Sonida Senior Living Inc (SNDA) 2005 Q2 法說會逐字稿

Good day, and welcome to today's Capital Senior Living second quarter 2005 results conference call. Today's conference is being recorded. As a reminder, any forward-looking statements made by management in this conference call 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 downturns 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 principals and interpretations among others and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to the Chairman, Mr. James Stroud. Please go ahead, sir.

Good morning, and welcome to Capital Senior Living's second quarter 2005 earnings call. We are pleased to report improvement in community occupancies and operating margins in the second quarter. The average physical occupancy rate on stabilized communities for the quarter was 90% compared to 88% for the second quarter of 2004. The operating margins before property taxes, insurance, and management fees improved to 47% and stabilized independent and assisted living communities, compared to 45% for the second quarter of 2004. These two factors contributed to continued growth in revenues and cash earnings.

The revenues for the second quarter were $24.4 million compared to 23 million for the second quarter of 2004, and an increase of approximately 6%. Excluding the effect of the treasury rate lock agreements, as will be discussed later, cash earnings defined as net income plus depreciation and amortization were 2 million compared to 1.4 for the second quarter of 2004, a 49% increase. In the second quarter, the Company also announced a new fixed rate financing of 39 million, and a sale leaseback transaction with Ventas, Inc. To comment on these and other second quarter results, I now introduce Larry Cohen, Chief Executive Officer.

Thanks, Jim, and good morning, everybody. We're pleased to report our financial and operating results for the second quarter of 2005. Capital Senior Living is benefiting from the completion of key strategic initiatives that have resulted in an improved capital structure and an expanded portfolio of properties to fuel our continued growth. We are also encouraged by better industry fundamentals, including higher overall occupancies and rental rates, lower capitalization rates and attractive interest rates. The convergence of these factors is contributing to a very active acquisition market, which we believe will accelerate the continued improvement in the Company's profitability.

The positive market environment is evidenced by our recently announced sale leaseback transaction with Ventas Healthcare Properties, involving the six communities owned by our joint venture with an affiliate of Blackstone real estate investors. The venture is selling these communities to Ventas for approximately $85 million and Capital Senior living with lease these six communities from Ventas for an initial term of ten years with two five-year renewal options. The initial lease rate will be 8%, and will be subject to conditional escalation clauses. This transaction is expected to close in the third quarter of 2005, subject to lender and regulatory approvals and other customary closing conditions. We anticipate receiving net proceeds of approximately $6.5 million from the transaction, representing our equity interest and additional incentive payments from the joint venture. These payments will be more than four times our initial investment of $1.6 million.

The Ventas transaction, along with our recently recompleted refinancing with GMAC further confirms the embedded equity in our own and joint venture communities. The Ventas transaction also validates our joint venture structure and is significant in numerous respects. It will result in the Company reporting a gain in each of the next ten years with incremental earnings through improvements in the community's occupancies and increases in rental rates. It will bolster our cash position by approximately $6.5 million. It results in a better than expected return to Blackstone continuing their interest in further investments with the Company and provides the Company with a new capital partner, Ventas for additional acquisition and sale leaseback transactions.

We are fortunate to have completed a $128 million refinance last December, with GMAC that provides us the flexibility to allow our Waterford and Wellington communities to stabilize and either be refinanced with permanent fixed rate debt on terms similar to the refinancing we completed last month, or be sold in sale lease back transactions allowing us to recognize the embedded gains in the communities and operate them under long-term leases. Our successful track record as a proven operator of senior living communities has afforded us the opportunity to cultivate excellent relationships, with a variety of financial partners. Currently, there are more than $1 billion of quality senior living communities for sale in the market and we expect to successfully complete acquisitions utilizing both joint venture and lease structures.

