Sonida Senior Living Inc (SNDA) 2005 Q3 法說會逐字稿

Welcome to today's Capital Senior Living third quarter 2005 results conference call. Today's conference is being recorded. Now, at this time, I would like to turn the conference over to the Chief Financial Officer, Ralph Beattie. Mr. Beattie, please go ahead.

Good morning. Before we begin the actual conference call this morning, I would like to note that any and all 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 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 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. I would now like to introduce our Chairman, Mr. James Stroud.

Thank you, Ralph. And good morning. And welcome to Capital Senior Living's third quarter 2005 earnings call. The operating fundamentals of the public senior housing companies continued to improve in the third quarter of 2005 with companies reporting gains in occupancy, revenue or earnings growth. Capital Senior Living also experienced improving operating matrix in the third quarter 2005. Our average physical occupancy rate on stabilized communities was 91%. Our revenue on an all community basis increased 6% as compared to the third quarter 2004. We also maintained an operating margin of 45% in the third quarter 2005 in our stabilized independent and assisted living communities. These improvements in operating fundamentals contributed to income from operations of $3 million for the third quarter 2005 as compared to 2.1 million a year ago or a 44% increase over last year. The Company also completed several transactions in the third quarter. I now would like to introduce Larry Cohen, Chief Executive Officer for further comment. Larry?

Thanks, Jim. And good morning. We're pleased to report our financial and operating results for the third quarter of 2005. Operating matrix continued to improve for both the Company and the industry. This quarter reflects further increases in occupancies, rental rates and operating income. Lease transactions that we have completed in the past 90 days are expected to be immediately accretive while increasing our revenue by over $2 million per month. We are evaluating a number of additional joint venture and lease opportunities which we believe, if completed, will further improve our operating results. In addition, we are finalizing plans to increase the number of assisted living units available in several communities in 2006, thus, providing a continuum of care for our residents while increasing the Company's revenue potential.

The positive market environment is evidenced by our recently-announced transactions. During the quarter, we completed the refinancing of four communities converting variable rate debt to a fixed rate at 5.46%. We completed the sale of six communities owned by our joint venture with an affiliate of the Blackstone Real Estate Investors and leased these communities in an $85 million transaction with Ventas Inc. The transaction resulted in the Company recording a gain of $4.2 million which has been deferred and will be recognized over the initial tenure lease term. In October, we received net proceeds of $6.1 million from the transaction, representing our equity interest and additional incentive payments from the joint venture. These payments are nearly four times our initial investment of $1.6 million in the Blackstone venture. These transactions completed during the third quarter, make evident the embedded equity in our owned and joint ventured communities. In October, we leased a seventh community from Ventas which Ventas purchased for $19.5 million.

The Company is also executing a strategy to convert our variable rate debt to fixed interest rates. By generating cash through additional sale leaseback transactions, we intend to reduce our overall borrowing and fix the remaining debt at attractive rates. The successful execution of this strategy should reduce our leverage, interest expense, and interest rate risk, as well as generating gains to the Company. 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 and REITs. Currently, there are several 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 review the financial results for the third quarter.

Excluding the effect of the noncash 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 $1.4 million or $0.05 per share in the third quarter of 2004. The Company generated cash earnings, defined as net income plus depreciation and amortization for the third quarter, excluding the effect of the treasury rate lock of $2.1 million or $0.08 per diluted share, a 24% improvement from the 1.7 million or $0.06 per diluted share of cash earnings generated in the third quarter of 2004. Adjusted EBITDA, which we define as income from operations plus depreciation and amortization for the second quarter increased 20% to $6.1 million from $5.1 million reported in the third quarter of 2004. And income from operations increased 44% to $3 million from $2.1 million in the same period in the prior year. Now, I would like to review the operating results for the quarter.

