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ALC > SEC Filings for ALC > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ASSISTED LIVING CONCEPTS INC

Form 10-Q for ASSISTED LIVING CONCEPTS INC


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions which could cause actual results to differ materially from those projected, including those risks, uncertainties and assumptions described or referred to in Item 1A - Risk Factors in Part I of ALC's Annual Report on Form 10-K for the year ended December 31, 2011, and in

Part II, Item 1A Risk Factors and Part II, Item 5 - Other Information -
Forward-Looking Statements and Cautionary Factors in this report.

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the condensed consolidated financial statements in Part I, Item 1 of this report.

Executive Overview

In the second quarter of 2012, we began a review of our operations which included identifying and evaluating operational issues affecting the delivery of care and services to our residents. Based upon our review, we believe that certain failures to meet ALC's established performance standards have damaged ALC's reputation in the marketplace and contributed to ALC's inability to increase private pay occupancy as rapidly as desired. We initiated a number of measures to enhance the performance of our resident services to restore in all affected facilities the level of quality care and service expected by our residents, their families, the regulators, the Board of Directors and the stakeholders of the Company and to re-establish our reputation with regulators, our stakeholders and the communities in which our facilities are located. In addition to naming Dr. Charles H. Roadman II, M.D. as Interim President and Chief Executive Officer, we also:

? Formed a Quality Review Committee of the Board of Directors

o Engaged an independent consultant to review the quality of our resident services performance

o Expect to perform on-going independent quality reviews of residences

? Enhanced clinical procedures and quality performance standards

o Hired a senior vice president of quality services and risk management

o Added approximately 800 employees to enhance quality and clinical procedures

o Implemented a satisfaction survey process to monitor progress

? Revised staffing patterns to enhance the residents' experience and provide quality outcomes

? Met with state regulators to resolve licensing issues in high priority states

As compared to the second quarter of 2012, these measures resulted in approximately $ 5.1 million of additional salaries, wages and benefits, $0.3 million in additional food and kitchen related expenses and $0.3 million of consulting expenses. We believe they are necessary to accomplish our longer term goals of improving occupancy and profitability. We continue to believe that poor economic conditions continue to hinder our ability to attract and retain private pay residents.

On a continuing residence basis, average private pay occupancy in the quarter ended September 30, 2012 decreased by 114 units as compared to the quarter ended September 30, 2011, while overall average daily revenue per occupied unit increased by 1.7%. Private pay and overall revenues for the quarter ended September 30, 2012, decreased by $3.0 million from the quarter ended September 30, 2011. We believe our success in attracting and maintaining private pay residents in the third quarter of 2012 was, and may continue to be, affected by the current poor general economic conditions and, as a result, promotional discounts may continue to be necessary to attract and retain private pay residents. Continuing poor general economic conditions, especially those related to high unemployment levels and poor housing markets, affect private pay occupancy and rates because:

? family members are more willing and able to provide care at home;

? residents have insufficient investment income or are unable to obtain necessary funds from the sale of their homes or other investments; and

? independent living facilities are accepting traditional assisted living residents with home care services.


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The impact of these factors is referred to in this report as the "Economic Impact". In the event general economic conditions fail to improve or get worse, we believe there can be negative pressure on our private pay occupancy and rates.

Average occupancy as a percentage of total available units for all continuing residences in the quarters ended September 30, 2012 and 2011 was 59.5% and 62.4%, respectively.

From time to time, we may increase or reduce the number of units we actively operate, which may affect reported occupancy and occupancy percentages.

On June 15, 2012, in connection with litigation filed in April 2012 by Ventas, we signed and closed on an agreement with Ventas Realty, Limited Partnership ("Ventas Realty") and MLD Delaware Trust ("MLD") to purchase 12 residences consisting of 696 units for a purchase price of $97 million plus $3 million for a litigation settlement fee plus Ventas's expenses in connection with the litigation. The residences, five located in Georgia, four in South Carolina and one in each of Florida, Alabama and Pennsylvania were previously operated by us under a master lease agreements with Ventas Realty and MLD. The transaction was funded with borrowings available under our $125 million revolving credit agreement. Subsequent to this acquisition, we now own 82% of our residences.

