Sonida Senior Living Inc (SNDA) 2006 Q2 法說會逐字稿

Good day, and welcome to the Capital Senior Living second 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 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 risk factors identified from time to time in the Company's reports filed with the Securities and Exchange Commission.

At this time, I'd like to turn the call over to Mr. James Stroud. Please go ahead, sir.

Good morning, and welcome to Capital Senior Living Corporation's second quarter earnings call. The Company previously announced its 2006 business plan consisting of four major building blocks. The building blocks are first, sale/leaseback transactions to generate gains, monetize equity and communities and reduce and fix our interest rates; second, acquisitions through joint ventures and REIT acquisition leasebacks; third, maximize value of our communities by improving operating income and increasing the Company's assisted living capacity; and the fourth building block is increased third-party fee income.

In the second quarter, the Company continued to execute the 2006 business plan. The Company completed or announced a number of significant transactions using our sale/leaseback and joint venture acquisition strategies, which are driving growth in revenues and EBITDAR. Additionally, we have strengthened our financial position by reducing debt and eliminating interest rate risk on our owned portfolio. For further comment on the second quarter results, I now introduce Larry Cohen, Chief Executive Officer. Larry?

Thanks, Jim, and good morning. We are pleased to report our results for the second quarter of 2006. Our 2006 business plan was developed to generate significant income and asset growth, maximize our return on invested capital and strengthen the balance sheet.

During the quarter, we completed transactions valued at $259 million. These transactions advance our objectives and return the Company to profitability. Our joint venture and REIT acquisitions enable us to expand our portfolio, our sale/leaseback transactions allow us to monetize equity in our communities, while retaining the management and net operating income from the properties.

And with the completion of our refinancing, we have reduced our mortgage debt by $44.3 million and fixed or capped the interest rate on our entire wholly owned portfolio at a maximum blended rate of approximately 6.5%. Organically, we continued to increase occupancies, rental rates and operating income, while industry fundamentals continued to improve. We are successfully growing our business while strengthening our balance sheet.

I would like to review our financial highlights for the second quarter of 2006. Second quarter revenues increased 39% to $33.9 million compared to the second quarter of 2005. Second quarter adjusted EBITDAR, which we define as income from operations plus depreciation and amortization and facility lease expense, increased 66% to $9.6 million from the second quarter of 2005. Our adjusted EBITDAR margin improved 450 basis points to 28.2% from the second quarter of the prior year.

For the second quarter, we reported an adjusted net loss of $300,000 or $0.01 per share versus a loss of $1.1 million or $0.04 per share in the second quarter of 2005. For comparability, the second quarter 2006 results exclude non-cash stock based compensation and nonrecurring expenses related to transactions and refinancings completed in the quarter, as well as the effect of a change in Texas state taxes expected to occur in 2007.

The second quarter 2005 results exclude a loss on a treasury rate lock agreement during that period. Second quarter results would have generated positive normalized earnings had all the transactions that were closed during the quarter been completed at the beginning of the second quarter. We expect our financial results will be positive in the third quarter.

Cash earnings, defined as net income plus depreciation and amortization, for the second quarter were $2.8 million or $0.11 per diluted share compared to $2 million or $0.08 per diluted share for the second quarter of 2005, excluding the effects noted previously.

As Jim mentioned, there were several initiatives that created the foundation for our accomplishments during the quarter and position us well for future growth. The cornerstone to this plan are maximizing the value of our communities, pursuing additional joint venture acquisitions as well as REIT acquisition leasebacks, and increasing revenue through management and development fees for the third parties. I am pleased to report that we continued to execute on all of these initiatives.

First, we continued to maximize the value of our communities. During the second quarter, our stabilized communities averaged a 91% occupancy rate compared to 90% in the second quarter of 2005. In the second quarter of 2006, same-store revenues at all communities under management, which include revenues generated by our consolidated communities, communities owned in joint ventures and communities owned by third parties and managed by the Company, increased 8.5% and net income increased 16.1%.

Operating margins before property taxes, insurance and management fees at our stabilized communities, improved to 48% in the second quarter as compared to 47% the same period in the prior year. The number of communities we consolidated in the second quarter increased 52% to 44 from 29 a year earlier. Financial occupancies at these communities increased 320 basis points in the last 12 months, and ended the second quarter at 89.5%. Operating margins at our consolidated communities improved to 42% during the quarter compared to 40% in the prior year and average monthly rents increased 4.3% to $2,188.