Now I would like to discuss and review a summary of the financial results for the quarter. Excluding the effect of the non-cash mark to market adjustments on the treasury lock agreements, the Company's net loss for the current quarter improved to $1.1 million, or $0.04 per share compared to a loss of $1.6 million in the second quarter of 2004. The Company generated cash earnings for the second quarter, excluding the effect of the treasury rate lock of $2 million, or $0.08 per diluted share, a 49% improvement from the $1.4 million, or $0.05 per diluted cash earnings generated in the fourth quarter -- I'm sorry, in the second quarter of 2004. Adjusted EBITDA, which we define as income from operations, plus depreciation and amoritization for the second quarter increased 27% to $5.8 million compared to $4.5 million in the second quarter of 2004.

Reviewing the operational highlights for the quarter, our revenues under management increased 27% to $41.1 million in the second quarter from $32.3 million in the comparable quarter of 2004. Revenues under management include revenues generated by our 29 consolidated communities, our 10 communities owned to joint ventures, and 15 communities owned by third parties that are managed by Capital Senior Living. General and administrative expenses as a percentage of revenue under management decreased in the second quarter of 2005 to 6% compared to 7% in the second quarter of 2004. We have consolidated 29 communities, with a resident capacity of 4831 during the quarter. Resident and healthcare revenue at these wholly owned properties increased $1 million, or 4.4% as a result of a 2.3% increase in the average monthly rent and a 1.3% increase in occupancy.

Operating expenses were equal to the comparable quarter of the prior year, and the operating margins and our consolidated communities improved to 39% from 38% in the second quarter of 2004. Resident revenues in 40 communities with a combined resident capacity of 6854 that we owned and/or managed during both the second quarter of 2005 and second quarter 2004 increased 6% to approximately $34.2 million from $32.3 million. Operating expenses at these 40 communities increased by 2.5%, resulting in net income growth of 16%. We increased our total portfolio by 14 communities and our resident capacity by 1814 since the second quarter of 2004. Operating margins for the 54 communities currently under management with combined resident capacity of 8668 improved to 42% during the second quarter compared to 40% during the same quarter last year.

We ended the quarter with 44 communities stabilized, which we define as having achieved 90% occupancy, of which 23 are wholly owned, 8 are in joint ventures and 13 are managed to third parties. Average physical occupancies at the stabilized communities improved to 90% during the second quarter of 2005, compared to 88% of the same quarter last year. Operating margins at the stabilized independent and assisted living communities also improved to 47% for the quarter compared to 45% for the second quarter of 2004. Our 17 Waterford and Wellington communities with a resident capacity of 2426 increased their average physical occupancy to 90% as of June 30, 2005, up from 87% at the end of the first quarter 2004. Increases in the average monthly rents of 3.6% and occupancy growth of 2.6% resulted in an 8% increase in revenues at these 17 communities to $10.1 million compared to $9.4 million in the second quarter of 2004. Efficient operations resulted in no change in operating expenses for the quarter. The operating leverage in our communities is reflected in the collective net income growth of 34%. In addition, operating margins at our Waterford and Wellington properties improved to 41% from 36% a year earlier.

Looking at industry fundamentals, we see continued improvement throughout the second quarter. Occupancy rates continued 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 to 300 basis points for larger portfolio transactions and to a lesser extent for individual asset sales. Cap rates are lower for independent living communities than other categories of senior living communities. This benefits Capital Senior Living significantly, since 84% of our residents live in independent living apartments. We have ownership interest in 73% of our communities, 54% are wholly owned, and 19% are owned with joint venture partners, and we have fixed purchase options on another 13% of our communities under management.

This marked improvement in values has also generated an active acquisition market where a significant number of quality properties are being offered for sale, and acquisition financing is available to proven operators at attractive terms. We believe we can successfully participate in this market and make accretive acquisitions with our joint venture partners, or by leasing acquired communities from REIT at favorable rates. I expect that the balance of 2005 will be an active period for us, as we grow our portfolio through both individual asset and portfolio acquisitions. I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2005.

