Brookdale Senior Living Inc (BKD) 2007 Q1 法說會逐字稿

Good day everyone, and welcome to today's Brookdale Senior Living's first quarter earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Ms. Francie Nagy, please go ahead, ma'am.

Thank you Melissa and good morning everyone. I would like to welcome all of you to the first quarter 2007 earnings call for Brookdale Senior Living. Joining us today are Bill Doniger, our Vice Chairman, Mark Schulte our co-CEO, Mark Ohlendorf our Co-President and Chief Financial Officer, and Bryan Richardson, our Chief Accounting Officer. Before I turn the call over to Bill, as Melissa mentioned, this call is being recorded, and the replay number is 888-203-1112 from within the U.S., or 719-457-0820 from outside of the U.S., and reference access code 411-5938. This 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 not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain other factors that cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in our SEC report.

I direct you to Brookdale Senior Living's earnings release for the full forward-looking statement legend. Now, I would like to turn the call over to Bill Doniger, Bill?

Thanks Francie. Well, we had kind of a great start to 2007 with our core business continuing to perform really well, and we had great momentum in terms of some of the growth initiatives that we've talked about such as the ancillary services and expansions. As we've mentioned in the past, our first quarter historically it's always been our lowest quarter in terms of CFFO per share, and this quarter is no different, but again we are quite optimistic for the rest of the year.

In terms of organic growth, revenue grew by 6.9% and NOI by 11.1% for the 12 months ended March 31st over the previous 12 months. And this is pretty much all [rate], so very little occupancy. So really strong pricing power remains in the business. In addition, margins improved. Our NOI margins improved to 36.3% up from 35% in the fourth quarter, so sequentially pretty good movement there. The one area we had a little bit of volatility is on the entrance fee side, particularly in two assets one in Florida and one in Arizona, but again that is a business that you really can't look out on a quarterly basis. And there was obviously some slow down in the housing market, so it took people longer to sell their houses.

That being said, we remain optimistic about that part of our business, as I think April is one of our better months ever and in fact April will look like it will be better in terms of net entrance fees than all of the -- all of the first quarter combined. So a little slow there, but you know, we're already starting to make that up. So again we still feel pretty good about that.

And then ancillary service business, the rollout of that until Legacy Brookdale assets has gone great. You know, last earnings call we talked about reaching about 8,000 units in calendar year 2007 in the old Brookdale units. Sitting here today, we are already providing services to little over 5,600. So we're ahead of plan which in the short-term creates some startup loses but in the long-term obviously is great for the business. We have historically tried to stay out of the guidance business, but last earnings call, we talked about trying to deliver to shareholders in the area of $2.10 to $2.20 per share of CFFO for calendar year 2007, with this quarter ending up at around $0.36 a share just doing simple math that would imply we would be earning at the low end of that range of about $1.74 for the remaining three quarters or about $0.58 per share per quarter on average. So -- and we still feel pretty good about that. So the rest of 2007 looks great and we are -- we're pretty excited. So with that, I'll turn it over to Mark.

Thanks Bill. Brookdale is the largest operator of senior living facilities in the U.S. with 546 locations, and we serve over 52,000 residents and have over 33,000 associates. As for our acquisition program, year-to-date we've closed on nine facilities for a total purchase price of $183.1 million.

We have also been successful in our strategy of buying back facilities we currently lease at attractive yields. Year-to-date of the acquisitions we have closed five of the facilities with 1,414 units for a total purchase price of a $152 million were previously either leased or managed by Brookdale. On the ancillary services side, our ancillary service company Innovative Senior Care, is doing very well.

We are exceeding our expectations for rollout of these services to the Legacy Brookdale units, while the existing platform remains strong. And I would like to highlight some of the work we are doing on that front. The Legacy ARC ancillary service business is strong contributing a $156 of monthly facility operating income per unit in Q1 of 2007 which is similar to the $155 to $160 per unit that we've achieved in the previous four quarters. As we mentioned on the previous call, our plan was to reach 8,000 new Legacy Brookdale units during 2007, and so far this year we've already started providing services at over 5,600 new units and are well ahead of our internal objectives.

