Sonida Senior Living Inc (SNDA) 2006 Q4 法說會逐字稿

Good day and welcome to the Capital Senior Living fourth-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 risks and 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. Larry Cohen. Please go ahead.

Thank you and good morning, everybody. I would like to welcome you all to Capital Senior Living's fourth-quarter and full-year 2006 earnings call.

We are pleased to report our results for the fourth quarter and full year of 2006. Our 2006 business plan was focused on increasing shareholder value by providing significant income and asset growth, strengthening our balance sheet and returning the Company to profitability. The execution of this plan resulted in one of the most successful years in the Company's history.

Compared to 2005 results, our total revenues increased 26% to $159.1 million and EBITDAR increased 56% to $40.6 million. We completed acquisition transactions valued at $216 million in 2006. We expect these acquisitions to increase our annual revenue by approximately $33 million at a combined EBITDAR margin of over 40%.

We also reduced our mortgage debt by $56 million, and fixed or capped the interest rate on our entire wholly-owned portfolio, at a maximum blended average rate of approximately 6.5%. These actions not only improved our balance sheet; they also result in interest savings of approximately $7.5 million per year. Later on this call, Ralph Beattie will update our progress on further debt retirement and refinancings in 2007.

We are successfully growing our business while strengthening our balance sheet. Our achievement in 2006 was supported by strong industry fundamentals. Occupancies are increasing, new construction starts are limited, average monthly rents are rising and acquisition opportunities are robust. We are also benefiting from our relationships with strong capital partners and their demand for proven operators of senior housing communities. We expect these dynamics to continue our momentum as we move forward into 2007.

I would like to review our financial highlights for the fourth quarter and full year 2006. Fourth-quarter revenues increased 23% to $43 million, compared to the fourth quarter of 2005.

Fourth-quarter adjusted EBITDAR, which we define as income from operations plus depreciation and amortization and facility lease expense, increased 42% to $11.9 million from the fourth quarter of 2005. Our adjusted EBITDAR margin improved 380 basis points, to 27.8%, from the fourth quarter of the prior year.

For the fourth quarter, we reported adjusted net income of $1 million or $0.04 per share versus the loss of $1.4 million or $0.06 per share in the fourth quarter of 2005. These comparisons exclude non-cash stock-based compensation in both periods, and fourth-quarter 2005 adjustments for non-cash mark-to-market adjustments on treasury lock agreements and hurricane damage.

Adjusted cash earnings, defined as net income plus depreciation and amortization, for the fourth quarter increased 73% to $3.8 million or $0.14 per diluted share, compared to $2.2 million or $0.08 per diluted share for the fourth quarter of 2005, excluding the effects noted previously. Full-year revenue increased 26% from 2005 to $159.1 million. Full-year adjusted EBITDAR increased 56% to $40.6 million versus the prior year. Our annual adjusted EBITDAR margin improved 490 basis points from 2005 to 25.5%.

For the full year, we reported adjusted net income of $0.1 million, less than $0.01 per share, versus a loss of $4.5 million or a $0.17 loss per share in 2005. These comparisons exclude non-cash stock-based compensation in both periods, and 2005 adjustments for non-cash mark-to-market adjustments on treasury lock agreements, hurricane damage and write-offs of contract rights and deferred loan costs. Adjusted cash earnings for the full year were $12.4 million or $0.48 per diluted share, versus $8.5 million or $0.33 per diluted share in 2005, excluding the effects noted above.

There were several initiatives that created the foundation for our accomplishments during the quarter and position us well for our continued growth. First, we enhanced the operating results of our communities. During the fourth quarter, 58 of our properties were stabilized with a 91.3% average physical occupancy rate. Operating margins before property, taxes, insurance and management fees were 46% in our stabilized independent and assisted living communities.

Same-store revenues at 48 communities under management in both the fourth quarter of 2006 and 2005 -- these include revenues generated by our consolidated communities, communities owned in joint ventures, as well as communities owned by third parties and managed by the Company -- increased 6.1% as a result of a 5.1% increase in average monthly rents and a 1% increase in occupancy. Same-store expenses increased 2%, and net income increased 13.3% from the comparable period in 2005. The operating leverage in our business model is reflected in the 79% incremental EBITDAR margin realized from these same-store revenue increases.

The number of communities we consolidated in the fourth quarter increased 33% to 48 from 36 a year earlier. Financial occupancies at these communities increased by 150 basis points, and averaged 90.4% during the quarter. Operating margins at our consolidated communities improved to 43% during the quarter, compared to 41% in the prior year.

Average monthly rents increased 7% to $2,269. Attaining a 93% financial occupancy, with a 5% increase in average monthly rents at our consolidated communities, would generate approximately $14 million in additional annual consolidated revenues over our December 2006 run rate. At a 75% incremental EBITDAR margin, these additional revenues would increase the Company's EBITDAR by $10.5 million.

17 of our consolidated properties are Waterford/Wellington communities, which we developed between 1999 and 2002. In the fourth quarter of 2006, these communities enjoyed a 91.7% financial occupancy, compared to a 90.5% occupancy in the fourth quarter of 2005, and average monthly rents grew 5.9% to $1,942. This performance generated a 6.8% increase in revenues, while expenses increased by 1.3%, resulting in a 17.4% increase in net income, compared to the fourth quarter of 2005.

