Brookdale Senior Living Inc (BKD) 2009 Q1 法說會逐字稿

Good morning. My name is Shaday, and I will be your conference operator for today. At this time I would like to welcome everyone to the Brookdale Senior Living first-quarter earnings conference call. (Operator Instructions). Thank you. Mr. Roadman, you may begin your conference.

Thank you, Shaday. Good morning, everyone. I would like to add my welcome to all of you to our first-quarter 2009 call. Joining must us today are Bill Sheriff, our Chief Executive Officer, and Mark Ohlendorf, our co-President and Chief Financial Officer. Also present is Andy Smith, our Executive Vice President and General Counsel.

Before I turn the call over to Bill, as Shaday mentioned, this call is being recorded. A replay will be available through May 14 by dialing 1-800-642-1687. Outside the US dial 706-645-9291 and reference access code 97498283. This call will also be available via webcast on our website at www.brookdaleliving.com for three months following the call.

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 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 I would like to turn the call over to Bill Sheriff. Bill?

Good morning and thank you for joining us today. On today's call we will discuss the operating results and accomplishments of the first quarter, where we stand regarding our liquidity position, and finally, an overview of our current sense of 2009.

We had a very good start to the year. We produced record CFFO of $50 million or $0.49 per share, up from last year's $0.41. Mark will give more details, but the $0.49 does include a $0.01 benefit on a one-time tax benefit. Still the $0.48 was up 17% versus last year.

As we had planned and indicated on our last call, we managed our business for the occupancy decline and offset it with Senior Living rate growth, strong ancillary services growth and a tremendous progress in our cost structure efforts.

We also significantly improved our capital profile with a major paydown of our line of credit from the quarter's strong cash flow and the exercise of the extension of our mortgage debt maturing in 2009. On last quarter's call, we said we anticipated pressure on occupancy and expected it to decline by a point or two over the year. In fact, our average occupancy declined a point from last quarter to 88.7%, and all of that decline came in January as we were hit with a normal first-quarter seasonal attrition pattern. We have had some of that decline -- we have made some of that decline back up in February through March collectively seeing positive net move-ins.

Stepping back you can see that our current occupancy is within a couple of percent of the highs reached at the end of 2007, despite the challenging economic environment, which is a strong testament to continuing favorable fundamentals of our industry and the outstanding work being done by our associates.

It is still a very difficult uncertain market environment. Our marketing initiatives that we have previously described, including M3, an enhanced website and the Brookdale benefit, plus new initiatives relating to our memory care and skilled nursing units all continue to put us in the best position to capture market share and potential revenues.

On the revenue side, we achieved 5.4% growth with our monthly revenue per unit increasing to $3961 from $3759 in Q1 2008. One market dynamic that has possibly affected our revenue has been the delayed decision by consumers to move into senior housing due to the recession has resulted in rising acuity needs in incoming residents. This is positive from a revenue and operating contribution perspective. Because of our diverse product offerings, we are positioned to serve a wide range of the needs of seniors. From the increased level of care fees to higher utilization of care levels in a continuum to increased utilization of our supportive services like therapy, home health and private duty, we are experiencing an increase in service-related components of revenue. This also benefits our expansion program, which was focused primarily on adding higher care units to existing well performing markets.

Our ancillary services continue to demonstrate strong growth potential. During the first quarter, our therapy and home health revenues grew by 41% over Q1 2008 and operating contribution by 48%.

Having expanded our therapy services rapidly during the last two years, we decided to slow down the rollout of new clinics and instead focus on maturing the existing clinics, which has had and will continue to have a potentially greater and more immediate impact on cash flow. And we had great success in increasing the capture rate in these existing clinics.

The coordination among our associates to track residents into a full continuum of care that includes ancillary services was the key to this increasing penetration. For home health we are seeing the full impact of the 11 home health agency acquisitions we made during the year last year. But the key has been the very successful transition of those acquisitions into our core operations. As a result, the operating contribution per month for occupied unit of any unit covered by ancillary services was $167 for the first quarter, up from $143 last quarter. In the legacy ARC buildings, which has a higher healthcare mix than the broader Brookdale portfolio, monthly ancillary operating contribution was $243 this quarter.

