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EX-10.65.41 - EX-10.65.41 - EMERITUS CORP\WA\ex106541.htm
EX-10.65.21 - EX-10.65.21 - EMERITUS CORP\WA\ex106521.htm
EX-10.65.31 - EX-10.65.31 - EMERITUS CORP\WA\ex106531.htm
EX-10.70.07 - EX-10.70.07 - EMERITUS CORP\WA\ex107007.htm
EX-10.65.22 - EX-10.65.22 - EMERITUS CORP\WA\ex106522.htm
EX-10.65.51 - EX-10.65.51 - EMERITUS CORP\WA\ex106551.htm
EX-31.1.1 - EX-31.1.1 BATY 302 CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3111baty302cert.htm
EX-32.1.2 - EX-32.1.2 COBB 906 CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3212cobb906cert.htm
EX-32.1.1 - EX-32.1.1 BATY 906 CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3211baty906cert.htm
EX-31.1.2 - EX-31.1.2 COBB 302 CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3112cobb302cert.htm
EX-3.2 - EX-3.2 RESTATED BYLAWS OF EMERITUS SEPT 14 2009 - EMERITUS CORP\WA\ex32restatedbylaws.htm
EX-3.1 - EX-3.1 RESTATED ARTICLES OF INCORPORATION SEPT 14 2009 - EMERITUS CORP\WA\ex31articlesofincorp.htm
EX-31.1.3 - EX-31.1.3 BRANDSTROM 302 CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3113brandstrom302cert.htm
EX-32.1.3 - EX-32.1.3 BRANDSTROM CERT 3RD QTR 2009 - EMERITUS CORP\WA\ex3213brandstrom906cert.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________

FORM 10-Q
(Mark One)
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
  THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended September 30, 2009

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

Commission file number   1-14012
logo
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)

WASHINGTON
91-1605464
(State or other jurisdiction
(I.R.S Employer
of incorporation or organization)
Identification No.)

3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)

(206) 298-2909
(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 þ No o

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 o No o

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 definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o           Accelerated filer þ           Non-accelerated filer o Smaller reporting company o

 
 

 


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

As of October 31, 2009, there were 39,254,363 shares of the Registrant’s Common Stock, par value $0.0001, outstanding.



 
 

 
 
 

EMERITUS CORPORATION
       
 
   
Page No.
       
       
   
       
   
       
   
       
   
       
   
       
 
 
       
       
       
Note:
Items 2, 3, 4, and 5 of Part II have been omitted because they are not applicable.
       
     
     
       
 
 
 
     
 

 
 

 



[The rest of this page is intentionally left blank]



 
1

 
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share data)


ASSETS
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Current Assets:
           
Cash and cash equivalents
  $ 52,090     $ 27,254  
Short-term investments
    2,054       1,802  
Trade accounts receivable, net of allowance of $951 and $549
    9,970       11,596  
Other receivables
    5,669       5,556  
Tax, insurance, and maintenance escrows
    24,466       21,762  
Prepaid workers' compensation
    18,860       19,288  
Other prepaid expenses and current assets
    22,980       23,720  
Property held for sale
    37,354       13,712  
          Total current assets
    173,443       124,690  
Long-term investments
    4,946       4,192  
Property and equipment, net of accumulated depreciation of $200,231 and $144,441
    1,676,947       1,725,558  
Restricted deposits
    13,071       12,337  
Lease acquisition costs, net of accumulated amortization of $1,781 and $1,877
    3,742       3,867  
Goodwill
    74,197       73,704  
Other intangible assets, net of accumulated amortization of $25,814 and $76,368
    118,491       131,994  
Other assets, net
    23,364       18,851  
          Total assets
  $ 2,088,201     $ 2,095,193  
                 
LIABILITIES, SHAREHOLDERS' EQUITY AND NON-CONTROLLING INTEREST
 
                 
Current Liabilities:
               
Current portion of long-term debt
  $ 49,941     $ 18,267  
Current portion of capital lease and financing obligations
    10,838       9,172  
Trade accounts payable
    5,650       7,474  
Accrued employee compensation and benefits
    39,266       32,778  
Accrued interest
    7,606       7,012  
Accrued real estate taxes
    13,129       9,791  
Accrued professional and general liability
    9,599       10,842  
Accrued income taxes
    596       3,715  
Other accrued expenses
    12,822       12,284  
Deferred revenue
    12,938       12,463  
Unearned rental income
    16,590       16,101  
          Total current liabilities
    178,975       139,899  
Long-term debt obligations, less current portion
    1,335,086       1,355,149  
Capital lease and financing obligations, less current portion
    168,194       180,684  
Deferred gain on sale of communities
    7,420       2,667  
Deferred rent
    28,818       14,022  
Other long-term liabilities
    37,186       36,744  
          Total liabilities
    1,755,679       1,729,165  
Commitments and contingencies
               
Shareholders' Equity and Non-controlling Interest:
               
Preferred stock, $.0001 par value.  Authorized 20,000,000 shares, none issued
    -       -  
Common stock, $.0001 par value.  Authorized 100,000,000 shares, issued and outstanding
               
39,244,363 and 39,091,648 shares at September 30, 2009, and December 31, 2008, respectively
    4       4  
Additional paid-in capital
    723,782       719,903  
Accumulated other comprehensive income
    1,235       -  
Accumulated deficit
    (398,451 )     (360,506 )
Total Emeritus Corporation shareholders' equity
    326,570       359,401  
Noncontrolling interest-related party
    5,952       6,627  
Total shareholders' equity and non-controlling interest
    332,522       366,028  
Total liabilities, shareholders' equity and non-controlling interest
  $ 2,088,201     $ 2,095,193  
                 

See accompanying Notes to Condensed Consolidated Financial Statements

 
2

 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Community revenue
  $ 221,262     $ 189,638     $ 655,411     $ 555,925  
Management fees
    1,439       1,266       4,359       3,648  
Total operating revenues
    222,701       190,904       659,770       559,573  
                                 
Expenses:
                               
Community operations (exclusive of depreciation and amortization
                               
    and facility lease expense shown separately below)
    146,700       122,119       426,832       359,504  
General and administrative
    16,429       14,725       47,666       44,066  
Impairment loss on long-lived assets
    1,857       -       1,857       -  
Depreciation and amortization
    18,643       28,925       58,031       88,742  
Facility lease expense
    29,360       22,339       88,029       66,968  
Total operating expenses
    212,989       188,108       622,415       559,280  
Operating income from continuing operations
    9,712       2,796       37,355       293  
                                 
