Unassociated Document

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2012

or

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

For the transition period from _____________ to _____________

Commission File Number: 001-32641

BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)

Delaware
20-3068069
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)

111 Westwood Place, Suite 400, Brentwood, Tennessee
37027
 
(Address of principal executive offices)
(Zip Code)
 

(615) 221-2250
(Registrant's telephone number, including area code)

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  T  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  T  No  £

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.

 
Large accelerated filer   T
Accelerated filer                   £
 
 
Non-accelerated filer     £ (Do not check if a smaller reporting company)
 
Smaller reporting company  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  £  No  T

 
 

 

 
As of May 3, 2012, 121,197,671 shares of the registrant’s common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).
 


 
2

 

 
TABLE OF CONTENTS
BROOKDALE SENIOR LIVING INC.

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2012

 
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PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)

   
March 31,
2012
   
December 31,
2011
 
Assets
 
(Unaudited)
       
Current assets
           
Cash and cash equivalents
  $ 42,113     $ 30,836  
Cash and escrow deposits — restricted
    44,867       45,903  
Accounts receivable, net
    102,568       98,697  
Deferred tax asset
    11,776       11,776  
Prepaid expenses and other current assets, net
    96,217       93,663  
Total current assets
    297,541       280,875  
Property, plant and equipment and leasehold intangibles, net
    3,793,384       3,694,064  
Cash and escrow deposits — restricted
    48,887       52,980  
Marketable securities — restricted
    33,519       31,721  
Investment in unconsolidated ventures
    32,216       32,798  
Goodwill
    109,553       109,553  
Other intangible assets, net
    156,884       154,136  
Other assets, net
    104,125       109,934  
Total assets
  $ 4,576,109     $ 4,466,061  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 125,316     $ 47,654  
Trade accounts payable
    39,230       54,134  
Accrued expenses
    176,542       183,634  
Refundable entrance fees and deferred revenue
    339,171       327,808  
Tenant security deposits
    7,254       7,720  
Total current liabilities
    687,513       620,950  
Long-term debt, less current portion
    2,380,926       2,350,971  
Line of credit
    85,000       65,000  
Deferred entrance fee revenue
    73,811       72,485  
Deferred liabilities
    157,830       161,185  
Deferred tax liability
    112,211       112,736  
Other liabilities
    41,002       42,526  
Total liabilities
    3,538,293       3,425,853  
                 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized at March 31, 2012 and December 31, 2011; no shares issued and outstanding
           
Common stock, $0.01 par value, 200,000,000 shares authorized at March 31, 2012 and December 31, 2011; 128,914,032 and 127,782,538 shares issued and 126,485,631 and 125,354,137 shares outstanding (including 5,288,427 and 4,221,598 unvested restricted shares), respectively
    1,265       1,254  
Additional paid-in-capital
    1,977,708       1,970,820  
Treasury stock, at cost; 2,428,401 shares at March 31, 2012 and December 31, 2011
    (46,800 )     (46,800 )
Accumulated deficit
    (894,389 )     (884,051 )
Accumulated other comprehensive income (loss)
    32       (1,015 )
Total stockholders’ equity
    1,037,816       1,040,208  
Total liabilities and stockholders’ equity
  $ 4,576,109     $ 4,466,061  

See accompanying notes to condensed consolidated financial statements.


 
BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Revenue
           
Resident fees
  $ 596,886     $ 568,035  
Management fees
    7,924       1,405  
Reimbursed costs incurred on behalf of managed communities
    78,715       17,480  
Total revenue
    683,525       586,920  
                 
Expense
               
Facility operating expense (excluding depreciation and amortization of $57,936 and $58,959, respectively)
    399,249       370,954  
General and administrative expense (including non-cash stock-based compensation expense of $6,435 and $4,540, respectively)
    44,973       33,543  
Facility lease expense
    71,445       66,315  
Depreciation and amortization
    63,344       71,782  
Asset impairment
    1,083       14,846  
Loss on acquisition
    636        
Gain on facility lease termination
    (2,780 )      
Costs incurred on behalf of managed communities
    78,715       17,480  
Total operating expense
    656,665       574,920  
Income from operations
    26,860       12,000  
                 
Interest income
    852       625  
Interest expense:
               
Debt
    (32,050 )     (31,561 )
Amortization of deferred financing costs and debt discount
    (4,473 )     (2,704 )
Change in fair value of derivatives and amortization
    (233 )     (8 )
Loss on extinguishment of debt, net
    (221 )     (2,894 )
Equity in earnings of unconsolidated ventures
    99       266  
Other non-operating (loss) income
    (111 )     817  
Loss before income taxes
    (9,277 )     (23,459 )
(Provision) benefit for income taxes
    (1,061 )     11,154  
Net loss
  $ (10,338 )   $ (12,305 )
                 
Basic and diluted net loss per share
  $ (0.09 )   $ (0.10 )
                 
Weighted average shares used in computing basic and diluted net loss per share
    121,145       120,792  
                 

See accompanying notes to condensed consolidated financial statements.


 
BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)

   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
Net loss
  $ (10,338 )   $ (12,305 )
Other comprehensive income (loss):
               
Unrealized gain on marketable securities - restricted
    1,038       257  
Reclassification of net gains on derivatives into earnings
    (79 )     114  
Amortization of payments from settlement of forward interest rate swaps
    94       94  
Other
    (6 )     (181 )
Total other comprehensive income, net of tax
    1,047       284  
Comprehensive loss
  $ (9,291 )   $ (12,021 )
                 

See accompanying notes to condensed consolidated financial statements.


 
BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 (Unaudited, in thousands)
 
                         Accumulated      
             Additional            Other       
     
Common Stock
      Paid-In-    Treasury    Accumulated    Comprehensive      
         Shares     Amount       Capital    Stock     Deficit   (Loss) Income    Total
Balances at January 1, 2012
    125,354     $ 1,254     $ 1,970,820     $ (46,800 )   $ (884,051 )   $ (1,015 )   $ 1,040,208  
Compensation expense related to restricted stock grants
                6,435                         6,435  
Net loss
                            (10,338 )           (10,338 )
Issuance of common stock under Associate Stock Purchase Plan
    20             336                         336  
Restricted stock, net
    1,112       11       (25 )                       (14 )
Unrealized gain on marketable securities - restricted
                                  1,038       1,038  
Reclassification of net gains on derivatives into earnings
                                  (79 )     (79 )
Amortization of payments from settlement of forward interest rate swaps
                                  94       94  
Other
                142                   (6 )     136  
Balances at March 31, 2012
    126,486     $ 1,265     $ 1,977,708     $ (46,800 )   $ (894,389 )   $ 32     $ 1,037,816  

See accompanying notes to condensed consolidated financial statements.
 