Revenues under management increased 13% to $42.2 million in the third quarter of 2005 from $37.5 million in the third quarter of 2004. Revenues under management include revenues generated by our 29 consolidated communities, six leased communities, four communities owned in joint ventures, and 15 communities owned by third-parties and managed by the Company. General and administrative expenses as a percentage of revenue under management were approximately 6% in the third quarter of 2005, equal to the third quarter of 2004. Our 29 consolidated communities have a resident capacity of 4,831. Resident and healthcare revenue at these wholly-owned properties increased $1.2 million or 5% as a result of a 2% increase in average monthly rent and a 2.6% increase in occupancy. While revenues increased, operating expenses were equal to the comparable quarter of the prior year, resulting in more than three percentage points of margin improvement and reflective of the operating leverage in our business model. Resident revenues in 40 communities with combined resident capacity of 6,854 that we operated during both the third quarter of 2005 and the third quarter of 2004 increased 6.4% to approximately $35.2 million from $33.1 million. Operating expenses at these 40 communities increased by 3.1% resulting in net operating income growth of 11.4%.

Other expenses consisting of real estate taxes and insurance decreased 5.7% from the same quarter of 2004, resulting in net income growth of 15.7%. We increased our total portfolio by 14 communities and our resident capacity by 1,814 during the third quarter of 2004. Operating margins for the 54 communities under management during the third quarter of 2005 with combined resident capacity of 8,668 improved to 42%, compared to 39% during the same quarter last year. We ended the quarter with 44 communities stabilized, which we defined as having achieved 90% occupancy of which 23 were wholly-owned, six were leased, two were in joint ventures, and 13 we managed for third-parties. The average physical occupancies at the stabilized communities improved to 91% during the third quarter of 2005, compared to 89% in the same quarter last year.

Our 17 Waterford/Wellington communities with a resident capacity of 2,426 increased our average physical occupancy to 92% as of September 30, 2005, up from 88% at the end of the third quarter of 2004. Increases in average monthly rents of 4.5% and occupancy growth of 3.2% resulted in a 7.2% increase in revenues at these 17 communities to $10.3 million, compared to $9.6 million in the third quarter of 2004. Operating expenses increased 3.6% to $6.3 million from $6.1 million in the same quarter of 2005. The operating leverage in these communities is reflected in the collective net income growth from operations of 13.6% and with the reduction in taxes and insurance which were decreased by 7.1%, net income grew by 21.7%. In addition, the operating margins at our Waterford/Wellington communities improved to 39% from 36% a year earlier.

The industry fundamentals continued to improve throughout the third quarter. Occupancy rates continue to gain throughout the industry and new construction remains constrained. Senior Living's property values have increased dramatically 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. And cap rates are lower for independent living communities than other categories of senior living. This benefits us significantly since 84% of our residents live in independent living apartments. We have ownership for long-term leases in 72% of our communities 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 are pleased with our recently-completed transactions and we are optimistic that we can continue to make accretive acquisitions with joint venture partners or by leasing acquired communities from REITs at favorable rates.

I expect that the balance of 2005 and 2006 will continue to be productive periods for us as we grow our portfolio for both individual assets and portfolio acquisitions. I also expect that we will begin selectively developing new communities in 2006. We continue to own sites that we never developed and these markets look promising for the development of independent with assisted living communities. We would expect to pursue these developments with a joint venture partner and are looking at additional sites primarily in barrier to entry markets for a limited number of additional development opportunities. I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the third quarter for 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 third quarter and the first nine 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.capitalsenior.com.

The Company reported revenues of $25.1 million to the third quarter of 2005 compared to revenues of $23.7 million for the third quarter of 2004, an increase of approximately $1.4 million or 6%. Resident and healthcare revenues increased by approximately $1.2 million. Its average monthly rents and our consolidated properties increased by 2% and the percentage of occupied units increased by 2.6%. Management fees increased by $0.2 million in the third quarter of 2004. Primarily due to the addition of 14 managed properties from the acquisition of CGI Management in August of last year. Revenues under management, which includes our own communities along with communities owned in joint ventures and communities we manage for third-parties, increased approximately 13% to $42.2 million in the third quarter of 2005, from $37.5 million in the third quarter of 2004.

