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) OFTHE
      SECURITIES EXCHANGE ACT 1934





For the
quarterly period ended March 31, 2009





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





Commission
file number   1-14012





EMERITUS
CORPORATION


(Exact
name of registrant as specified in its charter)





WASHINGTON
            91-1605464(State
      or other jurisdiction
            (I.R.S
      Employerof
      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. YesþNoo





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). YesoNoo





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. (Check
one):





Large
accelerated fileroAccelerated
filerþNon-accelerated
fileroSmaller
reporting company o








Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesoNoþ





As of
April 30, 2009, there were 39,141,902 shares of the Registrant’s Common Stock,
par value $0.0001, outstanding.














EMERITUS CORPORATIONTable
      of ContentsPart I.  Financial
  InformationPage No.Item 1.  Financial Statements
      (unaudited):
              1Condensed Consolidated Balance Sheets as of March 31, 2009, and
      December 31, 2008
              2Condensed Consolidated Statements of Operations for the three
      months ended March 31, 2009 and 2008
              3Condensed Consolidated Statements of Cash Flows for the three
      months ended March 31, 2009 and 2008
              4Condensed Consolidated Statements of Shareholders’ Equity for
      the three months ended March 31, 2009
              5Notes to Condensed Consolidated Financial
      Statements
              6Item 2.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              15Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              33Item 4.
              Controls and Procedures
              33Part II.  Other
InformationNote:
              Items
      2, 3, 4, and 5 of Part II are omitted because they are not
      applicable.Item 1.
              Legal Proceedings
              34Item 1A.
              Risk Factors
              34Item 6.
              Exhibits
              34Signature
              35Index to Exhibits
              36








PART I. Financial Information





Item 1.  Financial Statements (unaudited)








[The rest
of this page is intentionally left blank]








1





EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED BALANCE SHEETS(In
      thousands, except share data)ASSETSMarch
      31,2009
                  
                  
                  December
      31,Current
      Assets:
                  
                  (unaudited)
                  
                  
                  2008Cash
      and cash equivalents
                  
                  $
                  42,755
                  
                  
                  $
                  27,254Short-term
      investments
                  
                  
                  1,472
                  
                  
                  
                  1,802Trade
      accounts receivable, net of allowance of $922 and $549
                  
                  
                  13,088
                  
                  
                  
                  11,596Other
      receivables
                  
                  
                  5,273
                  
                  
                  
                  5,556Tax,
      insurance, and maintenance escrows
                  
                  
                  21,643
                  
                  
                  
                  21,762Prepaid
      workers' compensation
                  
                  
                  19,603
                  
                  
                  
                  19,288Other
      prepaid expenses
                  
                  
                  8,865
                  
                  
                  
                  8,170Property
      held for sale
                  
                  
                  33,737
                  
                  
                  
                  13,712Total
      current assets
                  
                  
                  146,436
                  
                  
                  
                  109,140Long-term
      investments
                  
                  
                  4,054
                  
                  
                  
                  4,192Property
      and equipment, net of accumulated depreciation of $159,722 and
      $144,441
                  
                  
                  1,690,727
                  
                  
                  
                  1,725,558Restricted
      deposits
                  
                  
                  12,735
                  
                  
                  
                  12,337Lease
      acquisition costs, net of accumulated amortization of  $1,564
      and $1,877
                  
                  
                  3,907
                  
                  
                  
                  3,867Goodwill
                  
                  
                  73,704
                  
                  
                  
                  73,704Other
      intangible assets, net of accumulated amortization of $83,371 and
      $76,368
                  
                  
                  124,992
                  
                  
                  
                  131,994Other
      assets, net
                  
                  
                  18,174
                  
                  
                  
                  18,851Total
      assets
                  
                  $
                  2,074,729
                  
                  
                  $
                  2,079,643LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Current
      portion of long-term debt
                  
                  $
                  44,236
                  
                  
                  $
                  18,267Current
      portion of capital lease and financing obligations
                  
                  
                  9,448
                  
                  
                  
                  9,172Trade
      accounts payable
                  
                  
                  6,449
                  
                  
                  
                  7,474Accrued
      employee compensation and benefits
                  
                  
                  38,384
                  
                  
                  
                  32,778Accrued
      interest
                  
                  
                  7,638
                  
                  
                  
                  7,012Accrued
      real estate taxes
                  
                  
                  8,798
                  
                  
                  
                  9,791Accrued
      professional and general liability
                  
                  
                  11,325
                  
                  
                  
                  10,842Accrued
      income taxes
                  
                  
                  2,477
                  
                  
                  
                  3,715Other
      accrued expenses
                  
                  
                  12,265
                  
                  
                  
                  12,284Deferred
      revenue
                  
                  
                  12,535
                  
                  
                  
                  12,463Unearned
      rental income
                  
                  
                  18,328
                  
                  
                  
                  16,101Total
      current liabilities
                  
                  
                  171,883
                  
                  
                  
                  139,899Long-term
      debt, less current portion
                  
                  
                  1,328,890
                  
                  
                  
                  1,355,149Capital
      lease and financing obligations, less current portion
                  
                  
                  178,364
                  
                  
                  
                  180,684Deferred
      gain on sale of communities
                  
                  
                  2,593
                  
                  
                  
                  2,667Deferred
      rent
                  
                  
                  19,017
                  
                  
                  
                  14,022Other
      long-term liabilities
                  
                  
                  22,148
                  
                  
                  
                  21,194Total
      liabilities
                  
                  
                  1,722,895
                  
                  
                  
                  1,713,615Commitments
      and contingenciesShareholders'
      Equity:Preferred
      stock, $.0001 par value. Authorized 20,000,000 shares, none
      issued
                  
                  
                  –
                  
                  
                  
                  –Common
      stock, $.0001 par value. Authorized 100,000,000 shares; issued and
      outstanding39,138,402
      and 39,091,648 shares at March 31, 2009, and December 31, 2008,
      respectively
                  
                  
                  4
                  
                  
                  
                  4Additional
      paid-in capital
                  
                  
                  721,018
                  
                  
                  
                  719,903Accumulated
      other comprehensive loss
                  
                  
                  (214
                  )
                  
                  
                  –Accumulated
      deficit
                  
                  
                  (375,387
                  )
                  
                  
                  (360,506
                  )Total
      Emeritus Corporation shareholders' equity
                  
                  
                  345,421
                  
                  
                  
                  359,401Noncontrolling
      interest–related party
                  
                  
                  6,413
                  
                  
                  
                  6,627Total
      shareholders' equity
                  
                  
                  351,834
                  
                  
                  
                  366,028Total
      liabilities and shareholders' equity
                  
                  $
                  2,074,729
                  
                  
                  $
                  2,079,643





See
accompanying Notes to Condensed Consolidated Financial Statements





2





EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(In
      thousands, except per share data)Three
      Months EndedMarch
      31,2009
                
                
                2008Revenues:Community
      revenue
                
                $
                216,518
                
                
                $
                182,610Management
      fees
                
                
                1,467
                
                
                
                1,159Total
      operating revenues
                
                
                217,985
                
                
                
                183,769Expenses:Community
      operations (exclusive of depreciation and amortizationand
      facility lease expense shown separately below)
                
                
                141,428
                
                
                
                119,391General
      and administrative
                
                
                14,980
                
                
                
                14,611Depreciation
      and amortization
                
                
                21,428
                
                
                
                30,635Facility
      lease expense
                
                
                29,196
                
                
                
                22,315Total
      operating expenses
                
                
                207,032
                
                
                
                186,952Operating
      income (loss) from continuing operations
                
                
                10,953
                
                
                
                (3,183
                )Other
      income (expense):Interest
      income
                
                
                138
                
                
                
                855Interest
      expense
                
                
                (25,633
                )
                
                
                (20,725
                )Change
      in fair value of interest rate swaps
                
                
                90
                
                
                
                (838
                )Equity
      gains (losses) in unconsolidated joint ventures
                
                
                624
                
                
                
                (1,522
                )Other,
      net
                
                
                46
                
                
                
                402Net
      other expense
                
                
                (24,735
                )
                
                
                (21,828
                )Loss
      from continuing operations before income taxes
                
                
                (13,782
                )
                
                
                (25,011
                )Provision
      for income taxes
                
                
                (270
                )
                
                
                (210
                )Loss
      from continuing operations
                
                
                (14,052
                )
                
                
                (25,221
                )Loss
      from discontinued operations
                
                
                (1,043
                )
                
                
                (747
                )Net
      loss
                
                
                (15,095
                )
                
                
                (25,968
                )Less
      net loss attributable to the noncontrolling interest
                
                
                214
                
                
                
                –Net
      loss attributable to Emeritus Corporation common
    shareholders
                
                $
                (14,881
                )
                
                $
                (25,968
                )Basic
      and diluted loss per common share attributable toEmeritus
      Corporation common shareholders:Continuing
      operations
                
                $
                (0.35
                )
                
                $
                (0.65
                )Discontinued
      operations
                
                
                (0.03
                )
                
                
                (0.02
                )$
                (0.38
                )
                
                $
                (0.67
                )Weighted
      average common shares outstanding-basic and diluted
                
                
                39,117
                
                
                
                39,036








See
accompanying Notes to Condensed Consolidated Financial
Statements


3





EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(In
      thousands)Three
      Months Ended March 31,2009
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (15,095
                )
                
                $
                (25,968
                )Adjustments
      for noncash items:Depreciation
      and amortization
                
                
                21,428
                
                
                
                30,635Amortization
      of above/below market rents
                
                
                2,516
                
                
                
                2,524Amortization
      of deferred gain
                
                
                (74
                )
                
                
                (502
                )Impairment
      of long-lived assets
                
                
                1,063
                
                
                
                -Amortization
      of loan fees
                
                
                755
                
                
                
                511Allowance
      for doubtful receivables
                
                
                754
                
                
                
                491Equity
      investment (gains) losses and distributions
                
                
                (624
                )
                
