Alerislife Inc (ALR) 2005 Q3 法說會逐字稿

Good day and welcome to the Five Star Quality Care third quarter 2005 earnings results conference call. This call is being recorded. At this time for opening remarks, I would like to turn the conference over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Jessica. Good afternoon, everyone. Joining me on today's call are Evrett Benton, President and Chief Executive Officer, and Bruce Mackey, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, November 14, 2005. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Evrett Benton.

Thanks, Tim. Welcome to everyone that is joining us for today's conference call. To say the least, the third quarter was an active one for Five Star. We terminated 12 management agreements with Sunrise Senior Living services for $81.5 million, we raised about $60 million through a sale of common stock in a secondary equity offering, and we committed to a $58 million sale leaseback transaction with Senior Housing Properties Trust. Overall, we believe that the actions taken during the quarter better position the Company for sustained long-term growth.

Earlier today, Five Star reported a loss per share from continuing operations of $5.64 in the third quarter of 2005. However, obviously, these third-quarter results included several charges which require further discussion.

First, we recorded an $81.5 million charge for the termination of 12 management agreements with Sunrise. This amount includes a $1.3 million fee paid to Sunrise to accelerate the termination date. I'll talk about these terminations in more detail in a few minutes.

Second, Five Star recorded an asset impairment charge in the third quarter for $2.3 million regarding a sale leaseback transaction with Senior Housing for six communities which we previously acquired in June of 2005. These charges entirely relate to transaction costs. We used the proceeds from this $58 million sale to partially fund the termination of the Sunrise management agreements. Obviously, we will continue to operate these communities under a long-term lease with Senior Housing and we pay additional rent of $5.2 million per year for these six communities.

Finally, in the third quarter, former insurance providers notified us of $2.1 million of costs relating to prior periods. Specifically, we recorded about $720,000 of health insurance costs for an expired healthcare plan that we assumed with our purchase of LifeTrust America in November of 2004. In addition, we recorded a $1.4 million charge for insurance costs for periods prior to October of 2003 relating to our Sunrise managed properties. Without these charges totaling $86.1 million, income from continuing operations the third quarter would have been $0.11 per share. We think that this illustrates the strength of our core business.

Our decision to terminate the 12 management agreements with Sunrise was clearly the right thing to do, both for Five Star as a growing company and for the interests of our investors. While it will help simplify our story for investors, the real impact will be seen in our bottom-line performance.

You have heard me state several times that our Sunrise managed properties are some of the finest independent and assisted living communities in the country. And while our working relationship with Sunrise has grown over the past couple of years, our interests are not always fully aligned. At the end of the day, Sunrise's incentive is based on their ability to grow the top-line, while Five Star is clearly focused on improving its bottom-line performance.

Economically, terminating these management agreements with Sunrise makes sense for Five Star. By taking over the management of these communities, we are eliminating approximately $8.5 million from over $22 million of the annual management fees we pay to Sunrise. In addition, we believe that we can apply our proven operational expertise to drive savings to the bottom-line while continuing the 90%-plus occupancy level that we have maintained throughout our portfolio over this past year.

We think these additional cost savings may come in a number of forms. But for example, instead of paying Sunrise to insure these communities, as the operators we can now move them over to our own captive insurance companies and realizes some savings.

Now, given these considerations, we're very pleased to have been able to accelerate the original termination date on the 12 management agreements by two months. We took over operations of these communities on November 1. And by all reports the transition is going smoothly. We offered employment to all employees of these communities and over 99% have accepted, including all but two of the communities' executive directors.

The result has been an increase to our work force by almost 1900 employees and over 2500 residents for which we now have direct operational responsibility. As of today, we have moved almost all of the communities over to our IT systems and have begun the transition of third-party rehabilitation therapists to our own in-house program.

Now, while the transition of these communities in many ways can be viewed like an acquisition, the difference here is that we know these communities intimately. As a result, we are hopeful that the transition will continue to move ahead smoothly.

