Sonida Senior Living Inc (SNDA) 2006 Q1 法說會逐字稿

Good day, and welcome to the Capital Senior Living first quarter 2006 earnings release conference call. Today's conference is being recorded.

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 abilities 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 changing in accounting principles and interpretations, among others, and other risk factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

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

Good morning, and welcome to Capital Senior Living's first quarter 2005 earnings call. In the first quarter, management continued to execute on the Company's business plan in the areas of monetizing equity and company-owned assets, realizing profits that will be recognized over the next nine to 10 years, and generating cash for future debt paydowns.

Further, management achieved growth externally through sale/leaseback and joint venture acquisition strategies, and internally through same-store growth.

Revenues increased approximately 33% over the first quarter of 2005. Income from operations increased approximately 30% from the first quarter a year ago. And adjusted EBITDAR, defined in the press release, increased approximately 53% from the first quarter of 2005.

The cumulative effect of these accomplishments started in the first quarter, and will be recognized over quarters to come. I now introduce Larry Cohen, Chief Executive Officer, for further comment.

Thanks, Jim, and good morning. We are pleased to report our results for the first quarter of 2006. Our 2006 business plan has positioned us well to create value for our shareholders. Organically, we continue to increase occupancies, rental rates and operating income, while industry fundamentals continue to improve. Our joint venture acquisitions enable us to expand our portfolio while earning management fees and a substantial return on our investment. And our sale/leaseback transactions with major healthcare REITs monetize equity in our communities while retaining the management and net operating income from the properties.

We have completed or announced nearly $400 million of transactions in the last six months, including the pending $110 million fixed-rate refinancing, which will increase EBITDAR by approximately $16 million, pre-tax income by approximately $11 million, cash by approximately $30 million, and will reduce consolidated debt by approximately $62 million. We are growing our business while strengthening the balance sheet.

I would like to review our financial highlights for the first quarter of 2006.

First-quarter revenues increased 33% to $32.1 million compared to the first quarter of 2005. First-quarter income from operations increased 30% to $3.5 million from the year-ago period. First-quarter adjusted EBITDAR, which we define as income from operations plus depreciation and amortization and facility lease expense, increased approximately 53% to $8.8 million versus the first quarter of 2005.

For the first quarter, we reported a loss of $900,000, or $0.03 per share, versus a loss of $0.04 per share in the first quarter of 2005. For comparability, these results exclude the expense of noncash stock-based compensation in the first quarter of 2006 and the gain on the treasury rate lock in the first quarter of 2005.

First quarter 2006 results were impacted by a $1.1 million increase in interest expense, primarily due to higher rates on the Company's variable-rate debt. Interest expense is expected to be reduced significantly by the upcoming fixed-rate refinancing and reduction in principal.

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 $2.2 million for the first quarter of 2005, excluding the effects of stock-based compensation and the treasury rate lock.

There were several initiatives that created the platform for our accomplishments during the quarter and positioned us well for our future.

Our 2006 business plan is focused on providing significant income and asset growth, maximizing our return on invested capital, and continuing to strengthen our balance sheet. The cornerstones of this plan continuing are continuing to maximize the value of our communities, pursuing additional sale/leaseback transactions, completing additional acquisitions through joint ventures, as well as REIT acquisitions and leasebacks, and increasing revenue through management and development fees from third parties. I am pleased to report that we are executing on all of these initiatives.

First, we are maximizing the value of our communities. During the first quarter, our stabilized communities averaged a 92% occupancy rate, compared to 90% in the first quarter of 2005, enabling us to capitalize on the operating leverage in our communities.

In the first quarter of 2006, same-store revenues at all communities under management -- which include revenues generated by our consolidated communities, communities owned through joint ventures and communities owned by third parties and managed by the Company -- increased 8%, net income increased 16.2%, and financial occupancy increased 400 basis points.

Operating margins before property taxes, insurance and management fees at our stabilized communities improved to 48% in the first quarter, as compared to 47% the same period in the prior year. The number of communities we consolidated in the first quarter increased to 36, from 29 a year earlier. Financial occupancies at these communities increased to 89.1%, compared to 86.2% in the first quarter of 2005. And operating margins at our consolidated communities improved to 42% during the quarter, compared to 40% in the prior year.

17 of our consolidated properties are our newer Waterford/Wellington communities, which continued to improve throughout the quarter. In the first quarter, these communities enjoyed a 90.8% financial occupancy, compared to 87.3% in the first quarter of 2005, and average monthly rents grew 4.71% to $1860. This performance generated a 9% increase in revenues, a 23% improvement in net income, and operating margins improved to 44% from 40% a year earlier. We intend to further enhance the value of our communities through increasing the capacity for assisted living with supported services at several communities, and through additional ancillary services. In addition, we are kicking off this month a group purchasing program that should generate additional savings on the cost of food, supplies and service contracts at our communities.