Seventeen of our consolidated properties are our newer Waterford/Wellington communities, which also are continuing to improve. In the second quarter, these communities enjoyed a 90.2% financial occupancy compared to 88.2% in the second quarter of 2005 and average monthly rents grew 4.5% to $1,881. This performance generated a 7.9% increase in revenues, a 16.1% improvement in net income, and operating margins improved to 43% from 41% a year earlier.

We intend to further enhance the value of our communities by increasing the capacity for assisted living or supportive services as well as through additional ancillary services. In addition, we expect to see further improvement in our revenues as we implement price increases and community fees at many of our properties. Moreover, we are benefiting from our recently contracted group purchasing program that is generating additional savings on the cost of food, supplies and service contracts.

The second initiative that we implemented involves sale/leaseback transactions. These sale/leaseback transactions allow us to monetize the equity in some of our communities, are immediately accretive with a positive impact on earnings for 10 years and generate proceeds that have been used to retire debt and for other corporate purposes.

During the second quarter, we completed $97 million in sale/leaseback transactions, resulting in gains of approximately $16.4 million with $13.5 million being amortized over the initial 10-year lease term. These sale/leaseback transactions reduced our mortgage debt by $29.3 million and generated cash proceeds of approximately $26.6 million. Our CGIM six-community sale/leaseback transaction enables us to exercise our options, purchase previously managed communities, recognize the value we created and convert their operations into consolidated communities.

The third initiative that we expanded during the quarter is joint venture acquisitions. In the first quarter, we formed a joint venture with GE Healthcare Financial Services. This venture has acquired five senior living communities for a combined purchase price of $46.85 million. We announced a second joint venture in the second quarter to acquire three Indiana communities for $38.2 million, and this acquisition is scheduled to close this month, and we will begin earning management fees, a return on our minority interest, and potential incentive distributions.

In addition, we completed another acquisition leaseback transaction valued at $19.1 million during the quarter. Our acquisition pipeline is robust and we expect to acquire additional senior living portfolios throughout the year with our joint venture partners and REITs.

The fourth initiative involved improving our debt. We are pleased with the results of the refinancings we've completed during the quarter on 19 wholly-owned communities. We continue to obtain mortgage debt at the most favorable terms in the Senior Living industry. The Company's mortgage debt has been reduced by $44.3 million and is now either fixed or capped at a maximum blended rate of approximately 6.5%. Annual interest savings are expected to be approximately $3.8 million.

New development of senior living 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 new construction in most markets. This scenario bodes well for further enhancement in the value of our existing properties and continued strong same-sales.

We're looking forward to beginning development of two premium independent and assisted living communities in Ohio with a joint venture partner in the second half of this year on sites we have owned since 1999. We are actively seeking additional sites, primarily in strong barrier-to-entry markets for a limited number of developments with a joint venture partner. Our goal is to start six developments in 2007.

Our successful track record as a proven operator of senior living communities has provided us with a solid platform for growth, and we are fortunate to continue to expand our relationships with strong capital partners. The senior living industry experienced a shakeout following the overbuilding that occurred in the late 1990s. The industry remains highly fragmented and with the consolidations that are occurring in the industry, we are one of a limited group of proven independent operators that are benefiting from increased institutional investor interest.

We continue to be active with a solid pipeline of attractive acquisition opportunities, and our existing infrastructure allows us to integrate these acquisitions at low marginal costs. We are also fortunate to team up with strong financial partners with low capital costs, making us a formidable competitor in acquiring existing properties.

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 shareholder value will be enhanced by continuing to increase the value of our communities, acquiring other senior living portfolios and operations with our well-capitalized financial partners and REITs, and expanding our developed activities with joint venture partners.

As evidenced again this quarter, we are experiencing solid operating results with significant revenue and EBITDAR growth. During the first six months of this year, we have completed or announced acquisitions of 15 high-quality senior living communities from third parties with a combined value of approximately $150 million. Twelve of these acquisitions have closed, and three are scheduled to close this month. Eight of the acquisitions work with a joint venture partner and seven have been acquired by a healthcare REITs and leaseback to the Company on favorable terms. Our proven track record continues to afforded us access to debt and equity capital at the most attractive terms in the industry.

