Brookdale Senior Living Inc (BKD) 2012 Q3 法說會逐字稿

Good morning. My name is Marley and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living third 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).

I would now like to turn the call over to Ross Roadman, Senior Vice President, Investor Relations. Sir, you may begin your conference.

Thank you, Marley and good evening, everyone. I'd like to welcome all of you to the third quarter 2012 earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff, our Chief Executive Officer, Mark Ohlendorf, our Co-president and Chief Financial Officer, and Andy Smith, our Executive Vice President and General Counsel. As Marley mentioned, this call is being recorded. A replay will be available through November 9, and the details on how to access that replay are in the earnings release. This call will also be available via webcast on our web site for three months following the call.

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

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

Good morning, and thanks to all for joining our call this morning.

First, let me begin by commenting on Hurricane Sandy. We had 52 communities in the path of the storm that were affected. Numerous communities lost power, none for any extended period of time. Our asset management team did a great job of preparing for the storm, including having staged backup generators for nearly every community in Sandy's path. Eleven communities did operate using on-site or backup generators for a long power outage. As of last night, only three remained on generators. We did evacuate one community, the Hallmark at Battery Park. It did not flood nor did it ever lose power. And by Tuesday evening, residents were returning from families in those locations where we took them for safety.

We did have storm damage in some of our communities, but nothing major. Now I want to express our thanks to our associates who did a tremendous job of caring for our residents and ensuring their safety and comfort. I also wanted to express my thanks to our residents and their families for their cooperation and understanding. And finally I want to express our concern to all those affected by the storm and wishes for a rapid recovery.

Last night, we announced our operating results for the third quarter. Excluding certain items, our cash from facility operations, CFFO, for the quarter totaled $0.54 per share. We were pleased with our overall performance in the third quarter. In general, we saw a continuation of trends that we have been reporting on in recent quarters. That is stable growth in occupancy, improvement in entry-fee sales, and continued solid average revenue rate growth.

During the third quarter, in spite of the continuing global macroeconomic uncertainty, some of the domestic US economic trends continued to show support -- there are signs of positive support for our industry's fundamentals. The increasing level of existing home sales, although still below what Congress considered healthy, increasing home prices, improving consumer sentiment, and if it continues, improving employment, all contribute to the demand dynamics of need, affordability, and willingness to make a change. It remains a local market business and we have seen some markets -- Florida, for example -- rebounding faster than others, like California.

As in the first half of the year, we saw a good improvement in the third quarter in our independent living occupancy. While rental IO was solid, the entry-fee independent living sales again had record results. We continue to strengthen our sales and marketing efforts to take full advantage of more favorable conditions. We will make the most of any opportunity provided by an improving market, as well as build our market share.

Our success is coming not only from pursuing new leads, but by diligently reengaging the prospects residing in our large lead data base and testing their willingness or need to become a resident. Cultivating those relationships with prospects and their adult children is what always allows us to be part of the decision making process when they determine they no longer want to or can delay the decision to move in. These efforts are bearing fruit.

We increased third quarter average occupancy by 60 basis points for the consolidated portfolio over the prior year, reflecting a year over year 70 basis point increase in two of our segments, retirement centers and assisted living. Sequentially, our overall occupancy increased 30 basis points from the second quarter. Retirement centers were up 30 basis points, assisted living up 50 basis points, and CCRCs were flat due to soft skilled nursing census.

Looking across levels of care versus segments, independent living was up 20 basis points, assisted living up 40 basis points, memory care up 30 basis points, and skilled nursing down 30 basis points for the second quarter. The third quarter is typically a seasonally lower census quarter for skilled nursing, though this was a bit softer than normal. You have seen lower occupancies recorded by skilled operators and softer hospital volumes. The number of our 551 consolidated communities that were at 95% or greater occupancy, improved from 186 in June, to 208 in September.

The big story for Q3 was the continuing improvement in our independent living entry-fee sales. Our 140 sales, with $19.1 million of net entry-fee cash flow, were record highs, spurred by the improving existing home sales in our local markets and extraordinary execution by our sales staff. We are seeing a renewed interest by prospects in these communities. The primary driver is the confidence that if they can sell their home, and that will happen at a reasonable price, they can make the decision.