The number of clinics we have has increased to 263 from a 186 at the end of 2006. And we now employ over 1,200 therapists, and we've employed 935 at the end of Q4 of '06. Since the acquisition of ARC last July, we've increased the number of units served from the original 12,000 to approximately 22,000 units. While many are still ramping up to our historical benchmarks, we expect to see the operating income impact of these increased units later this year. Our home health business is also ramping up with our closing of the Florida acquisition last quarter, and we have another three home health agencies we previously launched already billing for services.

In addition, we have license applications progressing for 14 other markets. Again, we are excited about the impact of home health, and what that can do for us for the rest of the year. As to Brookdale's core operations, the underlying supply-demand for senior living fundamentals remain very favorable.

Demand remains robust as evidenced in our high occupancy of about 91%. In addition, our average rates improved to $3,498 in Q1 of '07 from $3,402 in Q4 of '06. That's a 2.8% increase.

Facility operating income margins improved to 36.3% in Q1 of '07 from 35% in Q4 of '06. As we saw, our facility operating expenses increase a modest 1.6%.

Same store revenue growth including the ARC facilities was 6.9%. And facility operating income increased to 11.1% for the trailing 12 months ended March 31, 2007, over the 12 months ended March 31, 2006.

Q1'07 over Q1 '06, same store revenue increase, 7.2% and facility operating income increased 11.9%. Revenue increases for both time periods were driven primarily by rate growth which we expect to continue.

As Bill mentioned, we experienced some variability on the entrance fee side this past quarter with lower than expected sales.

However, the beginning of this quarter evidenced stronger sales momentum. April was a strong start to the quarter for entrance fee sales. We expect to have better net entrance fee results just for April compared to all of Q1 of '07.

I would like to again reiterate to you, as you have seen from past results, predicting these entry fees on a quarterly basis is difficult, with some quarters being over target and some under, but they are more consistent over longer periods of time, and should be measured on that basis.

We believe we'll reach our expected level of entrance fee cash flow over the next two quarters. With that, I would like to turn things over to Mark Ohlendorf, Brookdale's Co-President and CFO who will go over the CFFO results and our growth, expansion, and integration activities. Mark.

Thanks, Mark. The magnitude of our integration work continues to grow as we focus on the integration of ARC as well as the other acquisitions that we completed last year.

As we've discussed, our objectives in this integration includes several key items. First, to create cost efficiencies through a shared service support structure across Brookdale.

Second, develop a scalable platform that's able to appropriately support the various types of communities that we operate. And third, to further take advantage of best practices in operating efficiencies within our existing business.

During 2007, we started to go live on some of our next generation information systems including new fixed asset and project costing systems.

We've also rolled out across much of our organization a new online procurement portal which we call One Source. Through this procurement system, we are able to better leverage our purchasing and sourcing opportunities and closely measure compliance with our procurement programs across the organization.

We expect to complete the implementation of most common systems across all of our operating groups by the end of 2007.

The acquisition, expansion, and ancillary services initiatives that we are pursuing caused Brookdale to incur integration expenses, and startup losses and as a result the reported CFFO of $0.33 per share does not reflect our recurring run rate cash flow potential.

The net impact on first quarter results of these items is approximately $0.06 per share. Included in these integration and startup expenses are, one, acquisition and integration-related expenses of $3.1 million or $0.03 per share which are primarily related to systems and process integration as well as spending on activities to achieve the year one Sarb-Ox compliance.

Two, approximately $800,000 or $0.01 a share of startup expenses that are related to recent expansion openings and employee training costs for communities that we have acquired within the last year.

And three, $1.9 million or $0.02 cents per share of startup expenses, and losses related to the ancillary services rollout to new locations. We typically expect these investments to start generating returns in one to three quarters.

As we are starting a new fiscal year, I would like to provide you with a quick reminder as to some supplemental disclosures that we make each quarter.

First, the calculation of cash from facility operations or CFFO reflects our recurring capital expenditures for the quarter.

During the first quarter, we also spent $6 million of CapEx improving our infrastructure platform by investments and information systems and other technology.

We spent approximately $10.4 million on major CapEx projects at our existing, and newly acquired facilities improving their local market position to better equip us to maintain high occupancy and drive rates.