Other income (expense):
                               
Interest income
    575       480       902       1,913  
Interest expense
    (26,170 )     (24,874 )     (77,649 )     (68,030 )
Change in fair value of interest rate swaps
    (221 )     (119 )     621       16  
Equity earnings (losses) for unconsolidated joint ventures
    (76 )     (33 )     1,108       (890 )
Other, net
    441       (440 )     792       (481 )
Net other expense
    (25,451 )     (24,986 )     (74,226 )     (67,472 )
                                 
Loss from continuing operations before income taxes
    (15,739 )     (22,190 )     (36,871 )     (67,179 )
Provision for income taxes
    (360 )     (270 )     (900 )     (750 )
Loss from continuing operations
    (16,099 )     (22,460 )     (37,771 )     (67,929 )
Loss from discontinued operations
    (122 )     (616 )     (849 )     (6,349 )
Net loss
    (16,221 )     (23,076 )     (38,620 )     (74,278 )
Net loss attributable to the noncontrolling interest
    232       -       675       -  
Net loss attributable to Emeritus Corporation common shareholders
  $ (15,989 )   $ (23,076 )   $ (37,945 )   $ (74,278 )
                                 
Basic and diluted loss per common share attributable to
                               
   Emeritus Corporation common shareholders:
                               
   Continuing operations
  $ (0.41 )   $ (0.57 )   $ (0.95 )   $ (1.74 )
   Discontinued operations
    (0.00 )     (0.02 )     (0.02 )     (0.16 )
    $ (0.41 )   $ (0.59 )   $ (0.97 )   $ (1.90 )
                                 
Weighted average common shares outstanding; basic and diluted
    39,208       39,082       39,158       39,059  


See accompanying Notes to Condensed Consolidated Financial Statements

 
3

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss
  $ (38,620 )   $ (74,278 )
Adjustments to reconcile net loss to net cash provided by
               
operating activities
               
Depreciation and amortization - continuing operations
    58,031       88,742  
Depreciation and amortization - discontinued operations
    284       1,239  
Amortization of above/below market rents
    7,430       7,572  
Amortization of deferred gains
    (460 )     (1,134 )
Impairment of long-lived assets and investments
    2,989       4,930  
Amortization of loan fees
    2,363       1,849  
Allowance for doubtful receivables
    2,317       1,096  
Equity investment (earnings) losses and distributions
    (1,108 )     890  
Stock based compensation
    3,250       3,786  
Change in fair value of interest rate swaps
    (621 )     (16 )
Other
    212       221  
Changes in operating assets and liabilities
               
Deferred rent
    14,796       7,012  
Deferred revenue
    475       2,688  
Change in operating assets and liabilities - other
    3,772       11,860  
Net cash provided by operating activities
    55,110       56,457  
Cash flows from investing activities:
               
Acquisition of property and equipment
    (22,416 )     (568,035 )
Community acquisition
    (10,579 )     (6,935 )
Acquisition deposits
    (6,345 )     (3,167 )
Sale of property and equipment
    2,677       6,754  
Lease and contract acquisition costs
    (194 )     (686 )
Payments from affiliates and other managed communities, net
    798       394  
Distribution from (investment in) unconsolidated joint ventures/other
    1,589       (2,976 )
Net cash used in investing activities
    (34,470 )     (574,651 )
Cash flows from financing activities:
               
Proceeds from sale of stock
    629       950  
Decrease (increase) in restricted deposits
    (477 )     1,882  
Debt issuance and other financing costs
    (564 )     (9,405 )
Proceeds from long-term borrowings and financings
    16,008       663,496  
Repayment of long-term borrowings and financings
    (4,397 )     (151,055 )
Repayment of capital lease and financing obligations
    (7,003 )     (11,743 )
Net cash provided by financing activities
    4,196       494,125  
Net increase (decrease) in cash and cash equivalents
    24,836       (24,069 )
Cash and cash equivalents at the beginning of the period
    27,254       67,710  
Cash and cash equivalents at the end of the period
  $ 52,090     $ 43,641  
                 
 


 
4

 

 
 
 
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Supplemental disclosure of cash flow information -
           
Cash paid during the period for interest
  $ 74,658     $ 65,143  
Cash paid during the period for income taxes
    2,864       1,667  
Cash received during the period for income tax refunds
    421       2,647  
Non-cash financing and investing activities:
               
Adjustments related to purchase of leased properties:
               
Capital and financing lease buyouts
    -       281,925  
Deferred gains and losses
    -       15,462  
Lease acquisition costs
    -       13,570  
Deferred rent
    -       562  
Capital lease and financing obligations
    295       4,964  
Contingent purchase price adjustment on goodwill
    -       4,458  
Sales leaseback transaction
               
Net increase in property and equipment
    968       -  
Decrease in lease obligation
    4,115       -  
Increase in deferred gain
    (5,212 )     -  
Decrease in deferred rent
    129       -  
Unrealized gain on investment in marketable equity securities
    1,235       86  


 
See accompanying Notes to Condensed Consolidated Financial Statements



 
5

 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(In thousands, except share data)



   
Emeritus Corporation Shareholders
             
 
                   
Accumulated
                   
   
Common stock
   
Additional
   
other
               
Total
 
   
Number
         
paid-in
   
comprehensive
   
Accumulated
   
Noncontrolling
   
shareholders'
 
   
of shares
   
Amount
   
capital
   
income
   
deficit
   
interest
   
equity
 
Balances at December 31, 2008
    39,091,648     $ 4     $ 719,903     $     $ (360,506 )   $ 6,627     $ 366,028  
Issuances of shares under Employee Stock Purchase Plan, net of repurchases
    14,739             169                         169  
Options exercised
    137,976             460                         460  
Stock option compensation expense
                3,250                         3,250  
Accumulated other comprehensive income
                      1,235                   1,235  
Net loss
                            (37,945 )     (675 )     (38,620 )
Balances at September 30, 2009
    39,244,363     $ 4     $ 723,782     $ 1,235     $ (398,451 )   $ 5,952     $ 332,522  


See accompanying Notes to Condensed Consolidated Financial Statements


 
6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009

1.
Description of Business

Emeritus Corporation (“Emeritus” or the “Company”) is an assisted living, Alzheimer’s and dementia care service provider that operates residential style communities located throughout the United States.  Through these communities, Emeritus management (“we”, “our” or “us”) provides a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services.  As of September 30, 2009, the Company owned 165 communities and leased 105 communities.  Of the combined 270 communities, five are accounted for as discontinued operations and 265 are accounted for as continuing operations. These 270 communities comprise the communities included in the consolidated financial statements.

