Brookdale Senior Living Inc (BKD) 2009 Q2 法說會逐字稿

Good morning, my name is Wes and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale second-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. I'll now turn the conference over to Mr. Ross Roadman, Senior Vice President Investor Relations. Please go ahead, sir.

Thank you, Wes, and good morning, everyone. I'd like to welcome all of you to the second-quarter 2009 earnings call for Brookdale Senior Living. Joining 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 Wes mentioned, this call is being recorded; a replay will be available through August 11 by dialing 1-800-642-1687 from within the United States or 706-645-9291 from outside the US and referencing access code 21888466. This call will also be available via our website, 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'd 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 second quarter and overview of our current sense of the remainder of 2009. I want to start by saying how pleased we are with what has been accomplished in the first six months of the year.

Going into the year we put together a strong plan to improve the performance of the Company, no matter the environment, and the teams are executing that plan well, reflecting our initiatives that are focused on perfecting our service delivery models that have now been in place for some time.

As a result we reported the second straight record quarterly revenue and cash from facility operations, our measure of the cash flow generated by our operations. We produced record CFFO of $52.5 million or $0.50 per share. The $0.50 per share was a 9% increase versus last year excluding integration costs in 2008.

On the sales and marketing side we have expanded new ways to source leads to market based on value added and to evolve our product offerings to meet the consumers' needs. We continue to succeed in the face of a difficult market and are poised to benefit when the market improves.

On the operational cost side the response has been the best of any organization I have been associated with. We have not squandered the opportunities that this deep recession environment provided us, to challenge ourselves to become a more efficient company. Our people have made permanent institutional changes without sacrificing our quality standards.

As a point of measure we've always prided ourselves with the number of deficiency free state surveys we receive in our assisted living, memory care and skilled nursing. And in the first six months of this year we had a nice increase in the number of deficiency free surveys. More importantly, we have seen a good increase in the satisfaction survey scores from our residents.

Our plan also included significantly improving our balance sheet. The combination of the actions we've completed regarding our debt and equity offerings have put us on very firm ground. We significantly improved the liquidity of the Company and our debt maturity schedule, putting ourselves in a better position to capitalize on future opportunities.

The accomplishments of the second quarter followed a very -- a similar positive track as the first quarter. With occupancy relatively flat in the second quarter we continued to have positive senior living rate growth, strong ancillary services growth and a controlled expense growth resulting from the focused actions of our operating organization.

The June equity offering significantly strengthened our balance sheet, paid off the outstanding cash borrowings of our line of credit and added to our cash position. I will begin discussing our operating results by looking at the occupancy. While the environment remains uncertain we do believe that the market seems to be a bit more stable which was reflected in our relatively flat occupancy for the quarter. The average occupancy declined 20 basis points to 88.5% from last quarter's 88.7%, but our June ending occupancy was 88.8%, the highest since January.

In the market we are seeing that while the consumer is cost-conscious, ultimately people are very much making their decision where to move based on quality. And we believe with our product positioning that we are faring very well in that regard.

We have seen a very slight increase in financial move outs in each of our product lines, but we see no acceleration and our people have been very effective at backfilling those vacancies. In the face of an uncertain market our sales and marketing and initiatives continue to put us in the best position to capture market share of potential residents by emphasizing and demonstrating value.

We have expanded our major market management initiative, M3, where we cohesively market all of our communities in a single market to create a virtual CCRC. We have expanded to 20 markets now covering over 18,500 units with three more markets being ready for rollout with continued positive results.

We have also focused new initiatives over the last six months on areas where we have always been successful, such as with our memory care, and that's across all three product lines, and our skilled nursing units and our CCRCs. These are some of our highest revenue per unit and dollar margin product offerings. Since the beginning of the year memory care occupancy is up 200 basis points and skilled nursing is up almost 300 basis points.

Additionally, our actions to expand new lead sources are paying off we continue to refine our Internet strategies while systematically maximizing search engines which produced a 61% year-over-year increase in hits and our own website which saw a 36% increase in leads and produced exactly double the move ins for this quarter over last year.