Operating margins also improved at the Waterford/Wellington's to 43% from 42% a year earlier. We expect to see further improvement in our revenues as we benefit from occupancy gains, price increases and community fees which we implemented at many of our communities last August. Moreover, we are benefiting from cost controls and additional savings on the cost of food, supplies and service contracts through our group purchasing program.

During the fourth quarter of 2006, we expanded our REIT acquisitions leaseback transactions. We leased four communities from a publicly-traded health-care REIT purchased from a third party for $51 million, and leased another community purchased from a third party for $18 million. These two transactions are expected to yield approximately $16.3 million in annual revenues, $6.6 million in incremental annual EBITDAR and be accretive to earnings.

The seniors housing acquisition market continues to be robust, and our strong relationships with major healthcare REITs and private equity investors provide us access to attractive capital, enabling us to be a prolific acquirer. These relationships are also generating significant deal flow, and we are optimistic that we will continue to be successful in acquiring additional senior living communities throughout 2007.

Our existing infrastructure and national platform allow us to integrate these acquisitions operationally and at very low incremental costs. This was evidenced in the most recent quarter by the reduction in general and administrative expenses as a percent of revenues under management and in our strong EBITDAR margin growth.

We are looking forward to beginning the development of two premier independent and assisted living communities in Ohio with a joint venture partner on sites that we have owned since 1999. We are actively working on additional sites, primarily in strong to barrier entry markets for a limited number of joint venture developments.

The NIC/ASHA Seniors Housing Construction Trends Report for 2006 indicates that there are only 18,597 units of independent and assisted living under construction in the 75 largest metro areas. New development of seniors housing continues to be 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 many markets. This is exacerbated by the limited number of markets that can afford the higher rents necessary to generate an adequate return on significantly higher replacement costs.

This phenomenon, combined with strong industry fundamentals, is providing an environment where values of existing seniors housing communities are rising, as institutional buyers are more confident about the outlook for their acquired communities in the senior living industry. We currently own, directly or with a joint venture partner, 57% and lease 37% of the communities we operate. As such, we as shareholders should benefit from higher valuations of our communities, dynamic growth opportunities generated by our operating platform and strong industry fundamentals. We are fortunate to be aligned with many of the dominant investors in the industry, both healthcare REITs and private equity investors, allowing us to remain active as an acquirer of additional communities.

As substantiated again by our strong same-store sales results, the operating leverage in our business model creates considerable organic growth. We have fixed or capped our mortgage debt, eliminating interest rate risk in our balance sheet.

Combined with exciting external growth opportunities, I believe we are very well-positioned to create significant value for our shareholders by continuing to execute on our business plan. Our track record as a successful operator of senior living communities has provided us with a solid platform for future growth, and our accomplishments have returned us to profitability with a stronger balance sheet. I want to take this opportunity to express our gratitude for the diligent efforts of the dedicated members of the Capital Senior Living team, from our Board of Directors to our on-site staff, that have contributed to our success.

I would now like to introduce Ralph Beattie, Chief Financial Officer, to review the Company's financial results for the fourth quarter and full year 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'm going to review and expand upon highlights of our financial results. If you need a copy of our press release, it has been posted on our corporate website at capitalsenior.com.

There were two significant transactions that were completed in the fourth quarter, both involving new leases for the Company. In the first, we leased four communities that a publicly traded healthcare REIT purchased from a third party for approximately $51 million. These communities are located in North Carolina, South Carolina and Virginia, and increased our resident capacity by 420. These leases are expected to yield approximately $12.7 million in annual revenues, $5 million in incremental annual EBITDAR and be accretive to earnings.

In the second transaction, we leased a community in California that a healthcare REIT purchased from a third party for approximately $18 million. This transaction is expected to yield approximately $3.6 million in annual revenues, $1.6 million in incremental annual EBITDAR, and this transaction will also be accretive to earnings. The Company previously managed this communities; there was no change in residency.

We made one reporting change this quarter which I would like to explain. Revenues in all reported periods now include community reimbursement revenue. This revenue is comprised of reimbursable expenses from non-consolidated communities that the Company operates under long-term management agreements. These exact amounts are also reported as community reimbursement expense, so there is no net effect on the Company's income statement.

Moving to the financial results, the Company reported revenues of $43 million for the fourth quarter of 2006, compared to revenues of $35 million for the fourth quarter of 2005, an increase of nearly $8 million or 23%. The number of consolidated communities has increased by 12 since the fourth quarter of last year, from 36 to 48. Financial occupancy at the consolidated portfolio averaged 90.4% for the quarter, an increase of 150 basis points from a year ago.

Revenues under management increased approximately 17% to $51.5 million in the fourth quarter of 2006 from $44 million in the fourth 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.

At these communities under management, same-store revenue increased 6.1% versus fourth quarter of 2005, as a result of a 5.1% increase in average monthly rent and a 1% increase in occupancy. Along with nearly an $8 million increase in revenues, operating expenses increased by $4 million in the fourth quarter of 2005. As a percentage of resident and healthcare revenues, operating expenses decreased from 65.2% in the fourth quarter of last year to 63% this year, reflecting 220 basis points of margin improvement.

