Brookdale Senior Living Inc (BKDT) 2010 Q3 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 everyone to the Brookdale third quarter earnings conference call.

(Operator Instructions)

Thank you Mr. Roadman you may begin your conference.

Thank you Sarah and good morning everyone. I would like to welcome you all to the third quarter 2010 earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff Chief Executive Officer, and Mark Ohlendorf Co-President and Chief Financial Officer, and Andy Smith our Executive Vice President and General Counsel. As Sarah mentioned this call is being recorded. A replay will be available through November 9 and details on how to access that replay are in 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 security laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that can cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued yesterday and in the reports we file with 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'd like to turn the call over to Bill Sheriff. Bill?

Thanks Ross. Good morning and welcome to our third quarter earnings call. We saw the continuation of positive trends in the third quarter particular related to the key revenue drivers of the business as well as in other areas. Compared to the third quarter of 2009 we drove a 21% increase in adjusted EBITDA and almost a 24% increase in cash from facility operations. We continue to see the fundamentals improving. For context, the [met 31] third quarter industry performance showed occupancy remained flat sequentially and year-over-year rate growing a 0.7%. Foremost our occupancy increased sequentially 60 basis points over the second quarter to 87.4%, the highest since Q4 of 2008. And the increase was across all segments with independent living up 30 basis points assisted living up 100 basis points and CCRCs, even with the recent expansion up 20 basis points. In fact we have increased occupancy every month for the past seven months. On a year-over-year basis occupancy was up 70 basis points. Sales inquiries continued at a higher level than last year.

In the third quarter inquiries were up 23% over the third quarter of 2009 while initial visits were up 10%. While we have been executing well with our sales and marketing programs we also view that our perspective customers have been adjusting to the current economic environment and continue to move forward with making decisions. We saw the improvement revenue per unit growth in the third quarter our same store average monthly revenue per unit was $4362 and 3.1% increase over Q3 of 2009. Compared to year-over-year growth in the first and second quarter of 2.4% and 2.2% respectively. As we have said before senior housing occupancy growth will lead pricing improvement. For the senior housing business excluding ancillary services we produced a same-store year-over-year rate growth up 1.5% for the third quarter. This is up from 0.8% from Q1 of this year and 0.9% in Q2 . We have 186 communities average greater than 95% occupancy in September versus 167 in September of 2009. Our ancillary services business continued nicely to our results. For the quarter outpatient therapy and home health revenues grew by 36% over the same quarter last year and operating contribution was up 55%. Separately our therapy revenue and our skilled nursing grew by 28% as the Medicare revenue in our expansions were very strong. We will continue to see good growth in our home health business as we expand the footprint to cover more of the portfolio.

During the third quarter we acquired two home health agencies and received a the final survey on to Greenfield home health agencies as well. These four agencies do not have a positive contribution to third quarter but will have for Q4. We are continuing to expand our in-home services to patients outside our communities as we -- follow skilled nursing discharges home, as well as build relationship within our lease database. This not only leverages are in-place platform but creates a pool of potential customers who may elect to move into one of our communities in the future. As a result of the positive senior housing revenue drivers, the strong performance in the ancillary services business and our acquisitions, our overall revenue was up 10.4% from the third quarter of 2009. Another positive aspect of the third quarter was the strong performance at our entry-fee communities. We produced $14.1 million of net entry fee cash flows through two interrelated components with the entry-fee program. And excluding Freedom Pointes first generation sales. We did tweak some of our pricing options and you need to include the MyChoice receipts in tandem with re-sale receipts. We did see that the average entry-fee sale decreased, but was more than offset by received in the MyChoice program. We're admitting new residents used as on options increased their initial entry fee. We had 87 closings on entry fee sales during the quarter, the highest number since the Company went public.