In the third quarter of 2012, we agreed to voluntarily surrender the assisted living license for 50 units which are part of a campus consisting of 164 independent and assisted living units in Alabama. This decision was due to past regulatory noncompliance. The apartments will reopen as independent living units. We have several other residences with various degrees of regulatory issues. The outcomes of these issues cannot be determined at this time.

Business Strategies

We plan to grow our revenue and operating income by:

? increasing our private pay occupancy;

? applying efficiencies achievable from operating a large number of senior living residences;

? increasing the attractiveness and operating results of our portfolio by refurbishing and repositioning residences; and

? adding or reducing the number of units available in our portfolio by acquiring, expanding upon or divesting assets.

Increasing our private pay occupancy

We continue to focus on increasing the number of residents in our communities by filling existing vacancies with private pay residents. As discussed above, in the second quarter of 2012 we initiated programs to enhance the performance of our quality standards to improve customer satisfaction and restore our performance to meet quality standards to attract and retain residents. We use a focused sales and marketing effort designed to increase demand for our services among private pay residents and to establish ALC as the provider of choice for residents who value wellness and quality of care. We intend to leverage our fixed cost structure and may provide incentives to attract a larger number of private pay residents.

If general economic conditions fail to improve, our ability to fill vacant units with private pay residents may continue to be limited and the occupancy and revenue challenges may continue.

Applying efficiencies achievable from operating a large number of senior living residences

The senior living industry is large and fragmented and characterized by many small and regional operators. We leverage the efficiencies of scale we have achieved through the consolidated purchasing power of our residences, our standardized operating model, and our centralized financial and management functions to lower costs at our residences.


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Increasing the attractiveness and operating results of our portfolio by refurbishing and repositioning residences

We continually evaluate our portfolio to identify opportunities to improve the attractiveness and operating results of our residences. We regularly upgrade and replace items such as flooring, wall coverings, furniture and dishes and flatware at our residences. In addition, from time to time we may temporarily close residences to facilitate refurbishing and repositioning them in the marketplace.

On January 1, 2011 we closed two properties consisting of 39 units in Washington and 35 units in Idaho. In the second quarter of 2011, we closed one property consisting of 23 units in Wisconsin and reopened two properties consisting of 33 units in Oregon and 39 units in Washington. In the fourth quarter of 2011 we closed one property consisting of 60 units in Minnesota. In the first quarter of 2012 we closed one property consisting of 56 units in Washington and in the second quarter of 2012 we closed an additional property consisting of 39 units in Idaho. We believe the temporarily closed residences are located in markets with strong growth potential but require some updating and repositioning in the market. Once underway, refurbishments are expected to take three to nine months to complete. Following refurbishment, we expect these projects will take approximately twelve additional months to stabilize occupancy. We spent approximately $200,000 to $400,000 on each of our reopened refurbishment projects and expect the cost of other refurbishments to be in that range. We own 82% of our residences which provides us with significant flexibility.

Adding to or reducing the number of units available in our portfolio by acquiring, expanding upon or divesting assets

We intend to continue to grow our portfolio of residences by making selective acquisitions in markets with favorable private pay demographics. Because of the size of our operations and the depth of our experience in the senior living industry, we believe we are able to effectively identify and maximize cost efficiencies and expand our portfolio by investing in attractive assets in our target markets. Additional regional, divisional and corporate costs associated with our growth are anticipated to be proportionate to current operating levels. Acquiring additional properties can require significant outlays of cash. Our ability to make sizable future acquisitions may be limited by general economic conditions affecting credit markets and our ability to raise additional capital at acceptable terms.