These accomplishments have returned us to profitability. And the operating leverage in our business model, the financial leverage achieved through our acquisition strategies, and favorable industry conditions, should provide the impetus for continued growth at a rapid pace. Thanks to the diligent efforts of the dedicated members of the Capital Senior team, we are experiencing significant growth.

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

Thanks, Larry, and good morning. I hope everyone has had a chance to receive the press release, which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the second quarter and first six months of 2006. If you need a copy of our press release, it has been posted on our corporate website, at www.CapitalSenior.com.

I'm going to begin with a summary of significant transactions either completed or announced in the second quarter. First, we completed the sale of Tesson Heights, Veranda Club and Crosswood Oaks to healthcare REIT for approximately $54 million and leased these three communities back on a 10-year lease with two 10-year renewal options.

We realize a gain of approximately $12.8 million amortized over the initial 10-year term, a reduction of $29.3 million of debt and incremental cash proceeds of $23 million. Second, we exercised a purchase option to acquire seven communities and sold six of them to a healthcare REIT for approximately $43 million. We leased them back from the REIT on an initial 10-year term with two 10-year renewal options.

Our $3.6 million gain on this sale was partially reduced by $2.9 million write-off of contract rights related to our purchase of a management company in 2004. The $0.7 million net gain will be amortized over the initial 10-year term of the lease. Next, we completed a lease transaction with another healthcare REIT on a Grove's Arbor community in Minnesota, which they repurchased for approximately $19.1 million.

This lease has an initial term of 10 years with two five-year renewal options. This transaction is expected to increase our annual revenues by approximately $4.7 million and EBITDAR by $1.9 million. We also announced an additional joint venture to acquire three communities in Indiana for $38.2 million. We expect to earn approximately $0.5 million per year of management fees along with the return on our 15% investment. This transaction should close later this month.

Also, during the quarter, we completed the refinancing of $143 million of debt on 19 owned communities. We paid down approximately $14.8 million of principal as part of the refinancing. With $110 million of debt on 15 communities as a 10-year term and is fixed for the first nine years at the rate of 6.29%. The other $33 million of debt on four communities is for a three-year term plus extensions, at a rate of LIBOR plus 260 basis points.

We purchased an interest rate cap that limits this rate to no more than 7.6% through January 2008. We expect to realize approximately $3.8 million per year in interest savings as a result of the refinance and debt repayment. We also expect to reduce our amortization of deferred financing costs from $0.2 million to $0.1 million per quarter resulting in an additional savings of $0.4 million per year.

The Company's mortgage debt is now either fixed or capped at a maximum rate of 6.5%. At our current level of debt, our interest expense, including amortization of deferred loan costs, should be stable at $3.5 million per quarter. These second quarter transactions and refinancings have resulted in some unusual expenses for the quarter, including the write-off of $1.8 million of deferred loan costs and the write-off of $0.9 million of contract rights.

In addition, we had $0.2 million of non-cash stock-based compensation and a $0.3 million adjustment in our deferred tax asset for Texas due to a pending change in state law. Excluding these effects, the Company's adjusted net loss for the second quarter of 2006 was $0.01 per share. Furthermore, if the Company had received a full quarter's benefit from the transactions completed during the quarter, normalized second quarter earnings per share would have been a profit of $0.01 per share.

So the continuing improvements in operations, along with these transactions and refinancing have enabled the Company to regain profitability. Moving on to the income statement the Company reported revenues of $33.9 million for the second quarter of 2006, compared to revenues of $24 million for the second quarter of 2005, an increase of approximately $9.5 million or 39%.

The number of consolidated communities increased by eight during the second quarter of 2006 and by 15 since the second quarter of last year. Financial occupancy of the consolidated portfolio was 89.5% at the end of the quarter, an increase of 320 basis points from a year ago. Revenues under management increased approximately 13% to $46.6 million in the second quarter of 2006 from $41.1 million in the second 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 $5.3 million in the second quarter of 2005. As a percentage of resident and healthcare revenues, operating expenses decreased from 69.1% last year to 64.6% this year reflecting 450 basis points of margin improvement.

General and administrative expenses were $0.5 million higher in the second quarter of 2006 than in the second quarter of 2005. Approximately $0.2 million of G&A in the second quarter of 2006 was due to the Company's adoption of Statement of Financial Accounting standards number-123 R, regarding non-cash stock-based compensation. G&A expenses as a percentage of revenues under management excluding stock based compensation were approximately 5.8% in the second quarter of 2006 compared to 5.9% in second quarter of 2005.