Thanks, Larry, and good morning. I hope everyone's 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 second quarter and the first six months 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.capital senior.com.

The Company reported revenues of $24.4 million for the second quarter of 2005 compared to revenues of $23 million for the second quarter of 2004, an increase of approximately $1.4 million, or 6%. Resident and healthcare revenues increased by approximately $1 million, and average monthly rents in our consolidated properties increased by 2.3% and the percentage of occupied units increased by 1.3%. Management fees increased by $0.4 million from the second quarter of 2004, primarily due to the addition of 14 properties under management through the acquisition of CGI management last August. Revenues under management, which includes our own communities, along with communities owned at joint ventures and communities we manage for third parties, increased approximately 27% to $41.1 million in the second quarter of 2005 from $32.3 million in the second quarter of 2004.

Total expenses for the second quarter of 2005 were up approximately $400,000 from the second quarter of 2004, an increase of less than 2%. Operating expenses were flat year-over-year and general and administrative expenses and depreciation and amoritization each increased by approximately $200,000 from the second quarter of 2004. Operating expenses as a percentage of resident revenues improved over 3 percentage points from the prior year. General and administrative expenses as a percentage of revenues under management improved from 7% last year to 6% in the current quarter. With a $1.4 million increase in revenues and a $0.4 million revenue in expenses, income from operations increased from $1.6 million in the second quarter of 2004 to $2.6 million in the second quarter of 2005, an increase of approximately 66%.

Adjusted EBITDA, which we define as income from operations, plus depreciation and amoritization, for the second quarter of 2005, was $5.8 million compared to $4.5 million in the second quarter of 2004, an increase of $1.3 million, or approximately 27%. Interest expense net of interest income was approximately $0.8 million higher in the second quarter of 2005 compared to the second quarter of 2004, primarily due to higher rates on the Company's variable rate debt. The Company's weighted average interest rate was 6.5% in the second quarter of 2005, with fixed rate debt averaging 8.1% and variable rate debt averaging 6.2%. Mortgage debt in the second quarter of 2005 was $6.3 million below the level at the end of the second quarter of 2004.

As part of the Company's strategy to convert variable rate debt to long-term fixed rates at attractive terms, the Company announced in July that it has completed the refinancing of four communities known as the Independence Village properties, with GMAC Commercial Mortgage. The interest rate on these loans is fixed for the entire ten-year term at the rate of 5.46%. With the completion of this refinancing, approximately 30% of the Company's debt is at fixed rates and 70% is variable. In the second quarter of 2005, the Company recorded a pre-tax loss of $1.6 million on treasury rate lock agreements with a previous lender to Triad II. The Company acquired Triad II in July of 2003.

These rate lock agreements were originally required by the lender to hedge the risk that the cost of future issuance of debt may be adversely effected by higher interest rates. The debt related to these agreements was refinanced in the fourth quarter of 2004, no longer qualifying these agreements as an effective interest rate hedge. The Company reflects the interest rate lock agreements at fair value on the balance sheet, and related gains and losses are reflected on the income statement. The mark to market value of these obligations generally moves in the opposite direction of the yield on the ten-year treasury note. During the second quarter a reduction of over 50 basis points and the yield on the ten-year treasury note caused an increase of $1.6 million in the settlement amount of this obligation. Since June 30, 2005, the yield on the ten-year treasury has increased and the Company has recovered most of this reported loss.

These non cash mark to market adjustments will continue until the settlement date of January 3, 2006, or until the Company decides to convert the settlement amount of this obligation to a term note. The Company has an option to convert the settlement amount of the note to a five-year term at an interest rate of LIBOR plus 250 basis points. The Company reported a net loss of $2.2 million in the second quarter of 2005, equivalent to a loss of $0.08 per share, $0.04 of the loss was due to the treasury rate locks and $0.04 was due to operations. Excluding the effects of the treasury rate lock agreements, the Company generated cash earnings, which we define as net income plus depreciation and amoritization in the second quarter of 2005 of $2 million, or $0.08 per diluted share, compared to $1.4 million, or $0.05 per diluted share in the second quarter of 2004.

