Sonida Senior Living Inc (SNDA) 2004 Q2 法說會逐字稿

Thank you for standing by, and welcome to the Capital Senior Living's Second Quarter 2004 Results Conference Call. Today's conference is being recorded. Now, at this time, I'd like to turn the conference over to the Chairman, James Stroud. Mr. Stroud, please go ahead.

Thank you. Good morning, and welcome to Capital's Second Quarter 2004 Earnings Call. We experienced continued growth and laid the foundation for future growth in the second quarter. The continued growth from acquiring the 12 Triad communities was evident in revenue, EBITDA, and occupancy in the second quarter.

The Company reported revenues of 23m, compared to 14.3m in the second quarter of 2003, regarding the Triad communities, a 61-percent increase.

Adjusted EBITDA, as defined in the press release, for the second quarter was 4.5m, compared to 3.5m in the period a year ago. And the Triad communities leased to 89 percent, versus 79 percent for the prior comparable period.

The recent signing of the CGI Management agreement will provide the foundation for additional future growth. CGI manages 16 independent and assisted living communities in states where we already operate.

An affiliate of CGI, the Covenant Group, owns 7 of the 16 communities. Capital receives mid- to long-term management agreements on the 16 communities, the opportunity to acquire the 7 owned communities at an option price of 41m for the first 2.5 years and 42m for the second 2.5 years, and equally important, a strategic alliance with a proven developer to pursue not-for-profit and university campus opportunities.

In fact, I will have to leave the call right around 10:50 Central Standard Time to meet with one of the university presidents that they already have a relationship with.

The closing is expected in the third quarter 2004, and we believe the transaction will be immediately accretive on a cash and GAAP basis.

Now, for further comment on the second quarter, I introduce Larry Cohen, CEO. Larry?

Thanks, Jim, and good morning, everybody.

We're pleased to report our financial and operating results for the second quarter of 2004.

Capital Senior Living continues to build on the accomplishments achieved over the last couple of years as we successfully execute our business plan. We have further improved the occupancy levels in our Triad communities, which is one of our key operating metrics to measure our organic growth.

Lease-up rates in our Triad communities increased to 89 percent, from 79 percent in the second quarter of last year. Occupancy rates at these 19 communities improved to 87 percent as of June 30, from 78 percent in June of 2003.

Our offering of $34.5m of common stock in January has enabled us to retire debt and has provided the liquidity we need to complement our organic growth with prudent acquisitions and joint venture investments. The announcement this past Monday of our signing a definitive agreement with the Covenant Group of Texas to purchase CGI Management is a significant step in positioning the Company for future growth. The transaction will increase our resident capacity by 30 percent to nearly 9,000 residents and will be immediately accretive to earnings.

Our strategy of providing quality, affordable senior living services with a focus on private pay, independent living communities has served us well since we began operating senior living properties in 1990.

Our 2004 operating strategy calls for increasing revenues, maintaining our focus on completing the lease-up of our recently built communities, sustaining high occupancy rates in our stabilized properties, and ensuring our margins remain above industry averages. Once again, with the capable leadership of our senior management team, which has nearly 150 years of combined industry experience, our accomplished regional, operational, and the marketing vice presidents and our talented on-site staff, we are on track to successfully accomplish these critical objectives.

For the second quarter, we reported a net loss of $1.6m, or 6 cents per share. Cash earnings, defined as net income plus depreciation and amortization for the second quarter, were $1.4m, or 5 cents per diluted share. The most significant action we took last year was the acquisition of the remaining interest in Triads 2 through 5. Collectively, these entities owned 12 communities developed and managed by Capital Senior Living with a combined resident capacity of 1,670, 95 percent of whom live in independent living. In addition the 7 communities in Triad 1 are now consolidated due to the adoption of FASB Interpretation Number 46.

Our operating results for the second quarter reflect the fact that many of the Triad communities are still on lease-up and have not yet stabilized. I'm pleased to report that 11 of the Triad properties have achieved occupancies greater than 90 percent and another 3 are above 85 percent.

Our Triad properties attained considerable improvement during the quarter, both in revenues and net operating income.

Average monthly revenue per occupied unit in the Triad communities increased 4 percent to $1,791. The collective revenues of these 19 communities increased 17 percent to $10.2m in the second quarter, compared to $8.7m in the second quarter of 2003.

The leverage existing in our operating model is reflected in the Triad community's collective net income growth of 41 percent over the same period in 2003.

