Brookdale Senior Living Inc (BKD) 2008 Q3 法說會逐字稿

Good morning, my name is Kate, and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living third quarter 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, Mr. Ross Rodman, you may begin your conference.

Thank you, Kate, and good morning, everyone. I would like to welcome all of you to the third quarter 2008 earnings call for Brookdale Senior Living. Joining us today our Bill Doniger, our Vice Chairman; Bill Sheriff, our CEO; and Mark Ohlendorf, our Co-President and Chief Financial Officer. Before I turn the call over to Bill, as Kate mentioned this call is being recorded, a replay will be available through November 12th, 2008, by calling 800-642-1687 from within the US, or 706-645-9291 from outside the US and referencing access code 71534021. This call is also available via webcast on our website.

I would also like to point out that all statements today, which are not historical facts may be deemed to be forward-looking statements within the meaning of the Federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued last night, and in the reports we'll file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor Statement.

And now, with that, I would like to turn the call over to Bill Doniger. Bill?

Thanks, Ross. Before Bill gets to the operating results for the quarter, I want to spend a minute on our overall strategy. We're obviously in the midst of a unique economic climate that presents challenges for everyone, but that same environment equally offers opportunity. We believe that the investment opportunities in our sector over the next year and beyond may be the best of our generation. To remind you, Brookdale went public in 2005 with over 30,000 units. Its formation, however, was the result of a series of attractively-priced, distressed but high-quality assets over the five-year period from 2000 to 2005. During that period, I believe the company acquired almost 25,000 units and the returns on invested capital during that period were truly outstanding.

The opportunities presented by the previous cycle were really a function primarily of the over building of the 1990s. The market had gotten ahead of itself in terms of supply. Today supply and demand is a quite positive balance. We believe we're entering in to a new cycle, where similar acquisition opportunities with similar returns exist. This time, however, it's due to liquidity issues, and shorter-term economic distress. The companies with the strongest balance sheets will those best positioned to capitalize on the opportunity. We intend to be one of those companies.

So what are we doing? First and foremost, we continue to grow our liquidity. We slowed down our stock purchase program and are using all of our excess cash to pay down our corporate line, which matures in May of 2009, which is our only debt maturity of any significance over the next couple of years. Through operating cash flow and a number of other initiatives, we are quite comfortable with our ability to deal with corporate line and actually expect to do so before the end of this year.

One specific item I will mention is that our Board of Directors is seriously considering the reduction or quite possibly the elimination of our dividend as soon as the fourth quarter of this year. Brookdale is the only senior housing operator to pay a dividend, and while we are very comfortable with our ability to service that dividend, even in difficult times, it is quite clear from our recent share price decline that the market not only discounts the value of dividend but may in fact be penalizing the company for depleting its liquidity. To the extent that the Board makes that decision, we believe we'll be quite proactive in using that liquidity in seeking acquisition opportunities that we know will exist and returning to the successful strategy that made the company what it is today.

With that, I would like to turn the call over to Bill.

Thanks, Bill. First, let's discuss our Q3 results. As we described on our last call, we saw upward momentum in occupancy towards the end of Q2 and continuing in Q3. Our occupancy increased every month of the third quarter. Average occupancy for the quarter was 89.7%, up almost a point over Q2. Our month-ending occupancy at the end of September was 90.3, up 1.3% from the end of June. This increase was the result of several factors. First, there is pent-up demand. People are delaying their decision to move in. But really needed to make the move. This was evidenced by an increase in the acuity level of move-ins during the quarter, particularly in the retirement center independent living. Both retirement centers and assisted living had strong performances, both ending September over 90%.

Second, we saw our lead base increase in Q2 over Q1. As a result, we strategically increased incentives at the beginning of Q3 to get prospects off the fence. We did see a small impact on our rate growth this quarter, but a sizable portion of these incentives burn off by the end of the year. The amount of these incentives on average are less than 70% of one month's rent, and again, they burn off over a relatively short period of time.

Third, we noted an increase in our residents length of stay. This is influenced by the expanding ancillary services delivered in our buildings, therapy, home health, and private duty companion care services.

