2008 Annual Report
T h e B ro o k d a l e E X P E R I E N C E
“I really enjoy being able
to live at my own pace.”
James Moncrief
“The pressure and
responsibilities of taking
care of a house are gone.”
Melvin Erlinger
“Good friends,
good food, great care.”
Dan Hixenbaugh
“The food, the people and the
events are just fantastic.”
Pauline Howard
“We have terrific rehab
people and facilities here.”
William R. Cabe
”The support and amenities
are exceptionally good.”
Kermit Fox
“There’s always something
to do and I never have
to eat dinner alone.”
Nancy Frazier
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
As of and for the years ended
December 31,
2008
2007
Selected Operating Data
Total revenue .....................................................................................
Loss from operations(1).......................................................................
Net loss ..............................................................................................
Net loss per share of common stock, basic and diluted ....................
Adjusted EBITDA(2)............................................................................
Cash From Facility Operations(3) .......................................................
Facility Operating Income(4) ..............................................................
Selected Balance Sheet Data
Property, plant and equipment and leasehold intangibles, net..........
Cash and cash equivalents.................................................................
Total assets.........................................................................................
Debt obligations.................................................................................
Stockholders’ equity ..........................................................................
Weighted average shares used in computing basic
and diluted loss per share.............................................................
Stock Performance Data
Closing share price on December 31, 2008.......................................
Closing share price on December 31, 2007.......................................
Dividends declared for the year ended December 31, 2008 ..............
Dividends declared for the year ended December 31, 2007 ..............
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,928,054
(240,143)
(373,241)
(3.67)
302,562
130,144
637,454
3,694,784
53,973
4,449,258
2,552,929
960,601
101,667
5.58
0.75
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,839,296
(41,207)
(161,979)
(1.60)
306,379
143,241
642,329
3,760,453
100,904
4,811,622
2,335,224
1,419,538
101,511
28.41
1.95
(1) Includes impairment charges of $220 million in the fourth quarter of 2008 primarily driven by adverse equity market conditions.
(2) Adjusted EBITDA is a measure of operating performance that is not calculated in accordance with U.S. generally accepted accounting principles
(“GAAP”). Adjusted EBITDA should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided
by or used in operations, as determined in accordance with GAAP. Adjusted EBITDA is a key measure of the Company's operating performance used
by management to focus on operating performance and management without mixing in items of income and expense that relate to long-term
contracts and the financing and capitalization of the business. We define Adjusted EBITDA as net income (loss) before provision (benefit) for
income taxes, non-operating (income) loss items, depreciation and amortization (including non-cash impairment charges), straight-line rent expense
(income), amortization of deferred gain, amortization of deferred entrance fees, and non-cash compensation expense and including entrance fee
receipts and refunds.
(3) Cash From Facility Operations (“CFFO”) is a measurement of liquidity that is not calculated in accordance with GAAP and should not be
considered in isolation as a substitute for cash flows provided by or used in operations, as determined in accordance with GAAP. We define CFFO
as net cash provided by (used in) operating activities adjusted for changes in operating assets and liabilities, deferred interest and fees added to
principal, refundable entrance fees received, entrance fee refunds disbursed, lease financing debt amortization with fair market value or no purchase
options, other, and recurring capital expenditures. Recurring capital expenditures include expenditures capitalized in accordance with GAAP that
are funded from CFFO. Amounts excluded from recurring capital expenditures consist primarily of unusual or non-recurring capital items (including
integration capital expenditures), community purchases and/or major projects or renovations that are funded using financing proceeds and/or
proceeds from the sale of communities that are held for sale. Beginning in 2008, our calculation of CFFO was modified to subtract principal
amortization related to our capital leases that contain fair market value or no purchase options.
(4) Facility Operating Income is not a measurement of operating performance calculated in accordance with GAAP and should not be considered
in isolation as a substitute for net income, income from operations, or cash flows provided by or used in operations, as determined in accordance
with GAAP. We define Facility Operating Income as net income (loss) before provision (benefit) for income taxes, non-operating (income) loss items,
depreciation and amortization (including non-cash impairment charges), facility lease expense, general and administrative expense, including non-
cash stock compensation expense, amortization of deferred entrance fee revenue and management fees.
Note: See enclosed Form 10-K for non-GAAP reconciliations.
D e f i n i n g
O U R C O M PA N Y
Brookdale Senior Living is a leading
dementia care, and skilled nursing delivered
national provider of active and caring
in our healthcare and rehabilitation centers.
lifestyles and services in senior living
We also offer continuing care communities
communities. With almost 52,000 residents
with multiple levels of care. Some are entry
living in Brookdale’s 548 senior living
fee communities which provide payment
communities in 35 states, the Company has
alternatives to rental, with Life Care
grown dramatically over the previous five
protection
and
enhanced
healthcare
years,
largely through
acquisitions of
benefits.
communities
that
complemented the
Another element of our strategy is to
Company’s existing portfolio.
provide a full array of services. In markets
Since the beginning of 2006, resident
where we have a large number of residents
capacity has increased by 73 percent and
we have created an effective, economical
revenues have more than doubled. While
model
for providing ancillary services
much of the revenue growth resulted from
within our communities. Our rehabilitative
acquisitions, it is also attributable in part to
therapy
component
now
covers
more diversified product offerings,
the
approximately 35,000 units, while home
addition and growth of rehabilitation and
health covers more than 17,000 units. The
home health businesses as ancillary services
growth of
these services has
further
and vibrant marketing programs.
established Brookdale’s industry leadership
Brookdale’s
strategy
is
to provide
and stands as testimony to our Company’s
multiple community types to meet the
innovative approach to the marketplace –
diverse needs of its residents: independent
addressing the needs of our residents in a
living, assisted living, Alzheimer’s and
comprehensive manner.
Experiences of a Lifetime. Brookdale’s Experiences of a Lifetime program is a component
of our culture of Optimum Life in which residents at Brookdale Senior Living communities
nationwide submit their wishes for a life-fulfilling experience. Recent winners and their
experiences are featured as sidebar articles in this year’s Annual Report.
The Brookdale Experience
1
To O u r
S H A R E H O L D E R S
In our planning for
creative problem-solving. Those experiences
2008, we anticipated that
have encouraged us
to transcend our
we would face a very
individual legacy company identities and
challenging
economic
focus on the current task at hand. In the
environment. We did
process, we have made great progress toward
not, of course, anticipate
the formation of a new and singular Brookdale
the dramatic sequence of
identity and corporate culture. For this reason
extraordinary events that
alone, and despite the devastating economic
resulted in the current,
environment and the decline of our market
severe recession. But we
capitalization, 2008 was a pivotal year for us.
Bill Sheriff,
Chief Executive Officer
knew we were up against a difficult residential
We are a much stronger company now than
real estate market and facing weak consumer
we were a year ago.
confidence. We nevertheless entered the year
absolutely dedicated to our goal of creating a
The Brookdale Platform
cohesive, visible corporate culture focused on
The senior services industry is a young
the care of our residents.
one that will witness many changes and
Brookdale Senior Living doubled in size as
experience
tremendous
growth before
recently as 2006, and is built on a foundation
reaching its maturity. We believe that because
comprising three major companies with
of its unique platform, Brookdale is best-
unique corporate histories and diverse
positioned among its peers to thrive during
strengths. Bringing all these elements together
the formative years ahead. The animating
is every bit as difficult as it is crucial to our
spirit behind the Company’s strategy is that
future success. If there is a silver lining in the
we are dedicated to providing our residents
current economic storm, it accrues from one
the services they want and need, where they
of the grace-notes of human nature — that
want them and for the best value. How we
good people respond to difficult times with
achieve those goals is what distinguishes
redoubled efforts. I am proud that our
Brookdale as the industry leader that we see
associates have responded to the current
ourselves as being. Our operational platform
environment by pulling together to produce
is characterized by the following key
many shared experiences of hard work and
features.
2
2008 Annual Report • Brookdale Senior Living
• The breadth of our product offering –
major investments in technological
we provide independent living, assisted
support
systems
that
equip our
living, memory care, skilled nursing,
management teams with the tools they
companion services, therapy services,
need to master
the multi-variable
home health and private duty care. We
logistics that they deal with on a daily
also offer alternative financial structures
basis.
such as entry fee and monthly rentals.
• Our market concentrations – our scope
Strengthening the Platform
is national, and includes a number of
Our
single
and most
significant
major markets wherein we have a dense
accomplishment of 2008 was the formation
concentration of synergistic product
of a new operational structure designed to
offerings that span the entire continuum
integrate the best elements of our three
of senior care services.
legacy companies into geographical regions.
• Our national branding program – our
These regions now operate with a market-
brand emphasizes our commitment to
oriented focus that leverages the broad array
the continual improvement of programs
of our product offerings into a cohesive
that are directed at enhancing the most
continuum. Our communities are moving
important aspects of the senior lifestyle
beyond the vestiges of their previous legacy
as it is lived each day – food service,
company identities in order to participate
health and wellness, life enrichment
fully in the goal of directing prospective
activities and the maintenance of a safe
residents to whatever Brookdale setting will
and comfortable residential
setting
best serve their physical, social and financial
provided at an excellent value –
needs. And as these new operating teams
particularly
as
embodied in our
strive to meet the difficult challenges posed
Optimum Life program.
by the current economic environment, they
• Industry experience – the know-how
are expanding their knowledge of our unique
and dedication of our associates is
product
offerings,
and
even more
second to none; we are proud to be
importantly, they are developing a cohesive
associated with them and we strive to
ethic built on shared challenges, shared
make them proud to be part of our team.
experiences, hard work and dedication to our
• Investment in technology – the senior
residents.
care business is comprehensive and
Our new operational structure is keenly
complex, and demands a sophisticated
focused on sales and marketing. A number
technological underpinning; we have
of
our
continuing
and
significant
made -- and will continue to make --
information technology initiatives are aimed
The Brookdale Experience
3
at providing enhanced sales and marketing
communities that they serve. These services
information. These initiatives include tools
enhance the wellness of our residents while
that allow us to respond more quickly to
also adding approximately ten percent to the
prospective residents, tools that enable us to
economic value of our communities.
price our services more efficiently, and an
improved website
that
is
yielding
Renewed Emphasis on Cost Control
significantly increased leads. We also rolled
As we began to finalize our budgets for
out
a very successful Major Market
2009 in the fall of 2008, our team realized
Management (M3) program in key markets
that the economic uncertainty that was
where we have
a
significant, multi-
unfolding would exert increasing pressure on
community, multi-product
presence,
our business. We responded to this
enhancing the ability of our team members
realization by, in effect, starting over, and
to re-direct leads as well as move residents as
focusing more aggressively on cost control at
their needs change to the most suitable
all levels of the organization. Although we
Brookdale offering in a given locale.
have been very careful not to make decisions
We also succeeded in reducing open
that would compromise our commitment to
positions
in key areas of our
field
quality of care, we have made comprehensive
organization in 2008, a development that
changes affecting virtually all of our major
produced increased costs in the short run,
cost items. Some of these will be permanent,
but is proving to be very cost-effective in the
and some may be temporary. But owing to
mid-to-long term. Moreover, we continue to
the pressures of the times, these measures
drive up our already high associate retention
have had a very receptive audience,
rates, and we believe that we are achieving
including both our associates and our
greater consistency in the caliber of our field
residents. These efforts began to be visible
organization.
in late 2008, but have been even more
Another vital area in which we continued
pronounced in the first months of 2009.
to make solid gains in 2008 was in the
ongoing rollout of our Innovative Senior
Direction for 2009
Care services. We now provide therapy
We have focused intently on enhancing
services in 2/3 of our locations, and we
our liquidity. We suspended our dividend
provide home health care in 1/3 of them.
after the third quarter of 2008, and in
Brookdale is unique in the industry in our
February 2009, we renewed our credit line
ability to provide these services, and as of the
through August 2010. Factoring in extension
fourth quarter they were adding $143 of
options, we have virtually no mortgage debt
monthly operating income per unit in the
that matures in 2009 or 2010, which is a very
4
2008 Annual Report • Brookdale Senior Living
major
advantage
in
today’s
lending
resident expectations. All of these trends
environment, and we intend to devote
augur well for us. Furthermore, our general
substantially all of our cash flow to the
and administrative cost as a percentage of
repayment in full of our credit line before its
revenues is the lowest in the industry, and we
maturity. We also intend to explore
believe that is a key element of our story.
opportunities to extend our 2011 and 2012
By doing what it takes to succeed in this
debt maturities now, instead of letting them
challenging environment, we are becoming
go to term. Our goal is to substantially
more efficient and more focused on our
de-lever the company as well as to minimize
mission. We believe it is clear that we have
our mortgage refinancing risk.
the most comprehensive operating platform
Operationally, we expect to keep our
in the industry, and we have made
focus on the key areas we stressed in 2008.
tremendous progress in bringing its various
We will further expand our therapy services
elements into alignment. Our Company’s
and home health. We will be very
internal communication organ is called One
aggressive and comprehensive about cost
Voice, a name which is expressive of the very
control. We will continue to give our sales
important goal we set for ourselves of forging
and marketing personnel the tools they
a Brookdale identity and culture that is in
need to compete from a position of relative
harmony with itself and our residents.
strength in the very difficult economic
Although we cannot predict the future, we
environment we expect to experience in
can be assured that we have equipped our
2009. And we will be innovative in seeking
team of dedicated, experienced professionals
low-cost alternatives for residents, such as
with a clear strategic focus and the support
the use of shared suites, smaller units and
systems and timely information they need to
assistance programs.
make good decisions. We enter 2009 with a
The population pool of age and income
sound plan, a strong team and a mission that
qualified residents continues to grow. New
inspires us each day to do our best.
supply has been minimal over the last few
Sincerely,
years, and will cease almost entirely over the
next few years. Refinancing pressure on our
peers will create below-market acquisition
opportunities and further differentiate the
stronger operators. Ongoing advancements
Bill Sheriff
in geriatric wellness will create new
Chief Executive Officer
opportunities for senior care providers to
serve their residents, and will raise the bar on
The Brookdale Experience
5
E m b r a c i n g
C H A L L E N G E
Faced with a declining
economy
pilot markets to a dozen metro areas. As a
Brookdale turned to its marketing team for
complement
to the M3 program,
the
strategies to generate visibility and entice
Brookdale
Benefit
provides
transfer
prospects
to our communities.
The
opportunities
for
residents
between
Company’s marketing initiatives generated
different Brookdale communities as their
a record number of sales leads and enabled
needs change. These benefits include free
us to maintain high occupancy levels.
days in higher healthcare settings and a
We continued to implement our Major
tenure benefit
to buffer
longstanding
Market Management (M3) initiative in
residents from future price increases.
markets where we operate multiple product
Successful
lead
generation
and
types,
creating
networks
of
virtual
management is a key to marketing success
Continuing Care Retirement Communities
in any venue. Brookdale’s new website,
(CCRCs). These enable Brookdale to retain
launched at
the end of 2007, greatly
residents within our system as their care
improved our online capability over the past
needs change and also provide for lead
year and our site ranks among the top ten
sharing between communities. The M3
search results for 25 of the most common
concept has now expanded from its five
senior living industry keywords. Our online
“We’re here with people
just like us – the same age
and the same concerns
and problems. And it’s
very peaceful.”
-John and Kathleen Vigneaux,
Jacksonville, FL
6
2008 Annual Report • Brookdale Senior Living
marketing strategy has also succeeded in
expanding online partnerships with senior
living directories and referral sites.
Brookdale’s
internal advertising and
public
relations
department
helped
minimize marketing
costs without
sacrificing
visibility
by
successfully
increasing publicity placements, which
positioned our communities with our target
audiences and generated additional leads.
We optimized leads generated using
SIMS,
our
proprietary
approach
to
collecting, tracking and managing leads.
These marketing initiatives, coupled with
a strategic pricing program that encourages
prospects to act with urgency, enabled
Brookdale to produce stable occupancy
throughout most of 2008.
EXPERIENCE OF A LIFETIME
Attending the Inauguration
of a U.S. President
“I felt born again,” said Alfred Bouey
as he described his
experience of
witnessing the inauguration of Barack
Obama as President of the United States.
A resident of Holley Court Terrace, a
Brookdale Senior Living community in
Oak Park, Illinois, Alfred Bouey is also the
grandson of slaves. He was raised in a
segregated south, joined a segregated U.S.
Army and was in the first class of African
American men to serve as Chicago Police
officers.
According to Mr. Bouey, he never
dreamed this day would come. But, when
it did, he and members of his family
reveled in his Experience of a Lifetime as
they traveled to Washington, D.C. for the
inaugural
festivities,
courtesy
of
Brookdale.
“When I saw Barack Obama come out
to make his acceptance speech, I started
crying and never stopped,” said Bouey. “I
have witnessed not only my greatest wish,
but also the dream of my parents.”
The Brookdale Experience
7
C e l e b r a t i n g
S U C C E S S
Retirement living and senior services
associates who serve them each day. At the
today are unlike those available to earlier
same time, the existence of senior living
generations. For many seniors, their lives
communities has made a significant positive
in modern
retirement
communities
impact upon the families of those with
represent the most sublime existence to
Alzheimer’s and dementia – or those who
which they can aspire for its freedoms, its
need nursing or rehabilitative care and
opportunities
to cultivate meaningful
services.
friendships and for its positive social,
Residents of Brookdale communities who
intellectual and emotional impacts on the
engage in a comprehensive health and
body, mind, spirit and physical well-being
wellness program such as the ancillary
of the individual. Brookdale residents view
services provided by our Innovative Senior
retirement not just as a phase of life, but as
Care staff are more likely to maintain their
a grand celebration of it.
sense of wellness, thus ensuring greater
Even those who require help with
independence for them, along with higher
activities of daily living can find a sense of
occupancy and increased profitability for the
serenity and purpose in the company of
Company. We deliver our ancillary services
peers and the care of compassionate
on site
at our
communities
for
the
“Living here has enabled me
to have more time to learn
more things, visit new places,
meet good people and have
more fun. Most of all, it’s
given me a lot of time to fill
with rewarding activities.”
-Carolyn Simon
Tucson, AZ
8
2008 Annual Report • Brookdale Senior Living
convenience of our residents. These services
have provided our Company with perhaps its
most significant point of differentiation from
our competition.
The longevity of our residents is a tribute
to their resilient spirits, just as their life
quality is, in some measure, a tribute to the
work
of
our
approximately
32,000
associates who serve them daily in their
respective celebrations of life while fulfilling
our Company mission: Enriching the lives
of those we serve with compassion, respect,
excellence and integrity. In living up to that
mission, we embrace each day, secure in the
knowledge that our residents depend upon
us – and we strive always to meet their
expectations.
EXPERIENCE OF A LIFETIME
Lifting Spirits on the Wind
Bob Atkinson’s wish was to take a hot
air balloon ride and, although it was his
wish that was granted, he would not be
the one to take the ride. The experience
was to be fulfilled at the Albuquerque
International Balloon Fiesta in New
Mexico. Unfortunately, Mr. Atkinson was
unable to travel when it was his turn to
take the trip.
So, Brookdale quickly found two
replacement balloon riders at the Grand
Court in Albuquerque, a Brookdale Senior
Living community.
Enter Michelle
Koetter and Mary Schultz from New
Mexico. Accompanied by Dr. Kevin
O’Neil, medical director for Brookdale,
the two ladies took Bob Atkinson’s ride.
They also took with them a sign that read:
“Bob Atkinson: Keep Your Spirits High,”
which they hung from the balloon. Back
in Connecticut, Bob Atkinson received
photos of
the balloon ride and was
pleased that
two fellow Brookdale
residents got to share his experience.
The Brookdale Experience
9
I n s p i r i n g
O U R R E S I D E N T S
As Brookdale residents enjoy their
Life program, which helps to promote
lifestyles in our communities or receive the
wellness across six dimensions: physical,
quality care we provide, we welcome the
social, intellectual, emotional, purposeful
opportunity to celebrate their positive
and spiritual.
attitudes, which may
be
singularly
Within the Brookdale lifestyle model, our
responsible for their longevity.
unique “Celebrations” program provides a
Our residents have been eyewitnesses to
monthly template for our residents to
the drama of human history from before
continue to learn, imagine and explore. This
World War I to the present day. They have
year’s “Celebrations” theme, “Dream. Dare.
seen firsthand the great moments and
Discover!” inspires our residents’ creativity
cataclysmic events that have shaped our
by allowing them to experience a different
existence through the most prolific era of
focus
each month. Through shared
growth and technological advancement the
experiences, special events and themed
world has ever experienced. Today, they
dining, “Celebrations” unifies all Brookdale
choose to live in our communities for the
residents
in a
common program of
opportunity to achieve a sense of well-being
participation,
continued
learning,
by participating in Brookdale’s Optimum
intellectual stimulation and imagination.
“My friends have become
my family – my sisters
and brothers. And there’s
the possibility of making
new friends each day.
I laugh with some.
I cry with others.”
-Isabel Sampson
Seminole, FL
10
2008 Annual Report • Brookdale Senior Living
Experiences of a Lifetime is yet another
exclusive Brookdale program operated
under the banner of Optimum Life that
helps our residents explore and experience
a sense of life fulfillment. Launched in
2008, this program celebrates the rich
diversity of our residents and actualizes
fulfillment of their unique interests.
These
two examples of
signature
Brookdale programs demonstrate how we
engage our residents in a full range of
physical and mental experiences to promote
their wellness and active participation in
life.
In the process,
they share the
satisfaction of having found comfort,
security
and companionship in the
environments we offer.
EXPERIENCE OF A LIFETIME
Life in the Fast Lane
The day may have dawned overcast,
but the sun was shining in Eve Stovall’s
heart as she rode in the lead Corvette
from her home at The Heritage at Gaines
Ranch,
a
Brookdale
retirement
community, down the MoPac Expressway
to the State Capitol in Austin, Texas.
The yellow Corvette in which she rode
that day was the official pace car of the
1986 Indianapolis 500.
Eve Stovall
returned from her ride with a wide smile
to a reception in her honor at her home
community, complete with refreshments,
a live band and a proclamation from the
Mayor declaring that day as “Eve Stovall’s
Experience of a Lifetime.” She was also
accepted as an honorary member of the
Longhorn Corvette Club, which provided
the wheels for the event.
“This day is the happiest day of my life,
fulfilling my wish to have one more ride
in my dream car, a yellow Corvette,” said
Ms. Stovall.
“The love of a yellow
Corvette knows no age.”
The Brookdale Experience
11
A n t i c i p a t i n g
O U R F U T U R E
We recognize that our global economy is
that our Company is optimally positioned
currently experiencing very rapid changes
for growth as the economy rebounds and we
and we understand that those changes will
are optimistic about Brookdale’s position as
require us to alter our business operations
both an industry pioneer and as an industry
as we move forward. We were successful in
leader.
2008
in
innovating
new products,
Brookdale associates at every level are
expanding
supportive
services
and
honored to serve members of what has
adjusting our cost structure.
come to be called The Greatest Generation,
Our objective is to minimize costs for our
to whom we owe the mantel of freedom
residents without compromising on either
under which we live. Their spirit and zest
the quality or availability of services to
for vibrant lifestyles inspire our associates.
them. While we understand that these
We are also energized by the business
measures will impact our Company and that
challenges we face in today’s marketplace
the cost-saving impacts are profound,
and we are proud of our ability to maintain
Brookdale accepts
the challenges and
our occupancy levels during difficult
embraces the opportunities of the prevailing
economic times while delivering excellence
business environment. We remain confident
in resident service.
“My life is purposeful here
because I’m associated with
people who have lived
productive lives and don’t
mind sharing the past,
creating a diversity which
proves interesting and
entertaining.”
-Kermit Fox, M.D., Austin, TX
12
2008 Annual Report • Brookdale Senior Living
Finally, we are eager to embrace the
future with all of its uncertainty, secure in
the knowledge that our people and our
Company are prepared to endure the tests,
meet the challenges and share the reward of
the future success that awaits Brookdale
Senior Living. Most of all, we are privileged
to serve those who rely upon us each day,
our residents and their families, and to join
in their daily celebrations of life that occur
in our
senior
living and retirement
communities as part of
the Brookdale
Experience.
EXPERIENCE OF A LIFETIME
A Visit to the
World War II Memorial
Sometimes we are the
instruments b
Sometimes we are the instruments by
which the wishes of others come true.
That’s how it was for Clella Adams, a
resident of Bradford Village, a continuing
care retirement community in Edmond,
Oklahoma managed by Brookdale, who
fulfilled the dream of her deceased
husband to visit
the World War II
Memorial. Mrs. Adams was accompanied
on the trip by her two sons.
A military
family, Mrs. Adams’
husband served in the U.S. Navy from
1940 to 1960; he saw action in both
World War II and the Korean War. Her
oldest
son followed in his
father’s
footsteps, serving as a Lieutenant in the
Navy from 1968-1974. Her youngest son
retired from the U.S. Air Force as a
Colonel in the Chaplain’s Corps, serving
from 1970 to 2000.
“The trip was very special and truly
wonderful,” said Mrs. Adams. “It was very
emotional for me and it meant a lot to my
family.”
The Brookdale Experience
13
C O R P O R AT E D ATA
Corporate Office
111 Westwood Place,
Suite 200
Brentwood, TN 37027
615.221.2250
www.brookdaleliving.com
Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
800.937.5449
Governance & Certifications
Stock Listing
NYSE: BKD
Approximate Number of Record
Holders (as of April 24, 2009):
544
Investor Relations Contact
Ross Roadman
Brookdale Senior Living
111 Westwood Place,
Suite 200
Brentwood, TN 37027
615.376.2412
Independent Auditors
Ernst & Young LLP
233 S. Wacker Drive
Chicago, IL 60606
2009 Annual Meeting
June 23, 2009 • 10:00 a.m. CDT
Brookdale Senior Living
111 Westwood Place, Suite 200
Brentwood, TN 37027
615.221.2250
Brookdale’s corporate governance guidelines, code of business conduct and ethics, the
charters of the principal board committees and other governance information can be accessed
through the Investor Relations portion of our website, www.brookdaleliving.com.
Certifications by the Chief Executive Officer and the Chief Financial Officer of Brookdale
Senior Living pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 have been filed as
exhibits to the Company’s 2008 Annual Report on Form 10-K. We also have submitted to the New
York Stock Exchange (NYSE) the annual CEO Certification for 2008 regarding the Company’s
compliance with the NYSE’s corporate governance listing standards.
Forward-Looking Statements
Certain statements in this Annual Report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to, statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations
regarding occupancy, revenue, expense levels, the demand for senior housing and acquisition opportunities; our belief regarding our growth prospects;
our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our expectations regarding liquidity; our expectations
regarding financings and refinancings of assets; and our ability to increase revenues, earnings, and/or Cash From Facility Operations. Words such as
“anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “target(s),” project(s),” “believe(s),” “will,” “would,” “seek(s),” “estimate(s)” and similar
expressions are intended to identify such forward-looking statements. We can give no assurance that our expectations will be attained. These statements
are subject to a number of risks and uncertainties that could lead to actual results materially different from our expectations, which include, but are not
limited to, the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or
refinance) debt as it matures or replace our amended credit facility when it matures; the risk that we may not be able to satisfy the conditions precedent
to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our
monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover
required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the possibilities
that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or
unavailable to us; delays in obtaining regulatory approvals; competition for the acquisition of assets; a decrease in the overall demand for senior housing;
our vulnerability to economic downturns; and the other risks detailed from time to time in our filings with the SEC, including those listed under “Risk
Factors” in the accompanying Annual Report on Form 10-K. Such forward-looking statements speak only as of the date of this Annual Report. We
expressly disclaim any obligation to release publicly any updates or revisions to any such statements.
14
2008 Annual Report • Brookdale Senior Living
B O A R D O F D I R E C T O R S
Wesley R. Edens, Chairman;
Chief Executive Officer &
Chairman of the Board,
Fortress Investment Group LLC
Frank M. Bumstead 2, Director;
Chairman and Principal Shareholder,
Flood, Bumstead, McCready and McCarthy
Jackie M. Clegg 1,3, Director;
Managing Partner,
Clegg International Consultants, LLC
Tobia Ippolito, Director;
Managing Director,
Fortress Investment Group LLC
Jeffrey R. Leeds 1,2,3, Director;
Self-Employed Consultant
Mark J. Schulte, Director;
Former Co-Chief Executive Officer,
Brookdale Senior Living Inc.
James R. Seward 1, Director;
Private Investor, Consultant
Dr. Samuel Waxman 2,3, Director;
Distinguished Service Professor,
Mount Sinai School of Medicine
(1) Audit Committee
(2) Compensation Committee
(3) Nominating and Corporate Governance
Committee
EXECUTIVE OFFICERS
W.E. Sheriff
Chief Executive Officer
Kristin A. Ferge
Executive Vice President & Treasurer
Mark W. Ohlendorf
Co-President and Chief Financial Officer
George T. Hicks
Executive Vice President – Finance
John P. Rijos
Co-President and Chief Operating Officer
H. Todd Kaestner
Executive Vice President – Corporate Development
T. Andrew Smith
Executive Vice President, General Counsel &
Secretary
Gregory B. Richard
Executive Vice President – Field Operations
Bryan D. Richardson
Executive Vice President
& Chief Administrative Officer
The Brookdale Experience
15
B ro o k d a l e S e n i o r L i v i n g
P E R F O R M A N C E G R A P H
Comparison of Cumulative Return since
Corporation, Sunrise Senior Living, Inc.,
November 22, 2005 (the date of Brookdale’s
Capital Senior Living Corporation, Five Star
initial public offering) through December 31,
Quality Care, Inc., HCP, Inc., and Ventas,
2008, for Brookdale, the Russell 2000 Index
Inc. The graph assumes $100 invested on
and a Peer Group.
November 22, 2005, the date of Brookdale’s
The graph below compares the cumulative
initial public offering, and $100 invested at
total return for Brookdale common stock
that same time in each of the Russell 2000
with the comparable cumulative return of
Index and the peer group. The comparison
the Russell 2000 Index and a peer group of
assumes that all dividends are reinvested.
companies
composed
of
Emeritus
AMONG BROOKDALE SENIOR LIVING INC., THE RUSSELL 2000 INDEX AND A PEER GROUP
COMPARISON OF CUMULATIVE TOTAL RETURN
(cid:2)
(cid:1)
(cid:3)
(cid:1)
(cid:2)
(cid:3)
(cid:2)
(cid:1)(cid:3)
(cid:2)
(cid:1)
(cid:3)
(cid:2)
11/22/05
12/31/05
12/31/06
12/31/07
12/31/08
BKD
$100.00
$118.20
$197.18
$122.73
$25.02
Russell 2000
$100.00
$98.81
$116.95
$115.12
$76.23
Peer Group
$100.00
$98.92
$127.54
$126.22
$87.68
16
2008 Annual Report • Brookdale Senior Living
OUR MISSION
Enriching the lives of those we serve
with compassion, respect, excellence and integrity.
OUR CORNERSTONES
• Take ownership and pride in everything we do.
• Recognize that good people make the difference and are the key to our success.
• Work together as one team.
• Provide meaningful rewards for residents, associates and shareholders.
• Respect others through honesty, understanding and trust.
• Put the resident first and the “bottom line” will take care of itself.
• Have fun and celebrate life every day.
Corporate Headquarters
111 Westwood Place, Suite 200, Brentwood, TN 37027
(615) 221-2250
For more information visit our website: www.brookdaleliving.com
Brookdale Senior Living Resident Programs:
Brookdale, Optimum Life, Innovative Senior Care and other trademarks
and service marks herein are the registered and unregistered trademarks
and service marks of Brookdale Senior Living Inc.
2008 Annual Report • Brookdale Senior Living
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32641
BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
20-3068069
(I.R.S. Employer
Identification No.)
111 Westwood Place, Suite 200
Brentwood, Tennessee 37027
(Address of Principal Executive Offices)
(Registrant’s telephone number including area code)
(615) 221-2250
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Common Stock, $0.01 Par Value Per Share
Name of Each Exchange on Which Registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2008, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately $761.1 million. The market value calculation was determined using a per share price of $20.36,
the price at which the registrant’s common stock was last sold on the New York Stock Exchange on such date. For purposes of this calculation, shares
held by non-affiliates excludes only those shares beneficially owned by the registrant’s executive officers, directors, and stockholders owning 10% or
more of the outstanding common stock (and, in each case, their immediate family members and affiliates).
As of February 23, 2009, 101,722,806 shares of the registrant’s common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant’s Definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PAGE
5
17
32
32
33
33
35
36
37
66
68
109
109
109
110
110
110
111
111
111
Table of Contents
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-K and other information we provide from time to time may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to our operational initiatives and
our expectations regarding their effect on our results; our expectations regarding occupancy, revenue, expense levels, the demand for senior housing,
acquisition opportunities and asset dispositions; our belief regarding our growth prospects; our ability to secure financing or replace or extend existing
debt as it matures; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our
expectations regarding liquidity; our expectations regarding financings and refinancings of assets; our plans to generate growth organically through
occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our
offering of ancillary services (therapy and home health); our plans to expand existing communities; the expected project costs for our expansion program;
our expected levels of expenditures and reimbursements (and the timing thereof); the anticipated cost and expense associated with the resolution of
pending litigation and our expectations regarding the disposition thereof; our expectations for the performance of our entrance fee communities; our
ability to anticipate, manage and address industry trends and their effect on our business; our expectations regarding the payment of dividends; and our
ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined
herein). Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”,
“could”, “should”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements. These statements are based
on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing
materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are
reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and
future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, the risk associated with the
current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or refinance) debt as it matures or replace our
amended credit facility when it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options
associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees;
the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term
operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our
mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit
spreads, or other factors could make financing more expensive or unavailable to us; the risk that we may be required to post additional cash collateral in
connection with our interest rate swaps; the risk that continued market deterioration could jeopardize certain of our counterparties’ obligations; changes
in governmental reimbursement programs; our limited operating history on a combined basis; our ability to effectively manage our growth; our ability to
maintain consistent quality control; delays in obtaining regulatory approvals; our ability to integrate acquisitions into our operations; competition for the
acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our
vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living
spaces we lease; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates;
environmental contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of
complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our
filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under “Risk Factors” included
elsewhere in this Annual Report on Form 10-K. Such forward-looking statements speak only as of the date of this Annual Report. We expressly disclaim
any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations
with regard thereto or change in events, conditions or circumstances on which any statement is based.
4
Table of Contents
Item 1. Business.
Overview
PART I
As of December 31, 2008, we are the largest operator of senior living communities in the United States based on total capacity, with 548 communities in 35
states and the ability to serve over 51,800 residents. We offer our residents access to a full continuum of services across the most attractive sectors of
the senior living industry. As of December 31, 2008, we operated in four business segments: retirement centers, assisted living, continuing care
retirement communities (“CCRCs”) and management services.
As of December 31, 2008, we operated 85 retirement center communities with 15,251 units/beds, 409 assisted living communities with 21,021 units/beds, 32
CCRCs with 11,183 units/beds and 22 communities with 4,349 units/beds where we provide management services for third parties. The majority of our
units/beds are located in campus settings or communities containing multiple services, including CCRCs. As of December 31, 2008, our communities were
89.5% occupied. We generate approximately 86.2% of our revenues from private pay customers. For the year ended December 31, 2008, 39.5% of our
revenues were generated from owned communities, 60.1% from leased communities and 0.4% from management fees from communities we operate on
behalf of third parties.
The table below presents a summary of our operating results and certain other financial metrics for each of the years ended December 31, 2008, 2007 and
2006 (dollars in millions, except dividends per share):
For the Years Ended December 31,
2007
2008
2006
Total revenues
Net loss(1)
Adjusted EBITDA(2)
Cash From Facility Operations(3)
Facility Operating Income(2)
Dividends declared per share of common stock
__________
$
$
$
$
$
$
1,928.1
(373.2)
302.6
130.1
637.5
0.75
$
$
$
$
$
$
1,839.3
(162.0)
306.4
143.2
642.3
1.95
$
$
$
$
$
$
1,309.9
(108.1)
200.6
88.7
476.3
1.55
(1)
(2)
(3)
Net loss for 2008 includes non-cash impairment charges of $220.0 million.
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. See “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for an
explanation of how we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of
each measure, and a reconciliation of net loss to each of these measures.
Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for an explanation of how we define this
measure, a detailed description of why we believe such measure is useful and the limitations of such measure, and a reconciliation of net cash
provided by operating activities to such measure. In the first quarter of 2008 we changed our definition of Cash From Facility Operations to
include lease financing debt amortization with fair market value or no purchase options. Prior periods have been restated for comparative
purposes.
During 2008, our operating results were favorably impacted by an increase in our total revenues and average monthly revenue per unit/bed across all
segments. Although we made progress in certain areas of our business, our recent operating results have been negatively impacted by unfavorable
conditions in the housing, credit and financial markets and by deteriorating conditions in the overall economy, resulting in lower than anticipated
occupancy rates and increased levels of expenses. In response to these conditions, we are focusing on maintaining occupancy, increasing our ancillary
services programs, and controlling expenses (including by limiting our capital expenditures).
We are also taking steps to preserve our liquidity and increase our financial flexibility during 2009. For example, we have suspended our quarterly
dividend payments and have terminated our share repurchase program. As
5
Table of Contents
discussed in more detail elsewhere in the Annual Report on Form 10-K, we also recently entered into an amended credit facility with Bank of America,
N.A., as administrative agent, providing for a $230.0 million revolving credit facility that matures on August 31, 2010. Furthermore, we have extended the
maturity of a number of mortgage loans, and, after giving effect to contractual extension options, will have virtually no mortgage debt maturities until
2011. Finally, we have taken steps to reduce materially our exposure to collateralization requirements associated with interest rate swaps.
In the fourth quarter of 2008, similar to many companies, we experienced a significant decline in the market value of our common stock due primarily to the
depressed macroeconomic environment and volatility in the equity markets. As a result, our market capitalization eroded in the fourth quarter when
compared to previous periods and was significantly below book value. In accordance with the requirements of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we performed an impairment test of the goodwill for each of our reporting units
as of the end of the fourth quarter. As a result of our impairment tests, we recorded a non-cash goodwill impairment charge of $215.0 million for the
quarter ended December 31, 2008. The non-cash charge does not impact our ongoing business operations, liquidity, cash flows from operating activities
or financial covenants and will not result in any future cash expenditure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for additional information regarding the impairment charge.
We believe that we are positioned to take advantage of favorable demographic trends and future supply-demand dynamics in the senior living
industry. We also believe that we operate in the most attractive sectors of the senior living industry with significant opportunities to increase our
revenues through providing a combination of housing, hospitality services, ancillary services and health care services. Our senior living communities
offer residents a supportive “home-like” setting, assistance with activities of daily living, or ADLs, and, in several communities, licensed skilled nursing
services. We also provide ancillary services, including therapy and home health services, to our residents. By providing residents with a range of service
options as their needs change, we provide greater continuity of care, enabling seniors to “age-in-place” and thereby maintain residency with us for a
longer period of time. The ability of residents to age-in-place is also beneficial to our residents and their families who are concerned with care decisions
for their elderly relatives.
We believe that there are substantial organic growth opportunities inherent in our existing portfolio. We intend to take advantage of those opportunities
by growing revenues, while tightening expense control, at our existing communities, driving our ancillary services business across our existing portfolio
and, to a lesser extent, expanding our existing communities.
Growth Strategy
Our primary growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income. Key elements
of our strategy to achieve these objectives include:
· Organic growth in our core business, including expense control and the realization of economies of scale. We plan to grow our existing
operations by increasing revenues through a combination of occupancy growth and monthly service fee increases as a result of our competitive
strength and growing demand for senior living communities. In addition, we intend to take advantage of our sophisticated operating and
marketing expertise to retain existing residents and attract new residents to our communities. We also plan to continue our efforts to achieve
cost savings through the realization of additional economies of scale. The size of our business has allowed us to achieve savings in the
procurement of goods and services and increased efficiencies with respect to various corporate functions, and we expect that we can achieve
additional savings and efficiencies.