Our expanding relationship with elder care referral sources is also paying off with leads up 50% from a year ago. Together these two expanded source of leads produced almost 19% of the second-quarter move ins versus 9% in the second quarter of 2008.

On the revenue per unit side we achieved 5.2% rate growth with our monthly revenue per unit increasing to $3,990 from $3,791 in Q2 of '08. Our revenue per unit growth for the senior housing operations, that is without the ancillary services, was 2.9% for the quarter, within the range of the 2.5% to 3% that we have been discussing. We have not seen widespread use of base rate discounts across the industry; there are a few instances but not widespread. We are continuing to see, and use ourselves, incentives similar to previous quarters.

One thing we rarely do is wave community fees like some of our peers. Our community fees in total actually exceed the incentives in total. Again, our ancillary services were a strong contributor in both topline and cash flow growth. For the quarter our therapy and home health revenues grew by 48% over Q2 of 2008 and operating contribution by 68%.

Like the first quarter, the maturing of existing clinics continued to produce impressive increases in therapy service provisions. While we did open in the Southern California market and now reach over 35,000 units, it was the increasing capture rate in the existing clinics that drove a 22% increase in service volume versus the prior year's second quarter and a 9% increase versus last quarter.

For home health we continue to see the full impact of the home health agency acquisitions we made last year in the transition of those into our core operations. As a result the operating contribution per month per occupied unit for any unit covered by ancillary services was $200 for the second quarter, up from $167 last quarter.

Switching to the cost side of the business during the quarter, we continue to show positive adjustments to our cost structure. Again, we've demonstrated the strength of our platform and the discipline and focus of our organization who continue to deliver consistent quality care and service more efficiently and effectively.

Mark will give more details about the operating expenses which increased 3.3% overall for the second quarter of 2009 versus second quarter of '08. But almost all of the increase was ancillary services. In fact, in spite of the one more operating day, senior housing operating expenses actually decreased in the second quarter versus the first quarter. The end result of all of this is that our margin increased to 36.6% from 35.6% second-quarter of '08, and up from 35.9% in the first quarter of '09, the highest margin in two years.

Again, we are very pleased with the results of the quarter and with the improvements the team has made as they've focused on capitalizing on the positive momentum of the last nine months. I will now turn the call over to mark to provide more details and then follow up with some closing comments.

Thanks, Bill. Let me start by looking at some highlights of our financial performance for the quarter. Before I begin I want to remind everyone that as part of the 8-K containing the earnings release we filed last night, we've also included our supplemental information package.

For the second quarter we reported cash from facility operations, or CFFO, of $52.5 million or $0.50 a share. This was the highest quarterly result we have ever produced and, excluding merger and integration costs in 2008, was a 9% increase over last year's Q2 $0.46. Operating margins expanded to the highest we've had in two years as revenue posted a solid 5% increase and operating costs 3.3.

General and administrative expenses, excluding non-cash comp and the $8 million special litigation charge we had last year, was about $1.2 million higher than Q2 '08, more than entirely attributable to higher incentive compensation costs related to our strong performance this year. Our quarterly G&A costs continue to run at about a $25 million run rate.

Our Q2 '09 over Q2 '08 same community results were very positive. Revenue increased 4.8%, a result of an average revenue per unit increase of 5.3% and a decline in occupancy of 30 basis points. Expenses grew at 2.4% resulting in same community NOI growth of 9.2%. Due to our continued progress on the cost side, this is stronger than a typical growth pattern we have described in the past where revenue growth of 5% and expense growth of 3.5% would produce operating income growth of 7% to 8%.

A key part of our operating income improvement came from the expense side. Of the 2.4% expense increase operating expenses, excluding ancillary services, grew at only 3/10 of a percent. The remaining 2.1% related to ancillary services growth, mainly labor to provide the services.

