Sonida Senior Living Inc (SNDA) 2005 Q1 法說會逐字稿

Please stand by. Good day everyone and welcome to today’s Capital Senior Living first quarter 2005 results conference call. As a reminder, this call is being recorded. And, at this time, for opening remarks I would like to turn the call over to Mr. Ralph Beattie. Please go ahead, Sir.

Thank you, operator. Any forward-looking statements in this telephone conference are subject to certain risks and uncertainties that could cause results to differ materially, including but not without limitation to, the Company’s ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of down turns and economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

This telephone conference may also refer to certain financial information not derived in accordance with generally accepted accounting principles, including adjusted EBITDA, cash earnings, cash earnings per share, and other items. The Company believes this information is useful to investors and other interested parties. Such information should not be considered as a substitute for any measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. Reconciliation of this information to the most comparable GAAP measures is included as an attachment to our press release.

At this time, I would like to turn the call over to Mr. James Stroud, Chairman of the Company.

Thank you, Ralph, and good morning and welcome to Capital Senior Living’s first quarter 2005 earnings call. The first quarter results reflect the Company’s continued focus on growth in revenues and cash earnings while managing expenses. Revenues of $24.2 million in the first quarter increased 7 percent compared to revenues of $22.6 million in the first quarter of 2004.

Cash earnings, defined as net income plus depreciation and amortization, of $2.4 million in the first quarter increased 167 percent compared to cash earnings of $900,000 in the first quarter of 2004.

Operating expenses of $14.3 million in the first quarter decreased slightly by $200,000 compared to operating expenses of $14.5 million in the first quarter of 2004. These achievements resulted in a 140 percent increase in income from operations for this quarter.

The Company also made progress in the first quarter with higher occupancies and operating margins compared to the similar quarter of 2004. For further comment on these achievements, I now introduce Larry Cohen, Chief Executive Officer.

Thanks, Jim, and good morning. We are pleased to report our financial and operating results for the first quarter of 2005. Capital Senior Living is benefiting from the key strategic initiatives completed in 2004. These accomplishments have resulted in an improved capital structure and an expanded portfolio of properties to fuel continued growth.

We are also encouraged by better industry fundamentals such as higher overall occupancies and rental rates and lower capitalization rates. We expect the convergence of these factors to contribute to continued improvement in the Company’s profitability.

Our 2005 strategic initiatives are focused on incremental growth through improved occupancies, pricing, and operating margins. Management is focused on increasing the number of ancillary services offered to our residents through the communities as well as third-party providers. Our goal is to provide a higher level of care for residents while increasing the Company’s operating margins. We are also seeking acquisitions or co-investments, as the current industry dynamics make acquisitions an attractive avenue for growth.

With the capable leadership of our Senior Management team, which has 155 years of combined industry experience, our accomplished regional operating and marketing vice presidents and our skillful and caring on-site staff, we are successfully executing on these strategic initiatives.

First, I would like to review the financial results for the quarter. For the first quarter we reported a loss of $800,000 or $0.03 per share compared to a loss of $2 million or $0.09 per share in the comparable period of 2004.

Cash earnings, defined as net income plus depreciation and amortization, for the first quarter were $2.4 million or $0.09 per share compared to $900,000 or $0.04 per share in the first quarter of 2004.

Adjusted EBITDA, which we define as income from operations plus depreciation and amortization, for the first quarter increased 42 percent to $5.8 million compared to $4.1 million in the first quarter of 2004.

Now, I would like to review our same-store sales results for the quarter. We consolidated 29 communities with a resident capacity of 4,831, all of which are wholly-owned during the quarter. Resident revenues for these wholly-owned properties increased $1.3 million as a result of a 2.3 percent increase in occupancy and a 4.4 percent increase in average monthly rents.

Operating expenses were lower than in the comparable quarter of the prior-year by more than $200,000. The operating margins at the consolidated communities improved to 40 percent from 36 percent in the first quarter of 2004.

Resident revenues in 40 communities, with a combined resident capacity of 6,854 that we owned and/or managed during both the first quarter 2005 and first quarter 2004, increased 6 percent to approximately $33.8 million from $31.8 million. Operating expenses at these 40 communities increased only 1-tenth of 1 percent, resulting in net income growth of 22 percent.

We increased our total portfolio by 14 communities and our resident capacity by 1,814 since the first quarter of 2004. Operating margins for the 54 communities currently under management, with combined resident capacity of 8,668, improved to 43 percent during the first quarter compared to 38 percent during the same quarter of last year.

We ended the quarter with 44 communities stabilized, which we define as having achieved 90 percent occupancy, of which 23 are wholly-owned, 8 are in joint ventures, and 13 are managed by third parties. Average physical occupancies at the stabilized communities improved to 90 percent during the first quarter of 2005, compared to 88 percent in the same quarter of last year. Operating margins at the stabilized, independent, and assisted living communities also improved to 47 percent for the quarter.

