Brookdale Senior Living Inc (BKDT) 2011 Q2 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living second 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. I would now like to turn the conference over to Mr. Ross Roadman, Senior Vice President Investor Relations. Sir, you may begin your conference.

Thank you, Nicole and good morning everyone. I'd like to welcome you all to the second 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 present is Andy Smith, our Executive Vice President and General Counsel. As Nicole mentioned, this call is being recorded. A replay will be available through August 16 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, www.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. And now like to turn the call over to Bill Sheriff. Bill?

Good morning and welcome to our second-quarter earnings call. We accomplished some very good things in the second quarter and at the same time had some outcomes which were not as good as we expected. First, I want to start by describing what we saw with regard to occupancy and rate for the entire quarter.

We began the year with expectations that we were nearing the tipping point where we would begin to produce the strong growth metrics that this industry will create given even a slow but recovering economy. Our first-quarter, while having the typical seasonal occupancy softness, was in line with our internal plans and we continued to focus on both rate and occupancy growth that began in 2010. In the second quarter we successfully drove rate growth achieving a 3.7% same growth community growth for senior housing, the fifth consecutive quarter of rate growth improvement. All of our segments, retirement centers, assisted living, and CCRCs have rate growth greater than the NIC industry average rate growth of 1.6%.

In terms of occupancy, April, other than having higher attrition than is customary, was not totally out of the norm but as we went through May we were not seeing the improvement we had expected. It became clear to us that the change in the economic drivers affecting our customers was having an impact. It was at that time that we were in the process of undertaking a securities offering and we felt it necessary to update our guidance. More importantly, in response to what we were experiencing, we undertook to mitigate the more challenging environment. We tweaked some of our pricing and use of incentives beginning in May to drive new beds. With the use of measured incentives we were able to reestablish occupancy growth and in June we moved in 1,800 residents and increased average occupancy by 30 basis points. We ended the quarter at a higher occupancy than we started the quarter. This carried on into July and we increased average occupancy by another 40 basis points. We expect to see continued census improvement while staying within the boundaries of reasonable competitive pricing.

We were also impacted by the decrease in hospital discharges. Which has been broadly reported by the hospital industry. Which resulted in a drop in our skilled nursing census, particularly rehab oriented Medicare. Of the 90 basis points sequential drop in our CCRC occupancy over half of that was in skilled nursing. Which also accounted for about 25% of the 60 basis point overall sequential occupancy decrease. While skilled nursing census is a short duration and can be a little volatile, this was unusual. We believe this is a temporary situation and we saw an increase in July and expect further improvement through the third quarter.

The second quarter was also vexing with entry fee sales. We were on track to have a good second quarter with it unravel at the end of the quarter with a rise in (Inaudible) and canceled sales. We did increase the number of sales to 73 from last year's 59 with gross proceeds increasing to $12.5 million from $9.4 million. The third quarter is off to a decent start, but we will have to see the effects of recent market moves and other events.

I want to take a minute to provide an update on our ancillary services business which does not include skilled nursing. The second quarter was the first time that our ancillary services business growth leveled off a bit. Our revenue grew by 5% over the prior year even with the impact of rate cuts in both outpatient therapy and home health. Primarily from increased from home health census volume. While most home health providers have reported, we were also not immune to the impact of CMS procedural changes such as the face-to-face requirement and home health reassessment changes.

We're making progress on mitigating the impact on our productivity with systems and process changes. We made 4 home health acquisition -- home health agency acquisitions this year, have four hospice locations and pre-survey readiness and started personalized living which is private duty, private nursing services in 18 locations so far this year. Those activities incurred approximately $70,000 in start-up losses in the second quarter. With the impending acquisition of Horizon Bay, our ancillary services organization has been preparing to rollout our services as quickly as possible across this large portfolio and we view this as a significant opportunity.

We have been working hard to develop and maintain our strategic advantage with ancillary services expanding our footprint, building the most cost effective model, as well as introducing new services. Even with the impact of home health and therapy rate reductions and home health procedural changes, because of our strategic cost structure advantage, the outpatient therapy and home health business has still produced a healthy margins. These programs are a way to leverage our capital intensive business with non-capital-intensive services that provide good incremental investment returns and important services to our residents.