· Growth through the continued expansion of our ancillary services programs (including therapy services and home health). We plan to grow
our revenues by further expanding our Innovative Senior Care program throughout our retirement centers, assisted living, CCRCs and
management services segments. This expansion includes both continuing to roll out our services to communities not currently serviced as well
as expanding the scope of services provided at the communities currently served. Through the Innovative Senior Care program, we currently
provide therapy, home health and other ancillary services, as well as education and wellness programs, to residents of many of our
communities. These programs are focused on wellness and physical fitness to allow residents to maintain maximum
6
Table of Contents
independence. These services provide many continuing education opportunities for residents and their families through health fairs, seminars,
and other consultative interactions. The therapy services we provide include physical, occupational, speech and other specialized therapy
and home health services. The home health services we provide include skilled nursing, physical therapy, occupational therapy, speech
language pathology, home health aide services as well as social services as needed. In addition to providing these in-house therapy and
wellness services at our communities, we also provide these services to other senior living communities that we do not own or operate. These
services may be reimbursed under the Medicare program or paid directly by residents from private pay sources and revenues are recognized
as services are provided. We believe that our Innovative Senior Care program is unique in the senior living industry and that we have a
significant advantage over our competitors with respect to providing ancillary services because of our established infrastructure and
experience. We believe there is a significant opportunity to grow our revenues by continuing to expand these services to communities at
which they are not presently offered, which we believe will increase our revenue per unit/bed in the future. As of December 31, 2008 we
offered therapy services in our communities containing 35,049 units and home health in our communities containing 16,730 units.
· Growth through the expansion of existing communities. We intend to grow our revenues and cash flows through the expansion of certain of
our existing communities where economically advantageous. Certain of our communities with stabilized occupancies and excess demand in their
respective markets may benefit from additions and expansions (which additions and expansions may be subject to landlord, lender and other
third party consents) offering increased capacity. Additionally, the community, as well as our presence in the market, may benefit from adding a
new level of service for residents.
Given the current market environment, the stressed credit environment and limitations imposed by our new line of credit, we are focusing on integrating
previous acquisitions and on the significant organic growth opportunities inherent in our growth strategy. Over the longer-term, we plan to take
advantage of the fragmented continuing care, independent living and assisted living sectors by selectively purchasing existing operating companies and
communities. Additionally, as opportunities arise, we may also grow through the selective acquisition and consolidation of additional communities, asset
portfolios and other senior living companies, as well as through the acquisition of the fee interest in communities that we currently lease or manage. Our
acquisition strategy will continue to focus primarily on communities where we can improve service delivery, occupancy rates and cash flow.
The Senior Living Industry
The senior living industry is highly fragmented and characterized by numerous local and regional operators. We are one of a limited number of national
operators that provide a broad range of community locations and service level offerings at varying price levels. The industry has seen significant growth
in recent years and has been marked by the emergence of the assisted living segment in the mid-1990’s.
Since the beginning of 2007, the industry has been affected by the downturn in the housing market and by the declining economy in general. In spite of
these factors, occupancy in the industry has only decreased by 340 basis points for the independent living industry and 220 basis points for the assisted
living industry since that time according to the National Investment Center for the Seniors Housing & Care Industry. Construction of new senior
housing units, which, according to The American Seniors Housing Association, peaked at more than 62,064 units in 1999, has now moderated to a
projected 14,000 units annually for 2009 and is projected to decrease further in the next several years.
Despite current economic conditions, we believe that a number of trends will contribute to the continued growth of the senior living industry in coming
years. The primary market for senior living services is individuals age 70 and older. According to U.S. Census data, the group is expected to grow by 4.1
million through 2015. As a result of these demographic trends, we expect an increase in the demand for senior living services in future years.
We believe the senior living industry has been and will continue to be impacted by several other trends. The use of long-term care insurance is
increasing among current and future seniors as a means of planning for the costs of senior living services. In addition, as a result of increased mobility in
society, reduction of average family size and increased number of two-wage earner couples, more seniors are looking for alternatives outside of their
family for their care. Growing consumer awareness among seniors and their families concerning the types of
7
Table of Contents
services provided by independent and assisted living operators has further contributed to the opportunities in the senior living industry. Also, seniors
currently possess greater financial resources than in the past, which makes it more likely that they are able to afford to live in market-rate senior housing.
Seniors in the geographic areas in which we operate tend to have a significant amount of assets generated from savings, pensions and, despite
weakening in national housing markets, equity from the sale of private homes.
Challenges in our industry include increased state and local regulation of the assisted living and skilled nursing industries, which has led to an increase
in the cost of doing business. The regulatory environment continues to intensify in the number and types of laws and regulations affecting us,
accompanied by increased enforcement activity by state and local officials. In addition, like other companies, our financial results may be negatively
impacted by increasing employment costs including salaries, wages and benefits, such as health care, for our employees. Increases in the costs of
utilities, insurance, and real estate taxes may also have a negative impact on our financial results.
Certain per person annual limits on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These
exceptions are currently scheduled to expire on December 31, 2009. If these exceptions are modified or not extended beyond that date, there may be
reductions in our therapy services revenue and the profitability of those services. There continues 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. Changes in the
reimbursement policies of the Medicare and Medicaid programs could have an adverse effect on our results of operations and cash flow.
Our History
We were formed as a Delaware corporation in June 2005 for the purpose of combining two leading senior living operating companies, Brookdale Living
Communities, Inc., or BLC, and Alterra Healthcare Corporation, or Alterra. BLC and Alterra had been operating independently since 1986 and 1981,
respectively. Beginning in December 2003, BLC and Alterra were under the common control of Fortress Investment Group LLC (“Fortress” or “FIG”). On
November 22, 2005, we completed our initial public offering of common stock, and on July 25, 2006, we acquired American Retirement Corporation, or
ARC, another leading senior living provider which had been operating independently since 1978. Funds managed by affiliates of Fortress beneficially
own 60,875,826 shares, or approximately 57.8% of our outstanding common stock (including unvested restricted shares), as of December 31, 2008.
Our Product Offerings
We offer a variety of senior living housing and service alternatives in communities located across the United States. Our primary product offerings
consist of (i) retirement center communities; (ii) assisted living communities; and (iii) CCRCs. As discussed below under “Segments”, we also operate
certain communities on behalf of third parties pursuant to management agreements.
Retirement centers. Our retirement center communities are primarily designed for middle to upper income seniors generally age 70 and older who desire
an upscale residential environment providing the highest quality of service.
The majority of our retirement center communities consist of both independent and assisted living units in a single community, which allows residents to
“age-in-place” by providing them with a continuum of senior independent and assisted living services. While the number varies depending upon the
particular community, approximately 77.8% of all of the units at our retirement center communities are independent living units, with the balance of units
licensed for assisted living.
Our retirement center communities are large multi-story buildings containing on average 184 units/beds with extensive common areas and amenities.
Residents may choose from studio, one-bedroom and two-bedroom units, depending upon the specific community.
Each retirement center community provides residents with basic services such as meal service, 24-hour emergency response, housekeeping, concierge
services, transportation and recreational activities. Most of these communities also offer custom tailored supplemental care services at an additional
charge, which may include
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medication reminders, check-in services and escort and companion services. In addition, our Innovative Senior Care program is currently available in
most of our retirement centers communities. Through the program, we are able to offer our residents various education, wellness, therapy, home health
and other ancillary services.
In addition to the basic services, our retirement center communities that include assisted living also provide residents with supplemental care service
options to provide assistance with ADLs. The levels of care provided to residents vary from community to community depending, among other things,
upon the licensing requirements of the state in which the community is located.
Residents in our retirement center communities are able to maintain their residency for an extended period of time due to the range of service options
available to residents (not including skilled nursing) as their needs change. Residents with cognitive or physical frailties and higher level service needs
are accommodated with supplemental services in their own units or, in certain communities, are cared for in a more structured and supervised
environment on a separate wing or floor. These communities also generally have a dedicated assisted living staff, including nurses at the majority of
communities, and separate assisted living dining rooms and activity areas.
Our retirement center communities represent approximately 29.4% of our total senior living capacity.
Assisted Living. Our assisted living communities offer housing and 24-hour assistance with ADLs to mid-acuity frail and elderly residents.
Our assisted living communities include both freestanding, multi-story communities with more than 30 beds and smaller, freestanding single story
communities with less than 30 beds. Depending upon the specific location, the community may include (i) private studio, one-bedroom and one-bedroom
deluxe apartments, or (ii) individual rooms for one or two residents in wings or “neighborhoods” scaled to a single-family home, which includes a living
room, dining room, patio or enclosed porch, laundry room and personal care area, as well as a caregiver work station.
Under our Clare Bridge brand, we also operate 75 memory care communities, which are freestanding assisted living communities specially designed for
residents with Alzheimer’s disease and other dementias requiring the attention, personal care and services needed to help cognitively impaired residents
maintain a higher quality of life. Our memory care communities have from 20 to 60 beds and some are part of a campus setting, which includes a
freestanding assisted living community.
All residents at our assisted living and memory care communities receive the basic care level, which includes ongoing health assessments, three meals
per day and snacks, coordination of special diets planned by a registered dietitian, assistance with coordination of physician care, social and recreational
activities, housekeeping and personal laundry services. In some locations we offer our residents exercise programs and programs designed to address
issues associated with early stages of Alzheimer’s and other forms of dementia. In addition, we offer at additional cost higher levels of personal care
services to residents at these communities who are very physically frail or experiencing early stages of Alzheimer’s disease or other dementia and who
require more frequent or intensive physical assistance or increased personal care and supervision due to cognitive impairments. We also offer our
Innovative Senior Care program at certain of our assisted living and memory care communities.
As a result of their progressive decline in cognitive abilities, residents at our memory care communities typically require higher levels of personal care and
services and therefore pay higher monthly service fees. Specialized services include assistance with ADLs, behavior management and an activities
program, the goal of which is to provide a normalized environment that supports residents’ remaining functional abilities. Whenever possible, residents
participate in all facets of daily life at the residence, such as assisting with meals, laundry and housekeeping.
Our assisted living communities (including our memory care communities) represent approximately 40.6% of our total senior living capacity.
CCRCs. Our CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and
health. Most of our CCRCs have retirement centers, assisted living and skilled nursing available on one campus, and some also include memory
care/Alzheimer’s units.
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Ten of our CCRCs are entry fee communities, in which residents in the retirement centers apartment units pay a one-time upfront entrance fee, typically
$100,000 to $400,000 or more, which fee is partially refundable in certain circumstances. The amount of the entrance fee varies depending upon the type
and size of the dwelling unit, the type of contract plan selected, whether the contract contains a lifecare benefit (i.e., a healthcare discount) for the
resident, the amount and timing of refund, and other variables. These agreements are subject to regulations in various states. In addition to their initial
entrance fee, residents under all of our entrance fee agreements also pay a monthly service fee, which entitles them to the use of certain amenities and
services. Since we receive entrance fees upon initial occupancy, the monthly fees are generally less than fees at a comparable rental community.
The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or
upon the sale of the unit, or in certain agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit. In addition,
certain entrance fee agreements entitle the resident to a refund of the original entrance fee paid plus a percentage of the appreciation of the unit upon
resale.
We also offer a broad array of ancillary services, including therapy, home health, and other services through our Innovative Senior Care program, to the
residents of each of our CCRCs.
Our CCRCs represent approximately 21.6% of our total senior living capacity. The retirement centers units at our entry fee communities (those units on
which entry fees are paid) represent 11.1% of our total senior living capacity. Excluding managed communities and equity homes (which are residences
located on certain of our CCRC campuses that we do not generally own), entry fee communities represent 9.2% of our total senior living capacity.
Competitive Strengths
We believe our nationwide network of senior living communities is well positioned to benefit from the growth and increasing demand in the industry.
Some of our most significant competitive strengths are:
· Skilled management team with extensive experience. Our senior management team has extensive experience in acquiring, operating and
managing a broad range of senior living assets, including experience in the senior living, healthcare, hospitality and real estate industries.
· Geographically diverse, high-quality, purpose-built communities. As of December 31, 2008, we operate a nationwide base of 548 purpose-
built communities in 35 states, including 88 communities in nine of the top ten standard metropolitan statistical areas.
· Ability to provide a broad spectrum of care. Given our diverse mix of independent and assisted living communities and CCRCs, we are able to
meet a wide range of our customers’ needs. We believe that we are one of the few companies in the senior living industry with this capability.
We believe that our multiple product offerings create marketing synergies and cross-selling opportunities.
· The size of our business allows us to realize cost and operating efficiencies. We are the largest operator of senior living communities in the
United States based on total capacity. The size of our business allows us to realize cost savings and economies of scale in the procurement of
goods and services. Our scale also allows us to achieve increased efficiencies with respect to various corporate functions. We intend to utilize
our expertise and size to capitalize on economies of scale resulting from our national platform. Our geographic footprint and centralized
infrastructure provide us with a significant operational advantage over local and regional operators of senior living communities. In connection
with our formation transactions and our acquisitions, we negotiated new contracts for food, insurance and other goods and services. In
addition, we have and will continue to consolidate corporate functions such as accounting, finance, human resources, legal, information
technology and marketing. We began to realize these savings upon the completion of our formation transactions in September 2005 and have
realized additional savings as we continued to consolidate and integrate various corporate functions.
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· Significant experience in providing ancillary services. Through our Innovative Senior Care program, we provide a range of education,
wellness, therapy, home health and other ancillary services to residents of certain of our retirement centers, assisted living, and CCRC
communities. Having therapy clinics and home health agencies located in our buildings to provide needed services to our residents is a
distinctive competitive difference. We have significant experience in providing these ancillary services and expect to receive additional
revenues as we expand our ancillary service offerings to additional communities.
Segments
As of December 31, 2008, we had four reportable segments: retirement centers; assisted living; CCRCs; and management services. These segments were
determined based on the way that our chief operating decision makers organize our business activities for making operating decisions and assessing
performance.
Our management services segment includes the results of communities that we operate on behalf of third parties pursuant to management agreements.
Information regarding the other segments is included above under “Our Product Offerings”.
Operating results from our four business segments are discussed further in “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and Note 22 to our consolidated financial statements included herein.
Operations
Operations Overview
We believe that successful senior living operators must effectively combine the expertise and business disciplines of housing, hospitality, health care,
marketing, finance and real estate.
We continually review opportunities to expand the types of services we provide to our residents. To date, we have been able to increase our monthly
revenue per unit each year and we have generally experienced increasing facility operating margins through a combination of the implementation of
efficient operating procedures and the economies of scale associated with the size and number of our communities. Our operating procedures include
securing national vendor contracts to obtain the lowest possible pricing for certain services such as food, energy and insurance, implementing effective
budgeting and financial controls at each community, and establishing standardized training and operations procedures.
We have implemented intensive standards, policies and procedures and systems, including detailed staff manuals, which we believe have contributed to
high levels of customer service and to improved facility operating margins. We have centralized accounting controls, finance and other operating
functions in our support centers so that, consistent with our operating philosophy, community-based personnel can focus on resident care and efficient
operations. We have established company-wide policies and procedures relating to, among other things: resident care; community design and
community operations; billings and collections; accounts payable; finance and accounting; risk management; development of employee training materials
and programs; marketing activities; the hiring and training of management and other community-based personnel; compliance with applicable local and
state regulatory requirements; and implementation of our acquisition, development and leasing plans.
Consolidated Corporate Operations Support
We have developed a centralized infrastructure and services platform, which provides us with a significant operational advantage over local and regional
operators of senior living communities. The size of our business also allows us to achieve increased efficiencies with respect to various corporate
functions such as human resources, finance, accounting, legal, information technology and marketing. We are also able to realize cost efficiencies in the
purchasing of food, supplies, insurance, benefits, and other goods and services. In addition, we have established centralized operations groups to
support all of our product lines and communities in areas such as training, regulatory affairs, asset management, dining and procurement.
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Community Staffing and Training
Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of service, social
services and financial performance. Each Executive Director receives specialized training from us. In addition, a portion of each Executive Director’s
compensation is directly tied to the operating performance of the community and key service quality measures. We believe that the quality of our
communities, coupled with our competitive compensation philosophy, has enabled us to attract high-quality, professional community Executive
Directors.
Depending upon the size of the community, each Executive Director is supported by a community staff member who is directly responsible for day-to-day
care of the residents and either community staff or regional support to oversee the community’s marketing and community outreach programs. Other key
positions supporting each community may include individuals responsible for food service, activities, housekeeping, and engineering.
We believe that quality of care and operating efficiency can be maximized by direct resident and staff contact. Employees involved in resident care,
including the administrative staff, are trained in the support and care needs of the residents and emergency response techniques. We have adopted
formal training and evaluation procedures to help ensure quality care for our residents. We have extensive policy and procedure manuals and hold
frequent training sessions for management and staff at each site.
Quality Assurance
We maintain quality assurance programs at each of our communities through our corporate and regional staff. Our quality assurance program is designed
to achieve a high degree of resident and family member satisfaction with the care and services that we provide. Our quality control measures include,
among other things, community inspections conducted by corporate staff on a regular basis. These inspections cover the appearance of the exterior and
grounds; the appearance and cleanliness of the interior; the professionalism and friendliness of staff; quality of resident care (including assisted living
services, nursing care, therapy and home health programs); the quality of activities and the dining program; observance of residents in their daily living
activities; and compliance with government regulations. Our quality control measures also include the survey of residents and family members on a
regular basis to monitor their perception of the quality of services provided to residents.
In order to foster a sense of community as well as to respond to residents’ desires, at many of our communities, we have established a resident council or
other resident advisory committee that meets monthly with the Executive Director of the community. Separate resident committees also exist at many of
these communities for food service, activities, marketing and hospitality. These committees promote resident involvement and satisfaction and enable
community management to be more responsive to the residents’ needs and desires.
Marketing and Sales
Our marketing strategy is intended to create awareness of us, our communities, our products and our services among potential residents and their family
members and among referral sources, including hospital discharge planners, physicians, clergy, area agencies for the elderly, skilled nursing facilities,
home health agencies and social workers. Our marketing staff develops overall strategies for promoting our communities and monitors the success of our
marketing efforts, including outreach programs. In addition to direct contacts with prospective referral sources, we also rely on print advertising, yellow
pages advertising, direct mail, signage and special events, health fairs and community receptions. Certain resident referral programs have been
established and promoted within the limitations of federal and state laws at many communities.
In order to mitigate the impact of weakness in the housing market, we have recently implemented several new sales and marketing initiatives designed to
increase our entrance fee sales results. These include the acceptance of short-term promissory notes in satisfaction of a resident’s required entrance fee
from certain pre-qualified, prospective residents who are waiting for their homes to sell. In addition, we have implemented the MyChoice program, which
allows new and existing residents in certain communities the option to pay additional refundable entrance fee amounts in return for a reduced monthly
service fee, thereby offering choices to residents desiring a more affordable ongoing monthly service fee.
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Competition
The senior living industry is highly competitive. We compete with numerous other organizations that provide similar senior living alternatives, such as
home health care agencies, community-based service programs, retirement communities, convalescent centers and other senior living providers. In
general, regulatory and other barriers to competitive entry in the retirement centers and assisted living segments of the senior living industry are not
substantial, except in the skilled nursing segment. Although new construction of senior living communities has declined in recent years, we have
experienced and expect to continue to experience competition in our efforts to acquire and operate senior living communities. Some of our present and
potential senior living competitors have, or may obtain, greater financial resources than us and may have a lower cost of capital. Consequently, we may
encounter competition that could limit our ability to attract residents or expand our business, which could have a material adverse effect on our revenues
and earnings. Our major publicly-traded competitors are Sunrise Senior Living, Inc., Emeritus Corporation and Capital Senior Living Corporation and our
major private competitors include Professional Community Management Life Care Services, LLC and Atria Senior Living Group, as well as a large number
of not-for-profit entities.
Customers
Our target retirement center residents are senior citizens age 70 and older who desire or need a more supportive living environment. The average
retirement center resident resides in a retirement center community for 37 months. A number of our retirement center residents relocate to one of our
communities in order to be in a metropolitan area that is closer to their adult children.
Our target assisted living residents are predominantly senior citizens age 80 and older who require daily assistance with two or three ADLs. The average
assisted living resident resides in an assisted living community for 23 months. Residents typically enter an assisted living community due to a relatively
immediate need for services that might have been triggered by a medical event or need.
Our target CCRC residents are senior citizens who are seeking a community that offers a variety of services and a continuum of care so that they can “age
in place.” These residents generally first enter the community as a resident of an retirement centers unit and may later move into an assisted living or
skilled nursing unit as their needs change.
We believe our combination of retirement center and assisted living operating expertise and the broad base of customers that this enables us to target
creates a unique opportunity for us to invest in a broad spectrum of assets in the senior living industry, including retirement center, assisted living, CCRC
and skilled nursing communities.
Employees
As of December 31, 2008, we had approximately 22,200 full-time employees and approximately 9,000 part-time employees, of which 199 work in our
Nashville headquarters office, 350 work in our Milwaukee office, 60 work in our Chicago office and 83 work in a variety of field-based management
positions. We currently consider our relationship with our employees to be good.
Government Regulation
The regulatory environment surrounding the senior living industry continues to intensify in the number and type of laws and regulations affecting it. In
addition, federal, state and local officials are increasingly focusing their efforts on enforcement of these laws and regulations. This is particularly true for
large for-profit, multi-community providers like us. Some of the laws and regulations that impact our industry include: state and local laws impacting
licensure, protecting consumers against deceptive practices, and generally affecting the communities’ management of property and equipment and how
we otherwise conduct our operations, such as fire, health and safety laws and regulations and privacy laws; federal and state laws designed to protect
Medicare and Medicaid, which mandate what are allowable costs, pricing, quality of services, quality of care, food service, resident rights (including
abuse and neglect) and fraud; federal and state residents’ rights statutes and regulations; Anti-Kickback and physicians referral (“Stark”) laws; and
safety and health standards set by the Occupational Safety and Health Administration. We are unable to predict the future course of federal, state and
local legislation or regulation. Changes in the regulatory framework could have a material adverse effect on our business.
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Many senior living communities are also subject to regulation and licensing by state and local health and social service agencies and other regulatory
authorities. Although requirements vary from state to state, these requirements may address, among others, the following: personnel education, training
and records; community services, including administration of medication, assistance with self-administration of medication and the provision of nursing,
home health and therapy services; staffing levels; monitoring of resident wellness; physical plant specifications; furnishing of resident units; food and
housekeeping services; emergency evacuation plans; professional licensing and certification of staff prior to beginning employment; and resident rights
and responsibilities, including in some states the right to receive health care services from providers of a resident’s choice that are not our employees. In
several of the states in which we operate or may operate, we are prohibited from providing certain higher levels of senior care services without first
obtaining the appropriate licenses. In addition, in several of the states in which we operate or intend to operate, assisted living communities, home health
agencies and/or skilled nursing facilities require a certificate of need before the community can be opened or the services at an existing community can be
expanded. Senior living communities may also be subject to state and/or local building, zoning, fire and food service codes and must be in compliance
with these local codes before licensing or certification may be granted. These laws and regulatory requirements could affect our ability to expand into
new markets and to expand our services and communities in existing markets. In addition, if any of our presently licensed communities operates outside
of its licensing authority, it may be subject to penalties, including closure of the community.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by
governmental authorities and consequent citations for failure to comply with regulatory requirements. Unannounced surveys or inspections may occur
annually or bi-annually, or following a regulator’s receipt of a complaint about the community. From time to time in the ordinary course of business, we
receive deficiency reports from state regulatory bodies resulting from such inspections or surveys. Most inspection deficiencies are resolved through an
agreed-to plan of corrective action relating to the community’s operations, but the reviewing agency typically has the authority to take further action
against a licensed or certified community, which could result in the imposition of fines, imposition of a provisional or conditional license, suspension or
revocation of a license, suspension or denial of admissions, loss of certification as a provider under federal health care programs or imposition of other
sanctions, including criminal penalties. Loss, suspension or modification of a license may also cause us to default under our loan or lease agreements
and/or trigger cross-defaults. Sanctions may be taken against providers or facilities without regard to the providers’ or facilities’ history of compliance.
We may also expend considerable resources to respond to federal and state investigations or other enforcement action under applicable laws or
regulations. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other disposition that has had a material adverse
effect on our revenues. However, any future substantial failure to comply with any applicable legal and regulatory requirements could result in a material
adverse effect to our business as a whole. In addition, states Attorneys General vigorously enforce consumer protection laws as those laws relate to the
senior living industry. State Medicaid Fraud and Abuse Units may also investigate assisted living communities even if the community or any of its
residents do not receive federal or state funds.
Regulation of the senior living industry is evolving at least partly because of the growing interests of a variety of advocacy organizations and political
movements attempting to standardize regulations for certain segments of the industry, particularly assisted living. Our operations could suffer if future
regulatory developments, such as federal assisted living laws and regulations, as well as mandatory increases in the scope and severity of deficiencies
determined by survey or inspection officials or increase the number of citations that can result in civil or criminal penalties. Certain current state laws and
regulations allow enforcement officials to make determinations on whether the care provided by one or more of our communities exceeds the level of care
for which the community is licensed. A finding that a community is delivering care beyond its license might result in the immediate transfer and discharge
of residents, which may create market instability and other adverse consequences. Furthermore, certain states may allow citations in one community to
impact other communities in the state. Revocation or suspension of a license, or a citation, at a given community could therefore impact our ability to
obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our loan or lease agreements and
trigger cross-defaults or may also trigger defaults under certain of our credit agreements, or adversely affect our ability to operate and/or obtain financing
in the future. If a state were to find that one community’s citation will impact another of our communities, this will also increase costs and result in
increased surveillance by the state survey agency. If regulatory requirements increase, whether
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through enactment of new laws or regulations or changes in the enforcement of existing rules, including increased enforcement brought about by
advocacy groups, in addition to federal and state regulators, our operations could be adversely affected. In addition, any adverse finding by survey and
inspection officials may serve as the basis for false claims lawsuits by private plaintiffs and may lead to investigations under federal and state laws, which
may result in civil and/or criminal penalties against the community or individual.
There are various extremely complex federal and state laws governing a wide array of referrals, relationships and arrangements and prohibiting fraud by
health care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such
anti-fraud initiatives. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Balanced Budget Act of 1997 expanded the
penalties for health care fraud. In addition, with respect to our participation in federal health care reimbursement programs, the government or private
individuals acting on behalf of the government may bring an action under the False Claims Act alleging that a health care provider has defrauded the
government and seek treble damages for false claims and the payment of additional monetary civil penalties. Recently, other health care providers have
faced enforcement action under the False Claims Act. The False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf
of the federal government and earn a percentage of the federal government’s recovery. Because of these incentives, so-called “whistleblower” suits have
become more frequent. Also, if any of our communities exceeds its level of care, we may be subject to private lawsuits alleging “transfer trauma” by
residents. Such allegations could also lead to investigations by enforcement officials, which could result in penalties, including the closure of
communities. The violation of any of these regulations may result in the imposition of fines or other penalties that could jeopardize our business.
Additionally, we operate communities that participate in federal and/or state health care reimbursement programs, including state Medicaid waiver
programs for assisted living communities, the Medicare skilled nursing facility benefit program and other healthcare programs such as therapy and home
health services, or other federal and/or state health care programs. Consequently, we are subject to federal and state laws that prohibit anyone from
presenting, or causing to be presented, claims for reimbursement which are false, fraudulent or are for items or services that were not provided as claimed.
Similar state laws vary from state to state and we cannot be sure that these laws will be interpreted consistently or in keeping with past practices.
Violation of any of these laws can result in loss of licensure, claims for recoupment, civil or criminal penalties and exclusion of health care providers or
suppliers from furnishing covered items or services to beneficiaries of the applicable federal and/or state health care reimbursement program. Loss of
licensure may also cause us to default under our leases and loan agreements and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback
Law, the Stark laws and certain state referral laws. The Federal Anti-Kickback Law makes it unlawful for any person to offer or pay (or to solicit or receive)
“any remuneration ... directly or indirectly, overtly or covertly, in cash or in kind” for referring or recommending for purchase any item or service which is
eligible for payment under the Medicare and/or Medicaid programs. Authorities have interpreted this statute very broadly to apply to many practices and
relationships between health care providers and sources of patient referral. If we were to violate the Federal Anti-Kickback Law, we may face criminal
penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid, which may also cause
us to default under our leases and loan agreements and/or trigger cross-defaults. Adverse consequences may also result if we violate federal Stark laws
related to certain Medicare and Medicaid physician referrals. While we endeavor to comply with all laws that regulate the licensure and operation of our
senior living communities, it is difficult to predict how our revenues could be affected if we were subject to an action alleging such violations. We are also
subject to federal and state laws designed to protect the confidentiality of patient health information. The U.S. Department of Health and Human Services,
or HHS, has issued rules pursuant to HIPAA relating to the privacy of such information. Rules that became effective April 14, 2003 govern our use and
disclosure of health information at certain HIPAA covered communities. We established procedures to comply with HIPAA privacy requirements at
these communities. We were required to be in compliance with the HIPAA rule establishing administrative, physical and technical security standards for
health information by April 2005. To the best of our knowledge, we are in compliance with these rules.
Environmental Matters
Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in
certain circumstances for the costs of investigation, removal or
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remediation of certain hazardous or toxic substances, including, among others, petroleum and materials containing asbestos, that could be located on, in,
at or under a property, regardless of how such materials came to be located there. Additionally, such an owner or operator of real property may incur
costs relating to the release of hazardous or toxic substances, including government fines and payments for personal injuries or damage to adjacent
property. The cost of any required investigation, remediation, removal, mitigation, compliance, fines or personal or property damages and our liability
therefore could exceed the property’s value and/or our assets’ value. In addition, the presence of such substances, or the failure to properly dispose of or
remediate the damage caused by such substances, may adversely affect our ability to sell such property, to attract additional residents and retain existing
residents, to borrow using such property as collateral or to develop or redevelop such property. In addition, such laws impose liability for investigation,
remediation, removal and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third-party sites. Such
laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release or
disposal of such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Moreover,
the imposition of such liability upon us could be joint and several, which means we could be required to pay for the cost of cleaning up contamination
caused by others who have become insolvent or otherwise judgment proof.
We do not believe that we have incurred such liabilities that would have a material adverse effect on our business, financial condition and results of
operations.
Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-
containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the
environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents, including, for
example, blood-soaked bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with an infectious
disease. The management of infectious medical waste, including its handling, storage, transportation, treatment and disposal, is subject to regulation
under various federal, state and local environmental laws. These environmental laws set forth the management requirements for such waste, as well as
related permit, record-keeping, notice and reporting obligations. Each of our communities has an agreement with a waste management company for the
proper disposal of all infectious medical waste. The use of such waste management companies does not immunize us from alleged violations of such
medical waste laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from
third-party claims for the cost to cleanup disposal sites at which such wastes have been disposed. Any finding that we are not in compliance with
environmental laws could adversely affect our business operations and financial condition.
Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, their
employees and certain other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing
materials and potential asbestos-containing materials in their buildings. The regulations also set forth employee training, record-keeping requirements
and sampling protocols pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for
violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of
personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials. The regulations
may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested.
Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing
materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or
demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and
potential asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for
personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.
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The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire
may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan. Furthermore, the presence of
mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire may present a
risk that third parties will seek recovery from the owners, operators or tenants of such properties for personal injury or property damage. In some
circumstances, areas affected by mold may be unusable for periods of time for repairs, and even after successful remediation, the known prior presence of
extensive mold could adversely affect the ability of a community to retain or attract residents and could adversely affect a community’s market value.
We believe that we are in material compliance with applicable environmental laws.
We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory
framework could have a material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our
operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports, are available free of
charge through our web site as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission, at the following address: www.brookdaleliving.com. The information within, or that can be accessed through, the web site is not part of this
report.
We have posted our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of our Audit, Compensation, Investment,
and Nominating and Corporate Governance Committees on our web site at www.brookdaleliving.com. In addition, our Code of Ethics for Chief Executive
and Senior Financial Officers, which applies to our Chief Executive Officer, Co-Presidents, Chief Financial Officer, Treasurer and Controller, is also
available on our website. Our corporate governance materials are available in print free of charge to any stockholder upon request to our Corporate
Secretary, Brookdale Senior Living Inc., 111 Westwood Place, Suite 200, Brentwood, Tennessee 37027.
Item 1A. Risk Factors.
Risks Related to Our Business
Recent disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could
negatively impact our liquidity, financial condition and the market price of our common stock.
The United States stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have
caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These
circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have
resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional
financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.
Subsequent to December 31, 2008, we now have an available secured line of credit of $230.0 million (including a $25.0 million letter of credit sublimit) and
separate letter of credit facilities of up to $48.5 million in the aggregate. As of December 31, 2008, we also had $158.5 million of debt that is scheduled to
mature during the twelve months ending December 31, 2009 (excluding the $4.5 million current portion of our line of credit). If we are unable to extend our
amended credit facility, or enter into a new credit facility, at or prior to its August 31, 2010 maturity date or extend (or refinance, as applicable) any of our
other debt or letter of credit facilities prior to their scheduled maturity dates, our liquidity and financial condition could be adversely impacted. In
addition, even if we are able to extend or replace our credit facility at or prior to its maturity or extend or refinance our
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other maturing debt or letter of credit facilities, the terms of the new financing may not be as favorable to us as the terms of the existing financing.
A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to
further adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital, including through the issuance
of common stock. Continued disruptions in the financial markets could have an adverse effect on us and our business. If we are not able to obtain
additional financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our
revenues and results of operations.
If we are not able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements, our liquidity
and financial condition could be negatively impacted.
Our consolidated financial statements reflect approximately $158.5 million of debt obligations (excluding the $4.5 million current portion of our line of
credit) due on or prior to December 31, 2009. Although these debt obligations are scheduled to mature on or prior to December 31, 2009, we have the
option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately
$131.0 million of certain mortgages payable included in such debt until 2011, as the instruments associated with such mortgages payable provide that we
can extend the respective maturity dates for up to two terms of 12 months each from the existing maturity dates. We presently anticipate that we will
exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations. If we are not able to
satisfy the conditions precedent to exercising these extension options, our liquidity and financial condition could be adversely impacted.
Due to the dependency of our revenues on private pay sources, events which adversely affect the ability of seniors to afford our monthly resident fees
or entrance fees (including downturns in the economy, housing market, consumer confidence or the equity markets) could cause our occupancy rates,
revenues and results of operations to decline.
Costs to seniors associated with independent and assisted living services are not generally reimbursable under government reimbursement programs
such as Medicare and Medicaid. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our communities
are located typically can afford to pay our monthly resident fees. Economic downturns, softness in the housing market, lower levels of consumer
confidence, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford our resident fees or entrance
fees. If we are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the fees associated with
independent and assisted living services and other service offerings, our occupancy rates, revenues and results of operations could decline.
The inability of seniors to sell real estate may delay their moving into our communities, which could negatively impact our occupancy rates,
revenues, cash flows and results of operations.
Recent housing price declines and reduced home mortgage availability have negatively affected the U.S. housing market, with certain geographic areas
experiencing more acute deterioration than others. Downturns in the housing markets, such as the one we have recently experienced, could adversely
affect the ability (or perceived ability) of seniors to afford our entrance fees and resident fees as our customers frequently use the proceeds from the sale
of their homes to cover the cost of our fees. Specifically, if seniors have a difficult time selling their homes, these difficulties could impact their ability to
relocate into our communities or finance their stays at our communities with private resources. If the recent volatility in the housing market continues for
a protracted period, our occupancy rates, revenues, cash flows and results of operations could be negatively impacted.
General economic factors could adversely affect our financial performance and other aspects of our business.
General economic conditions, such as inflation, commodity costs, fuel and other energy costs, costs of labor, insurance and healthcare, interest rates, and
tax rates, affect our community operating and general and administrative expenses, and we have no control or limited ability to control such factors. In
addition, current global economic conditions and uncertainties, the potential impact of a prolonged recession, the potential for failures or realignments of
financial institutions, and the related impact on available credit may affect us and our business partners, landlords, counterparties and residents or
prospective residents in an adverse manner including,
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but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk
that certain of our business partners, landlords or counterparties would be unable to fulfill their obligations to us, and other impacts which we are unable
to fully anticipate.
If we are unable to generate sufficient cash flow to cover required interest and lease payments, this would result in defaults of the related debt or
leases and cross-defaults under other debt or leases, which would adversely affect our ability to continue to generate income.
We have significant indebtedness and lease obligations, and we intend to continue financing our communities through mortgage financing, long-term
leases and other types of financing, including borrowings under our line of credit and future credit facilities we may obtain. We cannot give any
assurance that we will generate sufficient cash flow from operations to cover required interest, principal and lease payments. Any non-payment or other
default under our financing arrangements could, subject to cure provisions, cause the lender to foreclose upon the community or communities securing
such indebtedness or, in the case of a lease, cause the lessor to terminate the lease, each with a consequent loss of income and asset value to us.
Furthermore, in some cases, indebtedness is secured by both a mortgage on a community (or communities) and a guaranty by us and/or one or more of
our subsidiaries. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on real property
by declaring all amounts outstanding under the guaranty immediately due and payable, and requiring the respective guarantor to fulfill its obligations to
make such payments. The realization of any of these scenarios would have an adverse effect on our financial condition and capital structure.
Additionally, a foreclosure on any of our properties could cause us to recognize taxable income, even if we did not receive any cash proceeds in
connection with such foreclosure. Further, because our mortgages and leases generally contain cross-default and cross-collateralization provisions, a
default by us related to one community could affect a significant number of our communities and their corresponding financing arrangements and leases.
Our indebtedness and long-term leases could adversely affect our liquidity and our ability to operate our business and our ability to execute our
growth strategy.
Our level of indebtedness and our long-term leases could adversely affect our future operations and/or impact our stockholders for several reasons,
including, without limitation:
· We may have little or no cash flow apart from cash flow that is dedicated to the payment of any interest, principal or amortization required with
respect to outstanding indebtedness and lease payments with respect to our long-term leases;
· Increases in our outstanding indebtedness, leverage and long-term leases will increase our vulnerability to adverse changes in general economic
and industry conditions, as well as to competitive pressure;
· Increases in our outstanding indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures,
expansions, new developments, acquisitions, general corporate and other purposes; and
· Our ability to pay dividends to our stockholders may be limited.
Our ability to make payments of principal and interest on our indebtedness and to make lease payments on our leases depends upon our future
performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations,
many of which are beyond our control. Our business might not continue to generate cash flow at or above current levels. If we are unable to generate
sufficient cash flow from operations in the future to service our debt or to make lease payments on our leases, we may be required, among other things, to
seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay
planned capital expenditures or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our debt or to
make lease payments on our leases. The failure to make required payments on our debt or leases or the delay or abandonment of our planned growth
strategy could result in an adverse effect on our future ability to generate revenues and sustain profitability. In addition, any such financing, refinancing
or sale of assets might not be available on economically favorable terms to us.
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Our existing credit facilities, mortgage loans and lease arrangements contain covenants that restrict our operations and any default under such
facilities, loans or arrangements could result in the acceleration of indebtedness, termination of the leases or cross-defaults, any of which would
negatively impact our liquidity and inhibit our ability to grow our business and increase revenues.
Our outstanding indebtedness and leases contain restrictions and covenants and require us to maintain or satisfy specified financial ratios and coverage
tests, including maintaining prescribed net worth levels, leverage ratios and debt service and lease coverage ratios on a consolidated basis, and on a
community or communities basis based on the debt or lease securing the communities. In addition, certain of our leases require us to maintain lease
coverage ratios on a lease portfolio basis (each as defined in the leases) and maintain stockholders’ equity or tangible net worth amounts. The debt
service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee and a reserve for capital
expenditures, divided by the debt (principal and interest) or lease payment. Net worth is generally calculated as stockholders’ equity as calculated in
accordance with GAAP, and in certain circumstances, reduced by intangible assets or liabilities or increased by deferred gains from sale-leaseback
transactions and deferred entrance fee revenue. These restrictions and covenants may interfere with our ability to obtain financing or to engage in other
business activities, which may inhibit our ability to grow our business and increase revenues. If we fail to comply with any of these requirements, then
the related indebtedness could become immediately due and payable. We cannot assure you that we could pay this debt if it became due.
Our outstanding indebtedness and leases are secured by our communities and, in certain cases, a guaranty by us and/or one or more of our subsidiaries.
Therefore, an event of default under the outstanding indebtedness or leases, subject to cure provisions in certain instances, would give the respective
lenders or lessors, as applicable, the right to declare all amounts outstanding to be immediately due and payable, terminate the lease, foreclose on
collateral securing the outstanding indebtedness and leases, and restrict our ability to make additional borrowings under the outstanding indebtedness
or continue to operate the properties subject to the lease. Certain of our outstanding indebtedness and leases contain cross-default provisions so that a
default under certain outstanding indebtedness would cause a default under certain of our leases. Certain of our outstanding indebtedness and leases
also restrict, among other things, our ability to incur additional debt.
