Brookdale Senior Living Inc (BKD) 2010 Q1 法說會逐字稿

Welcome everyone to the Brookdale Senior Living conference call on May 4, 2010 at 9 o'clock am Eastern Standard Time. (Operator Instructions). Mr. Ross Roadman, you may begin your conference.

Thank you, Christy. I would like to welcome you all to the Brookdale Senior Living first quarter earnings conference call. Joining us today are Bill Sheriff, our Chief Executive Officer, and Mark Ohlendorf, our Chief Financial Officer. Also with us is Andy Smith, our Vice President and Chief General Counsel. As Christy mentioned, this call is being recorded. A replay will be available through May 11, and the details on 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 the statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living 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 earnings release for the full Safe Harbor statement. Now I would like to turn the call over to Bill Sheriff. Bill?

Good morning and welcome to our first quarter earnings call. Let's start with the market. We are beginning to see signs of economic improvement in our business. Occupancy has been increasing, with April ending at the highest occupancy for the year. Our sales inquiries increased over 9% in the first quarter over the same period last year, and up 28% from the fourth quarter. This increase in activity was also reflected in our entry fee communities, particularly in Florida.

Sales inquiries for the entry fee communities were up 31% from the first quarter of 2010 versus the first quarter of 2009. We had 67 closings in the first quarter, netting $6.3 million of net entrance fees, compared to 48 closings and a net of $2.7 million last year. More people are showing up with the announcement that they have contracts to sell their homes and are ready to schedule a move in. As we have discussed before, it is a lengthy time in entry fee CCRCs between when a prospect initially makes an inquiry to move in. In normal times that time period is around two years, as people take time to think through their decision. And remember these are a younger group who are planners. Looking at last year, that time period had stretched to over four years, with the lack of housing market liquidity. This last quarter it went down to a little over three years. Activity continued to improve in April, and we are encouraged. At the same time, it is hard to tell how much effect if any the stimulus packages are having, but we believe there is a positive upturn.

By the way, all of my comments on the entry fee communities are excluding the good continued activity at our new CCRC in The Villages of Florida. While things seem to be improving, it is still too early to judge the full impact of the recession on our customers' real or perceived financial challenges and concerns. So we don't anticipate any significant changes from what we previously stated. Small but steady increases in occupancy and pressure on pricing. On occupancy, we saw evidence in the first quarter of improvement in certain markets. Remember the first quarter is seasonally the most difficult for occupancy because of the lack of activity at the end of the fourth quarter, due to the holidays and the seasonal morbidity pattern.

Our occupancy was basically flat for the quarter with a 10 basis point decline from Q4. January experienced the biggest decline as it typical, and then we saw a good pickup in March. From a pricing standpoint, we believe there will continue to be a little pressure on rates. Occupancy will lead, but we are not at the point where meaningful rate increases will be accepted in the market. We did see a decrease in the number of incentives used for move ins in the first quarter versus the fourth quarter. We increased the rates in our pre-standing assisted living communities on average 2% to 3% during the first quarter. Overall the first quarter was a good start to the year with a record CFFO of $54.4 million.

Our overall revenue was up 9.3%, the Sunrise portfolio acquisition did account for 3.4% of that increase. Our ancillary services continues to demonstrate strong growth. For the quarter, our therapy and home health revenues grew by 36% over the same quarter last year, and operating contribution was up 49%. The number of units served for therapy increased by over 1,500 units from the fourth quarter of 2009, mainly due to the rollout of services into the former Sunrise communities, as well as the expansions opened last year.

While we have expanded into many of our markets that currently contain the required critical mass, we are continuing to improve the product productivity of our current clinics. We monitor the key metrics of our therapy clinics, and have in fact closed a few clinics that proved unprofitable. As seen this quarter, acquisitions and expansions provide the opportunity to increase units served within these markets. For the Sunrise acquired community, we have services being provided in 12 of the 18 communities with over 800 units, and have a couple more communities to add this quarter. For home health, we continue to expand services in our current agencies and continue to make progress on additional acquisitions.

