Brookdale Senior Living Inc (BKD) 2011 Q4 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living 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 Sarah and good morning everyone. I also would like to welcome you all to the fourth-quarter 2011 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 president is Andy Smith, our Executive Vice President and General Counsel.

As Sarah mentioned, this call is being recorded. A replay will be available until November 24 and the details on how to access that replay are in the earnings release. This call will also be available via webcast on our website, brookdaleliving.com, for three months following the call.

I'd also like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal Securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

With that, I'd like to turn the call over to Bill.

Good morning and welcome to our call.

The Company performed well in the fourth quarter, a quarter where there was a lot going on, operating 30% more units for the full quarter, adjusting to changes in the Medicare components of our business, all against a backdrop of an economy that appeared to be stabilizing but certainly not producing a tailwind.

On the revenue side, occupancy improved and pricing was stable. We increased sequential quarter average occupancy by 40 basis points for the consolidated portfolio. Our Retirement Center segment, which represents 30% of our consolidated units, increased sequential average occupancy by 50 basis points to 88.9% its highest occupancy since the first quarter of 2008. It was also the highest average rate for that period. With over 75% of the Retirement Centers units being independent living, we are seeing the beginnings of a rebound in independent living occupancy, which is the result of the continued upgrading of this product line and the increased supportive services in our independent living product.

Our Assisted Living segment hit 88.7% occupancy, its high for the year. The CCRCs occupancies remained level in spite of a skilled nursing census that decreased slightly in line with reduced hospital discharges.

The fourth quarter was also good for the number of independent living entry fee sales. We closed on 85 sales this quarter versus 73 in the fourth quarter of 2010, producing over $13 million of gross entrance fee proceeds. We did have an abnormal spike in refunds with a higher than normal proportion of high refund contracts terminating, but still produced over $9 million of net entry fee cash flow.

In looking at pricing, one has to remove the effects of the ancillary services and Medicare skilled nursing reimbursement reductions. Without the RUGS impact, same community growth rate was approximately 2% for the fourth quarter, in line with the third quarter and nearly the same level as a year ago. That same adjusted growth rate for the first and second quarters of 2011 was approximately 2.5%. While flat, as we have said before, occupancy increases will lead any significant pricing growth.

Our Ancillary services expanded its footprint slightly and produced revenue growth of 7% for the fourth quarter over the fourth quarter of 2010. While volume increased, the impact of the rate cuts and procedural changes reduced margin and reduced ancillary services operating income contribution by 5% quarter-to-quarter.

Our hospice initiative continues to make progress. We now have four markets fully operational. Two more markets are applying to be surveyed and have four more markets targeted to begin application and survey process this year.

All in all, we produced over $104 million of EBITDA and $64.8 million of CFFO in the quarter, excluding the integration and transaction related costs largely related to Horizon Bay.

Taking a moment to reflect back on the full year, our organization has performed well. We purchased and successfully integrated the ninth largest operator, adding 30% our portfolio. As a part of the transaction, we created our first RIDEA joint venture, thus creating an alternative financing model for future growth.

The Horizon Bay acquisition was far more strategic than the numbers will ever suggest. While the fit with our portfolio and our targeted markets was great, it was also a huge test of our platform's capabilities. In a short period of time, we were able to fold the communities into our operations and integrate them into our systems. The key to the rapid integration was how we successfully merged together the cultures for the two organizations.

Additionally, during the year, we adjusted to what proved to be a very different economic scenario than we had expected going into the year. The marketplace became more challenged, and in the second quarter, we had a declining market. We became more competitive and overcame the second quarter's occupancy deficit to actually finish the year with full-year average occupancy 20 basis points ahead of prior year.

We spent the year continuing to strengthen our platform with good progress on developing an electronic medical record system, advancing our Program Max initiative, and continuing to build deeper relationships with key players in the healthcare field.

Before turning the call over to Mark with details of the quarter, let me just comment on the transactions we just announced this week. First, the refinance, while not major, was the first step in beginning to deal with our 2013 maturities. The remaining mortgage loans with 2013 maturities are secured by strong assets and you can expect us to refinance or extend these loans most likely this year. Second, the portfolio of nine assets we purchased were underperforming assets that will require more than the normal level of capital expenditures as part of our Program Max initiative to maximize their potential and greatly improve their performance. We are pleased to purchase these assets and get the flexibility to make the required investment, or divestiture if that's what's determined for a couple of them, and resolve what can be a difficult position for both owner and operator under certain lease terms. The transaction increased our owned assets and we expect the acquisition to be slightly accretive but with the opportunity for greater contribution in the future.