Turning to the balance sheet, with positive cash flow in the equity offering we significantly strengthened our financial position. Of course the most significant event of the quarter was the equity offering from which we netted $164 million of proceeds which was used primarily to pay off the $125 million of cash borrowings on our line of credit.

Prior to the offering our pro forma leverage was 7.2 times net debt, that is debt less cash and cash held as collateral against existing debt to adjusted EBITDA, a level sustainable under current underwriting standards but still somewhat higher than we thought was desirable.

At the end of the second quarter our leverage was 6.5 times net debt to adjusted EBITDA calculated by annualizing the year-to-date adjusted EBITDA number of $178 million and we continue to work toward prudently lowering that leverage further. We have indicated that our ultimate leverage target is at or under six times adjusted EBITDA.

As it relates to our mortgage debt, as we've discussed before, other than normal amortization we now have no mortgage debt maturities until 2011 after the impact of contractual extension options. We've initiated discussions with existing and potential lenders related to refinancing or extending our 2011 and 2012 debt maturities. While it's obviously too early in the process to provide you with details, we're optimistic that these maturities will be refinanced or extended in due course.

In the supplement we've included information about our debt maturity schedule and fixed charge 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 two quarters of 2009 we purposefully deferred capital expenditures into the second half of the year and as a result the first half CapEx spend rate was lower than what we expect to spend in the last two quarters which we would expect to be higher than the Q2 run rate.

We continue to anticipate spending around $25 million for net recurring property level CapEx for full year 2009. Our routine CapEx in Q2 totaled around $0.04 per share while we would expect the average quarterly spend for 2009 to be around $0.06 per share.

Two final details I'd like to note. The first relates to share count. Our average share count for the second quarter was 106 million shares, that will increase to approximately 118.3 million shares for the next two quarters given the full impact of the equity offering.

The second relates to the third-quarter seasonal expense pattern. Looking back to the third quarter of 2008 our senior housing labor and utility costs increased by $9.7 million over the second quarter of 2008. Roughly half of this related to seasonally higher utility costs while the other half related to an additional day of payroll and one more holiday in the third quarter. We would expect to see a similar pattern in her senior housing operating expenses in the third quarter of 2009, though we expect to offset some of that increase with our continuing cost adjustments.

In addition, we expect to see continued growth of our ancillary services business which will result in both higher revenue and operating expenses in the third quarter. I'll now turn the call back over to Bill for comments about the remainder of 2009.

And again, we are extremely pleased by the outcome of the first half of the year and encouraged as we look to the remainder of the year. We will continue to be cautious about occupancy and expect a positive but moderated rate growth, a robust growing ancillary business and continued focus on comprehensive adjustments to costs without compromising our quality commitment.

We have achieved strong growth in our cash flow over the last two quarters and we expect to continue to demonstrate the good growth inherent in this business. We were pleased with the equity offering and what it did to strengthen our balance sheet and reduce our risk profile. We eliminated the cash borrowings on our line of credit. Beyond eliminating the interest expense our flexibility with other lenders has increased as we look to address our future maturities sooner than later.

Reduced leverage provides us with greater operating and strategic flexibility in good times or bad. A strong platform, a strengthened balance sheet, which will continue to get stronger, and significant opportunities for growth, which will emerge, all equal an exciting future with the right discipline.

I feel very good about the Company and what we have built. Brookdale was assembled in a bold and aggressive manner and we went through the challenges of integrating a myriad of business models and cultures. It became even more complicated by the worst economic environment in many decades. But we have emerged a strong company with the best overall platform in the industry for both the short-term and the longer term.

We have a very strong management team and talented organization at all levels who are committed to providing the highest quality service possible. We have a solid functioning Board of Directors and the continuing support of the original sponsor shareholder who has a clear commitment to the future of this company. I am truly looking forward to the next chapters of Brookdale Senior Living's story. We will now turn the call back to the operator to begin the question-and-answer session. Operator?

(Operator Instructions). Mark Biffert, Oppenheimer.