On the cost side of the equation, the team continues to be diligent about our controls. Mark will give you more details, but first quarter of 2010 first us the fourth quarter of 2009, same community expenses in the senior living business increased 2.8%, with our largest expense category of labor and benefits up 2.5%. We are very pleased with the results of the quarter. The environment and our results were pretty much as we said we expected on the call last quarter. 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. As Bill said, we had a good first quarter, and we reported Cash From Facility Operations, or CFFO of $54.4 million, or $0.46 per share. That did include an estimated $1 million of weather-related costs from the abnormally wet or snowy weather conditions, depending on which part of the country you were in, and $1.3 million, or $0.01 a share of start-up losses related to the expansions during the quarter. We have also embarked on a Green program, and spent $1 million on changing to more efficient lighting systems. We expect continued spending on this program of an additional $2 million in the next three to four months, but expect to see savings and utilities beginning in the second quarter with a one-year payback.

During the first quarter of 2009, we reported $50.2 million, or $0.49 per share of CFFO. The lower per share number of $0.46 in 2010 reflects the equity offering that we did in June 2009. The immediate benefit of that offering was of course the improvement and stabilization of our capital structure. At the time, the proceeds were mainly used to retire the outstanding cash borrowings on the line of credit, and measured solely on that basis is somewhat dilutive. However, the transaction improved our liquidity, and put us in a position to be proactive, rather than defensive when it comes to capital deployment, which I will discuss in a minute. Over time we expect to deploy funds into more accretive uses, which we believe will offset the near-term dilutive effect of the offering. The acquisitions that we completed in the fourth quarter of 2009, are initial examples of this accretive capital deployment. We again have excluded from CFFO the first generation entry fees from The Villages, which totaled $6 million for the quarter. These funds are by state regulation, escrowed until we hit 70% occupancy, at which time the construction loan is paid down.

Adjusted EBITDA for the quarter was $96.3 million, a $10.4 million increase over the first quarter of 2009. Our average occupancy decreased 10 basis points from the fourth quarter in the seasonally weak first quarter. Within the segments, assisted living was affected the most, consistent with historic trends, where the higher acuity segment is more affected by higher morbidity, while the CCRC segment actually increased as expansions fell. Q1 2010 occupancy was equal to Q1 2009 occupancy at 86.6%. Please note that we have switched to reporting the average unit occupancy data, now that we have two years of comparative information. It is the most consistent, accurate method of measuring occupancy, as it correlates more closely to our revenues.

At the same time with the strength of ancillary services, our monthly revenue per unit grew to $4,386, from $4,215 in Q1 of 2009, a 4% increase. Costs grew 11.7% in the quarter from the first quarter of 2009. Much of that was driven by acquisitions, growth of ancillary services and expansions. Included in our total expenses are $1.3 million of start-up losses, associated with our newly opened expansions down from Q4's $2.4 million. These start-up losses show up in operating interest and lease expenses. We continue to expect these start-up losses to decline progressively through 2010.

Turning to the same community results, the year-over-year same community results were positive, with average revenue per unit up 3.7%, expenses up 2.1%, and operating profit up 6.7%, on an occupancy decrease of 40 basis points. Our Q1 2010 over Q1 2009 same community results showed a revenue increase of 2.4%, as a result of an average revenue per unit increase of 2.4% with flat occupancy. Breaking the rate increase into its components, the senior housing rate grew by 70 basis points, and ancillary services added 1.7% to the revenue per unit growth metric. Quarterly same community expenses grew at 4.1%, resulting in nearly flat same community NOI growth. Costs on the senior housing side were again fairly muted. Excluding IFC, senior housing expenses grew by 2.8%. Our labor and benefit costs increased only 2.5%, even though we did incur some increased costs in the first quarter, from some increased staffing requirements due to new state regulations in several states, and a dramatic jump in a few state unemployment taxes.

