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ESC > SEC Filings for ESC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for EMERITUS CORP\WA\


2-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The disclosure and analysis in this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. They often include words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "seek," "should," "will," or the negative of those terms, or comparable terminology. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Any or all of our forward-looking statements in this report may turn out to be inaccurate. Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements. Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain. Accordingly, you should not place undue reliance on our forward-looking statements.

Although we believe that the expectations and forecasts reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Consequently, no forward-looking statement can be guaranteed, and future events and actual or suggested results may differ materially. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosures we make in our quarterly reports on Form 10-Q and current reports on Form 8-K.


Table of Contents

Overview

Our Business

We are one of the largest and fastest-growing operators of senior living communities in the United States. We own and operate a portfolio of high-quality, purpose-built communities providing resident services including independent living, assisted living, specialized Alzheimer's/dementia ("memory care"), and, to a lesser extent, skilled nursing care. Beginning in the fourth quarter of 2012, we added home healthcare to our service offerings through our acquisition of Nurse On Call, Inc. ("NOC").

We strive to provide a wide variety of supportive living services in a professionally staffed environment that enables seniors to live with dignity and independence. Our holistic approach enhances every aspect of our residents' lives by assisting them with life enrichment activities, including transportation, socialization and education, housing and 24-hour personal support services, such as medication management, bathing, dressing, personal hygiene and grooming. The average age of our residents is 85.

As of June 30, 2013, we owned 190 communities and leased 273 communities. These 463 communities comprise the communities included in the condensed consolidated financial statements and are referred to as our "Consolidated Portfolio."

We also provide management services to independent and related-party owners of senior living communities. As of June 30, 2013, we managed 15 communities, three of which are owned by joint ventures in which we have a financial interest. The communities we manage for others, combined with our Consolidated Portfolio, are referred to as our "Operated Portfolio."

Summary of Activity

A summary of activity for the first six months of 2013, compared to the same period for 2012, is as follows:

Total operating revenues increased $198.9 million, or 26.5%, to $948.3 million from $749.4 million for the prior-year period, due primarily to acquisitions in the fourth quarter of 2012.

Operating income from continuing operations increased $31.6 million to $73.8 million from $42.2 million for the prior-year period. Our net loss attributable to Emeritus Corporation common shareholders was $75.7 million compared to $41.1 million for the prior-year period.

Average occupancy of our portfolio of owned and leased communities (the "Consolidated Portfolio") was 86.5% for both periods.

Average rate per occupied unit decreased 2.8% to $4,013 from $4,128 for the prior-year period. This primarily results from the communities in the HCP Transaction, which had lower rates than our legacy communities.

Net cash provided by operating activities was $56.1 million compared to $68.5 million for the prior-year period.

Our Portfolios

As of June 30, 2013, we operated 478 senior living communities in 45 states. Our
Consolidated Portfolio had a capacity of 47,853 beds and our Operated Portfolio
had a capacity of 49,597 beds. The following table sets forth a comparison of
our Consolidated and Operated Portfolios:



                                           June 30, 2013               December 31, 2012               June 30, 2012
                                                        Unit                           Unit                         Unit
                                       Community       Count        Community         Count        Community       Count
                                         Count          (b)           Count            (b)           Count          (b)
Owned                                         190       15,864             192         16,157             186       15,243
Leased(a)                                     273       25,261             269         24,831             141       14,596

Consolidated Portfolio                        463       41,125             461         40,988             327       29,839
Managed                                        12        1,301              13          1,357               9          933
Managed - Joint Ventures                        3          198               9            687             141       11,809

Operated Portfolio                            478       42,624             483         43,032             477       42,581

(a) We account for 78 of the 273 leased communities as operating leases, 191 as capital leases, and four as financing leases. We do not include the assets and liabilities of the 78 operating lease communities on our condensed consolidated balance sheets.

(b) Total units reflect skilled nursing units in terms of beds.