Resident revenues in all 42 communities that we own and/or manage increased more than 7 percent to approximately $32.4m in the second quarter of 2004.

Occupancies of our owned and our managed, stabilized communities averaged 88 percent during the quarter.

Average monthly revenue per occupied unit at our 12 owned mature properties increased 10 percent to $2,336.

Our gross move-in rates continued to improve in the quarter. Similarly, our deposit-taking, tours, and conversions of tours to deposits all improved in the quarter.

In June, we averaged 5.7 gross move-ins versus 3.8 a year ago. Our attrition had decreased during the quarter to a rate of 38 percent from 40 percent in the first quarter. We expect that our move-ins will continue to improve as we enjoy the summer months, which are typically very good for leasing.

Operating margins at our stabilized communities averaged 45 percent for the quarter. As our Triad communities continue to stabilize, our average operating margin has dropped slightly, reflecting the lower average rent in the Triads, as compared to our mature properties. As we continue to raise rents at our newer communities, we should see margins expand.

Also, our expenses are under budget through stringent expense controls and recent reductions of as much as 13 percent in our insurance and worker's compensation premiums, resulting from maintaining a favorable claims history and effective risk management.

With the completion of our stock offering in January, we are also well positioned to grow externally through prudent acquisitions and joint venture investments. We're excited about the recently announced definitive purchase agreement signed with the Covenant Group of Texas to acquire CGI Management. We will assume management of 16 operating communities with a resident capacity of 2,070, 79 percent of whom live in independent living and 21 percent live in assisted-living units. CGI Management employs approximately 500 personnel at these 16 communities. The acquisition is expected to close in the third quarter and will be immediately accretive to earnings. The acquisition is expected to increase our management revenues by $1.6m and EBITDA by approximately $1m.

Capital Senior Living will pay approximately $2.5m in cash at closing subject to various adjustments set forth in the purchase agreement. We will pay three installments of [$366,667][ph] on the first, third, and fifth anniversaries of the closing subject to reduction if the management fees from 9 third-party-owned communities are terminated and not replaced by substitute agreements during the period.

Our 2 organizations share many similarities that are advancing a successful integration. We are optimistic our integration plan will be successful and will benefit our residents, family members, employees, and shareholders.

At the closing of the acquisition, we will also receive the exclusive right and option through July of 2009 to purchase 7 senior living communities owned by Covenant Group of Texas. This option allows the Company to improve the performance of these properties and have the option to purchase them at a fixed price, most likely with our joint venture partners. Capital Senior Living will also receive the right of first refusal to acquire these properties for 15 years.

We are also forming a strategic alliance with Covenant Group of Texas to jointly pursue development and management opportunities for not-for-profit owners. This will provide the Company with a platform for additional external growth. We are very focused on continuing the growth of our Company and are actively reviewing with our joint venture partners a number of interesting transactions that are being marketed at the present time.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the first quarter of 2004.

Thanks, Larry, and good morning.

I hope everyone has had a chance to see the press release, which was sent out last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results from the second quarter and the first half of 2004. By the way, if you don’t have a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

For the second quarter of 2004, the Company reported revenues of $23m, compared to revenues of $14.3m in the second quarter of 2003, an increase of 61.3 percent. The 2004 revenues include the consolidation of 19 communities that were developed in 5 Triad partnerships. Twelve (12) of these communities are in Triads 2 through 5, that were acquired in the third quarter of 2003, and 7 communities are in Triad 1, which has been consolidated since December 31, 2003 due to the adoption of Fin. 46.

Adjusted EBITDA, a non-GAAP term which we define as income from operations plus depreciation and amortization, for the second quarter of 2004 increased 29 percent to $4.5m, compared to $3.5m in the prior-year period.

Corporate G&A, as a percentage of total revenues under management, was 6.4 percent for the second quarter. We're offsetting a significant part of our Sarbanes-Oxley compliance cost with reduced insurance and worker's compensation premiums, as Larry mentioned earlier, due to an aggressive risk management program.

Interest expense, net of interest income, was nearly $2.9m higher in the second quarter of 2004 compared to the second quarter of 2003 due to the consolidation of the debt on the 19 Triad communities.

The Company reported a pre-tax loss of $2m in the second quarter of 2004, and of this $2m loss, approximately $0.9m is attributable to consolidation of Triad 1 under Fin. 46, and $1.1m is attributable to other operations.