We also saw a modest impact on therapy productivity, due to therapy cap uncertainty early in the quarter. And as previously mentioned, the weather was unusually bad, with excess snow in the North and heavy rain in the Southwest, with an estimated impact of $1 million. Our ancillary services programs continue to perform well. The platform now serves over 37,000 units for therapy services, and over 22,000 units for home health. Overall in Q1, $244 per unit per month of operating income across all units served by our ancillary services drops to the bottom-line, versus $171 per unit per month in Q1 of 2009. As a point of reference for the legacy ARC portfolio, the average monthly operating income per occupied unit reached $311 in the first quarter, though it has a greater proportion of skilled units than the overall portfolio.

The big drivers of these numbers continue to be the maturation of the home health agencies in our communities where the scope of our services are expanding within the units already served, and the expansion of skilled nursing units increasing occupancy. Excluding the impact of SNF units, average monthly ancillary services NOI per occupied unit was $131 in the first quarter, with a target of $150 per unit. General and administrative expenses excluding non-cash comp expenses was approximately $27.1 million, or $200,000 higher than Q1 2009. Our quarterly cash G&A costs continue to run in a $26 million to $27 million run rate range.

Turning to the balance sheet, with positive cash flow we again strengthened our financial position. As we described on the last call, we entered into a new revolving credit agreement with GE Capital during the first quarter. The facility has a commitment of $100 million, with the option to increase that up to $120 million. It replaced the $75 million line of credit that was maturing in August 2010. The new line matures at the end of June 2013, and importantly removed many of the restrictions of the old line. We are allowed to use the line for acquisitions, working capital, capital expenditures, and for other general corporate purposes. We ended the quarter with $66 million of unrestricted cash, and $15 million of borrowings on the line, which ebbs and flows with working capital cycles. At March 31, 2010, we had cash and available borrowings under our line of about $143 million.

After considering normal working capital needs and current underwriting standards, we have several hundred million dollars of investment purchasing power, which doesn't include cash to be generated for the remainder of 2010. Our available capital can be deployed in several ways. First we have ample opportunities to invest in our own business by expanding or repositioning existing communities. We know these markets and products, which lowers our risk. Also, this strategy is not dependent on third parties or competitive auctions, and we have a track record of achieving attractive returns in this area. Second, we continue to seek bolt-on acquisitions of local and regional senior housing operations, which help to achieve or build our market concentrations. Of course, ancillary service acquisitions of home health agencies will have top priority, though the capital requirements in this area are low.

Like others we expect more activity in the acquisition arena as the economy and financial markets recover. We can also use the capital to further deleverage our balance sheet, push out our maturity schedule, and better position ourselves for the future. At the end of the first quarter, our leverage was 6.5 times net debt to adjusted EBITDA, calculated by using the first quarter annualized adjusted EBITDA number of $386 million, which includes EBITDA from our acquisitions, 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, and absent any acquisitions, we expect to make meaningful progress towards this target during 2010.

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. During the first quarter we completed $45 million of permanent mortgage financing for five of the communities we acquired from Sunrise. In addition, we are actively work toward near-term refinancing of our 2011 maturities, as well as a piece of the 2012 maturities. In our quarterly supplemental information package posted on our Website, as well as filed as part of the earnings release 8-K, we have included information about our debt maturity schedule and our fixed charge coverage. Finally, looking at our CapEx, you can see that the level of spending in Q1 for maintenance CapEx was $6.4 million, approximately where we had said it would be on the last call. EBITDA enhancing where we include products that reposition and enhance the current communities, will produce a new economic stream with $6.5 million.

In addition, to clarify what we spend to maintain our communities, we expensed approximately $7 million in the first quarter for normal repairs and expenditures below $1,500 except for unit turns. This is the normal level of expense we incur every quarter. I will now turn the call back over to Bill for comments on the balance of 2010.

Again we are pleased by the outcome of the first quarter, and encouraged as we look to the remainder of the year. The quarter played out as we had expected, with a little seasonal pressure on occupancy and with moderate rate growth. The increased sales lead activity is encouraging, and we believe that we will experience small but steady gains in occupancy during the year across our different segments. There is significant occupancy upside in the retirement centers and CCRCs. And while it will take time, this will prove itself out. Rate growth will be positive but modest in 2010. And while the use of incentives declined, it is still too early to expect significant strengthening in pricing.

