Brookdale Senior Living Inc (BKD) 2006 Q1 法說會逐字稿

Good morning. My name is Leslie and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living, first quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session.

[OPERATOR INSTRUCTIONS].

Thank you. Ms. Nagy, you may begin your conference.

Thank you, Leslie and good morning every. I'd like to welcome all of you to the first quarter 2006 earnings call for Brookdale Senior Living. Joining us today are Bill Doniger our Vice Chairman; Mark Schulte our CEO; Mark Ohlendorf our Co-President and Stan Young our Chief Financial Officer.

Before I turn the call over to Bill, as Leslie mentioned this call is being recorded and the replay number is 800-642-1687 from within the U.S. or 706-645-9291 from outside of the U.S with an access code of 8808783. The call will also be available via webcast on our website www.brookdaleliving.com. I would also like to point out that statements today which are non historical facts may be deemed as forward looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements.

Certain other factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in our SEC reports. I direct you to Brookdale Senior Living's earning release for the full forward looking statement legend. Before I turn the call over to Bill, I would like to mention that we will be hosting our annual shareholder's meeting on May 18th, 2006 at 1:00 p.m. at the Four Season's Hotel in New York City.

Now, I'd like to turn the call over to Bill. Bill?

Thanks, Francie. Welcome everybody to our first quarter earnings call. Obviously we have some exciting news to discuss. You should know on Friday we announced our acquisition of American Retirement Corporation for $33 per share all cash. Before we get to that transaction, we'd like to talk about our first quarter earnings which also were quite pleasing to us.

Our quarter turned out to be great. Operations were strong and we starting to realize a lot the benefits and synergies we expected to realize from last year's merger of Brookdale and Alterra. In addition, we remain very active in our acquisition strategy having announced $751 million in transactions since the IPO that was for 104 facilities about 9,000 units. We expect to invest about $315 million of equity in these transactions when they all close. Also we raised our dividend in the first quarter from $0.25 to $0.35. So really from all aspects of the company we are incredibly pleased with the results.

Before I get to the bigger news the American Retirement acquisition, I'm going to turn this over to Mark Schulte who will lead us into the discussion of our first quarter results.

Thanks, Bill. We're really happy with the strong financial performance of Brookdale in the first quarter of 2006. A few highlights, 49% of our Q1 revenue came from independent living and CCRC facilities, 50.5% of our revenue came from the assisted living facilities and our largest [preferences] in Florida and Texas; Illinois and California. We continue to see strong industry fundamentals including high occupancy and consumer demand. As a result to the early success of our strategy, we raised our first quarter 2006 dividend to $0.35 a share an increase of 40% over the $0.25 a share dividend in Q4 of '05 and the dividend was paid in April.

Average occupancy for the quarter improved to 89.5% from 89.4% in Q4 of '05. Our average monthly rates increased to $3,116 from $3,062 in Q4 of '05 and our adjusted EBITDA of 26.9 million was up from 22.3 million in Q4 of '05. This is excluding a one time non-cash benefit of 4.7 million. Cash from facility operations was 13.3 million or $0.20 per share. Excluding developments, same store revenues were up 6.4% and facility operating income was up 14% for the quarter ended March 31, 2006 over Q1 of 2005.

This increase does not reflect the underlying growth characteristics of the portfolio as in Q1 of '06 we were benefiting from the synergies we realized from the merger the old Brookdale and Alterra. And we had a net loss of 19.3 million primarily due to 30.2 million non-cash expenses, including real estate depreciation and straight line lease payments.

To talk about our acquisitions and integration of those acquisitions over the quarter, I'm going to turn it over to Mark Ohlendorf, Co-President of Brookdale.

As Bill mentioned, since our IPO we've announced $750 million of transactions involving 100 properties and about 9,100 units. To date, we've closed $689 million worth of those transactions, representing about 7,800 units and we've invested approximately $268 million of equity in these closed transactions.

In the first quarter the Wellington Group acquisition closed as well as the first phase of the Liberty closing and in the second quarter we've closed the Southern Assisted Living acquisition and an acquisition of properties from AEW. The deal pipeline continues to be active. We intend to continue to [accretably] deploy capital in the acquisition area. Although obviously with the announcement of the American Retirement transaction, we'll be assessing timing of a number of these potential transactions.