I'll now turn the call over to Mark to provide more details on the quarter.

Thanks Bill. Our reported CFFO in the fourth quarter was $0.47 per share. Excluding $8 million of integration and transaction related costs, our CFFO was $0.54 per share. Compared to the fourth quarter of 2010, same community revenue increased 2% with average revenue per unit up 1.7%, occupancy was up 20 basis points, and expenses increased 5.8%. Breaking the same community data down further and excluding ancillary services, our senior housing revenue grew by 1.5% with revenue per unit increasing by 1.2%.

Of course, the reduction in Medicare skilled nursing reimbursement rates impacted the fourth-quarter results and revenue growth. Adjusting the Medicare rate reduction impact out of the calculation, senior housing revenue grew by 2.1% and the average rate grew by 1.8%. Excluding ancillary services, senior housing expenses grew by 4%.

Controllable costs were largely in line with our expectations, but we had a difficult comparison against Q4 2010 where we had held expense growth an unsustainably low 70 basis points. We experienced $600,000 of added therapy costs in the quarter in our skilled nursing operations, due to CMS' elimination of group therapy. Also, we experienced a modest spike in non-controllable costs, primarily utilities, real estate taxes, and GLPL insurance reserves.

Same-community senior housing Facility Operating Income, or FOI, decreased by 3% in the fourth quarter. Adjusting for the Medicare related impacts to revenue and expense, FOI would've decreased by 1%.

As an aside, included in our operating expenses this quarter was a $2.4 million increase in bad debt reserves related to Medicare Home Health receivables, which we believe resulted from both the Medicare Home Health administrative procedural changes and our ongoing centralization of Medicare billing from the field, which disrupted our processes for a time. We believe the centralization process will pay off for us in the long run.

General and administrative expenses, excluding non-cash stock-based compensation expense and integration and transaction related costs, was approximately $28.8, million which was 3.9% as a percentage of total revenue under management, compared to $29.7 million for the fourth quarter of 2010.

Turning to the balance sheet, we continue to strengthen our financial position and improve our flexibility. We do not have any debt maturities until 2013 except for normal scheduled principal amortization. Subsequent to the end of the quarter, we refinanced a $63 million mortgage loan that was due in 2013. (technical difficulty)

(technical difficulty) -- the positive signs will simply be another blip in a recovery marked by difficult starts, or whether it marks a stronger phase of the recovery.

We were feeling encouraged a year ago and that turned out not to be sustained. Our outlook for this year, what we have based our guidance on, is that we will see continued gradual improvement in the economy. We expect to see growth in occupancy, partly from the improved environment, partly from market share, partly from reinvestment in our portfolio, and partly from our innovative work in building deeper relationships within the healthcare provider world.

We don't expect to see much pricing acceleration this year. The Medicare rate reductions will be a drag on revenue growth. We expect that the relationship between unit revenue growth and unit expense growth will remain similar to the last several years where they both were running at similar rates resulting in relatively stable markets.

We do expect to prioritize capital deployment for those areas with the highest returns with expansions, redevelopment and repositionings at the top of the list. We completed six Program Max projects in 2011, have 14 projects ongoing, and a target of 29 total projects this year. We also completed 27 EBITDA enhancing projects in 2011. As a reminder, these are less expansive projects than Program Max but enhance the communities in ways that we expect higher financial results through the occupancy and rate growth.

Mark will now provide detail on key assumptions supporting our 2012 guidance.

Thanks Bill. Our growth rates from 2011 to 2012 are obviously impacted by changes in Medicare Home Care and skilled nursing rates.

To describe the underlying growth dynamics in our business, we first need to separate out the effect of the Medicare changes on our 2011 and 2012 numbers. The first impact is the 11.3% decrease in skilled nursing rates and the elimination of group therapy. Based on the fourth quarter, it looks like we were accurate in our estimate of approximately a $20 million per-year reduction in revenue and a $3 million to $4 million increase in expenses. Both of these changes began in the fourth quarter.