When we consolidate Triad 1 under GAAP, we do not receive a tax benefit from these losses. Consequently, we received a tax benefit of only $0.4m on the reported pre-tax loss of $2m. This pre-tax loss, by the way, is closely in line with analysts' expectations. If the Triad 1 loss had received a tax benefit consistent with the other consolidated entities, the loss per share for the Company would've been reduced from 6 cents to 5 cents for the second quarter of 2004, meeting Street estimates.

Cash earnings, defined as net income from operations plus depreciation and amortization, were $1.4m, or 5 cents per diluted share, in the second quarter of 2004.

Moving to the 6-month results for the first half of the year, the Company produced revenues of $45.6m compared to revenues of $28.8m for the first six months of last year, an increase of 58.8 percent.

The Company reported a net loss of $3.6m, or 15 cents per share, compared to net income of $4.3m, or 21 cents per diluted share, for the same period of 2003. Last year's results included approximately 10 cents per share that were gains from asset sales.

Adjusted EBITDA for the first half of 2004 was $8.6m, an increase of 12 percent from the $7.6m of EBITDA in the first half of 2003.

The Company's pre-tax loss of $4.8m in the first half of 2004 includes a loss attributable to Triad 1 of $1.7m and a loss attributed to other operations of 3.1m. And, again, the provision for income taxes does not include a tax benefit from the Triad 1 loss.

The Company produced cash earnings of $2.3m, or 9 cents per diluted share in the first 6 months of 2004.

As of June 30, we had $260.9m of debt on the Company's balance sheet and a blended average borrowing rate of 5.4 percent. The Company's fixed-rate debt averaged 7.8 percent, while our floating-rate debt averaged 4.6 percent.

Approximately $139.7m of debt is sensitive to changes in short-term rates, with the remainder either fixed or floating, with interest rate floors above current base rates. We believe that this approximate 50/50 mix of fixed and floating interest rates helps the Company to reduce interest rate volatility while benefiting from the current low interest rate environment. In addition, the floating rate loans provide flexibility regarding opportunities for permanent financing as communities reach stabilization.

As of June 30, 2004, the Company had $24.9m of cash, cash equivalence, and restricted cash and $154m in shareholders' equity, equivalent to approximately $5.98 per share.

At this time, we'd like to take questions.

And, again, now ready for the Q&A. [Caller instructions.]

And we'll first go to [Frank Morgan][ph] with Jefferies and Company.

Can you hear me?

Frank?

Yes.

Yes, we can hear you.

Okay, yeah, I just had a couple of questions. I was curious if you could comment. Want to make sure I was doing my math right. This management contract -- management business you picked up accretive, is that about 2 cents a share on an annual basis to the accretion?

Frank, we believe it's going to be a little bit less than that because the purchase price is going to need to be amortized. Of the total $3.6m potential investment cost, we feel like the majority of that's going to be amortized over a 15-year period because most of the value is in the 15-year contract in the 7 owned communities. The third-party contracts are shorter term, so whatever amortization takes place there would be shorter, but we would probably amortize the majority of the purchase price over a 15-year period and a smaller portion of the investment over a 2- to 3-year period, and that amortization is being worked out with our public accounting firm.

Okay. With regard to rates, I think you hit on it. I was looking at the consolidated property schedule, how the rates there basically were down about 3.6 percent, and that's attributed to the roll-in of the Triads from the year ago.

Also, Frank, it's interesting. You know, what's happening is that as you roll in the Triads, it does have an effect on those rates, but you know, we do think that as we continue to see improvement in those rates and those lease-ups, they'll be back at higher levels.

Right. And I guess my question is how long do you think, with regard to the Triads, based on your current turnover that you're seeing and the capacity, really, how long does it take those rates to get back up to where you think is the real market rate because those are clearly all new assets, you know, high-quality assets. Seems like they certainly deserve higher rates, but from a timing standpoint, how long do you think that takes?

And let me ask one final one, and you can answer them; I'll hop off. Just could you give us a little more update. I know there are a couple of major transactions out in the marketplace today. What do you see as really your opportunity? Is it really more on the management side to pick up business, or you have an appetite for really going back in and actually buying assets again? That's all I have. Thank you.

Okay. I'll answer the -- I'll go in reverse order.