Our 17 Waterford/Wellington communities, with a resident capacity of 2,426, increased their average physical occupancy to 89 percent as of March 31st, up from 83 percent at the end of the first quarter of 2004. Twelve Waterford/Wellington communities have achieved stabilized occupancies and 5 are still lease-ups.

Increases in average monthly rents of 3.8 percent and occupancy growth of 4.1 percent resulted in a 9 percent increase of revenues at these 17 communities to $9.9 million compared to $9.1 million in the first quarter of 2004.

Efficient operations resulted in a reduction in operating expenses of $2.6 percent for the quarter. The operating leverage in our communities is reflected in the collective net income growth of 56 percent. In addition, operating margins at our Waterford/Wellington communities improved to 40 percent from 34 percent a year earlier.

Lastly, I would like to talk about industry fundamentals. The industry fundamentals continue to improve throughout the first quarter. Occupancy rates continue to gain throughout the industry and new construction remains constrained. Senior living property values have increased significantly over the past year, with capitalization rates falling by as much as 200 basis points for larger portfolio transactions and, to a lesser extent, for individual asset sales, and cap rates are lower for independent living communities than other categories of senior living.

This benefits Capital Senior Living significantly since, 1) 84 percent of our residents live in independent living apartments. 2) We have ownership interests in 73 percent of our communities, 54 percent are wholly-owned and 19 percent are owned with joint venture partners, and 3) We have fixed purchase options on another 13 percent of our communities under management.

This marked improvement in values has also generated an active acquisition market, where higher quality properties are being offered for sale and acquisition financing is available to proven operators at attractive terms. Even with lower capitalization rates, we can participate in this market and make accretive acquisitions with our joint venture partners or by leasing from REIT’s at favorable rates. I expect that 2005 will be an active year for us as we grow our portfolio.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company’s financial results for the first quarter of 2005.

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I’m going to review and expand upon highlights of our financial results for the first quarter of the 2005 fiscal year. By the way, if you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenues of $24.2 million for the first quarter of 2005 compared to revenues of $22.6 million for the first quarter of 2004, an increase of approximately $1.6 million or 7 percent.

Resident and healthcare revenues increased by approximately $1.3 million, and average monthly rents in our consolidated properties increased by 4.4 percent, and occupied units increased by 2.3 percent.

Management fees increased by $0.3 million from the first quarter of 2004, primarily due to the addition of 14 properties under management through the acquisition of CGI Management last August.

Total expenses for the first quarter of 2005 were up less than $100,000 from the first quarter of 2004, even with the increase in revenues.

Operating expenses actually declined $250,000 year-over-year, and operating expenses as a percentage of resident revenues improved 4.6 percentage points, from 65.7 percent in the first quarter of 2004 to 61.1 percent in the first quarter of 2005.

General and administrative expenses increased by $139,000, or about 3 percent, from the first quarter of the previous year. Corporate general and administrative expenses as a percentage of revenues under management declined from 6.3 percent in the first quarter of 2004 to 5.7 percent in the first quarter of 2005.

Depreciation and amortization increased by $177,000, primarily due to the amortization of the CGI Management contract rights.

With a 7 percent increase in revenues and virtually flat expenses, income from operations increased 140 percent.

Adjusted EBITDA, defined as income from operations plus depreciation and amortization, for the first quarter of 2005 was $5.8 million compared to $4.1 million in the first quarter of 2004, an increase of $1.7 million or approximately 42 percent.

Interest expense net of interest income was approximately $300,000 higher this year than last, as higher rates offset lower levels of debt.

In the first quarter of 2005, the Company recorded a gain of $267,000 on the treasury rate lock agreement with [Key Bank], but was originally put in place with the financing of Triad II. This rate lock is tied to the 10-year treasury note, and the rate on the 10-year treasury increased from 4.24 percent at the beginning of the quarter to 4.49 percent on March 31, 2005. Consequently, we booked a gain as the settlement amount of this obligation declined.

Future quarterly gains or losses will depend on the interest rate on the 10-year treasury on the last day of each quarter. Some economists are forecasting the 10-year treasury to end 2005 as 5.5 percent, which if true would create additional income over the next 3 quarters.

Other income increased by $43,000 from the first quarter of the prior year, reflecting higher equity in earnings of affiliates, in other words, higher income in our joint venture partnerships.

The Company recorded a net loss of $0.8 million in the first quarter of 2005, equivalent to a loss of $0.03 per share. Excluding the gain on the treasury rate lock in the quarter, the Company’s net loss would have been approximately $0.9 million, equivalent to a loss of approximately $0.04 per share. This compares to a loss of $2 million or $0.09 per share in the first quarter of last year.

The Company generated cash earnings, defined as net income plus depreciation and amortization, of $2.4 million or $0.09 per diluted share in the first quarter of 2005 compared to $0.9 million or $0.04 per diluted share in the first quarter of 2004.