The second impact is the reduction in home health rates and case mix payments, which as we have said we estimate to be $8 million to $9 million of annual revenue reduction. In total and recognizing that the change in Medicare skilled nursing rates is reflected for one quarter in 2011, we expect that the year-to-year impact on CFFO with these Medicare rate changes will be around $25 million to $26 million, or $0.20 to $0.21 per share of CFFO. The vast majority of this change comes out of the 2012 revenue line. Therefore, we begin with the perspective that the 2011 per share of CFFO we produced in 2011 becomes approximately $1.90 per share as a starting point. Our guidance for 2012 is CFFO of $2.10 to $2.20 per share, which would imply a growth rate of 11% to 16% in CFFO outside of the Medicare changes.

Looking at the drivers behind that growth, we start with revenue. In total, including the impact of the added Horizon Bay leased assets, we expect approximately 6% to 6.5% total revenue growth, with total revenue in excess of $2.4 billion, excluding entrance fee amortization and the reimbursed management costs.

As a footnote, all of the drivers that I'll talk about will include the impact of the Horizon Bay acquisition.

The center point of our guidance range reflects an increase in average occupancy in our consolidated portfolio of 100 basis points for 2012 over 2011. We expect to see the continuation of occupancy improvement across all segments, including the independent living product as we move through 2012.

While occupancy will improve, we do not expect a meaningful acceleration in rate growth over recent trends. In the aggregate, we expect total revenue per unit growth in the range of 2.5% to 3%. This includes the negative impact of the RUGS for SNF payment rates and the reduction in the home health rates, which in total diminishes rate growth by approximately 1.5%. We expect the underlying senior housing rate growth to be in the 2% to 2.5% range, impacted by a full year's operation under the RUGS for SNF payment rate reductions which diminishes growth by a little less than 1%.

We expect to show some growth in ancillary services contribution in 2012 through the ongoing expansion of the home health footprint in the Horizon Bay community rollout. As you may recall, around 10,000 of the Horizon Bay units are in markets already served by our ancillary services platform. We expect ancillary services will add another 0.5% to 1% or so to the revenue per unit growth rate. Finally, we will have management fee revenue primarily from the Horizon Bay acquisition that will be approximately $30 million for 2012, the same as the Q4 2011 run rate.

On the expense side, we expect unit cost growth to remain muted. For the senior housing business, we expect costs to increase in the 5.5% to 6% range, including the new Horizon Bay communities and the impact of increased therapy costs in our SNFs. Adding in the ancillary services business, we expect cost growth to be in the 6% to 6.5% range.

2012 looks to continue the recent experience that revenue growth and expense growth are in the same range, meaning we will see little to no margin percentage improvement excluding the management fee growth.

Running through a few other detailed assumptions related to our guidance, we expect our G&A to grow to approximately $130 million with the addition of a large managed community portfolio from Horizon Bay. This represents G&A costs at approximately 4.4% of all revenues under management. Including the managed communities, we expect this to continue to decrease as a percentage of gross revenues under management as Brookdale grows.

For our cash lease expense, the fourth-quarter run rate will be a good indicator of the 2012 run rate with the lease escalators being offset by the repurchase we just announced.

Interest expense should come in close to the Q4 run rate after adjustment for increased interest on the newly purchased assets as well as incremental interest on refinancing the 2013 maturities sometime during 2012. We assumed a little over $200 million gets refinanced in 2012, starting in Q3.

Our capital lease amortization schedule increases to an annual $12 million over the course of 2012. According to our current tax analysis, we expect to pay $1 million or so in state taxes per quarter. To digress on taxes for a moment, we now project that we won't be a cash federal taxpayer until 2015. This calculation is very sensitive to a number of items, such as the level of projected earnings, asset purchases and several other factors. Without getting into a discussion of whether or not there is a valuation impact of becoming a taxpayer, let me just say it's an area that we will continue to be focused on as we monitor our position, changes to the tax code, and other future developments.

