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 June 30, 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 August 6, 2012, 122,474,134 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 QUARTER ENDED JUNE 30, 2012

 
PAGE
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Balance Sheets -
 
 
As of June 30, 2012 (Unaudited) and December 31, 2011
4
 
 
 
 
Condensed Consolidated Statements of Operations -
 
 
Three and six months ended June 30, 2012 and 2011 (Unaudited)
5
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income -
 
 
Three and six months ended June 30, 2012 and 2011 (Unaudited)
6
 
 
 
 
Condensed Consolidated Statement of Stockholders' Equity -
 
 
Six months ended June 30, 2012 (Unaudited)
7
 
 
 
 
Condensed Consolidated Statements of Cash Flows -
 
 
Six months ended June 30, 2012 and 2011 (Unaudited)
8
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
 
 
 
Item 4.
Controls and Procedures
52
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
52
 
 
 
Item 1A.
Risk Factors
52
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
52
 
 
 
Item 6.
Exhibits
53
 
Signatures
 
 
54
3


PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

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

 
 
June 30,
2012
   
December 31,
2011
 
Assets
 
(Unaudited)
   
 
Current assets
 
   
 
Cash and cash equivalents
 
$
38,676
   
$
30,836
 
Cash and escrow deposits - restricted
   
45,202
     
45,903
 
Accounts receivable, net
   
106,934
     
98,697
 
Deferred tax asset
   
11,776
     
11,776
 
Prepaid expenses and other current assets, net
   
89,994
     
93,663
 
Total current assets
   
292,582
     
280,875
 
Property, plant and equipment and leasehold intangibles, net
   
3,792,169
     
3,694,064
 
Cash and escrow deposits - restricted
   
51,590
     
52,980
 
Marketable securities - restricted
   
33,661
     
31,721
 
Investment in unconsolidated ventures
   
31,461
     
32,798
 
Goodwill
   
109,553
     
109,553
 
Other intangible assets, net
   
158,782
     
154,136
 
Other assets, net
   
108,523
     
109,934
 
Total assets
 
$
4,578,321
   
$
4,466,061
 
 
               
Liabilities and Stockholders' Equity
               
Current liabilities
               
Current portion of long-term debt
 
$
410,581
   
$
47,654
 
Trade accounts payable
   
43,105
     
54,134
 
Accrued expenses
   
188,455
     
183,634
 
Refundable entrance fees and deferred revenue
   
341,364
     
327,808
 
Tenant security deposits
   
6,589
     
7,720
 
Total current liabilities
   
990,094
     
620,950
 
Long-term debt, less current portion
   
2,099,265
     
2,350,971
 
Line of credit
   
75,000
     
65,000
 
Deferred entrance fee revenue
   
75,173
     
72,485
 
Deferred liabilities
   
158,300
     
161,185
 
Deferred tax liability
   
112,259
     
112,736
 
Other liabilities
   
42,267
     
42,526
 
Total liabilities
   
3,552,358
     
3,425,853
 
 
               
Stockholders' Equity
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized at June 30, 2012 and December 31, 2011; no shares issued and outstanding
   
     
 
Common stock, $0.01 par value, 200,000,000 shares authorized at June 30, 2012 and December 31, 2011; 128,867,519 and 127,782,538 shares issued and 126,439,118 and 125,354,137 shares outstanding (including 3,965,578 and 4,221,598 unvested restricted shares), respectively
   
1,264
     
1,254
 
Additional paid-in-capital
   
1,984,814
     
1,970,820
 
Treasury stock, at cost; 2,428,401 shares at June 30, 2012 and December 31, 2011
   
(46,800
)
   
(46,800
)
Accumulated deficit
   
(913,199
)
   
(884,051
)
Accumulated other comprehensive loss
   
(116
)
   
(1,015
)
Total stockholders' equity
   
1,025,963
     
1,040,208
 
Total liabilities and stockholders' equity
 
$
4,578,321
   
$
4,466,061
 

See accompanying notes to condensed consolidated financial statements.
4

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

 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Revenue
 
   
   
   
 
Resident fees
 
$
602,387
   
$
563,923
   
$
1,199,273
   
$
1,131,958
 
Management fees
   
7,499
     
1,505
     
14,943
     
2,910
 
Reimbursed costs incurred on behalf of managed communities
   
80,924
     
17,871
     
159,639
     
35,351
 
Total revenue
   
690,810
     
583,299
     
1,373,855
     
1,170,219
 
 
                               
Expense
                               
Facility operating expense (excluding depreciation and amortization of $58,090, $57,808, $116,026 and $116,767, respectively)
   
403,515
     
366,242
     
802,284
     
737,196
 
General and administrative expense (including non-cash stock-based compensation expense of $6,729, $4,555, $13,164 and $9,095, respectively)
   
46,071
     
33,681
     
91,044
     
67,224
 
Facility lease expense
   
70,628
     
66,065
     
142,073
     
132,380
 
Depreciation and amortization
   
63,561
     
70,577
     
126,905
     
142,359
 
Asset impairment
   
7,246
     
     
8,329
     
14,846
 
Loss on acquisition
   
     
     
636
     
 
Gain on facility lease termination
   
     
     
(2,780
)
   
 
Costs incurred on behalf of managed communities
   
80,924
     
17,871
     
159,639
     
35,351
 
Total operating expense
   
671,945
     
554,436
     
1,328,130
     
1,129,356
 
Income from operations
   
18,865
     
28,863
     
45,725
     
40,863
 
 
                               
Interest income
   
692
     
773
     
1,544
     
1,398
 
Interest expense:
                               
Debt
   
(32,431
)
   
(30,673
)
   
(64,481
)
   
(62,234
)
Amortization of deferred financing costs and debt discount
   
(4,586
)
   
(2,010
)
   
(9,059
)
   
(4,714
)
Change in fair value of derivatives and amortization
   
(278
)
   
(2,635
)
   
(511
)
   
(2,643
)
Loss on extinguishment of debt
   
     
(15,254
)
   
(221
)
   
(18,148
)
Equity in (loss) earnings of unconsolidated ventures
   
(61
)
   
146
     
38
     
412
 
Other non-operating income (loss)
   
3
     
(441
)
   
(108
)
   
376
 
Loss before income taxes
   
(17,796
)
   
(21,231
)
   
(27,073
)
   
(44,690
)
Provision for income taxes
   
(1,014
)
   
(12,728
)
   
(2,075
)
   
(1,574
)
Net loss
 
(18,810
)
 
$
(33,959
)
 
$
(29,148
)
 
$
(46,264
)
 
                               
Basic and diluted net loss per share
 
$
(0.15
)
 
$
(0.28
)
 
$
(0.24
)
 
$
(0.38
)
Weighted average shares used in computing basic and diluted net loss per share
   
121,708
     
121,280
     
121,426
     
121,037
 

See accompanying notes to condensed consolidated financial statements.
5


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

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2012
   
2011
   
2012
   
2011
 
 
 
   
   
   
 
Net loss
 
$
(18,810
)
 
$
(33,959
)
 
$
(29,148
)
 
$
(46,264
)
Other comprehensive (loss) income:
                               
Unrealized (loss) gain on marketable securities - restricted
   
(200
)
   
(36
)
   
838
     
221
 
Reclassification of net gains (loss) on derivatives into earnings
   
     
114
     
(79
)
   
228
 
Amortization of payments from settlement of forward interest rate swaps
   
85
     
94
     
179
     
188
 
Other
   
(33
)
   
(69
)
   
(39
)
   
(250
)
Total other comprehensive (loss) income, net of tax
   
(148
)
   
103
     
899
     
387
 
Comprehensive loss
 
$
(18,958
)
 
$
(33,856
)
 
$
(28,249
)
 
$
(45,877
)
 
                               

See accompanying notes to condensed consolidated financial statements.
6


BROOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands)

                       
     Common Stock    
Additional
Paid-In-
Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
    Total  
Shares Amount
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
   
     
     
13,164
     
     
     
     
13,164
 
Net loss
   
     
     
     
     
(29,148
)
   
     
(29,148
)
Issuance of common stock under Associate Stock Purchase Plan
   
41
     
     
678
     
     
     
     
678
 
Restricted stock, net
   
1,044
     
10
     
(100
)
   
     
     
     
(90
)
Unrealized gain on marketable securities - restricted
   
     
     
     
     
     
838
     
838
 
Reclassification of net gains on derivatives into earnings
   
     
     
     
     
     
(79
)
   
(79
)
Amortization of payments from settlement of forward interest rate swaps
   
     
     
     
     
     
179
     
179
 
Other
   
     
     
252
     
     
     
(39
)
   
213
 
Balances at June 30, 2012
   
126,439
   
1,264
   
1,984,814
   
(46,800
)
 
(913,199
)
 
(116
)
 
1,025,963
 


See accompanying notes to condensed consolidated financial statements.

7

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

 
Six Months Ended
June 30,
 
 
 
2012
   
2011
 
Cash Flows from Operating Activities
 
   
 
Net loss
 
$
(29,148
)
 
$
(46,264
)
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Loss on extinguishment of debt
   
221
     
18,148
 
Depreciation and amortization
   
135,964
     
147,073
 
Asset impairment
   
8,329
     
14,846
 
Equity in earnings of unconsolidated ventures
   
(38
)
   
(412
)
Distributions from unconsolidated ventures from cumulative share of net earnings
   
1,015
     
 
Amortization of deferred gain
   
(2,186
)
   
(2,186
)
Amortization of entrance fees
   
(13,050
)
   
(12,366
)
Proceeds from deferred entrance fee revenue
   
17,377
     
15,660
 
Deferred income tax benefit
   
(41
)
   
 
Change in deferred lease liability
   
3,206
     
3,182
 
Change in fair value of derivatives and amortization
   
511
     
2,643
 
Loss (gain) on sale of assets
   
172
     
(1,315
)
Loss on acquisition
   
636
     
 
Gain on facility lease termination
   
(2,780
)
   
 
Non-cash stock-based compensation
   
13,164
     
9,095
 
Changes in operating assets and liabilities:
               
Accounts receivable, net
   
(8,801
)
   
1,623
 
Prepaid expenses and other assets, net
   
4,446
     
1,937
 
Accounts payable and accrued expenses
   
(7,800
)
   
1,317
 
Tenant refundable fees and security deposits
   
(1,117
)
   
23
 
Deferred revenue
   
8,467
     
4,348
 
Net cash provided by operating activities
   
128,547
     
157,352
 
 
               
Cash Flows from Investing Activities
               
Increase in lease security deposits and lease acquisition deposits, net
   
(6,336
)
   
(372
)
Decrease in cash and escrow deposits - restricted
   
5,404
     
58,296
 
Purchase of marketable securities - restricted
   
(400
)
   
(32,724
)
Sale of marketable securities - restricted
   
     
1,417
 
Additions to property, plant and equipment and leasehold intangibles, net of related payables
   
(91,966
)
   
(67,929
)
Acquisition of assets, net of related payables and cash received
   
(109,959
)
   
(54,508
)
(Issuance of) payment on notes receivable, net
   
(439
)
   
403
 
Investment in unconsolidated ventures
   
(571
)
   
 
Distributions received from unconsolidated ventures
   
184
     
116
 
Proceeds from sale of assets, net
   
325
     
29,032
 
Other
   
(702
)
   
(468
)
Net cash used in investing activities
   
(204,460
)
   
(66,737
)
 
               
Cash Flows from Financing Activities
               
Proceeds from debt
   
193,016
     
30,417
 
Repayment of debt and capital lease obligations
   
(118,653
)
   
(418,176
)
Proceeds from line of credit
   
205,000
     
55,000
 
Repayment of line of credit
   
(195,000
)
   
(55,000
)
Proceeds from issuance of convertible notes, net
   
     
308,335
 
Issuance of warrants
   
     
45,066
 
Purchase of bond hedge
   
     
(77,007
)
Payment of financing costs, net of related payables
   
(2,714
)
   
(3,485
)
Other
   
(264
)
   
(332
)
Refundable entrance fees:
               
      Proceeds from refundable entrance fees
   
17,306
     
11,390
 
      Refunds of entrance fees
   
(13,531
)
   
(11,411
)
Cash portion of loss on extinguishment of debt
   
(118
)
   
(17,014
)
Recouponing and payment of swap termination
   
(1,289
)
   
(99
)
Net cash provided by (used in) financing activities
   
83,753
     
(132,316
)
   Net increase (decrease) in cash and cash equivalents
   
7,840
     
(41,701
)
   Cash and cash equivalents at beginning of period
   
30,836
     
81,827
 
   Cash and cash equivalents at end of period
 
$
38,676
   
$
40,126
 
See accompanying notes to condensed consolidated financial statements.
 