As you probably know, in order to partially fund the Sunrise termination, we completed a secondary offering in early September. Originally, we had sized this equity offering at 4 million shares. But it was upsized to 7.75 million shares because of investor interest. This allowed us to increase the number of Sunrise management agreements we could terminate from eight to 12.

Furthermore, the September stock offering, in combination with our December 2004 stock offering, have increase our public float by approximately 150%, from about 8 million shares outstanding to approximately 20 million shares outstanding today. We believe this increase creates a more efficient market for our stock and benefits both existing and potential shareholders.

Now let's review our existing operations. Turning to occupancy, overall, occupancy in the third quarter was 91%, which is an increase over the 90% occupancy we reported in the third quarter of 2004 as well as an increase sequentially over the 90% we reported in the second quarter of 2005. Occupancy in our same-store communities also continues to improve. For those communities we have operated continuously since July 1, 2004 occupancy has increased to 91% in the third quarter from 90% in the same period last year.

Now let's take a minute and review some trends in our other operating statistics. The average daily rate per resident in the third quarter decreased to $128 from $131 in the third quarter of 2004. As we discussed on last quarter's call, the reason for this decrease was because we acquired more independent and assisted living communities that have a lesser average rate than do our skilled nursing units.

On a same-store sales basis, the more relevant number, the average daily rate has increased by 4% to $137 in the third quarter from $132 during the same period last year. The percentage of our revenues that came from residents private resources was 64% in the third quarter, which is a 12% increase over last year and a 3%-plus increase sequentially. This is clear evidence of our continued focus on acquisitions that are prominently private pay.

Now moving on to labor costs. As you know, labor costs are more than 50% of our revenues. Our focus on keeping these costs down resulted in labor costs as a percentage of revenues declining by 70 basis points from 51.6% to 50.9% between the third quarters of 2004 and 2005.

I would now like to touch briefly on our pharmacy and rehabilitation businesses. Revenues in our pharmacy business increased 189% to $10.3 million in the third quarter compared to $3.6 million in the third quarter of 2004. Operating margins for our pharmacy business are below our expectations, and there are several reasons for this.

First, we just completed our third acquisition at the end of the second quarter and have only recently begun to move our own communities to this pharmacy. Second, we are consolidating all our pharmacies onto one software platform, and this process, as planned, has been drawn out and costly. Third, we have been preparing for the implementation of the federal government's prescription drug program known as Medicare Part D. We're hopeful that operating margins for our pharmacy business may begin to improve in 2006.

Our outpatient rehabilitation services are also continuing to grow. We have added seven communities to the nine independent assisted living communities that had our company's rehabilitation services on site as of last quarter's call. We are still on track to open 19 in total by year-end and have targeted an additional 21 communities for 2006.

At this point I'd like to turn the time over to Bruce Mackey, our Chief Financial Officer, who will discuss our financial results in more detail. Bruce?

Great. Thanks, Evrett. I would like to review the third-quarter numbers.

Our net revenues from residents were 185.7 million for the third quarter and increased by 22% when compared with the third quarter of 2004. This is due primarily to the 47 communities we acquired in November 2004, the six communities we acquired in June 2005, higher per diem charges to residents, and an increase in occupancy. I would also note that same-store net revenues from residents for those communities which we have continuously operated since July 1, 2004 have increased by 5%, due primarily to 4% higher per diem charges to residents and an increase in occupancy.

Moving on to expenses. Wages and benefits increased by 25% in the third quarter to 99.8 million from the third quarter of 2004. This increase in the third quarter is primarily due to the 47 communities we acquired in November 2004, the six communities we acquired in June 2005, and wage increases. Included in the third quarter of 2005 wages and benefits are about $720,000 of health insurance costs from expiring healthcare plans that we assumed with our purchase of LifeTrust America in November 2004.