One should keep in mind that the refunds are driven predominantly by current attrition. Of our 650 vacant entry-fee units, only 10% have a refund associated with them, so as we eat into the unsold inventory, sales goes up without proportionate increase in refunds.

While we saw solid sales across the portfolio, Freedom Point in Florida now stands at 98% occupancy, and is joined by two other entry-fee communities that now have reached the mid-90%s occupancy. While we are very focused on accelerating occupancy, we have also been able to maintain fairly consistent pricing growth. Pricing remains competitive, however. In many of our markets, the level of promotional activity remains about the same. During the quarter our same-community average monthly revenue per unit, excluding skilled nursing, ISC, increased 2.2% over the prior year.

Our largest challenge in the third quarter was our ancillary services business. While revenue grew by 10.7%, our margin declined. The revenue growth was primarily related to the continued rollout of ancillary services to the Horizon Bay communities, which has gone very well. We are now generating revenue at communities representing 10,200 former Horizon Bay units for home health and almost 11,200 units for outpatient therapy.

Two items negatively affected our ancillary service margins -- first, the rate reductions that have occurred over the last several quarters. The increased volume is coming at a lower rate. Second, as I will speak to later, our September volume and labor productivity were affected by a recent change enacted by Congress related to how CMS is processing the provision of services to a beneficiary who has reached a specific amount, approximately double the current therapy cap. To say the least, that process has gotten off to a very messy start.

Thanks again to our management and community teams for a solid performance for the quarter, and with that let me ask you Mark and Andy to provide additional comments about the quarter and our focus going forward.

Thanks, Bill. Let me begin by discussing the performance of our six operating segments.

First, the Retirement Centers, which showed an occupancy increase of 70 basis points since the third quarter of last year, and 30 basis points sequentially over the second quarter of 2012, reached 89.1% occupancy. Average monthly revenue per unit increased by 2.8% over the prior year's third quarter. This segment has sown good progress since the beginning of last year.

The Assisted Living segment also increased occupancy by 70 basis points, versus last year's third quarter, and by 50 basis points sequentially over the second quarter of 2012, to also hit 89.1% occupancy. Revenue per unit increased by 2.8%. We were pleased with the performance of this segment.

The rental CRTC segment, composed of rental campuses as well as some skilled nursing communities that are part of our market continuum, saw occupancy decrease 50 basis points from prior year, but remained flat sequentially from the second quarter of 2012. The softness in this segment related solely to our skilled nursing census.

Occupancy in the entry-fee CTRC segment, which includes our 14 entry-fee campuses, was up 120 basis points from the third quarter of 2011, and was flat sequentially. Of course, given the skilled nursing concentration, the comparative financial performance of the two CTRC segments was affected by the October 1, 2011, Medicare skilled nursing RUG IV rate reductions and increased therapy costs.

Our fifth segment, ISC, is the ancillary services business. ISC's revenue grew by 10.7% versus last year's third quarter, due to an increase in service volume, but ISC's operating income dropped by 17.2%, due in large part to the Medicare rate decreases, increased labor costs, transitional costs resulting from our business off of centralization process, and incrementally higher sales and marketing costs. As Bill mentioned earlier, we were affected by the outpatient therapy exception process change, and estimate that the operating income was affected by approximately $500,000 in the third quarter.

Our final segment, management services, saw occupancy increase 30 basis points sequentially from the second quarter. We added one new management contract to our managed portfolio during the quarter.

Looking at our same community data, beginning with senior housing, for the quarter ended September 30, 2012, compared to the quarter ended September 30, 2011, our senior housing same communities produced a 2% increase in revenue, due to a 1.3% increase in revenue per unit, and a 60 basis point improvement in occupancy. Senior housing same community expenses grew by 3.2%, and NOI was essentially flat between the third quarters.