                
                1,522Stock
      option compensation
                
                
                947
                
                
                
                1,382Change
      in fair value of interest rate swaps
                
                
                (90
                )
                
                
                838Other
                
                
                340
                
                
                
                641Changes
      in operating assets and liabilitiesDeferred
      revenue
                
                
                72
                
                
                
                1,596Deferred
      rent
                
                
                4,995
                
                
                
                2,437Change
      in other operating assets and liabilities
                
                
                4,203
                
                
                
                4,147Net
      cash provided by operating activities
                
                
                21,190
                
                
                
                20,254Cash
      flows from investing activities:Acquisition
      of property and equipment
                
                
                (6,135
                )
                
                
                (9,463
                )Acquisition
      deposits
                
                
                -
                
                
                
                (5,030
                )Sale
      of property and equipment
                
                
                2,677
                
                
                
                -Lease
      and contract acquisition costs
                
                
                (153
                )
                
                
                (322
                )Payments
      from (to) affiliates and other managed communities, net
                
                
                109
                
                
                
                (235
                )Distribution
      from (investment in) unconsolidated joint ventures
                
                
                548
                
                
                
                (2,925
                )Net
      cash used in investing activities
                
                
                (2,954
                )
                
                
                (17,975
                )Cash
      flows from financing activities:Proceeds
      from sale of stock
                
                
                168
                
                
                
                286Restricted
      deposits
                
                
                (246
                )
                
                
                (385
                )Debt
      issuance and other financing costs
                
                
                (133
                )
                
                
                (540
                )Financing
      deposits
                
                
                -
                
                
                
                (4,938
                )Proceeds
      from long-term debt
                
                
                938
                
                
                
                31,794Repayment
      of long-term debt
                
                
                (1,228
                )
                
                
                (286
                )Repayment
      of capital lease and financing obligations
                
                
                (2,234
                )
                
                
                (5,690
                )Net
      cash provided by (used in) financing activities
                
                
                (2,735
                )
                
                
                20,241Net
      increase in cash and cash equivalents
                
                
                15,501
                
                
                
                22,520Cash
      and cash equivalents at the beginning of the period
                
                
                27,254
                
                
                
                67,710Cash
      and cash equivalents at the end of the period
                
                $
                42,755
                
                
                $
                90,230











Supplemental
      disclosure of cash flow information -Cash
      paid during the period for interest
                
                $
                24,240
                
                
                $
                21,440Cash
      paid during the period for income taxes
                
                
                93
                
                
                
                600Cash
      received during the period for income tax refunds
                
                
                82
                
                
                
                2,496Non-cash
      financing and investing activities:Capital
      lease and financing obligations
                
                
                190
                
                
                
                4,802Unrealized
      gain (loss) on investment in marketable equity securities
                
                
                (214
                )
                
                
                264





See
accompanying Notes to Condensed Consolidated Financial Statements








4





EMERITUS CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(unaudited)(In
      thousands, except share data)Emeritus
      Corporation ShareholdersAccumulatedCommon
      stock
                
                
                Additional
                
                
                other
                
                
                
                
                
                
                
                
                TotalNumber
                
                
                
                
                
                paid-in
                
                
                comprehensive
                
                
                Accumulated
                
                
                Noncontrolling
                
                
                shareholders'of
      shares
                
                
                Amount
                
                
                capital
                
                
                loss
                
                
                deficit
                
                
                interest
                
                
                equityBalances
      at December 31, 2008
                
                
                39,091,648
                
                
                $
                4
                
                
                $
                719,903
                
                
                $
                –
                
                
                $
                (360,506
                )
                
                $
                6,627
                
                
                $
                366,028Options
      exercised
                
                
                46,754
                
                
                
                –
                
                
                
                168
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                168Stock
      option compensation expense
                
                
                –
                
                
                
                –
                
                
                
                947
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                947Accumulated
      other comprehensive income
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (214
                )
                
                
                –
                
                
                
                –
                
                
                
                (214
                )Net
      loss for the quarter endedMarch
      31, 2009
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (14,881
                )
                
                
                (214
                )
                
                
                (15,095
                )Balances
      at March 31, 2009
                
                
                39,138,402
                
                
                $
                4
                
                
                $
                721,018
                
                
                $
                (214
                )
                
                $
                (375,387
                )
                
                $
                6,413
                
                
                $
                351,834








See
accompanying Notes to Condensed Consolidated Financial Statements





5





EMERITUS CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31,
2009





1.
            Description
      of Business





Emeritus
Corporation (Emeritus or the Company) is an assisted living and Alzheimer’s and
dementia care service provider that operates residential style communities
located throughout the United States.  These communities provide 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 March 31, 2009, the Company owned 164
communities and leased 105 communities.  These 269 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.  At March 31, 2009, we managed 40 communities, of
which 24 are owned by joint ventures in which the Company has a financial
interest.  Management agreements typically provide for fees of from 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 management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an ongoing basis, we evaluate our estimates,
including those related to resident programs and incentives such as move-in
fees, bad debts, investments, intangible assets, impairment of long-lived
assets, 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.  Revisions in such estimates are charged 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.





Basis
of Presentation





Throughout
this Form 10-Q, unless specified otherwise, references to “we”, “us”, and “our”
refer to Emeritus.





The
unaudited condensed consolidated financial statements reflect all adjustments
that are, in the opinion of management, necessary to state fairly the financial
position, results of operations, and cash flows of Emeritus as of March 31, 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 March 31, 2009, are not necessarily
indicative of the operating results that may be achieved for the full year ended
December 31, 2009.  Management presumes 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, which was filed with the SEC on March 16, 2009.  Therefore, we
have omitted certain footnotes and other disclosures that are disclosed in the
Form 10-K.


6
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS – CONTINUED
 March
31, 2009





Reclassifications





Certain
reclassifications have been made to the condensed consolidated financial
statements to conform to the current period presentation.





The 2008
financial information has been recast so that the basis of presentation is
consistent with that of the 2009 financial information.  Specifically,
we reclassified the results of operations of three communities determined in
2009 to be held for sale as 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, and, as a result,
we have classified noncontrolling interests—related party as a separate
component of shareholders’ equity in our consolidated balance sheets as of March
31, 2009, and December 31, 2008.  We also present the amount of
consolidated net loss attributable to Emeritus and to the noncontrolling
interest on the face of the statement of income in accordance with SFAS No.
160.





3.
            Stock-Based
      Compensation





We record
compensation expense based on fair value for all stock-based awards, which is
estimated using the Black-Scholes option pricing model.  We recorded
compensation expense for stock options and shares issued under
the Company's various equity incentive plans and the Employee Stock
Purchase (ESP) Plan of approximately $947,000 and $1.4 million for the three
months ended March 31, 2009 and 2008, respectively.





The following table summarizes our
stock option activity for the three months ended March 31,
2009:








Weighted-
                  
                  
                  AggregateAverage
                  
                  
                  IntrinsicExercise
                  
                  
                  ValueShares
                  
                  
                  Price
                  
                  
                  $(000)Outstanding
      at  beginning of period
                  
                  
                  2,840,652
                  
                  
                  $
                  16.30Granted
                  
                  
                  3,700
                  
                  
                  $
                  4.88Exercised
                  
                  
                  (46,754
                  )
                  
                  $
                  3.60
                  
                  
                  $
                  197Forfeited/expired
                  
                  
                  (172,200
                  )
                  
                  $
                  18.54Outstanding
      at end of period
                  
                  
                  2,625,398
                  
                  
                  $
                  16.36
                  
                  
                  $
                  1,747Options
      exercisable
                  
                  
                  1,275,059
                  
                  
                  $
                  14.76
                  
                  
                  $
                  1,741Weighted-average
      fair value of options granted
                  
                  
                  
                  
                  
                  $
                  2.41Options
      exercisable in the money
                  
                  
                  510,894
                  
                  
                  
                  
                  
                  
                  $
                  1,741Options
      exercisable out of the money
                  
                  
                  764,165





The
amount of cash received from the exercise of stock options under
the Company's various equity incentive plans and stock purchased through
the ESP Plan was $168,000 and $286,000 in the three months ended March 31, 2009
and 2008, respectively.  As of March 31, 2009, there were no shares
available for purchase under the ESP Plan, 948,892 shares available for grant
under the 2006 Equity Incentive Plan (the 1996 Plan), and 96,500 shares
available for grant under the Amended and Restated Option Plan for Non-employee
Directors (the Directors Plan).





Of the
outstanding exercisable options as of March 31, 2009, 510,894 were exercisable
at a price below the closing price of the Company’s stock of $6.56 on the New
York Stock Exchange as of that date and 764,165 were exercisable at a price
above the closing price.


7
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009


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.  The fair value of the stock options granted
was estimated 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) was estimated using the
historical exercise behavior of option holders.  Expected volatility
was 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 was 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.  For the three months
ended March 31, 2009, 3,700 options were granted under the 2006 Plan and the
fair value of these options was estimated at the date of grant using the
following weighted average assumptions:





Expected
      life from vest date (in years)
              5Risk-free
      interest rate
              1.90%Volatility
              56.1%





Since
1998, we have offered eligible employees the opportunity to purchase Emeritus
common stock through the ESP Plan 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.  Due to an inadvertent error in
recordkeeping, the amount of shares issued under the 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 is approximately
$650,000.  Cash paid for share purchases, if any, will be recorded as
a reduction in shareholders’ equity.





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





On
December 19, 2008, we purchased five communities from Ventas Realty, LP (Ventas)
consisting of 432 units (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.





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





On
December 1, 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%.


8
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009


2008
HCN Asset Acquisition





On June
6, 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 located throughout the United States 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.





On June
30, 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.  The Company financed Tranche 1 with mortgage debt of
approximately $163.2 million and seller-provided debt of $50.0
million.  We accounted for 18 of the 19 acquired communities in
Tranche 1 as capital leases.





On
October 17, 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 and one as an operating lease.





