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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

Amendment No. 1

 

     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission File Number 1-16499

 

 

SUNRISE SENIOR LIVING, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   54-1746596

(State or other jurisdiction

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7900 Westpark Drive

McLean, VA

  22102

(Address of principal

executive offices)

  (Zip Code)

Registrant’s telephone number, including area code: (703) 273-7500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common stock, $.01 par value per share   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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.    x

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   ¨    Accelerated filer   x
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 Exchange Act).    Yes  ¨    No  x

The aggregate market value of the Registrant’s Common Stock held by non-affiliates based upon the closing price of $9.53 per share on the New York Stock Exchange on June 30, 2011 was $515.7 million. Solely for the purposes of this calculation, all directors and executive officers of the registrant are considered to be affiliates.

The number of shares of Registrant’s Common Stock outstanding was 57,662,303 at February 17, 2012.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our 2012 annual meeting proxy statement are incorporated by reference into Part III of this report.

 

 

 


EXPLANATORY NOTE

On March 1, 2012, we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Original Form 10-K”). At the time of the filing of the Original Form 10-K, financial statements for CC3Acquisition, LLC were not available. These statements are being included pursuant to Rule 3-09 of Regulation S-X.

This Amendment No. 1 on Form 10-K/A is being filed to amend Item 8 of the Original Form 10-K to provide the separate Rule 3-09 financial statements for CC3 Acquisition, LLC as well as to amend the Exhibit Index.

The Exhibit Index is being amended to include as exhibits new certifications by our Principal Executive Officer and Principal Financial Officer, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended.

There are no other changes to the Original Form 10-K other than those outlined above. This Amendment does not modify or update disclosures therein in any way other than as outlined above.

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the complete text of each Item, as amended, is presented below.

 

2


Item 8. Financial Statements and Supplementary Data

The following information is included on the pages indicated:

 

     Page  

Sunrise Senior Living, Inc.

  

Report of Independent Registered Public Accounting Firm

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Operations

     6   

Consolidated Statements of Changes in Stockholders’ Equity

     7   

Consolidated Statements of Cash Flows

     8   

Notes to Consolidated Financial Statements

     9   

CC3 Acquisition, LLC

  

Report of Independent Auditors

     67   

Consolidated Balance Sheet

     68   

Consolidated Statement of Operations

     69   

Consolidated Statement of Comprehensive Income

  

Consolidated Statement of Changes in Members’ Equity

     70   

Consolidated Statement of Cash Flows

     71   

Notes to the Consolidated Financial Statements

     73   

 

3


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Sunrise Senior Living, Inc.

We have audited the accompanying consolidated balance sheets of Sunrise Senior Living, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 Sunrise Senior Living, Inc. as of December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sunrise Senior Living, Inc.’s internal control over financial reporting as of December 31, 2011, 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 29, 2012 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

McLean, Virginia

February 29, 2012

 

4


SUNRISE SENIOR LIVING, INC.

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share and share amounts)    December 31,
2011
    December 31,
2010
 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 49,549      $ 66,720   

Accounts receivable, net

     38,251        37,484   

Income taxes receivable

     2,287        4,532   

Due from unconsolidated communities

     17,926        19,135   

Deferred income taxes, net

     19,912        20,318   

Restricted cash

     47,873        43,355   

Assets held for sale

     1,025        1,099   

Prepaid expenses and other current assets

     12,290        20,167   
  

 

 

   

 

 

 

Total current assets

     189,113        212,810   

Property and equipment, net

     624,585        238,674   

Due from unconsolidated communities

     0        3,868   

Intangible assets, net

     38,726        40,749   

Investments in unconsolidated communities

     42,925        38,675   

Restricted cash

     183,622        103,334   

Restricted investments in marketable securities

     2,479        2,509   

Assets held in the liquidating trust

     23,649        50,750   

Other assets, net

     13,269        10,089   
  

 

 

   

 

 

 

Total assets

   $ 1,118,368      $ 701,458   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Current maturities of debt

   $ 77,861      $ 80,176   

Outstanding draws on bank credit facility

     39,000        0   

Liquidating trust notes, at fair value

     26,255        0   

Accounts payable and accrued expenses

     134,157        131,904   

Due to unconsolidated communities

     404        502   

Deferred revenue

     11,804        15,946   

Entrance fees

     19,618        30,688   

Self-insurance liabilities

     42,004        35,514   
  

 

 

   

 

 

 

Total current liabilities

     351,103        294,730   

Debt, less current maturities

     450,549        44,560   

Liquidating trust notes, at fair value

     0        38,264   

Investments accounted for under the profit-sharing method

     12,209        419   

Self-insurance liabilities

     43,611        51,870   

Deferred gains on the sale of real estate and deferred revenues

     8,184        16,187   

Deferred income tax liabilities

     19,912        20,318   

Interest rate swap

     21,359        0   

Other long-term liabilities, net

     109,548        110,553   
  

 

 

   

 

 

 

Total liabilities

     1,016,475        576,901   
  

 

 

   

 

 

 

Equity:

    

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding

     0        0   

Common stock, $0.01 par value, 120,000,000 shares authorized, 57,640,010 and 56,453,192 shares issued and outstanding, net of 509,577 and 428,026 treasury shares, at December 31, 2011 and 2010, respectively

     576        565   

Additional paid-in capital

     487,277        478,605   

Retained loss

     (385,294     (361,904

Accumulated other comprehensive (loss) income

     (5,932     2,885   
  

 

 

   

 

 

 

Total stockholders’ equity

     96,627        120,151   
  

 

 

   

 

 

 

Noncontrolling interests

     5,266        4,406   
  

 

 

   

 

 

 

Total equity

     101,893        124,557   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,118,368      $ 701,458   
  

 

 

   

 

 

 

See accompanying notes

 

5


SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Twelve Months Ended
December 31,
 
(In thousands, except per share amounts)    2011     2010     2009  

Operating revenue:

      

Management fees

   $ 96,132      $ 107,832      $ 112,467   

Buyout fees

     3,685        63,286        0   

Resident fees for consolidated communities

     464,064        354,714        339,125   

Ancillary fees

     30,544        43,136        45,397   

Professional fees from development, marketing and other

     2,498        4,278        13,193   

Reimbursed costs incurred on behalf of managed communities

     715,290        827,240        942,809   
  

 

 

   

 

 

   

 

 

 

Total operating revenue

     1,312,213        1,400,486        1,452,991   

Operating expenses:

      

Community expense for consolidated communities

     333,491        262,893        257,968   

Community lease expense

     76,444        59,715        59,315   

Depreciation and amortization

     37,523        40,637        45,778   

Ancillary expenses

     28,396        40,504        42,457   

General and administrative

     114,474        126,566        126,940   

Carrying costs of liquidating trust assets

     2,456        3,146        0   

Write-off of capitalized project costs

     0        0        14,879   

Accounting Restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation

     0        (1,305     3,887   

Restructuring costs

     0        11,690        32,534   

Provision for doubtful accounts

     3,802        6,154        13,251   

(Gain) loss on financial guarantees and other contracts

     (2,100     518        2,053   

Impairment of long-lived assets

     12,734        5,647        29,439   

Costs incurred on behalf of managed communities

     719,159        831,008        949,331   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,326,379        1,387,173        1,577,832   
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (14,166     13,313        (124,841

Other non-operating income (expense):

      

Interest income

     2,060        1,096        1,341   

Interest expense

     (18,320     (7,707     (10,273

Gain on investments

     0        932        3,556   

Gain on fair value of pre-existing equity interest from a business combination

     11,250        0        0   

Gain on fair value of liquidating trust notes

     88        5,240        0   

Other (expense) income

     (615     1,181        6,553   
  

 

 

   

 

 

   

 

 

 

Total other non-operating (expense) income

     (5,537     742        1,177   

Gain on the sale of real estate and equity interests

     8,185        27,672        21,651   

Sunrise’s share of earnings and return on investment in unconsolidated communities

     2,629        7,521        5,673   

Loss from investments accounted for under the profit-sharing method

     (9,806     (9,650     (12,808
  

 

 

   

 

 

   

 

 

 

(Loss) income before (provision for) benefit from income taxes and discontinued operations

     (18,695     39,598        (109,148

(Provision for) benefit from income taxes

     (1,771     (6,559     3,942   
  

 

 

   

 

 

   

 

 

 

(Loss) income before discontinued operations

     (20,466     33,039        (105,206

Discontinued operations, net of tax

     (1,091     67,787        (28,309
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (21,557     100,826        (133,515

Less: Income attributable to noncontrolling interests, net of tax

     (1,833     (1,759     (400
  

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common shareholders

   $ (23,390   $ 99,067      $ (133,915
  

 

 

   

 

 

   

 

 

 

Earnings per share data:

      

Basic net (loss) income per common share

      

(Loss) income from continuing operations

   $ (0.39   $ 0.56      $ (2.06

Discontinued operations, net of tax

     (0.02     1.22        (0.55
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (0.41   $ 1.78      $ (2.61
  

 

 

   

 

 

   

 

 

 

Diluted net (loss) income per common share

      

(Loss) income from continuing operations

   $ (0.39   $ 0.54      $ (2.06

Discontinued operations, net of tax

     (0.02     1.18        (0.55
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (0.41   $ 1.72      $ (2.61
  

 

 

   

 

 

   

 

 

 

See accompanying notes

 

6


SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(In thousands)   Shares of
Common
Stock
    Common
Stock
Amount
    Additional
Paid-in
Capital
    Retained
(Loss) Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
    Equity
Attributable

to  Noncontrolling
Interests
    Total
Equity
 

Balance at January 1, 2009

    50,872      $ 509      $ 458,404      $ (327,056   $ 6,671      $ 138,528      $ 9,386      $ 147,914   

Net (loss) income

    0        0        0        (133,915     0        (133,915     400        (133,515

Foreign currency translation loss, net of tax

    0        0        0        0        (4,813     (4,813     0        (4,813

Sunrise’s share of investee’s other comprehensive income

    0        0        0        0        6,324        6,324        0        6,324   

Distributions to noncontrolling interests

    0        0        (142     0        0        (142     (1,341     (1,483

Sale of Greystone

    0        0        0        0        0        0        (6,371     (6,371

Consolidation of a controlled entity

    0        0        0        0        120        120        2,113        2,233   

Issuance of restricted stock

    4,175        42        11,064        0        0        11,106        0        11,106   

Forfeiture or surrender of restricted stock

    (59     (1     (116     0        0        (117     0        (117

Stock option exercises

    764        8        1,020        0        0        1,028        0        1,028   

Stock-based compensation expense

    0        0        3,928        0        0        3,928        0        3,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    55,752        558        474,158        (460,971     8,302        22,047        4,187        26,234   

Net income

    0        0        0        99,067        0        99,067        1,759        100,826   

Foreign currency translation loss, net of tax

    0        0        0        0        (6,940     (6,940     0        (6,940

Sunrise’s share of investee’s other comprehensive income

    0        0        0        0        1,418        1,418        0        1,418   

Unrealized gain on investments

    0        0        0        0        105        105        0        105   

Distributions to noncontrolling interests

    0        0        0        0        0        0        (1,540     (1,540

Issuance of restricted stock

    475        5        (5     0        0        0        0        0   

Forfeiture or surrender of restricted or common stock

    (39     (1     (116     0        0        (117     0        (117

Stock option exercises

    265        3        370        0        0        373        0        373   

Stock-based compensation expense

    0        0        4,348        0        0        4,348        0        4,348   

Tax effect from stock-based compensation

    0        0        (150     0        0        (150     0        (150
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    56,453        565        478,605        (361,904     2,885        120,151        4,406        124,557   

Net (loss) income

    0        0        0        (23,390     0        (23,390     1,833        (21,557

Foreign currency translation gain, net of tax

    0        0        0        0        1,330        1,330        0        1,330   

Sunrise’s share of investee’s other comprehensive loss

    0        0        0        0        (1,894     (1,894     0        (1,894

Unrealized gain on investments

    0        0        0        0        72        72        0        72   

Unrealized losses on interest rate swap

    0        0        0        0        (8,325     (8,325     0        (8,325

Distributions to noncontrolling interests

    0        0        0        0        0        0        (1,778     (1,778

Noncontrolling interest reserve fund

    0        0        0        0        0        0        805        805   

Issuance of restricted stock

    337        3        (3     0        0        0        0        0   

Forfeiture or surrender of restricted or common stock

    (81     (1     (409     0        0        (410     0        (410

Stock option exercises

    931        9        1,470        0        0        1,479        0        1,479   

Stock-based compensation expense

    0        0        7,614        0        0        7,614        0        7,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    57,640      $ 576      $ 487,277      $ (385,294   $ (5,932   $ 96,627      $ 5,266      $ 101,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

7


SUNRISE SENIOR LIVING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended December 31,  
(In thousands)   2011     2010     2009  

Operating activities

     

Net (loss) income

  $ (21,557   $ 100,826      $ (133,515

Less: Net loss (income) from discontinued operations

    1,091        (67,787     28,309   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

     

Gain on the sale of real estate and equity interests

    (8,185     (27,672     (21,651

Gain on fair value of liquidating trust note

    (88     (5,240     0   

Loss from investments accounted for under the profit-sharing method

    9,806        9,650        12,808   

Gain on investments

    0        (932     (3,556

Gain on fair value of pre-existing equity interest from a business combination

    (11,250     0        0   

Impairment of long-lived assets

    12,734        5,647        29,439   

Write-off of capitalized project costs

    0        0        14,879   

Provision for doubtful accounts

    3,802        6,154        13,251   

Benefit from deferred income taxes

    0        0        (2,790

(Gain) loss on financial guarantees and other contracts

    (2,100     518        2,053   

Sunrise’s share of earnings and return on investment in unconsolidated communities

    (2,629     (7,521     (5,673

Distributions of earnings from unconsolidated communities

    12,826        35,863        18,998   

Depreciation and amortization

    37,523        40,637        45,778   

Amortization of financing costs and debt discount

    3,562        1,003        1,261   

Stock-based compensation

    7,614        4,232        3,812   

Changes in operating assets and liabilities:

     

(Increase) decrease in:

     

Accounts receivable

    (4,969     779        13,617   

Due from unconsolidated senior living communities

    1,385        (830     23,997   

Prepaid expenses and other current assets

    136        (4,237     11,829   

Captive insurance restricted cash

    8,535        (8,837     (722

Other assets

    1,751        871        23,922   

Increase (decrease) in:

     

Accounts payable, accrued expenses and other liabilities

    1,305        (11,390     (37,105

Entrance fees

    (1,653     968        (2,159

Self-insurance liabilities

    (1,493     (15,725     (3,714

Guarantee liabilities

    0        (500     (125

Deferred revenue and gains on the sale of real estate

    (6,745     4,024        1,676   

Net cash (used in) provided by discontinued operations

    (2,239     2,431        (1,200
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    39,162        62,932        33,419   
 

 

 

   

 

 

   

 

 

 

Investing activities

     

Capital expenditures

    (11,361     (15,563     (19,629

Net proceeds (funding) for condominium projects

    2,521        (61     (4,963

Acquisition of AL US Development Venture, LLC , net of cash acquired

    (45,292     0        0   

Dispositions of property

    6,226        18,411        10,758   

Proceeds from the sale of equity interests

    0        35,936        0   

Change in restricted cash

    (75,706     9,247        (14,549

Proceeds from short-term investments

    0        19,618        15,950   

Increase in investments and notes receivable

    0        0        (89,473

Proceeds from investments and notes receivable

    0        1,431        94,968   

Investments in unconsolidated communities

    (13,728     (5,952     (6,760

Distributions of capital from unconsolidated communities

    963        314        (142

Net cash provided by discontinued operations

    5,813        112,869        98,213   
 

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (130,564     176,250        84,373   
 

 

 

   

 

 

   

 

 

 

Financing activities

     

Net proceeds from exercised options

    1,479        373        1,028   

Issuance of junior subordinated convertible debt

    86,250        0        0   

Borrowings on Credit Facility

    39,000        0        0   

Additional borrowings of long-term debt

    0        4,010        4,969   

Repayment of long-term debt

    (34,554     (71,794     (13,561

Net repayments on Bank Credit Facility

    0        (33,728     (61,272

Repayment of liquidating trust notes

    (11,921     (11,482     0   

Distributions to noncontrolling interests

    (1,778     (1,540     (1,341

Financing costs paid

    (4,245     (1,111     (590

Net cash used in discontinued operations

    0        (96,473     (37,255
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    74,231        (211,745     (108,022
 

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    (17,171     27,437        9,770   

Cash and cash equivalents at beginning of period

    66,720        39,283        29,513   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 49,549      $ 66,720      $ 39,283   
 

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

8


Sunrise Senior Living, Inc.

Notes to Consolidated Financial Statements

 

1. Organization and Presentation

Organization

We are a provider of senior living services in the United States, Canada and the United Kingdom. Founded in 1981 and incorporated in Delaware in 1994, we began with a simple but innovative vision — to create an alternative senior living option that would emphasize quality of life and quality of care. We offer a full range of personalized senior living services, including independent living, assisted living, care for individuals with Alzheimer’s and other forms of memory loss, nursing and rehabilitative care. In the past, we also developed senior living communities for ourselves, for ventures in which we retained an ownership interest and for third parties. Due to economic conditions, we have suspended all new development.

At December 31, 2011, we operated 311 communities, including 269 communities in the United States, 15 communities in Canada and 27 communities in the United Kingdom, with a total unit capacity of approximately 30,733. Of the 311 communities that we operated at December 31, 2011, 22 were wholly owned, 26 were under operating leases, one was consolidated as a variable interest entity, one was a consolidated venture, six were leased from a venture and consolidated, 113 were owned in unconsolidated ventures and 142 were owned by third parties.

Basis of Presentation

The consolidated financial statements which are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) include our wholly owned and controlled subsidiaries. Variable interest entities (“VIEs”) in which we have an interest have been consolidated when we have been identified as the primary beneficiary. Entities in which we hold the managing member or general partner interest are consolidated unless the other members or partners have either (1) the substantive ability to dissolve the entity or otherwise remove us as managing member or general partner without cause or (2) substantive participating rights, which provide the other partner or member with the ability to effectively participate in the significant decisions that would be expected to be made in the ordinary course of business. Investments in ventures in which we have the ability to exercise significant influence but do not have control over are accounted for using the equity method. All intercompany transactions and balances have been eliminated in consolidation.

Discontinued operations consist primarily of three communities sold in 2011, our German operations which were sold in 2010, two communities sold in 2010, 22 communities sold in 2009, one community closed in 2009, our Greystone subsidiary sold in 2009 and our Trinity subsidiary which ceased operations in the fourth quarter of 2008.

 

2. Significant Accounting Policies

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider cash and cash equivalents to include currency on hand, demand deposits, and all highly liquid investments with a maturity of three months or less at the date of purchase.

 

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Restricted Cash

We utilize large deductible blanket insurance programs in order to contain costs for certain lines of insurance risks including workers’ compensation and employers’ liability risks, automobile liability risk, employment practices liability risk and general and professional liability risks (“Self-Insured Risks”). We have self-insured a portion of the Self-Insured Risks through our wholly owned captive insurance subsidiary, Sunrise Senior Living Insurance, Inc. (the “Sunrise Captive”). The Sunrise Captive issues policies of insurance on behalf of us and each community we operate and receives premiums from us and each community we operate. The Sunrise Captive pays the costs for each claim above a deductible up to a per claim limit. Cash held by the Sunrise Captive was $95.4 million and $103.9 million at December 31, 2011 and 2010, respectively. The earnings from the investment of the cash of the Sunrise Captive are used to reduce future costs and pay the liabilities of the Sunrise Captive. Interest income in the Sunrise Captive was $0.1 million, $0.2 million and $0.7 million for 2011, 2010 and 2009, respectively.

Also included in restricted cash is $85.0 million related to a lease extension. In December 2011, we closed the transactions contemplated by the Agreement Regarding Leases, dated December 22, 2011 (the “ARL”), by and among us, Marriott International, Inc. (“Marriott”), Marriott Senior Holding Co. and Marriott Magenta Holding Company, Inc. (collectively, the “Marriott Parties”). The ARL relates to a portfolio of 14 leases (the “Leases”) for senior living facilities that are leased by SPTMRT Properties Trust, as landlord to us as tenant and guaranteed by Marriott pursuant to certain lease guarantees (collectively, the “Lease Guarantees”). Each of the Leases is scheduled to expire on December 31, 2013 and, pursuant to a prior agreement between us and the Marriott Parties, we are not permitted to exercise our option under the Leases to extend our terms for an additional five-year term unless Marriott is released from its obligations under the Lease Guarantees.

Pursuant to the terms of the ARL, among other things, Marriott consented to the extension of the term of four of the Leases (the “Continuing Leases”) for an additional five-year term commencing January 1, 2014 and ending December 31, 2018 (the “Extension Term”). We provided Marriott with a letter of credit (the “Letter of Credit”) issued by KeyBank, NA (“KeyBank”) with a face amount of $85.0 million to secure Marriott’s exposure under the Lease Guarantees for the Continuing Leases during the Extension Term and certain other of our obligations (collectively, the “Secured Obligations”). During the Extension Term, we will be required to pay Marriott an annual payment in respect of the cash flow of the Continuing Lease facilities, subject to a $1 million annual minimum. We have notified the landlord that the other ten Leases will terminate effective December 31, 2013.

Marriott may draw on the Letter of Credit in order to pay any of the Secured Obligations if not paid by us when due. We have provided KeyBank with cash collateral of $85.0 million as security for its Letter of Credit obligations. Marriott has agreed to reduce the face amount of the Letter of Credit proportionally on a quarterly basis during the Extension Term as we pay our rental obligations under the Continuing Leases. As the face amount of the Letter of Credit is reduced, KeyBank will return a proportional amount of its cash collateral to us. Following closing, to the extent that we elect not to extend any or all of the Continuing Leases, the face amount of the Letter of Credit will be reduced proportionally in respect of the rent obligations under the Continuing Leases that are not extended.

The details of our restricted cash as of December 31, 2011 and 2010 are as follows (in thousands):

 

     2011      2010  

Self insurance restricted cash

   $ 95,406       $ 103,941   

Cash collateral for letters of credit

     89,002         13,765   

AL US Development restricted cash

     19,313         0   

CC3 restricted cash

     4,211         0   

Other restricted cash

     23,563         28,983   
  

 

 

    

 

 

 
   $ 231,495       $ 146,689   
  

 

 

    

 

 

 

 

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Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts on our outstanding receivables based on an analysis of collectability, including our collection history and generally do not require collateral to support outstanding balances.

Due from Unconsolidated Communities

Due from unconsolidated communities represents amounts due from unconsolidated ventures for development and management costs, including development fees, operating costs such as payroll and insurance costs, and management fees. Operating costs are generally reimbursed within thirty days.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the lesser of the estimated useful lives of the related assets or the remaining lease term. Repairs and maintenance are charged to expense as incurred.

We review the carrying amounts of long-lived assets for impairment when indicators of impairment are identified. If the carrying amount of the long-lived asset exceeds the undiscounted expected cash flows that are directly associated with the use and eventual disposition of the asset, we record an impairment charge to the extent the carrying amount of the asset exceeds the fair value of the assets. We determine the fair value of long-lived assets based upon valuation techniques that include prices for similar assets.

Business Combinations

Our consolidated financial statements include the operations of an acquired business from the date of acquisition. We account for acquired businesses using the acquisition method of accounting. The acquisition method of accounting for acquired businesses requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Also, transaction costs are expensed as incurred.

Assets Held for Sale

As of December 31, 2011 and 2010, approximately $1.0 million and $1.1 million of assets, respectively, were held for sale. The assets are certain condominium units that were acquired through an acquisition. We classify an asset as held for sale when all of the following criteria are met:

 

   

executive management has committed to a plan to sell the asset;

 

   

the asset is available for immediate sale in its present condition;

 

   

an active program to locate a buyer and other actions required to complete the sale have been initiated;

 

   

the asset is actively being marketed; and

 

   

the sale of the asset is probable and it is unlikely that significant changes to the sale plan will be made.

We classify land as held for sale when it is being actively marketed. For wholly owned operating communities, binding purchase and sale agreements are generally subject to substantial due diligence and historically these sales have not always been consummated. As a result, we generally do not believe that the “probable” criteria are met until the community is sold. Upon designation as an asset held for sale, we record the asset at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we cease depreciation. If assets classified as assets held for sale have been held for sale for over a year, the requirements to be classified as held for sale are no longer being met and the assets are reclassified to held and used and depreciation resumed and brought current. However, we usually will continue to market the assets for sale.

 

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Real Estate Sales

We account for sales of real estate in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Property, Plant and Equipment Topic. For sales transactions meeting the requirements of the Topic for full accrual profit recognition, the related assets and liabilities are removed from the balance sheet and the gain or loss is recorded in the period the transaction closes. For sales transactions that do not meet the criteria for full accrual profit recognition, we account for the transactions in accordance with the methods specified in the ASC Property, Plant and Equipment Topic. For sales transactions that do not contain continuing involvement following the sale or if the continuing involvement with the property is contractually limited by the terms of the sales contract, profit is recognized at the time of sale. This profit is then reduced by the maximum exposure to loss related to the contractually limited continuing involvement. Sales to ventures in which we have an equity interest are accounted for in accordance with the partial sale accounting provisions as set forth in the ASC Property, Plant and Equipment Topic.

For sales transactions that do not meet the full accrual sale criteria, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting rather than full accrual sale, based on the nature and extent of the continuing involvement. Some transactions may have numerous forms of continuing involvement. In those cases, we determine which method is most appropriate based on the substance of the transaction.

In transactions accounted for as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, profit, including our development fee, is only recognizable to the extent that proceeds from the sale of the majority equity interest exceeds the costs related to the entire property.

We also may provide guarantees to support the operations of the properties. If the guarantees are for an extended period of time, we apply the profit-sharing method and the property remains on our books, net of any cash proceeds received from the buyer. If support is required for a limited period of time, sale accounting is achieved and profit on the sale may begin to be recognized on the basis of performance of the services required when there is reasonable assurance that future operating revenues will cover operating expenses and debt service.

Under the profit-sharing method, the property portion of our net investment is amortized over the life of the property. Results of operations of the communities before depreciation and fees paid to us is recorded as “Loss from investments accounted for under the profit-sharing method” in the consolidated statements of operations. The net income from operations as adjusted is added to the investment account and losses are reflected as a reduction of the net investment. Distributions of operating cash flows to other venture partners are reflected as an additional expense. All cash paid or received by us is recorded as an adjustment to the net investment. The net investment is reflected in “Investments accounted for under the profit-sharing method” in the consolidated balance sheets. At December 31, 2011 and 2010, we have two ventures accounted for under the profit-sharing method.

Intangible Assets

We capitalize costs incurred to acquire management, development and other contracts. We use the acquisition method of accounting in determining the allocation of the purchase price to net tangible and intangible assets acquired, we make estimates of the fair value of the tangible and intangible assets using information obtained as a result of pre-acquisition due diligence, marketing, leasing activities and independent appraisals.

Intangible assets are valued using expected discounted cash flows and are amortized using the straight-line method over the remaining contract term, generally ranging from one to 30 years. The carrying amounts of intangible assets are reviewed for impairment when indicators of impairment are identified. If the carrying

 

12


amount of the asset (group) exceeds the undiscounted expected cash flows that are directly associated with the use and eventual disposition of the asset (group), an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value.

Investments in Unconsolidated Communities

We hold a noncontrolling equity interest in ventures established to develop or acquire and own senior living communities. Those ventures are generally limited liability companies or limited partnerships. Our equity interest in these ventures generally ranges from 10% to 50%.

In accordance with ASC Consolidation Topic, we review all of our ventures to determine if they are VIEs and require consolidation. The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could both potentially be significant to the VIE. We perform ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE. At December 31, 2011 and 2010, we are the primary beneficiary of one VIE and therefore consolidate that entity.

In accordance with ASC Consolidation Topic, the general partner or managing member of a venture consolidates the venture unless the limited partners or other members have either (1) the substantive ability to dissolve the venture or otherwise remove the general partner or managing member without cause or (2) substantive participating rights in significant decisions of the venture, including authorizing operating and capital decisions of the venture, including budgets, in the ordinary course of business. We have reviewed all ventures that are not VIEs where we are the general partner or managing member and have determined that in all cases the limited partners or other members have substantive participating rights such as those set forth above and, therefore, no such ventures are consolidated.