 
BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net loss
  $ (10,338 )   $ (12,305 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Loss on extinguishment of debt
    221       2,894  
Depreciation and amortization
    67,817       74,486  
Asset impairment
    1,083       14,846  
Equity in earnings of unconsolidated ventures
    (99 )     (266 )
Distributions from unconsolidated ventures from cumulative share of net earnings
    206        
Amortization of deferred gain
    (1,093 )     (1,093 )
Amortization of entrance fees
    (6,403 )     (5,762 )
Proceeds from deferred entrance fee revenue
    7,000       6,361  
Deferred income tax benefit
    (4 )     (11,841 )
Change in deferred lease liability
    1,642       1,726  
Change in fair value of derivatives and amortization
    233       8  
Loss (gain) on sale of assets
    114       (1,315 )
Loss on acquisition
    636        
Gain on facility lease termination
    (2,780 )      
Non-cash stock-based compensation
    6,435       4,540  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (5,317 )     (105 )
Prepaid expenses and other assets, net
    (3,621 )     (7,104 )
Accounts payable and accrued expenses
    (23,705 )     8,453  
Tenant refundable fees and security deposits
    (442 )     310  
Deferred revenue
    12,168       11,269  
Other
    1,940       7,564  
Net cash provided by operating activities
    45,693       92,666  
                 
Cash Flows from Investing Activities
               
(Increase) decrease in lease security deposits and lease acquisition deposits, net
    (2,217 )     941  
Decrease in cash and escrow deposits — restricted
    8,442       54,455  
Purchase of marketable securities — restricted
    (399 )     (26,409 )
Sale of marketable securities — restricted
          809  
Additions to property, plant and equipment and leasehold intangibles, net of related payables
    (41,533 )     (28,589 )
Acquisition of assets, net of related payables and cash received
    (104,984 )     (51,330 )
(Issuance of) payment on notes receivable, net
    (439 )     403  
Distributions received from unconsolidated ventures
    100       60  
Proceeds from sale of assets
          23,147  
Other
    (362 )     (164 )
Net cash used in investing activities
    (141,392 )     (26,677 )
                 
Cash Flows from Financing Activities
               
Proceeds from debt
    175,838       28,000  
Repayment of debt and capital lease obligations
    (86,068 )     (134,550 )
Proceeds from line of credit
    130,000       40,000  
Repayment of line of credit
    (110,000 )     (40,000 )
Payment of financing costs, net of related payables
    (2,378 )     (2,575 )
Other
    (86 )     (184 )
Refundable entrance fees:
               
Proceeds from refundable entrance fees
    7,989       6,080  
Refunds of entrance fees
    (8,102 )     (4,930 )
Cash portion of loss on extinguishment of debt
    (118 )     (2,861 )
Recouponing and payment of swap termination
    (99 )     (64 )
Net cash provided by (used in) financing activities
    106,976       (111,084 )
   Net increase (decrease) in cash and cash equivalents
    11,277       (45,095 )
   Cash and cash equivalents at beginning of period
    30,836       81,827  
   Cash and cash equivalents at end of period
  $ 42,113     $ 36,732  

See accompanying notes to condensed consolidated financial statements.


 
BROOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. 
Description of Business

Brookdale Senior Living Inc. (“Brookdale” or the “Company”) is a leading owner and operator of senior living communities throughout the United States.  The Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest quality service, care and living accommodations for residents.  The Company owns, leases and operates retirement centers, assisted living and dementia-care communities and continuing care retirement centers (“CCRCs”).

2. 
Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company as of March 31, 2012, and for all periods presented. The condensed consolidated financial statements are prepared on the accrual basis of accounting. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission.

Revenue Recognition

Resident Fees

Resident fee revenue is recorded when services are rendered and consists of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.

Entrance Fees

Certain of the Company’s communities have residency agreements which require the resident to pay an upfront entrance fee prior to occupying the community.  In addition, in connection with the Company’s MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return for a reduced monthly service fee.  The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation.  The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or upon the sale of the unit, or in certain agreements, upon the resale of a comparable unit or 12 months after the resident vacates the unit.  In such instances the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.

Certain contracts require the refundable portion of the entrance fee plus a percentage of the appreciation of the unit, if any, to be refunded only upon resale of a comparable unit (“contingently refundable”).  Upon resale the Company may receive reoccupancy proceeds in the form of additional contingently refundable fees, refundable fees, or non-refundable fees.  The Company estimates the amount of reoccupancy proceeds to be received from additional



contingently refundable fees or non-refundable fees and records such amount as deferred revenue.  The deferred revenue was approximately $47.8 million and $48.1 million at March 31, 2012 and December 31, 2011, respectively, and is amortized over the life of the community.  All remaining contingently refundable fees not recorded as deferred revenue and amortized are included in refundable entrance fees and deferred revenue.

All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue, are classified as current liabilities.

The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability.  The balance of the non-refundable portion is recorded as a long-term liability.

Community Fees

Substantially all community fees received are non-refundable and are recorded initially as deferred revenue.  The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the implied contractual terms of the resident lease.

Management Fees

Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage of gross revenues (as defined).  Incentives and penalties receivable or payable under management contracts containing such provisions (other than contractual termination fees) are recorded based on the amounts that would be due pursuant to the contractual arrangements if the contracts were terminated on the reporting date.

Reimbursed Costs Incurred on Behalf of Managed Communities

The Company manages certain communities under contracts which provide for payment to the Company of a monthly management fee plus reimbursement of certain operating expenses.  Where the Company is the primary obligor with respect to any such operating expenses, the Company recognizes revenue when the goods have been delivered or the service has been rendered and the Company is due reimbursement.  Such revenue is included in “reimbursed costs incurred on behalf of managed communities” on the condensed consolidated statements of operations.  The related costs are included in “costs incurred on behalf of managed communities” on the condensed consolidated statements of operations.

Fair Value of Financial Instruments

Cash and cash equivalents, cash and escrow deposits-restricted, derivative financial instruments and marketable securities - restricted are reflected in the accompanying condensed consolidated balance sheets at amounts considered by management to reasonably approximate fair value.  Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness.  The Company had outstanding debt with a carrying value of approximately $2.6 billion and $2.5 billion as of March 31, 2012 and December 31, 2011, respectively.  As of March 31, 2012 and December 31, 2011, the estimated fair value of debt was approximately $2.6 billion and $2.5 billion, respectively.

ASC 820 - Fair Value Measurement (“ASC 820”) establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.



Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s cash and cash equivalents and cash and escrow deposits-restricted reported on its condensed consolidated balance sheets approximate fair value due to the short maturity.

The Company’s marketable securities - restricted include marketable securities that are recorded in the financial statements at fair value. The fair value is based primarily on quoted market prices and is classified within Level 1 of the valuation hierarchy.  Changes in fair value are recorded, net of tax, as other comprehensive income and included as a component of stockholders’ equity.

The Company’s derivative assets and liabilities include interest rate swaps and caps that effectively convert a portion of the Company’s variable rate debt to fixed rate debt.  The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations.

The Company’s fair value of debt disclosure is determined based primarily on market interest rate assumptions of similar debt applied to future cash flows under the debt agreements and is classified within Level 2 of the valuation hierarchy.

Self-Insurance Liability Accruals

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company’s current policy provides for deductibles for each and every claim ($150,000 effective January 1, 2010).  As a result, the Company is, in effect, self-insured for claims that are less than $150,000.  In addition, the Company maintains a self-insured workers compensation program and a self-insured employee medical program for amounts below excess loss coverage amounts, as defined. The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.

Marketable Securities - Restricted

Marketable securities - restricted include amounts required to be held in reserve related to the Company’s entrance fee CCRCs pursuant to various state insurance regulations and consist of mutual funds holding equities and fixed-income securities. The Company classifies its marketable securities - restricted as available-for-sale and accordingly, they are carried at their estimated fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income.  Realized gains and losses from the available-for-sale securities are determined on the specific identification method and are included in other non-operating income (loss) on the trade date.



A decline in the market value of any security below cost that is deemed to be other than temporary results in a reduction in the carrying amount of the security to fair market value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

The amortized cost basis of the marketable securities – restricted as of March 31, 2012 and December 31, 2011 was $33.5 million and $32.7 million, respectively.