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-CEO, who
contributed approximately $6.8 million to the joint venture for the purchase of
the properties.  Prior to the acquisition and continuing after the
acquisition, these eight communities are subject to a cash flow sharing
agreement with Mr. Baty, and the joint venture operates under similar economic
terms and conditions as the existing cash flow sharing
agreement.  Emeritus has 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





On April
2, 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
2008-2009 Community Acquisitions





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 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 set increases for two years and increases thereafter at
3.0%.





On June
12, 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.





In
January 2008, we entered into a long-term lease for a 104-unit
community.  The lease term is 15 years, expiring in January 2023, with
two 10-year renewal options available.  The initial annual lease
payment is approximately $901,000, with annual increases of 3.0%.





5.
            Long-Term
      Debt





On
February 8, 2008, we entered into a credit agreement with Wells Fargo Bank,
N.A., which provides a $25.0 million unsecured revolving line of
credit.  The credit agreement includes a letter of credit feature that
allows us to


9
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009


Table of Contents





obtain
letters of credit from the lender, provided that the undrawn amount of any
outstanding letters of credit (and any borrowings outstanding under the credit
agreement) does not exceed $25.0 million.  The line of credit matured
on February 15, 2009 and was extended to June 30, 2009.  Furthermore,
the interest rate calculation on outstanding borrowings changed from Wells
Fargo’s prime rate less 0.50% to 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 pay a commitment fee of 0.25% on the average
daily unused amount of the line of credit, payable quarterly.  In
addition, we are required to pay fees equal to 1.0% of the face amount of every
letter of credit issued as well as the negotiation fees on each
letter.  We must maintain a zero balance on advances for 30
consecutive days during each fiscal year and a $20.0 million minimum balance in
cash, cash equivalents and/or publicly traded marketable
securities.  There were no outstanding borrowings under the line of
credit at March 31, 2009 or December 31, 2008.





Effective
March 31, 2009, Emeritus was 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.  We did not designate the swaps as hedging
instruments.





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.  To address exposure to
interest rates, we use derivatives to fix the interest rate on debt that is
based on floating-rate indices and to manage the cost of borrowing
obligations.





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,
in accordance with SFAS No. 133, 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
March 31, 2009 and December 31, 2008, the fair value of the two interest rate
swaps was as follows (in thousands):







As
      of
                As
      ofMarch
      31, 2009
                December
      31, 2008Balance
      Sheet
                Fair
                FairLocation
                Value
                ValueInterest
      rate swaps
                Other
      long-term liabilities
                $                       2,192
                $                       2,282





Unrealized
gains (losses) from the change in fair value of our interest rate swaps for the
three months ended March 31, 2009 and 2008 were as follows (in
thousands):





Amount
      of Gain (Loss)Location
      of Gain (Loss)
              
              Recognized
      in Income onRecognized
      in Income on
              
              DerivativeDerivative
              
              2009
              
              
              2008Interest
      rate swaps
              Other
      income (expense):
              
              $
              90
              
              
              $
              (838
              )Change
      in fair value of interest rate swaps





10
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009


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 dilutive potential common shares, which include convertible debentures and
stock options.  Options are included using the “treasury stock method”
to the extent they are dilutive.  Certain shares issuable upon the
exercise of stock options and conversion of convertible debentures have been
excluded from the computation 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 anti-dilutive (in thousands):





Three
      Months EndedMarch
      31,2009
              
              2008Convertible
      debentures
              –
              
              475Options
              2,625
              
              2,1402,625
              
              2,615





8.
            Comprehensive
      Loss





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





Three
      Months EndedMarch
      31,2009
                
                
                2008Net
      loss
                
                $
                (15,095
                )
                
                $
                (25,968
                )Other
      comprehensive income (loss):Unrealized
      holding gains (losses)on
      available-for-sale investment securities
                
                
                (214
                )
                
                
                264Comprehensive
      loss
                
                $
                (15,309
                )
                
                $
                (25,704
                )





Amounts
attributable to Emeritus Corporation common shareholders are as follows (in
thousands):





Three
      Months EndedMarch
      31,2009
                
                
                2008Loss
      from continuing operations
                
                $
                (13,838
                )
                
                $
                (25,221
                )Loss
      from discontinued operations
                
                
                (1,043
                )
                
                
                (747
                )Net
      loss attributable to Emeritus Corporationcommon
      shareholders
                
                $
                (14,881
                )
                
                $
                (25,968
                )





9.
            Discontinued
      Operations





During
the first half of 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 due to geographic location and
local market conditions.  Two of the communities were sold in the
second quarter of 2008, one was sold on January 1, 2009, and the remaining two
are expected to be sold during 2009.


11
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009


During
the first quarter of 2009, we decided to sell three additional underperforming
communities, which we expect will be sold during 2009.  Financial
statements for the three months ended March 31, 2008, have been recast to
present the operations of these communities as discontinued
operations.





The
assets of all five properties remaining to be sold as of March 31, 2009, which
consist of property and equipment, are presented separately under the caption
“Property held for sale” in the accompanying condensed consolidated balance
sheet at March 31, 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, net loss, and net loss per common share for
the discontinued operations (in thousands, except per share data):


Three
      Months EndedMarch
      31,2009
                
                
                2008Total
      revenue
                
                $
                3,581
                
                
                $
                4,928Net
      loss
                
                $
                (1,043
                )
                
                $
                (747
                )Basic
      and diluted net loss per common share
                
                $
                (0.03
                )
                
                $
                (0.02
                )Weighted
      average common shares outstanding-basic and diluted
                
                
                39,117
                
                
                
                39,036





10.
            Liquidity





As of
March 31, 2009, the Company has a working capital deficit of $25.4
million.  We are able to operate in the position of a working capital
deficit because revenues are collected more quickly, often in advance, than
obligations are required to be paid.  This can result in a low level
of current assets to the extent cash has been deployed in business development
opportunities or to pay down long-term liabilities.  Along those
lines, the working capital deficit includes, as part of current liabilities,
$30.9 million of 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 $44.2 million scheduled to mature in the next 12 months, of which
$36.4 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 from operating activities in the condensed consolidated
statements of cash flows of $21.2 million and $20.3 million for the three months
ended March 31, 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 transactions will be readily available, or on terms
attractive to us.





In fiscal
2008, we refinanced and extended the terms of a substantial amount of our
existing debt obligations, extending the maturities of such financings to dates
in 2011 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.  For the quarter ended March 31, 2009, we were in
violation of covenants related to rent coverage ratio requirements in four
leases covering four communities and a net operating loss requirement in one
debt agreement for a newly constructed community.  We have made the
required cash deposit or obtained waivers from the owners related to these
defaults and, as such, the Company was deemed to be in compliance as of March
31, 2009.  The waivers expire on April 1, 2010.


12
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 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 March 31, 2009, and indicates
the fair value hierarchy of the valuation techniques that we utilize to
determine such fair value (in thousands):








Quoted Prices in
                
                
                SignificantActive
      Markets
                
                
                Other
                
                
                Significant
                
                
                Balance
      atfor
      Identical
                
                
                Observable
                
                
                Unobservable
                
                
                March
      31,Assets
      (Level 1)
                
                
                Inputs (Level 2)
                
                
                Inputs (Level 3)
                
                
                2009AssetsInvestment
      securities – trading
                
                $
                1,472
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,472Investment
      securities – available-for-sale
                
                
                1,020
                
                
                
                -
                
                
                
                -
                
                
                
                1,020Property
      held for sale
                
                
                -
                
                
                
                33,737
                
                
                
                -
                
                
                
                33,737LiabilitiesDerivative
      financial instruments
                
                
                -
                
                
                
                2,192
                
                
                
                -
                
                
                
                2,192








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 2 input).




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.





As of
March 31, 2009, the following available-for-sale securities were in an
unrealized loss position for less than 12 months (in thousands):





GrossUnrealizedHolding
                  FairLosses
                  ValueMarketable
      equity securities
                  $           (214)
                  $      1,020





We
recognized unrealized gains of $90,000 and unrealized losses of $838,000, in the
first quarter of 2009 and 2008, respectively, which represent the change in the
fair value of our interest rate swaps.  We also recorded unrealized
holding losses during the first quarter of 2009 from our investment in
available-for-sale marketable equity securities in the amount of $214,000, which
are included in comprehensive loss (see Note 8).





Impairment
of Long-Lived Assets




During
the three months ended March 31, 2009, we recorded impairment losses of $1.1
million, which are included in loss from discontinued operations (see Note
9).


13
 EMERITUS
CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 March
31, 2009





12.
            Income
      Taxes





FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (FIN 48), clarifies the accounting
and reporting for uncertainties in income tax law. In accordance with FIN 48, 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.





Included
in our income tax accruals are liabilities for unrecognized tax benefits,
including penalties and interest, which were recorded in connection with the
Summerville purchase price allocation.  This liability, amounting to
$2.6 million, is the result of uncertainty surrounding the deductibility of
certain items included in Summerville tax returns for periods prior to the
merger and is included in other long-term liabilities in the condensed
consolidated balance sheet.





13.
            Subsequent
      Events





On May 1,
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 on
May 1, 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%.








14


Item
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND


RESULTS
OF OPERATIONS





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
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 of our 2008 Annual Report on Form 10-K 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 quarter of 2009, we continued to concentrate on implementing our
previously disclosed growth strategy, which focuses on increasing our revenues
and cash flows through a combination of: (i) organic growth in





15
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


our
existing operations; (ii) selected acquisitions of additional communities; and
(iii) expansion of our existing communities. A summary of activity in the
current quarter is as follows:





·
            Operating
      income from continuing operations was $11.0 million compared to a $3.2
      million loss in the prior year period.  Our net loss
      attributable to Emeritus Corporation common shareholders was $14.9 million
      compared to $26.0 million in the prior year
  period.


·
            Average
      occupancy decreased to 86.2% in the first quarter of 2009 as compared to
      87.3% in the first quarter of 2008.