With regard to ancillary services, we still have significant growth potential as the maturation of the rollout therapy clinics and home health agencies continues, and with agency acquisitions. In home health we have been piloting a very focused geriatric case management model, and are having definite success outside our walls. While not terribly material at this point, we are very encouraged as the pilots are demonstrating sustainability, as well as the ability to drive business into our other parts of our business. This could ultimately prove to be meaningful.

On our last call, we gave guidance that CFFO will be in the range of $2.00 to $2.10 for the year, on revenues in the neighborhood of $2.2 billion. We remain comfortable with that given our expectations of occupancy gains, continued growth of the ancillary business, and the focus of the organization on managing costs. When we step back and look at where we are today versus a year ago, our financial position and our prospects for growth are much stronger. We view that we have the most comprehensive and compelling operating platform in the industry, which gives us tremendous opportunities to effect accretive growth from acquisitions, expansions, and broadening our services, to meet the evolving needs of our residents in the growing seniors population.

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

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ryan Daniels with William Blair.

Good morning, guys. Let me start with a quick question on the expense structure. I know for the year before you were indicating that average revenue per unit, you were comfortable with plus or minus 3%. I am curious if you look forward what you see, kind of the same facility cost structure looking like? It sounds like obviously there is some permanent impact from the higher taxes and staffing ratios, but probably less of an impact from weather going forward. So any color or thoughts you had there would be helpful?

On the cost expense side, we still believe in that 2 to 2.5% expense growth areas, and we think that we will be able to continue to hold that in that range.

Okay. And the 3% plus or minus is still good for same store revenue growth? The bulk of which is --

Well, on the revenue growth on a same-store basis, you saw the pressure in the first quarter, and on the near-term we may still see some pressure on that. On the longer term, we do see that getting back to a growth rate that would give you a margin.

Okay. Great. And then Mark, maybe you could talk a little bit more about the debt refinancing. You mentioned it in the release and in your prepared comments about the 2011 debt. Two questions there, one, is that still more likely to be Fanny and Freddie, or are you starting to see more lenders come in the market? Then number two, looking at the supplemental information it looks like the rates on that 2011 debt are actually pretty high, about 7.6% on a weighted average. I am curious what rates might look like, and if there is a shot of that actually coming down a little bit?

Fanny and Freddie continue to be very active in the market. We are beginning to see some other folks come back into the market. For example, our new line is with GE Capital. So we are beginning to see some new folks come into the market. We have not announced any specific transactions yet obviously, related to the 2011 maturities. Fixed rate pricing in the market today is probably in the 6 to 6.5% range. It tends to be amortizing debt today, while some of this debt that is maturing would have been interest-only debt. I am just looking at these numbers. Again these maturities are a number of different separate financings. So some of them may be a bit higher, some of them may be a bit lower.

Okay. And then just on The Villages, two more quick ones on The Villages, can you actually give us the current occupancy? I know you need to get to 70% until you start paying off the construction loans. Where do you sit today, and where might we see that go?

The overall occupancy of the 357 total units there is a little over 65%. We are approaching 50% at the end of the first quarter, we are approaching 50% of the independent living units. So we had good closings. We still have a good closing pipeline of a full 10% deposits, plus we showed a good net gain in deposits in the quarter. So we are still looking in the next quarter or two to be able to get to that point.

Great. Then maybe one bigger one and I will hop off. Can you give us any update on M3? I think it has been a while since we have talked about that. I am curious one if you are still seeing a delta in occupancy and pricing in the M3 markets, and others. Then number two, maybe just looking at your new capacity adds, or some of the acquisitions, are you actually in effect creating more M3 type markets, or will you do that going forward? Thanks.