Our appetite is to grow our assets under management. If you look at, for example, the transaction that we announced this week, it's accretive to the Company. It increases our revenues, our EBITDA. Any acquisitions that we would make, we would look to make with a third-party joint venture partner, and again, those partners typically like to see some co-investments and, therefore, we will co-invest, but we are definitely open to managing, as well as -- as long as we have the right type of contracts. You know, look at the Covenant transaction. To generate $1.6m of management fees, that 5-percent management fee, for example, would result in about $32m in revenues. And, again, if you look at the structure of our venture, with our co-investment, typically what happens there is that about 80 percent of the return we're getting is from the management contracts and about 20 percent of the return coming from the investment. And from EBITDA perspective, since we don't have to use equity accounting, we don't co-invest, we get the full contribution of that management fee.

So we're looking to be able to use our capital wisely. We think that this transaction is great for the Company. We think it gives us additional up side through the option that Jim mentioned earlier, with a fixed purchase option over 5 years. So as we are managing those properties and hopefully can improve their performance and create value, we can profit from that because we have a fixed purchase price.

So, you know, we are very open in looking at transactions. As you said, there are a number of transactions in the marketplace. We're looking at those, both with our joint venture partner, where we co-invest 10 percent and get the management with long-term contracts. We're also looking at situations where we may just manage the property for a third-party owner. So we like the flexibility because we'll drive our growth either way. Really, we'll be growing our capacity, our management fees, and then looking to lever off that structure to be able to enhance our portfolio and maximize it with a minimal capital investment.

Frank, it's an interesting financial model that we find is best suited for our Company compared to other companies, and we have owned assets with the Triads, so we benefit in the rental increases. We also benefit -- which is not reflective on the financial statements -- but the appreciation in the real estate, which is a value to us. So we have the owned assets, where we can benefit from increases in rents and our operating margins.

The second area is a joint venture area that we have had with [Flagstone][ph] and Prudential where we do co-invest generally at 10 percent. We do receive the benefit of the management agreement. So we participate in our labors not only through the management agreement but also with the co-investment.

And the third, the CGI Management agreement, is very typical if the investors go back to the history of our Company, of how we built our Company, and it allows us to go ahead and manage assets, learn about the assets. All four of the states where these assets are located, we already operate. We're in Jackson, Mississippi; they're in Jackson, Mississippi. They're in the Little Rock area; we're in the Hot Springs area. They're obviously Dallas/Fort Worth; we're in that area, and Oklahoma City, as well. So the CGI Management is kind of the third model that we've used in the past, which allows us to go ahead and secure the long-term management contracts. And then as we create value, we have the ability to come in under the option, which goes for 5 years, as mentioned, and at that price. So we feel good that all of those different models will allow us to take advantage of this -- the portfolios that are currently in the marketplace.

The second question regarding the Triads and rates, as I reported in my comments for the quarter, the average monthly rents -- rates in Triads were up 4 percent year over year. The average in this quarter was [1791]. And the decision to raise rents is a market-by-market. It's interesting. If you look at the performance of the Triads, many of them today are -- for example, Thousand Oaks is 100 percent; Huebner's, 98 percent; Mesquite, 93; [Trumble][ph] -- let's see -- Iron Bridge, 95; Oklahoma City, 97; Mesquite, 93. So as we see these properties -- you know, Highland Colony, 96 percent -- as these properties get into these mid- and high- 90-percent ranges, obviously, we have more pricing power to go in and to raise rents.

We talk about attrition, and while attrition was lower in the quarter, it's still higher than it was last year. Last year, it was about 34, 35 percent. And one of the benefits of attrition is that we are able to mark-to-market those rent levels. So in those markets, we have certain markets where over the last 18 months we've had 10 different price increases. So it's going to be a function that as we see these properties perform, which they are performing, in every quarter, we see more properties move over to the stabilized levels. It does give us the ability to raise the street rents. Again, our existing residents have annual contracts, and we typically raise those rents at about 4 to 5 percent, and we typically will start to see further increases on the street rents as units do turn. But, again, I'm very pleased with the progress we're making. The occupancy levels -- July was a very good month, up again, so you know, when you look at these levels of occupancies and the ability to start pushing rents, we are optimistic that we can start to see that margin expand. And, obviously, it makes a lot -- very important to the Company since half of our revenues this quarter are the Triad Group properties. So it does have a significant impact on the EBITDA and our bottom line.

Okay, one final follow-up question. A lot of my companies in long-term care and acute-care hospitals are all commenting about a reversal in these insurance cost trends, medical liability. And I'm wondering, are you at a point where you're coming up at the renewal cycle where you're starting to have discussions? Are you seeing at least a moderation in that cost line, if not a decrease? Thank you very much.