The Company had total mortgage debt of $254.4 million on March 31, 2005 at a blended average borrowing rate of 6.1 percent. Of the $254 million of debt, approximately $42 million or 17 percent of the total is a fixed interest rate averaging 8 percent, and approximately $212 million or 83 percent of the debt is variable at an average rate of 5.7 percent. The Company had interest rate caps in place on the $184 million of the $212 million of variable rate debt.

As of March 31, 2005, the Company had $20.2 million of cash, cash equivalents, and restricted cash, and $148.8 million in shareholders equity, equivalent to nearly $5.78 per share.

At this time, we would like to open the call for questions.

[OPERATOR INSTRUCTIONS]. And, gentlemen, our first question will come from Frank Morgan of Jefferies & Company.

Good morning. I’m looking at the statistics here on the selected operating results and it looks like you had almost a million-dollar year-over-year increase on the Waterford portfolio as a result of about a 4 percent increase in the occupancy. And I was curious, is it fair to triangulate off that in terms of what you think you can do if you get this portfolio up into the 90’s, or do you think going from 87 percent on up to 90 or 91 percent will produce a much higher incremental EBITDA?

And then, secondly, I was curious-- when I looked at the total portfolio, it looked like on a sequential basis that the occupancies actually slipped down a little bit, and I wonder if you could kind of pinpoint that out to me what’s really the source of that?

And then the last one is just the timeline on bringing in and adding ancillary services and how much growth do we think you can attribute to that?

Good morning, Frank, it’s Larry. Let me just answer each one of those separately. As far as the total portfolio, the portfolio also includes the covenant properties that were acquired. Those were acquired last August. We have properties in lease-up with covenants. So if you look at the occupant rates, we try to differentiate those which are stable versus those which are lease-up and those which have been renovated and are being re-leased. If you look at the stable properties, which, again, are 44 of the 54 properties and, again, of which are owned properties represent 23 of those, those 44 properties actually improved from 88 to 90 percent year-over-year.

The number on the supplemental schedule for the total portfolio is showing occupancy of 82 to 84. That’s financial occupancy, which is defined as the actual physical occupancy per date during the quarter, but also what it does is incorporates 9 properties which are in lease-up and 1 property that’s being re-leased through [an organization]. So that’s the way that comes out.

Secondly, as it relates to the triangulation of the numbers, the Waterford-- the 17 Waterfords, an average financial occupancy of 87.3 percent for the quarter. The physical occupancy ending the quarter was actually 89 percent. And if you look at our presentation on our corporate slide, which we’ll update after this call, there we show a schedule where if we were to improve those occupancies to 93 percent, we show a significant improvement in our EBITDA because about 90 percent of the incremental revenue there would flow to EBITDA, since the only incremental costs we have is typically food.

On our current slide presentation, which has not yet been updated for first quarter results, it shows the effect of going to 93 percent on the Triads would be about $3.2 million of incremental revenue over the fourth quarter run rate, and, again, we’ll adjust that for the improved performance in the first quarter.

The one fact that has not been shown in this presentation and in trying to forecast forward is the discrepancy in the average monthly rents for the Waterfords versus the rest of our portfolio. Look at our stabilized properties that we consolidate-- average monthly rents in the quarter were actually $2,400 for our mature properties and $1,777 for the Waterfords.

So, there’s typically a discrepancy of $250 to $300 a month rental between the Waterford properties and our mature properties, much of which was caused by the fact they opened into more competitive environments, and as the industry continues to see better occupancy rates and we can start having better movements in the pricing there, we would expect to see further increases in those rents as well. So we think there’s further contribution there. But, clearly, we’re making good progress there and expect to continue to make progress throughout this year to get the Waterfords over 90 percent and, obviously, that would have a significant impact on our EBITDA.

The third question--

Ancillary services.

Ancillary services-- we have been introducing at our properties home healthcare and also having certified agencies in the properties to provide ancillary services to many of our residents. We serve an 85-year-old, even in independent living. We do have one agency in Indiana that we have at one of our properties. The other services are being rented by third parties who rent a space for us.

And, again, we think that immediate impact will be to benefit on occupancies, slow down the attrition, and extend length of stay and also help market our communities, so we think we’ll be able to achieve that. But we are continuing to look at ways that we can be a provider of those services, and, again, we don’t have a timeframe for that, but we do see opportunities to grow that business. We see others in the industry have grown that business. It’s something we can introduce both to our residents and also look outside of the walls of our communities to go out into the marketplace and serve residents and serve seniors in their homes, which also will both improve our revenues and also improve a feeder for prospects to move into our communities.

So it’s an area of strong focus at the Company. All of our regionals are working with different agencies at the property level as well as our on-site staff to introduce those services to our residents, and we think we’ll see a lot of benefits from that this year and into the future.