General and administrative expenses of $2.7 million were equal to the fourth quarter of 2006. As a percentage or revenues under management, G&A declined from 6.3% in the fourth quarter of 2005 to 5.2% in the fourth quarter of 2006.

Facility lease expenses were $5.5 million in the fourth quarter of 2006, nearly $3.5 million higher than the fourth quarter of 2005, reflecting 23 leased communities this year versus 7 last year. Adjusted EBITDAR for the fourth quarter of 2006 was approximately $11.9 million, an increase of 42% from $8.4 million in the fourth quarter of 2005. Adjusted EBITDAR margin was 27.8% for the period, a 380 basis point improvement from the comparable period of the prior year.

Interest income of $0.4 million was about twice the normal level, as the Company earned interest on not only cash balances and lease deposits but also earned interest income on a refund of federal income taxes. Interest expense of $3.5 million in the fourth quarter of 2006 was $1.5 million less than the fourth quarter of 2005, reflecting the debt retirements and refinancings accomplished in the second quarter of this year.

The Company earned a net profit of $0.8 million or $0.03 per share in the fourth quarter of 2006, versus a net loss of $1.8 million or a $0.07 loss per share in the fourth quarter of 2005. Excluding non-cash stock-based compensation in both periods, and excluding from 2005 the adjustments for mark-to-market treasury rate lock agreements, hurricane damage and write-offs of deferred loan costs, net income improved from a loss of $1.4 million or a $0.06 loss per share in the fourth quarter of 2005 to a profit of $1.1 million or a $0.04 profit per share in the fourth quarter of 2006. On this same basis, adjusted cash earnings, defined as net income plus depreciation and amortization and non-cash stock-based compensation, were $3.8 million or $0.14 per diluted share in the fourth quarter of 2006, versus $2.2 million or $0.08 per diluted share in the fourth quarter of 2005.

Capital expenditures for the fourth quarter of 2006 were $2.2 million, which included approximately $1 million in renovation costs to improve three communities. So cash earnings minus capitalized maintenance costs for the fourth quarter of 2006 was approximately $2.6 million, simply taking the $3.8 million of cash earnings and subtracting the $1.2 million of capitalized maintenance expenditures.

As of December 31, 2006, the Company had $192.4 million in mortgage debt, at a blended average borrowing cost of just under 6.5%. Approximately $159.4 million of debt is at fixed interest rates, averaging approximately 6.2%, and $33 million of debt is at variable rates capped at a maximum of 7.6%.

Since December 31, 2006, the Company has fully retired a $5 million note, which originated from the settlement approximately one year ago of interest rate lock agreements. This five-year note carries an interest rate of LIBOR plus 250 basis points, or nearly 7.9%. The retirement of this debt will result in future interest expense savings of over $100,000 per quarter.

Also in the first quarter of 2007, the Company is refinancing the debt on one community to take advantage of additional proceeds, a lower interest rate and a longer maturity. The Company is replacing a $7 million mortgage at approximately 7.6% with a new $9.5 million mortgage at a fixed rate of 5.75%. This refinancing extends the loan maturity to 2018, while freeing up $2.5 million of proceeds and leaving interest expense flat.

The Company ended 2006 with approximately $25.6 million of cash and cash equivalents.

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

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

Congratulations. A couple questions -- first, on the rates, obviously some good rate growth in the quarter there. But I'm wondering, what do you see as the outlook there? I know that you've mentioned initiating those community fees back in August, but how much of your rate growth was really influenced by starting that process? Or have we really yet to see that?

Then, across your markets, how wide is the range of what your rates really are? We know what the average number is, but is it a pretty tight number around that average, or does it vary a lot from market to market? At the end of the day, what I'm trying to do is just see how much upside you really think you have left in rate growth.

First of all, the community fees that we began in August really started to come into play somewhat in the fourth quarter. Again, you have to look at the process of implementing the deposits, which range from $1,000 to $3,000 per move-in at a community, and also the fact that we're starting to see some of that benefit.

The other thing that's really driving rate growth, I think, are two factors. One is just strong markets raising rents. Secondly is the positive side of attrition. If you look at our attrition for 2006, we averaged about 35% throughout our portfolio. We're seeing rents on the new leases probably averaging up to $200 a month higher than what the prior lease was from the former residence. So we're seeing a combination of factors providing the new move-in's paying a community fee, increases in the rents and then the mark-to-market effect of adjusting rents from in-house residence to street rents, based upon vacancies caused by attrition.

When you look at the 10-K, by the way, that we will file shortly, we actually include in the 10-K what the range of rents are across the markets. Again, because we do operate in 20 different states in various markets -- for example, independent living rents in our whole portfolio range from a level of $1,290 a month for a studio in some of the Texas markets to as high as $4,880 a month. If you look at our assisted living rents across the country, similarly, we're seeing rents ranging from a low of $1,980 to a high of $5,725 per month.

But again, if you look at the upside there, we continually mark our rents to the market. Our marketing team, which is both national, regional and on-site, continually monitors the competition in those markets. We mystery shop our competition. We understand what the rents structures are, and we want to remain competitive with those properties.

