Brookdale Senior Living Inc (BKD) 2009 Q3 法說會逐字稿

Good morning. My name is Lori, and I will be your conference operator. At this time I would like to welcome everyone to the Brookdale third-quarter earnings conference call. (Operator Instructions).

Thank you. I will now turn the call over to Ross Roadman, Senior Vice President Investor Relations. Please go ahead, sir.

Thank you, Lori, and good morning, everyone. I would like to welcome you all to the third-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 Lori mentioned, this call is being recorded. A replay will be available through November 10, and the details of how to access that replay are in the earnings release. This call will also be available via webcast on 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 yesterday 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?

Thank you, Ross. Good morning and welcome to our third-quarter earnings call. Let's start by summarizing how we see the market. While there is obviously a lot of uncertainty about whether we have hit the bottom or not, we are cautiously optimistic that overall the worst is behind us. We achieved a 50 basis points increase in average occupancy in Q2 to 89%. We have seen occupancy stabilized since early in the second quarter with an overall net occupancy gain for the five months ended October of approximately 650 residents with each month having positive net move-ins. During the third quarter, we saw occupancy gains in both independent living and assisted living, and CCRCs were flat without the impact of The Villages opening on September 15. While the needs-based product offerings of skilled nursing, Alzheimer's and assisted living continued to lead, there were some more positive movements in the more discretionary products in most markets.

The rate environment remained the same as the second quarter with continued use of selected incentives. We do have approximately 200 of our communities at greater than 95% occupancy, which, of course, have limited use of incentives.

Our performance in the quarter was strong. This was our fifth consecutive quarter of real revenue growth and our third consecutive quarter of producing 50 million or more of recurring CFFO. We performed well across all of our financial metrics. As we said going into the year, we've put together a strong plan to improve the performance of the Company no matter the environment, and the teams continue to execute the plan well. We believe our capital structure is approaching the appropriate balance, and we are demonstrating the very positive cash flow dynamics of our business.

As evidenced by the announced acquisition of the 21 Sunrise communities and the opening of several expansions, we are moving forward with our growth strategies beyond our strong organic growth.

Turning to the results of the third quarter, all of our key drivers were positive, leading to a 43% per share year over year increase in cash from facility operations. Occupancy increased 89%, up 50 basis points from Q2. It was actually 89.2% if you exclude the expansions that opened in the third quarter and that were just starting to get traction.

Revenue increased almost 5% over the third quarter of 2008, led by revenue per unit increase greater than 5% from both senior living rate growth and strong ancillary services growth. Again, controlled expense growth contributed to year-over-year margin expansion. As a result, we reported cash from facility operations of $50.4 million or $0.43 per share. As Mark will explain, the $0.43 includes $2.2 million or $0.02 per share of acquisition-related costs and includes $1.5 million of startup costs, as well as the dilutive effect of building cash after the equity offering.

As in the last three quarters, the primary story has been the excellent execution by our organization. While a good location with a good value proposition is as always important, the sales and marketing skills of the local community are key to maintaining or building high occupancies in this recession. Our salespeople have increased leads, been disciplined and prompt in their follow-up and effectively converting those leads into move-ins.

On the operational side, we continued to execute well, providing efficient and effective service following our high quality standards, also key to attracting and retaining residents. With the strong growing cash flow and the actions we have taken to right size the balance sheet, we have put ourselves in a good position to focus on future growth opportunities.

I want to spend a little time discussing those opportunities beyond our basic strong organic growth, which will only get better once the economy bottoms and begins slow recovery.

As we have discussed before, one area with very attractive returns is the expansion of our existing assets. Back in 2007 we talked about [16] expansion projects we had identified as attractive opportunities. These expansions either added like units in successful communities or more often added new services to a community or a market, enhancing the existing community and ancillary services network.

As the environment changed, we put many of the projects on hold and continued with a more selective buildout. By the end of this year, our expansion program will have completed 19 expansions over three years with almost 900 units, primarily skilled nursing and Alzheimer's units to enhance one of our networks.

In addition, we completed the development of a 312 unit CCRC for a total of 1179 new units.

Regarding the CCRCs, on September 15 we opened the 240 unit independent living component to our existing assisted living and memory care community in The Villages in Florida. The assisted living and memory care units have operated at maximum occupancy for a number of years. The Villages is a senior-oriented town of 80,000 residents advertised as Golf for Life, and this is the only retirement community that has been allowed within its boundaries. It is progressing nicely.