Other operating expenses increased by 17% in the third quarter to 46.6 million as compared to the same period in 2004. This increase is primarily the result of 47 communities we acquired in November 2004, the six communities we acquired in June 2005, and increased charges from third parties. Included in the third quarter 2005 other operating expenses is a $1.4 million charge for insurance costs for periods prior to October of 2003 relating to our Sunrise managed properties.

The management fee at Sunrise rose by 14% in the third quarter, to 5.7 million from 5 million in the same period a year ago. This expense increased predominantly because of the increased revenues at these communities. By virtue of the termination of the 12 management agreements, we expect it to decrease by over $8 million annually.

G&A expenses in the third quarter increased by 42% to 6.9 million from the year-ago period. The increase in G&A expense primarily results from our increased operations at the 47 communities which we acquired in November 2004, the six communities we acquired in June 2005, and increased audit and professional service fees for compliance with the Sarbanes-Oxley Act of 2002. As I mentioned on the last call, Five Star incurred additional costs for Sarbanes-Oxley 404 compliance in 2005 rather than 2004 because we are a smallcap company. Even with these additional items, G&A for the third quarter was still only 3.5% of total revenues.

The termination expense of the 12 Sunrise management agreements arose from our August 30, 2005 notice to terminate 12 of the 30 management agreements for communities that Sunrise managed for us. On November 1, 2005, we terminated the 12 Sunrise management agreements for a payment of 81.5 million and we began to directly operate those communities.

As part of our termination of the 12 management agreements, Five Star entered into a sale leaseback transaction with Senior Housing for six assisted living communities. The sale leaseback was for $58 million and required initial rent of 5.2 million, or 9% per annum of the purchase price. The purchase price paid to us by Senior Housing was the same purchase price we paid for these six communities in June 2005. However, as a result of the sale leaseback transaction, we recognized a 2.31 million impairment charge to reduce the carrying value of these communities to the net amount received after transaction costs. This transaction occurred on October 31, 2005, but we classified these six communities as held for sale on our consolidated balance sheet as of September 30.

We financed the balance of the $81.5 million termination payment by using cash on hand and the proceeds from our September equity offering. EBITDA was a negative 81.7 million in the third quarter compared to a positive 1.8 million in the third quarter of 2004. Excluding the 86.1 million of charges described earlier, EBITDA would have been 4.4 million for the third quarter, an increase of over 220% over the third quarter of 2004.

Rent expense during the third quarter for the communities that we lease increased by 21% to 25 million from the third quarter of 2004. This is due to the additional communities that we began to lease in 2004 and 2005 and our payment of additional rent for capital improvements financed by Senior Housing since July 1, 2004.

Loss per share from continuing operations for the third quarter was $5.64 compared with income per share from continuing operations of $0.10 in the third quarter of 2004. To reiterate what Evrett had said earlier, without the 86.1 million of charges we would have recorded income per share of $0.11 in the third quarter of 2005.

Moving on to the balance sheet and some more items of note. Cash and cash equivalents was 47.7 million at the end of the third quarter. Had the $58 million sale leaseback transaction and the 81.5 million termination payment at Sunrise taken place by the end of the third quarter, our cash and cash equivalents would have been about 23 million.

Accounts receivable at the end of the third quarter were 40.2 million. Our days sales outstanding remains an industry-leading 19 days. As a reminder, this was achieved while factoring in 36% of our revenues for the quarter ended September 30, 2005 we received for Medicare and Medicaid programs that generally pay 30 days in arrears.

At the end of the third quarter we had 90.6 million of net property and equipment. Subsequent to quarter's end, on October 31, 2005, we sold six properties to Senior Housing for 58 million. The market value of our HUD insured mortgage notes is 45.5 million. The cash interest cost on these notes has a weighted average rate of approximately 7% per year. Principal and interest is due monthly through varying dates ranging from 2032 to 2039. These mortgages are secured by nine of our communities and contain standard HUD covenants. As of today we own 14 properties, five of which are unencumbered.