We had previously indicated that one of our primary goals this year was to maintain a positive spread between the revenue growth and expense growth by aggressively managing expenses in a challenging occupancy environment, and I'm very pleased to say that we continued to execute that plan effectively.

During the quarter we made very significant progress on refining our cost structure. In the fourth-quarter call, we described our continued focus on expense control. I cannot describe enthusiastically enough how our people have responded to our call to action. Without compromising our quality standards, they have successfully completed dozens of cost structure initiatives. I have never seen an organization work so well on achieving its objectives as what our people have accomplished the past six months.

Mark will give you more details, but for the first quarter of 2009 versus the first quarter of 2008, excluding ancillary services, we experienced a decrease in controllable calls with almost a 1% decrease in labor-related expenses and saw significant decreases in travel, food and training costs. Overall our expenses increased by 1.2%. This compares extremely favorably to the normal 3% to 4% inflation we would expect to see.

As a result of the effective cost control and continued revenue growth, our margin increased to 36.1% from 33.5% in the fourth quarter of '08.

Finally on the balance sheet and liquidity front, we are very pleased with progress we have made so far in 2009. Since we amended the line of credit at the end of February, we have reduced the outstanding balance and letters of credit by a combined $58 million in less than three months, and Mark will provide the detail later in the call.

Additionally we continue to exercise contractual extension objects on mortgage loans due in 2009, as well as expect to in 2010. Thus, we will have virtually no mortgage debt due before 2011. Again, we are very pleased with the results of the quarter. There are no windfalls hidden in the operating numbers; just the outcome of the hard work of our organization.

I will now turn the call over to Mark to provide more details.

Thanks, Bill. Let me start by looking at some highlights of our financial performance for the quarter. Before I begin, I wanted to mention that we have refined and expanded the way we are reporting our quarterly information. Along with the earnings release, we have also filed supplemental information packages, which contains some of the data we previously included in the press release, as well as additional financial and operating information. We have added more detail regarding our segments, expansions, capital structure, entrance fees and a reconciliation of CFFO to the income statement.

In addition, as I will discuss in more detail in a moment, we have added additional detail around occupancy metrics. For the first quarter, we reported cash from facility operations or CFFO of $0.49 per share. This was the highest quarterly result we have ever produced, and excluding merger and integration costs in 2008 and a Q1 2009 tax benefit was a 17% increase over last year's Q1 $0.41 per share and a 37% increase over the fourth quarter's $0.35 per share. This quarter did include a $0.01 positive benefit related to the closure of an old American Retirement tax audit.

Also, as I will talk about, there was a timing difference with the level of capital expenditures in the quarter, which was below a normal run-rate by approximately $0.03 per share. Net of these two items our CFFO for the quarter was around $0.45 per share. This record result was despite an average occupancy decline of about 100 basis points from Q4 '08.

In the data supplement, we have provided additional occupancy and rate statistics that reflect consistent reporting across all product lines based on average occupied units. As you can imagine, given the number of acquisitions we made, occupancy was reported using a number of slightly different conventions. We now have all communities on a common measure.

Additionally this moves us to a methodology which the industry trade associations through NIC are trying to standardize in its actions to bring more transparency to industry data which we support. While the absolute occupancy number using this method is a little lower, the historical trends remain the same and revenue remains the same. Over time we will be moving to this average occupied unit based reporting method for our external reporting. Over the near term, as we make the transition, we will continue showing both methods of calculating occupancy in our reported data.

Our Q1 '09 over Q1 '08 same community results showed an increase in revenue of 4% as a result of an average revenue per unit increase of 5.3% and a decline in occupancy of 110 basis points. Expenses grew at 3.8%, resulting in same community NOI growth of 4.5%. Of the 3.8% expense increase, non-ancillary services expenses grew at only 1.2% or $4.9 million with the remaining 2.6% related to ancillary services growth, mainly labor to provide these services.

We are pleased with our successful moderation of non-ancillary expense growth to 1.2%. Controllable costs, which include items such as labor, benefits food, supplies and repairs and maintenance, make up around 80% of our cost structure. These expenses actually declined by 2% in Q1 '09 compared to Q1 '08.