So as I said, what really is the phenomena that is causing this improvement of rents -- and we think that will continue in 2008 and, quite frankly, beyond -- is the fact that many of our residence have lived in our properties for many years, and we're able to mark those rents more aggressively on the new leases being implemented, as opposed to renewals, coupled with the community fees.

Also, I just want to get a little more thoughts or comments. I think you mentioned a 79% incremental margin on this incremental revenue. I want to make sure I understood that correctly. I'm assuming that from here on out, there's no reason why that number would be --?

That has been consistent. We were actually 78% in the third quarter. What we do is we look on our same-store basis what the incremental revenue is for the quarter, and how much of that is contributing to bottom-line income -- EBITDAR, if you will. If you look at the economics, in the third quarter, it was 78%. In the fourth quarter, it was 79%. As we continue to grow, it probably will go even a little higher, because incrementally, the costs are very minimal as we drive our revenues through higher occupancies, higher rents and community fees.

That's why, when we look at this organic growth chart that we have in our corporate presentation and I referenced in my comments, if we look at a 90.4% financial occupancy in the fourth quarter, and if we're able to improve that occupancy to 93% off the December run rate, that would generate $14 million of revenue. At a 75% incremental EBITDAR margin, which is actually lower than our performance has been, that would regenerate $10.5 million of EBITDAR on our consolidated communities, which by, obviously, we would fully benefit.

So we think there's great traction. We think there's great opportunity for margin expansion and EBITDAR expansion, because of the operating leverage in the senior housing model, once we are operating at the occupancies that we do today.

It sounds like same-store portfolio obviously doing very well, continuing to do well. But it also sounds like you may be more interested in acquisitions in the year ahead. While I know you don't give guidance, just conceptually, in terms of just to say aggregate dollar volume of transactions, any very broad numbers you might like to share with us, in terms of what you think you might look to do -- if you had a successful year, how much incremental capacity you think you could bring online?

Last year, we acquired $260 million of new acquisitions. We had $85 million of that were bought with joint venture partners; the balance we bought with the healthcare REITs. Based on what we're seeing in the marketplace, I would hope that we could be -- to replicate that again this year. \

Again, acquisitions -- you never can control exactly what you can buy. Part of the reason we don't give guidance is that it's very hard to really anticipate what we will acquire. As I mentioned, the activity we're seeing today is very robust. We are in the thick of many transactions as we speak.

One thing that I'm very, very pleased with is that, obviously, there has been a lot of discussion in the industry about higher values, lower cap rates. We are very pleased to see that our partners, our REITs, are adjusting cost of capital to reflect those new values that allow us to continue to be competitive in these markets.

So, again, I think that the activity will continue. I think that we could achieve what we achieved last year, based on the activity in the marketplace.

But again, as far as guidance, it's hard to really predict that, because again, it's somewhat out of our control, both on the number and timing of transactions. But I am very, very optimistic, based on what we're seeing and the processes that we are in today, that we will be successful in growing externally and also go back to the fact that the biggest driver of value will continue to be organic growth.

It's the ability to continue to increase the occupancies. Quite frankly, even if we don't achieve a 93% occupancy level, the fact that we do have this mark-to-market phenomenon as we relet units to market rents, and the fact that we are generating community fees -- we are going to see our revenues grow and our EBITDAR margin grow, even if we don't see a significant increase in occupancy.

Jerry Doctrow, Stifel Nicolaus.

Covering some of the same ground, but I just want to get a little more color for organic growth a bit, and you touched on some of it. But you threw out this 93% figure. I assume it's not thrown out there idly, so is that a reasonable objective, and as you think about it, what time period something like that (multiple speakers)?

If you look at this industry, and the success that the industry has had in regaining occupancy from the oversupply, and kind of the (technical difficulty) industry experienced between 1999 through 2002. Going back, when we went public in 1997, our occupancies nationwide averaged about 96%. Today, as I said, we are very pleased with the 91% plus occupancy rate.

If you look at from a mathematical point of view, it's kind of interesting. We consolidate currently approximately 6,500 units. To grow our occupancy by 2.6% off that base is a couple of hundred units nationwide.

So, again, is 93% achievable? Yes. The timeframe on gross move-in's will be very quick. We serve an elder population, and there's going to be attrition. So we are finding on this growth -- when we net 1% growth in a year or 150 basis point increases in financial occupancy, our gross move-in's is significantly higher than that. It's in the net number we are looking at.

So, again, if I look at the activity in our properties, we typically average four to six move-in's every month in every community we operate. But again, with an elder population, we are going to have attrition, and that's the impact on the moderation.

But what is compensating for some of that uncertainty, as I mentioned, is the ability to mark to market the rents upon re-leasing a unit. Part of the reason that we started to implement community fees to cover the cost of move-in, to assess residents as they move into our communities, is to also generate additional revenues through the move-in's, even without a net increase in occupancy.

But again, you know this industry as well as anyone. You see what the other companies are reporting. You look at the industry guidelines. If I was underwriting acquisitions today, I would be very comfortable underwriting to a 93% occupancy, because I think that, based on the limited new supply coming online, the growing demand of our elder population and the strength that we have and the focus we have a from a marketing perspective of on-site, regionally and corporately, we can achieve those goals.