Fourth, the sales and marketing initiatives that we have talked about in the past produced strong results in the quarter. Our cross-selling activities, our market cluster M3 initiatives which assist customers to find the best-fitting community for their needs in terms of either price and/or acuity, did well. In the 12 markets, with 13,600 units where M3 has been initiated by the beginning of 2008, the occupancy increased 2.4% in Q3 over Q2. We expect to reach a total of 20 markets with 20,000-plus units by mid-next year.

Also the additions to assisted living sales force positively impacted occupancy. In the four regions where a good bit of the new sales resources were focused, average occupancy for Q3 2008 is up over 5.2% from the same period last year, and 3.6% from the second quarter of 2008. Our entry fee business held up reasonably well for most of the quarter, but a number of transactions scheduled for September closings didn't happen as the credit and financial market crisis started to intensify. We closed several of these in October and expect to close a few more carryovers in Q4.

For the quarter, our net entrance fees was a positive cash contribution of $5.7 million as depicted in the adjusted EBITDA table in the earnings release.

Turning to ancillary services, our ancillary service business continued to grow and expand the need-based health care component of our business. This part of our business is especially attractive in times like this. These services are provided to our own residents and are need-based.

Prior to ISC becoming operational in the community, residents already used to some extent third-party providers. As a result, Brookdale has an existing receptive market for over 45,000 potential customers living in our communities. And we have yet to reach many of these residents. In addition to our widely-used therapy service, we have been expanding our home health platform which allows us to provide a second type of ancillary service to the same residents using the same infrastructure, hence materially increasing profitability. The rollout continues to go very well with ISC ancillary revenue increasing 29% over the prior-year quarter, and NOI was up 39% between the periods.

At the end of the quarter, we were providing therapy services to almost 34,000 units in our portfolio, up from 28,000 in Q3 of last year, and over 15,000 units with home health versus 7,400 last year. We believe over the next 18 to 24 months we can reach approximately 40,000 units with our therapy services and 30,000 with our home health. This represents substantial cash flow upside from a relatively stable business line.

Another component of our ancillary services that we provide and haven't talked about is our private-duty companion care services, which is a private-pay home health type service, used mainly in independent living. This service increases occupancy by retaining residents longer, and in this difficult economy as people search for lower-cost alternatives, is contributing to independent living move-ins. Third quarter revenue for this service was 50% higher than a year ago, and at a 20% margin contributed almost $3.5 million so far this year. I should note this is not revenue and contribution from the companion services not included in the IFC revenue and contribution per unit metrics.

I will now turn the call over to Mark to give you more detail on our expense initiatives and the financial results for the quarter.

Thanks, Bill. Let me start by looking at some of the highlights of our financial performance for the third quarter. Cash from facility operations or CFFO for the quarter was $0.30 a share before non-recurring expenses of approximately $0.08 a share. In the third quarter we recorded $3.6 million of hurricane-related expenses, and incurred $3.9 million of acquisition, integration, and severance-related costs. We also incurred $1 million of start-up expenses related to the ahead-of-plan roll-out of our ancillary services.

Our same-store results for the year-over-year showed an increase in revenue of 4.9%, a result of average revenue per unit increasing at 6.5%, and a decline in occupancy of 1.4%. Expenses grew at 7.3% resulting in same-store NOI growth of 60 basis points.

Looking at the year-over-year same-store expenses, excluding ancillary services, expenses were up $54.4 million or 5.3%. Some key areas for this increase were, first, our spending was $4.7 million higher for advertising and other lead-generating activities; second, utility costs were up $5 million; third, we incurred $4.3 million related to our community-level initiatives to reduce management vacancies and increase sales resources, and finally we have conformed various elements of our employee benefit programs across the company which has generally broadened participation and resulted in $10 million of incremental cost. Excluding these items, our same-store expenses increased under 3.5%. Excluding these items, our same-store expenses increased under 3.5%. We're clearly operating in a rapidly changing and fluid environment.

On the cost side of the business, it is our sense that unique cost pressures are declining significantly. As a result, we expect that commodity cost pressures that we have seen in recent quarters will abate we move forward.