Other elements of our quarterly capital spending including our expansion and development related capital spending are shown in a table in our quarterly press release.

Second, the CFFO calculation reflects cash, lease, expense, each quarter. As you know, we have a number of leased facilities under a variety of structures and some of these leases are classified as capital leases for accounting purposes.

This occurs most frequently when we have an option to purchase leased assets. As a result some of the lease payments associated with these capital leases is accounted for in our financial statements, similar to debt amortization.

In addition, some of our debt instruments contain ongoing scheduled amortization features. For the quarter ended March 31st, this capital lease amortization is approximately $3.4 million.

A table is also included in our quarterly press release that summarizes these [principle] amortization amounts.

On the expansion front, as we previously discussed, Brookdale has undertaken an expansion program to leverage the operations of our existing portfolio.

We've currently identified 65 locations to expand over the next three years as well as the development of a new CCRC.

The total project cost for this initial expansion and development program is expected to be over $500 million on a mix of leased and owned properties.

During the first quarter, the Company opened expansions at four communities with a total of 196 units. Three of these expansions opened early to mid quarter and ended the first quarter at an average occupancy of 70%.

Two of the community expansions are already producing positive operating income. Three other expansions with 86 units are currently under construction. Again, we expect these expansion projects to generate 12% to 15% unleveraged yields on project costs and most of the accredited results of these expansions will be realized beginning in 2009.

I will now turn things over to Bryan Richardson, our Chief Accounting Officer, who will go over some of the financial highlights for the quarter.

Thank you Mark, and welcome every one. For Q1, 2007, resident fees were $445.3 million and total revenue was $446.8 million. Net loss of $35.1 million. Our net loss includes $90.7 million of non-cash charges, depreciation, amortization, stock compensation expense and straight-line lease expense, net of deferred gain amortization.

G&A expenses were $40.7 million which includes $10.8 million of non-cash stock compensation and nonrecurring expenses of $3.1 million during the quarter. Also, during the quarter, we incurred additional G&A as a result of the rollout of the ancillary services, approximately $1.1 million, and increased budget overhead in connection with the recent acquisitions.

As we look at the results, I would like to focus everyone on the key metrics that management and the board use in evaluating the business. Cash from facility operations, adjusted EBITDA, and facility operating income. Cash from facility operations or CFFO was $33.8 million or $0.33 per outstanding common share at March 31, 2007.

Adjusted EBITDA was $70.6 million and facility operating income was $160.3 million with an operating margin of 36%. As Bill mentioned earlier including ARC, same store revenues increased approximately 6.9% and the facility operating income improved 11.1% for the 12 months ended March 31, 2007, over the same period in 2006.

Adjusted EBITDA and cash flow from facility operations also included nonrecurring expenses of $3.1 million in Q1 '07.

Our net entrance fee sales for the quarter were $1.9 million. This is most easily seen in the adjusted EBITDA reconciliation which shows entrance fee receipts of $8.2 million and entrance fee disbursements or refunds of $6.3 million, for a net of $1.9 million of cash flow.

Turning to capital expenditures, recurring CapEx was $6.2 million in Q1, net of reimbursements. Recurring CapEx spending for Q1 2007 was consistent with what we would expect over a full year. In addition to our recurring CapEx, we have three other categories of spending.

Corporate CapEx of $6 million, which includes systems integration capital and for information technology systems and equipment. EBITDA enhancing CapEx of $10.4 million, which represents unusual or non-recurring capital items and major renovations. And development CapEx of $11.7 million for expansions and the de novo developments.

Looking at our balance sheet for March 31st, our cash position was $56 million. During January 2007, we obtained a $130 million of First Mortgage financing, in connection with NHP acquisition that closed during Q4, and the purchase in January '07, of our venture partners interest in a 114 unit bed facility located in Flint, Michigan. We also entered into an interest rate swap to convert the loan from floating to fixed.

At March 31st, our outstanding line balance was $128 million leaving available capacity of $173 million. On the tax front, we don't expect to pay any federal taxes for the remainder of 2007 or 2008.

In summary, we're pleased with our results and look forward to the rest of 2007. We'll now turn the call back to the operator for questions.

