Qualitative Disclosures
At December 31, 2005, our long-term debt consisted of fixed-rate debt of $93.2 million and variable-rate debt of $38.4 million. Assuming that the balance of the variable-rate debt remained constant, each one percentage point increase in the six-month LIBOR would result in an annual increase in interest expense, and a corresponding decrease in cash flows, of approximately $0.4 million. Conversely, each one percentage point decrease in the six-month LIBOR would result in an annual decrease in interest expense, and a corresponding increase in cash flows, of approximately $0.4 million.
As of December 31, 2005, we had no derivative instruments. We do not speculate using derivative instruments and do not engage in trading activity of any kind.
Quantitative Disclosures
The table below presents principal, or notional, amounts and related weighted average interest rates by year of maturity for our debt obligations as of December 31, 2005 (dollars in thousands). There were no material changes in our monthly debt service payments from December 31, 2005 to June 30, 2006.
The above table incorporates only those exposures that existed as of December 31, 2005, and does not consider those exposures or positions which could arise after that date or future interest rate movements.
70 Fair Value After Liability 2006 2007 2008 2009 2010 2010 Total (Asset) LONG-TERM DEBT: Fixed Rate $ 2,538 $ 2,732 $ 26,515 $ 12,090 $ 1,290 $ 48,009 $ 93,174 $ 93,775 Average Interest Rate 6.34 % 6.36 % 6.05 % 6.38 % 6.58 % 6.60 % 6.40 % Variable Rate $ 387 $ 383 $ 382 $ 18,601 $ 18,599 — $ 38,352 $ 38,352 Average Interest Rate 6.02 % 6.02 % 6.02 % 6.02 % 6.02 % — 6.02 %
Table of Contents BUSINESS Our Business
We are one of the five largest publicly traded operators of assisted living facilities in the United States, based on total capacity, with 206 assisted living facilities totaling 8,270 units. Our assisted living facilities, or residences, typically consist of 35 to 50 units and offer residents a supportive, home-like setting and assistance with the activities of daily living. Our facilities are purpose-built to meet the special needs of seniors and are located in targeted, middle-market suburban bedroom communities that are selected on the basis of a number of factors, including the size of our target resident pool in the community. We own 151 of our facilities, and the remaining are under long- term leases, giving us significant operational flexibility with respect to our properties. For the three months ended June 30, 2006, the average occupancy rate for our facilities was approximately 84.3% (with mature facilities, defined as facilities with all units open for at least a year, having an occupancy rate of 85.6%), the average combined
monthly rate for rent and services was $2,644 per unit and the percentage of our revenue generated from private pay sources was 79.0%.
We plan to grow our revenue and operating income by:
We plan to grow our property portfolio by making selective acquisitions in markets with favorable private pay demographics and, to a lesser extent, by expanding existing properties to meet any additional private pay demand in markets we currently serve. In addition, we plan to increase demand for our services among private pay residents through a focused sales and marketing effort intended to establish ALC as the provider of choice for residents who value wellness, quality of care and customer service. Because of the size of our operations and the depth of our experience in the senior living industry, we believe we are able to effectively identify and maximize cost efficiencies and to expand our portfolio by investing in attractive assets in our target communities.
We believe we are well positioned to take advantage of the growing demand for senior living facilities. This growing demand is the result of a number of demographic and macro-economic factors, including:
As a result of these trends, we believe the demand for senior living facilities will continue to increase. Within the senior living industry, we believe that most seniors prefer the home-like setting and lifestyle of assisted living facilities to the institutional setting of nursing facilities and will therefore choose to live in assisted living facilities over nursing facilities for so long as their health and physical condition permit them to do so.
71 • increasing the overall size of our property portfolio;
• increasing our occupancy rate and the percentage of revenue derived from private pay sources; and • capitalizing on the efficiencies that larger organizations can achieve in the highly fragmented senior living
facility industry.
• An Aging Population. The population of Americans over the age of 65 is projected to steadily and significantly increase over the next 20 years — both in absolute numbers and as a percentage of the overall population. • Cost Containment Pressures. As life expectancies increase and the size of the elderly population grows, the
cost of caring for the elderly also increases. Federal and state governments, as well as private insurers, are increasingly turning to lower cost alternatives to acute care facilities to help contain the increase in these costs. • Changing Family Dynamics and Economics. We believe that an increasing number of families are unwilling
or incapable of providing the day-to-day care that the elderly require. However, we believe these families are capable of assisting with the financial support for the elderly to receive the care they need in nursing homes or assisted living facilities.
Table of Contents
Our Competitive Strengths
Our major competitive strengths are:
Leading Provider of Long-term Care Services. We are one of the five largest publicly traded operators of
assisted living facilities in the United States. We operate 206 assisted living facilities, totaling 8,270 units, in 17 states, 151 of which are owned and the remaining 55 of which are leased under long-term leases. The size and breadth of our portfolio, as well as the depth of our experience in the senior living industry, allow us to achieve operating efficiencies that many of our competitors in the highly fragmented senior living industry cannot.
Significant Ownership of Purpose-Built, Attractive and Efficient Facilities. We own 151 assisted living
facilities, or 73% of the total number of facilities we operate. We also have the option to purchase another five assisted living facilities from an unrelated landlord in 2009. We believe that owning properties, rather than leasing, increases our operating flexibility by allowing us to:
In addition, our facilities, which have an average age of approximately nine years, have been specifically built for the needs of senior residents and include features designed to appeal to the senior living community and their decision makers. The majority of our facilities are approximately 40-unit, single story, square shaped buildings with an enclosed courtyard, a mix of studio and one-bedroom apartments and wide hallways to accommodate our residents who use walkers and wheelchairs. The relatively small number of units and the design of our buildings enhances our ability to provide effective security and quality care, while also appealing to seniors who generally prefer easy access to their living quarters, pleasing aesthetics and simplicity of design. Our moderate sized facilities are primarily on a single level and appeal to seniors for mobility and safety reasons and provide them with easy access to common areas and exterior gardens.
Focus on Wellness, Quality of Care and Customer Service. The staffing model of our facilities emphasizes
the importance we place on delivering high quality care to our residents, with a particular emphasis on preventative care and wellness. Each of our facilities staffs a full-time registered nurse who supervises the clinical plans and health services for our residents. At each facility, we organize and oversee a variety of social and recreational activities that promote wellness and education regarding preventative healthcare measures. Furthermore, at almost all of our facilities, we employ a minimum of two staff members at all times to ensure that we meet the healthcare and security needs of our residents.
Facility Portfolio in Targeted Locations. Most of our facilities are located in middle-market, suburban
bedroom communities with populations typically ranging from 10,000 to 40,000. We have targeted these communities based on their demographic profile, the average wealth of the population and the cost of operating in the community. Focusing on smaller, middle-market suburban communities permits us to quickly build the relationships necessary to establish our reputation and effectively market to our target residents, whom we define as people having a net worth between $100,000 and $500,000. In addition, smaller middle-market communities tend to have lower real estate related costs, lower labor costs and less employee turnover than urban and larger suburban markets, which allows us to operate more efficiently and to provide more consistent services.
Experienced Executive and Senior Management Team. Our corporate executive and senior divisional
management team is highly experienced, with an average of 20 years of experience in the senior living industry. Their experience spans the senior healthcare industry and includes experience in both the assisted living and post- acute care industries, which will assist us in identifying the clinical needs of seniors and delivering high quality care to our residents.
72 • refurbish facilities to meet changing consumer demands; • expand facilities without having to obtain landlord consent; and • divest facilities and exit markets at our discretion.