8

 
 
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").  Through its Innovative Senior Care ("ISC") program, the Company also offers a range of outpatient therapy, home health and hospice services, primarily to residents of its communities.

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 June 30, 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 entrance fee 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
9

 
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 entrance fee revenue.  Such deferred entrance fee revenue was approximately $47.5 million and $48.1 million at June 30, 2012 and December 31, 2011, respectively, and is amortized over the life of the community.  All remaining contingently refundable fees not recorded as deferred entrance fee 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 June 30, 2012 and December 31, 2011, respectively.  As of June 30, 2012 and December 31, 2011, the estimated fair value of debt was approximately $2.6 billion and $2.5 billion, respectively.

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 820 - Fair Value Measurements ("ASC 820"), which 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:
10

 
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.
11

 
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 June 30, 2012 and December 31, 2011 was $33.8 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 Accounting Standards Update ("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 condensed 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.

In July 2012, the FASB issued ASU 2012-01, Continuing Care Retirement Communities - Refundable Advance Fees ("ASU 2012-01").  ASU 2012-01 amends the situations in which recognition of deferred revenue for refundable advance fees is appropriate.  Under this amendment, refundable advance fees that are contingent upon reoccupancy by a subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and reported as a liability.  The guidance in ASU 2012-01 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The Company is currently evaluating the impact this provision will have on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other ("ASU 2012-02").  ASU 2012-02 amends current guidance to allow an entity to first assess qualitative factors to determine whether it is necessary to perform the annual quantitative indefinite-lived intangible asset impairment test.  Under this amendment, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset 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 2012-02 applies to all companies that have indefinite-lived intangible assets reported in their financial statements.  The provisions of ASU 2012-02 are effective for annual reporting periods beginning after September 15, 2012.  The Company has not yet adopted this pronouncement, but does not believe it will have an impact on the Company's consolidated financial statements.
12

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 and six months ended June 30, 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 1.3 million and 1.5 million for the three months ended June 30, 2012 and June 30, 2011, respectively, and 1.4 million and 1.6 million for the six months ended June 30, 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 six months ended June 30, 2012, the Company purchased three home health agencies and an existing skilled nursing facility as part of its growth strategy for an aggregate purchase price of approximately $6.5 million.  The purchase price of the acquisitions has primarily 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.
13

 
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 six months ended June 30, 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.

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 June 30, 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.

5.  Stock-Based Compensation

The Company's compensation expense recorded in connection with grants of restricted stock and restricted stock units for the three and six months ended June 30, 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
 
Three months ended June 30, 2012
   
85
   
 
$18.72 - $19.55
   
 
$1,666
 

6.  Goodwill and Other Intangible Assets, Net

Following is a summary of changes in the carrying amount of goodwill for the six months ended June 30, 2012 and the year ended December 31, 2011 presented on an operating segment basis (dollars in thousands):
14

 
 
 
 
June 30, 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 - Rental
   
56,281
     
-
     
(56,281
)
   
-
     
56,281
     
-
     
(56,281
)
   
-
 
CCRCs - Entry Fee
   
158,718
     
-
     
(158,718
)
   
-
     
158,718
     
-
     
(158,718
)
   
-
 
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.  During the three months ended June 30, 2012, the Company changed the composition of its operating segments as further discussed in Note 15.  The Company reevaluated goodwill under the new segment composition for impairment and determined that no impairment charge was necessary.

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 six months ended June 30, 2012.  The following is a summary of other intangible assets at June 30, 2012 and December 31, 2011 (dollars in thousands):
 
 
 
June 30, 2012
   
December 31, 2011
 
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Community purchase options
 
$
147,610
   
$
(19,414
)
 
$
128,196
   
$
147,610
   
$
(17,566
)
 
$
130,044
 
Health care licenses
   
30,586
     
-
     
30,586
     
24,092
     
-
     
24,092
 
Total
 
$
178,196
   
$
(19,414
)
 
$
158,782
   
$
171,702
   
$
(17,566
)
$
154,136
 

Amortization expense related to definite-lived intangible assets for the three months ended June 30, 2012 and 2011 was $0.9 million and $8.7 million, respectively, and for the six months ended June 30, 2012 and 2011 was $1.8 million and $17.4 million, respectively.  Health care 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):
15



 
June 30,
2012
   
December 31,
2011
 
Land
 
$
291,452
   
$
275,277
 
Buildings and improvements
   
3,209,013
     
3,080,882
 
Leasehold improvements
   
407,646
     
429,133
 
Furniture and equipment
   
484,025
     
450,179
 
Resident and leasehold operating intangibles
   
163,366
     
163,366
 
Construction in progress
   
61,356
     
39,600
 
Assets under capital and financing leases
   
698,090
     
667,239
 
   
5,314,948
     
5,105,676
 
Accumulated depreciation and amortization
   
(1,522,779
)
   
(1,411,612
)
Property, plant and equipment and leasehold intangibles, net
 
$
3,792,169
   
$
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 six months ended June 30, 2012, there were indicators of impairment on certain long-lived assets.  The Company compared the estimated fair value of the assets (a Level 2 valuation) to their carrying value and recorded an impairment charge for the excess of carrying value over fair value.  A non-cash charge of $8.3 million within the Assisted Living and CCRCs - Entry Fee 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 or estimated selling prices.

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):

 
June 30,
2012
   
December 31,
2011
 
 
Mortgage notes payable due 2013 through 2022; weighted average interest rate of 4.87% for the six months ended June 30, 2012, net of debt discount of $0.5 million (weighted average interest rate of 5.04% in 2011)
 
$
1,568,697
   
$
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
   
146,503
     
148,601
 
 
Discount mortgage note payable due June 2013, weighted average interest rate of 2.58% for the six months ended June 30, 2012, net of debt discount of $2.0 million (weighted average interest rate of 2.52% in 2011)
   
80,224
     
79,911
 
 
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average interest rate of 1.71% for the six months ended June 30, 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
   
100,186
     
100,423
 
16

 
 
 
Capital and financing lease obligations payable through 2026; weighted average interest rate of 8.48% for the six months ended June 30, 2012 (weighted average interest rate of 8.61% in 2011)
   
351,523
     
348,195
 
 
Convertible notes payable in aggregate principal amount of $316.3 million, less debt discount of $69.8 million, interest at 2.75% per annum, due June 2018
   
246,518
     
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 2.68% for the six months ended June 30, 2012 (weighted average interest rate of 3.11% in 2011), due 2013
   
9,001
     
2,545
 
Total debt
   
2,509,846
     
2,398,625
 
Less current portion
   
410,581
     
47,654
 
Total long-term debt
 
2,099,265
   
2,350,971
 
 
In accordance with applicable accounting pronouncements, as of June 30, 2012, the current portion of long-term debt within the Company's condensed consolidated financial statements reflects approximately $359.9 million of mortgage notes payable due within the next 12 months.  Although these debt obligations are scheduled to mature on or prior to June 30, 2013, the Company has the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $205.6 million of certain mortgages payable included in such debt until 2018 or later, as the instruments associated with such mortgages payable provide that the Company can extend the respective maturity dates for terms of five to seven years from the existing maturity dates.  The Company presently anticipates that it will exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations.

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.
17


As of June 30, 2012, the Company had an available secured line of credit with a $230.0 million commitment and $201.7 million of availability (of which $75.0 million had been drawn as of such date).  The Company also had secured and unsecured letter of credit facilities of up to $92.7 million in the aggregate as of June 30, 2012.  Letters of credit totaling $78.3 million 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%.

On June 29, 2012, the Company obtained a $15.0 million first mortgage loan, secured by two communities that the Company acquired in February 2012.  The loan bears interest at a variable rate equal to 30-day LIBOR plus a margin of 425 basis points and matures in June 2017.  In connection with the transaction, the Company repaid $15.0 million of seller-financed debt that had been obtained at the time of closing of the acquisition (Note 4).

As of June 30, 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 June 30, 2012 (dollars in thousands):
18

 
 
Current notional balance
 
$
27,568
 
Highest possible notional
 
$
27,568
 
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 June 30, 2012)
 
$
(1,944
)
Estimated liability fair value (included in other liabilities at December 31, 2011)
 
$
(2,809
)

The following table summarizes the Company's cap instruments at June 30, 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 June 30, 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 $0.3 million and $2.6 million for the three months ended June 30, 2012 and 2011, respectively, and decreased $0.5 million and $2.6 million for the six months ended June 30, 2012 and 2011, respectively.  This is included as a component of interest expense in the condensed consolidated statements of operations.

During the six months ended June 30, 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.
19

 
10.  Supplemental Disclosure of Cash Flow Information

(dollars in thousands):

 
Six Months Ended
June 30,
 
 
2012
   
2011
 
Supplemental Disclosure of Cash Flow Information:
       
Interest paid
 
$
65,427
   
$
63,097
 
Income taxes paid
 
$
1,650
   
$
2,070
 
Write-off of deferred costs
 
$
744
   
$
1,414
 
               
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
   
123,450
     
50,350
 
Other intangible assets, net
   
6,494
     
4,158
 
Other assets, net
   
(7,327
)
   
-
 
Accrued expenses
   
(489
)
   
-
 
Other liabilities
   
2,335
     
-
 
Long-term debt, less current portion
   
(15,000
)
   
-
 
Net
 
$
109,959
   
$
54,508
 
Capital leases:
               
Property, plant and equipment and leasehold intangibles, net
 
$
14,443
   
$
-
 
Long-term debt
   
(14,443
)
   
-
 
Net
 
$
-
   
$
-
 

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
June 30,
   
Six Months Ended
June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Cash basis payment
 
$
70,157
   
$
65,702
   
$
141,053
   
$
131,384
 
Straight-line expense
   
1,564
     
1,456
     
3,206
     
3,182
 
Amortization of deferred gain
   
(1,093
)
   
(1,093
)
   
(2,186
)
   
(2,186
)
Facility lease expense
 
$
70,628
   
$
66,065
   
$
142,073
   
$
132,380
 

12.  Income Taxes

The Company's effective tax rates for the three months ended June 30, 2012 and 2011 were (5.7%) and (60.0%), respectively, and for the six months ended June 30, 2012 and 2011 were (7.7%) and (3.5%), respectively.  The difference in the effective rate between the three month periods ended June 30, 2012 and 2011 was primarily due to the Company's decision to record a valuation allowance against the deferred tax benefit for the six months ended June 30, 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 difference in the effective rate for the six month periods ended June 30, 2012 and 2011 was primarily due to the impact of the tax contingency reserve
20

 
recorded in the six months ended June 30, 2012 and the decrease in loss before income taxes for the six month period ended June 30, 2012 as compared to the 2011 period.

The Company does not anticipate being able to utilize any additional tax benefits generated in 2012 so a full valuation allowance was recorded against this benefit.  This conclusion was determined solely on the reversal of timing differences recorded as of December 31, 2011, not taking into account future profitability of the Company, as required under generally accepted accounting principles.

The Company recorded additional interest charges related to its tax contingency reserve for the six months ended June 30, 2012.  Additionally, uncertain tax positions recorded in prior periods were increased due to a change in estimate.  The Company's consolidated federal income tax return for 2010 is currently under audit by the Internal Revenue Service.  Tax returns for years 2008 and 2009 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 and six months ended June 30, 2012.  As of June 30, 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 June 30, 2012 (dollars in thousands):

 
Total Carrying Value at
June 30,
2012
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant unobservable
inputs
(Level 3)
 
Marketable securities - restricted
 
$
33,661
   
$
33,661
   
$
-
   
$
-
 
Derivative liabilities
   
(1,944
)
   
-
     
(1,944
)
   
-
 
 
$
31,717
   
$
33,661
   
$
(1,944
)
 
$
-
 

15.
Segment Information

Operating segments are defined as components of an enterprise that engage in business activities from which it may earn revenues and incur expenses; for which separate financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker to assess the performance of the individual segment and make decisions about resources to be allocated to the segment.