One doesn't like to give up margin, but there is a positive side. We are already beginning to see home health agencies and COM states coming to the acquisition market at reduced prices. We believe there may be similar opportunities for us to acquire COM beds for skilled nursing where we have been previously unable to acquire at reasonable prices and where we need to fill out a campus or network.

The $0.52 CFFO number was disappointing to us. If you remember when we discussed Q4 2010 expenses that everything went right, this was the polar opposite. Demand slackened as the economy faltered, skilled nursing Medicare census fell, entry fee cancellations and refunds spiked. Ancillary services hit a growth low and was incurring some higher cost of dealing with the procedural changes, while preparing for significant growth for the Horizon Bay acquisition and then storm related expenses jumped. All items that should and will correct themselves.

This was not our strongest quarter. But we are looking ahead to many exciting things on the horizon. We're seeing the positive impact of actions we took several months ago in occupancy and operating costs. We have pushed out our debt maturities at the same time without incurring -- encouraging the larger rate reset that was feared might happen. The form of debt also lost attractive rates and increases flexibility as to future accessibility to value in our assets. And, of course, we are very excited about the Horizon Bay acquisition which will I will talk about, but first I want to turn the call over to Mark to provide more details on the quarter.

Our reported CFFO was $0.51 per share. Excluding almost $1 million of acquisition and financing transaction costs, our CFFO was $0.52 a share. As Bill described, there were some areas that caused the shortfall to our expectations. We incurred $1.1 million of incremental storm related costs, our home health and hospice start-ups incurred start-up costs of $700,000, our entry fee refunds were $1 million higher than historical trends, our SNF occupancy averaged 50 less Medicare occupied beds within the first quarter. And, of course, occupancy was lower sequentially compared to the first quarter. Rates generally held up well.

Looking at the details of our operating performance for the quarter compared to Q2 2010, same community revenue increased 3% with average revenue per unit up 4%, occupancy down 90 basis points and expenses increased 4.4%. Breaking the same community data down further, our senior housing revenue grew by 2.7% with revenue per unit increasing by 3.7% and occupancy down by 90 basis points. Senior housing expenses grew by 3.3%, consistent with the 3% to 3.5% range that we had projected. Our labor costs, our largest expense item, grew by 1.9%. Food and utilities were both up around 2.8%. Excluding the ancillary services business, same community senior housing facility operating income grew 1.5% in the second quarter. General and administrative expenses, excluding non-cash stock competition expense, was approximately $28.2 million which was 4.7% as a percentage of total revenue under management.

Turning to the balance sheet, we continued to strengthen our financial position and improve our flexibility. During the second quarter we completed the issuance of $316.3 million of convertible senior notes due in 2018 in an underwritten public offering. Simultaneously, we entered into convertible note hedge transactions, as well as a warrant transactions relating to the same number of shares of common stock. The effect was to increase the effective convert strike price to $40.25 a share which was 75% over the closing price of our common stock on the day of pricing. The net cash proceeds of all three transactions were $276.4 million, which was used to repay $274.9 million of mortgage debt. The interest rate of the converts is 2.75% and including the net cost of the hedges, the effective rate is 3.1%.

Last week we announced that the Company closed a seven-year $437.8 million first mortgage loan with Fannie Mae. 75% of the loan bears interest at a fixed rate of 4.25% and the remaining 25% of the loan bears interest at a variable rate of 30 day LIBOR plus a margin of 182 basis points for a blended current rate of 3.7%. The loan is based on a 55% loan to value ratio and we have the right to substitute properties, important for our program max initiative and also the ability to increase the capacity for the asset value grows. We used the proceeds, along with a cash on hand, to repay $445.2 million in mortgage debt which was scheduled to mature in February and August of 2012. Both the convert and these mortgages were structured to mature at the same time, so that with the leverage on the mortgage debt there would be free asset borrowing capacity to refinance the convert maturity if needed in 2018. We have now eliminated all of the Company's 2012 debt maturities except for normal scheduled principal amortization and a proportion of the Company's 2013 maturities.