·
            Average
      rate per occupied unit increased to $3,655 in the first quarter of 2009 as
      compared to $3,336 in the first quarter of
2008.


·
            Net
      cash provided by operating activities was $21.2 million compared to $20.3
      million in the prior year period.


·
            We
      added one leased community to our portfolio, opened a new Alzheimer’s
      community, and opened one expansion at an existing community during the
      first quarter of 2009.


·
            We
      reclassified three underperforming communities to discontinued operations
      and sold one building that was held for sale during the first quarter of
      2008.





The
following table sets forth a summary of our property interests:





As
      of March 31,
              
              As
      of December 31,
              
              As
      of March 31,2009
              
              2008
              
              2008Buildings
              
              Units
              
              Buildings
              
              Units
              
              Buildings
              
              UnitsOwned
      (1)
              164
              
              13,095
              
              164
              
              13,111
              
              107
              
              8,781Leased
      (2 )
              105
              
              10,632
              
              104
              
              10,548
              
              149
              
              13,120Consolidated
      Portfolio
              269
              
              23,727
              
              268
              
              23,659
              
              256
              
              21,901Managed/Admin
      Services
              16
              
              1,689
              
              14
              
              1,479
              
              10
              
              1,184Joint
      Venture/Partnership
              24
              
              1,818
              
              24
              
              1,818
              
              23
              
              1,737Operated
      Portfolio
              309
              
              27,234
              
              306
              
              26,956
              
              289
              
              24,822Percentage
      increase  (3)
              1.0%
              
              1.0%
              
              6.6%
              
              9.2%
              
              0.7%
              
              0.6%





(1)   Of the owned
      communities at March 31, 2009, five are held for sale and are in
      discontinued operations, representing 538
  units.


(2)   Of
      the 105 leased communities at March 31, 2009, 79 are accounted for as
      operating leases, in which the assets and liabilities of the communities
      are not included in our condensed consolidated balance sheet and 22 are
      accounted for as capital leases, in which a long-term asset and
      corresponding liability is established on our balance
      sheet.  The remaining four leased communities are reflected in
      our condensed consolidated financial statements as owned communities
      because of accounting requirements related to sale-leaseback accounting,
      notwithstanding the legal sale of the communities and their subsequent
      leasing by us.


(3)   The
      percentage increase indicates the change from the prior year, or, in the
      case of March 31, 2009 and 2008, from the end of the prior fiscal
      year.





The
      total consolidated portfolio of 23,727 units at March 31, 2009, consists
      of the following unit types:





Total
      UnitsIndependent
      Living
              
              1,365Assisted
      Living
              
              17,943Alzheimer's
      Care
              
              3,370Skilled
      Nursing Care
              
              252Operating
      Units
              
              22,930Held
      for sale (5 properties)
              538Units
      taken out of service
              259Designed
      Capacity Units
              23,727





16
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 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.  These transactions are summarized below. For
details on significant transactions that affected the comparability of the
financial statements included in this Form 10-Q, see Note 4, Acquisitions and Other Significant
Transactions, in Notes to Condensed Consolidated Financial Statements
above.





Purchase
                      
                      
                      AmountPrice
      (1)
                      
                      
                      FinancedPortfolio
                      Date
                      
                      Communities
                      
                      
                      Units
                      
                      
                      (in
      thousands)Individual
      community
                      January
      2009
                      
                      
                      1
                      
                      
                      
                      83
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      (3
                      )Ventas
                      December
      2008
                      
                      
                      5
                      
                      
                      
                      432
                      
                      
                      
                      64,251
                      
                      
                      
                      55,621
                      
                      (2
                      )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
                      
                      (2
                      )Health
      Care REIT, Inc. (Tranche 1)
                      June
      2008
                      
                      
                      19
                      
                      
                      
                      1,564
                      
                      
                      
                      222,656
                      
                      
                      
                      213,220
                      
                      (2
                      )Individual
      community
                      June
      2008
                      
                      
                      1
                      
                      
                      
                      54
                      
                      
                      
                      6,750
                      
                      
                      
                      6,000
                      
                      (4
                      )Nationwide
      Health Properties, Inc.
                      April
      2008
                      
                      
                      24
                      
                      
                      
                      1,672
                      
                      
                      
                      313,954
                      
                      
                      
                      279,140
                      
                      (2
                      )Nationwide
      Health Properties, Inc.
                      January
      2008
                      
                      
                      1
                      
                      
                      
                      38
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      (5
                      )Individual
      community
                      January
      2008
                      
                      
                      1
                      
                      
                      
                      104
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      (3
                      )(1)
      Excludes closing costs and purchase accounting
adjustments.(2)
      Acquisition of properties previously operated under
leases.(3)
      Operating leases.(4)
      Purchase of community(5)
      Leased community included in February 2008 acquisition.





17
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





The
following table shows the changes in buildings from December 31, 2007, through
March 31, 2009, including those transactions previously described:





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







Results
of Operations





Two of
the important factors affecting our financial results are the rates we charge
our residents and the occupancy levels we achieve in our
communities.  In evaluating the rate component, we generally 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
generally 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.  We evaluate these and other operating
components for our consolidated portfolio, which includes the communities we own
and lease, and our operating portfolio, which also includes the communities we
manage.





18


Table of Contents


The table
below shows the average monthly revenue per occupied unit and occupancy rate for
our consolidated portfolio for the three months ended March 31, 2009 and
2008.  Please refer to the completecomparison contained
herein for further analysis of these rate and occupancy statistics.




Three
      Months ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      % DAverage
      monthly revenueper
      occupied unit
                      
                      $
                      3,655
                      
                      
                      $
                      3,336
                      
                      
                      $
                      319
                      
                      
                      
                      9.6
                      %Average
      occupancy rate
                      
                      
                      86.2
                      %
                      
                      
                      87.3
                      %
                      
                      
                      
                      
                      
                      
                      (1.1
                      )
                      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 2008 and
2009.  Although occupancy rates have recently leveled off or declined
slightly, we continue to evaluate the factors of rate and occupancy to find the
optimum balance in each community.





Since our
inception in 1993, we have incurred operating losses totaling approximately
$375.4 million as of March 31, 2009.  We believe that these losses
have resulted from our emphasis on expansion, financing costs arising from
multiple financing and refinancing transactions related to this expansion,
administrative and corporate expenses that we incurred in anticipation of
further expansion and increased emphasis on risk management and financial
reporting controls, the impact in the early years on many of our leases from
capital and financing lease treatments, and occupancy rates remaining lower for
longer periods than we anticipated.  Our current emphasis is on
maximization of cash flows as we work toward improvements in occupancy and
average rates, selective growth, and changes in our capital structure, such as
acquisition of leased properties and refinancing of existing high-rate
debt.


19
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 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 our
condensed consolidated statements of operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to
period.





Period-to-PeriodPercentageChangeFav
      / (Unfav)Percentage
      of Revenues
                
                
                Three
      MonthsThree
      Months Ended
                
                
                EndedMarch
      31,
                
                
                March
      31,2009
                
                
                2008
                
                
                
                2009-2008Revenues:
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                18.6
                %Expenses:Community
      operations*
                
                
                64.9
                
                
                
                65.0
                
                
                
                (18.5
                )General
      and administrative
                
                
                6.9
                
                
                
                8.0
                
                
                
                (2.5
                )Depreciation
      and amortization
                
                
                9.8
                
                
                
                16.7
                
                
                
                30.1Facility
      lease expense
                
                
                13.4
                
                
                
                12.1
                
                
                
                (30.8
                )Total
      operating expenses
                
                
                95.0
                
                
                
                101.8
                
                
                
                (10.7
                )Operating
      income (loss) from continuing operations
                
                
                5.0
                
                
                
                (1.8
                )
                
                
                N/AOther
      income (expense)Interest
      income
                
                
                0.1
                
                
                
                0.5
                
                
                
                (83.9
                )Interest
      expense
                
                
                (11.7
                )
                
                
                (11.2
                )
                
                
                (23.7
                )Change
      in fair value of interest rate swaps
                
                
                -
                
                
                
                (0.5
                )
                
                
                N/AEquity
      gains (losses) in unconsolidated joint ventures
                
                
                0.3
                
                
                
                (0.8
                )
                
                
                141.0Other,
      net
                
                
                -
                
                
                
                0.2
                
                
                
                (88.6
                )Net
      other expense
                
                
                (11.3
                )
                
                
                (11.8
                )
                
                
                (13.3
                )Loss
      from continuing operations before income taxes
                
                
                (6.3
                )
                
                
                (13.6
                )
                
                
                44.9Provision
      for income taxes
                
                
                (0.2
                )
                
                
                (0.1
                )
                
                
                (28.6
                )Loss
      from continuing operations
                
                
                (6.5
                )
                
                
                (13.7
                )
                
                
                44.3Loss
      from discontinued operations
                
                
                (0.4
                )
                
                
                (0.4
                )
                
                
                (39.6
                )Net
      loss
                
                
                (6.9
                )
                
                
                (14.1
                )
                
                
                41.9Less
      net loss attributable to the noncontrolling interest
                
                
                0.1
                
                
                
                -
                
                
                
                N/ANet
      loss attributable to Emeritus Corporation common
    shareholders
                
                
                (6.8
                %)
                
                
                (14.1
                %)
                
                
                40.0
                %





*  exclusive
of depreciation and amortization and facility lease expense shown
separately.