First of all on the integration front between the Brookdale and Alterra legacy companies that started some six to nine months ago. In April of this year, the integrated enterprise information systems went live. This combines the operating systems so the two predecessor companies put us on a platform with a new generation of information systems that position us well for growth. In anticipation of the acquisition that we've announced since the IPO, we've also accelerated the implementation of a number of information systems. As a result of this a substantial portion of our one time CapEx and non-recurring GNA costs have been incurred by the end of the first quarter.

In addition to information systems other corporate functions such as human resources, dining, purchasing and asset management have been functioning in the company on a combined basis for some time. Before we talk about the integration of the acquisitions that we've completed, it's worth spending just a couple of minutes putting this into context. Again, a number of these transactions were announced in the first quarter of 2006. Generally the licensure and closing process takes a few months. So, these transactions that we've just closed were actually started some time earlier this year. This period of time is used as a planning period and in this period of time we involve our acquisition integration team in our existing infrastructure to complete the integration.

The integration activity occurs largely in two areas, first field operation management and second in centralized support activates. On the field operations front, we were fortunate to be able to hire a number of key managers from the acquired companies Southern Assist Living, Liberty and Wellington, which smoothes the transition for the site level people. The field operations' reporting structures are not in place for all these closed acquisitions.

On the central support front, again this relate primarily to information systems, accounting and management reporting. This integration work is generally complete for all acquisitions. We do in some cases however, when we acquire a company with existing infrastructure, leave that infrastructure in place and transition it over several months. And of course we consider that transaction period as we underwrite these acquisitions.

To give you some more detail on the first quarter I'll turn it over to Stan Young our CFO.

Thank you, Mark and welcome everyone. Brookdale Senior Living has completed its second full quarter since its formation on September 30th. For Q1 2006 residents fees were 221 million, and total revenue was 222.2 million with a net loss 19.3 million. Our net loss includes 30.2 million of non-cash charges for depreciation and amortization, stock compensation expense and straight line lease expense net of deferred gain of amortization.

GNA expenses were 21.1 million for the quarter. This includes 3 million of non-cash stock compensation expense and non-recurring expenses of $3 million during the quarter. Also during the quarter we incurred additional GNA as a result of increased staffing in connection with the acquisitions that came on line in Q1 and our coming on line in Q2.

We'd like to focus everyone on key non-GAAP measures used by management and the board. These include cash from facility operations was 13.3 million or $0.20 per outstanding common share at March 31st. Adjusted EBITDA was 26.9 million and facility operating income was 84 million with an operating margin of 38%. Adjusted EBITDA and cash flow from facility operations also include non-recurring expenses of $3 million.

Total CapEx for the quarter was 6.1 million net of reimbursements. Normal recurring CapEx was 2.1 million. Recurring CapEx spending for the quarter was delayed due to the implementation of a procurement program to focus our acquisition of furniture, carpet, et cetera and our focus on our recently completed acquisitions. We expect higher CapEx in Q2 and Q3 as a result of this delay. CapEx, as with working capital, can vary quarter to quarter due to timing, however, we expect the full year CapEx to be in line with our full-year budget of approximately 5 to $600 per unit. 1.3 million was for EBITDA enhancing CapEx. This includes projects related to the [planned] $10 million capital project at the six CCRC facilities and another 3.5 million at one assisted living facility. $2.7 million was, as Mark mentioned, for the capital information technology systems that went live during the second quarter of 2006.

In summary, we are pleased with our results and look forward to the balance of 2006. I'll now turn it back to Bill Doniger.

Okay, at this point I'd like to spend a few minutes talking about the larger transaction we announced on Friday. Again, as you probably saw, we signed a definitive agreement to purchase American Retirement Corporation for $33 per share or roughly $1.3 billion. We began talking to the company as early as January this past year and their board expressed to us a desire for an all cash transaction and given Brookdale did not have in excess of $1 billion of cash, Fortress Investment Group and Affiliated Funds agreed to backstop this transaction with a fully committed $1.3 billion common equity commitment. Included in that 1.3 billion is a $100 million investment from the principle and employees of Fortress.

This transaction was unanimously approved by the special committee of independent directors of Brookdale including advice of their own counsel and financial advisors. The way the transaction works is that Fortress agreed to buy $1.3 billion of common stock at a price of $36.93. That price is based upon a ten day trailing average of Brookdale's common stock as of last Thursday of $38.07 less a 3% fee which is intended to equal an underwriting commission that Brookdale would have to pay if they were going to hire an underwriter and raise public capital.