Since the beginning of the year, we paid off $845.5 million of debt and obtained new financings of $782 million for a net reduction in funded debt of $63.4 million, while also unencumbering assets that can be used to add borrowing capacity to our secured line of credit. Moreover, we have managed to reduce our interest costs by about $1.7 million per year in contrast to our original expectation that we would have a $20 million increase due to refinancing rate resets. We ended the quarter with $40 million of unrestricted cash and no borrowings on the line. At the end of the quarter, we had cash and available borrowings under our line of almost $260 million. We will use roughly $50 million of this liquidity to close the Horizon Bay acquisition and the related transactions with HCP.

Looking at the CapEx, which we include in our CFFO calculation, our spending in Q2 for maintenance CapEx was $9.3 million. For the full-year we continue to expect to spend $35 million to $40 million on maintenance CapEx for our communities.

Next, just a few comments on CMS's 2012 skilled nursing rule. Our Medicare Part A skilled nursing revenues are approximately $165 million to $170 million per year, plus we have an additional $15 million or so of managed care skilled nursing revenue that is contracted based on Medicare PPS RUG rates. The new rule reduces rates about 11% for us with our current case mix and eliminates the use of group therapy which will initially increase cost. Our preliminary analysis shows that we expect our CFFO for the year, from October 1, 2011 to September 30, 2012, will reduce -- be reduced by $20 million to $25 million before considering any mitigation measures. We will look to lower expenses through increased productivity and examination of our case mix and believe that we can mitigate 10% to 15% of the rule change impact. The bottom line of these changes for us is that the rates end up about 3% to 4% higher than what we received in 2009 with somewhat higher operating expenses.

Skilled nursing remains an integral part of our business strategy. As part of our strategy to have a range of products and services in a market, skilled nursing fulfills our customers desires to make only one decision, to minimize moves and to build a lasting relationship with the trusted provider. We do not operate freestanding skilled nursing and enjoy both a cost structure advantage and a higher quality mix with a combination of private pay and Medicare beds as part of our continuum. For us skilled nursing remains a profitable product line even after these rate reductions.

Finally, we are excited about the Horizon Bay acquisition. We will be adding 90 communities with over 16,000 units, increasing our footprint by over 30%. 21 of these communities will be in a RIDEA joint venture with HCP. RIDEA will buy a 10% interest in the joint venture and assume the management of those communities. There is a base management fee based on gross revenues and an incentive fee based on exceeding EBITDAR targets. We will retain all of the ancillary services cash flow and pay fair market rent for the space occupied.

Second, Brookdale will triple net lease 12 communities from HCP. The primary lease term expires in 2024 and has 2, 20-year renewals. The lease has a predetermined rent schedule for five years then escalates at 3% per year thereafter. Those 33 communities in the RIDEA JV and the lease pool with nearly 7,000 units of capacity at 90.8% occupancy for the second quarter. The remaining 57 Horizon Bay communities are third party managed.

In total, we received significant management fees, all of the ancillary services cash flow, joint venture ownership returns on some of the assets and the operational cash flow on the leased assets. Our initial investment for both of these transactions will be approximately $47 million including acquisition consideration and capital contributions to the HCP joint venture, integration costs, transaction expenses and capital expenditures related to the rollout of our ancillary services programs. We project our return on the invested capital of approximately $47 million for all of these transactions to be in the 35% to 40% range. Before transaction and integration costs, we expect CFFO accretion of $0.08 to $0.09 for the first year and to grow from there. For 2011 that means a few pennies of accretion which becomes more significant in 2012, a range of $0.09 to $0.11 and in 2013 a range of $0.15 to $0.17. This does not include opportunities for us to reduce costs across our total portfolio using procurement volume leverage which we are exploring with our vendors. I'll turn the call back over to Bill.

Thanks, Mark. It remains to be seen what happens with the economy during the remainder of the year. But we are operating under the assumption that we will not see much improvement. And have taken actions consistent with that assumption. As I said, we are focused on occupancy with more aggressive but measured pricing and looking to manage all of our costs appropriately. For the remainder of 2011, we now expect that we will continue to have a consumer challenged by a stalled economy. That leads us to expect that for the full year 2010 the following.