On June 15, 2012, in connection with the settlement of litigation filed in April 2012 by Ventas, we signed and closed on an agreement with Ventas Realty, Limited Partnership ("Ventas Realty") and MLD Delaware Trust ("MLD") to purchase 12 residences consisting of 696 units for a purchase price of $97 million plus $3 million for a litigation settlement fee plus Ventas's expenses in connection with the litigation. The residences, five located in Georgia, four in South Carolina and one in each of Florida, Alabama and Pennsylvania were previously operated by us under a master lease agreements with Ventas Realty and MLD. The transaction was funded with borrowings available under our $125 million revolving credit agreement.

We expect to continue to evaluate our portfolio for assets that may not meet management's long term expectations. Assets that do not meet or are anticipated not to meet our performance expectations criteria may be closed or divested.

The remainder of this Management's Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

? Business Overview: This section provides a general financial description of our business, including the sources and composition of our revenues and operating expenses. In addition, this section outlines the key performance indicators that we use to monitor and manage our business and to anticipate future trends.

? Consolidated Results of Operations: This section provides an analysis of our results of operations for the three and nine month periods ended September 30, 2012 compared to the three and nine month periods ended September 30, 2011.

? Liquidity and Capital Resources: This section provides a discussion of our liquidity and capital resources as of September 30, 2012, and our expected future cash needs.

? Critical Accounting Policies: This section discusses accounting policies which we consider to be critical to obtain an understanding of our consolidated financial statements because their application on the part of management requires significant judgment and reliance on estimations of matters that are inherently uncertain.


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In addition to our core business, ALC holds share investments in Omnicare, Inc., a publicly traded corporation in the United States, and MedX Health Corporation, a Canadian publicly traded corporation, and cash or other investments held by Pearson Indemnity Company Ltd. ("Pearson"), our wholly-owned consolidated Bermuda based captive insurance company formed primarily to provide self-insured general and professional liability coverage.

Business Overview

Revenues

We generate substantially all of our revenue from private pay sources. Residents are charged an accommodation fee that is based on the type of accommodation they occupy and a service fee that is based upon their assessed level of care. We generally offer studio, one-bedroom and two-bedroom accommodations. The accommodation fee is based on prevailing market rates of similar senior living accommodations. The service fee is based upon periodic assessments, which include input of the resident and the resident's physician and family and establish the additional hours of care and service provided to the resident. We offer various levels of care for our residents who require less or more frequent and intensive care or supervision. For the three month periods ended September 30, 2012 and 2011, approximately 76% and 75%, respectively, of our private pay revenue was derived from accommodation fees with the balance derived from service fees. Both the accommodation and level of care service fees are charged on a per day basis, pursuant to residency agreements.

Residence Operations Expenses

For all continuing residences, as defined below, residence operations expense
percentages consisted of the following:

                                    Three Months Ended           Nine Months Ended
                                       September 30,               September 30,
                                   2012            2011          2012           2011
        Wage and benefit costs          57 %            60 %          60 %         60 %
        Property related costs          22              24            23           24
        Other operating costs           21              16            17           16
        Total                          100 %           100 %         100 %        100 %

The largest component of our residence operations expense consist of wages and benefits and property related costs which include utilities, property taxes, and building maintenance related costs. Other operating costs include food, advertising, insurance, and other operational costs related to providing services to our residents. Wage and benefit costs are generally variable (with the exception of minimum staffing requirements as provided from state to state) and can be adjusted with changes in census. Property related costs are generally fixed while other operating costs are a mix of fixed (i.e. insurance) and variable costs (i.e. food). In the third quarter of 2012, other operating costs increased as a percentage of total operating costs primarily due to legal expenses associated with regulatory issues in the southeast, increased bad debt expense and higher food related costs related to our improved quality initiatives.

Key Performance Indicators

We manage our business by monitoring certain key performance indicators. We believe our most important key performance indicators are:

Census

Census is defined as the number of units rented at a given time.


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Average Daily Census

Average daily census, or ADC, is the sum of rented units for each day over a period of time, divided by the number of days in that period.