At the end of the third quarter we had no amounts outstanding on our $25 million revolving credit facility. As of today, November 14, 2005, we have 4 million outstanding on the facility. We also believe that we are currently in compliance with all material covenants of our mortgages and revolving credit facility.

In summary, the third quarter was an important one in solidifying Five Star's position as a leader in the senior living industry. We believe that the termination of the 12 Sunrise management agreements will allow us to increase profits at these communities in the future. In our core business, our operating metrics and bottom-line performance continue the strong trends of the past few quarters.

Overall, we believe that our proven track record as an acquirer and operator of senior living communities, our focus on maintaining high occupancy and operating margins, and our focus on increasing the percentage of our revenues that comes from residents private resources make Five Star an appealing choice for investors.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS). Jerry Doctrow, Legg Mason.

I had a few different things. I was wondering if we could get a little more color maybe to start on just the Sunrise transition just over November 1. Evrett, you had talked about maybe some additional savings. Is some of that stuff that could be realized fairly quickly over the next quarter or two? Should we be looking at it to phase in more next year? Any sense about that would be helpful.

You bet. Thanks, Jerry. Just a couple of points. It's probably a dual answer. There are certain things that we will be able to realize immediately. For example, one part of the insurance we have been able to switch over, and so we will see some smaller savings immediately from November 1. So there are certain things with regard to that. Secondly, we have in fact switched over several of the rehabilitation services over to our own employees. And that has had a reduction in the cost in that area. So, that, as you can tell, would be immediate. More long-term, we are continuing to review things such as the employee structure and how we would anticipate reshuffling if necessary the labor force there. And secondly, a number of the remainder of the insurance costs actually kick in at various points during 2006 as various programs are terminated and then move over to our own.

Great. A couple of specifics. I guess on the pharmacy margin, a little bit lower there. You said you'd sort of recover -- we sort of think of it, I guess, as more like a 9 to 10% margin like you did in the second quarter. How quickly might that come back?

It's not that it's come back. That's an excellent question, Jerry. First, we took over a pretty big pharmacy really at the start of this quarter. And there are integration costs that we just rolled in. And it happened that we had anticipated switching over to a very vaunted software system, the Rescot system, for all of our properties. And you have to input every drug. This isn't every resident or every patient, it's every drug. And so, we decided why would we wait and keep this new acquisition on the old system? Let's move everybody over and take care of that right now. And that in and of itself creates, as you can imagine, some disruption.

In addition, we like to right-size the inventory and make sure that we've got all that together. And then we're working through some contract -- employment contract issues, etcetera. So, all of that would be what we'd consider normal.

Look, this is a great opportunity for us, but it's still a little peanut of a company. We have got two more acquisitions that we hope to be able to talk about further before the end of this year. They are small as well, but they will continue to grow. So, at probably this time next year you're going to see the real fruits of that. You're exactly right, though; 9% -- the 9 to 10% is the proper amount. As we, one, get over the hump, which I think is a long-term positive, on Part D; two, add our own communities in; and three, get all the Rescot and the integration stuff on, then we're going to be able to take care of the things that we see here.

We're very bullish on this. This is an area where I think that we will have -- there are manifold reasons for going into this. We know what we're doing in this area. So, it is, however, putting all of the pieces in the right place. There wasn't anything that's going wrong. We planned the Rescot; it's just very expensive. We planned the acquisition; it just has integration costs. And we've got to get ready for Part D.

Jerry, I want to back up, because I heard that you had asked in the call with the Senior Housing folks about the number of communities. It's sort of a fun thing that we bounce back and forth to keep the analysts off balance. There are 12 management contracts that we are terminating with Sunrise. Two of those contracts relate to the Remington Club Phase 1 and Phase 2. By virtue of how we have traditionally viewed that Remington Club, it is operated as one community. But with regard to the filings which we actually make, it would show up as two. So, I don't want to -- I know that you might have been given some information. It's run by one executive director. It's one as one, if you will. But it shows up as Phase 1 and Phase 2, and it actually has different licenses. So, I hope that doesn't (multiple speakers)

So, we should call it 12 management contracts and 12 communities?