The second initiative that we implemented involves sale/leaseback transactions. In the first quarter we completed a sale/leaseback transaction with Ventas, which is expected to result in a gain of approximately $14.3 million that will be amortized over the initial 10-year lease term, the retirement of $16.2 million of variable-rate debt, and cash proceeds of approximately $12.7 million. In addition, we announced a three-community sale/leaseback transaction valued at approximately $54 million that is expected to result in the gain of approximately $13 million amortized over the initial 10-year lease term, the reduction of $29.6 million of debt with a fixed interest rate of 8.2%, and cash proceeds of approximately $23.5 million. We also announced a six-community sale/leaseback transaction valued at approximately $43 million, which is projected to result in a gain of between 3 and $4 million amortized over the initial 10-year lease term, and incremental cash proceeds of approximately $4.5 million. This transaction also allows us to exercise our option to purchase these communities which we currently manage, and thereby recognize the value we created.

These sale/leaseback transactions are immediately accretive and will have a positive impact on earnings for 10 years. They will also eliminate more than $45 million of debt from our balance sheet and provide cash for additional debt repayment and future investment opportunities.

The third initiative that we continued to expand during the quarter is joint venture acquisitions. In the first quarter, we completed a $46.85 million acquisition of five senior housing communities through a joint venture formed with GE Healthcare Financial Services, which is expected to increase management fees by approximately $500,000 per year, while providing incremental opportunities from the Company's equity participation. We expect to acquire additional senior housing portfolios in the second quarter and throughout the course of the year with our joint venture partners and REITs.

The fourth initiative involves improving our debt. We expect to complete a significant refinancing during the second quarter that will refinance 15 wholly-owned communities at fixed interest rates that are about 200 basis points below current levels. The principal amount of this refinancing is expected to be approximately $110 million after a paydown of approximately $15 million. Annual interest savings are expected to be approximately $3.5 million from current levels as a result of lower fixed rates and principal reduction.

The development of seniors housing communities has been severely constrained, with new supply growing at a compounded annual growth rate of only 1.3% since 1999. A scarcity of well located sites, increasing land and construction costs, complexities with zoning, and limited sources of capital have restricted the opportunity for new construction in many markets. This scenario bodes well for further enhancement in the value of our existing properties and continued strong same-store sales growth.

We are looking forward to beginning development of two Ohio sites we have owned since 1999 with a joint venture partner in the second half of this year. We are actively seeking additional sites, primarily in the strong barrier-to-entry markets for a limited number of additional development opportunities that would be developed with a joint venture partner. Our goal would be to start about six developments in 2007.

Our successful track record as a proven operator of senior living communities has provided us with a strong platform of growth, and we are fortunate to continue to expand our joint venture and REIT relationships. The seniors housing industry has gone through a shakeout following the overbuilding that occurred in the late 1990s. We are one of a select group of proven operators that are positioned to benefit from the increased institutional interest in investing in seniors housing. We continue to see accretive acquisition opportunities in a highly fragmented industry, and our existing infrastructure allows us to integrate these acquisitions at low marginal costs.

While our existing asset base has created value for our shareholders and provided liquidity to fund our growth and strengthen our balance sheet, I believe that this value will be maximized by continuing to increase the value of our communities, acquiring other senior housing portfolios and operations with our strong financial partners and REITs, and expanding our development activities with joint venture partners.

As evidenced again this quarter, we are experiencing solid revenue growth, strong growth in operating income, impressive EBITDAR growth, and with the completion of our announced sale/leaseback transactions and fixed rate refinancing, we will have a stronger balance sheet. Our proven track record has afforded us access to debt and equity capital at the most attractive costs in the industry.

These accomplishments will return us to profitability this year, and the operating leverage in our business model, the financial leverage achieved through our acquisition structures, and favorable industry conditions should provide the impetus for continued growth at a rapid pace. These are the reasons why we do not believe that now is the time to put the Company up for sale, and why we believe that as we continue to execute on our business plan, our shareholders will be rewarded with continued enhancement in the value of their stock and greater liquidity. Thanks to the success accomplished through the diligent efforts of the members of the Capital Senior team, we are well-positioned for significant growth.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the first quarter of 2006.