For ventures not consolidated, we apply the equity method of accounting in accordance with ASC Investments – Equity Method and Joint Ventures Topic. Equity method investments are initially recorded at cost and subsequently are adjusted for our share of the venture’s earnings or losses and cash distributions. In accordance with this Topic, the allocation of profit and losses should be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Because certain venture agreements contain preferences with regard to cash flows from operations, capital events and/or liquidation, we reflect our share of profits and losses by determining the difference between our “claim on the investee’s book value” at the end and the beginning of the period. This claim is calculated as the amount that we would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method.

Our reported share of earnings is adjusted for the impact, if any, of basis differences between our carrying value of the equity investment and our share of the venture’s underlying assets. We generally do not have future requirements to contribute additional capital over and above the original capital commitments, and therefore, we discontinue applying the equity method of accounting when our investment is reduced to zero barring an expectation of an imminent return to profitability. If the venture subsequently reports net income, the equity method of accounting is resumed only after our share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

When the majority equity partner in one of our ventures sells its equity interest to a third party, the venture frequently refinances its senior debt and distributes the net proceeds to the equity partners. All distributions received by us are first recorded as a reduction of our investment. Next, we record a liability for any contractual or implied future financial support to the venture including obligations in our role as a general partner. Any remaining distributions are recorded as “Sunrise’s share of earnings (loss) and return on investment in unconsolidated communities” in the consolidated statements of operations.

 

13


We evaluate realization of our investment in ventures accounted for using the equity method if circumstances indicate that our investment is other than temporarily impaired.

Derivative Instruments

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determines how we reflect the change in fair value of the derivative instrument in our financial statements. A derivative qualifies for hedge accounting if, at inception, we expect the derivative to be highly effective in offsetting the underlying hedged cash flows and we fulfill the hedge documentation standards at the time we enter into the derivative contract. We have designated an interest rate swap as a cash flow hedge. The asset or liability value of the derivative will change in tandem with its fair value. For the effective portion of the hedge, we record changes in fair value in other comprehensive income (“OCI”). We release the derivative’s gain or loss from OCI to match the timing of the underlying hedged item’s effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we will release gains and losses from OCI based on the timing of the underlying cash flows.

Deferred Financing Costs

Costs incurred in connection with obtaining financing for our consolidated communities are deferred and amortized over the term of the financing using the effective interest method. Deferred financing costs are included in “Other assets” in the consolidated balance sheets.

Loss Reserves For Certain Self-Insured Programs

We offer a variety of insurance programs to the communities we operate. These programs include property insurance, general and professional liability insurance, excess/umbrella liability insurance, crime insurance, automobile liability and physical damage insurance, workers’ compensation and employers’ liability insurance and employment practices liability insurance (the “Insurance Program”). Substantially all of the communities we operate that participate in the Insurance Program are charged their proportionate share of the cost of the Insurance Program.

We utilize large deductible blanket insurance programs in order to contain costs for certain of the lines of insurance risks in the Insurance Program including self-insured risks. The design and purpose of a large deductible insurance program is to reduce overall premium and claim costs by internally financing lower cost claims that are more predictable from year to year, while buying insurance only for higher-cost, less predictable claims.

We have self-insured a portion of the self-insured risks through the Sunrise Captive. The Sunrise Captive issues policies of insurance on behalf of us and each community we operate and receive premiums from us and each community we operate. The Sunrise Captive 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.

We record outstanding losses and expenses for all self-insured risks and for claims under insurance policies based on management’s best estimate of the ultimate liability after considering all available information, including expected future cash flows and actuarial analyses. We review our sensitivity analysis annually and our annual estimated cost for self-insured risks is determined using management judgment including actuarial analyses at various confidence levels. Our confidence level, based on our annual review, is currently at 50%. We

 

14


believe the 50% confidence level provides our best estimate of our expected liability due to our sufficient history of paid and incurred claims associated with our Sunrise Captive. The confidence level is the likelihood that the recorded expense will exceed the ultimate incurred cost.

We believe that the allowance for outstanding losses and expenses is appropriate to cover the ultimate cost of losses incurred at December 31, 2011 and 2010 based on our best estimate at that date. The allowance may ultimately be settled for a greater or lesser amount. Any subsequent changes in estimates are recorded in the period in which they are determined and will be shared with the communities participating in the Insurance Programs based on the proportionate share of any changes.

Employee Health and Dental Benefits

We offer employees an option to participate in our self-insured health and dental plans. The cost of our employee health and dental benefits, net of employee contributions, is shared between us and the communities based on the respective number of participants working either at our community support office or at the communities. Funds collected are used to pay the actual program costs including estimated annual 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. We also record a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. We believe that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses incurred at December 31, 2011 and 2010, but actual claims may differ. Any subsequent changes in estimates are recorded in the period in which they are determined and will be shared with the communities participating in the program based on their proportionate share of any changes.

Continuing Care Agreements

We lease communities under operating leases and own communities that provide life care services under various types of entrance fee agreements with residents (“Entrance Fee Communities” or “Continuing Care Retirement Communities”). Residents of Entrance Fee Communities are required to sign a continuing care agreement with us. The care agreement stipulates, among other things, the amount of all entrance and monthly fees, the type of residential unit being provided, and our obligation to provide both health care and non-health care services. In addition, the care agreement provides us with the right to increase future monthly fees. The care agreement is terminated upon the receipt of a written termination notice from the resident or the death of the resident. Refundable entrance fees are returned to the resident or the resident’s estate depending on the form of the agreement either upon re-occupancy or termination of the care agreement.

When the present value of estimated costs to be incurred under care agreements exceeds the present value of estimated revenues, the present value of such excess costs is accrued. The calculation assumes a future increase in the monthly revenue commensurate with the monthly costs. The calculation currently results in an expected positive net present value cash flow and, as such, no liability was recorded as of December 31, 2011 or December 31, 2010.

Refundable entrance fees are primarily non-interest bearing and, depending on the type of plan, can range from between 30% to 100% of the total entrance fee less any additional occupant entrance fees. As these obligations are considered security deposits, interest is not imputed on these obligations. Deferred entrance fees were $19.6 million and $30.7 million at December 31, 2011 and 2010, respectively.

Non-refundable portions of entrance fees are deferred and recognized as revenue using the straight-line method over the actuarially determined expected term of each resident’s contract.

 

15


Accounting for Guarantees

Guarantees entered into in connection with the sale of real estate often prevent us from either accounting for the transaction as a sale of an asset or recognizing in earnings the profit from the sale transaction. Guarantees not entered into in connection with the sale of real estate are considered financial instruments. For guarantees considered financial instruments we recognize at the inception of a guarantee or the date of modification, a liability for the fair value of the obligation undertaken in issuing a guarantee. On a quarterly basis, we evaluate the estimated liability based on the operating results and the terms of the guarantee. If it is probable that we will be required to fund additional amounts than previously estimated a loss is recorded. Fundings that are recoverable as a loan from a venture are considered in the determination of the contingent loss recorded. Loan amounts are evaluated for impairment at inception and then quarterly.

Asset Retirement Obligations

In accordance with ASC Asset Retirement and Environmental Obligations Topic, we record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated.

Certain of our operating real estate assets contain asbestos. The asbestos is appropriately contained, in accordance with current environmental regulations, and we have no current plans to remove the asbestos. When, and if, these properties are demolished, certain environmental regulations are in place which specify the manner in which the asbestos must be handled and disposed of. Because the obligation to remove the asbestos has an indeterminable settlement date, we are not able to reasonably estimate the fair value of this asset retirement obligation.

In addition, certain of our long-term ground leases include clauses that may require us to dispose of the leasehold improvements constructed on the premises at the end of the lease term. These costs, however, are not estimable due to the range of potential settlement dates and variability among properties. Further we believe, the present value of any such costs would be insignificant as the remaining term of each of the leases is fifty years or more.

Income Taxes

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how these events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We provide a valuation allowance against the net deferred tax assets when it is more likely than not that sufficient taxable income will not be generated to utilize the net deferred tax assets.

Revenue Recognition

“Management fees” is comprised of fees from management agreements for operating communities owned by unconsolidated ventures and third parties, which consist of base management fees and incentive management fees. The management fees are generally between five and eight percent of a managed community’s total operating revenue. Fees are recognized in the month they are earned in accordance with the terms of the management agreement.

“Buyout fees” is comprised of fees from the buyout of management agreements.

 

16


“Resident fees from consolidated communities” are recognized monthly as services are provided. Agreements with residents are generally for a term of one year and are cancelable by residents with 30 day notice. Approximately 16.0%, 19.4% and 21.1% of our resident fees from our consolidated communities for 2011, 2010 and 2009, respectively, were derived from governmental reimbursement programs. Revenues from these programs are recorded net of contractual adjustments as dictated under the specific program guidelines. Retroactive adjustments or assessments from program cost report audits conducted by governmental agencies are recorded against net revenues in the month we are given notice, without regard to whether we intend to appeal such assessments.

“Ancillary services” is comprised of fees for providing care services to residents of certain communities owned by ventures and fees for providing home health assisted living services.

“Professional fees from development, marketing and other” is comprised of fees received for services provided prior to the opening of an unconsolidated community and fees received for renovation projects. Our development fees related to building design and construction oversight are recognized using the percentage-of-completion method and the portion related to marketing services is recognized on a straight-line basis over the estimated period the services are provided. The cost-to-cost method is used to measure the extent of progress toward completion for purposes of calculating the percentage-of-completion portion of the revenues. Fees for renovation projects are recognized when earned.

“Reimbursed costs incurred on behalf of managed communities” is comprised of reimbursements for expenses incurred by us, as the primary obligor, on behalf of communities operated by us under long-term management agreements. Revenue is recognized when the costs are recorded on the books of the managed communities and we are due the reimbursement. If we are not the primary obligor, certain costs, such as interest expense, real estate taxes, depreciation, ground lease expense, bad debt expense and cost incurred under local area contracts, are not included. The related costs are included in “Costs incurred on behalf of managed communities”.

We considered the indicators in ASC Revenue Recognition Topic, in making our determination that revenues should be reported gross versus net. Specifically, we are the primary obligor for certain expenses incurred at the communities, including payroll costs, insurance and items such as food and medical supplies purchased under national contracts entered into by us. We, as manager, are responsible for setting prices paid for the items underlying the reimbursed expenses, including setting pay-scales for our employees. We select the supplier of goods and services to the communities for the national contracts that we enter into on behalf of the communities. We are responsible for the scope, quality and extent of the items for which we are reimbursed. Based on these indicators, we have determined that it is appropriate to record revenues gross versus net.

Stock-Based Compensation

We record compensation expense for our employee stock options and restricted stock awards in accordance with ASC Equity Topic. This Topic requires that all share-based payments to employees be recognized in the consolidated statements of operations based on their grant date fair values with the expense being recognized over the requisite service period. We use the Black-Scholes model to determine the fair value of our awards at the time of grant. For awards with both performance and service conditions, we start recognizing compensation cost over the remaining service period, when it is probable the performance condition will be met.

Foreign Currency Translation

Our reporting currency is the U.S. dollar. Certain of our subsidiaries’ functional currencies are the local currency of their respective country. In accordance with ASC Foreign Currency Matters Topic, balance sheets prepared in their functional currencies are translated to the reporting currency at exchange rates in effect at the end of the accounting period except for stockholders’ equity accounts and intercompany accounts with

 

17


consolidated subsidiaries that are considered to be of a long-term nature, which are translated at rates in effect when these balances were originally recorded. Revenue and expense accounts are translated at a weighted average of exchange rates during the period. The cumulative effect of the translation is included in “Accumulated other comprehensive income” in the consolidated balance sheets. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the balance sheet date. All differences are recorded as “Other income (expense)” in the consolidated statements of operations.

Advertising Costs

We expense advertising costs as incurred. Total advertising expense for the years ended December 31, 2011, 2010 and 2009 was $2.5 million, $4.1 million and $4.8 million, respectively.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals quarterly and make revisions based on changes in facts and circumstances.

Reclassifications

Certain amounts have been reclassified to conform to the current year presentation. The majority of the reclassifications are to discontinued operations which includes three communities sold in 2011, our German operations which were sold in 2010, two communities sold in 2010, 22 communities sold in 2009, one community closed in 2009, our Greystone subsidiary sold in 2009 and our Trinity subsidiary which ceased operations in 2008.

New Accounting Standards

The following Accounting Standards Update (“ASU”) was issued in 2009:

The FASB issued ASU 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). It requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. It eliminated the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognized revenue for an arrangement with multiple deliverables subject to Accounting Standards Codification (“ASC”) Subtopic 605-25 – Revenue Multiple Element Arrangements. It no longer requires third party evidence. ASU 2009-13 was effective for us January 1, 2011 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

The following ASUs were issued in 2010:

ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements, requires separate disclosures of transfers in and out of Level 1 and Level 2 fair value measurements along with the reason for the transfer. ASU 2010-06 also requires separately presenting in the reconciliation for Level 3 fair value measurements purchases, sales, issuances and settlements. It clarifies the disclosure regarding the level of disaggregation and input and valuation techniques. Certain portions of ASU 2010-06 were effective in the first quarter of 2010, and the portions of ASU 2010-06 which effect Level 3 reconciliation was effective for us January 1, 2011 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

18


ASU 2010-13, Compensation – Stock Compensation (Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Security Trades, clarifies that a share-based payment award with an exercise price denominated in the currency of the market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that would require the share-based payment award to be classified as a liability. ASU 2010-13 was effective for us on January 1, 2011 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplemental pro forma disclosures under Topic 805. ASU 2010-29 was effective for us on January 1, 2011 and did not have a material impact on our consolidated financial position, results of operations or cash flows.

The following ASUs were issued in 2011.

ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, clarifies some existing rules but does not require additional fair value measurements, is not intended to establish valuation standards or affect valuation practices outside of financial reporting. A specific clarification relates to the concepts of “highest and best use” and “valuation premise” which are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring fair value of financial assets or liabilities. Additional disclosures for Level 3 measurements include the valuation process used and the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. ASU 2011-04 is effective for us January 1, 2012 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, gives an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 is effective for us January 1, 2012 and will not have a material impact on our consolidated financial position, results of operations or cash flows.

ASU 2011-10, Property, Plant and Equipment (Topic 360), Derecognition of in Substance Real Estate – a Scope Clarification, requires when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance of Subtopic 360-20 to determine whether it should derecognize in the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest, the reporting entity would continue to include the real estate, debt and results of the subsidiary’s operations in its consolidated financial statements until legal title of the real estate is transferred to legally satisfy the debt. ASU 2011-10 is effective for us July 1, 2012 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

ASU 2011-11, Balance Sheet (Topic 210), Disclosure about Offsetting Assets and Liabilities, requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for us January 1, 2013 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

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ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 defers the presentation of the reclassification adjustments in and out of other comprehensive income, but requires entities to report reclassification out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. ASU 2011-05 is effective for us January 1, 2012 and will not have a material impact on our consolidated financial position, results of operations or cash flows.

 

3. Fair Value Measurements

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The ASC Fair Value Measurements Topic established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs that are used when little or no market data is available.

Interest Rate Swap

In connection with our purchase of our partner’s interest in AL US Development Venture, LLC (“AL US”) (refer to Note 11), we assumed the mortgage debt and an interest rate swap. We then entered into a new interest rate swap arrangement that extended the term of the existing interest rate swap to be coterminous with the maturity extension of the mortgage debt (extended from June 2012 to June 2015). We entered into the swap in order to hedge against changes in cash flows (interest payments) attributable to fluctuations in the one-month LIBOR rate. As a result, we will pay a fixed rate of 3.2% plus the applicable spread of 175 basis points as opposed to a floating rate equal to the one-month LIBOR rate plus the applicable spread of 175 basis points on a notional amount of $259.4 million through the maturity date of the loan. The agreement includes a credit-risk-related contingency feature whereby the derivative counterparty has incorporated the loan covenant provisions of our indebtedness with a lender affiliate of the derivative counterparty. The failure to comply with the loan covenant provisions would result in being in default on any derivative instrument obligations covered by the agreement. We have not posted any collateral related to this agreement. As of December 31, 2011, the derivative is in a liability position and has a fair value of $21.4 million. If we had breached any of these loan covenant provisions at December 31, 2011, we could have been required to settle our obligations under the agreement at their termination value of approximately $22.3 million. The difference between the fair value liability and the termination liability represents an adjustment for accrued interest.

We have designated the derivative as a cash flow hedge. The derivative value is based on the prevailing market yield curve on the date of measurement. We also consider counterparty credit risk in the calculation of the fair value of the swap. We evaluate the hedging effectiveness of the derivative both at inception and on an on-going basis. For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $3.2 million of losses, which are included in accumulated other comprehensive (loss) income (“AOCI”), are expected to be reclassified into earnings in the next 12 months as an increase to interest expense.

 

20


The following table details the fair market value as of December 31, 2011 (in thousands):

 

             Fair Value Measurements at Reporting Date Using  

Liabilities

   December 31,
2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Interest rate swap

   $ 21,359       $ 0       $ 21,359       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details the impact of the derivative instrument on the consolidated statements of operations and other comprehensive income for the twelve months ended December 31 (in thousands):

 

     Location   2011     2010      2009  

Loss on interest rate swap recognized in OCI

   OCI   $ 10,665      $ 0       $ 0   

Loss reclassified from AOCI into income (effective portion)

   Interest expense     2,340        0         0   

(Loss) gain recognized in income (ineffective portion and amount excluded from effectiveness testing)

   Other (expense) income     (135     0         0   

Restricted Investments in Marketable Securities

The following table details the restricted investments in marketable securities measured at fair value as of December 31, 2011 (in thousands):

 

Assets

   December 31,
2011
     Active Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs

(Level 3)
 

Restricted investments in marketable securities

   $ 2,479       $ 2,479       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The restricted investments in marketable securities relates to a consolidated entity in which we have control but no ownership interest.

Assets Held for Sale, Assets Held and Used and Liquidating Trust Assets

The following table details the assets impaired in 2011 (in thousands):

 

Assets

   December 31,
2011
     Active Markets for
Identical Assets
(Level 1)
     Observable
Inputs
(Level 2)
     Unobservable
Inputs

(Level 3)
     Total
Impairment
Losses in 2011
 

Assets held and used

   $ 22,879       $ 0       $ 0       $ 22,879       $ 5,359   

Assets held for sale

     1,025         0         0         1,025         139   

Liquidating trust assets (1)

     19,135         0         0         19,135         6,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 43,039       $ 0       $ 0       $ 43,039       $ 11,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes assets sold in 2011. Impairment losses of $0.9 million relate to land parcels sold in 2011 included in operating expenses under impairment of long-lived assets.

Assets Held for Sale

Assets held for sale with a lower of carrying value or fair value less estimated costs to sell consists of the following (in thousands):

 

      December 31,
2011
     December 31,
2010
 

Assets held for sale (condominium units)

   $ 1,025       $ 1,099   
  

 

 

    

 

 

 

 

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In 2011, we classified the assets of a condominium project as held for sale. The assets are recorded at the lower of their carrying value or fair value less estimated costs to sell. We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value. As the carrying value of the assets were in excess of their fair value less estimated costs to sell, we recorded an impairment charge of $0.1 million, which is included in operating expenses under impairment of long-lived assets.

In 2010, certain land parcels, a closed community and a condominium project were classified as assets held for sale. They were recorded at the lower of their carrying value or fair value less estimated costs to sell. We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value. As the carrying value of an asset was in excess of its fair value less estimated costs to sell, we recorded an impairment charge of $0.7 million in 2010, which is included in operating expenses under impairment of long-lived assets.

In 2010, land parcels and a closed community classified as assets held for sale had been held for sale for over a year. Therefore, the requirements to be classified as held for sale were no longer being met and the assets were reclassified to held and used or to the liquidating trust.

In 2009, we recorded certain land parcels (including two closed construction sites), a condominium project and a closed property as held for sale at the lower of their carrying value or fair value less estimated costs to sell. We used appraisals, bona fide offers, market knowledge and broker opinions of value to determine fair value. As the carrying value of some of the assets was in excess of the fair value less estimated costs to sell, we recorded a charge of $4.5 million. At the end of 2009, seven land parcels classified as assets held for sale had been held for sale for over a year. Therefore, the requirements to be classified as held for sale were not met and the assets were re-classified to held and used as of December 31, 2009.

Assets Held and Used

In 2011, we recorded impairment charges of $5.4 million for a land parcel and an operating community as the carrying value of each of the assets was in excess of its fair value. We used recent comparable sales, market knowledge, brokers’ opinions of value and the income approach to determine fair value. The impairment loss is included in operating expenses under impairment of long-lived assets.

In 2010, we recorded impairment charges of $1.1 million for a land parcel and an operating community as the carrying value of these assets was in excess of their fair value. We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value. The impairment charges are included in operating expenses under impairment of long-lived assets.

In 2009, we recorded impairment charges of $24.9 million related to certain operating communities that are held and used as the carrying value of these assets was in excess of the fair value. We used appraisals, recent sale and a cost of capital rate to the communities’ average net income to estimate fair value of all of these assets. We subsequently sold 21 operating communities that were classified as assets held and used and the $22.6 million impairment charge related to certain of these communities was included in discontinued operations.

In 2009, we also recorded impairment charges of $24.9 million for certain land parcels held and used as the carrying value of these assets was in excess of the fair value. We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value.

Liquidating Trust Assets

In connection with the restructuring of our German indebtedness (refer to Note 11), we granted mortgages for the benefit of the electing lenders on certain of our unencumbered North American properties (the “liquidating trust”). As of December 31, 2011, the liquidating trust assets consist of nine land parcels and one closed community. In 2011, we recorded $6.3 million of impairment charges on seven land parcels held in the

 

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liquidating trust as the carrying value of each of the assets was in excess of its estimated fair value. We used recent comparable sales, market knowledge, brokers’ opinions of value and the income approach to estimate the fair value. Our estimate of fair value also considered the short-term maturity of the liquidating trust notes. The impairment loss is included in operating expenses under impairment of long-lived assets.

In 2010, we recorded impairment charges of $4.1 million on ten assets held in the liquidating trust as the carrying value of these assets were in excess of the fair value. We used appraisals, bona fide offers, market knowledge and brokers’ opinions of value to determine fair value. The impairment charge is included in operating expenses under impairment of long-lived assets.

Debt

The fair value of our debt has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. We have applied Level 2 and Level 3 type inputs to determine the estimated fair value of our debt. The following table details by category the principal amount, the average interest rate and the estimated fair market value of our debt (in thousands):

 

     Fixed Rate
Debt
    Variable Rate
Debt
 

Total Carrying Value

   $ 87,615      $ 506,050 (1) 
  

 

 

   

 

 

 

Average Interest Rate

     5.03     3.96
  

 

 

   

 

 

 

Estimated Fair Market Value

   $ 87,640      $ 497,506   
  

 

 

   

 

 

 

 

(1) Includes $259.4 million of debt that has been fixed by a separate interest rate swap instrument.

Disclosure about fair value of financial instruments is based on pertinent information available to us at December 31, 2011.

Liquidating Trust Notes

We elected the fair value option to measure the financial liabilities associated with and which originated from the restructuring of our German loans (refer to Note 11). The notes for the liquidating trust assets are accounted for under the fair value option. The carrying value of the financial liabilities for which the fair value option was elected was estimated applying certain data points including the underlying value of the collateral and the expected timing and amount of repayment. However, the carrying value of the notes, while under the fair value option, is subject to our minimum payment guarantee.

 

             Fair Value Measurements at Reporting Date Using         

(In thousands)

Liabilities

   December 31,
2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gain
 

Liquidating trust notes, at fair value

   $ 26,255       $ 0       $ 0       $ 26,255       $ 88   

The following table reconciles the beginning and ending balances for the notes for the liquidating trust assets using fair value measurements based on significant unobservable inputs for 2011 (in thousands):

 

     Liquidating
Trust Notes
 

Beginning balance - 1/1/11

   $ 38,264   

Total gains

     (88

Payments

     (11,921
  

 

 

 

Ending balance - 12/31/11

   $ 26,255   
  

 

 

 

 

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Other Fair Value Information

Cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses, equity investments and other current assets and liabilities are carried at amounts which reasonably approximate their fair values.

 

4. Allowance for Doubtful Accounts

Allowance for doubtful accounts consists of the following (in thousands):

 

     Accounts
Receivable
    Other
Assets
    Total  

Balance January 1, 2009

   $ 35,033      $ 8,000      $ 43,033   

Provision for doubtful accounts (1)

     14,931        0        14,931   

Write-offs

     (25,900     (8,000     (33,900
  

 

 

   

 

 

   

 

 

 

Balance December 31, 2009

     24,064        0        24,064   

Provision for doubtful accounts (1)

     6,156        0        6,156   

Write-offs

     (13,891     0        (13,891
  

 

 

   

 

 

   

 

 

 

Balance December 31, 2010 (1)

     16,329        0        16,329   

Provision for doubtful accounts (1)

     3,845        0        3,845   

Write-offs

     (5,676     0        (5,676
  

 

 

   

 

 

   

 

 

 

Balance December 31, 2011 (1)

   $ 14,498      $ 0      $ 14,498   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes provision associated with discontinued operations.

 

5. Property and Equipment

Property and equipment consists of the following (in thousands):

 

     December 31,  
     Asset Lives    2011     2010  

Land and land improvements

   15 years    $ 120,803      $ 50,806   

Building and building improvements

   40 years      579,064        205,822   

Furniture and equipment

   3-10 years      166,517        144,970   
     

 

 

   

 

 

 
        866,384        401,598   

Less: Accumulated depreciation

        (241,799     (162,924
     

 

 

   

 

 

 

Property and equipment, net

      $ 624,585      $ 238,674   
     

 

 

   

 

 

 

Depreciation expense was $32.4 million, $27.3 million and $31.0 million in 2011, 2010 and 2009, respectively.

In 2011, we sold three wholly owned operating communities with a net book value of $15.8 million and three land parcels with a net book value of $4.0 million for total proceeds of $12.8 million. We also recorded impairment charges of $12.7 million related to ten land parcels, one condominium project and one operating community. Refer to Note 3.

In addition, we received $2.0 million in 2011 relating to the sale of a land parcel sold in 2010. The receipt of the amount was contingent on the buyer receiving zoning approval for the property which the buyer received in 2011.

In 2010, we sold two communities with a net book value of $5.7 million and four land parcels with a net book value of $14.7 million for total proceeds of $24.4 million. We also recorded impairment charges of $5.9 million related to eight land parcels, two operating communities, one condominium project and two ceased development projects. Refer to Note 3.

 

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In 2009, we sold 21 non-core communities with a net book value of $142.5 million for an aggregate purchase price of $204 million. We recorded a gain of approximately $48.9 million after a deduction of $5.0 million related to potential future indemnification obligations which expired in November 2010. We recognized $5.0 million of gain related to expiration of this indemnification obligation in 2010 which is included in discontinued operations. In 2009, we also sold one community with a net book value of zero for $2.0 million and we recorded a gain of $0.5 million in 2009 with additional gain of $1.5 million recorded in 2010 when a note receivable was collected.

 

6. Acquisition of AL US

On June 2, 2011, we closed on a purchase and sale agreement with Morgan Stanley Real Estate Fund VII Global-F (U.S.), L.P., Morgan Stanley Real Estate Fund VII Special Global (U.S.), L.P., MSREF VII Global-T Holding II, L.P., and Morgan Stanley Real Estate Fund VII Special Global-TE (U.S.), L.P. (collectively, the “MS Parties”) to purchase the MS Parties’ 80% membership interest (“MS Interest”) in the AL US Development Venture, LLC (“AL US”) venture in which we already owned the remaining 20% membership interest. AL US indirectly owns 15 assisted and independent living facilities which we managed prior to the purchase. Pursuant to the purchase and sale agreement, we purchased the MS Interest for an aggregate purchase price of $45 million. As a result of the transaction, we own 100% of the membership interest of AL US and accordingly, have consolidated the assets, liabilities and operating results of AL US from the date of acquisition.