Total expenses for the third quarter of 2005 were up approximately $0.5 million from the third quarter of 2004, an increase of approximately 2%. Operating expenses were flat year-over-year and as a percentage of resident revenues improved over three percentage points from the prior year period. General and administrative expenses as a percentage of revenues under management were approximately 6% in the third quarter of 2005, equal to the third quarter of 2004 despite the addition of a new expense category in this quarter. Approximately $100,000 of general and administrative expense in the third quarter of 2005 was due to the Company's early adoption on July 1, 2005, of Statement of Financial Accounting Standards No. 123R. The Company recognized compensation expense for new share-based awards and recognized compensation expense for the remaining vesting periods of awards that had been included in pro forma disclosures in prior periods. With a $1.4 million increase in revenues and a $0.5 million increase in expenses, income from operations increased from $2.1 million in the third quarter of 2004 to $3 million in the third quarter of 2005, an increase of approximately 44%.

Adjusted EBITDA, defined as income from operations plus depreciation and amortization for the third quarter of 2005 was $6.1 million compared to $5.1 million in the third quarter of 2004, an increase of $1 million or approximately 20%. Interest expense net of interest income was approximately $0.9 million higher in the third quarter of 2005 compared to the third quarter of 2004, primarily due to higher rates on the Company's variable rate debt. The Company's weighted average interest rate was 6.8% in the third quarter of 2005 with both fixed rate debt and variable rate debt averaging 6.8%. As part of the Company's strategy to convert variable rate debt to long-term rates at attractive terms, the Company announced in July that it had completed the refinancing of four communities known as the Independent Village properties with GMAC Commercial Mortgage. The interest rate on these loans is fixed for the entire 10-year term at a rate of 5.46%. With a completion of this refinancing approximately 32% of the Company's debt is at fixed rates and 68% is variable. The Company is executing a strategy to convert additional variable rate debt to fixed interest rates. By generating cash through additional sale leaseback transactions, the Company intends to reduce its overall borrowing and fix the remaining debt at attractive rates. This successful execution of the strategic objective should reduce leverage, interest expense and interest rate risk, as well as generating gains for the Company.

In the third quarter of 2005, the Company recorded a pretax gain of $0.8 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 affected by higher interest rates. The debt related to these agreements were 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 reflected on the income statement. The mark-to-market value of these obligations generally moves in the opposite direction of the yield on the 10-year treasury note.

During the third quarter, an increase of nearly 40 basis points and the yield on the 10-year treasury note caused a decrease of $0.8 million in the settlement amount of this obligation. And since September 30, 2005, the yield on the 10-year treasury has increased further and now exceeds the yield at the beginning of the year. These noncash 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 to a note with a five-year term at an interest rate of LIBOR plus 250 basis points. The Company reported a net loss of $0.6 million in the third quarter of 2005, equivalent to a loss of $0.02 per share. Excluding the affect of the treasury rate lock agreements the Company's loss improved from $0.05 per share in the third quarter of last year to $0.04 per share in the current quarter, and cash earnings defined as net income plus depreciation and amortization improved from $0.06 per share in the third quarter of last year to $0.08 per share in the current quarter.

For the first nine months of 2005 the Company produced revenues of $73.8 million, compared to revenues of $69.3 million in the first nine months of 2004, an increase of $4.4 million or approximately 6.4%. Excluding the effect of the treasury rate lock agreements, the Company's loss improved from $0.20 per diluted share in the first nine months of 2004 to $0.12 per diluted share in the first nine months of 2005. Adjusted EBITDA for the first nine months of 2005 was $17.7 million, an increase of approximately $4 million or 29% in the prior year. Excluding the affect of the treasury rate lock agreements, the Company produced cash earnings of $6.3 million or $0.24 per diluted share in the first nine months of 2005 compared to cash earnings of $3.9 million or $0.16 per diluted share in the comparable prior year period. As of September 30, 2005, the Company had $18.5 million of cash, cash equivalent and restricted cash, and $146.9 million in shareholder's equity equivalent to approximately $5.60 per share. We would now like to open the call to any questions.

[OPERATOR INSTRUCTIONS]. Our first question will come from Jerry Doctrow with Legg Mason.

Good morning. I've got a few different things. I guess maybe to start with -- and we can come back and I'll try and do this in some greater detail. But I just wanted to try and have you walk through the impact in the fourth quarter of the two leased transactions, both the JV and then the additional one. There is a little bit in the press releases, but if you could help us sort of understand those moving parts.