With the current move-ins and other depositors, we have commitments for over 60% of the units. Since mid-September, when the building was opened, we had over 400 new prospects visit and are picking up new depositors each week. We will open the 72-bed skilled nursing unit in the next few weeks, creating the full CCRC. Being located across the street from the local hospital, we expect the nursing units will fill very rapidly. So we maintain a very, very high expectation of this unique CCRC.

We are now in the process of reevaluating all of our on hold expansion projects with the intention of restarting the program. Based on our historical experience, we expect expansions to have stabilized unlevered returns in the midteens or better.

The next area of growth strategy is acquisitions. As we have stated, opportunities will begin to emerge. We are pleased to be acquiring the portfolio of 21 communities from Sunrise. The communities fit us very well. They are 100% private pay. 30% of the units are high demand Alzheimer's units, and the rest are very attractive assisted living with the [DUIL] units.

Importantly, they are located in markets where we have a good presence, and therefore, they enhance our existing clusters. The opportunity to add ancillary services with over 1150 of the units within our licensed therapy markets and almost 800 within our home health license markets further validates and demonstrates how well the portfolio fits our platform.

We believe that we should be able to achieve our $150 per occupied unit per month operating income benchmark sometime next year. We will see immediate improvement in the operating margin as we overlay our cost structure with identified savings in areas such as risk management, insurance, and certain procurement areas, and due to the good market fit, the incremental overhead will be quite low. We are purchasing the communities for $204 million, assuming $134 million of debt, and the rest of the purchase price to be funded from cash on hand, and we expect to make mid-teens levered return on our equity.

Brookdale is well-positioned to be a consolidator. Our current platform is scalable. We will demonstrate cost savings with this recently acquired portfolio. Plus, we will demonstrate the benefits of our ancillary services program.

The final growth element is our ancillary services that will continue to show strong growth of both revenue and cash flow. For the quarter our therapy and home health revenues grew by 42% over Q3 of 2008, and operating contribution grew by 77%. Therapy services with the maturation of existing clinics continued to produce increased volume. We stayed steady at over 35,000 units served this quarter for therapy, and we see continued upside, expecting ultimately to reach 40,000 units.

For home health we continue to see the impact of our home health agency acquisitions. If you will recall, we have typically acquired small agencies in [non-CON] states and transitioned the business to serve our residents. We have acquired 18 agencies over the last three years for a total investment of $10 million, which has been already more than paid back, a small investment for the return as evidenced by the substantial yield we are achieving.

We are actively studying additional acquisitions though in CON states they are likely to be larger transactions and will require us to operate outside our communities to justify the acquisition costs. In that line we have now expanded our pilots to deliver home health outside our communities to nine markets with good success. September saw a monthly operating income contribution of over $250,000 for the outside business. Our target is to reach 30,000 units with our home health services in the next year or two.

In summary, our growth will come from strong organic growth as the market improves, highly accretive expansion activity, accretive acquisitions and our unique ancillary services platform. Again, we are very pleased with the results of the quarter.

I will now turn the call over to Mark to provide more details, and then I will 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 yesterday we have included our supplemental information package. As Bill said, we had a good quarter, and for the third quarter, we reported cash from facility operations or CFFO of $48.2 million or $0.41 a share. That did include $2.2 million or roughly $0.02 a share of outside expenses related to specific acquisition activities in the quarter and $1.5 million or around $0.01 a share of startup losses due to expansions during the quarter. Excluding the acquisition costs, the quarter's CFFO would have been $0.43, and further excluding the expansion startup costs, it would have been $0.44.

The quarter also includes $0.03 to $0.04 of dilution from the June equity offering. During the reporter we retained cash as we analyzed investment alternatives. Deploying this capital into acquisitions will be accretive in the long run as demonstrated by our announced acquisition from Sunrise.

The $2.2 million of acquisition-related costs relate to expenses for third parties who support the due diligence and analysis of potential transactions. Previous to an accounting rule change, these costs would have been eligible to be capitalized if the transaction were affected. Now all costs are expensed as at the time they are incurred.

During the third quarter of 2008, we reported $0.22 a share of CFFO, but that included $0.04 per share of hurricane costs and $0.04 per share of merger and integration costs. Comparing this quarter's $0.43 to the adjusted $0.30 for 2008, we produced a 43% increase in CFFO.

