Brookdale Senior Living Inc (BKD) 2010 Q4 法說會逐字稿

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Roadman, you may begin your conference.

Thank you, Ashley. Good morning, everyone. I'd like to welcome all of you to the fourth quarter and full year 2010 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.

As Ashley mentioned, this call is being recorded. A replay will be available through March 3 and the details on how to access that replay are on 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 and 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 today and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

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

Good morning, and welcome to our fourth-quarter earnings call. Our fourth-quarter results were very good and showed a continuing upward trend in some of the key drivers of our business. As a result of improving occupancy and revenue per unit, combined with excellent cost management, Brookdale produced a 23% increase in adjusted EBITDA, and a 41% increase in cash flow from facility operations, compared to the fourth quarter of 2009.

We continue to feel better about the fundamentals of the business. In spite of the lackluster levels of some of the macroeconomic factors relevant to us, especially housing and unemployment, we believe we are seeing signs of improvement in some of our markets.

Our occupancy increased sequentially 10 basis points over the third quarter and was up 90 basis points over the fourth quarter of 2009. Looking behind the occupancy increase, we see some encouraging signs -- sales inquiries continued at a higher level than last year, and the fourth quarter inquiries were up almost 30% over the fourth quarter of 2009, while initial visits were up 7%. The number of move-ins was up 7% from a year ago. On the move outside, we have had declining trends in both move-outs due to financial reasons in due to moves to higher levels of care over the last year. We did, however, have an increase in the number of move-outs due to deaths in Q4 of 2010.

Importantly, we also saw an improvement in revenue per unit growth in the fourth quarter. Our same-store average monthly revenue per unit growth in the senior housing business, which excludes ancillary services, was 2.6% over Q4 2009, continuing the upward trend of 0.8% in Q2; 1.5% in Q3. A little less than 0.5% of the 2.6% came from the October 1, 2010 implementation of RUGs-IV rates in our Skilled Nursing.

As our occupancy has been slowly increasing, we have been focusing on rates. That means appropriately pricing new move-ins for the inventory on hand. To that point, we have implemented a new inventory management system that gives real-time clarity to inventory and pricing down to the individual unit level. Fewer discounts, shorter duration incentives, and market rate increases result in this more rigorous approach.

We've always had good discipline in the sales pricing process, but this provides a better support tool to continually fine-tune that process. Still, senior housing pricing growth can be led by occupancy growth, and we have a way to go before we will see widespread pricing improvement.

Our ancillary services business continues to perform well. For the quarter, our outpatient therapy and home health revenue grew by 24% over the same quarter last year, and operating contribution was up 28%. This business is now at a $200 million revenue run rate. We continue to see good growth in our home health businesses and we cover nearly 60% of our senior housing portfolio. During the year, we acquired seven home health agencies, having added two more during the fourth quarter.

Our Entry Fee communities produced another solid quarter. We produced $9.9 million net; entry fee cash flow, excluding Freedom Pointe's first-generation sales, and an increase of $2.4 million over Q4 of 2009. We had 73 sales closing on the Entry Fee [IL] units during the quarter, and it was the second quarter in a row where our Entry Fee [IL] move-ins exceeded the IL attrition at these communities.

The team also did a very good job at managing our expenses. It was clearly a quarter where our operations team executed at a very high level. There were no large nonrecurring items where we received a benefit or a penalty. Our base same community wage and benefit inflation was 1.3%, and we continue to see positive results in areas such as our wellness-oriented medical plan and Workers' Compensation programs.

This was a quarter that clearly demonstrated the organic growth power of a properly financed business with operating leverage. Compared to Q4 2009, revenue grew 8.3%; operating expenses grew 6.5%; and facility operating income was up 13.4%. Excluding transactions-related costs in Q4 2009, adjusted EBITDA increased by 23%, and cash from facility operations increased by 41% to $69.6 million or $0.58 per share from the prior year.

The fourth quarter capped off a good year for the Company. We saw positive trends in occupancy and revenue per unit throughout the year; we broadened the footprint and reach of our ancillary services; we saw our entry fee communities began to reclaim some of their lost territory; we strengthened our operating platform with new systems; and increased investment in critical service delivery areas. We re-started the process of expanding and repositioning communities to improve current and future performance, and we used positive free cash flow to delever the balance sheet, and added increased financial flexibility to take advantage of future opportunities.

Before giving an outlook for 2011, I will now turn the call over to Mark to provide more details on the quarter and the full year.

Thanks, Bill. Let me start by looking at some highlights of our improving operating performance for the quarter. With 510 of our 540 consolidated communities and our same community results, these results illustrate much of what happened in the quarter. Compared to Q4 2009, same community revenue increased 3.9%, with average revenue per unit up 3.7% and occupancy up 20 basis points.

Expenses increased 1.8%, driving a facility operating income growth of 8% and expanding the same community margin to 36% from 34.7%. This was the best same community growth performance of the year, and our second-best quarterly same community growth performance since the end of 2007.

