorganization"); (4) material compliance with covenants; (5) accuracy of each party's representations, subject to materiality thresholds; and (6) absence of injunctions or orders that prohibit or restrain the consummation of the Mergers (together, the "Closing Conditions"). The reorganization transactions are being effected because, pursuant to the Merger Agreement, HCN may request Sunrise to sell its management business to a third party (the "Management Business Sale") or spin-off its management business contemporaneously to the Closing. As part of the Reorganization, immediately following the Holding Company Merger and prior to the Merger, Sunrise will be converted from a corporation into a Delaware limited liability company (the "Management Business LLC") and its real estate business will be distributed to Holdco.

The Closing will occur on the later of (1) the 3-month anniversary of the date of the Merger Agreement (the "Target Closing Date") and (2) the second business day following the satisfaction or waiver of each of the conditions to Closing. The completion of the Management Business Sale (or, if such sale does not occur and Health Care REIT requests that Sunrise spin off its management business, the spin-off of the management business) is not a closing condition, but Prior to completion of the Merger, HCN has a right to extend the Target Closing Date on one or more occasions ("Extension Right") to a date that is no later than the first anniversary of the date of the Merger Agreement for purposes of completing the Management Business Sale (or, if such sale does not occur and HCN requests that Sunrise spin off its management business, the spin-off of the management business) or to receive certain state regulatory approvals. If HCN exercises its Extension Right and the Closing Conditions are satisfied or waived, but the Closing has not occurred on or prior to the 6-month anniversary of the date of the Merger Agreement, then the Merger Consideration shall be increased by $0.007621 for each day during the period commencing on the 6-month anniversary of the date of the Merger Agreement and ending on the Closing. The Closing is currently anticipated to occur early in 2013.

If the Management Business Sale is completed, HCN may request Sunrise and Holdco to declare a cash dividend (the "Distribution") to Sunrise or Holdco stockholders of record as of immediately prior to the Closing up to an aggregate amount equal to the after-tax proceeds to Sunrise or Holdco from the Management Business Sale, subject to Delaware law. In such circumstances, the Merger Consideration will be decreased by an amount equal to the per share Distribution. However, in all cases, the sum of the per share Merger Consideration and the per share Distribution, if any, will equal the transaction consideration of $14.50 (subject to increase under certain circumstances if HCN exercises its Extension Right). The Distribution is not a Closing Condition.


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Upon completion of the Merger, equity awards outstanding under Sunrise's equity compensation plans will be treated as follows: (i) each stock option will vest and be converted into the right to receive cash in an amount equal to the excess of the per share Merger Consideration over the exercise price per share for such stock option, (ii) each restricted stock unit or share of restricted stock will vest and be converted into the right to receive cash in an amount equal to the per share Merger Consideration, and (iii) each performance unit will vest (at the maximum level for performance units with a 2011-2013 performance period, and either at the target level if the Merger is completed before July 1, 2013 or at the maximum level if the Merger is completed on or after July 1, 2013 for performance units with a 2012-2014 performance period) and be converted into the right to receive cash in an amount equal to the per share Merger Consideration, in each case net of withholding taxes.

Sunrise and HCN have made customary representations, warranties and covenants in the Merger Agreement. The Merger Agreement contains covenants that require Sunrise to call and hold a shareholder meeting and, subject to certain exceptions, require the Board of Directors of Sunrise to recommend to its shareholders the adoption of the Merger Agreement. Sunrise is also prohibited from soliciting alternative acquisition proposals and from providing certain information to, or engaging in discussions with, third parties, subject to certain exceptions.

The Merger Agreement also provides for certain termination rights for both Sunrise and HCN. Upon termination of the Merger Agreement under specified circumstances, Sunrise may be required to pay HCN a termination fee of $40 million.

On September 13, 2012, in conjunction with the Merger Agreement above, Red Fox Management, LP ("Buyer"), a new entity formed by affiliates of Kohlberg Kravis Roberts & Co. L.P., Beecken Petty O'Keefe & Company and Coastwood Senior Housing Partners LLC, entered into a Membership Interest Purchase Agreement (the "Management Business Sale Agreement") with Sunrise and Holdco to acquire Sunrise's management business for approximately $130 million. HCN will also acquire a 20% interest in the Buyer. Pursuant to the Management Business Sale Agreement, Holdco (which, immediately following the Holding Company Merger, will be the sole member of the Management Business LLC) will sell the Management Business LLC to the Buyer (or a wholly owned subsidiary of the Buyer) immediately following the completion of the Holding Company Merger and the Reorganization and immediately prior to the completion of the Merger.

The Management Business Sale Agreement provides that it will automatically terminate upon the termination of the Merger Agreement and provides for certain other termination rights for both Sunrise and the Buyer. The consummation of the Management Business Sale is conditioned on the satisfaction or waiver of customary closing conditions, including (1) expiration or termination of applicable waiting periods for the Management Business Sale under the Hart Scott Rodino Act; (2) receipt of certain state approvals; and (3) completion of the Reorganization by Sunrise in all material respects.

Other materials terms of the Merger Agreement are described in our current report on Form 8-K filed on August 22, 2012 and other filings we have made with the Commission. Other material terms of the Management Business Sale Agreement are described in our current report on Form 8-K filed on September 17, 2012 and other filings we have made with the Commission.

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).


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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.

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 $229.5 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 September 30, 2012 was $3.6 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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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 $21.6 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. As of November 1, 2012, we have transitioned all of the communities to the new manager. 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. 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.

Venture Sale of Five Communities

On August 31, 2012, ventures in the U.K. in which we are a member sold five communities to HCN UK Investments Limited for an aggregate purchase price of 154 million ($243.6 million). We received approximately $56.1 million in cash from the transaction and recognized $30.7 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 five communities under the same terms of the pre-existing management agreements with respect to management fees and contract length, which range from 12 to 27 years.

Health Care REIT Financing

On October 1, 2012, we entered into a credit agreement with HCN for approximately $467 million and borrowed $359 million in term loans under such agreement. The borrowing was made to finance (i) our acquisition of the HVP interests (see below) in two ventures, and (ii) repay existing mortgage debt on the certain senior living facilities we acquired in those transactions.

On October 16, 2012, we borrowed an additional $104 million under the HCN credit agreement to finance (i) the acquisition of our partner's interest in the MSREF joint venture in the United Kingdom (the "MSREF Interest") (see below), and
(ii) to repay the existing mortgage debt on two senior facilities in the MSREF venture.

The term loans outstanding under the credit agreement bear interest at one-month LIBOR plus 5.00% and mature on December 31, 2013. The term loans are prepayable at any time without premium or penalty. The term loans are unconditionally guaranteed by us and are secured by a pledge of the acquired senior living facilities. No later than 45 days after the purchase of the MSREF Interest, the term loans also shall be secured by (i) a pledge of the equity interests in two senior living facilities in the U.K. and (ii) first priority mortgages over those facilities. The HCN credit agreement also includes customary representations, covenants and events of default.

HVP Sun Investor LLC and HVP Sun Investor II LLC ("HVP") Purchases

On October 1, 2012, we purchased HVP's majority interests in two ventures in . . .

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