As we develop our plans for 2009, we're taking a number of steps to contain cost growth, and in some cases reduce cost to reflect these new economic realities with the target of reducing our normal cost increase from around 3.5% to closer to 2.5%. 60% of our cost structure is salaries, wages, and benefits, and we have already taken actions to moderate labor and benefit cost increases through limited increases closer to 2% than the 3% to 3.5% we have seen historically, and increased employee participation in benefit program costs. Another 18% of our cost structure relates to commodity items such as food and utilities. Our procurement programs have already locked in reduced pricing with vendors, targeting meaningful savings. Given the current environment we are reducing spending to minimal levels in some discretionary areas as well such as travel, training and supplies.

Our sales and marketing initiatives like M3 have stabilized such that we can refine and reduce costs of marketing communications and lead generation without sacrificing our efforts to build occupancy. We also continue to focus on reducing corporate overhead costs.

Finally, let me spend a moment on the balance sheet. Other than our line of credit, we have virtually no mortgage debt maturities without extension rights until 2011. Our current line of credit matures next May when we expect to have approximately $150 to $200 million of line of credit need. That assuming balance sheet cash of $40 million to $50 million, and which consists mainly of letters of credit which are used for various deposits and regulatory requirements.

In addition to the substantial internally generated cash flow, we have 15 unencumbered assets available with a total of more than 1100 units where we might do sale leasebacks or other asset financings. Without any pending acquisitions, our corporate financing needs are substantially lower than they have been historically, and the size of our new corporate line will reflect that. The net of it is that we remain confident we will be able to address the line maturity issue in a timely manner and Brookdale will have the resources necessary to grow its business consistent with the market opportunities as they present themselves.

To conclude, let me turn it back to Bill Sheriff.

While Q3 had many positive trends, the recent worsening financial news and significant drop in consumer confidence will have some impact on our industry. But should not be overestimated. Although our October occupancy held stable and actually was a very slight positive, we are assuming that maintaining flat occupancy will be challenging for the balance of 2008 and into 2009 and that rate growth will moderate. Our best estimate right now is approximately 3.5% to 4% annualized rate growth due to the lower increases for existing residents, and a higher use of incentives.

We can't control consumer confidence, so we will continue to focus on the things that we can control, such as ancillary services, marketing programs that take advantage of our market clusters, as well as the significant flexibility and differentiation that our therapy, home health, and companion care services gives us across our product lines. We will also focus hard on agressive management of expenses and CapEx.

As we have said before and was strongly demonstrated in Q3, we believe that we don't need the economic environment to materially improve, but instead simply stabilize to see significant and rapid improvements in occupancy.

As you saw, we improved occupancy by 130 basis points in the third quarter, just in three months, and we believe that demand will continue to build and when things begin to stabilize, occupancy improvement will be there. And finally, as Bill mentioned, there will be opportunities for us to deploy capital at very attractive risk adjusted returns. That has rewarded us well in the past and we believe it will do so again in the future. We want to thank you for your participation today and we will now turn it over to the operator to begin the question and answer session.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. And your first question is from Ryan Daniels from William Blair.

Yes, good morning, guys. I had a handful of questions, if I could. First off, I guess for Mark, I noticed the accounts receivable spiked up a bit. It looks like a bigger than typical increase in the quarter. Are you seeing anything on your resident front where they are delaying payments or any issues there? Or is that just some timing?

Not particularly. Much of that, Ryan, relates to the home health acquisitions that we have done, and some regulatory transitions that occur shortly after those acquisitions. We expect to see those numbers come back down over the next quarter or so.

That's more -- getting the appropriate provider license numbers transferred?

That's right. The transfer of the provider number and so forth.

Okay. It looks like home health, and that actually leads into my next question, was up quite a bit, I think the number of units was up about 100% year-over-year. Is that just a lot of acquisition activity? Have you got some of the licenses you have been waiting to get? Any color on that would be helpful?

Combination of both. We did get some additional licenses we have been waiting on for some time. And we've effected seven acquisitions to date, have more in the queue for Q4. It was an extremely busy month, lot of start-up costs, but that part of the business is coming on strong.

Okay. Great. And Bill, you mentioned in your prepared comments about the burn-off, if you will, on some of the incentives. Is that things like lower rates through the end of the year so those would be reset as of January? Or how should we read those comments?