That is a core strategy, to concentrate on building concentrations with a continued care within those markets. We still do see very positive effects, in terms of being able to move people within that, as well as to better direct leads to the most appropriate location place, which is giving us good effects. Very much we will be looking to continue to focus when we talk about operables on acquisitions, it will be pretty much with the specific of that. The Sunrise acquisition fit us so incredibly well, because it did get us some additional critical mass within certain markets that now approach the M3 category. And so that is still a very positive factor for us. We will continue to focus on that.

Okay. Thanks a lot for the color.

Your next question comes from the line of Kevin Fischbeck with Bank of America.

Okay. Thank you. Good morning. You mentioned some disruption in Q1 from the therapy caps. Is there any way to quantify that impact?

A bit hard. We know that our productivity was down. The period of time we did have some recovery in March. But as far as giving you a total quantification, I don't have that. I know that by the month, but the early part of the quarter, the mid-quarter was disrupted a bit. But then March had a pretty good recovery, but not enough to, you can't go back and recover the past productivity losses.

Okay. So is this a pretty I guess bullish commentary in the prepared remarks about acquisitions. If you could give us a little bit of color there? I guess the deals we have seen the last couple quarters in the industry have been more from distressed sellers. Is that where you think the opportunity will be near-term, or are you seeing more interest from willing sellers out there, outside of a distressed transaction?

I think there is maybe a little bit more willing sellers, but some of that may well though be triggered with what they may be looking at here in another year or two of refinancings, and what those different terms might be, before they decide to put capital into the business or not. And I wouldn't necessarily call those distressed situations, but we might think that that is going to be a little bit of what we are seeing, and what might kind of be a trend.

Okay. And I guess, what do you think the kind of return on cash that you guys will be able to get from an acquisition? What is your, can you share what your target is there?

Well, we expect it to be accretive, which means that we should be looking for cash on cash on a reasonable-term basis in excess of 10. But our overall underwriting is a little bit higher than that.

Okay. And is that the same hurdle on the ancillary services?

There is certainly more there, there is just not a lot of capital investment in those. Though it does take a little bit of time to get those ramped up, but they come up pretty quickly.

I guess in the past you talked about on the ancillary services side, obviously the core focus is to treat your own facilities. But potentially looking at actually treating people out in the market more broadly. Any update on any pilots you have been doing there?

Yes. My comments maybe were not clear enough in my earlier comments, that we have had good success with that. We are seeing sustainability, as well as the fact that we are definitely seeing those people who come into that service, who are not our residents, we are seeing some pretty consistent move ins off of that base, that happen within a relatively short period of time. So it is proving to have good synergy, as well as a sustainability. And the pilots I think have affirmed the strategy, and we will be looking to move a little bit more focus on that part of it.

Okay. Great. Thanks.

Your next question comes from the line of Brian Sekino with Barclays Capital.

Thanks. Just a couple of questions here. The last two years have been kind of unusual times. So I wanted to know if you could give us an update on what the seasonality is in this business, and what you expect for I guess 2010, as it relates to seasonality?

Well, seasonality first quarter is usually your softer quarter. And how our communities lay out geographically, we kind of see the second quarter as a much improved quarter. Third quarter is good, except it has a high cost basis to it. And then your fourth quarter is usually your total best quarter. For us this year we will have a little bit of change in that profile, due to the number of expansions, openings, and the pattern there, as well as the economy is going to be a little bit of a different pattern. But we do expect to see some progression through the year.

Okay. And is some of that progression, or an expectation in the progression, due to your thoughts that occupancy could potentially pick up throughout the year?

Again, we think it will be slow and steady, but we do think that we would sense that we have had a bottoming, and that we are seeing some signs of improvement. But we are going to see it from that, we are going to see it from our expansion maturations, we are going to see it from the entry fee improvement, and we are going to see it from our ancillary services, both maturing as well as the additions that we will make to that.

Okay. Great. And then just one more on the ancillary services, can you just provide us in the near-term, what are the opportunities for, I know you have rolled it out to over 37,000 units at this point. Can that reach at some point closer to your total of over 50,000 units?