Breaking the same community data down further, our senior housing revenue grew by 2.9%, with revenue per unit increasing by 2.6% and occupancy up by 20 basis points. Senior housing expenses grew by 0.7%. Again, as Bill said, this was a quarter where things went extremely well on the cost side. While these very strong unit cost growth results are not totally sustainable over an extended period of time, they're clearly much better than our last couple of noisy quarters.

Excluding the growth of our ancillary services business, our senior housing facility operating income, or FOI, grew 7% in the fourth quarter. Ancillary services added 1% to the revenue per unit metric, as its relative growth slows due to its larger size and the extent to which outpatient therapy programs cover our communities over the last 12 months.

The platform now serves almost 38,000 units for therapy services and over 26,500 of our units for home health. The big drivers of these growth numbers continue to be the home health agency acquisitions and maturation of the home health agencies in our communities, and also in their broader local markets, where the scope of our services are expanding within the units and markets already served.

We continue to expand our in-home home health activities, and in December 2010, we had more than 480 people on that general market caseload. The fourth quarter annualized revenue run rate for home health outside our walls was over $12 million. We've also started the process of highlighting hospice in four of our markets. Excluding the impact of skilled nursing units, average monthly ancillary services, operating income per occupied unit was $153 in the fourth quarter, compared to $147 per unit in the fourth quarter of 2009.

General and administrative expenses, excluding non-cash stock comp expense, was approximately $29.7 million or 1.4% higher than the fourth quarter of 2009, and was 5% as a percentage of revenue under management.

Turning to the balance sheet, we continue to strengthen our financial position and improve our flexibility. During the year, we completed multiple transactions that both reduced the level of debt as well as extended maturities. We continue to use the positive cash flow of the business to delever the balance sheet, while at the same time creating financial flexibility. To that end, we have expanded the commitment under our secured line of credit to $230 million.

Subsequent to the end of the quarter, we acquired previously-leased communities and a new community, and will place those into the line. We also repaid a mortgage loan and will place some of those currently unencumbered assets into the line as well.

By the end of 2010, we reached our goal of six times net debt to adjusted EBITDA when measured on a trailing 12-month basis. Annualizing our adjusted EBITDA for the fourth quarter, our net debt to adjusted EBITDA stands at 5.6. Additionally, as a result of these transactions, we have no mortgage debt maturities before 2012 except for normal scheduled principal amortization. Although we're not at the point to announce refinancing activity related to these 2012 maturities, we are in active discussions with multiple lenders related to those debt pools.

We ended the quarter with $82 million of unrestricted cash and no borrowings under the line. At the end of the year, we had cash and available borrowings under the line of approximately $195 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 the cash to be generated in 2011.

Finally, looking at our CapEx, which is included in our CFFO calculation, the level of spending in Q4 for maintenance CapEx was $6.4 million. For the full year, we spent almost $28 million on maintenance CapEx of our communities.

Looking at the CapEx where we expect a return, and therefore, don't included it in CFFO, we spent a total of $53.9 million for the full year, broken down as follows -- first, EBITDA enhancing CapEx, where we include projects that typically reposition or enhance current communities, was $10.7 million for the quarter and $34 million for the year. The fourth quarter reflects our increasing activity to reposition communities to meet the demands of the improving market.

Second, corporate CapEx, which includes home health acquisitions, ancillary services spending, and system investment, totaled $5.2 million in the fourth quarter and $16 million for the full year, about half of which related to home health agency acquisitions.

Finally, for development and expansion, we spent $4 million during the year, while we were resuming our process of evaluating, seeking approvals for, and entering into initial contracts for the expansion pipeline we're developing.

I'll turn the call back over to Bill for comments on our outlook for 2011.

As we entered 2011, we were experiencing occupancy improvement, positive modest rate growth, continued growth in ancillaries, and continued improvement in entry fees -- all encouraging signs. We are seeing the effects of a slowly improving economy. As in any big shock, we believe we will see continued slow steady improvement in the economy.

Of course, underlying the success of this industry during this great recession has been the growing demand of our services, as the population ages and the physical and medical needs of the population continues to increase. At the same time, construction of new supply has fallen to a very low level. Given the strong underlying demand growth, strengthened by a slightly better economy, and with very little new supply, we believe 2011 will improve over the positive trends of 2010.

We expect to see our higher revenue growth, driven by positive occupancy growth, improved pricing, and continued ancillary services growth, and to continue effective cost management. We expect that this will drive a 12% to 13% adjusted [EBITDAR] growth, and CFFO dollars will grow around 16% to 19%, and be in the range of $2.30 to $2.40 per share for the year on revenues in excess of $2.3 billion.

I will now turn it back over to Mark to give you more details on key assumptions supporting our guidance.