How much of the portfolio is still sub-90% or even sub-85%, or is it all --?

Of the 64 properties, 58 are stabilized. What's interesting -- you only have two properties sub-80%. Those are in some markets that have some issues, and maybe that we sell one or two of those properties this year, because we just are looking at that.

So if you look at our portfolio, we're very pleased -- I'm looking right now at our December occupancies by property. The bulk of them are at 90%. We have properties at 100%. Again, what is very encouraging is we have very few properties, really, below 85%.

Over the last several quarters, you have talked some about both ancillary services and also, in some cases, retrofitting some of your properties with assisted living. I was just wondering if we can get an update on where that stands, what you're doing on ancillaries and --

Obviously, in all of our communities today, there is home healthcare in our communities. 74% of our residents live in independent living. I think what's important -- and it's a great question, because I think it's important for the market to understand our business model, and differentiate Capital Senior Living from some of the other public companies that have different platforms. We have two CCRCs out of 64 properties. Many of our freestanding independent living properties were built as independent living that are not licensable for assisted living.

So what we had done in those communities is we have taken space and we rent out to third parties to provide homecare services to our residents. We are looking at ways -- and we have been looking very closely at this, and I'm hopeful that in 2007, we will actually announces something that will be helpful here, where we can align ourselves with some of these homecare companies through an investment in acquisition. We're looking at different structures, but I think what's important to recognize is that part of the reason -- we have been very delivered in this process, because our model is different.

There is great opportunity there. There's opportunity in many of our properties to look at conversions. We have done a state-by-state analysis regarding conversions, because we recognize the fact that we have an elder population with higher needs. We're looking at different structures that will benefit the Company and our residents, in order to be able to have an integrated system to deliver the homecare to the resident. As I said, hopefully, we will be able to discuss more of this as we go further into 2007.

But basically, if I understood you correctly, in 2007, you could make some kind of investment, whether it's just buying somebody outright, as Sunrise did in hospice, or some kind of --

Yes.

-- unit joint venture?

Exactly right.

How about just expansions, as well? Because the number of your peers are going back and adding rooms or adding a space or whatever to drive revenue. Is there any of that going on in the portfolio that we should be thinking about?

No. We had some significant renovations last year in our properties, some retrofitting. We have done expansions in the past. The question about expansion is going to be the sites. We have gone through this and identified probably about 10 or so properties that are possible expansion candidates, and we constantly review, in those markets, the opportunity to expand.

Obviously, what we're finding -- it's very interesting. If you look at our average occupancies, because of our continuum, where most of our assisted living residents are living in a separate wing in a building that has both independent and assisted living, and the new developments that we're excited about will also have 101 units of independent living and 45 units of assisted living. It provides a great feeder for the assisted living, and those occupancies in assisted living far exceed industry averages because of that.

So that is an opportunity we're looking at, we continue to monitor. It's really a question of market-by-market as to the timing of when we will entertain those expansions. But clearly, it's something, as I said, we have gone through. We have done a state-by-state analysis of what can be done. We have identified a number of properties that are candidates, and we are updating market studies to really look at the ability to either add or convert.

The other opportunity, quite frankly, is conversions, where we can take some of the independent living units and convert them to assisted living in a separate wing. We had the success, for example, in Cottonwood, Arizona. We had a property that we acquired and operated for years in Cottonwood which was 77 units. About five, six years ago, we expanded it to over 170 units, adding assisted living, expanding the independent living. Today, that property is 95% occupied. So it is a great opportunity and great success driver, and an area that we will pursue.

But in terms of the stuff we should build in our model, there's no expansion, sort of, that would --?

I would not build it in the model, because there's nothing that will be that imminent.

Then, just a couple sort of nitty-gritty kinds of stuff. G&A, I think, was down a little bit in the fourth quarter. Is there a good run rate for that, and also for non-cash comp for 2007?

I think the anomaly was really the third quarter, G&A expenses were out of line. So I think if you just took a look at the third quarter as being a few hundred thousand dollars high, because of some health,care claims that we had in that particular quarter, this quarter is a more normal quarter at about $2.7 million. We will see growth in that number, as the number of consolidated communities increases, and just normal kind of inflationary growth that we will have to absorb. But I would say, use the fourth quarter number as a run rate, as opposed to the third.

How about non-cash comp?

We ran about $300,000 in the fourth quarter. That number tends to increase gradually over time, but I think if you use that number into 2007, that give you a reasonable run rate.

Then, also, I think you said this, but maintenance CapEx is like $1.2 million, was it, for the fourth quarter?

Right. Our total CapEx for the fourth quarter was about $2.2 million, but about $1 million of that was renovations at three communities that we had been doing some improvements, both interior and exterior improvements. So the maintenance CapEx would be about $1.2 million in the fourth quarter. That's probably a pretty good run rate, based upon our current portfolio size.

That was my next question. Then, there's just a little item for bad debt, like I think it was like $23,000 or something, so it's not that significant. But what's going on there?

