Brookdale Senior Living Inc (BKD) 2010 Q2 法說會逐字稿

Good morning, my name is Marisa and I will be your conference operator at this time. I would like to welcome everyone to the Brookdale second quarter earnings call. (Operator Instructions)Thank you, Mr. Roadman. You may begin your conference.

Thank you, Marisa. Good morning, everyone, I would like to welcome you to the second quarter, 2010 earning call for Brookdale Senior Living. Joining us today is 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. As Marisa mentioned this call is being recorded. A replay will be available through August 10th, and details on how to access the replay are in the earnings release.

This call will be available via webcast on our web site www.Brookdaleliving.com for three months following the call. I would also like to point out, all statements today which are not historical facts, may be deemed to be forward-looking statement within the meanings of the federal security laws.

Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that can 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 theSEC from time to time.

I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. I would also like to add that we will be hosting an investor day on September 28th, in Kansas City. We will start with a dinner on the 27th, for those who can make it in, and follow with presentations and a tour of several of our local communities on the 28th. We will be sending out information on that event this week.

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

Good morning and welcome to our second quarter earnings call. We feel good about the quarter's results, though we did have some impact on the turmoil in the financial markets. The balance of our results was at or above our expectation and July results continues to be encouraging.

Starting at the top line, the fundamentals driving senior housing revenue have been improving. As a backdrop, the NIC MAP 31 second quarter industry performance showed occupancy increasing 10 basis points sequentially with only the assisted living segment registering increased occupancy and year-over-year rate growing at 0.7 of a percent.

Notably, our occupancy increased every month of the quarter. Our second quarter occupancy was up 20 basis points from the first quarter and increased in every segment. On a same-store basis, occupancy was up 60 basis points year-over-year.

The first time we have seen positive year-over-year growth in a while. Sales inquiries continued at a higher level than last year and were up 12% over the second quarter of 2009 and up 4% from last quarter. Pricing growth remained positive, though at lower levels as the occupancy growth trend continues, demonstrating sustainability, pricing will follow.

That will take a while and the rate of improvement will be dependant upon on the pace of occupancy recovery. We have 160 communities average greater than 95% occupancy in the second quarter, versus 140 last quarter and 132 a year ago. We expect to continue to build on this number.

Additionally our ancillary services continues to demonstrate strong growth for the quarter, our therapy and home health revenues grew by 30% over the same quarter last year and operating contribution was up 46%. The number of units served with therapy increased by over 700 units from the first quarter, mainly due to the rollout of services into the former Sunrise community as well as the expansions opened last year.

For home health, we acquired three home health agencies during the quarter with the potential to serve almost 1800 units. We now service 264 of our 564 communities with home health. As a result of the positive senior housing revenue drivers and the strong performance and the ancillary services business, our overall revenue was up 9.6% from the second quarter of 2009.

The 2009 acquisitions accounted for 4.1% of that increase. On the cost side of the equation, the team continues to work hard to match the needs of the business with the appropriate cost structure.

Mark will give more details but for the second quarter of 2010 versus the second quarter of 2009, the same community expenses, in the senior living business increased approximately 2.5%, excluding a couple of unusual items which is within our expected range.

Operating margin improved sequentially from 34.6% to 35.5%. Our adjusted EBITDA grew 8.9%, versus the second quarter of 2009 to over 100 million for the first time.

The second quarter started with robust activity in the entry fee communities, but suffered as the turmoil in the financial markets caused higher than normal cancellation in delays of sale closings in the latter half of the second quarter. We ended the quarter with 59 closings and net entry fees of $4 million, which was lighter than we had expected.

We have gotten back on track and our 33 July deposits were actually the strongest we had in a while to start a quarter. In the end, given the more challenging environment we were able to produce a record CFFO of $57 million, an 8.6% increase from a year ago.

Overall, we are pleased with the performance of the quarter. We continued the positive trends of the last several quarters. 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 second quarter and we reported record cash from facility operations or CFFO, of $57 million or $0.48 per share. That did include two unusual expense items where we experienced an estimated $1 million of weather-related property damage costs due to stormy weather conditions and as we talked about last quarter, we are changing to more efficient lighting systems and spent $1.5 million in this quarter on that initiative.

We expect continued spending on this program of an additional $1 million or so in the next three to for months, but anticipate that we will see the savings in utilities becoming more evident in the third quarter. During the second quarter of 2009, we reported $52.5 million or $0.50 per share of CFFO.