Looking at how the scenario of a slow, steadily improving economy relates to our key business drivers, begins with occupancy. We believe that we will experience an increase in occupancy during the year similar to 2010, with an average of 100 basis points for the year centering a range of possibilities. Whereas 2010 saw occupancy growth primarily in the need-based segments of assisted living, including memory care, we expect to see the beginnings of improvement in the independent living product as well, as we move through 2011.

We expect a more favorable environment for rate growth. With occupancy moving in the right direction, we believe we're beginning to see some pricing improvement. We also have put in place stronger systems to support our sales, inventory management and pricing efforts.

We increased our freestanding assisted living rates approximately 3.5% for current residents on January 1, and expect 3% to 3.5% for the other product lines as well, spread throughout the year. However, with the softer new move-in rates that occurred over the last several years, we will have to work through some negative mark-to-market dynamics in certain markets. Therefore, we expect senior housing rate growth to be in the 3.5% to 4% range. This includes the positive impact of the full year's operations under the new RUGs-IV skilled nursing payment rates. We expect the ancillary contribution to continue to show good growth in 2011, and that ancillary services will add another 1% or so to the revenue per unit growth rate.

In the aggregate, we expect total revenue per unit growth in the range of 4% to 5%. Adding in the occupancy growth, we expect to see 5% to 5.5% total revenue growth, again, with total revenue in excess of $2.3 billion.

On the expense side, we expect unit cost growth to remain muted. For the senior housing business, controllable community expenses, which account for approximately 80% of our cost structure and include items like labor, food, travel, training, and supplies, will grow modestly.

For 2010, we saw average wage inflation of around 1.5% and expect that 2011 should be similar or slightly higher. Adding in all other costs, such as utilities, real estate taxes, and insurance, we expect overall expense growth to be in a range of 3% to 3.5%. Adding in the ancillary services business, we expect unit cost growth to be in the 4% to 4.5% range. Our fundamental goal is to maintain a positive spread between the level of revenue growth and that of expense growth. Without compromising our quality of care standards, we'll continue to manage expenses toward that goal.

To date, we have not seen inflation cause meaningful growth in our operating costs -- though, historically, the industry has done well in times of inflation, with the ability to pass on added costs, admittedly with a slight lag, at a time our consumers are often feeling better off from the resulting higher yields on their fixed income investments.

Looking at other elements of expense, we'd expect our G&A to grow in line with revenue growth. Our cash lease expense should remain fairly level with escalators being offset by some of the repurchases we've done. Interest expense should be slightly less than the Q4 2010 run rate, given the recent debt paydowns, until we refinance the $650 million of mortgage debt due in 2012, of which $450 million currently carries a low interest rate.

We expect to complete the refinancing of the $650 million of 2012 maturing mortgage debt in the second half of the year, and as it looks currently, our rate would increase by approximately 2.5% to 3% on the total $650 million. Our guidance incorporates an increase in interest expense on this refinancing effective in the fourth quarter of 2011. Our capital lease amortization schedule increases to an annual $10.5 million over the course of 2011. According to our current tax projections, we do not expect to be a cash taxpayer until 2013.

Looking at other elements of cash flow, our routine maintenance CapEx, which impacts the FFO, is expected to be $35 million to $40 million for the year. Not included in CFFO, we also expect to spend an additional $90 million to $95 million on other major projects. The corporate component of this CapEx is $30 million or so, and includes projected ISE expenditures on clinics, strategic systems, project initiatives, and $10 million to $15 million on building an electronic medical records systems. Having a credible electronic medical records systems is critical to maintaining our healthcare niche with key referral sources. In fact, in many markets, it's becoming a required competency.

The remaining $60 million to $65 million is projected to be spent primarily on projects which create new or enhanced economics, such as major renovations and repositioning projects at our communities. In addition, during 2011, we plan to aggressively resume our efforts related to the expansion of our communities. We anticipate undertaking $200 million to $350 million of projects, with around 80% of this funded by debt or REITs, and therefore, requiring equity of approximately $40 million to $80 million in connection with these projects over the next 12 to 24 months.

We're expressing this as a fairly broad range, due to the significant number of potential projects that are involved. There's a lot of planning, approvals, and architectural work to be done, so at this stage, the precise timing is hard to predict. We do not expect many new units to open in 2011.

Turning to entry fee cash flow, given the environment, we had good results in Q4 and we saw improvements throughout 2010. In 2011, taking into account the environment, we do expect results to be approximately $35 million of net entry fee cash flow. Any upward movement in the home resale market could bring a good upside to this entry fee number.

The combination of all these factors is that we expect that CFFO dollars will grow 16% to 19%, and be in the range of $2.30 to $2.40 a share for the year on revenues in excess of $2.3 billion. While not giving quarterly guidance, we do want to remind you that we have a seasonal pattern where occupancy and entry fee sales are weakest in Q1, and stronger towards the last half of the year. Our operating expenses also peak seasonally in Q3.