Occupancy

Occupancy is measured as the percentage of average daily census relative to the total number of units available for occupancy in the period.

Average Revenue Rate

The average revenue rate represents the average daily revenues earned from accommodation and service fees provided to residents. The daily revenue rate is calculated by dividing aggregate revenues earned by the ADC in the corresponding period.

Adjusted EBITDA and Adjusted EBITDAR

Adjusted EBITDA is defined as net loss/income from continuing operations before income taxes, interest expense net of interest income, depreciation and amortization, non-cash equity based compensation expense, transaction costs and certain non-cash, gains and losses, including disposal of assets, impairment of goodwill and other long-lived assets, gains and losses on sales of securities, impairment of investments, impairment of intangibles and non-recurring lease termination and settlement fees. Adjusted EBITDAR is defined as Adjusted EBITDA before rent expenses incurred for leased assisted living properties. Adjusted EBITDA and Adjusted EBITDAR are not measures of performance under accounting principles generally accepted in the United States of America, or GAAP. We use Adjusted EBITDA and Adjusted EBITDAR as key performance indicators and Adjusted EBITDA and Adjusted EBITDAR expressed as a percentage of total revenues as a measurement of margin.

We understand that EBITDA and EBITDAR, or derivatives of these terms, are customarily used by lenders, financial and credit analysts, and many investors as a performance measure in evaluating a company's ability to service debt and meet other payment obligations or as a common valuation measurement in the long-term care industry. Moreover, our revolving credit facilities contain covenants in which a form of EBITDA is used as a measure of compliance, and we anticipate a form of EBITDA will be used in covenants in any new financing arrangements that we may establish. We believe Adjusted EBITDA and Adjusted EBITDAR provide meaningful supplemental information regarding our core results because these measures exclude the effects of non-operating factors related to our capital assets, such as the historical cost of the assets.

We report specific line items separately and exclude them from Adjusted EBITDA and Adjusted EBITDAR because such items are transitional in nature and would otherwise distort historical trends. In addition, we use Adjusted EBITDA and Adjusted EBITDAR to assess our operating performance and in making financing decisions. In particular, we use Adjusted EBITDA and Adjusted EBITDAR in analyzing potential acquisitions and internal expansion possibilities. Adjusted EBITDAR performance is also used in determining compensation levels for our senior executives. Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as substitutes for net income, cash flows from operating activities, and other income or cash flow statement data prepared in accordance with GAAP, or as measures of profitability or liquidity. In this report, we present Adjusted EBITDA and Adjusted EBITDAR on a consistent basis from period to period, thereby allowing for comparability of operating performance.

Review of Key Performance Indicators

In order to compare our performance between periods, we assess the key performance indicators for all of our continuing residences. From time to time, we may temporarily close residences and subsequently reopen them after refurbishment which will increase or decrease the number of units we actively operate. These residences are included in continuing operations as long as they are available for occupancy.

In addition, when material, we assess key performance indicators for residences that we operate in all reported periods, or "same residence" operations. Same residence operations include those residences that have been available for occupancy for the entire reporting period. For the three month periods ended September 30, 2012 and 2011, residences which are not considered "same residence" include four residences consisting of 194 units that were closed subsequent to October 1, 2011. For the nine month periods ended September 30, 2012 and 2011, in addition to those residences not considered "same residence" for the three month periods ended September 30, 2012 and 2011, one additional closed residence consisting of 23 units, a property addition consisting of 20 units which opened February 1, 2011, and two refurbished properties consisting of 72 units which reopened May 1, 2011 were also not considered "same residence." The number of units, occupancy or payer mix associated with these residences were not materially different from data included in all continuing residences; therefore, same residence information has been omitted from our discussion of key performance indicators.


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ADC

All Continuing Residences

The following table sets forth our average daily census ("ADC") for the three
and nine month periods ended September 30, 2012 and 2011 for all of the
continuing residences whose results are reflected in our condensed consolidated
financial statements.