The lower per share number of $0.48 in 2010 reflects the equity offering that we did in June of 2009, while the immediate benefit of the offering was the improvement and stabilization of our capital structure, overtime, we expect to deploy funds into more accretive uses.

We again, have excluded from CFFO the first generation entry fees from the villages, which totaled $5.6 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.

We ended the quarter at 55% occupancy, and are working with 28 additional depositors to set move-in dates for a total commitment of 67%. Adjusted EBITDA for the first quarter was $100.3 million, and $8.2 million increase over the second quarter of 2009.

Our average occupancy increased 20 basis points from the first quarter. Within the segments, all segments experienced a sequential increase with retirement centers up 10 basis points and CCRCs up 20 basis points. The assisted living segment increased by 40 basis points and is at its highest occupancy in several years.

Overall, Q2 2010 average occupancy of 86.8% was 60 basis points better than Q2, 2009 occupancy. With the strength of the ancillary services, our monthly revenue per unit grew to $4,415 from $4,258 in Q2 2009, a 4% increase.

Turning to the same community results, the quarter-over-quarter same community results were positive with average revenue per unit up 2.9%, expenses up 4.2%, and operating profit up 0.6 of a percent.

The same community revenue increase of 2.9% was as a result of an average revenue per unit increase of 2.2%, and occupancy increasing 60 basis points.

The 60 basis point occupancy increase was the first positive year-over-year growth we have seen since the third quarter of 2007. Breaking the 2.2% rate increase into its components, the senior housing rate grew by 0.8 of a percent, and ancillary services added 1.4% to the revenue per unit growth metric.

Quarterly same community expenses grew at 4.2%, excluding ancillary services, senior housing expenses grew by 3.3%. As I mentioned, we incurred $1.5 million of lighting expenses and $1 million of storm damage in the second quarter.

As we analyze our expense performance in the second quarter, excluding these costs, our real expense growth was in the 2.5% range, which we projected particularly given our occupancy growth. Our ancillary services program continue to perform well. The platform now serves almost 38,000 units for therapy services and over 24,000 of our units for home health.

Overall, in the second quarter, $268 per unit per month of operating income across all units served by our ancillary services dropped to the bottom line versus $200 per unit in the second quarter of 2009. As a point of the reference for the legacy ARC portfolio, the average monthly operating income for occupied unit reached $319 in the second quarter, though it has a greater proportion of skilled nursing units than the total portfolio.

The big drivers of these numbers continue to be home health agency acquisitions, and maturation of the home health agencies in our communities where the scope of our services are expanding within the units already served. In addition, the skilled nursing expansion units opened over the last year, are experiencing increasing occupancy.

Excluding the impact of SNIF units, average monthly ancillary services NOI per occupied unit was $153 in the second quarter, compared to $129 per unit in the second quarter of 2009. General and administrative expenses, excluding non-cash comp expenses, was approximately $26.7 million or $1.9 million higher than the second quarter of 2009, with the increase driven primarily to support the growth in the ancillary services and our unit capacity.

As a percentage of revenue, G&A was 4.6% of revenue in both periods. Turning to the balance sheet, we continue to strengthen our financial position.

As we previously announced we refinanced a portion of our 2011 maturities with a $117 million, ten-year fixed rate loan with Bracadia and Fannie Mae. We executed a rate lock with the lender for a $181 million, 10-year fixed rate mortgage loan at a 5.9% rate and expect to close very soon.

We also expect to close another $31.5 million mortgage loan, very shortly. These two loans totalling $213 million will refinance all of the 2011 maturities that did not include extension rights and a portion of the 2012 maturities all totaling $240 million.

We will be deliveraging slightly by using $28 million of cash which will come out of restricted cash from deposits related to the retiring loans, to pay down the remaining balance. The level of interest expense will remain largely unchanged after these transactions.

The assets associated with both loans were not asset types within the GSE's criteria, which demonstrates that we are seeing more lenders begin to come back into the market for senior housing. We ended the quarter with $51 million of unrestricted cash and no borrowings on the line.

At June 30th , 2010, we had cash and available borrowings under our line of about $170 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. At the end of the second quarter, our leverage was 6.3 times net debt to adjusted EBITDA.

Calculated by using the year-to-date annualized adjusted EBITDA number of $393 million, and we continue to work towards prudently lowering this leverage further. We indicated that our ultimate leverage target is approximate six times adjusted EBITDA and absent any acquisitions, we expect to make meaningful progress towards this target.