During the second quarter of 2012, the Company changed the composition of its operating segments from four reportable segments to six reportable segments.  This change was made to align operating segments with the basis that the chief operating decision maker uses to review financial information to make operating decisions, assess
21

 
 
performance, develop strategy and allocate capital resources.  All prior period disclosures below have been recast to present results on a comparable basis.

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

CCRCs - Rental.  The Company's CCRCs - Rental segment includes large owned or leased 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 independent living, assisted living and skilled nursing available on one campus or within the immediate market, and some also include memory care/Alzheimer's units.

CCRCs - Entry Fee .  The communities in the Company's CCRCs - Entry Fee segment are similar to those in the Company's CCRCs - Rental segment but allow for residents in the independent living apartment units to pay a one-time upfront entrance fee, which is partially refundable in certain circumstances.  The amount of the entrance fee varies depending upon the type and size of the dwelling unit, the type of contract plan selected, whether the contract contains a lifecare benefit for the resident, the amount and timing of refund, and other variables.  In addition to the initial entrance fee, residents under all entrance fee agreements also pay a monthly service fee, which entitles them to the use of certain amenities and services.  Since entrance fees are received upon initial occupancy, the monthly fees are generally less than fees at a comparable rental community.

ISC.  The Company's ISC segment includes the outpatient therapy, home health and hospice services provided to residents of many of the Company's communities, to other senior living communities that the Company does not own or operate and to seniors living outside of the Company's communities.  The ISC segment does not include the therapy services provided in the Company's skilled nursing units, which are included in the Company's CCRCs - Rental and CCRCs - Entry Fee segments.

Management Services.  The Company's management services segment includes communities operated by the Company pursuant to management agreements.  In some of the cases, the controlling financial interest in the community is held by third parties and, in other cases, the community is owned in a joint venture structure in which the Company has an ownership interest.  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):
22


 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Revenue (1)
 
   
   
   
 
Retirement Centers
 
$
125,813
   
$
115,916
   
$
250,325
   
$
231,445
 
Assisted Living
   
252,399
     
237,665
     
503,751
     
478,893
 
CCRCs - Rental
   
95,258
     
88,618
     
190,370
     
178,816
 
CCRCs - Entry Fee
   
71,195
     
71,390
     
143,251
     
142,233
 
ISC
   
57,722
     
50,334
     
111,576
     
100,571
 
Management Services (2)
   
88,423
     
19,376
     
174,582
     
38,261
 
 
$
690,810
   
$
583,299
   
$
1,373,855
   
$
1,170,219
 
Segment operating income (3)
                               
Retirement Centers
 
$
52,675
   
$
48,924
   
$
103,666
   
$
97,501
 
Assisted Living
   
90,166
     
86,047
     
180,729
     
171,722
 
CCRCs - Rental
   
26,764
     
29,755
     
54,783
     
59,704
 
CCRCs - Entry Fee
   
15,854
     
17,987
     
32,996
     
35,778
 
ISC
   
13,413
     
14,968
     
24,815
     
30,057
 
Management Services
   
7,499
     
1,505
     
14,943
     
2,910
 
 
$
206,371
   
$
199,186
   
$
411,932
   
$
397,672
 
General and administrative (including non-cash stock-based compensation expense)
   
46,071
 
33,681
     
91,044
     
67,224
 
Facility lease expense
   
70,628
     
66,065
     
142,073
     
132,380
 
Depreciation and amortization
   
63,561
     
70,577
     
126,905
     
142,359
 
Asset impairment
   
7,246
     
-
     
8,329
     
14,846
 
Loss on acquisition
   
-
     
-
     
636
     
-
 
Gain on facility lease termination
   
-
     
-
     
(2,780
)
   
-
 
Income from operations
 
$
18,865
   
$
28,863
   
$
45,725
   
$
40,863
 

 
 
As of
 
 
June 30,
2012
   
December 31,
2011
 
Total assets
 
   
 
Retirement Centers
 
$
1,175,952
   
$
1,047,388
 
Assisted Living
   
1,429,114
     
1,451,612
 
CCRCs - Rental
   
545,166
     
546,867
 
CCRCs - Entry Fee
   
973,143
     
994,064
 
ISC
   
96,021
     
78,137
 
Corporate and Management Services
   
358,925
     
347,993
 
   Total assets
 
$
4,578,321
   
$
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).
23



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, the home resale market, expansion and development activity, acquisition opportunities, asset dispositions, our share repurchase program, capital deployment 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
 
24

 
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 tables below present a summary of our operating results and certain other financial metrics for the three and six months ended June 30, 2012 and 2011 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).

 
 
Three Months Ended
June 30,
   
Increase
(Decrease)
 
 
 
2012
   
2011
   
Amount
   
Percent
 
Total revenues
 
$
690.8
   
$
583.3
   
$
107.5
     
18.4
%
Net loss
 
$
(18.8
)
 
$
(34.0
)
 
$
(15.1
)
   
(44.6
%)
Adjusted EBITDA
 
$
104.5
   
$
103.7
   
$
0.8
     
0.7
%
Cash From Facility Operations
 
$
61.5
   
$
61.3
   
$
0.2
     
0.3
%
Facility Operating Income
 
$
192.2
   
$
191.1
   
$
1.1
     
0.6
%


 
Six Months Ended
June 30,
   
Increase
(Decrease)
 
 
2012
   
2011
   
Amount
   
Percent
 
Total revenues
 
$
1,373.9
   
$
1,170.2
   
$
203.6
     
17.4
%
Net loss
 
$
(29.1
)
 
$
(46.3
)
 
$
(17.1
)
   
(37.0
%)
Adjusted EBITDA
 
$
201.1
   
$
206.5
   
$
(5.4
)
   
(2.6
%)
Cash From Facility Operations
 
$
116.1
   
$
123.1
   
$
(7.0
)
   
(5.7
%)
Facility Operating Income
 
$
383.9
   
$
382.4
   
$
1.5
     
0.4
%

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 six months ended June 30, 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 six months ended June 30, 2012 increased to $1.4 billion, an increase of $203.6 million, or 17.4%, over our total revenues for the six months ended June 30, 2011.  Resident and management fee revenue for the six months ended June 30, 2012 increased $79.3 million, or 7.0%, from the six months ended June 30, 2011.  Revenue from reimbursed costs incurred on behalf of managed communities
 
25

 
increased $124.3 million, or 351.6%, 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 during the six months ended June 30, 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 3.6% increase in consolidated units operated.  Our weighted average occupancy rate for the six months ended June 30, 2012 and 2011 was 87.7% and 86.9%, 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 six months ended June 30, 2012.

During the three months ended June 30, 2012, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 0.7%, 0.3% and 0.6%, respectively, when compared to the three months ended June 30, 2011.  During the six months ended June 30, 2012, our Adjusted EBITDA and Cash From Facility Operations decreased by 2.6% and 5.7%, respectively, and Facility Operating Income increased by 0.4%, when compared to the six months ended June 30, 2011.

During the second quarter of 2012, we changed the composition of our operating segments from four reportable segments to six reportable segments (Retirement Centers, Assisted Living, CCRCs - Rental, CCRCs - Entry Fee, ISC and Management Services) (Note 15).  This change was made to align operating segments with the basis that the chief operating decision maker uses to review financial information to make operating decisions, assess performance, develop strategy and allocate capital resources.  All prior period disclosures below have been recast to present results on a comparable basis.

During the six months ended June 30, 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 period, we also acquired three home health agencies and an existing skilled nursing facility for an aggregate purchase price of approximately $6.5 million.

During the six months ended June 30, 2012, we continued to expand our ancillary services offerings.  As of June 30, 2012, we offered therapy services to approximately 49,900 of our units and home health services to over 42,600 of our units (approximately 36,800 and 34,500 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.
 
26

 
Consolidated Results of Operations

Three Months Ended June 30, 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
June 30,
2012 2011
Increase
(Decrease)
%
Increase
(Decrease)
Statement of Operations Data:
               
Revenue
 
   
   
   
 
Resident fees
 
   
   
   
 
Retirement Centers
 
$
125,813
   
$
115,916
   
$
9,897
     
8.5
%
Assisted Living
   
252,399
     
237,665
     
14,734
     
6.2
%
CCRCs - Rental
   
95,258
     
88,618
     
6,640
     
7.5
%
CCRCs - Entry Fee
   
71,195
     
71,390
     
(195
)
   
(0.3
%)
ISC
   
57,722
     
50,334
     
7,388
     
14.7
%
Total resident fees
   
602,387
     
563,923
     
38,464
     
6.8
%
Management services (1)
   
88,423
     
19,376
     
69,047
     
356.4
%
Total revenue
   
690,810
     
583,299
     
107,511
     
18.4
%
Expense
                               
Facility operating expense
                               
Retirement Centers
   
73,138
     
66,992
     
6,146
     
9.2
%
Assisted Living
   
162,233
     
151,618
     
10,615
     
7.0
%
CCRCs - Rental
   
68,494
     
58,863
     
9,631
     
16.4
%
CCRCs - Entry Fee
   
55,341
     
53,403
     
1,938
     
3.6
%
ISC
   
44,309
     
35,366
     
8,943
     
25.3
%
Total facility operating expense
   
403,515
     
366,242
     
37,273
     
10.2
%
General and administrative expense
   
46,071
     
33,681
     
12,390
     
36.8
%
Facility lease expense
   
70,628
     
66,065
     
4,563
     
6.9
%
Depreciation and amortization
   
63,561
     
70,577
     
(7,016
)
   
(9.9
%)
Asset impairment
   
7,246
     
−−
     
7,246
     
100.0
%
Costs incurred on behalf of managed communities
   
80,924
     
17,871
     
63,053
     
352.8
%
Total operating expense
   
671,945
     
554,436
     
117,509
     
21.2
%
Income from operations
   
18,865
     
28,863
     
(9,998
)
   
(34.6
%)
Interest income
   
692
     
773
     
(81
)
   
(10.5
%)
Interest expense
                               
Debt
   
(32,431
)
   
(30,673
)
   
1,758
     
5.7
%
Amortization of deferred financing costs and debt discount
   
(4,586
)
   
(2,010
)
   
2,576
     
128.2
%
Change in fair value of derivatives and amortization
   
(278
)
   
(2,635
)
   
(2,357
)
   
(89.4
%)
Loss on extinguishment of debt
   
−−
     
(15,254
)
   
(15,254
)
   
(100.0
%)
Equity in (loss) earnings of unconsolidated ventures
   
(61
)
   
146
     
(207
)
   
(141.8
%)
 
 
 
27

 
 
Other non-operating income (loss)
   
3
     
(441
)
   
444
     
100.7
%
Loss before income taxes
   
(17,796
)
   
(21,231
)
   
(3,435
)
   
(16.2
%)
Provision for income taxes
   
(1,014
)
   
(12,728
)
   
(11,714
)
   
(92.0
%)
Net loss
 
$
(18,810
)
 
$
(33,959
)
 
$
(15,149
)
   
(44.6
%)
 
                               
Selected Operating and Other Data:
                               
Total number of communities (period end)
   
647
     
557
     
90
     
16.2
%
Total units operated (2)
                               
Period end
   
66,032
     
50,099
     
15,933
     
31.8
%
Weighted average
   
66,090
     
50,192
     
15,898
     
31.7
%
Owned/leased communities units (2)
                               
Period end
   
48,004
     
46,314
     
1,690
     
3.6
%
Weighted average
   
47,946
     
46,407
     
1,539
     
3.3
%
Owned/leased communities occupancy rate(weighted average)
   
87.7
%
   
86.6
%
   
1.1
%
   
1.3
%
Senior Housing average monthly revenue
per unit (3)
 
$
4,266
   
$
4,203
   
63
     
1.5
%
 
                               
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
   
76
     
74
     
2
     
2.7
%
Total units (2)
                               