Sure, Jerry. It is Ralph Beattie, I would be glad to do that. For everyone else's information, these press releases are on our website which do contain some additional information. But the two transactions were a six transaction sale leaseback in which case our joint venture with our Blackstone partner sold these six properties to Ventas and Capital Senior Living leased them back from Ventas in an $85 million transaction. These six properties were annualizing revenues of about $20.1 million based upon the August results. So, we would expect going forward to consolidate that $20 million plus of revenue in our income statement and they were realizing about $7.7 million in NOI based upon the August year-to-date results. So that those figures would now be consolidated, beginning with the fourth quarter results and going forward.

The seventh property was actually purchased by Ventas in the month of October and we leased this property from Ventas in a $19.5 million transaction. And that property was realizing about $4 million of revenue and about $1.9 million of EBITDA and then, of course, along with that revenue and NOI you would have to deduct a lease expense that's about 8% of that transaction value. And that would give you the income statement effect of those transactions.

Also, Jerry, on the Blackstone venture, there was a $4.2 million gain they were going to recognize over 10 years. So, we'll pick up that in the fourth quarter, starting to pick that up; straight line that over 10 years. And then we also lose the management fee. We were generating about a million dollars of management fees from that portfolio which was in our income, so that comes out. So, those are the components for purposes of modeling I think that can give you some visibility on the affect of the lease transactions.

Ok. And just to clarify, 8% is basically the rate on both leases?

They're the same terms. They are initial 10-year terms. The initial rate is 8%. And then they have conditional increases in those rates, the greater of 75% of CPI or 2% for the first five years. And then the greater of 75% of CPI or 3% in years six through 10.

Ok. And the one last thing I wanted to clarify that, I think you had said in addition to the gain, that you got certain incentive fees. Is there anything that is going to be recognized one time in the quarter or it's all spread over the --?

Well, the $4.2 million gain is inclusive of incentives. There's still going to be over the next year some catch up based on cash still in the venture that will probably not be distributed until next year. So there may be at some point some additional cash and gains coming out once it is settled. But the bulk of it has been reported through the 4.2. And the 4.2, again, we initially invested 1.6 million. We had a 10% equity interest but then we ended up with about 25% of the proceeds because of our promotes.

Ok. And just -- on the mark-to-market, just a couple of questions on that. Any sense about where it is likely to end up for the fourth quarter given where rates are? And then do you expect to convert or do you expect just to pay it off in next year?

Jerry, actually, based upon the current yield on the 10-year treasury note, we're actually in a gain position year-to-date on that. Through the first nine months of the year we still had about a net $600,000 pretax loss on that obligation. But that loss has been recovered based upon the yield on the 10-year treasury note today. And we have between now and January 3, 2006, to settle the obligation. So, we're watching the yield on the 10-year treasury note very closely. But if we would just choose to let it go to term, on January 3rd of 2006, we would convert that amount which will be around 6 or $7 million to a term note with that lender at a rate of LIBOR plus 250 basis points. And there is seven-year amortization and a five-year term available to us through that option.

Okay, so even at -- basically it is just a matter of when it converts at this point more than anything else? It will likely convert -- you'll convert it to a lease or convert it to a note at that time?

Right. And it looks like with a 10-year treasury yield continuing to increase, we'll probably wait until near that January 3, 2006 date to convert it to a term note at that time.

Okay, and we'll get a little bit of a gain similar maybe to what we got this quarter? I guess it depends totally where rates are, but you'll see some gain rather than any loss in the fourth quarter?

Well, I think if the rate closed the quarter at today's rate, we would pick up about $600,000 and end up in about a net neutral position year-to-date.

Okay. Great. Just one or two other things, if I could. I mean, clearly, posted improved performance across the portfolio. The one thing I had a question about was just the actual rental rate growth, I guess, for the portfolio as a whole was only about 2% or so, or a little bit more than 2% which seemed a little bit lower than some of your peers. So I was wondering if maybe you could just give me a little color on growth and rental rates as opposed to occupancy and overall revenue.