The substantial majority of our lease arrangements are structured as master leases. Under a master lease, we may lease a large number of geographically
dispersed properties through an indivisible lease. As a result, it is difficult to restructure the composition of the portfolio or economic terms of the lease
without the consent of the landlord. Failure to comply with Medicare or Medicaid provider requirements is a default under several of our master lease and
debt financing instruments. In addition, potential defaults related to an individual property may cause a default of an entire master lease portfolio and
could trigger cross-default provisions in our outstanding indebtedness and other leases, which would have a negative impact on our capital structure
and our ability to generate future revenues, and could interfere with our ability to pursue our growth strategy.
Certain of our master leases also contain radius restrictions, which limit our ability to own, develop or acquire new communities within a specified
distance from certain existing communities covered by such master leases. These radius restrictions could negatively affect our expansion, development
and acquisition plans.
Mortgage debt and lease obligations expose us to increased risk of loss of property, which could harm our ability to generate future revenues and
could have an adverse tax effect.
Mortgage debt and lease obligations increase our risk of loss because defaults on indebtedness secured by properties or pursuant to the terms of the
lease may result in foreclosure actions initiated by lenders or lessors and ultimately our loss of the property securing any loans for which we are in
default or cause the lessor to terminate the lease. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a
purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could
negatively impact our earnings and liquidity. Further, our mortgage debt and leases generally contain cross-default and cross-collateralization provisions
and a default on one community could affect a significant number of our communities, financing arrangements and leases.
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Increases in market interest rates could significantly increase the costs of our unhedged debt and lease obligations, which could adversely affect our
liquidity and earnings.
Our unhedged floating-rate debt and lease payment obligations and any unhedged floating-rate debt incurred in the future, exposes us to interest rate
risk. Therefore, increases in prevailing interest rates could increase our payment obligations, which would negatively impact our liquidity and earnings.
Changes in the value of our interest rate swaps could require us to post additional cash collateral with our counterparties, which could negatively
impact our liquidity and financial condition.
In the normal course of our business, we use a variety of financial instruments to manage or hedge interest rate risk. We have entered into certain interest
rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing
transactions. Pursuant to our hedge agreements, we are required to secure our obligation to our counterparty if the fair value liability exceeds a specified
threshold by posting cash or other collateral. In periods of significant volatility in the credit markets, the value of our swaps can change significantly
and, as a result, the amount of collateral we are required to post can change significantly. If we are required to post additional collateral due to changes in
the fair value liability of our existing or future swaps, our liquidity and financial condition could be negatively impacted.
We will rely on reimbursement from governmental programs for a greater portion of our revenues than in the past, and will be subject to changes in
reimbursement levels, which could adversely affect our results of operations and cash flow.
We will rely on reimbursement from governmental programs for a greater portion of our revenues than before, and we cannot assure you that
reimbursement levels will not decrease in the future, which could adversely affect our results of operations and cash flow. Certain per person annual limits
on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These exceptions are currently scheduled to
expire on December 31, 2009. If these exceptions are modified or not extended beyond that date, there may be reductions in our therapy services revenue
and the profitability of those services. 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. Changes in the reimbursement policies of the Medicare program could have an
adverse effect on our results of operations and cash flow.
We have a limited operating history on a combined basis and we are therefore subject to the risks generally associated with the formation of any new
business and the combination of existing businesses.
In June 2005, we were formed for the purpose of combining two leading senior living operating companies, Brookdale Living Communities, Inc., or BLC,
and Alterra Healthcare Corporation, or Alterra, through a series of mergers that occurred in September 2005. Prior to this combination, we had no
operations or assets. We are therefore subject to the risks generally associated with the formation of any new business and the combination of existing
businesses, including the risk that we will not be able to realize expected efficiencies and economies of scale or implement our business strategies. As
such, we only have a brief combined and consolidated operating history upon which investors may evaluate our performance as an integrated entity and
assess our future prospects. In addition, from the date of our initial public offering in November 2005, we have purchased over 220 additional
communities, including 83 communities from American Retirement Corporation, or ARC. There can be no assurance that we will be able to successfully
integrate and oversee the combined operations of BLC, Alterra and ARC and the additional communities purchased in these acquisitions. Accordingly,
our financial performance to date may not be indicative of our long-term future performance and may not necessarily reflect what our results of
operations, financial condition and cash flows would have been had we operated as a combined entity throughout the periods presented.
We have a history of losses and we may not be able to achieve profitability.
We have incurred net losses in every quarter since our formation in June 2005. Given our history of losses, there can be no assurance that we will be able
to achieve and/or maintain profitability in the future. If we do not effectively manage our cash flow and combined business operations going forward or
otherwise achieve profitability, our stock price would be adversely affected.
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If we do not effectively manage our growth and successfully integrate new or recently-acquired or initiated operations into our existing operations,
our business and financial results could be adversely affected.
Our growth has and will continue to place significant demands on our current management resources. Our ability to manage our growth effectively and to
successfully integrate new or recently-acquired or initiated operations (including expansions, developments, acquisitions and the expansion of our
ancillary services program) into our existing business will require us to continue to expand our operational, financial and management information
systems and to continue to retain, attract, train, motivate and manage key employees. There can be no assurance that we will be successful in attracting
qualified individuals to the extent necessary, and management may expend significant time and energy attracting the appropriate personnel to manage
assets we purchase in the future and our expansion and development activities. Also, the additional communities and expansion activities will require us
to maintain consistent quality control measures that allow our management to effectively identify deviations that result in delivering care and services
that are substandard, which may result in litigation and/or loss of licensure or certification. If we are unable to manage our growth effectively,
successfully integrate new or recently-acquired or initiated operations into our existing business, or maintain consistent quality control measures, our
business, financial condition and results of operations could be adversely affected.
Delays in obtaining regulatory approvals could hinder our plans to expand our ancillary services program, which could negatively impact our
anticipated revenues, results of operations and cash flows.
We plan to continue to expand our offering of ancillary services (including therapy and home health) to additional communities. In the current
environment, it is difficult to obtain certain required regulatory approvals. Delays in obtaining required regulatory approvals could impede our ability to
expand to additional communities in accordance with our plans, which could negatively impact our anticipated revenues, results of operations and cash
flows.
If we are unable to expand our communities in accordance with our plans, our anticipated revenues and results of operations could be adversely
affected.
We are currently working on projects that will expand several of our existing senior living communities over the next several years. We are also
developing certain new senior living communities. These projects are in various stages of development and are subject to a number of factors over which
we have little or no control. Such factors include the necessity of arranging separate leases, mortgage loans or other financings to provide the capital
required to complete these projects; difficulties or delays in obtaining zoning, land use, building, occupancy, licensing, certificate of need and other
required governmental permits and approvals; failure to complete construction of the projects on budget and on schedule; failure of third-party
contractors and subcontractors to perform under their contracts; shortages of labor or materials that could delay projects or make them more expensive;
adverse weather conditions that could delay completion of projects; increased costs resulting from general economic conditions or increases in the cost
of materials; and increased costs as a result of changes in laws and regulations. We cannot assure you that we will elect to undertake or complete all of
our proposed expansion and development projects, or that we will not experience delays in completing those projects. In addition, we may incur
substantial costs prior to achieving stabilized occupancy for each such project and cannot assure you that these costs will not be greater than we have
anticipated. We also cannot assure you that any of our expansion or development projects will be economically successful. Our failure to achieve our
expansion and development plans could adversely impact our growth objectives, and our anticipated revenues and results of operations.
We may encounter difficulties in acquiring communities at attractive prices or integrating acquisitions with our operations, which may adversely
affect our operations and financial condition.
We will continue to selectively target strategic acquisitions as opportunities arise. The process of integrating acquired communities into our existing
operations may result in unforeseen operating difficulties, divert managerial attention or require significant financial resources. These acquisitions and
other future acquisitions may require us to incur additional indebtedness and contingent liabilities, and may result in unforeseen expenses or compliance
issues, which may limit our revenue growth, cash flows, and our ability to achieve profitability. Moreover, any future acquisitions may not generate any
additional income for us or provide any benefit to our business. In addition, we cannot assure you that we will be able to locate and acquire communities
at attractive prices in locations that are compatible with our strategy or that competition for the acquisition of communities
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will not increase. Finally, when we are able to locate communities and enter into definitive agreements to acquire or lease them, we cannot assure you that
the transactions will be completed. Failure to complete transactions after we have entered into definitive agreements may result in significant expenses to
us.
Unforeseen costs associated with the acquisition of communities could reduce our future profitability.
Our growth strategy contemplates selected future acquisitions of existing senior living operating companies and communities. Despite our extensive
underwriting and due diligence procedures, communities that we have previously acquired or may acquire in the future may generate unexpectedly low or
no returns or may not meet a risk profile that our investors find acceptable. In addition, we might encounter unanticipated difficulties and expenditures
relating to any of the acquired communities, including contingent liabilities, or newly acquired communities might require significant management
attention that would otherwise be devoted to our ongoing business. For example, a community may require capital expenditures in excess of budgeted
amounts, or it may experience management turnover that is higher than we project. These costs may negatively affect our future profitability.
Competition for the acquisition of strategic assets from buyers with lower costs of capital than us or that have lower return expectations than we do
could limit our ability to compete for strategic acquisitions and therefore to grow our business effectively.
Several real estate investment trusts, or REITs, have similar asset acquisition objectives as we do, along with greater financial resources and lower costs
of capital than we are able to obtain. This may increase competition for acquisitions that would be suitable to us, making it more difficult for us to
compete and successfully implement our growth strategy. There is significant competition among potential acquirers in the senior living industry,
including REITs, and there can be no assurance that we will be able to successfully implement our growth strategy or complete acquisitions, which could
limit our ability to grow our business effectively.
We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us, or at
all, which may limit our ability to grow.
Continued expansion of our business through the expansion of our existing communities, the development of new communities and the acquisition of
existing senior living operating companies and communities will require additional capital, particularly if we were to accelerate our expansion and
acquisition plans. Financing may not be available to us or may be available to us only on terms that are not favorable. In addition, certain of our
outstanding indebtedness and long-term leases restrict, among other things, our ability to incur additional debt. If we are unable to raise additional funds
or obtain them on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies. Further, if additional funds are raised
through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted. Any newly issued equity securities
may have rights, preferences or privileges senior to those of our common stock.
We are susceptible to risks associated with the lifecare benefits that we offer the residents of our lifecare entrance fee communities.
As of December 31, 2008, we operated ten lifecare entrance fee communities that offer residents a limited lifecare benefit. Residents of these communities
pay an upfront entrance fee upon occupancy, of which a portion is generally refundable, with an additional monthly service fee while living in the
community. This limited lifecare benefit is typically (a) a certain number of free days in the community’s health center during the resident’s lifetime, (b) a
discounted rate for such services, or (c) a combination of the two. The lifecare benefit varies based upon the extent to which the resident’s entrance fee is
refundable. The pricing of entrance fees, refundability provisions, monthly service fees, and lifecare benefits are determined utilizing actuarial projections
of the expected morbidity and mortality of the resident population. In the event the entrance fees and monthly service payments established for our
communities are not sufficient to cover the cost of lifecare benefits granted to residents, the results of operations and financial condition of these
communities could be adversely affected.
Residents of these entrance fee communities are guaranteed a living unit and nursing care at the community during their lifetime, even if the resident
exhausts his or her financial resources and becomes unable to satisfy his or her obligations to the community. In addition, in the event a resident requires
nursing care and there is insufficient capacity for the resident in the nursing facility at the community where the resident lives, the
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community must contract with a third party to provide such care. Although we screen potential residents to ensure that they have adequate assets,
income, and reimbursements from government programs and third parties to pay their obligations to our communities during their lifetime, we cannot
assure you that such assets, income, and reimbursements will be sufficient in all cases. If insufficient, we have rights of set-off against the refundable
portions of the residents’ deposits, and would also seek available reimbursement under Medicaid or other available programs. To the extent that the
financial resources of some of the residents are not sufficient to pay for the cost of facilities and services provided to them, or in the event that our
communities must pay third parties to provide nursing care to residents of our communities, our results of operations and financial condition would be
adversely affected.
The geographic concentration of our communities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in those
areas, resulting in a decrease in our revenues or an increase in our costs, or otherwise negatively impacting our results of operations.
We have a high concentration of communities in various geographic areas, including the states of Florida, Texas, North Carolina, California, Colorado,
Ohio and Arizona. As a result of this concentration, the conditions of local economies and real estate markets, changes in governmental rules and
regulations, particularly with respect to assisted living communities, acts of nature and other factors that may result in a decrease in demand for senior
living services in these states could have an adverse effect on our revenues, costs and results of operations. In addition, given the location of our
communities, we are particularly susceptible to revenue loss, cost increase or damage caused by other severe weather conditions or natural disasters
such as hurricanes, earthquakes or tornados. Any significant loss due to a natural disaster may not be covered by insurance and may lead to an increase
in the cost of insurance.
Termination of our resident agreements and vacancies in the living spaces we lease could adversely affect our revenues, earnings and occupancy
levels.
State regulations governing assisted living communities require written resident agreements with each resident. Several of these regulations also require
that each resident have the right to terminate the resident agreement for any reason on reasonable notice. Consistent with these regulations, many of our
assisted living resident agreements allow residents to terminate their agreements upon 0 to 30 days’ notice. Unlike typical apartment leasing or
independent living arrangements that involve lease agreements with specified leasing periods of up to a year or longer, in many instances we cannot
contract with our assisted living residents to stay in those living spaces for longer periods of time. Our retirement center resident agreements generally
provide for termination of the lease upon death or allow a resident to terminate his or her lease upon the need for a higher level of care not provided at the
community. If multiple residents terminate their resident agreements at or around the same time, our revenues, earnings and occupancy levels could be
adversely affected. In addition, because of the demographics of our typical residents, including age and health, resident turnover rates in our
communities are difficult to predict. As a result, the living spaces we lease may be unoccupied for a period of time, which could adversely affect our
revenues and earnings.
Increases in the cost and availability of labor, including increased competition for or a shortage of skilled personnel or increased union activity,
would have an adverse effect on our profitability and/or our ability to conduct our business operations.
Our success depends on our ability to retain and attract skilled management personnel who are responsible for the day-to-day operations of each of our
communities. Each community has an Executive Director responsible for the overall day-to-day operations of the community, including quality of care,
social services and financial performance. Depending upon the size of the community, each Executive Director is supported by a community staff member
who is directly responsible for day-to-day care of the residents and either community staff or regional support to oversee the community’s marketing and
community outreach programs. Other key positions supporting each community may include individuals responsible for food service, healthcare
services, therapy services, activities, housekeeping and engineering. We compete with various health care service providers, including other senior living
providers, in retaining and attracting qualified and skilled personnel. Increased competition for or a shortage of nurses, therapists or other trained
personnel, or general inflationary pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We
may not be able to offset such added costs by increasing the rates we charge to our residents or our service charges, which would negatively impact our
results of operations. Turnover rates and the magnitude of the shortage of nurses,
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therapists or other trained personnel varies substantially from market to market. Although reliable industry-wide data on key employee retention does not
exist, we believe that our employee retention rates are consistent with those of other national senior housing operators. If we fail to attract and retain
qualified and skilled personnel, our ability to conduct our business operations effectively, our ability to implement our growth strategy, and our overall
operating results could be harmed.
In addition, efforts by labor unions to unionize any of our community personnel could divert management attention, lead to increases in our labor costs
and/or reduce our flexibility with respect to certain workplace rules. Recently proposed legislation known as the Employee Free Choice Act, or card
check, could make it significantly easier for union organizing drives to be successful, leading to increased organizational activity, and could give third-
party arbitrators the ability to impose terms of collective bargaining agreements upon us and a labor union if we and such union are unable to agree to the
terms of a collective bargaining agreement. If we experience an increase in organizing activity, if onerous collective bargaining agreement terms are
imposed upon us, or if we otherwise experience an increase in our staffing and labor costs, our profitability and cash flows from operations would be
negatively affected.
Departure of our key officers could harm our business.
Our future success depends, to a significant extent, upon the continued service of our senior management personnel, particularly: W.E. Sheriff, our Chief
Executive Officer; Mark W. Ohlendorf, our Co-President and Chief Financial Officer; John P. Rijos, our Co-President and Chief Operating Officer; and T.
Andrew Smith, our Executive Vice President, General Counsel and Secretary. If we were to lose the services of any of these individuals, our business and
financial results could be adversely affected.
Environmental contamination at any of our communities could result in substantial liabilities to us, which may exceed the value of the underlying
assets and which could materially and adversely effect our liquidity and earnings.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property, such as us, may be held liable in
certain circumstances for the costs of investigation, removal or remediation of, or related to the release of, certain hazardous or toxic substances, that
could be located on, in, at or under a property, regardless of how such materials came to be located there. The cost of any required investigation,
remediation, removal, mitigation, compliance, fines or personal or property damages and our liability therefore could exceed the property’s value and/or
our assets’ value. In addition, the presence of such substances, or the failure to properly dispose of or remediate the damage caused by such substances,
may adversely affect our ability to sell such property, to attract additional residents and retain existing residents, to borrow using such property as
collateral or to develop or redevelop such property. In addition, such laws impose liability, which may be joint and several, for investigation, remediation,
removal and mitigation costs on persons who disposed of or arranged for the disposal of hazardous substances at third party sites. Such laws and
regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence, release or disposal of
such substances as well as without regard to whether such release or disposal was in compliance with law at the time it occurred. Although we do not
believe that we have incurred such liabilities as would have a material adverse effect on our business, financial condition and results of operations, we
could be subject to substantial future liability for environmental contamination that we have no knowledge about as of the date of this report and/or for
which we may not be at fault.
Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to our business and in our
asset value, which would have an adverse effect on our earnings and financial condition.
Our operations are subject to regulation under various federal, state and local environmental laws, including those relating to: the handling, storage,
transportation, treatment and disposal of medical waste products generated at our communities; identification and warning of the presence of asbestos-
containing materials in buildings, as well as removal of such materials; the presence of other substances in the indoor environment; and protection of the
environment and natural resources in connection with development or construction of our properties.
Some of our communities generate infectious or other hazardous medical waste due to the illness or physical condition of the residents. Each of our
communities has an agreement with a waste management company for the
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proper disposal of all infectious medical waste, but the use of such waste management companies does not immunize us from alleged violations of such
laws for operations for which we are responsible even if carried out by such waste management companies, nor does it immunize us from third-party
claims for the cost to cleanup disposal sites at which such wastes have been disposed.
Federal regulations require building owners and those exercising control over a building’s management to identify and warn their employees and certain
other employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential
asbestos-containing materials in their buildings. Significant fines can be assessed for violation of these regulations. Building owners and those exercising
control over a building’s management may be subject to an increased risk of personal injury lawsuits. Federal, state and local laws and regulations also
govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potential asbestos-containing materials
when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose
liability for improper handling or a release to the environment of asbestos-containing materials and potential asbestos-containing materials and may
provide for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work exposure
associated with asbestos-containing materials and potential asbestos-containing materials.
The presence of mold, lead-based paint, contaminants in drinking water, radon and/or other substances at any of the communities we own or may acquire
may lead to the incurrence of costs for remediation, mitigation or the implementation of an operations and maintenance plan and may result in third party
litigation for personal injury or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for
repairs, and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a community to retain or
attract residents and could adversely affect a community’s market value.
Although we believe that we are currently in material compliance with applicable environmental laws, if we fail to comply with such laws in the future, we
would face increased expenditures both in terms of fines and remediation of the underlying problem(s), potential litigation relating to exposure to such
materials, and potential decrease in value to our business and in the value of our underlying assets. Therefore, our failure to comply with existing
environmental laws would have an adverse effect on our earnings, our financial condition and our ability to pursue our growth strategy.
We are unable to predict the future course of federal, state and local environmental regulation and legislation. Changes in the environmental regulatory
framework could have a material adverse effect on our business. In addition, because environmental laws vary from state to state, expansion of our
operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate our communities.
We are subject to risks associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002.
We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our
management is required to include a report with each Annual Report on Form 10-K regarding our internal control over financial reporting. We have
implemented processes documenting and evaluating our system of internal controls. Complying with these requirements is expensive, time consuming
and subject to changes in regulatory requirements. The existence of one or more material weaknesses, management’s conclusion that its internal control
over financial reporting is not effective, or the inability of our auditors to express an opinion that our internal control over financial reporting is effective,
could result in a loss of investor confidence in our financial reports, adversely affect our stock price and/or subject us to sanctions or investigation by
regulatory authorities.
Risks Related to Pending Litigation
Complaints filed against us could, if adversely determined, subject us to a material loss.
We have been and are currently involved in litigation and claims incidental to the conduct of our business which are comparable to other companies in
the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the
senior living industry is
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continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, we
maintain insurance policies in amounts and with coverage and deductibles we believe are adequate, based on the nature and risks of our business,
historical experience and industry standards. Effective January 1, 2009, our current policies provide for deductibles of $250,000 for each
claim. Accordingly, we are, in effect, self-insured for most claims. If we experience a greater number of losses than we anticipate under these policies, or
if certain claims are not ultimately covered by insurance, our results of operation and financial condition could be adversely affected.
Risks Related to Our Industry
The cost and difficulty of complying with increasing and evolving regulation and enforcement could have an adverse effect on our business
operations and profits.
The regulatory environment surrounding the senior living industry continues to evolve and intensify in the amount and type of laws and regulations
affecting it, many of which vary from state to state. In addition, many senior living communities are subject to regulation and licensing by state and local
health and social service agencies and other regulatory authorities. In several of the states in which we operate or may operate, we are prohibited from
providing certain higher levels of senior care services without first obtaining the appropriate licenses. Also, in several of the states in which we operate
or intend to operate, assisted living communities and/or skilled nursing facilities require a certificate of need before the community can be opened or the
services at an existing community can be expanded. Furthermore, federal, state and local officials are increasingly focusing their efforts on enforcement of
these laws, particularly with respect to large for-profit, multi-community providers like us. These requirements, and the increased enforcement thereof,
could affect our ability to expand into new markets, to expand our services and communities in existing markets and, if any of our presently licensed
communities were to operate outside of its licensing authority, may subject us to penalties including closure of the community. Future regulatory
developments as well as mandatory increases in the scope and severity of deficiencies determined by survey or inspection officials could cause our
operations to suffer. We are unable to predict the future course of federal, state and local legislation or regulation. If regulatory requirements increase,
whether through enactment of new laws or regulations or changes in the enforcement of existing rules, our earnings and operations could be adversely
affected.
The intensified regulatory and enforcement environment impacts providers like us because of the increase in the number of inspections or surveys by
governmental authorities and consequent citations for failure to comply with regulatory requirements. We also expend considerable resources to respond
to federal and state investigations or other enforcement action. From time to time in the ordinary course of business, we receive deficiency reports from
state and federal regulatory bodies resulting from such inspections or surveys. Although most inspection deficiencies are resolved through an agreed-to
plan of corrective action, the reviewing agency typically has the authority to take further action against a licensed or certified facility, which could result
in the imposition of fines, imposition of a provisional or conditional license, suspension or revocation of a license, suspension or denial of admissions,
loss of certification as a provider under federal health care programs or imposition of other sanctions, including criminal penalties. Furthermore, certain
states may allow citations in one community to impact other communities in the state. Revocation of a license at a given community could therefore
impact our ability to obtain new licenses or to renew existing licenses at other communities, which may also cause us to be in default under our leases,
trigger cross-defaults, trigger defaults under certain of our credit agreements or adversely affect our ability to operate and/or obtain financing in the
future. If a state were to find that one community’s citation would impact another of our communities, this would also increase costs and result in
increased surveillance by the state survey agency. To date, none of the deficiency reports received by us has resulted in a suspension, fine or other
disposition that has had a material adverse effect on our revenues. However, the failure to comply with applicable legal and regulatory requirements in the
future could result in a material adverse effect to our business as a whole.
There are various extremely complex federal and state laws governing a wide array of referral relationships and arrangements and prohibiting fraud by
health care providers, including those in the senior living industry, and governmental agencies are devoting increasing attention and resources to such
anti-fraud initiatives. Some examples are the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Balanced Budget Act of 1997,
and the False Claims Act, which gives private individuals the ability to bring an action on behalf of the federal government. The violation of any of these
laws or regulations may result in the imposition of fines or other penalties that could increase our costs and otherwise jeopardize our business. Under the
Deficit Reduction
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Act of 2005, or DRA 2005, every entity that receives at least $5 million annually in Medicaid payments must have established written policies for all
employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal
laws, including the federal False Claims Act, and similar state laws. Failure to comply with this new compliance requirement may potentially give rise to
potential liability. DRA 2005 also creates an incentive for states to enact false claims laws that are comparable to the federal False Claims Act.
Additionally, we provide services and operate communities that participate in federal and/or state health care reimbursement programs, which makes us
subject to federal and state laws that prohibit anyone from presenting, or causing to be presented, claims for reimbursement which are false, fraudulent or
are for items or services that were not provided as claimed. Similar state laws vary from state to state and we cannot be sure that these laws will be
interpreted consistently or in keeping with past practice. Violation of any of these laws can result in loss of licensure, civil or criminal penalties and
exclusion of health care providers or suppliers from furnishing covered items or services to beneficiaries of the applicable federal and/or state health care
reimbursement program. Loss of licensure may also cause us to default under our leases and/or trigger cross-defaults.
We are also subject to certain federal and state laws that regulate financial arrangements by health care providers, such as the Federal Anti-Kickback
Law, the Stark laws and certain state referral laws. Authorities have interpreted the Federal Anti-Kickback Law very broadly to apply to many practices
and relationships between health care providers and sources of patient referral. This could result in criminal penalties and civil sanctions, including fines
and possible exclusion from government programs such as Medicare and Medicaid, which may also cause us to default under our leases and/or trigger
cross-defaults. Adverse consequences may also result if we violate federal Stark laws related to certain Medicare and Medicaid physician referrals. While
we endeavor to comply with all laws that regulate the licensure and operation of our business, it is difficult to predict how our revenues could be affected
if we were subject to an action alleging such violations.
Compliance with the Americans with Disabilities Act (especially as recently amended), Fair Housing Act and fire, safety and other regulations may
require us to make unanticipated expenditures, which could increase our costs and therefore adversely affect our earnings and financial condition.
All of our communities are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for
“public accommodations” and “commercial properties,” but generally requires that buildings be made accessible to people with disabilities. Compliance
with ADA requirements could require removal of access barriers and non-compliance could result in imposition of government fines or an award of
damages to private litigants.
We must also comply with the Fair Housing Act, which prohibits us from discriminating against individuals on certain bases in any of our practices if it
would cause such individuals to face barriers in gaining residency in any of our communities. Additionally, the Fair Housing Act and other state laws
require that we advertise our services in such a way that we promote diversity and not limit it. We may be required, among other things, to change our
marketing techniques to comply with these requirements.
In addition, we are required to operate our communities in compliance with applicable fire and safety regulations, building codes and other land use
regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. Like other
health care facilities, senior living communities are subject to periodic survey or inspection by governmental authorities to assess and assure compliance
with regulatory requirements. Surveys occur on a regular (often annual or bi-annual) schedule, and special surveys may result from a specific complaint
filed by a resident, a family member or one of our competitors. We may be required to make substantial capital expenditures to comply with those
requirements.
Capital expenditures we have made to comply with any of the above to date have been immaterial, however, the increased costs and capital expenditures
that we may incur in order to comply with any of the above would result in a negative effect on our earnings, and financial condition.
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Significant legal actions and liability claims against us in excess of insurance limits could subject us to increased operating costs and substantial
uninsured liabilities, which may adversely affect our financial condition and operating results.
The senior living business entails an inherent risk of liability, particularly given the demographics of our residents, including age and health, and the
services we provide. In recent years, we, as well as other participants in our industry, have been subject to an increasing number of claims and lawsuits
alleging that our services have resulted in resident injury or other adverse effects. Many of these lawsuits involve large damage claims and significant
legal costs. Many states continue to consider tort reform and how it will apply to the senior living industry. We may continue to be faced with the threat
of large jury verdicts in jurisdictions that do not find favor with large senior living providers. We maintain liability insurance policies in amounts and with
the coverage and deductibles we believe are adequate based on the nature and risks of our business, historical experience and industry standards. We
have formed a wholly-owned “captive” insurance company for the purpose of insuring certain portions of our risk retention under our general and
professional liability insurance programs. There can be no guarantee that we will not have any claims that exceed our policy limits in the future.
If a successful claim is made against us and it is not covered by our insurance or exceeds the policy limits, our financial condition and results of
operations could be materially and adversely affected. In some states, state law may prohibit or limit insurance coverage for the risk of punitive damages
arising from professional liability and general liability claims and/or litigation. As a result, we may be liable for punitive damage awards in these states that
either are not covered or are in excess of our insurance policy limits. Also, the above deductibles, or self-insured retention, are accrued based on an
actuarial projection of future liabilities. If these projections are inaccurate and if there are an unexpectedly large number of successful claims that result in
liabilities in excess of our self-insured retention, our operating results could be negatively affected. Claims against us, regardless of their merit or eventual
outcome, also could have a material adverse effect on our ability to attract residents or expand our business and could require our management to devote
time to matters unrelated to the day-to-day operation of our business. We also have to renew our policies every year and negotiate acceptable terms for
coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases. There can be no assurance that we will be able
to obtain liability insurance in the future or, if available, that such coverage will be available on acceptable terms.
Overbuilding and increased competition may adversely affect our ability to generate and increase our revenues and profits and to pursue our
business strategy.
The senior living industry is highly competitive, and we expect that it may become more competitive in the future. We compete with numerous other
companies that provide long-term care alternatives such as home healthcare agencies, therapy services, life care at home, community-based service
programs, retirement communities, convalescent centers and other independent living, assisted living and skilled nursing providers, including not-for-
profit entities. In general, regulatory and other barriers to competitive entry in the independent living and assisted living segments of the senior living
industry are not substantial. We have experienced and expect to continue to experience increased competition in our efforts to acquire and operate senior
living communities. Consequently, we may encounter increased competition that could limit our ability to attract new residents, raise resident fees or
expand our business, which could have a material adverse effect on our revenues and earnings.
In addition, overbuilding in the late 1990’s in the senior living industry reduced the occupancy rates of many newly constructed buildings and, in some
cases, reduced the monthly rate that some newly built and previously existing communities were able to obtain for their services. This resulted in lower
revenues for certain of our communities during that time. While we believe that overbuilt markets have stabilized and should continue to be stabilized for
the immediate future, we cannot be certain that the effects of this period of overbuilding will not effect our occupancy and resident fee rate levels in the
future, nor can we be certain that another period of overbuilding in the future will not have the same effects. Moreover, while we believe that the new
construction dynamics and the competitive environments in the states in which we operate are substantially similar to the national market, taken as a
whole, if the dynamics or environment were to be significantly adverse in one or more of those states, it would have a disproportionate effect on our
revenues (due to the large portion of our revenues that are generated in those states).
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Risks Related to Our Organization and Structure
If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant
corporate decisions and may result in conflicts of interest.
As of December 31, 2008, funds managed by affiliates of Fortress beneficially own 60,875,826 shares, or approximately 57.8% of our outstanding common
stock (including unvested restricted shares). In addition, two of our directors are associated with Fortress. As a result, funds managed by affiliates of
Fortress are able to control fundamental and significant corporate matters and transactions, including: the election of directors; mergers, consolidations
or acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and
restated certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Fortress’s interests, including its
ownership of the North American operations of Holiday Retirement Corp., one of our competitors, may conflict with your interests. Their control of the
Company could delay, deter or prevent acts that may be favored by our other stockholders such as hostile takeovers, changes in control of the Company
and changes in management. As a result of such actions, the market price of our common stock could decline or stockholders might not receive a
premium for their shares in connection with a change of control of the Company.
Anti-takeover provisions in our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or
prevent a merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management.
Certain provisions of our amended and restated certificate of incorporation and our amended and restated by-laws may discourage, delay or prevent a
merger or acquisition that you may consider favorable or prevent the removal of our current board of directors and management. We have a number of
anti-takeover devices in place that will hinder takeover attempts, including:
· a staggered board of directors consisting of three classes of directors, each of whom serve three-year terms;
· removal of directors only for cause, and only with the affirmative vote of at least 80% of the voting interest of stockholders entitled to vote;
· blank-check preferred stock;
· provisions in our amended and restated certificate of incorporation and amended and restated by-laws preventing stockholders from calling
special meetings (with the exception of Fortress and its affiliates, so long as they collectively beneficially own at least 50.1% of our issued and
outstanding common stock);
· advance notice requirements for stockholders with respect to director nominations and actions to be taken at annual meetings; and
· no provision in our amended and restated certificate of incorporation for cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election.
Additionally, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law, which restricts
certain business combinations with interested stockholders in certain situations, will not apply to us. This may make it easier for a third party to acquire
an interest in some or all of us with Fortress’ approval, even though our other stockholders may not deem such an acquisition beneficial to their interests.
We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial
obligations.
We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating
subsidiaries. As a result, we are dependent on loans, dividends and
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other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our subsidiaries are legally distinct from us and
have no obligation to make funds available to us.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to
resell your shares at or above your purchase price. We cannot assure you that the market price of our common stock will not fluctuate or decline
significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our
common stock include:
· variations in our quarterly operating results;
· changes in our earnings estimates;
· the contents of published research reports about us or the senior living industry or the failure of securities analysts to cover our common stock;
· additions or departures of key management personnel;
· any increased indebtedness we may incur or lease obligations we may enter into in the future;
· actions by institutional stockholders;
· changes in market valuations of similar companies;
· announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
· speculation or reports by the press or investment community with respect to the Company or the senior living industry in general;
· increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
· changes or proposed changes in laws or regulations affecting the senior living industry or enforcement of these laws and regulations, or
announcements relating to these matters; and
· general market and economic conditions.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including commercial paper, medium-term
notes, senior or subordinated notes, series of preferred shares or shares of our common stock. Upon liquidation, holders of our debt securities and
preferred stock, and lenders with respect to other borrowings, would receive a distribution of our available assets prior to the holders of our common
stock. Additional equity offerings may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock,
or both. Shares of our preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend
payments that could limit our ability to pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering
will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their share holdings
in us.
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We may issue all of the shares of our common stock that are authorized but unissued and not otherwise reserved for issuance under our stock incentive
plans without any action or approval by our stockholders. We intend to continue to pursue selected acquisitions of senior living communities and may
issue shares of common stock in connection with these acquisitions. Any shares issued in connection with our acquisitions or otherwise would dilute
the holdings of our current stockholders.
The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.
At February 23, 2009, 101,722,806 shares of our common stock were outstanding (excluding unvested restricted shares). All of the shares of our common
stock are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as
amended, or the Securities Act, or any shares otherwise subject to the limitations of Rule 144.
Pursuant to our Stockholders Agreement, Fortress and certain of its affiliates and permitted third-party transferees have the right, in certain
circumstances, to require us to register their shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness
of such a registration statement, all shares covered by the registration statement will be freely transferable. In addition, as of December 31, 2008, we had
registered under the Securities Act an aggregate of 5,700,000 shares for issuance under our Omnibus Stock Incentive Plan and an aggregate of 1,000,000
shares for issuance under our Associate Stock Purchase Plan. In accordance with the terms of the Omnibus Stock Incentive Plan, the number of shares
available for issuance automatically increases by 400,000 shares on January 1 of each year. Pursuant to the terms of the Associate Stock Purchase Plan,
the number of shares available for purchase under the plan will automatically increase by 200,000 shares on the first day of each calendar year beginning
January 1, 2010. Subject to any restrictions imposed on the shares and options granted under our stock incentive programs, shares registered under
these registration statements will be available for sale into the public markets.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Facilities
At December 31, 2008, we operated 548 communities across 35 states, with the capacity to serve over 51,800 residents. Of the communities we operated at
December 31, 2008, we owned 168, we leased 358 pursuant to operating and capital leases, and 22 were managed by us and fully or majority owned by
third parties.
The following table sets forth certain information regarding our communities at December 31, 2008:
Occupancy
Ownership Status
State
Alabama
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Massachusetts
Units/Beds
Rate(1)
Owned
Leased
1,113
2,154
3,067
2,895
289
54
8,817
568
228
2,465
1,139
139
1,319
291
84
281
2
3
13
5
-
1
35
4
2
1
4
1
10
-
1
-
90.7%
88.7%
89.7%
86.1%
80.3%
100.0%
85.9%
78.7%
95.6%
91.4%
85.5%
95.0%
88.0%
100.0%
100.0%
94.0%
32
Managed
5
11
7
19
2
-
39
-
1
10
10
-
10
1
-
1
-
2
-
2
-
-
3
1
-
-
-
-
2
-
-
-
Total
7
16
20
26
2
1
77
5
3
11
14
1
22
1
1
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Michigan
Minnesota
Mississippi
Missouri
Nevada
New Jersey
New Mexico
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Tennessee
Texas
Virginia
Washington
Wisconsin
Total
2,489
763
54
937
306
534
343
1,196
4,013
2,385
1,177
830
999
563
1,399
5,855
1,403
1,181
474
51,804
93.3%
83.6%
35.3%
89.5%
94.1%
79.4%
92.7%
94.4%
99.8%
82.7%
88.2%
92.5%
85.4%
83.4%
86.2%
91.6%
93.1%
86.3%
89.4%
89.3%
5
-
-
2
-
2
-
6
3
14
3
4
4
4
14
17
2
4
2
168
26
16
1
1
3
6
2
10
50
19
24
8
3
7
8
33
3
9
13
358
2
1
-
-
-
-
-
-
-
-
1
-
1
-
-
7
-
-
-
22
33
17
1
3
3
8
2
16
53
33
28
12
8
11
22
57
5
13
15
548
(1) Includes the impact of managed properties.
A significant majority of our owned properties are subject to mortgages.
Corporate Offices
Our main corporate offices are all leased, including our 51,988 square foot facility in Nashville, Tennessee, our 93,573 square foot facility in Milwaukee,
Wisconsin and our 30,314 square foot facility in Chicago, Illinois.
Item 3. Legal Proceedings.
The information contained in Note 21 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report on Form 10-K is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information concerning our executive officers as of February 23, 2009:
Name
W.E. Sheriff
Mark W. Ohlendorf
John P. Rijos
T. Andrew Smith
Bryan D. Richardson
Kristin A. Ferge
George T. Hicks
H. Todd Kaestner
Gregory B. Richard
Age
66
48
56
48
50
35
51
53
54
Position
Chief Executive Officer
Co-President and Chief Financial Officer
Co-President and Chief Operating Officer
Executive Vice President, General Counsel and Secretary
Executive Vice President and Chief Administrative Officer
Executive Vice President and Treasurer
Executive Vice President – Finance
Executive Vice President – Corporate Development
Executive Vice President – Field Operations
W.E. Sheriff has served as our Chief Executive Officer since February 2008. He previously served as our Co-Chief Executive Officer from July 2006 until
February 2008. Previously, Mr. Sheriff served as Chairman and Chief Executive Officer of ARC and its predecessors since April 1984 and as its President
since November 2003.
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From 1973 to 1984, Mr. Sheriff served in various capacities for Ryder System, Inc., including as President and Chief Executive Officer of its Truckstops of
America division. Mr. Sheriff also serves on the boards of various educational and charitable organizations and in varying capacities with several trade
organizations.
Mark W. Ohlendorf became our Co-President in August 2005 and our Chief Financial Officer in March 2007. Mr. Ohlendorf previously served as Chief
Executive Officer and President of Alterra from December 2003 until August 2005. From January 2003 through December 2003, Mr. Ohlendorf served as
Chief Financial Officer and President of Alterra, and from 1999 through 2002 he served as Senior Vice President and Chief Financial Officer of Alterra. Mr.
Ohlendorf has over 25 years of experience in the health care and long-term care industries, having held leadership positions with such companies as
Sterling House Corporation, Vitas Healthcare Corporation and Horizon/CMS Healthcare Corporation. He is a member of the board of directors of the
Assisted Living Federation of America.
John P. Rijos became our Co-President in August 2005 and our Chief Operating Officer in January 2008. Previously, Mr. Rijos served as President and
Chief Operating Officer and as a director of BLC since August 2000. Prior to joining BLC in August 2000, Mr. Rijos spent 16 years with Lane Hospitality
Group, owners and operators of over 40 hotels and resorts, as its President and Chief Operating Officer. From 1981 to 1985 he served as President of High
Country Corporation, a Denver-based hotel development and management company. Prior to that time, Mr. Rijos was Vice President of Operations and
Development of several large real estate trusts specializing in hotels. Mr. Rijos has over 25 years of experience in the acquisition, development and
operation of hotels and resorts. He serves on many tourist-related operating boards and committees, as well as advisory committees for Holiday Inns,
Sheraton Hotels and the City of Chicago and the Board of Trustees for Columbia College. Mr. Rijos is a certified hospitality administrator.