Table of Contents

                              EMERITUS CORPORATION

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                       RESULTS OF OPERATIONS - CONTINUED

               Three and Six Months Ended June 30, 2013 and 2012

Our Total Operated Portfolio as of June 30, 2013 consisted of the following unit
types:



                                                    Units by Type of Service
                             AL (a)      MC (b)      IL (c)      SN (d)       Other (e)       Total
 Owned                        11,413       2,954       1,092         208             197       15,864
 Leased                       17,197       3,624       3,196         961             283       25,261

 Consolidated Portfolio       28,610       6,578       4,288       1,169             480       41,125
 Managed                         782         226         246          25              22        1,301
 Managed - Joint Ventures        122          76          -           -               -           198

 Operated Portfolio           29,514       6,880       4,534       1,194             502       42,624

(a) Assisted living

(b) Memory care

(c) Independent living

(d) Skilled nursing beds

(e) Units taken out of service

The units taken out of service represent rooms that we have converted to alternative uses, such as additional office space, and are not available for immediate occupancy. We exclude the units taken out of service from the calculation of the average occupancy rate. We place these units back into service as demand dictates.

Significant Transactions

Transactions completed in the first six months of 2013 are summarized below.



                                                                                    D in         D in          D in
                                      Transaction       Unit       Transaction     Owned        Leased        Managed
                                        Period         Count           Type        Count        Count          Count
Count as of December 31, 2012                                                         192           269             22

2013 Activity
Necanicum Village                         Feb 2013         80     Disposition          -             -              (1 )
Emeritus at Diablo Lodge                  Mar 2013        118     Acquisition          -              1             -
HCP Transaction - delayed close
properties                                Mar 2013         -      Acquisition          -              4             (4 )
Big Sky                                   Apr 2013        159     Disposition          -             -              (1 )
Emeritus at Roseville Gardens             Apr 2013         -      Acquisition           1            (1 )           -
Sunshine Village                          Apr 2013         84     Disposition          (1 )          -              -
Emeritus at Pinellas Park                 May 2013         97     Disposition                        (1 )           -
Emeritus at Augusta                       May 2013         50     Disposition          (1 )          -              -
Emeritus at Fulton Villa                  Jun 2013         80     Disposition          -             -              (1 )
Emeritus at Springtree                    Jun 2013         -      Sale-leaseback       (1 )           1             -

Count as of June 30, 2013                                                             190           273             15


Table of Contents

EMERITUS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Six Months Ended June 30, 2013 and 2012

Results of Operations

Sources of Revenues

We generate revenues by providing senior housing and related healthcare services to the senior population. We are the largest provider of assisted living and memory care services in the United States, with a capacity for approximately 50,000 residents. Assisted living and memory care units comprise approximately 85% of our total Operated Portfolio.

The two basic drivers of our community revenues are the rates we charge our residents and the occupancy levels we achieve in our communities. In evaluating the rate component, we utilize the average monthly revenue per occupied unit, computed by dividing the total operating revenue for a particular period by the average number of occupied units for the same period. In evaluating the occupancy component, we track the average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period.

We rely primarily on our residents' ability to pay our charges for senior living services from their own or family resources and expect that we will do so for the foreseeable future. Private pay revenues represent 79.7% of our consolidated revenues and 87.3% of our senior living revenues in the first six months of 2013. We believe that only residents with income or assets meeting or exceeding the regional median can afford to reside in our communities, and that the rates we charge and our occupancy levels are interrelated. Therefore, we continuously evaluate rate and occupancy in each community to find the optimal balance so that we can benefit from our increasing capacity and anticipated future occupancy increases. Although our business is primarily needs-driven, we believe that our occupancy growth has been slowed due to slow economic growth, as some seniors and their families have postponed moves for financial reasons, and we believe that high unemployment has enabled family members and others to provide home care for seniors.

Revenues from government reimbursement programs, which are the federal Medicare and state Medicaid programs, represented 20.3% of our consolidated revenues in the first six months of 2013 compared to 12.4% in the comparable 2012 period. The increase in government reimbursed revenues is primarily due to our acquisition of NOC in November 2012, as NOC's revenues are almost all from Medicare. Future changes in revenues from Medicare and Medicaid programs in our existing communities will depend upon factors that include resident mix, levels of acuity among our residents, overall occupancy and government reimbursement rates.

There continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future. For example, on April 1, 2013, the mandated 2% reduction in Medicare payments under the Budget Control Act of 2011 went into effect. These cuts cannot be offset through higher co-pays or other charges to patients. Although we believe that we can offset Medicare cuts through targeted expense reductions, the reductions are not expected to fully offset the revenue decrease.