Good morning. Great job on the quarter. First I just wanted to ask you what -- did you say, and I may have missed this, did you say what the current occupancy rate was in the portfolio as of to date, if you have it?

As of today?

Yes.

At the first month of this quarter? We didn't say that, but we are -- July is actually -- was a positive occupancy gain for the month.

Okay. And then in terms of the cost savings as we look ahead, Mark, you had alluded that your costs would probably go up in the third quarter. I'm just trying to get a normalized growth rate for your operating cost. Is it in that 3.5% range?

Well, over time that's likely the case. What you'll see in the short-term is continued growth on the ancillary side, which will tend to drive the cost growth up just a little bit. You'll also see some period of time here where the structural growth in our costs will be somewhat lower because of the adjustments we've made in the cost structure. And then at the same time, again the third quarter is a little bit of an odd duck in terms of sequential cost, and I think we provided a general framework about what to expect there.

Okay. So what's the anticipation of the existing units that you have currently for ancillary services or the potential to build out this ancillary service business? When would you expect most of those costs to get built and in terms of your build out of that business?

Most all of that cost is a function of the actual service units delivered because it's almost all labor and there's not a lot of organizational infrastructure cost, a little bit, but most of it is actually billed at the service units, there's the labor cost directly associated with it. And we just opened Southern California. It will take a while to do that. We're working on a couple of other markets plus there's still a fair amount of maturation to go on with therapy.

The home health part is continuing to grow and we're continuing to pursue acquisitions. Again, those are small without any existing revenue or operating contribution to speak of at that point. But that part is continuing to -- going to be the bigger growth piece of this as we continue to roll those out and then experience the synergy and the efficiencies we get as we merge the rehab clinic with the home health together as one operation.

Okay. And then lastly, Mark, if you could -- you mentioned that you're currently in negotiation with your lenders on some of the 2011, 2012 maturities. I'm just wondering when you look at, as part of those conversations, and you look at the cost of that current debt in the mark to market, have you seen at all what the rate of interest would be on any type of new mortgage debt you would do?

Well, we obviously have a sense of what spreads are in the current market for a deal that you originate today. When you're talking about a refinancing or an extension it's kind of a blended discussion of the remaining term of the current deal and the spread structure in the current market. Obviously spreads are higher today than they were in 2006. But it's a component of the discussion for sure.

Okay. And then as part of that your anticipation is that you'll end up paying off some of that debt to get down to that six times target that you talked about?

There are several things occurring at the same time. We are generating a fair amount of free cash flow since we suspended the dividend at the end of last year, that's one piece. Another piece, the cash flow is growing. And then finally, precisely what we do with different debt instruments as they're extended or renewed, we may pay them down or we may extend them at the current level. But all of those things together should get us to that six times number over the next several quarters.

Okay. So when you reach that target then would the potential of the conversation of reinstituting a dividend come back onto the table at any chance -- by any chance?

I think we'll be looking at the total opportunity sets at that time and assessing what is the best course and what maximizes shareholder growth.

Okay. Thanks a lot, guys.

Ryan Daniels, William Blair.

Good morning, guys, and again congrats on the nice quarter. Mark, I was just hoping you could go back over something I think you mentioned on the same-store revenue growth. Can you break that out on ancillary and then what was the core pricing in the quarter?

I can. The overall -- excuse me just a second here while I get back here. The overall single quarter over single quarter revenue growth was 5.3, 2.9 ex ancillaries.

Okay. And then if we look at the ancillary, I don't know if you have this level of data available, but you indicated that it's up to about $200 of facility operating income per occupied unit in the quarter and that's from organic growth plus adding some of the home healthcare clinics. Is there a way to break that down to see what's your organic or increased capture as you called it earlier versus what's the effect of the bolt-on acquisitions in home health?

I don't think we have that readily available, that's a very good question. We'll try to give some thought as to whether -- within the supplemental data that we can maybe bring a bit more clarity in the future to that.