Following the closing of the transaction, Brookdale has the right for six months to repurchase up to 50% of the shares from Fortress at $36.93 if the capital is never called. If it is funded, that price is $38.07. It would Brookdale's intention subject to market conditions to raise this capital commensurate with the closing of the transaction which we would hope to happen some time during the third quarter.

In terms of the company's balance sheet going forward, our intention is to finance the company in the manner we have existing financing which is at an asset level. For owned assets we finance the assets with roughly two-thirds mortgage debt and one-third common equity and for leased assets we do not put any financing against those assets. In effect, look at the lease financing add leverage in, put no additional leverage on our balance sheet against those assets.

As I mentioned in the press release, Mark Schulte and Bill Sheriff will become the co-CEOs of the combined company. Bill Sheriff is not here; he had scheduled kind of an off-site annual management retreat with his senior managers and given this transaction he felt that it was important that he was with them personally to talk about the transaction and the exciting aspects for all of them. So, in future earnings call you will be hearing from Bill and he was disappointed he couldn't be here.

In terms of the combined company staff, once closed Brookdale will own roughly 530-odd properties in 34 states with in excess of 50,000. That makes us the largest operator of senior housing assets in the United States. Without given our too specific guidance on a combined basis the company should have in excess of $1.8 billion in revenues.

Now, I'd like to spend a moment talking about the valuation and rationale for the transaction. As Mark Ohlendorf said, we have a pretty robust pipeline of assets out there for sale. But its fair to say the portfolio of assets, while attractive, pale into comparison to the quality of these assets at American Retirement. In our view these are the - - this is the best portfolio of senior housing assets that exist outside of our own company and the opportunity to make an investment was extremely exciting to us.

In terms of valuation, we focus more on sum of the parts valuation as opposed to pure accretion. Obviously that is something you look at, but from our own buy perspective we basically looked at the different pieces of their company and capital structure. In terms of the owned assets, we valued them like we value assets we buy, lease quality assets. That they would trade in the market at roughly 7, 7.5% cap rate on our cost to manage. The leased assets we valued them in a similar fashion to how we have bought leased assets, roughly nine to 10 times net-net cash flow.

And when you do all of that you come up in our view with a reasonably attractive price and so we were - - think it's a fair price, but we are pretty enthused. And with the price, we really get upside in two ways. We get upside with cost savings, as Mark Ohlendorf has talked about and you have heard before there is cost savings from things like food and insurance and when you put companies of this magnitude together there is number of opportunities on that side. Secondly, there is obviously upside in their ancillary services business, which I will talk about in a minute.

So, in summary, what we think what we got is a really irreplaceable portfolio of great senior housing assets with really world class management team that stacks up as good as our management team. And frankly, we expect all the senior managers from American Retirement to join our company and be with in the long-term. There's a lot to do here.

With respect to the ancillary business first, over the last four or five years American Retirement has done a fantastic job of providing incremental services to their residence. Things like physical, speech, occupational therapy, that resident's use those services often contracting with outside services. American Retirement has done a great job bringing that capability in house. I think to put it in perspective, I think they earn about $150 per month per occupied unit in ancillary services to the residents. To put that in the context with our assets, we have roughly 35,000 units at roughly 90% occupancy that would imply pre-tax ancillary cash flow opportunity of roughly $57 million.

We currently generate about zero dollars in cash flow for these services, because we don't provide them. We've obviously taken a much more conservative approach in our valuation and we expect to kind of ramp up that business at our assets over the next 18 to 24 months. One of the reasons we are confident of the ability to achieve a fair number of ancillary cash flows at our assets with our residents, is the geographic overlap of the two portfolios. If you took a map of our assets and their assets and stuck one on top of the other, you'd be amazed about how much overlap there is. And that is incredibly powerful when you talk about trying to keep therapists with full case loads and being efficient.

The upside opportunity is cost savings. As we've told you before, when we put Brookdale and Alterra together we saved in the area of $15 million between the two companies. I would expect that savings to be substantially similar here, a fair bit of that comes from things like continuing to buy food, cheaper insurance, IT purchase, supplies. While there is some headcount reduction, a lot of which comes from pure normal run off of people leaving the company in an ordinary course. This is not about a massive headcount reduction. We don't need to really eliminate very many jobs at all to make it successful. There is a lot to do and we are trying to keep incredibly talented people busy. So, we have - - as much to do as kind of cost savings on the purchasing side more than anything else.