20
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


Comparison of the Three
Months Ended March 31, 2009 and 2008





Total
Operating Revenues:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Community
      revenue
                      
                      $
                      216,518
                      
                      
                      $
                      182,610
                      
                      
                      $
                      33,908
                      
                      
                      
                      18.6
                      %Management
      fees
                      
                      
                      1,467
                      
                      
                      
                      1,159
                      
                      
                      
                      308
                      
                      
                      
                      26.6
                      %Total
      operating revenues
                      
                      $
                      217,985
                      
                      
                      $
                      183,769
                      
                      
                      $
                      34,216
                      
                      
                      
                      18.6
                      %





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      DAverage
      monthly revenue per occupied unit
                      
                      $
                      3,655
                      
                      
                      $
                      3,336
                      
                      
                      $
                      319
                      
                      
                      
                      9.6
                      %Average
      occupancy rate
                      
                      
                      86.2
                      %
                      
                      
                      87.3
                      %
                      
                      
                      
                      
                      
                      
                      (1.1
                      )
                      ppt*





*
percentage points





Of the
$33.9 million increase in community revenues for the three months ended March
31, 2009, compared to the three months ended March 31, 2008, approximately $24.3
million was due to the addition of 18 new communities.  The remaining
increase of $9.6 million was primarily due to the increase in the average
monthly revenue per occupied unit, partially offset by a decrease in occupancy
rate.





We
continue our efforts to build our occupancy through marketing initiatives,
programs that address resident mix and a focus on property improvements and
other community-level enhancements to attract additional long-term residents and
increase occupancy while maintaining growth in average monthly revenue per
unit.  In spite of the current economic downturn, we believe that
these initiatives will continue to have a positive impact on operating
performance over time.





The
management fee revenue was derived from the Blackstone joint venture (Blackstone
JV), from which we recorded $871,000 and $801,000 in the three-month periods
ended March 31, 2009 and 2008, respectively, and from the Stowe JV and other
third-party contracts.  The Blackstone JV and the Stow JV accounted
for $93,000 of the increase and the remainder was due to the addition of six new
management contracts.





Community
Operations:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Community
      operations
                      
                      $
                      141,428
                      
                      
                      $
                      119,391
                      
                      
                      $
                      22,037
                      
                      
                      
                      18.5
                      %As
      a percent of revenue
                      
                      
                      64.9
                      %
                      
                      
                      65.0
                      %
                      
                      
                      
                      
                      
                      
                      (.1
                      )
                      ppt








Of the
$22.0 million increase in community operations expenses, $18.1 million was due
to the addition of 18 new communities.  The remaining increase of $3.9
million primarily includes increases in employee salaries and benefits of $1.8
million, repairs and maintenance of $561,000, and property taxes of $536,000,
with the remainder consisting of a net increase in various other community
operating expenses.


21
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





General
and Administrative:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)General
      and administrative
                      
                      $
                      14,980
                      
                      
                      $
                      14,611
                      
                      
                      $
                      369
                      
                      
                      
                      2.5
                      %As
      a percent of revenue
                      
                      
                      6.9
                      %
                      
                      
                      8.0
                      %
                      
                      
                      
                      
                      
                      
                      (1.1
                      )
                      ppt





The
increase in general and administrative expenses of $369,000 reflects the
Company’s growth over the past year resulting from the addition of 18 new
communities.  Salaries and benefits for regional and corporate
overhead positions increased by $488,000, resulting from both increases in the
number of personnel and in average salaries.  The increase in salaries
and benefits was offset in large part by a $435,000 decrease in non-cash stock
compensation expense, which amounted to $947,000 and $1.4 million for the three
months ended March 31, 2009 and 2008, respectively.  Ongoing stock
option expense is approximately $1.0 million per quarter based on the current
stock options outstanding.  The remaining net increase is due to
various other general and administrative expenses.





General
and administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative expense as a
percentage of community operating revenues for all managed and consolidated
communities decreased to 6.1% for the three months ended March 31, 2009 from
6.9% for the three months ended March 31, 2008.





Depreciation
and Amortization:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Depreciation
      and amortization
                      
                      $
                      21,428
                      
                      
                      $
                      30,635
                      
                      
                      $
                      (9,207
                      )
                      
                      
                      (30.1
                      %)As
      a percent of revenue
                      
                      
                      9.8
                      %
                      
                      
                      16.7
                      %
                      
                      
                      
                      
                      
                      
                      (6.9
                      )
                      ppt





The
decrease in depreciation and amortization expense of $9.2 million represents a
decrease in depreciation expense of $1.6 million and a decrease in amortization
expense of $7.6 million.  The decrease in depreciation expense is the
result of our purchase in 2008 of the real estate underlying 52 communities
accounted for as capital leases.  Assets under capital leases are
depreciated over the lease terms, which are generally shorter than the useful
lives.





The
decrease in amortization expense is due primarily to the in-place resident
contract intangible asset acquired in our acquisition of Summerville Senior
Living, Inc. on September 1, 2007.  This asset was fully amortized in
the 2009 first quarter, accounting for $7.5 million of the decrease in
amortization expense from the prior year period.





Facility
Lease Expense:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Operating
      lease expense
                      
                      $
                      21,685
                      
                      
                      $
                      17,354
                      
                      
                      $
                      4,331
                      
                      
                      
                      25.0
                      %Above/below
      market rent
                      
                      
                      2,516
                      
                      
                      
                      2,524
                      
                      
                      
                      (8
                      )
                      
                      
                      (0.3
                      %)Straight-line
      rent
                      
                      
                      4,995
                      
                      
                      
                      2,437
                      
                      
                      
                      2,558
                      
                      
                      
                      105.0
                      %Total
      facility lease expense
                      
                      $
                      29,196
                      
                      
                      $
                      22,315
                      
                      
                      $
                      6,881
                      
                      
                      
                      30.8
                      %As
      a percent of revenue
                      
                      
                      13.4
                      %
                      
                      
                      12.1
                      %
                      
                      
                      
                      
                      
                      
                      1.3
                      
                      ppt





22
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


The
increase in facility lease expense of $6.9 million was due to the addition of
new leased communities.  Operating lease expense increased by $4.3
million mostly due to a net increase of seven communities operated by us
under operating leases.  We leased 79 and 72 communities under
operating leases as of March 31, 2009 and 2008, respectively.





Interest
Income:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      income
                      
                      $
                      138
                      
                      
                      $
                      855
                      
                      
                      $
                      (717
                      )
                      
                      
                      (83.9
                      %)As
      a percent of revenue
                      
                      
                      0.1
                      %
                      
                      
                      0.5
                      %
                      
                      
                      
                      
                      
                      
                      (.4
                      )
                      ppt





Interest
income is primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.  Cash balances were
considerably lower in the first quarter of 2009 as compared to the first quarter
of 2008.  In addition, interest rates were much lower in the first
quarter of 2009 as compared to the first quarter of 2008.





Interest
Expense:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      expense
                      
                      $
                      25,633
                      
                      
                      $
                      20,725
                      
                      
                      $
                      4,908
                      
                      
                      
                      23.7
                      %As
      a percent of revenue
                      
                      
                      11.7
                      %
                      
                      
                      11.2
                      %
                      
                      
                      
                      
                      
                      
                      0.5
                      
                      ppt





The
increase in interest expense of $4.9 million for the first quarter of 2009 as
compared to the 2008 period was primarily due to the increase in long-term debt
in 2008 related to the refinancing of certain mortgages and a net increase in
debt obligations related to the purchase of 58 previously leased communities, of
which 52 were accounted for as capital leases.





Change
in Fair Value of Interest Rate Swaps:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      % D(in
      thousands, except percentages)Change
      in fair value of interest rate swaps
                      
                      $
                      90
                      
                      
                      $
                      (838
                      )
                      
                      $
                      928
                      
                      
                      
                      N/AAs
      a percent of revenue
                      
                      
                      –
                      
                      
                      
                      (0.5
                      %)
                      
                      
                      
                      
                      
                      
                      .5
                      
                      ppt





For the
three months ended March 31, 2009 and 2008, we had unrealized gains of $90,000
and unrealized losses of $838,000, respectively, which represent the change in
the fair value of the interest rate swaps.


23
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





Equity
Gains (Losses) in Unconsolidated Joint Ventures:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Equity
      gains (losses) inunconsolidated
      joint ventures
                      
                      $
                      624
                      
                      
                      $
                      (1,522
                      )
                      
                      $
                      2,146
                      
                      
                      
                      (141.0
                      %)As
      a percent of revenue
                      
                      
                      0.3
                      %
                      
                      
                      (0.8
                      %)
                      
                      
                      
                      
                      
                      
                      1.1
                      
                      ppt





The
equity gains of $687,000 from the Blackstone JV were partially offset by equity
losses of $63,000 from the Stow JV for the three months ended March 31,
2009.  The equity losses of $1.5 million in the three months ended
March 31, 2008, primarily reflect net equity losses of $1.5 million in the
Blackstone JV.





Equity
gains and losses related to the Blackstone JV are impacted by changes in the
fair value of its interest rate swap, which are recorded in the Blackstone JV’s
earnings.  Changes in the fair value of this swap resulted in equity
earnings of $480,000 in the 2009 first quarter and equity losses of $791,000 in
the 2008 period.





Other,
net:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Other,
      net
                      
                      $
                      46
                      
                      
                      $
                      402
                      
                      
                      $
                      (356
                      )
                      
                      
                      (88.6
                      %)As
      a percent of revenue
                      
                      
                      –
                      
                      
                      
                      0.2
                      %
                      
                      
                      
                      
                      
                      
                      (.2
                      )
                      ppt





Other,
net includes the amortization of deferred gains of $74,000 and $502,000 for the
three months ended March 31, 2009 and 2008, respectively.





Income
Taxes:





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Provision
      for income taxes
                      
                      $
                      (270
                      )
                      
                      $
                      (210
                      )
                      
                      $
                      (60
                      )
                      
                      
                      28.6
                      %As
      a percent of revenue
                      
                      
                      (0.2
                      %)
                      
                      
                      (0.1
                      %)
                      
                      
                      
                      
                      
                      
                      0.1
                      
                      ppt





The
income tax provisions in 2009 and 2008 represent estimated state income and
franchise tax liabilities.