Moving to the first half results, the Company produced revenues of $48.7 million compared to revenues of $45.6 million in the first half of 2004, for an increase of $3.1 million, or approximately 6.6%. Excluding the effect of the treasury rate lock agreements, the Company's loss improved from $0.15 per diluted share in the first half of 2004 to $0.08 per diluted share in the first half of 2005. Adjusted EBITDA for the first half of 2005 was $11.5 million, an increase of approximately $3 million, or 34% in the prior year. Excluding the effect of the treasury rate lock agreements, the Company produced cash earnings of $4.2 million, or $0.16 per diluted share in the first half of 2005, compared to cash earnings of $2.3 million, or $0.09 per diluted share in the comparable prior year period.

As of June 30, 2005, the Company had $15.8 million of cash, cash equivalents and restricted cash in $146.8 million in shareholders equity, equivalent to approximately $5.69 per share. The Company expects to receive net proceeds of more than $10 million in the third quarter of 2005 due to the GMAC refinancing discussed earlier and the sale lease back agreement with Ventas that Larry reviewed. We would now like to open the call to Q&A.

[OPERATOR INSTRUCTIONS] We'll take our first question from Jerry Doctrow with Legg Mason.

Good morning.

Good morning, Jerry.

I just had a couple things. I guess first, just on the treasury lock and maybe more importantly just on the variable rate debt, I was wondering if you could just sort of talk through a little bit so we can help understand how much sensitivity you have to movements here in the, in the ten-year in terms of your actual interest rates, the treasury lock is going to be there, it's going to be there, it's going to bounce up and down. I'm less concerned about that, than just how much sensitivity you have and maybe what plans you have to maybe term out more of that.

Jerry, it's Ralph. Actually your point is well taken. The treasury rate lock agreement is a non-cash adjustment that's made quarter to quarter. We're required to roll it to (INAUDIBLE - audio difficulties) no longer underlying debt to match up with these rate lock agreements, but at some point, between now and January 3, 2006, the Company will decide to net all those and term out the balance into a five-year note, and in the meantime, that is going to adjust quarter to quarter, but we're really just waiting for the proper time to convert that to a term agreement. If you take a look at our debt structure, we have announced in July that we've refinanced about $34 million of variable rate debt with GMAC, and actually increased the proceeds by about $5 million so that we're going to have about $39 million of fixed rate debt at a rate of 5.46% fixed for a rate of ten years.

By the time you look at the structure after that transaction is completed, we will have about $82 million of fixed rate debt, which is about 32% of our total debt balance and about 176 million or so of variable rate debt, about 68% of our total, and we're very interested in fixing more of that variable rate debt as attractive opportunities develop for us, so what we're doing is looking at the portfolio, looking at our variable rate debt and seeing when we have the ability to convert those variable rate loans to fixed rate loans at longer terms, more permanent financing, and fixed rates of interest and we're working very hard in that direction.

And, Jerry, as I commented earlier, it's Larry, one of the benefits we see in this structure is that most of the floating rate debt relates to the Waterford and Wellington communities that were built between 1999 and 2002 and we made good strides, we ended the quarter with 90% occupancy in those communities, we're raising rents year-over-year by almost 4%. Now we think we can accelerate that. We're looking ancillary service and other revenue ways to enhance the revenues of those communities, and we think we have the flexibility, then, of running the analysis. When we did this Independent Villas refinance in July, we figured our rate terms in GMAC on a ten-year fixed rate basis, and we compared that to a sale lease back structure.