Period end
   
14,451
     
13,949
     
502
     
3.6
%
Weighted average
   
14,451
     
14,050
     
401
     
2.9
%
Occupancy rate (weighted average)
   
88.8
%
   
87.3
%
   
1.5
%
   
1.7
%
Senior Housing average monthly revenue per unit (3)
 
$
3,268
   
$
3,150
   
118
     
3.7
%
Assisted Living
                               
Number of communities (period end)
   
434
     
428
     
6
     
1.4
%
Total units (2)
                               
Period end
   
21,653
     
21,145
     
508
     
2.4
%
Weighted average
   
21,637
     
21,145
     
492
     
2.3
%
Occupancy rate (weighted average)
   
88.6
%
   
87.4
%
   
1.2
%
   
1.4
%
Senior Housing average monthly revenue per unit (3)
 
$
4,390
   
$
4,288
   
$
102
     
2.4
%
CCRCs - Rental
                               
Number of communities (period end)
   
27
     
22
     
5
     
22.7
%
Total units (2)
                               
Period end
   
6,693
     
6,071
     
622
     
10.2
%
Weighted average
   
6,659
     
6,071
     
588
     
9.7
%
Occupancy rate (weighted average)
   
85.8
%
   
86.3
%
   
(0.5
%)
   
(0.6
%)
Senior Housing average monthly revenue per unit (3)
 
$
5,561
   
$
5,643
   
$
(82
)
   
(1.5
%)
CCRCs - Entry Fee
                               
Number of communities (period end)
   
14
     
14
     
-
     
-
 
Total units (2)
                               
Period end
   
5,207
     
5,149
     
58
     
1.1
%
Weighted average
   
5,199
     
5,141
     
58
     
1.1
%
Occupancy rate (weighted average)
   
83.4
%
   
82.3
%
   
1.1
%
   
1.3
%
Senior Housing average monthly revenue per unit (3)
 
$
4,963
   
$
5,106
   
$
(143
)
   
(2.8
%)


28

 
 
Other Entry Fee Data
 
   
   
   
 
Non-refundable entrance fees sales
 
$
10,377
   
$
9,299
     
1,078
     
11.6
%
Refundable entrance fees sales (4)
   
9,317
     
5,310
     
4,007
     
75.5
%
Total entrance fee receipts
   
19,694
     
14,609
     
5,085
     
34.8
%
Refunds
   
(5,429
)
   
(6,481
)
   
(1,052
)
   
(16.2
%)
Net entrance fees (5)
 
$
14,265
   
$
8,128
     
6,137
     
75.5
%
Management Services
                               
Number of communities (period end)
   
96
     
19
     
77
     
405.3
%
Total units (2)
                               
Period end
   
18,028
     
3,785
     
14,243
     
376.3
%
Weighted average
   
18,144
     
3,785
     
14,359
     
379.4
%
Occupancy rate (weighted average)
   
84.0
%
   
84.8
%
   
(0.8
%)
   
(0.9
%)
 
                               
ISC
                               
Brookdale units served
                               
Outpatient Therapy (total)
   
49,867
     
41,580
     
8,287
     
19.9
%
Outpatient Therapy (consolidated)
   
36,844
     
35,535
     
1,309
     
3.7
%
Home Health (total)
   
42,661
     
31,116
     
11,545
     
37.1
%
Home Health (consolidated)
   
34,503
     
28,129
     
6,374
     
22.7
%
Outpatient Therapy treatment codes
   
957,364
     
823,539
     
133,825
     
16.2
%
Home Health average census
   
3,554
     
3,316
     
238
     
7.2
%
 
                               
__________
(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) Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of entrance fees and ISC segment revenue, divided by average occupied units.
(4) Refundable entrance fee sales for the three months ended June 30, 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 $3.6 million and $1.6 million for the three months ended June 30, 2012 and 2011, respectively.
(5) Includes $1.5 million and $2.2 million of f irst 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 June 30, 2012 and 2011, respectively.

As of June 30, 2012, our total operations included 647 communities with a capacity of 66,894 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
 
29

 
 
increase in occupancy and a 3.6% increase in consolidated units operated.  During the current period, revenues grew 2.4% at the 535 communities we operated during both periods with a 1.1% increase in the average monthly revenue per unit (excluding amortization of entrance fees in both instances).  Occupancy increased 1.1% in these communities period over period.

Retirement Centers revenue increased $9.9 million, or 8.5%, 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.

Assisted Living revenue increased $14.7 million, or 6.2%, 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.

CCRCs - Rental revenue increased $6.6 million, or 7.5%, primarily due to the inclusion of revenues from communities acquired subsequent to the prior year period.  The increase was partially offset by decreases in the average monthly revenue per unit and occupancy at the communities we operated during both periods.  Revenue for the CCRCs - Rental segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

CCRCs - Entry Fee revenue decreased $0.2 million, or 0.3%, primarily due to a decrease in the average monthly revenue per unit at the communities we operated during both periods. The decrease was partially offset by an increase in occupancy at the communities we operated during both periods.  Revenue for the CCRCs - Entry Fee segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

ISC revenue increased $7.4 million, or 14.7%, primarily due to the roll-out of our ancillary services programs to additional units subsequent to the prior year period.  The increase was partially offset by a reduction in Medicare reimbursement rates.

Management Services

Management services revenue, including reimbursed costs incurred on behalf of managed communities, increased $69.0 million, or 356.4%, 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 bad debt expense recorded in the current year period.

Retirement Centers operating expenses increased $6.1 million, or 9.2%, primarily due to 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 decreases in healthcare supplies and bad debt expense in the current year period.

Assisted Living operating expenses increased $10.6 million, or 7.0%, primarily due to the inclusion of expenses from communities acquired subsequent to the prior year period. There was also an increase in salaries and wages and an increase in insurance expense due to increased reserves and claims costs.  These increases were partially offset by a decrease in bad debt expense recorded in the current year period.

CCRCs - Rental operating expenses increased $9.6 million, or 16.4%, 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 skilled therapy services expense due to a negative change in the allowable method for delivering therapy services to skilled nursing patients .  These increases were partially offset by decreases in bonus and workers compensation expense recorded in the current year period.

CCRCs - Entry Fee operating expenses increased $1.9 million, or 3.6%, primarily driven by an increase in salaries and wages due to wage rate increases, an increase in skilled therapy expenses due to a negative change in the allowable
 
30

 
 
 
method for delivering therapy services to skilled nursing patients and an increase in employee benefits expense.   These increases were partially offset by a decrease in bonus and bad debt expense.

ISC operating expenses increased $8.9 million, or 25.3%, primarily due to an increase in expenses incurred in connection with the continued expansion of our ancillary services programs and an increase in therapy direct labor expenses.  

General and Administrative Expense

General and administrative expense increased $ 12.4 million, or 36.8%, primarily as a result of an increase in integration, transaction-related and electronic medical records ("EMR") roll-out costs, an increase in the number of employees in connection with the   Horizon Bay and HCP transactions that occurred during the third quarter of 2011 and an increase in non-cash stock-based compensation expense.  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 and integration, transaction-related and EMR roll-out costs , was 4.2% and 4.7 % for the three months ended June 30, 2012 and 2011, respectively, calculated as follows (dollars in thousands):

 
Three Months Ended June 30,
 
 
2012
   
2011
 
               
Resident fee revenues
 
$
602,387
     
79.6
%
 
$
563,923
     
93.9
%
Resident fee revenues under management
   
153,986
     
20.4
%
   
36,934
     
6.1
%
Total
 
$
756,373
     
100.0
%
 
$
600,857
     
100.0
%
General and administrative expenses (excluding non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
31,654
     
4.2
%
 
$
28,232
     
4.7
%
Non-cash stock-based compensation expense
   
6,729
     
0.9
%
   
4,555
     
0.8
%
Integration, transaction-related and EMR roll-out costs
   
7,688
     
1.0
%
   
894
     
0.1
%
General and administrative expenses (including non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
46,071
     
6.1
%
 
$
33,681
     
5.6
%

Facility Lease Expense

Facility lease expense increased $4.6 million, or 6.9%, 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 first quarter of 2012.

Depreciation and Amortization

Depreciation and amortization expense decreased $7.0 million, or 9.9%, 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 .
 
31

 

Asset Impairment

During the three months ended June 30, 2012, w e recognized $7.2 million of impairment charges primarily as a result of writing down the carrying value of assets which we intend to dispose of to their estimated fair value as determined by the estimated selling price for a community within the Assisted Living segment.

Costs Incurred on Behalf of Managed Communities

Costs incurred on behalf of managed communities increased $63.1 million primarily due to new management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions.

Interest Income

Interest income decreased by $0.1 million, or 10.5%, primarily due to decreased interest earned on our restricted marketable securities .

Interest Expense

Interest expense increased $2.0 million, or 5.6%, primarily due to additional expense from the amortization of our debt discount primarily on our convertible notes issued during 2011 and increased interest expense related to our line of credit, which had a higher average outstanding balance drawn period over period.   These increases were partially offset by a decrease in interest expense recorded from the change in the fair value of interest rate swaps and caps due to fewer swap and cap instruments in place during the current period.

Income Taxes

Our effective tax rates for the three months ended June 30, 2012 and 2011 were (5.7%) and (60.0%), respectively. 
The difference in the effective rate between these periods was primarily due to our decision to record a valuation allowance against the deferred tax benefit for the three months ended June 30, 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 by the Company.  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.

We do not anticipate being able to utilize any additional tax benefits generated in 2012 so a full valuation allowance was recorded against this benefit.  This conclusion was determined solely on the reversal of timing differences recorded as of December 31, 2011, not taking into account our future profitability, as required under generally accepted accounting principles.

An additional interest charge related to our tax contingency reserve was recorded for the three months ended June 30, 2012.  Additionally, uncertain tax positions recorded in prior periods were increased due to a change in estimate.  Our consolidated federal income tax return for 2010 is currently under audit by the Internal Revenue Service.  Tax returns for years 2008 and 2009 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.

Six Months Ended June 30, 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.
 
32

 
 

 (dollars in thousands, except average monthly revenue per unit)
 
Six Months Ended
June 30,
2012 2011
Increase
(Decrease)
%
Increase
(Decrease)
Statement of Operations Data:
               
Revenue
 
   
   
   
 
Resident fees
 
   
   
   
 
Retirement Centers
 
$
250,325
   
$
231,445
   
$
18,880
     
8.2
%
Assisted Living
   
503,751
     
478,893
     
24,858
     
5.2
%
CCRCs - Rental
   
190,370
     
178,816
     
11,554
     
6.5
%
CCRCs - Entry Fee
   
143,251
     
142,233
     
1,018
     
0.7
%
ISC
   
111,576
     
100,571
     
11,005
     
10.9
%
Total resident fees
   
1,199,273
     
1,131,958
     
67,315
     
5.9
%
Management services (1)
   
174,582
     
38,261
     
136,321
     
356.3
%
Total revenue
   
1,373,855
     
1,170,219
     
203,636
     
17.4
%
Expense
                               
Facility operating expense
                               
Retirement Centers
   
146,659
     
133,944
     
12,715
     
9.5
%
Assisted Living
   
323,022
     
307,171
     
15,851
     
5.2
%
CCRCs - Rental
   
135,587
     
119,112
     
16,475
     
13.8
%
CCRCs - Entry Fee
   
110,255
     
106,455
     
3,800
     
3.6
%
ISC
   
86,761
     
70,514
     
16,247
     
23.0
%
Total facility operating expense
   
802,284
     
737,196
     
65,088
     
8.8
%
General and administrative expense
   
91,044
     
67,224
     
23,820
     
35.4
%
Facility lease expense
   
142,073
     
132,380
     
9,693
     
7.3
%
Depreciation and amortization
   
126,905
     
142,359
     
(15,454
)
   
(10.9
%)
Asset impairment
   
8,329
     
14,846
     
(6,517
)
   
(43.9
%)
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
   
159,639
     
35,351
     
124,288
     
351.6
%
Total operating expense
   
1,328,130
     
1,129,356
     
198,774
     
17.6
%
Income from operations
   
45,725
     
40,863
     
4,862
     
11.9
%
Interest income
   
1,544
     
1,398
     
146
     
10.4
%
Interest expense
                               
Debt
   
(64,481
)
   