Revenue will grow by 3% or so. We do expect full year average level of occupancy to be at least that of 2010. And we expect rate growth in the 2.5% to 3% range, including the effect of the $5 million hit in Q4 due to the CMS SNF rate reduction. Ancillary contribution growth, which slows seasonally in Q3, will then pick up in Q4 plus we will have growth as the rollout begins with the Horizon Bay acquisition. Expense growth will be in the range of 2.5% to 3% with senior housing costs growing at 1.5% to 2.5%. Routine CapEx, maintenance CapEx will be in the range of $35 million to $40 million. We would expect approximately $30 million of net entry fee cash flow. And we should experience a small contribution from the Horizon Bay acquisition during the latter part of the year. All of this will drive CFFO to be in the range of $2.10 to $2.20 per year.

In rough terms, breaking down the $0.15 reduction in guidance is due to occupancy shortfall of roughly $0.10. Rate shortfall of $0.08 including the additional $0.04 from CMS reductions in Q4, an entry fee reduction of several cents, the one-month delay in closing of the Horizon Bay transaction which would be a reduction of approximately $0.01. Some of these would be offset by positive impacts of lower operating costs and interest costs. The guidance does not include the impact of any future acquisitions we may make.

It is unfortunate that the economy turned against us and has created disappointing short-term results. We still are excited about the value that we are creating and will create over time. Putting aside the current economic environment, we are in a very good place. We have spent a lot of time, resources and effort to build a platform that positions Brookdale to pursue the growth opportunities that we knew would inevitably be merged. We have created relationships with partners whose interests are aligned and who has significant low cost financial wherewithal. We are seeing a period of time where sellers are reappearing and for the most part, the valuation perspectives that make for attractive additions to our portfolio given our operating advantages.

Horizon Bay is a good example. We have extolled the many benefits before, but as we go deeper into the integration process which is well underway, we find that our assumptions and cultural fit and strong people balance are being exceeded. We believe there will be other significant opportunities that will evolve out of this acquisition, though it is premature to discuss them until we have -- after we close and are deeper into the integration process.

The pipeline is very active. Subject, of course, to market and financial market conditions, we expect to make additional acquisitions before the end of the year. We have reduced leverage and executed a refinancing plan that eliminates debt maturities until 2013 and actually reduces interest costs in the face of higher lender spreads. We believe we are incredibly well positioned to capitalize on some significant opportunities to maximize shareholder value and true to believe that investors should not become discouraged at a time when the table is set for good things to happen, despite a challenging environment. We will now turn the call back to the operator to begin the question and answer session. Operator?

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

Good morning guys. I wanted to dive in a little bit more on the incentives that you are using to drive up the occupancy, obviously that has been working fairly nicely of late. Can you give a bit more color on what form does it take and are you lowering street rents? Is it just additional months for free? And I'm also curious if your new inventory management system has allowed you to have a little bit more flexibility there and is driving that occupancy growth?

The systems which we have rolled out are certainly providing us much better tools and clear real-time information. The incentives are not a lot different than what we have used and had in our tool boxes before. Though we have loosened up where we had tightened up a fair amount in the first quarter and even into the early part of the second quarter, but it is a lot of the same tools. It is not aggressive price reductions. It is more in the form of incentives that do burn off and are not long-lasting as far as totally decreasing your rate base. So, it is a lot of the tools that we have known and used in times of the past that have been effective and it varies a little bit market by market depending on what those market conditions and competitive environment is.

That is helpful. Looking at a nuance, a question for Mark, entrance fee refunds even netting off the My Choice refunds look a lot higher than we have seen in the past and I think you called that out as being maybe $1 million or $1.2 million above your expectations. Was there anything unique there that drove that average refund per unit up during the period or was that just an anomaly?

This is Bill. Mark will expound on it, but it is a little more of an anomaly. You have more of the non-amortizing set that refunded during that quarter than the amortizing and it was one of the higher peaks that we've seen in that particular mix and you would expect that to balance. And as you see in the data, the trend has been over the last couple of years out of marketing more non-refundable than refundable. Ones that don't amortize as much has actually declined, but in the refund side of that, that peaked during the quarter.

Okay. That is enough color. That is helpful. 2 more and I'll hop off. Just on Program Max. I'm curious if, given some of the recent changes, you guys have revisited that at all -- either thinking about the macro environment and growth opportunities there, or maybe more specific to SNP beds? Are you revisiting the potential to change some of those to more dementia beds or other categories given the recent rate reductions?