Frank, Jim Stroud. To just give some additional color on the occupancy question, on the covenant portfolio, the 2 properties that are having-- that are pulling down that overall occupancy are 2 third-party fee contracts. One opened up the community, Mountain Creek, opened in January of this year, so it’s now in a lease-up. The second one is one called [Our Brook], and [Our Brook] is an asset that the lender foreclosed on before we-- was in the process of foreclosing on them in August of last year that we’ve taken over, and that’s in the low 40’s. So those are the 2 that are drawing down the overall occupancy of the covenant properties.

Okay, and then one final on the debt side, the-- you mentioned 184 out of the 212 actually has caps on it. Are those--? Are those the same caps that expire in January of ’06?

Actually, Frank, we have 2 different primary caps. There is a $50 million cap that expires in January of ’06, and there is also a $100 million cap that expires in January of ’08. You might be thinking also the treasury rate lock agreement also expires or matures in January of ’06, so that’s also the maturity date on the treasury rate lock agreement.

Okay, thank you.

Thank you, Mr. Morgan. Next we’ll hear from Jerry Doctrow of Legg Mason.

Hi. Good morning. I’m trying to make it easy. I’m going to ask 1 question at a time.

We’re taking notes, Jerry.

Okay. I guess just starting off I wondered if we could get a little bit more sort of on strategy? I think Larry indicated that you see acquisition opportunities, but I wondered if you could contrast a little bit with kind of where you see capital going in terms of property mix, maybe geography, and that sort of thing versus some of the other guys out there, maybe [Mercury Time] and Sunrise. Do you stay [out]? Do you stay in a particular part of the country? If I could get a little bit of color on that.

We do benefit today of having an established national platform. Our 54 properties are spread across 20 states and if you look at the map, it really spans from Connecticut down to Florida all the way out to California. So we have concentrations in the Southwest, Midwest. We would like to expand more in the Southeast. We would like to expand more in the Northeast. We have a big presence in the Midwest, and we see opportunities there. But one of the advantages we think we have with our platform is with our regional infrastructure in place with regional operating and marketing vice presidents throughout the country, we really have the luxury of being able to look at properties throughout the country that make sense.

So for acquisitions, we will look to fill in certain areas. Again, we are seeing some attractive situations out there. There have been some very high profile portfolios which have been regionalized that have been in the market. We’re also seeing individual assets come on the market. And I think there’s a bifurcated acquisition market. There has been a Northeast portfolio, there has been a California portfolio, there was a Houston portfolio, all of which have been marketed or transactions have occurred since the fourth quarter of 2004.

And then, as I said, we’re seeing assets throughout the country come on the market, many of which are by private owners or financial owners that are very sensitive to the impact of marketing a property broadly because of disruption at the site level. And with our relationships in the industry, we’re able to be a small group of companies to go in and look at those assets and we’re seeing opportunities for those acquisitions.

So I think that as far as acquisitions are concerned, we do have the benefit of looking. We, obviously, have this infrastructure in place. Each regional covers right now about 8 to 10 properties and there’s a little capacity there. So we like to fill in some of the regions, but I think that we feel fortunate that we have the ability to look fairly aggressively at acquisitions wherever they may pop up.

And the focus would remain almost entirely IL versus say broadening into--?

Yes, predominantly IL/AL, but we are looking. We’ve looked at some CCRC’s that we think make some sense. We probably have been less focused on pure AL or [AL/SNIF] type properties. So I think we like the IL/AL model. We like the focus of our platform and we’ll continue to grow in that respect.

Okay, and then the other question which I sort of got to by your discussion of cap rates is just your thoughts on whether it’s better actually to be a buyer or a seller right now given how cap rates have come down. I mean you obviously have substantial real estate on your books. Some would argue it may even be a heated or overheated market. Do you think about which way-- which role you would be better off playing and your thoughts on that?

Jerry, let me respond first to your additional information on your first question about acquisition strategy. It’s similar to how we’ve continued to build this Company over the years. We’re focusing on the right products in the right market, and the right product for us is a community over 100 units, ideally independent living and/or independent living/assisted living, and even on the pure independent living we would add a continuum via the home healthcare as well as rehab services. So that is a consistent theme that we have.

Second, we’re looking at cities, ideally [SMSA’s], and the minimum threshold is a population of over 250,000, and that allows us to have the employee base that’s necessary to provide competitive services at affordable prices.

And from a standpoint of-- what’s interesting about the question of being a buyer or seller, at the recent National Investment Conference the Owner/Operator meeting in Chicago, we had a closed-door session with all of the large owner/operators as well as the research analysts from National Investment Conference, and the final conclusion was that companies that own 5 or more communities only comprise 40 percent of the available supply. There are a lot of projects out there that are single-asset owners and they’re looking at additional competition, compression on a standalone basis of operating expenses, and, as Larry mentioned, it does provide an acquisition opportunity. So, in that light, we clearly would want to be the acquirer of the assets.