Thank you, the question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go first to Jerry Doctrow with Stifel Nicolaus.

Good morning. See, I've got a few [nitty gritty things] since we didn't -- have to put quite as much time to digest this as we may would have liked. The one question I guess on CFFO, was just about entrance fees. I mean, there's always lot of, sort of, [deduction stuff], but entrance fee -- not entrance fees but the startup losses on the ancillary businesses, that's something that I would expect that we would see recurring over the next few years, as you continue rollout. I just want to understand your logic, I guess, about deducting that out as a one time --

Jerry, its Mark. What we tried to show with the number we've given you is -- because as Bill mentioned, we had a very substantial ramp up to new units in the very end of the fourth quarter and into the first quarter. I mean, we've reached 5,600 of the 8,000 units we plan to get to in the Legacy Brookfield portfolio already this year.

Right, clearly way above what we expected, yes.

Right, so to get to that geography, the ramp up in the overhead costs is higher, and we're operating more smaller clinics early in the year. Now, those will mature, clearly, as we go through the year. We will open new clinics, but it seems unlikely that we would open 5,600 -- reach 5,600 new units in such a short period of time again.

So just on an ongoing basis, would you continue to just deduct out or -- that startup losses are -- is that going to stabilize to a smaller number that will just be left as a recurring expense?

Right, you would expect, as the G&A costs don't grow as we go through the year, this will diminish. Well, obviously, I've to see what the results look like, but you would expect by the end of the year that this would not be something that would be dilutive to the earnings.

Okay, and then there's the $3.3 million, I think it is, of the lease amortization. I just want to make sure that I'm absolutely clear on that. That's a number that you are not deducting from CFFO but which you suggest might reasonably be deducted because it is like a lease, even though it's not treated like that for accounting purposes, that's my understanding.

Well, we put the table in the press release and call out those numbers, because quite frankly, different people treat that differently. It's -- on the one end, in the nature of dead amortization, on the other hand, it is a cash payment related to a lease. So different people view that somewhat differently and because of that we'll present the information in the press release each quarter so that everyone has that.

Okay, let me just one -- one or two more if I could. Just -- could you just run over again the expansion units that are put into service and timing of that? You just went through it, but I didn't pick it up.

What we've got in service so far, we have in -- in the first quarter, we opened expansions at four locations with a 196 units. We currently have three other expansions underway with 86 units.

Okay, and of the three, I think you were saying that or the four, there were three that opened mid-quarter or something like that and one was late in the quarter, is that --

Yes, of the four, three opened mid to early quarter and are already 70% occupied on average.

Okay, and do you just have ending share count, and then I've got one broad one and I'll -- I'll stop.

We do, give us just a second here. Actual shares outstanding, 101,320,000.

Okay, and then I just want to go back to one broad issue. I mean, the only hiccup to the extent there were any in the quarter are the entrance fee stuff which, I know from following ARC in the past, it's just one of the things that bounces around, but you sort of touched on, I guess, two areas, and you touched on housing market issues, and I think that particular topic is one of the things that people sometimes raise. I mean, how are you feeling about housing markets, sort of effecting that and you -- can you give us just a little bit more cover -- color, I guess, on why you're comfortable, sort of that the number's going to stabilize out as we go forward?

This is Bill Sheriff, Jerry. As the process of making the decision or people moving into the decision making mode and as they make the decision, and the timeline it takes to -- it gets protracted a little bit. You have a delay there in a period of time of that basis. As we see the market beginning to flatten, and as we actually track the days on market, of sales that are actually being affected, that seems to be stabilizing as well as we're building up a bigger pipeline, even though it is moving [through] slowly, it starts to adjust itself. And as you've seen, it's -- we've discussed in prior years.

All of that comes back, it's simply a timing matter. But people do adjust to the fact that they cannot sell their house for what their neighbors sold it more than a year ago plus 10%, and that's a very key part of the process, and you start seeing that adjustment, and we are affected primarily in two markets. The Tampa area and the Phoenix area. And we expect those to start gaining traction back as we work with broadening our pipeline. Even though it takes a little bit more time, to work people through the process.