As we begin 2011, we may also see some cost impacts resulting from the severe weather that we've seen in the first quarter. This guidance does not include the impact of future acquisitions we may make. We're seeing the deal market getting quite active, as the recent bell-ringer deals have gotten people's attention and drawn some potential sellers into the market. Some people have been in a holding period. The industry has gone close to three years without much transaction volume. We expect to be active, but haven't included any senior housing acquisitions in these guidance numbers.

Bill?

Looking beyond 2011, we can't help but be very excited about the future of the Company. The growth prospects are excellent. We continue to see little new development other than expansions and some limited development by regional operators, and do not believe we will see meaningful new construction for some time. Demand, again, will continue to grow as people age and require supporting services.

The organic growth characteristics of the business have begun to normalize and the natural operating leverage, creating the potential for meaningful organic growth and cash flow. The case for consolidation is compelling. We believe we have developed the best platform of which to operate a national business, operating across the continuum of senior housing types, and expect to be active in completing accretive transactions over the long-term.

Our strategy of being the leading provider of wellness and healthcare solutions within the senior living industry continues to serve us well. It will be difficult for others in the field to offer the range of services that we offer to our residents. We are uniquely positioned to provide a continuum of care, including our ancillary services, to meet the growing preferences of current and future customers. Our unique platform also gives us a strategic position in the new healthcare world order, as acute and post-acute providers look for who can best partner with them to transition their patients and create better measured outcomes.

We are incredibly well-positioned to capitalize on significant opportunities as the economy recovers and the world of healthcare evolves, to enhance and maximize shareholder value.

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

(Operator Instructions). Ryan Daniels, William Blair.

It's [Christina] for Ryan today. On the M&A front, your outlook commentary was pretty bullish and I wanted to get a little bit more color on what's driving activity in your view. I guess also on the property front, are you seeing that they're in pretty good condition? Or are they more of the distressed ones?

Well, again, Christina, we've gone three or four years here without very many assets trading hands in senior housing. It is a predominantly for-profit industry. So, you have family businesses; you have private equity sponsors; and just given circumstances, some assets need trade. So at some level there, there is a backup in terms of transactions that haven't occurred during the recession.

At the same time, we've had some very significant transactions announced. And the REITs, which currently have very low cost of capital, are paying, by historical standards, some pretty full prices. So even folks who may not have thought they wanted to be in the market selling assets -- the pricing is beginning to get their attention. So, you put all those things together with a relatively good financing market today, and it does drive a reasonable amount of transaction volume.

On your question around distress, we really haven't seen much economic distress in the industry, even in the depths of the recession. There are a few isolated cases that are more distress-oriented, but I would call those the exception rather than the rule.

I think many operators have been, even in this period of time, realizing more and more the need to adapt their product and adjust it to the reality of what's going in [and aging]. And there's the reality of also the consumer's preference for having a setting where there is a continuous -- some level of continuous services available. And some people have been very active in that.

Others realize they need to do it, but in terms of the issues of their decision-making and funding that and all, it also may bring some assets to market. But I wouldn't class them in distress as much as opportunity upside, relative to those that need to do something to invest in them, in order to make sure that they maintain competitiveness.

Okay, thanks. That's really helpful color. And then moving on -- this is a little nitpicky of a question, but we noticed that the average monthly rent for your assisted living properties was down sequentially from the third quarter, but occupancy remains strong. And I know you indicated in your prepared remarks that you did implement a price increase in January for assisted living. But just was wondering if you could give us a little bit more color on what was going on during the fourth quarter.

Sure. I think if you look back over several years, you would see a similar pattern to that. Often what is happening is our sales force is selling against the rent increases that will go into place January 1. So, you tend to get decent lease closing volume in the fourth quarter, though the rates may be a little bit softer than what you would have seen in the third quarter and certainly softer than what you'll see in the first quarter.

I see. Okay. That's helpful. And then one final question, if I can. Can you talk a little bit more about your hospice opportunities? You indicated you're in four markets now. And how active you plan to be in that business over the next couple of years or so?

Well, we'll take a very similar disciplined approach that we've taken, first of all, our rehab, and then as we moved into home health and then as we absolutely believe hospice is a very natural extension for us. Again, we will do it in a very disciplined manner and a focused model that is based around the case management factors of our residents.

It does involve matching and getting the total case mix activity outside our walls. And we have laid the groundwork for that with our home health and other services. So we don't plan to make big, major acquisitions of large hospice entities or regional hospice entities. We will do some local acquisition work but the initial [four to eight] that are in the queue are de novo. And natural extensions of states where we can get that licensure and go through the process of the surveys and all.

So we don't expect it to produce any meaningful increment this year. There's some starting -- operating startup losses associated with some of that. We think it will be fairly neutral for the year. As we demonstrate the model and the distance at all, then we will look for the opportunity to accelerate our pace as we go then in the future.

Okay. Thank you for all the great color. Congratulations on a nice quarter.