We acquired AL US in stages. The fair value of our 20% membership interest immediately prior to the acquisition of the MS Interest was calculated to be approximately $11.3 million based on an estimated fair value of approximately $56.3 million for the total underlying equity of AL US. The estimated fair value of the equity was calculated based on the acquisition date fair value of the assets and working capital of approximately $421.5 million less the fair value of the debt and interest rate swap assumed of $365.2 million. As the carrying value of our investment in AL US prior to the acquisition was zero, we recognized a gain of approximately $11.3 million on our pre-existing membership interest as of the acquisition date.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the acquisition date (in thousands):

 

     Amounts
Recognized as of
Acquisition Date
 

Property and equipment

   $ 412,560   

Other assets

     16,069   

Debt

     (350,069

Interest rate swap

     (15,130

Other liabilities

     (7,180
  

 

 

 

Net assets acquired

     56,250   

Gain on fair value of pre-existing equity interest from a business combination

     (11,250

Net transaction costs

     292   
  

 

 

 

Total consideration paid

   $ 45,292   
  

 

 

 

The estimated fair value of the real estate assets at acquisition was approximately $412.6 million. To determine the fair value of the real estate, we examined various data points including (i) transactions with similar assets in similar markets and (ii) independent appraisals of the acquired assets. As of the acquisition date, the fair value of working capital approximated its carrying value.

The estimated fair value of the assumed debt and interest rate swap at acquisition was approximately $350.1 million and $15.1 million, respectively. The fair value of the debt was estimated based on current rates offered

 

25


for debt with the same remaining maturities and comparable collateralizing assets. Immediately following the closing of the transaction, we entered into an amendment to the loan agreement with HSH Nordbank AG (refer to Note 11) and made a $25.0 million principal payment on the debt.

The following table presents information for AL US that is included in our consolidated statement of operations from the acquisition date, June 2, 2011, through December 31, 2011 (in thousands).

 

     AL US
Included in
Sunrise’s
2011
Results
 

Revenues

   $ 49,286   

Income attributable to common shareholders

     854   

The following table presents our supplemental consolidated pro forma information as if the acquisition had occurred on January 1, 2010 (in thousands except per share amounts):

 

     2011     2010  

Revenues

   $ 1,326,300      $ 1,434,561   

(Loss) income from continuing operations

     (32,398     49,024   

Diluted (loss) earnings per share

   $ (0.60   $ 0.82   

The unaudited pro forma consolidated results do not purport to project the future results of operations. The unaudited pro forma consolidated results reflect the historical financial information of us and AL US, adjusted for the following pro forma pre-tax amounts:

 

   

Elimination of our revenue earned from the management of the communities prior to acquisition of $2.4 million and $5.8 million for 2011 and 2010, respectively.

 

   

Elimination of direct expenses from the management of the communities prior to acquisition of $18.3 million and $41.9 million for 2011 and 2010, respectively.

 

   

Elimination of equity in earnings from the AL US venture of $2.7 million and $(2.7) million for 2011 and 2010, respectively.

 

   

Addition of revenue from the operation of the communities prior to acquisition of $34.8 million and $81.8 million for 2011 and 2010, respectively.

 

   

Addition of expenses from the operation of the communities prior to acquisition of $15.6 million and $34.8 million for 2011 and 2010, respectively.

 

   

Adjustments to depreciation of $4.2 million and $15.0 million for 2011 and 2010, respectively, related to the property and equipment acquired.

 

   

Interest adjustment of $5.9 million and $15.3 million for 2011 and 2010, respectively, related to the debt assumed.

 

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7. Sales of Real Estate

Total gains (losses) on sale recognized are as follows (in thousands):

 

     December 31,  
     2011      2010     2009  

Properties accounted for under basis of performance of services

   $ 5,236       $ 1,269      $ 10,451   

Properties accounted for previously under deposit method

     0         1,900        3,439   

Properties accounted for under the profit-sharing method

     0         0        8,853   

Land and community sales

     2,101         (241     (360

Sales of equity interests

     0         25,013        0   

Condominium sales

     0         (171     (1,032

Other sales

     848         (98     300   
  

 

 

    

 

 

   

 

 

 

Total gains on the sale of real estate and equity interests

   $ 8,185       $ 27,672      $ 21,651   
  

 

 

    

 

 

   

 

 

 

Basis of Performance of Services

In connection with certain transactions where we sold majority membership interests in entities owning partially developed land or sold partially developed land to ventures, we provided guarantees to support the operations of the underlying communities for a limited period of time. In addition, we have operated the communities under long-term management agreements since their opening. Due to our continuing involvement, all gains on the sale and fees received after the sale are initially deferred. Any fundings under the cost overrun guarantees and the operating deficit guarantees are recorded as a reduction of the deferred gain. Gains and development fees are recognized on the basis of performance of the services required. Gains of $5.2 million, $1.3 million and $10.5 million were recognized in 2011, 2010 and 2009, respectively.

Deposit Method

In 2003, we sold a portfolio of 13 operating communities and five communities under development for approximately $158.9 million in cash, after transaction costs, which was approximately $21.5 million in excess of our capitalized costs. In connection with the transaction, we agreed to provide income support to the buyer if the cash flows from the communities were below a stated target. We recorded a gain of $52.5 million upon the expiration of the guarantee in 2007. In 2011, 2010 and 2009, the buyer reimbursed us for some of the income support payments previously made. We recorded additional gains of zero, $1.9 million and $3.4 million in 2011, 2010 and 2009, respectively, relating to these reimbursements.

Installment Method

In 2009, we sold a wholly owned community to an unrelated third party for approximately $2.0 million. We received $0.3 million in cash and a note receivable for $1.7 million when the transaction closed. The cash received did not meet the minimum initial investment required to adequately demonstrate the buyer’s commitment to purchase this type of asset. Therefore, we applied the installment method of accounting to this transaction. Under the installment method, the seller recognizes a sale of real estate. However, profit is recognized on a reduced basis. As of December 31, 2010, the note receivable had been paid back in full. Gains of $1.5 million and $0.5 million were recognized in 2010 and 2009, respectively, relating to this transaction. This community sale is included in discontinued operations as we have no continuing involvement.

 

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Investments Accounted for Under the Profit-Sharing Method, net

In 2009, a guarantee we provided in conjunction with the sale of three communities in 2004 expired. The guarantee stated that we would make monthly payments to the buyer equal to the amount by which a net operating income target exceeded actual net operating income for the communities until a certain coverage ratio was reached. In 2004, we had concluded that the guarantee would be for an extended period of time and applied the profit-sharing method of accounting. Upon the expiration of the guarantee, we recorded a gain of approximately $8.9 million.

In a different transaction in 2006, we sold a majority interest in two separate entities related to a project consisting of a residential condominium component and an assisted living component with each component owned by a different entity. We provided guarantees to support the operations of the entities for an extended period of time. We account for the condominium and assisted living ventures under the profit-sharing method of accounting, and our liability carrying value at December 31, 2011 was $12.2 million for the two ventures. We recorded a loss of $9.8 million, $9.6 million and $13.6 million in 2011, 2010 and 2009, respectively.

In connection with the condominium project, we are obligated to our partner and the lender on the assisted living venture to fund future operating shortfalls. We are also obligated to our partner on the condominium venture to fund operating shortfalls. We have funded $8.1 million under the guarantees through December 31, 2011, of which approximately $1.2 million was funded in 2011. In addition, we are required to fund sales and marketing costs associated with the sale of the condominiums (refer to Note 16).

The depressed condominium real estate market in the Washington, D.C. area has resulted in lower sales and pricing than forecasted. We believe the partners have no remaining equity in the condominium project. Accordingly, we have informed our partner that we do not intend to fund future operating shortfalls. However, under the profit sharing method, we will continue to incur losses associated with the venture.

As of December 31, 2011, loans of $116.4 million for the residential condominium venture and of $29.9 million for the assisted living venture are both in default. We have accrued $3.3 million in default interest relating to these loans. We are in discussions with the lenders regarding these defaults.

Relevant details are as follows (in thousands):

 

     Year Ended December 31,  
     2011     2010     2009  

Revenue

   $ 15,208      $ 13,012      $ 14,219   

Operating expenses

     (18,643     (17,934     (18,849

Interest expense

     (7,082     (5,826     (6,195

Impairment loss

     (396     (462     (1,146
  

 

 

   

 

 

   

 

 

 

Loss from operations before depreciation

     (10,913     (11,210     (11,971

Depreciation expense

     1,562        1,560        1,489   

Other non-operating expense

     (455     0        0   

Distributions to other investors

     0        0        (2,326
  

 

 

   

 

 

   

 

 

 

Loss from investments accounted for under the profit-sharing method

   $ (9,806   $ (9,650   $ (12,808
  

 

 

   

 

 

   

 

 

 

Investments accounted for under the profit-sharing method, net

   $ (12,209   $ (419   $ 11,031   

Amortization expense on investments accounted for under the profit-sharing method

   $ 0      $ 0      $ 363   

 

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Land and Community Sales

In 2011, 2010 and 2009, we sold three, four and one parcels of undeveloped land, respectively. We recognized gains (losses) of $0.2 million, $(0.2) million and $(0.4) million, in 2011, 2010 and 2009, respectively, related to these land sales.

In addition, we received $2.0 million in 2011 relating to the sale of a land parcel sold in 2010. The receipt of the amount was contingent on the buyer receiving zoning approval for the property which the buyer received in 2011. A gain of approximately $2.0 million was recognized in 2011.

In 2011, we sold three operating communities which were part of the liquidating trust for approximately $8.3 million and recognized gains of approximately $1.5 million which is included in discontinued operations. This gain is after a reduction of $0.1 million related to potential future indemnification obligations which expire in 2012. These properties, in addition to three land parcels sold in 2011, were part of the liquidating trust held as collateral for the electing lenders and a prorated portion of the net proceeds from the sales were distributed to the electing lenders and reduced the principal balance of our restructure note by $11.3 million (refer to Note 11).

In 2010, we sold two operating properties for approximately $10.8 million and we recognized a net gain of approximately $4.0 million which is reflected in discontinued operations in our consolidated statements of operations. This gain is after a reduction of $0.7 million related to potential future indemnification obligations which expire in 2011. These properties, in addition to two land parcels sold in 2010, were part of the liquidating trust held as collateral for the electing lenders and a prorated portion of the net proceeds from the sales were distributed to the electing lenders and reduced the principal balance of our restructure note by $10.7 million. In 2011, a gain of $0.7 million was recognized when the indemnification period expired. The gain is included in discontinued operations.

In 2009, we sold 21 non-core assisted living communities, located in 11 states, to Brookdale Senior Living, Inc. for an aggregate purchase price of $204 million. At closing, we received approximately $59.6 million in net proceeds after we paid or the purchaser assumed approximately $134.1 million of mortgage loans, the posting of required escrows, various prorations and adjustments, and payments of expenses by us, recognizing a gain of $48.9 million. This gain was after a reduction of $5.0 million related to potential future indemnification obligations which expired in November 2010. In 2010, a gain of $5.0 million was recognized when the indemnification period expired and is included in discontinued operations.

Condominium Sales

In 2006, we acquired the long-term management agreements of two San Francisco Bay area continuing care retirement communities (“CCRC”) and the ownership of one community. As part of the acquisition, we also received ten vacant condominium units from the seller that we could renovate and sell. In 2007, we purchased an additional 37 units. Of the 47 units acquired, three were converted into a fitness center for the community, 14 were converted into seven double units and three were converted into a triple unit. In 2011, 2010 and 2009, we sold one, nine and nine of the 35 renovated units in each respective year and recognized losses on those sales totaling zero, $(0.2) million and $(1.0) million in 2011, 2010 and 2009, respectively.

Sales of Equity Interests

We sold our equity interest in nine limited liability companies in the U.S. and two limited partnerships in Canada in 2010 and one venture in 2009 whose underlying assets were real estate. In accordance with ASC Property, Plant and Equipment Topic, the sale of an investment in the form of a financial asset that is in substance real estate should be accounted for in accordance with this Topic. For all of the transactions, we did not provide any forms of continuing involvement that would preclude sale accounting or gain recognition. We recognized gains on sale of $25.0 million and zero in 2010 and 2009, respectively, related to these sales.

 

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Other

In 2011, we recognized a $0.8 million gain when it was determined that our obligations relating to certain environmental and structural issues at a property previously sold by us had been fully satisfied and no further amounts would be incurred.

 

8. Variable Interest Entities

GAAP requires that a variable interest entity (“VIE”), defined as an entity subject to consolidation according to the provisions of the ASC Consolidation Topic, must be consolidated by the primary beneficiary. The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could both potentially be significant to the VIE. We perform ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE. At December 31, 2011, we are the primary beneficiary of one VIE and therefore consolidate that entity.

VIEs where Sunrise is the Primary Beneficiary

We have a management agreement with a not-for-profit corporation established to own and operate a continuing care retirement community (“CCRC”) in New Jersey. This entity is a VIE. The CCRC contains a 60-bed skilled nursing unit, a 32-bed assisted living unit, a 27-bed Alzheimer’s care unit and 252 independent living apartments. We have included $16.1 million and $17.1 million, respectively, of net property and equipment and debt of $21.8 million and $22.5 million, respectively, of which $1.4 million was in default as of December 31, 2011, in our December 31, 2011 and December 31, 2010 consolidated balance sheets for this entity. The majority of the debt is bonds that are secured by a pledge of and lien on revenues, a letter of credit with the Bank of New York and by a leasehold mortgage and security agreement. We guarantee the letter of credit. Proceeds from the bonds’ issuance were used to acquire and renovate the CCRC. As of December 31, 2011 and December 31, 2010, we guaranteed $20.4 million and $21.1 million, respectively, of the bonds. Management fees earned by us were $0.7 million, $0.6 million and $0.6 million for 2011, 2010 and 2009, respectively. The management agreement also provides for reimbursement to us for all direct cost of operations. Payments to us for direct operating expenses were $12.4 million, $10.1 million and $11.1 million for 2011, 2010 and 2009, respectively. The entity obtains professional and general liability coverage through our affiliate, Sunrise Senior Living Insurance, Inc. The entity incurred $0.2 million per year in 2011, 2010 and 2009, respectively, related to the professional and general liability coverage. The entity also has a ground lease with us. Rent expense is recognized on a straight-line basis at $0.7 million per year. Deferred rent relating to this agreement was $7.0 million and $6.6 million at December 31, 2011 and December 31, 2010, respectively. These amounts are eliminated in our consolidated financial statements.

VIEs Where Sunrise Is Not the Primary Beneficiary but Holds a Significant Variable Interest in the VIEs

In July 2007, we formed a venture with a third party which purchased 17 communities from our first U.K. development venture. The entity has £439.4 million ($679.0 million) of debt of which $621.0 million is in default. This debt is non-recourse to us. Our equity investment in the venture is zero at December 31, 2011. The line item “Due from unconsolidated communities” on our consolidated balance sheet as of December 31, 2011 contains $1.4 million due from the venture. Our maximum exposure to loss is $1.4 million. We calculated the maximum exposure to loss as the maximum loss (regardless of probability of being incurred) that we could be required to record in our consolidated statements of operations as a result of our involvement with the VIE.

This VIE is a limited partnership in which the general partner (“GP”) is owned by our venture partner and us in proportion to our equity investment of 90% and 10%, respectively. The GP is supervised and managed under a board of directors and all of the powers of the GP are vested in the board of directors. The board of directors is made up of six directors. Four directors are appointed by our venture partner and two directors are appointed by

 

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us. Actions that require the approval of the board of directors include approval and amendment of the annual operating budget. Material decisions, such as the sale of any facility, require approval by 75% of the board of directors. We have determined that the board of directors has power over financing decisions, capital decisions and operating decisions. These are the activities that most impact the entity’s economic performance, and therefore, neither equity holder has power over the venture. We have determined that power is shared within this venture as no one partner has the ability to unilaterally make significant decisions and therefore we are not the primary beneficiary.

In 2007, we formed another venture with a third party which owned 13 communities. Upon its formation, the entity was not considered a VIE. In August 2011, the venture transferred ownership of six communities in the venture to another entity. This was a reconsideration event for the venture and the entity was deemed to be a VIE because it no longer had sufficient equity to finance its activities without additional subordinated financial support. The entity has $138.7 million of debt which is non-recourse to us. Our equity investment in the venture is zero at December 31, 2011. Our maximum exposure to loss is zero. We calculated the maximum exposure to loss as the maximum loss (regardless of the probability of being incurred) that we could be required to record in our consolidated statements of operations as a result of our involvement with the VIE.

This VIE is a limited partnership in which the general partner is owned by us. However, material decisions, such as approval and amendment of the annual operating budget and the sale of any facility, require unanimous approval by both venture partners. These are the activities that most impact the entity’s economic performance, and therefore, neither equity holder has power over the venture. We have determined that power is shared within this venture as no one partner has the ability to unilaterally make significant decisions for the venture and therefore, we are not the primary beneficiary.

 

9. Intangible Assets and Goodwill

Intangible assets consist of the following (in thousands):

 

     Estimated    December 31,  
    

Useful Life

   2011      2010  

Management contracts less accumulated amortization of $11,612 and $42,143

   1 - 30 years    $ 34,413       $ 36,739   

Leaseholds less accumulated amortization of $5,237 and $4,822

   10 - 29 years      2,646         3,062   

Other intangibles less accumulated amortization of $2,360 and $1,033

   1 - 40 years      1,667         948   
     

 

 

    

 

 

 
      $ 38,726       $ 40,749   
     

 

 

    

 

 

 

Amortization was $3.5 million, $11.7 million and $13.0 million in 2011, 2010 and 2009, respectively. These amounts include $0.5 million, $9.5 million and $10.2 million of accelerated amortization of certain terminated management contracts. Amortization is expected to be approximately $3.6 million in 2012 and $1.7 million per year from 2013 to 2016.

 

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10. Investments in Unconsolidated Communities

The following are our investments in unconsolidated communities as of December 31, 2011:

 

     Sunrise
Ownership
 

Karrington of Findlay

     50.00

CC3 Acquisition, LLC

     40.00

Sunrise/Inova McLean Assisted Living, LLC

     40.00

CLPSun III Tenant, LP

     32.12

CLPSun Partners III, LLC

     32.12

CNLSun Partners II, LLC

     30.00

AU-HCU Holdings, LLC

     30.00

RCU Holdings, LLC

     30.00

SunVest, LLC

     30.00

Metropolitan Senior Housing, LLC

     25.00

Sunrise at Gardner Park, LP

     25.00

Master CNL Sun Dev I, LLC

     20.00

Master MetSun, LP

     20.00

Master MetSun Two, LP

     20.00

Master MetSun Three, LP

     20.00

PS UK Investment (Jersey) LP

     20.00

Sunrise Beach Cities Assisted Living, LP

     20.00

Sunrise First Euro Properties LP

     20.00

Sunrise HBLR, LLC

     20.00

PS UK Investment II (Jersey) LP

     16.90

Santa Monica AL, LLC

     15.00

Cortland House, LP

     10.00

Dawn Limited Partnership

     9.81

Our weighted average ownership percentage in our unconsolidated ventures, including our investments accounted for under the profit sharing method, is approximately 23.5% based on total assets as of December 31, 2011.

Included in “Due from unconsolidated communities” are net receivables and advances from unconsolidated ventures of $17.5 million and $22.5 million at December 31, 2011 and 2010, respectively. Net receivables from these ventures relate primarily to development and management activities.

Summary financial information for unconsolidated ventures accounted for by the equity method, which excludes our venture accounted for under the profit sharing method, is as follows (in thousands and unaudited):

 

    December 31,  
    2011     2010     2009  

Current assets

  $ 117,375      $ 115,970      $ 146,468   

Noncurrent assets, principally property and equipment

    2,747,355        2,664,564        3,842,919   

Current liabilities, excluding current portion of mortgage debt

    73,953        84,845        121,868   

Total mortgage debt

    2,392,623        2,672,506        3,569,246   

Noncurrent liabilities, excluding mortgage debt

    24,240        51,177        104,810   

Equity

    373,914        (27,994     193,463   

Revenue

    577,829        513,349        443,318   

Loss from continuing operations

    (29,679     (38,763     (87,363

Net loss

    (51,513     (43,850     (40,727

 

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Accounting policies used by the unconsolidated ventures are the same as those used by us.

Total management fees and reimbursed contract services from related unconsolidated ventures was $319.2 million, $500.5 million and $572.7 million in 2011, 2010 and 2009, respectively.

Our share of earnings and return on investment in unconsolidated communities consists of the following (in thousands):

 

     December 31,  
     2011     2010     2009  

Sunrise’s share of (loss) earnings in unconsolidated communities

   $ (2,435   $ 8,599      $ 4,245   

Return on investment in unconsolidated communities

     7,110        9,956        10,612   

Impairment of equity and cost investments

     (2,046     (11,034     (9,184
  

 

 

   

 

 

   

 

 

 

Sunrise’s share of earning and return on investment in unconsolidated communities

   $ 2,629      $ 7,521      $ 5,673   
  

 

 

   

 

 

   

 

 

 

Various transactions, such as recapitalizations, and other adjustments, which can vary significantly year to year, account for differences in the amount at which our investments are carried and the amount of our underlying equity in the net assets of those investments. Our investment in unconsolidated communities was (less than) greater than our portion of the underlying equity in the ventures by $(76.0) million and $60.4 million as of December 31, 2011 and 2010, respectively.

Return on Investment in Unconsolidated Communities

Sunrise’s return on investment in unconsolidated communities includes cash distributions from ventures arising from a refinancing of debt within ventures. We first record all equity distributions as a reduction of our investment. Next, we record a liability if there is a contractual obligation or implied obligation to support the venture including in our role as general partner. Any remaining distribution is recorded in income.

In 2011, our return on investment in unconsolidated communities was primarily the result of distributions of $4.4 million from operations of the investments where the book value is zero and we have no contractual or implied obligation to support the venture. Also, in 2011, we recognized $2.7 million in conjunction with the expiration of a contractual obligation.

In 2010, our return on investment in unconsolidated communities was primarily the result of distributions of $9.4 million from operations of the investments where the book value is zero and we have no contractual or implied obligation to support the venture. Also, in 2010, we recognized $0.4 million in conjunction with the sale of a community within a venture in which we own a 25.0% interest, and we recognized $0.3 million in conjunction with the expiration of a contractual obligation.

In 2009, our return on investment in unconsolidated communities was primarily the result of distributions of $10.6 million from operations from investments where the book value is zero and we have no contractual or implied obligation to support the venture.

Transactions

CNL

In January 2011, we contributed our 10% ownership interest in an existing venture in exchange for a 40% ownership interest in a new venture, CC3 Acquisition, LLC (“CC3”), organized to own the same portfolio of 29 communities that we manage. We recorded our new investment at its carryover basis. We made an additional

 

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capital contribution of $9.9 million of which $7.6 million was funded as a deposit into escrow in 2010 and $2.3 million was funded upon transaction closing. The portfolio was valued at approximately $630 million (excluding transaction costs). As part of our new venture agreement with a wholly-owned subsidiary of CNL Lifestyle Properties (“CNL”), from the start of year three to the end of year six following our January 2011 acquisition, we will have a buyout option to purchase CNL’s remaining 60% interest in the venture. The purchase price provides a 13% internal rate of return to CNL if we exercise our option in years three and four and a 14% internal rate of return if we exercise our option in years five and six. Our share of the transaction costs for 2011 was approximately $5.0 million, of which $4.0 million was reflected as an expense in Sunrise’s share of loss and return on investment in unconsolidated communities and $1.0 million was reflected as general and administrative expense. Six communities in the state of New York, whose real estate is owned by the venture, are being leased and operated by us and therefore, the operations are included in our consolidated financial statements.

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

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

Ventas

In 2010, we sold to Ventas, Inc. (“Ventas”) all of our venture interests in nine limited liability companies in the U.S. and two limited partnerships in Canada, which collectively owned 58 communities managed by us. The aggregate purchase price for the venture interests was approximately $41.5 million. In connection with this transaction, we recorded a $25.0 million gain on the sale and deferred $5.7 million of the payment, as of December 31, 2010, which was recognized as management fee income in 2011.

U.K. Venture

In 2010 and 2009, our first U.K. development venture in which we have a 20% equity interest sold two and four communities, respectively, to a venture in which we have an approximate 10% interest. We recorded equity in earnings in 2010 and 2009 of approximately $13.0 million and $19.5 million, respectively. In 2010, we entered into an amendment to the partnership agreement for our first U.K. development venture. Under the amendment, we and our venture partner agreed to amend the partnership agreement as it related to distributions and acknowledged that we had received distributions less than what we were entitled to. In December 2010, we received a distribution of $15.2 million. In addition, our venture partner agreed to release $7.3 million of undistributed proceeds from previous sales that had been held on our behalf in an escrow account within the venture. Our equity in earnings from this venture is composed of (i) gains on the sale of the communities, (ii) the amendment to the cash distribution waterfall in 2010 and (iii) earnings and losses from the community operations.

 

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When our U.K. ventures were formed, we established a bonus pool in respect to each venture for the benefit of employees and others responsible for the success of these ventures. At that time, we agreed with our partner that after certain return thresholds were met, we would each reduce our percentage interests in venture distributions with such excess to be used to fund this bonus pool. In 2010 and 2009, we recorded bonus expense of $0.2 million and $0.7 million, respectively, in respect of the bonus pool relating to the U.K. venture.

Non-Participation in Capital Calls and Debt Defaults

In 2011, based on economic challenges and defaults under the venture’s construction loan agreements, we considered our equity investment in one of our ventures to be other than temporarily impaired and wrote down the equity investment by $2.0 million. The impairment charge is included in our consolidated statements of operations in “Sunrise’s share of earnings and return on investment in unconsolidated communities.”

In 2010, based on an event of default under the loan agreements of two ventures in which we own a 20% interest, we considered our equity to be other than temporarily impaired and wrote-off the remaining equity balance of $1.9 million for one venture and wrote down the equity balance of the other venture by $1.2 million. Also in 2010, we chose not to participate in a capital call for two ventures in which we had a 20% interest and as a result our initial equity interest in those ventures was diluted to zero. Accordingly, we wrote off our remaining investment balance of $1.8 million which is reflected in Sunrise’s share of earnings and return on investment in unconsolidated communities in our consolidated statements of operations. In addition, based on poor operating performance of two communities in one venture in which we have a 20% interest, we considered our equity to be other than temporarily impaired and wrote off the remaining equity balance of $0.7 million.

We have one cost method investment in a company in which we have an approximate 9% interest. In 2010, based on the inability of this company to secure continued financing and having significant debt maturing in 2010, we considered our equity to be other than temporarily impaired and wrote off our equity balance of $5.5 million which is recorded as part of Sunrise’s share of earnings and return on investment in unconsolidated communities.

In 2009, we wrote-down our equity investments in two of our development ventures by $7.4 million based on poor performance and defaults under the ventures’ construction loan agreements. In 2009, based on the receipt of a notice of default from the lender to a venture in which we own a 20% interest and the poor rental experience in the venture, we considered our equity to be other than temporarily impaired and wrote off the remaining equity balance of $1.1 million. Also in 2009, we chose not to participate in a capital call for a venture in which we had a 20% interest and we wrote off our remaining investment balance of $0.6 million and as a result our initial equity interest in the venture was diluted to zero. We determined the fair value of our investment in a venture in which we had a 1% interest had decreased to zero and was other than temporarily impaired, resulting in an impairment charge of $0.1 million.

Aston Gardens

In 2008, we received a notice of default from our equity partner alleging a default under our management agreement for six communities as a result of the venture’s receipt of a notice of default from a lender. In December 2008, the venture’s debt was restructured and we entered into an agreement with our venture partner under which we agreed to sell our 25% equity interest and to resign as managing member of the venture and manager of the communities when we were released from various guarantees provided to the venture’s lender.

In 2009, we sold our 25% equity interest in the venture and were released from all guarantee obligations. Our management agreement was terminated on April 30, 2009. We received proceeds of approximately $4.8 million for our equity interest and our receivable from the venture for fundings under the operating deficit guarantees. We had previously written down our equity interest and our receivable to these expected amounts in 2008 so there was no gain or loss on the transaction in 2009.

 

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Fountains Venture

In 2008, the Fountains venture, in which we held a 20% interest, failed to comply with the financial covenants in the venture’s loan agreement. The lender had been charging a default rate of interest since April 2008. At loan inception, we provided the lender a guarantee of operating deficits including payments of monthly principal and interest payments, and in 2008 we funded payments under this guarantee as the venture did not have enough available cash flow to cover the full amount of the interest payments at the default rate. Advances under this guarantee were recoverable in the form of a loan to the venture, which was to be repaid prior to the repayment of equity capital to the partners, but was subordinate to the repayment of other venture debt. We funded $14.2 million under this operating deficit guarantee which had been written-down to zero as of December 31, 2008. These advances under the operating deficit guarantee were in addition to the $12.8 million we funded under our income support guarantee to our venture partner, which was written-down to zero as of December 31, 2008.