                              Average Daily Census

                             Three Months Ended          Nine Months Ended
                                September 30               September 30

2012 2011 2012 2011 Total ADC 5,251 5,628 5,365 5,602

During the third quarter of 2012, ADC decreased 6.7% from the third quarter of 2011. ADC decreased 5.6% due to the ending of certain rate concessions offered in 2011 and an increase in the market rates we charge as of January 1, 2012. The remaining 1.1% was due to the planned reduction of residents paying through Medicaid. In the nine month period ended September 30, 2012, ADC decreased 4.2% from the comparable period of 2011. ADC decreased 2.9% due to the ending of certain rate concessions offered in 2011 and an increase in the market rates we charge as of January 1, 2012. The remaining 1.3% was due to the planned reduction of residents paying through Medicaid.

Occupancy Percentage

Occupancy percentages are affected by the completion and opening of new residences and additions to existing residences as well as the temporary closure of residences. As total capacity increases from the addition of expansion units or a new residence, occupancy percentages are negatively impacted as the residence is filling the additional units. After the completion of construction, we generally plan for additional units to take anywhere from one to one and a half years to reach optimum occupancy levels (defined by us as at least 90%). The temporary closure of residences generally has a positive impact on occupancy percentages.

Because of the impact that developmental units have on occupancy rates, when material, we split occupancy information between mature and developmental units. In general, developmental units are defined as the additional units in a residence that has undergone an expansion or in a new residence that has opened. New units identified as developmental are classified as such for a period of no longer than twelve months after completion of construction. The 20 expansion units that opened subsequent to January 1, 2011 and the two refurbished residences that reopened in the second quarter of 2011 constitute the developmental units at September 30, 2012. All units that are not developmental are considered mature units. The number of units, occupancy or payer mix associated with the residences considered to be developmental and not mature are immaterial; therefore, mature versus development information has been omitted from our discussion of key performance indicators.

All Continuing Residences

The following table sets forth our occupancy percentages for the three and nine
month periods ended September 30, 2012 and 2011 for all continuing residences
whose results are reflected in our condensed consolidated financial statements:

                              Occupancy Percentage

                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,

2012 2011 2012 2011 All residences 59.5 % 62.4 % 60.4 % 62.3 %


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Occupancy percentages for all residences decreased from 62.4% and 62.3% in the three month and nine month periods ended September 30, 2011, to 59.5% and 60.4%, respectively, in the corresponding periods of 2012. The declines in our occupancy percentages for the three and nine months ended September 30, 2012 were primarily due to the ending of certain rate concessions offered in 2011 and an increase in the market rates we charge as of January 1, 2012.

Average Revenue Rate

All Continuing Residences

The following table sets forth our average daily revenue rates for the three and
nine month periods ended September 30, 2012 and 2011 for all continuing
residences whose results are reflected in our condensed consolidated financial
statements.

                           Average Daily Revenue Rate

                                       Three Months Ended         Nine Months Ended
                                          September 30,             September 30,

2012 2011 2012 2011 Average daily revenue rate $ 115.05 $ 113.09 $ 116.60 $ 114.81

The average daily revenue rate increased by 1.7% and 1.6% for the three and nine month periods ended September 30, 2012 compared to the comparable period in 2011. For both periods, the average daily revenue rate increased primarily as a result of annual rate increases, but was partially offset by greater use of promotions. Our ability to obtain rate increases has been impacted by the Economic Impact and may continue to be impacted if general economic conditions do not improve.

Number of Residences Under Operation

The following table sets forth the number of residences under operation as of
September 30:

                                               2012        2011
                     Owned(1)                     173         161
                     Under operating leases        38          50
                     Total under operation        211         211

                     Percent of residences:
                     Owned                       82.0 %      76.3 %
                     Under operating leases      18.0        23.7
                                                100.0 %     100.0 %

(1) Includes ten residences temporarily closed for refurbishment in 2012 and 2011.


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