In our quarterly supplemental information package, posted on our web site, and filed in the 8K, we have included information on our debt maturity and fixed charge coverage. I will now turn the call back over to Bill for final comments on

Thanks, Mark. There is a fair amount of noise as we are dealing with number of issues, including the macro economy environment, and the healthcare industry and the senior housing industry.

Regarding the general economy, we think the first quarter showed that we need only a gentle wind behind us, not a significant recovery to show significant increase in occupancy and entry fees which has strong implications for cash flow growth. Certainly the last half of the second quarter did not provide that gentle breeze, particularly for entry fees. July has improved, though.

In addition to the general economy, there has also been several issues raised dealing directly with entry fee communities first was an IRS issue with a competitor, regarding the tax treatment of refundable entry fees. This was subsequently dropped by the IRS and will have no impact on Brookdale.

And two weeks ago, we had the senate hearing and reporting fees, special committee on aging and GOA report which all affirmed that CCRCs play a positive, and much needed role for seniors. They call for states to have consistent well-developed regulations to provide better disclosure to protect consumers and we expect no action at the federal level.

Next are the issues of Medicare and the healthcare industry. Our ability to provide healthcare services to residents dramatically adds to our attractiveness as the go-to provider of senior housing. The services also significantly enhance our returns. It does mean that we are affected by changes in government reimbursement policy.

There are a number of moving parts to reimbursement right now and that has caused speculation about the ultimate outcomes. At this point, when all is said and done, we think the net of all the reimbursement changes under discussion will actual be neutral to possibly slightly positive for us.

Let's look at the components as to what has been discussed. First in skilled nursing on October 1 st, the rules regarding concurrent therapy changed. We expect a negligible negative impact. Second we like everyone in the outpatient arena, were taken by surprise by the physician fee fix, that included a proposal to dramatically cut the practice costs of part B therapy rates supplement services in a single session.

This is still playing out in Washington, D.C., right now but it enacted as proposed without either a phase in or adjustment to the rates we believe we would experience a $7 million to $8 million impact operating profits on our current business.

However, there will be opportunities to mitigate some of the negative impacts, always keeping in mind what's best for the customer. Given that this is a proposed rule and not yet final, there may well be some improvement when the rule is finalized sometime in November, just as we saw last Friday's announcement regarding hospitals and LPACs being better than initially proposed.

Third there's been a cloud hanging over the practices of the home health industries, let me just say that our resident centered Home Health activity is a unique model and we believe we practice in an ethical and a customer service oriented manner, that to our knowledge, avoids any of the issues currently under the spotlight in investigation.

A 4.8% decrease in home health rates effective 1/1/11 was recently announced, as currently published this would have a negative impact of $5 million to $6 million on our current book of business. Finally, at this point, it does seem likely that the senate will take action on some technical matters, such that Reg4 will be implemented on October 1, 2010, rather than 2011.

Wile not everything is not totally defined yet, we believe this will be a positive for us and shifts some of the reimbursement payment structure from therapy to nursing. As currently proposed and with the nature of our business, we believe that the positive impact of RegS 4 will more than offset the negative $12 million to $14 million impacts from outpatient therapy and home health combined.

Like I said before, we believe that providing healthcare services is a positive, both for our residents and for our Company and therefore we will continue to grow our ancillary services business. Our therapy business is probably 85% to 90% rolled out.

On the other hand, Home Health is about 50% of the way there on a unit served basis. We have already closed on two acquisitions so far this quarter, and have three more acquisitions lined up to close by the end of the year. Importantly, one of these -- one of the five acquisitions is in North Carolina, a CON state where agencies are very difficult to obtain.

We have also just received notification that our start-up applications for agency certifications and two key additional markets were being scheduled for final survey and should begin operation before the end of the year. We know these issues surrounding entry fees an healthcare services make us a more complex story than other investment alternatives.

But it is those complexities that bring significant economics, marketing advantage and greater return potential. As we look to the remainder of the year, we continue to believe that our assumptions remain true. We have been more cautious than others in the industry but the second quarter confirmed that the range of possibilities for the pace of economic recovery remains uncertain, yet we still see increasing occupancy, positive but modest rate growth, and a need to be diligent with expenses and we will be.

We will see significant growth from ancillaries and a return to improving entry fee sales. Also there remains one fact that's very certain. Given the demographics and the virtual shutdown of new development, the supply and demand fundamentals will become increasingly strong in the not too distant future.