T. Andrew Smith became our Executive Vice President, General Counsel and Secretary in October 2006. Previously, Mr. Smith was with Bass, Berry &
Sims PLC in Nashville, Tennessee from 1985 to 2006. Mr. Smith was a member of that firm’s corporate and securities group, and served as the chair of the
firm’s healthcare group.
Bryan D. Richardson became our Executive Vice President in July 2006 and our Chief Administrative Officer in January 2008. Mr. Richardson also served
as our Chief Accounting Officer from September 2006 through April 2008. Previously, Mr. Richardson served as Executive Vice President – Finance and
Chief Financial Officer of ARC since April 2003 and previously served as its Senior Vice President – Finance since April 2000. Mr. Richardson was
formerly with a national graphic arts company from 1984 to 1999 serving in various capacities, including Senior Vice President of Finance of a digital
prepress division from May 1994 to October 1999, and Senior Vice President of Finance and Chief Financial Officer from 1989 to 1994. Mr. Richardson was
previously with the national public accounting firm PriceWaterhouseCoopers.
Kristin A. Ferge became our Executive Vice President and Treasurer in August 2005. Ms. Ferge also served as our Chief Administrative Officer from
March 2007 through December 2007. She previously served as Vice President, Chief Financial Officer and Treasurer of Alterra from December 2003 until
August 2005. From April 2000 through December 2003, Ms. Ferge served as Alterra’s Vice President of Finance and Treasurer. Prior to joining Alterra, she
worked in the audit division of KPMG LLP. Ms. Ferge is a certified public accountant.
George T. Hicks became our Executive Vice President – Finance in July 2006. Previously, Mr. Hicks served as Executive Vice President – Finance and
Internal Audit, Secretary and Treasurer of ARC since September 1993. Mr. Hicks had served in various capacities for ARC’s predecessors since 1985,
including Chief Financial Officer from September 1993 to April 2003 and Vice President – Finance and Treasurer from November 1989 to September 1993.
H. Todd Kaestner became our Executive Vice President – Corporate Development in July 2006. Previously, Mr. Kaestner served as Executive Vice
President – Corporate Development of ARC since September 1993. Mr. Kaestner served in various capacities for ARC’s predecessors since 1985,
including Vice President – Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
Gregory B. Richard has served as our Executive Vice President – Field Operations since January 2008. He previously served as our Executive Vice
President – Operations from July 2006 through December 2007. Previously, Mr. Richard served as Executive Vice President and Chief Operating Officer of
ARC since January
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Table of Contents
2003 and previously served as its Executive Vice President-Community Operations since January 2000. Mr. Richard was formerly with a pediatric practice
management company from May 1997 to May 1999, serving as President and Chief Executive Officer from October 1997 to May 1999. Prior to this, Mr.
Richard was with Rehability Corporation, a publicly traded outpatient physical rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September 1992 to October 1996.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Market Information
Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol “BKD”. The following table sets forth the range of high
and low sales prices of our common stock and dividend information for each quarter for the last two fiscal years.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2008
High
Low
28.29
27.22
27.05
21.84
$
$
$
$
$
$
$
20.46
20.15
14.06
3.03
Fiscal 2007
High
Low
49.94
48.36
48.41
41.70
$
$
$
$
43.13
41.73
33.53
27.50
$
$
$
$
$
$
$
$
$
$
$
$
Dividends
Declared
0.25
0.25
0.25
—
Dividends
Declared
0.45
0.50
0.50
0.50
The closing sale price of our common stock as reported on the NYSE on February 23, 2009 was $3.99 per share. As of that date, there were approximately
544 holders of record of our common stock.
Dividend Policy
On December 30, 2008, our Board of Directors voted to suspend our quarterly cash dividend indefinitely. Although we anticipate that, over the
intermediate and longer-term, we will pay regular quarterly dividends to the holders of our common stock, over the near term we are focused on
preserving liquidity. Accordingly, we do not expect to pay cash dividends on our common stock for the foreseeable future. In addition, our amended
credit facility currently prohibits us from paying dividends or making cash distributions on our common stock.
Our ability to pay and maintain cash dividends in the future will be based on many factors, including then-existing contractual restrictions or limitations,
our ability to execute our growth strategy, our ability to negotiate favorable lease and other contractual terms, anticipated operating expense levels, the
level of demand for our units/beds, occupancy rates, entrance fee sales results, the rates we charge, our liquidity position and actual results that may
vary substantially from estimates. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay or maintain
dividends. We can give no assurance as to our ability to pay or maintain dividends in the future. We also cannot assure you that the level of dividends
will be maintained or increase over time or that increases in demand for our units/beds and monthly resident fees will increase our actual cash available
for dividends to stockholders. As we have done in the past, we may also pay dividends in the future that exceed our net income for the relevant period as
calculated in accordance with U.S. GAAP.
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Table of Contents
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data.
The selected financial data should be read in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” “Business” and our historical consolidated financial statements and the related notes included elsewhere herein. The
consolidated financial data includes Brookdale Living Communities, Inc. and Alterra Healthcare Corporation for all periods presented and the acquisition
of ARC, effective July 25, 2006. Other acquisitions are discussed in Note 4 in the notes to the consolidated financial statements. Our historical statement
of operations data and balance sheet data as of and for each of the years in the five-year period ended December 31, 2008 have been derived from our
audited financial statements.
2008
For the Years Ended December 31, (1)
2005
2006
2007
2004
Fiscal Year ended December 31,
(in thousands, except per share data)
Total revenue
Facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Total operating expense
(Loss) income from operations
Interest income
Interest expense
Debt
Amortization of deferred financing costs
Change in fair value of derivatives and amortization
(Loss) gain on extinguishment of debt
Equity in loss of unconsolidated ventures
Other non-operating income (loss)
Loss before taxes
Benefit (provision) for income taxes
Loss before minority interest
Minority interest
Loss before discontinued operations and cumulative effect of
a change in accounting principle
Loss on discontinued operations
Net loss
$
$
1,928,054
1,261,581
140,919
269,469
276,202
220,026
2,168,197
(240,143)
7,618
(147,389)
(9,707)
(68,146)
(3,052)
(861)
1,708
(459,972)
86,731
(373,241)
—
1,839,296 $
1,170,937
138,013
271,628
299,925
—
1,880,503
(41,207)
7,519
(143,991)
(7,064)
(73,222)
(2,683)
(3,386)
402
(263,632)
101,260
(162,372)
393
(373,241)
—
(373,241) $
(161,979)
—
(161,979) $
$
1,309,913 $
819,801
117,897
228,779
188,129
—
1,354,606
(44,693)
6,810
(97,694)
(5,061)
(38)
(1,526)
(3,705)
—
(145,907)
38,491
(107,416)
(671)
(108,087)
—
(108,087) $
790,577 $
493,887
81,696
189,339
47,048
—
811,970
(21,393)
3,788
(46,248)
(2,835)
3,992
(3,996)
(838)
—
(67,530)
97
(67,433)
16,575
(50,858)
(128)
(50,986) $
660,872
415,169
43,640
99,997
50,153
—
608,959
51,913
637
(63,634)
(2,154)
3,176
1,051
(931)
(114)
(10,056)
(11,111)
(21,167)
11,734
(9,433)
(361)
(9,794)
Basic and diluted loss per share
Loss before discontinued operations and cumulative effect of
a change in accounting principle
Loss on discontinued operations
Net loss
$
$
$
(3.67)
—
(3.67) $
(1.60)
$
—
(1.60) $
(1.34)
$
—
(1.34) $
(1.35)
$
—
(1.35) $
(0.49)
(0.02)
(0.51)
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Table of Contents
Weighted average shares of common stock used
computing basic and diluted loss per share
Dividends declared per share of common stock
in
$
101,667
0.75
$
101,511
1.95
$
80,842
1.55
$
37,636
0.50
$
19,185
—
Other Operating Data:
Total number of facilities (at end of period)
Total units/beds operated(2)
Occupancy rate at period end
Average monthly revenue per unit/bed(3)
Cash and cash equivalents
Total assets
Total debt
Total stockholders’ equity
__________
$
$
548
51,804
89.5%
3,791
$
550
52,086
90.6%
3,577
$
546
51,271
91.1%
3,247
$
383
30,057
89.6%
2,991
$
367
26,208
89.4%
2,827
2008
For the Years Ended December 31,
2006
2007
2005
2004
$
53,973
4,449,258
2,552,929
960,601
$
100,904
4,811,622
2,335,224
1,419,538
$
68,034
4,756,000
1,874,939
1,764,012
$
77,682
1,697,811
754,301
630,403
86,858
746,625
371,037
40,091
(1) Prior to October 1, 2006, the effective portion of the change in fair value of derivatives was recorded in other comprehensive income and the
ineffective portion was included in the change in fair value of derivatives in the consolidated statements of operations. On October 1, 2006,
we elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Gains and losses accumulated
in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments are being amortized to
interest expense over the life of the underlying hedged debt payments. Although hedge accounting was discontinued on October 1, 2006,
the swap instruments remained outstanding and are carried at fair value in the consolidated balance sheets and the change in fair value
beginning October 1, 2006 has been included in the consolidated statements of operations.
(2) Total units/beds operated represent the total units/beds operated as of the end of the period.
(3) Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees,
divided by average occupied units/beds.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with our “Selected Financial Data” and our consolidated financial statements and related
notes, included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis may contain
forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s
expectations. Please see additional risks and uncertainties described in “Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995” for more information. Factors that could cause such differences include those described in “Risk Factors” which appears elsewhere in this
Annual Report on Form 10-K.
Executive Overview
During 2008, we continued to make progress in implementing our long-term growth strategy, integrating our previous acquisitions, and building a
platform for future growth. Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and
Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including expense control and the realization
37
Table of Contents
of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy and home health services); and (iii) expansion of our
existing communities.
Our operating results for the twelve months ended December 31, 2008 were favorably impacted by an increase in our total revenues and average monthly
revenue per unit/bed across all segments. Although we made progress in certain areas of our business, our recent operating results have been
negatively impacted by unfavorable conditions in the housing, credit and financial markets and by deteriorating conditions in the overall economy,
resulting in lower than anticipated occupancy rates and increased levels of expenses. In response to these conditions, we are focusing on maintaining
occupancy, increasing our ancillary services programs, and controlling expenses (including by limiting our capital expenditures).
We are also taking steps to preserve our liquidity and increase our financial flexibility during 2009. For example, we have suspended our quarterly
dividend payments and have terminated our share repurchase program. As discussed in more detail under “Credit Facilities - Refinancing of Existing Line
of Credit” below, we also recently entered into an amended credit facility with Bank of America, N.A., as administrative agent, providing for a $230.0
million revolving credit facility that matures on August 31, 2010. Furthermore, we have extended the maturity of a number of mortgage loans, and, after
giving effect to contractual extension options, will have virtually no mortgage debt maturities until 2011. Finally, we have taken steps to reduce materially
our exposure to collateralization requirements associated with interest rate swaps.
In the fourth quarter of 2008, similar to many companies, we experienced a significant decline in the market value of our common stock due primarily to the
depressed macroeconomic environment and volatility in the equity markets. As a result, our market capitalization eroded in the fourth quarter when
compared to previous periods and was significantly below book value. In accordance with the requirements of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we performed an impairment test of the goodwill for each of our reporting units
as of the end of the fourth quarter. We determined fair values of the reporting units and their underlying assets using discounted cash flows. As a result
of our impairment tests, we recorded a non-cash goodwill impairment charge of $215.0 million for the quarter ended December 31, 2008. The impairment
charge was primarily driven by the adverse equity market conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market
multiples and our stock price at December 31, 2008 compared with our stock price at September 30, 2008. Our reporting units under SFAS 142 are our
operational segments and the goodwill impairment charge related entirely to our CCRCs segment. The non-cash charge does not impact our ongoing
business operations, liquidity, cash flows from operating activities or financial covenants and will not result in any future cash expenditure. We also
evaluated all long-lived depreciable assets using the same cash flow data used to evaluate goodwill and determined that the undiscounted cash flows
exceeded the carrying value of the assets for all except for four communities within the Assisted Living segment. As a result, we recorded a non-cash
asset impairment charge of $5.0 million for the quarter ended December 31, 2008.
The table below presents a summary of our operating results and certain other financial metrics for the years ended December 31, 2008 and 2007 and the
amount and percentage of increase or decrease of each applicable item (dollars in millions).
Total revenue
Net loss(1)
Adjusted EBITDA
Cash From Facility Operations
Facility Operating Income
Years Ended
December 31,
Increase
(Decrease)
2008
2007
Amount
Percent
$
$
$
$
$
1,928.1
(373.2)
302.6
130.1
637.5
$
$
$
$
$
1,839.3
(162.0)
306.4
143.2
642.3
$
$
$
$
$
88.8
(211.2)
(3.8)
(13.1)
(4.8)
4.8%
(130.4%)
(1.2%)
(9.1%)
(0.7%)
(1) Net loss for 2008 includes non-cash impairment charges of $220.0 million.
Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility
Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP Financial Measures” below for an explanation of how
we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure,
38
Table of Contents
a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities
to Cash From Facility Operations. In the first quarter of 2008 we changed our definition of Cash From Facility Operations to include lease financing debt
amortization with fair market value or no purchase options. Prior periods have been restated for comparative purposes.
Our revenues for the year ended December 31, 2008 increased to $1.9 billion, an increase of $88.8 million, or approximately 4.8%, over our revenues for the
year ended December 31, 2007. The increase in revenues in the current year was primarily a result of an increase in the average revenue per unit/bed
compared to the prior year and growing revenues from our ancillary services programs, partially offset by a decline in occupancy from the prior year. Our
weighted average occupancy rate for the year ended December 31, 2008 was 89.6% compared to 90.7% for the year ended December 31, 2007.
Although our revenues increased period over period, our overall financial results for the year ended December 31, 2008 were negatively impacted by a
higher than customary level of expense growth.
During the year ended December 31, 2008, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income decreased by 1.2%, 9.1%
and 0.7%, respectively, when compared to the year ended December 31, 2007. Adjusted EBITDA and Cash From Facility Operations for the year ended
December 31, 2008 were negatively impacted by $4.8 million of hurricane and named tropical storms expense and an $8.0 million charge to general and
administrative expense relating to the establishment of a reserve for certain litigation (Note 21).
During 2008, we repurchased 1,211,301 shares of our common stock at a cost of approximately $29.2 million. Our Board of Directors terminated our share
repurchase program on February 25, 2009. In addition, our amended credit facility effectively prohibits us from repurchasing shares of our common stock.
During the year, we continued to expand our ancillary services offerings. As of December 31, 2008, we offered therapy services to 35,049 of our units and
home health services to 16,730 of our units. We expect to continue to expand our ancillary services programs to additional units and to open or acquire
additional home health agencies. We also continue to see positive results from the maturation of previously-opened therapy and home health clinics.
During the year, we advanced our expansion program, completing expansions at seven communities (with a total of 186 units). We currently have seven
projects under construction with a total of 753 units.
We believe that the deteriorating housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult
children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates and occupancy levels when compared to the
prior year periods. We remain cautious about the economy and the adverse credit and financial markets and their effect on our customers and our
business. In addition, we continue to experience volatility in the entrance fee portion of our business. The timing of entrance fee sales is subject to a
number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively
or negatively) when measured over the short-term. These factors also impact our potential independent living customers to a significant extent. We
expect occupancy to decline slightly over the near term and we expect occupancy and entrance fee sales to normalize over the longer term.
Consolidated Results of Operations
Year Ended December 31, 2008 and 2007
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The
results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in
conjunction with our consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of acquisitions
that occurred during the respective reporting periods. Refer to our Annual Report on Form 10-K for the year ended December 31, 2007, filed February 29,
2008, and the notes to the consolidated financial statements included herein for additional information regarding 2007 acquisitions.
Certain prior period amounts have been reclassified to conform to the current year presentation.
39
Table of Contents
(dollars in thousands)
Statement of Operations Data:
Total revenue
Resident fees
Retirement Centers
Assisted Living
CCRCs
Total resident fees
Management fees
Total revenue
Expense
Facility operating expense(1)
Retirement Centers
Assisted Living
CCRCs
Total facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Total operating expense
Loss from operations
Interest income
Interest expense
Debt
Amortization of deferred financing costs
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in loss of unconsolidated ventures
Other non-operating income
Loss before income taxes
Benefit for income taxes
Loss before minority interest
Minority interest
Net loss
Selected Operating and Other Data:
Total number of communities (at end of period)
Total units/beds operated(2)
Owned/leased communities units/beds
Owned/leased communities occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
Selected Segment Operating and Other Data
Retirement Centers
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
40
Years Ended
December 31,
Increase
(Decrease)
2008
2007
Amount
Percent
$
$
542,180
845,348
533,532
1,921,060
6,994
1,928,054
$
532,680
799,070
500,757
1,832,507
6,789
1,839,296
313,469
563,210
384,902
1,261,581
140,919
269,469
276,202
220,026
2,168,197
(240,143)
7,618
(147,389)
(9,707)
(68,146)
(3,052)
(861)
1,708
(459,972)
86,731
(373,241)
—
(373,241) $
548
51,804
47,455
299,086
514,130
357,721
1,170,937
138,013
271,628
299,925
—
1,880,503
(41,207)
7,519
(143,991)
(7,064)
(73,222)
(2,683)
(3,386)
402
(263,632)
101,260
(162,372)
393
(161,979) $
550
52,086
47,670
$
89.5%
89.6%
90.6%
90.7%
$
3,791
$
3,577
85
15,251
87
15,805
89.9%
90.3%
91.7%
92.4%
$
3,229
$
3,067
9,500
46,278
32,775
88,553
205
88,758
14,383
49,080
27,181
90,644
2,906
(2,159)
(23,723)
220,026
287,694
(198,936)
99
(3,398)
(2,643)
5,076
(369)
2,525
1,306
(196,340)
(14,529)
(210,869)
(393)
(211,262)
(2)
(282)
(215)
(1.1%)
(1.1%)
214
(2)
(554)
(1.8%)
(2.1%)
162
1.8%
5.8%
6.5%
4.8%
3.0%
4.8%
4.8%
9.5%
7.6%
7.7%
2.1%
(0.8%)
(7.9%)
100%
15.3%
(482.8%)
1.3%
(2.4%)
(37.4%)
6.9%
(13.8%)
74.6%
324.9%
(74.5%)
(14.3%)
(129.9%)
(100%)
(130.4%)
(0.4%)
(0.5%)
(0.5%)
(1.2%)
(1.2%)
6.0%
(2.3%)
(3.5%)
(2.0%)
(2.3%)
5.3%
Table of Contents
Assisted Living
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
CCRCs
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
Management Services
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Selected Entrance Fee Data:
Non-refundable entrance fees sales
Refundable entrance fees sales(4)
Total entrance fee receipts
Refunds
Net entrance fees
Non-refundable entrance fees sales
Refundable entrance fees sales(4)
Total entrance fee receipts
Refunds
Net entrance fees
__________
409
21,021
409
21,012
90.2%
89.9%
89.7%
89.7%
$
3,738
$
3,537
32
11,183
32
10,853
—
9
0.5%
0.2%
201
—
330
87.7%
87.9%
90.8%
90.0%
(3.1%)
(2.1%)
$
4,759
$
22
4,349
4,481
22
4,416
278
—
(67)
87.1%
84.9%
83.1%
87.1%
4.0%
(2.2%)
—
0.0%
0.6%
0.2%
5.7%
—
3.0%
(3.4%)
(2.3%)
6.2%
—
(1.5%)
4.8%
(2.5%)
Q1
Q2
2,780
$
3,492
6,272
(3,632)
$
2,640
5,177 $
7,420
12,597
(4,843)
7,754 $
Q1
Q2
3,916
$
4,258
8,174
(6,315)
$
1,859
4,726 $
4,064
8,790
(4,089)
4,701 $
$
$
$
$
2008
Q3
7,253 $
4,273
11,526
(5,856)
5,670 $
2007
Q3
5,673 $
8,696
14,369
(5,084)
9,285 $
Q4
YTD
7,391 $
4,686
12,077
(4,819)
7,258 $
22,601
19,871
42,472
(19,150)
23,322
Q4
YTD
5,015 $
8,901
13,916
(4,069)
9,847 $
19,330
25,919
45,249
(19,557)
25,692
(1)
(2)
(3)
Segment facility operating expense for the year ended December 31, 2008 includes hurricane and named tropical storms expense totaling $4.8
million consisting of $1.3 million for Retirement Centers, $2.0 million for Assisted Living and $1.5 million for CCRCs. There was no hurricane and
named tropical storms expense in 2007. Facility operating expense for the year ended December 31, 2007 includes $7.0 million of charges
comprised of $5.9 million of estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and
certain accrual policies.
Total units/beds operated represent the total units/beds operated as of the end of the period.
Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by
average occupied units/beds.
41
Table of Contents
(4)
Refundable entrance fee sales for the years ended December 31, 2008 and 2007 include amounts received from residents participating in the
MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a
reduced monthly service fee. MyChoice amounts received from existing residents totaled $0.4 million, $0.8 million, $0.6 million and $0.5 million in
the first, second, third and fourth quarters of 2008, respectively, and $0.2 million, $3.6 million and $4.7 million in the second, third and fourth
quarters of 2007, respectively. We did not receive any MyChoice amounts from existing residents during the first quarter of 2007.
As of December 31, 2008, our total operations included 548 communities with a capacity to serve 51,804 residents. During 2008, our total portfolio
decreased by two communities with our resident capacity decreasing by 282 units as a result of a terminated management agreement and the
consolidation of two communities into one.
Our 2008 results were also affected by our continuing implementation of our ancillary services programs at a number of our locations as described above.
Resident Fees
The increase in resident fees occurred across all business segments. Resident fees increased over the prior-year primarily due to an increase in average
monthly revenue per unit/bed during the current year which includes an increase in our ancillary services revenue as we continue to roll out therapy and
home health services to many of our communities. This increase was partially offset by a decrease in occupancy in the Retirement Centers and CCRCs
segments. During the current year, same-store revenues grew 4.4% at the 515 properties we operated in both years with a 6.0% increase in the average
monthly revenue per unit/bed and a 1.4% decrease in occupancy.
Retirement Centers revenue increased $9.5 million, or 1.8%, primarily due to an increase in the average monthly revenue per unit/bed at the communities
we operated during both years as well as an increase in revenues related to the expansion of our ancillary service. This increase was partially offset by a
decrease in occupancy at our same-store communities year over year.
Assisted Living revenue increased $46.3 million, or 5.8%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we
operated during both years as well as an increase in revenues relate to the expansion of our ancillary service programs. Occupancy at our same-store
communities was approximately flat year over year.
CCRCs revenue increased $32.8 million, or 6.5%, primarily due to an increase in the average monthly revenue per unit/bed at the communities we operated
during both years as well as an increase in revenues related to the expansion of our ancillary services. This increase was partially offset by a decrease in
occupancy at our same-store communities year over year.
Management Fees
Management fees were comparable year over year as the number of management contracts maintained was largely consistent during both years.
Facility Operating Expense
Facility operating expense increased over the prior-year primarily due to an increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, as well as an increase in expenses incurred in connection with the continued rollout of
our ancillary services program during the current year.
Retirement Centers operating expenses increased $14.4 million, or 4.8%, primarily due to an increase in salaries, wages and benefits related to normal
salary increases, increased employee hours worked and reduced open positions, $1.3 million of expense incurred in connection with hurricanes and other
named tropical storms, an increase in insurance and utility expenses period over period as well as an increase in expense incurred in connection with the
continued rollout of our ancillary services program.
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Table of Contents
Assisted Living operating expenses increased $49.1 million, or 9.5%, due to an increase in salaries, wages and benefits related to normal salary increases,
increased employee hours worked and reduced open positions, $2.0 million of expense incurred in connection with hurricanes and other named tropical
storms as well as an increase in expense incurred in connection with the continued rollout of our ancillary services program.
CCRCs operating expenses increased $27.2 million, or 7.6%, due to an increase in salaries, wages and benefits due to normal salary increases and
increased employee count, increased pharmacy, medical, and other health care supplies, as well as $1.5 million of expense incurred in connection with
hurricanes and other named tropical storms.
General and Administrative Expense
General and administrative expense increased $2.9 million, or 2.1%, primarily as a result of an increase in non-controllable expenses related to the $8.0
million reserve established for certain litigation during the second quarter (Note 21) and non-cash stock-based compensation expense in connection with
restricted stock grants period over period offset by a decrease in integration and merger costs that were significantly higher in the prior year. General and
administrative expense as a percentage of total revenue, including revenue generated by the communities we manage, was 4.5% and 5.0% for the years
ended December 31, 2008 and 2007, respectively, calculated as follows (dollars in thousands):
Resident fee revenues
Resident fee revenues under management
Total
General and administrative expenses (excluding merger and integration expenses and non-cash stock compensation
expense totaling $48.4 million and $39.2 million in 2008 and 2007, respectively)
General and administrative expenses as % of total revenues
Facility Lease Expense
Year Ended
December 31,
2008
1,921,060
152,970
2,074,030
$
$
2007
1,832,507
150,204
1,982,711
92,473
$
4.5%
98,858
5.0%
$
$
$
Facility lease expense decreased by $2.2 million, or 0.8%, primarily as a result of lower variable interest rates within certain lease agreements.
Depreciation and Amortization
Depreciation and amortization expense decreased by $23.7 million, or 7.9%, primarily as a result of resident in-place lease intangibles becoming fully
amortized during the year ended December 31, 2008, which was partially offset by an increase in depreciation expense related to depreciation on capital
expenditures that we made during the latter part of 2007.
Goodwill and Asset Impairment
During the year we recognized $220.0 million of impairment charges mainly related to the CCRCs operating segment. The non-cash charges consisted of
$215.0 million of goodwill impairment related to the CCRCs segment and $5.0 million of asset impairment for property, plant and equipment and leasehold
intangibles for certain communities within the Assisted Living segment. The impairment charge was primarily driven by adverse equity market conditions
intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and our stock price at December 31, 2008 compared with our
stock price at September 30, 2008.
Interest Income
Interest income remained relatively constant year over year.
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Table of Contents
Interest Expense
Interest expense remained relatively constant period over period. During the year ended December 31, 2008, we recognized approximately $68.1 million of
interest expense on our interest rate swaps due to unfavorable changes in the LIBOR yield curve which resulted in a change in the fair value of the
swaps, as compared to approximately $73.2 million of interest expense on our interest rate swaps for the year ended December 31, 2007. Interest expense
incurred on debt remained relatively consistent year over year as interest from additional borrowings was offset by a reduction in interest from
refinancing outstanding debt at a more favorable rate as well as the payoff of certain debt during the current year.
Income Taxes
The decrease in the income tax benefit over the same prior year period is due to a decrease in the effective tax rate from 38.4 % in 2007 to 18.9 % in
2008. This decrease is primarily to the impact of the impairment charge taken for financial statement purposes, which is not deductible for tax. The rate
was also impacted by the Company’s stock based compensation tax deduction as compared to the financial expense for 2008, and for an additional
valuation allowance recorded in the year.
Year Ended December 31, 2007 and 2006
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of increase or decrease of these
items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read
in conjunction with our consolidated financial statements and the notes thereto, which are included herein. Our results reflect the inclusion of
acquisitions that occurred during the respective reporting periods. Refer to our Annual Report on Form 10-K for the year ended December 31, 2006, filed
March 16, 2007, and the notes to the consolidated financial statements included herein for additional information regarding 2007 and 2006 acquisitions.
Certain prior period amounts have been reclassified to conform to the current year presentation.
(dollars in thousands)
Statement of Operations Data:
Total revenue
Resident fees
Retirement Centers
Assisted Living
CCRCs
Total resident fees
Management fees
Total revenue
Expense
Facility operating expense(1)
Retirement Centers
Assisted Living
CCRCs
Total facility operating expense
General and administrative expense
Facility lease expense
Depreciation and amortization
Total operating expense
Loss from operations
Interest income
Interest expense
Debt
Amortization of deferred financing costs
Years Ended
December 31,
Increase
(Decrease)
2007
2006
Amount
Percent
$
$
532,680
799,070
500,757
1,832,507
6,789
1,839,296
$
432,673
614,973
256,650
1,304,296
5,617
1,309,913
299,086
514,130
357,721
1,170,937
138,013
271,628
299,925
1,880,503
(41,207)
7,519
248,062
383,987
187,752
819,801
117,897
228,779
188,129
1,354,606
(44,693)
6,810
(143,991)
(7,064)
(97,694)
(5,061)
100,007
184,097
244,107
528,211
1,172
529,383
51,024
130,143
169,969
351,136
20,116
42,849
111,796
525,897
3,486
709
(46,297)
(2,003)
23.1%
29.9%
95.1%
40.5%
20.9%
40.4%
20.6%
33.9%
90.5%
42.8%
17.1%
18.7%
59.4%
38.8%
7.8%
10.4%
(47.4%)
(39.6%)
44
Table of Contents
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in loss of unconsolidated ventures
Other non-operating income
Loss before income taxes
Benefit for income taxes
Loss before minority interest
Minority interest
Net loss
Selected Operating and Other Data:
Total number of communities (at end of period)
Total units/beds operated(2)
Owned/leased communities units/beds
Owned/leased communities occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
Selected Segment Operating and Other Data
Retirement Centers
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
Assisted Living
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
CCRCs
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
Average monthly revenue per unit/bed(3)
Management Services
Number of communities (period end)
Total units/beds(2)
Occupancy rate:
Period end
Weighted average
(73,222)
(2,683)
(3,386)
402
(263,632)
101,260
(162,372)
393
(161,979) $
550
52,086
47,670
(38)
(1,526)
(3,705)
—
(145,907)
38,491
(107,416)
(671)
(108,087) $
546
51,271
46,723
$
90.6%
90.7%
91.1%
90.4%
$
3,577
$
3,247
$
87
15,805
85
15,556
91.7%
92.4%
92.4%
92.4%
$
3,067
$
2,864
$
409
21,012
405
20,687
89.7%
89.7%
89.7%
89.7%
$
3,537
$
3,285
$
32
10,853
32
10,480
(73,184)
(1,157)
319
402
(117,725)
62,769
(54,956)
1,064
(53,892)
4
815
947
(0.5%)
0.3%
330
2
249
(0.7%)
—
203
4
325
—
—
252
—
373
90.8%
90.0%
91.9%
88.2%
(1.1%)
1.8%
$
4,481
$
4,048
$
22
4,416
24
4,548
433
(2)
(132)
83.1%
87.1%
92.6%
92.3%
(9.5%)
(5.2%)
NM
(75.8%)
8.6%
100%
(80.7%)
163.1%
(51.2%)
158.6%
(49.9%)
0.7%
1.6%
2.0%
(0.5%)
0.3%
10.2%
2.4%
1.6%
(0.8%)
—
7.1%
1.0%
1.6%
—
—
7.7%
—
3.6%
(1.2%)
2.0%
10.7%
(8.3%)
(2.9%)
(10.3%)
(5.6%)
45
Table of Contents
Selected Entrance Fee Data:
Non-refundable entrance fees sales
Refundable entrance fees sales(4)
Total entrance fee receipts
Refunds
Net entrance fees
Non-refundable entrance fees sales
Refundable entrance fees sales
Total entrance fee receipts
Refunds
Net entrance fees
__________
Q1
Q2
3,916
$
4,258
8,174
(6,315)
$
1,859
4,726 $
4,064
8,790
(4,089)
4,701 $
Q1
Q2
2007
Q3
5,673 $
8,696
14,369
(5,084)
9,285 $
2006
Q3
Q4
YTD
5,015 $
8,901
13,916
(4,069)
9,847 $
19,330
25,919
45,249
(19,557)
25,692
Q4
YTD
$
448
1,621
2,069
(703)
$
1,366
165 $
1,135
1,300
(308)
992 $
3,716 $
4,144
7,860
(3,529)
4,331 $
8,467 $
7,860
16,327
(4,648)
11,679 $
12,796
14,760
27,556
(9,188)
18,368
$
$
$
$
(1)
(2)
(3)
(4)
Facility operating expense for the year ended December 31, 2007 includes $7.0 million of charges comprised of $5.9 million of estimated
uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
Total units/beds operated represent the total units/beds operated as of the end of the period.
Average monthly revenue per unit/bed represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by
average occupied units/beds.
Refundable entrance fee sales for the year ended December 31, 2007 include amounts received from residents participating in the MyChoice
program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly
service fee. MyChoice amounts received from existing residents totaled $0.2 million, $3.6 million and $4.7 million in the second, third and fourth
quarters of 2007, respectively. We did not receive any MyChoice amounts from existing residents during the first quarter of 2007 or in 2006.
As of December 31, 2007, our total operations included 550 communities with a capacity to serve 52,086 residents. During 2007, our total portfolio grew
by three communities and our resident capacity increased by 815 units. During 2007, we focused substantial resources on furthering the integration of
the communities that we acquired during 2006.
Our 2007 results were also affected by our continuing implementation of our ancillary services programs at a number of our locations as described above.
Resident Fees
The increase in resident fees was driven by revenue growth across all business segments. Resident fees increased over the prior-year primarily due to
the number of acquisitions that we completed during 2006 and 2007, as resident fees from these acquisitions are partially or entirely excluded from the
prior period results. Including the effect of the historical results of the ARC facilities only partially included in our results of operations in 2006, resident
fees increased by approximately $94.4 million, or 6.9%, at the 425 communities we operated during both periods, driven primarily by an increase of 6.9% in
the average monthly revenue per unit/bed. Average occupancy at these 425 communities was 90.9% in 2007 and 2006.
Retirement Centers revenue increased $100.0 million, or 23.1%, primarily due to the inclusion of facilities acquired during 2006 and 2007, as resident fees
from these acquisitions are partially or entirely excluded from the prior period results. Revenue growth was also impacted by an increase in the average
monthly revenue per
46
Table of Contents
unit/bed at the facilities we operated during both periods. Occupancy at these facilities remained fairly constant period over period.
Assisted Living revenue increased $184.1 million, or 29.9%, primarily due to the 2006 and 2007 acquisitions. In addition, resident fees increased as a result
of an increase in the average monthly revenue per unit/bed, coupled with relatively constant occupancy as compared to the same period in the prior-year.
CCRCs revenue increased $244.1 million, or 95.1%, primarily due to the acquisition of ARC in the third quarter of 2006.
Management Fees
The increase in management fees over the prior-year is primarily due to the acquisition of management contracts in conjunction with the ARC acquisition
in July 2006. The increase is partially offset by the termination of ten management agreements during 2006.
Facility Operating Expense
Facility operating expense increased over the prior-year same period mainly due to the ARC acquisition as well as other 2006 and 2007 acquisitions. The
increase was primarily due to additional salaries, wages and benefits resulting from these acquisitions. In addition, for the quarter ended December 31,
2007, we recorded $7.0 million of charges to facility operating expenses comprised of $5.9 million of estimated uncollectible accounts, and $1.1 million of
accounting conformity adjustments pertaining to inventory and certain accrual policies. Including the effect of the historical results of the ARC facilities
only partially included in our results of operations in 2006, facility operating expense increased by 6.5% at the 425 communities we operated in both
periods.
Retirement Centers operating expenses increased $51.0 million, or 20.6%, primarily due to increased salaries, wages and benefits primarily as a result of the
2006 acquisitions and additional 2007 acquisitions.
Assisted Living operating expenses increased $130.1 million, or 33.9%, primarily due to increased salaries, wages and benefits primarily as a result of the
2006 acquisitions and additional 2007 acquisitions.
CCRCs operating expenses increased $170.0 million, or 90.5%, primarily due to the 2006 acquisition of ARC.
General and Administrative Expense
General and administrative expenses increased $20.1 million, or 17.1%, primarily as a result of an increase in salaries, wages and benefits due to an
increase in the number of employees in connection with the 2006 acquisition of ARC. Additionally, general and administrative expense was positively
impacted during the year by a receivable related to a collateral recovery of $4.2 million from an insurance carrier recorded in the second quarter which was
largely offset by other insurance activity and a decrease of $6.5 million in non-cash compensation expense in connection with previously expensed
performance-based restricted stock grants. General and administrative expense as a percentage of total revenue, including revenue generated by the
facilities we manage, was 5.0% and 5.4% for the year ended December 31, 2007 and 2006, calculated as follows (dollars in thousands):
Resident fee revenues
Resident fee revenues under management
Total
General and administrative expenses (excluding merger and integration expenses and non-cash stock compensation
expense totaling $39.2 million and $43.4 million in 2007 and 2006, respectively)
General and administrative expenses as % of total revenues
Year Ended
December 31,
2007
1,832,507
150,204
1,982,711
$
$
2006
1,304,296
73,507
1,377,803
98,858
$
5.0%
74,449
5.4%
$
$
$
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Table of Contents
Facility Lease Expense
Lease expense increased by $42.8 million, or 18.7%, primarily due to the ARC acquisition in July 2006 as well as other 2006 and 2007 acquisitions and
expense increases based on rent escalators included in the lease agreements. The increase in expense is partially offset by a decrease in lease expense
resulting from the purchase of previously leased assets in the fourth quarter of 2006. Lease expense includes straight-line rent expense of $25.4 million
and $24.7 million for the years ended December 31, 2007 and 2006, respectively, and is partially offset by $4.3 million of additional deferred gain
amortization for both periods.
Depreciation and Amortization
Total depreciation and amortization expense increased by $111.8 million, or 59.4%, primarily due to the acquisition of ARC as well as other 2006 and 2007
acquisitions. The increase was partially offset by a decrease in expense for resident in-place lease intangibles which were fully depreciated at the end of
2006.
Interest Income
Interest income increased $0.7 million, or 10.4%, primarily due to the acquisition of ARC in July 2006.
Interest Expense
Interest expense increased $121.5 million, or 118.2%, primarily due to additional debt incurred in connection with our acquisitions as well as the change in
fair value of our interest rate swaps for the year ended December 31, 2007. During the year, we recognized approximately $73.2 million of interest expense
related to the change in fair value and amortization of our interest rate swaps due to declines in the LIBOR yield curve which resulted in a change in the
fair value of the swaps. We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to fixed
rate. Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the
fair value liability exceeds specified thresholds. In periods of significant volatility in the credit markets, the value of these swaps can change
significantly. The effective portion of the change in fair value of derivatives was excluded from interest expense and was included in other
comprehensive loss for the nine months ended September 30, 2006. On October 1, 2006, we discontinued hedge accounting and the changes in fair value
of derivatives have been included in interest expense prospectively.
Income Taxes
The increase in the income tax benefit over the same prior year period is due to an increase in the effective tax rate from 26.4% in 2006 to 38.4% in
2007. This increase is primarily due to the ability of the Company to record a tax benefit on its entire 2007 loss, compared to benefiting the losses in 2006
after the acquisition of ARC, which occurred in July 2006.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to
make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses. We consider an accounting estimate to
be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate, or different estimates
that could have been selected, could have a material impact on our consolidated results of operations or financial condition. We have identified the
following critical accounting policies that affect significant estimates and judgments.
Revenue Recognition and Assumptions at Entrance Fee Communities
Our ten entrance fee communities provide housing and healthcare services through entrance fee agreements with residents. Under certain of these
agreements, residents pay an entrance fee upon entering into the contract and are contractually guaranteed certain limited lifecare benefits in the form of
healthcare discounts. The recognition of entrance fee income requires the use of various actuarial estimates. We recognize this revenue by recording the
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Table of Contents
nonrefundable portion of the residents’ entrance fees as deferred entrance fee income and amortizing it into revenue using the straight-line method over
the estimated remaining life expectancy of each resident or couple. In addition, certain entrance fee agreements entitle the resident to a refund of the
original entrance fee paid plus a percentage of the appreciation of the unit contingent upon resale. We estimate the portion of such entrance fees that
will be repaid to the resident from other contingently refundable entrance fees received or non-refundable entrance fees received and record that portion
as deferred revenue with the remainder classified as refundable entrance fees. The portion recorded as deferred revenue is amortized over the life of the
entrance fee building. We periodically assess the reasonableness of these mortality tables and other actuarial assumptions, and measurement of future
service obligations.