We also provide management services to independent and related-party owners of assisted living communities.  As of September 30, 2009, we managed 39 communities, of which 24 are owned by joint ventures in which the Company has a financial interest.  Management agreements typically provide for fees of 5% to 6% of gross revenues.

Emeritus has one operating segment, which is assisted living and related services.

2.
Summary of Significant Accounting Policies and Use of Estimates

The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to resident move-in fees, bad debts, investments, intangible assets, impairment of long-lived assets and goodwill, income taxes, long-term service contracts, contingencies, self-insured retention, insurance deductibles, health insurance, inputs to the Black-Scholes option pricing model, and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We believe that certain critical accounting policies are most significant to the judgments and estimates used in the preparation of our condensed consolidated financial statements.  We record revisions to such estimates to income in the period in which the facts that give rise to the revision become known.  A detailed discussion of our significant accounting policies and the use of estimates is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which was filed with the Securities and Exchange Commission (“SEC”) on March 16, 2009.  See Note 11 for additional discussion of our policy regarding goodwill impairment tests.

Basis of Presentation

The unaudited condensed consolidated financial statements reflect all adjustments that are, in our opinion, necessary to state fairly the financial position, results of operations, and cash flows of Emeritus as of September 30, 2009, and for all periods presented.  Except as otherwise disclosed in these Notes, such adjustments are of a normal, recurring nature.  The results of operations for the period ended September 30, 2009, are not necessarily indicative of the operating results that may be achieved for the full year ended December 31, 2009.  We presume that those reading this interim financial information have read or have access to the 2008 audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations that are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.  Therefore, we have omitted certain footnotes and other disclosures that are disclosed in the Form 10-K.

 
7

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

Reclassifications and Revisions

We recast the 2008 financial information so that the basis of presentation is consistent with that of the 2009 financial information.  Specifically, in 2009 our Board of Directors approved the sale of three communities and, as a result, we reclassified the results of operations for these communities to discontinued operations for all periods presented (see Note 9).  Additionally, we adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (SFAS No. 160) effective January 1, 2009 (superceded in September 2009 by the Financial Accounting Standards Board Codification (“FASC”) section 810-10-45-16).  As a result, we have classified the ”Noncontrolling interest—related party” as a separate component of shareholders’ equity in our condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008.  We also present the amount of consolidated net loss attributable to Emeritus and to the noncontrolling interest–related party on the face of the statement of operations.

We revised the condensed consolidated balance sheet as of December 31, 2008, to reflect a reallocation of approximately $15.6 million of our valuation allowance from current deferred tax assets to noncurrent deferred tax assets, resulting in current deferred tax assets and noncurrent deferred tax liabilities of $15.6 million in the condensed consolidated balance sheet.

Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167), amending the consolidation guidance for variable-interest entities under FIN 46(R), Consolidation of Variable Interest Entities—an interpretation of ARB No. 51.  The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity.  We will be required to adopt SFAS No. 167 as of January 1, 2010.  We are reviewing the requirements of SFAS No. 167, which applies to our investments in unconsolidated joint ventures, and have not yet made a definitive determination as to whether this statement will require us to consolidate our equity method investees.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (as amended) (SFAS No. 165), which was effective for our June 30, 2009, financial statements.  SFAS No. 165 establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, as defined in the Statement.  As is required for public companies, we evaluate subsequent events through the date that our financial statements are distributed to the public.  The adoption of SFAS No. 165 did not change our current practice and had no impact on our consolidated financial statements.

3.
Stock-Based Compensation

We have three equity incentive plans: the 2006 Equity Incentive Plan (the “2006 Plan”), the Amended and Restated Stock Option Plan for Non-employee Directors (the “Directors Plan”) and the 1995 Stock Incentive Plan (the “1995 Plan”).  We also provide an Employee Stock Purchase Plan (the “2009 ESP Plan”), which replaced the Amended 1998 Employee Stock Purchase Plan (the “1998 ESP Plan”).  We record compensation expense based on fair value for all stock-based awards, which amounted to approximately $1.2 million and $1.0 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $3.3 million and $3.8 million for the nine months ended September 30, 2009 and 2008, respectively.

Stock Incentive Plans

During the nine months ended September 30, 2009, we granted options to purchase 91,200 shares of our common stock from the 2006 Plan and options to purchase 52,500 shares of our common stock from the Directors Plan.  The following table summarizes our stock option activity for the nine months ended September 30, 2009:

 
8

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

         
Weighted-
   
Aggregate
 
         
Average
   
Intrinsic
 
         
Exercise
   
Value
 
   
Shares
   
Price
    $(000)  
Outstanding at  beginning of period
    2,840,652     $ 16.30          
Granted
    143,700     $ 12.48          
Exercised
    (137,976 )   $ 3.44     $ 985  
Forfeited/expired
    (310,900 )   $ 18.68          
Outstanding at end of period
    2,535,476     $ 16.49     $ 19,272  
                         
                         
Options exercisable
    1,374,093     $ 17.16     $ 9,632  
                         
Weighted-average fair value of options granted
          $ 6.99          
                         
Options exercisable in the money
    811,576             $ 9,632  
Options exercisable out of the money
    562,517             $ -  

We estimate the fair value of our options using the Black-Scholes option pricing model.  Option valuation models require the input of various assumptions, including the expected stock price volatility, risk-free interest rate, dividend yield and forfeiture rate.  We group the options into two main categories based on expected life, which are the employee group and the non-employee directors.  We estimate the fair value of the stock options granted using a risk-free rate that is the five-year or seven-year U.S. Treasury yield in effect at the time of grant.  The expected life of the stock options granted (five or seven years) is estimated using the historical exercise behavior of option holders.  Expected volatility is based on historical volatility for a period equal to the stock option’s expected life, ending on the date of grant.  Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.  The forfeiture rate, which is currently estimated at 6.5% of the options awarded, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.  Our options have characteristics significantly different from those of traded options and changes in the various input assumptions can materially affect the fair value estimates.  We estimated the fair value of the options granted in the current year period under the 2006 Plan at the date of grant using the following weighted average assumptions:

   
For Employees and Key Executives
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Expected life from vest date (in years)
    5       5  
Risk-free interest rate
    1.87-2.53 %     2.69 %
Volatility
    55.6-58.8 %     42.7 %

We estimated the fair value of options granted in the current year period under the Directors Plan at the date of grant using the following weighted average assumptions:

   
For Directors
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Expected life from vest date (in years)
    7       7  
Risk-free interest rate
    2.86 %     3.90 %
Volatility
    61.6 %     54.7 %


 
9

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009
Employee Stock Purchase Plan

In May 2009, the Company’s shareholders approved the 2009 ESP Plan, which replaced the 1998 ESP Plan.  The terms of the 2009 ESP Plan are substantially the same as 1998 ESP Plan, whereby we offer eligible employees the opportunity to purchase Emeritus common stock at a 15% discount from the lower of the market price on (a) the first trading date of each calendar quarter or (b) the last trading date of each quarter.  Sales of Emeritus stock to eligible employees under the 2009 ESP Plan began for the offering period ended September 30, 2009.  We sold 14,786 shares under the 2009 ESP Plan at $11.49 per share.

The 1998 ESP Plan was terminated by our board of directors in March 2009 after all shares reserved for issuance under the plan had been issued.  Due to an inadvertent error in recordkeeping, the amount of shares issued under the 1998 ESP Plan exceeded the 400,000-share reserve.  As a result, the excess shares were not registered with the SEC.  Under the applicable provisions of federal securities laws, plan participants who purchased such unregistered shares have the right to require us to repurchase the shares at the original exercise price plus interest or, if the employee bought and sold the shares for a loss, to reimburse the employee for the amount of the loss.  For the quarterly offering periods ended December 31, 2007 through December 31, 2008, we sold a total of 55,031 unregistered shares to plan participants at a weighted average price of $12.56 per share.  Accordingly, the aggregate purchase price of shares subject to rescission, which excludes shares sold to Emeritus officers, is approximately $650,000.  Cash paid for share purchases are recorded as a reduction in shareholders’ equity.  As of September 30, 2009, we have repurchased 47 shares subject to rescission at a weighted average share price of $18.74.

We received cash from the exercise of stock options under our various equity incentive plans and stock purchased through the 2009 ESP Plan in the amount of $629,000 for the nine months ended September 30, 2009.

As of September 30, 2009, there were 385,214 shares available for purchase under the 2009 ESP Plan, 1,000,092 shares available for grant under the 2006 Plan, and 44,000 shares available for grant under the Directors Plan.

4.
Acquisitions and Other Significant Transactions

The following is a description of various transactions that affected the comparability of the condensed consolidated financial statements included in this Form 10-Q.

2008 Ventas Asset Acquisition

In December 2008, we purchased five communities from Ventas Realty, LP (“Ventas”) consisting of 432 units (the “Ventas Purchase”) for a purchase price of $64.3 million plus transaction costs of $282,000.  Prior to this acquisition, we operated these communities under lease agreements with affiliates of Ventas.  

Previously, we accounted for four of the communities as operating leases, and one of the communities as a capital lease.  In connection with the Ventas Purchase, we borrowed $55.6 million, of which $45.6 million represents mortgage financing and $10.0 million was borrowed from Ventas under a three-year note.

2008 HCP Lease Agreement

In December 2008, we executed a Master Lease and Security Agreement (the “HCP Agreement”) to lease 11 communities comprised of 1,462 units/beds from affiliates of HCP, Inc. (collectively, “HCP”).  The HCP Agreement is for a term of ten years.  Annual rents are fixed at $17.5, $21.0, $25.0, $28.0, and $30.0 million in years one through five, respectively, and thereafter will increase by the greater of the increase in the CPI or 3.0%.

2008 HCN Asset Acquisition

In June 2008, we entered into an asset purchase agreement (the “HCN Agreement”) with Health Care REIT, Inc. (“HCN”) and its affiliated entities to purchase 29 communities consisting of 2,257 units for a purchase price of $299.9 million, excluding transaction costs.  The Company formerly leased these communities from HCN.  As provided in the HCN Agreement, the transaction closed in two phases.

 
10

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009
In June 2008, we completed the first phase of the HCN transaction (“Tranche 1”).  Tranche 1 consisted of 19 communities with a capacity of 1,564 units and a purchase price of $222.7 million, plus closing costs of $1.1 million.  Tranche 1 was financed with mortgage debt of approximately $163.2 million and seller-provided debt of $50.0 million.  We previously accounted for 18 of the 19 acquired communities in Tranche 1 as capital leases.

In October 2008, we completed the second phase of the HCN transaction (“Tranche 2”).  This closing consisted of 10 communities with a capacity of 693 units for a purchase price of $77.2 million plus transaction costs of $190,000.  Tranche 2 was financed with $29.0 million of fixed rate mortgage debt and $27.4 million of variable rate mortgage debt.  We previously accounted for nine of the 10 acquired communities in Tranche 2 as capital leases.

As part of Tranche 2, eight of the 10 communities are included in a 50/50 joint venture owned by Emeritus and Mr. Daniel R. Baty, the Company’s Chairman and Co-Chief Executive Officer, who contributed approximately $6.8 million to the joint venture for the purchase of the properties.  Prior to the acquisition, these eight communities were subject to a cash flow sharing agreement with Mr. Baty, which continues in effect after the acquisition by the joint venture.  We have the option to buy out Mr. Baty’s membership interest in the joint venture after January 1, 2011, for a price equal to the lesser of fair market value or a formula specified in the joint venture operating agreement, but in no event less than the amount of Mr. Baty’s capital contribution.  The joint venture is included in the consolidated financial statements of Emeritus.

2008 NHP Asset Acquisition

In April 2008, we purchased from Nationwide Health Properties, Inc. (“NHP”) 24 communities consisting of 1,672 units for a purchase price of $314.0 million plus transaction costs of $856,000.  We had previously leased these communities from NHP and accounted for them as capital leases.  We financed the purchase through mortgage debt of approximately $249.1 million and seller-provided debt of $30.0 million.

Other Acquisitions

In June 2009, we purchased an 85-unit assisted living community that we previously managed for an affiliate of Mr. Baty.  The purchase price was $10.6 million, of which $7.8 million was financed with mortgage debt and $1.3 million was financed with an unsecured note payable to an affiliate of Mr. Baty (the “Baty Note”).  We expensed closing costs of approximately $20,000 related to this purchase.