Now, on the seller’s side, given the results of this first quarter, on the operating margins we’re continuing to leverage off our existing asset ownership and the benefits of being able to have 50 to 55 percent ownership of assets and the balance would be the third-party fee income and non-owned income. Larry?

Yes, and we would, obviously, in this type of environment, we do see the-- on stable properties that have really matured, we do see some of the benefits of some sale-managed-backs or sale-leasebacks. We think there we can capture profits, increase our cash, and continue to operate those properties under long-term arrangement of favorable terms.

So, we wear 2 hats, Jerry, and we negotiate differently depending on which hat we wear, but we do think if you look at our portfolio, clearly, on the Waterford/Wellingtons, which are still stabilizing and have room for improvement, we would not look to sell those at this point because we think we can capture more value, more cash flow. On other assets which are seasoned and stable and strong performers, we do think there would be benefits and we will look to selectively do as, again, sale-leasebacks or sale-managed-backs where we can capture some of that profit and then continue to operate those properties on a long-term basis.

Okay, and I guess you touched on service a little bit. I just wanted to clarify and make sure I heard you right. You’re essentially operating 1 home health agency now and elsewhere you’re using third parties but you could see yourself more in that business. Is that sort of the right summary?

Yes, it is, Jerry, and definitely we’ve had the operations up in Indiana for 9 or 10 years now and it has served our residents well. We do see that there is definitely with the age cohort that we’re serving, even in independent living, an opportunity to expand those services and, as I said, we’ve seen multiple benefits of doing that, both to provide higher services to our residents so they can enjoy the comforts and rich lifestyles in our properties for a longer term.

We think it’s attractive in marketing, the kids market, who feel comfortable that if their parents have needs they can be served within the community. It’s very convenient having in that physical space, and as we expand our portfolio and look at different regions of the country, we have concentration. We see opportunities for us to take that on ourselves to serve those residents in those communities and also go outside the community to serve other seniors in their homes, which we think will be supplemental income to the Company and also provide good relationships with the marketplace, which we think will enhance the occupancies of our properties as well.

Is that business that you need to buy because of licensing or expertise or is that just something you kind of build internally?

It’s very possible it’s something we look to buy. We think that it makes a lot of sense to buy a proven operator with the systems in place, with the licensure in place. So I think it would be much more likely that it would be something that we would buy than to grow internally.

Okay, and then my last question, just in terms of prospects for development, I think you categorized things as still very much under control. I’m sort of hearing anecdotally that, particularly I think more in an IL than elsewhere, where development is really starting up and my sense is that the developer juices are flowing out there. Maybe if we could get a little bit more color on both when you might see yourself being back in the development business and maybe a little bit more color on what’s going on out there in the industry.

We are looking and we’ve been talking about selective developments. We think there are-- it’s interesting. If you look at what’s happened to this business, development really-- our development stopped at the end of 1999. And if you look at the industry data, construction peaked in ’99 and each of the next 6 years it was down by more than 50 percent from that year. We’re averaging industry-wide about 30,000 new units a year and that incorporates seniors’ apartments all the way to CCRC’s.

There are areas in the country where we’re having great success, which are underserved. There has been very little development. There is very little land, quite frankly, available for development in many of these markets. It’s been a very rare bid, home building, and other types of construction phase that’s going on when the senior housing industry was not building. So I think that good sites are going to be limited, but we are going to go back into some of those markets slowly and selectively to introduce a new prototype which will have a continuum of independent with assisted living and really serve what we see as needs of seniors over the next 5 or 10 years. But we think it will be a slow process.

As far as what we’re seeing in our operations out in the marketplace, I do think that development is still constrained. I think that what’s happening is that the lenders are still fewer. They are only looking to proven companies with proven track records as operators. So unlike the last phase where there was just this indiscriminate kind of field of dreams where, “If you build it, they will come,” and everyone in there was getting involved in it because of demographics, I think people, and the lenders more particularly, understand that it is an operating business and they look very closely and scrutinize the operating records of those developers and operators, quite frankly.

So I think that there will be some development. I think it will be a small club of developers as opposed to home builders and retail developers, because money is there. And I think it will be much more disciplined when there is going to be a greater demand and a greater need.

Thanks a lot.

And we’ll be moving on to [Peter Lutz] of Smith Barney.

Hi. How are you guys doing? A couple-- some of these points were made already, but I’ll ask you, did you say that your same-store sales increased about 4 percent year-over-year? Is that what that number was?

Yes. I mean if you look at our same-store sales, actually on our consolidated properties they were actually up more than that. There was a 2.3 percent increase in occupancy and a 4.4 percent increase in average monthly rent. So I think the combined was about 6 or 7 percent on our consolidated properties. If you break it out between our Waterford properties, there we actually saw a 9 percent increase in same-store sales coming from a 3.8 percent increase in average monthly rents and a 4.1 percent increase in occupancies.