In 2009, we informed the venture’s lenders and our venture partner that we were suspending payment of default interest and payments under the income support guarantee, and that we would seek a comprehensive restructuring of the loan, our operating deficit guarantees and our income support guarantee. Our failure to pay default interest on the loan was an additional default of the loan agreement. In October 2009, we entered into agreements with our venture partner, as well as with the lender, to release us from all claims that our venture partner and the lender had against us prior to the date of the agreements and from all of our future funding obligations in connection with the Fountains portfolio.

Pursuant to these agreements, the lender and our venture partner released us from all past and future funding commitments in connection with the Fountains portfolio, as well as from all other liabilities prior to the date of the agreements arising under the Fountains venture, loan and management agreements, including obligations under operating deficit and income support obligations. We retain certain management and operating obligations with respect to one community until regulatory approval is obtained to transfer management. Regulatory approval was received in January 2012 and we are no longer managing the community.

In exchange for these releases, we have, among other things:

 

   

Transferred our 20-percent ownership interest in the Fountains venture to our venture partner in 2009;

 

   

Contributed vacant land parcels adjacent to six of the Fountains communities and owned by us to the Fountains venture in 2009;

 

   

Transferred management of 15 of the 16 Fountains communities in 2010 and will transfer management of the remaining community as soon as regulatory approval is obtained; and

 

   

Repaid the venture the management fee we had earned in 2009 of $1.8 million.

The contributed vacant land parcels were carried on our consolidated balance sheets at a book value of $12.9 million, in addition to a guarantee liability of $12.9 million, both of which was written off upon closing of the transaction resulting in no gain or loss.

Other

In 2010, a venture in which we own 25% interest sold its only property. We received proceeds of approximately $0.4 million.

 

36


11. Debt

At December 31, 2011 and December 31, 2010, we had $593.7 million and $163.0 million, respectively, of outstanding debt with a weighted average interest rate of 4.12% and 2.78%, respectively, as follows (in thousands):

 

     December 31,      December 31,  
     2011      2010  

AL US debt, at fair value (1)

   $ 321,992       $ 0   

Community mortgages

     94,641         96,942   

Liquidating trust notes

     26,255         38,264   

Convertible subordinated notes

     86,250         0   

Credit facility

     39,000         0   

Other

     3,757         5,284   

Variable interest entity

     21,770         22,510   
  

 

 

    

 

 

 
   $ 593,665       $ 163,000   
  

 

 

    

 

 

 

 

(1) The principal amount of the debt at December 31, 2011 was $334.6 million.

Of the outstanding debt at December 31, 2011, we had $87.6 million of fixed-rate debt with a weighted average interest rate of 5.03% and $506.1 million of variable rate debt with a weighted average interest rate of 3.96%.

Of our total debt of $593.7 million, $47.3 million was in default as of December 31, 2011. We are in compliance with the covenants on all our other consolidated debt and expect to remain in compliance in the near term.

Principal maturities of debt at December 31, 2011 are as follows (in thousands):

 

     Mortgages,
Wholly-Owned
Properties
     Variable
Interest
Entity Debt
     Liquidating
Trust

Note
     Convertible
Subordinated
Notes
     Other      Total  

Default

   $ 45,907       $ 1,365       $ 0       $ 0       $ 0       $ 47,272   

2012

     27,713         775         26,255         0         1,610         56,353   

2013

     21,021         810         0         0         1,610         23,441   

2014

     0         840         0         0         39,537         40,377   

2015

     321,992         880         0         0         0         322,872   

2016

     0         915         0         0         0         915   

Thereafter

     0         16,185         0         86,250         0         102,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 416,633       $ 21,770       $ 26,255       $ 86,250       $ 42,757       $ 593,665   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Canadian Debt

Three communities in Canada that are wholly owned have been slow to lease up. The outstanding loan balance relating to these communities is non-recourse to us but we have provided operating deficit guarantees to the lender. We are not currently funding under these operating deficit guarantees. The loan matured in April 2011 and had a balance of $45.9 million as of December 31, 2011. In February 2012, we entered into a loan modification that, among other things: (i) extended the loan on our three Canadian communities two years from the modification date; (ii) provided for a termination of our operating deficit guarantee 42 months from the modification date; (iii) cross collateralized the three communities; (iv) increased the interest rate from the TD Bank Prime rate plus 175 bps to TD Bank Prime rate plus 200 bps; and (v) obligated us to complete a reminiscence conversion in a section of one of the communities.

 

37


AL US Debt

In connection with the AL US transaction (refer to Note 6), on June 2, 2011, we assumed $364.8 million of debt with an estimated fair value of $350.1 million. Immediately following the closing of the transaction, we entered into an amendment to the loan. The loan amendment, among other matters, (i) extended the maturity date to June 14, 2015; (ii) provided for a $25.0 million principal repayment; (iii) set the interest rate on amounts outstanding from the effective date of the amendment to LIBOR plus 1.75% with respect to LIBOR advances and the base rate (i.e. the higher of the Federal Funds Rate plus 0.50% or the prime rate announced daily by HSH Nordbank AG (“Nordbank”)) plus 1.25% with respect to base rate advances; (iv) instituted a permanent cash sweep of all excess cash at the communities securing the loan on an aggregated and consolidated basis, which will be used by Nordbank to pay down the outstanding principal balance; (v) released certain management fees that were escrowed and eliminated the requirement for any further subordination or deferral of management fees provided no event of default under the loan occurs; (vi) provided for a $5.0 million escrow for certain indemnification obligations; (vii) provided relief under current debt service coverage requirements; and (viii) modified certain other covenants and terms of the loan. In connection with the amendment, we entered into a new interest rate swap arrangement that extended an existing swap with a fixed notional amount of $259.4 million at 3.2% plus the applicable spread of 175 basis points, down from 5.61% on the previous swap. The new swap arrangement terminates at loan maturity in June 2015. The remaining outstanding balance on the loan will continue to float over LIBOR as described above. The amendment also contains representations, warranties, covenants and events of default customary for transactions of this type. We recorded this loan on our consolidated balance sheet at its estimated fair value on the acquisition and assumption date. The fair value balance of the loan as of December 31, 2011 was $322.0 million and the face amount was $334.6 million.

Junior Subordinated Convertible Notes

In April 2011, we issued $86.25 million in aggregate principal amount of our 5.00% junior subordinated convertible notes due 2041 in a private offering. We received an aggregate $83.7 million of net proceeds. The notes are junior subordinated obligations and bear a cash interest rate of 5.0% per annum, subject to our right to defer interest payments on the notes for up to 10 consecutive semi-annual interest periods. The notes will be convertible into shares of our common stock at an initial conversion rate of 92.2084 shares of common stock per $1,000 principal amount of the notes (which represents the issuance of approximately 8.0 million shares at an equivalent to an initial conversion price of approximately $10.845 per share), subject to adjustment upon the occurrence of specified events. We do not have the right to redeem the notes prior to maturity and no sinking fund is provided. We may terminate the holders’ conversion rights at any time on or after April 6, 2016 if the closing price of our common stock exceeds 130% of the conversion price for at least 20 trading days during any consecutive 30 trading day period, including the last day of such period. The notes will mature on April 1, 2041, unless purchased or converted in accordance with their terms prior to such date.

Germany Restructure Notes

We previously owned nine communities in Germany. In 2009, we entered into a restructuring agreement, in the form of a binding term sheet, with three of our lenders (“electing lenders”) to seven of the nine communities, to settle and compromise their claims against us, including under operating deficit and principal repayment guarantees provided by us in support of our German subsidiaries. These three lenders contended that these claims had an aggregate value of approximately $148.1 million. The binding term sheet contemplated that, on or before the first anniversary of the execution of definitive documentation for the restructuring, certain other of our identified lenders could elect to participate in the restructuring with respect to their asserted claims. The claims being settled by the three lenders represented approximately 85.2% of the aggregate amount of claims asserted by the lenders that could elect to participate in the restructuring transaction.

The restructuring agreement provided that the electing lenders would release and discharge us from certain claims they may have had against us. We issued to the electing lenders 4.2 million shares of our common stock, their pro rata share of up to 5 million shares of our common stock which would have been issued if all eligible

 

38


lenders had become electing lenders. The fair value of the 4.2 million shares at the time of issuance was $11.1 million. In addition, we granted mortgages for the benefit of all electing lenders on certain of our unencumbered North American properties (the “liquidating trust”).

In April 2010, we executed the definitive documentation with the electing lenders. As part of the restructuring agreements, we also guaranteed that, within 30 months of the execution of the definitive documentation for the restructuring, the electing lenders would receive a minimum of $49.6 million from the net proceeds of the sale of the liquidating trust, which equals 80 percent of the appraised value of these properties at the time of the restructuring agreement. If the electing lenders did not receive at least $49.6 million by such date, we would make payment to cover any shortfall or, at such lenders’ option, convey to them the remaining unsold properties in satisfaction of our remaining obligation to fund the minimum payments. We have sold 10 North American properties in the liquidating trust for gross proceeds of approximately $26.7 million with an aggregate appraised value of $33.2 million through December 31, 2011. As of December 31, 2011, the electing lenders have received net proceeds of $23.4 million as a result of sales from the liquidating trust.

In April 2010, we entered into a settlement agreement with another lender of one of our German communities (a “non-electing lender” for purposes of the restructuring agreement). The settlement released us from certain of our operating deficit funding and payment guarantee obligations in connection with the loans. Upon execution of the agreement, the lender’s recourse, with respect to the community mortgage, was limited to the assets owned by the German subsidiaries associated with the community. In exchange for the release of these obligations, we agreed to pay the lender approximately $9.9 million over four years, with $1.3 million of the amount paid at signing. The payment is secured by a non-interest bearing note. We have recorded the note at a discount by imputing interest on the note using an estimated market interest rate. The balance on the note was recorded at $5.3 million and is being accreted to the note’s stated amount over the remaining term of the note. The balance of the note as of December 31, 2011 was $3.8 million.

In addition to the consideration paid to the German lenders described above, in 2010, we sold the real property and certain related assets of eight of our nine German communities. The aggregate purchase price was €60.8 million (approximately $74.5 million as of the signing date) which was paid directly to the German lenders.

In addition to the restructuring agreements, we entered into a settlement agreement with the last remaining non-electing lender of one of our German communities. In 2010, we closed on the sale of this community and we were released from the obligations related to the community.

We elected the fair value option to measure the financial liabilities associated with and which originated from the restructuring of our German loans. The fair value option was elected for these liabilities to provide an accurate economic reflection of the offsetting changes in fair value of the underlying collateral. As a result of our election of the fair value option, all changes in fair value of the elected liabilities are recorded with changes in fair value recognized through earnings. As of December 31, 2011, the notes for the liquidating trust assets are accounted for under the fair value option. The carrying value of the financial liabilities for which the fair value option was elected was estimated applying certain data points including the value of the underlying collateral. However, the carrying value of the notes, while under the fair value option, is subject to our minimum payment guarantee. The balance as of December 31, 2011 was $26.3 million, which represents our minimum payment guarantee at that date.

KeyBank Credit Facility

On June 16, 2011, we entered into a credit agreement for a $50 million senior revolving line of credit (“Credit Facility”) with KeyBank National Association (“KeyBank”), as administrative agent and lender, and other lenders which may become parties thereto from time to time. The Credit Facility includes a $20.0 million sublimit to support standby letters of credit and it is also expandable to $65.0 million if (i) additional lenders commit to participate in the Credit Facility and (ii) there are no defaults.

 

39


The Credit Facility is secured by our 40% equity interest in CC3, our joint venture with a wholly owned subsidiary of CNL, that owns 29 senior living communities managed by us. The Credit Facility replaced our previous credit facility with Bank of America (“BoA Bank Credit Facility”).

The Credit Facility matures on June 16, 2014, subject to our one-time right to extend the maturity date for one year, with ninety days’ notice, provided no material event of default has occurred and we pay a 25 basis point extension fee. Payments on the Credit Facility will be interest only, payable monthly, with outstanding principal and interest due at maturity. Prepayment is permitted at any time, subject to make whole provisions for breakage of certain LIBOR contracts. Pricing for the Credit Facility is KeyBank’s base rate or LIBOR plus an applicable margin depending on our leverage ratio. The LIBOR margins range from 5.25% to 3.25%, and the base rate margins range from 3.75% to 1.75%. We are obligated to pay a fee, payable quarterly in arrears, equal to 0.45% per annum of the average unused portion of the Credit Facility, or 0.35% per annum of the average unused portion for any quarter in which usage is greater than or equal to 50% throughout the quarter. In addition, at closing, we paid KeyBank a commitment fee of 1.0% of the Credit Facility and certain other administrative fees. The Credit Facility requires us to use KeyBank and its affiliates as our primary relationship bank, including for primary depository and cash management purposes, except as required by agreements with other entities.

The Credit Facility requires us to meet several covenants which include:

 

   

Maximum corporate leverage ratio of 5.25 to 1.0 in 2012 and thereafter;

 

   

Minimum corporate fixed charge coverage ratio of 1.25 to 1.0 in 2012 and 1.45 to 1.0 in 2013 and thereafter;

 

   

Minimum liquidity of $15.0 million;

 

   

Minimum collateral loan to value of 75%; and

 

   

Maximum permitted development obligations of $60.0 million per year after January 1, 2012.

In addition the covenants stated above, the Credit Facility also contains various covenants and events of default which could trigger early repayment obligations and early termination of the lenders’ commitment obligations. Events of default include, among others: nonpayment, failure to perform certain covenants beyond a cure period, incorrect or misleading representations or warranties, cross-default to any recourse indebtedness of ours in an aggregate amount outstanding in excess of $30.0 million, and a change of control. Our ability to borrow under the Credit Facility is subject to these covenants.

The Credit Facility also includes limitations and prohibitions on our ability to incur or assume liens and debt except in specified circumstances, make investments except in specified circumstances, make restricted payments except in certain circumstances, make dispositions except in specified situations, incur recourse indebtedness in connection with the development of a new senior living project in excess of specified threshold amounts, use the proceeds to purchase or carry margin stock, enter into business combination transactions or liquidate us and engage in new lines of business and transactions with affiliates except in specified circumstances.

As of December 31, 2011, there were $39.0 million of draws against the Credit Facility and $10.2 million in letters of credit outstanding. We have no borrowing availability under the Credit Facility at December 31, 2011.

Terminated Bank Credit Facility

We entered into a termination agreement with regards to our BoA Bank Credit Facility in June 2011 at the time we entered into the Credit Facility with KeyBank. The termination agreement provided, among other things, that we would use good faith efforts to cause any outstanding letters of credit under the BoA Bank Credit Facility to be returned promptly to Bank of America for cancellation. As each letter of credit was cancelled, Bank of America returned to us the cash collateral proportionate to the letter of credit cancelled and released any lien it had upon our assets in connection with the BoA Bank Credit Facility. At December 31, 2011, there were no longer any letters of credit outstanding under the BoA Bank Credit Facility.

 

40


Mortgage Financing

In February 2011, we extended the maturity date for a loan secured by a wholly owned community to June 2012 in exchange for a principal payment of $1.0 million plus fees and expenses. The loan balance at December 31, 2011 was $27.7 million.

Other

In addition to the debt discussed above, Sunrise ventures have total debt of $2.5 billion with near-term scheduled debt maturities of $0.3 billion in 2012, and there is $0.9 billion of debt that is in default as of December 31, 2011. The debt in the ventures is non-recourse to us with respect to principal payment guarantees and we and our venture partners are working with the venture lenders to obtain covenant waivers and to extend the maturity dates. In all such instances, the construction loans or permanent financing provided by financial institutions is secured by a mortgage or deed of trust on the financed community. We have provided operating deficit guarantees to the lenders or ventures with respect to $0.6 billion of the total venture debt. Under the operating deficit agreements, we are obligated to pay operating shortfalls, if any, with respect to these ventures. Any such payments could include amounts arising in part from the venture’s obligations for payment of monthly principal and interest on the venture debt. These operating deficit agreements would not obligate us to repay the principal balance on such venture debt that might become due as a result of acceleration of such indebtedness or maturity. We have non-controlling interests in these ventures.

One of the ventures mortgage loans described above is in default at December 31, 2011 due to a violation of certain loan covenants. The mortgage loan balance was $621.0 million as of December 31, 2011. The loan is collateralized by 15 communities owned by the venture located in the United Kingdom. The lender has rights which include foreclosure on the communities and/or termination of our management agreements. The venture is in discussions with the lender regarding the possibility of entering into a loan modification. During 2011, we recognized $9.0 million in management fees from this venture. Our United Kingdom Management segment reported $1.6 million in income from operations in 2011. Our investment balance in this venture was zero at December 31, 2011.

Value of Collateral and Interest Paid

At December 31, 2011 and 2010, the net book value of properties pledged as collateral for mortgages payable was $542.3 million and $196.8 million, respectively.

Interest paid totaled $12.3 million, $6.9 million and $12.6 million in 2011, 2010 and 2009, respectively. Interest capitalized was zero for both 2011 and 2010 and $0.5 million in 2009.

 

41


12. Income Taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for income tax purposes. The significant components of our deferred tax assets and liabilities are as follows (in thousands):

 

     December 31,  
     2011     2010  

Deferred tax assets:

    

Sunrise operating loss carryforwards - federal

   $ 71,544      $ 66,303   

Sunrise operating loss carryforwards - state

     20,072        15,851   

Sunrise operating loss carryforwards - foreign

     15,313        11,519   

Financial guarantees

     1        21   

Accrued health insurance

     856        1,145   

Self-insurance liabilities

     4,452        4,763   

Stock-based compensation

     8,240        6,242   

Allowance for doubtful accounts

     4,923        4,169   

Tax credits

     7,734        7,734   

Accrued expenses and reserves

     29,246        30,896   

Basis difference in property and equipment and intangibles

     0        24,496   

Entrance fees

     17,310        15,536   

Liability - Liquidating trust

     6,825        14,023   

Other

     2,352        1,788   
  

 

 

   

 

 

 

Gross deferred tax assets

     188,868        204,486   

U.S. federal and state valuation allowance

     (134,476     (134,232

Canadian valuation allowance

     (15,182     (14,063

U.K. valuation allowance

     (79     (282
  

 

 

   

 

 

 

Net deferred tax assets

     39,131        55,909   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Investments in ventures

     (27,272     (49,649

Basis difference in property and equipment and intangibles

     (6,839     0   

Other

     (5,020     (6,260
  

 

 

   

 

 

 

Total deferred tax liabilities

     (39,131     (55,909
  

 

 

   

 

 

 

Net deferred tax liabilities

   $ 0      $ 0   
  

 

 

   

 

 

 

Our worldwide taxable (loss) income for 2011 and 2010 was estimated to be $(31.0) million and $105.2 million, respectively. All available sources of positive and negative evidence were evaluated to determine if there should be a valuation allowance on our net deferred tax asset. In 2011 and 2010, we recorded a full valuation allowance on the deferred tax asset as deferred tax assets in excess of reversing deferred tax liabilities were not likely to be realized. At December 31, 2011 and 2010, our total valuation allowance on deferred tax assets was $149.7 million and $148.6 million, respectively.

At December 31, 2011, we have estimated U.S. federal net operating loss carryforwards of $203.7 million which are carried forward to offset future taxable income in the U.S. for up to 20 years. At December 31, 2011, we had state net operating loss carryforwards valued at $20.1 million, which are expected to expire from 2012 through 2027. At December 31, 2011, we had German net operating loss carryforwards to offset future foreign taxable income of $70.7 million, which have an unlimited carryforward period. At December 31, 2011, we had Canadian net operating loss carryforwards of $47.1 million to offset future foreign taxable income, which are

 

42


carried forward to offset future taxable income in Canada for up to 20 years. In 2011, 2010 and 2009, we provided income taxes for unremitted earnings of our foreign subsidiaries that are not considered permanently reinvested.

At December 31, 2011, we had $1.3 million of foreign tax credit carryforwards expire in 2013. In addition, we have general business credits carryforwards of $6.5 million at December 31, 2011. At December 31, 2008, we had Alternative Minimum Tax credits of $4.7 million. In 2009, we elected to carryback the 2008 Alternative Minimum Tax losses and received a refund related to the credits. The major components of the provision for income taxes attributable to continuing operations are as follows (in thousands):

 

     Years Ended December 31,  
     2011     2010     2009  

Current:

      

Federal

   $ 641      $ 4,094      $ (952

State

     1,225        1,975        799   

Foreign

     (95     640        (1,201
  

 

 

   

 

 

   

 

 

 

Total current expense

     1,771        6,709        (1,354

Deferred:

      

Federal

     0        (150     (5,412

State

     0        0        2,824   

Foreign

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Total deferred benefit

     0        (150     (2,588
  

 

 

   

 

 

   

 

 

 

Provision for (benefit from) income taxes

   $ 1,771      $ 6,559      $ (3,942
  

 

 

   

 

 

   

 

 

 

The income tax benefit allocated to discontinued operations was zero, $(1.4) million and zero for 2011, 2010 and 2009, respectively. Taxes paid (refunded) were $(0.6) million, $0.7 million and $(29.2) million in 2011, 2010 and 2009, respectively.

The differences between the amount that would have resulted from applying the domestic federal statutory tax rate (35%) to pre-tax income from continuing operations and the reported income tax expense from continuing operations recorded for each year are as follows:

 

     Years Ended December 31,  
(In thousands)    2011     2010     2009  

(Loss) income before tax benefit (expense) taxed in the U.S.

   $ (11,575   $ 37,366      $ (105,892

(Loss) income before tax benefit (expense) taxed in foreign jurisdictions

     (7,120     2,232        (3,656
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before tax benefit (expense)

   $ (18,695   $ 39,598      $ (109,548
  

 

 

   

 

 

   

 

 

 

Tax at US federal statutory rate

     35.0     35.0     35.0

State taxes, net

     -4.3     3.2     -2.9

Work opportunity credits

     0.0     -12.2     0.0

Change in valuation allowance

     -26.7     -20.5     -40.5

Nondeductible wages

     -7.3     3.6     0.0

Tax exempt interest

     0.1     -0.2     0.2

Tax contingencies

     -0.1     3.5     1.8

Write-off of non-deductible goodwill

     0.0     0.0     9.1

Foreign rate differential

     -0.2     -0.5     -0.2

Unremitted foreign earnings

     5.3     0.0     -0.3

Transfer pricing

     -4.8     3.6     -2.0

Other

     -6.5     1.1     -3.8
  

 

 

   

 

 

   

 

 

 
     -9.5     16.6     -3.6
  

 

 

   

 

 

   

 

 

 

 

43


The table below details our unrecognized tax benefits (in thousands):

 

     2011     2010      2009  
                     

Gross unrecognized tax benefit at beginning of year

   $ 13,920      $ 13,920       $ 17,817   

Additions based on tax positions taken during a prior period

     0        0         0   

Reductions based on tax positions taken during a prior period

     0        0         (3,897

Additions based on tax positions taken during the current period

     0        0         0   

Reductions based on tax positions taken during the current period

     0        0         0   

Reductions related to settlement of tax matters

     0        0         0   

Reductions related to a lapse of applicable statute of limitations

     (261     0         0   
  

 

 

   

 

 

    

 

 

 

Gross unrecognized tax benefit at end of year

   $ 13,659      $ 13,920       $ 13,920   
  

 

 

   

 

 

    

 

 

 

Included in the balances of unrecognized tax benefits at December 31, 2011 and 2010 were approximately $13.7 million and $13.9 million, respectively, of tax positions that, if recognized, would decrease our effective tax rate.

We reflect interest and penalties, if any, on unrecognized tax benefits in the consolidated statements of operations as income tax expense. The amount of interest recognized in the consolidated statements of operations for 2011, 2010 and 2009 related to unrecognized tax benefits was a pre-tax expense of $0.5 million, $1.4 million and $1.2 million, respectively. The amount of penalties recognized in the consolidated statements of operations for 2011, 2010 and 2009 related to unrecognized tax benefits was a pre-tax (expense) income of $(0.2) million, zero and $0.1 million, respectively.

The total amount of accrued liabilities for interest recognized in the consolidated balance sheets related to unrecognized tax benefits as of December 31, 2011 and 2010 was $6.5 million and $6.0 million, respectively. The total amount of accrued liabilities for penalties recognized in the consolidated balance sheets related to unrecognized tax benefits as of December 31, 2011 and 2010 was $1.6 million and $1.8 million, respectively. To the extent that uncertain matters are settled favorably, this amount could reverse and decrease our effective tax.

Taxing Jurisdictions Audits

Within the next twelve months, it is reasonably possible that approximately $1.1 million of uncertain tax positions may be released into income due to the expiration of state statute of limitations.

In 2010, the IRS completed the field audits for the 2005 through 2008 federal income tax returns and all related net operating loss carryback claims without any modifications to our refund claim. Our case was officially closed in March 2011 when the IRS notified us that their review of the field agents’ assessments was complete. The German government has concluded its income tax audit for the years 2006 through 2008. There are no income tax returns under audit by the Canadian government with years after 2006 remaining open and subject to audit. In addition, the years after 2003 are subject to transfer pricing adjustments only. There are no returns under audit by the U.K. government with years after 2008 remaining open and subject to audit. At this time, we do not expect the results from any income tax audit to have a material impact on our financial statements. We do not believe that it is reasonably possible that the amount of unrecognized tax benefits will significantly change in 2012.

 

44


13. Stockholders’ Equity

German Debt Restructuring

In 2009, we issued 4.2 million shares of the 5.0 million shares of common stock to three electing lenders in connection with the German debt restructuring discussed in Note 11. The common stock had a fair value at the time of issuance of $11.1 million.

2008 Omnibus Plan, As Amended

Our 2008 Omnibus Incentive Plan, as amended (the “2008 Omnibus Plan”) permits the grant of incentive and nonincentive stock options, stock appreciation rights (“SARs”), restricted stock, stock units, unrestricted stock, dividend equivalent rights, performance stock and performance units to eligible employees, officers, directors, consultants and advisors.

The number of shares of common stock available for award under the 2008 Omnibus Plan is 7,300,000, increased by the number of shares covered by awards granted under our Prior Plans (as defined below) that are not purchased or are forfeited or expire, or otherwise terminate without delivery of any shares, after September 17, 2008. The term “Prior Plans” consists of our 1995 Stock Option Plan, as amended; 1996 Non-Incentive Stock Option Plan, as amended, 1997 Stock Option Plan, as amended; 1998 Stock Option Plan, as amended; 1999 Stock Option Plan, as amended; 2000 Stock Option Plan, as amended; 2001 Stock Option Plan, as amended; 2002 Stock Option and Restricted Stock Plan, as amended; and 2003 Stock Option and Restricted Stock Plan, as amended. Pursuant to the terms of the 2008 Omnibus Plan, no further awards may be made under the Prior Plans.

As of December 31, 2011, there were a total of 352,732 shares of common stock available for award under the 2008 Omnibus Plan. In addition, up to an additional 1,043,660 shares that remain subject to outstanding awards under the Prior Plans at December 31, 2011 could at a future date become available for award under the 2008 Omnibus Plan to the extent the shares subject to the awards are not purchased or the awards are forfeited or expire or otherwise terminate without any delivery of shares.

Shares of common stock that are subject to awards in any form other than stock options or SARs under the 2008 Omnibus Plan are counted against the maximum number of shares of common stock available for issuance under the 2008 Omnibus Plan as 1.21 common shares for each share of common stock granted. Any shares of common stock that are subject to awards of stock options under the 2008 Omnibus Plan are counted against the 2008 Omnibus Plan share limit as one share for every one share subject to the award of options. With respect to any SARs awarded under the 2008 Omnibus Plan, the number of shares subject to an award of SARs are counted against the aggregate number of shares available for issuance regardless of the number of shares actually issued to settle the SAR upon exercise.

Under the terms of the 2008 Omnibus Plan, the option exercise price and vesting provisions are fixed when the option is granted. The options typically expire ten years from the date of grant and vest typically over a three-year period. The option exercise price is not less than the fair market value of a share of common stock on the date the option is granted. Fair market value is generally determined as the closing price on (i) the date of grant (if grant is made before or during trading hours) or (ii) the next trading day after the date of grant (if grant is made after the securities market closes on a trading day).

Stock Options

The fair value of stock options is estimated as of the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term (estimated period of time outstanding) is estimated using the historical exercise behavior of employees and directors. Expected volatility is based on historical

 

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volatility for a period equal to the stock option’s expected term, ending on the day of grant, and calculated on a monthly basis. Compensation expense is recognized ratably using the straight-line method for options with graded vesting.