We keep the resident focused on the full rate aspect, and there is -- and it's now different in different situations, whether it's the first month or fourth month, or whether it's a percentage off for X-number of the initial months, but it does burn off, and most of the incentives burn off by the end of the year.

That's helpful. Do you actually have the revenue per occupied unit? I know it's a little hard to break out because some of the ancillary is mixed in there. Do you have that specifically, and maybe a year-over-year comp?

On the same-store basis 12 over 12 -- excuse me, just a second here.

Sure.

12 over 12 with ISC. Rate up 4.7%. Occupancy down 1.2%. So a total revenue change of 3.4%.

Okay. Do you have it without ISC? Just so we can get the actual pricing?

I do. It's rate 3.4%.

Okay.

Occupancy down 1.2%. Then revenue 2.1%.

Okay. That's helpful. And then I guess the last question I had I know something that -- maybe this is something Bill could address, but obviously Fortress has had some shares pledged on loans and I think that's been a bit of an overhang. Certainly, a lot of investors have asked me about it. Have you guys had any conversations or any thoughts on what you may do to try to eliminate that overhang going forward?

Well, obviously, we have heard the same thing, and we had -- I guess something on file last year of a loan balance that was secured by shares of stock in one of our funds. That -- what I can tell you is that that balance has been substantially, and greatly reduced, and we have a lot of flexibility.

I can't really be more specific about what our plans are, as you can understand, but at these levels we're pretty reluctant to want to sell much stock, but as I've also said, we haven't sold a share of stock and we've owned this company -- been a large investor in this company since 2000, but we certainly don't want our ownership of Brookdale to be an overhang and want to get that past us, and I think we will, and we can kind of focus on all of the great opportunities that Brookdale has. So that's really all I can tell you at this point.

But you were saying with your comments that the $250 million, I think was the size of the loan, that has actually come down?

Yes. A lot.

A lot. Is that something that Fortess might disclose in some of their statements to help reduce the overhang? I don't want to push it much.

I don't know the answer to that. But Fortress has an earnings call next week, and again, I don't think we disclosed the specific information about our private equity funds, but like I said we have a fair bit of flexibility on what we want to do.

Okay. That's very helpful color, thanks, Bill. Thanks, guys.

Your next question is from Sloan Bowland from Goldman Sachs.

A quick question for Mark with regard to the hurrican-related costs. Should we just pretty much look at that as water damage and repairs at this point? Or are there going to be any costs for downtime or relocating tenants going forward?

Essentially what that cost is, Sloan, is the uninsured portion that the company will incur related to the hurricane damage. So we set up a reserve in the quarter for what the company is exposed to. Beyond that our expectation is that it is substantially insured.

But were there units where tenants had to actually be moved out or --

There were for a period of time. But by and large -- I think we're largely back in service right now.

Again, there were three named storms or hurricanes, the biggest one was Ike. We did over those have to evacuate three different communities under mandatory evacuation elements. It's interesting in each case in the area of Houston where we had nine communities affected, one week after the hurricane passed, we were -- all of the communities were back in full operation, and actually were - a week later higher occupancy than before the storm hit.

We had to evacuate one in Louisiana under mandatory evacuation from the earlier storm. Again, we relocated those folks to one of our other communities in Alabama, and in a matter of days after returning the residents to that community, we were 100% occupied at that community. Our folks did an incredible job but there was a lot of expense.

And the $3 million-something or close to $4 million is the part that we have to recognize as opposed to what will reimburse through business interruption and property insurance.

Thank you, that's helpful. And a question for Bill Doniger just with regards to opportunities going forward. Could you talk about what you assume for the credit markets and kind of timing of taking advantage of those opportunities and sort of relate that to where your capitalization is now, and how you see that plan out?

Sure, we're not actively working on anything materially at this point. I will tell you that, believe it or not, financing for senior housing assets still exist, so Fannie Mae is still in business. You still get financing. I think there's opportunities on the debt side of the world for folks who have liquidity issues. You know, capital -- we also believe there there's -- the company has access to capital and we have been kind of asked about it for investment opportunities.