Sure. Jerry, hi, it is Larry. If you look at the portfolio, the entire portfolio had that 2% growth that's owned and managed properties, including the managed covenant portfolio, which is for not-for-profits mostly universities and faith-based, not-for-profits. If you look at the Waterford and Wellingtons that I mentioned earlier, those actually saw a 4.5% increase in the average monthly rents year-over-year. I think going forward, what we're seeing now is a couple of things working in our favor, looking forward to 2006. One is the fact that our portfolio continues to see higher occupancies as of the industry. There clearly is very little new supply coming online as far as new competition. And, again, the Waterfords, because the average monthly rents there are about $1800 a month, again, they continue to drag behind our more mature properties as those markets mature and those occupancies continue to improve, we can see further improvements in those rents.

I think also what we're seeing is that for 2006, is that if you look at the prices that are being paid for transactions in the market place, I think that bodes well for the ability for people to continue to raise rents to kind of keep up those prices. So, I think that we'll start to see better improvement. And I think if you look at what's happened in the last quarter and this year, some of what's controlling those prices again, if you look at the financial occupancy or consolidated properties, 87.5% a quarter, yet we're seeing by the end of the quarter, that the physical occupancies are 91, 92%. So being above 90% definitely gives us more pricing power which we expect to be able to effect in '06.

Okay. And then if I could just on sort of acquisition development, can you give me a little bit more color on -- I mean development always makes other investors cringe here for past history. But how much development are you going to see -- I don't know if you want to talk markets, and just if you can give me a little color there? And then on the acquisitions are you going to buy the managed stuff or is it other things that you're thinking about?

On development, we have two sites that we have owned since 1999. Back in '99, we made the decision to stop building when we saw what was happening in the industry. And we own today, two of those sites. They're both in Ohio. We have updated our analysis on those sites and they look attractive. Our goal would be to build those with a joint venture partner. So there would not be a significant [contingent] by the Company for that. We think that, again, if you look at the market we are in Ohio. We have other properties. I think we're -- looking at where the average monthly rents are in those markets, the fact that the competition is few and doing well. They seem to be very -- and [Ventas] shows good demand. We think those would be good markets to build those out. Particularly when we have very low basis in those land parcels which we've owned since 1999.

On top of that, it's going to be very selected, and again, I want to make sure everyone understands that this is a very slow, deliberate course that we're taking. I don't expect to see a big ramp-up in development. We've had a lot of success with some of our properties in the Northeast. They've filled well. They continue to perform exceptionally well with very strong rents in good markets. And these barrier to entry markets, they are difficult to get into but once you're in there we think we can create a lot of value. So those are markets we're looking at. And, again, we would hope that we can find some sites there to build with the joint venture partner, but again, we're not ramping up in major development.

The most of our growth is still going to come from the organic growth opportunity with our own portfolio and then acquisitions. And on acquisitions we are seeing portfolios in the market place that fit well with our joint venture structure similar to what we've done in the past with the Blackstones and the Prudentials and other financial partners that we have good relationships with. And then on the -- similar to the property we acquired the Georgetowne Place acquisition, we expect that we'll look at more single-type asset transactions that are good performing assets in markets that fit well in our floor print that we can go out and look to a REIT and acquire those -- have the REIT require those properties, we can lease them and those are accretive transactions to us as well.

Jerry, hi, Jim Stroud. In addition to what Larry said, the -- for purposes of 2006, when we speak about development, the major emphasis is going to be on -- to our existing portfolio. And that would be the addition of supportive services and/or conversions of possibly one wing or selected units in that community. And so the benefit to us is we already own those assets. We already know those markets. And from a standpoint of the dollars invested in what we call "new development," it is the highest margin attainable.

So, as Larry mentioned, we have two projects or two sites that we've had for a number of years that we're taking a look at. We would do that through a joint venture. And then from a standpoint of addition of supportive services or conversions, that could be up to seven to eight maybe nine communities we're taking a look at. But that would be the major emphasis in 2006.

Okay. I think -- I don't know if you can do it now, or maybe on a subsequent call if we can just get kind of a sense of schedule volume or that stuff, how it would play out and timing, that would be helpful?

Sure. We can do it off the call.

Okay.

[OPERATOR INSTRUCTIONS]. And we'll next go to Frank Morgan with Jefferies & Company.