Convertible Debt Instruments

Convertible debt instruments are accounted for under FASB ASC Topic 470-20, Debt – Debt with Conversion and Other Options.  This guidance requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion, including partial cash settlement, to separately account for the liability (debt) and equity (conversion option) components of the instruments in a manner that reflects the issuer’s estimated non-convertible debt borrowing rate.

New Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).  The guidance in ASU 2011-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011 and requires the components of net income and other comprehensive income and total comprehensive income for each interim period. The Company adopted the provisions of this update as of January 1, 2012 and incorporated the provisions of this update to its consolidated financial statements upon adoption. The adoption of this update did not have an impact on the Company's financial condition or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (“ASU 2011-08”).  ASU 2011-08 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under this amendment, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  ASU 2011-08 applies to all companies that have goodwill reported in their financial statements.  The provisions of ASU 2011-08 are effective for the Company in 2012.  The adoption of this update did not have an impact on the Company's financial condition or results of operations.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s consolidated financial position or results of operations.

3. 
Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents.  For purposes of calculating both basic and diluted earnings per share, vested restricted stock awards are considered outstanding.  Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result in the issuance of common stock.  Potentially dilutive common stock equivalents include unvested restricted stock and restricted stock units and convertible debt instruments and warrants.

During the three months ended March 31, 2012 and 2011, the Company reported a consolidated net loss.  As a result of the net loss, unvested restricted stock and restricted stock unit awards and convertible debt instruments and warrants were antidilutive for each period and were not included in the computation of diluted weighted average shares.  The weighted average restricted stock and restricted stock unit grants excluded from the calculations of



diluted net loss per share were 1.5 million and 1.8 million for the three months ended March 31, 2012 and 2011, respectively.

4. 
Acquisitions and Dispositions

Effective February 2, 2012, the Company acquired the underlying real estate associated with nine communities that were previously leased for an aggregate purchase price of $121.3 million. The results of operations of these communities, prior and subsequent to the acquisition, are reported in the Retirement Centers segment. The Company financed the transaction with $77.9 million of first mortgage financing secured by seven of the communities and $15.0 million of seller-financing secured by two of the communities (Note 8).

During the three months ended March 31, 2012, the Company purchased two home health agencies as part of its growth strategy for an aggregate purchase price of approximately $3.7 million.  The entire purchase price of the acquisitions has been ascribed to an indefinite useful life intangible asset and recorded on the condensed consolidated balance sheet under other intangible assets, net.

Horizon Bay/HCP Transactions

On September 1, 2011, the Company acquired 100% of the equity and voting interests in Horizon Bay Realty, L.L.C. ("Horizon Bay").  The results of Horizon Bay’s operations have been included in the condensed consolidated financial statements since that date.  Horizon Bay is a seniors housing management company primarily focused on managing large portfolios of retirement communities across the United States for institutional real estate investors.  In connection with the acquisition, the Company also restructured Horizon Bay's existing relationship with HCP, Inc. (“HCP”) relating to 33 communities that Horizon Bay leased from HCP. In particular, the Company (i) formed a joint venture with HCP to own and operate 21 communities (the “HCP RIDEA JV”), and (ii) leased the remaining 12 communities from HCP under long-term, triple net leases. Of these 12 communities, the Company assumed the pre-existing lease for eight communities and entered into a new lease for the remaining four communities.  The joint venture with HCP utilizes a RIDEA structure with the Company having acquired a 10% non-controlling interest in the joint venture. The Company also manages the communities under a ten-year management agreement with four five-year renewal options and retains all ancillary services operations.

As part of the transactions, the Company entered into an agreement to restructure Horizon Bay’s management arrangements with Chartwell Seniors Housing Real Estate Investment Trust (“Chartwell”).  Certain elements of the Chartwell management arrangement restructuring are subject to lender and other third party approvals.  Until such approvals are received, the Company will operate Chartwell’s properties under the existing management contracts.

The aggregate acquisition-date fair value of the purchase consideration transferred for the acquisition of Horizon Bay included $2.7 million of contingent consideration. The contingent consideration arrangement requires the Company to pay up to a maximum of approximately $3.4 million to Horizon Bay’s former members.  The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model.  This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumption in applying the income approach was the assignment of probabilities to the various possible outcomes. As of March 31, 2012, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition of Horizon Bay.

The Company estimated fair values of the assets acquired and liabilities assumed at the acquisition date and is in the process of obtaining third-party valuations of self-insured liabilities; thus the provisional measurements of accrued expenses and other liabilities are subject to change. The Company purchased 100% of Horizon Bay in a transaction that involved the restructuring of certain leases and other elements of Horizon Bay’s capital structure.  The fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred.  Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate.  As a result, the Company initially recognized a net non-cash gain of $2.0 million in 2011 which was subsequently reduced by approximately $0.6 million in the three months ended March 31, 2012 due to adjustments related to pre-acquisition self-insurance reserves and the related



tax impact.  The loss of $0.6 million is included in the line item “loss on acquisition” in the condensed consolidated statements of operations.

5. 
Stock-Based Compensation

The Company’s compensation expense recorded in connection with grants of restricted stock and restricted stock units for the three months ended March 31, 2012 and 2011 was calculated net of forfeitures estimated from 0% to 10% of the shares granted.  For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis (or if, applicable, on the accelerated method) over the requisite service period.  For graded-vesting awards with performance-based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of achievement.  Performance goals are evaluated quarterly.  If such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed.

Current year grants of restricted shares under the Company’s Omnibus Stock Incentive Plan were as follows (amounts in thousands except for value per share):

   
Shares Granted
   
Value Per Share
   
Total Value
 
Three months ended March 31, 2012
    1,286     $17.39 – $19.07     $24,524  

6. 
Goodwill and Other Intangible Assets, Net

Following is a summary of changes in the carrying amount of goodwill for the three months ended March 31, 2012 and the year ended December 31, 2011 presented on an operating segment basis (dollars in thousands):
 
   
March 31, 2012
   
December 31, 2011
 
   
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment
and Other Charges
   
Net
   
Gross
Carrying
Amount
   
Adjustment
   
Accumulated
Impairment
and Other Charges
   
Net
 
Retirement Centers
  $ 7,642     $ (34 )   $ (487 )   $ 7,121     $ 7,642     $ (34 )   $ (487 )   $ 7,121  
Assisted Living
    102,680       (106 )     (142 )     102,432       102,680       (106 )     (142 )     102,432  
CCRCs
    214,999             (214,999 )           214,999             (214,999 )      
Total
  $ 325,321     $ (140 )   $ (215,628 )   $ 109,553     $ 325,321     $ (140 )   $ (215,628 )   $ 109,553  

Goodwill is tested for impairment annually with a test date of October 1 or sooner if indicators of impairment are present.  No indicators of impairment were present during the three months ended March 31, 2012.

Community purchase options are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise. No indicators of impairment were present during the three months ended March 31, 2012.  The following is a summary of other intangible assets at March 31, 2012 and December 31, 2011 (dollars in thousands):



   
March 31, 2012
   
December 31, 2011
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Community purchase options
  $ 147,610     $ (18,490 )   $ 129,120     $ 147,610     $ (17,566 )   $ 130,044  
Home health licenses
    27,764             27,764       24,092             24,092  
Total
  $ 175,374     $ (18,490 )   $ 156,884     $ 171,702     $ (17,566 )   $ 154,136  

Amortization expense related to definite-lived intangible assets for the three months ended March 31, 2012 and 2011 was $0.9 million and $8.7 million, respectively.  Home health licenses were determined to be indefinite-lived intangible assets and are not subject to amortization.