We have a very small amount of bad debt expense at our two CCRCs, primarily. Most of our independent living and assisted living communities have little, if any, bad debts. But there is a very small bad debt component, primarily in those two CCRCs.

[Todd Cohen], [MTC Advisors].

Congrats. The first question is kind of an administrative/bookkeeping, I guess. But in one of the notes out this morning, from I think it was Jefferies, they indicated that you reported fourth-quarter earnings adjusted of $0.03, compared to a $0.02 estimate, consensus estimate of $0.04. I thought I read in your press release that you reported adjusted fourth-quarter earnings of $0.04.

Actually, the GAAP income number for the fourth quarter was $0.03, but we have been adding back non-cash stock based compensation this year, because some of the prior-year numbers didn't include it. So for comparability, we have been adding back non-cash stock-based compensation. If you make that adjustment, it was really a $0.04 per share profit. But for GAAP purposes, the reported number is $0.03.

But you reported an adjusted number of $0.04?

We reported both numbers. If you look at our press release, you will see -- and if you look at the income statement -- on the front page of the press release, if you look at the fourth bullet, it says net income of $800,000 for the quarter; that's the $0.03. Then the next bullet is the adjustment for the non-cash stock-based compensation.

So the net income of $8 million [sic -- see press release] is not the adjusted number?

Correct. That's GAAP number, and then the adjusted number is $1.1 million.

Which is $0.04?

Correct.

Right.

So I'm just saying that in your press release, you have indicated that you reported an adjusted fourth-quarter number of $0.04.

That's correct.

In the Jefferies research note, it says you reported an adjusted fourth-quarter number of $0.03.

Well, then, we [speak to Frank] about that. I don't have the note. Actually --

I was just trying to figure out if I had missed something.

That's correct.

It might be a typo. I don't know.

Second, the $6.6 million of incremental EBITDAR from the transactions that occurred in the fourth quarter -- was there much benefit? I don't know when those deals closed, but was there much benefit in the fourth quarter from those transactions?

The for-property transaction closed around November 30.

So there was a month?

A month. The single asset closed in December; I think it was around the second week of December -- 14th of December. So that gives you some comparability.

By the way, those numbers that we show on that benefit -- those are trailing results. Those are not budgets or our projections. When we announce in our press releases [path of] transactions, we typically -- and you'll see in the press release, it's typically the prior quarter annualized. So it's a trailing number that we use for purposes of the contribution. Obviously, with increases of rents and --

So where is the $6.6 million now?

We'll talk about it after the quarter. Based on closing in December, November 30, December 14, that was the prior quarter annualized.

So, in effect, there's very little contribution in your fourth quarter from these. So this is just a very big increase to the EBITDAR for next year?

Yes. Also, it's interesting, if you look at our annualized -- it's interesting also, if you put perspective, our full-year EBITDAR was $40.6 million. Our fourth-quarter EBITDAR was $11.9 million, without the full contribution. So if you analyze $11.9 million, that's $48 million. So I also think, when people look at --

So you're at -- that's $48 million run rate (multiple speakers) without those transactions.

Correct.

So you're already in the mid 50's.

Then, just to clarify a couple of things on the transactions, first, the REIT deals are leases for you, correct?

That is correct. They're operating leases from the REITs.

So there is basically no capital outlay on your part?

Correct. What happens is we enter into a lease and the entire purchase price is provided by the REIT.

Could you refresh for me -- I remember in your presentation a kind of benefit you get.

We have a slide -- if you look at our corporate presentation, at slide 24, what we have done is presented the example of how we enhance shareholder value through three components. One is our lease acquisition strategy, one are our joint venture acquisitions and the third is the organic growth. What we show in that slide, based on actual results of the transactions that we accomplished in 2006, that if we were to complete $100 million of lease acquisitions -- meaning that a healthcare REIT purchased $100 million of properties that leased back to the Company -- those have been averaging, on a $100 million contribution of $25 million of consolidated revenues to the Company, $10 million of EBITDAR, and our rent expense was typically $8 million. So the incremental EBITDA is $2 million. Then we also look at the implied equity value on our outstanding share count, [26.6 million] shares, based on a relative multiple of that EBITDAR contribution.

If you look at the joint venture transactions, again, what is also interesting about the joint venture transactions is that we have consistently invested in the range of 5% to 15% of the equity with our joint venture partners. If you think about, for example, $100 million of acquisitions by a joint venture, about $70 million to $75 million of that acquisition cost would be financed by a lender. So of the $25 million or $30 million of equity, we are investing somewhere in the range of 5% to 15% -- call it 10%. That's a $2.5 million to $3 million investment from the Company.

What's interesting is that our first-year management fees alone in that side of the transaction have typically averaged about $1.3 million. Then on top of that, what's exciting for us is that we will also participate pari passu with our joint venture partners, getting our proportionate share of the cash flow, and then we participate through an incentive payment on the back end, based on performance.

Just anecdotally, if you remember, our first joint venture was with Blackstone. Those six properties were sold in October of 2005 to Ventas. We will be leasing them back. Our initial investment was $1.6 million, and our back end, with our promote, was about $6.4 million.

So there's tremendous opportunity to create value. What we like is that, as we managing these properties and enhancing their value, we get a disproportionate share of that back-end residual through participations that range in the 25% to 40% range.