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 am going to review and expand upon highlights of our financial results for the first quarter of 2006. 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 $32.1 million for the first quarter of 2006, compared to revenues of $24.2 million for the first quarter of 2005, an increase of approximately $7.9 million, or 33%. The number of consolidated communities remained at 36 throughout the first quarter of 2006.

Revenues increased primarily as a result of consolidating seven communities which were leased from Ventas in two separate transactions which closed in the fourth quarter of 2005. Six of these communities were previously owned by a joint venture between affiliates of the Company and Blackstone, and hence not consolidated, and the seventh was Georgetown Place, an additional community which Ventas acquired from a third party.

Financial occupancy at the consolidated portfolio increased by 2.9 percentage points in the last 12 months and ended the first quarter of 2006 at 89.1%.

Revenues under management increased approximately 13% to $45.6 million in the first quarter of 2006, from $40.4 million in the first quarter of 2005. Revenues under management include revenues generated by the Company's consolidated communities, communities owned in joint ventures, and communities owned by third parties that are managed by the Company.

Operating expenses increased by $4.3 million in the first quarter of 2005. As a percentage of resident and healthcare revenues, operating expenses decreased from 69% last year to 65% this year, reflecting 4 percentage points of margin improvement.

General and administrative expenses were $0.6 million higher in the first quarter of 2006 than in the first quarter of 2005. Approximately $0.2 million of general and administrative expense in the first quarter of 2006 was due to the Company's adoption of Statement of Financial Accounting Standards No. 123(R) regarding non-cash share-based compensation.

General and administrative expenses as a percentage of revenues under management, excluding share-based compensation, were approximately 5.9% in the first quarter of 2006; about equal to the 5.8% in the first quarter of 2005. Lease costs for the quarter were approximately $2.1 million, reflecting an 8% lease rate on approximately $105 million of leases on seven communities.

Adjusted EBITDAR -- defined as income from operations, plus depreciation and amortization and facility lease expense -- for the first quarter of 2006 was approximately $8.8 million, compared to $5.8 million in the first quarter of 2005, an increase of 53%.

While consolidated revenues increased by $7.9 million in the first quarter of 2006 compared to the prior-year period, total expenses increased by approximately $7.1 million, resulting in a $0.8 million, or 30%, increase in income from operations.

Interest expense net of interest income was $5.3 million in the first quarter of 2006, compared to $4.2 million in the first quarter of 2005. The $1.1 million increase in interest expense is primarily due to higher rates on the Company's variable-rate debt. The Company's weighted average interest rate on its variable mortgage debt was approximately 7.8% at the end of the first quarter of 2006, compared to 7.4% at the end of 2005 and 5.7% at the end of the first quarter of 2005.

The Company anticipates completing a significant refinancing later this quarter, which will affect 19 of the Company's 28 wholly-owned communities. Of these 19 communities, 15 are anticipated to be refinanced at fixed interest rates which are approximately 130 basis points over the yield on the 10-year treasury note, resulting in savings of approximately 200 basis points over current variable rates. The principal amount of this fixed rate refinancing is expected to be approximately $110 million after a paydown of approximately $15 million.

Annual interest savings are expected to be approximately $3.5 million from current levels as a result of the lower fixed rates and the reduced principal. We expect to save about $2.2 million on the $110 million refinance and 1.3 million on the reduced principal in the first 12 months following the completion of this refinancing.

Upon completion of this refinancing, there will remain only four communities with variable-rate debt, and these communities have an interest rate cap in place which limits the Company's LIBOR exposure to 5%. LIBOR presently exceeds 5%, making the cap effective. The other nine wholly-owned communities are all financed at fixed rates with a weighted average rate of 6.8%, and include three communities which are expected to be sold and leased back with the buyer assuming approximately $30 million of debt.

The Company reported a net loss of $1 million in the first quarter of 2006, equivalent to a loss of $0.04 per share. Excluding the expense of non-cash share-based compensation, the Company's net loss is equivalent to $0.03 per share. The Company's net loss in the first quarter of 2005 was $0.04 per share, excluding a gain on treasury rate lock agreements.

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 2006, versus $2.2 million in the first quarter of 2005, excluding the effects of stock-based compensation and the treasury rate lock.

Total mortgage debt declined approximately $18 million in the quarter, and was $237.2 million on March 31, 2006. Our variable-rate debt averaged 7.87, with interest rate caps limiting LIBOR to 5%. At the end of the quarter, we settled the interest rate cap at a gain, except for the $33 million of variable-rate debt on four properties presently being refinanced.

The Company ended the quarter with over $26 million of cash and cash equivalents.

At the present time we would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Frank Morgan, Jefferies & Company.