Adjusted EBITDAR, defined as income from operations plus depreciation and amortization and facility lease expense, for the second quarter 2006 was approximately $9.6 million compared to $5.8 million in the second quarter of 2005 an increase of 66%. Adjusted EBITDAR margin of 28.2% improved 460 basis points from the second quarter of the prior year.

Interest expense was $4.4 million in the second quarter of 2006, down sequentially from $5.3 million in the first quarter of 2006 and $0.1 million lower than second quarter 2005. As a result of the refinancings completed in the second quarter 2006, interest expense expected to drop another at $0.9 million in the third quarter of 2006 and to stabilize at approximately $3.5 million per quarter at our current level of debt. The Company reported an adjusted net loss of $0.3 million or a $0.01 loss per share versus a loss of $1.1 million, or a $0.04 loss per share in the second quarter of 2005.

For comparability the second quarter 2006 adjusted net loss excludes non-cash stock-based compensation, expenses related to transactions or refinancings completed in the quarter, and the effect of a change in Texas State taxes expected to occur in 2007. The second quarter of 2005 adjusted net loss excludes a loss on our treasury rate lock agreement during that period.

Cash earnings defined as net income plus depreciation and amortization for the second quarter of 2006 were $2.8 million or $0.11 per diluted share versus $2 million or $0.8 per diluted share in the second quarter of 2005, excluding the effects noted above.

During the second quarter of 2006 the Company reduced its total debt from 247.2 million to 206.6 million. This reduction of $40.6 million of debt resulted from the sale/leaseback of three communities and the refinancing of 19 others including a principal repayment of approximate $14.8 million. And as of June 30th, 2006, the Company had $25.7 million of cash and cash equivalents and $142.5 million in shareholders' equity.

Jimmy, at the present time, we'd like to take any questions.

[OPERATOR INSTRUCTIONS] And we'll take our first question from Jerry Doctrow with Stifel Nicolaus.

Good morning.

Good morning, Jerry.

I had a couple of maybe brief things and then maybe some broader ones. Just on the, I think 602,000 of maybe after-tax, on the write-off of the management fee or management contract amortization. Ralph, where is that in terms of just a basic income statement, if we wanted to back it out? Is it in G&A or is it in amortization? It wasn't clear to us.

Okay. Let me pull out the income statement here and refer you to that line on the income statement. It's actually, Jerry, included in depreciation and amortization. So the $3,714,000 depreciation and amortization number for the second quarter of 2006 includes 866,000 or we'll call it 900,000 of management write-offs. So part of that depreciation and amortization really is amortization this quarter including the write-off of this contract rights..

Right. Okay. And that's where the write-off of the financing costs are as well, are they --

It's actually on a separate line item a little further down. Write-off of deferred loan costs of 1.762 million that again is the pretax numbers.

Yes. Okay. And then if you just -- the Texas tax thing, if we can just be a little clear on that. Are you're running through the income statement but you're really adjusting your deferred tax or explain to me what that is and whether it's cash or non-cash?

It's actually non-cash. What's happening is the state of Texas, the Texas Legislature is trying to accomplish property tax reform in the state of Texas and they're doing so by adjusting the way they tax businesses based upon their assets, revenues or margins. And there's a law that was recently passed in Texas, which takes effect in 2007, which basically is going to convert from a franchise tax to more of an income tax in the state of Texas in 2007.

Because of this, some deferred tax asset on our balance sheet will not be fully utilized in the future. We won't receive the same benefit from those deferred tax assets we had expected to, so we've adjusted by roughly $300,000 in the second quarter of 2006 and done so through the tax provision line. So our tax benefit for the quarter was not as large as we would have expected. Because we've adjusted as per tax assets. This law actually is going to be challenged in the state of Texas. So it may or may not ever come to pass but for conservatism we've adjusted on deferred tax assets in the second quarter of 2006.

Okay. And it won't recur? This is through the onetime adjustment to basically ready for that law in '07?

That's correct. This should be a onetime adjustment. And we should have fully reflected the change in that law anticipated in 2007.