On the last call we gave guidance that CFFO will be $2 to $2.10 in the year on revenues in the neighborhood of $2.2 billion. We remain comfortable with our expectation of occupancy gains, continued growth of the ancillary business and the focus of the organizational on managing costs.

Given the economic disruption that we saw in the second quarter and particularly impact on the second quarter entry fees we would direct people to the lower half of our guidance range. Let me close by talking about what we care deeply about and that is our commitment to our stakeholders, our residents, our people, and our shareholders. It starts with our commitment to our residents.

We just completed our 2010 satisfaction survey, we mailed out over 45,000 surveys and received back over 30,000 responses, a remarkable 68% response rate. We are very pleased that the overall satisfaction was almost 87%, which in of it's self, is a great testimony.

What is even more impressive is that during a typical period for us, when we had to - had a strict focus on managing expenses we are actually able to increase customer satisfaction, in fact, overall satisfaction was up nearly 5% from our survey two years ago. Additionally, we asked your senior living community mission is to enrich the lives of those we serve with compassion, respect, excellence and integrity.

Overall, how well do staff members in your community demonstrate this mission? As a company, we scored 85.6% relative to this question. It is that commitment of our front line associates at all levels that make this Company a long-term value creator and the leader in the senior living industry.

In order to deliver on our commitment to our residents and achieve these results we must maintain our commitment to our people. It is they who make a real difference in our residents lives every day. And only by maintaining these two commitments can we deliver on our absolute commitment to maximizing shareholder wealth.

We challenge ourselves is every day to be the best stewards of our residents money, our investors capital and our people's trust. We do that by having a strong platform, strengthening the balance sheet, and creating an advantaged competitive position and taking the appropriate actions with a long-term view.

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

(Operator instructions.) First question comes from the line of Brian Sekino with Barclays Capital.

Good morning. I just have a question here referencing -- appreciate your comments on the impact from part B therapy cuts and home health cuts, but as you think about Reg4, I just wanted to get a little color in terms of your comments about the shift from therapy to nursing. Is it the acuity of the patient that you have -- that will allow you to benefit from Reg4 here?

It is the mix of patient base that we have that does play into that as well as other -- I guess technical factors being a little difficult to get too deep into in the conversation here. It's running through our actual case loads and mix that produces that outcome.

Okay. Okay. And is it -- is it that you have, I guess, more patients that are reimbursed under the -- I guess, there's less of a therapy component to their -- to their treatment?

No. It's -- a lot of what we do is rehab. And particularly in the orthopedic segment, we're dealing with -- their portion is with our own residents, as well as general discharges from, the hospitals but as you work through our particular mix, we don't take on a lot of the very complex, highly complex medical components, but the shift in patient therapy to nursing is a general overall CMS shift. In the early '90s they shifted very heavily towards therapy and now they are shifting back just in terms of how they calculate -- how they affect the reimbursements in the two different segments.

Got it. And then if I could shift gears here a bit. A question on, I know -- I think last quarter you mentioned that the use of incentives declined in Q1. And I wanted to know if there was any need to use -- use some incentives in Q2 given your comments about, I guess, tentative -- tentative tenants going into your facilities?

We had reported, in the first quarter that we saw a slight decline in the use of it. Second quarter was very similar to the first quarter where there still definitely is a very -- it's a very price sensitive market and each market is different, but as we get more and more communities to the higher level of occupancies, the stronger their pricing power becomes. We continue to see a growing proof of our communities getting into that area where we can strengthen pricing.

Okay. Great. And then just one more, if I may. On the home health acquisitions, I just wanted to see if the actual ownership of these -- these home health agencies is, I guess, the real bottleneck in terms of expanding the rollout and kind of as you purchase these -- these three units, can you just, expand to those -- to the capacity that those agencies are capable of serving right away?

What we are acquiring, basically, we are acquiring the Medicare provider number. Again, it's been consistent in the ones that we acquired in the second quarter and what we had for the third quarter. There's not a lot of existing business or what part of existing business we phase out and, again, we work with our model, but the acquisition allows us to have the licensure and the Medicare provider number, and the model that we build is consistent with what we have done for several years.

Okay. Thank you very much.

Your next question comes from the line of Frank Morgan with RBC Capital Markets.