Continuing on with other elements of our forecast cash flow, our routine maintenance CapEx, which impacts CFFO, is expected to be $35 million to $40 million for 2012. Beyond routine CapEx, we also expect to spend an additional $100 million to $105 million on other major projects. The corporate component of this CapEx is $35 million or so, and includes ISC expenditures on new clinics as we roll out the Horizon Bay communities, home health agency acquisitions, strategic project initiatives, and $10 million to $15 million on further advancing our electronic medical record system.

Having a credible EMR system is critical to our strategic position in the postacute healthcare provider world. During 2012, we will begin to roll out our EMR systems to our home health and outpatient therapy operations. We'll also prepare for rollouts in other areas of our business and continue to develop our wireless infrastructure, a critical element of EMR deployment.

The remaining $70 million to $75 million of CapEx is projected to be spent primarily on projects which create newer, enhanced economics such as major renovations and repositioning project.

In addition, during 2012, we plan to accelerate our Program Max projects to expand, redevelop and reposition our communities. As Bill said, we have 14 Program Max projects ongoing with a total of 29 projects as our target for 2012. Many of these projects are of the redevelopment/repositioning type versus expansions. Therefore, we expect to add approximately 250 incremental units to our capacity in 2012. Given the opportunity associated with repositioning our 25-year-old Retirement Center portfolio to increase market share and rate, even in this economic environment, these repositioning projects are being given first priority.

The current and target projects will require equity of approximately $60 million over the next 12 months. We expect these projects to yield over 15% on the equity invested with a one-year ramp up after project completion.

Turning to entry fee cash flow, in 2012, taking into account the environment, we are forecasting approximately $35 million of net entry fee cash flow, slightly better than 2011. Any acceleration in the home resale market could bring upside to our entry fee numbers.

In total then, we expect that adjusted EBITDA will grow in the range of 9% to 12% and CFFO dollars will be in the range of $2.10 to $2.20 per share for the year, again excluding integration costs on revenues in excess of $2.4 billion. Again, that revenue number not including reimbursed manage costs.

While not providing quarterly guidance, we do want to remind people that we have a seasonal pattern to our performance. We expect to see a similar pattern as we saw in 2011, where the first quarter of 2012 decreased by around $0.07 from the fourth quarter of the prior year because of the January 1 home health rate reductions and the seasonal softness of both occupancy and entry fee sales in Q1. Then it will build from there with operating expenses peaking seasonally in the third quarter. This guidance does not include the impact of future acquisitions that we may make. In spite of a lack of deals since mid-2011, there are a number of transactions in the market. We expect that, as the environment improves, the deal flow will become more active again. We expect to be acquisitive but have not included any senior housing acquisitions in our guidance numbers.

Bill?

We are encouraged as we start into 2012. We dug out of the occupancy decline we experienced in the first half of last year and came back strong. We successfully acquired and integrated a large number of communities and added some very good people to the organization.

Looking beyond 2012, we can't help but be quite optimistic. The underlying fundamentals that have helped this industry, whether the great recession, basic demographics, changes in morbidity and mortality driven by medical science, limited new competitive supply, will only get stronger. Yet it is the prospects internal to Brookdale that also have us excited. We have the opportunity, resources and talent to build beyond being the largest -- to place the Company in a unique position more broadly with seniors and the rest of the healthcare provider system. We have been working on a path to integrate health and wellness solutions with a broad spectrum of senior living options to create optimal aging experiences for seniors and their families.

Delivering a comprehensive suite of health and wellness solutions that optimize family well-being, offering a broad spectrum of senior living options to meet individual needs of each resident and their families, developing an industry-leading brand an operating platform, and empowering caring, compassionate associates who embody Brookdale's values and culture to deliver exceptional service everyday all are key elements of our strategy. We are on the right path. It will take innovation, hard work and good discipline.

We will add to our asset base but we will also pursue innovations like integrated electronic medical records, care transition programs, joint bids with procedures institutions for CMS grants and pilots, and use technology that will allow us to reach beyond our physical assets to serve seniors in the broader community. We see the opportunity build something special, that can serve seniors and their families in a meaningful way, while providing great opportunity for our associates and superior financial returns for our shareholders.

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

(Operator Instructions). Ryan Daniels, William Blair & Co.

Good morning. It's Kristina Blaschek for Ryan today. A quick question on the first quarter. Any big impact from the leap year? I think most costs are daily but rates are monthly, at least outside of (inaudible). Will that have any impact on CFFO or is it largely irrelevant to the outlook?