Frank Morgan, RBC Capital Markets.

A couple of things here. With regard to just the strength you saw really with rate and occupancy, were there any particular reasons that were stronger than others? I know some of the laggards had always been general areas like Florida and Arizona -- just any color that you could provide on any of the strengths regionally.

And then the second question was really -- you commented about the big transactions that have been done that really have gotten people's attention, these potential sellers. Does that -- the fact that those are getting done raise their attention? I mean, they're not -- hopefully, they're not expecting to get the kind of valuations that were done on these bigger platforms.

But from your discussions you've had, what are you seeing out there in terms of where expectations are? And then really revving it all up, how do you balance the opportunity now that the business seems to be growing nicely again -- balancing growth and the interest and refinancing, and your long-term leverage targets. Thanks.

I think there's about six questions there. First, on the correlation geographically around occupancy and rate -- I think it's probably more correlated still to product type than it is to geography.

Bill, I'll let you add some color.

There are certainly some regional difference and market differences, but even within the state of Florida, there's differences in different markets there. So yes, there's still a little bit of issue in certain markets, but in a general sense, it's more of the product and the positioning of that product.

Everybody's baby is always the cutest, so even people coming to the market and seeing those -- eye-popping for those bigger transactions and have strategic elements and stuff, they start off with a high expectations as they work through and test the market and stuff, that there is reality that they can't quite have that expectation and that's that. There will be some that will test the market and maybe go back, but out of that, certainly, there's going to be a decent amount of activity moving forward.

The other thing I would just remind folks is, when you look at seller cap rates in our business, those are typically very different than what our cap rate profile looks like as a buyer. Every asset, every portfolio, is unique in terms of what the cost structure is and what the revenue opportunities are. But it is not unusual for us to change operating margins at the community level by 3%, 4%, 5%.

Our marginal overhead is relatively low, probably 2%, 3%, depending on the product type, compared to 5%, 6% marginal overhead for many other folks. And we also have the ancillary service business, which improves the service already at an acquired community and also brings an additional set of economics to the table that can improve operating income by 10% to 15%. So, where you may see assets advertised as seller cap rates of 6.5%, in our view, that may be 8% or more by the time all the economics come into the equation.

Okay. And the final one was just targeting your leverage -- with these growth opportunities, where do you really feel comfortable in terms of your ultimate leverage?

You know, I think we still feel comfortable at six times or a little bit under. Obviously, we've made significant moves over the last 12 months in moving some of our leverage from funded term debts or revolving credit capacity. It allows us to make the balance sheet a little more efficient. But I still think that target, around six times, is how we think about things. You may think differently with a very significant opportunity of some kind, but I think all things being equal, we're comfortable at six times.

Thank you.

Brian Sekino, Barclays Capital.

A question here on the costs. I know you said -- you gave some guidance for 2011, but the cost growth in Q4 was obviously a bit lower and you mentioned that it was not necessarily sustainable. Can you give us some color in terms of what the benefit was and what you don't see repeating in '11?

Well, again, the bigger part of our cost structure are labor and benefits. That inflation level in the fourth quarter was about 1.5%.

We also had a quarter where the weather situation was reasonably benign. We had very good experience in our risk-based insurance programs -- health insurance and Workers' Comp. So that was truly the result that we had in the quarter. It's just you would not expect that to occur quarter after quarter after quarter. And we think that core inflation rate, again, as we look towards next year, is probably 3% to 3.5%.

Okay, great. Thanks. And then on the $200 million to $250 million of expansion that you mentioned over the next two years or so, are those -- in the past, you've talked about 500 units, 1,500 units expansion in '11 and '12. Can you talk a little bit about -- are those expansions on existing facilities or new facilities that you're putting all together?

This is adding primarily to levels of care. Some smaller part of expansion of the same kind of units but it's not de novo communities. You'll see a lot of Alzheimer's, you'll see a little bit of nursing, you'll see some adding assisted living and memory care to a retirement center that's independent living only. It will be that type of thing. Out of this first -- and getting all this restarted, we expect, again, as Mark said, 1,500 units by the end of 2012. And the goal is to get to where we're, on a going forward basis, are delivering 1,000 units per year after that.

Yes, a couple of quarters ago, Brian, we had indicated an objective of opening perhaps 500 units in 2011. From where we're at today, we don't think that will occur. We may open some units yet late this year, but it's more likely that the significant openings begin in 2012. All that said, we will be investing the capital this year to get to that place.

Okay. And can you give us a little sense in the ramp-up once those units open up? Are the facilities in need of these right away and therefore you see a real quick ramp-up? Or does it happen over a bit of time?

We would expect fairly rapid ramp-up as we look at all the expansions that we did before we shut that down, now they're all open in what has been achieved there. They've had a pretty rapid ramp-up. And again, we underwrite those to kind of a mid-teens unlevered basis and results that we have seen, and we've shared in our presentations and stuff is that we're achieving at least that level.