Obligation to Provide Future Services
Annually, we calculate the present value of the net cost of future services and the use of communities to be provided to current residents of certain of
our CCRCs and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the net
cost of future services and the use of communities exceeds the non-refundable deferred revenue from entrance fees, a liability is recorded (obligation to
provide future services and use of communities) with a corresponding charge to income.
Self-Insurance Liability Accruals
We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although we maintain general liability and
professional liability insurance policies for our owned, leased and managed communities under a master insurance program, our current policy provides
for deductibles for each and every claim ($3.0 million on or prior to December 31, 2008 and $250,000 effective January 1, 2009). The amount of liquid
assets available to satisfy these deductible obligations is $10.9 million (classified as cash and escrow deposits – restricted in the consolidated balance
sheets). As a result, we are effectively self-insured for most claims. In addition, we maintain a self-insured workers compensation program (with excess
loss coverage above $0.5 million per individual claim) and a self-insured employee medical program (with excess loss coverage above $0.3 million per
individual claim). We are self-insured for amounts below these excess loss coverage amounts. We have formed a wholly-owned “captive” insurance
company, Senior Services Insurance Limited (“SSIL”) for the purpose of insuring certain portions of our risk retention under our general and professional
liability insurance programs. SSIL issues policies of insurance to and receives premiums from Brookdale Senior Living Inc. that are reimbursed through
expense allocation to each operated community and us. SSIL pays the costs for each claim above a deductible up to a per claim limit. Third-party insurers
are responsible for claim costs above this limit. These third-party insurers carry an A.M. Best rating of A-/VII or better.
The cost of our employee health and dental benefits, net of employee contributions, is shared by us and our communities based on the respective
number of participants working directly either at our corporate headquarters or at the communities. Cash received is used to pay the actual costs of
administering the program which include paid claims, third-party administrative fees, network provider fees, communication costs, and other related
administrative costs incurred by us. Claims are paid as they are submitted to the plan administrator.
Outstanding losses and expenses for general liability and professional liability and workers compensation are based on the recommendations of
independent actuaries and management’s estimates. Outstanding losses and expenses for our self-insured medical program are estimated based on the
recommendation of our third party administrator.
We review the adequacy of our accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third-party
administrator estimates, consultants, advice from legal counsel and industry data, and adjust accruals periodically. Estimated costs related to these self-
insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are
monitored and estimates are updated as information is available.
Income Taxes
We account for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and
liabilities using tax rates in effect for
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the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets
to the amounts that are expected to be realized. As of December 31, 2008 and 2007, we have a valuation allowance against deferred tax assets of
approximately $9.7 million and $6.4 million, respectively. When we determine that it is more likely than not that we will be able to realize our deferred tax
assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected in either income or as an
adjustment to goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will
make it more likely than not that these deferred tax assets will be realized.
Lease Accounting
We determine whether to account for our leases as either operating or capital leases depending on the underlying terms. As of December 31, 2008, we
operated 358 communities under long-term leases with operating, capital and financing lease obligations. The determination of this classification is
complex and in certain situations requires a significant level of judgment. Our classification criteria is based on estimates regarding the fair value of the
leased communities, minimum lease payments, effective cost of funds, the economic life of the community and certain other terms in the lease agreements
as stated in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Communities under operating leases are
accounted for in our statement of operations as lease expenses for actual rent paid plus or minus straight-line adjustments for fixed or estimated minimum
lease escalators and amortization of deferred gains. For communities under capital lease and lease financing obligation arrangements, a liability is
established on our balance sheet and a corresponding long-term asset is recorded. Lease payments are allocated between principal and interest on the
remaining base lease obligations and the lease asset is depreciated over the shorter of its useful life or the term of the lease. In addition, we amortize
leasehold improvements purchased during the term of the lease over the shorter of their economic life or the lease term. Sale-leaseback transactions are
recorded as lease financing obligations when the transactions include a form of continuing involvement, such as purchase options.
One of our leases provides for various additional lease payments based on changes in the interest rates on the debt underlying the lease. All of our
leases contain fixed or formula based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease payments are
accounted for on a straight-line basis over the life of the lease. In addition, we recognize all rent-free or rent holiday periods in operating leases on a
straight-line basis over the lease term, including the rent holiday period.
Allowance for Doubtful Accounts
Accounts receivable are reported net of an allowance for doubtful accounts, and represent our estimate of the amount that ultimately will be realized in
cash. The allowance for doubtful accounts was $13.3 million, and $15.5 million as of December 31, 2008 and 2007, respectively. The adequacy of our
allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios
by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as necessary. Changes in
legislation are not expected to have a material impact on collections; however, changes in economic conditions could have an impact on the collection of
existing receivable balances or future allowance considerations.
Approximately 86.2% and 13.8% of our resident and healthcare revenues for the year ended December 31, 2008 were derived from private pay customers
and services covered by various third-party payor programs, including Medicare and Medicaid. Billings for services under third-party payor programs
are recorded net of estimated retroactive adjustments, if any, under reimbursement programs. Retroactive adjustments are accrued on an estimated basis
in the period the related services are rendered and adjusted in future periods or as final settlements are determined. We accrue contractual or cost related
adjustments from Medicare or Medicaid when assessed (without regard to when the assessment is paid or withheld), even if we have not agreed to or are
appealing the assessment. Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.
Long-Lived Assets, Goodwill and Purchase Accounting
As of December 31, 2008 and 2007, our long-lived assets were comprised primarily of $3.7 billion and $3.8 billion, respectively, of property, plant and
equipment and leasehold intangibles. In accounting for our long-lived
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assets, other than goodwill, we apply the provisions of SFAS No. 141, Business Combinations, and SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“SFAS 144”). In connection with our formation transactions, for financial reporting purposes we recorded the non-
controlling stockholders’ interest at fair value. Acquisitions are accounted for using the purchase method of accounting and the purchase prices are
allocated to acquired assets and liabilities based on their estimated fair values. Goodwill associated with our acquisition of ARC and our formation
transactions was allocated to the reportable segment and included in our application of the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”). We account for goodwill under the provisions of SFAS 142. During the year ended December 31, 2008, we recorded a $215.0 million
goodwill impairment charge in connection with our annual impairment test. The impairment charge was primarily driven by adverse equity market
conditions intensifying in the fourth quarter of 2008 that caused a decrease in current market multiples and our stock price at December 31, 2008 compared
with our stock price at September 30, 2008. We also evaluated the related long-lived depreciable assets using the same cash flow data used to evaluate
goodwill and determined that the undiscounted cash flows exceeded the carrying value of these assets for all except for four communities. As a result,
we recorded a non-cash asset impairment charge of $5.0 million for the quarter ended December 31, 2008 for these four communities within the Assisted
Living segment. As of December 31, 2008 and 2007, we had $110.0 million and $325.5 million of goodwill, respectively.
We test long-lived assets other than goodwill for recoverability annually during our fourth quarter or whenever changes in circumstances indicate the
carrying value may not be recoverable. Recoverability of an asset group is estimated by comparing its carrying value to the future net undiscounted cash
flows expected to be generated by the asset group. If this comparison indicates that the carrying value of an asset group is not recoverable, we are
required to recognize an impairment loss. The impairment loss is measured by the amount by which the carrying amount of the asset group exceeds its
estimated fair value. When an impairment loss is recognized for assets to be held and used, the carrying amount of those assets is permanently adjusted
and depreciated over its remaining useful life.
Goodwill is not amortized, but is subject to annual or more frequent impairment testing. We test goodwill for impairment annually during our fourth
quarter, or whenever indicators exist that our goodwill may not be recoverable. The recoverability of goodwill is required to be assessed using a two-step
process. The first step requires a comparison of the estimated fair value of a reporting unit with its carrying value. If the carrying value of the reporting
unit exceeds its estimated fair value, the second step requires a comparison of the implied fair value of goodwill (based on a putative purchase price
allocation methodology) with its carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess.
In estimating the fair value of a reporting unit or long-lived assets other than goodwill, we use the income approach. The income approach utilizes future
cash flow projections that are developed internally. Any estimates of future cash flow projections necessarily involve predicting an unknown future and
require significant management judgments and estimates. In arriving at our cash flow projections, we consider our historic operating results, approved
budgets and business plans, future demographic factors, expected growth rates, and other factors. Future events may indicate differences from
management’s current judgments and estimates, which could, in turn, result in future impairments. Future events that may result in impairment charges
include increases in interest rates, which could impact discount rates, differences in the projected occupancy rates and changes in the cost structure of
existing communities.
In using the income approach to estimate fair value of a reporting unit or long-lived assets other than goodwill, we make certain key assumptions. Those
assumptions include assumptions related to future revenues, future facility operating expenses, future cash flows that we would receive upon a future
sale of the communities using estimated cap rates. We attempt to corroborate the cap rates we use in these calculations with cap rates observable from
recent market transactions.
Where required, future cash flows are discounted at a rate that is consistent with a weighted average cost of capital for a potential market participant. The
weighted average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.
Although we make every reasonable effort to ensure the accuracy of our estimate of the fair value of our reporting units, future changes in the
assumptions used to make these estimates could result in the recording of an impairment loss.
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Hedging
We periodically enter into certain interest rate swap or cap agreements to effectively convert floating rate debt to a fixed rate basis or to hedge anticipated
future financings. Amounts paid or received under these agreements are recognized as an adjustment to interest expense when such amounts are
incurred or earned. For effective cash flow hedges, settlement amounts paid or received in connection with settled or unwound interest rate swap
agreements are deferred and recorded to accumulated other comprehensive income. For effective fair value hedges, changes in the fair value of the
derivative will be offset against the corresponding change in fair value of the hedged asset or liability through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized in
earnings. All derivative instruments are recorded at fair value. Derivatives that do not qualify for hedge accounting are recorded at fair value through
earnings.
On October 1, 2006, we elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently, the net
gain accumulated in other comprehensive income at that date of approximately $1.3 million related to the previously designated swap instruments is being
reclassified to interest expense over the life of the underlying hedged debt. In the future, if the underlying hedged debt is extinguished or refinanced, the
remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income.
In measuring our derivative instruments at fair value, we have considered nonperformance risk in our valuation. In so doing, we review the netting
arrangement and collateral requirements of each instrument and counterparty to determine appropriate reductions of credit exposure. Remaining credit
exposure is estimated by reference to market prices for credit default swaps and/or other methods of estimating probabilities of default.
Stock-Based Compensation
We adopted SFAS No. 123 (revised), Share-Based Payment (“SFAS No. 123R”), in connection with initial grants of restricted stock effective August
2005, which were converted into shares of our restricted stock on September 30, 2005 in connection with our formation transaction. This Statement
requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee
stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred.
Certain of our employee stock awards vest only upon the achievement of performance targets. SFAS No. 123R requires recognition of compensation cost
only when achievement of performance conditions is considered probable. Consequently, our determination of the amount of stock compensation
expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, we must make
estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are
updated as information is available.
Litigation
Litigation is inherently uncertain and the outcome of individual litigation matters is not predictable with assurance. We are involved in various legal
actions and claims incidental to the conduct of our business which are comparable to other companies in the senior living industry, some for specific
matters as described in Note 21 to the consolidated financial statements and others arising in the ordinary course of business. We have established loss
provisions for matters in which losses are probable and can be reasonably estimated. In other instances, we may not be able to make a reasonable
estimate of any liability because of uncertainties related to the outcome and/or the amount or range of losses. Changes in our current estimates, due to
unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.
New Accounting Pronouncements
The information required by this Item is provided in Note 2 of the notes to the consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data”.
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Liquidity and Capital Resources
The following is a summary of cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows
(dollars in thousands):
Cash provided by operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended
December 31,
2008
2007
$
$
$
136,767
(166,439)
(17,259)
(46,931)
100,904
53,973 $
199,662
(358,419)
191,627
32,870
68,034
100,904
The decrease in cash provided by operating activities was attributable to an increase in accounts receivable due to the timing of billings and payments
and an increase in billings in conjunction with the rollout of our therapy and home health services to many of our communities. Also contributing to the
decrease was an increase in prepaid expenses and other assets offset by a decrease in working capital year over year.
The decrease in cash used in investing activities was primarily attributable to a decrease in acquisition activity in the current year as well as cash received
on outstanding notes receivable. This decrease was partially offset by an increase in additions to our property, plant and equipment and leasehold
intangibles year over year.
The change in cash related to financing activities year over year was primarily attributable to a decrease in borrowings in the current year and an increase
in repayments on debt related to financing activities partially offset by a decrease in the payment of dividends in the current year and the buyout of a
capital lease in the prior year. Additionally, during the year ended December 31, 2008, we repurchased 1,211,301 shares of our common stock at an
aggregate cost of $29.2 million.
Our principal sources of liquidity have historically been from:
cash balances on hand;
cash flows from operations;
proceeds from our credit facilities;
proceeds from mortgage financing or refinancing of various assets;
funds generated through joint venture arrangements or sale-leaseback transactions; and
·
·
·
·
·
· with somewhat lesser frequency, funds raised in the debt or equity markets and proceeds from the selective disposition of underperforming
assets.
Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity. Over the near-term, however, we expect a
reduced level of mortgage refinancing activity. As described under “Credit Facilities” below, the revolving loan commitment under our amended credit
agreement decreases on a quarterly basis beginning March 31, 2009. As such, we anticipate a reduced level of reliance on proceeds from our credit
facility over the near-term compared to historical levels. In addition, given current conditions in the credit and equity markets, we also expect a reduced
level of debt and equity financing activity over the near-term when compared to historical levels.
Our liquidity requirements have historically arisen from:
· working capital;
·
·
·
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
debt service and lease payments;
acquisition consideration and transaction costs;
cash collateral required to be posted in connection with our interest rate swaps and related financial instruments;
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·
·
·
·
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
dividend payments;
purchases of common stock under our previous share repurchase authorization; and
other corporate initiatives (including integration and branding).
Over the near-term, we expect that our liquidity requirements will primarily arise from:
· working capital;
·
·
·
·
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
debt service and lease payments;
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
other corporate initiatives (including integration); and
to a lesser extent, cash collateral required to be posted in connection with our interest rate swaps and related financial instruments.
We are highly leveraged, and have significant debt and lease obligations. We have two principal corporate-level indebtednesses: our $230.0 million
amended credit facility and our unsecured facilities providing for up to $48.5 million of letters of credit in the aggregate. The remainder of our
indebtedness is generally comprised of non-recourse property-level mortgage financings.
At December 31, 2008, we had $2.1 billion of debt outstanding, excluding our line of credit and capital lease obligations, at a weighted-average interest
rate of 4.91%. At December 31, 2008, we had $318.4 million of capital and financing lease obligations, $159.5 million was drawn on our revolving loan
facility and $149.7 million of letters of credit had been issued under our letter of credit facilities. Approximately $158.5 million of our debt obligations
(excluding the $4.5 million current portion of our line of credit) are due on or before December 31, 2009, subject in the case of debt obligations totaling
$131.0 million to extension at our option, as described below under “Contractual Commitments”. We also have substantial operating lease obligations
and capital expenditure requirements. For the year ending December 31, 2009, we will be required to make approximately $261.9 million of payments in
connection with our existing operating leases.
We had $54.0 million of cash and cash equivalents at December 31, 2008, excluding cash and escrow deposits-restricted and lease security deposits of
$136.3 million. Additionally, as of December 31, 2008, we had $41.4 million available under our corporate credit facility and $16.9 million of unused
capacity under our letter of credit facilities.
As of December 31, 2008, we had $158.5 million of current debt maturities (excluding the $4.5 million current portion of our line of credit) and $107.2 million
of letters of credit issued under facilities that were scheduled to mature prior to December 31, 2009. After giving effect to our amended credit agreement,
our $48.5 million unsecured letter of credit facilities, and the extension in early 2009 of $87.7 million of mortgage debt that was initially due in 2009 until
2011, we have approximately $139.6 million of debt maturities due during the year ending December 31, 2009, comprised of the following: non-recourse
mortgage debt maturities of $131.0 million, which we expect will be extended to 2011 pursuant to the exercise of contractual extension options, and $8.6
million of scheduled periodic principal amortization and other required principal payments.
At December 31, 2008, we had $365.2 million of negative working capital, which includes the classification of $206.5 million of refundable entrance fees,
$30.0 million in tenant deposits and $131.0 million of debt for which we have extension rights as current liabilities. Based upon our historical operating
experience, we anticipate that only 9.0 % to 12.0% of those entrance fee liabilities will actually come due, and be required to be settled in cash, during the
next 12 months. We expect that any entrance fee liabilities due within the next 12 months will be fully offset by the proceeds generated by subsequent
entrance fee sales. Entrance fee sales, net of refunds paid, provided $23.3 million of cash for the year ended December 31, 2008.
For the year ending December 31, 2009, we anticipate that we will make investments of approximately $60.0 million for capital expenditures (net of
approximately $108.0 million expected to be reimbursed from lenders/lessors or funded through construction financing), comprised of approximately $25.0
million of net
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recurring capital expenditures, approximately $5.0 million of net capital expenditures in connection with our community expansion and development
program, and approximately $30.0 million of expenditures relating to other major projects (including corporate initiatives). These major projects include
unusual or non-recurring capital projects, projects which create new or enhanced economics, such as major renovations or repositioning projects at our
communities (including deferred expenditures in connection with recently acquired communities), integration related expenditures, and expenditures
supporting the expansion of our ancillary services programs. For the year ended December 31, 2008, we spent approximately $27.3 million for net
recurring capital expenditures, approximately $39.9 million for capital expenditures in connection with our expansion and development program (net of
$65.6 million that had been reimbursed as of December 31, 2008) and approximately $53.5 million for expenditures relating to other major projects and
corporate initiatives.
During 2009, we anticipate funding the majority of capital expenditures relating to our expansion and development program through debt and lease
financings for those projects (approximately $108.0 million in the aggregate). We expect that our other capital expenditures will be funded from cash on
hand, cash flows from operations, and amounts drawn on our credit facility.
Through 2007, we focused on growth primarily through acquisition, spending approximately $2.2 billion during 2007 and 2006 on acquiring communities
and companies, excluding fees, expenses and assumption of debt. Given the current market environment and limitations imposed by our new credit
facility, we are focusing on integrating previous acquisitions and on the significant organic growth opportunities inherent in our growth
strategy. Consequently, we expect a reduced level of acquisition activity and spending over the near term. Over the longer-term, we plan to take
advantage of the fragmented continuing care, independent living and assisted living sectors by selectively purchasing existing operating companies,
asset portfolios and communities.
In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk. We have entered into certain interest rate
protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis. Pursuant to certain of our hedge agreements, we are
required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds. In periods
of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are required to
post can change significantly. During 2008, we posted approximately $39.0 million of cash collateral pursuant to interest rate swaps. We have recently
taken a number of steps to reduce this risk. In particular, during 2008, we terminated a number of interest rate swaps with an aggregate notional amount
of $1.1 billion and purchased $445.2 million in aggregate notional amount of interest rate caps, which do not require the posting of cash
collateral. Furthermore, during 2008, we obtained $37.6 million of swaps that are secured by underlying mortgaged assets and, hence, do not require cash
collateralization. As of December 31, 2008, we have $670.5 million in aggregate notional amount of interest rate caps, $37.6 million in aggregate notional
amount of swaps secured by underlying mortgaged assets, $314.2 million in aggregate notional amount of swaps that require cash collateralization and
$119.8 million of variable rate debt that is not subject to any cap or swap agreements.
We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically. If our existing resources are
insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell
additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be
certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all (particularly given current market
conditions). If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our
business development activities, any of which could reduce the growth of our business.
In light of the current uncertainty in the credit market and the deteriorating overall economy, we are taking steps to preserve our liquidity during
2009. For example, we have suspended our quarterly dividend payments, terminated our share repurchase program and initiated a number of cost control
measures (including limitations on our capital expenditures). We currently estimate that our existing cash flows from operations, together with existing
working capital, amounts drawn under our credit facility and, to a lesser extent, proceeds from anticipated refinancings of various assets, will be sufficient
to fund our liquidity needs for at least the next 12 months, assuming that the overall economy does not substantially deteriorate further.
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Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, the actual level of capital
expenditures, our expansion, development and acquisition activity, general economic conditions and the cost of capital. Shortfalls in cash flows from
operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies. The
current volatility in the credit and financial markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing
or refinancing. As a result, this may impact our ability to grow our business, maintain capital spending levels, expand certain communities, or execute
other aspects of our business strategy. In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness
or lease financing to provide additional funding. There can be no assurance that any such additional financing will be available or on terms that are
acceptable to us (particularly in light of current adverse conditions in the credit market).
As of December 31, 2008, we are in compliance with the financial covenants of our outstanding debt and lease agreements.
Credit Facilities
As of December 31, 2008, we had an available secured line of credit of $245.0 million (including a $70.0 million letter of credit sublimit), an associated letter
of credit facility of up to $80.0 million, and separate letter of credit facilities of up to $42.5 million in the aggregate. The line of credit bore interest at the
base rate plus 3.0% or LIBOR plus 4.0%, at our election, and was scheduled to mature on May 15, 2009. We were required to pay fees ranging from 2.5%
to 4.0% of the amount of any outstanding letters of credit issued under the associated letter of credit facility and are required to pay a fee of 2.5% of the
amount of any outstanding letters of credit issued under the separate letter of credit facilities.
As of December 31, 2008, $159.5 million was drawn on the revolving loan facility and $149.7 million of letters of credit had been issued under our letter of
credit facilities. Included in the $149.7 million of letters of credit outstanding at December 31, 2008 is $32.2 million of duplicative letters of credit posted
with counterparties that were in process of being returned. As of February 27, 2009, these duplicative letters of credit were returned and are no longer
outstanding.
Refinancing of Existing Line of Credit
We recently refinanced our line of credit by (i) entering into unsecured facilities with a financial institution providing for up to $48.5 million of letters of
credit in the aggregate and (ii) entering into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent,
Banc of America Securities LLC, as sole lead arranger and book manager, and the several lenders from time to time parties thereto. The amended credit
agreement amended and restated our existing $245.0 million secured line of credit and terminated the associated $80.0 million letter of credit facility.
The amended credit agreement consists of a $230.0 million revolving loan facility with a $25.0 million letter of credit sublimit and is scheduled to mature on
August 31, 2010. Pursuant to the terms of the amended credit agreement, we will be required to make mandatory prepayments of (a) 65% of our Excess
Cash Flow (as defined in the amended credit agreement) for each fiscal quarter beginning with the first fiscal quarter of 2009, (b) 85% of our net cash
proceeds from refinancings, (c) 100% of our net cash proceeds from the issuance of equity (subject to certain exceptions), and (d) 100% of our net cash
proceeds from asset dispositions (subject to certain exceptions and limited to 85% in the case of sale-leaseback transactions and dispositions of joint
venture interests). The revolving loan commitment will be permanently reduced in a corresponding amount in connection with each mandatory
prepayment, provided the commitment reduction with respect to any issuance of equity is limited to 65% of such net cash proceeds. To the extent that
the revolving loan commitment has not been permanently reduced either voluntarily or as a result of mandatory prepayments, the revolving loan
commitment will be further reduced as of the dates below to the following aggregate amounts:
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March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
$220.0 million
$200.0 million
$180.0 million
$155.0 million
$130.0 million
$75.0 million
Pursuant to the terms of the amended credit agreement, certain of our subsidiaries, as guarantors, will guarantee our obligations under the amended credit
agreement and the other loan documents. Further, in connection with the amended credit agreement, (i) the company and certain guarantors executed
and delivered a Pledge Agreement in favor of the administrative agent for the banks and other financial institutions from time to time parties to the
amended credit agreement, pursuant to which such guarantors pledged certain assets for the benefit of the secured parties as collateral security for the
payment and performance of our obligations under the amended credit agreement and the other loan documents and (ii) certain guarantors granted
mortgages and executed and delivered a Security Agreement, in each case, in favor of the administrative agent for the banks and other financial
institutions from time to time parties to the amended credit agreement encumbering certain real and personal property of such guarantors. The collateral
includes, among other things, certain real property and related personal property owned by the guarantors, equity interests in certain of our subsidiaries,
all related books and records and, to the extent not otherwise included, all proceeds and products of any and all of the foregoing.
At our option, amounts drawn under the revolving loan facility will generally bear interest at either (i) LIBOR plus a margin of 7.0% or (ii) the greater of (a)
the Bank of America prime rate or (b) the Federal Funds rate plus 0.5%, plus a margin of 7%. For purposes of determining the interest rate, in no event
shall the base rate or LIBOR be less than 3.0%. In connection with the loan commitments, we will pay a quarterly commitment fee of 1.0% per annum on
the average daily amount of undrawn funds. We will also be required to pay a fee equal to 7.0% of the amount of any issued and outstanding letters of
credit; provided, with respect to drawable amounts that have been cash collateralized, the letter of credit fee shall be payable at a rate per annum equal to
2.0%.
The proceeds of the loans under the amended credit agreement will be used to refinance our existing indebtedness under the existing credit agreement
and to provide ongoing working capital and for other general corporate purposes.
The amended credit agreement contains typical representations and covenants for loans of this type, including restrictions on our ability to pay
dividends, make distributions, make acquisitions, incur capital expenditures, incur new liens, or repurchase shares of our common stock. The amended
credit agreement also contains financial covenants, including covenants with respect to maximum consolidated adjusted leverage, minimum consolidated
fixed charge coverage, minimum tangible net worth, and maximum total capital expenditures. A violation of any of these covenants (including any failure
to remain in compliance with any financial covenants contained therein) could result in a default under the amended credit agreement, which would result
in termination of all commitments and loans under the amended credit agreement and all other amounts owing under the amended credit agreement and
certain other loan agreements becoming immediately due and payable.
After giving effect to the amended credit facility and other transactions completed subsequent to year-end, as of February 27, 2009, we have an available
secured line of credit of $230.0 million (including a $25.0 million letter of credit sublimit) and separate letter of credit facilities of up to $48.5 million in the
aggregate. As of February 27, 2009, $195.0 million was drawn on the revolving loan facility and $71.7 million of letters of credit had been issued under our
letter of credit facilities.
Since the amended credit facility matures on August 31, 2010, amounts drawn against the line of credit as of December 31, 2008 have been classified as a
long-term liability on the consolidated balance sheet to the extent of the revolving loan commitment availability under the amended credit facility at
December 31, 2009, with the $4.5 million remaining amount classified as a current liability.
Contractual Commitments
The following table presents a summary of our material indebtedness, including the related interest payments, lease and other contractual commitments,
as of December 31, 2008.
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Contractual Obligations:
Long-term debt obligations(1)(2)(3)
Capital lease obligations(1)
Operating lease obligations(4)
Refundable entrance fee obligations(5)
Total contractual obligations
Total commercial construction
commitments
Total
2009
2010
2011
(dollars in thousands)
2012
2013
Thereafter
Payments Due by Twelve Months Ending December 31,
$
2,685,190
$
109,433
$
259,914
$
529,471
$
923,466
$
500,087
$
531,825
2,679,422
206,461
6,102,898
$
46,710
261,890
48,792
264,482
50,101
267,517
49,154
268,400
48,418
262,032
25,808
443,841 $
25,808
598,996 $
25,808
25,808
872,897 $ 1,266,828 $
25,808
836,345 $
$
362,819
288,650
1,355,101
77,421
2,083,991
$
66,585
$
61,480 $
5,105 $
— $
— $
— $
—
(1)
(2)
(3)
(4)
(5)
Includes contractual interest for all fixed-rate obligations and assumes interest on variable rate instruments at the December 31, 2008 rate after
giving effect to in-place interest rate swaps.
$131.0 million has been classified beyond its 2009 initial maturity date to 2011 due to our unilateral option to extend the initial maturity date.
Includes the following amounts of scheduled principal payments due on such long-term debt obligations for the respective periods: $2,234,489
in total; $13,072 in 2009 (inclusive of the current portion of the line of credit of $4,453, which was refinanced in February 2009); $166,742 in 2010
(inclusive of the long term portion of the line of credit of $155,000, which was refinanced in February 2009); $452,564 in 2011; $868,358 in 2012;
$476,254 in 2013; and $257,499 thereafter.
Reflects future cash payments after giving effect to non-contingent lease escalators and assumes payments on variable rate instruments at the
December 31, 2008 rate.
Future refunds of entrance fees are estimated based on historical payment trends. These refund obligations are generally offset by proceeds
received from resale of the vacated apartment units. Historically, proceeds from resales of entrance fee units each year generally offset refunds
paid and generate excess cash to us.
The foregoing amounts exclude outstanding letters of credit of $149.7 million as of December 31, 2008. Included in the $149.7 million of letters of credit
outstanding at December 31, 2008 is $32.2 million of duplicative letters of credit posted with counterparties that were in process of being returned. As of
February 27, 2009, these duplicative letters of credit were returned and are no longer outstanding.
Company Indebtedness, Long-term Leases and Hedging Agreements
Indebtedness
We have two principal corporate-level indebtednesses: our $230.0 million amended credit facility and our unsecured facilities providing for up to $48.5
million of letters of credit in the aggregate. The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage
financings.
As of December 31, 2008, 2007 and 2006, our outstanding property-level secured debt and capital leases were $2.4 billion, $2.1 billion and $1.7 billion,
respectively.
During 2008, we incurred $547.3 million of additional property-level debt primarily related to the financing of acquisitions, the expansion of certain
communities and the releveraging of certain assets. Approximately $158.5 million of the new debt was issued at a variable interest rate (subject to hedge
agreements that may effectively cap or convert the debt to a fixed rate) and the remaining $388.8 million was issued at a fixed interest rate. Refer to the
notes to the consolidated financial statements for a detailed discussion of the new debt and related terms.
We have secured our self-insured retention risk under our workers’ compensation and general liability and professional liability programs and our lease
security deposits with cash and letters of credit aggregating $10.9 million and $64.3 million, and $7.7 million and $36.4 million as of December 31, 2008 and
2007, respectively.
As of December 31, 2008, we are in compliance with the financial covenants of our outstanding debt, including those covenants measuring facility
operating income to gauge debt coverage.
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Long-Term Leases
As of December 31, 2008, we have 358 communities under long-term leases. The leases relating to these communities are generally fixed rate leases with
annual escalators that are either fixed or tied to changes in leased property revenue or the consumer price index.
Two portfolio leases have or had a floating-rate debt component built into the lease payments. We acquired one of the portfolios on December 30,
2005. Prior to the acquisition, the lease payment was a pass through of debt service, which includes $100.8 million of floating rate tax-exempt debt that
was credit enhanced by Fannie Mae. Our variable rate exposure under this lease is partially hedged through an interest rate cap. The second lease
includes $96.5 million of variable rate mortgages and/or tax exempt debt that is credit enhanced by Freddie Mac.
For the year ended December 31, 2008, our minimum annual cash lease payments for our capital/financing leases and operating leases were $44.5 million
and $251.9 million, respectively.
As of December 31, 2008, we are in compliance with the financial covenants of our capital and operating leases, including those covenants measuring
facility operating income to gauge lease coverage.
Hedging
In the normal course of business, we use a variety of financial instruments to hedge interest rate risk. We have historically entered into certain interest
rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis. Pursuant to certain of our hedge agreements,
we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds. In
periods of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are
required to post can change significantly. During 2008, we posted approximately $39.0 million of cash collateral. We have recently taken a number of
steps to reduce this risk. In particular, during 2008, we terminated a number of interest rate swaps with an aggregate notional amount of $1.1 billion and
purchased $445.2 million in aggregate notional amount of interest rate caps, which do not require the posting of cash collateral. Furthermore, during 2008,
we obtained $37.6 million of swaps that are secured by underlying mortgaged assets and, hence, do not require cash collateralization. As of December 31,
2008, we have $670.5 million in aggregate notional amount of interest rate caps, $37.6 million in aggregate notional amount of swaps secured by
underlying mortgaged assets, $314.2 million in aggregate notional amount of swaps that require cash collateralization and $119.8 million of variable rate
debt that is not subject to any cap or swap agreements.
All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value.
The following table summarizes our swap instruments at December 31, 2008 (dollars in thousands):
Current notional balance
Highest possible notional
Lowest interest rate
Highest interest rate
Average fixed rate
Earliest maturity date
Latest maturity date
Weighted average original maturity
Estimated liability fair value (included in other liabilities at December 31, 2008)
Estimated asset fair value (included in other assets at December 31, 2008)
$
$
351,840
351,840
3.24%
4.47%
3.74%
2011
2014
5.0 years
(20,931)
—
$
$
The following table summarizes our cap instruments at December 31, 2008 (dollars in thousands):
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Current notional balance
Highest possible notional
Lowest interest cap rate
Highest interest cap rate
Average fixed cap rate
Earliest maturity date
Latest maturity date
Weighted average original maturity
Estimated liability fair value (included in other liabilities at December 31, 2008)
Estimated asset fair value (included in other assets at December 31, 2008)
$
$
670,521
670,521
4.96%
6.50%
6.02%
2011
2012
4.0 years
—
350
$
$
Impacts of Inflation
Resident fees from the communities we own or lease and management fees from communities we manage for third parties are our primary sources of
revenue. These revenues are affected by the amount of monthly resident fee rates and community occupancy rates. The rates charged are highly
dependent on local market conditions and the competitive environment in which our communities operate. Substantially all of our retirement center,
assisted living, and CCRC residency agreements allow for adjustments in the monthly fee payable thereunder not less frequently than every 12 or 13
months thereby enabling us to seek increases in monthly fees due to inflation, increased levels of care or other factors. Any pricing increase would be
subject to market and competitive conditions and could result in a decrease in occupancy in the facilities. We believe, however, that our ability to
periodically adjust the monthly fee serves to reduce the adverse effect of inflation. In addition, employee compensation expense is a principal cost
element of facility operations and is also dependent upon local market conditions. There can be no assurance that resident fees will increase or that costs
will not increase due to inflation or other causes.
At December 31, 2008, approximately $1.1 billion of our indebtedness, excluding our line of credit, bears interest at floating rates. We have mitigated our
exposure to floating rates by using interest rate swaps and interest rate caps under our debt/lease arrangements. Inflation, and its impact on floating
interest rates, could affect the amount of interest payments due on our line of credit.
Off-Balance Sheet Arrangements
The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures
that are not considered VIEs as we do not possess a controlling financial interest. We do not believe these off-balance sheet arrangements have or are
reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors.
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash
flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-
GAAP financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.
Adjusted EBITDA
Definition of Adjusted EBITDA
We define Adjusted EBITDA as follows:
Net income (loss) before:
·
provision (benefit) for income taxes;
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·
·
·
·
·
·
non-operating (income) loss items;
depreciation and amortization (including non-cash impairment charges);
straight-line rent expense (income);
amortization of deferred gain;
amortization of deferred entrance fees; and
non-cash compensation expense;
and including:
·
entrance fee receipts and refunds.
Management’s Use of Adjusted EBITDA
We use Adjusted EBITDA to assess our overall financial and operating performance. We believe this non-GAAP measure, as we have defined it, is
helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations. This
measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting
current financial goals as well as achieve optimal financial performance. It provides an indicator for management to determine if adjustments to current
spending decisions are needed.
Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-
term, such as depreciation and amortization (including non-cash impairment charges), straight-line rent expense (income), taxation and interest expense
associated with our capital structure. This metric measures our financial performance based on operational factors that management can impact in the
short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA is one of the metrics used by senior management and the board
of directors to review the financial performance of the business on a monthly basis. Adjusted EBITDA is also used by research analysts and investors to
evaluate the performance of and value companies in our industry.
Limitations of Adjusted EBITDA
Adjusted EBITDA has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of earnings. Material
limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP
net income (loss), include:
· the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities
and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value
of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position. We use non-
GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our
business.
Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and
presented in accordance with GAAP. You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure. We strongly urge
you to review the reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our consolidated financial statements included herein. We
also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA is not a measure of
financial performance under GAAP and is susceptible to varying
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calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by
other companies.
The table below shows the reconciliation of our net loss to Adjusted EBITDA for the years ended December 31, 2008, 2007 and 2006 (dollars in
thousands):
Net loss
Benefit for income taxes
Other non-operating income
Minority interest
Equity in loss of unconsolidated ventures
Loss on extinguishment of debt
Interest expense
Debt
Capitalized lease obligation
Amortization of deferred financing costs
Change in fair value of derivatives and amortization
Interest income
Loss from operations
Depreciation and amortization
Goodwill and asset impairment
Straight-line lease expense
Amortization of deferred gain
Amortization of entrance fees
Non-cash compensation expense
Entrance fee receipts(4)
Entrance fee disbursements
Adjusted EBITDA
Years Ended December 31, (1)
2007(2)(3)
2006(2)
2008
$
(373,241)
(86,731)
(1,708)
—
861
3,052
119,853
27,536
9,707
68,146
(7,618)
(240,143)
276,202
220,026
20,585
(4,342)
(22,025)
28,937
42,472
(19,150)
302,562 $
$
(161,979)
(101,260)
(402)
(393)
3,386
2,683
114,518
29,473
7,064
73,222
(7,519)
(41,207)
299,925
—
25,439
(4,342)
(19,241)
20,113
45,249
(19,557)
306,379 $
(108,087)
(38,491)
—
671
3,705
1,526
74,133
23,561
5,061
38
(6,810)
(44,693)
188,129
—
24,699
(4,345)
(8,149)
26,612
27,556
(9,188)
200,621
$
$
__________
(1)
(2)
(3)
(4)
The calculation of Adjusted EBITDA includes merger, integration, and hurricane and named tropical storms expense as well as other non-
recurring and acquisition transition costs totaling $24.3 million, $19.0 million and $16.8 million for the years ended December 31, 2008, 2007 and
2006, respectively. The 2008 amount includes the effect of the $8.0 million reserve established for certain litigation (Note 21).
Adjusted EBITDA for the years ended December 31, 2007 and 2006 includes a non-cash benefit of $0.3 million and $4.1 million, respectively,
related to a reversal of an accrual established in connection with Alterra’s emergence from bankruptcy in December 2003.
Adjusted EBITDA for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter ended
December 31, 2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million related to estimated
uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
Includes the receipt of refundable and nonrefundable entrance fees.
Cash From Facility Operations
Definition of Cash From Facility Operations
We define Cash From Facility Operations (CFFO) as follows:
Net cash provided by (used in) operating activities adjusted for:
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·
·
·
·
·
·
·
changes in operating assets and liabilities;
deferred interest and fees added to principal;
refundable entrance fees received;
entrance fee refunds disbursed;
lease financing debt amortization with fair market value or no purchase options;
other; and
recurring capital expenditures.
Recurring capital expenditures include expenditures capitalized in accordance with GAAP that are funded from CFFO. Amounts excluded from recurring
capital expenditures consist primarily of unusual or non-recurring capital items (including integration capital expenditures), community purchases and/or
major projects or renovations that are funded using financing proceeds and/or proceeds from the sale of communities that are held for sale. Beginning in
2008, our calculation of CFFO was modified to subtract principal amortization related to capital leases that contain fair market value or no purchase
options.
Management’s Use of Cash From Facility Operations
We use CFFO to assess our overall liquidity. This measure provides an assessment of controllable expenses and affords management the ability to make
decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance. It provides an
indicator for management to determine if adjustments to current spending decisions are needed.
This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of
the organization. CFFO is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding
indebtedness (including our credit facilities and long-term leases), (ii) our ability to pay dividends to stockholders, (iii) our ability to make regular
recurring capital expenditures to maintain and improve our communities on a period-to-period basis, (iv) for planning purposes, including preparation of
our annual budget and (v) in setting various covenants in our credit agreements. These agreements generally require us to escrow or spend a minimum
of between $250 and $450 per unit/bed per year. Historically, we have spent in excess of these per unit/bed amounts; however, there is no assurance that
we will have funds available to escrow or spend these per unit/bed amounts in the future. If we do not escrow or spend the required minimum annual
amounts, we would be in default of the applicable debt or lease agreement which could trigger cross default provisions in our outstanding indebtedness
and lease arrangements.
Limitations of Cash From Facility Operations
CFFO has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations. CFFO
does not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-
discretionary expenditures not reflected in the measure. Material limitations in making the adjustment to our cash flow from operations to calculate CFFO,
and using this non-GAAP financial measure as compared to GAAP operating cash flows, include:
· the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and
extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of
our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
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We believe CFFO is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding
indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our
ability to make regular recurring capital expenditures to maintain and improve our communities.
CFFO is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely
on CFFO as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of CFFO to GAAP net cash provided
by (used in) operating activities, along with our consolidated financial statements included herein. We also strongly urge you to not rely on any single
financial measure to evaluate our business. In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to
varying calculations, the CFFO measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other
companies.