And really the last piece of the puzzle that is hard to quantify in terms of economics is their CCRC business. This is an incredibly, incredibly stable asset class that we've really just started to get into ourselves. We bought a handful of CCRC with our NBA acquisition. The American Retirement folks have been really in this business for 20 years. To put it into context where you have two to three year average length of stays in an independent or assisted living facility, on average, CCRC residents stay for up to 10 years. That's because they can age [and play], there's independent living, there's an assisted living and there's a nursing home facility on campus and that creates very, very stable long-term cash flows. We think that by bringing their expertise in-house we will in affect expand what we already think is a pretty exceptional acquisition platform. There are a lot of assets out there to buy and this will only help our acquisition strategy.

Really the last piece is discussing what we think this will do for us economically. I need to be a little bit careful here, because A) we don't own the company yet and it's a very early stage. And secondly, as I mentioned at the beginning of the call it would be our expectation over the shorter term to access public markets to raise equity, but that being the case I'll try to give you some dimensional thoughts on what we think this will do for us.

In the short-term this will be meaningfully accretive to us without any benefit of ancillary service revenues or cost savings. Next year we would expect this to add in the area of $0.20 to $0.25 on a stand alone basis. In the longer term, that is over the next 18 to 24 months, this is an incredibly powerful transaction for us. Trying to be a bit more specific, what we think will happen when we fully realize the benefits of cost savings and ancillary cash flows at our assets would be that on an annualized, kind of run rate basis we could add roughly $0.50 to $0.75 in cash earnings. We can't guarantee that result, but anything less than that would be really disappointing from our point of view. This is an incredibly talented management team we are bringing on board with really world-class assets and we couldn't be more excited about this transaction.

So with that, we can turn it over to Francie and questions.

Leslie, please open it up for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Kevin Fischbeck with Lehman Brothers.

Okay, thank you. Good morning. That was very helpful, Bill there at the end with some of the comments about the accretion. But I guess if you could just kind of help me think about it, I could give you the math here in minute on the shares, but what are you looking for exactly on the CFFO from ACR, what do you think they are going to be generating on a stand alone basis?

I guess, Kevin, I apologize for not answering the question, we've made it a policy of - - at Brookdale to not give specific guidance on our company. And given that we don't it for our own company, its unlikely were going to do it for somebody else's company. But we have obviously given you our sense of the accretion of the transaction is. You've done a reasonable job giving your views on Brookdale. And I think there is some guidance out there with respect from other analysts with American Retirement, none of which I think is meaningfully wrong, I would think at some levels maybe more conservative. Because it's based upon GAAP and we focus on cash. But I really can be more specific than what I've told you so far and I apologize for that.

Okay, that makes sense. The - - if you could just give a little bit more timing around - - or sense about the timing for the ancillary service business and more color there. Why didn't you provide these services before? And why do you now think it is the right thing to do, and again just timing about how that might rollout after the deal is closed?

Sure, since we've been in the business we've seen these services provided to our residents. So, our residents whether if someone falls down and hurts a hip or a leg and needs some type of treatment, typically at our facilities they have hired outside vendors to come in to provide the service. Frankly, over the last 18 months or so we've been so busy buying assets at very attractive price; we always thought we could eventually get to that part of the business. But it's a function of hiring therapists, putting in place a staffing, a training program.

It's clearly something we could have done and intended to do, but the opportunity to in effect buy those where we don't believe at the end of the day we're paying very much for that, because again, we valued the underlying assets and the cash flows. Our primary objective in the past has been really to pursue real estate related cash flows. And this is an important component of the business, but again it's still going to be an insignificant portion of our cash flows relative to the rest of the cash flow to the business.

So, it's really something that is a great business, we were fortunate to buy it versus build it. In terms of timing, like I said the intention is to be fully functional over the next 18 to 24 months. It's a little hard to be more specific than that at this point.

Okay and does this in any way mean that you are going to be slowing down on acquisitions. This seems like a pretty big pill to swallow. Are we going to focusing on this for the next nine months or do you still expect to be in the market for more deals?

In the first six months of the year we bought and integrated roughly 100 assets, small assets. They own about 80 assets, bigger assets in some ways this is a lot easier from incorporation into our business. The short answer we can generate incredibly powerful cash flows for our company just doing this. That being said, I think there is still assets out there to buy and we are going to be prudent about deploying incremental capital. I don't think those will be mutually exclusive and there are some things that we are working on. So, I don't thinks it's kind of an all or nothing thing, but we will obviously be pretty busy with this one.