It actually does have some effect. There is one more day in the quarter, so the variable costs would be up by 1/90 or 1/91 if you compared it to the prior year. It's not a huge effect but there is some impact.

Great, that's helpful. Then I guess moving on, with the continued momentum of ACOs and other shared saving models, I'm curious if you're seeing any incremental traction with hospitals to become a more valued or preferred partner for postacute care services in your skilled nursing facilities?

We have very active dialogue and explorations and also several initiatives and pilots going on with different hospital systems. They are reaching out to us as we reach out to them, and we do and are getting traction, and we will continue to focus on that.

Great. Then one final one if I may. One of the things that you've talked about of late is that while the 80 or 85-plus population is not exactly growing at a different rate, the population is a more wealthy one than it has been in any years past, so it's maybe increasing the absorption rate in the industry. I'm curious if you're seeing signs of the starting to happen yet where close rates are high.

It's hard to get into exact measurements of that, of all of what's going on in the backdrop of the economic environment, but certainly I believe it is a factor as to why we're seeing the improvement we are seeing. But again, we are on the very early years of serving that silent generation, people from 1925 to 1945 births. And so that will maybe pick up more as we go through each of the next couple of years.

Okay, great. Thanks for all the color today.

Kevin Fischbeck, Bank of America Merrill Lynch.

This is actually Josh Marans in for Kevin. I just wanted to come back to that outlook for same-store community results for senior housing excluding the ancillary services and the changes in SNF reimbursement and group therapy. So you gave a very helpful metric in the press release on that number that senior housing facility operating income ex-those items was down about 1% in the fourth quarter. So I was just wondering if you could give us the equivalent number for 2012 I think within your guidance.

Let me be sure I understand your question. The impact on rate growth of the change in RUG rates? Is that your question?

No, the question is on same-store senior housing facility operating income growth, excluding ancillary services and excluding the cuts on the SNF side and the group therapy changes. So I think the equivalent metric that you gave in the press release was that it was down 1% in the fourth quarter.

Right.

So just wondering what that number is for 2012.

Actually, the guidance number we provided are more aggregate type numbers, but the dollar impact year-to-year, again, the impact of the RUG rates came through in the fourth quarter of 2011. Adjusting for that, the year-to-year impact is $25 million to $26 million. The lion's share of that is in the same-store portfolio.

Okay, so I guess maybe to come at it a different way, it sounds like the same-store senior housing pricing growth is for 2.5% to 3%. I think you said that includes a negative -- I'm sorry, 2% to 2.5% and I think you said that includes a 1% negative drag from the SNF cuts?

Correct. That's correct.

I think the number in the fourth quarter was up 2.1%, so ex the SNF reimbursement cuts, so is the implication that the plus 2.1% in the fourth quarter is going to go up to 3% to 3.5%?

As we go through the year. Now, some of these numbers are impacted a bit by the change in mix of our business over time, but that is correct.

Okay. Thanks. That's helpful. Then one last one, just coming back to the components of underlying free cash flow, and I think you touched on some of the buckets. I'm sorry if I missed them, but I just wanted to get a sense for underlying deployable free cash flow in 2012 that's not included in the guidance. So I get about $260 million of CFFO for 2012. Then I think you had mentioned about $35 million of corporate CapEx. If you could just give EBITDA enhancing, EBITDA enhancing cash and development cash in separate buckets, that would be helpful.

Okay, so the CFFO guidance is already inclusive of $35 million to $40 million of routine CapEx. Beyond that, we are forecasting $100 million to $105 million of major project CapEx,, which does not include Program Max, and about $60 million related to Program Max. So it's roughly $160 million to $165 million between major projects, corporate CapEx and Program Max of that CFFO number that you described.

Got it. Then how much is available on the revolver at this point after you did those nine community acquisitions recently?

Well, those were financed, so at the end of the quarter, we were about $160 million of cash in available line capacity. We are not going to quote a number for you on our line balance in the middle of a quarter, but as we go forward here, we are obviously generating cash flow, using some of the equity in that case to reacquire some assets, so there was some investment in that transaction, but it's not an enormous number.