After you complete all these outstanding -- the refinancing that is left here, what will the pro forma balance sheet look like in terms of cash and debt, debt as a percentage of total capitalization?

Secondly, I was hoping you could talk about what your thoughts are about -- you obviously had some reasonable rate growth in the quarter. But now that those occupancies seem to be getting up close to the 90, and going through the 90% level, I am curious what your position is -- really how much further you think you can drive the rate growth, either just by raising street rates or because you are adding ancillary services?

And then the last one would be -- just kind of long-term, what do you see as the real optimal mix of asset ownership here versus owned versus lease?

Let me start with the first question. And I would refer a lot of our listeners to a press release which the Company put out on March 13 of 2006 which includes some of these figures, so that will help somewhat. But in terms of what the pro forma balance sheet will look like after all of these transactions are complete, there is still the three property sale/leaseback and the CGIM six-property sale/leaseback to be completed. Those transactions have been announced but not yet completed. And those two transactions combined will increase cash by about $28 million over current levels. So, that will increase our cash balance from its present level to about -- by about $28 million, excluding other sources and uses of cash.

We will also retire about $30 million of debt, with the buyer assuming that $30 million, on the three-property sale/leaseback. And the refinance will result in a paydown of about $15 million of debt. So our debt will decline by about 45 million and our cash balance will increase by about 28 million.

Let me just take it a step further and just try to answer your question. I think the bottom line is our debt to total capitalization will be about 40%, Frank. And the way you get there is that, if you look at the end of the quarter, our debt is currently -- and this is on the supplemental schedule to our release -- we are showing that our debt is $242 million. I believe that is after the (indiscernible) sale is already taken out of that. So then you add to that the retirement of the $30 million (indiscernible) 45 -- that would take it down to $198 million. Our market cap today is about $290 million. So, taking that debt over our total capitalization, I believe it is about 40%, which we think is an optimal level, quite frankly.

Secondly, as far as growth, I think that on occupancies, this year we are see continued improvement. Waterfords are now at 93%. I think that if you look at our budgets this year, our occupancies are budgeted to be at 94%. We may or may not accomplish that in all of our properties. But again, I think that we are seeing a very strong market. We are seeing the opportunity for rent growth higher than we have seen in past years.

And I think there are some very interesting fundamentals occurring in the marketplace today. First of all, we serve an age cohort that has the highest level of disposable income in America. We are seeing home equity values at the highest levels that our seniors have ever seen. And a fairly still liquid housing market, even though it has slowed some.

The other phenomenon we are seeing today is very high gas costs, making cost of living [home] higher than people have ever encountered, between utility costs and putting $3 per gallon of gasoline in their cars. One of the focal points we have always had is providing living arrangements for residents to enrich their lifestyles without the burdens of home ownership. And the economic decision by our seniors has always come down to comparing the cost of living in our communities to the cost of living at home. And clearly, it is becoming much more costly to live at home than in our communities.

The other phenomenon we are recognizing is that the average age of our residents is 85 years, meaning that we have to focus more on wellness programs, home healthcare and ancillary services. We have designed a phenomenal prototype for our developments which we are going to begin in Ohio, which will incorporate (indiscernible) physicians' offices, wellness centers -- not only for our residents, but also for seniors in the community. We're looking at expanding these programs into our properties in Texas and elsewhere. We are talking actively with other homecare agencies, developing strategic alliances that will allow us to provide additional ancillary services, as well as rehab services to our residents.

So we are, as you can tell, very bullish about the opportunity to continue to see revenue growth, rate growth and occupancy growth, all of which, with the operating leverage in our properties, should drive very high incremental contributions to our profitability.

And the third point, after we spoke so much -- you want to refresh my (indiscernible) the question, Frank?

Just optimal mix of asset ownership between --

Right now we are less than (technical difficulty) owned. I think that if you look at our growth, I would not be surprised if we brought five properties in the first quarter (indiscernible) joint venture. We will continue to see, I would think, throughout the course of the year that we should be able to buy three to five properties a quarter with a joint venture partner; probably one a quarter with a REIT. So, if you look at that mix, we are looking at probably a growth of 15 to 20 properties a year, probably of which three-quarters will come through joint ventures, and one-quarter or so will come from acquisition leaseback (indiscernible) REIT acquisitions.

Our existing portfolio right now -- we have no current intent to do anymore sale/leasebacks at the current time. We are looking at the continued growth. Again, the Waterford had a 23% income contributions year-over-year, so we are pleased with the [9]% revenue growth, which we think will only enhance as we continue to see the occupancies grow and the rents increase. And I think that with the complement of the services, we are going to benefit both with not only higher revenues through participating in some of those services, but more importantly, allowing our residents to stay in place and [age] in place for longer period of time, which would reduce our attrition and increase our occupancy.