So again, for the right opportunity, and we think those will exist, the ability to access capital to do things that are accretive to Brookdale is not really something that we're that concerned about, and I think -- I think that the opportunity is not going away in the next quarter or two.

Okay. Thank you, guys.

Your next question is from Rob Mains from Morgan Keegan.

Good morning. Bill Sheriff, you said that entry fees you saw some delay from Q3 into Q4. Is that stuff that you would characterize, is it someone that was going to move in in September, moved in in October, someone who went to contract and ended up not moving in at all?

These were contracts with scheduled closing dates in the latter part of September. We closed 14 in October. Most of those were of -- of those that carry over, but they just simply froze with all of the markets there.

We probably did lose -- it's yet to be seen, we're still working on others to see whether or not we lose them where they stay frozen for awhile, but we were well on track to having a good quarter before that impact. And they were actual -- we had a significant number of actual scheduled closings that did ( inaudible ) saying we already closed in Q4, some which we think we'll additionally close, but undoubtedly we lost -- we probably lost a couple.

Okay. Fair enough. And then I may be looking at this in too much detail, but the issue about some of the incentives that you are giving people to move in. As those burn off, those -- your year-over-year revenue per unit increases for those units should be above average, right?

That will come back. You will have -- though, in this environment we'll probably continue to use some incentives, so you'll have the next batch a little bit, but it won't be a sequential declining of rate effect .

Okay. That was going to be my question. Until things get better, probably this is going to be the way a lot of people move in. So that 3.5% number you gave, that contemplates that you're going to get kind of bigger increases off of year-one for some people that moved in under incentives, but new ones coming in under incentives will be at a slightly reduced rate.

I think that's an accurate characterization.

Okay. Fair enough. The schedule mark in the CapEx, where you have the types of CapEx, there's development and then reimbursements. The reimbursements, I assume, are what you are getting back from REITs for development on leased properties.

Yes, it would include both funding from REITs and also construction funding on development activity. This is the expanded disclosure in the press release this quarter, so that you can tie both our gross and net CapEx back into the cash flow statement.

Okay. Where does -- in doing that, the -- in this quarter you had $20,193,000 of reimbursements, where does that enter the cash flow statement, is that a financing flow?

Yes, it's going to be a component of the financing inflows.

Okay. And that -- whether it's from a lender or a landlord, correct?

That's right.

Okay. All right. The -- couple -- one quick one. Segment breakdown that you usually provide in the Q. I know last quarter it was in the press release. Will that be in the Q, all of the operating statistics for the different business lines?

I they will. I believe we have consistently had that information in the Q.

Okay. I just wanted to know, so I won't ask you anything about that here. Two balance sheet numbers that weren't in the press release, both on the current side. The line items that are current portion of debt and line of credit that were $278 million and $50 million, respectively, do you have those as of 9/30?

Yes, the balance on the line is about $85 million at 9/30.

All right.

The current -- well the current maturity number, I believe, is 250, 260. Again, substantially, other than the line, we have virtually no debt maturities through 2011.

Right. So and that -- that current maturity, that's the mortgages that you can extend out?

That's correct.

Okay. And that is subject to certain conditions. Are you still -- are you still on the right side of those conditions?

Yes, we believe we are.

Okay. And then last balance sheet question and then I'll hop back in if I have got more, in terms of your leverage in covenants and what-not, where do you stand?

We're in good shape through September 30th, obviously.

Okay. So -- everything -- you are on the right side of all of the covenants.

Correct.

Okay. All right. Thanks.

Your next question is from Peter Lukes from Smith Barney.

Hi, good morning. Hi, Bill, how are you been?

Good, Peter.

When Brookdale first came to life as a public company the plan as to differentiate to other senior housing was to return 100% of free cash flow to the shareholders in the form of dividends, obviously that model is somewhat changing, given the environment and given the stock price. Is it ultimately the goal to eventually get back to that model?

Well, we'll have to evaluate that over time. I mean, with the significant change in the environment, and the incredible amount of what we see as potential opportunities we'll have to continue to assess that. I wouldn't think anybody would want to totally conclude that we go away from a distribution model, but, again, it is a matter of looking at what the opportunities of getting extraordinary returns.