Okay. Thanks. And just one more on the entrance fee -- I know Q3 you saw a bit of an uptick with the use of the My Choice program. Can you give us a sense of how that impacted the entry fee in Q4?

Well, not quite as much as Q3, but it was still a component there. (multiple speakers)

Brian, that's in our supplemental data, which I am trying to flip through to get to right here.

Again, as we tweaked some of our plans and give you some different options, and particularly where our customer and our prospective customer right now is very much challenged in terms of getting any kinds of return on their investments -- giving them a bit of an option. That's kind of a dynamic thing has proven to be effective of stimulating sales as well as being able to get something that works for our customer.

The My Choice number in Q4 was $3.8 million.

Okay. Thanks a lot, guys.

Jerry Doctrow, Stifel Nicolaus.

Mark, this is for you. There was some change in the methodology for CFFO, at least I think the way we read it, where you were basically re-doing the JV portion of that. I'm just trying to understand a couple of things. One, what the rationale was; two, whether we're going to get better disclosure on some of the JVs or some guidance on how we can project it and go forward; and also, it's not clear to me whether you re-did numbers retroactively. But can you just give a little more detail there?

Sure. Historically, we have, for CFFO purposes, included JV results based on cash distributions from those JVs. So, based on our ownership level, there are usually quarterly cash distributions. And as we get those cash distributions -- it's cash, so it shows up in the cash flow statement and it rolls into CFFO.

What's happened increasingly over the last couple of quarters is there is reinvestment activity occurring in those JVs. So, for example, a largely independent living community is converting some of its units to assisted living or a memory care, the JV partners are leaving their capital in to essentially finance that repositioning. So we end up with a situation where the cash distribution approach doesn't really reflect the economics of what's going on.

So effective in the fourth quarter, we're actually calculating CFFO for each of the joint venture entities, just as we would for the Company. And then we're including in CFFO our ratable share of that joint venture entity CFFO. Okay? We did apply that retroactively in the fourth quarter, so that item standalone would pick up a little under $1 million of CFFO in the Q4 numbers.

The other item, which we (multiple speakers) --

(multiple speakers) [Affecting] the whole year's change, I guess, in the fourth quarter?

That's right. And we have not restated the prior years because the impact of this in the prior years is just very de minimis. The other thing that occurred in the fourth quarter totally unrelated to this is we did have another secondary completed by Fortress and we sold some assets. We incurred overhead -- in our G&A costs, you have about $1 million related to those two items. So, rather than muddy up our disclosure here and say -- add in this $0.01, take out this $0.01 -- we really just didn't feature those in a significant way, as we've described the quarter.

So you think it's kind of a wash if you would really take those out?

That's right. But you are correct, we've refined the way we're reflecting our joint ventures for CFFO purposes.

So when I go forward -- maybe you can just give me a little -- I don't really remember offhand what your JVs look like, because I haven't focused on them in a long time, but -- so when I go forward, how should I be projecting that, thinking about that? I mean, the REITs sort of sometimes give us a full schedule for the JV so we could sort of program that out. Are you going to give us a little bit better -- or how much is in the guidance for that kind of number maybe?

The impact of the joint ventures for us is very de minimis. If you stack up all the pieces of the CFFO math for us, essentially, you end up with a line that is Other -- if you're working off the P&L. And that Other includes our joint ventures; it includes taxes; it includes a couple of other things that are all fairly minor. So I think if you look at the quarterly run rates for those other items, it's actually pretty consistent over time. And I suggest you just roll that forward.

Okay. So it would be maybe $1 million for the year, in terms of thinking about it relative to the way it used to be done? Is that --?

That's right. Or perhaps just a little bit more for the joint venture piece on its own.

Okay. (multiple speakers) And then last thing, just in terms of financing acquisitions and consolidations going forward, is it more likely to be on balance sheet, JV, REIT -- what would you, looking at the capital markets today, be thinking about as the most likely structure?

I think you've described the range of possibilities. Every opportunity is a little different in terms of what the best financing approach is. So I think you may well see all of those used going forward.

Okay. Maybe my last just quickly -- do you know -- have exactly how much rent your -- I think you said the rental number will be about the same because you're obviously getting rid of some rent on these properties you bought. Do you have a sense of just what that rent is that's going away on those properties you bought -- the 14?

Well, we reacquired a little over $30 million worth of leased assets in one transaction; an implicit $7 million or $8 million in another transaction. So if you said $40 million in the effective lease rates today on those assets is 10% or 11% -- I'm making this math up, but I think that will get you fairly close.

Okay. That's fine. And the one property that you actually bought that's new, if I understood right, is not going to move the occupancy or rates or anything particularly one way or the other?

Correct.

Okay. All right. Thanks.

Kevin Fischbeck, Bank of America.