(62,234
)
   
2,247
     
3.6
%
Amortization of deferred financing costs and debt discount
   
(9,059
)
   
(4,714
)
   
4,345
     
92.2
%
Change in fair value of derivatives and amortization
   
(511
)
   
(2,643
)
   
(2,132
)
   
(80.7
%)
Loss on extinguishment of debt
   
(221
)
   
(18,148
)
   
(17,927
)
   
(98.8
%)
Equity in earnings of unconsolidated ventures
   
38
     
412
     
(374
)
   
(90.8
%)
Other non-operating (loss) income
   
(108
)
   
376
     
(484
)
   
(128.7
%)
Loss before income taxes
   
(27,073
)
   
(44,690
)
   
(17,617
)
   
(39.4
%)
Provision for income taxes
   
(2,075
)
   
(1,574
)
   
501
     
31.8
%
Net loss
 
$
(29,148
)
 
$
(46,264
)
 
$
(17,116
)
   
(37.0
%)
                       
33

 
 
Selected Operating and Other Data:
 
   
   
   
 
Total number of communities (period end)
   
647
     
557
     
90
     
16.2
%
Total units operated (2)
                               
Period end
   
66,032
     
50,099
     
15,933
     
31.8
%
Weighted average
   
66,114
     
50,294
     
15,820
     
31.5
%
Owned/leased communities units (2)
                               
Period end
   
48,004
     
46,314
     
1,690
     
3.6
%
Weighted average
   
47,915
     
46,509
     
1,406
     
3.0
%
Owned/leased communities occupancy rate(weighted average)
   
87.7
%
   
86.9
%
   
0.8
%
   
0.9
%
Senior Housing average monthly revenue
per unit (3)
 
$
4,261
   
$
4,200
   
$
61
     
1.5
%
 
                               
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
   
76
     
74
     
2
     
2.7
%
Total units (2)
                               
Period end
   
14,451
     
13,949
     
502
     
3.6
%
Weighted average
   
14,451
     
14,077
     
374
     
2.7
%
Occupancy rate (weighted average)
   
88.8
%
   
87.3
%
   
1.5
%
   
1.7
%
Senior Housing average monthly revenue
per unit (3)
 
$
3,252
   
$
3,139
   
$
113
     
3.6
%
Assisted Living
                               
Number of communities (period end)
   
434
     
428
     
6
     
1.4
%
Total units (2)
                               
Period end
   
21,653
     
21,145
     
508
     
2.4
%
Weighted average
   
21,636
     
21,220
     
416
     
2.0
%
Occupancy rate (weighted average)
   
88.5
%
   
87.8
%
   
0.7
%
   
0.8
%
Senior Housing average monthly revenue per unit (3)
 
$
4,384
   
$
4,284
   
$
100
     
2.3
%
CCRCs - Rental
                               
Number of communities (period end)
   
27
     
22
     
5
     
22.7
%
Total units (2)
                               
Period end
   
6,693
     
6,071
     
622
     
10.2
%
Weighted average
   
6,643
     
6,072
     
571
     
9.4
%
Occupancy rate (weighted average)
   
86.1
%
   
86.7
%
   
(0.6
%)
   
(0.7
%)
Senior Housing average monthly revenue per unit (3)
 
$
5,549
   
$
5,662
   
$
(113
)
   
(2.0
%)
CCRCs - Entry Fee
                               
Number of communities (period end)
   
14
     
14
     
−−
     
−−
 
Total units (2)
                               
Period end
   
5,207
     
5,149
     
58
     
1.1
%
Weighted average
   
5,185
     
5,140
     
45
     
0.9
%
Occupancy rate (weighted average)
   
83.6
%
   
82.7
%
   
0.9
%
   
1.1
%
Senior Housing average monthly revenue per unit (3)
 
$
5,009
   
$
5,092
     
(83
)
   
(1.6
%)
 
34


 
Other Entry Fee Data
 
   
   
   
 
Non-refundable entrance fees sales
 
$
17,377
   
$
15,660
     
1,717
     
11.0
%
Refundable entrance fees sales (4)
   
17,306
     
11,390
     
5,916
     
51.9
%
Total entrance fee receipts
   
34,683
     
27,050
     
7,633
     
28.2
%
Refunds
   
(13,531
)
   
(11,411
)
   
2,120
     
18.6
%
Net entrance fees (5)
 
$
21,152
   
$
15,639
     
5,513
     
35.3
%
Management Services
                               
Number of communities (period end)
   
96
     
19
     
77
     
405.3
%
Total units (2)
                               
Period end
   
18,028
     
3,785
     
14,243
     
376.3
%
Weighted average
   
18,199
     
3,785
     
14,414
     
380.8
%
Occupancy rate (weighted average)
   
84.2
%
   
84.8
%
   
(0.6
%)
   
(0.7
%)
 
                               
ISC
                               
Brookdale units served
                               
Outpatient Therapy (total)
   
49,867
     
41,580
     
8,287
     
19.9
%
Outpatient Therapy (consolidated)
   
36,844
     
35,535
     
1,309
     
3.7
%
Home Health (total)
   
42,661
     
31,116
     
11,545
     
37.1
%
Home Health (consolidated)
   
34,503
     
28,129
     
6,374
     
22.7
%
Outpatient Therapy treatment codes
   
1,865,180
     
1,641,661
     
223,519
     
13.6
%
Home Health average census
   
3,501
     
3,231
     
270
     
8.4
%
 
                               
__________
(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) Senior Housing average monthly revenue per unit represents the average of the total monthly resident fee revenues, excluding amortization of entrance fees and ISC segment revenue, divided by average occupied units.
(4) Refundable entrance fee sales for the six months ended June 30, 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 $6.0 million and $2.7 million for the six months ended June 30, 2012 and 2011, respectively.
(5) Includes $2.0 million and $4.9 million of f irst 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 six months ended June 30, 2012 and 2011, respectively.

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 3.6% increase in consolidated units operated.  During the current period, revenues grew 2.0% at the 532 communities we operated during both periods with a 1.1% increase in the average monthly revenue
 
35

 
 
per unit (excluding amortization of entrance fees in both instances).  Occupancy increased 0.8% in these communities period over period.

Retirement Centers revenue increased $18.9 million, or 8.2%, 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.

Assisted Living revenue increased $24.9 million, or 5.2%, 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.

CCRCs - Rental revenue increased $11.6 million, or 6.5%, primarily due to the inclusion of revenue from communities acquired subsequent to the prior year period.  The increase was partially offset by decreases in the average monthly revenue per unit and occupancy at the communities we operated during both periods.  Revenue for the CCRCs - Rental segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

CCRCs - Entry Fee revenue increased $1.0 million, or 0.7%, primarily due to an increase in occupancy at the communities we operated during both periods.  The increase was partially offset by a decrease in the average monthly revenue per unit at the communities we operated during both periods.  Revenue for the CCRCs - Entry Fee segment was also impacted by a reduction in the reimbursement rate for Medicare skilled nursing patients.

ISC revenue increased $11.0 million, or 10.9%, primarily due to the roll-out of our ancillary services programs to additional units subsequent to the prior year period.  The increase was partially offset by a reduction in Medicare reimbursement rates.

Management Services

Management services revenue, including reimbursed costs incurred on behalf of managed communities, increased $136.3 million, or 356.3%, 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 $12.7 million, or 9.5%, primarily due to 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 utilities expense as a result of milder weather in the current year period.

Assisted Living operating expenses increased $15.9 million, or 5.2%, 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 utilities expense as a result of milder weather in the current year period.

CCRCs - Rental operating expenses increased $16.5 million, or 13.8%, primarily due to the inclusion of expenses from communities acquired subsequent to the prior year period, an increase in salaries and wages due to wage rate increases and an increase in hours worked period over period, and an increase in skilled therapy services expense due to a negative change in the allowable method for delivering therapy services to skilled nursing patients.  These increases were partially offset by decreases in utilities and bad debt expense.
 
 
36

 
 
CCRCs - Entry Fee operating expenses increased $3.8 million, or 3.6%, primarily due to an increase in salaries and wages due to wage rate increases and an increase in hours worked period over period, as well as an increase in skilled therapy expenses due to a negative change in the allowable method for delivering therapy services to skilled nursing patients .  These increases were partially offset by decreases in bad debt expense and real estate taxes.

ISC operating expenses increased $16.2 million, or 23.0%, primarily due to an increase in expenses incurred in connection with the continued expansion of our ancillary services programs and an increase in therapy direct labor expenses.

General and Administrative Expense

General and administrative expense increased $ 23.8 million, or 35.4%, 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 integration, transaction-related and EMR roll-out costs, and an increase in non-cash stock-based compensation expense.  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 and integration, transaction-related and EMR roll-out costs , was 4.4% and 4.7 % for the six months ended June 30, 2012 and 2011, respectively, calculated as follows (dollars in thousands):

 
Six Months Ended June 30,
 
 
2012
   
2011
 
               
Resident fee revenues
 
$
1,199,273
     
79.5
%
 
$
1,131,958
     
93.9
%
Resident fee revenues under management
   
309,802
     
20.5
%
   
73,274
     
6.1
%
Total
 
$
1,509,075
     
100.0
%
 
$
1,205,232
     
100.0
%
General and administrative expenses (excluding non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
66,288
     
4.4
%
 
$
57,235
     
4.7
%
Non-cash stock-based compensation expense
   
13,164
     
0.9
%
   
9,095
     
0.8
%
Integration, transaction-related and EMR roll-out costs
   
11,592
     
0.7
%
   
894
     
0.1
%
General and administrative expenses (including non-cash stock-based compensation expense and integration, transaction-related and EMR roll-out costs)
 
$
91,044
     
6.0
%
 
$
67,224
     
5.6
%

Facility Lease Expense

Facility lease expense increased $9.7 million, or 7.3%, 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 $15.5 million, or 10.9%, 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 six months ended June 30, 2012, w e recognized $8.3 million of impairment charges primarily as a result of writing the carrying value of assets down to their estimated fair value as determined by the estimated selling price for a community within the Assisted Living segment which we intend to dispose of, and as a result of fire damage at one of our communities within the CCRCs - Entry Fee segment.  During the six months ended June 30, 2011, we
 
37

 
 
recognized $14.8 million of impairment charges related to asset impairments for property, plant and equipment and leasehold intangibles for certain communities within the Retirement Centers and Assisted Living 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.

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 year period, partially offset by the write-off of deferred lease costs.

Costs Incurred on Behalf of Managed Communities

Costs incurred on behalf of managed communities increased $124.3 million primarily due to new management agreements entered into or acquired in conjunction with the Horizon Bay and HCP transactions.

Interest Income

Interest income increased by $0.1 million, or 10.4%, primarily due to increased interest earned on our restricted marketable securities .

Interest Expense

Interest expense increased $4.5 million, or 6.4%, primarily due to additional expense from the amortization of our debt discount primarily on our convertible notes issued during 2011 and increased interest expense related to our line of credit, which had a higher average outstanding balance drawn period over period.   These increases were partially offset by a decrease in interest expense recorded from the change in the fair value of interest rate swaps and caps due to fewer swap and cap instruments in place during the current period.

Income Taxes

Our effective tax rates for the six months ended June 30, 2012 and 2011 were (7.7%) and (3.5%), respectively.  The primary difference in the rates for these periods is due to the impact of the tax contingency reserve recorded during the current year period and the decrease in loss before income taxes for the six month period ended June 30, 2012 as compared to the 2011 period.

We do not anticipate being able to utilize any additional tax benefits generated in 2012 so a full valuation allowance was recorded against this benefit.  This conclusion was determined solely on the reversal of timing differences recorded as of December 31, 2011, not taking into account our future profitability, as required under generally accepted accounting principles.