Which produce $12.7 million of gross resale received or $7.7 million of net entry-fee cash flow after refunds. It was also the first quarter in two years where our entry-fee ILN move-ins exceeded IL-attrition at these communities. MyChoice, which is a program we operate at our entry-fee communities, where incoming our existing residents can increase their initial entry-fee within a very prescribed limits in order to adjust their monthly service fee, reached $6.5 million in the third quarter. Over half of this quarter's receipts were from incoming new residents. For the resident it is a very tax efficient means of using their assets. Again, our belief that we don't need a strong recovering economy and particularly the housing market just to building. To turn the quarter with entry-fee sales. It is encouraging to see the positive sales and marketing results and confidence consumers are showing in our products and or services. Overall, we are pleased with the performance of the quarter. The environment is still challenging, but we were able to produce a record CFFO of almost $60 million or $0.50 per share, by improving on the positive trends of the last several quarters. I will now turn the call over to Mark to provide more

Thanks Bill . Let me start by looking at some highlights of our financial performance for the quarter. As Bill said we had a good third quarter and reported cash from facility operations or CFFO of nearly $60 million or $0.50 per share. This was 18% higher than the third quarter of 2009 where we produced $50.4 million or $0.43 per share CFFO. Excluding $2.2 million of transaction related costs in Q3 2009. Adjusted EBITDA for the third quarter was $103.3 million a $17.6 million increase over third quarter of 2009. This increase in cash flow was driven primarily by the 10.4% increase in revenue. Due to the factors Bill described and the large increase in entry fees received, partly offset I higher expenses.

Our average occupancy increased to 70 basis points from the third quarter of 2009. The assisted living segment increased to 89% occupancy and has nearly and unabated increase trend since mid-2009 having increased 300 basis points from its low in the second quarter of 2009. Retirement centers occupancy have stabilized with a slight improvement this year, while CCRCs without the expansions have been holding their own. Overall Q3 2010 had an average occupancy of 87.4% was the highest we've seen since the end of 2008. With the strength of ancillary services and slightly improved rate performance our monthly revenue per unit grew to $4,457 from $4,259 in the third quarter of 2009. A 4.6% increase. Turning to the same community results, compared to the third quarter of 2009, same community results were positive with average revenue per unit up 3.7%, expenses up 5.3%, and operating profit up 0.7%. The same community revenue increase of the 3.7% was a result of an average revenue per unit increase of the 3.1% and occupancy increasing 50 basis points.

The 50 basis point occupancy increase built on last quarter's 50 basis point increase, to produce the first 12-month positive year-over-year growth that we've seen since the end of 2007. Breaking the 3.1% rate increase into its components, our senior housing rate grew by 1.5% and ancillary services added 1.6% to the revenue per unit growth metric. Quarterly same community expenses grew 5.3% over the third quarter of 2009. If you remember the third quarter of 2009 was the apex of our cost containment measures and we actually produced a negative cost growth in that quarter. Excluding ancillary services, senior housing expenses grew by 4.1%. Looking at controllable expenses, which includes labor, benefits, and other direct operating expenses. Our senior housing expenses increased 3% reflecting increased FTEs because of occupancy growth, particularly in the AL segment and ordinary course wage-increases. Our ancillary services programs continue to perform well and grow rapidly. The platform now serves over 38,000 units for therapy services and over 24,000 of our units for home health. Overall in Q3 $264 per unit per month of operating income across all units served by our ancillary services dropped to the bottom line versus $206 per unit in the third quarter of 2009.

As a point of reference for the Legacy ARC portfolio the average monthly operating income per occupied unit reached $317 in the third quarter, though it has a greater proportion of skilled units when compared to the overall portfolio. The big drivers of these numbers continue to be home health agency acquisitions and maturation of the home health agencies in our communities. Where the scope of our services are expanding within the units already served. As Bill said, we continue to expand our in-home home health a today's and in the third quarter averaged 335 people on case-load. Excluding the impact of [sniff] units, average monthly ancillary services NOI per occupied unit was $155 in the third quarter,compared to $142 per unit in the third quarter of 2009. G&A expenses excluding non-cash comp-expenses was approximately $27.4 million or 2.1% higher than Q3 2009. As a percentage of revenue, including revenue under management, G&A was 4.6% of revenue for both periods. Turning to the balance sheet we continue to strengthen our financial position. As we previously announced we completed two refinancings during the quarter . In connection with these transactions we obtained a total of $219 million of a mortgage debt and repaid $244.5 million of existing debt.