One new item that we have excluded from CFFO this quarter is the first-generation entry fees from The Villages. These funds are by state regulation escrowed until we hit 70% occupancy, at which time the construction loan is paid down. For the third quarter, the $10.6 million of first-generation entry fees we collected are in the GAAP cash flow statement, but we have excluded them from our non-GAAP numbers and the supplemental data sheets pertaining to entry fees.

Operating margins improved by 240 basis points versus Q3 '08 because revenue posted a solid 4.9% increase and operating costs grew by only 0.8%. Last quarter we discussed the seasonality of our costs, and we did experience sequential increases due to utilities and the number of work days and holidays in the third quarter. However, on a year over year basis, senior housing expenses actually decreased. General and administrative expenses, excluding non-cash comp expenses and integration and acquisition-related costs, were approximately $24.7 million or $2.4 million higher than Q3 '08, primarily attributable to the $2.2 million of acquisition-related costs. Our quarterly cash G&A costs continue to run at about $25 million a quarter, excluding the acquisition expenses.

Our Q3 '09 over Q3 '08 same community results were very positive. Revenue increased 4.4% as a result of an average revenue per unit increase of 5% and a decline in occupancy of 50 basis points. The senior housing rate grew by 3.2%, and ancillary services added 1.8% to the revenue per unit growth metric. Expenses grew at 0.9%, resulting in same community NOI growth of 11.7%.

A key part of our operating income improvement came from the expense side. Of the 0.9% same-store expense increase, the operating expenses associated with senior housing, therefore, excluding ancillary services actually decreased by 0.6% with the bulk of the overall increase resulting principally from labor to provide the increased volume of ancillary services. Included in our expenses are $1.5 million of startup losses associated with our newly opened expansions.

We have opened up several larger expansions, particularly a couple of skilled nursing centers and The Villages independent living operations. The 2009 projects are larger than the prior year's projects and are incurring greater startup costs. These costs were $1.5 million in the third quarter and will approach $3 million to $4 million in the fourth quarter. These costs show up in operating interest and lease expenses.

Turning to the balance sheet, with positive cash flow, we significantly strengthened our financial position. We ended the quarter with $159 million of unrestricted cash and no borrowings on the line. At the end of the third quarter, our leverage was 6.5 times net debt to adjusted EBITDA, calculated by annualizing the year-to-date adjusted EBITDA number of $264 million, and we continue to work toward prudently lowering that leverage further. We have indicated that our ultimate leverage target is approximately 6 times adjusted EBITDA.

As it relates to our mortgage debt, as we have discussed before, other than normal amortization, we now have no mortgage debt maturities until 2011 after the impact of contractual extension options. In the supplement we have included information about our debt maturity schedule and fixed charge coverage.

As we described previously, given the level of uncertainty that we faced in early 2009, we aggressively managed our uses of capital, including capital spending. In the first two quarters of 2009, we purposely deferred capital expenditures into the second half of the year. It has taken a little longer to spool up the CapEx process than expected. It now appears that this delayed CapEx will come through in Q4 '09 and Q1 of 2010. We anticipate spending in the range of $21 million to $23 million for net recurring property level CapEx for the full-year 2009.

We now expect to spend $50 million to $55 million in total for CapEx for full-year 2009. For development the last two projects that we will open in Q4 are leased and, therefore, require no capital from us.

I will now turn the call back over to Bill for concluding comments.

Thanks, Mark. Another very strong quarter, which makes three quarters in a row that we have made material improvements in the performance of the business, in spite of a terrible economic environment. While we continue to operate with a conservative perspective towards occupancy, rates and costs, we do feel confident about engaging in activities supporting growth. We have strong growth in our cash flow, and we will diligently look to deploy that capital in a manner that achieves the best return.

It is time to restart our expansion program. It will take a while to see new units come online, but the results from our recent expansions are in line with our historical experience and are compelling. We will be actively engaged in corporate development, looking for acquisitions that fit our business strategy. The growth of our ancillary services program will continue to be a focus as we look to expand our reach into new markets and perhaps new offerings.

The opportunities ahead of us are significant. We have the best platform in the industry, a strengthened balance sheet with good current cash flow, and strong growth dynamics. Our management team has been thoroughly tested, and I wanted to say that I am very proud of this management team and how they have performed through these very difficult times. They have put us in a very strong position for the future. We will now turn the call back to the operator to begin the question and answer session.