First of all, we have had a good healthy mix of the Alzheimer dementia beds in our Program Max. We are still getting extraordinarily high returns out of those where we are adding the skilled nursing component. And even after the rate reductions and other effects of cost, again due to our cost structure in skilled nursing, that is still a very attractive component. Again, we are quite different than the free standing nursing in terms of our cost structures and the quality of pay mix that we get, but we still get very good returns in that. But the returns and as you look at all that in terms of all the detail, we are getting very strong healthy returns out of that and probably is even more effective to deal with the adverse conditions than not. But we will certainly be evaluating and looking at every aspect of our capital and capital deployment in light of the last few days' market changes.

Okay. And then my final question and I'll get off. Thinking about the pending Horizon deal, I'm curious if you have engaged more with Chartwell about the potential to buy some of those real estate assets? I think they become more vocal lately given some of the tax law changes about their desire to divest some of their US real estate. Any color there about that would be helpful as well. Thanks guys.

We've had discussions and certainly there is restructuring of the agreements and things that were there. And do contemplate a number of different possible outcomes. Until all of that is finalized and closed, we have agreed with them not to go into a discussion of the total range of different options that will be available there.

Okay. That is fair enough. Thanks guys.

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

I have a couple here. First, can you give us a little more color and commentary on the actual timing of the rollout of ancillary expansion at the Horizon acquisition? And then I know you mentioned and talked about your interest in acquisitions. Does this in any way make you rethink your -- the development expansion part of your story? And then the last 1 is on the incentive programs that you have talked about. Any kind of ideas or thoughts on how long you might be willing to run those programs? Thanks.

Well on the first point, the Horizon Bay ancillary services rollout, Frank. In our own numbers that we're providing you from an accretion standpoint, we are assuming the full rollout is 4, 5, 6 quarters -- somewhere in that range. We are obviously trying to go quicker than that, but from the standpoint of providing some accretion guidance that is the assumption we're making.

There is about 70%-some odd units are within areas where we have licensure and have operating capability, but you have existing other third-party vendors who are leasing spaces and other things all of which have to be worked through that affect the timing of that rollout. But we will be going at it pretty aggressively and as we get into it, of course, we can give a better outlook in terms of what the final timing of that rollout will be.

Was your second question the expansions as it relates to Horizon Bay, or the environment in general?

The environment in general. You talked about making acquisitions but does anything that has happened recently, particularly on the occupancy side, make you rethink the need for the expansions?

No. The expansion program is a very long-term program. We discussed earlier this year building the construction-in-progress pipeline there and the project-in-progress pipeline over the year this year. Many of those projects take a number of years. And I think it is clear to all of us what the demand situation looks like once you get out 2, 3, 4 years. Now it could theoretically impact pacing at some point. But quite frankly the pacing is probably more impacted by our acquisition opportunities.

The expansion where we are opening those, the repositioning and the expansions, we are, even in this environment, those are some of our strongest performers that are taking on. Typically we're filling in a missing level of need where we have [internal feed, direct feed] factors. So, those would probably stay in a priority position with regard to the capital allocation.

I think your last question was on the use of the incentive programs. You really are not seeing a sea change in incentive programs here. I'd say what you see now are sort of redeployment of the same kind of programs we would have used in the middle of 2010.

And by the revenue guidance that we have given you here for the balance of the year, we -- it will moderate what we would otherwise expected in terms of the rate increase, but we will still be affecting growth in rates.

Okay. 1 final one. On the cost side under that environment, are there really any cost levers left that you can pull or is it pretty much just a matter of getting incentives in place and driving occupancy growth? And I'll hop off. Thanks.

We will be working hard on the cost side of the equation. We have a lot of these systems rollout in all we have. We have a very robust cost control system capability that helps us tweak those areas and in this environment you expect to tackle the varied. We expect it will be effective in holding the cost and cost increase in line and also to the Horizon Bay growth, that is about a 30% increase in our spend elements and we are absolutely seeing that with our vendors and stuff we're being able to leverage that for lower costs within the base of Brookdale. So, we will be tenaciously looking at all the cost elements.

Thanks.

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

Good morning guys. I just wanted to start with a question on your view of the CMS's philosophy on rate cuts and whether this year was just a matter of getting back to where we were before last year or whether going forward -- the idea of government austerity or future cuts. How you think about that risk going forward?