We allocated the preliminary purchase price as follows, based on the estimated fair value of the identified tangible and intangible assets (in thousands):

Current assets
  $ 4  
Property and equipment
    8,800  
In-place resident contract intangible
    1,283  
Goodwill
    492  
Purchase price
  $ 10,579  

During the second quarter of 2009, we purchased the California homes of Mr. Granger Cobb, our President and Co-Chief Executive Officer, and Mr. Budgie Amparo, our Senior Vice President—Quality and Risk Management, in connection with their required relocation to Seattle following the merger with Summerville Senior Living, Inc. (“Summerville”) in September 2007.  The combined purchase price was approximately $4.3 million.  The purchase price for each was determined based on an independent appraisal.  The homes are included in “Property held for sale” in the condensed consolidated balance sheet at September 30, 2009.

In January 2009, we entered into a lease for one community consisting of 83 units.  The lease term is ten years with two five-year renewal options available.  The initial annual minimum rent is approximately $600,000 (less abatements in the first year of $300,000) with fixed annual increases of 3.0%.

In December 2008, we entered into a lease for two communities consisting of 254 units.  The lease term is ten years with two five-year renewal options available.  The initial annual lease payment is approximately $1.8 million with fixed increases for two years and increases thereafter at 3.0%.

 
11

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

In June 2008, we purchased a 54-unit community for $6.8 million plus closing costs of $185,000, of which $6.0 million was financed through a mortgage loan.

Sale-Leaseback

In 2003, we sold four communities to HCN and leased them back.  The sale did not qualify for sale-leaseback accounting because of our continuing involvement in the form of a guarantee of the underlying mortgage debt, which was assumed by HCN in the sale.  Therefore, we recorded the sale proceeds of $34.6 million as a financing lease obligation and continued to report the real estate and equipment as owned assets.

HCN paid the mortgage obligations in June 2009 and our guarantee terminated.  As a result, we recorded the sale-leaseback transaction.  Each of the four leases is now accounted for as a capital lease.  As a result, we recorded a net increase in property and equipment of $968,000, a net decrease in capital lease and financing obligations of $4.1 million, an increase in deferred gains of $5.2 million and a decrease in deferred rent of $129,000.

5.
Long-Term Debt

In June 2009, we extended our credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) to June 30, 2010. This agreement provides a $25.0 million unsecured revolving line of credit with interest based on our choice of either (a) a fluctuating rate equal to the daily one-month London Interbank Offered Rate (“LIBOR”) plus 2.50% or (b) a fixed rate for a 30-day term equal to the one-month LIBOR plus 2.25%, payable monthly.  We must maintain a zero balance on advances for 30 consecutive days during the one-year term, a $20.0 million minimum balance in cash, cash equivalents and/or publicly traded marketable securities and a fixed charge coverage ratio of 1.1 to 1.0.  There were no outstanding borrowings under the line of credit as of the periods presented.

In June 2009, we entered into two debt agreements related to the purchase of an assisted living community (see Note 4).  The $7.8 million Freddie Mac mortgage loan has a ten-year term, with monthly payments of interest only at 6.92% through January 2011 and monthly payments of principal and interest thereafter based on a 30-year amortization, with the unpaid principal balance due at maturity.  The $1.3 million unsecured Baty Note has a five-year term, with monthly payments of interest only at 6.5% and the principal balance due at maturity.  The maturity date of the Baty Note will be accelerated in the event that we sell, in a single offering, debt or equity securities in the amount of $150.0 million or more.

In May 2009, we entered into an agreement to extend the maturity on $11.3 million of mortgage debt from January 1, 2010 to January 1, 2011.  The LIBOR margin on the loan increased from 2.25% to 3.50%.  Also in May 2009, we entered into an agreement to extend the maturity on $7.4 million of mortgage debt from March 31, 2010 to October 1, 2010.  The interest rate on the loan increased from 2.65% over LIBOR, with a floor of 5.65%, to 3.25% over LIBOR with a floor of 6.25%.

In June 2009, we entered into an agreement to extend the maturity of $23.0 million of mortgage debt from April 1, 2010 to October 1, 2010.  The interest rate on the loan increased from 2.9% over LIBOR, with no floor, to 4.0% over LIBOR with a floor of 6.5%.

6.
Derivative Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes and we limit these risks by following risk management policies and procedures, including the use of derivatives.  We use derivatives to fix the interest rate on floating-rate debt in order to address exposure to increases in interest rates and to manage the cost of borrowing obligations.

Emeritus is a party to two interest rate swaps with a combined notional amount of $32.0 million.  The swaps effectively convert the interest rates on the related mortgage debt from floating rates to fixed rates, thus mitigating the impact of interest rate changes on future interest expense.

 
12

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

 
Hedges that are reported at fair value and presented on the balance sheet could be characterized as either cash flow hedges or fair value hedges. Our interest rate swap contracts are considered cash flow hedges as they address the risk associated with future cash flows of debt transactions.  We have chosen not to designate our interest rate swaps as hedge instruments; therefore, the gain or loss resulting from the change in the estimated fair value of the derivative instruments is recognized in current earnings during the period of change.

As of September 30, 2009 and December 31, 2008, the combined fair value of the two interest rate swaps was as follows (in thousands):
 
 
Balance Sheet
Location
 
As of
September 30, 2009
Fair
Value
   
As of
December 31, 2008
Fair
Value
 
               
Interest  rate swap
Other long-term liabilities
  $ 1,661     $ 2,282  

 
 
7.
Loss Per Share

Basic loss per share is computed based on the weighted average number of shares outstanding and excludes any potential dilution.  Diluted loss per share is computed based on the weighted average number of shares outstanding plus stock options.  All shares issuable upon the exercise of stock options are excluded from the computation for the periods presented because the effect of their inclusion would be antidilutive.

