Sonida Senior Living Inc (SNDA) 2007 Q2 法說會逐字稿

Good day and welcome to the Capital Senior Living second quarter 2007 earnings release conference call. (Operator instructions)

The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially, including, but not limited to, the Company's ability to complete the refinancing of certain of our wholly owned communities, realize the anticipated savings related to such financing, find suitable acquisition properties at available terms, financing, licensing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission.

At this time I would like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you, and I'm pleased to welcome everyone to Capital Senior Living's second quarter 2007 conference call.

Our business plan is focused on increasing shareholder value by providing significant income and asset growth, strengthening our balance sheet, and improving the company's profitability. I am pleased to report that we accomplished these objectives and achieved solid results in the second quarter of 2007. We increased our income and grew our assets.

Compared to first quarter 2006 results, our revenues increased 24% to $46.9 million; and adjusted EBITDAR, which we define as income from operations plus depreciation and amortization in facility lease expense, increased 40% to $13.4 million. Our adjusted EBITDAR margin improved 320 basis points from the second quarter of 2006 to 28.6%, and adjusted second quarter 2007 net income was $1.1 million, or $0.04 per diluted share, compared to an adjusted net loss of $400,000, or a loss of $0.02 per share, for the second quarter of 2006. These comparisons exclude the write-off of deferred loan costs as a result of a $30 million mortgage refinancing in the second quarter 2007 and a non-cash charge relating to additional depreciation and amortization expense upon finalizing the purchase price allocation for eight communities acquired in 2006 by two joint ventures.

Adjusted cash earnings, defined as net income plus depreciation and amortization for the first quarter, increased 44% to $3.9 million, or $0.15 per diluted share; compared to $2.7 million, or $0.10 per diluted share for the second quarter of 2006, excluding the effects noted previously.

We strengthened our balance sheet during the quarter. We refinanced $30 million of mortgage debt for a ten year term fixed at a rate of 5.9%, approximately 170 basis points below the variable rate debt that was replaced. We have now fixed the interest rate on our entire wholly owned portfolio. In just over a year, we have reduced our mortgage debt by $51.6 million, refinanced or retired $162 million of variable rate debt, and reduced our average interest rate from 7.5% to 6.1%.

We achieved solid community operating results during the quarter. 59 of our communities were stabilized with a 90.5% average physical occupancy rate. Operating margins before property taxes, insurance, and management fees were 47% in our stabilized independent and assisted living communities.

Same-store revenues at 55 communities under management in both the second quarter of 2007 and 2006. 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 4.1% with a 5% increase in average monthly rents. Same-store expenses decreased 0.2% as a result of our expense savings and controls, and same-store net income increased 11.2% from the comparable period in 2006. The operating leverage in our business model is reflected in the 100% EBITDAR margin realized from these same-store revenue increases.

The number of communities we consolidated in the second quarter increased to 49, from 44 a year earlier. Financial occupancies at these communities averaged 88.7% during the quarter. One of the additional consolidated communities is in lease-up with occupancy below 60%.

Operating margins at our consolidated communities improved to 44% during the quarter, compared to 42% in the prior year. Average monthly rents increased 8% to $2367, compared to the second quarter of 2006. Every 1% in occupancy gain at our consolidated communities we generate approximately $2.1 million in additional revenues. Attaining a 93% financial occupancy with a 5% increase in average monthly rents at our consolidated communities, we generate approximately $17.3 million in additional annual consolidated revenues over annualized June 2008 revenues. At a 75% incremental EBITDAR margin, these additional revenues would increase the company's EBITDAR by $13 million.

17 of our consolidated properties are Waterford/Wellington communities which we developed between 1999 and 2002. In the second quarter 2007 these communities enjoyed a 91.7% financial occupancy compared to 90.5% in the second quarter of 2006; and average monthly rents grew 5.5% to $1981. This performance generated a 6.5% increase in revenues while expenses decreased by 1%, resulting in a 20.8% increase in net income, compared to second quarter 2006. Operating margins also improved at the Waterford/Wellingtons to 46% from 43% a year earlier.

I would like to respond to the questions we have received about the effects of the housing market on our operations. The average age of our resident is 85, and most residents move in because they need the supportive services offered at our communities. The elder senior population generally carries little or no mortgages on their homes and they have experienced significant increases in their home values. More significantly, the cost of living at our communities is typically more affordable than living at home.

The negligible impact of a housing market on our fundamentals is evident in our second quarter results. We have compared on a same-store basis the rate of move-ins, tours, and deposits received in the second quarter 2007 to the second quarter of 2006. At our independent and assisted living communities, move-ins improved to an average of 12.6 per community, versus 11.2 per community in the second quarter 2006. Initial tours improved to 62.3 per community, versus 43.5 per community in the same quarter in 2006. Our deposits taken during the first quarter of 2007 match those taken during the first quarter of 2006.