Okay, and I can follow up with Ross off line. Maybe just another question on that. You guys had indicated previously on the home health you were thinking maybe five additional deals this year. It looks like that continues to progress well. Is that an area you may be dedicating more cash flow to in the future? And if so, what opportunities do you see to get those provider licenses and continue to take that 7,000 to 7,200 up toward the 30,000 to 40,000 unit level?

The acquisitions that we have in process are still low cost, fairly low cost basis. But we are beginning to work and focus on what might be the more challenging markets, either from COMs or just very restrictive basis and in that regard acquiring larger agencies, which would represent a larger capital outlay.

Okay. Is it safe to say that's more of a focus for acquisition opportunities than actually the core senior housing assets?

Well, we're going to look across the broad element. But certainly we're going to remain consistently focused on the ancillary services and we expect to make progress in that area. But I would think that we will continue to assess the opportunity set across the total.

Okay, fair enough. And then, Mark, I don't know if you've run this lately, but something you used to share with us maybe three or four quarters ago was just looking at what a 1% increase in occupancy would do to your cash flow. And I know the cost structure is a little different, we've got a different share count and leverage is a little different. I'm curious if you've run that and if you could share what a 1% move would do to your cash flow from facility operations today?

Well again, it's a relatively hypothetical number. But a 1% move in our revenue is $18 million to $20 million. And you're going to see 80% plus margins on the incremental move. So it's $15 million, $16 million of cash flow based on a 1 point move in occupancy.

Okay. And then maybe the last question -- this is a little bit broader one, but obviously a lot of talk recently about Government Reform. And I know you're primarily not exposed to that given your private pay model. But there's been discussion on bundling payments, maybe focusing on more on re-admissions. And I'm curious, one, if you really think you could be a partner of choice in some of your markets with your rehab and skilled nursing facilities in home health. And if so, is there any data you're currently trying to capture to show the quality of your services and something that you can present to hospitals to maybe be a better referral partner?

That's a good question. And yes, we are having and starting those kinds of dialogues and, yes, we are addressing some systems, refinement work and stuff and are into the activity of tracking outcomes post discharges and through that process. It's a whole lot to go yet in terms of really what comes out of all of this. But as we have stepped back and thought about our role in all of that we pretty well came to the brilliant conclusion, or un-brilliant conclusion, that all of that was something we ought to have been doing anyway a bit more and that there was some great positive potential outcomes from our preparing ourselves and being active in the -- proactive in the explorations of those things.

And have you been able to increase referrals by presenting that data already or is that something --?

It's early -- it's early at this point. I think we are moving up and we have continued to improve our mix in our skilled nursing and the occupancy gains that we referenced are positive and certainly some of our initiatives are showing some signs. But in terms of evaluating the total potential of all of that, it's a little early.

Okay, fair enough. Well, thanks a lot, guys.

Sloan Bohlen, Goldman Sachs.

Good morning. First question, could you guys maybe a elaborate a little bit more on the financial move outs in the quarter and whether that was just seasonal or what was driving that in this particular quarter?

Well, the economy is affecting all the consumers. I don't know that there's anything particularly seasonal; it is a very slight, modest uptick. We've been watching and moving, measuring that along the way. It's one unit in this community, maybe another unit in another community. But there is a factor out there of it, but it is not -- we're not -- the point was we're not seeing any acceleration of it, though we saw a very, very slight increase.

Okay. Fair enough. And then with regard to the incentives you guys are giving, I think last quarter you had maybe mentioned about a month and a half, is that still basically the standard going forward?

No, no, no, no. It's a little over half a month's rent on average across all the admissions. And it was relatively consistent this quarter, 58% to 60% of the new admissions including some incentive package.

And we continue to try to be as smart as we can be about how we do that. And one illustration point we'd give there today is not waving the community fee. And I think we're doing that very effectively to have the mental effect to basic cost structures and things going forward.

Is it fair to say though at this point that you're not quite close to rolling any of those types of incentives back? You mentioned stabilization in the marketplace, is it not quite that far that yet?