Good morning. A couple of questions here. Based on kind of your history in the business, is there a magic occupancy number where, when things start to accelerate back the other way, where you can say, ah hah, this is the point at, which, where we feel a little bit more aggressive about pricing that we can start raising prices again? That was my first question. And I was curious if you could elaborate a little bit on your mitigation strategy, particularly on this part B practice expense component. Is it because you think you can maybe -- because the residents are already in the billing you can schedule them at different times so they don't have multiple procedures done? And then finally, and then I will hop off. Could you give us a road map, a conceptual road map of how we think about the progression of the balance of the year, understanding that we are trying to get to that lower part of the current guidance range in terms of things like the occupancy growth, the growth in ancillaries kind of all the things you think have to happen to get to the low end of the guidance range? Thanks.

First on occupancy, you need to get above the 90% mark typically to start getting into -- and it will be a little bit different by product line and a little bit different by market, but, again, we are operating in a market that the consumer is very, very price conscious in that regard. I think it's going to be the pace, what would be -- what we track is the pace of occupancy recovery and correlate to when you start seeing the strengthening of rates across the field. On the -- the therapy, and the issues of mitigation there, I think those will come from several factors. Part will come from the potential opportunity to -- to hold the line a bit better with regard to the labor cost component, and what the -- what the scale is there in terms of what the market has, continues to have a -- a shortage of therapists, but I think there will be some relieving of pressure in that area and there are also some issues that we will study with regard to scheduling as you noted. As far as the balance of the year and the progression, again, the general pattern we have is that the third quarter is going to be a little bit better season for a fair mix of our communities and then the fourth quarter is usually one of our best quarters in that regard. We do have continue billing in the ancillary services. We have good momentum with regards to the home health components and parts of that and what we have in the pipeline and the attraction that they are continuing to get. We -- the expansions that we have opened previously continued to strengthen and having more, positive contributions, particularly the large community in Florida will start making meaningful contribution. We do expect, the occupancy to continue to show some gain and at the same time, developing to continue to hold our costs in line, I think. So those are all the factors and when you take them in total, we think we are -- we are definitely still confirming that we think we are within our range.

Okay. Thank you very much.

Thank you.

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

Okay. Great. Thank you. I guess I just wanted to follow up on that last question there. I guess normally when we think about the seasonality of the business, usually, you know Q3 is a little bit weaker than Q2. If nothing else, because operating expenses are a little bit higher as things like air conditioning expense, et cetera, comes in. I mean, should that progression, hold steady? And if it does, that kind of implies a pretty big Q4 ramp up. Is there something else in there as far as CapEx -- CapEx spending or entry fees that would skew that normal CFFO progression?

If you back over history, the entry fee does progress and we do expect some progression in the entry fee components. We think with all the momentum we have in the ancillary services we will provide a definite positive and particularly this year the status of the expansions and where they are will add a component and going into the -- to the third quarter and with the July results and the occupancy improvement trend that has been continuing that will take it. You are certainly right that the expenses both in our labor cost because of the number of days and holidays and vacationing, PTO replacement costs and utilities, that cost goes up but I think we have -- we'll have a little bit stronger room on each side than -- than you might be relating to.

So the things that you have mentioned in response to Frank's question, will help to offset the normal seasonality to some degree?

Right to some degree.

And then going back to your comment earlier about the rate cuts. So if -- if I -- I just want to make sure that I understand. You are saying that your view about the rates in and of themselves reg4 will offset the rate cuts, therapy as written -- as if it goes in as written and the home health cuts, is it then appropriate to say that if -- if final therapy comes in better, we should expect this to be a net positive, especially if you are able to put in some -- some cost saves?

I think that would be true.

Okay.

And all again, we -- we have run it through each -- each component of our business, our mix of -- our case mixes and as they are currently proposed as we understand them, that would be the outcome.

Okay. Great. And then the sequential increase in occupancy across all three levels of care was great, especially in conjunction with the pricing increase. I guess the pricing increase includes some ancillary services. Did pricing -- was pricing flat or increasing, if you stripped out ancillary services or was it flat to down a little bit ex-ancillary?

Well, on a single quarter over quarter basis -- Overall rate growth was 2.2%. Of that, senior housing rate growth was 0.8 of a percent. So the ancillaries added 1.4% to the revenue per unit growth.

Yes, I guess I have it cut it quarter over quarter Q1 to Q2. Have you not cut it that way. Kevin, I don't have that right in front of me.

It was also a positive progression.

I believe it was a slight uptick from Q1 to Q2.

Yes, as reported it uptick on all three, I just wasn't sure if ex-ancillary it would have been the case.

It would have been, yes.