In June 2013, the Centers for Medicare & Medicaid Services ("CMS") issued a proposed rule to update Medicare payment rates for home health agencies. The rule proposes rebasing adjustments over a four-year period beginning in 2014. CMS estimates that net payments to home health agencies will decrease by approximately 1.5% in 2014.

We also earn management fee revenues by managing certain communities for third parties, including communities owned by related parties and by joint ventures in which we have an ownership interest. The majority of our management agreements provide for fees equal to 5.0% of gross revenues.

In addition to our monthly management fee, we receive reimbursement for operating expenses of managed communities. Reimbursed operating expenses for which the Company is the primary obligor are reported as costs incurred on behalf of managed communities and included in total operating expense in our condensed consolidated statements of operations. A corresponding amount of revenue is recognized in the same period in which the expense is incurred and the Company is due reimbursement.


Table of Contents

EMERITUS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Six Months Ended June 30, 2013 and 2012

As a result of the HCP Transaction, the number of communities managed by Emeritus for others was reduced significantly as 142 communities became part of our Consolidated Portfolio. Specifically, 133 of the managed communities were leased and nine communities were sold to Emeritus in connection with the HCP Transaction in the fourth quarter of 2012. Therefore, there has been a significant reduction in reimbursed costs incurred on behalf of managed communities in 2013. See Note 4, Acquisitions and Other Significant Transactions-2012 HCP Transaction.

Same Community Portfolio Analysis

Of the 463 communities included in our Consolidated Portfolio as of June 30, 2013, we include 321 communities in our Same Community Portfolio. Our Same Community Portfolio consists of consolidated communities that we have continuously operated since January 1, 2012, and does not include properties where new expansion projects were opened during the comparable periods, communities in which we substantially changed the service category offered, or communities accounted for as discontinued operations.

Selected data from our Same Community Portfolio is as follows:

                                                                 Three Months Ended June 30,
                                                 2013              2012             $ D            % D (a) (b)
                                                             (in thousands, except percentages)

Community revenue                             $  322,096        $  314,770        $  7,326                  2.3 %
Community operations expense                    (213,212 )        (208,221 )        (4,991 )               (2.4 )%

Community operating income                    $  108,884        $  106,549        $  2,335                  2.2 %


Average monthly revenue per occupied unit     $    4,236        $    4,148        $     88                  2.1 %
Average occupancy rate                              86.7 %            86.6 %                            0.1 ppt

(a) "N/M" indicates percentages that are not meaningful in this analysis. Applies to all subsequent tables in this section.

(b) "ppt" refers to percentage points. Applies to all subsequent tables in this section.

Revenues from our Same Community Portfolio represented 75.7% of our total community revenue for the second quarter of 2013. The increase in same community revenues was primarily due to improvements in average revenue per occupied unit.

The increase in operating expense from the Same Community Portfolio was primarily due to increases in professional liability insurance, marketing, and salaries and benefits, offset somewhat by lower health insurance expenses from our August 2012 transition to a more efficient network, as well as lower bad debt expense.

Comparison of the Three Months Ended June 30, 2013 and 2012

Net Loss Attributable to Emeritus Corporation Common Shareholders

We reported a net loss attributable to Emeritus common shareholders of $36.0 million for the three months ended June 30, 2013, compared to net loss of $21.7 million in the prior-year period. As further described in the section Liquidity and Capital Resources below, the Company has incurred significant losses since its inception, but has generated annual positive cash flow from operating activities since 2001.

Operating income from continuing operations increased by $19.0 million to $41.3 million in the second quarter of 2013. The increase in operating income was primarily the result of net community acquisitions during 2012 and the acquisition of NOC in November 2012.


Table of Contents

EMERITUS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Six Months Ended June 30, 2013 and 2012

The $14.2 million increase in net loss was due primarily to the increase in operating income of $19.0 million being offset by increases in other net non-operating expenses. Interest expense increased by $33.5 million primarily as a result of capital lease treatment of the HCP Leased Communities that we acquired in the fourth quarter of 2012.

The details of each of the components of net loss are set forth below.