In support of the numerous cost structure actions, as we previously described, we have implemented a number of new management tools for labor management, capital spending and food purchasing that have had a material impact on controlling costs at the community level as can be seen in our community results. These actions produce some strong results. By flexing labor to match occupancy and improving the efficiency of labor scheduling, total labor hours declined in Q1 by more than 370,000 hours from Q4 '08, a reduction of the equivalent of more than 700 FTEs.

We are pleased with the slow rate of growth reflected in our controllable costs for the quarter and believe that this significant cost containment will continue through this period of economic uncertainty.

As Bill indicated, we made significant progress in the quarter in improving our debt maturity profile. As we announced, we extended the line of credit to August 2010. We closed the new line at the end of February with $195 million of cash borrowings outstanding. By the end of March, we were at $155 million outstanding, and subsequent to the end of Q1, we paid the line down by an additional $15 million, and the outstanding cash borrowings currently stand at $140 million.

We accomplished the paydown with our strong operating cash flow, improved working capital management both on the receivable and payable side of the balance sheet, and by closing some financing and sales transactions in the quarter, which resulted in proceeds of approximately $19 million. With a current total line usage of $161 million comprised of $140 million in cash borrowings and approximately $21 million of letters of credit outstanding, we are already near the level we committed to be at by the end of the year on the line.

On the one hand, we are way ahead of schedule on reducing our borrowings on the line, and on the other hand, we have significant liquidity if needed. As it relates to our mortgage debt, other than normal amortization, we now have no mortgage debt maturities through 2009. We exercised the contractual extension option on the one remaining 2009 mortgage loan maturity, which is a one-year option, and we have the same extension option again in 2010.

Of the $323 million mortgage debt maturing in 2011, $158 million has similar extension rates. We are also actively working to extend out our 2011 and beyond mortgage debt. Overall we made progress and continue to be focused on lowering our corporate leverage and prudently reducing the refinancing risk for our asset level debt.

In the supplement we have included some additional information about our debt maturity schedule and debt service coverage. As we described previously, given the level of uncertainty that we face in 2009, a component of our plan is to aggressively manage our uses of capital, including capital spending. In the first half of 2009, we are purposely deferring capital expenditures into the second half of the year. And, as a result, the first-quarter CapEx spend rate was lighter than what we plan to spend in the next three quarters, which we would expect to be higher than the Q1 runrate. We still plan to spend around $25 million for net recurring property level CapEx for the full-year 2009. Our routine CapEx in Q1 totaled $0.03 per share, while we would expect the average quarterly spend for 2009 to be around $0.06 a share.

Finally, on the expansion side, virtually all of the capital funding going forward in this category will be provided either through our lessor partners or by contracted construction loans. We opened three expansions with 128 units in the first quarter and expect to add 611 more units during the remainder of the year, many of which are in the higher care levels of Alzheimer's care or skilled nursing. These expansions will fill out a market product continuum for us in several markets. These will have on average higher revenue per unit as they fill.

I will now turn the call back to Bill for comments about the remainder of 2009.

We are pleased by the outcome of the first quarter and encouraged but cautious as we look to the remainder of the year. The quarter played out as we had expected and planned for with pressure on occupancy and with moderated rate growth. We were prepared and countered with strong control of cost and growth of ancillary services. We do not see many signs that the market is getting any better and believe uncertainty will continue regarding occupancy and rates. However, we will continue to bear down on increasing market share.

We have said before that we expect no more than 1% to 1.5% growth in controllable community expenses for 2009, things again like labor, food, travel, training and supplies which account for approximately 80% of our cost structure, and we did significantly better than that in the first quarter. We will continue to see strong growth in the ancillary services as the maturation of the rolled out therapy clinics continues and home health bills caseload. The platform now serves 35,000 units for therapy services and 16,500 units for home health in our consolidated portfolio.

We recently completed the acquisition of an agency in California that will allow us to expand therapy services into our California communities, and we continued to work on acquiring additional home health agencies in our scale markets.

Finally, as Mark discussed, we are making solid progress from a liquidity and capital structure perspective with the letter of credit balance already down close to the year-end level required by our lenders and no mortgage debt maturities through the end of 2010 that do not have extension options.

In conclusion, we feel very good about the effectiveness of our organization and our platform. We came into 2009 with a sound clear plan and a strong team that is demonstrating an incredible determination to execute that plan. We have the most comprehensive operating platform in the industry that is serving a senior population whose needs change and evolve virtually every day in a rapidly changing environment. As we continue to improve the Company's capital structure, we are in a strengthened position. We expect to continue to focus on positioning our Company for the longer term.