Operator?

(Operator Instructions). Sloan Bohlen, Goldman Sachs.

Just, first, a question on growth initiatives. You spoke a little bit about particularly in the home health how you have gone outside of your network I think it is in nine markets. With regard to acquisitions or potential acquisitions going forward, would you expand outside, or is it still trying to build on the network that you have right now?

Well, we will certainly be trying to build on our network that we have, but we will be trying to acquire home health agencies in markets where we have a strong presence. But it most likely is more and more of them are going to be in CON states. The size of those acquisitions will be larger. We are expanding our home health activity outside our communities in those nine markets, demonstrating our ability to take and manage that outside business. Primarily we are following our discharges from our skilled nursing. Also, the networking of referral sources that support us, and that is going well. And we think that we will be able to demonstrate that we can operate a model outside of our own walls, and through that also we will get that licensor capability to deploy our program within our communities in those markets.

Okay. But even outside of home health, just with regard to new facilities, can you maybe give us a sense of what the opportunity set is out there? And particularly maybe with assets, either with difficulty in refinancing, we have seen a couple of deals happen in the last couple of months. Are there a number of other opportunities out there like that?

We think there will begin to be more that will emerge, and I think you would characterize it correctly and the fact that they most likely will be associated with the organizations that have some degree of challenge with their capital structure, debt maturities or abilities to refinance.

On the longer-term, it will be more on the other fundamentals of our position as a consolidator.

Okay. And with regard to just the Sunrise acquisition, is there any assumption for initial CapEx that you are going to have to spend with that facility -- for those facilities?

We will probably be disclosing more of that detail post the acquisition and as we get the final full assessment of those assets.

All right. Just one question on The Villages. Could you give us what the lease rate is? You said at 70% you would be able to recognize those first-generation entry fees, and when can we maybe expect that?

The timing of that, it will be well into next year before we would get to that point.

Okay. And the current lease rate is --?

Well, we have closed 60 someodd to date. We have a good-sized number of others on the books for scheduled move-ins before the end of the year, which will bring us up towards the 85 to 100 range by the end of the year and may add some more to that. We are weekly adding to the deposit list of the 10% depositors with an intent to move forward through the process of preparing themselves and scheduling move-in dates. But we will be -- this is opening during the prime season for that market. So we expect to make substantial progress through the next several quarters.

[Brian Sakino], Barclays Capital.

I wanted to follow-up on the entrance fees that you're expecting for the year. I know you had said you hope to do better than the $23 million in 2008. I wanted to know if that is still the case for 2009?

The third quarter did fall short of where we had anticipated it being, and while we still have good activity and good deposits, getting all of them closed still continues to be a little bit of a challenge.

The fourth quarter will be our best quarter of the year by far, but it is going to have to be an exceptional quarter in order for us to achieve what we have given in guidance. So we are most likely going to fall just a little bit short of that guidance that we had given.

Okay. And that is excluding the first-generation fees, right?

Yes, totally excluding those.

Okay. And, as we think about those first-generation fees, I know you did like around $10.6 million in the quarter, and I guess that is for 60 facilities. So, as we get up to 80 --

No, that was not for 60. 60 is through where we are today. The $10.6 million was for about 46.

Okay. So that $10.6 million figure, I guess, going forward will be --

It was 34, I guess. 37, excuse me. I get corrected here. The $10.6 million was for 37.

Okay. So to get -- I guess as I'm looking at that $10.6 million, as you get to 85 to 100, it is going to be a similar figure in Q4?

Yes.

Okay. And then you mentioned I guess getting to the 70% in later 2010, is that correct?

That is correct.

You mentioned three to four in startup losses. Is that something we can expect each quarter in 2010 as the leaseup occurs?

Well, you would expect that to taper down as you go through 2010.

Okay. And also, on the drag I think Bill you mentioned that occupancy would have been something closer to 89.2%, excluding that opening.

That is correct.

Do you have any indication as to how much a drag it is going to be in the fourth quarter?

Well, we have another large expansion opening in the fourth quarter. I have not done the exact math of the effect of those.

But I would expect it would be at least a 20 basis points impact in the fourth quarter as well. (multiple speakers)

With that other expansion coming on, probably yes.

Yes, probably a good proxy.

Got it. Thanks for taking my questions.

Mark Biffert, Oppenheimer.