Included in these expenses were several items that we'd like to point out. First, we had $1.9 million of group medical insurance program cost increases over the third quarter of 2011, because of an unusual number of large claims this year. Second, we incurred a $600,000 increase in sales commissions and bonuses, related to the gross entry-fee sale cash flow of nearly $23 million in the quarter, resulting in the net entry-fee cash flow of $19.1 million. While these costs show up as current expense, the benefit of the related entry-fee cash flow is minimally reflected in revenue under the GAAP amortization conventions.

Excluding the group medical insurance cost increase and the increased sales commissions in the entry-fee business, same-store expenses would have increased by 2.5%, rather than the reported 3.2%. Bottom line is that expense growth continues to largely parallel revenue growth. Comparative senior housing same-community data was also negatively impacted by RUG IV changes in Medicare and skilled nursing rates and related expenses October 1 of 2011. This is the last quarter we'll have to point this out, but when we excluded the RUG IV SNF reimbursement reductions and related expense changes from the senior housing same-store comps, revenue increased 3% with revenue per unit growing by 2.2%, expenses growing by 3%, and operating income growing by 2.8%.

Excluding non-cash stock-based compensation expense, and integration, transaction-related and EMR rollout costs, general and administrative expenses for the quarter were approximately $32.5 million, which was 4.3% as a percentage of total revenue under management, compared to $28 million for the third quarter of 2011, also 4.3% as a percentage of total revenue under management. Much of the increase in absolute overhead dollars is, of course, related to the addition of the Horizon Bay communities to Brookdale's operations.

Not included in the G&A that I just discussed, nor in our adjusted CFFO calculation are the integration, transaction and EMR rollout costs this quarter that totaled $4.6 million. Remember that a portion of those costs are related to the integration of Horizon Bay, including some costs of rolling out ISC and the remainder relates primarily to the ongoing effort of implementing electronic medical records through several areas of our business. As we have described, we expect to incur $4 million to $5 million of these costs again in the fourth quarter.

I'd now like to turn the call over to Andy Smith for some comments regarding capital deployment and capital structure.

Thanks, Mark.

Consistent with our continuing improvement and operating results, our balance sheet continues to be in a strong position. As we have discussed previously, our 2013 debt maturities, without contractual extension rights, total approximately $300 million. We are actively engaged with the lenders on refinancing these loans, and have a plan in place to effect a series of refinancings over the next year. We expect to begin to execute on that plan before the end of 2012.

Looking at capital deployment, we continue to prioritize those areas with the highest return. As such, during the quarter we invested more than $47 million into our existing portfolio. Our spending in Q3 for maintenance CapEx, which we include in our CFFO calculation, was $11.5 million. We also spent $27.6 million on EBITDA-enhancing CapEx and major projects during the last quarter. These projects, which are less expansive than our Program Max projects, are integral to our strategy of building occupancy. To that end, we have increased spending on upgrades to apartments and common area renovations.

We spent $7.9 million of net cash on Program Max projects during the quarter. Historically, Program Max projects have shown the highest returns among our capital deployment options. Program Max encompasses expansions, redevelopment and repositionings of our current communities. We completed 13 Program Max projects in 2011 and 2012, and these projects are yielding returns in excess of 15%. The 13 projects were a mix of repositionings, unit conversions and expansions, resulting in 56 net new units. The product changes from these projects reflect a reflection -- a reduction of 83 independent living units and 26 assisted living units, with the addition of 165 memory care units. We currently have 19 additional Program Max projects that have been internally approved. Fourteen of these are under construction, which will add 400 new units, primarily in memory care, over roughly the next year with project costs of $121 million, requiring Brookdale equity of approximately $55 million. We also continue to work with lessors and third-party owners to commence additional Program Max projects.

We spent $6.8 million in the third quarter on corporate CapEx, primarily on our systems and ISC. As to acquisitions, we will continue to be very disciplined. We have reflected for the first time in our supplemental data package the general financial characteristics of communities where we have bargain purchase options to acquire leased assets. We have given notice of our intent to exercise purchase options on two sets of currently leased assets, totaling 11 communities. We expect to complete those transactions near the end of this year. We expect the purchase price for those assets to be in the range of $150 million to $160 million, reacquiring Brookdale equity of $25 million to $30 million. Buying back these assets on favorable terms will be accretive be to us and further develop our owned asset base.