We will now turn the call back to the operator to begin question and answer.

(Operator Instructions). Mark Biffert, Oppenheimer.

Related to the home health business, you talked a little bit about expanding into and buying further businesses. Can you just quantify that a bit in terms of the markets that you are looking at? How many markets and the potential size of increase that there could be over the next 12 months?

Well, that depends on quite a number of variables. We are currently targeting about four or five this year, and again it is a matter of being able to find those small agencies that are clean and have a clean provider number. And then I think the team is clearly demonstrating their ability to execute and have worked hard on the model and the manner in which they roll those out.

So the timing of those and the ramp-up of those depends on so many variables. But again the 11 we acquired last year and the significant growth we are beginning to see out of those, and there is still maturation of those to go, we've got some good legs left there with that. But it is hard to quantify the exact amounts and timing at this time.

And what are those costs? I mean in terms of the investment that you have to put into each one of those to build it out.

Well, we paid anywhere from about $200,000 to maybe $1.5 million per agency so far. There may be some of the mortgage challenging markets that we may have to buy something a little bit more of size. But so far we have been successful in finding the very small ones but clean, and it's a matter of making sure that we have an absolute clean provider number, and that is more what we are looking to acquire than a business volume.

Okay. And then related to the entrance fee communities, can you just provide a little color on the traffic that you are seeing at those facilities and the confidence of the people that are coming in in terms of the housing market changes that we have seen, is that helping traffic and what your closing rates are at currently?

We are still seeing good traffic. There is good interest. The confidence factor moving forward is all tied to the confidence of being able to sell the house and sell it at a value that the consumer is comfortable with. The closing process is still quite protracted in some select markets where we have seen some housing resale pickup where there was not a lot of overhang from foreclosure and stuff because the general area was an age restricted area. We have seen more immediate effect in pickup by that. But again, as we see home resale velocity and more than just cleaning out the foreclosures and the underwater assets, as we see more of that, we would expect to see that to be reflected.

We still see a good solid response of people wanting to learn and get educated about our offering and get comfortable with their longer-range planning and decision of it, but it is pent-up at this point in time. I think there is more and more people recognizing that the value proposition of the entry fee communities and particularly the ones we have and how they are positioned is probably stronger than ever before. And so it is still a matter of getting to the point where the consumer confidence and you have the home sale in those markets specifically supporting it.

Okay. And then Mark, related to a lot of these extensions that you're getting on these mortgages, I mean what is your view on just addressing the mortgage, either getting them refinanced? What are you hearing from lenders in terms of appetite for lending to senior housing, and then sort of the rates that you are seeing coming out of Fannie or the GSEs?

Well, obviously Fannie and Freddie continue to be the more active lenders in the market right now. Underwriting standards have clearly changed a bit over the last six to 12 months, but we feel good about the debt maturity profile. Again, the true refinancing activity that we need to get at is really out in 2011 and beyond. We are obviously trying to get ahead of that refinancing if we can, but I would not note any particular change over the last 90 days.

Okay. And then I guess longer-term, it seems like your CFFO is improving, and previously Fortress and others you guys had mentioned that you would prefer to pay out. Obviously we're in a time where you reducing the line, but once you get the line reduced, what is your view on the dividend and in terms of reinstating that?

Well, that will be a matter of looking at and evaluating the alternative options and what is the return on capital opportunity. The first focus is clearly going to be that of derisking the Company and strengthening the balance sheet and putting it in a strong position. That is first priority, and we will remain focused on that. And, as we move beyond that, it will certainly be something that will be evaluated.

Sloan Bohlen, Goldman Sachs.

Just first, Bill, you have mentioned talking about delevering longer-term, and right now it seems like you're focused on looking at and reducing your mortgages exposure. But, as you think about flexibility for maybe turning offensive or being acquisitive at some point in the future, how should we think about what the appropriate level of leverage in the business is longer-term?