I wanted to walk through the free cash flow of the Company. Obviously, the CFFO guidance kind of implied something around $285 million, call it, and you outlined -- that includes maintenance CapEx, so there's another $90 million, $95 million of growth CapEx. And then the bed extensions, would those be in addition to that growth CapEx?

It is. Essentially what that $40 million to $80 million represents is building that construction in progress pipeline. So that would build over the period of time that we ramp this up and stay in place, so long as we are continuing to deliver 1,000 units a year.

Okay. So maybe in 2011, you hit the low end of that and you spend $80 million over the next 18 months -- is kind of the best thought process there? So, if we take the $285 million minus the $90 million minus $40 million, that leaves you $160 million of cash flow on top of your cash on the balance sheet, on top of your credit facility to do deals?

That's right.

Okay. And then when we think about deals, I mean, does the REIT interest in the states in becoming owners make it more likely that you'll be doing smaller deals, because the bigger deals might be ones that are more attractive to REITs? And so you're going to be better able to compete on a small, regional chain than on a large chain -- how do you think about that opportunity?

Certainly, I think there's going to be a continuing opportunity with the small and the regional and maybe that will pick up, but you shouldn't -- we won't say that we won't be involved in the larger transactions.

The total cost structure, both within the operating expenses as well as the G&A expense, makes us very, very competitive. There's a difference in cost capital but there's also a difference in the cost of debt in those (technical difficulty) have a management entity and what are the economics they bring. And we think there's a significant difference there. So I wouldn't preclude or say that we wouldn't be very competitive with some of the larger transactions.

Okay. So, I mean, I can see where you guys get the cost advantage versus the smaller facilities when you buy them, but I guess if someone is going to be managing a large portfolio, theoretically, they might have some form of scale. Do you think you can outcompete whoever will be managing those facilities under that structure?

(multiple speakers) Yes, sure. And, I mean, even among the larger operators, I think if you line up what G&A cost looks like, you'll see that we have a dramatic cost advantage, even compared to some of the other public operators.

Okay. That makes sense. And then, I guess, obviously, the ancillary services business is a benefit as well and with you looking to grow hospice. I mean, how big could hospice be when we size it? Is it essentially as big as home health is? Or is it just by definition a smaller added [add in a line]?

It would be smaller than the home health piece. It still can be quite significant, but we're going to walk before we run here.

Okay. That makes sense. And finally, on the occupancy growth, obviously, you guys did a very good job this year -- in 2010, growing occupancy. And -- but the guidance is (technical difficulty) [another 100] basis points, which seems achievable but maybe not the most conservative outlook, especially given that your Q4 numbers were strong. But I guess (technical difficulty) wasn't quite as strong as what you guys were able to do.

How comfortable and how confident are you with that occupancy rate? And what indicators are you seeing today that give you comfort you're going to get there over the next (multiple speakers) --?

I've outlined that while I was [giving] the guidance, it's only a repeat of what we did last year and we do believe that the environment is getting better.

And so what's allowing you to out-grow the industry if you thought before was a little bit softer for the industry, but you guys are growing? Is there anything kind of on a -- (multiple speakers) advantage that you're seeing?

We do think we have a competitive advantage. In our M3 markets, our scale markets, there is significant value in the brand. In the markets where we have ancillary services deployed, which is 50%, 60%, 70% of the Company, depending on how you measure it, that is a very significant competitive advantage. So these things we've described rolling out in the Company over the last couple of years do make a big difference when we compete.

Okay, great. Thanks.

Rob Mains, Morgan Keegan.

One housekeeping question, Mark. The one net acquisition that you made, was that AL or IL?

AL.

AL? And a couple RUGs-related questions. One is, could you remind us -- I don't know if you've got this handy -- the number of SNF beds that you've got throughout the portfolio?

It's somewhere just over 3,000, Rob. I'm afraid I don't have it in front of me.

Okay. That's close enough. And then do you have a sense -- the CCRC average rate in the quarter, how much of that came from the RUGs-IV boost?

I do not know.

Okay.

I mean, we can follow-up with you on that.

Okay. And then another pricing question. AL -- are all the ALs now on a [1-1] price increase? Or you still have some that are renewed on anniversary date?

Effectively all are January 1. Not 100%, but it is a predominant number of them.

Okay. And the other two product types, it's anniversary?

Correct. Generally, that is the case.

Okay. All right. Bill, at the beginning, you talked about inquiries and visits, pretty strong increases there. Any comment about how they were spread among the product types? Is it equal among them? Are you seeing more in one type of product than the other?

It's pretty even. There's not a significant difference between them. We're seeing good increase across the spectrum.

Okay. And then last question, looking at the REITs kind of not as a financing vehicle, but some of them have started to emerge effectively as competitors. And just want to understand how that might change your thinking about them going forward as operators, rather than just real estate owners.

Well, they are not operators. They cannot be operators.

Right. Well, through the right data structure, they're at least taking part in operations?