We are 37 probably until we affect some acquisitions in some markets that may give us better critical mass to reach a little further. We are kind of close to the level there. It is in the home health side that it is a little over 60% of that, that we will continue to grow up to that level. And that will be the bigger contributor. Though we do expect to continue to see some maturations of the existing base in the therapy, but the home health will be the larger growth area.

And I guess rolling out the home health to that 37,000 is the real opportunity?

Right.

Okay, great. Thank you very much.

Your next question comes from the line of Sloan Bohlen with Goldman Sachs.

Just a quick follow-up on the home health opportunity. Could you maybe comment on what the opportunities out there for some of the largest certificate and nursing type markets, whether there is any bigger portfolios that potentially you are looking at?

Well, again we are looking for the smallest size that we can get yet get the licensed provider number. But we will have about three or four closings in the second quarter here. We have some in the queue for third quarter, and we have the potential for a couple of COM states, where we have some encouraging work being done. So we are making progress.

Okay. And then shifting over to Mark just on the capital side, for the financings you did with the Sunrise mortgages, were those fair to say that those were in that 6 to 6.5% rate? And then I don't know if you provided the LTV on those. Perhaps I missed it.

Yes. The rate was in that range. Actually towards the lower end of that range. And then I am sorry, the second part of your question?

The loan to value or amount of leverage that the banks are providing?

They continue to be 65 to 70% type financings, measured on loan to value.

Okay. And then I guess just a broader question as you look at delevering over time, and maybe a large number of those upcoming maturities roll from interest only to amortizing. How does that change the amount of cash that you need on hand, or how do you deal with those interest payments over time?

The amortization is not a dramatic number. The amortization schedules factored into these deals tend to be fairly long, 25 years or so. So it is not an enormous impact. It really would not have an impact on our view of working capital.

Okay. Great. And that is it. All right. Thank you guys.

Your next question comes from the line of Rob Mains with Morgan Keegan.

Good morning.

Good morning, Rob.

Bill, when you look at the pricing that you have been experiencing sort of this downdraft, I am assuming that most of the pressure that you are seeing is on the street rates, as opposed to renewing, or to annual price increases to residents?

Both would have pressure on them.

Okay. Just in terms of where we are in the cycle, why would that pressure be greater now than it was say a year ago?

It is kind of the collective weight of this deep recession. And as you have just a little bleeding off of the option one side, but you also have the collective burden with regard to your customer base. And that combination puts pressure on both sides.

Okay. And I assume that you would say kind of the same comments across product types?

Yes.

Okay. Within the CCRCs, of the nursing home units in the CCRCs, kind of what percentage roughly of residents are CCRC residents, rather than others from the community?

Rob, I will be guessing here, but I would think we are about 30 to 35% maybe, residents versus external.

Okay. And when you talk about potential acquisitions, are you talking about just deploying your capital, or might you do lease assumptions as well?

Well, we are going to certainly focus on ownership. We are going to work over time to improve that ratio between our leased and our owned. We wouldn't say it depends on the circumstance or the situation. We wouldn't say that we wouldn't do some leases. That is not going to be our first preference.

Okay. And then last one, you mentioned that the types of age divisions, one of the types of acquisitions you would be looking for is operators facing refinancings that are kind of onerous. Would that imply that you would be looking potentially at smaller acquisitions, maybe aggregate a number of small ones, or would you still want to do the type of things like Sunrise, that kind of moves the needle on the corporate level?

Well, we are going to be looking at trying to build out these concentrations in these markets. Therefore there can be some ones and twos, and things of that nature that we do. We will also be certainly evaluating the larger portfolio, in terms of how they would totally fit us. And we certainly think we have the platform and the basis to do something more significant. We would be looking across that range.

Okay. Fair enough. Thanks a lot.

Your next question come from the line of Frank Morgan with RBC.

Good morning. Just to make sure here, on the issue of the therapy services have you seen the volume? I know you mentioned productivity was impacted. But do you feel like you are back at the levels prior to this whole issue and concern over the therapy cap exception process?

I think so.

You are there. Okay. Any markets on a geographic basis, I mean it sounds like you were encouraged about occupancy trends. But are there any specific geographic markets that move the needle, where you are actually starting to see that show up? And where do you think occupancies would turn the first, in terms of the markets, and then also on the rates?