Okay. Great. And then, I guess the last question here, in the past you have always talked, about maintaining a spread between revenue growth and cost growth and it flipped on us here. What is your outlook for that -- know for the rest of the year? Are you going to be able to get back to that normal -- that normal spread?

It will be a bigger challenge. We will be focusing on the fourth quarter but we may not get back to that balance until the early part of next year.

Okay. Great. Thanks.

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

Good morning, guys. Bill, just your comments on basically, sticking with the plan to build out the ancillary services platform, despite the changes in the rates. Is that -- I guess, could we expect that opinion may change if we get -- I mean, we're just trying to get a sense of given what rate changes have come through, where your mind-set would be out if things come it different than what is proposed today?

Well, we have always focused very -- very hard on our cost structures and making sure that our cost structures and taking advantage of the fact that our concentration of visits are -- are within our own communities and our cost elements there, from everything that we can measure we have a very favorable cost structure advantage in that perspective and bases. While nobody likes to lose margins, we do have healthy margins in that area and still be a very positive element for our business. And I -- before you even take into account the synergy and the impacts it has on the total overall business. I think actually as -- as it has -- does squeeze margins a bit, I think -- I think there will be, potentially the more marginal operators that will struggle to maintain viability and out of that may actually even come more opportunity for us.

Okay. I guess as that margin gets squeezed, on both sides, as it being a positive to you, as smaller players potentially drop out of the market or as a negative, do we expect that shows up in the number of units that you plan to build the services out for or where do you think that number in terms of what you are telling us from the guidance perspective, that shows up first?

Well, I think we're seeing awfully good traction with regards to into the new markets and expanding our coverage and I think that's well on track to -- to playing out there. We also are continuing to see good traction as we expand the home health activity outside of our own community in the local markets, very discipline case management -- geriatric case management model bases and we think we will have growing opportunity in that regard.

Okay. And then just a question, quickly for Mark on the expense growth in the quarter, does the expenditures on the new lighting systems, the question I have, was that something that came up within the quarter or had been planned out early in the year and why that wasn't included in the previous expectations for expense growth.

It was -- the impact of that was included in our guidance for the year. Where it becomes a bit challenging is if you look at same store comparisons, that program is in, for example, Q2 '10 was not in Q2 '09, so it affects the basic growth rates on the cost side.

Okay. I see. And then just last question, you talked about the supply demand dynamic now that should be favorable going forward. You know for rent growth. What are you seeing on, I guess your expectations for facility lease expense from what your landlords are telling us?

We don't have any significant renewals for a number of years. So the basic rent structures that we have are what will flow here for the foreseeable future. There's nothing -- there's no variable -- other variable changes that we would expect in that area.

Okay. Fair enough. Thank you.

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

Thanks. Just speaking on the debt side, following up on that question before, I assume your leases are CPI based or do they have floors or with CPIs being so low do we expect the year-over-year growth being lower, say lower than 2%?

It's a wide variety of inflator structures, Jerry. There's some CPI their are some revenue participation leases. I don't think we would change our overall view on growth on the lease expenditure year-over-year, it still going to be 2% to 3%.

Okay.

Most of them have caps.

Right.

That's right.

Yes. Well, caps I'm not worried about right now. It's whether there's any floors is the issue. Okay. And on the debt side, just sticking with that for a second. It sounds like -- I want to understand a little bit more color Mark, on -- that you mentioned these properties wouldn't qualify for the agencies, maybe get a little sense of just the type of lender that you are getting the commitment for and maybe the term. I mean it sounds like a pretty good rate, the 5.9%, I think you said it was. So a little more color there. It sounds like you are feeling comfortable about being able to continue to refi.

Yes, I mean, generally the properties that we operate that won't fit the GSE criteria are going to involve properties that are new or relatively new or involve a meaningful component of skilled nursing.

Okay.

From a product standpoint, it doesn't fit their standard underwriting criteria. The ten-year is very helpful right now in terms of where general market rates are at. It's also the case that historically these properties that did not fit the GSE criteria, the kind of sticker interest cost there tended to be a little bit higher than where the GSEs were at. So the net effect of all of that is, as we refinance those loans, as they are within a couple of years of maturity, there's no meaningful change in the interest costs.

Okay. And the 5.9, that's a five-year deal or a ten-year deal?

I believe it's a ten-year deal.

Okay. Great and it's kind of insurance or banks or what -- I mean, any color on -- ?

The life companies are back in the market, commercial credit companies are beginning to loan again. So it's the folks that everybody in the industry has worked with over time.