 

     2011    2010    2009

Risk free interest rate

   2.09% - 3.49%    2.63% - 3.63%    3.0% - 3.7%

Expected dividend yield

   0    0    0

Expected term (years)

   6.5    6.5    6.5

Expected volatility

   94.6% - 95.7%    92.9% - 94.7%    81.8% - 92.0%

A summary of our stock option activity and related information for the year ended December 31, 2011 is presented below (share amounts are shown in thousands):

 

     Shares     Weighted
Average
Exercise Price
     Remaining
Contractual
Term in Years
 

Outstanding - 1/1/09

     7,807      $ 6.72      

Granted

     890        2.58      

Exercised

     (763     1.37      

Forfeited

     (397     1.25      

Expired

     (865     15.67      
  

 

 

      

Outstanding - 12/31/09

     6,672        6.45      

Granted

     1,420        3.97      

Exercised

     (264     1.34      

Forfeited

     (329     1.60      

Expired

     (1,149     14.09      
  

 

 

      

Outstanding - 12/31/10

     6,350        5.00      

Granted

     705        7.65      

Exercised

     (931     1.59      

Forfeited

     (113     3.44      

Expired

     (212     18.32      
  

 

 

      

Outstanding - 12/31/11

     5,799        5.39         7.0   
  

 

 

      

Vested and expected to vest - 12/31/11

     5,799        5.39         7.0   
  

 

 

      

Exercisable - 12/31/11

     3,888        5.13         6.2   
  

 

 

      

The weighted average grant date fair value of options granted was $6.09, $3.15 and $1.94 per share in 2011, 2010 and 2009, respectively. The total intrinsic value of options exercised was $10.3 million, $1.2 million and $1.7 million for 2011, 2010 and 2009, respectively. The fair value of shares vested was $3.0 million, $2.0 million and $2.3 million for 2011, 2010 and 2009, respectively. Unrecognized compensation expense related to the unvested portion of our stock options was approximately $6.9 million as of December 31, 2011, and is expected to be recognized over a weighted-average remaining term of approximately 1.9 years.

The amount of cash received from the exercise of stock options was approximately $1.5 million in 2011. We generally issue shares for the exercise of stock options from authorized but unissued shares.

In 2011, we granted 17 recently promoted or newly hired employees non-qualified stock options to purchase 205,000 shares of common stock at grant prices ranging from $5.82 to $9.68. One-third of the options vest yearly beginning in 2012.

 

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In January 2011, our chief investment and administrative officer was granted an award of 500,000 stock options. The options have a term of 10 years and an exercise price per share of $7.31. One-third of the stock options will vest on each of the first three anniversaries of the date of grant, subject to continued employment on the applicable vesting date.

In March 2011, in connection with our former chief financial officer’s termination of employment, 166,666 stock options held by her vested pursuant to the terms of her employment agreement. The options expire 12 months after her termination of employment. We recorded non-cash compensation expense of $0.1 million as a result of the vesting acceleration pursuant to the terms of her employment agreement.

In December 2010, our chief executive officer was granted an award of 1,000,000 stock options. The options have a term of 10 years and an exercise price per share of $3.94. One-third of the stock options will vest on each of the first three anniversaries of the date of grant, subject to continued employment on the applicable vesting date.

In May 2010, we accelerated the vesting of a former executive’s stock options and restricted stock pursuant to the terms of his separation agreement. Upon termination, 3,000 shares of restricted stock and 91,324 options vested. The options expire 12 months after the termination of employment. We recorded non-cash compensation expense of $0.3 million as a result of the vesting acceleration.

In May 2009, we accelerated the vesting of our former chief financial officer’s stock options and restricted stock pursuant to the terms of his separation agreement. Upon his termination, 70,859 shares of restricted stock and 750,000 options vested. The options expire 12 months after the termination of his consulting term, which can be up to nine months after his termination date of May 29, 2009. We recorded non-cash compensation expense of $0.8 million as a result of the vesting acceleration.

Restricted Stock

Restricted stock awards typically vest over three years. Compensation expense is recognized ratably using the straight-line method for restricted stock with graded vesting.

A summary of our restricted stock activity and related information for the years ended December 31, 2011, 2010 and 2009 is presented below (share amounts are shown in thousands):

 

     Shares     Weighted Average
Grant Date
Fair Value
 

Nonvested, January 1, 2009

     324      $ 24.91   

Granted

     0        0.00   

Vested

     (138     28.77   

Canceled

     (43     32.38   
  

 

 

   

Nonvested, December 31, 2009

     143        19.05   

Granted

     475        3.53   

Vested

     (67     14.87   

Canceled

     (2     24.00   
  

 

 

   

Nonvested, December 31, 2010

     549        6.11   

Granted

     337        9.88   

Vested

     (190     6.24   

Canceled

     (12     9.68   
  

 

 

   

Nonvested, December 31, 2011

     684        7.87   
  

 

 

   

 

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The total fair value of restricted shares vested was $6.24 per share and $14.87 per share for 2011 and 2010, respectively. Unrecognized compensation expense related to the unvested portion of our restricted stock was approximately $4.1 million as of December 31, 2011, and is expected to be recognized over a weighted-average remaining term of approximately 2.0 years.

Restricted stock shares are generally issued from authorized but unissued shares.

In 2011, connection with a new incentive program for certain of our employees, we also granted 237,074 shares of restricted stock to 65 employees at grant date fair values ranging from $5.82 to $9.68. The grants vest yearly over three years beginning in 2012, with the exception of one employee whose first tranche vested immediately.

In March 2011, we made a grant of 100,000 shares of restricted stock at a grant date fair value of $11.51 to our new chief financial officer. The restricted stock vests at a rate of one-third on each of first three anniversaries of the date of grant, subject to continued employment on the applicable vesting date.

In May 2010, our chief investment and administrative officer was granted 25,000 shares of restricted stock which vested immediately at a price of $5.13 per share. In October 2010, we granted our Chief Investment and Administrative Officer and our General Counsel 200,000 shares and 100,000 shares of restricted stock, respectively, which vest ratably over three years at a price of $3.52 per share.

Restricted Stock Units

In 2011, half of our non-employee directors’ retainer fee was paid in restricted stock units. Accordingly, a total of 71,880 restricted stock units were granted to our six non-employee directors (11,980 each) in January 2011 at a grant date fair value of $6.26 per share. One-quarter of the restricted stock units vested immediately upon grant and the remainder vested quarterly during 2011. All compensation expense for these awards was recognized in 2011.

In 2011, 441,616 restricted stock units were granted in the second quarter of 2011 at a grant date fair value of $9.34. One-third of the units vest yearly beginning in 2012. Compensation expense for these restricted stock units is recognized ratably over the vesting period. As of December 31, 2011, the unrecognized compensation expense for these awards totaled $3.3 million and is expected to be recognized over the remaining term of 2.4 years. A total of 45,499 restricted stock units were forfeited during 2011.

Shares used to satisfy restricted stock unit awards are expected to be issued from authorized but unissued shares.

Performance Units

In 2011, an aggregate of 671,816 performance units were granted for performance periods 2011, 2012 and 2013 to employees at a grant date fair value of $9.34 per share. There were a total of 12,024 performance units forfeited during 2011. The performance units are allocated 25% in 2011, 25% in 2012 and 50% in 2013, with the number of performance units earned each year based upon the achievement of specified adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets. Vesting of any earned performance units is subject to the employee remaining employed by us through June 1, 2014. The adjusted EBITDA targets were established for the 2011 performance units on the date of grant. The adjusted EBITDA targets for 2012 and 2013 performance units will be established within the first 90 days of each respective year. We recorded a total of $0.3 million in stock compensation expense with regard to the 2011 performance units in 2011 based upon the probable outcome of the performance condition for 2011. As of December 31, 2011, the unrecognized compensation expense for the 2011 performance units totaled $1.2 million, and is expected to be recognized over the remaining service period of 2.4 years. No compensation expense for the 2012 and 2013 performance units

 

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was recorded in 2011 because the grant dates for these awards are not deemed to occur until the respective adjusted EBITDA targets for these performance units have been established. Once the adjusted EBITDA targets for 2012 and 2013 are established, the 2012 and 2013 performance units will be accounted for using the same methodology as applied to the 2011 performance units.

Shares used to satisfy performance units are expected to be issued from authorized but unissued shares.

Stockholder Rights Agreement

We have a Stockholders Rights Agreement (“Rights Agreement”) that was adopted effective as of April 24, 2006, as amended in November 2008 and January 2010. All shares of common stock issued by us between the effective date of the Rights Agreement and the Distribution Date (as defined below) have rights attached to them. The rights expire on April 24, 2016. The Rights Agreement replaced our prior rights plan, dated as of April 25, 1996, which expired by its terms on April 24, 2006. Each right, when exercisable, entitles the holder to purchase one one-thousandth of a share of Series D Junior Participating Preferred Stock at a price of $170.00 per one one-thousand of a share (the “Purchase Price”). Until a right is exercised, the holder thereof will have no rights as a stockholder of us.

The rights initially attach to the common stock. The rights will separate from the common stock and a distribution of rights certificates will occur (a “Distribution Date”) upon the earlier of (1) ten days following a public announcement that a person or group (an “Acquiring Person”) has acquired, or obtained the right to acquire, directly or through certain derivative positions, 10% or more of the outstanding shares of common stock (the “Stock Acquisition Date”) or (2) ten business days (or such later date as the Board of Directors may determine) following the commencement of, or the first public announcement of the intention to commence, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person of 10% or more of the outstanding shares of common stock.

In general, if a person acquires, directly or through certain derivative positions, 10% or more of the then outstanding shares of common stock, each holder of a right will, after the end of the redemption period referred to below, be entitled to exercise the right by purchasing for an amount equal to the Purchase Price common stock (or in certain circumstances, cash, property or other securities of us) having a value equal to two times the Purchase Price. All rights that are or were beneficially owned by the Acquiring Person will be null and void. If at any time following the Stock Acquisition Date (1) we are acquired in a merger or other business combination transaction, or (2) 50% or more of our assets or earning power is sold or transferred, each holder of a right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price. Our Board of Directors generally may redeem the rights in whole but not in part at a price of $.005 per right (payable in cash, common stock or other consideration deemed appropriate by our Board of Directors) at any time until ten days after a Stock Acquisition Date. In general, at any time after a person becomes an Acquiring Person, the Board of Directors may exchange the rights, in whole or in part, at an exchange ratio of one share of common stock for each outstanding right.

The Rights Agreement was amended in November 2008 to: (1) modify the definition of beneficial ownership so that it covers, with certain exceptions (including relating to swaps dealers), interests in shares of common stock created by derivative positions in which a person is a receiving party to the extent that actual shares of common stock are directly or indirectly held by the counterparties to such derivative positions; and (2) decrease from 20% to 10% the threshold of beneficial ownership of common stock above which investors become “Acquiring Persons” under the Rights Agreement and thereby trigger the issuance of the rights. Pursuant to the amendment, stockholders who beneficially owned more than 10% of our common stock as of November 19, 2008 were permitted to maintain their existing ownership positions without triggering the preferred stock purchase rights.

 

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The Rights Agreement was further amended in January 2010 to exclude FMR LLC (and its affiliates and associates) from the definition of “Acquiring Person” so long as (1) FMR is the beneficial owner of 14.9% or less of our outstanding common stock, (2) FMR acquired, and continues to beneficially own, such shares of common stock in the ordinary course of business with no purpose of changing or influencing the control, management or policies of the Company, and not in connection with or as a participant to any transaction having such purpose, and (3) FMR is not required to report its beneficial ownership on Schedule 13D under the Securities Exchange Act, and, if FMR is the beneficial owner of shares representing 10% or more of the shares of common stock then outstanding, is eligible to file a Schedule 13G to report its beneficial ownership of such shares.

The Rights Agreement was further amended in December 2011 to exclude Carlson Capital, L.P., together with its Affiliates and Associates (as defined in the Rights Agreement) (together, “CCLP”), but only so long as CCLP is the beneficial owner of our outstanding common stock constituting in the aggregate 14.9% or less of our outstanding common stock, inclusive of the shares of common stock currently beneficially owned by CCLP. In conjunction, CCLP agreed to certain standstill provisions with respect to our common stock for a period of one year.

 

14. Buyout of Management Agreements and Settlement of Management Agreement Disputes

In 2011, we earned $3.7 million in buyout fees as the result of the termination of four management contracts.

In 2010, we entered into a settlement and restructuring agreement with HCP regarding certain senior living communities owned by HCP and operated by us. Pursuant to the agreement, we gave HCP the right to terminate us as manager of 27 communities owned by HCP for a $50.0 million cash payment which we recognized as buyout fee revenue in our consolidated statements of operations. In addition, we recognized $8.9 million of amortization expense relating to the remaining unamortized management agreement intangible assets for these communities in 2010. The agreement also provided for the release of all claims between HCP, ourselves and third party tenants including the settlement of litigation already commenced. We were terminated as manager of these communities on November 1, 2010.

Also in 2010, two property owners bought out five management agreements for which we were the manager. We recognized $13.3 million in buyout fees in connection with these transactions. We also wrote off the remaining $1.0 million unamortized management agreement intangible asset.

As a result of these management agreement buyouts, we have been terminated as manager on 36 communities. We earned $0.4 million, $12.8 million and $17.9 million of management fees from these communities in 2011, 2010 and 2009, respectively. We will not earn these fees in 2012 and thereafter.

Settlement of Management Agreement Disputes

In 2010, we reached an agreement to settle certain management agreement disputes with one of our venture partners and recorded a $2.8 million charge related to this settlement, $1.1 million of which was accrued in 2009. This charge is reflected as a reduction to management fee income in our consolidated statements of operations.

 

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15. Net Income (Loss) Per Common Share

The following table summarizes the computation of basic and diluted net income (loss) per common share amounts presented in the accompanying consolidated statements of operations (in thousands, except per share amounts):

 

     Years Ended December 31,  
     2011     2010      2009  

Numerator for basic and diluted income (loss) per share:

       

(Loss) income from continuing operations

   $ (22,299   $ 31,280       $ (105,792

(Loss) income from discontinued operations

     (1,091     67,787         (28,123
  

 

 

   

 

 

    

 

 

 

Total net (loss) income

   $ (23,390   $ 99,067       $ (133,915
  

 

 

   

 

 

    

 

 

 

Denominator:

       

Weighted-average shares outstanding - basic

     56,725        55,787         51,391   

Effect of dilutive securities - Employee stock options and restricted stock

     0        1,654         0   
  

 

 

   

 

 

    

 

 

 
     56,725        57,441         51,391   
  

 

 

   

 

 

    

 

 

 

Basic net (loss) income per common share

       

(Loss) income from continuing operations

   $ (0.39   $ 0.56       $ (2.06

(Loss) income from discontinued operations

     (0.02     1.22         (0.55
  

 

 

   

 

 

    

 

 

 

Total net (loss) income

   $ (0.41   $ 1.78       $ (2.61
  

 

 

   

 

 

    

 

 

 

Diluted net income (loss) per common share

       

(Loss) income from continuing operations

   $ (0.39   $ 0.54       $ (2.06

(Loss) income from discontinued operations

     (0.02     1.18         (0.55
  

 

 

   

 

 

    

 

 

 

Total net (loss) income

   $ (0.41   $ 1.72       $ (2.61
  

 

 

   

 

 

    

 

 

 

Options are included under the treasury stock method to the extent they are dilutive. Shares issuable upon exercise of stock options after applying the treasury stock method of 1,724,840, zero and 513,025 for 2011, 2010 and 2009, respectively, have been excluded from the computation because the effect of their inclusion would be anti-dilutive.

 

16. Commitments and Contingencies

Leases for Office Space

Rent expense for office space, excluding Trinity, for 2011, 2010 and 2009 was $3.3 million, $4.0 million and $7.6 million, respectively. We lease our community support office and regional offices under various leases which expire through September 2013. In 2008, we ceased using approximately 40,276 square feet of office space at our community support office. In 2011 and 2009, we terminated additional portions of our lease at our community support office and recorded charges of $0.1 million and $2.7 million related to the terminations.

Trinity Leases

Trinity and each of its subsidiaries (together, “the Trinity Companies”) filed plans of liquidation and dissolution (“Plans”) before the Delaware Chancery Court in January 2009 and November 2009, respectively. Pursuant to a federal statute that gives claims held by divisions of the federal government priority over other unsecured creditor claims, Trinity paid all of its then remaining cash to the federal government in 2010 and the Trinity Companies had no remaining assets at December 31, 2010. We currently expect that any obligations related to the Trinity Companies’ long-term leases for office space will be eliminated three years from the dates that the Plans were filed for each of the respective Trinity Companies.

 

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When the Trinity Companies ceased operations in December 2008, all leased premises were vacated and leasehold improvements and furniture, fixtures and equipment were abandoned. As a result, we recorded a charge of $0.7 million, $1.0 million and $1.2 million in 2011, 2010 and 2009, respectively, related to the lease abandonment which is included in loss from discontinued operations.

Leases for Operating Communities

We have operating leases for ten communities (excluding the Marriott leases discussed below) with terms ranging from 15 to 20 years, with two ten-year extension options. We have three other ground leases related to operating communities with lease terms ranging from 25 to 99 years. These leases are subject to annual increases based on the consumer price index and/or stated increases in the lease. In addition, we have one ground lease related to an abandoned project.

In connection with the acquisition of MSLS in March 2003, we assumed 14 operating leases and renegotiated an existing operating lease agreement for another MSLS community in June 2003. We also entered into two new leases with a landlord who acquired two continuing care retirement communities from MSLS on the same date. Fifteen of the leases expire in 2013, while the remaining two leases expire in 2018. The extension of 14 of these leases beyond the 2013 expiration date requires third party approval. Rent expense from these 17 leases was $51.0 million, $50.8 million and $50.4 million for 2011, 2010 and 2009, respectively. The leases had initial terms of 20 years, and contain one or more renewal options, generally for five to 15 years. The leases provide for minimum rentals and additional rentals based on the operations of the leased community.

In December 2011, we closed the transactions contemplated by the Agreement Regarding Leases, dated December 22, 2011 (the “ARL”), by and among us, Marriott International, Inc. (“Marriott”), Marriott Senior Holding Co. and Marriott Magenta Holding Company, Inc. (collectively, the “Marriott Parties”). The ARL relates to a portfolio of 14 leases (the “Leases”) for senior living facilities that are leased by SPTMRT Properties Trust, as landlord to us as tenant and guaranteed by Marriott pursuant to certain lease guarantees (collectively, the “Lease Guarantees”). Each of the Leases is scheduled to expire on December 31, 2013 and, pursuant to a prior agreement between us and the Marriott Parties, we are not permitted to exercise our option under the Leases to extend our terms for an additional five-year term unless Marriott is released from its obligations under the Lease Guarantees.

Pursuant to the terms of the ARL, among other things, Marriott consented to the extension of the term of four of the Leases (the “Continuing Leases”) for an additional five-year term commencing January 1, 2014 and ending December 31, 2018 (the “Extension Term”). We provided Marriott with a letter of credit (the “Letter of Credit”) issued by KeyBank, NA (“KeyBank”) with a face amount of $85.0 million to secure Marriott’s exposure under the Lease Guarantees for the Continuing Leases during the Extension Term and certain other of our obligations (collectively, the “Secured Obligations”). During the Extension Term, we will be required to pay Marriott an annual payment in respect of the cash flow of the Continuing Lease facilities, subject to a $1 million annual minimum. We have notified the landlord that the other ten Leases will terminate effective December 31, 2013.

Marriott may draw on the Letter of Credit in order to pay any of the Secured Obligations if not paid by us when due. We have provided KeyBank with cash collateral of $85.0 million as security for its Letter of Credit obligations. Marriott has agreed to reduce the face amount of the Letter of Credit proportionally on a quarterly basis during the Extension Term as we pay our rental obligations under the Continuing Leases. As the face amount of the Letter of Credit is reduced, KeyBank will return a proportional amount of its cash collateral to us. Following closing, to the extent that we elect not to extend any or all of the Continuing Leases, the face amount of the Letter of Credit will be reduced proportionally in respect of the rent obligations under the Continuing Leases that are not extended.

Rent expense for communities subject to operating leases was $76.4 million, $59.7 million and $59.3 million for 2011, 2010 and 2009, respectively, including contingent rent expense of $5.7 million, $5.6 million and $5.5 million for 2011, 2010 and 2009, respectively.

 

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Future minimum lease payments under office, ground and other operating leases at December 31, 2011 are as follows (in thousands):

 

2012

   $ 71,179   

2013

     67,883   

2014

     37,886   

2015

     39,176   

2016

     23,570   

Thereafter

     105,143   
  

 

 

 
   $ 344,837   
  

 

 

 

Letters of Credit

At December 31, 2011, in addition to $10.2 million in letters of credit secured by our Credit Facility, we have letters of credit outstanding of $91.7 million relating to our insurance programs and $85.0 million related to the Marriott lease guarantee discussed above. These letters of credit are fully cash collateralized.

Guarantees

We have provided operating deficit guarantees to the venture lenders, whereby after depletion of established reserves, we guarantee the payment of the lender’s monthly principal and interest during the term of the guarantee and have provided guarantees to ventures to fund operating shortfalls. The terms of the guarantees generally match the terms of the underlying venture debt and generally range from three to five years, to the extent we are able to refinance the venture debt. Fundings under the operating deficit guarantees and debt repayment guarantees are generally recoverable either out of future cash flows of the venture or from proceeds of the sale of communities.

Excluding the impact of our senior living condominium project, which is accounted for under the profit sharing method, the maximum potential amount of future fundings for outstanding guarantees, the carrying amount of the liability for expected future fundings at December 31, 2011 and fundings in 2011 were immaterial.

Senior Living Condominium Project

In 2006, we sold a majority interest in two separate ownership entities to two separate partners related to a project consisting of a residential condominium component and an assisted living component with each component owned by a different venture. In connection with the equity sale and related financings, we undertook certain obligations to support the operations of the project for an extended period of time. We account for the condominium and assisted living ventures under the profit-sharing method of accounting, and our liability carrying value at December 31, 2011 was $12.2 million for the two ventures. We recorded losses of $9.8 million, $9.6 million and $13.6 million for 2011, 2010 and 2009, respectively.

We are obligated to our partner and the lender on the assisted living venture to fund future operating shortfalls. We are also obligated to our partner on the condominium venture to fund operating shortfalls. We have funded $8.1 million under the guarantees through December 31, 2011, of which approximately $1.2 million was funded in 2011. In addition, we are required to fund sales and marketing costs associated with the sale of the condominiums.

The depressed condominium real estate market in the Washington D.C. area has resulted in lower sales and pricing than forecasted and we believe the partners have no remaining equity in the condominium project. Accordingly, we have informed our partner that we do not intend to fund future operating shortfalls.

 

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As of December 31, 2011, loans of $116.4 million for the residential condominium venture and $29.9 million for the assisted living venture are both in default. We have accrued $3.3 million in default interest relating to these loans. In February 2012, the lenders for the residential condominium venture commenced legal proceedings necessary to foreclose on the assets of the residential condominium venture. We are still in discussion with the lender for the assisted living venture regarding the default on the loan.

Agreements with Marriott International, Inc.

In December 2011, we closed on an agreement with Marriott International, Inc. (“Marriott”) permitting us to extend for an additional five year term commencing January 1, 2014, certain lease obligations that would have otherwise expired effective December 31, 2013. Pursuant to the terms of the agreement, we provided Marriott with a letter of credit issued by KeyBank with a face amount of $85.0 million to secure Marriott’s exposure under the Lease Guarantee and entrance fee obligations that remain outstanding (approximately $5.6 million at December 31, 2011). Marriott may draw on the letter of credit in order to pay any of the secured obligations if they are not paid by us when due. We have provided KeyBank with cash collateral of $85.0 million as security for its letter of credit obligations.

Other

Generally, the financing obtained by our ventures is non-recourse to the venture members, with the exception of the debt repayment guarantees discussed above. However, we have entered into guarantees with the lenders with respect to acts which we believe are in our control, such as fraud or voluntary bankruptcy of the venture. If such acts were to occur, the full amount of the venture debt could become recourse to us. The combined amount of venture debt underlying these guarantees is approximately $1.7 billion at December 31, 2011. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

To the extent that a third party fails to satisfy an obligation with respect to two continuing care retirement communities we manage, we would be required to repay this obligation, the majority of which is expected to be refinanced with proceeds from the issuance of entrance fees as new residents enter the communities. At December 31, 2011, the remaining liability under this obligation is $31.5 million. We have not funded under these guarantees, and do not expect to fund under such guarantees in the future.

Employment Agreements

We have employment agreements with Mark S. Ordan, Chief Executive Officer, C. Marc Richards, Chief Financial Officer, Greg Neeb, Chief Investment and Administrative Officer, and David Haddock, General Counsel and Secretary.

On December 1, 2010, we entered into an amended and restated employment agreement with Mark S. Ordan, our Chief Executive Officer. Under Mr. Ordan’s amended and restated employment agreement, his employment term was extended from November 1, 2011 (as provided in this original employment agreement) to December 1, 2012, with automatic one-year renewals at the end of that term and each year thereafter unless either party otherwise provides notice to the other at least 120 days prior to the next renewal. In connection with the execution of his amended and restated employment agreement, Mr. Ordan received a cash re-signing bonus of $3 million and a grant of a ten-year option to purchase 1,000,000 shares of our common stock at an exercise price of $3.94 per share. The re-signing option vests as to one-third of the shares subject to the option on each of December 1, 2011, 2012 and 2013, so long as Mr. Ordan continues to be employed by us on the applicable vesting date. The golden parachute excise tax gross-up provision also was eliminated from his original employment agreement.

On January 25, 2011, we entered into an amended and restated employment agreement with Greg Neeb, our Chief Investment and Administrative Officer. Under Mr. Neeb’s amended and restated employment agreement, Mr. Neeb’s employment term was extended from January 21, 2012 (as provided in his original employment

 

54


agreement) to January 25, 2013, with automatic one-year renewals at the end of that term and each year thereafter unless either party otherwise provides notice to the other at least 120 days prior to the next renewal. In connection with the execution of his amended and restated employment agreement, Mr. Neeb received a cash re-signing bonus of $2 million and a grant of a ten-year option to purchase 500,000 shares of our common stock at an exercise price of $7.31 per share. The re-signing option vests as to one-third of the shares subject to the option on each of January 25, 2012, 2013 and 2014, so long as Mr. Neeb continues to be employed by us on the applicable vesting date. The golden parachute excise tax gross-up provision also was eliminated from his original employment agreement.

We also entered into an employment agreement with Mr. Haddock, our General Counsel and Secretary, on October 1, 2010. The employment agreement provides for an initial three-year employment term, with automatic one-year renewals at the end of the initial term and each year thereafter unless either party provides notice to the other, at least 120 days prior to the next renewal date, that the term will not be extended.

We also entered into an employment agreement with Mr. Richards, our Chief Financial Officer, on March 11, 2011. The employment agreement provides for an initial three-year employment term, with automatic one-year renewals at the end of the initial term and each year thereafter unless either party provides notice to the other, at least 120 days prior to the next renewal date, that the term will not be extended.

Under the employment agreements, Mr. Ordan, Mr. Neeb, Mr. Haddock and Mr. Richards are entitled to receive an annual base salary of $650,000, $450,000, $350,000 and $300,000 per year, respectively, subject to increase as may be determined by the Compensation Committee of our Board of Directors. Each of these executives is eligible for an annual bonus under the terms of their employment agreements. Currently, none of the employment agreements with our named executive officers contain a golden parachute excise tax gross-up provision.

Legal Proceedings

Purnell and Miller Lawsuits

On May 14, 2010, Plaintiff LaShone Purnell filed a lawsuit on behalf of herself and others similarly situated in the Superior Court of the State of California, Orange County, against Sunrise Senior Living Management, Inc., captioned LaShone Purnell as an individual and on behalf of all employees similarly situated v. Sunrise Senior Living Management, Inc. and Does 1 through 50, Case No. 30-2010-00372725 (Orange County Superior Court). Plaintiff’s complaint is styled as a class action and alleges that Sunrise failed to properly schedule the purported class of care givers and other related positions so that they would be able to take meal and rest breaks as provided for under California law. The complaint asserts claims for: (1) failure to pay overtime wages; (2) failure to provide meal periods; (3) failure to provide rest periods; (4) failure to pay wages upon ending employment; (5) failure to keep accurate payroll records; (6) unfair business practices; and (7) unfair competition. Plaintiff seeks unspecified compensatory damages, statutory penalties provided for under the California Labor Code, injunctive relief, and costs and attorneys’ fees. On June 17, 2010, Sunrise removed this action to the United States District Court for the Central District of California (Case No. SACV 10-897 CJC (MLGx)). On July 16, 2010, plaintiff filed a motion to remand the case to state court, which the Court denied. The parties have completed briefing on class certification, and the Court held a hearing on plaintiff’s motion for class certification on January 23, 2012. On February 27, 2012, the Court denied the plaintiff’s motion for class certification.