The table below shows the reconciliation of net cash provided by operating activities to CFFO for the years ended December 31, 2008, 2007 and 2006
(dollars in thousands):
Net cash provided by operating activities
Changes in operating assets and liabilities
Refundable entrance fees received (4)
Entrance fee refunds disbursed
Recurring capital expenditures
Lease financing debt amortization with fair market value or no purchase options
Reimbursement of operating expenses and other
Cash From Facility Operations
Years Ended December 31,(1)
2007(2)(3)
2006(2)
2008
$
136,767
25,865
$
19,871
(19,150)
(27,312)
(6,691)
794
130,144 $
$
199,662
(36,571)
$
25,919
(19,557)
(25,048)
(5,594)
4,430
143,241 $
85,912
17,936
14,760
(9,188)
(23,518)
(2,213)
5,000
88,689
(1)
(2)
(3)
(4)
The calculation of CFFO includes merger, integration, and hurricane and named tropical storms expense as well as other non-recurring and
acquisition transition costs totaling $24.3 million, $19.0 million and $16.8 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The 2008 amount includes the effect of the $8.0 million reserve established for certain litigation (Note 21).
The December 31, 2007 and 2006 amounts have been reclassified to conform to the modified definition of CFFO used during the year ended
December 31, 2008.
CFFO for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter ended December 31,
2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million of estimated uncollectible accounts and
$1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
Total entrance fee receipts for the year ended December 31, 2008, 2007 and 2006 were $42.5 million, $45.2 million and $27.6 million, respectively,
including $22.6 million, $19.3 million and $12.8 million, respectively, of nonrefundable entrance fee receipts included in net cash provided by
operating activities.
Facility Operating Income
Definition of Facility Operating Income
We define Facility Operating Income as follows:
Net income (loss) before:
·
·
·
provision (benefit) for income taxes;
non-operating (income) loss items;
depreciation and amortization (including non-cash impairment charges);
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·
·
·
facility lease expense;
general and administrative expense, including non-cash stock compensation expense;
amortization of deferred entrance fee revenue; and
· management fees.
Management’s Use of Facility Operating Income
We use Facility Operating Income to assess our facility operating performance. We believe this non-GAAP measure, as we have defined it, is helpful in
identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility
operations. This measure provides an assessment of revenue generation and expense management and affords management the ability to make decisions
which are expected to facilitate meeting current financial goals as well as to achieve optimal facility financial performance. It provides an indicator for
management to determine if adjustments to current spending decisions are needed.
Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management
in the short-term, such as depreciation and amortization, lease expense, taxation and interest expense associated with our capital structure. This metric
measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or
expenses of the organization. Facility Operating Income is one of the metrics used by our senior management and board of directors to review the
financial performance of the business on a monthly basis. Facility Operating Income is also used by research analysts and investors to evaluate the
performance of and value companies in our industry by investors, lenders and lessors. In addition, Facility Operating Income is a common measure used
in the industry to value the acquisition or sales price of communities and is used as a measure of the returns expected to be generated by a facility.
A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages. The debt or lease
coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as
determined on an accrual basis in accordance with GAAP). For purposes of the coverage calculation, the lender or lessor will further require a pro forma
adjustment to facility operating income to include a management fee (generally 4% to 5% of operating revenue) and an annual capital reserve (generally
$250 to $450 per unit/bed). An investor or potential investor may find this item important in evaluating our performance, results of operations and
financial position, particularly on a facility-by-facility basis.
Limitations of Facility Operating Income
Facility Operating Income has limitations as an analytical tool. It should not be viewed in isolation or as a substitute for GAAP measures of
earnings. Material limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial
measure as compared to GAAP net income (loss), include:
· interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of
debt activities generally represent charges (gains), which may significantly affect our financial results; and
· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of
our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-
facility basis. We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors
and trends affecting our business. Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or
used in operations as calculated and presented in accordance with GAAP. You should not rely on Facility
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Operating Income as a substitute for any such GAAP financial measure. We strongly urge you to review the reconciliation of Facility Operating Income
to GAAP net income (loss), along with our consolidated financial statements included herein. We also strongly urge you to not rely on any single
financial measure to evaluate our business. In addition, because Facility Operating Income is not a measure of financial performance under GAAP and is
susceptible to varying calculations, the Facility Operating Income measure, as presented in this report, may differ from and may not be comparable to
similarly titled measures used by other companies.
The table below shows the reconciliation of net loss to Facility Operating Income for the years ended December 31, 2008, 2007 and 2006 (dollars in
thousands):
Net loss
Loss on discontinued operations
Benefit for income taxes
Other non-operating income
Minority interest
Equity in loss of unconsolidated ventures
Loss on extinguishment of debt
Interest expense
Debt
Capitalized lease obligation
Amortization of deferred financing costs
Change in fair value of derivatives and amortization
Interest income
Loss from operations
Depreciation and amortization
Goodwill and asset impairment
Facility lease expense
General and administrative (including non-cash stock compensation expense)
Amortization of entrance fees
Management fees
Facility Operating Income
Years Ended December 31,
2007(1)(2)
2006(1)
2008
$
(373,241)
—
(86,731)
(1,708)
—
861
3,052
119,853
27,536
9,707
68,146
(7,618)
(240,143)
276,202
220,026
269,469
140,919
(22,025)
(6,994)
637,454 $
$
(161,979)
—
(101,260)
(402)
(393)
3,386
2,683
114,518
29,473
7,064
73,222
(7,519)
(41,207)
299,925
—
271,628
138,013
(19,241)
(6,789)
642,329 $
(108,087)
—
(38,491)
—
671
3,705
1,526
74,133
23,561
5,061
38
(6,810)
(44,693)
188,129
—
228,779
117,897
(8,149)
(5,617)
476,346
$
$
__________
(1)
(2)
Facility Operating Income for the years ended December 31, 2007 and 2006 includes a non-cash benefit of $0.3 million and $4.1 million,
respectively, related to a reversal of an accrual established in connection with Alterra’s emergence from bankruptcy in December 2003.
Facility operating income for the year ended December 31, 2007 includes $7.0 million of charges to facility operating expenses in the quarter
ended December 31, 2007, which relates to our desire to conform our policies across all of our platforms including $5.9 million of estimated
uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risks from changes in interest rates charged on our credit facilities, other floating-rate indebtedness and lease payments subject
to floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in
market rates and prices. As of December 31, 2008, excluding our line of credit and capital and financing lease obligations, we had approximately $932.9
million of fixed rate debt, of which $930.1 is classified as long-term, $1.1 billion of variable rate debt, of which $1.0 billion is classified as long-term, and
$318.4 million of capital and financing lease obligations. As of December 31, 2008, our total fixed-rate debt and variable-rate debt outstanding had
weighted-average interest rates of 4.91%.
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We enter into certain interest rate swap agreements with major financial institutions to manage our risk on variable rate debt. Additionally, during 2008,
we entered into certain cap agreements to effectively manage our risk above certain interest rates. As of December 31, 2008, $1.3 billion, or 61.9%, of our
debt, excluding our line of credit and capital and financing lease obligations, either has fixed rates or variable rates that are subject to swap
agreements. As of December 31, 2008, $670.5 million, or 32.3%, of our debt, excluding our line of credit and capital and financing lease obligations, is
subject to cap agreements. The remaining $119.8 million, or 5.8%, of our debt is variable rate debt, not subject to any cap or swap agreements. A change
in interest rates would have impacted our interest rate expense related to all outstanding variable rate debt, excluding our line of credit and capital and
financing lease obligations, as follows: a one, five and ten percent change in interest rates would have an impact of $7.8 million, $38.8 million and $48.9
million, respectively.
As noted above, we have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate
basis, as well as to hedge anticipated future financing transactions. Pursuant to certain of our hedge agreements, we are required to secure our obligation
to the counterparty by posting cash or other collateral if the fair value liability exceeds a specified threshold. A change in the interest rates of 25 basis
points would impact our cash or other collateral by $1.6 million.
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Item 8. Financial Statements and Supplementary Data.
BROOKDALE SENIOR LIVING INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Equity for the Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
68
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69
70
71
72
73
74
76
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Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Brookdale Senior Living Inc.
We have audited the accompanying consolidated balance sheets of Brookdale Senior Living Inc. and subsidiaries (the “Company”) as of December 31,
2008 and 2007, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31,
2008. Our audits also included the financial statement schedule listed in the accompanying index to the financial statements. These financial statements
and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at
December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion
thereon.
Chicago, Illinois
February 27, 2009
/s/ Ernst & Young LLP
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Brookdale Senior Living Inc.
We have audited Brookdale Senior Living Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of the Company as of December 31, 2008 and 2007 and the related consolidated statements of operations, equity, and cash flows for each of the
three years in the period ended December 31, 2008, and our report dated February 27, 2009 expressed an unqualified opinion thereon.
Chicago, Illinois
February 27, 2009
/s/ Ernst & Young LLP
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BROOKDALE SENIOR LIVING INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)
Assets
Current assets
Cash and cash equivalents
Cash and escrow deposits – restricted
Accounts receivable, net
Deferred tax asset
Prepaid expenses and other current assets, net
Total current assets
Property, plant and equipment and leasehold intangibles, net
Cash and escrow deposits – restricted
Investment in unconsolidated ventures
Goodwill
Other intangible assets, net
Other assets, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt
Current portion of line of credit
Trade accounts payable
Accrued expenses
Refundable entrance fees and deferred revenue
Tenant security deposits
Dividends payable
Total current liabilities
Long-term debt, less current portion
Line of credit, less current portion
Deferred entrance fee revenue
Deferred liabilities
Deferred tax liability
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ Equity
Preferred stock, $.01 par value, 50,000,000 shares authorized at December 31, 2008 and 2007; no shares issued and
outstanding
Common stock, $.01 par value, 200,000,000 shares authorized at December 31, 2008 and 2007; 106,467,764 and
104,962,211 shares issued and 105,256,463 and 104,962,211 outstanding (including 3,542,801 and 3,020,341
unvested restricted shares), respectively
Additional paid-in-capital
Treasury stock, at cost; 1,211,301 shares at December 31, 2008
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
71
$
$
$
December 31,
2008
2007
$
53,973
86,723
91,646
14,677
33,766
280,785
3,694,784
29,988
28,420
109,967
231,589
73,725
4,449,258 $
$
158,476
4,453
29,105
170,366
253,647
29,965
—
646,012
2,235,000
155,000
76,410
135,947
178,647
61,641
3,488,657
100,904
76,962
66,807
13,040
34,122
291,835
3,760,453
17,989
41,520
325,453
260,534
113,838
4,811,622
18,007
—
37,137
156,253
254,582
31,891
51,897
549,767
2,119,217
198,000
77,477
119,726
266,583
61,314
3,392,084
—
—
1,053
1,690,851
(29,187)
(700,720)
(1,396)
960,601
4,449,258 $
1,050
1,752,581
—
(332,692)
(1,401)
1,419,538
4,811,622
$
Table of Contents
Revenue
Resident fees
Management fees
Total revenue
Expense
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Facility operating expense (excluding depreciation and amortization of $195,517, $222,315 and
$159,349, respectively)
General and administrative expense (including non-cash stock-based compensation expense of
$28,937, $20,113 and $26,612, respectively)
Hurricane and named tropical storms expense
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Total operating expense
Loss from operations
Interest income
Interest expense
Debt
Amortization of deferred financing costs
Change in fair value of derivatives and amortization
Loss on extinguishment of debt
Equity in loss of unconsolidated ventures
Other non-operating income
Loss before income taxes
Benefit for income taxes
Loss before minority interest
Minority interest
Net loss
Basic and diluted loss per share
Weighted average shares used in computing basic and diluted loss per share
Dividends declared per share
For the Years Ended
December 31,
2007
2008
2006
$
1,921,060
$
6,994
1,928,054
1,832,507
$
6,789
1,839,296
1,304,296
5,617
1,309,913
1,256,781
1,170,937
819,801
140,919
4,800
269,469
276,202
220,026
2,168,197
(240,143)
138,013
—
271,628
299,925
—
1,880,503
(41,207)
117,897
—
228,779
188,129
—
1,354,606
(44,693)
7,618
7,519
6,810
(147,389)
(9,707)
(68,146)
(3,052)
(861)
1,708
(459,972)
86,731
(373,241)
—
(373,241) $
(3.67) $
101,667
0.75 $
(143,991)
(7,064)
(73,222)
(2,683)
(3,386)
402
(263,632)
101,260
(162,372)
393
(161,979) $
(1.60) $
101,511
1.95 $
(97,694)
(5,061)
(38)
(1,526)
(3,705)
—
(145,907)
38,491
(107,416)
(671)
(108,087)
(1.34)
80,842
1.55
$
$
$
See accompanying notes to consolidated financial statements.
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Table of Contents
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2008, 2007 and 2006
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In-
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Balances at January 1, 2006
Dividends
Compensation expense related to restricted
stock grants
Issuance of common stock from equity
offering and to employees, net
Issuance of common stock from vested
restricted stock grants
Unvested restricted stock
Net loss
Reclassification of net gains on derivatives
into earnings
Amortization of payments from settlement of
forward interest rate swaps
Unrealized loss on derivative, net of tax
Unrealized loss on investments
Balances at December 31, 2006
Dividends
Compensation expense related to restricted
stock grants
Net loss
Reclassification of net gains on derivatives
into earnings
Amortization of payments from settlement of
forward interest rate swaps
Unrealized loss on derivative, net of tax
Other
Balances at December 31, 2007
Dividends
Compensation expense related to restricted
stock grants
Net loss
Reclassification of net gains on derivatives
into earnings
Amortization of payments from settlement of
forward interest rate swaps
Purchase of Treasury Stock
Deconsolidation of an entity pursuant to FIN
46(R)
Other
Balances at December 31, 2008
65,007
—
$
650
—
$
690,950
(134,224)
$
—
—
26,612
36,026
360
1,351,268
228
3,282
—
—
—
—
—
3
33
—
—
—
—
—
(3)
(33)
—
—
—
—
—
104,543
—
1,046
—
1,934,570
(202,136)
—
—
—
—
—
419
—
—
—
—
—
4
20,113
—
—
—
—
34
104,962
—
1,050
—
1,752,581
(77,559)
—
—
—
—
—
—
294
105,256 $
—
—
—
—
—
—
28,937
—
—
—
—
(13,287)
3
179
1,053 $ 1,690,851 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29,187)
$
(62,626)
—
$
$
1,429
—
Total
630,403
(134,224)
—
—
—
—
(108,087)
—
—
—
—
(170,713)
—
—
(161,979)
—
—
—
—
(332,692)
—
—
(373,241)
—
—
—
—
26,612
—
1,351,628
—
—
—
—
—
(108,087)
(393)
(393)
376
(2,247)
376
(2,247)
(56)
1,764,012
(202,136)
(56)
(891)
—
—
—
20,113
(161,979)
(1,680)
(1,680)
376
125
669
376
125
707
1,419,538
(77,559)
(1,401)
—
—
—
262
376
—
28,937
(373,241)
262
376
(29,187)
—
—
(29,187) $
5,212
1
(700,720) $
—
(633)
(1,396) $
(8,075)
(450)
960,601
See accompanying notes to consolidated financial statements.
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Table of Contents
BROOKDALE SENIOR LIVING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Non cash portion of loss on extinguishment of debt
Depreciation and amortization
Goodwill and asset impairment
Minority interest
(Gain) loss on sale of assets
Equity in loss of unconsolidated ventures
Distributions from unconsolidated ventures from cumulative share of net earnings
Amortization of deferred gain
Amortization of entrance fees
Proceeds from deferred entrance fee revenue
Deferred income tax benefit
Change in deferred lease liability
Change in fair value of derivatives and amortization
Non cash stock-based compensation
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets, net
Accounts payable and accrued expenses
Tenant refundable fees and security deposits
Net cash provided by operating activities
Cash Flows from Investing Activities
Decrease in lease security deposits and lease acquisition deposits, net
(Increase) decrease in cash and escrow deposits – restricted
Net proceeds from sale of property, plant and equipment
Distributions received from unconsolidated ventures
Additions to property, plant and equipment, and leasehold intangibles, net of related payables
Acquisition of assets, net of related payables and cash received
Payment on (issuance of) notes receivable, net
Investment in unconsolidated ventures
Proceeds from sale of business
Proceeds from sale of unconsolidated venture
Net cash used in investing activities
Cash Flows from Financing Activities
Proceeds from debt
Repayment of debt and capital lease obligation
Buyout of capital lease obligation
Proceeds from line of credit
Repayment of line of credit
Payment of dividends
Payment of financing costs, net of related payables
Cash portion of loss on extinguishment of debt
Other
Refundable entrance fees:
Proceeds from refundable entrance fees
Refunds of entrance fees
For the Years Ended
December 31,
2007
2008
2006
$
(373,241)
$
(161,979)
$
(108,087)
3,052
285,909
220,026
—
(2,131)
861
3,752
(4,342)
(22,025)
22,601
(89,498)
20,585
68,146
28,937
(25,150)
(14,850)
15,428
(1,293)
136,767
3,481
(21,760)
—
3,916
(189,028)
(6,731)
39,362
(2,779)
2,935
4,165
(166,439)
511,344
(255,489)
—
339,453
(378,000)
(129,455)
(14,292)
(1,240)
(2,974)
19,871
(19,150)
2,683
306,989
—
(393)
(457)
3,386
1,521
(4,342)
(19,241)
19,330
(103,180)
25,439
73,222
20,113
(6,134)
14,783
21,512
6,410
199,662
2,620
(15,002)
6,700
2,038
(169,556)
(172,101)
(11,133)
(1,985)
—
—
(358,419)
591,524
(115,253)
(51,114)
671,500
(637,000)
(196,827)
(14,012)
(2,040)
(1,010)
25,919
(19,557)
1,526
193,190
—
671
123
3,705
336
(4,345)
(8,149)
12,796
(39,267)
24,699
38
26,612
(23,022)
6,598
(4,156)
2,644
85,912
9,144
35,555
—
1,240
(68,313)
(1,968,391)
(9,850)
(2,071)
—
—
(2,002,686)
743,190
(230,177)
—
378,500
(215,000)
(104,183)
(22,404)
—
—
14,760
(9,188)
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Recouponing and payment of swap termination
Proceeds from issuance of common stock, net
Costs incurred related to initial public and follow-on equity offerings
Purchase of treasury stock
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(58,140)
—
—
(29,187)
(17,259)
(46,931)
100,904
53,973 $
(60,503)
—
—
—
191,627
32,870
68,034
100,904 $
—
1,354,063
(2,435)
—
1,907,126
(9,648)
77,682
68,034
$
See accompanying notes to consolidated financial statements.
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Table of Contents
BROOKDALE SENIOR LIVING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Organization
Brookdale Senior Living Inc. (“Brookdale”, “BSL” or the “Company”) is a leading owner and operator of senior living communities throughout the United
States. The Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest
quality service, care and living accommodations for residents. The Company owns, leases and operates retirement centers, assisted living and dementia-
care communities and continuing care retirement centers (“CCRCs”).
The Company was formed as a Delaware corporation on June 28, 2005. Under its Certificate of Incorporation, the Company was initially authorized to
issue up to 5,000,000 shares of common stock and 5,000,000 shares of preferred stock. On September 30, 2005, the Company’s Certificate of Incorporation
was amended and restated to authorize up to 200,000,000 shares of common stock and 50,000,000 shares of preferred stock.
Acquisition of American Retirement Corporation
On July 25, 2006, the acquisition of American Retirement Corporation (“ARC”) was completed. Under the terms of the merger agreement, BSL acquired all
outstanding shares of ARC for an aggregate purchase price of approximately $1.2 billion, or $33.00 per share, in cash, plus the assumption of $268.3
million of debt and capitalized lease obligations (the “ARC Merger”). In connection with the ARC Merger, RIC Coinvestment Fund LP (the “Investor”), a
fund managed by an affiliate of Fortress Investment Group (“FIG”), committed to purchase up to $1.3 billion in the aggregate of the Company’s common
stock at a price of $36.93 per share. Prior to closing the ARC Merger, the right to reduce the Investor’s commitment to $650.0 million was exercised and on
July 25, 2006, the Company issued the Investor 17,600,867 shares of common stock at $36.93 per share for aggregate net proceeds of $650.0 million. The
acquisition of ARC was recorded using the purchase method and the purchase price was allocated to ARC’s assets and liabilities based on their
estimated fair values.
On July 25, 2006, a follow-on equity offering was completed, pursuant to which 17,721,519 primary shares were issued and sold, and an existing
stockholder, Health Partners, which is an affiliate of Capital Z Partners, sold 4,399,999 shares (including 2,885,415 shares pursuant to the option granted
by Health Partners to the underwriters to purchase up to an additional 2,885,415 shares of common stock to cover over-allotments). The shares were
issued at a price of $39.50 per share. The Company did not receive any proceeds from the shares sold by Health Partners. In addition, in connection with
the acquisition of ARC, certain employees of ARC purchased 475,681 shares of common stock at $38.07 per share. Additional compensation expense of
$0.7 million was recorded based on the difference between the $38.07 purchase price and the stock price of BSL on the date of the purchase. In
connection with the follow-on equity offering, net proceeds of approximately $672.8 million, after deducting an aggregate of $24.5 million in underwriting
discounts and commissions paid to the underwriters and $2.4 million in other direct expenses incurred in connection with the offering was received by the
Company. Funds managed by affiliates of FIG, which beneficially owned approximately 65% of the Company’s common stock prior to the consummation
of the offering, did not sell any shares in the offering and after completion of the offering continued to own approximately 60% of the outstanding shares
of the Company’s common stock.
2. Summary of Significant Accounting Policies
The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting
principles (“GAAP”). The significant accounting policies are summarized below:
Principles of Consolidation
The consolidated financial statements include BSL and its wholly-owned subsidiaries Brookdale Living Communities, Inc. (“BLC”), Brookdale Senior
Living Communities, Inc. (formerly known as Alterra Healthcare Corporation) (“Alterra”), Fortress CCRC Acquisition LLC (“Fortress CCRC”) and ARC. In
December 2003, the Financial Accounting Standards Board (“FASB”) issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51 (“FIN 46R”). FIN 46R addresses the consolidation by
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business enterprises of primary beneficiaries in variable interest entities (“VIE”) as defined in the Interpretation. A company that holds variable interests
in an entity will need to consolidate the entity if its interest in the VIE is such that it will absorb a majority of the VIE’s losses and/or receive a majority of
expected residual returns, if they occur. As of December 31, 2008 and 2007, the Company had no communities considered VIEs which were consolidated
pursuant to FIN 46R. Investments in affiliated companies that the Company does not control, but has the ability to exercise significant influence over
governance and operations, are accounted for by the equity method.
The results of facilities and companies acquired are included in the consolidated financial statements from the effective date of the respective acquisition.
All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are
used for, but not limited to, the evaluation of asset impairments, the accounting for future service obligations, self-insurance reserves, performance-based
compensation, the allowance for doubtful accounts, depreciation and amortization, income taxes and any contingencies. Although these estimates are
based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from
the estimates.
Revenue Recognition
Resident Fees
Resident fee revenue is recorded when services are rendered and consist of fees for basic housing, support services and fees associated with additional
services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees
billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly
in arrears.
Entrance Fees
Certain of the Company’s communities have residency agreements which require the resident to pay an upfront fee prior to occupying the community. In
addition, in connection with the Company’s MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return
for a reduced monthly service fee. The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay
of the resident based on an actuarial valuation. The refundable portion of a resident’s entrance fee is generally refundable within a certain number of
months or days following contract termination or upon the sale of the unit, or in certain agreements, upon the resale of a comparable unit or 12 months
after the resident vacates the unit. In such instances the refundable portion of the fee is not amortized and included in refundable entrance fees and
deferred revenue.
Certain contracts require the refundable portion of the entrance fee plus a percentage of the appreciation of the unit, if any, to be refunded only upon
resale of a comparable unit (“contingently refundable”). Upon resale the Company may receive reoccupancy proceeds in the form of additional
contingently refundable fees, refundable fees, or non-refundable fees. The Company estimates the amount of reoccupancy proceeds to be received from
additional contingently refundable fees or non-refundable fees and records such amount as deferred revenue. The deferred revenue is amortized over the
life of the community and was approximately $63.4 million and $69.7 million at December 31, 2008 and 2007, respectively. All remaining contingently
refundable fees not recorded as deferred revenue and amortized are included in refundable entrance fees and deferred revenue.
All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue are classified as current liabilities.
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The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability. The balance
of the non-refundable portion is recorded as a long-term liability.
Community Fees
Substantially all community fees received are non-refundable and are recorded initially as deferred revenue. The deferred amounts, including both the
deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the
implied contractual terms of the resident lease.
Management Fees
Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage
of gross revenues (as defined).
Purchase Accounting
In determining the allocation of the purchase price of companies and communities to net tangible and identified intangible assets acquired and liabilities
assumed, the Company makes estimates of the fair value of the tangible and intangible assets acquired and liabilities assumed using information obtained
as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals. The Company allocates the purchase price of
communities to net tangible and identified intangible assets acquired and liabilities assumed based on their fair values in accordance with the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations. The determination of fair value involves the use of
significant judgment and estimation. The Company determines fair values as follows:
Current assets and current liabilities assumed are valued at carryover basis which approximates fair value.
Property, plant and equipment are valued utilizing discounted cash flow projections that assume certain future revenue and costs, and considers
capitalization and discount rates using current market conditions.
The Company allocates a portion of the purchase price to the value of resident leases acquired based on the difference between the communities valued
with existing in-place leases adjusted to market rental rates and the communities valued with current leases in place based on current contractual terms.
Factors management considers in its analysis include an estimate of carrying costs during the expected lease-up periods considering current market
conditions and costs to execute similar resident leases. In estimating carrying costs, management includes estimates of lost rentals during the lease-up
period and estimated costs to execute similar leases. The value of in-place leases is amortized to expense over the remaining initial term of the respective
leases.
Leasehold operating intangibles are valued utilizing discounted cash flow projections that assume certain future revenues and costs over the remaining
lease term. The value assigned to leasehold operating intangibles is amortized on a straight-line basis over the lease term.
Community purchase options are valued at the estimated value of the underlying community less the cost of the option payment discounted at current
market rates. Management contracts and other acquired contracts are valued at a multiple of management fees and operating income and amortized over
the estimated term of the agreement.
Long-term debt assumed is recorded at fair market value based on the current market rates and collateral securing the indebtedness.
Capital lease obligations are valued based on the present value of the minimum lease payments applying a discount rate equal to the Company’s
estimated incremental borrowing rate at the date of acquisition.
Deferred entrance fee revenue is valued at the estimated cost of providing services to residents over the terms of the current contracts to provide such
services. Refundable entrance fees are valued at cost pursuant to the resident lease plus the resident's share of any appreciation of the community unit at
the date of acquisition, if applicable.
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A deferred tax liability is recognized at statutory rates for the difference between the book and tax bases of the acquired assets and liabilities.
The excess of the fair value of liabilities assumed and cash paid over the fair value of assets acquired is allocated to goodwill.
Deferred Costs
Deferred financing and lease costs are recorded in other assets and amortized on a straight-line basis, which approximates the level yield method, over the
term of the related debt or lease.
Income Taxes
Income taxes are accounted for under the asset and liability approach which requires recognition of deferred tax assets and liabilities for the differences
between the financial reporting and tax bases of assets and liabilities. A valuation allowance reduces deferred tax assets when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. To the extent the Company’s valuation allowance is reduced or eliminated as a result
of a business combination, the reduction in the valuation allowance is recorded as part of the purchase price allocation.
Fair Value of Financial Instruments
Cash and cash equivalents, cash and escrow deposits-restricted and derivative financial instruments are reflected in the accompanying consolidated
balance sheets at amounts considered by management to reasonably approximate fair value. Management estimates the fair value of its long-term debt
using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the
indebtedness. The Company had outstanding debt with a carrying value of $2,552.9 million and $2,335.2 million as of December 31, 2008 and 2007,
respectively. The fair value of debt as of December 31, 2008 was $2,423.5 million. As of December 31, 2007, the fair value of the long-term debt
approximated its book value.
FASB Statement No. 157, Fair Value Measurement (“SFAS 157”) establishes a three-level valuation hierarchy for disclosure of fair value measurements.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial
instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The
three levels are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company’s derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily
observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.
The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any
adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations
(Note 16).
Cash and Cash Equivalents
The Company defines cash and cash equivalents as cash and investments with maturities of 90 days or less when purchased.
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Cash and Escrow Deposits - Restricted
Cash and escrow deposits - restricted consist principally of deposits required by certain lenders and lessors pursuant to the applicable agreement and
consist of the following (dollars in thousands):
Current:
Real estate taxes
Tenant security deposits
Replacement reserve and other
Subtotal
Long term:
Insurance reserves
Debt service and other deposits
Subtotal
Total
December 31,
2008
2007
$
$
$
35,855
10,175
40,693
86,723
11,346
18,642
29,988
116,711 $
35,216
10,967
30,779
76,962
8,025
9,964
17,989
94,951
As of December 31, 2008 and 2007, ten and nine communities, respectively, located in Illinois are required to make escrow deposits under the Illinois Life
Care Facility Act. As of December 31, 2008 and 2007, required deposits were $20.8 million and $15.5 million, respectively, all of which were made in the
form of letters of credit.
Accounts Receivable
Accounts receivable are reported net of an allowance for doubtful accounts, to represent the Company’s estimate of the amount that ultimately will be
realized in cash. The allowance for doubtful accounts was $13.3 million and $15.5 million as of December 31, 2008 and 2007, respectively. The adequacy of
the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of
receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance as
necessary.
Approximately 86.2% and 13.8% of the Company’s resident and healthcare revenues for the year ended December 31, 2008 were derived from private pay
customers and services covered by various third-party payor programs, including Medicare and Medicaid, respectively. Billings for services under third-
party payor programs are recorded net of estimated retroactive adjustments, if any, under reimbursement programs. Retroactive adjustments are accrued
on an estimated basis in the period the related services are rendered and adjusted in future periods or as final settlements are determined. Contractual or
cost related adjustments from Medicare or Medicaid are accrued when assessed (without regard to when the assessment is paid or
withheld). Subsequent positive or negative adjustments to these accrued amounts are recorded in net revenues when known.
Property, Plant and Equipment and Leasehold Intangibles
Property, plant and equipment and leasehold intangibles, which include amounts recorded under capital leases, are recorded at cost. Depreciation and
amortization is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
Asset Category
Buildings and improvements
Leasehold improvements
Furniture and equipment
Resident lease intangibles
Leasehold operating intangibles
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Estimated
Useful Life
(in years)
40
1 – 18
3 – 7
1 – 4
1 – 18
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Expenditures for ordinary maintenance and repairs are expensed to operations as incurred. Renovations and improvements, which improve and/or extend
the useful life of the asset, are capitalized and depreciated over their estimated useful life, or if the renovations or improvements are made with respect to
communities subject to an operating lease, over the shorter of the estimated useful life of the renovations or improvements, or the term of the operating
lease. Facility operating expense excludes depreciation and amortization directly attributable to the operation of the facility.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of long-lived assets held for use are assessed by a comparison of the carrying amount of the asset to the estimated future
undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of
the asset, the asset is considered impaired and expense is recorded in an amount required to reduce the carrying amount of the asset to fair value.
Goodwill and Intangible Assets
Goodwill is not amortized but is reviewed for impairment annually or more frequently if indicators arise. The evaluation is based upon a comparison of the
estimated fair value of the reporting unit to which the goodwill has been assigned with the reporting unit’s carrying value. The fair values used in this
evaluation are estimated based upon discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a
number of estimates and assumptions. Acquired intangible assets are initially valued at fair market value using generally accepted valuation methods
appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for
impairment if indicators of impairment arise. The evaluation of impairment is based upon a comparison of the carrying amount of the estimated future
undiscounted net cash flows expected to be generated by the asset. If estimated future undiscounted net cash flows are less than the carrying amount of
the asset, the asset is considered impaired. The impairment expense is determined by comparing the estimated fair value of the intangible asset to its
carrying value, with any shortfall from fair value recognized as an expense in the current period.
Amortization of the Company’s definite lived intangible assets are computed using the straight-line method over the estimated useful lives of the assets,
which are as follows:
Asset Category
Facility purchase options
Management contracts and other
Stock-Based Compensation
Estimated
Useful Life
(in years)
40
3 – 5
The Company adopted SFAS No. 123 (revised), Share-Based Payment (“SFAS No. 123R”), in connection with initial grants of restricted stock effective
August 2005, which were converted into shares of the Company’s restricted stock on September 30, 2005 in connection with the Company’s formation
transaction. This Statement requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date
fair value of the employee stock awards. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be
recognized when incurred.
Certain of the Company’s employee stock awards vest only upon the achievement of performance targets. SFAS No. 123R requires recognition of
compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the
amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets.
Additionally, the Company must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual
experience are monitored and estimates are updated as information is available.
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Derivative Financial Instruments
In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company entered into certain
interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future
financing transactions. All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheets at fair value. The change
in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive income (loss) depending upon whether it
has been designated and qualifies as an accounting hedge.
Prior to October 1, 2006, the Company qualified for hedge accounting on designated swap instruments pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities, with the effective portion of the change in fair value of the derivative recorded in other
comprehensive income and the ineffective portion included in the change in fair value of derivatives in the statement of operations.
On October 1, 2006, the Company elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently,
the net gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments
are being amortized to interest expense over the life of the underlying hedged debt payments. In the future, if the underlying hedged debt is extinguished
or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income. Although hedge
accounting was discontinued on October 1, 2006, some of the swap instruments remain outstanding and are carried at fair value in the consolidated
balance sheet and the change in fair value beginning October 1, 2006 has been included in the statements of operations.
Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with
major financial institutions based upon their credit rating and other factors.
Obligation to Provide Future Services
Annually, the Company calculates the present value of the net cost of future services and the use of communities to be provided to current residents of
certain of its CCRCs and compares that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of
the net cost of future services and the use of communities exceeds the non-refundable deferred revenue from entrance fees, a liability is recorded
(obligation to provide future services and use of communities) with a corresponding charge to income.
Self-Insurance Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains
general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the
Company’s current policy provides for deductibles for each and every claim ($3.0 million on or prior to December 31, 2008 and $250,000 effective January
1, 2009). As a result, the Company is, in effect, self-insured for most claims. In addition, the Company maintains a self-insured workers compensation
program and a self-insured employee medical program for amounts below excess loss coverage amounts, as defined. The Company reviews the adequacy
of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator estimates, consultants,
advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued
based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are
updated as information is available.
Community Leases
The Company, as lessee, makes a determination with respect to each of the community leases whether each should be accounted for as operating leases
or capital leases. The classification criteria is based on estimates regarding the fair value of the leased community, minimum lease payments, effective cost
of funds, the economic life of the community and certain other terms in the lease agreements. In a business combination, the Company assumes the lease
classification previously determined by the prior lessee absent a modification, as determined by
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SFAS No. 13, Accounting for Leases, in the assumed lease agreement. Payments made under operating leases are accounted for in the Company’s
statement of operations as lease expense for actual rent paid plus or minus a straight-line adjustment for estimated minimum lease escalators and
amortization of deferred gains in situations where sale-leaseback transactions have occurred. For communities under capital lease and lease financing
obligation arrangements, a liability is established on the Company’s balance sheet representing the present value of the future minimum lease payments
and a corresponding long-term asset is recorded in property, plant and equipment and leasehold intangibles in the consolidated balance sheet. The asset
is depreciated over the remaining lease term unless there is a bargain purchase option in which case the asset is depreciated over the useful life.
Leasehold improvements purchased during the term of the lease are amortized over the shorter of their economic life or the lease term.
All of the Company’s leases contain fixed or formula based rent escalators. To the extent that the escalator increases are tied to a fixed index or rate, lease
payments are accounted for on a straight-line basis over the life of the lease. In addition, all rent-free or rent holiday periods are recognized in operating
leases on a straight-line basis over the leased term, including the rent holiday period.
Sale-leaseback accounting is applied to transactions in which an owned community is sold and leased back from the buyer. Under sale-leaseback
accounting, the Company removes the community and related liabilities from the balance sheet. Gain on the sale is deferred and recognized as a reduction
of rent expense for operating leases and a reduction of interest expense for capital leases.
Treasury Stock
The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.
Dividends
On December 30, 2008, the Company’s board of directors voted to suspend the Company’s quarterly cash dividend indefinitely.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, Fair Value Measurements (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the
United States and expands disclosure about fair value measurements. The Company adopted SFAS 157 as required effective January 1, 2008. The
adoption of SFAS 157 did not have a material effect on the consolidated financial statements. See Note 16 in the notes to the consolidated financial
statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115 (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other
items at fair value that are not currently required to be measured at fair value. This Statement is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. SFAS 159 is effective January 1, 2008, but the Company has decided not to adopt this optional standard.
In June 2007, the Emerging Issues Task Force (“EITF”) ratified EITF 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards (“EITF 06-11”). EITF 06-11 requires that a realized income tax benefit from dividends or dividend equivalents that are charged to retained
earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options
should be recognized as an increase to additional paid-in-capital. The amount recognized in additional paid-in capital for the realized income tax benefit
from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment
awards. EITF 06-11 is effective for fiscal years after December 15, 2007 (Note 18). EITF 06-11 will not have an effect on the Company so long as the
Company is not paying dividends.
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In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R was issued to improve
the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business
combination and its effects. This Statement establishes principles and requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. The Statement is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB
No. 51 (“SFAS 160”). SFAS 160 was issued to improve the relevance, comparability, and transparency of the financial information that a reporting entity
provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 160 to have a material impact on the consolidated financial statements.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“SFAS 157-2”), which delays the effective date of SFAS
157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually). SFAS 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 and as a result is effective
for the Company beginning January 1, 2009. The Company does not expect the adoption of this FSP to have a material effect on the consolidated
financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB
Statement No. 133 (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of Statement 133 with the intent to provide users of
financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after November 15, 2008. The Company will adopt SFAS 161 in January 2009 and does not expect the adoption to have a material impact
on the consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and
provides for enhanced disclosures regarding intangible assets. The intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The disclosure provisions are effective as
of the adoption date and the guidance for determining the useful life applies prospectively to all intangible assets acquired after the effective
date. Adoption of FSP FAS 142-3 had no impact on the consolidated financial statements.
In May 2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies
the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. SFAS 162 will be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. The Company does not expect that SFAS 162 will result in a change in its current practices.
In June 2008, the FASB issued Staff Position EITF 03-06-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (“FSP EITF 03-06-1”). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per
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share pursuant to the two-class method in SFAS No. 128, Earnings per Share. FSP EITF 03-06-1 is effective for fiscal years beginning after December 15,
2008, and interim periods within those years and requires all prior-period earnings per share data to be adjusted retrospectively. FSP EITF 03-06-1 will not
have an effect on the Company so long as the Company is not paying dividends.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FAS
157-3”). FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and became effective upon issuance, including prior periods for
which financial statements have not been issued. The adoption of FAS 157-3 did not have a material impact on the consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s
consolidated financial position or results of operations. Operating results of communities are reflected in the results of the segment in which they are
classified as of the end of the period. Prior period results are recast to conform to the current period-end roll-up of communities by segment.
3. Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted
EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. For purposes of calculating basic and diluted
earnings per share, vested restricted stock awards are considered outstanding. Under the treasury stock method, diluted EPS reflects the potential
dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of
common stock. Potentially dilutive common stock equivalents include unvested restricted stock.
During fiscal 2008, 2007 and 2006 the Company reported a consolidated net loss. As a result of the net loss, unvested restricted stock awards were
antidilutive for the year and were not included in the computation of diluted weighted average shares. The weighted average restricted stock grants
excluded from the calculations of diluted net loss per share was 1.7 million for the year ended December 31, 2008.
4. Acquisitions
The Company’s financial results are impacted by the timing, size and number of acquisitions and leases the Company completes in a period. The number
of facilities owned or leased by the Company decreased by one during the year ended December 31, 2008 and increased by three during the year ended
December 31, 2007. The number of facilities owned or leased was unchanged by the Company’s acquisition of joint venture partner interests, its
acquisition of remaining portions of owned facilities and its acquisition of service businesses. The results of facilities and companies acquired are
included in the consolidated financial statements from the effective date of the acquisition.
2008 Acquisitions
During the year ended December 31, 2008 the Company purchased 11 home health agencies as part of its growth strategy for an aggregate purchase price
of approximately $6.7 million. The entire purchase price of the acquisitions has been ascribed to an indefinite useful life intangible and recorded on the
consolidated balance sheet under other intangible assets, net.