So, I think, on a go-forward basis, we'll probably be kind of looking to bring down our own portfolio in relation to our joint ventures portfolio. But again, I think that the mix going forward will probably be about 75% through joint ventures and about 25% through REITs.

Jerry Doctrow, Stifel Nicolaus.

Basically, on the ancillary services and those sorts of things, Larry, you're sense, if I understood you, was mostly those would be done in conjunction with a third party in a strategic alliance, rather than you guys getting into that business directly.

That's correct, Jerry. We have one agency we operate for years up in Indianapolis. We think that the way to get into this business, particularly with the size of our portfolio, is to strategically align with a good quality operator that can bring a lot of those services to us, and we are now in the process of discussing that with a couple of different candidates. Our policy in the past, and we have done it with our operations as well, is we like to get in a situation where we can learn the business smartly. We recognize that we don't have the capabilities in-house to take on, nor do we want to take on, all of the -- because some of this will be Medicare reimbursed. So we want to be smart in the way we approach this, and be able to really benefit our residents, benefit our company, and that also as we get further involved and learn some more about what is going on, we can assess that and then decide how we roll it out in other parts of the country.

The recognition is first of what portfolio we have and what our resident needs are. And because of our high percentage of independent living, it is different than if we were predominantly in assisted living and/or skilled nursing platforms. So we are going to meet the level of needs of our residents, then expand those to individuals outside our doors. And then in addition, as we continue to acquire assets -- and if you look at the first quarter, the predominate was assisted living, we will have a portfolio change that will have more assisted living. And therefore, we will have a relationship with a third-party carrier. And then as the portfolio needs shift to a higher level of care, we'll be able to reconsider that and see if we want to get into that business full-time ourselves.

The second question is on the acquisition environment. You're talking about adding 15, 20 properties a year. My sense is, obviously, it has gotten fairly competitive out there; cap rates are up, that sort of thing. I was wondering if you could just give me a little sense about how you see the acquisition environment, and maybe what you are doing differently, why you think you can buy them at good pricing and stuff here.

I think there are a couple of factors. One is that we have developed the confidence of very strong financial partners. GE Financial Services is a great example of a very strong financial partner that came to us looking to be their first joint venture partner in seniors housing, based on our expertise in managing portfolios, our track record. GE is wonderful because they have not only a voracious appetite -- no company in the industry, quite frankly, can compete with GE's cost of capital. So when we go in with a partner like GE, that has internal funding at very, very low costs, we can go in and compete very aggressively with others, coupled with the fact that their return requirements are very reasonable, and we have a very handsome participation in those ventures.

Similarly, with the REITs, if you look at the transactions that are [occurring], including the most recently announced [C&L], it was a REIT acquisitions. So, the REITs today like independent living. They like independent and assisted living. They are trying to move further away from some of the skilled nursing issues. Again, if you look at our performance with Ventas and the portfolio that we have with them, it's been sensational, quite frankly.

So we, again -- we have been fortunate. If you look at our cost of debt, Jerry, we bring in 130 basis points over the 10-year. I have not seen any press releases from any other operators at those rates. I look at our lease rates. They are lower than any other company I have seen released by the REITs or by the operators. So again, we are accessing the lowest cost of capital, which we think put us in the competitive driver's seat.

The other opportunity we are seeing is that there are a number of properties that are marketed below the radar screen. There is tremendous sensitivity that it's very disruptive to put up a portfolio or a company for sale. And sellers are very nervous about disruption, loss of staff. And most of the properties that we have been seeing and acquiring have been narrowly marketed. They have been through relationships in the industry. And it's those relationships that we have that really have captured the confidence that we come in there (technical difficulty) we are going to buy a portfolio. After our due diligence, we do.

So, we are a good buyer. We have good financial resources. We are a credible operator. And as I said, our pipeline is very, very active. We are very confident in the ability to continue to acquire properties, based on where we are in this process. And I think, again -- the reality is is that when you get down to what drives this business, it's the operations. And there's only a few either public or private operators that really have the opportunity to take advantage of this environment. And fortunately, we are one of them.

In terms of your new prototype, what is sort of the AL/IL mix there? And I gather you are adding some additional services, the new stuff that is going up in Ohio.

The prototype is a 150-unit property. It is a 105 units of independent and 45 of assisted. There are larger units with washer/dryers, walk-in closets, kitchens. Even the assisted living has no studios. We have, as I said, large -- we have the common areas which have traditional services, as well as now wellness centers. So we our focused on the fact -- we have spent a tremendous amount of time researching what the senior citizen resident that we are going to serve will be over the next five to 10 years. And what we are doing is developing a model to capture that.