That is a very good question. And the tone of CMS OIG was pretty harsh and I think they feel quite bitten by the aspect of the over-calculations or whatever else in the [fallback] which was expected. I think we are far more aggressive in that what people expected. Said that, it is the combination of issues of here and the struggles between the Medicare and the Medicaid basis, I think, that there will still be some pressure there. And that is where our focus on having the highest quality mix in the field and very different than skilled nursing free standing operators and having a cost structure advantage will be critically important to us.

We think we will actually end up with some benefits out of this and certainly all of the work that we are doing with the different initiatives in terms of ACO related or preliminary runners and working with different health systems and stuff and improving what we can do in transitions of care and those things, there is still the piece that hasn't totally dropped away in terms of pay performance element that comes with it. We think we are in a very good position, working very hard to maximize our position with respect to those. But it is a crystal ball that is pretty cloudy right now.

Okay. And then just a question on margins. To what degree -- you guys have done a lot of cost cutting back in the previous downturn. To what degree do you feel like you have flexibility on managing those expense growth rates going forward?

There is some flexibility there. I think we do have some flexibility in our benefit programs, for example, where we have learned that we need to make those benefit programs sensitive to our results in some cases. So some of that is self-correcting. Clearly you see less pressure on wage costs now than I think we would have feared you would see if you asked us that question a year ago. In spite of the fact that rate growth for the industry is 1.5% or 2% and for us is 3% or 3.5%, that you feel like you can grow cash flow in that environment because of the lack of pressure on the cost side. Any other questions?

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

Good morning guys. On the procedural requirements in the home health you mentioned -- I want to see what happened in the second quarter versus Q1 on the cost associated with that?

It is simply as you get deeper into that and as you got more into the face-to-face and the volume basis there, as well as the other impacts from administrative back support and support elements to all of the procedural changes, and I think you'll see it in the other home health -- public home health folks that the impact came to impact more the second quarter and started showing up more than the world had anticipated. At the same time are working through that and it takes some process. You have to -- the doctors -- the cooperation with the doctors and manner in which the process and systems support that you do with that in terms of being efficient -- effective in that face-to-face.

Our length of -- you get paid for an episode, but we did see that as you work through all that, that an increase in the length of stay, which is more time, more expense for the same dollar revenue element -- through the process improvements and [distant] procedural training and everything else, we start getting some of that back. But it was more than just the rate reduction, that procedural aspect had an impact as well.

Okay. So, should -- as you work through that we should the impact on the costs kind of abate throughout the year?

We expect some mitigation, yes.

Okay. And then on the occupancy growth in independent versus assisted, I know assisted you saw the largest decline in the quarter. Just curious in terms of how -- I would've thought that IL would have under-performed AL and curious to get your thoughts on that dynamic.

First, we have been working very hard and diligently on our IL and also the supportive service elements and everything else that have been going into support that are having effect. The pricing element, and as we have said in retrospect, feel that we were more aggressive on the pricing and that didn't adjust, but the bigger part of that hit the assisted living at the first -- we shouldn't do all of that at the first of the year effect. While as the other rate increases across the other lines of business spread through the year more. And certainly there are some element of effect there.

I think the issue of how more challenged our IL is, we have 8% or 9% of our total capacity is the entry fee IL, which you can put aside from 1 standpoint and it has not varied over 200 basis points over the last 2 years. It has seen -- but the rental part of IL and the CCRC's has always been much stronger than the other rental of just great IL and we've been working hard on all of those components. But the assisted living, we certainly expect some correction on that and we have certainly seen that in June and July, but some of that was probably from the strength of what we were pushing on the rate side.

Okay thanks. And 1 last for me. On the acquisition pipeline. Can you give us some color on the types of acquisitions you are seeing? Are they more on the management side similar to Horizon Bay, and then also in terms of the size, are they basically one offs or are there some portfolios out there are of multiple facilities that are in your pipeline right now?

We're seeing a number of singles and 2s, but we are also seeing a number of portfolios of varying sizes. And across the whole product spectrum.

So, I guess acquisitions with a real estate component as well?

Yes. That is more -- not acquisitions of management entities.

Thanks a lot.