I was wondering if you could maybe expand a little bit on the expansions that you talked about in terms of the timing in the size dollar value wise?

Of the future expansions?

Yes, and how much you think you could do or start in 2010.

I think, as we get through the planning process of that and scheduling as we are getting those things scheduled and getting that whole program reactivated, we will first quarter -- our fourth-quarter call would be when we would most likely be able to outline that for you the best.

Okay. And would the focus you think be more in the assisted living side or in the Alzheimer's care type expansion?

I think it would be in the Alzheimer's, skilled nursing and some assisted living.

Okay. And then in terms of the types of acquisition opportunities, what is in the market currently for assets I mean outside of looking at distressed? Is there a target type of asset that you are looking at that you feel would fit your portfolio, or is it really anything that meets your return hurdle?

Well, it is what makes the return hurdle, yes, but also what fits and complements our markets or is in a market where we clearly have the intent to try to grow concentration over time. So we will look at a combination of factors. But with the breadth of our platform and know-how, expertise and ability to execute across the product spectrum, that we would be wanting to see just how well the total fit is for us.

In terms of lease opportunities, are you seeing any of those out there from the REITs or otherwise?

We are not specifically looking or focusing on the REITs as a source of growth for us in that regard.

Okay. And just regarding the Sunrise properties, what are the margins currently in that property and the occupancy level, and how much or how quickly do you think you can assimilate that? I mean you mentioned that you could build out the ancillary revenues probably by mid next year. I'm wondering just on the operations side how quickly you think you can build up the occupancy and the margins in that portfolio.

We are not in a position to talk about any of the operating fundamentals there until after we close the transaction.

Okay. And then, Mark, you had talked a little bit about your target level range for leverage to 6 times. I mean is that a -- what is the deadline for trying to reach that target? Is it end of this year; is it end of next year?

Well, I don't think we have really established a firm deadline. Obviously, as we see organic growth in the business and as we use any of our operating cash flow to change our leverage profile, that will impact that. But we have not set a firm target date for that.

Kevin Fischbeck, Bank of America/Merrill Lynch.

Thanks. I just wanted to follow up on that last question. Since at the time of the equity offering, there was a pretty -- it seemed like debt paydown was a pretty big focus of the Company. Should we be interpreting in the commentary here about refocusing on growth and looking at acquisitions as still coming to the lower end of that leverage, but maybe that time horizon, although not firm maybe hasn't pushed back a little bit in that you are willing to delay that maybe next 6 times if the right opportunities come up?

Perhaps. Obviously we carried a lot of cash as we went through the third quarter as we were looking at a number of different opportunities. I don't think we have ever articulated the 6 times target as a date bound type target. Obviously we need to be in a position to execute on opportunities as they come forward. Quiet frankly, we are comfortable at the 6.5 times where we are today, but believe over time 6 times is an appropriate objective.

Okay. How should we think about the bed expansions? You mentioned that you will have more of an update on the Q4 call. Does that mean that we really should not be expecting a whole lot of bed growth until maybe second half of next year? Is that the way to think about it?

Well, the reality is we do not have any projects underway beyond a couple that will open in the fourth quarter. So just given logistics, it would be a bit of a challenge to open units even by the end of next year. But you would not expect anything before the end of next year. More likely on into 2011.

Okay. And then just to confirm some of the things that you said earlier. So, as far as the CapEx goes, the CapEx being $3 million or $4 million lighter this quarter, we should be thinking it sounds like that maybe Q1 of next year might be $3 million or so higher than average?

I think we will see a higher than normal recurring run-rate in both Q4 and Q1. I think that is right.

Okay. And then the commentary about the startup losses in Q4 of $3 million to $4 million, is that expected to lead into 2010 as well, or should that be breakeven by Q1?

It probably will not be breakeven by Q1, but I would think we would be getting close to that by Q2.

Okay. And then, I guess, with the last question here with the Sunrise transaction closing this quarter, is there going to be acquisition expense this quarter as well?

There will be some, though I would expect it would be a lower level than what we saw in the third quarter.

Ryan Daniels, William Blair.

I had a quick follow-up question to start on The Villages. I just want to make sure I understand this correctly. But the 70% occupancy hurdle, that will just drive you to take the cash in escrow and start paying off the construction loan. That is not a trigger for you to actually start recognizing those entrance fees in your CFFO. Is that right?

That is correct. All first-generation sale of each apartment will be taken and excluded out of our CFFO.