And what's interesting is that the cost of development is higher than what we have built in the past, which means we have to be in higher-income markets, which (indiscernible) barrier to entry, so they are more difficult to find sites, more expensive sites. Obviously, in Ohio, we have an advantage, because we have been sitting with those parcels on our balance sheet since 1999. But as we look (indiscernible), we are looking at markets where we are going to have higher rents. But I think (indiscernible) very strong markets with affluent seniors, that we will have a product that fit their needs. And then we will also, I think, take some of those concepts and use that to modify and alter some of our (indiscernible) portfolio.

The last thing I just have to ask -- and you addressed this, I think, earlier in terms of just views of sale versus continue to grow the Company. And I don't want to necessarily revisit all of that, but I think one of the things that -- and we have heard certainly from some of your investors who are focused on this issue. But I don't think there is any doubt that you can drive a lot of earnings growth through this company through the measures that you're talking about, on both the balance sheet and operations. What I didn't sort of here you say -- and I would just like to get some comment as to whether this is something you have really sort of done -- is sort of comparing, if you well, the projected cash flow stream versus what you could get today. Because the flip side of C&L and those others is there certainly is aggressive pricing, or what some people would call aggressive pricing, out there in the marketplace today. So is that a calculus that you sit down and do to reach your conclusion?

Yes, it is. It's something that we have done. We have done it with our board. We have done this analysis. Management owns 20% of the stock. We have a very committed interest in maximizing shareholder value. If we thought that this was a time to sell -- and it is a great market to be a seller. It is also a great market, we think, to be a buyer and grow this business. The demographic is only going to improve. It is very hard for new entrants to get into this business. There is very limited financing available for that. And we look at this, that there is the ability to see multiples on our stock price from where it is today.

You know, if you look at our (indiscernible) our stock performance over the last five years, although we are not happy with an $11 stock price, we have come quite a bit from where we were. And we think that there is no limit to how we can grow this company. We have been criticized for G&A, which we think is a big asset. We have been criticized for a national portfolio, which we think is a big asset, because we have seven regions around this country with the regional operating centers that are primed for growth. And we have an infrastructure in place that makes this incremental cost of growth highly profitable with very low marginal [costs].

So, we think that -- you know, we were deliberate and paused during the downtime. We didn't go chasing -- we had money available. We didn't go chasing after (indiscernible) we were concerned about the industry. Right now, the wind is in our sails. We have got great financial and cheap financial resources to team up with for acquisitions. We know we can acquire. We have done it for years (indiscernible) and been successful. And we have done the analysis, Jerry, and believe that the cash flows from our existing portfolio, annuitizing some of the results on the sale/leasebacks and the debt repayments -- you look at our joint venture model, look at the Blackstone venture, we turned a $1.6 million investment into $6.5 million of cash. If you look at the structure with GE, we might be able to do even better than that.

So, when we invest 10% or 15% with a partner, we are [getting it in] management fees and we are [getting it in] promote, we get a return of our investment typically in the first or second year. And with our REITs, the only capital that's necessary typically is a security deposit. So, there's tremendous leverage in the financial structures we are utilizing to grow our business. We don't have to raise more capital. We don't have to -- quite frankly, we'll have enough cash right now to take care of what we need and grow our business and have cash flow growing. So, we do believe that the decision made here is made with the, clearly, shareholder interest; that is paramount to management and to the board, and believe that we have a great ability to really continue to (indiscernible) the stock perform and generate significant value for all of our shareholders.

Thanks. We'll come back off-line just to get some of the timing on some of these transactions.

(OPERATOR INSTRUCTIONS). Roger Feldman, West Creek Capital.

I have a couple of questions, and I appreciate the amount of detail you put in the press release. The first question -- Larry, I believe in the prepared remarks you said that the Company is going to return to profitability. Can you put a timeframe on that?

It is very simple. If you look at this quarter's results, the Company lost $900,000, excluding the non-cash compensation charge. If you look at my remarks, and look at the effect of the transactions we are talking about -- and we can go through, because we do have a press release, and break it out to you. But if you look at the transactions that have not yet closed, and their impact -- again, this first quarter, we had the Blackstone assets, which are now Ventas -- leased from Ventas. That's in our first-quarter numbers, and Georgetown Place in our first-quarter numbers. That's it. If you look at the GE Healthcare, the Towne Center, the three-property, and the covenant transaction, that would increase our profitability by approximately $4.5 million. And the refinance would generate another 3.5 on top of that. So that would be $8 million divided by 4 is $2 million. And after-tax, that would be about 1.3 million, which would make us profitable today if we had accomplished everything in the fourth quarter. So we have announced the transactions that just concluding will make us profitable.