Well, I think that is something we are still going to be continuing to think through and work through and see how the total new normal of the world gets defined. The first priority again is the line of credit and addressing that from a basis. The rest of our debt is mortgage debt, which does have coverage. But again, in terms of looking at making sure that we get it at what is that optimal point, I think there is a lot to learn about what our new world is as we go to do that. But we are very much focused on the fact that we have an incredibly strong platform, and from that standpoint we believe that we will be a growth company.

Okay. But in the recent quarter, you sold a couple of smaller -- I guess they were assets. It is the $19 million or so. Is that a place that we could expect to see additional sources of funds, or would you look to do something perhaps in the capital markets?

We will be evaluating all options. They are some -- a small number of assets that just do not fit us for one reason or another, and we will be trying to work on some of those. We are not looking to sell any assets that we believe have strong long-term fundamentals, characteristics of that type. Over the length of time, we still want to work on our balance of between owned and leased and work towards the outcome of that, and we will evaluate all the factors that will -- and the timing of that with regard to, say, strengthening our balance sheet.

Okay. With regard to asset sales, have you seen much in the way of anything transact over the past three months, and could you maybe comment on pricing?

There's not enough transactions to really draw any conclusions about cap rates or valuations.

Okay. And then just one question for Mark, can you talk a little bit about -- you talked a little bit about deferring some of the recurring CapEx into the second half of the year. Could you maybe give us some granularity on what particular expense items those are?

Well, the first quarter tends to be a lower quarter for routine CapEx anyway because obviously in many parts of the country you cannot do a lot of work outside. So if you look back at our historical numbers, you will see the first quarter tends to be a little lower anyway, and then the CapEx builds a little bit as you get into the warmer part of the year. Again, we plan to spend about $25 million in total for the year on routine CapEx net of reimbursements. The total in the first quarter was about $2.7 million.

Ryan Daniels, William Blair.

It is [Christina Blaczek] for Ryan this morning. Can you talk a little bit more about incentives and whether or not they were used in the first quarter, and if so, how they compared to the past couple of quarters?

Really no significant change in the first quarter from what we saw in the fourth quarter of last year. I think we saw the incentive activity peak in the third quarter of last year. It continues to run at less than a half a month's rent. So it is, on a real dollar basis, not a huge impact.

Okay. Great. I guess moving onto reform, any thoughts on reform-related impacts to your ancillary services or Medicare skilled nursing rates?

Well, certainly there is a lot to observe and watch and study as it unfolds in Washington, and we like where we are, though, from two perspectives. One, we think we are on the right side of the general issue of public policy and trying to move to lower cost of care settings. We think we are in the right position there. Also, within all of this being debated and shaped, clearly there's going to be more of a pay for quality, and we like where we are there. And so we will continue to study that, but we do like where we are relative to what the core issues are.

That is helpful color. Thanks. And then I guess I have one final question. Do you have an update on The Villages in Florida and how that is progressing?

The construction is progressing very well on schedule and under-budget. The pre-marketing continues to hold quite well. We have seen a little attrition that we could clearly see, and we are back-filling that. Again, The Villages is a very unique market, and we have very high expectations of that project.

[Ryan Secanow], Barclays Capital.

Just wanted to get a couple of questions here on the ancillary services. Did you provide the revenue per unit growth, excluding the ancillary services rollout?

I think we have got in our supplemental information the number of units served. I think we referenced in the script the revenue was up a little over 40% Q1 '09 compared to Q1 '08. Obviously there is some broadening in the service profile as home health rolls out.

Okay. And then with the remaining opportunity in that going forward, with the home health, I think you are at 16,000 roughly units and 35 with the therapy. I just wanted to get a sense of where we can see the home health expand. I know in the past you had said like 35,000 units are in markets where therapy is a potential. Is that the same way we should think about home health?

Well, ultimately that would be our desire. There are some a little bit bigger barriers with regard to some certificate of need factors and things. Ultimately we might hope that we might actually be able to incrementally expand a little bit about what we both reach with home health and therapy through the therapy -- I mean through the home health basis. But that's a long -- that's a much longer-term perspective and would be more into speculation than being able to give good guidance in terms of how much we could expand beyond the 35. We would like to hope that over the next couple of years we could get to a fair percentage of that 35 with the home health. But we have got to -- we have got some significant CON acquisition things to have to prove that we can get over before we can give a strong predictor to that.