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

Thanks a few things. Bill, back to guidance. I appreciate you breaking it out the way you did. In terms of those things, the occupancy short fall rates, entrance fee -- I was curious between the guidance June 1 and now sort of what has may be changed? Or maybe change the most?

Well, we made up less ground than we had anticipated which the base of which -- even though we gained 30 basis points in June, we had expected to gain some in May that didn't quite fully materialize. Which set us at a slightly lower base. And it is that lower base that you work through from there on out that really is the difference.

The skilled nursing shortfall that was -- definitely sizable impact the second quarter, the latter part of May and the full month of June was particularly disappointing in that regard. That does start in that will correct itself quicker and we did see that in the latter part of July and continuing into August. But it is that base level factor that you are starting from that has the effect. And then you do affect a little bit and certainly with what has happened through that period of time, as well as particularly what is happening in the worldly environment and all, is what tells us also to moderate the rate factor in that a bit.

And was the entrance fee also just a surprise cancellation?

It is continued to be a challenging area and where you have buildup of bad news it throws up that wall of worry and concern and apprehension of making decisions. That built up strongly. We were having, quite frankly, looking to be 1 of our better quarters and had a better lock on those things and we're trying to make sure that we were anticipating what levels of fallouts we had. We would have to admit at the same time that as that [totally came] to the end of the quarter and what all had built up there, the cancellation recisions and delays in putting off closings were a bit -- definitely more than we had anticipated. We thought we had factored that fairly well into the base results we are seeing.

Now we are off to another -- July was a very good month, again some of that was from those things. We still have to see with all the economic environment news here lately, we definitely were seeing the fact that people were beginning to be able to sell their homes a little bit better. We're seeing some definite little ticks that was very helpful. Again, what will happen in this environment is a little unknown. But we still are getting good activity and -- that will be a battle on those units, again, that is about 8% to 9 % of our total capacity.

[Marked up] a couple of percent so hopefully we can hope for the best. Also I wondered on guidance -- to directionally 3Q, there's obviously sort of a lot going on because you are about to close on Horizon Bay. You have this drag from gearing up on the home health side and that sort of thing. And you are doing this -- and you have occupancy going up. So, directionally should I be thinking CFO up, CFO down or CFO level for third quarter? Try to understand some of the moving parts.

It should move up as we go through the year and that is our forecast. Again, we are coming out of the second quarter with much stronger occupancy that you would have averaged in the quarter. We will also see entry fees building as we go through the year. That is the typical seasonal pattern. And we do have some entry fee sales that have effectively rolled out of the second quarter into the second half of the year. So, our expectation is we will see those numbers move up in the second half.

And then on AL, I think someone asked about this. It looked like you had about 150 units less on the AL. Number of properties with the same. Are you taking units out of service of Program Max or was that a factor in the occupancy? Just trying to understand that a little bit.

I think the number of properties would have changed. We have had a couple of dispositions as we have gone through the last year.

Okay.

We have about 100 or 150 units out of inventory at this time in total, but that is more IL than anything because it more IL conversions to AL and memory care and things that is in that right now. There was a little bit of that in the quarter, but we are trying to keep -- that introduces so much noise in the thing that it's hard to work through that, so we've chosen not to call out or break those out.

Okay. And can you quantify how much the gearing up for Horizon Bay really dragged on the quarter? And was that a particularly big issue on the ancillary stuff?

There is a little bit there. But it is not -- I wouldn't say it is huge. But it is several hundred thousand dollars in just in ISC.

You will begin to see those numbers ramp up in the third quarter where we are doing a lot of on the ground integration work.

Okay. And last 1 for me. And Mark, you had mentioned that you are very optimistic about growth 3, 4 years out. When I look at the numbers and we tend to focus on the 85 plus population, I see that growth rate of that group continuing to drop off. As we kind of move through the last of the what we call the roaring 20s babies. When I look at the growth 3, 4 years out, I see much lower organic growth in that old senior population. So, what makes you bullish that things are going -- ?

You really have a couple of things. I think if you dug into those numbers and looked at it more on an asset and income basis you would see that there is some growth there. The second piece is there is clearly some pent-up demand in the market. And we have seen a lot of volatility in the economic situation. Unemployment is currently very high. So, either deferral of the decision or some other substitute form of care is -- it's clearly much more active in the market today than you would see in a more normal environment.