Yes, Jerry, this is Mark Schulte. It's really a matter of the sales process for a period of time getting stretched out. That's another way to think of that. It's not inventory that's lost, that inventory is still there, and it's lumpy anyway as you said. So we saw during April, kick off to the second quarter. So we're comfortable again, over -- if you'll take a look at it over the longer period of time, 12 months or whatever, instead of quarter by quarter.

Okay, and your thought is that those markets are stabilizing at this point, so that you're actually tracking days on market or whatever, the basic housing markets.

Yes.

Okay, all right, thanks.

We'll go next to Kevin Fischbeck with Lehman Brothers.

Okay, thank you, good morning. Just to follow up on Jerry's question about the treatment of the lease-amortization. You mentioned that you put in a (inaudible) however they want, but if I'm interpreting both the comment at the beginning correctly, you are looking at Q1 as $0.36 of CFFO, which is the $0.33 reported, excluding $0.06 of integration costs and start up losses, and then you appear to, in fact, be deducting the $3 million for amortization. So you're including that $3 million as a deduction in this quarter, and I assume, in your annual guidance, is that right?

In our reported CFFO metric, it's $0.33 with the $0.06 of items that I talked about. The effect of the lease amortization is about $0.03.

Okay, but then -- but I guess, when Bill talked about the guidance at the beginning he was saying kind of $0.36, --

Yes.

-- applying $0.36 so that -- you're including it in the guidance, I guess.

That is correct.

Okay, and then, a couple of times, you mentioned that most of the same store growth in the quarter was driven by pricing. Do you have a break out of price versus volumes, in more detail?

Yes, we do. The 12-month over 12-month growth, about -- it's 6.9%, about 40 basis points of that is occupancy, with the balance being rate. If you look at it on a quarter-over-quarter basis, the first quarter '07 over first quarter of '06, the revenue's up 7.2%, all of which is rate.

Okay, and then given the variability in that number, I mean, you mentioned a few times that you're on track to hit your entrance fee targets, but do you have an actual target that you are able to disclose for the year? I don't remember hearing a number.

I don't think we've provided any specific details behind the range we talked about.

Okay, but you just -- I guess you had put in your guidance you are comfortable you are going to hit that number by year-end.

Yes, as Bill said, we're still comfortable with the 210 to 220 range.

Okay, and then, since it looks like you're a bit ahead of schedule on rolling out the ancillary services to the core Brookdale facilities, does that mean that you might be able to exceed that $8,000 -- 8,000 bed target in 2007 or is there anything structural about contracts that terminate, that might preclude you from really accelerating the whole process?

No, it does mean that we could exceed that level of penetration in the portfolio.

Okay, and then I guess the last question I have, the four communities that you opened this quarter, was that included in your kind of original $500 million expansion project or were these parties that were already up and running and so they are separate?

I believe they were not included in the $500 million project.

Right, they were not included; those were started before the acquisition of ARC by Brookdale.

Okay, so the three then that you have started now, those are included or are we --

Those are included, okay.

All right. Thank you.

We'll go next to Ryan Daniels with William Blair.

Hey, good morning guys. One quick question on the guidance you provided last quarter on the call for the $25 million in integration expenses. As we look at this quarter, if the apples to apples value incurred $3.1 million of it during the first quarter, so there's still about another $22 million, or was it actually greater in this quarter versus that $25 million you talked about?

There's actually two parts to that. This is Bryan. The -- we've got the expenses which Mark touched on as part of the non-recurring expense. In addition to that there is a portion of this that is capital, and I -- I touched on the corporate bucket of capital spending which includes the systems integration, that was actually about $6 million this quarter, which is primarily driven by the systems integration works. There is a portion of this that's capital, as well as a portion that's a non-recurring expense.

Okay, that's helpful, and then that will decline throughout the year, it sounds like.

That's correct, yes.

Okay, great, and then can you talk a little bit about some of the acquisitions you've done recently of -- obviously purchase back some of the facilities you were operating, bought those leases and the properties and then you bought a home health care operator. Is that little bit of a sign again of continued focus on returns, and maybe not seeing those type of returns out in the acquisition market for operators, but instead looking at least facilities and ancillary services more than actual companies?