Okay. And then just with regards to the line of credit, I noticed that some of the REITs participated in the line. I just wanted to know, do you expect that to be a source of financing going forward in 2010 and potentially beyond?

Well, we certainly appreciated the assistance that the three REITs gave us in that regard in the line. That is not their traditional way of deploying capital, and it would not be a source we would look from in that regard on the basis in terms of the specific circumstances we had with the line that had originally been led by Lehman, and then they had sold them off, and it was into a number of hedge funds in terms of some portion of it versus the bank. And just getting to a good clean solution, we appreciate their support.

Jerry Doctrow, Stifel Nicolaus.

I just had a fair number of numbers things. There is an other income, which was up a bit at $4.2 million. Could you give a little more color on what is in there?

You are looking at the GAAP income statement, Jerry?

Yes, I think so.

In that number are two items. One is the tax benefit that we referenced, which is about $1.2 million. That does impact CFFO. Also, a gain on the sale of the joint venture interest in that number does not impact CFFO.

Okay. So it is backed out down below.

Correct.

There was -- in the operating numbers, I think there is a little line in there in your text about not sustainable. I think you talked about this 401(k) maybe gain. I was wondering if, sort of as you talked about on the CapEx side, if there's things that are in kind of the operating cost savings in the first quarter that may not be continued, and we get a little extra benefit from one thing or another in the first quarter.

Well, in the first quarter, the 401(k) would be the biggest of anything that you would put into that category, which was about $2 million, and it is certainly sustainable through the period of time until we feel like we are on solid ground on the other side of this stormy sea.

Okay. So that is not a one quarter item (multiple speakers)? I'm really just trying to get run-rate on, I guess, sort of margin.

There is nothing in there that would have been a one quarter factor.

Okay. And then on the working capital, Mark, I think there was like a positive $11 million benefit there. I just was again curious about what it would look like kind of go forward because it does affect some of the analysis we do.

Well, actually our working capital management in the quarter generated over $20 million. I think you're probably looking at either the receivable or payable side of it. That, again, I believe is sustainable. A lot of these impacts you are seeing here in the first quarter are the result of things we have been working on for some time. And given the size of the Company, some relatively modest tweaks in how we manage the balance sheet generates meaningful dollars.

Okay. So in terms of working capital needs go forward, if we think about it over the remainder of the year --

I think you can work -- obviously there is a little bit of seasonality in our working capital. But in terms of a starting point, I think March 31 is fine.

Okay. And then obvious -- you've given good guidance on some of the maintenance CapEx. In terms of just the development CapEx, I think about half of this was funded by REITs this quarter. In terms of what is a little -- any more color you can give us on sort of how much of that is going to be just additional debt whether it is on construction loans or whatever versus just REIT funding.

Our guidance on that since the last call would be unchanged. Virtually all of our development spending this year is funded either by the REITs or by construction loans.

And it has to do with economics CapEx portion, Mark. There is detail there as well in the supplemental data.

That is right.

That amount is about the run-rate for the balance of the year.

That is right. I think that number, Jerry, was $35 million for the year, and the actual amount is in the data supplement.

Okay. I will go back and take a look. And just one question on the occupancy stuff, a little bit more and then I will jump off. Bill, you seem to just -- and again, you said kind of it is obviously uncertain in terms of where we had. You also were saying that most of the hit was in January. You have kind of been rebuilding from the January level. Any more color you can give us of kind of where we are at quarter-end and maybe even trend in April there. I'm just trying to get a sense of should I be trending down another 50 basis points, or are we kind of flattish from here?

You know, we were just slightly positive in February and March, and April was somewhat similar. But we are six months into this deep recession, and the unemployment continues to go up. The full weight of that kind of comes. So we are tenaciously going after marketshare, and I cannot say enough about how strong our people are focused and how well they are executing. But I would think that it is reasonable to still see a little pressure there.

Okay. And it was kind of -- the end of the quarter number was -- is kind of about where we were for the average for the quarter as well?

No, it would have been down -- the year would have been down a little bit at the end of the quarter versus the average would have been down a little bit, which that by its definition suggests the second quarter if it is still flat would be slightly down from the first quarter.

Okay.

Just slightly.

Jeff Englander, Standard & Poor's.

Could you talk about what you are doing in terms of the expense controls to manage those across the different units and institute them as best practices?