We're not there yet.

Okay. And then lastly just a question for Mark. Thank you for the disclosure on the maturities and the debt. But could you maybe give us a sense for 2010 and '11, what level of principle amortization there is?

It's actually included in the supplemental data, Sloan. Let's see here. Net of the contractual extension options, 2009 is $2.2 million of principle amortization, 2010 $6.2 million, which is four quarters rather than two of the same information.

Okay, great. Thank you very much.

Kevin Fischbeck, Bank of America Merrill Lynch.

Good morning. The 2.9% same-store pricing ex ancillary services, can you break that out across the different business lines, assisted living, retirement centers and CCRCs?

We actually do not publish that information. We do have in the supplemental data the total rate growth year over year. So you see the retirement centers are 4.6, assisted living 4.1, CCRC 7.9. Somewhat higher on the CCRC side because the Medicare mix continues to grow there. But (multiple speakers) blended of those is 5.8.

Yes, I guess what I was trying to figure out was whether -- I would think that maybe the CCRCs and the assisted living might also disproportionately benefit from the ancillary service rollout since they have the high acuity patients. Is that a correct assumption?

The assisted living has the highest yield so to speak of units and then -- of course, then the CCRCs, you have assisted living, memory care and the nursing care component in those. But we still get a good yield in the Independent living, though it's probably only 60% of that of an assisted living.

Okay, that's helpful. And then the 2.9% number, that compares to I guess you said a 0.3% controllable cost growth ex ancillary services?

Correct.

Okay. So this quarter implies to me at least that keeping that spread for 2009 is going to be pretty achievable. But I guess what do you think about your ability to do that again next year if pricing remains in this range, are you going to be able to keep cost growth with a nice spread next year?

There will certainly be a healthy spread. If you look at that spread over an extended period of time, it's probably 150 basis points or so depending on the particular market conditions at a particular point in time. So for a couple of quarters here we're actually going through a period where we're seeing pretty heady growth from that standpoint. Some of what you're asking requires an accurate prediction about what's going to be happening economically here. Obviously as you begin to see some recovery in the economy, rate growth will strengthen and cost growth may come up just a little bit as well.

Okay. And then on the entrance fee side, that was a little bit light. Can you talk about what was going on there and your outlook? I guess previously you had talked about, at least of the $23 million you did last year, and the update on net entrance fees?

Yes, it was a little bit (inaudible), we had a little bit of extra amount of refund in the quarter, all of it though related to the normal factors of deaths out of people who had previously transferred to assisted living, memory care, nursing care, but their refund elements don't get triggered until they actually leave the community. And in all but two cases of the whole quarter that was by death.

We had given the guidance there at the beginning of the year that we -- last year it was $23 million and we expected this year to be better than that. And that's how we would continue to read it at this point is we would still expect the net amount to be better than last year.

Okay. And then this last question is just going back to some of Mark's points about the seasonality, the CFFO. I guess it's good to hear about the color on the cost side sequentially, but then to think about some of the other numbers around CFFO, we've got maintenance CapEx accelerating which might drag the number down by $5 million or $6 million per quarter, but then now it sounds like you're saying that the net entrance fees will probably accelerate in the second half of the year. I guess the thought process is that those numbers might kind of wash out versus where they were in the first half run rate?

I think you're making the right directional conclusions, yes.

Okay. So that's just a matter of the cost (inaudible) going into Q3 as being the delta?

Yes, just keep in mind that the Q3 cost is our one quarter that has the highest cost per quarter element to it. So it will go up and then costs will come back down a little bit in the fourth quarter.

Okay, great. Thanks.

[Brian Sequino], Barclays Capital.

Good morning, just actually a follow up on Kevin's last question with the seasonality. I know over the last couple of years there have been some changes in terms of the macro environment which have impacted some of the occupancy and pricing numbers. Can you just update us on normal seasonality that you see in third quarter? I know in Q3 '08 you saw a bit of uptick in occupancy.