I think that that is probably the better way after Bruce and I have sort of gone through it, and Bruce beat me over the head to find out that that is how we are doing it.

Just one last thing. The depreciation and amortization dropped a bit in the quarter from second quarter. And I am assuming it will go down again as the 58 (indiscernible) 58 are done in the sale leaseback. Can you just give us some guidance as to what that run rate would be as we go to the fourth quarter into next year?

Bruce?

Yes, I think the Q3 number -- the drop from Q3 to Q2 is predominantly because of the $24 million sale leaseback. And again, you're right, it will drop down again. We are moving about $58 million of assets on our balance sheet. And actually if you look in our S3 (ph) that we filed, it has some pretty good notes, Jerry, on that. But I'm just trying to say about 85% of the purchase price went to buildings which we amortize over 40 years; another 5% went to FF&E which we amortize over -- depreciate, rather, over seven years. And the remainder was land, which, obviously, you don't amortize. If you back up those numbers, you should get fairly close to where we will be.

And that sale was October 31, right?

That's correct.

Jerry, on a normalized basis, did you say that we're going to make $0.07 per share?

I'm sorry?

Next question.

(OPERATOR INSTRUCTIONS). George Walsh, Gilford Securities.

Were there any balance sheet-type of benefits with the termination with SRC in terms of -- there was a mention during the Senior Housing call there was some type of reserve escrows. Is there anything in that area that is helping you working capital-wise?

This is Bruce Mackey. We -- the working capital is really consolidated on our balance sheet anyway. So, we've always had the benefit -- we might not have had direct control over that working capital, but it's always been on our balance sheet. There are some FF&E escrows (indiscernible) equipment. As part of the contracts we're required to pay anywhere from 2.85% to 3% of total revenues to these escrow accounts which can be used for FF&E purposes. As part of the termination of these 12 agreements we'll now have direct control of those funds that were in those escrow accounts.

So, that's a direct benefit to you from that?

Correct. I don't think it's that large. It's around 1.5 million to 2 million of funds, in my estimate.

Also with the -- what is the tax loss carryforward now looking like, and how do you expect to use that in terms of an ongoing tax rate?

We're still trying to figure that out right now. The rules may require us to amortize the termination payment to Sunrise over a 15-year period, or perhaps up to the remaining life of the contracts. We're still exploring that. If that is the case, for GAAP purposes we'll probably not be recording any tax expense as you saw in the third quarter, really, going forward for probably a few years. However, we will be a taxpayer to the extent as we amortize that termination payment over that life that we (indiscernible) our taxable income by a few million dollars per year. But it will not eliminate the entire amount.

It will over time.

Correct.

But for book purposes, under GAAP you won't -- as Bruce has suggested, over the next several years you will not see any provisions for taxes.

But we're still wrestling that one to the ground. That's not the final determination (multiple speakers)

As to tax.

Correct. We're still exploring that right now.

One of the things if you look forward with margins is that -- or even just on a pro forma basis as you had in the prospectus for the offering, if you ex out the termination fee, it looks like those operating margins go from about less than 1% to about 1.93%. And I would guess your cash flow margins or your EBITDA margins would be, I think, with that somewhere around 2.5%. That is an interesting benefit even before you guys get to put your hands on the things that are available for improvements, as you mentioned the three areas of the insurance and bringing various factors in-house. Is there any kind of quantification you can give in terms of what type of margins are available? I figure there's something like about 120 million of revenues with the Sunrise properties.

I would say in the ballpark of that. Evrett talked about a few of the savings that we think we can immediately achieve, some of the insurance savings and rehabilitation services. And then down the road we're going to work on the labor savings. I don't want to put a fine point on what we expect, but we think we expect margin to improve over the next, I would say, two to three quarters.

Absolutely. We haven't broken it out as you have. We see that our margins in both of those metrics that you have utilized, George, have continued to go the right way as a whole. And we believe that this will only add to that.