So just -- not to put too fine a point on it, but in the second quarter of 2006 or the third quarter of 2006 --

We should complete these -- we expect to complete all these transactions within the second quarter that we have spoken about, which means that we should see the full effect in the third quarter.

So you should be profitable on a GAAP basis in Q3?

Yes.

And then on page 5, or at least on my page 5, of your release --

Yes, that's correct. Q3 is correct, yes. Because we expect everything will close in Q2. That's correct.

And of course, you should be more profitable -- or closer to profitable in Q2 than you were in Q1.

Yes. I mean, obviously, we expect operations to continue to grow at the rate we are growing. Some of these issues will be timing, quite frankly. I will tell you one thing that we are seeing out there -- lender approvals in this industry are taking longer than we have ever seen. So things are getting delayed slightly. But, yes; we definitely should see better profitability in the second than the first quarter. But again, a lot of that is going to be driven by some of the timing of the closing of these transactions.

But timing aside (multiple speakers)

(multiple speakers) yes, Roger, that is correct.

You gave a number about EBITDAR growth. And you said that these handful of events will increase EBITDAR by approximately $16 million. I am just not sure what it's increasing EBITDAR from.

If you go back, we have a press release, Roger, that was issued on March 13. And there's a schedule. And it breaks out by transaction the EBITDAR growth. So of the 16.3, 9.7 is the Blackstone sale of the assets to the Ventas joint venture. So now, we have that EBITDAR, because we operate those properties [now consolidated].

Georgetown Place is an acquisition that improved our EBITDAR by $1.8 million. The GE Healthcare portfolio -- and these are annual numbers, by the way. The GE Healthcare portfolio which closed, four of the assets closed in the first quarter; the fifth property closed in the second quarter. But on an annualized basis, that is $500,000. Obviously, our own sale/leasebacks don't change EBITDAR, because we already consolidate those properties. So -- and then the last one is the acquisition of the CGI properties, which -- it closed, which would improve the EBITDAR by about $4.3 million once those leases are affected.

Just to help me get -- what I am trying to get to is --

If you take what is today, we are talking about $4.8 million growth from where we were, without any other -- forget performance growth; just on a [staff] basis, we are talking about de novo new EBITDAR in our future periods upon closing of $4.8 million. So again, we have other acquisitions that we think will grow beyond that. But we are not (indiscernible) what is already announced.

Well, let me -- I am still not sure I'm getting -- I believe you did about -- you reported 8.8 million of EBITDAR in this quarter.

Correct.

So if I were to annualize that, I would get -- I would get $35.2 million. Right?

Yes.

So now, you are going to grow EBITDAR by 16 million. Should I add (multiple speakers)

No. What we are saying is that those are the last six months. Included in that 35.2 million is already approximately 11.7 million of announced deals. The incremental we are talking about is another 4.8. That's not yet in the existing EBITDAR on an annualized basis.

So, what you are saying to us is the portfolio -- when you get --

I'm not talking about the portfolio; I am just talking about external growth. No organic growth (inaudible).

Okay. But what we can reasonably expect is that the Company as it stands today, with the current assets and the current overhead, you are telling us that you can generate 40 million in EBITDAR.

We already have in place more than that, yes, based on announced transactions, without any organic growth. And again, if you look at our organic growth of our consolidated properties, it was 16%. We are not even talking about that. (multiple speakers)

I'm just trying to get a number. So tell me, if you already have in place more than that --

You are correct. Right now, if you take your annualized at 35.2, (indiscernible) to that 4.8 is exactly $40 million.

So if we are trying to model out what the Company is worth, you would tell us today to use 40 million of EBITDAR growth?

Correct.

Okay. Just to get some -- a follow-up on Jerry's question. Is EBITDAR the number you would use to put a multiple on to figure out what the Company might be worth in a transaction?

I think, actually, if you look at a transaction for the Company -- and again, I would rely somewhat on the analyst assessment. But again, we [buy] off cash flows. Typically off that cash flow, you're going to have CapEx reserves; you're going to have management fees taken out. That's not in those numbers. There may be some adjustments on G&A. So, there are the changes to those numbers that would be used for purposes of valuing the Company.

So might be higher, might be lower? Are you saying -- I am not sure whether or not you are saying it's lower, it might be higher, or -- I am just confused.