As a result of these transactions we have no mortgage debt maturities before 2012 that do not contained contractual extension options except for normal scheduled principal amortization. In the near term, we also expect to refinance $100 million of additional 2012 maturities. We ended the quarter with $69 million of unrestricted cash and no borrowings on the line. At September 30, 2010 we had cash and available borrowings under our line of nearly $190 million. After considering normal working capital needs and current underwriting standards, we have several hundred million dollars of investment purchasing power. Which doesn't include cash yet to be generated for the balance of 2010 and into 2011. At the end of the third quarter our leverage was 6.1 times net debt to adjusted EBITDA, calculated by using the year-to-date annualized adjusted EBITDA number of $400 million. And we expect to reach our announced leverage target of approximately six-times adjusted EBITDA, absent any acquisitions by the end of 2010. In our quarterly supplemental information package posted on our website, as well as filed as part of our earnings release and 8-K we have included information about our debt maturities schedule and fixed charge coverage.

Finally, looking at our CapEx, you can see that the level of spending in Q3 of for maintenance CapEx was $7.6 million still on pace for $25 million to $35 million for the year. EBITDA enhancing CapEx where we include projects that reposition and enhance current communities was $9.1 million. In the quarter we also invested $2 million in our expansion program other CapEx which includes home health acquisitions, ISC spending, and system investments totaled $4.9 million for the third quarter. I will now turn it back over to Bill for final comments on the quarter and the balance

Thanks Mark. As we look to the final quarter of the year and into next year, we continue to expect to see increasing occupancy positive, modest rate-growth, continued growth from ancillaries, and continued improvement in entry-fees. We continue to see little new development and other than expansions and some limited development by regional operators, we do not believe we will see meaningful new construction for some time because of limited construction financing availability, challenging development economics, given the current construction development cost, and protected entitlement process. For guidance -- our guidance remains the CFFO will be in the lower end of our original range of $2 to $2.10 for the year on revenue in the neighborhood of $2.2 billion. Let me close by talking about the deployment of cash and valuation.

As we look at our capital investment opportunities in the future we have set the following priorities. Expansions. We believe we have hundreds of opportunities within our current portfolio to invest capital and receive high returns, as we expand current services, add services, or modernize our communities. We continue to work on our expansion plans, re-activating back burner projects and beginning the development process on new projects. Timelines are still been formalized but we expect to produce 1,500 units or so in the next couple of years but most of those -- 2012. And then 1,000 units per year thereafter. Our current estimate it is that in order to develop those 1,000 units we will use approximately $50 million of equity on the per year on average once you factor in the impact of lease properties and construction financing. Our rough estimate, in case that something like $0.15 of CFFO will result from each 1,000 expansion units that we build and stabilize.

Acquisitions, while this is optimistic, we expect to participate in the consolidation of the industry. We have both a cost advantage, by bringing meaningful cost improvements to small operators have both the community and corporate levels, as well as the unique capability to add economics and product differentiation from our ancillary services. We are beginning to see a much stronger deal-flow come into the pipeline and will use our platform advantages to add appropriately to our portfolio. Debt, absent compelling acquisition opportunities we will look to deliver further though retain flexibility to call on that capital. Given at all of our debt as at the asset level we will see two deleverage and add to our unincumbered assets pool with the ability to draw against them if an acquisition opportunity arises that requires quick access to capital. Our current plans are to reduce our mortgage debt by approximately $100 million over the next six months as we re-pay or reduce debt on several pools of assets.

Finally, on the topic evaluation we are encouraged to see the more realistic valuations that are beginning to emerge for senior housing. Senior housing has proven to be the best real estate class with low default rates, resiliency through difficult economic times, and time proven strong growth characteristics. Whether it is the 7.5 cap of the Merrill Garden deal, or the [60s] cap of the Atria deal or the higher multiples of the other real estate sectors, we believe we will begin to see multiple expansion in senior housing such that we will move towards an improved valuation level. While we are not pleased with the valuations of our stock, we are making progress. And let me assure you that we will continue to examine all I'll turn it is and focus on what is best for the long-term interest of our shareholders. We will now turn the call back to the operator to begin the question-and-answer session.