Okay, some investment that used the revolver to fund?

Cash is fungible, right, but obviously, at that moment in time, we didn't have the cash; we used the revolver.

Okay, thank you.

Brian Sekino, Barclays Capital.

Good morning. Just a follow-up on the comments on the acquisitions you are seeing. Are you seeing kind of similar management type deals with like an overlay like Horizon Bay where you have ancillary rollout opportunity? Then also, are you also seeing acquisitions with a real estate component as well?

There is a full mix. Certainly, we look for things that fit us well. Part of that fit is where we have our licensures in place, or where it would give us critical mass on the market, that would make sense to pursue licensure. So there is a fair mix of different situations in the opportunity set.

Okay. Then on the HCP call, they talked about some new development opportunities with you guys. I wanted to know if you could provide some details on those projects and maybe some expected completion times and impacts.

There is some obvious confusion that I guess came out of our interpretation of what was apparently said. But we are not the developer of those projects. Those are projects being developed by a party that -- an experienced party that HCP had [underwritten], looked at, liked and committed to financing. They asked us to provide the management for those and the management services, and we have a good relationship there. Given what might be the future optionality factors, we were pleased to agree to provide the services. The first of those will open here in the second quarter. Others I think are just now beginning to get started, so you've got anywhere from a 15 to 18 month period for some of the balance of that.

Okay, thanks a lot.

Sloan Bohlen, Goldman Sachs.

Good morning guys. I have a question on the CapEx. For the $60 million of equity investment I think, Mark, you had mentioned that a little less of it is for expansions this year. Can you maybe talk a little bit, one, about how -- what are the components that are going to make up that 15% return? Is it in higher rents or higher rates that you guys can realize after that CapEx is spent? Then second to that, is there any income lost over the period that you're renovating those older assets?

It is generally -- the return is generally a combination of increased rate growth and improved occupancy, although the other factor in some of these repositionings is that units are essentially converted to higher revenue units, so independent living units converted to assisted or memory care for example. So both of those tend to drive the -- or all three of those tend to drive the revenue numbers up a little bit. On occasion, when the repositionings are done, units come out of service. I wouldn't say that's common, but it does happen.

(multiple speakers) in quite a few cases, we have capacity that comes out. We don't reduce our capacity. That obviously affects a little bit of our occupancy reporting. Actually though, we experienced that as that activity goes on, it often increases the attraction and interest even during the construction period. We are able to hold -- and not to have too much of a loss, so it is -- all of that is baked into our numbers.

Okay. The 15% return, I know you quoted a similar type of return number. This is maybe more towards expanding into some of the ancillary services. But given the rate cuts, and I think you talked about this at your investor day a little bit, but can you maybe talk about what the rate cuts, both for skilled nursing and the home health, have done to what your return expectations are on that income producing CapEx?

Those returns that we are reflecting and talking about and experiencing and (inaudible) doing are not -- we are not pulling into that, into the ancillary service income elements as part of that.

On the skilled nursing component, there are some of these expansion repositionings that does get into reconfiguring skilled nursing, and sometimes in expansions adding that skilled nursing. That does, in terms of those, may drop the expected returns by 1% to 2% based upon the outlook and reduced rates. But those -- of those types, those have been well above the 15% and those reductions would still leave it above that level in terms of the historic experience we've had on that type of asset.

That's good color. Then, maybe Bill, if you could, maybe just provide an update as to what the -- prospectively what the different scenarios are for future rate cuts or what's being discussed today?

Well, it's a good bit of uncertainty. There is activity on the Hill, but I'm not sure what will necessarily come out of that. I think right now in terms of what might happen in the fourth quarter, which is the usual time period for adjustments in the skilled nursing rates, I think the general view right now is at least we would hear is most likely not much of the change. So there is still uncertainty to it.

We do anticipate there might be some minor reductions in home health, next year into 2013. At least we need to make sure we are thinking and preparing ourselves for that, though that is also uncertain at this point.

Thank you guys.

Daniel Bernstein, Stifel Nicolaus.

I wanted to ask a few extra questions on the Program Max. Are you accelerating Program Max from redevelopments versus expansions because of competitive pressures or other facilities in your geographies doing these redevelopments as well, or is there another reason why you're accelerating the redevelopments? In particular, are you seeing -- are you accelerating it because you see an average entrance age that is going up and you need to have higher acuity units in your facilities versus what you had before with [IAI]?