So what we will do is look at the assets, look at the availability of either sale manage back, sale lease back and/or refinance and decide what it is the most favorable to the Company based on the cost of the financing, the holding period of financing, and the generation of income to the Company. So we think we have benefited over the very, very low short-term rate environment for many years now and obviously there's a lot of sensitivity, again, the feds meeting today. We're not economists, but we do think that we have a structure that will facilitate us to be able to mix and match in the way to maximize the value of these assets, enhance our cash, improve our profitability, and result in very long-term fixed, whether it be through a lease structure or through a refinance structure.

And in terms of the financing on that, are -- you sort of have the option of just rolling that, refinancing that at any time now--?

In fact, it was designed specifically for that purpose. It's an interim facility with GMAC and it was designed to allow us to roll those out at any time. That's the benefit of the floating rate, is that there are no lockouts and no prepayment penalties, so at any time we can just roll those into other vehicles.

Okay, and in terms of their progress, your sense is they are at the point where they are stabilized enough that permanent financing starts looking attractive basically, say, the rest of this year or into next year?

Exactly. If you look at Fannie Mae, they have a 90% requirement for occupancy for three months. So now we're there it gives us more flexibility. The structure with GMAC on the Independence Village properties, we really commend GMAC because it was creative. We ended up at a 1/30 spread over the ten year which is the most attractive terms I've seen in senior housing in my career. Typically with independent living emphasis, we can get lower spreads than with assisted living, so we think there are opportunities there, and coupled with the Ventas relationship and discussions with other REITs, we also will look at some of the sale lease back opportunities where we can capture some of the embedded equity in our properties and record profits and then also have good long-term structures.

Okay. Let's see, there was just a little item on expense versus SG&A that jumped around this quarter. Did you sort of reclassify some stuff it was like $2 million, looked like it moved from one category to the other.

Right. Jerry, what we did was we actually took a look during this last quarter and all of our expense structures and reevaluated whether or not each expense was more properly operating expense or general and administrative expense, and what we determined was that quite a bit of our G&A actually occurred at the property level, so it was property level overhead that we had classified historically as general and administrative expense, and in order to make the figures more meaningful and to bring us more closely in line with industry norms, classified, some of the G&A expenses to operating expense, but we've done it historically so that all of our comparisons are accurate. So we did it not only at the current quarter and year to date numbers, but also in the prior year statistics, but this will be the way we record it going forward.

And Jerry, if you look at our prior earnings releases and the supplemental information, we would have, for example, last quarter, we had as a sub top category, our G&A expenses breaking out what was corporate and what was property level. People can understand that. Now that rolls into the actual income statement. I think it better reflects what is a property level operating expense, which was previously categorized as G&A versus corporate G&A.

Okay, and your sense is that the current presentation, the revised presentation more closely matches industry and more closely matches maybe the way your peers do to it.

Exactly. And if you look, for example, at some of the companies reported last week, we're looking at their G&A, SG&A as a percent of revenues under management and we will show that as well as revenues as a percent of revenues under management.

Okay. Great. Thanks.

Thank you.

We'll take our next question from Frank Morgan with Jefferies & Company.

Hi, it's actually Derrick Bagman here. Had a couple of questions. One housekeeping question, I was wondering do you have a -- I might have missed it, do you have a cash flow from ops number for the quarter?

Actually, Derrick, we're going to be publishing our 10-Q later today and there will be a cash flow statement in the 10-Q, but it hasn't been disclosed at the present time, so I prefer to wait until the 10-Q has been filed.

Okay. That's fine. And I guess my other questions kind of refer to some sequential changes that are happening in the portfolio. I was wondering if you look at the consolidated portfolio being the Legacy and Triads I through 5, the occupancy looks like it increased 10 basis points on a sequential basis, but it looks like the Triad occupancy increased by about 90 basis points on the sequential basis. So I was wondering if there was any shift in the Legacy portfolio or change in the Legacy portfolio that you guys are seeing.