7. 
Property, Plant and Equipment and Leasehold Intangibles, Net

Property, plant and equipment and leasehold intangibles, net, which include assets under capital leases, consist of the following (dollars in thousands):

   
March 31,
2012
   
December 31,
2011
 
Land
  $ 285,703     $ 275,277  
Buildings and improvements
    3,207,881       3,080,882  
Leasehold improvements
    407,852       429,133  
Furniture and equipment
    464,098       450,179  
Resident and leasehold operating intangibles
    163,366       163,366  
Construction in progress
    50,300       39,600  
Assets under capital and financing leases
    674,337       667,239  
      5,253,537       5,105,676  
Accumulated depreciation and amortization
    (1,460,153 )     (1,411,612 )
Property, plant and equipment and leasehold intangibles, net
  $ 3,793,384     $ 3,694,064  

Long-lived assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives (or, in certain cases, the shorter of their estimated useful lives or the lease term) and are tested for impairment whenever indicators of impairment arise.

During the three months ended March 31, 2012, there were indicators of impairment on certain long-lived assets (primarily as a result of fire damage at one of the Company’s communities).  The Company wrote-off assets not deemed to be recoverable.  A non-cash charge of $1.1 million within the Assisted Living and CCRCs segments was recorded in the Company’s operating results and reflected as asset impairment in the accompanying condensed consolidated statements of operations.  These charges are reflected as a decrease to the gross carrying value of the asset.  The impairment charges are primarily due to the amount by which the carrying values of the assets exceed the estimated fair value.



8. 
Debt
 
Long-Term Debt, Capital Leases and Financing Obligations

Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):
 
    March 31,
2012
   
December 31,
2011
 
 
Mortgage notes payable due 2013 through 2022; weighted average interest rate of 4.90% for the three months ended March 31, 2012, net of debt discount of $0.5 million (weighted average interest rate of 5.04% in 2011)
  $ 1,573,629     $ 1,470,462  
 
$150,000 Series A notes payable, secured by five communities and by a $3.0 million cash collateral deposit, bearing interest at LIBOR plus 0.88%, payable in monthly installments of interest only until August 2011 and payable thereafter in monthly installments of principal and interest through maturity in August 2013
    147,554       148,601  
 
Discount mortgage note payable due 2013, weighted average interest rate of 2.57% for the three months ended March 31, 2012, net of debt discount of $2.5 million (weighted average interest rate of 2.52% in 2011)
    80,068       79,911  
 
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average interest rate of 1.80% for the three months ended March 31, 2012 (weighted average interest rate of 1.65% in 2011), due 2032, payable in monthly installments of principal and interest through maturity, secured by the underlying assets of the portfolio
    100,288       100,423  
 
Capital and financing lease obligations payable through 2026; weighted average interest rate of 8.62% for the three months ended March 31, 2012 (weighted average interest rate of 8.61% in 2011)
    342,643       348,195  
 
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount of $72.1 million, interest at 2.75% per annum, due June 2018
    244,186       241,897  
 
Construction financing due 2024; weighted average interest rate of 7.0%
    7,194       6,591  
 
Notes payable issued to finance insurance premiums, weighted average interest rate of 2.64% for the three months ended March 31, 2012 (weighted average interest rate of 3.11% in 2011), due 2012
    10,680       2,545  
 
Total debt
    2,506,242       2,398,625  
 
Less current portion
    125,316       47,654  
 
Total long-term debt
  $ 2,380,926     $ 2,350,971  
 
2011 Credit Facility

On January 31, 2011, the Company entered into an Amended and Restated Credit Agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The amended credit agreement amended and restated in its entirety the Company’s existing Credit Agreement dated as of February 23, 2010, as previously amended.  The amended credit agreement increased the commitment under the credit facility from $120.0 million to $200.0 million and extended the maturity date to January 31, 2016.  Effective February 24, 2011, the commitment under the Amended and Restated Credit Agreement was further increased to $230.0 million.

The revolving line of credit can be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.



The facility is secured by a first priority lien on certain of the Company’s communities.  The availability under the line will vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event will LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  The Company is also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

The credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth.  A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the credit agreement and all amounts owing under the credit agreement and certain other loan agreements becoming immediately due and payable.

As of March 31, 2012, the Company had an available secured line of credit with a $230.0 million commitment and $199.8 million of availability (of which $85.0 million had been drawn as of such date).  The Company also had secured and unsecured letter of credit facilities of up to $82.7 million in the aggregate as of March 31, 2012.  $77.8 million of letters of credit had been issued under these facilities as of such date.

Financings

On January 5, 2012, the Company obtained a $63.0 million first mortgage loan, secured by the underlying community.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 300 basis points and matures in January 2017.  In connection with the transaction, the Company repaid $62.8 million of existing variable rate debt.

On February 29, 2012, the Company obtained a $20.0 million first mortgage loan, secured by the underlying community.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 275 basis points and matures in February 2017.

The $77.9 million first mortgage facility used to partially finance the acquisition of the underlying real estate of nine communities (Note 4) has a ten year term.  75% of the facility bears interest at a fixed rate of 4.2% and the remaining 25% of the facility bears interest at a variable rate of 30-day LIBOR plus a margin of 276 basis points.  The $15.0 million mortgage loan used to partially finance the acquisition has a two year term and bears interest at a fixed rate of 7.0%.

As of March 31, 2012, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.

Interest Rate Swaps and Caps

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk.  Interest rate protection and swap agreements were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions.

All derivative instruments are recognized as either assets or liabilities in the condensed consolidated balance sheets at fair value.  The change in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive loss depending upon whether it has been designated and qualifies as an accounting hedge.

Derivative contracts are not entered into for trading or speculative purposes.  Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors.  Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.



The following table summarizes the Company’s swap instrument at March 31, 2012 (dollars in thousands):

Current notional balance
  $ 27,660  
Highest possible notional
  $ 27,660  
Lowest interest rate
    5.49 %
Highest interest rate
    5.49 %
Average fixed rate
    5.49 %
Earliest maturity date
    2016  
Latest maturity date
    2016  
Weighted average original maturity
 
5.0 years
 
Estimated liability fair value (included in other liabilities at March 31, 2012)
  $ (1,793 )
Estimated liability fair value (included in other liabilities at December 31, 2011)
  $ (2,809 )

The following table summarizes the Company’s cap instruments at March 31, 2012 (dollars in thousands):

Current notional balance
  $ 418,238  
Highest possible notional
  $ 418,238  
Lowest interest rate
    5.00 %
Highest interest rate
    6.06 %
Average fixed rate
    5.49 %
Earliest maturity date
    2012  
Latest maturity date
    2017  
Weighted average original maturity
 
2.7 years
 
Estimated asset fair value (included in other assets, net at March 31, 2012)
  $  
Estimated asset fair value (included in other assets, net at December 31, 2011)
  $  

The fair value of the Company’s interest rate swaps and caps decreased $0.2 million for the three months ended March 31, 2012.  This is included as a component of interest expense in the condensed consolidated statements of operations.

During the three months ended March 31, 2012, the Company terminated one swap agreement with a total notional amount of $150.0 million. In conjunction with this transaction, $1.2 million was paid to the counterparty, which had been previously deposited as collateral. The Company also entered into two new cap agreements with an aggregate notional amount of $169.5 million.