So obviously, you get a more immediate benefit to cash flows and earnings from the leases?

That's correct.

Is that kind of where you are focused, on your acquisition --

It depends on the property.

-- activity this year? Or are you looking at -- is it just whatever comes up?

Last year, it was 60% leases, 40% REIT -- joint ventures. When we look at acquisitions, the first thing we do is we underwrite the opportunity based on the community, the market and what we underwrite as, what we think value is and we project out a model of operations. Then we look at different structures, and it really varies based upon the type of transaction, what is a better source of capital. But I would think that this year, we will also be in that 60%/40% range is probably a good number that we look at for purposes of acquisitions with the healthcare REITs and then with our joint ventures.

The other aspect that is starting in 2007 and will start shortly will be actually starting some development in joint ventures as well, and there, that's exciting because we'll earn development fees. We will continue to have a minority interest, to share in the benefits of those developments and also earn management fees from those developments. So that will start to kick in, in the first half of this year.

John Mazanec, Wasatch Advisors.

Can you provide a little more color on the two acquisitions? I guess I was looking for specifically an idea of what rent expense would be for the $51 million transaction and the $18 million transaction.

The rent expense in the first year on the $51 million transaction is 8%. So if you take $51 million times 8%, the rent expense is $4,080,000 I guess that is. Then on the other transaction, the lease rate was 7.75%, on $18 million. So it's about $1,395,000 is the rent expense on that. What's interesting about 2007, as I mentioned, is that we are looking to see those lease rates actually come down in 2007, because we're seeing the lower cap rates.

The first $51 million transaction had resident capacity of 420. What was the number of units in --?

The actual number of units was 327. So on a per-unit basis, if you look at the cost, it was $156,000 per unit acquisition price.

Kind of similar, I was trying to do the similar thing for the second one. I did know how many units or residents there were (multiple speakers).

The second property is 152 units, so $18 million divided by 152 was $118,000 per unit.

You take all the fun out of it. I can -- let me do that.

Calculator, that's all. Trust me, it's not happening in my head.

In terms of -- would you execute on more sales/leaseback transactions going forward, or are you comfortable with your position now?

Right now, we're comfortable with our position. As we talk about this organic growth, we think there's a lot more upside in our properties. We're also very pleased with our restructuring, refinancing of our debt. So again, as Ralph announced, we're closing on a loan this quarter at 5.75% fixed rate.

So if you look on a cash basis, we're sitting here with a very nice portfolio, very well-financed, at attractive rates. We think there's more organic growth that we would give up if we were to sell prematurely.

Roger Feldman, West Creek Capital.

I really have two questions. The first is -- I'm used to hearing Jim on the calls; I miss him.

Jim is here. He's in the room.

Hi, Roger. I'm here.

I just wanted to make sure you were -- the lack of -- the fact that we didn't hear you didn't mean --

I was actually going to ascribe my first comment to Jim's quote, but --

No. I have found, in the opening of the calls previously, I was just reading my quote, and there was no reason to hold back Larry and Ralph.

I guess, listening to these calls as often as I do, you can't take offense to fewer words. So then my only other question is, you all have about $26 million in cash on your balance sheet. Just listening to the commentary as you went through it, Larry, it doesn't sound like you're going to need very much of that for the acquisition program. The construction is going to be financed with joint ventures. Given the sort of dramatic change in EBITDAR that you're projecting, and the fact that the properties still -- the Company still trades, just using the Jefferies numbers, at a pretty reasonable discount to replacement cost, would you think about buying back stock?

Right now, on the cash, as Ralph mentioned, we just underwent three renovations of communities. When we talk about doing expansions or conversions, a lot of that will be funded by internal cash, as opposed to joint ventures, because these are typically consolidated properties that we would look at. So in the immediate -- as we look at the application and uses of our cash, we just paid down $5 million of debt. I think we'll paid down some more debt this year. We are going to do some more refinancing this year. We think we have very good uses of that cash. Cash is precious, in the sense that if you do a stock buyback program or some other, once you spend that cash, you no longer have it.

We see some attractive uses to the cash. I've done an interesting analysis -- the return on some of the money we're putting back into our communities. It's quite high, when you think about the margin expansion and the improvement in occupancy and rents by putting some of this capital back into our communities. If you look at our portfolio today of our consolidated properties, probably half of the communities are probably within seven to eight years of age, and the other half are 20 years of age.

So we're looking at the use of cash. So for the immediate needs, we see opportunities to use that cash, which we think will be helpful to create value to our company and to our shareholders, and right now, think that at this point, we're not likely to use the cash to buy back stock.

I guess I want to better understand what you're saying. Because just to sort of parse, someone asked a question about acquisitions, and I think you threw out a number of somewhere between -- something that looked like last year's number, so sort of $250 million to $300 million. If I go through using the numbers you used, about how much of that would be financed and how much would be put up by third parties, it's a pretty small amount of money we're talking about, relevant to the $26 million.

One thing is that, again, we're investing with GE 15% of the equity. Last year, I think our total investment was in the $3.5 million to $5 million range. I forget the exact number.