Well, it's -- this is Bill, the purchase of assets that we already manage and lease from a risk return perspective are the best. Because obviously there is zero integration cost, risk, capital, because we spend the money on the assets, we don't have to spend capital to bring them to levels that we want to. So those are the best transactions, assuming you're in reasonable economic terms, which we have been, and then frankly, there are -- prices have gone up. I think we could make acquisitions that would be accretive, but as we sit here today with expansions, roll out of ancillary services, the earnings prospects for this Company without a lot of acquisitions to us is incredibly compelling. So there hasn't been a push to try to make acquisitions for acquisitions sense, because prices are higher than they have been but there haven't been large acquisitions recently. Again, the big ones are more lumpy. There are probably a few things percolating out there that we think might happen. But we're more focused on all of the stuff we have done over the last year, and if we do those well, the returns to investors should be, we think more than adequate.

Sure, and what about on the ancillaries, is that something we might see more of in the future? Not just the roll out of your services across the Brookdale portfolio, but may be moving into hospice or more home health acquisitions across the country, anything like that?

Yes, that's all totally within the realm of our expertise, capability, and objectives. You know, again, we have a lot more units to roll out inside of -- just getting in business inside the old Brookdale assets. So over time, you will see that but getting the ancillary business just inside of all our assets is the priority number one.

Okay, that's helpful, and then real quickly if we think of your, the leases you've done, obviously, purchasing some of those properties, have you tried to focus on the facilities that you want to expand so i.e. those that you're leasing and you don't own, but you see high occupancy and good opportunities to expand that, is that kind of the key target for you to buy that property then before you go through the lease, or -- I'm sorry, go through the expansion efforts?

We -- the answer is that these are good assets, and we're a high creditworthy tenant, so it is -- it's buying assets back from landlords, they're in the investment business too, and so it is not as easy as deciding which assets we want to own, high occupancy assets are assets that the landlord would like as well.

Right.

Low occupancy assets are probably the ones they're more likely to want to sell back, and so if they are low or operating them, we need to be pretty confident in our own kind of cooking to want to go buy those back assuming we will fill them up, and then expand them; we haven't really gotten to that point yet.

Okay, that's helpful. And then one last one, and I'll hop off. Just -- if we think of the ancillary, obviously, having a quicker pace this year, is there anything in particular behind that kind of from your expectations on the last call with 8,000 to sitting at 5,600 today, has it been easier to hire or have you just been more aggressive, kind of focusing on that as you just mentioned, anything particular, driving that so early on this year?

It's Mark, I'm not sure, "easier to hire," would be a good characterization. I mean it is a very competitive market out there for therapists.

Right.

I think if you'd attribute it to anything, it's inside the business. We're developing an ability to replicate this product and move it from market to market. The overhead cost in ISE this quarter was high, and it did ramp up quite a bit.

Right.

So we're spreading out that infrastructure throughout Brookdale and kind of making ourselves ready to roll that out. So I think I'd attribute it to developing a little expertise in the business as much as anything.

And probably being a little bit, I don't know, appropriately cautious, because a roll out of this business of this magnitude, there isn't really necessarily a lot you can point to in size, obviously, it's happened at the old American retirement communities, but again, the ambition here was pretty high, so you -- the going in objective was to be cautious about it, and frankly what the Company has done is actually been relatively -- absolutely very impressive in terms of getting people to -- the employees and associates at the facilities appreciating the value it provides to the residents and embracing it, and that is -- that's something that really is -- through a lot of hard work from management's perspective, so --

Sure, great, thanks a lot, that's helpful color.

We'll go next to Dennis Maloney with Goldman Sachs.

Hi, good morning. You've noted that dollars have chased acquisitions opportunities into space, driving pricing up. Have you seen dollars start to chase development opportunities in the space, could you comment broadly on what you're seeing on the new supply front as well as are there any markets where you're seeing disproportionate amount of new supply?

We're seeing about the same flat amount of new supply, we're not seeing any trend, certainly nationally or really in any particular markets. The 25,000 units a year that's been happening about the last five or six years, we're seeing pretty much that same pace.