And is it something that it's -- how long is the -- but like you say, you know these properties very well. How long is the transition period before you think you realize a lot of the full benefit as a running rate? Is it going to take two or three quarters?

I think that's more correct. The reality is that while you know, the implementation is always -- there are just a number of things. You've got contracts in the way. In some instances we might be able to replace a vendor with someone that we have a greater confidence in at a lesser price. But it will take us a while to move through that because we're subject to that contract.

You also have to overcome the human element. People inherently don't like change. And these 1900 employees just went through a very large change. And we'll make changes along the way, but we don't want to dramatically disrupt their daily lives to such an extent.

Just to maybe buttress that, because I think Bruce makes a good point. We have now had receptions in every one of these buildings where we have had meetings with all of the employees, as well as all the residents. In addition, we have had all of the accountants up here, their controllers, all of the marketing folks up here, all the clinical folks up here to our home office in Newton. And in two weeks we're having all the executive directors up here. We continue to have a regular program for visiting them and for going through calls and training. So, we're fairly confident that that which we implemented and started implementing at just around Labor Day earlier this year will continue to bear positive fruit. We're real happy with the number of folks that signed on and happy with the employees that are there. We think we're maintaining and stabilizing what's there and we think that we'll be able to improve the bottom-line.

I would guess you think it's fairly considerable, because you have done an acquisition type of transaction in terms of on a relative basis to size and what you are doing. And relative to other deals going on out there, you must see something here, I would guess, significant that you would be wanting to do this kind of move. Because effectively it doesn't change the top-line. It's all from margins. So there must be something fairly significant there.

I think if you look at what we did in the S3 that we filed back in August, the margin on this is around 10%. It's a lot better than what you're seeing right now in the marketplace for acquisitions. And that really doesn't talk about anything that we can bring into the bottom-line ourselves.

(indiscernible)

I have a few other questions, but I will pass on and come back.

Jerry Doctrow, Legg Mason.

I was wondering, Evrett, if you could talk a little bit about acquisition environment. We've now got the book deal IPO in the market where they seem to be talking pretty aggressively about being an acquirer. What are you seeing out there? Is it getting more competitive, tougher to find things to buy? Where do you see your future on the acquisition side?

You bet. I think from a -- you're probably well aware, as everyone has noted, it is a very frothy market, first of all. Secondly, there are a number of opportunities out there. It is rather -- and we look at and review almost all of them. We review all of them that come through, but those that makes sense, we try to go after them. The problem is that in any capital funding mechanism, these are very, very high priced, so that as we look at it and look at how we can operate them and how we can raise the funds to acquire them, it's very difficult for us to make sense of the majority of them. That's not to say that we haven't found some and that we won't continue to move toward acquiring some things. I think that there is a lot of competition out there for these products, especially the higher-end ones. But we're pretty darn good at this. We've got a great team that looks at everything and we've got a great team that can bring these things through the door. So, we're going to get our share, but we're going to do it in a judicious manner.

In terms of, say, what your acquisitions -- in this -- when you got Sunrise, you bought, what, six or seven properties, maybe a little bit more this year. Is that kind of a reasonable volume to just think about where we might go forward?

Yes, it is. It is like fishing, though; sometimes you get in a whole school and you're able to pull in a bunch. If you look at 2004, we had a banner year with regard to that, not just with the LTA of 47. But from our perspective, that is a little light. But if you consider that Sunrise was in there, obviously, we then acquired "near 20" and maybe that is closer to what we would like to try to see. But it just depends on what we see out there. And the other side of it is that to the extent (technical difficulty) a portfolio, that always makes sense. It seems to be easier for us to finance those, easier for us to do the deal and, in all candor, easier for us to bring them into the house.

One of the other things that I think people have speculated about a lot is just sort of the rest of the Sunrise contracts, whether you are buying the rest of them out or whether you can by virtue of maybe just the sale, this purchase alone, put some additional -- have provided Sunrise maybe a little bit of additional incentive -- if we can say it that way -- to perform better on the bottom-line. Can you speak to that at all? Would you consider buying more and does the relationship change as a result of this transaction?