Well, that has been the mantra here in terms of both best practices, particularly in this environment. One of the tremendous the positives out of this otherwise terrible environment is you have an opportunity really to step back and really tackle and challenge the things that we have always done it this way kind of thing. And this Company and the organization had evolved through the integration in putting the three major companies together and building all the system platforms and everything else, the re-organization changes last year. It could not have been a more positives time in a sense for this to come about.

So it has been absolutely looking across the board at the best practices, challenging how we have done things, challenging, and even we have a perceptive audience in part with the residents and things and you want to look at the dining hours and how many hours you are expanding there and how you might redo that. So it is a very large set of cost structure initiatives that we have taken. The 37.5 work week, the staffing and the ability to really flex the staff in the right areas to make sure we don't compromise quality service, quality control, but to really call ourselves to examine those things. And we've had a lot of good systems and things have been in place as we have developed those, our internal team, the IT team have just done a phenomenal job to make adjustments and things that help support the initiatives and the strategies and get good solid measures and quick timely response measures. It has been a phenomenal thing for me at least to watch from my perspective of what this organization has accomplished, and they would tell me we have not seen the best of all of it yet.

Could you provide a little more color, and maybe, Mark, you could fill in here. You talked about in your prepared comments total labor hours going down, I think you said 370,000 hours, which was the equivalent of 700 FTEs. Can you talk about where the -- how you're able to do that because it seems like an incredibly large number?

Well, a lot of -- again, we are obviously in a period here where there is some volatility from an occupancy standpoint. I mean report to you publicly what is happening in the Company in aggregate, and we had about a 1% change quarter to quarter. But within that, you always have some movement location by location with occupancy increasing or decreasing.

So a lot of the focus here is around how variable can we make our cost structure, particularly the labor side, without having any impact on the customer facing part of our business. So this change in labor hours is literally done two hours at a time, four hours at a time in terms of how we schedule our folks and how we vary our staffing as our occupancy moves.

(Operator Instructions). Rob Mains, Morgan Keegan.

Thanks for putting out the supplemental. It is helpful. And now to punish you, Mark, for having done it, I noticed on page eight where you have got the historical cash flow data, a couple of numbers I just wanted to question. First of all, deferred revenue went up a lot from where it has been previously. What was going on with that line?

Again, it is working capital management. Deferred revenue is essentially the revenue we collect in this case for April by March 31. So with some minor tweaks in the way our billing cycle works, we actually collected $15 million more in this quarter for April than we did in December for January.

Okay. So I was assuming that is going to be a number that would bounce around kind of depending when the -- like what day of the week the quarter ends on?

Yes, you can get some minor changes there, Rob, but this is really a change in our structure we have instituted. So this is working capital that will largely stay in the Company.

Okay. All right. So that is something that is not at the level, but we would see sort of the same thing going forward?

Well, we probably will not generate another $15 million (multiple speakers), but we will retain what has been produced.

Right. Got you. Okay. And the other one was the increase in cash and escrow deposits.

Well, as we have closed the new line and modified some of the security structures there, we are posting cash as opposed to letters of credit in many cases, and that is simply what you see there.

Okay. So that again assuming nothing changes kind of stays there?

Correct.

Okay. And then one other number question. I don't know if you have got this handy. If not, I can call you later. Do you have the current portion of debt as of 3/31?

I do. The 10-Q will actually be filed on Monday. It is about 24 -- I'm sorry, the current portion of mortgage debt is $24 million. The current portion of the line is $45.8 million.

45.8. And it is as of 3/31?

Correct.

Okay. Interest expense down sequentially without a whole lot of changes in the borrowing level, is that all rate?

Variable rates are coming down. We are using more caps now as opposed to swaps. So, as rates have come down, we have benefited somewhat from that.

Okay. And then a Medicare question. Your therapy business, excuse me, I'm assuming that is primarily Part B.

That is correct.

Okay. Do you do Part A just in the CCRCs?

Well, Part A on the skilled nursing but you also the home health.

Right. Okay. That is everything I had. Thank you very much.

There are no further questions at this time. Mr. Roadman, I hand the call back to you for closing remarks.

Thank you. I just want to conclude by again thanking you for your participation, and we will be available all day and look forward to discussing the quarter further if you wish. Thank you very much.

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