 9. 
Litigation

The Company has been and is currently involved in litigation and claims incidental to the conduct of its business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, the Company maintains general liability and professional liability insurance policies in amounts and with coverage and deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards.



10. 
Supplemental Disclosure of Cash Flow Information

(dollars in thousands):

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Supplemental Disclosure of Cash Flow Information:
           
Interest paid
  $ 30,049     $ 31,606  
Income taxes paid
  $ 207     $ 192  
Write-off of deferred costs
  $ 744     $ 313  
                 
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
               
Acquisition of assets, net of related payables and cash received:
               
Cash and escrow deposits-restricted
  $ 3,313     $  
Prepaid expenses and other current assets
    (2,817 )      
Property, plant and equipment and leasehold intangibles, net
    121,250       50,366  
Other intangible assets, net
    3,672       982  
Other assets, net
    (7,327 )      
Accrued expenses
    (392 )     (18 )
Other liabilities
    4,429        
Long-term debt, less current portion
    (15,000 )      
Accumulated earnings
    (2,144 )      
Net
  $ 104,984     $ 51,330  

11. 
Facility Operating Leases

A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains is as follows (dollars in thousands):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Cash basis payment
  $ 70,896     $ 65,682  
Straight-line expense
    1,642       1,726  
Amortization of deferred gain
    (1,093 )     (1,093 )
Facility lease expense
  $ 71,445     $ 66,315  




12. 
Income Taxes

The Company’s effective tax rates for the three months ended March 31, 2012 and 2011 were (11.4%) and 47.5%, respectively.  The difference in the effective tax rate between these periods was primarily due to the Company’s decision to record a valuation allowance against the deferred tax benefit generated during the three month period ended March 31, 2012.  The Company concluded that the additional benefits generated during the period did not meet the more likely than not criteria for realization.  The conclusion was determined solely based on the reversal of current timing differences and did not consider future taxable income to be generated by the Company.  The Company continues to maintain that the deferred tax assets recorded as of December 31, 2011, primarily related to net operating losses generated prior to December 31, 2011, are more likely than not to be realized based on the reversal of deferred tax liabilities also recorded as of December 31, 2011.

The Company recorded additional interest charges related to its tax contingency reserve for the three months ended March 31, 2012.  Additionally, uncertain tax positions recorded in prior periods were reduced due to a change in estimate.  Tax returns for years 2008, 2009 and 2010 are subject to future examination by tax authorities.  In addition, certain tax returns are open from 2000 through 2007 to the extent of the net operating losses generated during those periods.

13.  
Share Repurchase Program

On August 11, 2011, the Company’s board of directors approved a share repurchase program that authorizes the Company to purchase up to $100.0 million in the aggregate of the Company’s common stock.  Purchases may be made from time to time using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or by any combination of these methods, in accordance with applicable insider trading and other securities laws and regulations.  The size, scope and timing of any purchases will be based on business, market and other conditions and factors, including price, regulatory and contractual requirements or consents, and capital availability.  The repurchase program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended, modified or discontinued at any time at the Company’s discretion without prior notice. Shares of stock repurchased under the program will be held as treasury shares.

No shares were purchased pursuant to this authorization during the three months ended March 31, 2012.  As of March 31, 2012, approximately $82.4 million remains available under this share repurchase authorization.

14.  
Fair Value Measurements

The following table provides the Company’s derivative assets and liabilities and marketable securities - restricted carried at fair value as measured on a recurring basis as of March 31, 2012 (dollars in thousands):

   
Total Carrying
Value at
March 31,
2012
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant unobservable
inputs
(Level 3)
 
Marketable securities - restricted
  $ 33,519     $ 33,519     $     $  
Derivative liabilities
    (1,793 )           (1,793 )      
    $ 31,726     $ 33,519     $ (1,793 )   $  

15.  
Segment Information

The Company currently has four reportable segments: retirement centers; assisted living; CCRCs; and management services.   These segments were determined based on the way that the Company’s chief operating decision makers organize the Company’s business activities for making operating decisions and assessing performance.



Retirement Centers.  Retirement center communities are primarily designed for middle to upper income senior citizens age 75 and older who desire an upscale residential environment providing the highest quality of service.  The majority of the Company’s retirement center communities consist of both independent living and assisted living units in a single community, which allows residents to “age-in-place” by providing them with a continuum of senior independent and assisted living services.

Assisted Living.  Assisted living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents.  The Company’s assisted living communities include both freestanding, multi-story communities and freestanding single story communities.  The Company also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer’s disease and other dementias.

CCRCs.  CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health.  Most of the Company’s CCRCs have retirement centers, assisted living and skilled nursing available on one campus, and some also include memory care and Alzheimer’s units.

Management Services.  The Company’s management services segment includes communities operated by the Company pursuant to management agreements, where the controlling financial interest in the community is held by others.  Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of certain expenses it incurs on behalf of the owners.

The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies.

The following table sets forth certain segment financial and operating data (dollars in thousands):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
Revenue(1)
           
Retirement Centers
  $ 138,928     $ 128,561  
Assisted Living
    276,260       265,194  
CCRCs
    181,698       174,280  
Management Services(2)
    86,639       18,885  
    $ 683,525     $ 586,920  
Segment operating income(3)
               
Retirement Centers
  $ 54,231     $ 52,209  
Assisted Living
    95,902       93,077  
CCRCs
    47,504       51,795  
Management Services
    5,547       984  
      203,184       198,065  
General and administrative (including non-cash stock-based compensation expense)(4)
    42,596       33,122  
Facility lease expense
    71,445       66,315  
Depreciation and amortization
    63,344       71,782  
Asset impairment
    1,083       14,846  
Loss on acquisition
    636        
Gain on facility lease termination
    (2,780 )      
Income from operations
  $ 26,860     $ 12,000  
                 
 
 
 
   
As of
 
   
March 31,
2012
   
December 31,
2011
 
Total assets
           
Retirement Centers
  $ 1,181,247     $ 1,061,815  
Assisted Living
    1,454,289       1,463,198  
CCRCs
    1,550,275       1,563,004  
Corporate and Management Services
    390,298       378,044  
   Total assets
  $ 4,576,109     $ 4,466,061  


(1)
All revenue is earned from external third parties in the United States.
(2)
Management services segment revenue includes reimbursements for which the Company is the primary obligor of costs incurred on behalf of managed communities.
(3)
Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).
(4)
Net of general and administrative costs allocated to management services reporting segment.


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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements relating to the consummation of the restructuring of the management agreements with Chartwell Seniors Housing Real Estate Investment Trust; statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations regarding the economy, occupancy, revenue, cash flow, expenses, capital expenditures, Program Max opportunities, cost savings, the demand for senior housing, expansion and development activity, acquisition opportunities, asset dispositions, our share repurchase program and taxes; our belief regarding the value of our common stock and our growth prospects; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity; our plans to deleverage; our expectations regarding financings and refinancings of assets (including the timing thereof) and their effect on our results; our expectations regarding changes in government reimbursement programs and their effect on our results; our plans to generate growth organically through occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy, home health and hospice); our plans to expand, redevelop and reposition existing communities; our plans to acquire additional communities, asset portfolios, operating companies and home health agencies; the expected project costs for our expansion, redevelopment and repositioning program; our expected levels of expenditures and reimbursements (and the timing thereof); our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”, “could”, “should”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, the risk that we may not be able to satisfy the conditions and successfully complete the Chartwell management agreement restructuring; the risk that we may not be able to successfully integrate the new Horizon Bay communities into our operations; our determination from time to time to purchase any shares under the repurchase program; our ability to fund any repurchases; the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; changes in governmental reimbursement programs; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; the risk that we may not be able to expand, redevelop and reposition our communities in accordance with our plans; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; early terminations or non-renewal of management agreements; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates; environmental contamination at any

 

of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2011 and in this Quarterly Report.  Such forward-looking statements speak only as of the date of this Quarterly Report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Executive Overview

Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including occupancy growth, increases in the average monthly revenue per unit, expense control and the realization of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy, home health and hospice services); (iii) expansion, redevelopment and repositioning of existing communities; and (iv) acquisition and consolidation of asset portfolios and other senior living companies.