Well, with our large footprint and geographic diversification we have the balance of all of those things, it comes out slightly positive in the third and then the fourth quarter usually is one of your better quarters. But we have -- the summer season is not the best season for Florida or some of the -- or Phoenix or the some of the parts of Texas, but it's very good for the North and Central and other areas. And those somewhat have an offsetting, but on the overall blend of it occupancy is typically a little bit better if you have a normal environment in the third and then the fourth quarter is usually a good quarter. I hope that's responsive.

Jerry Doctrow, Stifel Nicolaus.

Thanks and, again, a good quarter. I just had a couple things -- obviously covered a lot of this. I was wondering maybe, Bill, if we could just get a little more color I think in terms of the move in/move out situation. My sense was from a couple of the things that you've said already is that there was -- it was strength in assisted living and the skilled side, maybe independent being a little weaker -- I think what I'm trying to get at is just your sense of whether we've bottomed here and started to improve or whether we've just bottomed and we're seeing normal seasonal pickup. Just trying to get a better feel for where you see the business given the economic conditions?

It's still a very difficult and uncertain market in one respect. But do sense somewhat on the more need driven components, which the nursing, the memory care, the assisted living, are the -- starting at the top on a need driven down basis. Some sense that maybe those have bottomed a bit. The independent living may not quite be there yet, so we're doing a very effective job in terms of -- both in terms of with our supportive ancillary services elements and things and as people are looking for quality but still cost conscious, finding that our independent living and supportive services is a very excellent alternative for them. But in terms of just the basic sense where the independent living is -- probably still has a weakness to it a little bit. And we may have bottomed on the other (multiple speakers).

Okay. And between the entrance fees product and the rental product, is the entrance fee product still a bit tougher because of that -- is it tougher because of housing market issues still or IL is kind of the same regardless of the payment time?

Well, across both the rental and the entry fee CCRCs we've got good size components of assisted living, memory care and nursing and those things are holding very, very strong. But the independent living -- the rental CCRCs is stronger than your independent living and your -- both of your other just retirement centers. And as at this point very -- there is not a lot of difference between it and the entry fee, but just a slight difference where the entry fee is maybe just a very small amount below the rental at this point.

Okay, that's helpful. And I guess the other thing I was trying to get a feel for, obviously the ancillaries are continuing to grow and you're an important contributor here. I was trying to get just a sense about where we are in that process. You had I think some -- you obviously rolled out a lot of these and then what's driving it is the fill on a lot of the existing centers, I think you made that point earlier. And I was trying to get a sense if we've kind of -- it will continue to grow but we're starting to crest a little bit in terms of just the overall rate or with -- go ahead, I'm sorry.

We still have legs and we still have legs. We still have some decent growth both in terms of some rollout as well as maturation of things, there are still a few markets where it's taken us a lot longer time where the market is harder in terms of recruiting and just the challenge of enough therapists, nurses within certain markets. And we're making good progress in those and that offers up some growth in that.

But the home health part, we're only about -- or a little over half way in terms of matching the same units that we have with therapy of getting the home health component up there. So that still represents some decent growth for us.

Okay. And last one from me. You talked about did you look at a full range of options in terms of paying down debt, investing more in ancillary, potentially paying a dividend again. I'm assuming one of those other options would be potentially buying additional senior housing, operator's units as well and you would just look for a return?

Well, we think there are going to be some attractive opportunities emerge there.

Okay, that's all for me. I've got a few knits, but maybe Ross can give me a ring back and we can cover those off line. Thanks.

Okay.

Rob Mains, Morgan Keegan.

Good morning. Bill, do I surmise from your comments about the economic move out that you're seeing that mostly in the independent product?

No, no, I would say we're probably seeing as much or maybe a tad more of that in the assisted living memory care, it's the -- it's just the accumulative weight of the economy on the consumer and the families who sometimes cobble together all their wherewithal to afford care while we've seen the sectors held up incredibly well and it's a great statement about our society in terms of how they prioritize that, but we're seeing that across the board, so to speak.