Okay. Any more -- anything else coming in terms of the lease buyout's in terms of you reducing your overall leverage?

As we have indicated over time we would certainly like to buy back more of our properties, given the opportunity. It's simply a question of whether there's an opportunity.

And do you have any buyout rights or are they meaningful or is it just a negotiation?

We do have some. Generally, though, those aren't active here for a few years.

Okay. Okay. And maybe just shifting back to the occupancy. I mean the fundamentals for the third quarter were very good, Bill. Any little color, I guess, in terms of what's driving that? I mean, obviously I think most investors, certainly over the quarter, were fretting that all the negative housing news and stuff was going to erode occupancy and you are actually improving it. So are you marketing harder? Is it -- is it rate deals? Are -- is it just supply and demand? I mean, just a little color maybe as to what's driving that occupancy, do you think?

No single silver bullet, but certainly our people are absolutely working harder and more diligently and we continue to improve our techniques and our focus on being responsive within the market place. I think we are also seeing the payoff of several years of work in terms of strengthening our programs, strengthening our systems, strengthening our people, the training elements certainly show good, positive results. There's a little bit as well to certain markets that are beginning to show a little improvement and with that, we are trying to make sure that we are positioned to maximize our participation in that. So it is a combination of facts but one overall factors is the fact that, we're serving, an aging population that continues to evolve and change. People continue to live longer. And with that, they do have a bit more of a need for assistance and services. And that factor of the demand is a factor that continues to increase each year. And certainly there are those that still opt for other options or the issues of costs and concerns and ability to board and not outliving their means has it's damping effect. If you have just a little bit of breeze, I think what we saw, again, we saw in the first quarter and the early part of the second quarter with just any gentle breeze we show some absolute definite strength. So I think we are seeing some what the bottom of -- the bottom of occupancies and with just a little bit of economic help, improvement, I think the field will show and I think we are positioned to participate very well in that regard.

And is your sense that people coming in a little bit older, a little bit more frail, as a result of having deferred moves, when the economy is more unsettled, a year ago or?

There is certainly that. There is certainly pent-up demand. There is also one of the -- going straight back, we have over a thousand sintarians in our communities today and four or five years ago, it would have been half that number. People are living longer.

Okay. Great. I'm jump off, thanks.

Your next question comes from the line of Ryan Daniels with Williams Blair.

Yes, good morning, guys. I think I'm relegated to some minutia here given that most of the big questions have been asked. Let me first just approach the M&A front, two questions there, one, as you think about some of the reimbursement changes for home health is that actually opening up more M&A opportunities? It obviously has been a good quarter for you. Sounds like the pipeline is good there, so is that driving some of the M&A activity? In addition to that, are you seeing lower purchase multiples given some of the uncertainty on reimbursements for those home health fields?

It has helped in terms of availability --we still -- the highest price we paid to date is $3.5 million for one agency and that was for the North Carolina CON, which is -- which was we think a very good outcome, and most of what we have been buying again has been buying the provider number element and we have continued to be able to do that at pretty reasonable prices. I think, in not so much, as to the multiples of what you would see in the larger -- the larger agencies.

Okay. And what about the M&A environment a little more broadly on the core business, obviously had a good deal with the Sunrise assets last year. It's been a little more quiet broadly on the M&A front?

But we have seen more activity and more people testing the market, and more situations where potentially they may be coming up to some refinancing elements and having to make choices whether they put significant capital back in or not. So we do see some -- a little bit -- some signs of a little increasing activity in that area.

Okay. And then one quick question for Mark, I guess just a little clarity. First off the lighting expenses in the quarter, I think you had that in Q1 as well. This is more of a follow up, but was that a million or so in the first quarter? Do you have that top of mind?

I believe it was a little bit higher than that. I think -- it was a similar dollar amount in the first quarter as I recall

So the total cost will be $3 million to $3.5 million, it is your still your impression you will get an ROI on that within a year or so?

Yes, the payback is fairly short. Probably, 18 months. Somewhere in that range.

Yes, as we crack the actual kilowatt hour factor, the savings are definitely showing up.

Okay. And again, we'll see that starting Q3. And again, I guess the last question, this is a little bit broader, but you both talked a little bit about some of the noise on the entrance-fee communities, be it the financial markets or the decline in housing, following the home buyers' tax credit, one of the other things is the noise about resident protection, and I'm curious if you heard in the field that, that came up, if that created any hesitancy in the residents or family members about their deposits, if it lingered or whether it was a temporary phenomenon? What your thoughts are their going forward?