Okay, great. Thanks.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Good thanks. Bill, I was just curious to get a little more color on the transaction, I know there is an 8-K out, but I haven't had time to fully digest it. Was - - did American Retirement sort of put it up for bid at all or was this just a negotiated transaction with you guys?

Well, we made the - - I personally made the initial call down to Bill and came down and talked about the idea of putting the two companies together. In terms of what their process it's probably more appropriate to wait for their proxy to come out which probably lays that out in greater detail. But the initial phone call came from me.

And do you have a sense of what timing is on the deal? And are you concerned at all about alternative bidders?

Well, we're always concerned about alternative bidders, because we certainly don't do this for breakup fees. The timing of the transaction, need to get a proxy filed and they need a shareholder vote, which we would hope to happen July, August timeframe, that would be our goal, but we don't obviously control the process - - the SEC process.

Okay and then just one or two more if I could. Just logistically, you mentioned the facilities overlap, from a management standpoint, you're leaving ACR management in place and obviously I know a lot about their ancillary businesses. Would staying in the same geographic area -- is it sort of they manage, you manage or could you have - - how do you sort some of those chain of command issues out on a practical level?

Well we clearly have a view, at this point I'd rather be more circumspect, because we have to lay it out for our employees, and again the idea of we'd like to talk to them and all the different companies in terms of our plan. So, it's a little premature to get specific about that. As the transaction proceeds and as we get towards closing, that might be something that will be a little bit more public. But, it's not some kind of massive overhaul or restructuring.

Okay and then just one last one, you may have touched on this earlier, but obviously the ancillary businesses get you in the Medicare businesses which Medicare financing which you've historically avoided. And I think you touched on the fact that you just don't think its going to be that material part of your revenue or cash flow at the end of the day. Have you given thought to the Medicare exposure?

Yes, of course, on a combined basis Medicare/Medicaid will be roughly I think in the area of 8-ish percent of total revenues. So, it's just not a material part of our business. I think if it every [inaudible] 10% it would mean that we'd knocked the ball out of the park. Certainly it hasn't been part of our business historically and it was something we focused on and I'm certainly no expert at being predictive in what is going to happen with Medicare reimbursement. It's a pretty fair guess to say it's not going to go up materially. But I think in the services provided by American Retirement we are on the right side of the policy which is the objective of getting the folks who receive these benefits those benefits at the lowest cost setting. And frankly in side an assisted or independent living facility it's a lot cheaper than say a nursing home or hospital.

Right. Okay, I guess that's it, thanks.

Your next question comes from the line of Matt Ripperger with Citigroup.

Hi, thanks very much. Just the first question on the quarter, of the same store revenue growth at 6.4 % can you just break out how much of that was occupancy versus price?

Yes, occupancy was less than 100 basis points. So, most of it was price. I think its roughly 90 basis points of occupancy and about a little over 5% in rate.

And as you go in to '06 is the rate trend that you are seeing currently roughly consistent with that 5% that you achieved in '05?

Hi, Matt, this is Mark Ohlendorf. I think if anything is occupancies across the industry have firmed up over the last six to 12 months, I think the rate behavior across the portfolio is probably a little stronger that what we've seen historically. That 4 to 5% range continues to look pretty solid.

Okay, great. The second question is about the ancillary from ACR. I know you mentioned the rehab, and the 57 million number I think was all rehab focused. They have some other initiatives I believe in hospice and institutional pharmacy. Have you thought at all about the opportunity from bringing some of those ancillaries in-house as well?

Well, they do do it again, the home health is a small part of their business and it's a growing part, again we didn't ascribe a ton of [value] to that. And on the pharmacy side they are in a joint venture, and again the revenue or cash flow contribution we assumed is de minimis, of course it could be there, but we're not counting on it.

Is their pharmacy joint venture something that you could potentially roll out to your other facilities, or who do you currently use for institutional pharmacies for the Brookdale properties?

We generally regionalize the pharmacy services that we have. Clearly the joint venture structure that ACR is using is something that we could replicate. But right now we have it spread out across dozens and dozens of pharmacies.

Okay, great. And then the last question I had is just I wanted to check on the NOL, where you stand right on that. Was ACR a cash tax payer, and how does this potentially impact your cash taxes going forward?

Just to be general, ACR was a cash tax payer. There is some tax benefits into '07 in this transaction without being specific. And really we start to be a bit of a tax payer in 2008. But as this thing progresses out, we will lay that out in more detail.

Okay, thanks very much.