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

Hi guys. Bill, just to start off with your last comment there on valuation. With where your stock is on applied cap-rate basis, if that's one way to look at it. Where would share repurchase fall, as part of your cap allocation priorities?

We will evaluate all the options. We still recognize that we are in a world with still considerable uncertainty, and we will have to factor that into it as to the -- as we evaluate the different options. What makes the most sense long-term.

Okay. And with regard to the acquisition landscape that -- could you maybe characterize who out there is looking for deals? Whether you guys have looked at stuff and the volume of activity. Should we expect that to pick up?

We are seeing some pick up of activity. We are seeing some things that are either in the pipeline, or starting to move toward the pipeline. We think the deal flow will pick up to a level that sustains itself through this next year.

All right. And to put a finer point maybe on cap-rate expectations. You know, you gave kind of a band of 7.5 to six for what deals have happened recently, but is there a cap-rate that you're kind of triangulating on, for deals that you would look at in the market, or what you're seeing being marketed out there?

To be honest with you Sloan, it's difficult to look at market cap-rates in transactions that we underwrite. Our cost structure is very different than the seller cost structure. And we've also got the ancillary service programs that change the scene quite a bit. So, we're underwriting primarily to yields. Whether un-levered yields or levered yields. To be honest with you, it's a little bit difficult to look at the cap-rates.

Okay. And those un-leverage deals are still in the low double-digit un-levered range?

Again, it will depend on the particular asset. It will depend on the financing that's in place, but I think that's typically what you would see.

Okay. Fair enough. I'll opt out.

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

Thanks. So a couple things. I wanted to just get drilled down on the expenses a little bit more. Trying to get a sense of how much of it's kind of expansion, how much is growth of ancillaries. I'm really looking for color on sort of the run-rate as we go forward, kind of fourth quarter, first quarter. Is this kind of margin level about right, or should we see some changes as we go forward?

Well seasonally, the third quarter will be the low point of the year, from a margin standpoint. Again, it has an additional day, compared to the second quarter. And the utility cost in the third quarter, are typically the highest of the year by a considerable amount. So the third quarter is naturally the low point, margin-wise. I think our sense is within the senior housing costs, the core growth rate in the third quarter was at about 3%. And that number, I think we would say is running 2.5% to 3% today.

Okay. And that's year-over-year?

That's an annual level of inflation, that's right.

Okay. And in terms of just thinking through fourth quarter, any big additions or ancillary expansions, whatever, that are going to move dramatically one way or the other?

I don't think so. We had a couple of home health acquisitions, that did occur in the third quarter. There will likely be some others in the fourth quarter. But with the size of the Company, I don't think that will dramatically change the numbers.

Okay. And expansion pace, Bill, you had talked about 1,500 units, 1012, so I'm assuming 511 -- I just want to make sure I'm sort of hearing you right. And are we seeing any of them right now, or it's still a ways off?

They're still a ways off. And it will be -- as we finalizing and getting things underway, it may be a little challenge to get the full 500 in to 2011. Some of that may get over to the early part of 2012. But by the end of 2012, we should get that 1,500 mark.

Okay. And then just one or two more if I could. So, the occupancy at the entrance fee, which again, you guys list in whole percentages, rather than give us a decimal point. You actually look like it went from 83 to 82 (inaudible) get the decimal point. It just seemed like if you were adding, you had more move-ins than move-outs. I was trying to figure out how that was just because it was back and loaded or --

That was on the average basis. And yes, the move-ins were stronger in the September timeframe.

So we should have ended it -- and if you could just adjust it, so we could actually get the decimals, because this makes it -- I'm sure was probably tenths of a decimal point, in terms of what was actually going on. And then, just two more real quick quick quick. One is just ending share counts, do you have that, or is the Q coming out relatively quickly.

The Q will be coming out relatively quickly. I think on the income statement in the Q, you will see a share number. I'm just looking real quickly here. Oh of course Yes, $120.4 million is the average for the third quarter.