An additional interest charge related to our tax contingency reserve was recorded for the six months ended June 30, 2012.  Additionally, uncertain tax positions recorded in prior periods were increased due to a change in estimate.  Our consolidated federal income tax return for 2010 is currently under audit by the Internal Revenue Service.  Tax returns for years 2008 and 2009 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):
 
38

 
 
 

 
Six Months Ended
June 30,
 
 
2012
   
2011
 
Cash provided by operating activities
 
$
128,547
   
$
157,352
 
Cash used in investing activities
   
(204,460
)
   
(66,737
)
Cash provided by (used in) financing activities
   
83,753
     
(132,316
)
Net increase (decrease) in cash and cash equivalents
   
7,840
     
(41,701
)
Cash and cash equivalents at beginning of period
   
30,836
     
81,827
 
Cash and cash equivalents at end of period
 
$
38,676
   
$
40,126
 

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 year acquisition, additional new borrowing on our line of credit, and a decrease in repayments of debt, as the prior year period included both the repayment of debt on a recently opened entrance fee CCRC when entrance fees originally escrowed were released in accordance with state regulations, as well as repayments of debt from proceeds received in connection with the convertible debt offering in June 2011.   Additionally, there was an increase in the cash portion of the loss on extinguishment of debt in the prior year period. The increase was partially offset by net cash received from the prior period convertible debt offering.

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:
 
39

 

· 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 June 30, 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 $92.7 million of letters of credit in the aggregate.  The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.

At June 30, 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 4.68% (calculated using an imputed interest rate of 7.5% for our $316.3 million convertible senior notes due 2018).  At June 30, 2012, we had $351.5 million of capital and financing lease obligations, $75.0 million was drawn on our revolving loan facility, and $78.3 million of letters of credit had been issued under our letter of credit facilities.  Approximately $410.6 million of our debt and capital lease obligations are due on or before June 30, 2013, subject in certain instances to extension at our option, as described below under "Contractual Commitments".  We also have substantial operating lease obligations and capital expenditure requirements.  For the year ending June 30, 2013, we will be required to make approximately $285.5 million of payments in connection with our existing operating leases.

We had $38.7 million of cash and cash equivalents at June 30, 2012, excluding cash and escrow deposits-restricted, marketable securities-restricted and lease security deposits of $167.3 million in the aggregate.  As of that date, we also had $201.7 million of availability on our revolving credit facility (of which $75.0 million had been drawn as of June 30, 2012).

At June 30, 2012, we had $697.5 million of negative working capital, which includes the classification of $247.4 million of refundable entrance fees and $6.6 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 $14.3 million and $21.2 million of cash for the three and six months ended June 30, 2012, respectively.

For the year ending December 31, 2012, we anticipate that we will make investments of approximately $150.0 million to $165.0 million for net capital expenditures (excluding expenditures related to our Program Max initiative discussed below), comprised of approximately $35.0 million to $45.0 million of net recurring capital expenditures and approximately $115.0 million to $120.0 million of expenditures relating to other major projects (including corporate initiatives).  These major projects include unusual or non-recurring capital projects, projects which create new or enhanced economics, such as major renovations or repositioning projects at our communities, integration related expenditures (including the cost of developing information systems), and expenditures supporting the expansion of our ancillary services programs.  For the six months ended June 30, 2012, we spent approximately $16.7 million for net recurring capital expenditures and approximately $49.1 million for expenditures relating to other major projects and corporate initiatives.

In addition, we have increased our efforts with respect to the expansion, redevelopment and repositioning of our communities through our Program Max initiative.  We anticipate making net investments of approximately $60.0
 
40

 
 
 
million to $70.0 million during 2012 in connection with recently initiated or currently planned projects.  For the six months ended June 30, 2012, we spent approximately $19.8 million in connection with our Program Max initiative.

During 2012, we anticipate that our capital expenditures will be funded from cash on hand, cash flows from operations, lessor reimbursement and amounts drawn on our credit facility.

As opportunities arise, we plan to continue to take advantage of the fragmented senior housing and care sectors by selectively purchasing existing operating companies, asset portfolios, home health agencies and communities. We may also seek to acquire the fee interest in communities that we currently lease or manage.

In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk.  We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis.  Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds.  In periods of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are required to post can change significantly.  We have taken a number of steps to reduce our collateral posting risk.   In particular, we terminated a number of interest rate swaps and purchased and assumed a number of interest rate caps, which do not require the posting of cash collateral.  Furthermore, we obtained a number of swaps that were secured by underlying mortgaged assets and, hence, did not require cash collateralization.  As of June 30, 2012, we have $418.2 million in aggregate notional amount of interest rate caps and a $27.6 million notional amount swap that do not require cash collateralization. As of June 30, 2012, $245.8 million of our variable rate debt, excluding our secured line of credit and capital lease obligations, is not subject to any cap or swap agreements.

We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically.  If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all (particularly given current market conditions). If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our business development activities, any of which could reduce the growth of our business.

We currently estimate that our existing cash flows from operations, together with existing working capital, amounts available under our credit facility and, to a lesser extent, proceeds from anticipated financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming that the overall economy does not substantially deteriorate further.

Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, the actual level of capital expenditures, our expansion, development and acquisition activity, general economic conditions and the cost of capital.  Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies.  The current volatility in the credit and financial markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing.  As a result, this may impact our ability to grow our business, maintain capital spending levels, expand certain communities, or execute other aspects of our business strategy.  In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding.  There can be no assurance that any such additional financing will be available or on terms that are acceptable to us (particularly in light of current adverse conditions in the credit market).

As of June 30, 2012, we are in compliance with the financial covenants of our outstanding debt and lease agreements.

41

 
Credit Facilities

2011 Credit Facility

On January 31, 2011, we 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 our 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 our 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.  We are 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 June 30, 2012, we had an available secured line of credit with a $230.0 million commitment and $201.7 million of availability (of which $75.0 million had been drawn as of such date).  We also had secured and unsecured letter of credit facilities of up to $92.7 million in the aggregate as of June 30, 2012.  $78.3 million of letters of credit had been issued under these facilities as of such date.

Convertible Debt Offering

In June 2011, we completed a registered offering of $316.3 million aggregate principal amount of 2.75% convertible senior notes (the "Notes"). We received net proceeds of approximately $308.2 million after the deduction of underwriting commissions and offering expenses.  We used a portion of the net proceeds to pay our cost of the convertible note hedge transactions described below, taking into account our proceeds from the warrant transactions described below, and used the balance of the net proceeds to repay existing outstanding debt.

The Notes are senior unsecured obligations and rank equally in right of payment to all of our other senior unsecured debt, if any. The Notes will be senior in right of payment to any of our debt which is subordinated by its terms to the Notes (if any). The Notes are also structurally subordinated to all debt and other liabilities and commitments (including trade payables) of our subsidiaries. The Notes are also effectively subordinated to our secured debt to the extent of the assets securing such debt.

The Notes bear interest at 2.75% per annum, payable semi-annually in cash.  The Notes are convertible at an initial conversion rate of 34.1006 shares of our common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $29.325 per share), subject to adjustment. Holders may convert their Notes at their option prior to the close of business on the second trading day immediately preceding the stated maturity date only under the following circumstances:  (i) during any fiscal quarter commencing after the fiscal quarter ending September 30, 2011, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period (the "measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of that measurement period was
 
42

 
 
less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such day; or (iii) upon the occurrence of specified corporate events.  On and after March 15, 2018, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.  Unconverted Notes mature at par in June 2018.

Upon conversion, we will satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock at our election.  It is our current intent and policy to settle the principal amount of the Notes (or, if less, the amount of the conversion obligation) in cash upon conversion.

In addition, following certain corporate transactions, we will increase the conversion rate for a holder who elects to convert in connection with such transaction by a number of additional shares of common stock as set forth in the supplemental indenture governing the Notes.

In connection with the offering of the Notes, in June 2011, we entered into convertible note hedge transactions (the "Convertible Note Hedges") with certain financial institutions (the "Hedge Counterparties"). The Convertible Note Hedges cover, subject to customary anti-dilution adjustments, 10,784,315 shares of common stock.  We also entered into warrant transactions with the Hedge Counterparties whereby the Company sold to the Hedge Counterparties warrants to acquire, subject to customary anti-dilution adjustments, up to 10,784,315 shares of common stock (the "Sold Warrant Transactions").  The warrants have a strike price of $40.25 per share, subject to customary anti-dilution adjustments.

The Convertible Note Hedges are expected to reduce the potential dilution with respect to common stock upon conversion of the Notes in the event that the price per share of common stock at the time of exercise is greater than the strike price of the Convertible Note Hedges, which corresponds to the initial conversion price of the Notes and is similarly subject to customary anti-dilution adjustments. If, however, the price per share of common stock exceeds the strike price of the Sold Warrant Transactions when they expire, there would be additional dilution from the issuance of common stock pursuant to the warrants.

The Convertible Note Hedges and Sold Warrant Transactions are separate transactions (in each case entered into by us and the Hedge Counterparties), are not part of the terms of the Notes and will not affect the holders' rights under the Notes. Holders of the Notes do not have any rights with respect to the Convertible Note Hedges or the Sold Warrant Transactions.

These hedging transactions had a net cost of approximately $31.9 million, which was paid from the proceeds of the Notes and recorded as a reduction of additional paid-in capital.

Contractual Commitments

Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the "Contractual Commitments" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

There have been no material changes outside the ordinary course of business in our contractual commitments during the six months ended June 30, 2012.  See Note 4 and Note 8 for acquisition and financing transactions that were completed during the period.

In accordance with applicable accounting pronouncements, as of June 30, 2012, the current portion of long-term debt within our condensed consolidated financial statements reflects approximately $359.9 million of mortgage notes payable due within the next 12 months.  Although these debt obligations are scheduled to mature on or prior to June 30, 2013, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $205.6 million of certain mortgages payable included in such debt until 2018 or later, as the instruments associated with such mortgages payable provide that we can extend the respective maturity dates for terms of five to seven years from the existing maturity dates.  We
 
43

 
 
presently anticipate that we will exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations.

Off-Balance Sheet Arrangements

The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures that are not considered variable interest entities as we do not possess a controlling financial interest.  We do not believe these off-balance sheet arrangements have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-GAAP financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.

Adjusted EBITDA

Definition of Adjusted EBITDA

We define Adjusted EBITDA as follows:

Net income (loss) before:

· provision (benefit) for income taxes;

· non-operating (income) expense items;
 
· (gain) loss on sale or acquisition of communities (including gain (loss) on facility lease termination);
 
· depreciation and amortization (including non-cash impairment charges);

· straight-line lease expense (income);

· amortization of deferred gain;

· amortization of deferred entrance fees;

· non-cash stock-based compensation expense; and
 
·
change in future service obligation; 
 
and including:

· entrance fee receipts and refunds (excluding (i) first generation entrance fee receipts from the sale of units at a recently opened entrance fee CCRC prior to stabilization and (ii) first generation entrance fee refunds not replaced by second generation entrance fee receipts at the recently opened community prior to stabilization).

In the first quarter of 2012, we revised the definition of Adjusted EBITDA to clarify the point at which first generation entrance fee receipts and refunds at recently opened entrance fee CCRCs will be included.  We determine the stabilization date of recently opened entrance fee communities to be the first day of the first full fiscal quarter occurring two years subsequent to the community's opening date for occupancy of all levels of care on the campus.
 
44

 

As a result of this change, beginning in the first quarter of 2012, we include all net entrance fee activity from a recently opened entrance fee CCRC in our non-GAAP financial measures.  For the three and six months ended June 30, 2012, first generation net entrance fee receipts which would have been excluded under the previous definition of Adjusted EBITDA were $1.5 million and $2.0 million, respectively.

Management's Use of Adjusted EBITDA

We use Adjusted EBITDA to assess our overall financial and operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a monthly basis.  Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.

Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

· the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our condensed consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Adjusted EBITDA for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):
 
45

 
 

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2012 (1)
   
2011 (1)
   
2012 (1)
   
2011 (1)
 
Net loss
 
$
(18,810
)
 
$
(33,959
)
 
$
(29,148
)
 
$
(46,264
)
Provision for income taxes
   
1,014
     
12,728
     
2,075
     
1,574
 
Equity in loss (earnings) of unconsolidated ventures
   
61
     
(146
)
   
(38
)
   
(412
)
Loss on extinguishment of debt
   
-
     
15,254
     
221
     
18,148
 
Other non-operating (income) loss
   
(3
)
   
441
     
108
     
(376
)
Interest expense:
                               
Debt
   
24,736
     
22,607
     
49,076
     
46,160
 
Capitalized lease obligation
   
7,695
     
8,066
     
15,405
     
16,074
 
Amortization of deferred financing costs and debt discount
   
4,586
     
2,010
     
9,059
     
4,714
 
Change in fair value of derivatives and
   amortization
   
278
     
2,635
     
511
     
2,643
 
Interest income
   
(692
)
   
(773
)
   
(1,544
)
   
(1,398
)
Income from operations
   
18,865
     
28,863
     
45,725
     
40,863
 
Gain on facility lease termination
   
-
     
-
     
(2,780
)
   
-
 
Loss on acquisition
   
-
     
-
     
636
     
-
 
Depreciation and amortization
   
63,561
     
70,577
     
126,905
     
142,359
 
Asset impairment
   
7,246
     
-
     
8,329
     
14,846
 
Straight-line lease expense
   
1,564
     
1,456
     
3,206
     
3,182
 
Amortization of deferred gain
   
(1,093
)
   
(1,093
)
   
(2,186
)
   
(2,186
)
Amortization of entrance fees
   
(6,647
)
   
(6,604
)
   
(13,050
)
   
(12,366
)
Non-cash stock-based compensation expense
   
6,729
     
4,555
     
13,164
     
9,095
 
Entrance fee receipts (2)
   
19,694
     
14,609
     
34,683
     
27,050
 
First generation entrance fees received (3)
   
-
     
(2,155
)
   
-
     
(4,884
)
Entrance fee disbursements
   
(5,429
)
   
(6,481
)
   
(13,531
)
   
(11,411
)
Adjusted EBITDA
 
$
104,490
   
$
103,727
   
$
201,101
   
$
206,548
 

 
(1) The calculation of Adjusted EBITDA includes integration, transaction-related and EMR roll-out costs of $7.7 million and $11.6 million for the three and six months ended June 30, 2012, respectively.  The calculation of Adjusted EBITDA includes integration and transaction-related costs of $0.9 million for both the three and six months ended June 30, 2011.
(2) Includes the receipt of refundable and non-refundable entrance fees.
(3) First generation entrance fees received represents initial entrance fees received from the sale of units at a recently opened entrance fee CCRC prior to stabilization.

Cash From Facility Operations

Definition of Cash From Facility Operations

We define Cash From Facility Operations (CFFO) as follows:

Net cash provided by (used in) operating activities adjusted for:

· changes in operating assets and liabilities;
· deferred interest and fees added to principal;
· refundable entrance fees received;
·
first generation entrance fee receipts at a recently opened entrance fee CCRC prior to stabilization ;
 
46

 
 
· entrance fee refunds disbursed adjusted for first generation entrance fee refunds not replaced by second generation entrance fee receipts at the recently opened community prior to stabilization ;
· lease financing debt amortization with fair market value or no purchase options;
· gain (loss) on facility lease termination;
· recurring capital expenditures, net;
· distributions from unconsolidated ventures from cumulative share of net earnings;
· CFFO from unconsolidated ventures; and
· other.

Recurring capital expenditures include routine expenditures capitalized in accordance with GAAP that are funded from current operations. Amounts excluded from recurring capital expenditures consist primarily of major projects, renovations, community repositionings, expansions, systems projects or other non-recurring or unusual capital items (including integration capital expenditures) or community purchases that are funded using lease or financing proceeds, available cash and/or proceeds from the sale of communities that are held for sale.

In the first quarter of 2012, we revised the definition of CFFO to clarify the point at which first generation entrance fee receipts and refunds at recently opened entrance fee CCRCs will be included.  We determine the stabilization date of recently opened entrance fee communities to be the first day of the first full fiscal quarter occurring two years subsequent to the community's opening date for occupancy of all levels of care on the campus.

As a result of this change, beginning in the first quarter of 2012, we include all net entrance fee activity from a recently opened entrance fee CCRC in our non-GAAP financial measures.  For the three and six months ended June 30, 2012, first generation net entrance fee receipts which would have been excluded under the previous definition of CFFO were $1.5 million and $2.0 million, respectively.

Management's Use of Cash From Facility Operations

We use CFFO to assess our overall liquidity.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  CFFO is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding indebtedness (including our credit facilities and long-term leases), (ii) to review our ability to pay dividends to stockholders, (iii) to review our ability to make regular recurring capital expenditures to maintain and improve our communities on a period-to-period basis, (iv) for planning purposes, including preparation of our annual budget, (v) in making compensation determinations for certain of our associates (including our named executive officers) and (vi) in setting various covenants in our credit agreements.  These agreements generally require us to escrow or spend a minimum of between $250 and $450 per unit per year.  Historically, we have spent in excess of these per unit amounts; however, there is no assurance that we will have funds available to escrow or spend these per unit amounts in the future.  If we do not escrow or spend the required minimum annual amounts, we would be in default of the applicable debt or lease agreement which could trigger cross default provisions in our outstanding indebtedness and lease arrangements.

Limitations of Cash From Facility Operations

CFFO has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations.  CFFO does not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary expenditures not
 
47

 
 
reflected in the measure.  Material limitations in making the adjustment to our cash flow from operations to calculate CFFO, and using this non-GAAP financial measure as compared to GAAP operating cash flows, include:

· the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

We believe CFFO is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our ability to make regular recurring capital expenditures to maintain and improve our communities.

CFFO is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on CFFO as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of CFFO to GAAP net cash provided by (used in) operating activities, along with our condensed consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to varying calculations, the CFFO measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net cash provided by operating activities to CFFO for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2012 (1)
   
2011 (1)
   
2012 (1)
   
2011 (1)
 
Net cash provided by operating activities
 
$
82,854
   
$
64,686
   
$
128,547
   
$
157,352
 
Changes in operating assets and liabilities
   
(14,172
)
   
11,139
     
4,805
     
(9,248
)
Refundable entrance fees received (2)(3)
   
9,317
     
5,310
     
17,306
     
11,390
 
First generation entrance fees received (4)
   
-
     
(2,155
)
   
-
     
(4,884
)
Entrance fee refunds disbursed
   
(5,429
)
   
(6,481
)
   
(13,531
)
   
(11,411
)
Recurring capital expenditures, net
   
(8,599
)
   
(9,268
)
   
(16,663
)
   
(16,325
)
Lease financing debt amortization with fair market value or no purchase options
   
(2,993
)
   
(2,587
)
   
(5,922
)
   
(5,120
)
Distributions from unconsolidated ventures from cumulative share of net earnings
   
(809
)
   
-
     
(1,015
)
   
-
 
CFFO from unconsolidated ventures
   
1,310
     
661
     
2,538
     
1,302
 
Cash From Facility Operations
 
$
61,479
   
$
61,305
   
$
116,065
   
$
123,056
 

 
(1) The calculation of Cash From Facility Operations includes integration, transaction-related and EMR roll-out costs of $7.7 million and $11.6 million for the three and six months ended June 30, 2012, respectively.  The calculation of Cash From Facility Operations includes integration and transaction-related costs of $0.9 million for both the three and six months ended June 30, 2011.
(2) Entrance fee receipts include promissory notes issued to the Company by the resident in lieu of a portion of the entrance fees due.  Notes issued (net of collections) for the three months ended June 30, 2012 and 2011 were ($1.0) million and $0.1 million, respectively, and for the six months ended June 30, 2012 and 2011 were ($1.7) million and $0.5 million, respectively.
(3)
Total entrance fee receipts for the three months ended June 30, 2012 and 2011 were $19.7 million and $14.6 million, respectively, including $10.4 million and $9.3 million, respectively, of non-refundable entrance fee
 
48

 
 
 
receipts included in net cash provided by operating activities.  Total entrance fee receipts for the six months ended June 30, 2012 and 2011 were $34.7 million and $27.1 million, respectively, including $17.4 million and $15.7 million, respectively, of non-refundable entrance fee receipts included in net cash provided by operating activities.
(4) First generation entrance fees received represents initial entrance fees received from the sale of units at a recently opened entrance fee CCRC prior to stabilization.

Facility Operating Income

Definition of Facility Operating Income

We define Facility Operating Income as follows:

Net income (loss) before:

· provision (benefit) for income taxes;

· non-operating (income) expense items;

·
(gain) loss on sale or acquisition of communities (including gain (loss) on facility lease termination);

· depreciation and amortization (including non-cash impairment charges);

· facility lease expense;

· general and administrative expense, including non-cash stock-based compensation expense;

·
change in future service obligation;

· amortization of deferred entrance fee revenue; and

· management fees.

Management's Use of Facility Operating Income

We use Facility Operating Income to assess our facility operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility operations.  This measure provides an assessment of revenue generation and expense management and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal facility financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Facility Operating Income is one of the metrics used by our senior management and board of directors to review the financial performance of the business on a monthly basis.  Facility Operating Income is also used by research analysts and investors to evaluate the performance of and value companies in our industry by investors, lenders and lessors.  In addition, Facility Operating Income is a common measure used in the industry to value the acquisition or sales price of communities and is used as a measure of the returns expected to be generated by a community.
 
49


 
A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages.  The debt or lease coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as determined on an accrual basis in accordance with GAAP).  For purposes of the coverage calculation, the lender or lessor will further require a pro forma adjustment to facility operating income to include a management fee (generally 4% to 5% of operating revenue) and an annual capital reserve (generally $250 to $450 per unit).  An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position, particularly on a facility-by-facility basis.

Limitations of Facility Operating Income

Facility Operating Income has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

· interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

· depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-facility basis.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Facility Operating Income as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Facility Operating Income to GAAP net income (loss), along with our condensed consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Facility Operating Income is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Facility Operating Income measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Facility Operating Income for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):
 
50

 
 

 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
 
2012
   
2011
   
2012
   
2011
 
Net loss
 
$
(18,810
)
 
$
(33,959
)
 
$
(29,148
)
 
$
(46,264
)
Provision for income taxes
   
1,014
     
12,728
     
2,075
     
1,574
 
Equity in loss (earnings) of unconsolidated ventures
   
61
     
(146
)
   
(38
)
   
(412
)
Loss on extinguishment of debt
   
-
     
15,254
     
221
     
18,148
 
Other non-operating (income) loss
   
(3
)
   
441
     
108
     
(376
)
Interest expense:
                               
Debt
   
24,736
     
22,607
     
49,076
     
46,160
 
Capitalized lease obligation
   
7,695
     
8,066
     
15,405
     
16,074
 
Amortization of deferred financing costs and debt discount
   
4,586
     
2,010
     
9,059
     
4,714
 
Change in fair value of derivatives and amortization
   
278
     
2,635
     
511
     
2,643
 
Interest income
   
(692
)
   
(773
)
   
(1,544
)
   
(1,398
)
Income from operations
   
18,865
     
28,863
     
45,725
     
40,863
 
Gain on facility lease termination
   
-
     
-
     
(2,780
)
   
-
 
Depreciation and amortization
   
63,561
     
70,577
     
126,905
     
142,359
 
Asset impairment
   
7,246
     
-
     
8,329
     
14,846
 
Loss on acquisition
   
-
     
-
     
636
     
-
 
Facility lease expense
   
70,628
     
66,065
     
142,073
     
132,380
 
General and administrative (including non-cash
   stock-based compensation expense)
   
46,071
     
33,681
     
91,044
     
67,224
 
Amortization of entrance fees
   
(6,647
)
   
(6,604
)
   
(13,050
)
   
(12,366
)
Management fees
   
(7,499
)
   
(1,505
)
   
(14,943
)
   
(2,910
)
Facility Operating Income
 
$
192,225
   
$
191,077
   
$
383,939
   
$
382,396
 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks from changes in interest rates charged on our credit facilities, other floating-rate indebtedness and lease payments subject to floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates and prices. As of June 30, 2012, we had approximately $1.5 billion of long-term fixed rate debt, $0.7 billion of long-term variable rate debt, excluding our line of credit, and $351.5 million of capital and financing lease obligations. As of June 30, 2012, our total fixed-rate debt and variable-rate debt outstanding had a weighted-average interest rate of 4.68% (calculated using an imputed interest rate of 7.50% for our $316.3 million convertible senior notes due 2018).