The following table summarizes those potential common shares that are excluded in each period because they are antidilutive (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September, 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Options
    2,535       2,150       2,535       2,150  

8.
Comprehensive Loss

The following table summarizes the comprehensive loss for the periods indicated (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net loss
  $ (16,221 )   $ (23,076 )   $ (38,620 )   $ (74,278 )
Other comprehensive income:
                               
Unrealized holding gains on
                               
available-for-sale investment securities
    614       24       1,235       86  
Comprehensive loss
  $ (15,607 )   $ (23,052 )   $ (37,385 )   $ (74,192 )

13


EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009
 
 

 
The following table sets forth amounts attributable to Emeritus Corporation common shareholders, excluding losses attributable to the noncontrolling interest (in thousands):

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Loss from continuing operations
  $ (15,867 )   $ (22,460 )   $ (37,096 )   $ (67,929 )
Loss from discontinued operations
    (122 )     (616 )     (849 )     (6,349 )
Net loss attributable to Emeritus Corporation common shareholders
  $ (15,989 )   $ (23,076 )   $ (37,945 )   $ (74,278 )

Discontinued Operations

In 2008, we decided to discontinue operations at five of our communities and put the assets and businesses up for sale.  We decided to sell these communities primarily because they have consistently incurred operating losses over a sustained period of time.  Two of the communities were sold in the second quarter of 2008 and one was sold in January 2009.

In the first quarter of 2009, we decided to sell three additional underperforming communities.  We recast our financial statements for the three and nine months ended September 30, 2008 to present the operations of these communities as discontinued operations.  We expect to sell the remaining five communities in the next 12 months.

The assets of all five properties remaining to be sold as of September 30, 2009, which consist of property and equipment, are presented separately in “Property held for sale” in the accompanying condensed consolidated balance sheet at September 30, 2009 at their estimated fair value less costs to sell (see Note 11).  We will continue to operate these communities until sold.

The following table shows the revenues and net loss for the discontinued operations (in thousands):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Total revenue
  $ 3,627     $ 3,881     $ 10,839     $ 13,082  
                                 
Net loss
  $ (122 )   $ (616 )   $ (849 )   $ (6,349 )

Net loss includes impairment losses of $0 and $592,000 in the three months ended September 30, 2009 and 2008 and $1.1 million and $4.9 million in the nine months ended September 30, 2009 and 2008, respectively, based on the most recent indicative offers that we received.

10.
Liquidity

As of September 30, 2009, the Company had a working capital deficit of $5.5 million, of which $15.1 million is a deferred tax asset and $29.5 million is deferred revenue and unearned rental income.  The level of current liabilities is not expected to increase from period to period in such a way as to require the use of significant cash, except for debt obligations of $49.9 million scheduled to mature in the next 12 months, of which $33.7 million is related to properties held for sale that is due in 2012 but will be payable upon the sale of the related properties.  We intend to refinance the remaining 2010 obligations prior to their respective due dates.

We reported net cash generated from operating activities in the condensed consolidated statements of cash flows of $55.1 million and $56.5 million for the nine months ended September 30, 2009 and 2008, respectively.  While we have reported positive cash flows from operating activities over the past three years, the cash flows have not always been sufficient to pay all of the Company’s long-term obligations and we have been dependent upon third-party financing or disposition of assets to fund operations.  We cannot guarantee that, if necessary in the future, such financing will be readily available, or on terms attractive to us.
 
 
14

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009
In fiscal 2008 and into 2009, we refinanced and extended the terms of a substantial amount of our existing debt obligations, extending the maturities of such financings to dates in 2010 through 2019.  Many of our debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations to the same lender or lessor.  Such cross-default provisions affect the majority of our properties.  Accordingly, any event of default could cause a material adverse effect on the Company's financial condition if such debt or leases are cross-defaulted.  As of September 30, 2009, we were in violation of certain financial covenants in four debt agreements.  We have obtained waivers from the lenders and, as such, the Company was in compliance as of September 30, 2009.  The lenders on three of the loans modified the minimum required coverage ratios and/or occupancy rates and we have a firm commitment to refinance the fourth loan in the fourth quarter of 2009.  Therefore, we classified each of these loans as noncurrent in the condensed consolidated balance sheet at September 30, 2009.

11.
Fair Value Disclosures

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009, and indicates the fair value hierarchy of the valuation techniques that we utilize to determine such fair value (in thousands):

   
Quoted Prices in
   
Significant
             
   
Active Markets
   
Other
   
Significant
   
Balance at
 
   
for Identical
   
Observable
   
Unobservable
   
September 30,
 
   
Assets (Level 1)
   
Inputs (Level 2)
   
Inputs (Level 3)
   
2009
 
Assets
                       
Investment securities – trading
  $ 2,054     $ -     $ -     $ 2,054  
Investment securities – available-for-sale
    2,468       -       -       2,468  
Property held for sale
    -       37,354       -       37,354  
Liabilities
                               
Derivative financial instruments
    -       1,661       -       1,661  

In general, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that we have the ability to access.  For example, the Company’s investment in available-for-sale equity securities is valued based on the quoted market price for that security.
 
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.  For example, we use market interest rates and yield curves that are observable at commonly quoted intervals in the valuation of our interest rate swap contracts.  The fair value of property held for sale was determined based on recent offers from prospective purchasers.
 
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company has financial instruments other than investment securities consisting of cash and cash equivalents, trade accounts receivable, other receivables, tax and maintenance escrows, workers’ compensation collateral accounts, short-term borrowings, accounts payable, capital and financing lease obligations and long-term debt.  The fair value of the Company’s other financial instruments at September 30, 2009 and December 31, 2008, based on their short-term nature or current market indicators such as prevailing interest rates, approximates their carrying value with the exception of the following (in thousands):

 
15

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

   
September 30, 2009
   
December 31, 2008
 
   
Carrying
         
Carrying
       
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
                         
Long-term debt
  $ 1,385,027     $ 1,373,281     $ 1,373,416     $ 1,332,370  

We estimated the fair value of debt obligations using discounted cash flows based on the Company’s assumed incremental borrowing rates of 8.0% for unsecured borrowings and 6.5% for secured borrowings at September 30, 2009 and 8.0% for unsecured borrowings and 6.0% for secured borrowings at December 31, 2008.  These assumptions are considered Level 3 inputs in the fair value hierarchy.
 
Impairment of Long-Lived Assets
 
We recorded impairment losses of $1.9 million in the three and nine months ended September 30, 2009 related to impairment of long-lived assets, which are included in operating income from continuing operations.  The impairment loss is comprised of a $623,000 adjustment to assets held for sale, based on recent negotiations, and a $1.2 million adjustment to intangible assets, based on our determination of the recovery of this asset from estimated future cash flows.  In addition, we recorded impairment losses related to our discontinued operations (see Note 9).

Goodwill Impairment Test

Our policy is to estimate the fair value of the Company using a combination of the market capitalization, discounted cash flows and market comparable approaches.  We also use market capitalization as a triggering event that may indicate possible impairment of the reporting unit’s goodwill in interim periods.