I think that if you look at the portfolio and our gains at the individual property levels, we had a little more attrition in the Legacy properties. A lot of that has to do with, for example, Villa Santa Barbara, which is one of our properties that is a Legacy property that had a lot of attrition. It's being released right now. That's one of the Ventas properties, going in the Ventas transaction. I think that we're seeing with the Waterfords and Wellingtons, as I said, we saw a nice improvement where we're 90% occupied right now. Our lease rate is higher than that, so we're seeing continued progress throughout the portfolio, and I think also we're finding is that if you look at the mix, the Legacy properties has a higher percentage of assisted living than the newer properties. So I think you're starting to see some of the effects of the independent living versus the assisted living portfolios drive right through those numbers.

Okay. So it looks like just changes ahead of this sale lease back transaction. And I think my other question really is very related on pricing seemed to do the same thing is that also related?

Well, what should happen is that because the newer properties, if you look at the average monthly rent, $1800 a month for the Waterford and Wellingtons compared to about $2100 a month for the total consolidated properties, if you look at just the Legacy properties for the quarter, the average monthly rents was closer to $2400 a month, so what we expect now that we have stabilized the Waterfords, we think there's been a pricing pressure there where we'll start to accelerate some of the pricing and start to narrow that disparity.

Okay. All right. Well, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We'll take our next question from Peter Lutz with Smith Barney.

Hi, Larry, how are you doing?

Good, Peter. How are you?

Good. What was -- you call it the rent, I call it same-store sales, what was your incremental increase this quarter over last year and last quarter and some of it, I know you've increased prices, but in general, what is -- what was the incremental increase?

If you look at our total portfolio, the 40 properties that we owned and/or managed year to year, we saw an increase of 6% in revenues, and that breaks out approximately, I think it's about 2.5% revenues and about 1.5% in occupancy.

Okay. Some of your competitors have started to get significant revenue and you had talked about it from ancillary products. Have you started to move more aggressively on that front?

Yes, we have. As you and others know, we began that process by introducing third party home care agencies to our communities to better serve our residents. We are in the process now of looking at different opportunities to be able to bring some of that into the Company in a way that gives us a good risk reward benefit, if you will, looking at how to best structure that in order to capture revenues because we think there is and we do see it in some of our peers where there is a tremendous amount of revenue growth through the ancillary services, and we expect that that will be one of our drivers for growth in the future.

As cap rates go down and as property values increase and as you said of significance, 79% wholly owned or mostly owned values with significant embedded values in the ground and as you have taken some of it out previously, what is your plan to bring some more of that to stockholders equity?

We plan to do that. As I mentioned, we're looking, it's interesting. I we look at the Waterford and Wellingtons, our capital structure facilitates that because we do have this debt in place that can be paid off. We will look at a case by case scenario. On the last transaction Independence Village, we could have done a sale lease back and captured a lot of that gain to the Company. The appraised values I think were $56 million. The basis is probably $20 million or so below that, maybe even greater.

We decided that at the attractive terms of the fixed rate debt, it was a good strategy for the Company to take some of the cash through the REIT finance and put in place long-term fixed rate debt at 5.4%, but we are looking now as these properties stabilize, we can capture that, improve our earnings and have a greater potential for profitability. Couple the fact that was interesting is that we have the purchased options on seven of the Covenant group assets, so we do monitor that. We have until February of '07 to exercise those options at $41 million purchase price, so gives us the ability to try to maximize the values there and then to look at ways to capture some of that through a sale leaseback.

So I think you'll see more sale leaseback transactions. I also think that with this very vibrant acquisition market, we will be looking to partner with some of the REITs as a way to acquire assets, lease them from the REITs as well as our joint venture structure, which still provides very, very formidable investment vehicle for us because of the high returns we get through both the management, our equity investment, and then our promotes.

Just to follow on that, and you brought the point up, obviously you do an appraised value versus a market value. What kind of discount would you say you have versus appraised value on the general portfolio?

Well, we have not appraised the entire portfolio, but if you look at Independence Village, for example, there we talked about what the basis is versus appraised value. There I guess the basis is probably closer to about 60% of appraised value, so I think that, again, signifies some of this embedded equity we value we have in our assets.