Your next question comes from the line of Steve Valentine with Valentine Capital.

Yes, Hi Bill. I just wanted to drill down a little bit more on the acquisition pipeline and just talk about if you could give some color in terms of pricing. Have you seen any change there? What's the market like for kind of smaller transaction that you've been doing up until this one? And then any outlook for any other large scale type deals that might be in the market in the future for you to look at?

When we were out raising capital in November for our IPO, we said our business plan was to deploy a couple hundred million dollars, $200, $300 million of capital and potentially one major transaction. So, far to date, we've fortunately been able to accomplish both of those goals. In terms of the pricing in the market place, clearly by historical standards prices are pretty high. But what we've said and continue to say is we have a real strategic advantage in terms of our marginal cost to integrate from an overhead perspective and then expenses at the facility level.

And what I said generally was we were buying [inaudible] at our cost at roughly 7.6, 8% un-leveraged yield on assets and roughly 9 to 10% cash yields on leased assets. We are continuing to see assets and pricing on our cost in line with that. So, from a pricing perspective nothing has materially changed. In terms of other major large transactions, I think given this transaction our focus is going to be on some of the smaller one-off things where we kind of infill around our portfolio. Because again, getting this one done right and well will provide incredible cash flow for the company. So, the short-term need to focus on other big transactions is a lot less relevant.

Great, thanks.

Your next question comes from the line of Dennis Maloney with Goldman Sachs.

Hi, good morning. Most of my questions have been answered, but I do have a couple left. In ACR's 10-K they spoke about 24 million in maintenance CapEx to be spent in 2006, which translates to about 1,600 per unit, which seems kind of high. I'm just wondering if there's anything unique to 2006 or ACR's portfolio, that would necessitate a higher spend on CapEx?

That - - I think the CapEx number I guess can be quoted different ways. It may be called maintenance, some of that we think is kind of revenue enhancing CapEx, in our view and our underwriting. So we don't fundamentally - - there assets are great assets, they are clearly some - - they've made a bunch of acquisitions and so they, like we often spend capital upfront to improve the quality of the assets relative to previous owner. I'm not - - I can't really speak to how they account for it, but I don't see - - we don't see anything in their asset other than they are great assets that would change our view in terms of capital expenditures.

So from a modeling standpoint, you think it continues at 500, 600 range?

Yes, for assets that we have owned that is pretty reasonable. When we make acquisitions obviously we spend a bit more upfront, which we think about - - when we think about return on assets and equity we add into our basis, because it's kind of a one time non-recurring thing. But that's reasonable.

And then in acquiring ACR, it looks like you'll be getting some exposure to development. Do you think that is something you'll be increasingly focusing on more in the coming years?

Well the development business can be a good business. With our continued objective of paying out substantially all of our cash flows in the form dividends, that can't be a material part of our business if that's the capital structure strategy we want to maintain. And it is. That being said, they have a few developments farther out that we think are world-class assets, potentially trophy assets.

And secondly the development of CCRC assets in our view is a pretty attractive business, because 70 to 80% of the units are pre-sold prior to commencing development. So the real lease up risk that was problematic of the industry in the past is a lot less relevant there. So, you may see some development in our business, but again it's not going to be a material part of what we do.

And then just on the 1Q '06 results, were you surprised that you grew [since there are] only 10 basis sequentially or is there some seasonality to the business?

Actually, excuse me Dennis this is Mark Ohlendorf. There is some softness, typically from an occupancy standpoint right after the holiday period. So, on a historical basis if we were able to maintain flat occupancy through the first quarter that would be pretty successful. So, to see some incremental growth in the quarter was very encouraging.

Okay, great. And then just lastly, I apologize if you've mentioned this, could you offer a little more color on the 4.7 million non-recurring accrual reversal in the first quarter? What was it related to?

This is Stan Young. That was actually in the fourth quarter, we had an accrual reversal of employee benefits that were set up when Alterra emerged from bankruptcy. So that reversed out at the end of December '05.

Okay, great. Thank you, very much.

[OPERATOR INSTRUCTIONS]

We have a follow-up question from the line of Jerry Doctrow with Stifel Nicolaus.

Actually my question has been answered, thanks.

[OPERATOR INSTRUCTIONS]

Leslie, are there any more questions?

Ma'am we're still queuing.

Okay.

We have no questions at this time.

Okay, I guess that's it for us. Thank you for joining us this morning. We look forward to speaking with you next quarter.

This concludes today's conference call. You may now disconnect.