Okay. And then I guess a couple of broader things. The one item on the - that I guess, surprised us just in terms of the estimates and stuff for the quarter, was the average daily rate. And it wasn't so much that you didn't see year-over-year progress on same store, but the stuff that you're acquiring came -- I think if you just look at your Consolidated ADR from like first quarter, second quarter is only up by 0.4%. So the stuff you're buying, if maybe give us little more there on the acquisition strategy and whether we should be assuming this new stuff is coming in at kind of the same rent, lower rent, higher rent that kind of stuff?

Hi, Jerry. Hi, it's Larry. If you look at what's coming in this quarter, we have a couple of covenant properties that are opened. In fact if you look at our occupancies on a portfolio basis, I think it was 87.1%. That includes properties that are in lease-up, some of which have about 39% occupied. So some of these are incorporated into those numbers, those are newer properties.

As far as acquisitions, we are buying predominantly assisted living, assisted living with independent or assisted living with some Alzheimer's. I think in general the average rate on some of the acquisitions will be higher. If you look at Roseburg, you look at that's about $2,700 a month or $2,800 a month, it's a little higher. Some of the other transactions in the Midwest is kind of comparable to capital levels of care.

So I think that if you look at the pipeline of what we're buying, I think the trend line on the on acquisitions will end up being a little higher on average monthly rents than our kind of a core portfolio. But I think this quarter is reflecting some of the new more nor properties as well that are opening up some of the Covenant managed properties, two of which just recently opened. And I think that's also having an impact on it.

Okay. And on just same store I wonder, I think it would be great if you added to the, since you're now doing lots of stuff, acquiring stuff, developing stuff -- it would be great if we could get same-store stats.

Well, we did, but I'll give it to you again. . We did give it in the call, and in the future we'll put it into the release. If you look at -- actually in your release. When you look at the revenues we announced of 8.5%, that's apples-to-apples. That's exactly the same portfolio, second quarter of '05 to second quarter of '06. Operating expenses on those portfolios, year-over-year, are up 4.4% and the bottom line income growth is 16.1% contribution.

Okay. And in terms of maybe getting to the 85 [inaudible - cross talk]

85, is actually -- occupancy is little over 2% and about 6% is REIT.

Okay.

So that's why we give that number first because that's probably -- that really is, I think, the more important number because as we continue to grow and the portfolio's changing, it's hard for people to get comparability.

Yes. I certainly agree. And you showed a little bit of movement towards AL, I think you mentioned on the call that you might be converting more units to sort of AL. So could you just gives us little bit sense of, sort of what your thinking is there in terms of, is that a more desirable part of the business or where is that going to end-up as say, part of your mix?

Well, the average age of our resident's 85. We're finding that even in independent living communities we have a frailer population. About two years ago, we began renting space in those properties to third party homecare agencies to provide some services to our residents. In a number of properties, there is ability to have unlicensed supportive services. We're doing that where we can in other jurisdictions because some of these properties were built to independent living codes and non-assisted living codes, we have to have home healthcare agencies in there. And we are actively looking at some strategic relationships or acquisitions of some of the providers in some more properties to be able to grow that business in those properties. In other properties where we have the ability for licensure to do conversions or expansions, we're looking at that as well.

Okay. But over time, you would see maybe a little bit more --?

Yes. And I think for acquisition purposes, we're actually finding we're buying more AL or IL/AL product.

Okay. And then just actually the last thing I wanted to ask about broader, obviously you're doing a mix of REIT financing, JV financing right now, and there is sort of a debate in the industry, with kind of Brookdale on one side and Sunrise on the other, ownership versus sort of doing it maybe in a JV kind of role of being more of manager, how are you kind of making that trade off and what's kind of your thinking about sort of how you go going forward?

It depends on each transaction. We actually model all the acquisition opportunities for the various structures to see what generates the highest return and what is the most beneficial to the Company. We think that as owning assets -- and again, we own a significant portion of our assets today. And even though we've had some sale leasebacks, we continue to benefit from those ownerships.

Going forward, we get greater leverage, and you look at the returns of using a REIT financing in your -- a typical example if you look at our corporate presentation, we have a couple of slides that demonstrate this. But if you look at for example the Rose Arbor transaction that closed during the quarter, there the revenues going around $5 million a year.

EBITDAR is roughly $3 million a year - I'm sorry, $2 million a year. And our rent expense is about 1.6 million. Our rents are growing on average we figure about 2, 2.5% a year. And we're finding our EBITDAR is growing at a higher rate 10% to 12% generating about 40% growth in the EBITDAR.