Frank, it's Ralph. You know, of course, we don't have medical liability insurance. We do have general liability insurance. And as Larry mentioned earlier in the call, we've seen pretty dramatic reductions in our overall insurance premiums. Most of our insurance premiums actually renew about mid-year, so we've just gone through the cycle. And if we add up all of our insurance premiums this year versus last, we're expecting a reduction of about 12 percent across the board. So that's total general liability, worker's comp, D&O, everything else. But we're seeing pretty substantial reductions in insurance premiums although we don't have any medical liability insurance per se. Thank you.

And we'll next go to [Stefan Makiak][ph] with [Mike Place Capital][ph].

Hey, good morning.

Good morning, Stefan.

I guess a few questions. First off, on the CGI contract, how many units are actually in the 7 owned properties that you have the option on?

It is approximately -- I think it's 1,652 is the actual number of units.

Yeah, but these -- and gross capacity's 2,070, and I believe it's around -- 60/40? I think I’m going to say about 650. That's an approximate figure, but I think that's about right for the 7 owned communities.

Six hundred (650) units in the 7 owned, okay. That's units or that's resident occupancy?

That's units; that's units, yes.

Okay. And what are the rents that they get on average at CGI?

I believe the rents are more in the $1,500 to $1,600 range. So the rents average a little less than Capital Senior Living's rents.

Okay. And is that just because of the -- are these communities -- what kind of, you know, lease-up or occupancy or that?

The whole portfolio is 94 percent. And on the 7 owned assets, they're right around 92 percent.

Ninety-two (92) percent. So it's just the market; it's just because of the market where they are that these are --

Except for the product is a little different than our product. If you look at the -- it's a very nice property. They are looking -- they operate their properties with a little lower food cost. Staffing is a little lower than ours. And, therefore, they're getting a little lower rent. We will continue to operate them very similar to how they operate them, and in fact, our margins are a little higher than their margins because we are getting higher rents. But the mortgage they're in and the niche, both on their [faith][ph]-based properties and their owned properties, are directed at a very affordable product, which obviously, based on their occupancies, has been very successful.

Okay, terrific. And is there some reason why you decided to get this purchase option rather than buy those owned properties outright? I mean you just want to kind of try them out for a while first or--?

Well, Stefan, two reasons. One, the purchase price at 41m, and then 42m the second 2.5 years, we wanted to be sure that there was the right integration into our Company, and the best way to do that is to integrate it to the management opportunity.

And, second, we're sensitive to the depreciation impact on our balance sheet because we're experiencing that with the add-ons of the Triads. And so it makes sense to be able to phase it in, whereas in [Kid][ph], our income statement was a depreciation charge.

Okay, okay. But these -- I mean you could've -- you could've theoretically done these in the Blackstone [inaudible]?

I mean, yeah. I mean the key is to be able to manage these properties, create the value, and then have the ability to buy them at these fixed purchase prices. And we will most likely buy them through the joint venture, so it would be very similar to our other joint venture acquisitions.

Okay, great. And then, Ralph, what was the Triad 1 debt at the end of the quarter that you're consolidating?

Give me a second, and I can find a backup sheet on that.

Okay. While you're doing that, I was just going to say that the --

Triad 1 is --

It's 47 -- Stefan, it's $47m.

Okay.

All with [inaudible].

Okay, 47m; okay, great. And then these new tables, by the way, are very helpful.

Well, you know, we've been talking about doing it for a while. I'm happy we were able to put them out there, and we have gotten a lot of positive feedback. So we will continue again. We want to make it as easy as possible for the investment community to be able to understand our Company.

Right. I did miss -- I think -- I forget -- I think it was you, Larry, that went through -- what was the -- can you just remind us what the -- what the average rents were on the original 12 core [inaudible].

Let me go through it again, okay? And I'll just review that one more time then. The -- if you look at the -- for the quarter, the average monthly revenue per occupied unit at the 12 owned mature communities, it was 2,336.

Versus what?

That's up 10 percent over a year ago. Went up from the first quarter as well.

Okay. And what's occupancy now in those -- in those --?