Hi, it is actually Derek [Dagdon] here for Frank. I'd like to just ask one other question that Jerry didn't ask on the expansion projects for ALs you said seven, eight, maybe nine communities you're looking at. Is there anyway you could give us like a number of units that you may be looking at? And I guess that might be 2007-type of roll-out schedule. Could you give us --[multiple speakers]?

Actually, hi, Derek, it is Larry. I think that some of these will actually start in '06 and some will be in '07. If you look at our portfolio today, our history has been to -- on conversions, to convert 30 typically units to assisted living. That's kind of average of what we've done. We did more when we did some expansions, but on conversions, the -- probably the best number to look at would be about 30 per property. So, if we're look at seven to nine, you can figure out that's probably somewhere in the 2 to 300 unit number that we're looking to convert of our owned properties.

And the phase-in on that, Derek, would be '06 to '07.

Okay. And -- sorry. One other just kind of housekeeping question. On the balance sheet I noticed some sequential changes probably due to the Ventas deal. One thing I was looking at was accounts receivable from affiliates increased sequentially by about 6.6 million. Could you give us a little bit of color on that as well? Thanks.

Sure, Derek, it's Ralph. That Ventas transaction actually closed on September 30th, so it closed right at the end of the quarter. So, while the transaction closed, we booked that cash as a receivable at that time because we hadn't received the proceeds from the joint venture on September 30th. We have since received those and they're now included in cash on our balance sheet. But as of September 30th, that $6.1 million payment which was anticipated from the joint venture was booked as a receivable.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]. We'll next go to Peter Lux with Smith Barney.

Hi, guys. How are you doing, Larry?

Good. How are you?

I got on the call late, so I'm going to ask a question -- you might have answered them already and if you have, excuse me. And basically two questions. Number one, I call it "same-store sales." What was the growth per monthly rentals or monthly maintenance on a percentage basis or -- and also on a raw number basis?

Yes, we did cover that early, but happy to go back over to you. If you look at the consolidated properties, the average monthly rents grew by 2%. Occupancy grew by 2.6%. We had about three percentage points of margin improvement because our operating costs were flat year-over-year. If you look at the Waterford/Wellingtons, there our average monthly rents grew by 4.5%. Occupancy grew by 3.2%, resulting in a 7.2% increase of revenues. And then our actual operating income grew by 13.6% and our net income on those properties grew by 21.7% because of the operating leverage in our communities.

Also, you might have -- did you talk about ancillary at all?

We just talked about the -- that we're looking to add supportive services and do assisted living conversions at about seven to nine communities in '06 and '07 which ties into the ancillaries, obviously. So we see that as an area of growth that we will begin executing beginning in '06.

Some of your competitors have seen tremendous margins in some of the ancillary services that they've been able to perform.

We've seen that and we've also seen the effects on margins, higher occupancies and we think that, again, it drives for a stronger profitability, higher average monthly rents. And, again, we -- it is a course we plan to introduce to a number of our properties beginning in '06.

And finally, do you anticipate anymore sale leasebacks to bring some more equity to the shareholders over the next couple of months?

Yes. As we mentioned earlier on the comments, and in our press release, we are expecting to transact some more sale leasebacks of some of our properties which will generate gains, untap some of the equity in those properties. The cash will be used to reduce of some our floating rate debt, bringing down our leverage and then being able to fix those interest rates at attractive fixed rate terms.

Thanks. Good job.

Thanks, Peter.

Bye.

Our next question is Richard Ludman, Private Investor.

Hi, I have a few questions. It's been -- it must be six years since you guys have done new community development and I just wanted to go over whether there have been changes in the accounting of the revenue recognition for the fees that they're engaged, when you build a new property. It used to be like threeish, fourish percent of fees to just right up-front to the developer. Which would be you. Is that still the case? How is revenue recognized on those?

Well, we would earn a development fee during the development of a property with a joint venture partner. That fee, of course, would be negotiable so there's not really a fixed rate that we could point to, but that would be a negotiation between ourselves and our joint venture partner. But we would be recognizing development fee income to the extent that we could negotiate that.