Well, you are totally correct that it is market by market. And there are some significant differences in markets. But we are seeing some strengthening across a good portion of the markets. Still see some definite challenges and stress from the upper Midwest and North areas. Actually seeing some improvements in some of those areas that have been hardest hit previously. We are seeing some pockets of California improving, some not.

What about Florida and Arizona?

We are seeing some excellent improvement in both of those markets. I don't think we are going to see pricing strengthening in those for a while. I think we have got to gain some fair amount, and there has got to be a fair bit of absorption in the market before we start see pricing strengthening in those.

Okay. But on a relative basis, Florida, Arizona and California certainly would probably to the extent those are getting better that would outweigh the impact of the pressure you are still seeing in the Midwest, is that fair?

It is a total mix. And on an overall balance we are encouraged.

Okay. And then finally, I will hop off. Could you talk about the states where your seeing those increases in the staffing ratios, and just give us a little bit more color on what has changed there? Thanks.

They have specifically just increased the staffing requirements. We have seen it both in the skilled nursing end, and some of the assisted living. Florida is one of the more significant ones, as well as some requirements in Pennsylvania. Those were the more significant.

Okay. Thanks.

Your next question comes from the line of Jeff Englander with Standard & Poors.

Bill, wonder if you can talk about in terms of renewal pricing, I assume you have kind of a continuum of options available to you, that you can use maybe to satisfy some of your clients. Can you talk about them, and what you are seeing the greatest desire for, on the part of your residents, and maybe contrast that with what is most appealing to you?

Maybe you need to help me there. I am not sure I am fully understanding.

In other words, you could just cut price, maybe there are some incentives you can offer, maybe there are other things you can do in terms of --?

Well, we do use incentives. And we have always used some element of incentives, and certainly those did increase during this period of time. We have tried to be very focused in what we do. And it will vary by product line. Assisted living where you have some fair percentage, or some percentage of residents that prove out to be a relatively short length of stay, while another group will be a little bit longer stay, you don't want to totally discount the front end or your community fees. We still do a great job of collecting their community fees in that regard, but it may be in those cases, the seventh month or 13th month may have a price difference. In the independent living, you may give a bit more on that front, but you are still trying to maintain your total rate structure, so you will use incentives, to where you don't totally compromise your total rate structure. But it will vary by product, and it will vary by some of the markets, in terms of what we see from a competitive situation.

Is there anything you are seeing the greatest demand for from your residents?

From existing residents?

Yes, for renewals.

Well, we again try to be consistent with the fact that we have affected rate increases. We do have some isolated cases where you have people who have been with us a good number of years, and maybe facing some things to where we may make a slight concession or two, with regard to folks that have been with us, and we need to be sensitive and respond to it. That is not a big volume of activity, but there is some factor to that.

Great. Thanks very much.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

A lot has been covered. I wanted to ask one broad question, and a couple of sort of nitty-gritty modeling things. Broader, I actually wanted to go back to entrance fee. Bill, you had talked about a big step-up in inquires. You certainly beat our numbers in terms of entrance fees. I wanted to get some more color there, because that is part of the business that certainly from a cash flow standpoint, even slight improvements translate into a lot of cash for the bottom-line. So if you can give me a little more color what you are seeing there, and I don't know if you want to give guidance on entrance fees, or where you see that going?

Well, we are seeing the slight uptick in terms of home resales, which is directly translating to the fact that people are being able to sell their home. They have adjusted their price and their expectations a fair amount. And there is a pretty direct link between people being able to sell their homes, and moving into entry fee communities. But there appears to be a little bit of, across a good number of markets. We saw improvement in virtually all of our entry fee communities. And so that is encouraging. And it will stay length of that, as we see sustainability in the home resale markets, and some improvement in it, that should reflect directly over to continued improvement in that area. The fact of our significant increase in inquiries should reflect, and should be reflective of a little bit more consumer confidence, and willing to take and explore those steps.