And then lastly, and I'll jump off. Bill, I mean, I heard your responses to the other questions, and obviously this is an issue with shareholders. But why not announce a share buy-back program, and at least have that available. I mean if it's really an option that you're thinking about, why not have the authorization and safer example of expansions don't come on as quickly, and you've got cash available. Why not put it to work with share buy-backs, even if it's a modest level? Given where your share price is. You're obviously, your feelings about where it should be. I don't understand why a share buy-back isn't in place, if it's really an option that's on the table.

Well, that is a core deliberation matter. And we would not want to be giving any mis-signals or misunderstandings, you know, creating misguidance there. And it is clearly -- we'll look at all the options.

But I mean, I think (inaudible) if there's not a share buy-back, I think, the [inference] you know, again, you answered again, but the inference is that you probably don't expect to be doing one, given the cash demands --

I think you're over extending the interpretation.

Okay. All right .

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

Yes, guys. Maybe just a quick follow-up to that last question. I was under the impression that you guys did have a share repurchase program outstanding. I think a few years ago, when you pulled back the dividend, you put in a share rebo and didn't fill it. So is that expired, or am I wrong that you did fill that, and don't have any authorization?

At the moment we do not have a share buy-back program that's currently authorized. That expired, as you say, roughly two years ago.

Okay. So it's expired. Okay great. And then, a little bit more detail on the entrance fee communities. Can you talk a little bit more about the MyChoice. It looks like that was a nice benefit in cash flows this quarter. I'm curious, you know, if you've been pushing that more via marketing, or if you enhance the monthly discounts to try to bring in some of that cash flow, especially the new residents. Any color there would be helpful.

We did tweak both some of pricing options of the base entry-fee agreements, as well as a little bit of the My Choice. One of the real challenges that residents have, respective residents moving in, is getting returns on their investment dollars, with the traditional CDs, and treasury bills, and money-market funds are not paying them much of anything. So positioning to where it's attractive, and it's tax advantage to them. It simply makes sense. If you take that, and offset that against, and reduce the debt side of the equation, it's a win-win proposition. So getting them some options, and each party has an individual set of circumstances that they're trying to match and get comfortable with. So we just allowed a little more flexibility in the options.

Okay. That makes sense. And then another quick nuance. It looks like the unsold inventory value went up from $86 million, to nearly $90 million at the end of the third quarter. I'm curious if you have more closings, then you did refunds. Is that just kind of a reflection of the remaining inventory and the value of that inventory?

Well, it'll always be a mix of units, in perspective. And we did have more closings then we had new units become available in the quarter.

Okay, so it's the addition of those units in there.

That's a fairly significant milestone.

Got you. Okay, and then -- just on the deal flow, you mentioned that you expect the deal flow to increase, but we've also got the comps recently increasing, with perhaps lower cap-rates. And I'm curious what you're seeing on the pricing front. Are seller expectations elevated since seeing the deal, you know, a few weeks ago? Or do you think seller expectations are still reasonable enough --

I think anybody reading the headlines, has a natural tendency to get their expectation up. But again, it's a matter of a specific asset, the location, at-all. And so, it adds color to market. But I don't know that it dramatically changes the dynamics of what assets we'll trade for.

Okay, fair enough. And maybe one last question. Is there anyway you can provide a little bit more color on the net impact of the reimbursement puts and takes out of the Medicare program, I know [Rugsfore] has now been back in effect for a month or so. Maybe you have a little bit more clarity there, and clarity on the part B rates, and the potential reprieve from that. So, you guys have any update there to share?

There is not a lot that's changed. It is still very murky in terms of -- we're under this hybrid, interim thing, with regard to Rugsfore. And we still measuring that and doing that as a slight positive. And as Rugsfore gets fully implemented, it's likely additional positive. Nothing was released as we have seen yesterday, or this morning, with regard to the position schedules where the part B would be in it. There's still a lot of pressure going back-and-forth there to modify what had initially been proposed. So there's a fair uncertainty. We still feel in the end, that it will balance out fairly well for us.

Okay. Perfect. Thanks a lot guys.

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

You mentioned that the -- that you expect occupancy to continue to trend well, going-forward. Is that across the entire portfolio, or is that a particular product that you were -- you would highlight?