In addition, on January 31, 2012, the same counsel filed what that counsel characterized as a related lawsuit captioned Cheryl Miller, an individual on behalf of herself and others similarly situated v. Sunrise Senior Living Management, Inc., a Virginia corporation; and Does 1 through 100, Case No. BC478075 in the Superior Court of the State of California, County of Los Angeles. On or about February 8, 2012, Plaintiff Cheryl Miller filed a First Amended Complaint (“FAC”), which was served on Sunrise on February 15, 2012. Plaintiff’s FAC is styled as a class action and alleges that Sunrise failed to pay all wages owed to employees as a result of allegedly improper

 

55


“rounding” of time to the nearest quarter hour and that Sunrise failed to comply with the California Labor Code by issuing “debit cards” to pay wages. The FAC asserts claims for: (1) failure to pay all wages due to illegal rounding; (2) unfair, unlawful and fraudulent business practices; (3) failure to provide accurate pay stubs, (4) failure to pay wages upon ending employment; (5) failure to comply with Labor Code section 212 regarding payment of wages, and (6) seeking penalties under the California Labor Code Private Attorney Generals Act. Plaintiff seeks unspecified compensatory damages, statutory penalties provided for under the California Labor Code, injunctive relief, and costs and attorneys’ fees. Sunrise believes that Plaintiff’s allegations are not meritorious and that a class action is not appropriate in this case, and intends to defend itself vigorously. Because of the early stage of this suit, we cannot at this time estimate an amount or range of potential loss in the event of an unfavorable outcome.

Feely Lawsuit

On July 7, 2011, Plaintiff Janet M. Feely, a former Sunrise employee, filed a lawsuit on behalf of herself and others similarly situated in the Superior Court of the State of California, County of Los Angeles, against Sunrise Senior Living, Inc., captioned Janet M. Feely, individually and on behalf of other persons similarly situated v. Sunrise Senior Living, Inc. and Does 1 through 55, Case No. BC 465006 (Los Angeles County Superior Court). Plaintiff’s complaint is styled as a class action and alleges that Sunrise improperly classified a position formerly held by her as exempt from the overtime obligations of California’s wage and hour laws. The complaint asserts claims for: (1) failure to pay overtime wages, (2) failure to provide accurate wage statements, (3) unfair competition, and (4) failure to pay all wages owed upon termination. Plaintiff seeks unspecified compensatory damages, statutory penalties provided for under the California Labor Code, restitution and disgorgement of unpaid overtime wages under the California Business and Professions Code, prejudgment interest, costs and attorney’s fees. On August 11, 2011, Sunrise removed the case to the United States District Court for the Central District of California, Case No. LACV11-6601. On October 19, 2011, the Court entered an order approving the parties’ joint stipulation of dismissal of the case, with prejudice as to Ms. Feely and without prejudice as to others similarly situated.

Five Star Lawsuit

On July 10, 2008, Five Star Quality Care, Inc. filed a complaint against Sunrise (and other Sunrise-related entities and affiliates, as well as certain executives thereof) in Superior Court for the Commonwealth of Massachusetts, Five Star Quality Care, Inc. v. Sunrise Senior Living, Inc., et al., Civ. A. No. MICV2008-02641. In that action, Five Star Quality Care alleges, among other things, that Sunrise improperly retained payments made by communities owned by Five Star Quality Care in connection with the participation of such communities in the insurance and health benefit programs. The complaint asserts claims for (1) an accounting, (2) conversion, (3) aiding and abetting conversion, (4) unjust enrichment, (5) breach of contract, (6) breach of fiduciary duty, and (7) violation of Mass. Gen Law Chapter 93A. The complaint does not specify a quantum of damages and seeks an accounting, actual damages, treble damages, interest, costs and attorneys’ fees. Sunrise filed a motion for summary judgment on all claims asserted, which the Court denied in a written decision dated August 23, 2011. The Court also denied Five Star Quality Care, Inc.’s motion for partial summary judgment on its conversion claim.

On November 15, 2010, subsidiaries of Five Star Quality Care filed a new action, FS Tenant Pool I Trust, et al. v. Sunrise Senior Living, Inc., et al., Civ. A. No. MICV2010-04318, in Superior Court for the Commonwealth of Massachusetts, in which they asserted claims against Sunrise similar to those asserted by Five Star Quality Care.

The Court consolidated the two actions and held a pretrial conference on December 6, 2011. Discovery is ongoing and a final pretrial conference is scheduled for June 21, 2012. A trial date of August 6, 2012 has been set. At this point in time, we estimate that a loss from a negative outcome in the range of $2 million to $4 million is reasonably possible. As we do not believe this loss is probable, we have not accrued a contingent loss related to this matter.

 

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Subpoena From the U.S. Attorney’s Office

        The U.S. Attorney’s Office for the Eastern District of Pennsylvania has issued a subpoena to us for certain documents relating to resident care at one of our Pennsylvania communities. This community has experienced significant publicity due to an incident occurring in the spring of 2011. We are cooperating with the U.S. Attorney’s Office and are in the process of producing the requested documents.

Other Pending Lawsuits and Claims

In addition to the matters described above, we are involved in various lawsuits and claims and regulatory and other governmental audits and investigations arising in the normal course of business. In the opinion of management, although the outcomes of these other suits and claims are uncertain, in the aggregate they are not expected to have a material adverse effect on our business, financial condition, and results of operations.

 

17. Related-Party Transactions

Day Care Center Sublease

J127 Foundation (formerly Sunrise Senior Living Foundation) is an independent, not-for-profit organization whose purpose is to operate schools and day care facilities, provide low and moderate income assisted living housing and own and operate a corporate conference center. Paul Klaassen, our Non-Executive Chairman of the Board of Directors and his wife are the primary contributors to, and serve on the board of directors and serve as officers of, J127 Foundation. One or both of them also serve as directors and as officers of various J127 Foundation subsidiaries. Certain other of our employees also serve as directors and/or officers of J127 Foundation and its subsidiaries. Since November 2006, the Klaassens’ daughter has been the Director of J127 Foundation. She was previously employed by J127 Foundation from June 2005 to July 2006. Since October 2007, the Klaassens’ son-in-law has also been employed by J127 Foundation and beginning in August 2010, the Klaassens’ son was also employed by J127 Foundation.

J127 Foundation’s stand-alone day care center, which provides day care services for a fee for our employees and non-Sunrise employees, is located in the same building complex as our community support office. The day care center subleases space from us under a sublease that commenced in April 2004, expires September 30, 2013, and was amended in January 2007 to include additional space. The sublease payments, which equal the payments we are required to make under our lease with our landlord for this space, are required to be paid monthly and are subject to increase as provided in the sublease. J127 Foundation paid Sunrise approximately $0.2 million in sublease payments in each 2011, 2010 and 2009.

Fairfax Community Ground Lease

We lease the real property on which our Fairfax, Virginia community is located from Paul and Teresa Klaassen pursuant to a 99-year ground lease entered into in June 1986, as amended in August 2003. The amended ground lease provided for monthly rent of $12,926 when signed in 2003, and is adjusted annually based on the consumer price index. Annual rent expense paid by us under this lease was approximately $0.2 million for 2011, 2010 and 2009. The aggregate dollar amount of the scheduled lease payments through the remaining term of the lease is approximately $13.9 million.

Consulting Agreements

In November 2008, we entered into an oral consulting arrangement with Mr. Klaassen. Under the consulting arrangement, we agreed to pay Mr. Klaassen a fee of $25,000 per month for consulting with us and our chief executive officer, on senior living matters. This was in addition to any benefits Mr. Klaassen was entitled to under his employment agreement. Fees totaling $87,500 were paid to Mr. Klaassen for three and a half months commencing in November 2008 and ending in February 2009. Mr. Klaassen did not receive any consulting fees for the period March 2009 to July 2010.

 

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In 2010, Mr. Klaassen earned an advisory fee of $125,000 for the period August 2010 through December 2010.

Effective May 1, 2010, we entered into an independent contractor agreement with Teresa M. Klaassen to provide the following consulting services to us: advise our chief executive officer and other officers on matters relating to quality of care, training, morale and product development; and at the request of our chief executive officer, visit regions and communities, and attend and speak at quarterly meetings and other company functions. Ms. Klaassen was previously our employee and acted as our chief cultural officer. The agreement had a one-year term and expired on April 30, 2011. Under this agreement, we paid Ms. Klaassen $8,333 per month. In 2011 and 2010, we paid Ms. Klaassen $33,333 and $66,667, respectively, under the agreement.

SecureNet Payment Systems LLC

In October 2008, we entered into a contract with SecureNet Payment Systems LLC (“SecureNet”) to provide consulting services in connection with the processing of direct deposit and credit card payments by community residents of their monthly fees. The sales agent representing SecureNet, whose compensation on the contract is based on SecureNet’s revenue from the contract, is the wife of a then Sunrise employee. In November 2008, after the award of the contract, that employee became Senior Vice President, North American Operations and an officer of the Company. The Governance Committee reviewed this transaction at its meeting on July 20, 2009 and concluded that the bidding process was done with integrity, that the award to SecureNet appeared to have been in our best interest and that our employee’s relationship to the SecureNet sales representative did not have any influence over the decision to select SecureNet. In 2010 and 2009, $0.3 million and $0.2 million of fees were paid, respectively, to SecureNet. The Senior Vice President ceased to be an employee in 2010.

 

18. Employee Benefit Plans

401k Plan

We have a 401(k) Plan (“the Plan”) covering all eligible employees. Under the Plan, eligible employees may make pre-tax contributions up to 100% of the IRS limits. The Plan provides an employer match dependent upon compensation levels and years of service. The Plan does not provide for discretionary matching contributions. Matching contributions were $1.6 million, $1.5 million and $1.6 million in 2011, 2010 and 2009, respectively.

Sunrise Executive Deferred Compensation Plan

We had an executive deferred compensation plan (the “Executive Plan”) for employees who met certain eligibility criteria. Under the Plan, eligible employees may make pre-tax contributions in amounts up to 25% of base compensation and 100% of bonuses. We may make discretionary matching contributions to the Executive Plan. Employees vest in the matching employer contributions, and interest earned on such contributions, at a date determined by the Benefit Plan Committee. Matching contributions were zero in 2010 and 2009 and 2008. We terminated the Executive Plan in January 2010 and distributions were made in January 2011.

Deferred Compensation Plan with the former Chief Executive Officer

Pursuant to Mr. Klaassen’s prior employment agreement, we are required to make contributions of $150,000 per year for 12 years, beginning on September 12, 2000 into a non-qualified deferred compensation account, notwithstanding Mr. Klaassen’s termination of his employment in November 2008. At the end of the 12-year period, any net gains accrued or realized from the investment of the amounts contributed by us are payable to Mr. Klaassen and we will receive any remaining amounts. As of December 31, 2011, we had contributed an aggregate of $1.8 million into this plan which fully funded the account. Refer to Note 16 for further information regarding executive compensation plans.

 

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19. Discontinued Operations

Discontinued operations consist primarily of three communities sold in 2011, our German operations, two communities sold in 2010, 22 communities sold in 2009, one community closed in 2009, our Greystone subsidiary sold in 2009 and our Trinity subsidiary which ceased operations in 2008. The following amounts related to those communities and businesses that have been segregated from continuing operations and reported as discontinued operations (in thousands):

 

     For the Years Ended December 31,  
     2011     2010     2009  

Revenue

   $ 1,809      $ 28,177      $ 118,797   

Expenses

     (3,341     (40,960     (129,729

Impairments

     (1,031     (3,316     (74,770

Other (expense) income

     (1,143     10,035        (16,669

Gain on sale of real estate or business

     2,615        15,542        74,124   

Gain on German transaction

     0        56,819        0   

Income taxes

     0        1,490        (62
  

 

 

   

 

 

   

 

 

 

(Loss) income from discontinued operations

   $ (1,091   $ 67,787      $ (28,309
  

 

 

   

 

 

   

 

 

 

 

20. Information about Sunrise’s Segments

Effective in 2011, we revised our operating segments as a result of a change in the manner in which the key decision makers review the operating results and the cessation of all development activity. We now have three operating segments: North American Management, Consolidated Communities and United Kingdom Management. The operations of the communities we own or manage are reviewed on a community by community basis by our key decision makers. The communities managed for third parties, communities in ventures or communities that are consolidated but held in ventures or variable interest entities, are aggregated by location into either our North American Management segment or our United Kingdom Management segment. Communities that are wholly owned or leased are included in our Consolidated Communities segment. In 2010, we had five operating segments, North American Management, North American Development (the residual activity which is now included with corporate costs), Equity Method Investments (whose community operations are now included either in North American Management or United Kingdom Management), Consolidated (Wholly-Owned/Leased) and United Kingdom.

North American Management includes the results from the management of third party and venture senior living communities, including six communities in New York owned by a venture but whose operations are included in our consolidated financial statements, a community owned by a variable interest entity and a community owned by a venture which we consolidate, in the United States and Canada.

Consolidated Communities includes the results from the operation of wholly-owned and leased Sunrise senior living communities in the United States and Canada, excluding allocated management fees from our North American Management segment of $12.8 million, $10.0 million and $8.3 million for 2011, 2010 and 2009, respectively.

United Kingdom Management includes the results from management of Sunrise senior living communities in the United Kingdom owned in ventures.

Our community support office is located in McLean, Virginia, with a smaller regional center located in the U.K. Our North American community support office provides centralized operational functions. As a result, our community-based team members are able to focus on delivering excellent care and service consistent with our resident-centered operating philosophy.

 

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Segment results are as follows (in thousands):

 

     For the Year Ended December 31, 2011  
     North
American
Management
    Consolidated
Communities
     United
Kingdom
Management
     Corporate     Total  

Operating revenue:

            

Management fees

   $ 81,350      $ 0       $ 14,782       $ 0      $ 96,132   

Buyout fees

     3,685        0         0         0        3,685   

Resident fees for consolidated communities

     66,124        397,940         0         0        464,064   

Ancillary fees

     30,544        0         0         0        30,544   

Professional fees from development, marketing and other

     0        0         843         1,655        2,498   

Reimbursed costs incurred on behalf of managed communities

     706,934        0         8,356         0        715,290   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating revenues

     888,637        397,940         23,981         1,655        1,312,213   

Operating expenses:

            

Community expense for consolidated communities

     40,793        292,698         0         0        333,491   

Community lease expense

     17,961        58,483         0         0        76,444   

Depreciation and amortization

     3,076        26,141         0         8,306        37,523   

Ancillary expenses

     28,396        0         0         0        28,396   

General and administrative

     0        0         13,899         100,575        114,474   

Carrying costs of liquidating trust assets

     0        0         0         2,456        2,456   

Gain on financial guarantees

     (2,100     0         0         0        (2,100

Provision for doubtful accounts

     1,886        1,308         0         608        3,802   

Impairment of long-lived assets

     0        4,623         0         8,111        12,734   

Costs incurred on behalf of managed communities

     710,674        0         8,485         0        719,159   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     800,686        383,253         22,384         120,056        1,326,379   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 87,951      $ 14,687       $ 1,597       $ (118,401   $ (14,166
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Interest expense

   $ 0      $ 0       $ 0       $ (18,320   $ (18,320

Sunrise’s share of earnings (loss) and return on investment in unconsolidated entities

     0        0         4,592         (1,963     2,629   

Investments in unconsolidated communities

     0        0         28,062         14,863        42,925   

Segment assets

     218,031        649,540         42,899         207,898        1,118,368   

Expenditures for long-lived assets

     0        3,348         0         8,013        11,361   

 

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     For the Year Ended December 31, 2010  
     North
American
Management
     Consolidated
Communities
     United
Kingdom
Management
     Corporate     Total  

Operating revenue:

             

Management fees

   $ 95,807       $ 0       $ 12,025       $ 0      $ 107,832   

Buyout fees

     63,286         0         0         0        63,286   

Resident fees for consolidated communities

     23,507         331,207         0         0        354,714   

Ancillary fees

     43,136         0         0         0        43,136   

Professional fees from development, marketing and other

     0         0         3,177         1,101        4,278   

Reimbursed costs incurred on behalf of managed communities

     815,221         0         12,019         0        827,240   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating revenues

     1,040,957         331,207         27,221         1,101        1,400,486   

Operating expenses:

             

Community expense for consolidated communities

     16,446         246,447         0         0        262,893   

Community lease expense

     1,582         58,133         0         0        59,715   

Depreciation and amortization

     12,441         15,992         0         12,204        40,637   

Ancillary expenses

     40,504         0         0         0        40,504   

General and administrative

     0         0         11,325         115,241        126,566   

Carrying costs of liquidating trust assets

     0         0         0         3,146        3,146   

Accounting Restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation

     0         0         0         (1,305     (1,305

Restructuring costs

     0         0         0         11,690        11,690   

Provision for doubtful accounts

     3,824         921         0         1,409        6,154   

Loss on financial guarantees and other contracts

     518         0         0         0        518   

Impairment of long-lived assets

     0         826         0         4,821        5,647   

Costs incurred on behalf of managed communities

     818,987         0         12,021         0        831,008   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

     894,302         322,319         23,346         147,206        1,387,173   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from operations

   $ 146,655       $ 8,888       $ 3,875       $ (146,105   $ 13,313   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Interest expense

   $ 0       $ 0       $ 0       $ (7,707   $ (7,707

Sunrise’s share of earnings (loss) and return on investment in unconsolidated entities

     0         0         9,373         (1,852     7,521   

Investments in unconsolidated communities

     0         0         27,007         11,668        38,675   

Segment assets

     155,884         242,229         36,626         266,719        701,458   

Expenditures for long-lived assets

     380         10,121         0         5,062        15,563   

 

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     For the Year Ended December 31, 2009  
     North
American
Management
     Consolidated
Communities
     United
Kingdom
Management
    Corporate     Total  

Operating revenue:

            

Management fees

   $ 101,755       $ 0       $ 10,712      $ 0      $ 112,467   

Buyout fees

     0         0         0        0        0   

Resident fees for consolidated communities

     21,403         317,722         0        0        339,125   

Ancillary fees

     43,630         0         1,767        0        45,397   

Professional fees from development, marketing and other

     0         0         5,995        7,198        13,193   

Reimbursed costs incurred on behalf of managed communities

     931,867         0         10,942        0        942,809   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating revenues

     1,098,655         317,722         29,416        7,198        1,452,991   

Operating expenses:

            

Community expense for consolidated communities

     15,913         242,055         0        0        257,968   

Community lease expense

     1,525         57,790         0        0        59,315   

Depreciation and amortization

     13,243         15,443         0        17,092        45,778   

Ancillary expenses

     40,594         0         1,863        0        42,457   

General and administrative

     0         0         15,438        111,502        126,940   

Write-off of capitalized project costs

     0         0         0        14,879        14,879   

Accounting Restatement, Special Independent Committee inquiry, SEC investigation and stockholder litigation

     0         0         0        3,887        3,887   

Restructuring costs

     0         0         1,577        30,957        32,534   

Provision for doubtful accounts

     10,664         1,609         0        978        13,251   

Loss on financial guarantees and other contracts

     2,053         0         0        0        2,053   

Impairment of long-lived assets

     0         0         0        29,439        29,439   

Costs incurred on behalf of managed communities

     938,389         0         10,942        0        949,331   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,022,381         316,897         29,820        208,734        1,577,832   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

   $ 76,274       $ 825       $ (404   $ (201,536   $ (124,841
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Interest expense

   $ 0       $ 0       $ 0      $ (10,273   $ (10,273

Sunrise’s share of earnings (loss) and return on investment in unconsolidated entities

     0         0         15,977        (10,304     5,673   

Investments in unconsolidated communities

     0         0         32,596        32,375        64,971   

Segment assets

     174,708         245,364         46,458        444,059        910,589   

Expenditures for long-lived assets

     264         9,526         0        9,839        19,629   

We recorded $1.1 million, net, in exchange losses all relating to the Canadian dollar in 2011; $1.7 million, net, in exchange gains in 2010 ($2.2 million in gains related to the Canadian dollar and $(0.5) million in losses related to the British pound); and $7.4 million, net, in foreign exchange gains in 2009 ($8.0 million in gains related to the Canadian dollar and $(0.6) million in losses related to the British pound).

 

62


Upon designation as assets held for sale, we recorded the German assets at the lower of their carrying value or their fair value less estimated costs to sell. We used the bids received to date in the determination of fair value. As the carrying value of a majority of the assets was in excess of the fair value less estimated costs to sell, in 2009 we recorded an impairment charge of $49.9 million which is included in discontinued operations.

We generated 16.3%, 16.9% and 14.2% of revenue from Ventas in 2011, 2010 and 2009, respectively; 13.7%, 19.8% and 23.2%, from HCP in 2011, 2010 and 2009, respectively; and 11.4% in 2009 from a private capital partner for senior living communities which we manage.

 

21. Accounts Payable and Accrued Expenses and Other Long-Term Liabilities

Accounts payable and accrued expenses consist of the following (in thousands):

 

     December 31,
2011
     December 31,
2010
 

Accounts payable and accrued expenses

   $ 36,920       $ 38,095   

Accrued salaries and bonuses

     28,594         23,690   

Accrued employee health and other benefits

     33,498         34,145   

Other accrued expenses

     35,145         35,974   
  

 

 

    

 

 

 
   $ 134,157       $ 131,904   
  

 

 

    

 

 

 

Other long-term liabilities consist of the following (in thousands):

 

     December 31,
2011
     December 31,
2010
 

Deferred revenue from nonrefundable entrance fees

   $ 44,225       $ 39,693   

Lease liabilities

     26,466         25,527   

Executive deferred compensation

     16,317         19,516   

Uncertain tax positions

     20,375         20,360   

Other long-term liabilities

     2,165         5,457   
  

 

 

    

 

 

 
   $ 109,548       $ 110,553   
  

 

 

    

 

 

 

 

22. Severance and Restructuring Plan

In 2008, we implemented a program to reduce corporate expenses, including a voluntary separation program for certain team members, as well as a reduction of spending related to administrative processes, vendors, consultants and other costs. As a result of this program and other staffing reductions, we eliminated 182 positions in overhead and development, primarily in our McLean, Virginia community support office. We have recorded severance charges related to this program of $0.1 million, and $3.0 million for 2010 and 2009, respectively.

In 2009, we announced a plan to continue to reduce corporate expenses through a further reorganization of our corporate cost structure, including a reduction in spending related to, among others, administrative processes, vendors, and consultants. The plan was designed to reduce our annual recurring general and administrative expenses (including expenses previously classified as venture expense) to approximately $100 million, and to reduce our centrally administered services which are charged to the communities by approximately $1.5 million. Under this plan, approximately 177 positions were eliminated. We recorded severance expense of $2.1 million and $7.5 million in 2010 and 2009, respectively, as a result of the plan.

In May 2009, we entered into a separation agreement with our then chief financial officer in connection with this plan. Pursuant to his employment agreement, our then chief financial officer received severance benefits that

 

63


included a lump sum cash payment of $1.4 million. In addition, he received a bonus in the amount of $0.5 million and his outstanding and unvested stock options, restricted stock and other long-term equity compensation awards were fully vested, resulting in a non-cash compensation expense to us of $0.8 million.

In September 2009, we terminated a portion of our lease on our community support office in McLean, Virginia. We recorded a charge of $2.7 million related to the termination.

In January 2010, we entered into a separation agreement with our Senior Vice President, North American Operations, in connection with this plan, effective as of May 31, 2010. Pursuant to his employment agreement, he received severance benefits of $1.0 million and his outstanding and unvested stock options, restricted stock and other long-term equity compensation awards were fully vested, resulting in a non-cash compensation expense to us of $0.3 million.

Mr. Paul Klaassen resigned as our chief executive officer effective November 1, 2008 and became our non-executive Chair of the Board. Upon his resignation as our chief executive officer, under his employment agreement, he became entitled to receive:

 

   

annual payments for three years, beginning on the first anniversary of the date of termination, equal to Mr. Klaassen’s annual salary ($0.5 million) and bonus ($0) for the year of termination;

 

   

continuation of the medical insurance and supplemental coverage provided to Mr. Klaassen and his family until Mr. Klaassen attains or, in the case of his death, would have attained, age of 65 (but to his children only through their attainment of age 22); and

 

   

continued participation in his deferred compensation plan in accordance with the terms of his employment agreement.

The fair value of the continued participation of Mr. Klaassen in the deferred compensation plan cannot be reasonably estimated, as it is dependent upon Mr. Klaassen’s selection of available investment options and the future performance of those selections. Accordingly, no additional accrual was recorded with respect to the continued participation by Mr. Klaassen in his deferred compensation plan. At December 31, 2011, we had a deferred compensation liability of $0.2 million. Refer to Note 18 of the Notes to the Consolidated Financial Statements for more information regarding Mr. Klaassen’s deferred compensation account.

The following table reflects the activity related to our severance and restructuring plans during 2011:

 

(in thousands)    Liability at
January 1,
2011
     Additional
Charges
     Adjustments      Cash Payments
and Other
Settlements
    Liability at
December 31,
2011
 

Severance

   $ 425       $ 0       $ 12       $ (350   $ 87   

CEO retirement compensation

     632         0         45         (500     177   

Lease termination costs

     2,748         0         0         (1,000     1,748   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,805       $ 0       $ 57       $ (1,850   $ 2,012   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

We incurred $8.1 million in 2011 in severance costs in general and administrative expense unrelated to this plan which includes $1.1 million related to our then chief financial officer’s termination in March 2011.

 

64


23. Comprehensive (Loss) Income

Comprehensive (loss) income for the twelve months ended December 31, 2011, 2010 and 2009 was as follows (in thousands):

 

     2011     2010     2009  

Net (loss) income attributable to common shareholders

   $ (23,390   $ 99,067      $ (133,915

Foreign currency translation adjustment

     1,330        (6,940     (4,813

Equity interest in investees’ other comprehensive (loss) income

     (1,894     1,418        6,324   

Unrealized loss on interest rate swap

     (8,325     0        0   

Unrealized gain on investments

     72        105        120   
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (32,207     93,650        (132,284
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to noncontrolling interest - Unrealized gain on investments

     (72     (105     (120
  

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to common shareholders

   $ (32,279   $ 93,545      $ (132,404
  

 

 

   

 

 

   

 

 

 

 

24. Quarterly Results of Operations (Unaudited)

The following is a summary of quarterly results of operations for the fiscal quarter (in thousands, except per share amounts):

 

     Q1     Q2 (2)     Q3 (2)     Q4 (2)     Total  

2011

          

Operating revenue

   $ 320,298      $ 321,383      $ 339,951      $ 330,581      $ 1,312,213   

Impairment charges

     0        5,355        2,899        4,480        12,734   

(Loss) income from continuing operations

     (18,830     1,656        (6,958     1,833        (22,299

Income (loss) from discontinued operations

     1,125        (378     (1,776     (62     (1,091

Net (loss) income

     (17,705     1,278        (8,734     1,771        (23,390

Basic net (loss) income per common share (1)

          

Continuing operations

   $ (0.34   $ 0.03      $ (0.12   $ 0.03      $ (0.39

Discontinued operations

     0.02        (0.01     (0.03     0.00        (0.02

Net (loss) income

     (0.32     0.02        (0.15     0.03        (0.41

Diluted net (loss) income per common share (1)

          

Continuing operations

   $ (0.34   $ 0.03      $ (0.12   $ 0.03      $ (0.39

Discontinued operations

     0.02        (0.01     (0.03     0.00        (0.02

Net (loss) income

     (0.32     0.02        (0.15     0.03        (0.41

2010

          

Operating revenue

   $ 353,885      $ 347,688      $ 381,664      $ 317,249      $ 1,400,486   

Impairment charges

     700        2,659        1,014        1,274        5,647   

(Loss) income from continuing operations

     (13,567     (5,471     19,469        30,849        31,280   

(Loss) income from discontinued operations

     (2,450     51,799        (726     19,164        67,787   

Net (loss) income

     (16,017     46,328        18,743        50,013        99,067   

Basic net (loss) income per common share (1)

          

Continuing operations

   $ (0.24   $ (0.10   $ 0.35      $ 0.55      $ 0.56   

Discontinued operations

     (0.05     0.93        (0.01     0.35        1.22   

Net (loss) income

     (0.29     0.83        0.34        0.90        1.78   

Diluted net (loss) income per common share (1)

          

Continuing operations

   $ (0.24     (0.10     0.34        0.54        0.54   

Discontinued operations

     (0.05     0.91        (0.01     0.33        1.18   

Net (loss) income

     (0.29     0.81        0.33        0.87        1.72   

 

65


(1) The sum of per share amounts for the quarters may not equal the per share amount for the year due to a variance in shares used in the calculations or rounding.
(2) In the second quarter of 2010, we restructured our German debt, recognizing a gain of $56.8 million which is included in discontinued operations. In the second, third and fourth quarters of 2010, we had management agreement buyout fees of $13.5 million, $40.0 million and $9.8 million, respectively. In the fourth quarter of 2010, we sold venture interests to Ventas and recognized a gain of approximately $25.0 million.