The big impact in the second quarter was the financial markets and the significant uncertainties that started in Europe and came to the US markets in much greater uncertainty that you added to that the issues of whether or not there was a taxation, and then you added to that whether or not there's regulatory and what the impacts and things of the hearings were, so all of that add together to give some fair negative impact, so we did suffer some cancellation stuff. All development though is that July has started off quite strong. So it does appear to be more of a knee jerk and a big factor that impacted decisions during that period of time, but it -- as we move beyond that, and as some of those issues have been proven to be non-issues, we are seeing some definite strengthening in our sales activities again.

Okay. Great. Thanks a lot, guys.

Your next question comes from the line of Michael Sidebottom with Lexington Development Partners.

Good morning, first congratulations on an excellent quarter. You should be commended. My first question deals with, what is your current growth philosophy relative to new construction for assisted living and memory care facilities.

For Brookdale, we do not plan to get into any (inaudible) of new development of totally new communities. We have a significant amount of opportunity to expand existing communities, add additional levels of care. Add levels of care within markets where we have concentration, but don't have quite the right mix of it. So a new-development activity, that will be our focus -- will be really building out our networks and expanding and adding the levels of care where we need it. We think that new development overall will be quite muted and very challenging for folks to get any volume of new development going for sometime.

Are you looking to replicate facilities, for lack of a better word, similar to what you have done to Villages, and other geographic regions or are you just going to sit tight for a while?

We would not be looking to develop that type of community any time in the near future.

Okay. Very good. And good luck, guys. Thanks very much.

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

Good morning. Just a follow up to one of Jerry's questions about when people are moving in. I think that maybe a year or so ago, you might have hypothesized on one of these calls that people moving in later might cause some length of stay compression. Are you actually seeing that at all?

We have a lot of moving parts with length of stay in the ancillary service component continues to improve our length of stay, for one factor and basis, and yes, the people are moving in a little later. They are also living a bit longer, so there has been a -- it's -- a relatively small number in terms of the basis of what has been the reduction in the length of stay. It is quite varied across our product lines.

Okay.

But it is not a major change shift impact that's going on in the business.

Would it be fair to say, though, with the ancillaries on board, that you are seeing maybe higher average acuity?

I think that's -- that's true, but I think you would also see higher average acuity across the whole field. I think in our area, we do have, and do allow people, and with the support of our services to live independently at the -- whatever the appropriate level of care is longer than they would experience, I think, in other communities.

Okay. And then Mark just to clarify, when you are looking at some of the refinancing you might do beyond this year, I assume that you'll still where appropriate be seeking GSC support?

Clearly. That's a very attractive financing that's in the market where we can use it.

Okay. All right. Just wanted to make sure. That's all I had. Thanks.

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

Just two quick follow-ups. Bill, you commented that Regs4 is going to get addressed by Congress, just trying to figure out where that is coming from? I mean, is there a particular bill we should be looking at or time frame?

There were some very, very technical issues that needed to be dealt with in order to do that, but from all we can assess and understand and gain from the people that on the ground inside the beltway and all is that it seems to be on track to be affected by the end of the year, or before -- excuse me -- within this current session so it will be implemented in October.

Okay. But obviously they are breaking for recess momentarily, so it will be basically -- have to be dealt with early in September?

That probably is so, yes.

Okay. And then it looked like the entrance fee shifted more from refundable to non-refundable. I was wondering if that was a permanent shift or something else your doing from strategy stand point or just kind of a fluke of the quarter?

I think there is a little bit of trend that way, and it is, in terms of people, looking what option totally fits them and gives them the most security piece of mind factor that option is -- is beginning to show up a little bit more often.

So I would rather not take the worry about what is going to happen down the road, I would rather pay the non-refundable now, get a clear discount on the rate and --?

That's right.

Okay. Okay. So the mix maybe this quarter likely to continue -- I don't know if we model it so much as refundable or non-refundable?

We have got an unusually low average sales price per basis, and that had to do with where the cancellations -- and the profiles where of folks that did cancel and all. I think it will turn to more average.

That we have seen. Okay? Thanks a lot.

I think you see the dollar amount average go back up again.

And there are no further questions. At this time I would like to turn the conference back to management for any closing remarks.

Thank you, Merissa. We appreciate your participation. Management will be around all day. If you have any questions please call or email me and we'll get back to you. Thank you very much.

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