So we see great leverage there to drive EBITDAR growth with virtually no capital investment on good, stable properties. The joint venture is attractive because we're getting great returns. If you look at the transaction we completed with Blackstone a few years ago, there we invested $1.6 million. Those assets last October were sold to Ventas for $85 million. Our back-end was more than $6.1 million. So we benefited through our promote.

What's key to us is what gives us the advantage competitively. And we're fortunate to be able to team up with the likes of a GE Healthcare Finance or some of the larger REITs at very competitive rates. And we find that we're very competitive with Brookdale and others in acquisitions, because our partners are bringing very low cost of capital.

The other aspect we are finding is that you mentioned Brookdale and the consolidation in this industry, there are fewer and fewer independent companies that have the ability to be flexible and are really being courted by the financial investors to team up because they need an operator. And that gives us, we think, the best flexibility for our growth, because we're not tied to a capital source.

So we're benefiting from the ability to have a very strong partner like a GE Healthcare Finance that's funding their acquisitions internally off their credit. And the healthcare REITs, or REITs financing now, is averaging about 8% -- and some think it's lower than 8%. So we think that's a very efficient cost of capital.

And basically you just do a deal-by-deal transaction?

Yes. We look at the results of every transaction we model it out and look to see what is most beneficial to the Company and we'll continue to use both strategies.

Okay. And just on the development -- maybe just if I can get a little more color, obviously, you've had these two sites that have been [landbanked] for a while. So you're going to do those. Again, doing those through JVs, I assume is going to produce best return and also, I'm sure, limits losses. And then in terms of the new development, you actually have sites identified or you're working with a partner, just any more color on sort of what your thinking is there?

We actually have a development group. We have people in the markets looking at sites. We have one right now negotiating a contract. We have others that we're actively pursuing as well. So we are -- we have people spending their time looking for sites, predominantly in the mid-Atlantic and Northeast areas.

Okay. And, again, that will --

It will be in joint ventures. All be in joint ventures. The Ohio sites, we should get final approvals this month and be able to start construction in the next couple of months.

Okay. All right. Thanks.

Thank you.

We'll take our next question from Peter Lux with Smith Barney.

Hi. How are you guys doing?

Hey, Peter.

Hi again, Larry. How many new year-over-year with all the acquisitions and so forth and bed are you managing today versus a year ago?

Our resident capacity right now of our entire portfolio is 9,218 versus 8,668 a year ago.

Okay. And how much total ancillary are you getting out of the portfolio today?

We don't break out the ancillaries, so we don't quantify that. We're obviously -- we have a couple of CCRCs that we operate that have some significant ancillaries in there. And then if you look at our assisted living, the key growth driver is going to be on the independent living communities that we have, which still represents about 80% of our capacity by being able to introduce more services to our residents in those properties.

Also, you talked about -- I don't think it's any secret that one of your major shareholders is putting tremendous pressure on you guys talking about consolidations that are going on in the industry. Have you, rather than being a buyer, have you guys looked to be a seller at all?

Well, we've been selectively selling assets where we think there's good equity to -- it's a good time to do that. And we fixed our balance sheet. Right now, we feel we have wind in our sales. We have a great very strong financial partners. We see a great pipeline for acquisitions. We continue to see benefits in our own operations, and we think we can really enhance shareholder value significantly over a reasonable timeframe with this strategy versus a sale of a complex.

With the -- I don't know the exact numbers, but three years ago, I'd say you owned 70% of your properties and you managed 30 with leased. I think with all these sale leasebacks, what is the ratio today?

Right now, we have -- and this is all in our financial statements we have supplemental schedules that show all this. Right now, in the second quarter, our owned properties are 43% and our leased are 30%. Our managed - I can't read this - what is it --

11.7 or 12%.

-- yes, 12%.

And then our joint venture is 15%.

On the leases, do you have a repurchase option on - to get a back-end. I know you mentioned in some of these, you did get a back-end?

No. On leases, they're operating leases for GAAP purposes, so therefore, they're 10-year terms --

So they're outright sales initially. So you guys -- your end came on the initial sale leasebacks.

Well except they get amortized over the lease term.

Right. Okay. Thanks a lot.