Net Loss and Property-Related
Expense:





In
comparing the net loss for the three months ended March 31, 2009 and 2008, it is
important to consider our property-related expenses, which include depreciation
and amortization, facility lease expense, and interest expense that are directly
related to our communities, and which include capital lease accounting
treatment, finance accounting treatment, or straight-line accounting treatment
of rent escalators for many of our leases.  These accounting
treatments all result in greater property-related expense than actual lease
payments made in the early years of the affected leases and less
property-related expense than actual lease payments made in later years, as
detailed in the tables below.


24
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





Detail
      of property-related expenses from lease accounting
    treatment:Three
      Months Ended March 31,2009
                    
                    
                    2008
                    
                    
                    $D
                    
                    
                    %
      D(in
      thousands, except percentages)Total
      property-related expense:Depreciation
      and amortization
                    
                    $
                    21,428
                    
                    
                    $
                    30,635
                    
                    
                    $
                    (9,207
                    )
                    
                    
                    (30.1
                    %)Total
      facility lease expense
                    
                    
                    29,196
                    
                    
                    
                    22,315
                    
                    
                    
                    6,881
                    
                    
                    
                    30.8
                    %Interest
      expense
                    
                    
                    25,633
                    
                    
                    
                    20,725
                    
                    
                    
                    4,908
                    
                    
                    
                    23.7
                    %Total
      property-related expense
                    
                    $
                    76,257
                    
                    
                    $
                    73,675
                    
                    
                    $
                    2,582
                    
                    
                    
                    3.5
                    %Property-related
      expenses from lease accounting treatment:Depreciation
      and amortization
                    
                    $
                    3,089
                    
                    
                    $
                    9,593
                    
                    
                    $
                    (6,504
                    )
                    
                    
                    (67.8
                    %)Interest
      expense
                    
                    
                    3,728
                    
                    
                    
                    8,688
                    
                    
                    
                    (4,960
                    )
                    
                    
                    (57.1
                    %)Straight-line
      lease expense
                    
                    
                    4,995
                    
                    
                    
                    2,437
                    
                    
                    
                    2,558
                    
                    
                    
                    105.0
                    %Operating
      lease expense
                    
                    
                    21,685
                    
                    
                    
                    17,354
                    
                    
                    
                    4,331
                    
                    
                    
                    25.0
                    %Total
      property-related lease expense
                    
                    
                    33,497
                    
                    
                    
                    38,072
                    
                    
                    
                    (4,575
                    )
                    
                    
                    (12.0
                    %)Actual
      lease payments
                    
                    
                    (27,494
                    )
                    
                    
                    (31,580
                    )
                    
                    
                    4,086
                    
                    
                    
                    12.9
                    %Expense
      in excess of lease payments
                    
                    $
                    6,003
                    
                    
                    $
                    6,492
                    
                    
                    $
                    (489
                    )
                    
                    
                    (7.5
                    %)





Our
property-related expense associated with our leases exceeded our actual lease
payments by $6.0 million and $6.5 million for the three months ended March 31,
2009 and 2008, respectively.  The impact of lease accounting decreased
by $489,000 in the current year quarter from the comparable quarter last year
due primarily to a reduction in interest expense on the capital leases in
connection with the normal paydown of the lease obligation and the termination
of leases from the acquisition of the formerly leased
communities.  Notwithstanding the effects of lease accounting
treatment, the actual lease payments required under most of our leases will
continue to increase annually and, as a result, we will need to improve our
results from community operations to cover these increases.





25
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


Same
Community Comparison





Of the
269 communities included in our consolidated portfolio at March 31, 2009, we
include 241 communities in our “same communities” definition.  For
purposes of comparing the three months ended March 31, 2009 and 2008, same
communities are defined as those communities continuously operated since January
1, 2008, less any properties where new expansion projects were opened during the
comparable periods, and less communities accounted for as discontinued
operations.  In addition, the analysis below excludes general and
administrative expenses.





Three
      Months Ended March 31,(In
      thousands)$D
                    
                    
                    %
      D2009
                    
                    
                    2008
                    
                    
                    Fav
      / (Unfav)
                    
                    
                    Fav
      / (Unfav)Revenue
                    
                    $
                    188,305
                    
                    
                    $
                    181,082
                    
                    
                    $
                    7,223
                    
                    
                    
                    4.0
                    %Community
      operations *
                    
                    
                    (119,935
                    )
                    
                    
                    (116,871
                    )
                    
                    
                    (3,064
                    )
                    
                    
                    (2.6
                    )Community
      operating income
                    
                    
                    68,370
                    
                    
                    
                    64,211
                    
                    
                    
                    4,159
                    
                    
                    
                    6.5Depreciation
      & amortization
                    
                    
                    (13,581
                    )
                    
                    
                    (9,391
                    )
                    
                    
                    (4,190
                    )
                    
                    
                    (44.6
                    )Facility
      lease expense
                    
                    
                    (21,579
                    )
                    
                    
                    (30,893
                    )
                    
                    
                    9,314
                    
                    
                    
                    30.1Operating
      income
                    
                    
                    33,210
                    
                    
                    
                    23,927
                    
                    
                    
                    9,283
                    
                    
                    
                    38.8Interest
      expense, net
                    
                    
                    (19,519
                    )
                    
                    
                    (11,315
                    )
                    
                    
                    (8,204
                    )
                    
                    
                    (72.5
                    )Operating
      income after interest expense
                    
                    $
                    13,691
                    
                    
                    $
                    12,612
                    
                    
                    $
                    1,079
                    
                    
                    
                    8.6
                    %* exclusive
      of depreciation and amortization and facility lease expense shown
      separately





These
same communities represented $188.3 million or 87.0% of our total community
revenue of $216.5 million for the first quarter of 2009.  Of the $7.2
million increase in same community revenues, $7.7 million was due to
improvements in average revenue per occupied unit, partially offset by $467,000
due to the decrease in the average occupancy rate.


.





Three
      Months Ended March 31,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      DAverage
      monthly revenue per occupied unit
                      
                      $
                      3,514
                      
                      
                      $
                      3,371
                      
                      
                      $
                      143
                      
                      
                      
                      4.2
                      %Average
      occupancy rate
                      
                      
                      87.2
                      %
                      
                      
                      87.4
                      %
                      
                      
                      
                      
                      
                      
                      (.2
                      )
                      ppt





The
increase of $3.1 million in community operations expenses for our same
communities was primarily related to normal inflationary increases in
employee-related expenses of $1.4 million including salaries and workers’
compensation expense.  The remainder was primarily related to
increases in utilities, property taxes, repairs and maintenance, supplies, and
increases and decreases in various other community operating
expenses.





Property-related
expenses (depreciation and amortization, facility lease expense, and interest
expense, net of interest income) for our same communities increased by
approximately $3.1 million, which primarily reflects the effect of the
termination of leases from the acquisition of communities formerly leased, which
increased depreciation and amortization by $4.2 million and increased interest
expense by $8.2 million, while decreasing facility lease expense by $9.3
million.





Operating
income after interest expense for our same communities increased from $12.6
million to $13.7 million for a total increase of $1.1 million from the
comparable period of 2008, primarily as a result of an increase in operating
income and of the property-related expenses discussed above.  We will
continue our efforts to build our occupancy through increased marketing
initiatives, programs that address resident mix and a focus on property
improvements


26
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


and other
community-level enhancements to attract additional long-term residents and
increase occupancy while maintaining growth in average monthly revenue per
unit.  We believe that these initiatives will have a positive impact
on operating performance over time.





Liquidity
and Capital Resources





The
United States economy experienced a significant decline in the housing market
and a related weakness in the availability and affordability of credit during
2007 that continued through 2008 and into 2009.  We believe that the
slowdown in the housing market and the constriction of credit are likely to
continue throughout 2009.  Moreover, leading economic indicators such
as employment levels and income growth indicate that the nation is in a
recession.  However, we believe that need-driven demand for our
services continues to grow and remains resilient, in spite of the overall
housing and economic concerns, as evidenced by the relative stability in
occupancy, improvements in cash flows, and our ability to finance the
acquisition of 146 previously leased properties during 2007 and 2008, including
the acquisition of 58 communities in 2008.





At March
31, 2009, we had cash on hand of $42.8 million compared to $27.3 million at
December 31, 2008.  We had working capital deficits of $25.4 million
and $30.8 million at March 31, 2009 and December 31, 2008,
respectively.





We have
incurred significant operating losses since our inception.  Due to the
nature of our business, it is not unusual to operate in the position of a
working capital deficit because revenues are collected more quickly, often in
advance, than obligations are required to be paid.  The result is a
very low level of current assets to the extent cash has been deployed in
business development opportunities or to pay down long-term
liabilities.  Along those lines, the working capital deficit includes
$30.9 million of deferred revenue and unearned rental income.  The
level of current liabilities is not expected to increase from year to year in
such a way as to require the use of significant cash, except for debt
obligations of $44.2 million scheduled to mature in the next 12 months, of which
$36.4 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.  Given the unprecedented instability in worldwide credit
markets, there can be no assurance that we will be able to obtain such
refinancing.  Management believes that we will be able to sustain
positive operating cash flow or have adequate cash reserves for all necessary
operating, investing and financing activities including required debt service
and capital expenditures through at least the next 12 months.





While we
have reported positive cash flows from operating activities over the past three
years, our cash flows have not always been sufficient to pay all of our
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 transactions will be readily available to us,
or on terms attractive to us, but we believe that we will be able to sustain
positive operating cash flow or have adequate cash reserves and sources of
capital for all necessary investing and financing activities including required
debt service and capital expenditures through at least the next 12
months.  In February 2008, we obtained a $25.0 million unsecured
revolving line of credit as described below.