I mean, I think that, you know, it's unfortunate that the markets, you know, require you to react, but as Bill said, just the opportunities are such that if you are not -- if the marketplace doesn't value the dividend, and you think there's a better use of the capital, that's what you are supposed to do, and I think there's really -- we are living in evolving times.

The interesting thing, though, is that Brookdale generates a substantial amount of free cash flow, and to the extent that we didn't think the acquisition environment was such that we had a better use of capital, that's the obvious thing to do with it, is to return it to shareholders, but, again, it just becomes a question of what is the best use of shareholder capital.

With that said, and I think you already said you might curtail or cut back purchases of your own stock. I would think perhaps the best opportunity, given the price of the shares, is your opportunity.

You are 100% right. I mean, the decision is, do we go buy an asset or a company or do we buy back our own stock? And obviously from an operational perspective, buying your own stock is the best thing to do, but there's lots of other things that go in to that analysis, and so that's what management works on with the board and looks at all of the different alternatives. But it is simply going to be a question of where do we get the best return for our dollar.

With -- with the supply/demand equations as new supply seems to be dwindling and the demand is there, but perhaps delayed because of the financial situation, the age cone continues to increase as more and more people file into the need to come in to senior housing. What is the leverage factor at some point when occupancy starts to ramp up for every -- years ago we used to talk on the old ACR, one point of occupancy increase would yield so much in bottom-line growth. What do you think that is today?

It's 1% average is -- on average going to be about 18%, and your commentary is absolutely correct. The fundamentals are going -- are coming out of this are going to be incredibly strong as new supply continues to be more and more curtailed. So there's -- I mean, it's -- the fundamentals are going to be strong.

Finally, I know that Sunrise couldn't close -- or recently couldn't close a deal based on a cap rate of something in the 6.6 range. Where would you put cap rates today on good -- on quality properties?

Well, I'm not a good one to ask about cap rates, because it's all a matter of what return on investment you can get, and what you can bring to a transaction.

Obviously there has been a change and cap rates have gone up a little bit in this environment, but it will -- it will go down recorded that senior housing, you know, fared through this period of time far better than any other class of real estate. And over time, I think the cap rates will be very possibly comparable forward.

And just finally one more. On the cost -- cost side, whereas employee -- employment costs were pushing the envelope a year ago, do you think today's factor as unemployment rises -- you would think that employee cost could drop dramatically? Is that true or not true? And I don't know what dramatically means, but drops to a point where it's meaningful.

The environment has clearly changed. And our expectation is that the cost growth, including labor ,will be substantially lower in the next 12 months than it has been in the last 12.

Okay. Thanks, guys.

Your next question is from Adam Feinstein from Barclays.

Okay. Thank you. Good morning, everyone. Just wanted to follow up on the pricing questions from earlier. I know you said that you think 3% to 4% is a sustainable number, but just -- just curious in terms of -- what is the worst it has ever been for you guys? I'm just trying to think about it is possible to see no pricing, I mean -- and -- and not so much that that would be your strategy, but just certainly you never know what competition is going to do, so just curious to get your thoughts in terms of how bad things can get on the pricing side.

As I reflect over the 24, 25 years that I have observed, I don't think that we have ever seen a market condition where we didn't effect a 2.5% to 3% as -- on the bottom side of things, and I would say that that would be kind of the bottom side of expectation in this environment as well.

Okay. Great. And then just as we think about different regions, I'm just curious in terms of what regions are holding up better? Is it simply as we if we look at the housing market data, are those markets the areas where you guys are seeing the biggest issues around occupancy? I'm just curious as we look throughout your portfolio --

We have a pretty large footprint, and do cover a lot of different regions of the country, and the pattern of which ones have the more pressure, and which ones are recovering those that we had the early pressures are the ones that are performing stronger now, and it's -- we don't see any particular region at this point in time being particularly challenging. Moreso than another.

Florida and California have received a lot of attention on the early end -- early side, actually have been showing strength in the recent periods, so overall we get a pretty good balance, and, again, as consumer confidence factors tick at all or home resale market can tick at all, we see good response.