Those, we didn't break -- we will break it out next quarter. The reason we didn't do it this quarter is that we had some transactions last year that kind of mixed and matched numbers because we had some sale manage-backs, but the occupancies on those properties are probably pretty -- actually, [indiscernible], I went through -- you know, we report that our stabilized properties were 88 percent. There are 4 properties that are below 80 percent. And of those 4, most of those are actually managed properties. If we take those 4 out, our average occupancies would've been 90 percent on stabilized. So the numbers probably would be a little higher than the 88 percent we report if we just took the owned properties.

Okay. So you're saying the 88 was the 12 you owned plus the --

[Inaudible] --

-- the other managed stuff?

Those are approximately 30 stabilized properties owned and managed.

Okay.

Okay? And that's the actual occupancy at the end of each month averaging for the quarter. The other thing we've done this quarter on those supplements to schedules, we now have financial occupancy, which is the economic occupancy during the quarter showing the actual collections by day over the quarter. And if you look at that for the owned properties, the actual number for the quarter is about 85 percent, the 12 owned.

Okay, 12 owned were 85 percent.

Yeah, that's the actual financial occupancy. And we'll incorporate that into the schedule next quarter.

Okay. Do you know -- do you recall what that was in the first quarter?

A little lower. I think it was about 80 -- I think it's up about a point or 2.

Okay, great. Great. Okay, thanks so much.

Good talking to you. Thank you very much.

Our next question will come from [Mike Acristodumo][ph] with [Inwood Capital Management][ph].

Good morning, gentlemen.

Good morning, Mike.

To go back to the 7 wholly owned properties that the Covenant Group owns, where do they stand on the maturation curve? I think you said they were 92-percent occupancy, but where would you say they stand on the overall curve of, you know, immature to mature?

They would -- generally, the average age of those properties, Mike, is about 4.5 years of the blended 7 properties. So from a standpoint, they're still into a lease-up mode. Even though they've stabilized at, you know, 90 to 92 percent, there's still the up-side room on it, not only in the occupancy but also in the rent side.

Okay. And just to clarify, is the right of first refusal, is that -- that's a purchase option?

The right of first refusal is a 15-year, so it matches our management agreement. And, effectively, the right of first refusal, we have all through that 15-year time period. It really comes into play in year 6 because if we don't elect for whatever reason the option to purchase within the first 5 years, we still are protected that we can match a right of first refusal coming in in the year with 6 through 15. And so it's what we typically will negotiate in our management agreement because if we're out there laboring and increasing value, we want to have the opportunity to participate in that.

The other thing that is significant about the right of first refusal, it's a right of first refusal on all 7 properties. So it's not a situation where a third party can come in and select the 2 or 3 best performers and we would lose the opportunity to acquire those.

But years 1 through 5, you have a unilateral call on them?

Yes.

Exclusive?

Effectively, we have a unilateral call via an option --

And it is --

-- and it runs parallel with the right of first refusal. And for the first 2.5 years, the option price is 41m, and for the second 2.5 years, it's 42m.

And, Mike, it's --

Exclusive, okay. And that purchase option, that's kind of transferable to the Blackstone joint venture?

Yes, it would be to any entity that we would own 10 percent in.

Okay. And what about the other 9? Who owns those, and what kind of hooks do you have into those?

Well, the thing we're excited about is it's a new growth area. We've been in the not-for-profit area. We've developed. We've managed. We've marketed. But we've never really been able to penetrate a lower -- a lower horizon where an individual or a not-for-profit or a university, for that matter, would want to develop 1 or 2 communities. It's very time intensive. It takes a lot of relationship building, and that's where the Covenant Group really shines because that is their focus. That's what they love doing is developing and -- those relationships. So the other 9 are owned by -- 4 of them are by universities, 5 are by not-for-profits, and traditionally, they're religious not-for-profits. And there's expansion opportunity on 3 or 4 of those campuses. So the Covenant Group would be the developer and general contractor of those expansions, and then we would have the opportunity to come in and pick up the additional management.

The not-for-profit area, as you may or may not be aware, but it's about a $500m business a year, and it's been around longer than the for-profit area. And the need now that's arising is not only continual new development but a lot of their facilities are aged, and there's a need for expansion, as well as renovation. So we see this as a very significant area that's not only there now but also will be in the future.

Would you ever envision -- do you have purchase options on these 9, or would you ever envision buying them? Or is that just out of the question given the nature of the owners?

Yeah, given the nature of the owners, we would not envision that because, for instance, the one I'm at today is on the college campus in Arkansas. The one we were at yesterday in Jackson, Mississippi is on a 100-acre campus of that not-for-profit. So the deeds would be third-party, not-for-profit relationships.