The table below presents a summary of our operating results and certain other financial metrics for the three months ended March 31, 2012 and 2011 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).

   
Three Months Ended
March 31,
   
Increase
(Decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
Total revenues
  $ 683.5     $ 586.9     $ 96.6       16.5 %
Net loss
  $ (10.3 )   $ (12.3 )   $ (2.0 )     (16.0 %)
Adjusted EBITDA
  $ 96.6     $ 102.8     $ (6.2 )     (6.0 %)
Cash From Facility Operations
  $ 54.6     $ 61.8     $ (7.2 )     (11.7 %)
Facility Operating Income
  $ 191.2     $ 191.3     $ (0.1 )      

Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP Financial Measures” below for an explanation of how we define each of these measures, a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities to Cash From Facility Operations.

During the first quarter of 2012, we experienced an increase in our total revenues, primarily due to the addition of leased and managed communities from the Horizon Bay and HCP transactions in the third quarter of 2011, along with increases in occupancy and average monthly revenue per unit, including an increase in our ancillary services revenue.  Total revenues for the three months ended March 31, 2012 increased to $683.5 million, an increase of $96.6 million, or 16.5%, over our total revenues for the three months ended March 31, 2011.  Resident and management fee revenue for the three months ended March 31, 2012 increased $35.4 million, or 6.2%, from the first quarter of 2011.  Revenue from reimbursed costs incurred on behalf of managed communities increased $61.2 million, or 350.3%, primarily due to the management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions during the third quarter of 2011.  In connection with these transactions, we added to our portfolio 12 leased communities and 78 managed communities (after giving effect to our subsequent acquisition of one of the managed communities in the fourth quarter of 2011).

The increase in resident fees in the first quarter of 2012 was primarily a result of an increase in the average monthly revenue per unit compared to the prior year period, including growing revenues from our ancillary services programs, an increase in occupancy and a 2.8% increase in consolidated units operated.  Our weighted average occupancy rate for the three months ended March 31, 2012 and 2011 was 87.8% and 87.2%, respectively.  Although we have made significant progress in many areas of our business, the difficult operating environment has continued


 
to result in occupancy rates that are lower than historical levels and diminished growth in the rates we charge our residents.

Beginning October 1, 2011, we were impacted by a reduction in the reimbursement rates for Medicare skilled nursing patients and home health patients, as well as a negative change in the allowable method for delivering therapy services to skilled nursing patients (resulting in increased therapy labor expense).  The cumulative negative financial impact of these changes increased our expense and decreased our revenue, Facility Operating Income, Adjusted EBITDA and Cash From Facility Operations for the three months ended March 31, 2012.

During the three months ended March 31, 2012, our Adjusted EBITDA and Cash From Facility Operations decreased by 6.0% and 11.7%, respectively, and Facility Operating Income remained relatively constant when compared to the three months ended March 31, 2011.

During the three months ended March 31, 2012, we acquired the underlying real estate associated with nine Retirement Center communities that were previously leased for an aggregate purchase price of $121.3 million.  During the quarter, we also acquired two home health agencies for an aggregate purchase price of approximately $3.7 million.
 
During the three months ended March 31, 2012, we continued to expand our ancillary services offerings.  As of March 31, 2012, we offered therapy services to approximately 42,600 of our units and home health services to over 37,400 of our units (approximately 35,900 and 32,650 of these units, respectively, are in our consolidated portfolio).   We expect to continue to expand our ancillary services programs to additional units and to open or acquire additional home health agencies.

We believe that the recent challenge in the housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates and occupancy levels when compared to historical levels.  We remain cautious about the economy and the adverse credit and financial markets and their effect on our customers and our business.  In addition, we continue to experience volatility in the entrance fee portion of our business.  The timing of entrance fee sales is subject to a number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively or negatively) when measured over the short-term.  These factors also impact our potential independent living customers to a significant extent.  We expect occupancy and entrance fee sales to normalize over the longer term.

Consolidated Results of Operations

Three Months Ended March 31, 2012 and 2011

The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 (dollars in thousands, except average monthly revenue per unit)

   
Three Months Ended
March 31,
             
   
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
                         
Statement of Operations Data:
                       
Revenue
                       
Resident fees
                       
Retirement Centers
  $ 138,928     $ 128,561     $ 10,367       8.1 %
Assisted Living
    276,260       265,194       11,066       4.2 %
 
 
25

 
 
   
Three Months Ended
March 31,
             
   
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
CCRCs
    181,698       174,280       7,418       4.3 %
Total resident fees
    596,886       568,035       28,851       5.1 %
Management services(1)
    86,639       18,885       67,754       358.8 %
Total revenue
    683,525       586,920       96,605       16.5 %
Expense
                               
Facility operating expense
                               
Retirement Centers
    84,697       76,352       8,345       10.9 %
Assisted Living
    180,358       172,117       8,241       4.8 %
CCRCs
    134,194       122,485       11,709       9.6 %
Total facility operating expense
    399,249       370,954       28,295       7.6 %
General and administrative expense
    44,973       33,543       11,430       34.1 %
Facility lease expense
    71,445       66,315       5,130       7.7 %
Depreciation and amortization
    63,344       71,782       (8,438 )     (11.8 %)
Asset impairment
    1,083       14,846       (13,763 )     (92.7 %)
Loss on acquisition
    636             636       100.0 %
Gain on facility lease termination
    (2,780 )           2,780       100.0 %
Costs incurred on behalf of managed communities
    78,715       17,480       61,235       350.3 %
Total operating expense
    656,665       574,920       81,745       14.2 %
Income from operations
    26,860       12,000       14,860       123.8 %
Interest income
    852       625       227       36.3 %
Interest expense
                               
Debt
    (32,050 )     (31,561 )     489       1.5 %
Amortization of deferred financing costs and debt discount
    (4,473 )     (2,704 )     1,769       65.4 %
Change in fair value of derivatives and amortization
    (233 )     (8 )     225    
NM
 
Equity in earnings of unconsolidated ventures
    99       266       (167 )     (62.8 %)
Loss on extinguishment of debt, net
    (221 )     (2,894 )     (2,673 )     (92.4 %)
Other non-operating (loss) income
    (111 )     817       (928 )     (113.6 %)
Loss before income taxes
    (9,277 )     (23,459 )     (14,182 )     (60.5 %)
(Provision) benefit for income taxes
    (1,061 )     11,154       (12,215 )     (109.5 %)
Net loss
  $ (10,338 )   $ (12,305 )   $ (1,967 )     (16.0 %)
                                 
Selected Operating and Other Data:
                               
Total number of communities (period end)
    646       558       88       15.8 %
Total units operated(2)
                               
Period end
    66,093       50,385       15,708       31.2 %
Weighted average
    66,137       50,394       15,743       31.2 %
Owned/leased communities units(2)
                               