Finally, as we have said before, we are constantly reviewing our capital structure strategies. This analysis remains a high priority of our management team and our Board, and we are spending a significant amount of time, energy and money to make sure that we are maximizing value for all of our shareholders.

I'll now turn it back to Bill for closing comments.

Thanks, Andy.

With the improvements we've seen so far this year, we remain encouraged about the outlook for the remainder of the year and into 2013. We continue to focus on our core operations by executing our plan to grow occupancy, reduce costs and deliver strong operating cash flows to support future growth. We remain encouraged by what we're seeing in our markets.

The next quarter will not be without its pushes and pulls, however. While still a very competitive pricing environment in general, we expect to see continued momentum in occupancy growth. We also have strong expectations for entry-fee independent living unit sales. The entry-fee sales process, like many big-ticket item purchases, takes extended periods of time and can be somewhat susceptible to big macroeconomic traumas, and, therefore, a little difficult to forecast. Also keep in mind that we now have three communities with less available inventory.

As Mark described, we did have a $1.9 million hit to our medical benefits cost this quarter, due to high costs cases and higher utilization, and quite honestly, it appears that we'll see a similar hit in the fourth quarter. Further, we expect our Medicare outpatient therapy business to remain under some degree of pressure. While outpatient therapy only contributes $5 million in operating income per quarter, it is an element of our growth strategy that will be disrupted in the short-term, as I mentioned earlier. We expect our ISE operating income to be sequentially flat in the fourth quarter as volume increases in home health are offset by foregone revenue, lower labor productivity, and outpatient therapy, as we work to adjust our cost structure.

Congress enacted new rules October 1, requiring manual claim review of outpatient claims, if the medical care beneficiary uses more than a prescribed amount. That was approximately double the current therapy caps for the therapy services in a given calendar year. CMS also issued guidance regarding the process for obtaining exceptions to perform services for beneficiaries when they exceed this annual utilization level. This entire claim review and exception process is new and frankly very messy. We have already seen volumes decrease and resulting therapist productivity decline as seniors defer services in the face of confusing messages from CMS. We have also experienced intermediaries immediately bouncing back claims as they try to adjust to the new process. It will take some time for beneficiaries and intermediaries to adjust to these new processes.

And at the same time, last week's class action lawsuits settlement in Vermont appears to clarify the standard of medical necessity -- one requiring patient improvement, one of maintaining the patient's condition or preventing deterioration. This is potentially very significant and we believe the correct thing to do. All of our Medicare-related services, skilled rehab, outpatient therapy, home health, are on the right side of public policy in that they benefit the patient, are a medical necessity, and are the most cost effective means for serving the beneficiary. It can be frustrating to see seniors struggle with medical issues and to know firsthand the benefit of providing these services and not being able to fully provide them.

It remains unclear how this change in defining medical necessity will become operational. But as the only senior housing operator with a significant platform for providing these services, this could become a very positive development for us, and our residents.

Overall, we are encouraged by the improvements in the business, tempered by caution regarding selected expenses and outpatient therapy. While we do not give specific quarterly guidance, we remain comfortable with our previous quarterly CFFO guidance range, with our current expectations somewhere in the middle of the range.

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

(Operator Instructions). Your first question comes from the line of Ryan Daniels.

Good morning, guys. Thanks for taking my question for all the details. I guess the first question I had was on the pricing outlook. You mentioned that it remains fairly competitive. But on the other hand, I think you said you have over 200 facilities now approaching over 95% occupancy, which I would assume would give you a little bit more pricing power, especially for street rents in those facilities. So, you know, without giving 2013 guidance, can you talk a little bit about what your overall expectations for pricing might look like or use in incentives might look like over the coming three, four quarters?