Thanks a lot. Good job.

Thank you very much, Peter.

We'll take a follow-up from Jerry Doctrow with Legg Mason.

Larry, I wanted to just come back and maybe see if you can give a little more color on acquisition environment, and I think if I understood you correctly you are saying two things. One is, cap rates are very attractive, it creates an ability to capture embedded value in the portfolio, but you also seem to be talking about making additional acquisitions out there, and do you see further consolidation? What kind of properties are coming to market? Do the cap rates make sense as a buyer kind of as well as you being a seller? Maybe you can just give me a little color there.

It's interesting. I think right now it's a very interesting environment out there because cap rates have come down considerably, obviously trying to narrow the differential between multi family and historic scene of living cap rates. We feel that we are in a perfect position to capture that for a couple of reasons. One, we're a national operator with offices in 20 states, regional offices and a very proven track record of buyer of properties. Of the 54 properties we operate today, we built 17 and we acquired the rest. Last summer we acquired the management of 14 properties for the Covenant transaction, it was a very smooth integration. So we feel very comfortable in our ability with our regional oversight, our corporate structure, and our philosophy to operate the properties at the site level to be able to acquire both individual assets and portfolios, integrate them into our infrastructure.

Secondly, we think we're very fortunate to have a variety of capital structures that we can utilize for acquisitions. We are -- and believe we will be able to buy portfolios, more likely with joint venture partners than with REITs. We think that's the best way to really integrate those properties, operate them and learn them and get a very attractive return where, if you look at -- even without the promote on the Blackstone transaction, our typical joint venture structure with an expected return on the equity and our management fee can be anywhere from $0.70 to $0.75 on the $1 in the first year for every $1 we invest and we saw a quadruple in the return of the Blackstone investment compared to our initial equity.

And then we're looking at really probably more individual assets. What we'll buy with REITs, where we can buy, and everything we're buying is going to be accretive. What's very interesting is that if we can buy a transaction -- even at today's cap rates on individual assets, there is not the pricing premium you're getting for portfolios, so we're seeing a spread between going in cap rates to where we'll have an accretive transaction out of the box. And in the case of some of the more aggressive pricing portfolios, interest rates are still low, so there's still the ability for us and our joint venture partners to get very nice returns on the equity investment using leverage if our third party joint venture partners, coupled with management fees that we think will drive, again, a lot of earnings potential to the Company.

So we think that we strategically are well positioned from an operational standpoint, from an historical standpoint, as far as a track record and we feel very fortunate that we do have this grouping of joint venture partners and REITs that we can facilitate and also what we've done is we have really broadened the investment spectrum where we have partners with different risk profiles, different return requirements, and expectations in holding periods that we can participate in portfolios, whether they be very high quality, more stable, lower cap rate properties, or more opportunistic acquisitions, where, again, we have that type of equity partner to participate with. So we feel fortunate and this is the most active market that we've seen as an industry probably ever. I think what's facilitating it is that there's still a lot of financial partners that invested in this industry ten years ago. They got caught up in a tumultuous period where they could not exit and with cap rates coming down, now they are looking to recoup their equity, in some cases won't be called a recovery of their equity but they feel it's a good time for them to liquify their investments and return their investors capital or reinvest elsewhere.

So we're seeing situations where a number of large -- medium-sized portfolios are owned by financial sponsors which had thought they could take them public, but the other phenomenon today is that the IPO market really has shut down to those smaller companies. There's rumored to be one or maybe two IPOs looming out there of significant size, burr the smaller companies can participate and can get into the market. They are now looking to exit and we think we can facilitate that because we have a variety of ways of financing those acquisitions and we're also seeing smaller operators look to liquify their investments. We're seeing natural operators looking to prune some assets that may not fit strategically from geographic standpoint, so we do think that with lower cap rates, it makes sense for people to be sellers. We think we have the capital structure with our joint venture partners and with our REITs to be able to participate in that in ways that are (INAUDIBLE - audio difficulties) company.