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2007 Acquisitions
Seller
Closing Date
Purchase
Price
Excluding
Fees,
Expenses and
Assumption of
Debt
(dollars in
thousands)
Segment
McClaren Medical Management, Inc. and FP Flint, LLC
January 24, 2007
$
3,900
Assisted Living
American Senior Living of Jacksonville-SNF, LLC
February 1, 2007
6,800
CCRCs
1st Choice Home Health, Inc.
February 15, 2007
3,000
CCRCs,
Assisted Living and
Retirement Centers
Health Care Property Investors, Inc.
February 28, 2007
9,500
Assisted Living
Chancellor Health Care of California L.L.C.
Seminole Nursing Pavilion and Seminole Properties
Cleveland Retirement Properties, LLC and Countryside ALF, LLC
Paradise Retirement Center, L.P.
Darby Square Property, Ltd and Darby Square Services, LLC
Health Care REIT, Inc.
West Oak Associates, L.P.
Total 2007 Acquisitions
April 1, 2007
April 4, 2007
April 18, 2007
May 31, 2007
July 1, 2007
August 31, 2007
October 12, 2007
10,800
Retirement Centers
51,100
CCRCs
102,000
CCRCs
15,300
Retirement Centers
7,500
CCRCs
9,800
Assisted Living
3,900
Retirement Centers
$
223,600
On January 24, 2007, the Company acquired the interests held by its joint venture partners in a facility located in Flint, Michigan for approximately $3.9
million. In connection with the acquisition, the Company obtained $12.6 million of first mortgage financing bearing interest at LIBOR plus 1.15% payable
interest only through February 1, 2012 and also entered into interest rate swaps to convert the loan from floating to fixed.
On February 1, 2007, the Company acquired the skilled nursing portion of a CCRC facility located in Jacksonville, Florida for approximately $6.8 million.
The assisted living and retirement centers portions of the facility were acquired in 2006 by the Company. In connection with the acquisition, the
Company assumed a first mortgage note secured by the property in the amount of $3.7 million. The note bears interest at 6.10% with principal and interest
payable until maturity on September 1, 2039.
On February 15, 2007, the Company acquired certain home health care assets for approximately $3.0 million. The purchase price was assigned entirely to
intangible assets (Note 7).
On February 28, 2007, the Company acquired a previously leased facility in Richmond Heights, Ohio for approximately $9.5 million.
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Effective as of April 1, 2007, the Company acquired the leasehold interests of three assisted living facilities located in California for approximately $10.8
million.
On April 4, 2007, the Company purchased the real property underlying an entrance fee continuing care retirement community located in Tampa, Florida for
an aggregate purchase price of approximately $51.1 million. The community consists of retirement centers retirement apartments, a skilled nursing facility
and an assisted living facility. The Company previously managed this community pursuant to a cash-flow management agreement and accounted for this
community as a capital lease.
On April 18, 2007, the Company acquired two facilities located in Ohio and North Carolina for approximately $102.0 million. The facilities were previously
operated by the Company under long term operating lease agreements.
On May 31, 2007, the Company acquired a facility in Phoenix, Arizona in which it held partnership interests for approximately $15.3 million.
On July 1, 2007, the Company acquired the skilled nursing portion of a CCRC facility located in Lexington, Kentucky for approximately $7.5 million. The
assisted living and retirement centers portions of the facility are operated pursuant to an operating lease previously entered into by the Company.
On August 31, 2007, the Company acquired three facilities located in South Carolina and Oklahoma for approximately $9.8 million. The facilities were
previously operated by the Company under long term operating lease agreements.
On October 12, 2007, the Company acquired one facility located in Michigan in which it held partnership interests for approximately $3.9 million.
The above acquisitions were accounted for using the purchase method of accounting and the purchase prices were allocated to the associated assets
and liabilities based on their estimated fair values. The Company has made purchase price allocations for these transactions resulting in approximately
$3.1 million of intangible assets (Note 7) being recorded in the CCRCs segment.
5. Investment in Unconsolidated Ventures
The Company had investments in unconsolidated joint ventures ranging from 10% to 25% in six entities for the year ended December 31, 2008 and from
10% to 49% in seven entities for the years ended December 31, 2007 and 2006. The Company sold its investment in one joint venture during the third
quarter of 2008 for $4.2 million, the loss on sale of which is reported in other non-operating income in the consolidated statements of operations.
Combined summarized financial information of the unconsolidated joint ventures accounted for using the equity method as of December 31, and for the
years then ended are as follows (dollars in thousands):
Statement of Operations Data
Total revenue
Expense
Facility operating expense
Depreciation and amortization
Interest expense
Other expense
Total expense
Interest income
Net income (loss)
87
2008
2007
2006
$
113,246 $
133,103 $
88,518
73,126
17,186
17,975
2,475
110,762
3,932
6,416 $
88,641
21,557
22,347
2,959
135,504
1,717
(684) $
60,384
13,307
19,128
4,616
97,435
339
(8,578)
$
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Balance Sheet Data
Cash and cash equivalents
Property, plant and equipment, net
Other
Total assets
Accounts payable and accrued expenses
Long-term debt
Members’ equity
Total liabilities and members’ equity
Members’ equity consists of:
Invested capital
Cumulative net income (loss)
Cumulative distributions
Members’ equity
2008
2007
$
$
$
$
$
$
$
5,662
492,920
132,261
630,843 $
$
108,441
335,678
186,724
630,843 $
$
288,376
16,572
(118,224)
186,724 $
7,102
536,356
123,492
666,950
86,858
304,688
275,404
666,950
332,874
(10,719)
(46,751)
275,404
6. Property, Plant and Equipment and Leasehold Intangibles, Net
As of December 31, 2008 and 2007, net property, plant and equipment and leasehold intangibles, which include assets under capital leases, consisted of
the following (dollars in thousands):
Land
Buildings and improvements
Furniture and equipment
Resident and operating lease intangibles
Construction in progress
Assets under capital and financing leases
Accumulated depreciation and amortization
Property, plant and equipment and leasehold intangibles, net
$
2008
$
253,453
2,624,544
277,680
607,256
96,903
555,872
4,415,708
(720,924)
$ 3,694,784 $
2007
259,336
2,585,751
223,475
596,623
65,879
517,506
4,248,570
(488,117)
3,760,453
Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives and are tested for
impairment whenever indicators of impairment arise.
During the year ended December 31, 2008, the Company evaluated property, plant and equipment and leasehold intangibles for impairment. Through
December 31, 2008, $5.0 million of non-cash charges were recorded in the Company’s operating results and shown within goodwill and asset impairment
in the accompanying consolidated statements of operations. These charges are reflected as a decrease to the gross carrying value of the asset. The
impairment charges are primarily due to lower than expected performance of the underlying business. Fair value was determined based upon the
estimated fair value per unit of the underlying communities.
For the years ended December 31, 2008, 2007 and 2006, the Company recognized depreciation and amortization expense on its property, plant and
equipment and leasehold intangibles of $242.8 million, $251.2 million and $155.1 million, respectively.
Future amortization expense for resident and operating lease intangibles is estimated to be as follows (dollars in thousands):
Year Ending December 31,
2009
2010
2011
2012
88
Future
Amortization
44,029
$
42,484
40,700
39,838
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2013
Thereafter
Total
7. Goodwill and Other Intangible Assets, Net
37,949
150,227
355,227
$
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on October 1, 2002 and tests goodwill for impairment annually or whenever
indicators of impairment arise. During the fourth quarter of fiscal 2008, the Company performed its annual impairment review of goodwill allocated to its
operating segments. This review resulted in a charge of $215.0 million related to goodwill recorded on the CCRC segment and is recorded as a component
of operating results and shown within goodwill and asset impairment in the accompanying consolidated statement of operations. The impairment charge
is non-cash in nature. The Company determined the fair value of the reporting unit based on estimates of future cash flows developed by
management. In determining the amount of goodwill impairment, the Company estimated fair value using estimated cash flows of the underlying
businesses to value significant assets of the reporting unit. The impairment charge was primarily driven by adverse equity market conditions intensifying
in the fourth quarter of 2008 that caused a decrease in current market multiples and the Company’s stock price at December 31, 2008 compared with the
Company’s stock price at September 30, 2008. The Company also evaluated all long-lived depreciable assets using the same cash flow data used to
evaluate goodwill and determined that the undiscounted cash flows exceeded the carrying value of the assets for all except for four communities within
the Assisted Living segment. As a result, a non-cash asset impairment charge of $5.0 million was recorded for the quarter ended December 31,
2008. During the years ended December 31, 2007 and 2006, no goodwill impairments were recognized.
Following is a summary of changes in the carrying amount of goodwill for the year ended December 31, 2008 presented on an operating segment basis
(dollars in thousands):
Balance at December 31, 2007
Impairment
Adjustments
Balance at December 31, 2008
Retirement
Centers
Assisted
Living
CCRCs
Total
$
$
7,642 $
—
(487)
7,155 $
102,812 $
—
—
102,812 $
214,999 $
(214,999)
—
— $
325,453
(214,999)
(487)
109,967
Intangible assets with definite useful lives are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise.
The following is a summary of other intangible assets at December 31, 2008 and 2007 (dollars in thousands):
December 31, 2008
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
December 31, 2007
Accumulated
Amortization
Community purchase options
Management contracts and other
Home health licenses
Total
$
$
147,682
158,041
10,130
315,853
$
$
(6,457) $
(77,807)
—
(84,264) $
141,225 $
80,234
10,130
231,589 $
147,682 $
158,048
3,399
309,129 $
(2,773) $
(45,822)
—
(48,595) $
Net
144,909
112,226
3,399
260,534
Amortization expense related to definite-lived intangible assets for the twelve months ended December 31, 2008, 2007 and 2006 was $35.7 million, $34.5
million and $14.1 million, respectively.
Estimated amortization expense related to intangible assets with definite lives at December 31, 2008, for each of the years in the five-year period ending
December 31, 2013 and thereafter is as follows (dollars in thousands):
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Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total
8. Other Assets
Other assets consist of the following components as of December 31, (dollars in thousands):
Deferred costs
Notes receivable
Lease security deposits
Other
Total
Future
Amortization
35,268
$
34,829
21,208
3,690
3,690
122,774
221,459
$
2008
2007
$
25,244
22,168
19,561
6,752
73,725 $
22,478
59,528
23,042
8,790
113,838
$
$
9. Debt
Long-term Debt, Capital Leases and Financing Obligations
Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):
Mortgage notes payable due 2009 through 2039; weighted average interest at rates of 5.33% in 2008 (weighted
average interest rate 6.57% in 2007)
December 31,
2008
2007
$
1,246,204
$
853,694
Mortgages payable, due from 2009 through 2038; weighted average interest rate of 8.38% for the four months ended
April 30, 2008, the date of repayment (weighted average interest rate of 7.01% in 2007)
—
74,549
$150,000 Series A notes payable, secured by five facilities, bearing interest at LIBOR plus 0.88% effective August
2006 (3.05% prior to that date), payable in monthly installments of interest only until August 2011 and payable in
monthly installments of principal and interest through maturity in August 2013, and secured by a $7.0 million
guaranty by BLC and a $3.0 million letter of credit
Mortgages payable due 2012, weighted average interest rate of 5.64% (weighted average interest rate of 5.64% in
2007), payable interest only through July 2010 and payable in monthly installments of principal and interest
through maturity in July 2012 secured by the underlying assets of the portfolio
Mortgages payable due 2010, bearing interest at LIBOR plus 2.25%, payable in monthly installments of interest only
through the first quarter of 2008, the dates of repayment, secured by the underlying assets of the portfolio
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae (weighted average interest rates of 4.40% and 5.03%
at December 31, 2008 and 2007, respectively), due 2032 secured by the underlying assets of the portfolio,
payable interest only until maturity
Capital and financing lease obligations payable through 2020; weighted average interest rate of 8.84% in 2008
(weighted average interest rate of 8.97% in 2007)
Mortgage note, bearing interest at a variable rate of LIBOR plus 0.70%, payable interest only through maturity in
August 2012. The note is secured by 15 of the Company’s facilities and a $11.5 million guaranty by the
Company
150,000
150,000
212,407
—
100,841
318,440
212,407
105,756
100,841
299,228
315,180
325,631
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Construction financing due 2011 through 2023; weighted average interest rate of 6.02% in 2008 (weighted average
interest rate of 8.5% in 2007)
Mezzanine loan payable to Brookdale Senior Housing, LLC joint venture with respect to The Heritage at Gaines
Ranch facility, payable to the extent of all available cash flow (as defined)
Total debt
Less current portion
Total long-term debt
50,404
2,379
—
2,393,476
158,476
2,235,000 $
12,739
2,137,224
18,007
2,119,217
$
The annual aggregate scheduled maturities of long-term debt obligations outstanding as of December 31, 2008 are as follows (dollars in thousands):
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total obligations
Less amount representing interest (8.84%)
Total
Long-term
Debt
$
$
$
139,619
11,742
321,564
868,358
476,254
257,499
2,075,036
—
2,075,036 $
Capital and
Financing
Lease
Obligations
Total Debt
$
46,710
48,792
50,101
49,154
48,418
288,650
531,825
(213,385)
318,440 $
186,329
60,534
371,665
917,512
524,672
546,149
2,606,861
(213,385)
2,393,476
In accordance with applicable accounting pronouncements, as of December 31, 2008, the Company’s consolidated financial statements reflect
approximately $158.5 million of non-recourse debt obligations due within the next 12 months.
Although certain of the Company’s debt obligations are scheduled to mature on or prior to December 31, 2009, the Company has the option, subject to
the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $131.0 million of
certain non-recourse mortgages payable included in current maturities of debt until 2011, as the instruments associated with these mortgages payable
provide that the Company can extend the respective maturity dates for up to two terms of 12 months each from the existing maturity dates.
In addition to the foregoing maturities, as of December 31, 2008, the Company had an available secured line of credit of $245.0 million (including a $70.0
million letter of credit sublimit), an associated letter of credit facility of up to $80.0 million, and separate letter of credit facilities of up to $42.5 million in the
aggregate. The line of credit bore interest at the base rate plus 3.0% or LIBOR plus 4.0%, at the Company’s election, and was scheduled to mature on
May 15, 2009. The Company was required to pay fees ranging from 2.5% to 4.0% of the amount of any outstanding letters of credit issued under the
associated letter of credit facility and is required to pay a fee of 2.5% of the amount of any outstanding letters of credit issued under the separate letter of
credit facilities.
As of December 31, 2008, $159.5 million was drawn on the revolving loan facility and $149.7 million of letters of credit had been issued under letter of
credit facilities. Included in the $149.7 million of letters of credit outstanding at December 31, 2008 is $32.2 million of duplicative letters of credit posted
with counterparties that were in process of being returned. As of February 27, 2009, these duplicative letters of credit were returned and are no longer
outstanding.
On February 27, 2009, the Company entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent,
Banc of America Securities LLC, as sole lead arranger and book manager, and the several lenders from time to time parties thereto. The amended credit
agreement amended and
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restated the Company’s existing $245.0 million secured line of credit and terminated the associated $80.0 million letter of credit facility.
The amended credit agreement consists of a $230.0 million revolving loan facility with a $25.0 million letter of credit sublimit and is scheduled to mature on
August 31, 2010. Pursuant to the terms of the amended credit agreement, the Company will be required to make mandatory prepayments of (a) 65% of the
Company’s Excess Cash Flow (as defined in the amended credit agreement) for each fiscal quarter beginning with the first fiscal quarter of 2009, (b) 85%
of the Company’s net cash proceeds from refinancings, (c) 100% of the Company’s net cash proceeds from the issuance of equity (subject to certain
exceptions), and (d) 100% of the Company’s net cash proceeds from asset dispositions (subject to certain exceptions and limited to 85% in the case of
sale-leaseback transactions and dispositions of joint venture interests). The revolving loan commitment will be permanently reduced in a corresponding
amount in connection with each mandatory prepayment, provided the commitment reduction with respect to any issuance of equity is limited to 65% of
such net cash proceeds. To the extent that the revolving loan commitment has not been permanently reduced either voluntarily or as a result of
mandatory prepayments, the revolving loan commitment will be further reduced as of the dates below to the following aggregate amounts:
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
$220.0 million
$200.0 million
$180.0 million
$155.0 million
$130.0 million
$75.0 million
Pursuant to the terms of the amended credit agreement, certain of the Company’s subsidiaries, as guarantors, will guarantee obligations under the
amended credit agreement and the other loan documents. Further, in connection with the amended credit agreement, (i) the Company and certain
guarantors executed and delivered a Pledge Agreement in favor of the administrative agent for the banks and other financial institutions from time to time
parties to the amended credit agreement, pursuant to which such guarantors pledged certain assets for the benefit of the secured parties as collateral
security for the payment and performance of the Company’s obligations under the amended credit agreement and the other loan documents and (ii)
certain guarantors granted mortgages and executed and delivered a Security Agreement, in each case, in favor of the administrative agent for the banks
and other financial institutions from time to time parties to the amended credit agreement encumbering certain real and personal property of such
guarantors. The collateral includes, among other things, certain real property and related personal property owned by the guarantors, equity interests in
certain of the Company’s subsidiaries, all related books and records and, to the extent not otherwise included, all proceeds and products of any and all of
the foregoing.
At the option of the Company, amounts drawn under the revolving loan facility will generally bear interest at either (i) LIBOR plus a margin of 7.0% or (ii)
the greater of (a) the Bank of America prime rate or (b) the Federal Funds rate plus 0.5%, plus a margin of 7%. For purposes of determining the interest
rate, in no event shall the base rate or LIBOR be less than 3.0%. In connection with the loan commitments, the Company will pay a quarterly commitment
fee of 1.0% per annum on the average daily amount of undrawn funds. The Company will also be required to pay a fee equal to 7.0% of the amount of
any issued and outstanding letters of credit; provided, with respect to drawable amounts that have been cash collateralized, the letter of credit fee shall
be payable at a rate per annum equal to 2.0%.
The amended credit agreement contains typical representations and covenants for loans of this type, including restrictions on the Company’s ability to
pay dividends, make distributions, make acquisitions, incur capital expenditures, incur new liens or repurchase shares of the Company’s common stock.
The amended credit agreement also contains financial covenants, including covenants with respect to maximum consolidated adjusted leverage, minimum
consolidated fixed charge coverage, minimum tangible net worth, and maximum total capital expenditures. A violation of any of these covenants
(including any failure to remain in compliance with any financial covenants contained therein) could result in a default under the amended credit
agreement, which would result in termination of all commitments and loans under the amended credit agreement and all other amounts owing under the
amended credit agreement and certain other loan agreements becoming immediately due and payable.
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After giving effect to the amended credit facility and other transactions completed subsequent to year-end, as of February 27, 2009, the Company has an
available secured line of credit of $230.0 million (including a $25.0 million letter of credit sublimit) and separate letter of credit facilities of up to $48.5
million in the aggregate. As of February 27, 2009, $195.0 million was drawn on the revolving loan facility and $71.7 million of letters of credit had been
issued under the letter of credit facilities.
Since the amended credit facility matures on August 31, 2010, amounts drawn against the line of credit as of December 31, 2008 have been classified as a
long-term liability on the consolidated balance sheet to the extent of the revolving loan commitment availability under the amended credit facility at
December 31, 2009, with the $4.5 million remaining amount classified as a current liability.
On January 25, 2008, the Company financed two previously acquired communities with $47.3 million of first mortgage financing bearing interest at LIBOR
plus 1.8% payable interest only through January 25, 2011. The initial draw on the loan was $37.6 million. The Company entered into interest rate swaps
to convert the loan from floating to fixed. The loan is secured by the underlying properties.
On February 15, 2008, the Company financed a previously acquired community with $46.0 million of first mortgage financing bearing interest at 6.21%
payable interest only through August 5, 2012. The loan is secured by the underlying property.
On March 13, 2008, the Company financed a previously acquired community with $64.1 million of first mortgage financing bearing interest initially at 5.5%
and adjusted monthly commencing on May 1, 2008. The adjusted rate is calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The note is
payable interest only through April 1, 2011. The Company entered into interest rate swaps to convert the loan from floating to fixed. The loan is secured
by the underlying property.
On March 27, 2008, the Company financed a previously acquired community with $20.0 million of first mortgage financing bearing interest initially at 5.5%
and adjusted monthly commencing on May 1, 2008. The adjusted rate is calculated as LIBOR plus 2.45%, but will not be less than 5.45%. The note is
payable interest only through April 1, 2011. The Company entered into interest rate swaps to convert the loan from floating to fixed. The loan is secured
by the underlying property.
The financings entered into on January 25, 2008, February 15, 2008, March 13, 2008 and March 27, 2008 were all related to the same portfolio. In
conjunction with these refinancings, the Company repaid $105.8 million of existing debt.
On March 26, 2008, the Company obtained $119.4 million of first mortgage financing bearing interest at 5.41%. The debt matures on April 1, 2013, with one
extension term of up to five years from the maturity date. The loan is secured by 19 of the Company’s communities, with an additional loan commitment
not to exceed $6.0 million in connection with the addition of a property into the collateral pool. In conjunction with the financing, the Company repaid
$71.2 million of existing debt. The net proceeds from the transaction were used to pay down amounts drawn against the Company’s revolving credit
facility and fund other working capital needs.
On April 4, 2008, the Company entered into a construction loan agreement for up to $99.0 million to finance a portion of construction on a previously
acquired community. As of December 31, 2008, $30.1 million has been drawn against this loan. Future advances will be disbursed based on satisfaction
of agreed upon conditions. The note bears interest at the LIBOR rate or a base rate plus an applicable margin and is payable interest only with the
principal due on April 4, 2013. The loan is secured by the underlying property, with an additional loan commitment not to exceed $10.0 million. In
conjunction with the financing, the Company repaid $10.5 million of existing debt.
On April 30, 2008, the Company obtained an additional $6.0 million loan related to the March 26, 2008 financing and repaid $3.3 million of existing debt on
the property added into the collateral pool. All terms of the debt remain the same as the original first mortgage financing.
On June 3, 2008, the Company obtained $50.0 million of third mortgage financing bearing interest at 6.07%. The debt matures on May 1, 2013 and is
secured by the underlying properties. The net proceeds from the transaction
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were used to pay down amounts drawn against the Company’s revolving credit facility and fund other working capital needs.
On June 12, 2008, the Company obtained $87.1 million of second mortgage financing bearing interest at 6.20%. The debt matures on August 1, 2013. The
loan is secured by the underlying property. The net proceeds from the transaction were used to pay down amounts drawn against the Company’s
revolving credit facility and fund other working capital needs.
On June 30, 2008, the Company entered into a 15 year lease agreement related to a community previously managed by the Company. The Company has
the right to renew the lease for an additional 15 year term upon satisfaction of certain conditions. The lease contains a purchase option deemed to be a
bargain purchase option. Consequently, the lease has been categorized as a capital lease, which resulted in the recognition of $34.5 million of property,
plant and equipment and leasehold intangibles, net, and a corresponding $34.5 million capital lease obligation.
On August 28, 2008, the Company obtained $8.4 million of second mortgage financing bearing interest at 6.49%. The debt matures on February 1, 2013.
The loan is secured by the underlying property. The net proceeds from the transaction were used to pay down amounts drawn against the Company’s
revolving credit facility and fund other working capital needs.
On October 21, 2008, the Company entered into a First Modification Agreement which extends the maturity date on $33.0 million of debt due on June 30,
2009 as of December 31, 2008 to June 30, 2011 and obtained the right to extend the maturity date for two additional one-year periods. As such, the
Company has recorded the debt as long-term as of December 31, 2008.
On January 30, 2009, the Company amended and restated a $52.6 million first mortgage loan, secured by the underlying properties, which was payable
interest only through maturity in March 2009. Pursuant to the amendment, the maturity date has been extended to March 31, 2011. The amended and
restated loan bears interest at LIBOR plus 4.0% and requires principal amortization. In connection with the amendment, the Company made a $3.0 million
payment to reduce the outstanding principal amount of the loan. The loan has been classified as a long-term liability on the consolidated balance sheet
other than the related principal amounts paid and scheduled to be paid in 2009 which have been classified as a current liability.
On February 25, 2009, the Company amended a $41.0 million first mortgage loan, secured by the underlying properties, which was payable interest only
through maturity in June 2009. Pursuant to the amendment, the maturity date has been extended to June 2011. The amended loan is evidenced by two
promissory notes, the first of which is in the principal amount of $26.0 million and bears interest at LIBOR plus 3.0%. The second promissory note is in
the amount of $15.0 million and bears interest at LIBOR plus 5.6%. Both notes require principal amortization. In connection with the amendment, the
Company made a $2.0 million payment to reduce the outstanding principal amount of the loan. The loan has been classified as a long-term liability on the
consolidated balance sheet other than the related principal amounts paid and scheduled to be paid in 2009 which have been classified as a current
liability.
As of December 31, 2008, the Company is in compliance with the financial covenants of its outstanding debt.
In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. Interest rate protection and swap
agreements were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing
transactions. Pursuant to the hedge agreements, the Company is required to secure its obligation to the counterparty if the fair value liability exceeds a
specified threshold. Cash collateral pledged to the Company’s counterparty was $13.9 million and $5.0 million as of December 31, 2008 and 2007,
respectively.
All derivative instruments are recognized as either assets or liabilities in the consolidated balance sheet at fair value. The change in mark-to-market of the
value of the derivative is recorded as an adjustment to income or other comprehensive loss depending upon whether it has been designated and qualifies
as an accounting hedge.
Derivative contracts are not entered into for trading or speculative purposes. Furthermore, the Company has a policy of only entering into contracts with
major financial institutions based upon their credit rating and other
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factors. Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a
specified credit rating.
The following table summarizes the Company’s swap instruments at December 31, 2008 (dollars in thousands):
Current notional balance
Highest possible notional
Lowest interest rate
Highest interest rate
Average fixed rate
Earliest maturity date
Latest maturity date
Weighted average original maturity
Estimated liability fair value (included in other liabilities at December 31, 2008)
Estimated asset fair value (included in other assets at December 31, 2008)
The following table summarizes the Company’s cap instruments at December 31, 2008 (dollars in thousands):
Current notional balance
Highest possible notional
Lowest interest cap rate
Highest interest cap rate
Average fixed cap rate
Earliest maturity date
Latest maturity date
Weighted average original maturity
Estimated liability fair value (included in other liabilities at December 31, 2008)
Estimated asset fair value (included in other assets at December 31, 2008)
$
$
351,840
351,840
3.24%
4.47%
3.74%
2011
2014
5.0 years
(20,931)
—
$
$
$
$
670,521
670,521
4.96%
6.50%
6.02%
2011
2012
4.0 years
—
350
$
$
Prior to October 1, 2006, the Company qualified for hedge accounting on designated swap instruments pursuant to SFAS No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities, with the effective portion of the change in fair value of the derivative recorded in other
comprehensive income and the ineffective portion included in the change in fair value of derivatives in the statement of operations.
On October 1, 2006, the Company elected to discontinue hedge accounting prospectively for the previously designated swap instruments. Consequently,
the net gains and losses accumulated in other comprehensive income at that date of $1.3 million related to the previously designated swap instruments
are being amortized to interest expense over the life of the underlying hedged debt payments. In the future, if the underlying hedged debt is extinguished
or refinanced, the remaining unamortized gain or loss in accumulated other comprehensive income will be recognized in net income. Although hedge
accounting was discontinued on October 1, 2006, some of the swap instruments remain outstanding and are carried at fair value in the consolidated
balance sheet and the change in fair value beginning October 1, 2006 has been included in the statements of operations.
During the year ended December 31, 2008, the Company terminated 23 swap and cap agreements with a total notional amount of $1.1 billion. Notional
amounts of $726.5 million were recouponed at more favorable interest rates and one new swap agreement with a notional amount of $108.5 million was
entered into. The Company also entered into two new interest rate cap agreements with a notional amount of $445.2 million. In conjunction with these
transactions, $58.6 million was paid to the respective counterparties and the Company recorded a $1.6 million receivable and a $0.4 million payable. The
Company recorded a $1.6 million reserve on the aforementioned receivable as the counterparty to the swap which originated the receivable has filed for
protection under Chapter 11 of the Bankruptcy Code. The reserve was included in the change in fair value of derivatives and amortization in the
condensed consolidated statement of operations.
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10. Accrued Expenses
Accrued expenses consist of the following components as of December 31, (dollars in thousands):
Salaries and wages
Real estate taxes
Insurance reserves
Vacation
Lease payable
Interest
Income taxes
Other
Total
11. Facility Operating Leases
2008
2007
$
$
$
43,346
30,829
27,516
18,504
7,952
7,397
2,005
32,817
170,366 $
36,506
25,661
24,138
18,737
7,913
6,881
2
36,415
156,253
The Company has entered into sale leaseback and lease agreements with certain real estate investment trusts (REITs). Under these agreements facilities
are either sold to the REIT and leased back or a long-term lease agreement is entered into for the facilities. The initial lease terms vary from 10 to 20 years
and include renewal options ranging from 5 to 30 years. The Company is responsible for all operating costs, including repairs, property taxes and
insurance. The substantial majority of the Company’s lease arrangements are structured as master leases. Under a master lease, numerous facilities are
leased through an indivisible lease. The Company typically guarantees its performance and the lease payments under the master lease and is subject to
net worth, minimum capital expenditure requirements per facility per annum and minimum lease coverage ratios. Failure to comply with these covenants
could result in an event of default. Certain leases contain cure provisions generally requiring the posting of an additional lease security deposit if the
required covenant is not met.
As of December 31, 2008 and 2007, the Company operated 358 and 357 facilities, respectively, under long-term leases (298 operating leases and 60 capital
and financing leases at December 31, 2008). The remaining base lease terms vary from 1.3 to 39 years and generally provide for renewal, extension and
purchase options. The Company expects to renew, extend or exercise purchase options in the normal course of business; however, there can be no
assurance that these rights will be exercised in the future.
One lease required posting of a lease security deposit in an interest bearing account at closing. The lease security deposit will be released upon
achieving certain lease coverage ratios. The Company agreed to spend a minimum of $450 per unit per year on capital improvements of which the lessor
will reduce the security deposit by the same amount up to $600 per unit, or $2.7 million per year. For the years ended December 31, 2008, 2007 and 2006, a
release of $2.7 million, $2.4 million and $2.7 million, respectively, was received from the lease security deposit.
A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows (dollars in thousands):
Cash basis payment
Straight-line expense
Amortization of deferred gain
Facility lease expense
12. Self-Insurance
For the Years Ended
December 31,
2007
2008
$
253,226
20,585
(4,342)
269,469 $
$
250,531
25,439
(4,342)
271,628 $
$
$
2006
208,425
24,699
(4,345)
228,779
The Company obtains various insurance coverages from commercial carriers at stated amounts as defined in the applicable policy. Losses related to
deductible amounts are accrued based on the Company’s estimate of expected losses plus incurred but not reported claims. As of December 31, 2008 and
2007, the Company accrued $56.7
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million and $56.3 million for self-insured programs of which $29.2 million and $32.2 million is classified as long-term, respectively. During 2007, the
Company received a $4.2 million collateral recovery from an insurance carrier relating to an adjustment of an Alterra preconfirmation contingency.
The Company has secured self-insured retention risk under workers’ compensation and general liability and professional liability programs with cash and
letters of credit aggregating $10.9 million and $64.3 million, and $7.7 million and $36.4 million as of December 31, 2008 and 2007, respectively.
13. Retirement Plans
The Company maintains 401(k) Retirement Savings Plans for all employees that meet minimum employment criteria. The plan provides that the
participants may defer eligible compensation on a pre-tax basis subject to certain Internal Revenue Code maximum amounts. The Company makes
matching contributions in amounts equal to 50% of the employee’s contribution to the plan, up to a maximum of 4.0% of contributed
compensation. Employees are always 100% vested in their own contributions and vest in the Company’s contributions over five years. Contributions to
these plans were $4.8 million, $3.6 million and $1.7 million for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are
included in facility operating expense and general and administrative expense in the accompanying consolidated statements of operations. Subsequent
to December 31, 2008, the Company indefinitely suspended the matching contribution.
14. Related Party Transactions
Pursuant to the terms of his employment agreement, BLC loaned approximately $2.0 million to Mark J. Schulte, the Company’s former Co-Chief Executive
Officer and a current member of the Company’s Board of Directors. In exchange, BLC received a ten-year, secured, non-recourse promissory note, which
note bears interest at a rate of 6.09% per annum, of which 2.0% is payable in cash and of which the remainder accrues and is due at maturity on October 2,
2010. The note is secured by a portion of Mr. Schulte’s stock. There has been no modification to the terms of the loan since the date of enactment of the
Sarbanes-Oxley Act of 2002.
During 2008, certain funds affiliated with Fortress Investment Group LLC became participating lenders under the Company’s previous revolving credit
facility. Immediately prior to the replacement of the previous credit facility, such funds, in the aggregate, were committed for $138.8 million of the $245.0
million line of credit limit. Based on actual borrowings in effect immediately prior to the replacement of the previous credit facility, the Company was
indebted to these funds in the aggregate amount of $108.6 million. These Fortress funds are also participating lenders under the Company's amended
credit facility. In the aggregate, these funds are currently committed for $99.5 million of the $230.0 million line of credit limit.
15. Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (“SFAS 123R”), which addresses the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123R is a revision to SFAS No. 123 and supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement requires measurement of the cost of
employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. Incremental
compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. The Company adopted
SFAS 123R in connection with its initial grants of restricted stock effective August 2005, which were converted into BSL restricted stock on September
30, 2005.
On August 5, 2005, BLC and Alterra adopted employee restricted stock plans to attract, motivate, and retain key employees. The plans provide for the
grant of restricted securities to those participants selected by their board of directors. At September 30, 2005 these restricted shares were converted into a
total of 2.6 million shares of restricted stock in BSL at a value of $19.00 per share. Pursuant to the plans, the awards vest through 2010. As of December
31, 2008, 588,000 shares of unvested restricted stock issued under the plans were outstanding.
On October 14, 2005, the Company adopted a new equity incentive plan for its employees, the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan
(“Incentive Plan”), which was approved by its stockholders on October
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14, 2005. A total of 2,000,000 shares of common stock were initially reserved for issuance under the Incentive Plan; provided, however, that commencing
on the first day of the fiscal year beginning in calendar year 2006, the number of shares reserved and available for issuance was increased by an amount
equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of common stock on the last day of the immediately preceding
fiscal year. The maximum aggregate number of shares subject to stock options or stock appreciation rights that may be granted to any individual during
any fiscal year may not exceed 400,000, and the maximum aggregate number of shares that will be subject to awards of restricted stock, deferred shares,
unrestricted shares or other stock-based awards that may be granted to any individual during any fiscal year will be 400,000.
In connection with the ARC Merger, the Company’s board of directors approved an amendment to the Incentive Plan (the “Plan Amendment”) to reserve
an additional 2,500,000 shares of common stock for issuance thereunder to satisfy (i) obligations to provide for certain purchases of common stock by
ARC officers and employees and (ii) obligations to make corresponding grants of restricted shares of common stock under the Incentive Plan to those
ARC officers and employees who purchased such shares of common stock pursuant to employment agreements and optionee agreements entered into in
connection with the ARC Merger, and for such other grants that may be made from time to time pursuant to the Incentive Plan. Upon completion of the
ARC Merger, the Company issued 475,681 shares of common stock to certain officers of ARC at $38.07 per share for aggregate proceeds of $18.1 million
and granted the officers 475,681 shares of restricted stock at $48.00 per share. On May 12, 2006, funds managed by affiliates of Fortress Investment
Group, which then held approximately 65% of the Company’s common stock, executed a written consent approving the Plan Amendment effective upon
consummation of the ARC Merger. This consent constituted the consent of a majority of the total number of shares of outstanding common stock and
was sufficient to approve the Plan Amendment.
On June 15, 2006, the Company registered 2,900,000 shares of common stock (2,500,000 shares of common stock in connection with the ARC Merger and
400,000 shares of common stock resulting from the automatic annual increase for fiscal year 2006), under the Incentive Plan. Pursuant to the automatic
annual increase provisions of the Incentive Plan, an additional 400,000 shares of common stock became available for issuance on each of January 1, 2007,
2008 and 2009.
During 2006, the employee restricted stock plans described above were merged into the Incentive Plan. Certain participants receive dividends on
unvested shares. Where participants do not receive dividends on unvested shares during the vesting period, the grant-date per share fair value has been
reduced for the present value of the expected dividend stream during the vesting period. The shares are subject to certain transfer restrictions and may be
forfeited upon termination of a participant's employment for any reason, absent a change in control of the Company.
On September 15, 2006, the Company entered into Separation and General Release Agreements (“Agreements”) with two officers that accelerated the
vesting provision of a portion of their restricted stock grants upon satisfying certain conditions. As a result of the modification, the previous
compensation expense related to these grants was reversed and a charge based on the fair value of the stock at the modification date will be recorded
over the modified vesting period. The net impact of the adjustment was $4.1 million and $5.6 million of additional expense for the years ended December
31, 2007 and 2006, respectively.
On February 7, 2008, the Company entered into a Separation Agreement and General Release with an officer that accelerated the vesting provision of his
restricted stock grants as of March 3, 2008 upon satisfying certain conditions. As a result of the modification, the previous compensation expense
related to these grants was reversed and a charge based on the fair value of the stock at the modification date was recorded over the modified vesting
period. The net impact of the adjustment was $2.7 million of additional expense for the year ended December 31, 2008.
For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the
entire award on a straight-line basis over the requisite service period. For graded-vesting awards with performance-based vesting conditions, total
compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance,
multiple awards once the performance target is deemed probable of achievement. Performance goals are evaluated quarterly. If such goals are not
ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation
expense is reversed. During
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the current year the Company reversed approximately $1.2 million of previously recognized compensation expense related to performance-based awards
granted in 2006 and 2007.
The following table sets forth information about the Company’s restricted stock awards (amounts in thousands):
Outstanding on January 1,
Granted
Vested
Cancelled/forfeited
Outstanding on December 31,
Number of Shares
2007
2006
2008
3,020
1,975
(944)
(508)
3,543
3,282
662
(680)
(244)
3,020
2,168
1,548
(226)
(208)
3,282
As of December 31, 2008, there was approximately $49.0 million of total unrecognized compensation cost related to nonvested share-based compensation
arrangements granted. That cost is expected to be recognized over a weighted average period of 2.24 years.
Current year grants of restricted shares under the Company’s Omnibus Stock Incentive Plan were as follows (amounts in thousands except for value per
share amounts):
Three months ended March 31, 2008
Three months ended June 30, 2008
Three months ended September 30, 2008
Three months ended December 31, 2008
Shares
Granted Value Per Share Total Value
2,971
6,332
20,947
1,602
19.62 – 25.95 $
20.76 – 24.31
12.50 – 18.22
5.92 – 11.11
146
263
1,414
152
$
Compensation expense of $28.9 million, $20.1 million and $26.6 million in connection with the grants of restricted stock was recorded for the years ended
December 31, 2008, 2007 and 2006, respectively. For the years ended December 31, 2008, 2007 and 2006, compensation expense was calculated net of
forfeitures estimated from 0% - 6%, 5% and 5%, respectively, of the shares granted.
The Company has an employee stock purchase plan for all eligible employees. The plan became effective on October 1, 2008. Under the plan, eligible
employees of the Company can purchase shares of the Company’s common stock on a quarterly basis at a discounted price through accumulated payroll
deductions. Each eligible employee may elect to deduct up to 15% of his or her base pay each quarter. Subject to certain limitations specified in the plan,
on the last trading date of each calendar quarter, the amount deducted from each participant’s pay over the course of the quarter will be used to purchase
whole shares of the Company’s common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on that
date. Initially, the Company has reserved 1,000,000 shares of common stock for issuance under the plan. The employee stock purchase plan also
contains an “evergreen” provision that automatically increases the number of shares reserved for issuance under the plan by 200,000 shares on the first
day of each calendar year beginning January 1, 2010. The impact on the Company’s current year consolidated financial statements is de minimis.
16. Fair Value Measurements
The following table provides the Company’s derivative assets and liabilities carried at fair value as measured on a recurring basis as of December 31, 2008
(dollars in thousands):
Derivative assets
Derivative liabilities
Total Carrying
Value at December
31, 2008
Quoted prices in
active
markets (Level 1)
Significant other
observable inputs
(Level 2)
$
$
350 $
(20,931)
(20,581) $
— $
—
— $
350 $
(20,931)
(20,581) $
Significant
unobservable
inputs
(Level 3)
—
—
—
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The Company’s derivative assets and liabilities include interest rate caps and interest rate swaps that effectively convert a portion of the Company’s
variable rate debt to fixed rate debt. The derivative positions are valued using models developed internally by the respective counterparty that use as
their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.