They can own some operating incomes but they have to have that third party management entity. They each -- well, still they have to be played out in terms of exactly what are the strategies of each one (technical difficulty) [and what] percentage of their total portfolio will they go to -- is it 20%? Is it 30%? Whatever.

I mean, we'll be involved in a little part of that but also they have a limitation there before they start going over a level that may be counterproductive for them. So there will be a continued -- they'll be continuing to balance those. It's how we look at them; I guess, we wish they'd stay out of our sandbox but it's just good competition. And I think we'll be effective in being able to affect our growth as well as in certain cases, partner with them.

Fair enough. That's helpful. Thank you.

And our final question comes from the line of [Dan Zimith] with [Jilton].

A couple of questions. First of all, in the acquisition of the 13 units that was mentioned under subsequent events that you discussed previously, can you just clarify whether or not there was any positive or negative impact on cash flow from facilities from that accounting point of view? And can you say what that benefit would be on an annual run rate basis?

Well, essentially, there is a positive cash benefit here because we took assets that we had previously leased. And again, I don't have the exact rent numbers here, but for argument's sake, let's say it was an effective 10% lease rate. So, our rent expense went down by $3.5 million or $4 million. We then took those assets and put them in our line where they serve as collateral. So, essentially it allows us to manage the balance sheet more aggressively and essentially use cash to pay off leases, while at the same time having access to that equity to draw it out of line.

Right. But you can't quantify exactly what that benefit would have been?

Well, it depends on what we do with the cash, is really the answer.

Okay. Now, the assets that were sold that you referred to when this question was previously discussed, on the change in the CFFO calculation, you mentioned that some assets were sold and --?

No, assets that were sold had nothing to do with that change in the way we're accounting for our joint venture interests.

I understand that. I just was wondering -- I didn't see the announcement on the sale of the assets, and I was wondering how much they were sold for, and whether or not there was a gain or loss on that transaction? And then (multiple speakers) --

I'm sorry. There was a modest gain. All of that will be in the footnotes in the 10-K when the document is filed.

Okay. And why were those assets sold? Just normal course of events? Or what?

Generally, specific product issues around the kind of asset or remote market situations.

The Company was -- grew very rapidly and the different (technical difficulty) [companies] put together '05, '06, '07 and a number of financings of [whether] lease pools, debt pools or other things -- it's taken awhile to be effectively able to negotiate or whatever to extract out assets that need to be pruned.

I see. So you (multiple speakers) acquisition, there was some kind of assets -- some assets that didn't really fit with your net [worth] and/or you're just optimizing the net worth?

That's right and we're getting to the point and getting to basis of enable them out and expect to free up a few more of those and things that just don't fit. People wondered why we hadn't gotten rid of them before, but they were trapped in these different pools. And we're being able to work those out and expect to do more of that over the next couple of years.

Okay, great. Now the maintenance CapEx for the year -- is it right to look at the line under the cash flows from operating activities, and just follow that down to additions to property, plant and equipment, leasehold, intangibles, net of related payables? So that $94 million -- is it fair to consider that the maintenance CapEx?

No.

No?

That's the total CapEx for the year. If you refer to our supplemental schedules that we filed with the press release, there is a table that breaks out the specific components of CapEx. The cash flow statement has the total. We then break it out in some detail in the supplemental disclosures.

Okay. So something less than that $94 million?

Yes, it was about $28 million for the year, I believe.

Now could you just review briefly for me why the maintenance CapEx is 10% of the depreciation and amortization (multiple speakers) --

Sure.

Why is there such a large difference there?

Well, the Company is essentially a rollup, it's a consolidation story. So you've got a number of companies in portfolios that combined in 2005 and 2006. So essentially, the whole balance sheet was written up to current market in '05 or '06.

The way purchase accounting works, not only do you write the assets up, but you allocate some of the assets to relatively short-term assets. For example, the in-place pool of leases we have with our residents. And that gets amortized over a very short period of time. So at least for the first five or six years after that rollup transaction occurs, the depreciation and amortization is extremely high, relative to the historical basis of the assets.

I see. So the actual facilities that are subject to depreciation and amortization -- do you have what would be considered a real world book value of those or value of those if you had to replace those assets today? Any kind of estimate as to what those are actually worth? It seems very difficult to get at, based on how these things were written up in a period of time when perhaps asset values were overall inflated.

I can't disagree with you, but we need to do our accounting because we need to do our accounting. I think you'll find if you do some research that there are a number of industry studies out there on what normal levels of CapEx are. And you'll see that our recurring maintenance CapEx is fairly close to the middle of the range across those studies that were done.

Okay. I'll check that out. Very good. Thank you very much.

And there are no further questions in the queue at this time. I will now turn the conference over to Mr. Roadman.

With that, we want to thank you for your participation. Management will be around today for follow-up questions. We look forward to talking to you. We are going to participate in a number of conferences over the next month, so I look forward to seeing some of you there. With that, thank you very much.

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