Okay. And just in terms of the competitive landscape and clearly a more challenging environment as you talked about. Have you seen any capacity come off the market in recent months?

Well, there's always some element of capacity that goes off, just from obsolescence and age of some communities. I don't know that we have seen any significant new element of new closings, up until the end of September and the latest crisis, there was not that much stress in the marketplace. I think now the stress as Bill had mentioned earlier, is going to be more around securities, refinancings, and things of that nature. But certainly there will be a bit of an extra challenge as we go through these next few months.

Thank you very much.

You have a follow-up question from Rob Mains.

-- get this right. The AR increase, when you -- when you do a home health agency, do you typically acquire a license?

We typically do. But there's a process we have to go through with the intermediaries and CMS to transfer the provider number.

Right. My question is going to be how long is that -- do you find that takes you?

It can range anywhere from 30 to 90 days, and during that period you suspend your billing, you don't suspend your service and then you catch back up and that's what speaks to that backlog.

Right. So if you are going --

Did we lose you Rob?

I believe we did. I'll advance to Ryan Hoadley from Newbrook Capital. I'm sorry, Derrick Dagnan is now in the queue from Avondale Partners.

Yes, good morning. If I missed this, I apologize. But I was wondering if you look at your capital expenditure budget, the different buckets you have, are there certain areas where you have room to reduce spending in certain areas, and save cash flow?

Yes, obviously when we get in to a situation with market conditions like this, we're reducing expenditures wherever we can, including CapEx.

I guess, what would be your priority when you look at your CapEx? It is the EBITDA-enhancing CapEx or with different areas?

I would think we -- we will be slow walking or putting on shelf some of the enhancing -- revenue enhancing. Again, that's activity around repositioning assets and continually the process of matching the asset to the marketplace and more than just normal refurbishments, but during this period of time we can delay some of that.

Okay. That's my only question. Thank you.

And Rob Mains is back in the queue.

My voice must sound like star 2 or whatever you do to get out of queue. The question I had was on the home health, if you are going to continue an aggressive rollout of that business, then DSOs are going to come down, but not down to the level that they would be, if you were doing just all residential, ALIL; is that correct.

The ancillary business does involve a little bit of working capital, Rob. But over time once we have completed the acquisitions, integrated them, completed the change in ownership process, it's not a dramatic investment of working capital.

All of our billings are electronic, and on a electric basis if we do it right the first time, we get paid in 18 days.

Right. The share repurchase program, if you repurchase shares doesn't that come off of your line availability?

The line availability is a formula that's impacted by roughly half of the nominal amount of share repurchases.

Okay. So it wouldn't seem like that might not be the best use of your cash as we -- as we're with the line you have got now?

Yes, also in this market where you have a pretty difficult equity markets, there's not a thing that you could do, and your stock that will make your stock -- more likely it's going to go down just because of -- regardless of what we do, and so we basically said why buy stock in the 20s, when potentially it could go lower and we could have other uses of capital.

But, again, the line is something, that again, given the cash flow generation is something we're quite comfortable with, but we do have to deal with it and we will, then we're going to have lots of flexibility on what we do with our capital.

Okay. And then last question. It has been about a year now since we have been talking about the overhang of the economy and what it may or may not be doing to sense this. Are you seeing anything clinically, empirically, that you can point to, like increased ADLs or increased ancillary consumption from people moving in now suggesting that in fact the folks that you are getting in are -- may need more care than they might have a year ago?

Well, the assisted living doesn't change that much. The independent living, and again, the companion service growth that we have doubled in the last year, is an element of that, and you do see people seeking lower-cost options and where they can move in to independent living, and complement that with companion service and where we have the full array of the other ancillary support services it give another option in that regard, as well as just people and they're delaying some decisions -- we do notice, and it is very -- it is very noticeable the higher level of acuity in to the independent living, more so, than say, the other -- other levels of care.

Okay. That's very interesting. Thank you.

And at this time there are no further questions. I'll turn this up call back over to Ross Rodman.

I just want to thank everybody for their participation, and management will be around if you have follow-up questions, give us a call. With that, thank you very much.

This concludes today's conference call. And you may now disconnect. Thank you.