What was the actual ROR number per month?

I’m sorry, Peter. Can you repeat that question?

What are the actual ROR numbers of actual that’s on an average per unit?

The average monthly rent?

Yes. No. Well, yes, exactly.

The average monthly rent on our consolidated properties was $2,122 a month. The average monthly rent on our Waterfords was $1,777 a month.

Okay, and how much room do you see over the next couple of quarters?

Well, if you look back over the last 10 years, the industry consistently saw 4 to 5 percent rent increases, and we expect that that will be something that will continue to trend. And then in those opportunities, particularly with the Waterfords where you have rents that are below where we thought they’d be, as those markets [firm] they have better pricing pressure. So I think that we’ll see continuing increases throughout the year into next year that should accelerate from where they are today.

You said that the industry is adding about 30,000 units. I think that was the number you said. What is--? Is there a demand over that 30,000?

Yes. If you look at the demand today, it’s very interesting. The 85-and-elder cohort is expected to grow by nearly 40 percent this decade. It’s about 4.9 85-year-olds in 2005, expected to be 5.8 million in 2010. And if you look at the supply today, there are about 21,000 purpose-built professionally managed senior housing properties nationwide, and that-- you look at the demand from that-- and that represents about 2 million units. So, clearly, we’re serving a growing demand. If you look at the supply that’s been coming on line over the last 5 years or so, it’s been averaging about 25,000 to 30,000 units per year.

But that was in the slow period.

That’s correct, but even in the peak, in ’99 there were about 65,000 units built. Construction starts in 1999. And of that amount, about 2-thirds was assisted living and about 20 percent was independent living. If you look at 2003, 2004, 2005, that has not been yet been published, we’re seeing that the predominant new product that’s being built are seniors apartments, which is age-restricted, 55-and-elder communities, both-- some are tax credits, high [performer] deals, others are just empty nests or housing, and then the balance of that large influx of CCRC’s, but traditional senior living, which is independent/assisted, is fairly constrained.

So if you look at the supply, clearly, and if you look at the industry fundamentals, average occupancies as reported by the National Investment Conference in the fourth quarter were 90 percent for independent living and 88 percent for assisted living, so there’s-- you’re seeing good growth on those occupancies. Back in 2002, the average occupancies for assisted living was 83 percent and independent living was about 88 or 89 percent. So we’re seeing continuing improvement in the fill of the demand and expect that will continue.

And, finally, you talked about cap rates and buying or selling and so forth. Have you guys-- and I don’t know if this is for a public pronouncement-- the analysis of if you had to start this Company today, exactly how much--? What would be the replacement values of your profiting?

We have not, but, again, if you look at the industry, it’s typically looking at hard and soft costs. We see properties out there that some are financed at $200,000 a unit in certain markets. I think it’s very hard to build something today for less than $100,000 a unit. So we can look at kind of what replacement cost is. We feel that replacement cost is clearly much higher than both our carrying values and what our market cap implies.

Thanks. Good job.

We’ll take the next question today from [Gregory McKosko] of Lord, Abbott.

Yes, thank you. Could you talk a little bit about the range of occupancy in the 44 stabilized communities?

Hi, Gregory. Sure. I would be happy to do that. If you look at our stabilized properties averaging 90 percent, they range from 100 percent, and we have a number of properties that do operate at 95 to 100 percent. I’d say the lowest occupancy that we have in those stabilized properties is a property in California where we had 3-- it’s one of our managed-- it’s a [retention] managed properties, where we had a confluence of some higher than expected attrition, some competition, and a marketing director go on maternity leave all at the same time, where occupancies dropped down into the 65 percent range or so. It’s coming back up.

But I’d say that if you look at the mix, a large majority are at 90 percent or higher. We have a handful of properties that are 85 percent or greater and then selective properties below 80, 85 percent. And the aberration is the [Cedric clause] as the-- I’m sorry-- the Villa Santa Barbara property. So most of the properties are at that 90 percent or greater level and then we have a few outliers.

And just looking at-- I realize there are some outliers, as you say, and you’re obviously addressing those. But if we look further on, do we expect the occupancy on the mature area to approach something on an average of 95 percent?

If you look at our business prior to 1999, we ran consistently at 96 percent for years throughout the country. Obviously, there was a lot of new supply that came on line after that period of time. If you look at our corporate presentation, we show numbers of 93 percent. We feel comfortable with that, but we do have properties that do operate 100 percent. So we like that. Quite frankly, if properties are 100 percent too long, we probably aren’t raising rents enough, although we are sensitive to attrition. But I think that we’re comfortable in looking at 93 percent as stabilized levels. If you look at acquisitions, even though profit there may be 98 percent occupied, we do serve an 85-year-old. We know there are going to be move-outs, so we typically under rate that at 93 percent. But there is no reason why we can’t perform at a higher level.

And in all of the mature properties, do you have marketing people either on site or on location at this point or is there more--?