Sure. I think if you looked at the -- if you look back over the last several quarters at our core private-pay same-store rate results, you've seen a slight acceleration in the same-store rate growth. And now we're in the low to mid-twos. We are continuing our planning process for next year. But I think our initial sense is we may well see some rate growth that moves up a little bit from where we're at. Again we continue to be in an environment right now economically where cost inflation is relatively low. So the absolute level that our rate growth will get to will be lower than what you would have seen five years ago or six years ago.

But I think you're right. I think our sense is we'll continue to make gradual process on rate growth over the next year.

Okay. That's helpful color. Maybe one on the SNF census. I understand there's clearly been a lot of weakness in hospitals and that's probably spilling down to you.

And two things -- I guess, one, a lot of noise on the Medicare racks, looking at how they treat cases, whether it's in-patient or observational and whether you qualify for SNF coverage upon discharge. So I'm curious if that, one, is having an impact. Then number two, can you maybe talk about some of the initiatives you're putting in place? I think you've been able to show better quality, more care continuation, lower readmission, things like that to make you a preferred provider, at least over the next several years, it's going to be of increasing importance. So maybe a little color on your marketing initiative there.

Taking that latter first. We are making significant progress in our -- building our strategic relationships, being able to demonstrate to hospital and health care systems of our ability to significantly reduce the hospital readmissions, and we're going to start providing them quality measures. Those factors are certainly gaining some strength in position in our markets and it's going to be critical as the whole market competes more for market share. And that is a strong element in that. And I think we are -- continue to be well positioned to compete effectively in that arena.

The issue of hospital holds versus readmission clearly is a factor that has affected the third quarter. It is yet to be seen how much that practice grows. I think you even saw some of the hospitals reporting some actual increase in elements and actually giving some data around that. We are -- again the third quarter is seasonally a softer quarter. We are seeing adjustments in the fourth quarter. Again it will be very competitive and the organizations that are well focused on being able to deliver the quality outcomes and collaborate effectively with the hospital systems will be the big winners and we feel like -- the strategies we're focused on are going to serve us well in that regard.

Okay. Maybe a final one. Just on all the noise going on with the therapy and the new Medicare regs and reimbursements. What do you guys do in the near term to get a better handle on the margins, given these uncertainties and the changes in labor productivity, balancing that against the lawsuit that was settled and the potential for that to open up a lot more cases? Is it just kind of, you know, hold tight for now and see how everything pans out? Or are you making some adjustments there? Thanks.

Well, first of all we are certainly making adjustments both in the communications and helping clarify matters being more -- doing everything we can to be more effective and timely in the process of the reviews and the extension requests. There is just a lot of confusion that erupted in terms of the form of the CMS letter that went out to beneficiaries and all. And I think again good communications with that, with the beneficiaries from our residents with their families, with their doctors, certainly will help correct some of that.

But it will be a wait and see. It's unclear as to exactly how that new lawsuit -- or the settlement that's proposed, if and when accepted by the court, exactly how that becomes operational. And we wouldn't think that it would be anything that would particularly assist this fourth quarter. But it's hard to not to believe that it will be a definite benefit as we get back into the new year.

Okay. Great. Thanks for all the color, guys.

Your next question comes from the line of Darren Lehrich.

Thanks. Good morning, everybody. So, we've seen some pretty good sequential gains in occupancy over the course of this year. I guess I'm just wondering how you guys are thinking about that trend continuing in the fourth quarter, just how much visibility do you have on, you know, move-ins and some of the dynamics that you're seeing in your markets on that front.

We have seen the momentum continue in October. Again the basic fundamentals, consumer confidence, confidence around home resales, those elements continue to appear to be effective. We also think we're continuing to improve our lead generation and conversions, and that process. So we at this point just -- as in our prepared remarks, we expect continued momentum in the fourth quarter.

That's helpful. Just looking at the supplementals, it looks like the proceeds from the My Choice program and your entry fees was pretty stable with what we saw in the first half. I guess just want to confirm the entry-fee numbers are really more about market demand, versus a change in your pricing model. Is that the right way to be looking at this? Are there any other changes that you've made to drive that specific result?