Just a follow-up. Strategically, are you looking, I assume you're still focused on IL predominantly. Are you focused on amy particular part of the country? And maybe also if you were going head to head against your sort of, I don't know if they are peers exactly, but sort of other players. Are there things other than maybe capital structure and flexibility that sort of sets you guys apart in terms of being a buyer?

I think our relationship in this industry sets us apart. I think that if you look at the situations today, we'll be probably more active in properties which are not being marketed by the national brokerage firms, although we're looking at those as well. We are -- there are operators out there that we know well that do not want to disrupt their operations by having a broad marketing of those assets, so they are going to a select group of operators and we are one of and I think the relationships we have with them, as well as our financial partners and flexibility are giving us an advantage over some of the competition out there.

Jerry this, is Jim Stroud. From a standpoint of our closing track record, I think that's a major benefit to us because a seller can look at it and realize that we've closed on every transaction that we've gone through on the due diligence. Second, from a standpoint of our ability to do due diligence, with the 20 locations, 20 state locations Larry mentioned, and our understanding of the continuum of care, we have the ability to go in and buy an AL community with land next door and our development capacity to go ahead and create a continuum of care by buying the AL and then ultimately expanding the independent living, and then with the focus on the ancillary services, we can also come into independent living and bring in home healthcare. So we've got the flexibility with the continuum of care and they recognize that we look not only at the existing asset, but what that asset can perform financially, as well as service package two to three years down the road.

The focus is still primarily IL rather than anything else?

Well, we're also looking at AL and AL/IL combinations.

Okay.

It's good to recognize -- it's interesting that even though IL resident's 85 today and the acuity level is increasing that's why we're so focused on ancillary services, so we are looking at situations which may have a higher proportion of assisted to the independent than we have currently, but we think that that fits well, we feel comfortable in operating those properties. We do it today, and we think that it will create opportunities to further enhance the Company's profitability.

And maybe Jim touched on it, but just are you thinking about development or what's your thoughts about development, maybe even industry-wide over the next couple of years?

Well, I think the -- at the stage where all of a sudden the quality stock of communities available is bought, there will be a development starting. Right now we don't see it as a significant threat. From a standpoint of our own portfolio, a lot of our focus is on expansion and/or conversion. As Larry mentioned, we're finding we've been very successful in the Aegean place and so therefore a Waterford that's 100% independent, there's now the opportunity to go ahead and convert one of the floors and/or one of the wings to assisted living and therefore increase the revenue on that project. So we're seeing first, the expansion side of and it then we would see that probably in '06, '07 there will be more of a focus on development. But right now there's great opportunity in the acquisition side.

Okay. Great, thank you.

We'll take our next question from Peter Lutz.

Hi, just a follow-on question. And I sort of touched on it before, but supply/demand versus product in the market, would you still think that demand is significantly more than supply coming on the market? At one time we said -- you guys said it was around 10,000 units a year. Would you still hold to that?

Well, if you look at the last four or five years, the total new supply is about 25 to 30,000 units, but that incorporates C departments, CCRCs, independent and assisted living and about half of that was either CCRCs or senior apartments. I think that the 2005 numbers are actually lower than 2004 on new supply, with the preponderance still being seen as apartments. I think in traditional independent assisted it's still fairly constrained and obviously, if you look at the demographics, we serve in, and age cohort that's the fastest growing segment of our population. I think that we're seeing, I think the experience of the other companies or public and private industry also confirms that occupancies are firming, prices are improving because the supply is being outpaced by the demand.

Okay. Thanks a lot.

Thank you.

And there are no further questions. I'll turn the conference back over to your host for any additional or closing remarks.

We certainly appreciate the interest in the Company and we wish you a good day. Thank you very much.

And that does conclude today's teleconference. Thank you for your participation.