We’re happy. One of the benefits, and Jim talked earlier about our philosophy of our properties. The average size of our property is about 150 units. And what’s interesting about that is that we have the ability to have the infrastructure to have a full-time marketing director. Very often in our properties we’ll have more than one person on site marketing or as a retirement counselor doing outreach and dealing with senior groups as well as marketing.

We have a very disciplined approach how we look at marketing. We expect our marketing on-site directors to make around 400 calls a month. We track that every month. We track every one of our properties. We have a monthly meeting, which we’ll have actually tomorrow. We review by property our tours, our repeat tours, our deposits, our lead generation. We compare to each of our properties to industry averages. We compare those properties to year earlier.

So, again, we like the size of our communities with the independent and assisted living focus because it gives us the advantage of being able to have a full-time or sometimes more than full-time [1 per FCE] devoted exclusively to marketing, because we realize even if a property is full, we still have to market because we do run about 35 percent attrition a year.

And then, finally, just to repeat so I understand, at present you’re saying on the new contracts and agreements that you’re reaching, you’re still getting between 4 and 5 percent increase on an average monthly rent?

That is correct.

Thank you.

Thank you, Sir. Moving on to [Todd Cohen] of [MPC Advisors].

Good morning. Just a quick question on the book value you stated in the press release. What’s the average age of the properties on the books and in how their valued on the books?

If you look at the 17 Waterford and Wellingtons, those properties were acquired in July of ’03, some where acquired in November of ’04, and we consolidated last year. So those values reflect basically the values which then came over to the Company and those transactions over the last couple of years.

The other properties, we’ve typically owned those for as many as I guess 15 years or so, and so they have bases that carried over from our IPO back in 1996 and it continues since then. So they have depreciated book values, which we believe are below their current values. And, in fact, if you go back and look at our earlier releases years ago when we did some sale-managed backs, we always had a gain. So it does reflect the fact that the assets are-- even a higher cap rate environment, we saw that the values were greater than the book values.

Okay, and then getting back to the question that was previously asked on kind of replacement value, what was the figure that you have come up with as it relates to that cost as it relates to your specific stock portfolio?

It’s hard to say what the typical cost is when every area of the country is going to be different. We have some assets that we have ownership interest in that were built at in excess of $160,000 a unit. We have properties that were built at $100,000 or $110,000 a unit. So it’s hard to say and, as I said, we’re seeing properties just in the industry in the Northeast where construction costs could be as high as $200,000 a unit. But I do think it’s difficult to build a quality property for-- looking at the hard costs, soft costs, lease-up for less than $100,000 or $110,000 a unit is probably hard to accomplish.

Thank you.

[OPERATOR INSTRUCTIONS]. Next, we’ll hear from Carter Dunlap of Dunlap Equity Management.

Hi. You mentioned the expiration of the 2 caps on your floating rate debt. I guess more generally what I’d be curious about is your attitude about the term structure of that debt and any debt you take on with some of the prospective acquisitions. I mean the lending market seems to have warmed up to the IL and AL category. Is moving it--? First, presuming that management desired to move it to a more fixed rate structure, what’s before you in order to do that?

Probably the first thing we’ll do is that if you look at our balance sheet today, we have about $34 million of debt that actually matures in September of this year, September of ’05. And as we look at refinancing alternatives on that $34 million of debt, we’ll certainly look hard at fixed rate alternatives to try to fix the interest rate on that $34 million.

In terms of the rest of the portfolio, obviously the interest rates on variable rate debt are still significantly less than fixed rate debt but they are converging. And, at this time, I would say that we would probably look to structure more of our debt at fixed interest rates anticipating that the variable rate debt is going to continue to increase. So that’s one of our objectives today is to fix more of our debt in the future, probably starting with these 4 properties that will be refinanced later this year.

All right. Thanks.

And [Wes Sylvestri] of [Secure Tight Capital] has our next question.

Hello. How are you guys doing? A couple questions-- first of all, in the past, you’ve talked about attrition as the one of the things you’re kind of solving, obviously doing that by the services. I was wondering if you created a metric at all--? I mean length of stay, I guess, would be the most easy one, but to measure the impact of the added services and the reduction in attrition?

Well, it’s too early to really look at those numbers. We’re running, as I said, about 35 percent annual attrition, which would suggest the average length of stay of about 3 years in our communities, which again is probably close to double of what you see in free-standing assisted living, so we’re benefiting from having independent living or independent with assisted living. We do believe that by adding these services we can extend those lengths of stays.

Perhaps, historically, our attrition was down in the 25 percent range, so we’ll probably get somewhere, hopefully, between the 25 and 30 percent range, coupled with the fact, I also believe-- we also believe that it will accelerate the velocity of our leasing because an issue that seniors and their children do have is that there are needs, Mom doesn’t want to have to move again. So to the extent that it’s convenient to have it in the building, whether it be operated or third-party operates it, it makes it very appealing for someone moving into the property. So we think we get the benefit of having higher occupancies, which also would presumably have better rental rates because of supply and demand and slower attrition.