Okay. And just a general question about the overall acquisition environment out there. What are you seeing? You know, Providence Senior Living went out and raised a lot of capital. You know, Sunrise is still building. What's the tone of things, and are you surprised or disappointed at the pace of keying up other properties to feed into your various, you know, on-balance-sheet or joint-venture entities?

Mike, I will tell you that we are more active today than we've been in five years on properties that are being marketed. They are situations where, in some cases, there's very limited competition. In some, there's a bidding process where there are probably going to be a number of bidders. What's interesting about some of the larger portfolios is that the investment bank running that process would prefer to have a buyer of all the assets, as opposed to having multiple buyers selecting local assets. And I think when you look at some properties of size and complexity, I think it positions us well. So we are very excited about the prospect of seeing more properties come out.

The other phenomenon, which I think the whole industry will start to recognize, is that many of the properties that were built over the last 8 years, about -- just actually came out with the '04 construction numbers, but it's about 300,000 units built over the last 8 years in this industry, with construction really peaking in 2000, most of those loans were provided by banks with a 3-year to 5-year construction mini perm, and while some of those have been extended, we're expecting and starting to see, actually, lenders take action and take assets back. Some of the properties we're looking at buying today are actually directly from the lenders.

So I think that what's happened is that some of the product that was built that didn't get leased up are being put back to market at prices which are significantly below replacement costs. You know, I keep analogizing to the hotel industry where very often the second and third buyer makes all the money, and I think we're approaching that in this industry, where low interest rates, particularly low LIBOR, for years kept many developers/owners alive longer than they probably should have been. However, as loans mature and under [FIREA][ph], many of the banks have to get appraisals; they can't underwrite. They don't have the debt service coverages. They don't have the loan to values. We're starting to see those assets go back to some of the lenders, and we're seeing those come back to the market at very realistic pricing.

So I do think that the -- all of us are busier than we've been in many, many years working on acquisitions. Some are very sizable, and some are one-off deals, and I'm actually optimistic that we'll see that trend continue.

Very good. Thanks very much.

Thank you.

Thank you.

[Caller instructions].

And we'll next go to [Brian Wilkinson][ph] with [Lewis Asset Management][ph].

Hey, guys. I was wondering what the debt level was this quarter. I missed it; I just caught the tail end of that comment that you made. And what it was last quarter and how much debt you're paying down. And then, also, whether you've considered sale lease-backs for some of the properties just to get the debt off the balance sheet -- some of the debt off the balance sheet to make the balance sheet a little more attractive?

Actually, we finished June 30 with about $260.9m in debt. We basically had about 140m of that that's actually sensitive to changes in short-term interest rates, and the rest is either fixed or it's floating with base rates above -- the floor's above current base rates. And our fixed-rate debt averages about 7.8 percent or floating-rate debt averages about 4.6 percent.

If you compare our debt level at the end of June with the debt level at the end of March, it stayed pretty much the same. We did amortize some debt in the second quarter, but we also added some insurance premium financing as our insurance contracts renewed on June 1. So it really stayed about the same, although we did amortize the long-term debt and increase some short-term debt to finance our insurance premiums.

You know, it's interesting about sale-leaseback. We have looked at -- very seriously are looking at whether we'd entertain sale-leaseback. As you know, we don't have any leases today, and we have decided not to go forward with sale-leaseback transactions. We know other companies do do that. However, I think that those companies that do have sale-leasebacks, most of the analysts will capitalize those leases and convert them into debt. The leases are long-term recourse obligations with fixed increases in the base rents, and we must prefer -- we're more conservative, quite frankly. We today -- about 50 percent of our debt's floating; about 50 percent of our debt is either fixed or has floors or other types of hedging strategies to provide a fixed basis. We like the flexibility, particularly as we're seeing our properties, the Triad properties, which are the ones that have the floating rate debt, improve that we can, at the appropriate time, refinance those with Fannie Mae/Freddie Mac debt, GMAC. I mean there are a lot of lenders out there providing fixed-rate debt today at attractive rates. The typical fixed-rate market today for independent living is 150 basis points over the 10-year. It's got to be, you know, 6 percent, a little lower. Most of the lease rates that we're seeing from the REITs are 9 percent or higher, some going up to 10 point -- 10 percent and greater. And that rate increases, you know, at 3 percent or CPI. So it does become a very expensive debt. And while, you know, it provides high [octane] at its full financing, it is full financing. You know, I'd much rather have a 70- or 75-percent debt amount, which I think that when you analyze a company -- and I think the analysts have done that very well -- is you have to capitalize the leases and treat it as debt. So, you know, the benefit of a lease, obviously, from a financial reporting is you do get the revenues. You have the expenses, so it makes your company look larger.