And Richard, that would be earned over the development period. It is not going to come all at once. So, typically, what happens is that there is a methodology over the construction cycle and sometimes there are also some occupancy hurdles that have to be achieved before the full fees. So based on the terms of the development agreement would dictate how those fees are recognized.

Fair enough. So it is amortized over time rather than taken up-front?

[multiple speakers]. Yes. And Richard it is similar to what it was six years ago. I mean the range of development fee we're seeing is a 4 to 7% on hard costs. From a standpoint -- excluding land. And from a standpoint of the construction cycle we're seeing all the way -- on average you could assume is about 18 months on a construction cycle. And traditionally, we have gone ahead and recognized that on a percentage of completion basis. So, you recognize a little bit at the beginning. And then as the project is completed on the back end is a greater recognition.

Fair enough. You still have the people in place to be able to do this?

We do. Right now, we have Glen Campbell who is our Vice President of Development. Glen has been with us from the beginning and through the last construction cycle. In addition, we have added two additional site brokers to go out and one that is located in the Northeast and the other one with offices here out of Dallas. And the development team is still intact.

Okay, that's cool. Now, just to get a little bit of granularity. I mean you can ask a 10,000 foot question and it won't really speak to what I'm thinking. But for Ohio, you're talking about two properties. How does the cost compare of a new build versus what you could buy in that market place at prices now? Will you be able to create product cheaper than where the going rates are for [multiple speakers] property?

That's an excellent question. And on the first look of it, the answer is yes. But what people don't add to it is the cost to occupy the property. So, where we look at it is, it is not only the hard cost to build the hard and soft cost of development, but it is also the fill cost. And what we're finding right now in certain communities we could probably build and fill for less than we could purchase. But overall, a lot of our acquisitions are about the same level. And that's the benefit now of the market place is that we're not seeing a significant huge gain of going out and developing, and therefore, it is kind of a barrier to entry as mentioned earlier on the call.

The one area we're finding that has increased significantly compared to prior cycles is the land cost. Senior housing is now a known commodity. When people ask you what you're going to build, senior housing, they know how to value that. And they also recognize that it is an up-market for senior housing. So, we're not able to go in and buy land anymore at $2.50, $3 a foot. It is being more priced at a Class A multifamily project.

Fair enough. For what it's worth, I don't cringe about the idea of new builds. I mean I know that that hurt the industry before. But geez, how are you going to make money over time if you don't build your business? I mean, this is what you need to do in order to be able to amortize your fixed costs, your costs of operating over a larger base.

Well, your point is well-taken. And what we have is a balanced approach. With the joint venture relationships that we've had in the past with Blackstone and Prudential, we can go out there and acquire an asset, negotiate a right of first refusal and the Company historically has managed assets, brought them in and integrated the operations before we acquired the ownership. And that is a classic example that was just created with the Blackstone sale leaseback with Ventas. So, we'll continue to execute and buy selected assets. And the benefit now, because we've owned and operated now in 20 states, we have various thresholds where we can add assets and have a more efficient operational model. So, we're really leveraging off of our current locations.

And then the last thing is, the development is important. But key -- and we had a great conversation yesterday -- we're sitting there with a significant ownership of assets already on our balance sheet and our focus can be over the next years to continue to improve those operating matrix. Create value that is really not reflective in the income statement and then do through sale leasebacks or other transactions, untap that equity that's there which provides not only cash for additional expansions but also creates profits.

It sounds like you're moving toward more a -- instead of a property-owner model, to an operating model where you're just a manager?

Well, I think it is an operating model where we're more of a lessee. To have a 30-day management contract doesn't create a lot of value for us. But we're truly -- the industry is evolving and maturing into an operational business. And we're finding that a mix of owned assets, as well as a mix of operating assets can really drive not only the earnings side but also the cash management and debt management.

Fair enough. Well, that does it for me. Thanks for you helping.

Thank you.

And we'll next then go to Todd Cohen with MTC Advisors.