It's interesting I think I saw on the screen, I'd -- actually didn't read it, but Sunrise put some note out that they're going to expand, I don't know, 15,000 units or something. It'll be interesting to see that they do that, given what -- again, what construction costs are and land prices are, and what you need to charge to develop reasonable returns on capital. When you do that math, what will come out at some level is we have a lot of pricing power left in our business, because to earn a 10% unleveraged return on cost, at least by our math, to develop an asset and fill it up, you need to charge rates that are substantially above what our average rate is right now. So we think that there is -- that is really, at the end of the day, going to continue to inhibit kind of overexpansion if you will.

And Bill, you mentioned pricing power there. If you do the math, what's the sustainability of this outsized rent growth that you guys are seeing? I think you saw 2.8% this quarter. When do you go to a more normalized level?

That is a very, very, very, very difficult to predict, so we're not going to try to do that, it's not something that we -- it's not really in the foreseeable future. We've given you last quarter's earnings thoughts over the next couple of years. So clearly, over that period of time, we remain optimistic beyond that, we would -- it's just too difficult to tell.

Then on the occupancy front, you've more or less stated that you're pretty much at full occupancy. Could you describe some of the frictional forces that prevent you from going higher from here?

Well, I think it's just average length of stay, so you have people leaving, moving out potentially to -- there are different levels of service or (inaudible), or whatever. So you're continuing in the leasing business.

Yes, I wouldn't want anyone to think that we're not trying to achieve a higher level of occupancy, it's simply the fact that once you get a property or a portfolio to 92% occupancy, the inventory that you have to sell is more limited and you need to get the right customer in the right situation to fill one of those units. It's a different situation than when you have more inventory, and --

What's the typical downtime between residents in the same unit?

That would vary wildly based on a particular community.

Yes, you have waitlists at some, and others that are in the 80s where it's, I don't know, months, I don't know, it's all over the place. Again, it's a very local asset based business, and it's hard to make generalizations for that kind of stuff.

Another feature of the stay is putting ourselves in a situation to care for folks longer with our service package and clearly, as we roll out the therapy services, that also helps us.

Really two things right, we are also -- we're rolling out therapy, we are doing expansions in some cases to bring a different level of care maybe assisted or even some private paid nursing into assets which will expand the length of stay for our residents. I am looking at proposals from management to add 15 or 20 or 30 beds to a facility where they'll have 40 move outs into either an assisted or nursing in the area that are going somewhere else, so if we add 15 or 20 beds there, and they're moving 40 out, that's the type of stuff, where we're going to build that asset and reasonably expect to earn 20% return on cost.

And then I've Mark Bifford here with me, he has a couple of questions as well.

When you look at your preference to own versus lease, where do you see that going, seeing as you're buying out your lease properties?

Again, we've -- we stated -- whenever asked -- and I don't think it's changed our preferences to own. I think our cost to capital is lower than -- all -- if not all of the landlords and so that is from our perspective -- the rates are a source of financing for us, and given that we think our cost to capital is lower. We'd again -- we can -- we would finance elsewhere. And so we would love doing all those, but they are very good assets and the landlords value them just as much as we do and we're -- a reasonably good credit, I'm pretty sure we pay our bills on time.

Now, you're -- and then when you look at your exposure to each specific property type, are there -- is there one property type that you're more attracted to versus the other?

No, I think -- well, again, what we have said in the past is that bigger assets are kind of easier to operate economies of scale, a -- and sometimes -- versus smaller assets, so a lot of -- what is -- in my opinion, what is incredibly oppressive -- impressive about -- or one of the things that's impressive about our business is the margins that we generate from very small assets relative to everybody else. That being said, the bigger ones are easier to operate, again margins are higher, but when you buy them, they're typically more expensive too.

Okay, and then lastly when you look at -- can you provide a little bit more color in your EBITDA enhancing CapEx versus your development CapEx, what would that entail?