Total Operating Revenues:

                                                           Three Months Ended June 30,
                                              2013            2012             $ D             % D
                                                       (in thousands, except percentages)
Same Community Portfolio                    $ 322,096       $ 314,770       $   7,326             2.3 %
Acquisitions, dispositions, development
and expansion                                 103,018           3,092          99,926             N/M
Ancillary services                             42,374             616          41,758             N/M
Unallocated community revenue (a)                 322             150             172           114.7 %

Community and ancillary services revenue      467,810         318,628         149,182            46.8 %
Management fees                                   595           5,141          (4,546 )           N/M
Reimbursed costs incurred on behalf of
managed communities                             7,521          51,033         (43,512 )           N/M

Total operating revenues                    $ 475,926       $ 374,802       $ 101,124            27.0 %


Average monthly revenue per occupied
unit                                        $   4,014       $   4,140       $    (126 )          (3.0 %)
Average occupancy rate                           86.7 %          86.4 %                       0.3 ppt

(a) Comprised primarily of deferred move-in fees.

The increase in revenues of $7.3 million from the Same Community Portfolio was due to improvement in the rates we charge our residents as well as an increase in average occupancy. As further described in Same Community Portfolio Analysis above, our Same Community Portfolio consists of those communities that we have continuously operated since January 1, 2012, net of dispositions. Revenues from acquisitions, developments and expansions, which are derived from any communities that we began operating since January 1, 2012 (net of dispositions), increased by $99.9 million. The increase in ancillary services revenue was the result of our acquisition of NOC in November 2012.

The decrease in management fees and reimbursed costs incurred on behalf of managed communities is the result of the HCP Transaction in which 142 communities that were previously owned by the Sunwest JV and managed by us are now part of our Consolidated Portfolio as owned and leased properties.

Community and Ancillary Services Operating Expense:



                                                          Three Months Ended June 30,
                                             2013            2012             $ D            % D
                                                      (in thousands, except percentages)
Same Community Portfolio                   $ 213,212       $ 208,221       $   4,991             2.4 %
Acquisitions, dispositions,
development, and expansion                    68,887           2,545          66,342             N/M
Ancillary services                            32,702             357          32,345             N/M
Unallocated community expenses                 5,047           2,448           2,599           106.2 %

Community operations and ancillary
services                                   $ 319,848       $ 213,571       $ 106,277            49.8 %

As a percentage of total operating
revenues 67.2 % 57.0 % 10.2 ppt


Table of Contents

EMERITUS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Six Months Ended June 30, 2013 and 2012

Community operating expense includes direct costs incurred to operate the communities and includes costs such as payroll and benefits, resident activities, marketing, housekeeping, food service, facility maintenance, utilities, taxes, insurance, and licenses.

Community operating expense in our Same Community Portfolio increased by $5.0 million, as described above under Same Community Portfolio Analysis. We focus on providing the appropriate level of care to our residents, while also pursuing overall expense efficiencies.

Expenses related to acquisitions, developments and expansions, which are derived from any communities that we began operating since January 1, 2012 (net of dispositions), increased by $66.3 million, due primarily to the HCP Transaction.

Ancillary services expense represents the operating expenses incurred by NOC as well as our durable medical equipment subsidiary.

Unallocated community expenses primarily represent accrued liability adjustments for workers' compensation insurance and professional and general liability insurance. We periodically adjust our estimated self-insurance liabilities based on actuarial projected losses, representing our revised estimates of the ultimate exposure. In the quarter ended June 30, 2013, we recorded increases in our self-insurance liabilities related to prior-year claims by $5.7 million, compared to $1.8 million in the prior-year quarter.

General and Administrative Expense:



                                                           Three Months Ended June 30,
                                                  2013           2012           $ D          % D
                                                        (in thousands, except percentages)
Senior living                                   $ 24,738       $ 22,855       $ 1,883          8.2 %
Ancillary services                                 4,153            132         4,021          N/M

General and administrative                      $ 28,891       $ 22,987       $ 5,904         25.7 %

As a percentage of total operating revenues          6.1 %          6.1 %                    - ppt

The increase in general and administrative expenses attributable to our senior living operations primarily reflects increases in employee compensation, including noncash stock compensation expense. Ancillary services represents the general and administrative expenses incurred by NOC as well as our durable medical equipment subsidiary.

Senior living general and administrative expense as a percentage of community operating revenues for our Operated Portfolio was 5.6% and 5.4% for the three-month periods ended June 30, 2013 and 2012, respectively. We focus on overhead expense efficiencies, while ensuring adequate infrastructure to support our operational needs.


Table of Contents

                              EMERITUS CORPORATION

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                       RESULTS OF OPERATIONS - CONTINUED
. . .
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