So, as it builds up to that 70%, is that cash going to be sitting in restricted cash on the balance sheet?

It is restricted cash. It is held specifically in escrow.

Okay. And maybe a question for Mark. I don't know if this something we are missing in the 8-K, but in the press release, you mentioned restricted cash of about $171.4 million at quarter's end. But then the balance sheet looks like it's about $104 million. Do you know what's the deviation between those two?

There is likely a piece in both current and noncurrent. So when we get the Q on file, you will see the detail on that.

Okay. So that explains it. And then another one on the supplemental data you provided, I'm curious if the inventory you list of entrance fee CCRCs -- I think the $81 million in value -- does that actually include The Villages, or are you excluding it for that calculation?

That excludes it.

I'm sorry, excludes it?

That is correct.

Okay. Great. And then maybe a little bit broader question. You have talked a few times about the success you have had in the nine markets rolling out your home healthcare services. I'm curious if you have been able to track what kind of impact that has had on actual occupancy or maybe leads or move-ins in those facilities. I would assume by finding those patients out in the field and developing relationships, you are going to get them into your facilities when the need arises more easily. So do you have any data there of how successful that has been?

We are clearly trying to set up all the systems to track that. In our preliminary measures, we clearly are seeing some of that producing it. But we don't have it in a statistical presentation form at this time.

Okay and then maybe a similar question. I'm curious if the independent living, obviously a pleasant surprise with the stability or improvement in occupancy. I'm curious if you're seeing people kind of bundle home health services with IL to kind of create a pseudo-assisted living environment. And if so, I would be curious if the occupancy in IL where you have home health and ancillary is higher than the occupancy in markets where that might not be offered?

I have not broken that out specifically lately. But, in general, we, as well as many other retirement center operators with independent living, has certainly been augmenting some of the services to support people in that and in IL. In certain markets and certain communities, it becomes a little bit of a different AL option. Again, be very careful not to trip over any lines, but providing a bit more supportive services within their units.

Great and then maybe my final question here. I don't know if you want to break this out monthly. But I'm curious how tightly your entrance fee buy-ins have tracked the broader housing market, existing home sales, etc. Meaning that it was up in July, a little bit weaker in August and September. Did you see a similar phenomenon where July was a better month and then it tapered off a little bit towards the end of the quarter?

Well, we still see very definite correlation and movements in any market where we are starting to see some actual improvement. In home resales we are seeing that reflected in improvement in our entry fee deposits and closings. (multiple speakers) We still see that correlation clearly being administrated.

Jerry Doctrow, Stifel Nicolaus.

A lot has been covered. I did two sort of broader questions. One bill on the home health business as you expand, particularly beyond your communities and particularly start buying if I understood you correctly, larger home health agencies, which will also be providing services in the community, how should we be thinking about reimbursement risk? Obviously when you buy these agencies that are Medicare reimbursed, there is always risk of buying into someone else's problems. I guess maybe a little more color on how you are managing that. And, as you start buying larger agencies, does that risk go up in your mind?

Certainly the risk can go up, but I think we have to be very, very diligent as we have been, and I think we have an excellent track record in being able to ferret out acquisitions that may not have a clean record. We again will be trying to buy the smallest we can find within those, but within CON states they are going to tend to be a bit larger, and we will have to be very, very diligent as we have been with making sure that we're getting solid clean agencies and not inheriting somebody else's problems.

And do you have sort of a target on how much Medicare -- I think it's like 17% of revenue now -- how much Medicare you might end up with as you think this through to, say, 2010, or we have put 20% or 25% of --?

No, the other elements of our growth and growth elements will probably actually cause that percentage as a percentage of total to maybe actually decline a little bit.

Okay. And when you are buying these -- just to make sure, I'm clear -- it is really sort of a different model. You are not just going and providing it in another retirement community. You are actually going door to door, as I would call it, in sort of a typical home health agency style?

Though it is we have our own unique model design on that and what we are demonstrating, but yes, we are reaching out into the market to people in their own homes.

Okay. And then the one other thing I wanted to ask about, maybe back to Mark, just again thinking about the use of capital and debt versus debt paydown versus some other things.

I guess what I wanted to do is get a sense from you is, when you think about, let's say, through 2010 or even 2011 again, how much you think that growth in EBITDA helps get you to that target versus debt paydown? So that is kind of one part of this.