Okay. I think in previous calls you've also mentioned that you think that move ins are getting delayed somewhat for the same reason. Are you seeing any length of stay compression?

No, we've actually been -- again, I'd have to attribute a lot of it just to the incredible work of our people, as well as the effects of the ancillary service program elements that our length of stay is holding and in some instances extending.

Is the average acuity going up? Number of ADLs, that sort of thing?

The acuity has picked up a bit and you'd have to say that across pretty well the whole product spectrum.

Okay. Mark, when you talked about the various options you can do with the free cash, I just had one more to Jerry's suggestion. Do you have any purchase options on leases?

We do. Not very many of those are exercisable in the immediate term. But obviously there's a range of discussions that's possible with our REIT partners.

Okay. Is that something else that would be on the table?

It certainly would.

Okay. And I guess as the ancillaries have grown are we at a point where you have to start thinking about the outlook for Medicare next year given the unfavorable SNF rates and maybe better therapy rates?

They published last Friday and of course the SNF came out pretty well as what it had been previously posed, and that's about a $500,000 total annual negative impact on the nursing rate as we run it through our -- the rugs and the new rug distribution elements and stuff. It does look like we'll actually have a positive in the rehab and a positive in the home health as we run through the -- so the details, we've got to still work on that. But we may actually have a positive in two and a very slight negative and the other.

Great. Okay, that's what I had. Thank you very much.

Mark Biffert, Oppenheimer.

Yes, I mean, you answered with that last response the question on Medicare/Medicaid. I'm just -- do you do think that will be a net positive overall or is it just two positives and a negative -- comment on that?

It will be a net positive overall.

Okay. And then on the entrance fee communities, you referenced that you have about $80 million of potential revenues there. What ways are you marketing those properties to try to move them? I mean, would you discuss potential -- dropping the prices for the entrance fee communities or do you want to hold that fairly stable at $170,000 that you projected in your estimate?

We want to hold it fairly stable, but we have made some price adjustments and we will use some element of incentives. We are and do allow some payment structure as they pay it. And we continue to have very good outcomes with regard to our event marketing and all in terms of the number of leads and number of inquiries and responses to seminars in terms of how to help people think about selling their homes and processes and assisting those elements and concepts.

The interest is pretty good. And the inquiry flow, it's the process of being able to truly move them through that pipeline and ultimately it gets down to the confidence of selling a home and the perception of perspective of their willingness to accept the current values and adjusting to that. But all of that seems to be moving towards a good point.

If we can see a little bit more -- a lot movement in housing and (inaudible) the middle price housing then we're getting some benefit from the improvement in that lower-priced housing since the article in the Wall Street Journal yesterday was pretty well on point. But where we see the upticks we're seeing some improvement.

Okay, thanks.

[Brian Sequino], Barclays Capital.

Apologies, I accidentally got disconnected earlier. But I just had one follow-up question. Bill, you mentioned earlier having room to run I guess in the home health and not really -- you have only about 17,000 units I guess apparently with ancillary services. Just wanted to see if that full $35 million that you have right now with therapy can also have the home health component also?

The 35,000 units that we cover?

Yes.

That is our objective. We may have -- there may be a couple of markets that are going to be very difficult for us to solve. But we may actually -- in home health may be able to actually reach some additional units which would then bring therapy along with it too. But that would be our target. Though it's going to be a challenge to achieve the full of it.

And that full amount you would need to make additional acquisitions though, right?

Yes, yes.

Okay. Thank you very much.

At this time I'm showing no further questions. I'll turn the conference back to management for any closing remarks.

Thank you, Wes. With that we thank you for your participation, we'll be around all day if you have any follow-up questions. We look forward to it. Thank you.

And ladies and gentlemen, that concludes the Brookdale second-quarter 2009 earnings conference call. We appreciate your time. You may now disconnect.