The Company’s stock price declined in the first quarter of 2009 such that as of March 31, 2009, the Company’s market price per share closed at $6.56, which was less than net book value per share.  We therefore tested goodwill for impairment as of March 31, 2009.  The concluded fair value estimate of $9.80 per share at March 31, 2009 was determined using a 50-50 weighted average of the income approach (discounted cash flows) and the market comparable approach.  The Company’s book value per share as of March 31, 2009 was $8.83.  Because the estimated fair value exceeded book value on that date, we concluded that no impairment existed at March 31, 2009.

As of September 30, 2009 and June 30, 2009, the Company’s market capitalization exceeded its net book value; therefore, no triggering event occurred and we did not test goodwill for impairment as of those dates.

12.
Income Taxes

The FASC sets forth the accounting and reporting for uncertainties in income tax law.  Accordingly, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

Our income tax accruals include liabilities for unrecognized tax benefits, including penalties and interest, which were recorded in connection with the purchase price allocation in the Summerville merger.  These liabilities, which total $2.3 million, are included in “Other long-term liabilities” and are the result of uncertainty surrounding the deductibility of certain items included in the Summerville tax returns for periods prior to the merger.
 
 

 
16

 
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
September 30, 2009

 
13. Commitments and Contingencies
 
We guarantee the mortgage debt payable to a bank by a joint venture in which Emeritus has a 50% ownership interest (the Stow JV). We account for the Stow JV as an unconsolidated equity method investment. As of September 30, 2009, the loan balance was $8.1 million with interest at a variable rate of 2.26%. Emeritus and the other member of the Stow JV have each provided an unconditional guarantee of payment of this mortgage loan to the lender. In the event that we would be required to repay this loan, we would be entitled to recoup 50% of such payment from the other member of the Stow JV.

 
14.      Subsequent Events

Acquisitions

On October 1, 2009, we purchased a 97-unit assisted living and memory care community that we previously managed for an affiliate of Mr. Baty.  The purchase price was $15.8 million, of which $12.2 million was financed with a 10-year, 6.14% mortgage note and $2.0 million was financed with a five-year, 6.50% unsecured note payable to an affiliate of Mr. Baty, with the balance paid in cash.

On October 1, 2009, we purchased an 83-unit assisted living and memory care community from Ventas that was previously operated under a management contract.  The purchase price was $6.3 million and was financed with a three-year first mortgage note from Ventas in the amount of $5.0 million at a variable rate of monthly LIBOR plus 6.5%, with the balance paid in cash.  A one-year extension option is available.

Financings

On October 27, 2009, we extended the maturity on $22.9 million of mortgage debt for one year from October 1, 2010 to October 1, 2011.  All other terms of the debt remain the same.


 
17

 

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results.  In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the negative of those terms, or comparable terminology.  Some of the forward-looking statements included in this report and documents incorporated by reference and in some of our other public statements relate to, among other things:

 
·
the effects of competition and economic conditions on the occupancy levels in our communities, including possible excess assisted living capacity;
 
·
our ability under current market conditions to maintain and increase our resident charges without adversely affecting occupancy levels;
 
·
our ability to control community operating expenses, including the management of costs largely beyond our control (such as insurance and utility costs) without adversely affecting the level of occupancy and resident charges;
 
·
our ability to generate cash flow sufficient to service our debt and other fixed payment requirements;
 
·
our vulnerability to defaults as a result of noncompliance with various debt and lease covenants, including the effects of cross-default provisions;
 
·
uncertainties relating to competition, construction, licensing, environmental regulation, and other matters that affect acquisition, disposition, and development of assisted living communities;
 
·
our ability to find sources of financing and capital on satisfactory terms to meet our cash requirements to the extent that they are not met by operations; and
 
·
uncertainties related to professional liability and workers’ compensation claims.

Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be inaccurate.  Please carefully review Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008 for important factors that could cause our actual results to differ materially from the forward-looking statements included in this report and presented elsewhere by our management from time to time.  Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements.  Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain, and accordingly, you should not place undue reliance on forward-looking statements.

Although we believe that the expectations and forecasts reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements.  Consequently, no forward-looking statement can be guaranteed and future events and actual or suggested results may differ materially.  We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.  You are advised, however, to consult any further disclosures we make in our quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

During the first nine months of 2009, we continued to concentrate on implementing our growth strategy, which focuses on increasing our revenues and cash flows through a combination of: (i) organic growth in


 
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EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED
September 30, 2009


our existing operations; (ii) selected acquisitions of additional communities; and (iii) expansion of our existing communities.  A summary of activity in the first nine months of 2009 as compared to the equivalent period in 2008 is as follows:

 
·
Operating income from continuing operations was $37.4 million compared to $293,000 in the prior year period.  Our net loss attributable to Emeritus Corporation common shareholders was $37.9 million compared to $74.3 million in the prior year period.
 
·
Total revenue increased $100.2 million, or 17.9 %, to $659.8 million from $559.6 million in the prior year period.
 
·
Average occupancy decreased slightly to 86.6% from 86.8% in the prior year period.
 
·
Average rate per occupied unit increased 7.9% to $3,660 from $3,393 in the prior year period.
 
·
Net cash provided by operating activities was $55.1 million compared to $56.5 million in the prior year period.
 
·
We added one owned (formerly managed), one leased, and two managed communities to the Company’s portfolio, opened a new Alzheimer’s community, and opened an expansion at an existing community.
 
·
We reclassified three underperforming communities to discontinued operations and sold one building that was held for sale.

The following table sets forth a summary of the Company’s property interests:

   
As of September 30,
   
As of December 31,
   
As of September 30,
 
   
2009
   
2008
   
2008
 
   
Buildings
   
Units
   
Buildings
   
Units
   
Buildings
   
Units
 
Owned (1)
    165       13,180       164       13,111       149       11,981  
Leased (2 )
    105       10,632       104       10,548       106       9,971  
Consolidated Portfolio
    270       23,812       268       23,659       255       21,952  
Managed/Admin Services
    15       1,604       14       1,479       11       1,265  
Joint Venture/Partnership
    24       1,818       24       1,818       23       1,737  
Operated Portfolio
    309       27,234       306       26,956       289       24,954  
                                                 
Percentage increase  (3)
    1.0 %     1.0 %     6.6 %     9.2 %     0.7 %     1.1 %

(1)   Of the owned communities at September 30, 2009, five are held for sale and are included in discontinued operations, representing 538 units.
(2)   We account for 79 of the 105 leased communities as operating leases and the remaining 26 as capital leases.  We do not include the assets and liabilities of the 79 operating lease communities on our condensed consolidated balance sheets.
(3)   The percentage increase indicates the change from the prior year, or, in the case of September 30, 2009 and 2008, from the end of the prior fiscal year.