And then second, do you worry at all about potential increases in interest rates and may be needing some additional cash to lower debt, assuming we start seeing some rises in interest rates actually get out to 11%, 12% when you start having debt maturities?

Both very good questions. The first part of your question around the impact of organic cash flow growth and delevering, it is really a timing question as much as anything. If you look back, over time the unleverageed cash flow in the business has grown 7% to 8% a year.

Now we are obviously not in a normal time right now. So to some extent to answer that question requires that we predict when the economy is going to recover and what the piece of that recovery will be, which I think is difficult to do. But we clearly expect that we will get back to normal organic growth rates. Is that early -- (multiple speakers)

(multiple speakers). It might do a bit better if you are in a rebounding economy?

It certainly should be because -- that is right. As the retirement center part of the business, as the entry fee part of the business begins that rebound, you are right. You will get a disproportionate growth impact there. We clearly do keep an eye on market interest rates and how that impacts financing capacity in the assets, and that is an obvious part of the capital plan for the Company as you look forward a number of years.

Okay. And -- well, I don't know if you want to say what your assumptions are. But so having one way to deal with that, mitigate some of that risk is to have cash available to begin to pay down some of the debt as it may be refinanced a little lower LTV or something. Is that sort of part of the equation potentially?

That would certainly be part of the equation. Hedging activities could be part of the equation. A number of different alternatives there.

Rob Mains, Morgan Keegan.

Just about everything has been answered. I just have a follow-up to Jerry's last question. To the degree that you might accumulate cash on the balance sheet and not deploy it, would you just have it sit in cash, or would you pay down any debt that is out on there now?

Well, it will depend on what the opportunity set is at that moment in time. This last quarter we were looking at a variety of opportunities. So it did not make sense to go through the process of delevering and then re-accessing that capital if we needed it. Once we see some normalization in the credit markets here, we should be able to create some additional revolving capacity so that in a sense you can have both. You can both pay down debt and access capital. We are not quite at that point yet. Obviously we carried a lot of cash in the quarter. We are going to be using some of that capital for the Sunrise acquisition and some other opportunities we are looking at.

Okay. So (inaudible) a cash kind of is your revolver?

Well, to some extent. We have a $75 million revolver in place. It is probably not the long-term piece of our capital structure that we are after, but we do have that available today.

Okay. And then just one other thing. You have answered a couple of questions about the pending Sunrise deal details that you're not going to be able to release until after it closes. Is that like fourth-quarter conference call, or will you be handling that separately?

I would expect it would be -- whatever we will say would be the fourth-quarter conference call.

Chris Damas, BCMI Research.

Was there any thought given to buying all of Sunrise in spite of all their problems? I wondered if Mark Ordan and you got together and looked at that? Some of the problems might go away with the bigger entity taking them over.

That is not something that we would address whether we -- I mean it just would not be appropriate.

Okay. I thought I would ask.

Mark Biffert, Oppenheimer.

Yes, just a follow-up. When you look at your line of credit being unused and the higher rate that you have, now that your cash position is better, have you started talking to banks about redoing another line of potentially larger?

We are obviously in the capital markets all the time, and among the things we are talking to banks and others about are revolving credit capacity.

Is there a certain size that you guys are trying to target?

I guess yes and no. The credit market does not have a normal level of capacity right now. So what number you might pick over the long run as being appropriate probably would be difficult to do in today's market. But we have some rough ideas about what we would like to do.

And are the rates much improved obviously given that spreads have come in? I mean can you guys get a better rate than the 10% that you have on there?

I would not say that rates have improved or spreads have come in, and actually I think our rate is 9% on the line right now.

If we were to do something else with it, it would be -- today it would be lower. But right now it is not a -- we've got a very strong balance of cash, and it has not been --

So if you were to do a large transaction, you would probably make sure that you had assumable debt on it, is that safe to say to make it work, and it would not be larger than the amount of cash that you are generating or you expect to generate?

Well, obviously any acquisition opportunity you look at the financing is part of it. In a perfect world, it is highly leveraged with assumable debt, right? But different opportunities have different fact patterns.

At this time there are no further questions. I will now turn the call over to Ross Roadman for any final remarks.

Thank you. With that, we will close the call. We will be around all day. Please feel free to call or e-mail for follow-ups. With that, thank you very much.

Thank you. That does conclude today's Brookdale third-quarter earnings conference call. You may now disconnect.