Well, we saw occupancy growth in all three segments in the quarter. And we're going to continue to be focused very much on our marketing execution, and believe if we continue to execute well, and there's still prospects of continuing to see that trend extend itself.

Okay. And when we think about the cost side of the equation, with these new net expansions opening up. Does that change anything? Is there going to be anything that we should be thinking about on the cost side, as it takes time to ramp up? Or is that just going to be a negligible impact at the beginning?

All right Kevin, I think it will be negligible. We may see some impact in 2012, as -- if we open 1,500 new units during the year. That may be enough, that it would change the decimal points a little bit, but it won't have a significant impact on the growth fundamentals.

Okay. And what was the lease termination fee in the quarter?

We have one property that we are in the process of selling, that is actually a leased property. So, effectively, the price at which we are selling the property, is lower than we're repurchasing it from the Reit. And that lease termination cost is that spread between the two.

So, was that a un-profitable facility? And are there other facilities that you'd look at investing?

We have a handful of properties that we're looking to divest. It was a unprofitable facility.

Okay. Great. Thanks.

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

Hi. Good morning. Just a question on the entrance fees that you're seeing in the quarter. I know in the past -- the occupancy in these facilities, and the pressure with, I guess, you seeing seniors kind of delaying things, with the value of their homes just declining. And now, I guess you're seeing the opposite of that, where they're choosing to put more down up front. And I just wanted to get your thoughts on what has changed since then?

Well, they are beginning to move on with their decisions. They are getting their homes on the market. And they are selling some homes. It is also some other options of bridge financing, that's being offered by some new entities in the market, that are capitalized by major banks. And so, they're having some options there. And that's producing some results. So again, we just say, that we just need some stability, or very slight improvements, to I think, some real gains in that area.

Okay. And then just back on the cost side. I guess you mentioned, you've had an anniversary, a period where you saw some cost declines -- so if I guess in Q4, you're expecting maybe something similar in terms of the year-over-year cost growth. Can we expect -- you know, entrance fees that you're providing the same benefit in entrance fees, and that will likely provide you with a boost in Q4 for cash flow?

I think on the expenses, this has been a very challenging, comparable quarter. And again, the third quarter is always the highest, but also last year was a bit advantaged. And it's a very difficult comparison of those two quarters. We would actually expect the comparison to be more favorable. In Q4 to Q4 of last year. And -- we're going to continue to focus on improving the entry fee results, and trying to prove that we have turned a corner in that regard.

Okay, so maybe less cost-growth in Q4, and maybe less of the benefits from the entrance fees, I guess?

Yes, there may be a little less there, but again in Q4 historically, has usually been our best entry fee [quarter to quarter].

Okay. Thanks a lot guys.

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

Yes, thanks. The ancillary NOI was down sequentially Q2, Q3. Is that a seasonal impact?

It is a seasonal impact. We had a lot of therapists that are off on vacation in the third quarter. So in fact, you do get a little bit less production in that quarter, compared to the second quarter.

The change was pretty modest. It was a couple dollars per unit.

Right.

The ratio -- the relationship between revenue and the individual, is a direct one-to-one. And so, as you have that higher vacation period, CTO period, you either cover it with much higher cost of labor, revenue or the revenue goes down on that basis. So that's -- if you go back over all of our history over the years, we've always had that element in that third quarter versus second quarter, but then a strong recovery in the fourth quarter.

Okay. And then, Mark, you spoke of plans in the near term, to deal with about $100 million of mortgage debt. Obviously, there's a lot more than that coming due in 2012. Any thought as to whether that's things that you want to refinance, or, might look at some other way of dealing with?

We're constantly monitoring the market. In aggregate, we feel comfortable that the properties more than support the mortgage debt that's in place. The primary challenge we face on the 2012 debt, is, the debt that's in place is a very, very cost efficient debt. So, clearly well in advance of the maturity, we will extend that debt. We're trying to get to that cross-over point, where the pricing differential makes sense, related to certainty on the maturity.

Okay, so not tipping your hand towards the timing, or anything. But we will probably see you replace that with other secured debt ?