The other reason than about the REITs I want to clarify is we don't make any capital investment, but we do post a security deposit. So on $100 million of acquisitions with a REIT at a -- call it 8% lease rate, that's $8 million, we will post $2 million deposits for that. So if you look at the cash, even though -- and that cash, we'll still show on our balance sheet. We also have working capital of our communities. We like having some surplus there for opportunities that we think are very helpful for the growth of the Company.

Again, not to press it, but still, how much of the $26 million that's there is restricted in some way?

I think, right now -- and Ralph is here -- nothing is restricted. But there are deposits. We have, right now with our leases --

We're probably investing about half of it, in terms of overnight or short-term investments. The other half was made up of lease deposits, security deposits, other deposits that are really not investable, although we do earn some interest income on lease deposits.

So you, in effect -- if we said, what could you pay out, you could pay out $12 million or $13 million?

Right, about half that amount could actually be available for that purpose.

Then, Ralph, you are going to do some refi's where you take more money out. What do you plan to do -- I'm just saying, when you look at the acquisitions, it's very little money.

I guess Jerry Doctrow asked if there are going to be any big renovations or expansions, and the answer was no, not really, not for this year. So I guess, given that those are the two large uses of cash and you're generating cash, unless you've got something in mind that wasn't talked about on the call, as a large shareholder, you wonder what you are --

We retired $5 million -- we wrote a check to KeyBank for $5 million on that interest rate adjustment, and are saving the Company now about $1 million a year in interest expense on that. It was actually --

$400,000.

I'm sorry, 400,000. You are right. Then, on top of that, we are refinancing another property. We'll have some additional cash that will cover some of that. We have $33 million of variable-rate debt that we're looking at fixing that long-term, this year. We may reduce that slightly. The other aspect of the use of cash [we talked about] home healthcare, is that we are looking at the possibility of making an investment in a home healthcare company this year that we want to have cash for that as well.

So we are looking at opportunities for uses of cash which we think would be, on a long-term basis, extremely valuable to this company. That's why, right now, we are looking at -- and again, I don't think it's prudent to run with no cash in the bank. So we have to have some reserves just to have some cash for the business.

Jerry Doctrow, Stifel Nicolaus.

Mine was answered, thanks.

Todd Cohen, MTC Advisors.

Going back to one of the questions that was asked previously about more sale/leasebacks, is what I heard you say, Larry, is that you believe that there's organic growth in some of the properties, and as a result of that, you would wait to see that organic growth play out and then maybe do something? (Multiple speakers) value is higher?

Again, the reason we did our sale/leaseback transactions last year is we took some mature properties, and we were able to retire about, in total, $56 million of debt last year. So it was a strategy that was implemented in conjunction with a large refinancing and a paydown of debt. I think today, holding assets in the market, the perception of the marketplace is a good thing. I think, if you look at what's happening in the capital markets, if you look at what is happening in valuations of other companies in our peer group, as well as other long-term healthcare assets, I think having ownership is a positive. I think it helps our valuation. I think it gives us a higher multiple and, more importantly, gives us flexibility.

I agree with that.

So we're not looking to lease back at all, at this point. But again, it gives us flexibility. That's why I think it's important, is that we have a very nice core group of assets that we have 100% ownership on, that are well-financed. Then it gives us the luxury of having the equity in there as future deserves if there's an opportunity to use them.

I agree 100% with that, and I think it's kind of what Roger may have been getting at, which is there could be a more productive, efficient value-creating use of your cash. I would agree with him; it's probably something you should explore in some way. I think it goes a long way in continuing to build shareholder value. If you're investing in your stock, that reflects a very low value relative to replacement costs, then it could make some sense. But I -- so, anyway --

Roger and Todd, look. You've been long-term holders. We respect your thoughts, and we will consider it. Again, we're all here for the same goal, which is to maximize shareholder value. We're looking at uses of cash that are necessary for our business. We're looking at uses of cash that are helpful to our business, maybe opportunities. Again, we're all here trying to create shareholder value.

Roger Feldman, West Creek Capital.

When we look at the sale/leasebacks, I guess -- two parts. One, do you have purchase options in most of the leasebacks that you (multiple speakers)?

No, we do not. Because they are operating leases, there are no purchase options.

So there no purchase options --?

What happens is the lease terms can be renewed up to 30 years. So what it gives us is the long-term ability to operate these properties under a lease at our option, but there are no purchase options.

So is that only in the new leases, or is there -- I guess my question is, is there anything in the portfolio that you could buy in today, given the -- do you have any below-market repurchase options?

If you look last year, we bought back the covenant assets we had in the management agreement. Again, there's one more purchase option with covenant that we will look to execute this year and look at an acquisition there.

Again, if you look at our portfolio today, we only manage for third parties, now, four properties. In our joint ventures, we have bytes of offer, rights of first refusal and different mechanisms but no purchase options there. The leases, again, because they are operating leases for GAAP, cannot have purchase options.

Having no further questions, I would like to turn the conference over to Larry Cohen for any additional or closing remarks.

Well, we thank everybody. Again, we're very excited about 2006, and looking forward to continue this growth and success in 2007. Thank you, everybody, for your time today.

This does conclude today's conference. Thank you for your participation. You may now disconnect.