The Company’s total consolidated portfolio of 23,812 units at September 30, 2009 consists of the following unit types:

   
Total Units
 
Independent Living
    1,340  
Assisted Living
    17,985  
Alzheimer's Care
    3,459  
Skilled Nursing Care
    252  
 Operating Units
    23,036  
Held for sale
    538  
Units taken out of service
    238  
 Designed Capacity Units
    23,812  


 
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EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED
September 30, 2009

The units taken out of service represent rooms that have been converted for alternative uses, such as additional office space, and are not available for immediate occupancy; therefore, they are excluded from the calculation of the average occupancy rate.  These units are placed into service as demand dictates.

Significant Transactions

In recent periods, we entered into a number of transactions that affected the number of communities we own, lease, and manage; our financing arrangements; and our capital structure.  The following table summarizes these transactions as of September 30, 2009.  For details on significant transactions that affected the comparability of the financial statements included in this Quarterly Report on Form 10-Q, see Note 4, Acquisitions and Other Significant Transactions, in Notes to Condensed Consolidated Financial Statements

                 
Purchase
   
Amount
     
                 
Price (1)
   
Financed
     
Portfolio
Date
 
Communities
   
Units
   
(in thousands)
     
Individual community
June 2009
    1       85     $ 10,579     $ 9,010   (2 )
Individual community
January 2009
    1       83       -       -   (3 )
Ventas
December 2008
    5       432       64,251       55,621   (4 )
HCP, Inc.
December 2008
    11       1,462       -       -   (3 )
Individual communities
December 2008
    2       254       -       -   (3 )
Health Care REIT, Inc. (Tranche 2)
October 2008
    10       693       77,164       56,398   (4 )
Health Care REIT, Inc. (Tranche 1)
June 2008
    19       1,564       222,656       213,220   (4 )
Individual community
June 2008
    1       54       6,750       6,000   (2 )
Nationwide Health Properties, Inc.
April 2008
    24       1,672       313,954       279,140   (4 )
Nationwide Health Properties, Inc.
January 2008
    1       38       -       -   (5 )
Individual community
January 2008
    1       104       -       -   (3 )
        76       6,441                      
(1) Excludes closing costs and purchase accounting adjustments.
                                   
(2) Purchase of community
                                     
(3) Operating leases
                                     
(4) Acquisition of properties previously operated under leases
                                   
(5) Leased community included in April 2008 acquisition
                                   

The following table shows the changes in the Company’s building portfolio from December 31, 2007 through September 30, 2009, including those transactions previously described:

 
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EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED
September 30, 2009


 
Month
 
Owned
   
Leased
   
Consolidated
   
Managed
   
Total
 
December 31, 2007
      107       147       254       33       287  
Courtyard of Loyalton - development
Jan-08
          1       1             1  
Summerville at Hazel Creek
Jan-08
          1       1             1  
March 31, 2008
      107       149       256       33       289  
NHP Purchase
Apr-08
    24       (24 )                  
Galleria Oaks - disposition
May-08
    (1 )           (1 )           (1 )
Meridian Oaks - disposition
May-08
    (1 )           (1 )           (1 )
Arborwood
Jun-08
    1             1             1  
Emeritus at Stow - development
Jun-08
                      1       1  
HCN Purchase
Jun-08
    19       (19 )                  
June 30, 2008
      149       106       255       34       289  
No activity in the quarter
      -                          
September 30, 2008
      149       106       255       34       289  
HCN Purchase
Oct-08
    10       (10 )                  
New management agreements
Nov-08
                      4       4  
HCP Lease
Dec-08
          11       11             11  
LTC Leases
Dec-08
          2       2             2  
Ventas 5
Dec-08
    5       (5 )                  
December 31, 2008
      164       104       268       38       306  
Autumn Ridge - disposition
Jan-09
    (1 )           (1 )           (1 )
Emeritus at Northdale
Jan-09
          1       1             1  
Emeritus at Urbandale - development
Jan-09
    1             1             1  
New management agreements
Jan-09
                      2       2  
March 31, 2009
      164       105       269       40       309  
Emeritus at College Park
Jun-09
    1             1       (1 )      
June 30, 2009
      165       105       270       39       309  
No activity in the quarter
      -                          
September 30, 2009
      165       105       270       39       309  


Results of Operations

Two important factors affecting the Company’s financial results are the rates we charge our residents and the occupancy levels we achieve in our communities.  In evaluating the rate component, we rely on the average monthly revenue per occupied unit, computed by dividing the total community revenue for a particular period by the average number of occupied units for the same period.  In evaluating the occupancy component, we rely on an average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period.

The table below shows the average monthly revenue per occupied unit and occupancy rate for the Company’s consolidated portfolio, which includes the communities the Company owns and leases, for the three months ended September 30, 2009 and 2008.  Please refer to the complete comparison contained herein for further analysis of these rate and occupancy statistics.

 
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EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED
September 30, 2009


   
Three Months Ended September 30,
 
   
2009
   
2008
    $D      % D  
Average monthly revenue per occupied unit
  $ 3,673     $ 3,459     $ 214       6.2 %
Average occupancy rate
    87.2 %     86.6 %          
0.6 ppt*
 

* percentage points

We believe that occupancy rates reflect industry-wide factors and other economic conditions, as well as our own actions and policies, including the various acquisitions and development projects we completed in 2009 and 2008.  We continue to evaluate the factors of rate and occupancy to find the optimum balance in each community.

 
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EMERITUS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED
September 30, 2009


Statements of Operations as Percentage of Revenues and Period-to-Period Percentage Change

The following table sets forth, for the periods indicated, certain items from the Company’s condensed consolidated statements of operations as a percentage of total revenues and the percentage change in the dollar amounts from period to period.

                           
Period-to-Period Percentage of Change Fav/ (Unfav)
 
   
Percentage of Revenues
   
Three
   
Nine
 
   
Three Months Ended
   
Nine Months Ended
   
Months Ended
   
Months Ended
 
   
September 30,
   
September 30,
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
      2009-2008       2009-2008