 

25. Subsequent Event

On February 28, 2012, we closed on a purchase and sale agreement with our venture partner who owned 85% of the membership interests (the “Partner Interest”) in Santa Monica AL, LLC (“Santa Monica”). We owned the remaining 15% membership interest. Pursuant to the purchase and sale agreement, we purchased the Partner Interest for an aggregate purchase price of $16.2 million. Santa Monica indirectly owns one senior living facility located in Santa Monica, California. As a result of the transaction, effective February 28, 2012, the assets, liabilities and operating results of Santa Monica are consolidated.

Simultaneously, with the closing of the transaction, we entered into a new loan with Prudential Insurance Company of America to pool Santa Monica with Connecticut Avenue, and senior debt financed the two assets. The principal amount of the new loan in the aggregate is $55.0 million with an interest rate of 4.66%. It is a seven year loan that matures on March 1, 2019. The proceeds of the new loan were applied (i) to pay off $27.8 million of the Connecticut Avenue debt; (ii) to pay off $13.4 million of the Santa Monica debt; and (iii) towards the $16.2 million purchase price of the Partner Interest.

 

66


Report of Independent Auditors

To the Members of

CC3 Acquisition, LLC:

We have audited the accompanying consolidated balance sheet of CC3 Acquisition, LLC (the “Company”) as of December 31, 2011, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the period from January 10, 2011 (date of recapitalization) to December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 CC3 Acquisition, LLC at December 31, 2011, and the consolidated results of its operations and its cash flows for the period from January 10, 2011 (date of recapitalization) to December 31, 2011 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

March 13, 2012

 

67


CC3 ACQUISITION, LLC

CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2011

 

 

ASSETS

  

PROPERTY AND EQUIPMENT:

  

Land and land improvements

   $ 67,722,706   

Building and building improvements

     547,147,143   

Furniture, fixtures, and equipment

     14,416,746   

Construction in progress

     4,827,379   
  

 

 

 
     634,113,974   

Less accumulated depreciation

     (19,566,053
  

 

 

 

Property and equipment — net

     614,547,921   

CASH AND CASH EQUIVALENTS

     9,663,977   

RESTRICTED CASH

     7,810,301   

ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $290,150

     1,637,637   

RENT AND WORKING CAPITAL RECEIVABLE FROM AFFILIATES

     618,932   

PREPAID EXPENSES AND OTHER ASSETS

     1,507,251   

DEFERRED RENT RECEIVABLE

     1,421,333   

DEFERRED FINANCING COSTS — Net of accumulated amortization of $2,722,932

     5,672,794   

DEFERRED TAX ASSET

     424,328   

RESIDENT LEASE INTANGIBLE—Net of accumulated amortization of $3,852,931

     95,527   

ABOVE/BELOW MARKET LEASE INTANGIBLE—Net of accumulated amortization of $78,488

     2,521,512   
  

 

 

 

TOTAL

   $ 645,921,513   
  

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

  

LIABILITIES:

  

Notes payable

   $ 434,940,000   

Accrued interest

     2,123,317   

Accounts payable and accrued expenses

     7,620,771   

Income taxes payable

     362,638   

Payable to affiliates — net

     1,203,983   

Payable to Sunrise Third partners (Note1)

     152,435   

Reserve funds due to affiliates

     130,970   

Deferred rent liability

     339,975   

Deferred revenue

     5,335,150   

Security and reservation deposits

     79,250   
  

 

 

 

Total liabilities

     452,288,489   

MEMBERS' EQUITY

     193,633,024   
  

 

 

 

TOTAL

   $ 645,921,513   
  

 

 

 

See notes to consolidated financial statements.

 

68


CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2011

 

 

OPERATING REVENUE:

  

Resident fees

   $ 110,858,853   

Lease income from affiliate

     16,619,854   

Other income

     1,015,247   
  

 

 

 

Total operating revenue

     128,493,954   
  

 

 

 

OPERATING EXPENSES:

  

Labor

     47,713,155   

Depreciation and amortization

     23,418,984   

General and administrative

     6,066,192   

Taxes and license fees

     5,600,192   

Management fees to affiliate

     5,582,569   

Repairs and maintenance

     4,000,890   

Food

     3,783,493   

Insurance

     3,548,808   

Utilities

     3,415,787   

Advertising and marketing

     1,708,065   

Ancillary expenses

     1,086,973   

Ground lease expense

     839,850   

Bad debt

     222,712   
  

 

 

 

Total operating expenses

     106,987,670   
  

 

 

 

INCOME FROM OPERATIONS

     21,506,284   
  

 

 

 

OTHER EXPENSES (INCOME):

  

Interest expense

     31,728,084   

Transaction costs

     9,234,723   

Income tax expense

     471,914   

Interest income

     (3,874
  

 

 

 

Total other expenses

     41,430,847   
  

 

 

 

NET LOSS

   $ (19,924,563
  

 

 

 

See notes to consolidated financial statements.

 

69


CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY

FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2011

 

 

     CNL Income
Senior Holding,
LLC
    Sunrise Senior
Living
Investments, Inc.
    Total  

MEMBERS' EQUITY — January 10, 2011 (Date of Recapitalization)

   $ —        $ —        $ —     

Contributions

     134,865,252        89,910,168        224,775,420   

Distributions

     (11,217,833     —          (11,217,833

Net loss

     (11,954,738     (7,969,825     (19,924,563
  

 

 

   

 

 

   

 

 

 

MEMBERS’ EQUITY — December 31, 2011

   $ 111,692,681      $ 81,940,343      $ 193,633,024   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

70


CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2011

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net loss

   $ (19,924,563

Adjustments to reconcile net loss to net cash provided by operating activities:

  

Depreciation

     19,566,053   

Provision for bad debts

     222,712   

Deferred rent receivable

     (1,421,333

Amortization of financing costs

     2,722,932   

Deferred tax

     199,371   

Amortization of resident lease intangible

     3,852,931   

Amortization of above/below market lease intangible

     78,488   

Deferred rent liability

     339,975   

Changes in operating assets and liabilities:

  

Accounts receivable

     (456,679

Rent and working capital receivable from affiliates

     (1,546,241

Prepaid expenses and other assets

     (685,879

Accounts payable and accrued expenses

     1,310,729   

Income taxes payable

     362,638   

Accrued interest

     1,118,941   

Payable to affiliates — net

     1,000,910   

Reserve funds due to affiliates

     130,970   

Deferred revenue

     1,217,574   

Security and reservation deposits

     (32,750
  

 

 

 

Net cash provided by operating activities

     8,056,779   
  

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Acquisition of Sunrise Third, net of cash acquired

     (545,618,396

Payable to Sunrise Third partners

     (221,944

Restricted cash

     (3,879,639

Purchases of property and equipment

     (8,775,108
  

 

 

 

Net cash used in investing activities

     (558,495,087
  

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Proceeds from notes payable

     435,000,000   

Payment on notes payable

     (60,000

Financing costs paid

     (8,395,726

Contributions

     144,775,844   

Distributions

     (11,217,833
  

 

 

 

Net cash provided by financing activities

     560,102,285   
  

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     9,663,977   

CASH AND CASH EQUIVALENTS — Date of recapitalization

     —     
  

 

 

 

CASH AND CASH EQUIVALENTS — End of year

   $ 9,663,977   
  

 

 

 

(Continued)

 

71


CC3 ACQUISITION, LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION)

TO DECEMBER 31, 2011

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:

  

SSLII’s contribution of equity in Sunrise Third

   $ 79,999,576   
  

 

 

 

Accrued capital expenditures

   $ 793,696   
  

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest

   $ 26,881,834   
  

 

 

 

See notes to consolidated financial statements.

 

72


CC3 ACQUISITION, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND FOR THE

PERIOD FROM JANUARY 10, 2011 (DATE OF RECAPITALIZATION) TO DECEMBER 31, 2011

 

 

1.   ORGANIZATION

CC3 Acquisition, LLC (the “Company”) was formed on November 5, 2010 under the laws of the state of Delaware as a limited liability company. The Company was organized to acquire 100% of the membership interests in Sunrise Third Senior Living Holdings, LLC (“Sunrise Third”) which owned and operated 29 assisted living facilities (collectively, the “Facilities”). At formation, its sole member was Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”). On January 10, 2011, the Company acquired 100% of the membership interests in Sunrise Third and in conjunction with the transaction, CNL Income Senior Holding, LLC (“CNL”) contributed $134,865,252 and was admitted as a member of the Company, and SSLII contributed cash of $9,910,592 in conjunction with the transaction along with its interest in Sunrise Third valued at fair value of approximately $79,999,576 (the “2011 Recapitalization”). The limited liability agreement (“LLC Agreement”) was amended and the capital accounts were adjusted to reflect the new ownership structure with CNL as the managing member owning 60% and SSLII owning 40%. The Company shall continue in full force and effect until January 10, 2041 unless sooner terminated under the terms of the LLC Agreement.

In conjunction with the 2011 Recapitalization, the Company obtained new debt of $435,000,000 as further described in Note 5.

Total consideration paid for Sunrise Third, including interests contributed, was $630,625,410 (excluding transaction costs). At the 2011 Recapitalization date, $374,379 was payable to the Sunrise Third partners for earnings prior to the 2011 Recapitalization. At December 31, 2011, $152,435 of the payable was still outstanding.

The LLC Agreement, effective January 10, 2011, details the commitments of the members and provides the procedures for the return of capital to the members with defined priorities. All net cash flow from operations and capital proceeds is to be distributed according to the priorities as specified in the agreements. Any member can require additional capital to cure an event of default or to avoid an event of default under the loan agreements. The members must mutually agree upon additional capital requests for all other circumstances, including funding for operating shortfalls if they are determined to be reasonably necessary to effectuate any cost or expense associated with the operation or maintenance of any Facility or as it may be contemplated under the management agreements of the Facilities. Contributions are made in proportion to the relative percentage interests of the member at the time of the request. Net income (loss) is allocated to the members in proportion to their relative percentage interests.

 

73


Effective January 10, 2011 and as of December 31, 2011, the Company owns the following 29 Facilities:

 

Operator Entity    Location    Date Opened
Sunrise Village House, LLC    Montgomery Village, Maryland    May 1993
Sunrise Weston Assisted Living, LP    Weston, Massachusetts    December 1997
Sunrise Flossmoor Assisted Living, LLC    Flossmoor, Illinois    November 1999
Sunrise Gahanna Assisted Living, LLC    Gahanna, Ohio    March 1998
Sunrise Third Tustin, SL, LP    Tustin, California    September 2000
Sunrise Third Edgewater SL, LLC    Edgewater, New Jersey    October 2000
Sunrise Third Alta Loma SL, LP    Alta Loma, California    January 2001
Sunrise Chesterfield Assisted Living, LLC    Chesterfield, Missouri    October 2000
Sunrise Third Claremont SL, LP    Claremont, California    December 2000
Sunrise Third Holbrook SL, LLC    Holbrook, New York    June 2001
Sunrise Third Crystal Lake SL, LLC    Crystal Lake, Illinois    February 2001
Sunrise Third Gurnee SL, LLC    Gurnee, Illinois    May 2002
Sunrise Third West Bloomfield SL, LLC    West Bloomfield, Michigan    August 2000
Sunrise Third University Park SL, LLC    Colorado Springs, Colorado    February 2001
East Meadow A.L., LLC    East Meadow, New York    March 2002
Sunrise Third East Setauket SL, LLC    East Setauket, New York    June 2002
Sunrise North Naperville Assisted Living, LLC    Naperville, Illinois    June 2002
Sunrise Third Schaumburg SL, LLC    Schaumburg, Illinois    September 2001
Sunrise Third Roseville SL, LLC    Roseville, Minnesota    December 2001
Sunrise Third Lincroft SL, LLC    Lincroft, New Jersey    December 2001
Sunrise Third Plainview SL, LLC    Plainview, New York    January 2002
White Oak Assisted Living, LLC    Silver Spring, Maryland    March 2002
Canoga Park Assisted Living, LLC    West Hills, California    June 2002
Sunrise Basking Ridge Assisted Living, LLC    Basking Ridge, New Jersey    September 2002
Sunrise Third Dix Hills SL, LLC    Dix Hills, New York    March 2003
Sunrise Marlboro Assisted Living, LLC    Marlboro, New Jersey    January 2002
Sunrise Belmont Assisted Living, LLC    Belmont, California    October 2002
Sunrise Third West Babylon SL, LLC    West Babylon, New York    January 2003
Sunrise Kennebunk ME Senior Living, LLC    Kennebunk, Maine    December 2005

The Company owns and operates the 23 Facilities that are not located in the State of New York (“Non-NY Facilities”) to provide senior living services. Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Non-NY Facilities’ services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

The Company owns and leases the six Facilities located in the State of New York (“NY Facilities”) to Sunrise NY Tenant, LLC (“SRZ Tenant”), a wholly owned subsidiary of SSLI as further described in Note 9. SRZ Tenant has site control and cash surplus agreements with six limited liability companies (the “GWCs”) to operate the NY Facilities. The GWCs are ultimately controlled by SSLI with 2 of the 3 voting interests held by employees of Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly owned subsidiary of SSLI.

 

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2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The accompanying consolidated financial statements include the consolidated accounts of the Company after elimination of all intercompany accounts and transactions. The Company has reviewed subsequent events through March 13, 2012, the date the consolidated financial statements were issued, for inclusion in these consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the allocation of the purchase price of the Facilities, the useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.

Property and Equipment — Property and equipment were recorded at their fair value as of the date of acquisition. All subsequent additions were recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:

 

Land improvements

     10-15years   

Building and improvements

     30-40years   

Furniture, fixtures, and equipment

     3-10years   

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Impairment is recognized when the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss for such assets by comparing the fair value of the asset to its carrying amount. No impairment charge was recorded in 2011.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

Restricted Cash — Restricted cash balances represent amounts set aside for debt service charges, real estate taxes, insurance, ground rent, and capital expenditures as required by the loan and management agreements. In addition, the loan agreement, as further described in Note 5, provides for a cash management account to be controlled by the lender. All cash received from residents is deposited into this account, and amounts are reserved to pay the monthly interest amounts due to the lender and to fund the various escrow accounts. Excess cash amounts are then transferred to an operating cash account controlled by the Company.

The Company funds amounts on a monthly basis into a capital expenditures reserve account held by the lender. The amounts funded are for all 29 Facilities, and the lender maintains the escrow for all 29 Facilities in one account. This escrow amount is included in the restricted cash balance. The GWCs have reimbursed the Company for amounts related to the NY Facilities, and the Company has a liability to the GWCs for the escrow funds it is holding for them. This liability is reported as reserve funds due to affiliates in the accompanying consolidated balance sheet.

 

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Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense for the year ended December 31, 2011 was $2,722,932.

Resident Lease Intangible — Resident lease intangible includes the fair value assigned of the in-place resident leases at the Facilities acquired. The asset is being amortized using the straight-line method over a period of one year, based on management’s estimate of the average resident’s length of stay. Amortization expense for the year ended December 31, 2011 was $3,852,931.

Above/Below Market Lease Intangible — Above/below market lease intangible includes the fair value assigned to the land leases the Company assumed for the Facilities in Lincroft, New Jersey and East Meadow, New York as further described in Note 8. The net below market lease intangible is being amortized as an increase to ground lease expense using the straight-line method over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal period for the East Meadow Facility. Amortization expense for the year ended December 31, 2011 was $78,488. Amortization expense for each of the next five years will be $78,334.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Lease income is recognized on a straight-line basis over the non-cancelable term of the lease.

Income Taxes — The Company wholly owns CC3 Acquisition TRS Corporation (“TRS”), a taxable REIT subsidiary as defined in Section 856 of the Internal Revenue Code, which is subject to federal and state income taxes. The Company has a provision for federal income taxes related to the TRS. The Company is also subject to modified gross receipts taxes in Michigan, where one of the Facilities is located. The Financial Accounting Standards Board (“FASB”) has determined that the modified gross receipts tax in Michigan should be treated as an income tax for financial statement purposes. Effective January 1, 2012, Michigan will impose a corporate income tax (“CIT”) and replace the Michigan Business Tax (“MBT”) for most taxpayers. Once the CIT is in effect, all income or loss generated within Michigan will flow through to the Members. These federal and state taxes are expensed as incurred and are included in income tax expense in the accompanying consolidated financial statements.

ASC 740-10-25, Income Taxes, Overall Recognition describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ have full knowledge of the position and all relevant facts, but without considering time values. The Company adheres to the provisions of this statement. The Company has no uncertain tax positions that require accrual as of December 31, 2011.

 

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Fair Value Measurements — Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

As of December 31, 2011, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

 

3.   ACQUISITION OF SUNRISE THIRD

The Company accounted for the acquisition of Sunrise Third as a business combination which requires the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred. The acquisition was funded through the initial capitalization of the Company which consisted of debt of $435,000,000, contribution of cash by CNL of $134,865,252, and contribution of cash and existing equity interest in Sunrise Third by SSLII of $89,910,168.

The following table summarizes the recording, at fair value, of the assets and liabilities as of the date of acquisition, January 10, 2011:

 

Land and land improvements

   $ 67,135,946   

Building and building improvements

     545,840,515   

Furniture, fixtures, and equipment

     11,568,709   

Resident lease intangible

     3,948,458   

Above/below market lease intangible

     2,600,000   

Other assets

     10,805,257   

Other liabilities

     (10,899,096

Payable to Sunrise Third partners

     (374,379
  

 

 

 
     630,625,410   

SSLII’s contribution of equity in Sunrise Third

     (79,999,576
  

 

 

 

Total consideration, excluding transaction costs

     550,625,834   

Transaction costs

     9,234,723   
  

 

 

 

Total consideration

   $ 559,860,557   
  

 

 

 

Total consideration, excluding transaction costs

   $ 550,625,834   

Cash acquired

     (5,007,438
  

 

 

 

Total cash consideration

   $ 545,618,396   
  

 

 

 

 

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The estimated fair value of the real estate assets at acquisition was $624,545,170. To determine the fair value of the real estate, the Company examined various data points including (i) transactions with similar assets in similar markets and (ii) independent appraisals of the acquired assets. As of the acquisition date, the fair value of the working capital approximated its carrying value.

The resident lease intangible of $3,948,458 represents opportunity costs associated with lost rentals. Based on management’s historical experience, the Company determined one month’s operating revenues less operating expenses approximated the value of these opportunity costs.

The above/below market lease intangible of $2,600,000 represents the amount by which the land leases assumed by the Company for the Facilities in Lincroft, New Jersey and East Meadow, New York are unfavorable in the case of Lincroft or favorable in the case of East Meadow compared with the pricing of current market transactions with the same or similar terms. The above/below market cash flow of the leases is determined by comparing the projected cash flows of the leases in place to projected cash flows of comparable market-rate leases.

 

4.   TRANSACTIONS WITH AFFILIATES

The Company has lease agreements with SRZ Tenant for the use of the NY Facilities, as further discussed in Note 9.

On January 10, 2011, the Company entered into management agreements with SSLMI to manage each of the Non-NY Facilities. The agreements have terms of 30 years and expire in 2041. The agreements provide for management fees to be paid monthly for 5% of the Facilities’ gross revenues for the first 7 years and 6% of gross revenues for the remainder of the term. The agreements also provide for SSLMI to earn an incentive management fee commencing January 2017 provided certain thresholds, as described in the pooling agreement, are met. Total management fees incurred in 2011 were $5,582,569.

The agreements also provide for reimbursement to SSLMI of all direct costs of operations. Payments to SSLMI for direct operating expenses were $68,319,879 in 2011.

The Company obtains worker’s compensation, professional and general liability, and automobile coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $2,902,388 in 2011.

The Company had a net payable to SSLMI of $1,203,983 as of December 31, 2011. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as payable to affiliates – net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

 

5.   NOTES PAYABLE

On January 10, 2011, the Company entered into a loan agreement to obtain new debt totaling $435,000,000 to finance the acquisition of the 29 Facilities. The loan agreement originally provided for a loan in the amount of $325,000,000 and three mezzanine loans totaling $110,000,000. The loans are secured by the Facilities and are subject to prepayment penalties if paid prior to August 2013. Payments required on the loan are guaranteed by SSLI and CNL Income Partners, LP, an affiliate of CNL. The loan agreement provides for an initial fixed interest rate of 6.76% and requires monthly interest-only payments until maturity in February 2014.

 

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In March 2011, the loan agreement was amended to provide for the loan amount to be subdivided into five components with an aggregate interest rate of 6.11%. The amendments also changed the allocation of amounts financed under the three mezzanine loans and provided for varying interest rates for these loans. The weighted average of the interest rates for all loans remained at 6.76%.

In September 2011, the Illinois Department of Transportation (“IDOT”) condemned a piece of land on the Crystal Lake property to widen a road. IDOT will pay the Company $60,000 for the parcel. The lender required the Company to pay the $60,000 amount as a condemnation paydown and $9,000 for legal and administrative expenses as a condition precedent for the lender to release the land. Payment was made to the lender in September 2011, and the principal balance was reduced by $60,000.

A summary of loan terms and balances as of December 31, 2011 is a follows:

 

Loan Tranche    Interest
Rate
    Loan Balance as of
December 31, 2011
 

Loan

     6.11   $ 324,940,000   

Mezzanine A Loan

     8.00     40,000,000   

Mezzanine B Loan

     8.50     45,000,000   

Mezzanine C Loan

     10.15     25,000,000   
    

 

 

 

Total

     6.76   $ 434,940,000   
    

 

 

 

The Company is subject to non-financial covenants under the loan agreement. As of December 31, 2011, the Company was in compliance with all covenants.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. The Company has applied Level 2 type inputs to determine that the estimated fair value of the Company’s notes payable was approximately $452,450,000 as of December 31, 2011.

 

6.   INCOME TAXES

The Company, as an LLC, has elected to be treated as a partnership for federal income tax purposes and therefore, is not subject to federal income tax at the entity level.

An LLC is a flow through entity, and therefore the income or loss generated is recognized by the members rather than the Company. However, not all states follow suit. The modified gross receipts tax assessed by Michigan is a state income tax at the joint venture level. Deferred income taxes reflect the net tax effect of temporary difference between the carrying amounts of assets and liabilities for financial reporting purpose and the amount recognized for income tax purposes. Effective January 1, 2012, the MBT will be replaced by a CIT. Once the CIT is in effect, all income or loss generated within Michigan will flow through to the Members. Therefore, the Company will not be subject to Michigan tax on a go forward basis. In addition, any loss carryforwards and most tax credit carryforwards generated under the MBT will not be available to offset future CIT. The Company had no Michigan net operating loss carryforwards at December 31, 2011.

 

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The Company wholly owns a TRS, a taxable REIT subsidiary, which is subject to federal and state income taxes. The TRS was formed on November 5, 2010 under the laws of the state of Delaware. The first year the TRS was subject to taxation was 2011. For the period ended December 31, 2011, the TRS had a deferred provision for income taxes of $199,371 and a current provision of $362,638 for total tax expense of $562,009. Items in the TRS contributing to temporary differences that lead to deferred taxes include deferred revenue, accrued insurance reserves, and the allowance for doubtful accounts.

The Company had a tax credit for its non-TRS entities of $90,095. The net tax expense of $471,914 is reflected in income tax expense in the accompanying consolidated statement of operations.

The Company had a deferred tax asset at December 31, 2011 of $424,328. All available sources of positive and negative evidence were evaluated to determine if there should be a valuation allowance on the Company’s deferred tax asset. The Company determined that no valuation allowance on the deferred tax asset was necessary.

 

7.   CONTINGENCIES

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management of the Company does not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s consolidated financial position.

 

8.   COMMITMENTS

In conjunction with the 2011 Recapitalization, the Company assumed three lease agreements from Sunrise Third. Two of the lease agreements relate to the land associated with the Facilities in Lincroft, New Jersey and East Meadow, New York. The Lincroft lease has a remaining term at December 31, 2011 of approximately 88 years. The base rent escalates 20% every five years. The East Meadow lease has a remaining term at December 31, 2011 of approximately 16 years with five 10-year and one 14-year extension options. The base rent escalates by amounts defined in the lease agreement in March 2011 and March 2016. Lease expense for Lincroft and East Meadow is recognized on a straight-line basis over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal terms of the lease for the East Meadow Facility. Deferred rent liability in the accompanying consolidated balance sheet represents the cumulative effect of straight-lining the ground leases as of the 2011 Recapitalization over the periods described above. The deferred rent liability is computed as the difference between expenses accrued on a straight-line basis and contractually due payments.

The third lease that the Company assumed relates to the land associated with the Facility in Belmont, California. In conjunction with the 2011 Recapitalization, the Belmont lease was amended resulting in an increase to the monthly rental payment. The Belmont lease has a remaining term at December 31, 2011 of approximately 37 years with two 10-year extensions. The base rent escalates every five years by the accumulated CPI increase with a maximum increase of 4% per year, and every 15 years there is a fair market value increase with a maximum increase of 15% of the prior-year rent, as defined in the agreement.

 

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Future minimum lease payments, including payments under expected lease renewal terms, as of December 31, 2011 are as follows:

 

2012

   $ 432,396   

2013

     432,396   

2014

     432,396   

2015

     436,044   

2016

     451,678   

Thereafter

     45,786,610   
  

 

 

 

Total

   $ 47,971,520   
  

 

 

 

At the acquisition date, the Company determined the fair value of the land lease for the East Meadow Facility was below market compared with the pricing of current market transactions with similar terms by $3,100,000, and that the fair value of the land lease for the Lincroft Facility was above market by $500,000, resulting in a net below market lease intangible of $2,600,000. The net below market lease intangible is being amortized as an increase to ground lease expense over the remaining non-cancelable term of the lease for the Lincroft Facility and over the remaining non-cancelable term of the lease plus expected renewal terms of the lease for the East Meadow Facility.

Future amortization to be recognized on the net below market lease intangible as of December 31, 2011 is as follows:

 

2012

   $ 78,334   

2013

     78,334   

2014

     78,334   

2015

     78,334   

2016

     78,334   

Thereafter

     2,129,842   
  

 

 

 

Total

   $ 2,521,512   
  

 

 

 

 

9.   LEASES

On January 10, 2011, the Company, as lessor, entered into non-cancelable lease agreements with SRZ Tenant for the use of the NY Facilities. The leases expire in January 2016. The lease agreements provide for minimum rent and additional rent based on the operating expense of the Facilities. Minimum rent, as defined in each lease agreement, increases by 5% each year. As of December 31, 2011, the Company had rent receivable from SRZ Tenant totaling $226,940 which is included in rent and working capital receivable from affiliates in the accompanying consolidated balance sheet. The Company recognizes lease income from minimum rent on a straight-line basis. Deferred rent receivable in the accompanying consolidated balance sheet represents the cumulative effect of straight-lining the leases with SRZ Tenant over their non-cancelable term and is computed as the difference between income accrued on a straight-line basis and contractually due payments.

In conjunction with the 2011 Recapitalization, the Company assigned certain working capital accounts to the GWCs, affiliates of SRZ Tenant, valued at a net liability of $927,309. The Company overpaid this amount in March 2011 resulting in a receivable from the GWCs of $391,992 as of December 31, 2011 which is included in rent and working capital receivable from affiliates in the accompanying consolidated balance sheet.