Our second quarter 2007 occupancy rate was equal to that in the same period in 2006 as a result of higher attrition, yet we benefited from the mark-to-market effect of re-leasing these units at higher rents, the collection of community fees, and sound expense controls; and additional savings on the cost of food, supplies, and service contracts through our group purchasing program resulted in solid same-store income and margin growth.

In July we have gained occupancy and are currently leased to 91%. We expect occupancies will continue to grow and we should enjoy better same-store sales results in future quarters.

I also would like to discuss our plans for expansions and conversions on certain of our existing communities. We are currently annualizing additional levels of care through expansions or conversions at approximately 20% of our existing portfolio. We have enjoyed excellent results in generating significant value at communities that have been expanded or have had units converted to additional levels of care.

For example, about five years ago we expanded Cottonwood Village, in Cottonwood, AR, from a 66 unit independent living community to 163 units of independent and assisted living. Cottonwood Village currently enjoys a 98% occupancy, and in the second quarter of 2007 Cottonwood Village's revenues increased 12.4% year over year. Its net income grew 26.9%, and operating margins were 51.9%.

Another example of a successful conversion was Sedgwick Plaza in Wichita, KS. Sedgwick Plaza was acquired as part of a portfolio purchase in 2000. Its occupancy had been in the low 70% range until we converted a wing to accommodate 29 assisted living units and converted 16 assisted living units to independent living in 2004. Sedgwick Plaza end of July was at 97% occupancy. We believe that adding additional levels of care at existing properties will enhance revenues and cash flows by improving occupancies, reducing attrition, increasing average monthly rates, and expanding margins.

I also would like to comment on the seniors housing acquisition market. The acquisition market continues to be very active. As evidenced by our recent refinancing and lease transactions, we continue to benefit from low cost of capital. Our strong relationships with major healthcare REITs and financial investors provide us access to attractive capital, enabling us to be a prolific acquirer. I'm pleased to report that we have not been affected by the credit crunch affecting financial buyers, and believe that the current credit environment favors us as we are not dependent on mezzanine financing or other high yield debt.

The credit crunch that is affecting the capital markets should make the acquisition market more rational; and with our capital partners, healthcare REITs, and joint venture partners who have been long term investors in seniors housing, we believe the current environment will benefit us as we continue to be active in looking at numerous acquisition opportunities.

Our existing infrastructure and national platform allow us to integrate these acquisitions operationally and at very low incremental costs. This was demonstrated in the most recent quarter by the reduction in operating expenses and in our strong EBITDAR margin growth. Our low cost of capital, expense controls, and purchasing program give us a competitive advantage in looking at acquisition opportunities.

We are also actively looking at strategically acquiring, or investing in, home care agencies that have operations in markets where we have clusters of senior living communities. All of our independent living communities have home care agencies renting space in them, and many of our residents currently utilize their services. We believe that by having ownership in one or more agencies we will be able to better integrate the delivery of services to our residents and benefit from increased revenues from the home care services, as well as from longer length of stays at our communities. I expect that we will announce a home care transaction later this year.

As announced during the quarter, we have commenced construction on a premier independent and assisted living community in Miami Township, OH, in a joint venture with Prudential Real Estate Investors, and expect to commence construction on two other sites this year. We are actively working on additional sites, primarily in strong barrier to entry markets, for a limited member of joint venture developments.

New developments of senior housing continue to be severely constrained with new supply growing at a compounded annual growth rate of only 1.3% since 1999. In response to questions we have received about new construction, we have analyzed the construction that has been reported by the National Investment Center for the 75 largest metropolitan statistical areas as of February 28, 2007. We tracked the zip codes of our communities against those where construction starts had been reported. Only one zip code correlated, and that was in Naperville, IL where we operate a senior housing community and one of our joint ventures.

Within a five mile radius of our communities, we found construction starts in six locations across the country with an average of fewer than 100 units per location. This confirms our own research that construction is negligible in our markets and we expect will continue to be rare as the scarcity of well-located sites, increasing land and construction costs, complexities with zoning, and limited sources of capital continue to limit new construction. This is being exacerbated by the limited number of markets that can afford the higher rents necessary to generate an adequate return on significantly higher replacement costs.

(inaudible) development, combined with strong industry fundamentals, is providing an environment where values of existing senior housing communities continue to be vibrant. We currently own directly, or with a joint venture partner, 58% and lease 38% to the communities we operate. As such, we as shareholders should benefit from dynamic additional levels of care through expansions or conversions, as well as growth opportunities generated by our operating platform and continued strong industry fundamentals.

We are fortunate to be aligned with many of the dominant investors in this industry, 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 now fixed all of our mortgage debt at very attractive rates. Combined with exciting external growth opportunities, I believe we are well positioned to create significant value for our shareholders by continuing to execute on our business plan.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the company's financial results for the second quarter of 2007.