Considering what is happening in the aging. How much longer the living beyond the 85 point with multiple chronic conditions. There's a bigger percentage of those who will have more demand factor for services and if you isolate on just the incidence of Alzheimer's and the growth of the Alzheimer's component within that, which relates more to the driven demand factor. There is all those factors would strongly suggest you are not only still seeing some growth on the [nominal] part and predict the income asset qualified, but also in the true demand drivers of that, that would also suggest penetration improvement and on the supply side of the equation is very, very muted.

It is somewhat early to see what the changes in public policy that we are witnessing are going to have, but clearly if there's going to be pressure on freestanding skilled nursing rates you may well see some contraction in capacity there. Clearly, if you're going to see pressure on home health rates you're going to see that market rationalize. And because we have a meaningful cost advantage in both of those business lines, we should achieve better share than we do today.

And 1 for me. That was helpful thanks. Would you anticipate financing acquisitions on balance sheet or would you use refinancing as you think about the stuff in the pipeline?

I think it is very transaction dependent. There's a range of opportunities. We have equity available on the balance sheet with our line. We're generating internal capital. At the same time the REITs clearly have access to low-cost capital now. I think it would be more likely that we would look at RIDEA structures than additional triple net leases, but even that could be very transaction specific. Our investment level in this initial RIDEA joint venture is relatively low at 10%. I think our objective would be to have a higher ownership level than that in any future deals we might do.

Thanks. That is helpful.

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

Thanks and good morning. Follow-up on 1 of Jerry's questions. Bill, in the past you talked about -- I think it may have been when the European debt crisis first became prominent issue. How you have seen in your experience exogenous issues that all of a sudden put people in suspended animation when it comes to making these sorts of decisions. I know it is pretty tough to take a crystal ball and figure out what the last few days are going to do to your business. But when you're contemplating the guidance for the remainder of the year, were you giving weight to the idea that all the turmoil in the last couple weeks could have a negative impact on some of the [nice] improvements in move ins that you've seen?

Yes, we did. The whole picture here is still evolving. But definitely we saw the end view that was going to steepen the incline just a little bit. As we've seen and we have had those shock waves from a year ago in the second quarter, first slip in Greece, and the European thing and what all built-up, it had some quick reactions as consumers then adjusted a little bit and moved on.

We have seen the same thing happen again here in the second quarter. Now we are having a third quarter thing that is quite concerning. We certainly did take it and did influence a bit of our tampering some things and being slightly more cautious in our guidance. But we will still be needing to assess where all of this settles out at.

Right. And then I hate to get into Medicare minutia, but when you talked about the guidance for your SNP units, did you also include the potential negative impact of the new assessment rules?

Yes.

Okay. And I appreciate the breakdown of what you get directly from Medicare and what you get from managed-care payers who pay like Medicare. I assume you also have revenues in the SNPs for managed-care payers who pay like rational humans. Is that a the fact as well?

We do have some of that. And we continue to work on improving that and as we are working with some of the systems and some of the markets where we're proving that we can have significant positive impacts on hospital re-admissions and work on basic disease management protocols and things. We are getting good attention there and we expect -- that is an area we expect to make some improvement over time and we will focus even more on as a matter of how to deal with this new world order.

Right. I assume that both payers that are more outcomes focused and they are cost focused turned a blind eye to what is going on with Medicare rates? In terms of their rate setting discussions with you?

I'd have to get inside their mind a lot deeper than what I will be able to here to speculate much on what totally their thought processes are right now.

What I was saying is if you have a managed care payer who is not paying you on the Medicare fee schedule, you wouldn't expect to get rate pressure from them just because of what CMS did?

We don't think so.

Right. Okay. And simple guidance question. Mark, I assume the guidance does not include any transaction costs you might incur in the second half of the year?

That's correct. No transaction costs or integration costs related particularly to Horizon Bay. The third and fourth quarter we will call those out separately.

Very good. That's all I have. Thanks a lot.

There are no further questions at this time. Mr Roadman are there any closing remarks?

Just want to thank everyone for their participation. Say that management will be around today. If you have any follow-up questions give us a call. With that, thank you very much.

Thank you for participating in today's conference call. You may now disconnect.