Absolutely. It's tied to the fact of consumers' confidences so they can sell their homes, and the fact that -- and the result that as they are putting them on the market, they are selling, and selling fairly quickly. That's the big factor. The other factor is we have a very large database for people who have much identified business as an option that they want to take and avail themselves of at some point in time. A lot is coming out of that existing database, as well as all of our efforts to add additional prospects to that. And so the whole level of activity there has improved. And it's pretty well across all of our markets.

Yes. It's a good result there.

On the expense side, I just wanted to ask -- you obviously have been talking about your health insurance claims throughout the whole year. Is there anything differently that you're thinking about in terms of the benefit design for next year? And maybe just some commentary on how you think you might be able to get a better handle on the growth rate of those expenses over the course of the next year or so.

Oh, sure. Well obviously designing group medical plans today is very different than it was five years ago or ten years ago because we are right in the middle of, you know, the biggest reform in the way our health insurance system works, that we've ever seen. So there's some fairly fundamental changes occurring.

Now we started in a process here at Brookdale three, four years ago of emphasizing wellness and preventative services in a very significant way in our plans. So as we look at the absolute level of unit cost inflation in our medical plans for the last number of years, we've actually had a very, very good experience, where you might have seen general market inflation for health care costs and health insurance up in the high single digits, 7%, 8%, 9%, we were pretty consistently running 2%, 3% under those kinds of levels. So on a cumulative basis here over a number of years, our plans have been very cost effective.

We are experiencing a year where we seem to be incurring an unusual number of relatively large claims. Not dozens and dozens of those, but enough of them that it does impact the cost. So our plans as we go forward next year, are really more of the same that we've been up to, with an eye towards having our plans appropriately designed and positioned for 2014, where we would see potentially you know, very, very significant changes in the insurance market overall.

Okay. That's real helpful. All right. Thanks. I'll jump out of the queue.

Your next question comes from the line of Frank Morgan.

Good morning. I think you mentioned Florida in the initial comments. But I was just hopeful that you could provide a little geographic update, maybe where you're seeing particular areas of strength, be it on the occupancy side or in markets, where perhaps it's not as competitive on the pricing or the incentive side.

Certainly we have seen some gaining and strengthening in Florida. And it's not across all markets in Florida, but most of the markets that we're in in Florida we've seen improvement. We still have a little bit of weakness in the northeast, north central areas. We still have a little bit of weakness in California. Most of our other markets -- Chicago is soft, but it looks like we're beginning to gain some traction there. And within some markets, of course, it's in what particular suburb of some city, we see some variation. But overall we're encouraged of seeing some fundamental improvements in fundamentals in almost every market we're in. I guess there's a few pockets in Indiana that might be an exception. But it's fairly broad in terms of the improvements we're seeing.

I guess with -- based on past experiences with the occupancy improvement trends that you're seeing, I guess you're seeing a little bit of movement in the rate growth. But based on history, is there sort of a time lag that you have seen in the past to say after X number of quarters if occupancies continue up, you may see a little bit of improvement in the rate growth? Is there a rule of thumb that you've seen based on history?

You have several factors to have to crank into the equation. The lower inflation rate, which certainly has an effect on existing resident increases -- we have gone through a period of time where we did get into some negative mark to market elements that it takes a while, and only through attrition do you get that mark to market adjustment. And it will probably be into this next year before we start seeing the positive mark to market adjustment having much of any effect. And it is a matter of getting your occupancies up into those 90% areas to start gaining on it. So it's -- you mix all those factors together, I think we're going to see much, as what Mark described, as, again slow, but still some improvement in -- over the overall average rates.

Okay. And just a question on the resale activity -- is there any belief that either kind of the ratio of sales to refunds would improve? I think you made a comment about a lot of those units were --

The refunds are predominantly driven by your current attrition, current contracts, people who -- expiring -- their refunds are triggered on that event more than the resale. We have only about 10% of the unsold inventory that has, that is contingent upon the resale for those refunds. And we've suffered the fact that we had to give refunds without sales over the past years, three or four years. And we're now into that back on the reverse side of that, where we'll be affecting sales, where it doesn't specifically drive up an additional refund. So you'll see refund levels stay about where they are, up a little bit as we sell some of those and we certainly can be trying to make sure we sell those as well as ones without refunds. But again it's only 10% of the unsold inventory that has refund attachments associated with them.