The real view and perspective and need has not changed in the basis of -- as we have planned and articulated over several years, the acceleration is coming from solving some of the constraint issues that we have of lease structure, terms, elements or financing elements or other approval processes. It's been a little bit frustrating in terms of some of those constraints and getting through some of those as fast as we had anticipated. We are now beginning to get through that and start lengthening our stride.

I think it is essential that we continue to put in the absolute maximum competitive position each of our assets, and there's just a lot of opportunity in that. Yes, there are other folks within our field, and I think the ones that are more experienced in the basis quite well know that they need to -- there is significant return opportunity in reinvesting in their assets. But acceleration we refer to as simply our being able to get on and execute on a more consistent pace that which we have laid out here for a couple of years.

I take it that you would want to do some more lease buyouts so you can control of the assets and (multiple speakers)

We seem to get -- it's a complex issue, and it's a challenge within the lease terms, the timing of it and everything else on both sides. We are working with our REIT partners and we appreciate the work and cooperation that they are giving us. It is a little bit more complicated than may have been first appreciated, and we're making good progress. So there may be occasions where it does result in that, but in any other occasions the REITs are very willing to fund it. It's the issues of what are the terms and the longer-term economic effects of that? We continue to work to get alignment on that, and we appreciate the cooperation we're getting on that.

Then turning to the acquisition side, what are you seeing in terms of your pipeline? Are you seeing a lot of one-off acquisitions, or are we seeing any larger portfolios, $50 million, $100 million, $200 million that are going to be available to you in 2012? Maybe also is there any kind of leaning towards IL or AL were even perhaps CCRCs that you see as an opportunity?

It covers the whole spectrum. Everything you touched on is we are seeing elements of it.

Okay. Then on rate growth, at what level of occupancy or what kind of environment do you see (technical difficulty) accelerating from (technical difficulty)? Do you need to hit 90% occupancy before you really start get back to 4% or 5% rate growth that you had done in the past?

It has more to do with the dynamic of the pace of the [occupancy] and strength and (technical difficulty) market (technical difficulty) portfolio is in that 95% plus. That's where you start (technical difficulty) pricing power still within this kind of (technical difficulty) economic environment that we're in. But as we get more and more buildings on that basis, we have -- we will get more into that area where we can move (technical difficulty) better.

One more quick question. In terms of your occupancy, you did really well in independent living and entrance fee this quarter. Are you seeing any pickup in particular geography and, say, particularly like Florida, where you have had a lot of housing issues probably impacting some of your facilities there. So in the coastal markets, are you seeing a pick-up in your independent living and entrance fee property occupancy as well?

We are seeing a little bit. Certainly the coastal markets, as far as California and Florida, have been certainly the more challenging, and we are encouraged.

Thank you. I'll hop off.

Rob Mains, Morgan Keegan.

Yes, thanks. Just a couple of quick questions. First of all, when you talked about the Medicare hits that you're absorbing, in the past, you've talked about how you don't really have all the levers at your disposal that a dedicated nursing home, freestanding nursing home operator would in terms of cost offset. Do I surmise from what you are saying on the RUGS cuts that you're not expecting a lot in the way of cost offsets that the topline drops to the pretax line, or in your case kind of the net line?

The short answer is yes. We are seeking to improve some of the productivity activities around skilled nursing in our business, but in general we are not separately forecasting responses related to those rate changes as others may be doing. It's less than 10% of the revenue in our business, so it's a different dynamic.

Right, okay. Then I've got kind of a hairsplitting question on what you said about what you're expecting for occupancy. This year, you added a lot of residents obviously in the second half of the year, such that the fourth-quarter occupancy level is well above where the full year is. When you are saying that 100 basis points of occupancy, would that be that the full-year occupancy for 2012 would be 88.3%, or that by the end of 2012 you be at 88.8%?

I think the former. It's the full-year average over the full-year average.

Okay, that's helpful. That's all I had. Thanks.

At this time, there are no further questions.

With that, we want to thank you for your participation. Management will be here today for any follow-up questions. Just give us a call. Thanks. We appreciate it.

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