We enter into certain interest rate swap agreements with major financial institutions to manage our risk on variable rate debt.  Additionally, we have entered into certain cap agreements to effectively manage our risk above certain interest rates.  As of June 30, 2012, $1.5 billion, or 69.7%, of our debt, excluding our line of credit and capital and financing lease obligations, either has fixed rates or variable rates that are subject to swap agreements.  As of June 30, 2012, $409.0 million, or 18.9%, of our debt, excluding our line of credit and capital and financing lease obligations, is subject to cap agreements.   The remaining $245.8 million, or 11.4%, of our debt is variable rate debt, not subject to any cap or swap agreements.   A change in interest rates would have impacted our interest rate expense related to all outstanding variable rate debt, excluding our line of credit and capital and financing lease obligations, as follows: a one, five and ten percent change in interest rates would have an impact of $6.3 million, $32.6 million and $46.5 million, respectively.

As noted above, we have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds a specified threshold.
 
51

 

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The information contained in Note 9 to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by this reference.

Item 1A.  Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(a)
Not applicable.

(b)
Not applicable.

(c)
The following table contains information regarding purchases of our common stock made during the quarter ended June 30, 2012 by or on behalf of the Company or any ''affiliated purchaser,'' as defined by Rule 10b-18(a)(3) of the Exchange Act:
Period
Total
Number of
Shares
Purchased (1)
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (2)
04/01/12 - 04/30/12
 
 
-
 
 
$
-
 
 
 
-
 
 
 
-
 
05/01/12 - 05/31/12
 
 
4,686
 
 
 
16.02
 
 
 
-
 
 
 
-
 
06/01/12 - 06/30/12
 
 
-
 
 
 
-
 
 
 
        -
 
 
 
        -
 
Total
 
 
4,686
 
 
$
16.02
 
 
 
-
 
 
 
-
 
 

(1)
Consists entirely of shares withheld to satisfy tax liabilities due upon the vesting of restricted stock.
(2)
See Note 13 to the condensed consolidated financial statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for information regarding our share repurchase program.  No shares were purchased pursuant to this authorization during the three months ended June 30, 2012.  As of June 30, 2012, approximately $82.4 million remains available under this share repurchase authorization.
 
52

 

Item 6.  Exhibits

See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.

53

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
BROOKDALE SENIOR LIVING INC.
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
/s/ Mark W. Ohlendorf
 
 
 
Name:
 
Mark W. Ohlendorf
 
 
 
Title:
 
Co-President and Chief Financial Officer
 
 
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
Date:
 
August 9, 2012
 
 
 
 
 
 
 
 


54

EXHIBIT INDEX

 
 
 
Exhibit No.
 
Description
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed on February 26, 2010).
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 3, 2012).
4.1
 
Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Amendment No. 3) (No. 333-127372) filed on November 7, 2005).
4.2
 
Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K filed on March 31, 2006).
4.3
 
Amendment No. 1 to Stockholders Agreement, dated as of July 26, 2006, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT Holdings LLC (incorporated by reference to Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2006).
4.4
 
Amendment Number Two to Stockholders Agreement, dated as of November 4, 2009 (incorporated by reference to Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q filed on November 4, 2009).
4.5
 
Indenture, dated as of June 14, 2011, between the Company and American Stock Transfer & Trust Company, LLC, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 14, 2011).
4.6
 
Supplemental Indenture, dated as of June 14, 2011, between the Company and American Stock Transfer & Trust Company, LLC, as Trustee (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed on June 14, 2011).
4.7
 
Form of 2.75% Convertible Senior Note due 2018 (included as part of Exhibit 4.6).
10.1
 
Form of Outside Director Restricted Stock Unit Agreement.
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


55
 
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE BROOKDALE SENIOR LIVING INC.
OMNIBUS STOCK INCENTIVE PLAN

This Restricted Stock Unit Agreement (this "Agreement"), dated as of [_________ __, 20__] (the "Date of Grant"), is made by and between Brookdale Senior Living Inc., a Delaware corporation (the "Company"), and [_________________] (the "Participant" or "you") pursuant to the terms of the Brookdale Senior Living Inc. Omnibus Stock Incentive Plan (as amended and/or restated from time to time, the "Plan").

1.        Terms and Conditions .  The Plan is hereby incorporated by reference and made a part hereof.  This Agreement and the restricted stock units granted hereby are subject to all the terms and conditions of the Plan.  All capitalized terms not defined herein shall have the meaning ascribed to them in the Plan.  If there is any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control unless this Agreement explicitly states that an exception to the Plan is being made.

2.        Grant of Restricted Stock Units .  The Company hereby grants to the Participant [____________] restricted stock units, subject to all of the terms and conditions of this Agreement and the Plan.

3.        Vesting and Payout .  The restricted stock units shall be fully vested upon the Date of Grant.  The restricted stock units will be payable within thirty (30) days (with the date of payment elected by the Company in its sole discretion) following your termination of service as a director due to your (i) retirement or resignation from the Board, (ii) death or (iii) total and permanent disability, provided that such termination constitutes a "Separation from Service" under Section 1.409A-1(h) of the Treasury Regulations promulgated under Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), or, if later, upon the first date that payment may be made without violating the requirements of Section 409A of the Code, including, but not limited to, the circumstances described in Section 19 of this Agreement.

4.        Change in Control .  Notwithstanding any other provision of this Agreement, in the event a Change in Control of the Company occurs prior to the payment date provided for in Section 3, the restricted stock units will be payable within ten (10) days (with the date of payment determined by the Company in its sole discretion) of the closing date of the Change in Control.  Such payment shall be made in cash or stock of the continuing entity, as determined by the Company in its sole discretion.  For purposes of payments made pursuant to this Section 4, a "Change in Control" shall mean a "a change in the ownership of the Company," a "change in the effective control of the Company" or "a change in the ownership of a substantial portion of the assets of the Company" as such terms are defined in Section 1.409A-3(i)(5) of the Treasury Regulations promulgated under Section 409A of the Code, rather than the definition set forth in the Plan.


5.        Nontransferability .  The restricted stock units awarded pursuant to this Agreement cannot be sold, assigned, pledged, hypothecated, transferred, or otherwise encumbered prior to payment.

6.        Stockholder Rights; Dividend Units .  With respect to the awarded restricted stock units, you are not a stockholder and do not have any voting rights.  You will, however, receive notional dividend units on the awarded units equal to the amount of dividends paid on the Company's common stock.  Notional dividends paid on your restricted stock units will be accumulated in a bookkeeping account without interest until the payment of the underlying restricted stock units is made under paragraph 3 or 4.

7.        Settlement of Restricted Stock Units .  Except as provided in paragraph 4, vested restricted stock units will be paid to you in whole shares of the Company's common stock.  Partial shares, if any, and dividend units will be paid in cash.
 
8.        Adjustments .  Pursuant to Section 5 of the Plan and in accordance with Section 409A of the Code, in the event of a change in capitalization as described therein, the Administrator shall make such equitable and proportionate changes or adjustments, as it deems necessary or appropriate, in its discretion, to the number and kind of securities or other property (including cash) issued or issuable in respect of outstanding restricted stock units.

9.        Payment of Taxes .  You acknowledge and agree that you are responsible for the tax consequences associated with the award and vesting of units.  It is the intention of the Company that this award not be subject to the additional tax set forth in Section 409A of the Code, and the regulations and guidance promulgated thereunder, and the award shall be interpreted so as to comply with the requirements of such Section.  Notwithstanding anything to the contrary herein, to the extent that any provision of this award would become subject to the additional tax of Section 409A of the Code, such provision shall be deemed null and void.  By accepting this award, you agree that in the event that amendment of this award is required in order to comply with Section 409A of the Code, you shall cooperate in good faith with the Company with respect to amending the award, provided that the Company shall not be required to assume any increased economic burden in connection with any such amendment.

10.        Failure to Enforce Not a Waiver .  The failure of the Company to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

11.        Governing Law .  This Agreement shall be governed by and construed according to the laws of the State of Delaware without regard to its principles of conflict of laws.

12.        Amendments; Construction .  The Administrator may amend the terms of this Agreement prospectively or retroactively at any time and in accordance with Section

 
409A of the Code, but no such amendment shall impair the rights of the Participant hereunder without his or her consent.  Headings to Sections of this Agreement are intended for convenience of reference only, are not part of this Agreement and shall have no effect on the interpretation hereof.

13.        Survival of Terms .  This Agreement shall apply to and bind the Participant and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors.

14.        Agreement Not a Contract for Services .  Neither the Plan, the granting of the restricted stock units, this Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Participant has a right to continue to provide services as an officer, director, employee, consultant or advisor of the Company or any Subsidiary or Affiliate for any period of time or at any specific rate of compensation.

15.        Authority of the Administrator .  The Administrator shall have full authority to interpret and construe the terms of the Plan and this Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

16.        Representations .  The Participant has reviewed with the Participant's own tax advisors the Federal, state, local and foreign tax consequences of the transactions contemplated by this Agreement, including the application of Section 409A of the Code.  The Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents.  The Participant understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by this Agreement, including tax liability imposed under Section 409A of the Code.

17.        Severability .  Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable, or enforceable only if modified, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties hereto with any such modification (if any) to become a part hereof and treated as though contained in this original Agreement.  Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity, subject or otherwise so as to be unenforceable, in lieu of severing such unenforceable provision, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear, and such determination by such judicial body shall not affect the enforceability of such provision or provisions in any other jurisdiction.

18.        Acceptance .  The Participant hereby acknowledges receipt of a copy of the Plan and this Agreement.  The Participant has read and understands the terms and provisions of the Plan and this Agreement, and accepts the restricted stock units subject

 
to all the terms and conditions of the Plan and this Agreement.  The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under this Agreement.

19.        Section 409A .  Notwithstanding anything to the contrary in this Agreement or an accompanying election form executed by the Participant, if (i) on the date of the Participant's Separation from Service with the Company the Participant is a "specified employee" (as such term is defined under Section 1.409A-1(i) of the Treasury Regulations promulgated under Section 409A of the Code) of the Company and (ii) any payments to be provided to the Participant pursuant to this Agreement are or may become subject to the additional tax under Section 409A(a)(1)(B) of the Code, or any other taxes or penalties imposed under Section 409A of the Code if provided at the time otherwise required under this Agreement, then such payments shall be delayed until the date that is six months after the date of the Participant's Separation from Service from the Company, or if earlier, his or her death.  Any payments delayed pursuant to this paragraph shall be made in a lump sum on the first day of the seventh month following the Participant's Separation from Service, or if earlier, the Participant's death.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.


 
BROOKDALE SENIOR LIVING INC.
 
 
 
 
 
 
 
 
By:
 
 
 
Name:
W.E. Sheriff
 
 
Title:
Chief Executive Officer
 
 
 
 
 
 
 
 
[Name of Participant]
 
 
 
 
 
 
 
 
 
 
 
Participant
 


EXHIBIT 31.1



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, W.E. Sheriff, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Brookdale Senior Living Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 9, 2012
 
/s/ W.E. Sheriff
 
 
W.E. Sheriff
 
 
Chief Executive Officer

EXHIBIT 31.2



CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark W. Ohlendorf, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Brookdale Senior Living Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Desi g ned such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 9, 2012
 
/s/ Mark W. Ohlendorf
 
 
Mark W. Ohlendorf
 
 
Chief Financial Officer

EXHIBIT 32



CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report on Form 10-Q of Brookdale Senior Living Inc. (the "Company") for the period ended June 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), W.E. Sheriff, as Chief Executive Officer of the Company, and Mark W. Ohlendorf, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ W.E. Sheriff
 
Name:
W.E. Sheriff
 
Title:
Chief Executive Officer
 
Date:
August 9, 2012
 




/s/ Mark W. Ohlendorf
 
Name:
Mark W. Ohlendorf
 
Title:
Chief Financial Officer
 
Date:
August 9, 2012