Sources
and Uses of Cash





The
following is a summary of cash flow information for the periods indicated (in
thousands):





Three
      Months Ended March 31,2009
                
                
                2008Cash
      provided by operating activities
                
                $
                21,190
                
                
                $
                20,254Cash
      used in investing activities
                
                
                (2,954
                )
                
                
                (17,975
                )Cash
      provided by (used in) financing activities
                
                
                (2,735
                )
                
                
                20,241Net
      increase in cash and cash equivalents
                
                
                15,501
                
                
                
                22,520Cash
      and cash equivalents at the beginning of the period
                
                
                27,254
                
                
                
                67,710Cash
      and cash equivalents at the end of the period
                
                $
                42,755
                
                
                $
                90,230





27
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


In the
first three months of 2009 and in each of the previous three years, we reported
positive net cash from operating activities in our consolidated statements of
cash flows.  Both the 2009 and 2008 periods were positively impacted
by purchasing the real estate underlying leased facilities, whereby we replaced
lease payments with lower levels of debt service and also avoided future
scheduled lease escalators.





Net cash
used in investing activities for the first quarter of 2009 was $3.0 million as
compared to $18.0 million in the first quarter of 2008.  Cash used in
investing activities in the first quarter of 2009 consisted primarily of $6.1
million for the acquisition of property and equipment, partially offset by $2.7
million in proceeds from the sale of one of the communities held for
sale.  Net cash used in investing activities for the first quarter of
2008 consisted primarily of $9.5 million for the acquisition of property and
equipment, $5.0 million in acquisition deposits, and $2.9 million of investments
in unconsolidated joint ventures.





Net cash
used in financing activities for the first quarter of 2009 consisted primarily
of $2.2 million in repayment of capital lease and financing obligations and
$290,000 in repayment of long-term debt, net of borrowings under construction
loans.  Net cash provided by financing activities for the first
quarter of 2008 consisted primarily of $31.8 million of proceeds of long-term
debt, partially offset by $5.7 million for repayment of capital lease and
financing obligations and $4.9 million in financing deposits.





At March
31, 2009, we had payment obligations for long-term debt and capital and
financing leases due in the next 12 months totaling approximately $53.7
million.  In addition, for the year ending December 31, 2009, we
anticipate that we will make investments of approximately $20.0 to $23.0
million for capital expenditures, comprised of approximately $18.0 million to
$20.0 million of net recurring capital expenditures (including corporate capital
expenditures) and approximately $2.0 million to $3.0 million of net capital
expenditures for community expansions.





On
February 8, 2008, we entered into a credit agreement with Wells Fargo Bank,
N.A., which provides a $25.0 million unsecured revolving line of
credit.  The credit agreement permits us to borrow from time to time
up to $25.0 million on an unsecured basis.  The credit agreement also
allows us to obtain letters of credit from the lender, provided that outstanding
letters of credit and any borrowings outstanding do not exceed $25.0 million
(see Note 5, Long-Term
Debt, for further details).  The line of credit matured on
February 15, 2009, and was extended to June 30, 2009.  There were no
outstanding borrowings under the line of credit as of March 31,
2009.





On May 1,
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 on
May 1, 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%.





28
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


Payment
Commitments





The
following table summarizes our contractual obligations at March 31, 2009, (in
thousands):





Principal
      and Lease Payments Due by PeriodAfter
      5Contractual Obligations
                  
                  Total
                  
                  
                  1 year
                  
                  
                  2-3 years
                  
                  
                  4-5 years
                  
                  
                  yearsLong-term
      debt, including current portion
                  
                  $
                  1,373,126
                  
                  
                  $
                  44,236
                  
                  
                  $
                  285,358
                  
                  
                  $
                  124,152
                  
                  
                  $
                  919,380Capital
      lease and financing obligations,including
      current portion
                  
                  
                  187,812
                  
                  
                  
                  9,448
                  
                  
                  
                  22,173
                  
                  
                  
                  27,865
                  
                  
                  
                  128,326Operating
      leases
                  
                  
                  1,085,871
                  
                  
                  
                  88,693
                  
                  
                  
                  192,096
                  
                  
                  
                  204,056
                  
                  
                  
                  601,026Liability
      related to unrecognized tax benefits (1)
                  
                  
                  2,618
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  2,649,427
                  
                  
                  $
                  142,377
                  
                  
                  $
                  499,627
                  
                  
                  $
                  356,073
                  
                  
                  $
                  1,648,732





(1)
            We
      have recognized total liabilities related to unrecognized tax benefits of
      $2.6 million as of March 31, 2009. The timing of payments related to these
      obligations is uncertain; however, none of this amount is expected to be
      paid within the next year.





The
following table summarizes interest on our contractual obligations at March 31,
2009, (in thousands):








Interest
      Due by PeriodAfter
      5Contractual Obligations
                  
                  Total
                  
                  
                  1 year
                  
                  
                  2-3 years
                  
                  
                  4-5 years
                  
                  
                  yearsLong-term
      debt
                  
                  $
                  588,771
                  
                  
                  $
                  86,657
                  
                  
                  $
                  163,312
                  
                  
                  $
                  120,350
                  
                  
                  $
                  218,452Capital
      lease and financing obligations
                  
                  
                  121,886
                  
                  
                  
                  14,200
                  
                  
                  
                  27,387
                  
                  
                  
                  25,536
                  
                  
                  
                  54,763$
                  710,657
                  
                  
                  $
                  100,857
                  
                  
                  $
                  190,699
                  
                  
                  $
                  145,886
                  
                  
                  $
                  273,215








Significant
Accounting Policies and Use of Estimates





For a
description of our significant accounting policies and estimates, see our Annual
Report on Form 10-K for the year ended December 31, 2008.





Impact of Inflation





To date,
inflation has not had a significant impact on us.  Inflation could,
however, affect our cost of doing business, and consequently, our operating
income due to limitations on our ability to increase monthly rates because of
our dependence on the senior resident population, most of whom rely on
relatively fixed incomes to pay for our services.  The monthly charges
for the resident's unit and assisted living services are influenced by the
location of the community and local competition.  Our ability to
increase revenues in proportion to increased operating expenses may be
limited.  We typically do not rely to a significant extent on
governmental reimbursement programs, which accounted for approximately 9.2% of
revenues for the three months ended March 31, 2009.  In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.  The near-term negative economic outlook in the United States
may impact our ability to raise our prices.





Non-GAAP
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 included in most GAAP
measures.  In this report, we define and use the non-GAAP financial
measure of Adjusted EBITDA/EBITDAR, as set forth below:


29
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





Definition of Adjusted
EBITDA/EBITDAR:





We define
Adjusted EBITDA as net loss adjusted for:





·
            gains
      or losses, net of tax, in discontinued
  operations,


·
            provision
      or benefit for income taxes,


·
            equity
      earnings or losses in unconsolidated joint
  ventures,


·
            gains
      or losses on sale of assets, termination of leases, or
      investments,


·
            write-off
      of terminated development projects
costs,


·
            depreciation
      and amortization,


·
            straight-line
      rent and above/below market rent
amortization,


·
            deferred
      move-in fee revenues,


·
            impairment
      losses,


·
            amortization
      of deferred gains,


·
            non-cash
      stock-based compensation expense,


·
            interest
      expense,


·
            change
      in fair value of interest rate
swaps,


·
            loan
      prepayment fees and debt refinancing
costs,


·
            interest
      income, and


·
            other
      non-cash unusual adjustments





We define
Adjusted EBITDAR as Adjusted EBITDA adjusted for facility lease
expense.





Management's Use of Adjusted
EBITDA/EBITDAR:





We use
Adjusted EBITDA/EBITDAR to assess our overall financial and operating
performance.  We believe these non-GAAP measures, as we have defined
them, are useful in identifying trends in our day-to-day performance because
they exclude items that have little or no significance to our day-to-day
operations.  These measures provide an assessment of controllable
expenses and afford management the ability to make decisions, which are expected
to facilitate meeting current financial goals, as well as achieve optimal
financial performance.  These measures also provide indicators for
management to determine if adjustments to current spending levels are
needed.





Adjusted
EBITDA/EBITDAR provide us with measures of financial performance, independent of
items that are beyond the control of management in the short-term, such as
depreciation and amortization, taxation, interest expense, and lease expense
associated with our capital structure.  These metrics measure our
financial performance based on operational factors that management can influence
in the short-term, namely the cost structure or expenses of the
organization.  Adjusted EBITDA/EBITDAR are some of the metrics used by
senior management to review the financial performance of the business on a
monthly basis and are used by research analysts and investors to evaluate the
performance and value of the companies in our industry.





Limitations of Adjusted
EBITDA/EBITDAR:





Adjusted
EBITDA/EBITDAR have limitations as analytical tools.  Material
limitations in making the adjustments to our losses to calculate Adjusted
EBITDA/EBITDAR and using this non-GAAP financial measure as compared to GAAP net
loss include:





·
            The
      items excluded from the calculation of Adjusted EBITDA/EBITDAR generally
      represent income or expense items that may have a significant effect on
      our financial results,


·
            Items
      determined to be non-recurring in nature could, nevertheless, re-occur in
      the future, and


·
            Depreciation
      and amortization, while not directly affecting our current cash position,
      does represent wear and tear and/or reduction in value of our
      properties.  If the cost to maintain our properties exceeds our
      expected routine capital expenditures, then this could affect our ability
      to attract and retain long-term residents at our
    communities.