There are probably three points that I think that you are requesting or asking about there. Let me just take them. First is the relationship change. Well, it's changed a little bit, but the reality is that they're good corporate citizens. I think that they saw the benefit to us, and there was nothing personal here. So, we have been able to quickly right anything that might have been listing a little bit from that perspective, and hopefully we will continue on in the right direction.

Second, you asked what we plan with regard to that in the future. And that's -- from our perspective, we -- how much of the elephant can you eat at one time? We've got this that we're going to chew on and we hope that we are successful. But what the future holds, we really have not laid out any plans with regard to that.

Third, what we think will happen as far as how Sunrise handles these things. Hopefully this is an incentive to them to recognize that they can -- that they will be able to improve the operations on the remaining properties. So, everything that we presently see, while we certainly don't have plans going forward, we'll continue to work straight up and well with Sunrise. And I believe that we'll see some improvement in their operations on the remaining communities.

And Evrett, just for the record, our estimate for the quarter was $0.10. It was consensus that was $0.07. Take care.

George Walsh, Gilford Securities.

I just wonder if you could comment a bit on the -- I guess more as a measure perhaps of -- I kind of get a sense of the type of margins you could get out of these terminated contracts. You see that Brookdale is coming out, and they are 100% private pay. They seem very similar. Maybe you could comment on that. But while they were not particularly bringing things to the bottom-line, they seem to have some pretty good EBITDA margins of close to 10%. Is that something that is a reasonable type of number, or is that a potential target in terms of looking at in terms of operation of these kind of facilities?

George, thank you. That's actually a fairly complicated question, perhaps more than you might first envision. Of these 12 communities, eight of them are -- include what we call CCRCs, or continuing care retirement centers, which include some healthcare beds, skilled nursing beds, if you will. And so, from that perspective, those margins are routinely lower from an EBITDA perspective than other types of products in the senior living industry.

The highest margins, if you will, are independent. Then the second come assisted living. And as you move down then, obviously, the skilled nursing facilities. And so, while Brookdale -- you're exactly correct. While the Brookdale community is to a certain extent like ours -- they're nice, upscale, larger -- ours include some non-private pay; for example, Medicare and some healthcare insurance, as well as in a very, very few instances a minor amount of Medicaid. But that by itself, because it has skilled nursing in those beds, and there's 550 beds approximately, it changes what you're EBITDA is.

And in addition, we are a great company from the standpoint that we have now over two-thirds, if you will, of our units that we offer up are independent assisted living. We have this small part that we continue to diminish, if you will, which has some skilled nursing in it. So, our own EBITDA percentage is a little bit different. If you break it down, which we don't, but if you break it down you will see just what I said; independent is the highest with skilled nursing at the lowest. So, to say that Brookdale at 10%, could we equate to that, it isn't an apples-to-apples comparison. What I will tell you is that our own prognosis -- and we're now going through the budget process for these new communities -- allows us to see that we believe that we're going to be able to have a nice tick up on the percentage of EBITDA.

Okay. Because I noticed the -- at least the preliminary; they certainly have an interesting capitalization on a relative basis versus your current capitalization. So, I guess we'll just see how that deal does, I guess, in the next several weeks. I thought that was quite a spread between the two.

I think it could be. Just one comment on these IPOs. We think this is great. We think that's a great -- it's an opportunity for there to be other data points, if you will. And I think it's healthy for the industry to have some additional public companies.

With no other questions, I'd like to turn the conference back to Mr. Benton for any additional or closing remarks.

I want to thank everyone that's joined us for our third-quarter conference call. I would just like to underscore our excitement at where we are today as a company and the direction that we're headed. We look forward to speaking with you again on our fourth quarter and year-end conference call to update you all on our progress. Thank you.

Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and you may disconnect your phone line at this time.