The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any
adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations.
17. Share Repurchase Program
On March 19, 2008, the Company’s board of directors approved a share repurchase program that authorized the Company to purchase up to $150.0 million
in the aggregate of the Company’s common stock. Purchases could be made from time to time using a variety of methods, which could include open
market purchases, privately negotiated transactions or block trades, or by any combination of such methods, in accordance with applicable insider
trading and other securities laws and regulations. The size, scope and timing of any purchases was to be based on business, market and other conditions
and factors, including price, regulatory and contractual requirements or consents, and capital availability. The repurchase program did not obligate the
Company to acquire any particular amount of common stock and the program could be suspended, modified or discontinued at any time at the
Company’s discretion without prior notice. Shares of stock repurchased under the program were to be held as treasury shares.
Pursuant to this authorization, during the twelve months ended December 31, 2008, the Company purchased 1,211,301 shares at a cost of approximately
$29.2 million. No shares were repurchased during the three months ended December 31, 2008. As of December 31, 2008, approximately $120.9 million
remained available under this share repurchase authorization.
On February 25, 2009, the Company’s board of directors terminated this share repurchase authorization. In addition, the Company’s amended credit
facility effectively prohibits the Company from repurchasing shares of its common stock.
18. Income Taxes
The (provision) benefit for income taxes is comprised of the following (dollars in thousands):
Federal
Current
Deferred
State:
Current
Deferred (included in Federal above)
Total
For the Years Ended December 31,
2006
2007
2008
$
$
(77) $
89,498
89,421 $
(339) $
103,180
102,841
(2,690)
—
(2,690)
86,731 $
(1,581)
—
(1,581)
101,260 $
—
39,267
39,267
(776)
—
(776)
38,491
A reconciliation of the (provision) benefit for income taxes to the amount computed at the U.S. Federal statutory rate of 35.0% is as follows (dollars in
thousands):
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Tax benefit at U.S. statutory rate
State taxes, net of federal income tax
Goodwill impairment
Stock compensation
Valuation allowance
Other, net
Total
For the Years Ended December 31,
2006
2007
2008
$
$
$
160,990
16,449
(83,850)
(3,682)
(3,328)
152
86,731 $
$
92,271
9,521
—
—
—
(532)
101,260 $
51,068
5,666
—
—
(17,510)
(733)
38,491
The Company adopted FIN 46R as of December 31, 2003 and consolidated the VIEs for financial reporting purposes. For federal and state income tax
purposes, the Company is not the legal owner of the entities and is not entitled to receive tax benefits generated from the losses associated with these
VIEs. By December 31, 2007, all of these entities had been acquired by the Company.
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):
Deferred income tax assets:
Operating loss carryforwards
Capital lease obligations
Accrued expenses
Prepaid revenue
Deferred lease liability
Deferred gain on sale leaseback
Fair value of interest rate swaps
Tax credits
Other
Total gross deferred income tax asset
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Property, plant and equipment
Other
Total gross deferred income tax liability
Net deferred tax liability
$
2008
2007
$
183,331
106,872
49,816
43,693
35,988
15,755
8,339
5,239
2,407
451,440
(9,735)
441,705
112,207
112,956
44,411
47,849
28,063
17,199
7,198
4,256
6,195
380,334
(6,407)
373,927
(602,913)
(2,762)
(605,675)
(163,970) $
(625,585)
(1,885)
(627,470)
(253,543)
$
A reconciliation of the net deferred tax liability to the consolidated balance sheets at December 31 is as follows (dollars in thousands):
Deferred tax asset – current
Deferred tax liability – noncurrent
Net deferred tax liability
2008
$
$
14,677
$
(178,647)
(163,970) $
2007
13,040
(266,583)
(253,543)
In connection with Alterra’s emergence from bankruptcy in December 2003, its assets and liabilities were recorded at their respective fair market values.
Deferred tax assets and liabilities were recognized for the tax effects of the difference between the fair values and the tax bases of Alterra’s assets and
liabilities. In addition, deferred tax assets were recognized for the future use of net operating losses. The valuation allowance established to reduce
deferred tax assets as of December 31, 2004 was $28.4 million. The reduction in this valuation allowance relating to net deferred tax items existing at the
Effective Date will increase additional paid in capital.
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At December 31, 2004, Alterra increased additional paid-in capital by $4.8 million as a result of a reduction in valuation allowance related to net deferred
tax assets not benefited under fresh-start accounting, but realized in the year ended December 31, 2004. During 2005, Alterra reduced additional paid-in
capital by $0.9 million due to a reversal of the valuation allowance, related to net deferred tax asset.
As of December 31, 2008 and 2007, the Company had net operating loss carryforwards of approximately $468.6 million and $285.6 million, respectively,
which are available to offset future taxable income through 2028. The Company believes it is more likely than not that it will utilize all of its federal losses
prior to expiration. The Company has recorded valuation allowances of $8.2 million and $6.4 million at December 31, 2008 and 2007, respectively against
its state net operating losses, as the Company anticipates these losses will not be utilized prior to expiration. In 2008, the Company recorded $1.5 million
of valuation allowance against pre-2007 federal tax credits, which the Company believes will expire prior to utilization. Included in the Company’s net
operating loss carryforward is $10.8 million of losses relating to restricted stock grants. Under SFAS 123R, this loss will be recorded in additional paid-in
capital in the period in which the loss is effectively used to reduce taxes payable. The impact to the income tax expense relating to the dividends on the
unvested shares for the period ended December 31, 2008 is now included in the stock based compensation computation under SFAS 123R.
The formation of BSL, reorganization of Alterra, and the acquisitions of ARC and SALI constitute ownership changes under Section 382 of the Internal
Revenue Code, as amended. As a result, BSL’s ability to utilize the net operating loss carryforward to offset future taxable income is subject to certain
limitations and restrictions.
As disclosed in Note 2, the Company adopted the provision of FIN 48 as of January 1, 2007. At December 31, 2008, the Company had gross tax affected
unrecognized tax benefits of $4.4 million, of which the majority of the benefit, if recognized, would be recorded against goodwill. Interest and penalties
related to these tax positions are classified as tax expense in the Company’s financial statements. Total interest and penalties reserved is $1.7 million at
December 31, 2008. Tax returns for all wholly owned subsidiaries for years 2002 through 2006 are subject to future examination by tax authorities, with
the exception of ARC which has been audited by the federal tax authorities through 2004. In addition, for Alterra, tax returns are open from 1999 to 2001
to the extent of the net operating losses generated during those periods. The Company does not expect that unrecognized tax benefits for tax positions
taken with respect to 2008 and prior years will significantly change in 2009.
A reconciliation of the unrecognized tax benefits for the year 2008 is as follows (dollars in thousands):
Balance at January 1, 2008
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Settlements
Balance at December 31, 2008
$
$
4,453
0
511
(434)
(106)
4,424
19. Supplemental Disclosure of Cash Flow Information
(dollars in thousands)
Supplemental Disclosure of Cash Flow Information:
Interest paid
Income taxes paid
For the Years Ended
December 31,
2007
2008
2006
$
$
148,377 $
1,591 $
143,930 $
1,415 $
95,429
490
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Table of Contents
Supplemental Schedule of Noncash Operating, Investing and Financing Activities:
De-consolidation of leased development property:
Property, plant and equipment and leasehold intangibles, net
Long-term debt
Net
Capital leases:
Property, plant and equipment and leasehold intangibles, net
Long-term debt
Net
Acquisitions of assets, net of related payables and cash received, net:
Cash and escrow deposits-restricted
Account receivable, net
Property, plant and equipment and leasehold intangibles
Investment in unconsolidated ventures
Goodwill
Other intangible assets, net
Other assets, net
Other liabilities
Long-term debt and capital and financing lease obligations
Deferred tax liability
Minority interest
Net
De-consolidation of an entity pursuant to FIN 46(R):
Accounts receivable
Prepaid expenses and other current assets
Property, plant and equipment and leasehold intangibles, net
Other assets, net
Investment in unconsolidated ventures
Long-term debt
Accrued expenses
Trade accounts payable
Tenant security deposits
Refundable entrance fees and deferred revenue
Additional paid-in-capital
Accumulated deficit
Net
$
$
$
$
$
$
$
$
Consolidation of three limited partnerships pursuant to EITF 04-5 on January 1, 2006 and
subsequent sale and termination of one limited partnership:
Property, plant and equipment, net
Accounts receivable
Cash and escrow deposits - restricted
Prepaid and other
Accrued expenses
Tenant security deposits
Debt
Minority interest
Net
$
$
103
(6,387) $
6,387
— $
35,942 $
(35,942)
— $
$
—
—
—
—
—
6,731
—
—
—
—
—
6,731 $
92 $
1,870
36,613
7
186
(29,159)
(1,252)
(20)
(173)
(89)
(13,287)
5,212
— $
$
—
—
—
—
—
—
—
—
— $
(2,978) $
2,978
— $
— $
—
— $
$
387
64
172,074
(1,342)
3,395
(668)
(173)
(3,201)
(2,786)
—
4,351
172,101 $
— $
—
—
—
—
—
—
—
—
—
—
—
— $
$
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
57,253
25,302
2,375,304
259,104
306,531
—
(225,159)
(433,354)
(396,590)
—
1,968,391
—
—
—
—
—
—
—
—
—
—
—
—
—
14,745
40
88
381
(2,009)
(82)
(9,269)
(3,894)
—
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20. Commitments and Contingencies
The Company has three operating lease agreements for 30,314, 51,988 and 93,573 square feet of corporate office space that extend through 2010, 2010 and
2014, respectively. The leases require the payment of base rent which escalates annually, plus operating expenses (as defined). The Company incurred
rent expense of $4.0 million, $4.5 million and $2.6 million for the years ended December 31, 2008, 2007 and 2006, respectively, under the corporate office
leases.
The aggregate amounts of all future minimum operating lease payments, including community and office leases, as of December 31, 2008, are as follows
(dollars in thousands):
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total
Operating
Leases
$
261,890
264,482
267,517
268,400
262,032
1,355,101
$ 2,679,422
The Company has employment agreements with certain officers of the Company that grant these employees the right to receive their base salary and
continuation of certain benefits, for a defined period of time, in the event of certain terminations of the officers’ employment, as described in those
agreements.
21. Litigation
The Company has settled or tentatively settled the litigation specifically described below.
In connection with the sale of certain communities to Ventas Realty Limited Partnership (“Ventas”) in 2004, two legal actions have been filed. The first
action was filed on September 15, 2005, by current and former limited partners in 36 investing partnerships in the United States District Court for the
Eastern District of New York captioned David T. Atkins et al. v. Apollo Real Estate Advisors, L.P., et al. (the “Action”). On March 17, 2006, a third
amended complaint was filed in the Action. The third amended complaint was brought on behalf of current and former limited partners in 14 investing
partnerships. It names as defendants, among others, the Company, Brookdale Living Communities, Inc. (“BLC”), a subsidiary of the Company, GFB-AS
Investors, LLC (“GFB-AS”), a subsidiary of BLC, the general partners of the 14 investing partnerships, which are alleged to be subsidiaries of GFB-AS,
Fortress Investment Group LLC (“Fortress”), an affiliate of the Company’s largest stockholder, and R. Stanley Young, the Company’s former Chief
Financial Officer. The nine count third amended complaint alleged, among other things, (i) that the defendants converted for their own use the property of
the limited partners of 11 partnerships, including through the failure to obtain consents the plaintiffs contend were required for the sale of communities
indirectly owned by those partnerships to Ventas; (ii) that the defendants fraudulently persuaded the limited partners of three partnerships to give up a
valuable property right based upon incomplete, false and misleading statements in connection with certain consent solicitations; (iii) that certain
defendants, including GFB-AS, the general partners, and the Company’s former Chief Financial Officer, but not including the Company, BLC, or Fortress,
committed mail fraud in connection with the sale of communities indirectly owned by the 14 partnerships at issue in the Action to Ventas; (iv) that certain
defendants, including GFB-AS and the Company’s former Chief Financial Officer, but not including the Company, BLC, the general partners, or Fortress,
committed wire fraud in connection with certain communications with plaintiffs in the Action and another investor in a limited partnership; (v) that the
defendants, with the exception of the Company, committed substantive violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”);
(vi) that the defendants conspired to violate RICO; (vii) that GFB-AS and the general partners violated the partnership agreements of the 14 investing
partnerships; (viii) that GFB-AS, the general partners, and the Company’s former Chief Financial Officer breached fiduciary duties to the plaintiffs; and
(ix) that the defendants were unjustly enriched. The plaintiffs asked for damages in excess of $100.0 million on each of the counts described above,
including treble damages for the RICO claims. On April 18, 2006, the Company filed a motion to dismiss the claims with prejudice. On April 30, 2008, the
court granted the Company’s motion to dismiss the third amended
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complaint, but granted the plaintiffs’ motion for leave to amend. Subsequently, the parties agreed to settle the case and the case was formally dismissed
by the court on November 3, 2008.
A putative class action lawsuit was also filed on March 22, 2006 by certain limited partners in four of the same partnerships involved in the Action in the
Court of Chancery for the State of Delaware captioned Edith Zimmerman et al. v. GFB-AS Investors, LLC and Brookdale Living Communities, Inc. (the
“Second Action”). On November 21, 2006, an amended complaint was filed in the Second Action. The putative class in the Second Action consists only
of those limited partners in the four investing partnerships who were not plaintiffs in the Action. The Second Action names as defendants BLC and GFB-
AS. The complaint alleges a claim for breach of fiduciary duty arising out of the sale of communities indirectly owned by the investing partnerships to
Ventas and the subsequent lease of those communities by Ventas to subsidiaries of BLC. The plaintiffs seek, among other relief, an accounting, damages
in an unspecified amount, and disgorgement of unspecified amounts by which the defendants were allegedly unjustly enriched. On December 12, 2006,
the Company filed an answer denying the claim asserted in the amended complaint and providing affirmative defenses. On December 27, 2006, the
plaintiffs moved to certify the Second Action as a class action. Subsequent to December 31, 2008, the parties agreed to settle the case and are in the
process of preparing a release and stipulation and order for dismissal.
During the year ended December 31, 2008, the Company recorded an $8.0 million reserve related to the foregoing matters.
In addition, the Company has been and is currently involved in other litigation and claims incidental to the conduct of its business which are comparable
to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and
resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to
regulatory compliance matters. As a result, the Company maintains insurance policies in amounts and with coverage and deductibles the Company
believes are adequate, based on the nature and risks of its business, historical experience and industry standards. Effective January 1, 2009, the
Company’s current policies provide for deductibles of $250,000 for each claim. Accordingly, the Company is, in effect, self-insured for most claims.
22. Segment Information
The Company has four reportable segments: retirement centers; assisted living; CCRCs; and management services. These segments were determined
based on the way that the chief operating decision makers organize the Company’s business activities for making operating decisions and assessing
performance.
During the fourth quarter of 2008, five communities moved between segments to more accurately reflect the underlying product offering of each
segment. The movement did not change the Company’s reportable segments, but it did impact the revenues and cost reported within each segment. The
net impact of the change was a decrease of one community to the CCRCs segment.
Retirement Centers. Retirement center communities are primarily designed for middle to upper income senior citizens age 70 and older who desire an
upscale residential environment providing the highest quality of service. The majority of the Company’s retirement center communities consist of both
independent living and assisted living units in a single community, which allows residents to “age-in-place” by providing them with a continuum of
senior independent and assisted living services.
Assisted Living. Assisted living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly
residents. Assisted living communities include both freestanding, multi-story communities and freestanding single story communities. The Company
also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer’s disease
and other dementias.
CCRCs. CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health.
Most of the Company’s CCRCs have retirement centers, assisted living and skilled nursing available on one campus, and some also include memory care
and Alzheimer’s units.
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Management Services. The Company's management services segment includes communities owned by others and operated by the Company pursuant
to management agreements. Under management agreements for these communities, the Company receives management fees as well as reimbursed
expenses, which represent the reimbursement of certain expenses it incurs on behalf of the owners.
The accounting policies of the Company’s reporting segments are the same as those described in the summary of significant accounting policies. The
following table sets forth certain segment financial and operating data (dollars in thousands):
For the Years Ended December 31,
2007
2008
2006
Revenue(1):
Retirement Centers
Assisted Living
CCRCs
Management Services
Segment Operating Income(2):
Retirement Centers
Assisted Living
CCRCs
Management Services
General and administrative (including non-cash stock compensation expense)(3)
Facility lease expense
Depreciation and amortization
Goodwill and asset impairment
Loss from operations
Total Assets:
Retirement Centers
Assisted Living
CCRCs
Corporate and Management Services
__________
$
$
$
$
$
$
$
$
542,180
845,348
533,532
6,994
1,928,054 $
$
532,680
799,070
500,757
6,789
1,839,296 $
432,673
614,973
256,650
5,617
1,309,913
228,711
282,138
148,630
4,896
664,375 $
$
138,821
269,469
276,202
220,026
(240,143) $
233,594
284,940
143,036
4,752
666,322 $
$
135,976
271,628
299,925
—
(41,207) $
184,611
230,986
68,898
3,932
488,427
116,212
228,779
188,129
—
(44,693)
$
1,233,268
1,393,223
1,476,206
346,561
4,449,258 $
$
1,369,323
1,405,381
1,651,467
385,451
4,811,622 $
1,420,534
1,409,137
1,591,927
334,402
4,756,000
(1)
(2)
All revenue is earned from external third parties in the United States.
Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).
Alterra emerged from bankruptcy on December 4, 2003, and had accrued an estimated liability for certain insurance claims related to periods prior
to the emergence from Chapter 11 proceedings. For the years ended December 31, 2007 and 2006, a non-cash benefit of approximately $0.3 million
and $4.1 million, respectively, was recorded related to the reversal of an accrual established in connection with Alterra’s emergence from
bankruptcy in December 2003.
(3)
Net of general and administrative costs allocated to management services reporting segment.
23. Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for each of the fiscal quarters in 2008 and 2007 (dollars in thousands, except per share
amounts):
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For the Quarters Ended
March 31,
2008
June 30,
2008
September 30,
2008
December 31,
2008
Revenues
Loss from operations(1)
Loss before income taxes
Net loss
Weighted average basic and diluted loss per share
Weighted average shares used in computing basic and diluted loss per share
Cash dividends declared per share
$
480,648
$
478,201
$
482,277
$
(551)
(84,980)
(55,093)
(0.54) $
(4,697)
(6,256)
(3,485)
(0.03) $
101,995
101,856
0.25 $
0.25 $
(10,968)
(58,215)
(35,877)
(0.36) $
101,398
0.25 $
$
$
486,928
(223,927)
(310,521)
(278,786)
(2.75)
101,424
—
For the Quarters Ended
March 31,
2007
June 30,
2007
September 30,
2007
December 31,
2007
Revenues
Loss from operations(2)
Loss before income taxes
Net loss
Weighted average basic and diluted loss per share
Weighted average shares used in computing basic and diluted loss per share
Cash dividends declared per share
$
446,834
$
458,410
$
464,594
$
(16,093)
(55,577)
(35,140)
(12,861)
(32,032)
(18,675)
$
$
(0.35) $
(0.18) $
101,302
101,520
0.45 $
0.50 $
(12,079)
(94,047)
(58,927)
(0.58) $
101,564
0.50 $
469,458
(174)
(81,976)
(49,237)
(0.49)
101,656
0.50
(1)
(2)
Fourth quarter results include non-cash impairment charges of $220.0 million.
For the quarter ended December 31, 2007, a non-cash benefit of $0.3 million was recorded related to the reversal of an accrual established in
connection with Alterra’s emergence from bankruptcy in December 2003.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2008
(In thousands)
Description
Deferred Tax Valuation Account:
Year ended December 31, 2006
Year ended December 31, 2007
Year ended December 31, 2008
Additions
Balance at
Beginning of
Period
Charged to
costs and
expenses
Charged
To other
Accounts
Acquisitions
Deductions
Balance at
End of
Period
$
$
$
47,511
6,000
6,407
$
$
$
—
—
—
$
$
$
—
$
407(2) $
3,328(2)
(41,511)(1)
—
$
$
—
—
$
$
$
6,000
6,407
9,735
(1)
(2)
Change in valuation allowance due to generation of deferred tax liabilities in connection with ARC and SALI acquisitions.
Adjustment to valuation allowance for state net operating losses of $1,800. Establishment of valuation allowance against federal tax credits of
$1,528.
See accompanying report of independent registered public accounting firm.
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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management’s Assessment of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-
15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2008. Management reviewed the results of their
assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report
on Form 10-K, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of December 31, 2008, our disclosure
controls and procedures were effective.
Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9B. Other Information.
The disclosure regarding our amended credit agreement transaction contained under “Credit Facilities - Refinancing of Existing Line of Credit” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference. The summaries
contained therein of certain provisions of the amended credit agreement, pledge agreement and security agreement do not purport to be complete and are
qualified in their entirety by reference to the full text of the amended credit agreement, pledge agreement and security agreement filed as Exhibits 10.30,
10.31 and 10.32 hereto, which are incorporated herein by reference.
In addition, on February 25, 2009, William B. Doniger notified us of his resignation as a member of our Board of Directors (including in his capacities as
Vice Chairman and as a member of our Investment Committee), effective as of such date. There are no disagreements between Mr. Doniger and us on any
matter relating to our operations, policies or practices that caused or contributed to his decision to tender his resignation as a director.
In order to fill the vacancy created by the resignation of Mr. Doniger, on February 25, 2009, upon the recommendation of our Nominating and Corporate
Governance Committee, our Board of Directors elected Tobia Ippolito as a Class II director, to serve until our 2010 Annual Meeting of Stockholders and
until his successor is duly elected and qualified. Mr. Ippolito has also been appointed to serve as a member of our Investment Committee. Mr. Ippolito is
a managing director of Fortress and was designated by FIG Advisors LLC, an affiliate of Fortress, to serve as a member of our Board of Directors
pursuant to the terms of that certain Stockholders Agreement, dated as of November 28, 2005, by and among the company, FIT-ALT Investor LLC,
Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners, as amended to date. The disclosure regarding the participation of
certain funds affiliated with Fortress in our previous credit facility and
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amended credit facility set forth in Note 14 to the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data”
is incorporated herein by reference.
The disclosure contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the $215.0
million non-cash goodwill impairment charge we recorded for the quarter ended December 31, 2008 is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated by reference from the discussions under the headings “Proposal Number One - Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive Proxy Statement for the 2009 Annual Meeting of
Stockholders. Pursuant to General Instruction G(3), certain information concerning our executive officers is contained in the discussion entitled
“Executive Officers of the Registrant” under Item 4 of Part I of this report.
We have adopted a Code of Business Conduct and Ethics that applies to all employees, directors and officers, including our principal executive officer,
our principal financial officer, our principal accounting officer or controller, or persons performing similar functions, as well as a Code of Ethics for Chief
Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Co-Presidents, Chief Financial Officer, Executive Vice Presidents of
Finance and Controller, both of which are available on our website at www.brookdaleliving.com. Any amendment to, or waiver from, a provision of such
codes of ethics granted to a principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar
functions, will be posted on our website.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the discussions under the headings “Compensation of Directors” and
“Compensation of Executive Officers” in our Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the
discussion under the heading “Security Ownership of Certain Beneficial Owners and Management” in our Definitive Proxy Statement for the 2009 Annual
Meeting of Stockholders.
The following table provides certain information as of December 31, 2008 with respect to our equity compensation plans:
Plan category
Equity compensation plans approved by
security holders(2)
Equity compensation plans not approved by
security holders
Total
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)(1)
Weighted-average
exercise price of
outstanding
options, warrants
and, rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
—
—
—
110
—
—
—
1,003,784
—
1,003,784
Table of Contents
__________
(1)
(2)
In addition to options, warrants, and rights, our Omnibus Stock Incentive Plan allows awards to be made in the form of shares of restricted stock
or other forms of equity-based compensation. As of December 31, 2008, 2,954,147 shares of unvested restricted stock issued under our Omnibus
Stock Incentive Plan were outstanding. In addition, as of such date, 588,106 shares of unvested restricted stock issued under the plans of our
predecessor entities were outstanding. Such shares are not reflected in the table above.
Under the terms of our Omnibus Stock Incentive Plan, the number of shares reserved and available for issuance will increase annually each
January 1 by an amount equal to the lesser of (1) 400,000 shares or (2) 2% of the number of outstanding shares of our common stock on the last
day of the immediately preceding fiscal year.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated by reference from the discussions under the headings “Certain Relationships and Related
Transactions” and “Director Independence” in our Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders.
Item 14.
Principal Accounting Fees and Services.
The information required by this item is incorporated by reference from the discussion under the heading “Proposal Number Two - Approval of
Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm” in our Definitive Proxy Statement for the 2009 Annual Meeting
of Stockholders.
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
1)
Our Audited Consolidated Financial Statements
Balance Sheets as of December 31, 2008 and 2007
Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006
Statements of Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
2)
Exhibits – See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set
forth herein.
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BROOKDALE SENIOR LIVING INC.
SIGNATURES
/s/ W.E. Sheriff
By:
Name: W.E. Sheriff
Title:
Date:
Chief Executive Officer
March 2, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Wesley R. Edens
Wesley R. Edens
/s/ W.E. Sheriff
W.E. Sheriff
/s/ Mark W. Ohlendorf
Mark W. Ohlendorf
/s/ Frank M. Bumstead
Frank M. Bumstead
/s/ Jackie M. Clegg
Jackie M. Clegg
/s/ Tobia Ippolito
Tobia Ippolito
/s/ Jeffrey R. Leeds
Jeffrey R. Leeds
/s/ Mark J. Schulte
Mark J. Schulte
/s/ James R. Seward
James R. Seward
/s/ Samuel Waxman
Samuel Waxman
Chairman of the Board
Chief Executive Officer
Co-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
112
Date
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
March 2, 2009
Table of Contents
Exhibit No.
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
4.1
EXHIBIT INDEX
Description
Membership Interest Purchase Agreement, dated June 29, 2005, by and among NW Select LLC, Emeritus Corporation, FIT-ALT
Investor LLC and Brookdale Senior Living Inc. (incorporated by reference to Exhibit 2.11 to the Company’s Registration Statement
on Form S-1 (No. 333-127372) filed on August 9, 2005).
Conveyance Agreement, dated as of September 30, 2005, by and among Brookdale Senior Living Inc., Brookdale Living
Communities, Inc., BSL Brookdale Merger Inc., BSL CCRC Merger Inc., BSL FEBC Merger Inc., Emeritus Corporation, FEBC-ALT
Investors LLC, FIT-ALT Investor LLC, Fortress CCRC Acquisition LLC, Fortress Investment Trust II, Fortress Registered
Investment Trust, Fortress Brookdale Acquisition LLC, Health Partners and NW Select LLC (incorporated by reference to Exhibit
2.12 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-127372) filed on October 11, 2005).
Amended and Restated Agreement and Plan of Merger, dated March 30, 2006, by and between BLC Acquisitions, Inc., SALI Merger
Sub Inc., and Southern Assisted Living, Inc. (incorporated by reference to Exhibit 2.10 to the Company’s Annual Report on Form
10-K filed on March 31, 2006).
Stock Purchase Agreement, dated December 30, 2005, by and between Brookdale Living Communities, Inc. and Capstead Mortgage
Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on December 30, 2005).
Asset Purchase Agreement, dated January 11, 2006, by and between BLC Acquisitions, Inc., as buyer, and Health Care Properties I,
LLC; Health Care Properties IV, LLC; Health Care Properties VI, LLC; Health Care Properties VII, LLC; Health Care Properties VIII,
LLC; Health Care Properties IX, LLC; Health Care Properties X, LLC; Health Care Properties XI, LLC; Health Care Properties XII,
LLC; Health Care Properties XIII, LLC; Health Care Properties XV, Ltd.; Health Care Properties XVI, LLC; Health Care Properties
XVII, Ltd.; Health Care Properties XVIII, LLC; Health Care Properties XX, LLC; Health Care Properties XXIII, LLC; Health Care
Properties XXIV, LLC; Health Care Properties XXV, LLC; Health Care Properties XXVII, LLC; Cleveland Health Care Investors, LLC;
and Wellington SPE, LLC, as sellers (incorporated by reference to Exhibit 2.12 to the Company’s Annual Report on Form 10-K filed
on March 31, 2006).
Asset Purchase Agreement, dated January 12, 2006, by and between AHC Acquisitions, Inc., as buyer, and American Senior Living
Limited Partnership; American Senior Living of Fort Walton Beach, FL, LLC; American Senior Living of Jacksonville, LLC; American
Senior Living of Jacksonville-SNF, LLC; American Senior Living of Titusville, FL, LLC; ASL Senior Housing, LLC; American Senior
Living of Destin, FL, LLC; and American Senior Living of New Port Richey, FL, LLC, as sellers (incorporated by reference to Exhibit
2.13 to the Company’s Annual Report on Form 10-K filed on March 31, 2006).
Purchase and Sale Agreement, dated February 7, 2006, among PG Santa Monica Senior Housing, LP; PC Tarzana Senior Housing,
LP; PG Chino Senior Lousing, LP; The Fairways Senior Housing, LLC; AEW/Careage — Federal Way, LLC; AEW/Careage —
Bakersfield, LLC; and AEW/Careage — Bakersfield SNF, LLC, as sellers, and BLC Acquisitions, Inc., as buyer (incorporated by
reference to Exhibit 2.14 to the Company’s Annual Report on Form 10-K filed on March 31, 2006).
Agreement and Plan of Merger, dated as of May 12, 2006, by and among Brookdale Senior Living, Inc., Beta Merger Sub
Corporation, and American Retirement Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed on May 12, 2006).
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q filed on August 14, 2006).
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K filed on December 20, 2007).
Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1
(Amendment No. 3) (No. 333-127372) filed on November 7, 2005).
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Table of Contents
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC,
Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to
the Company’s Annual Report on Form 10-K filed on March 31, 2006).
Amendment No. 1 to Stockholders Agreement, dated as of July 25, 2006, by and among Brookdale Senior Living Inc., FIT-ALT
Investor LLC, Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT
Holdings LLC (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2006).
Employment Agreement dated August 9, 2005, by and between Brookdale Senior Living Inc., Brookdale Living Communities, Inc.
and Mark J. Schulte (incorporated by reference to Exhibit 10.69 to the Company’s Registration Statement on Form S-1 (Amendment
No. 1) (No. 333-127372) filed on September 21, 2005).*
Employment Agreement dated September 8, 2005, by and between Brookdale Senior Living Inc., Alterra Healthcare Corporation and
Mark W. Ohlendorf (incorporated by reference to Exhibit 10.70 to the Company’s Registration Statement on Form S-1 (Amendment
No. 1) (No. 333-127372) filed on September 21, 2005).*
Employment Agreement dated August 9, 2005, by and between Brookdale Senior Living Inc., Brookdale Living Communities, Inc.
and John P. Rijos (incorporated by reference to Exhibit 10.71 to the Company’s Registration Statement on Form S-1 (Amendment No.
1) (No. 333-127372) filed on September 21, 2005).*
Employment Agreement dated September 8, 2005, by and between Brookdale Senior Living Inc., a Delaware corporation, Alterra
Healthcare Corporation and Kristin A. Ferge (incorporated by reference to Exhibit 10.73 to the Company’s Registration Statement on
Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
Brookdale Living Communities, Inc. Employee Restricted Stock Plan (incorporated by reference to Exhibit 10.75 to the Company’s
Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
Award Agreement dated August 9, 2005, by and between Brookdale Living Communities, Inc. and Mark J. Schulte (incorporated by
reference to Exhibit 10.76 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on
September 21, 2005).*
Award Agreement dated August 9, 2005, by and between Brookdale Living Communities, Inc. and John P. Rijos (incorporated by
reference to Exhibit 10.77 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on
September 21, 2005).*
FEBC-ALT Investors LLC Employee Restricted Securities Plan (incorporated by reference to Exhibit 10.80 to the Company’s
Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21, 2005).*
Award Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and Mark W. Ohlendorf (incorporated by
reference to Exhibit 10.81 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on
September 21, 2005).*
Award Agreement dated August 5, 2005, by and between FEBC-ALT Investors LLC and Kristin A. Ferge (incorporated by reference
to Exhibit 10.82 to the Company’s Registration Statement on Form S-1 (Amendment No. 1) (No. 333-127372) filed on September 21,
2005).*
Exchange and Stockholder Agreement, dated September 30, 2005, by and among Brookdale Senior Living Inc., Fortress Brookdale
Acquisition LLC and Mark J. Schulte (incorporated by reference to Exhibit 10.86 to the Company’s Registration Statement on Form
S-1 (Amendment No. 2) (No. 333-127372) filed on October 11, 2005).*
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10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21.1
10.21.2
Consent to Change of Control and Third Amendment to Master Lease, dated April 1, 2006, by and between Health Care Property
Investors, Inc., Texas HCP Holding, L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland Real Estate Holdings, LLC,
ARC Sun City Center Real Estate Holdings, LLC, and ARC LaBarc Real Estate Holdings, LLC, on the one hand, and Fort Austin
Limited Partnership, ARC Santa Catalina, Inc., ARC Richmond Place, Inc., Freedom Village of Holland, Michigan, Freedom Village of
Sun City Center, Ltd., LaBarc, L.P. and Park Place Investments, LLC, on the other hand, and ARCPI Holdings, Inc. and American
Retirement Corporation (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on August
14, 2006).
Second Amended and Restated Master Lease Agreement, dated as of April 7, 2006, among Health Care REIT, Inc., HCRI North
Carolina Properties III, Limited Partnership, HCRI Tennessee Properties, Inc., HCRI Indiana Properties, LLC, HCRI Wisconsin
Properties, LLC, and HCRI Texas Properties, Ltd., and Alterra Healthcare Corporation (incorporated by reference to Exhibit 10.32 to
the Company’s Registration Statement on Form S-1 (No. 333-135030) filed on June 14, 2006).
Investment Agreement, dated as of May 12, 2006, by and among Brookdale Senior Living Inc. and RIC Coinvestment Fund LP
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 12, 2006).
Form of Option Agreement, by and among Brookdale Senior Living Inc. and RIC Coinvestment Fund LP (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 12, 2006).
Employment Agreement, dated May 12, 2006, by and between Brookdale Senior Living Inc. and W.E. Sheriff (incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 12, 2006).*
Form of Employment Agreement for Gregory B. Richard, George T. Hicks, Bryan D. Richardson and H. Todd Kaestner (incorporated
by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 12, 2006).*
Separation Agreement and General Release, dated September 15, 2006, between Brookdale Senior Living Inc. and R. Stanley Young
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 18, 2006).*
Separation Agreement and General Release dated September 15, 2006 between Brookdale Senior Living Inc. and Deborah C. Paskin
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 18, 2006).*
Employment Agreement, dated September 25, 2006, by and between Brookdale Senior Living Inc. and T. Andrew Smith
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 26, 2006).*
Amended and Restated Credit Agreement, dated as of November 15, 2006, among Brookdale Senior Living Inc., as Borrower, the
several lenders from time to time parties thereto, Lehman Brothers Inc. and Citigroup Global Markets Inc., as joint lead arrangers and
joint bookrunners, Goldman Sachs Credit Partners L.P., LaSalle Bank National Association and Banc of America Securities LLC, as
co-arrangers, LaSalle Bank National Association and Bank of America, N.A., as co-syndication agents, Goldman Sachs Credit
Partners L.P. and Citicorp North America, Inc., as co-documentation agents, and Lehman Commercial Paper Inc., as administrative
agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 17, 2006).
Amended and Restated Guarantee and Pledge Agreement, dated as of November 15, 2006, made by Brookdale Senior Living Inc. and
certain of its Subsidiaries in favor of Lehman Commercial Paper Inc., as administrative agent (incorporated by reference to Exhibit
10.2 to the Company’s Current Report on Form 8-K filed on November 17, 2006).
115
Table of Contents
10.21.3
10.22.1
10.22.2
10.22.3
10.22.4
10.22.5
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
First Amendment, Consent and Waiver, dated as of October 10, 2007, to the Amended and Restated Credit Agreement, dated as of
November 15, 2006, among Brookdale Senior Living Inc., the several lenders from time to time parties thereto, Lehman Brothers Inc.
and Citigroup Global Markets Inc., as joint lead arrangers and joint bookrunners, Goldman Sachs Credit Partners L.P., LaSalle Bank
National Association and Banc of America Securities LLC, as co-arrangers, LaSalle Bank National Association and Bank of America,
N.A., as co-syndication agents, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents,
and Lehman Commercial Paper Inc., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on October 16, 2007).
Brookdale Senior Living Inc. Omnibus Stock Incentive Plan, as amended and restated effective June 12, 2007 (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Three Year Time-
Vesting; No Dividends) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August
8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Five Year Time-Vesting;
With Dividends) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on August 8,
2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Four Year
Performance/Time-Vesting; With Dividends) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form
10-Q filed on August 8, 2007).*
Form of Restricted Share Agreement under the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (Four Year
Performance/Time-Vesting; No Dividends) (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form
10-Q filed on August 8, 2007).*
Separation Agreement and General Release, dated February 7, 2008, between Brookdale Senior Living Inc. and Mark J. Schulte
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 11, 2008).*
Separation Agreement and General Release and Consulting Agreement, dated February 11, 2008, between Brookdale Senior Living
Inc. and Paul A. Froning (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February
11, 2008).*
Second Amendment, dated as of May 12, 2008, to the Amended and Restated Credit Agreement, dated as of November 15, 2006,
among Brookdale Senior Living Inc., the several lenders from time to time parties thereto, Lehman Brothers Inc. and Citigroup Global
Markets Inc., as joint lead arrangers and joint bookrunners, Goldman Sachs Credit Partners L.P., LaSalle Bank National Association
and Banc of America Securities LLC, as co-arrangers, LaSalle Bank National Association and Bank of America, N.A., as co-
syndication agents, Goldman Sachs Credit Partners L.P. and Citicorp North America, Inc., as co-documentation agents, and Lehman
Commercial Paper Inc., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on May 14, 2008).
Brookdale Senior Living Inc. Associate Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on June 11, 2008).*
Third Amendment, effective as of October 27, 2008, to the Amended and Restated Credit Agreement, dated as of November 15, 2006,
among Brookdale Senior Living Inc., the several lenders parties thereto, and Bank of America, N.A., as successor administrative
agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2008).
Fourth Amendment, dated as of January 14, 2009, to the Amended and Restated Credit Agreement, dated as of November 15, 2006,
among Brookdale Senior Living Inc., the several lenders parties thereto, and Bank of America, N.A., as successor administrative
agent.
Fifth Amendment, dated as of February 9, 2009, to the Amended and Restated Credit Agreement, dated as of November 15, 2006,
among Brookdale Senior Living Inc., the several lenders parties thereto, and Bank of America, N.A., as successor administrative
agent.
Second Amended and Restated Credit Agreement, dated as of February 27, 2009, among Brookdale Senior Living Inc., certain of its
subsidiaries, the several lenders parties thereto, and Bank of America, N.A., as administrative agent.
116
Table of Contents
10.31
10.32
21
23
31.1
31.2
32
Pledge Agreement, dated as of February 27, 2009, among Brookdale Senior Living Inc., certain of its subsidiaries, and Bank of
America, N.A., as administrative agent.
Security Agreement, dated as of February 27, 2009, among certain subsidiaries of Brookdale Senior Living Inc. and Bank of America,
N.A., as administrative agent.
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*
Management Contract or Compensatory Plan
117
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, W.E. Sheriff, certify that:
1. I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 2, 2009
/s/ W.E. Sheriff
W.E. Sheriff
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Ohlendorf, certify that:
1. I have reviewed this Annual Report on Form 10-K of Brookdale Senior Living Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 2, 2009
/s/ Mark W. Ohlendorf
Mark W. Ohlendorf
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Brookdale Senior Living Inc. (the “Company”) for the fiscal year ended December 31, 2008, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), W.E. Sheriff, as Chief Executive Officer of the Company, and Mark W.
Ohlendorf, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ W.E. Sheriff
Name: W.E. Sheriff
Title:
Date:
Chief Executive Officer
March 2, 2009
/s/ Mark W. Ohlendorf
Name: Mark W. Ohlendorf
Title:
Date:
Chief Financial Officer
March 2, 2009