30
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009


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





Adjusted
EBITDA/EBITDAR are not alternatives to net loss, loss from continuing
operations, or cash flows provided by or used in operating activities as
calculated and presented in accordance with GAAP.  You should not rely
on Adjusted EBITDA/EBITDAR as substitutes for any such GAAP financial
measure.  We strongly urge you to review the reconciliation of GAAP
net loss to Adjusted EBITDA/EBITDAR presented below, along with our consolidated
balance sheets, statements of operations, and cash flows.  In
addition, because Adjusted EBITDA/EBITDAR are not measures of financial
performance under GAAP and are susceptible to varying calculations, this measure
as presented 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/EBITDAR for the
three months ended March 31, 2009 and 2008:





Three
      Months EndedMarch
      31,2009
                
                
                2008Net
      loss
                
                $
                (15,095
                )
                
                $
                (25,968
                )Provision
      for income taxes
                
                
                270
                
                
                
                210Equity
      losses (gains) in unconsolidated joint ventures
                
                
                (624
                )
                
                
                1,522Depreciation
      and amortization
                
                
                21,428
                
                
                
                30,635Amortization
      of deferred gains
                
                
                (74
                )
                
                
                (502
                )Non-cash
      stock option compensation expenses
                
                
                947
                
                
                
                1,382Interest
      expense
                
                
                25,633
                
                
                
                20,725Straight-line
      rent expense
                
                
                4,995
                
                
                
                2,437Above/below
      market rent amortization
                
                
                2,516
                
                
                
                2,524Development
      and transaction costs written off
                
                
                113
                
                
                
                -Deferred
      revenues
                
                
                72
                
                
                
                1,596Change
      in fair value of interest rate swaps
                
                
                (90
                )
                
                
                838Interest
      income
                
                
                (138
                )
                
                
                (855
                )Discontinued
      operations
                
                
                1,043
                
                
                
                747Adjusted
      EBITDA
                
                
                40,996
                
                
                
                35,291Facility
      lease expense
                
                
                21,685
                
                
                
                17,354Adjusted
      EBITDAR
                
                $
                62,681
                
                
                $
                52,645





Cash
From Facility Operations





We define
Cash From Facility Operations (CFFO) as net cash provided by operating
activities adjusted for:





·
            changes
      in operating assets and
liabilities,


·
            principal
      amortization of capital lease obligations,
and


·
            recurring
      routine capital expenditures.





Recurring
routine capital expenditures include expenditures capitalized in accordance with
GAAP that are funded from CFFO. Amounts excluded from recurring routine capital
expenditures consist primarily of community purchases and/or major projects or
renovations that are funded using financing proceeds.


31
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 March
31, 2009





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) our ability to make regular recurring routine capital expenditures to
maintain and improve our communities on a period-to-period basis, (iii) for
planning purposes, including preparation of our annual budget and (iv) 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/bed per year.  Historically, we have spent in excess of these per
unit/bed amounts; however, there is no assurance that we will have funds
available to escrow or spend these per unit/bed 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 discretionary
expenditures, since we may have mandatory debt service requirements or other
non-discretionary expenditures not reflected in the measure.





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, and (2) our
ability to make regular recurring routine 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 operating
activities, along with our 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
following table shows cash flows from facility operations (in
thousands):





Three
      Months EndedMarch
      31,2009
                
                
                2008Net
      cash provided by operating activities
                
                $
                21,190
                
                
                $
                20,254Adjust
      for changes in operating assets and liabilities
                
                
                (4,203
                )
                
                
                (4,147
                )Recurring
      capital expenditures, net
                
                
                (4,010
                )
                
                
                (3,469
                )Repayment
      of capital lease obligations and financing obligations
                
                
                (2,234
                )
                
                
                (5,690
                )Cash
      From Facility Operations
                
                $
                10,743
                
                
                $
                6,948











32





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





Our
earnings are affected by changes in interest rates as a result of our short-term
and long-term borrowings.  At March 31, 2009, we had approximately
$169.4 million of variable rate borrowings based on monthly LIBOR.  Of
the total variable rate debt of $169.4 million, $64.1 million varies with
monthly LIBOR with no LIBOR floors or ceilings.  For every 1% change
in the monthly LIBOR on this $64.1 million in variable rate debt, interest
expense will either increase or decrease by $641,000.  As of March 31,
2009, the weighted average variable rate is 2.79% in excess of the monthly LIBOR
on $64.1 million of the variable rate debt, and the monthly LIBOR rate was
0.50063%.   In addition, we have variable rate debt of $105.3
million that has LIBOR floors at a weighted average floor of 2.60% and a
weighted average spread of 3.86%, for a total weighted average rate of
6.46%.  The LIBOR floors effectively make this debt fixed rate debt as
long as the monthly LIBOR rate is less than the 2.60% weighted average
floor.  Increases or decreases to the monthly LIBOR rate do not change
interest expense on this variable rate debt until the monthly LIBOR rate rises
above the floor, and conversely, interest expense does not decrease when the
monthly LIBOR rates falls below the floor.  This analysis does not
consider changes in the actual level of borrowings or operating lease
obligations that may occur subsequent to March 31, 2009.  This
analysis also does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment, nor does it consider
actions that management might be able to take with respect to our financial
structure to mitigate the exposure to such a change.





We
currently have two interest rate swap contracts with a combined notional amount
of $32.0 million.  A 100-basis point increase in interest rates would
increase the fair value of these swaps by approximately $733,000 and a 100-basis
point decrease in interest rates would decrease the fair value of these swap
contracts by approximately $771,000.





The
downturn in the United States housing market in 2007 and 2008 triggered a
constriction in the availability of credit that is expected to continue in
2009.  This could impact our ability to borrow money or refinance
existing obligations at acceptable rates of interest.  Thus far, we
have experienced no significant barriers to obtaining credit.  See
Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.








Item 4.  Controls and Procedures





(a)  Evaluation
of disclosure controls and procedures.





Our
co-chief executive officers and our chief financial officer, after evaluating
the effectiveness of our “disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this quarterly report, have concluded that, as of that date,
our disclosure controls and procedures were effective to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.





(b)
            Changes in internal
      controls





Management
has evaluated the effectiveness of the Company's internal controls through March
31, 2009.  Through our ongoing evaluation process to determine whether
any changes occurred in internal control procedures in the first quarter of
2009, management has concluded that there were no such changes that materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.














33


PART II.  OTHER INFORMATION





Items
2, 3, 4, and 5 are not applicable.





Item 1.  Legal Proceedings





From time
to time, we are subject to lawsuits and other matters in the normal course of
business, including claims related to general and professional
liability.  Accruals for these claims are based upon actuarial and/or
estimated exposure, taking into account self-insured retention or deductibles,
as applicable.  While we cannot predict the results with certainty, we
do not believe that any liability from any such lawsuits or other matters will
have a material effect on our financial position, results of operations, or
liquidity.





Item 1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A., Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results.  The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.





Item 6.  Exhibits





See
      Index to Exhibits, which is incorporated by
  reference.


34








SIGNATURE





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.








Dated:  May
      11, 2009
            EMERITUS
      CORPORATION(Registrant)/s/
      Raymond R. BrandstromRaymond
      R. Brandstrom, Executive Vice President - Finance, Chief Financial
      Officer, and Secretary


35


Index to Exhibits


FootnoteNumber
                  
                  Description
                  
                  Number10.57
                  
                  Documents
      Relating to Purchase and Financing of Communities from Fretus
      Investors10.57.11
                  Second
      Amendment to Loan Agreement (Amended and Restated) dated December 31,
      2008
                  
                  (1)by
      and among Fretus Investors El Paso LP,  as borrower, and Capmark
      Bank, as lender.10.57.12
                  The
      First Amendment to Promissory Note (Amended and Restated) of borrower
      dated
                  
                  (1)December
      31, 2008 in the principal amount of $16.8 million payable to Capmark
      Bank.10.62
                  
                  Documents
      Relating to Debt Financing with General Electric Capital
      Corporation  (4 Communities)10.62.07
                  Second
      Amendment to Loan Agreement dated December 31, 2008 between ESC Arbor
      Place,
                  
                  (1)LLC,
      as borrower, and General Electric Capital Corporation as
      lender,10.67
                  
                  Documents
      Relating to the Purchase of Communities from Health Care Properties
      Investors, Inc.10.67.15
                  First
      Amendment to Promissory note of 4 Delaware LLC dated December 31, 2008 in
      principal
                  
                  (1)amount
      of $26.2 million payable to Capmark Bank, (Emerichip Everett LLC, Phoenix
      LLC, SanAntonio
      AO LP, and Walla Walla)10.67.16
                  First
      Amendment to Promissory note of 4 Delaware LLC dated December 31, 2008 in
      principal
                  
                  (1)amount
      of $42.2 million payable to Capmark Bank, (Emerichip New Port Richey,
      Venice,Altomonte,
      Stockton, Cambria, El Paso, and Dallas)10.69
                  
                  Documents
      Relating to the Credit Agreement with Wells Fargo Bank, National
      Association Dated 200810.69.03
                  First
      Amendment to Credit Agreement dated February 16, 2009  by
      and
                  
                  (1)between
      Emeritus Corporation and Wells Fargo Bank, National
      Association10.73
                  
                  Documents
      Relating to the Lease of Communities from Affiliates of HCP (collectively
      "HCP")(11
      Communities) Dated 200810.73.04
                  Third
      Amendment to Master Lease and Security Agreement dated November 14, 2008
      between
                  
                  (1)Affiliates
      of HCP (collectively "HCP") and Emeritus Corporation (11
      communities)10.75
                  
                  Documents
      Relating to Debt Financing with Nationwide Health Properties,
      Inc.Dated
      200810.75.01
                  Second
      Amendment to Loan Agreement dated March 3, 2008 between with
      NHP
                  
                  (1)and
      Emeritus Corporation (2 communities)10.75.02
                  Third
      Amendment to Loan Agreement dated October 22, 2008 between
    NHP
                  
                  (1)and
      Emeritus Corporation10.76
                  
                  Documents
      Relating to Debt Financing with Capmark Bank (7
    communities)Dated
      200810.76.01
                  Freddie
      Mac Multifamily Mortgage, Security, Assignment of Rents and Security
      Agreement
                  
                  (1)dated
      December 30, 2008 between EMERICHIP Dover, LLC and Capmark
      Bank.Representative
      example of 7 communities which in total equal $36.3
    million.31.1
                  
                  Certification
      of Periodic Reports31.1.1
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      302
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 11,
      2009.31.1.2
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      302
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated May 11,
      2009.31.1.3
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      302
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 11,
      2009.32.1
                  
                  Certification
      of Periodic Reports32.1.1
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      906
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated May 11,
      2009.32.1.2
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      906
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated May 11,
      2009.32.1.3
                  Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      906
                  
                  (1)of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated May 11,
      2009.





Footnotes:(1)
            Filed
      herewith.








36