There is obviously a pretty good size backlog of prospect base and things, and just the number of instances that we are having where people do walk into the office and say, at long last we have sold our house but or we have a contract on our house, we are ready to schedule a date. So there is, I mentioned before a little difficulty in saying just how much is the Stimulus, has the Stimulus been affecting that. So seeing what plays out here this next month, because we have already passed the deadline on those, and we will see. But we are still encouraged with the activity that we are seeing at the community levels.

And my sense is that, obviously the large increase in inquiries is encouraging. Obviously they won't all translate into sales, or translate into sales quickly. But I also sense that you have got basically vacant inventory. You have got inventory on which you have already paid out the refund if you will, or for the returned deposit from prior. So you will get kind of a disproportionate jump in entrance fee receipts, net receipts, as units start to sell. Is that kind of the right way to think about it?

That is. We need to appreciate it is going to be a long road back. But we will see some good increases, as there gets to be strength in the market place, that could become more and more meaningful.

And then just a couple of other little things if I could. On the rates when you strip out the ancillaries, I think you said you were up 70 bips year-over-year. And that is actually quite a bit less than we are seeing at most of the competitors, which is kind of 2.4. Sunrise just came out 3.1. So I am trying to understand why yours would be so much less, and whether we do see a decent ramp. You are talking about getting to 2.5 or 3. Was there something particular about the quarter? How quickly do you see it kind of ramping back up?

Well, I would have to look at our concentration, our geographic concentrations and markets by markets. I think we will continue to focus on driving and strengthening the occupancy side of the equation.

Okay.

I would have to I guess dig in, I don't have the availability to dig too far into the numbers there, as we kind of correlate ours to what we see out of the greater NIC data. We don't find a lot of incongruence grew there.

Okay. NIC was like 1.5 year-over-year. Yours is 70, is that right?

Well, yes. Our guidance, Jerry, for the year on rate growth 2% to 3% in terms of revenue per unit, that includes the ancillary services growth.

Okay.

The comparative number in the quarter was 2.4%.

2.4% for ancillaries included with the rate growth on the --

For overall revenue per unit growth, right.

Okay. And then just a couple other things in terms of timing. You have talked about getting back in kind of the expansion business. I mean my sense is you have got some of your building out, which we have got built into our model. When might we see sort of new units that are kind of now in kind of the planning phase start hitting? Would we start seeing additional expansion units that are just coming on? they won't start appearing in 2011, I was just trying to figure out for our model, whether to actually start building in more expansion units than I have got currently?

You will have none this year. And it will be into 2011 we ought to start seeing some, I would think by about mid-year.

Okay. And just some sense of quantity, are we talking 200, 500?

Well, initially it will be a relatively low volume. And it will grow over time.

Okay. All right. So it is not going to make that much difference. And then just on sort of the expense ramp, I mean, I think you detailed a handful of things. The $1 million for weather, the $1.3 million for start-up losses, which I think is going to wind down. Were there any sort of one-time expense things anywhere we should be building out for the quarter, and any sense just about how you see the maybe the ramp on expenses over the year?

Well, I mean, we are always reluctant to provide you with a laundry list of expense items. Because every quarter of course has its own unique stuff. But the things that impacted this quarter were weather-related costs, we had the relamping costs across the portfolio which was about $1 million, so some of that will continue here for a few months. We did have an increase in state unemployment taxes. The impact of that should decline over the year. But again, states are all trying to respond to their budget situations in different ways. And then we had some disruption in therapy productivity earlier in the first quarter.

Okay.

So it is really a bit of a mix as you go forward. Obviously the weather should moderate, although certainly here in Tennessee it hasn't moderated yet. The relamping costs will continue for a bit. The unemployment taxes should moderate through the year. And therapy cap situation, as Bill said, has normalized.

All right. Thanks a lot.

That concludes the answer and question portion of today's call. I hand the program back to management for any closing remarks.

Again, thank you for your participation. Management will be around all day to answer any follow-up questions. And with that we will end the call. Thank you.

And this conclude today's conference call. You may now disconnect.