Again, we are right now, if you look at our G&A for the quarter, I think it was about 5.9% of revenues under management. A typical management fee in this industry is somewhere in the 5 to 6% range. So, I think most people underwriting the portfolio would have a management fee implied in those numbers fairly similar to that. And even existing operators taking on this size portfolio would have to add incremental overhead for regional oversight and accounting, so I think that's probably not that different than what we'll report. Clearly, these numbers do not reflect ongoing capital expenditures. They are typically a factor that people use in looking at cash flows. That would reduce that number by the CapEx on an ongoing basis.

You have got a number in here where you say pre-tax income is going to increase by approximately $11 million. Can you do the same analysis for me, so I can get some sense of (multiple speakers)

(multiple speakers) same chart. If you look at the numbers we have, the Blackstone joint venture was a $3.6 million contribution to pre-tax profit. Georgetown Place is $200,000 -- this is all against the income in place at the time of acquisition, so we are not projecting any improvement or different changes in performance since the time we closed. GE would add $500,000. And then the sale/leasebacks would increase the -- the aggregate sale/leasebacks -- the Towne Center, which has closed, and then the other two transactions, would generate another $3.1 million of pre-tax profit. And then we have another $3.5 million of savings on interest expense upon completing the refinancing.

Taking all those inputs, I am looking at a loss for this quarter of -- I apologize; we don't have this modeled out yet -- of approximately $1.5 million. (multiple speakers)

No, no. The actual reported loss was 900,000. (multiple speakers) I'm sorry. Pre-tax was -- without the non-cash compensation, it would be about 1.3 million -- 1.4 million.

If I were to annualize that, I would be looking at 5.6, right? Is that the way to -- and then I add 11 million to that?

You would add to that -- 11 less 3.8. You add 7.2 to that.

So, 5.6 negative. And then 7 -- I'm sorry; 7.8?

7.8, because we already have 3.6 -- the Blackstone joint venture sale/leaseback and Georgetown are already in our numbers. (multiple speakers)

So, just using the numbers you have given us, I'm comparing putting a multiple on 40 million of EBITDAR, plus about 50 million of cash, versus 2.2 million in pre-tax income? Is that the right way to look at the sale versus hold decision?

No, because it's not stagnant. It's looking at the growth opportunity of this company based on the growth of our assets, based on the continuing growth of this company. So it is not just a snapshot of what your cash is one quarter. It's looking out to the cash flows from the annuitizing of these income gains that we are talking about, coupled with growth -- reasonable growth of our existing portfolio. Obviously, one of the advantages of the lease structure is that we will capture the economic upside of these properties that we now consolidate. So we are looking at that as well.

Can you help me put that in numbers? I think what I just came up with was something like $0.08 of pre-tax for -- just taking the numbers you gave me -- making no assumptions myself; just taking the numbers you gave me -- using $2.2 million of pre-tax, I get about $0.08 of pre-tax. Where -- just so that I can do the comparison myself against selling -- how should I think about growing that $0.08 over time?

I think, again, if you listen to what we said -- we have two development scheduled to start this year. We have six developments scheduled for next year. We have additional acquisitions -- if you look at -- roughly 15, 20 acquisitions coming in. Again, if you look at -- just looking at these numbers, Georgetown Place was $200,000; GE was 500,000. So, each acquisition is accretive, anywhere from -- looking at this -- $0.01 to $0.02 pre-tax. So you are looking at that. And if you look at our same-store sales comparison in the first quarter, we generated over 16% growth. Our Waterfords had over 23% growth year-over-year. So, I think that you have to -- and again, we have not given guidance, so I don't want to get quite into giving guidance. But I think you can take the components of what we are talking about and model it out. And you can start to see the cash flows, and then, applying a multiple on that, what that value would be.

I've got to be honest; I have no clue how to do that based on what we have. So, I guess all I would ask you is over time, I guess, we are going to keep looking at the value that we could get by laying this into a larger company, as I know you guys are, although I guess you guys do sell some stock in the market, which we don't. But I guess we are going to be looking at value to a third party who has already got ancillaries and could provide them immediately. And we hope you guys will. And then we are going to try to get our hands better around -- and I'm sure you guys have done this sort of modeling internally with far more specificity than we can as outsiders. I agree with you; there's got to be huge leverage in your model. We just haven't seen it yet. And I guess I hope we see it soon, because the bird in the hand doesn't look so bad.

That is a nice thought for us as well. So that, I think, is very valuable.

We have no further questions at this time. I will turn the conference back over to management for any closing comments.

We appreciate everyone's time, and have a good day. Thank you.

That does conclude today's conference.