So we think that there are significant benefits there. It’s a little too early to kind of come back and say these are the metrics and we can evaluate that because, again, this is something that we began doing last year. We’re still introducing some of these agencies to certain of our properties. Most of them have them today, but it’s a little too early to have anecdotal evidence of what the results will be.

Okay. So the trend in attrition then over the last 4 quarters, is it flat?

It’s actually improving some. It was 38 percent the second half of last year. It’s about 35 percent now. So, and I will comment. It’s interesting. If you look at the first quarter, occupancies are up, margins are up, and January is typically the worst month in this industry. Between the holidays, weather, illnesses, deaths, flu, it’s typically the worst month, yet we had a very successful quarter and we’re just now getting into the spring season, which is typically the best.

So, typically, if you look at this business, once you get into April through Thanksgiving, you’re probably in a very, very good trend line as to see improvements, both because it’s just-- it’s the spring. People do get out and make moves. It has been a very tough winter in the Midwest and Northeast, which helps us because a lot of seniors realize or their kids realize that enough shoveling and it’s hard. New York in the last 3 years averaged over 40 inches of snow. Chicago had a lot more snow. Boston had a lot of snow. So we’re seeing that people realize that it’s not so easy for someone 85 to get out there and get that snow removed.

So we start to see those benefits, and our velocity is good and we’re very optimistic that we’ll continue to see improved trends throughout the course of this year.

And then the other thing, could you remind me on how your variable cap on the interest rate actually get adjusted and how the interest expense is computed?

The way that works is we have 2 large interest rate caps in place.

Right.

There’s a $50 million cap maturing January of ’06, and that is at a 5 percent LIBOR rate. The other one, the $100 million cap that matures in January of ’08 actually fixes LIBOR at a maximum of 5 percent until LIBOR gets over 7 percent, at which time the cap moves up to 7 percent. So it’s actually a 2-stage cap, but it’s practically a 5 percent cap on LIBOR for the next almost 3 years. But if LIBOR does get above 7 percent, the cap moves to that level. We sold the upper end of the cap to keep our constant line. And what we’re doing is we’re amortizing the costs of those interest rate caps, the interest expense, over the term of the cap.

Okay.

It’s a portion of our interest and expense category.

I understand. And then last, I mean as you guys look at the [macroy] you seem pretty bullish in terms of your outlook. I mean what do you see derailing that bullish outlook for the industry?

Eventually, there will be construction. I mean it will come, and I think we’ve got a sweet spot with many years before that proves fruitful. The thing about the process, even if the industry today said, “We want to get back into development,” to find a site, get it approved could take a good 12 months, maybe longer to get it financed. It typically takes another 12 months to build and it takes a year to fill. So we probably are looking out for quite a number of years before we even see that impact.

It won’t-- unfortunately, people will develop and if occupancies get to 95 percent, we’ll all have profited tremendously in that period, but at some point it will be economic to build. Today, even with lower cap rates, it’s still cheaper to buy than to build. And I do think that what’s interesting is that with the really velocity of home building and other types of development, retail development we’re seeing out there, and other uses, it’s going to be harder to find sites. So that, obviously, is an issue that ultimately we’ll have to deal with, but I think we’ll all benefit handsomely before that accomplishes because you’ll have to have the economic basis to justify it.

And, secondly, is if you go back 15 years ago, we were in a recessionary period with very high interest rates and home sales slowed and people couldn’t move out of their houses, but, again, I don’t think anyone anticipates that if you look at the Fed comment yesterday, if you look at rates. If you look at long-term rates, I mean they’re 10-year-- a [voluminous] one is 418. So it’s telling you there-- we track economy-- we don’t pretend to be economists, but we do track what others are saying.

So as long as there is still an active home market, which there is, and a lot of equity in those homes, because it’s very attractive for residents to sell their homes-- and what’s also interesting is that when we sit down with a prospect and they visit a number of properties, but people don’t understand until they kind of go through the numbers, we typically are a cheaper alternative than living at home. So it becomes very competitive.

And the last factor that I’m actually I think positive about is interest rates, what we all focus on is that so many of our residents live on fixed income and it was very tough when people were getting 1 percent in the bank. So having these 25 basis point increases in the Fed rate commensurate with higher CD’s and higher interest rates, higher fixed income actually gives consumers, particularly 85-year-old consumers, more spending power and higher confidence levels. So I think that also will benefit us in the ability to attract more seniors and have more people being able to afford the monthly rents.

Thank you.

And, gentlemen, there are no further questions at this time. We’ll turn the conference back over to you, Mr. Stroud, for any additional or closing remarks.

We thank everyone’s time and we wish you a good day. Thank you very much.

That does conclude today’s conference. We do thank you for your participation.