Period end
    47,904       46,601       1,303       2.8 %
Weighted average
    47,884       46,610       1,274       2.7 %
Owned/leased communities occupancy rate (weighted average)
    87.8 %     87.2 %     0.6 %     0.7 %
Average monthly revenue per unit (3)
  $ 4,684     $ 4,609     $ 75       1.6 %
                                 
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
    76       75       1       1.3 %
Total units (2)
                               
Period end
    14,452       14,104       348       2.5 %
 
 
26

 
 
   
Three Months Ended
March 31,
             
   
2012
   
2011
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
Weighted average
    14,452       14,104       348       2.5 %
Occupancy rate (weighted average)
    88.8 %     87.3 %     1.5 %     1.7 %
Average monthly revenue per unit (3)
  $ 3,609     $ 3,482     $ 127       3.6 %
Assisted Living
                               
Number of communities (period end)
    434       428       6       1.4 %
Total units (2)
                               
Period end
    21,635       21,284       351       1.6 %
Weighted average
    21,635       21,295       340       1.6 %
Occupancy rate (weighted average)
    88.5 %     88.2 %     0.3 %     0.3 %
Average monthly revenue per unit (3)
  $ 4,813     $ 4,705     $ 108       2.3 %
CCRCs
                               
Number of communities (period end)
    40       36       4       11.1 %
Total units (2)
                               
Period end
    11,817       11,213       604       5.4 %
Weighted average
    11,797       11,211       586       5.2 %
Occupancy rate (weighted average)
    85.3 %     85.3 %     0.0 %     0.0 %
Average monthly revenue per unit (3)
  $ 5,810     $ 5,873     $ (63 )     (1.1 %)
Management Services
                               
Number of communities (period end)
    96       19       77       405.3 %
Total units (2)
                               
Period end
    18,189       3,784       14,405       380.7 %
Weighted average
    18,253       3,784       14,469       382.4 %
Occupancy rate (weighted average)
    84.3 %     84.7 %     (0.4 %)     (0.5 %)
                                 
Selected Entrance Fee Data:
                               
Non-refundable entrance fees sales
  $ 7,000     $ 6,361                  
Refundable entrance fees sales(4)
    7,989       6,080                  
Total entrance fee receipts
    14,989       12,441                  
Refunds
    (8,102 )     (4,930 )                
Net entrance fees(5)   $ 6,887     $ 7,511                  
 
__________
 
(1)
Management services segment revenue includes reimbursements for which we are the primary obligor of costs incurred on behalf of managed communities.
 
(2)
Period end units operated excludes equity homes.  Weighted average units operated represents the average units operated during the period, excluding equity homes.
 
(3)
Average monthly revenue per unit represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units.
 
(4)
Refundable entrance fee sales for the three months ended March 31, 2012 and 2011 include amounts received from residents participating in the MyChoice program, which allows new and existing residents the option to pay additional refundable entrance fee amounts in return for a reduced monthly service fee.  MyChoice amounts received from residents totaled $2.4 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively.
 
(5)
Includes $0.5 million and $2.7 million of first generation net entrance fee receipts (which represent initial entrance fees received from the sale of units, net of first generation entrance fee refunds not replaced by second generation entrance fee receipts, at a recently opened entrance fee CCRC) during the three months ended March 31, 2012 and 2011, respectively.


 
As of March 31, 2012, our total operations included 646 communities with a capacity of 66,987 units.
 
Resident Fees

Resident fees increased over the prior year period primarily as a result of an increase in the average monthly revenue per unit compared to the prior year period, including growing revenues from our ancillary services programs, an increase in occupancy and a 2.8% increase in consolidated units operated.  During the current period, revenues grew 2.1% at the 532 communities we operated during both periods with a 1.5% increase in the average monthly revenue per unit (excluding amortization of entrance fees in both instances).  Occupancy increased 0.5% in these communities period over period.

Retirement Centers revenue increased $10.4 million, or 8.1%, primarily due to the inclusion of revenue from communities acquired subsequent to the prior year period and increases in occupancy and average monthly revenue per unit at the communities we operated during both periods, including an increase in our ancillary services revenue.

Assisted Living revenue increased $11.1 million, or 4.2%, primarily due to the inclusion of revenues from communities acquired subsequent to the prior year period and an increase in the average monthly revenue per unit at the communities we operated during both periods.  There was also an increase in occupancy at the communities we operated during both periods.

CCRCs revenue increased $7.4 million, or 4.3%, primarily due to the inclusion of revenues from communities acquired subsequent to the prior year period.  The increase was partially offset by decreases in occupancy and the average monthly revenue per unit at the communities we operated during both periods.

Management Services

Management services revenue, including reimbursed costs incurred on behalf of managed communities, increased $67.8 million, or 358.8%, primarily due to the management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions that occurred during the third quarter of 2011.

Facility Operating Expense

Facility operating expense increased over the prior year period primarily due to the inclusion of expenses from communities acquired subsequent to the prior year period and additional current year expense incurred in connection with the continued expansion of our ancillary services programs during 2012 and 2011, as well as an increase in salaries and wages.  These increases were partially offset by a decrease in utilities expense as a result of milder weather in the current-year period.

Retirement Centers operating expenses increased $8.3 million, or 10.9%, primarily due to an increase in expenses incurred in connection with the continued expansion of our ancillary services programs and the inclusion of expenses from communities acquired subsequent to the prior year period, as well as increases in salaries and wages due to wage rate increases and an increase in hours worked period over period.  These increases were partially offset by a decrease in utility expenses as a result of milder weather in the current-year period.

Assisted Living operating expenses increased $8.2 million, or 4.8%, primarily due to the inclusion of expenses from communities acquired subsequent to the prior year period, as well as an increase in salaries and wages due to wage rate increases and an increase in hours worked period over period.  These increases were partially offset by a decrease in utility expenses as a result of milder weather in the current-year period and a decrease in group health insurance expenses due to a change in estimates.

CCRCs operating expenses increased $11.7 million, or 9.6%, primarily due to the inclusion of expenses from communities acquired subsequent to the prior-year period, an increase in expenses incurred in connection with the continued expansion of our ancillary services programs, and an increase in salaries and wages due to wage rate increases and an increase in hours worked period over period.  These increases were partially offset by a decrease in bad debt expense.



General and Administrative Expense

General and administrative expense increased $11.4 million, or 34.1%, primarily as a result of an increase in the number of employees in connection with the Horizon Bay and HCP transactions that occurred during the third quarter of 2011, an increase in non-cash stock-based compensation expense, and integration and transaction-related costs. General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash stock-based compensation expense, was 4.6% and 4.8% for the three months ended March 31, 2012 and 2011, respectively, calculated as follows (dollars in thousands):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
                         
Resident fee revenues
  $ 596,886       79.3 %   $ 568,035       94.0 %
Resident fee revenues under management
    155,816       20.7 %     36,340       6.0 %
Total
  $ 752,702       100.0 %   $ 604,375       100.0 %
General and administrative expenses (excluding non-cash stock-based compensation expense and integration and transaction-related costs)
  $ 34,634       4.6 %   $ 29,003       4.8 %
Non-cash stock-based compensation expense
    6,435       0.9 %     4,540       0.8 %
Integration and transaction-related costs
    3,904       0.5 %            
General and administrative expenses (including non-cash stock-based compensation expense and integration and transaction-related costs)
  $ 44,973       6.0 %   $ 33,543       5.6 %

Facility Lease Expense

Facility lease expense increased $5.1 million, or 7.7%, primarily as a result of the acquisition of 12 leased communities in connection with the Horizon Bay and HCP transactions that occurred in the third quarter of 2011, as well as increases due to normal rent escalators. These increases were partially offset by decreased lease expense as a result of the purchase of nine previously leased communities in the current year period.