Good morning. And thanks for taking the call. Just a couple of questions on this joint venture issue. I just kind of wanted to clarify, the joint venture partner will bear the majority of the cost and expenses associated with building these out? Yes. Hi, Todd. It is Larry Cohen. What we had done, both for acquisitions and our joint venture structures really aren't very different depending upon what they're used for. We typically have a minority interest. In the case of Blackstone, we invested 10% of the equity. With Prudential, we invested 5%. That will change by partner and by transaction. But we look at this, that we're putting in a minority interest. We co-invest. There will be a borrowing by the venture from a lender. And then the equity is primarily being borne by our financial partner or joint venture partner. We structure the transactions where we get paid for our services through management fees. If it is development, we would be paid for development fees for our services.

But most importantly, we've always had -- as Jim mentioned, rights to first offer, rights to first refusal, ways to control the assets. And over time, we can then also share in the economics because we've always shared pari passu with our partners on the economic returns with different target return hurdles and then we have incentives through promotes. And those can range, as we mentioned earlier when the Blackstone venture went full cycle and sold those six properties to Ventas, we had a 10% initial investment and ended up with 25% at the back end. So, that increased our return by almost four times. So, we look at this as a very good way to grow our business. It doesn't require a lot of capital. We think it prudently manages the risk of growing the business. It is accretive to our earnings and most importantly, it gives us flexibility over time as we look at longer holding places for those assets. Right. Then just a couple of other things. These will be independent living/assisted living-type facilities that you're going to do in Ohio? We're looking at independent with assisted living communities, yes. Okay. And do we -- do you know the number of units or the size of these communities yet? Well, again, it is going to vary by market. Typically, we would look to build probably about somewhere in the 130 unit range, 130 to 150 unit range. It is probably going to be roughly figure around 70% independent and 30% assisted. Again, it is going to depend upon each market of what the demand in that market would be. The cost of the land, configuration. But that's fairly typical of our model. If you look at of some the last Waterfords that we opened in Plano, as well as in Richardson with independent and assisted living there, there were roughly 90 units of independent, about 30 -- 95 and 30 independent and assisted -- and those have proven to lease up very well and are performing very well. So we like that mix. Then just one other question. You've indicated these are properties that you've had on the books for some time I guess since '99. So the land is already owned. Are there other parcels that you control and own --[multiple speakers]? No. We have -- actually, we have one other parcel which we did not plan to build on that we would probably look to sell at some point. But then these we owned. There are no other parcels that we own. Any other development that we do would be looking for the joint venture to acquire the land and then build on that land.

And Todd, your questions are very good on development. But we do not want this call really to be centered on development because of the two projects that are there. I mean the significant growth for the Company will continue along the lines, which is the joint venture, as well as the sell leaseback. That, by far will overshadow anything we do in the development area.

No, I understand. And I was just curious as to whether or not there were other opportunities in your land -- your land holdings to do others. No, but there is opportunity for a few expansions as well. As we talked earlier, in addition to the NoBo Development, we will look to add and convert -- add supportive services or convert independent to assisted living units on some of our properties. And there are also a few expansion opportunities that we'll look at to add additional levels of care at certain numbers of our properties. So that we have, obviously, ownership of those assets and that's another strong driver of growth in our income and operating matrix. Thank you.

Thank you.

And we do have a follow-up from Jerry Doctrow with Legg Mason.

Hello, again. I just wanted actually to get a little bit more color, if I could, on the ancillary services that -- are you providing is it rehab? Is it home health? Is it -- and what maybe -- is there any of it that's public pay versus private pay?

Right now we have -- we operate two rental CCRCs, one in Marysville, Indiana, one in Canton, Ohio. There we are doing rehab and a lot of different types of ancillary services. About -- there is some reimbursement there from Medicare. And the other area, we do have a home agency in Indianapolis at the Harrison where it is private pay. The ancillary service we're looking at will all -- we expect it all to be pretty much -- that we would be do directly right at this point will be private pay.

Again, we're looking at supportive services or more traditional assisted living services on these conversions. We have rented space in virtually all of our independent living communities to third-party providers. Most of those are Medicare certified and they're providing some services to the residents. But as we look at where we're moving, in the near-term it is going to be more in the private pay area looking at more assisted supportive services and then there may be the ability to have some more home care services to residents at of some our properties.

Okay, thanks.

Thank you.

And with that, there are no further questions. I would like to turn the conference back to James Stroud for a closing remark.

We appreciate everyone's interest in the Company and the time we spent today. Thank you very much.