One thing that we feel that the supplemental information we're providing out there in these calls is giving people some idea of the size of our Company and portfolio because right now we do manage, you know, all 42 properties, have over $120m of annual revenue run rate right now. But we think that the better way to go is the joint venture management structure that we've used, which, of course, the debt would not be our debt, or looking at the agency-type debt, which has very, very attractive terms. And we have to decide not to move forward on the sale-leaseback structure.

Okay. How much did you say you planned to pay down in the future on a quarterly basis?

Our amortization's running 2 to $3m a quarter.

Okay. Thank you.

Brian, thank you. And at this time, I'm going to -- Jim Stroud's going to exit the call, and I'll turn it over to Larry and Ralph. Thank you for your interest in Capital Senior.

Thank you, and have a great day.

Thank you.

And we do have one more that has signaled and that is [George Walshwith][ph] at [Gilbert Securities][ph].

Could you go into a little more detail on what the drivers were in the -- what did you say in the reduction in insurance costs? Is -- besides the different categories you mentioned -- general liability, worker's comp, etcetera -- is anything regional in terms of, you know, like tort reform in Texas or anything like that having an impact?

Hey, George, Larry Cohen. A couple things. We -- you know, we saw the increase in our premiums about 4 years ago. It was sticker shock when we saw premiums increase, you know, sometimes 300 percent; I mean some of the original quotes we had back then. And, you know, we made a conscious effort years ago to have a business model that would try to minimize the tort liability and some of the risks in order to really protect the Company and to keep our costs down. We do have professional liability insurance and general liability, property, worker's comp, auto, directors' and officers' liability, executives' and officers' liability, and, you know, we are -- you know, all those have been renewed. We're in the process now of renewing our prime fiduciary EPL.

And, you know, it's interesting. We invited over 4 years ago [indiscernible] underwriters down to our home office in Dallas, and we explained our business model. They worked with our risk management group. They worked very closely with our general counsel in reviewing all of our agreements. We have a monthly meeting with our broker in Dallas. We -- our brokers and our risk-management people -- go out to the field and work with our on-site staff. So through, fortunately, a very favorable claims history, through a very proactive risk management program that we've employed many years ago, we're starting to see some of the benefits. So, you know, we're seeing, as I said, it was actually about 12-percent reduction in the renewals in June -- and it's not regional; it's across the whole portfolio, and every one of our properties is benefiting similarly.

Okay. Do you see -- how about any best guesstimate in terms of how that trend will be going forward?

Well, I think the whole insurance industry -- you know, everyone -- and Frank Morgan made the comment earlier -- I think everyone's starting to see that, a softening in the insurance. I think what happened is that the premiums got a little too high, and I think people [are] coming back into adjustment. Hopefully, as we continue to run our business the way we have been and hopefully have minimal claims, we hopefully will see, you know, this -- I'm not sure how much more reductions we see in the future, but at least we see a moderation, and I don't expect that we'll start to see the volatility, where it jumps around year to year. Hopefully, we'll reach a level, and it may go down a little more, depending upon the market, obviously, and, you know, God willing, no terrorist acts or anything else happen in the next year or so when those premiums occur. But, you know, if the world stays kind of where it is today, I would think that, you know, again, like anything else, things get adjusted. The pendulum swings one way to the other until it hits that medium, but I would be optimistic that we'll see rates moderate over the next number of years.

Okay. Any thoughts on tort reform as an influence, either currently or potentially, in the future?

Well, you know, we've seen reform in Texas or Florida, which we think is beneficial. You know, we're very supportive of tort reform. But, fortunately, it doesn't involve our business as much. We are predominantly independent living. You know, we have two CTRCs that have [inaudible] about 120 beds. So, you know, again, if we look at our business model, the tort reform efforts would have less of an impact on our Company than others.

Okay, great. Thanks a lot.

Thank you.

There are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Well, I want to thank everybody for participating in our call today, and feel free if there are any further questions to give us a call, and we look forward to talking to you in the future. Thank you very much.