Depreciation and Amortization

Depreciation and amortization expense decreased $8.4 million, or 11.8%, primarily as a result of management contracts and therapy services intangibles related to a 2006 acquisition becoming fully amortized subsequent to the prior-year period.

Asset Impairment

During the three months ended March 31, 2012, we recognized $1.1 million of impairment charges related to asset impairments, primarily as a result of fire damage at one of our communities, within the Assisted Living and CCRCs segments.

Loss on Acquisition

The loss on acquisition relates to the reduction of a prior-year gain on an acquisition for adjustments to pre-acquisition self-insurance reserves and the related tax impact.

Costs Incurred on Behalf of Managed Communities

Costs incurred on behalf of managed communities increased $61.2 million primarily due to new management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions.


 
Gain on Facility Lease Termination

During the current-year period, we recognized a $2.8 million net gain on facility lease termination from the reversal of deferred lease liabilities associated with nine previously-leased communities that were acquired during the current period, partially offset by the write-off of deferred lease costs.

Interest Income

Interest income increased by $0.2 million, or 36.3%, primarily due to increased interest earned on our restricted marketable securities.

Interest Expense

Interest expense increased $2.5 million, or 7.2%, primarily due to additional expense from the amortization of our debt discount primarily on our convertible notes issued during 2011, increased interest expense on our mortgage debt due to higher average outstanding debt balances period over period, and increased interest expense related to our line of credit, which had a higher average outstanding balance drawn period over period.

Income Taxes

Our effective tax rates for the three months ended March 31, 2012 and 2011 were (11.4%) and 47.5%, respectively.  The difference in the effective tax rate between these periods was primarily due to our decision to record a valuation allowance against the deferred tax benefit generated during the three month period ended March 31, 2012.  We concluded that the additional benefits generated during the period did not meet the more likely than not criteria for realization.  The conclusion was determined solely based on the reversal of current timing differences and did not consider future taxable income to be generated.  We continue to maintain that the deferred tax assets recorded as of December 31, 2011, primarily related to net operating losses generated prior to December 31, 2011, are more likely than not to be realized based on the reversal of deferred tax liabilities also recorded as of December 31, 2011.
 
An additional interest charge related to our tax contingency reserve was recorded during the three months ended March 31, 2012.  Additionally, uncertain tax positions recorded in prior periods were reduced due to a change in estimate.  Tax returns for years 2008, 2009 and 2010 are subject to future examination by tax authorities.  In addition, certain tax returns are open from 2000 through 2007 to the extent of the net operating losses generated during those periods.

Liquidity and Capital Resources

The following is a summary of cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows (dollars in thousands):

   
Three Months Ended
March 31,
 
   
2012
   
2011
 
Cash provided by operating activities
  $ 45,693     $ 92,666  
Cash used in investing activities
    (141,392 )     (26,677 )
Cash provided by (used in) financing activities
    106,976       (111,084 )
Net increase (decrease) in cash and cash equivalents
    11,277       (45,095 )
Cash and cash equivalents at beginning of period
    30,836       81,827  
Cash and cash equivalents at end of period
  $ 42,113     $ 36,732  

The decrease in cash provided by operating activities was attributable primarily to changes in working capital.

The increase in cash used in investing activities was primarily attributable to an increase in cash paid for acquisitions and spending on property, plant, equipment, and leasehold intangibles. The increase was partially offset by a decrease in the purchase of restricted marketable securities. Additionally, the prior-year period includes cash


 
received from restricted cash and escrow deposits related to the release of escrows on a recently opened entrance fee CCRC and from the sale of assets.
 
The change in cash related to financing activities period over period was primarily attributable to an increase in the proceeds from debt related to the financing of a current period acquisition, additional new borrowing on our line of credit, and a decrease in repayments of debt, as the prior-year period included the repayment of debt on a recently opened entrance fee CCRC when entrance fees originally escrowed were released in accordance with state regulations.

Our principal sources of liquidity have historically been from:

 
·
cash balances on hand;
 
·
cash flows from operations;
 
·
proceeds from our credit facilities;
 
·
proceeds from mortgage financing or refinancing of various assets;
 
·
funds generated through joint venture arrangements or sale-leaseback transactions; and
 
·
with somewhat lesser frequency, funds raised in the debt or equity markets and proceeds from the selective disposition of underperforming and/or non-core assets.

Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.

Our liquidity requirements have historically arisen from:

 
·
working capital;
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
acquisition consideration and transaction costs;
 
·
cash collateral required to be posted in connection with our interest rate swaps and related financial instruments;
 
·
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
 
·
dividend payments;
 
·
purchases of common stock under our share repurchase authorizations; and
 
·
other corporate initiatives (including integration and branding).

Over the near-term, we expect that our liquidity requirements will primarily arise from:
 
 
·
working capital;
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
capital expenditures and improvements, including the expansion, redevelopment and repositioning of our current communities and the development of new communities;
 
·
other corporate initiatives (including information systems);
 
·
acquisition consideration and transaction costs;
 
·
purchases of common stock under our share repurchase authorization; and
 
·
to a lesser extent, cash collateral required to be posted in connection with our interest rate swaps and related financial instruments.
 
We are highly leveraged and have significant debt and lease obligations.  As of March 31, 2012, we have three principal corporate-level debt obligations:  our $230.0 million revolving credit facility, our $316.3 million convertible senior notes due 2018 and separate secured and unsecured letter of credit facilities providing for up to


 
$82.7 million of letters of credit in the aggregate.  The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.

At March 31, 2012, we had $2.2 billion of debt outstanding, excluding capital lease obligations and our line of credit, at a weighted-average interest rate of 4.70% (calculated using an imputed interest rate of 7.5% for our $316.3 million convertible senior notes due 2018).  At March 31, 2012, we had $342.6 million of capital and financing lease obligations, $85.0 million was drawn on our revolving loan facility, and $77.8 million of letters of credit had been issued under our letter of credit facilities.  Approximately $125.3 million of our debt and capital lease obligations are due on or before March 31, 2013.  We also have substantial operating lease obligations and capital expenditure requirements.  For the year ending March 31, 2013, we will be required to make approximately $285.0 million of payments in connection with our existing operating leases.
 
We had $42.1 million of cash and cash equivalents at March 31, 2012, excluding cash and escrow deposits-restricted, marketable securities-restricted and lease security deposits of $160.0 million in the aggregate.  As of that date, we also had $199.8 million of availability on our revolving credit facility (of which $85.0 million had been drawn as of March 31, 2012).

At March 31, 2012, we had $390.0 million of negative working capital, which includes the classification of $243.2 million of refundable entrance fees and $7.3 million in tenant deposits as current liabilities.  Based upon our historical operating experience, we anticipate that only 9.0% to 12.0% of those entrance fee liabilities will actually come due, and be required to be settled in cash, during the next 12 months. We expect that any entrance fee liabilities due within the next 12 months will be fully offset by the proceeds generated by subsequent entrance fee sales.  Entrance fee sales, net of refunds paid, provided $6.9 million of cash for the three months ended March 31, 2012.  This includes $0.5 million of first generation net entrance fee receipts which represent initial entrance fees received from the sale of units at a recently opened entrance fee CCRC.