Yes. I'll ask one more and then hop off. You made a comment about less inventory at one point. Was that in your prepared remarks? Did that relate to inventory of --

There's three communities that are now into the mid-90s or above. And those are the stronger communities and they contributed nicely in the second, third quarter. As they have less inventory there, there's more sales have to come out of the other communities. And we are seeing improvement in the other areas. It's just as we go along, we won't -- I think we'll maintain a fair momentum here. But at some point there will be a factor -- where are those vacant units concentrated? But that's out there a ways.

So as far as trying to project an increasing amount of sales above what we are here, you have some effect of what the inventory mix is.

Okay. But I guess as I just kind of summarize up what I'm hearing from you -- better occupancies, rate growth okay, generally good resale activity going forward. And on the ancillary service side, maybe some pluses and minuses, but that business will stabilize over the next several quarters and still be an important part of your growth story long-term. Is there anything else I'm missing?

I think you've got it.

Okay. Thanks.

Your next question comes from the line of Nick Yulico.

Oh, hey, thanks. Appreciate all the additional info on the leased properties this quarter. Just wanted to ask a bit about that, make sure I'm looking at things right. If I'm looking at page six of the supplemental, the segment operating income that you give for the leased properties and the different purchase options. That's the NOI before lease expense, is that right?

That's right. These are NOI gross margin numbers, correct.

Okay. And if I -- I think you said earlier that you had about 11 communities that at the end of the year on the -- I think they were in the bargain purchase option bucket that you were going to exercise a purchase option. Did I hear that right? That it was $150 million to $160 million is the sort of dollar figure with $25 million to $30 million being your equity piece?

I think that's right, yes.

So that means then is the rest of that, the $125 million to $130 million, would be funded by debt?

Yes, correct.

Okay. Is it possible to get the LTV on that debt?

Probably not as we sit here. As a general rule, when we're doing secured financings, we're financing at 60% to 70% --

Right. This will be consistent with that.

Okay. Okay. Great. So, all right. I'm just trying to obviously get at it. There's -- the overall properties are valued higher on an appraisable basis than the amount that you guys are paying to buy out the lease stream?

That's right. Obviously when we refer to something as a bargain purchase option, that's a little bit of a term of art from an accounting standpoint. But it generally suggests that our purchase option is at a price that's lower than what you would reasonably consider to be the market value.

Okay. And then just one other one on that transaction you guys are going to do. Is it possible to get the lease expense associated with that, those communities?

It is possible. I'm not sure we're prepared to disclose it. But I think -- how should we think about this? By and large, we're going to have -- this is going to be hard to back into a number. By and large we're going to have these options on leases that have been around for some period of time. So the lease rates will have inflated up to a, some level that's probably -- I don't even know what they would be, 10%, 11%, 12%. I don't have the exact math in front me. But it would be that order of magnitude I would expect.

Sorry. What was the 10% to 11%?

The going-in lease rates for the properties were probably 8%, 8.5%, somewhere in that range. They would have inflated over time. So I'm guessing that those effective lease rates now are 10% to 12%.

Okay. That's helpful. Thanks.

Just one other question on the lease properties with the purchase options -- is it fair to think about these different buckets having similar coverage, meaning that the lease, if we were to sort of divide up your overall lease expense into these different leased property buckets, that that division should be similar to the NOI breakdown between those segments at this point?

I would say that's not the case that that would be true. As a general rule, you're as familiar with the evolution of accounting and the accounting issues around leases and purchase options as I am probably. But as a general rule, a lease that you see that has no purchase option at all is probably one that's been entered into more recently, than one that would have had some kind of purchase option, even if it's a fair market value option.

All right. Great. Thanks. I'll follow-up offline. Thanks for the help.

Your final question comes from the line of Daniel Bernstein.