Yes. I would expect that's what we'll do. Again, our overall leverage target for the company, is to come under six times . We may well change the configuration of our secured debt at some point, so that we can effectively pay down more debt, and then draw the debt back in place if we've got some opportunities. But our overall target is still to get to six times

Got you. Okay. That's all I had. Thank you.

Your next question comes from the line of David Heller with Delaware Street.

Hey guys. How you doing? Can you walk me through -- I'm not sure I heard the numbers correctly, but the return on the investment you expect from those additional 1,000 units that are going to come online -- every year for the next few years.

Sure, it is -- at this point, a kind of gorilla-math, because we're putting in place the detailed planning process right now. Did you want to kind of walk through the math on how you get to the $0.15?

If I heard you correctly, you're spending about $50,000 per unit. Oh, $0.15, you said.

$0.15 right. The overall cost is -- that math is based on about $250,000 per unit, of construction costs. So 1,000 units would be, roughly $250 million of construction costs. We lease roughly 60% of our units. So, you would expect that we would be working with the Reits to finance the expansions on the lease properties.

So, you're left with -- if that is pro rata to our portfolio, you're left with about $100 million of expansions on owned assets. And for this purpose we're simply assuming half-and-half, roughly half equity, half debt. That's the $50 million of investment per year. And then on a yield basis, we've seen yields on the expansions that have stabilized from the '07 to '09 expansion group. 16% to 17% on an unlevered basis. The $0.15 per share math, is based on a 13.5% unlevered yield. And a 7% financing constant. Some will be lease, some will be interest expense. But if you run through all that math, you get to roughly $0.15 per share.

Thanks very much.

It's obviously very aggregate math. And as we have for the fourth-quarter call this year, we'll probably provide some additional color on that.

Okay great .

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

Good morning. Two questions, a little bit of clarification here on the lease termination charge you took in the quarter. Did you pull that building out of continuing option, or is that a money-losing building in your reported results?

We did not pull it out of continuing ops. It's reflected in the operating results, as all the properties are.

Okay. And is it your sense on timing of either pulling that one out, or say these four-five others that you're looking to sell? Would you be pulling those out and putting in a discontinued ops-line?

We would hope to avoid that, just because of the reporting complexities.

Okay. And then another question on the cost side here. I think I understood you to say that basically -- one of the reasons for your cost increases, is you been staffing-up as your occupancy has increased. And I know there's sort of a step function to labor, so I'm curious. Do you feel like that you've added enough incremental labor now, that you really could, if occupancy continues to rise. Do you feel like you could start to see a little bit of salary leverage here, FTE leverage, for some period of time, that might help margins going forward? Thank you.

Well, you certainly have some incremental margin effect. But we work very hard to make sure that we also are getting very skilled at fluxing our labor in relationship to our occupancy. And while there is some steps there, I don't know that you're going to see that any big, major point. But the incremental margins are still very high, as you increase occupancy.

Okay, thanks.

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

Thanks. I just wanted to come back and talk a little bit about sort of the CapEx run-rates. I mean this was touched on earlier. But wanted to just make sure that we were sort of -- had a good sense again, even fourth-quarter, first quarter maintenance, expansion CapEx, development CapEx. That kind of thing -- I mean enhancement CapEx. Can you just give me a little color about what you see?

Well, we provided some guidance for the year, in the 10-K last year, and on our fourth-quarter call. And we've been providing up-dates quarterly on that. I think the original guidance we provided is still in place. And what we're expecting, it continues to be consistent with that. We will begin to see some increase in investment in the expansions. But that likely won't be until the first half of next year. So, I think the run-rates you've seen, will likely continue.

Okay. And even this quarter, numbers basically -- I mean I think it's also sort of weighted a little bit towards back-end of the year. I mean I just don't remember off the top of my head what the annual guidance is?

That is typically the case, that it not tremendously weighted to the back end, but a little bit .

Okay. And so numbers for this quarter, going in the next, are probably about right? Is that --

They should be in the range.

Okay. Thanks.

At this time there are no further questions. Presenters, do you have any closing remarks?

Thank you Sarah. With that we'll conclude the call. Management will be available all day, if you have follow-up questions, give us a call. And with that, we want to thank you for your participation. Thank you.

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