Thanks, Peter

And we'll take our next question from Todd Cohen with MTC Advisors.

Good morning.

Good morning.

Just a couple of questions. First of all, you made reference to a recently completed group purchasing effort - I think is what you call it?

Yes.

Can you highlight what that is exactly?

Sure. We have now around 60 properties that we operated around the country, and we are growing. We found that by having a group purchasing contract with one vendor that then can provide each of our communities where we are doing all of the food service, we're doing all the housekeeping, maintenance, all those departments are buying supplies and materials and -- including some refurbishments of the buildings. Its -- we've found that with the size of our Company, we can take advantage of a group purchasing mechanism with one vendor that deals directly with each property to drive further savings to our operating expenses.

Okay. And then can you again talk a little bit about, I know you've made reference to industry fundamentals continuing to improve. Can you highlight that a little bit? I'm curious as to how you --

We look at industry data. We look at NIC and ASHA data. It's a - if you look at NIC, I think nic.org every quarter they update their statistics. If you look at the first quarter results, which are the most current for the industry, we see occupancies for independent living are around 91%-92%, assisted living is 89.5%.

If you look at trend lines over the last few years, we've seen dramatic improvements in the industry. We look at supply statistics from ASHA every year. We look at both independent, assisted and continuing care retirement new supply.

And as I mentioned, the growth since 1999, when the supply was peaking for the industry, the supply on a compounded growth rate has only been growing by 1.3% a year. So we compare -- we benchmark ourselves to the industry peer group. We use NIC data, we use ASHA data. We use our own information and what's also interesting as we are growing through acquisitions, we also are seeing how our competitors are doing.

So we continue to benchmark ourselves to those situations. And from all the operating metrics that we're looking at, we see continued improvement in fundamentals. Margins are expanding, rental growing and occupancies are rising.

And then, as it relates to the six developments that you hope to get accomplished in 2007, will you be looking to do those specifically in areas where you already have some infrastructure in place, so that you can leverage [inaudible - cross talk]

We have a regional office in that location. We do operate some properties, but again as I said, we're looking predominantly at the Mid-Atlantic and Northeastern areas where we think there is higher, larger barriers to entry, more affluent seniors in those markets, limited competition. We have a phenomenal operation in Trumbull, Connecticut and also in Summit, New Jersey. So we'd like to fill in there. We have our good strong regional office in that part of the country as well, so we can be able to expand in that region.

And then just getting back to this issue of this group purchasing effort. It seems to me that that's kind of a common business practice that one would employ in running any large business --

We look at this every year, and quite frankly it depends on critical mass. And what we've found looking at this year-after-year is that the way we're using our purchasing mostly at the site level was more efficient and now we're getting the size where we're getting the benefit of the group purchasing. So it's really coming to our critical mass.

And what we had before, we had national contracts with separate vendors -- for instance food service, maintenance, supplies. But what we found now with the cost of distribution and transportation costs, by going to the - a -- one company, and we bid four different companies, we're able now to also focus on reduction of transportation costs, which -- that was one of the areas we were concerned about.

And then, last question would be is there any point in time, here, where you guys will be more buyers of your stock as opposed to sellers. I mean, it's just, every quarter again and again and again, I'm just kind of wondering what your thinking is on that. I know you seem to be very excited about the opportunity that we as shareholders have get, you guys really aren't kind of putting your money where your mouths are.

Well, and this is Jim Stroud. It's really a two too edged sword. I mean one is, a year ago -- two years ago, one of the biggest concerns from shareholders was that there wasn't sufficient amount of float. And at any time a shareholder wanted to buy, let's say, 100,000 shares or more, it had an artificial increase in the price of the stock.

Coupled with the fact that my family was sitting there with close to 5 million shares and the reality, if I was killed in a car wreck, it could be disastrous not only for the Company but also for the government does not give you than nine months to pay the estate tax. So my decision to go ahead as reported on that 10b-5 plan is really in the estate planning issue, it's not a Company performance issue.

And my plan was very limited for a specific purpose to purchase a house, which has been purchased, and it was limited to a number of shares which have been sold.

Thank you.

Thank you.

And, gentleman, with no further questions, I'd like to turn the call back over to management for any closing comments or additional remarks.

We appreciate everyone's time and continued interest in the Company. Good day.

And ladies and gentlemen this does conclude today's teleconference. You may now disconnect and have a great day.