Hi, good morning. I just wanted to go a little bit further into the lease buyouts in terms of how are you looking at that in terms of an overall strategy of ownership? I mean, should -- not just from the bargain purchase option bucket, but will you consider buying out additional leases from the fair market value purchase option bucket and even properties that don't have purchase options, where it looks like the occupancy is actually lower than your overall occupancy and might have some upside?

As a general rule, we would prefer to buy our leased properties back. And there are a variety of reasons for that. We would prefer to own our assets where we can. And so the answer to your question is yes. We would -- on the fair market value options, we would plan on exercising those, if for no other reason as Mark just mentioned, the lease rate on those will be in the 10% or 12% range and we can finance the acquisition at a much lower rate. So we have every intention of exercising those options as they ripen. And we are constantly in dialogue with the -- our various landlords where we can to actually acquire assets where for whatever reason, they may wish to exit their investment in them. And we would like to buy them back, even if we don't have an option.

Okay. And so you have 11 of the 18 with bargain purchase options you're acquiring. And you have the other seven. When are those other bargain purchase options exercisable?

I couldn't tell you. Further down the road, I would say over the next several years.

Okay. Same goes for the fair market ones? Are there any, say, in the next 12 or 24 months, you're going to be able to exercise?

We have a couple of bargain purchase options that we can exercise beginning roughly a year from now. And on our fair market value options, they're going to be out as a general rule a little bit longer than that. One thing I should also add, Daniel, another reason that we would like to buy these assets back, is that it facilitates our program max opportunities on those assets.

You mean the landlords have been a little bit resistant for you to actually change the facilities in some way, is that the issue there?

I wouldn't say that. I think they all actually are very enthusiastic and recognize the opportunities to come from Program Max. But it gives us more flexibility if we actually own the asset outright. But I don't want to at all leave you with the impression that our landlords have been -- they're very enthusiastic.

Okay.

About investing money for Program Max-type alternatives.

Okay. Okay. And the other question I have, and I came on this call a smidgen late, so I don't know if you addressed the CEO search and timing of that. Is that still three to six months? Is there anything new that you may have mentioned before? I apologize again if you've spoken about that.

As we shared in our second quarter call, last quarter, there's a fine process to that that has been worked on over time. And that process is proceeding. The Board is focused on that. That is proceeding.

Okay.

There's no change there. And nothing should have been interpreted by the issues of timeframes here.

Okay. And again I apologize for this question as well if it was already addressed. The $11 million of maintenance CapEx and I believe CapEx overall has kind of bumped up. And so is the $11 million maintenance CapEx number, is that something that will be a good run rate for the fourth quarter? And how are you thinking about maintenance CapEx overall going forward? Is that going to be at a higher level than we saw the past couple of years?

Well, several things. You asked about six questions at once there. There is a slight amount of seasonality, even to maintenance CapEx. So you would expect the third quarter to be the highest quarter of the year as a general rule, because we're doing more work outside the communities. Probably a reasonably fair run rate to be thinking about for the fourth quarter, fourth quarter could be a little bit lower than that. But, you know, it's probably a good order of magnitude.

Maintenance CapEx over time, like any operating expense, does go up, right? I mean, the cost of paint and carpet and so forth, increases over time. So you would expect to see some inflationary growth in maintenance CapEx over time. You'd also see a little over-inflation growth because the assets are getting a little bit older. But that's not going to be a gigantic change in the trend.

One of the reasons that the CapEx is moving up a little bit, beyond what I just said, is the fact that our occupancy is getting higher. And we are making more units ready for occupancy and to be shown, to perspective residents. So that also would tend to push those numbers up modestly year-to-year as we get more units in service off of the smaller inventory.

Okay. But you haven't changed your expectations for full year maintenance CapEx relative to your guidance?

No.

Okay. Okay. I think that's probably about it for me. I'll jump off and see if there's anybody else that is going to ask questions here.

Thank you, Daniel. I would now like to turn the call back over to Ross Roadman.

With that, he'd we'd like to thank you for your participation. Management will be around all day for follow-up questions. With that, thank you very much.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.