 

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Future minimum rent to be received under non-cancelable leases in place at December 31, 2011 is as follows:

 

2012

   $  14,298,252   

2013

     15,013,163   

2014

     15,763,823   

2015

     16,552,013   

2016

     428,539   
  

 

 

 

Total

   $ 62,055,790   
  

 

 

 

The carrying value of properties under lease at December 31, 2011 is $178,636,642.

******

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules

a. (1) All financial statements

Consolidated financial statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K/A.

(2) Financial statement schedules

No schedules are required because either the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information is included in the consolidated financial statements or the notes thereto.

b. Exhibits

The exhibits listed in the accompanying index are filed as part of this report.

 

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SIGNATURES

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, on this 15th day of March, 2012.

 

SUNRISE SENIOR LIVING, INC.
By:   /s/ C. Marc Richards
  C. Marc Richards
  Chief Financial Officer

 

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EXHIBIT INDEX

 

          INCORPORATED BY REFERENCE

Exhibit

Number

  

Description

   Form    Filing Date with SEC    Exhibit
Number
  2.1    Master Agreement (CNL Q3 2003 Transaction) dated as of the 30th day of September, 2003 by and among (i) Sunrise Development, Inc., (ii) Sunrise Senior Living Management, Inc., (iii) Twenty Pack Management Corp., Sunrise Madison Senior Living, L.L.C. and Sunrise Development, Inc. (collectively, as the Tenant), (iv) CNL Retirement Sun1 Cresskill NJ, LP, CNL Retirement Edmonds WA, LP, CNL Retirement Sun1 Lilburn GA, LP and CNL Retirement Sun1 Madison NJ LP, and (v) Sunrise Senior Living, Inc.    8-K    October 15, 2003    2.4
  2.2    Purchase and Sale Agreement by and among Sunrise Senior Living Investments Inc., Sunrise Senior Living Management, Inc., SZR US Investments, Inc., Ventas REIT US Holdings, Inc. and Ventas, Inc., dated October 1, 2010.    8-K    December 7, 2010    2.1
  2.3    Purchase and Sale Agreement by and among Sunrise North Senior Living, Ltd., Sunrise Senior Living Management, Inc., Ventas SSL Ontario II, Inc. and Ventas, Inc., dated October 1, 2010.    8-K    December 7, 2010    2.2
  2.4    PropCo Agreement by and among Sunrise Senior Living, Inc., certain of its subsidiaries as set forth therein, GHS Pflegeresidenzen Grundstücks GmbH, and TMW Pramerica Property Investment GmbH, dated as of May 27, 2010.    8-K    June 3, 2010    10.1
  2.5    Purchase and Sale Agreement for Membership Interests in AL US Development Venture, LLC by and among Sunrise Senior Living Investments, Inc., Sunrise Senior Living Management, Inc., Morgan Stanley Real Estate Fund VII Global-F (U.S.), L.P., Morgan Stanley Real Estate Fund VII Special Global (U.S.), L.P., MSREF VII Global-T Holding II, L.P., and Morgan Stanley Real Estate Fund VII Special Global-TE (U.S.), L.P., dated April 19, 2011    10-Q    May 6, 2011    10.4
  3.1    Amended and Restated Certificate of Incorporation of Sunrise, effective as of November 14, 2008.    Def 14A    October 20, 2008    A
  3.2    Amended and Restated Bylaws of Sunrise, effective as of November 14, 2008.    8-K    November 19, 2008    3.1
  4.1    Form of Common Stock Certificate.    10-K    March 24, 2008    4.1
  4.2    Rights Agreement between Sunrise Senior Living, Inc. and American Stock Transfer & Trust Company, as rights agent, dated April 24, 2006.    8-K    April 21, 2006    4.1
  4.3    First Amendment to the Rights Agreement, dated as of November 19, 2008, between Sunrise Senior Living, Inc. and American Stock Transfer & Trust Company, as rights agent.    8-K    November 19, 2008    4.1
  4.4    Second Amendment to the Rights Agreement, dated as of January 27, 2010, between Sunrise Senior Living, Inc. and American Stock Transfer & Trust Company, as rights agent.    8-K    January 27, 2010    4.1
  4.5    Third Amendment, dated as of December 16, 2011, to the Rights Agreement, dates as of April 24, 2006, as amended as of November 19, 2008 and January 27, 2010, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.    8-K    December 16, 2011    4.1
  4.6    Indenture, dated as of April 20, 2011, by and between Sunrise Senior Living, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee.    8-K    April 20, 2011    4.1
10.1    1996 Non-Incentive Stock Option Plan, as amended.+    10-Q    May 15, 2000    10.8
10.2    1997 Stock Option Plan, as amended.+    10-K    March 31, 1998    10.25

 

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10.3    1998 Stock Option Plan.+    10-K    March 31, 1999    10.41
10.4    1999 Stock Option Plan.+    10-Q    May 13, 1999    10.1
10.5    2000 Stock Option Plan.+    10-K    March 12, 2004    10.4
10.6    2001 Stock Option Plan.+    10-Q    August 14, 2001    10.15
10.7    2002 Stock Option and Restricted Stock Plan.+    10-Q    August 14, 2002    10.1
10.8    2003 Stock Option and Restricted Stock Plan.+    10-Q    August 13, 2002    10.1
10.9    Forms of equity plan amendment adopted on March 19, 2008 regarding determination of option exercise price. +    10-K    July 31, 2008    10.11
10.10    2008 Omnibus Incentive Plan.+    Def 14A    October 20, 2008    B
10.11    2008 Omnibus Incentive Plan, as amended.+    Def 14A    March 22, 2010    A
10.12    Form of Executive Restricted Stock Agreement (2003 Stock Option and Restricted Stock Plan, as amended).+    10-K    February 25, 2011    10.12
10.13    Form of Executive Restricted Stock Agreement (2008 Omnibus Incentive Plan). +    10-K    February 25, 2011    10.13
10.14    Form of Director Stock Option Agreement.+    8-K    September 14, 2005    10.2
10.15    Form of Stock Option Certificate.+    10-K    March 24, 2008    10.14
10.16    Form of Non-Qualified Stock Option Agreement (2008 Omnibus Incentive Plan).+    10-K    March 2, 2009    10.17
10.17    Form of Executive Non-Qualified Stock Option Agreement (2008 Omnibus Incentive Plan).+    10-K    February 25, 2011    10.17
10.18    Form of Director Restricted Stock Unit Agreement.+    10-K    February 25, 2011    10.18
10.19    Form of Executive Performance Unit Agreement (2008 Omnibus Incentive Plan, as amended).    10-Q    November 7, 2011    10.4
10.20    Sunrise Executive Deferred Compensation Plan, effective January 1, 2009.+    10-K/A    March 31, 2009    10.23
10.21    First Amendment to Sunrise Executive Deferred Compensation Plan, effective December 31, 2009. +    10-K    February 25, 2011    10.20
10.22    Sunrise Senior Living, Inc. Senior Executive Severance Plan.+    10-K    February 25, 2011    10.53
10.23    Amendment to Sunrise Senior Living, Inc. Senior Executive Severance Plan.+    10-K/A    March 31, 2009    10.30
10.24    Form of Indemnification Agreement.+    10-K    March 16, 2006    10.54
10.25    Amended and Restated Employment Agreement dated as of November 13, 2003 by and between Sunrise Senior Living, Inc. and Paul J. Klaassen.+    10-K    March 12, 2004    10.1
10.26    Amendment No. 1 to Amended and Restated Employment Agreement by and between Sunrise Senior Livings, Inc. and Paul J. Klaassen.+    10-K    March 24, 2008    10.30
10.27    Employment Agreement between Sunrise Senior Living, Inc. and Mark S. Ordan, dated November 13, 2008.+    8-K    November 19, 2008    10.1
10.28    Amended and Restated Employment Agreement between Sunrise Senior Living, Inc. and Mark Ordan, effective as of December 1, 2010.    8-K    December 2, 2010    10.1
10.29    Employment Agreement between Sunrise Senior Living, Inc. and Greg Neeb, dated January 21, 2009.+    8-K    January 21, 2009    10.4
10.30    Amendment to Employment Agreement between Sunrise Senior Living, Inc. and Greg Neeb, dated October 1, 2010.+    10-K    February 25, 2011    10.29
10.31    Amended and Restated Employment Agreement between Sunrise Senior Living, Inc. and Greg Neeb, dated January 25, 2011.+    10-K    February 25, 2011    10.30

 

86


10.32    Employment Agreement between Sunrise Senior Living, Inc. and David Haddock, dated October 1, 2010.+    10-K    February 25, 2011    10.31
10.33    Employment Agreement between Sunrise Senior Living, Inc. and C. Marc Richards, dated March 22, 2011.+    10-Q    May 6, 2011    10.1
10.34    Employment Agreement between Sunrise Senior Living, Inc. and Julie A. Pangelinan, dated January 14, 2009.+    8-K    January 21, 2009    10.2
10.35    Amendment to Employment Agreement between Sunrise Senior Living, Inc. and Julie A. Pangelinan, dated July 9, 2009.+    10-K    February 25, 2010    10.115
10.36    Employment Agreement between Sunrise Senior Living, Inc. and Daniel J. Schwartz, dated January 16, 2009.+    8-K    January 21, 2009    10.3
10.37    Separation Agreement between Sunrise Senior Living, Inc. and Daniel J. Schwartz, dated February 15, 2010.+    10-K    February 25, 2010    10.116
10.38    Employment Agreement between Sunrise Senior Living, Inc. and Richard J. Nadeau, dated February 25, 2009.+    8-K    February 26, 2009    10.1
10.39    Sunrise Senior Living, Inc. 2010 Annual Incentive Plan – NEO Individual Goals.+    8-K    June 23, 2010    99.1
10.40    2010 Partial Bonus payments to Executive Officers.    10-Q    August 5, 2010    10.4
10.41    Performance Metrics for 2011 Annual Incentive Bonuses for Named Executive Officers.+    10-K    March 1, 2012    10.41
10.42    2010 Director Fees.+    10-K    February 25, 2011    10.44
10.43    2011 Director Fees.+    10-K    February 25, 2011    10.45
10.44    2012 Director Fees.+    10-K    March 1, 2012    10.44
10.45    Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, Wachovia Bank, National Association, as Syndication Agent, and other lender parties thereto, dated as of December 2, 2005.    8-K    December 8, 2005    10.1
10.46    Pledge, Assignment and Security Agreement between Sunrise Senior Living, Inc. and Bank of America, N.A., as Administrative Agent, dated as of December 2, 2005.    10-K    March 24, 2008    10.41
10.47    First Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 6, 2006.    10-K    March 24, 2008    10.42
10.48    Second Amendment to the Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 31, 2007.    10-K    March 24, 2008    10.43
10.49    Third Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of June 27, 2007.    10-K    March 24, 2008    10.44
10.50    Fourth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of September 17, 2007.    10-K    March 24, 2008    10.45

 

87


10.51    Fifth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 31, 2008.    10-K    March 24, 2008    10.46
10.52    Sixth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of February 19, 2008.    10-K    March 24, 2008    10.47
10.53    Pledge, Assignment and Security Agreement between Sunrise Senior Living, Inc. and Bank of America, N.A., as Administrative Agent, dated as of February 19, 2008.    10-K    March 24, 2008    10.48
10.54    Seventh Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 13, 2008.    10-K    March 24, 2008    10.49
10.55    Security Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Loan Parties, and Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of March 13, 2008.    10-K    March 24, 2008    10.50
10.56    Eighth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of July 23, 2008.    10-K    July 31, 2008    10.48
10.57    Ninth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of November 6, 2008.    10-Q    November 7, 2008    10.2
10.58    Tenth Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 20, 2008.    8-K    January 21, 2009    10.1
10.59    Eleventh Amendment to Credit Agreement by and among Sunrise Senior Living, Inc. and certain subsidiaries, as the Borrowers, the subsidiaries of the Borrower as identified therein, as the Guarantors, Bank of America, N.A., as the Administrative Agent, Swing Line Lender and L/C Issuer, and other lender parties thereto, dated as of January 20, 2008.    8-K    March 23, 2009    10.1
10.60    Twelfth Amendment to the Credit Agreement, dated April 28, 2009, by and among Sunrise Senior Living, Inc., certain subsidiaries of Sunrise Senior Living, Inc. party thereto, the lenders from time to time party thereto and Bank of America, N.A.    8-K    April 28, 2009    10.1
10.61    Thirteenth Amendment to the Credit Agreement, dated October 19, 2009, by and among Sunrise Senior Living, Inc., certain subsidiaries of Sunrise Senior Living, Inc. party thereto, the lenders from time to time party thereto and Bank of America, N.A.    8-K    October 20, 2009    10.1
10.62   

Fourteenth Amendment to Credit Agreement, dated August 31, 2010, by and among Sunrise Senior Living, Inc., certain subsidiaries of Sunrise Senior Living, Inc. party thereto, the lenders from time to time party thereto and

Bank of America, N.A.

   8-K    September 3, 2010    10.2
10.63    Termination Agreement by and among Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C issuer, Sunrise Senior Living, Inc., certain subsidiaries of Sunrise Senior Living, Inc. and KeyBank National Association, dated as of June 16, 2011.    8-K    June 20, 2011    10.4

 

88


10.64    Commitment Letter between Sunrise Senior Living, Inc. and KeyBank National Association and KeyBank Capital Markets, Inc., effective April 8, 2011.    10-Q    May 6, 2011    10.2
10.65    Credit Agreement by and among Sunrise Senior Living, Inc., as borrower, KeyBank National Association, as administrative agent, and certain other lenders, dated as of June 16, 2011.    8-K    June 20, 2011    10.1
10.66    Pledge Agreement by Sunrise Senior Living, Inc., as pledger, and KeyBank National Association, as agent for the benefit of the Lenders, dated as of June 16, 2011.    8-K    June 20, 2011    10.2
10.67    Guaranty Agreement by Sunrise Senior Living Services, Inc., Sunrise Senior Living Management, Inc., Sunrise Senior Living Investments, Inc. and Sunrise Development, Inc., as guarantors, in favor of certain Lenders, dated June 16, 2011.    8-K    June 20, 2011    10.3
10.68    Assumption and Reimbursement Agreement made effective as of March 28, 2003, by and among Marriott International, Inc., Sunrise Assisted Living, Inc., Marriott Senior Living Services, Inc. and Marriott Continuing Care, LLC.    10-Q    May 15, 2003    10.4
10.69    Assumption and Reimbursement Agreement (CNL) made effective as of March 28, 2003, by and among Marriott International, Inc., Marriott Continuing Care, LLC, CNL Retirement Properties, Inc., CNL Retirement MA3 Pennsylvania, LP, and CNL Retirement MA3 Virginia, LP.    10-Q    May 15, 2003    10.5
10.70    Amended and Restated Ground Lease, dated August 29, 2003, by and between Sunrise Fairfax Assisted Living, L.L.C. and Paul J. Klaassen and Teresa M. Klaassen.    10-K    March 24, 2008    10.62
10.71    Multifamily Mortgage, Assignment of Rents and Security Agreement.    8-K    May 12, 2008    10.1
10.72    Settlement Agreement, dated as of October 26, 2009, by and among Sunrise Senior Living Investments, Inc., Senior Living Management, Inc., Sunrise Senior Living, Inc., US Senior Living Investments, LLC and Sunrise IV Senior Living Holdings, LLC.    8-K    October 28, 2009    10.2
10.73    Settlement Agreement, dated as of October 26, 2009, by and among Sunrise Senior Living Investments, Inc., Sunrise Senior Living, Inc., Fountains Senior Living Holdings, LLC, Sunrise Senior Living Management, Inc., US Senior Living Investments, LLC, HSH Nordbank AG, New York Branch.    8-K    October 28, 2009    10.2
10.74    Restructure Term Sheet, dated October 22, 2009, by and among Sunrise Senior Living, Inc. and the creditors party thereto.    8-K    October 28, 2009    10.1
10.75    Settlement Agreement between Barclays Bank PLC and Sunrise Senior Living, Inc. dated as of April 29, 2010.    8-K    May 3, 2010    10.1
10.76    Loan Agreement, dated as of September 28, 2007, by and among Sunrise Pasadena CA Senior Living, LLC and Sunrise Pleasanton CA Senior Living, LP, as borrowers, and Wells Fargo Bank, National Association, as lender.    10-Q    November 9, 2009    10.2
10.77    Letter Agreement, dated October 1, 2009, by and among Sunrise Pasadena CA Senior Living, LLC and Sunrise Pleasanton CA Senior Living, L.P., as borrowers, Sunrise Senior Living, Inc., as guarantor, and Wells Fargo Bank, National Association, as lender.    10-Q    November 9, 2009    10.3
10.78    Letter Agreement, dated December 1, 2009, by and among Sunrise Pasadena CA Senior Living, LLC and Sunrise Pleasanton CA Senior Living, L.P., as borrowers, Sunrise Senior Living, Inc., as guarantor, and Wells Fargo Bank, National Association, as lender.    8-K    December 7, 2009    10.1
10.79    Modification Agreement (Secured Loan), dated February 10, 2010, by and between Sunrise Pasadena CA Senior Living, LLC and Sunrise Pleasanton CA Senior Living, L.P., as borrowers, and Wells Fargo Bank, National Association, as lender.    8-K    February 19, 2010    10.1

 

89


10.80    Second Modification Agreement (Secured Loan), dated August 31, 2010, by and between Sunrise Pasadena CA Senior Living, LLC and Sunrise Pleasanton CA Senior Living, L.P., as borrowers, and Wells Fargo Bank, National Association, as lender.    8-K    September 3, 2010    10.3
10.81    Loan and Security Agreement (Loan A), dated as of August 28, 2007, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, F.S.B., as agent for the lenders party thereto.    10-Q    November 9, 2009    10.4
10.82    Guaranty of Payment (Loan A), dated as of August 28, 2007, by and among Sunrise Senior Living, Inc. and Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.5
10.83    Deed of Trust Note A, dated as of August 28, 2007, by Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, to MB Financial Bank, N.A.    10-Q    November 9, 2009    10.6
10.84    Deed of Trust Note A, dated as of August 28, 2007, by Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, to Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.7
10.85    Deed of Trust, Assignment, Security Agreement and Fixture Filing (Loan A), dated as of August 28, 2007, by Sunrise Connecticut Avenue Assisted Living, L.L.C., as grantor, Alexandra Johns and Ellen-Elizabeth Lee, as trustees, and Chevy Chase Bank, F.S.B., as agent.    10-Q    November 9, 2009    10.8
10.86    Loan and Security Agreement (Loan B), dated as of August 28, 2007, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, F.S.B., as lender.    10-Q    November 9, 2009    10.9
10.87    Guaranty of Payment (Loan B), dated as of August 28, 2007, by and among Sunrise Senior Living, Inc. and Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.10
10.88    Deed of Trust Note B, dated as of August 28, 2007, by Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, to Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.11
10.89    Deed of Trust, Assignment, Security Agreement and Fixture Filing (Loan B), dated as of August 28, 2007, by Sunrise Connecticut Avenue Assisted Living, L.L.C., as grantor, Alexandra Johns and Ellen-Elizabeth Lee, as trustees, and Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.12
10.90    First Amendment to Loan Agreement (Loan A), dated as of April 15, 2008, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, F.S.B., as agent to the lenders party thereto.    10-Q    November 9, 2009    10.13
10.91    First Amendment to Guaranty of Payment (Loan A), dated as of September 2008, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.14
10.92    First Amendment to Loan Agreement (Loan B), dated as of April 15, 2008, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, F.S.B. as lender.    10-Q    November 9, 2009    10.15
10.93    First Amendment to Guaranty of Payment (Loan B), dated as of September 2008, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, F.S.B.    10-Q    November 9, 2009    10.16
10.94    Second Amendment to Loan Agreement (Loan A), dated as of August 28, 2009, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as agent for the lenders party thereto.    10-Q    November 9, 2009    10.17
10.95    Second Amendment to Guaranty of Payment (Loan A), dated as of August 28, 2009, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, a division of Capital One, N.A.    10-Q    November 9, 2009    10.18
10.96    First Amendment to Deed of Trust Note A (Loan A), dated as of August 28, 2009,by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and MB Financial Bank, N.A., as lender.    10-Q    November 9, 2009    10.19
10.97    First Amendment to Deed of Trust Note A (Loan A), dated as of August 28, 2009, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    10-Q    November 9, 2009    10.20

 

90


10.98    Second Amendment to Loan Agreement (Loan B), dated as of August 28, 2009, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    10-Q    November 9, 2009    10.21
10.99    Second Amendment to Guaranty of Payment (Loan B), dated as of August 28, 2009, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, a division of Capital One, N.A.    10-Q    November 9, 2009    10.22
10.100    First Amendment to Deed of Trust Note A (Loan B), dated as of August 28, 2009, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    10-Q    November 9, 2009    10.23
10.101    Third Amendment to Loan Agreement and Settlement Agreement (Loan A), effective as of December 2, 2009, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as agent for the lenders party thereto.    8-K    December 24, 2009    10.1
10.102    Third Amendment to Guaranty of Payment (Loan A), effective as of December 2, 2009, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, a division of Capital One, N.A.    8-K    December 24, 2009    10.2
10.103    Second Amendment to Deed of Trust Note A (Loan A), effective as of December 2, 2009, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and MB Financial Bank, N.A., as lender.    8-K    December 24, 2009    10.3
10.104    Second Amendment to Deed of Trust Note A (Loan A), effective as of December 2, 2009, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    December 24, 2009    10.4
10.105    Third Amendment to Loan Agreement and Settlement Agreement (Loan B), effective as of December 2, 2009, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    December 24, 2009    10.5
10.106    Third Amendment to Guaranty of Payment (Loan B), effective as of December 2, 2009, by and between Sunrise Senior Living, Inc. and Chevy Chase Bank, a division of Capital One, N.A.    8-K    December 24, 2009    10.6
10.107    Second Amendment to Deed of Trust Note B (Loan B), effective as of December 2, 2009, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    December 24, 2009    10.7
10.108    Fourth Amendment to Loan Agreement and Settlement Agreement (Loan A), dated August 30, 2010, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as gent for the lender party thereto.    8-K    September 3, 2010    10.5
10.109    Third Amendment to Deed of Trust Note A (Loan A), dated August 30, 2010, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and MB Financial Bank, N.A., as lender.    8-K    September 3, 2010    10.6
10.110    Third Amendment to Deed of Trust Note A (Loan A), dated August 30, 2010, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    September 3, 2010    10.7
10.111    Fourth Amendment to Loan Agreement and Settlement Agreement (Loan B), dated August 30, 2010, by and among Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    September 3, 2010    10.8

 

91


10.112    Third Amendment to Deed of Trust Note B (Loan B), dated August 30, 2010, by and between Sunrise Connecticut Avenue Assisted Living, L.L.C., as borrower, and Chevy Chase Bank, a division of Capital One, N.A., as lender.    8-K    September 3, 2010    10.9
10.113    Building Loan Agreement dated April 10, 2008, by and between Sunrise Monterey Senior Living, LP, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the financial institutions from time to time parties thereto, as lenders.    8-K    February 19, 2010    10.2
10.114    Modification Agreement (Secured Loan), dated February 10, 2010, by and between Sunrise Monterey Senior Living, LP, as borrower, and Wells Fargo Bank, National Association, as administrative agent.    8-K    February 19, 2010    10.3
10.115    Second Modification Agreement (Secured Loan), dated August 31, 2010, by and between Sunrise Monterey Senior Living, LP, as borrower, and Wells Fargo Bank, National Association, as administrative agent.    8-K    September 3, 2010    10.4
10.116    Settlement and Restructuring Agreement by and among HCP, Inc. and the Landlords as set forth therein and Sunrise Senior Living, Inc. and the Operators set forth therein, dated as of August 31, 2010.    8-K    September 3, 2010    10.1
10.117    Purchase and Sale Agreement dated as of December 8, 2010 by and among US Assisted Living Facilities III, Inc., Sunrise Senior Living Investments, Inc., CC3 Acquisition, LLC, and CNL Income Partners, LP.    10-K    February 25, 2011    10.120
10.118    Form of First Amended and Restated Management Agreement for Sunrise communities owned by Ventas, Inc.**    10-K    February 25, 2011    10.121
10.119    First Amended and Restated Master Agreement by and among Sunrise Senior Living Management, Inc., Sunrise North Senior Living Ltd., Sunrise Senior Living, Inc. and Ventas SSL, Inc., dated December 1, 2010.**    10-K    February 25, 2011    10.122
10.120    Purchase Agreement between Sunrise Senior Living, Inc. and Stifel, Nicolaus & Company, Incorporated on behalf of itself and several Initial Purchasers named in Schedule I, dated April 14, 2011.    10-Q    May 6, 2011    10.3
10.121    Loan Agreement, dated as of June 14, 2007, by and among AL US Development Venture, LLC, as Borrower, HSH Nordbank AG, as Administrative Agent, Sole Arranger and Lender, and other lender parties thereto.***    8-K/A    July 14, 2011    10.1
10.122    First Amendment to Loan Agreement, dated as of April 22, 2009, by and between AL US Development Venture, LLC, as Borrower, and HSH Nordbank AG, as Administrative Agent and Lender.    8-K    June 8, 2011    10.2
10.123    Second Amendment to Loan Agreement, dated as of July 2010, by and between AL US Development Venture, LLC, as Borrower, and HSH Nordbank AG, as Administrative Agent and Lender.    8-K    June 8, 2011    10.3
10.124    Third Amendment to Loan Agreement and Omnibus Amendment and Reaffirmation of Loan Documents, dated as of June 2, 2011, by and among AL US Development Venture, LLC, as Borrower, Sunrise Senior Living Investments, Inc., Sunrise Senior Living, Inc., certain indirect subsidiaries of Sunrise Senior Living Investments, Inc. and HSH Nordbank AG, as Administrative Agent and Lender.***    8-K/A    July 14, 2011    10.4
10.125    Agreement Regarding Transfer of Partnership Interests (Ownco), dated as of August 15, 2011 by and between Master MorSun Acquisition LLC and Sunrise Senior Living Investments, Inc.    10-Q    November 7, 2011    10.3
10.126    Agreement Regarding Leases, dated December 22, 2011, by and among Sunrise Senior Living, Inc., Sunrise Senior Living Services, Inc. and Sunrise Continuing Care, LLC and Marriott International, Inc., Marriott Senior Holding Co. and Marriott Magenta Holding Company, Inc.    10-K    March 1, 2012    10.126

 

92


  21    Subsidiaries of the Registrant.    10-K    March 1, 2012    21
  23.1    Consent of Ernst & Young LLP.    10-K    March 1, 2012    23.1
  23.2    Consent of Ernst & Young LLP.*    N/A    N/A    N/A
  23.3    Consent of Ernst & Young LLP.*    N/A    N/A    N/A
  31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    10-K    March 1, 2012    31.1
  31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    10-K    March 1, 2012    31.2
  31.3    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*    N/A    N/A    N/A
  31.4    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*    N/A    N/A    N/A
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    10-K    March 1, 2012    32.1
  32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    10-K    March 1, 2012    32.2
  32.3    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*    N/A    N/A    N/A
  32.4    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*    N/A    N/A    N/A
101.INS    XBRL Instance Document    10-K    March 1, 2012    101.INS
101.SCH    XBRL Taxonomy Extension Schema Document    10-K    March 1, 2012    101.SCH
101.CAL    XBRL Taxonomy Calculation Document Linkbase Document    10-K    March 1, 2012    101.CAL
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document    10-K    March 1, 2012    101.DEF
101.LAB    XBRL Taxonomy Label Linkbase Document    10-K    March 1, 2012    101.LAB
101.PRE    XBRL Taxonomy Presentation Linkbase Document    10-K    March 1, 2012    101.PRE

 

+ Represents management contract or compensatory plan or arrangement.
* Filed herewith.
** Confidential treatment has been afforded for portions of this document through December 1, 2015. The omitted portions of this document have been filed separately with the Securities and Exchange Commission.
*** Confidential treatment has been afforded for portions of this document through June 2, 2016. The omitted portions of this document have been filed separately with the Securities and Exchange Commission.

We have attached the following documents formatted in XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report: (i) the Consolidated Statements of Income for the twelve months ended December 31, 2011, 2010 and 2009, respectively; (ii) the Consolidated Balance Sheets at December 31, 2011, and December 31, 2010; and (iii) the Consolidated Statements of Cash Flows for the twelve months ended December 31, 2011, 2010 and 2009, respectively, and (iv) the Notes to the Consolidated Financial Statements, tagged as blocks of text. We advise users of this data that pursuant to Rule 406T of Regulation S-T this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

93