Yes, that basically is just about every asset we buy, we put a substantial amount of capital into it, so when we talk about buying something to 8% yield on cost, there is the purchase price to the seller, but our cost includes -- and I would say 100% of our acquisitions, some amount of one-time spend that it may be something like carpets, it may be stuff that generate kind of better curve appeal, because it's a well-located asset that hasn't had enough capital put into it that if we spend that money we can charge more and generate returns that we are trying to generate, so then again it's primarily acquisitions.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Matthew Ripperger with Citigroup

Hi, thanks very much, just a couple of questions. Related to the two entrance fee markets you highlighted, I just wanted to see if you could give a rough percentage or a sense of how much of your entrance fee unit, which I think is around 3,000, you get from those two markets?

Let's do it -- let's do some quick math here. 30%. Yes, about 30% -- About 30% is in those two markets.

Okay, great and then the next question I had is -- you've given a couple of therapy-related metrics, but I wanted to just see if you could give sort of aggregate revenue and sort of NOI from therapy in the quarter for both legacy, ACR and Brookdale, and maybe give a sense of how you project that ramping up through the course of the year.

I don't think what we have -- I don't think we've given that -- I think the metric we have given is the old ARC stuff, 156 of NOI, the margin is roughly 30 --

30, low 30.

-- 30, so you can back into the revenues. And then on the new stuff, again, we're talking about kind of the first year of operation, about a -- about $50 turning to kind of the end of the year being about a $100, and then in kind of the -- thereafter getting up to that 150 per month.

Okay, that --

-- I think, with consistent margins.

Asked another way, when you look at sort of the implied projected improvement in CFFO through the course of the year, especially relative to the first quarter, how much of that would you attribute to therapy versus other initiatives?

Well, the ramp up in the ancillary service business is significant. If you walk through the math, Bill just described, where you go from -- startup losses to $50 a unit to a $100 to a $150 when you stabilize out a few quarters, you roll that out across 8,000 units, you can see the magnitude of that.

Okay, great. And the next question I had is, you gave long-term debt at the end of the quarter, could you also give current debt and the amount drawn on the line of credit?

The amount in the line of credit is 128, which had -- so we had availability at the end of the quarter of 173.

And current?

Just a second, we'll get -- quote the right number here. Current portion of long-term debt is [$19] million.

Great, and then the 163 million of acquisitions you've done subsequent to the quarter, have those -- can you just give a sense of how those have been financed?

Well, our typical method of financing is to draw off of our line and then replace the financing with more permanent financing thereafter. In some cases, we can actually put the permanent financing in at closing, it just depends on the timing of the deal.

But it's roughly 70% debt, 30% equity?

Yes, 60/40, 70/30, somewhere in that range.

Between 60 and 70.

Okay, and then you've commented on sort of the purchasing initiative in One Source and consolidating that across the legacy portfolio. Can you give an update on where that stands in the rollout and what the incremental opportunity from rolling that out companywide is?

Sure. I think actually the last wave of One Source rollouts occurred towards the end of April. We're rolling this out in about 100 location waves.

We're -- right now we're rolled out to a little over half of the locations, we're approaching the two-thirds level right now, we would expect to complete that within the next three months or so. So we'll be completely rolled out by third quarter and the items that this focuses on are non-labor, non-capital items. So it'd be all of our food, purchasing, all of our supply purchasing, those kinds of things. It's a substantial dollar amount that we're managing through that.

Great, and then I have one last question for Bill, if I could.

Yes.

You've commented in the past that the dividend policy is supposed to be a proxy for forward CFFO and based on your guidance the forward CFFO would ramp up pretty nicely. Are -- has the policy changed, or is it roughly consistent and does the change in entrance fee cash flows at all impact this dividend policy?

No and no.

And --

So we have a board meeting, I think, next month, to discuss the second quarter dividend, we -- the entrance fee thing again -- we were telling you factually what happened in the quarter. When we gave you our thoughts on the year, we were cognizant of what's going on in the housing market, so I would say this is not something that came as a surprise to us, but we're now talking about what's actually happened, but we -- it was not something that took us by surprise, and so we will -- again, as we said we remain confident for the rest of the year, and as we generate free cash flow, it is again our stated goal, it has not changed as to pay that out to investors.

Great, thank you very much.

And it appears we have no further questions at this time.

Okay, great, well, thank you all for joining us this morning. We look forward to speaking with you next quarter.

Once again, that does conclude today's call; we do appreciate your participation. You may disconnect at this time.