Thanks, Larry, and good morning. I hope everyone has had a chance to see the press release which was distributed last night. In the next few minutes I'm going to review and expand upon highlights of our financial results for the second quarter and first six months of 2007. If you need a copy of our press release, it has been posted on our corporate website at CapitalSenior.com.

The company reported revenue of $46.9 million for the second quarter of 2007, compared to revenue of $37.7 million for the second quarter of 2006, an increase of $9.2 million, or 24%.

The number of consolidated communities has increased by 5 since the second quarter of last year, from 44 to 49. Financial occupancy of the consolidated portfolio averaged 88.7% for the quarter, a decrease of 60 basis points from a year ago. One of the five additional consolidated properties is Crescent Place, a community in lease-up with present occupancy below 60%. Average monthly rent in the consolidated portfolio increased approximately 8% year over year.

Approximately $0.1 million of revenue in the current quarter reflects development fees from a joint venture that's developing a 146 unit senior living community in Miami Township, OH.

Revenue under management increased approximately 17% to $54.3 million in the second quarter of 2007 from $46.6 million in the second quarter of 2006. Revenue under management includes revenue generated by the company's consolidated communities, communities owned in joint ventures, and communities owned by third parties that are managed by the company. These communities under management increased from 60 to 64 in the last 12 months.

Along with a $9.2 million increase in revenues, operating expenses increased by $3.9 million from the second quarter of last year. As a percentage of resident and healthcare revenues, operating expenses decreased from 65.1% in the second quarter of last year to 61.3% this year, reflecting 380 basis points of margin improvement.

General and administrative expenses of $3.2 million were $0.6 million higher than the second quarter of 2006. Approximately $0.1 million in G&A expense was due to consulting services to assist in the evaluation of the company's information systems. As a percentage of revenues under management, general and administrative expenses in the second quarter 2007 were 5.8%, equal to the second quarter of 2006.

Adjusted EBITDAR for the second quarter of 2007 was approximately $13.4 million, an increase of 40% from $9.6 million in the second quarter of 2006. Adjusted EBITDAR margin was 28.6% for the quarter, a 320 basis point improvement from the comparable period of the prior year.

Facility lease expenses were $6.8 million in the second quarter 2007, nearly $3 million higher than the second quarter of 2006, reflecting 24 leased communities at the end of this quarter versus 18 at the end of the second quarter of last year.

Interest expense of $3.2 million in the second quarter of 2007 was $1.2 million less than the second quarter of 2006, reflecting the debt retirements and refinancings which Larry reviewed earlier.

During the second quarter of 2007 the company refinanced $30 million of mortgage debt on four owned communities. These new mortgages each have a term of ten years at a fixed interest rate of 5.9%, and the company now has approximately $190.6 million of mortgage debt at fixed interest rates averaging approximately 6.1%.

The company reported a gain on sale of assets at $0.8 million in the second quarter of this year, reflecting the amortized portion of $28 million in deferred gains on lease transactions.

Other income reflects a $0.1 million loss in the second quarter of 2007, compared to a $0.1 million profit in the second quarter of 2006.

Two joint ventures in which the company holds a small interest finalized their purchase accounting for eight communities acquired in 2006. The final allocation of the purchase price resulted in a greater allocation to assets with shorter economic lives, increasing depreciation and amortization expense. These non-cash charges totaled $248,000 in the second quarter.

The company reported a net profit of $0.8 million, or $0.03 per diluted share in the second quarter of 2007, versus a net loss of $2.5 million, or a $0.10 loss per share in the second quarter of 2006.

As detailed in our non-GAAP reconciliation schedule in the press release, there were two adjustments for one-time non-cash items in the second quarter of 2007. The first of these is a $0.2 million net of tax write-off of deferred loan costs in connection with the refinancing of four mortgages during the quarter. The second was a $0.2 million net of tax depreciation and amortization expense related to the purchase accounting for the two joint ventures. These two adjustments increased the company's net income for the second quarter of 2007 from under $800,000 to over $1.1 million, or $0.04 per diluted share.

If we were to exclude the consulting fees for the systems evaluation from our G&A expense, our adjusted earnings per share would have been $0.05 for the second quarter of 2007.

On a comparable basis, the second quarter of last year's adjusted results were a loss of $0.4 million, or a loss of $0.02 per share. On this same basis, adjusted cash earnings were $3.9 million, or $0.15 per diluted share in the second quarter of 2007, versus $2.7 million, or $0.10 per diluted share, in the second quarter of 2006.

Moving to the first six months results, the company produced revenue of $93.1 million, an increase of 25%; adjusted EBITDAR of $26.6 million, an increase of 44%; and adjusted net income of $2.2 million, or $0.08 per diluted share. Cash earnings on this basis were $7.7 million, or $0.29 per diluted share in the first six months of 2007.

CapEx for the second quarter of 2007 was approximately $1.5 million, an we finished the quarter with $24.3 million of cash and cash equivalents.

We'd now be happy to open the call to any questions. Lindsey?

Thank you. (operator instructions) We'll take our first question from Frank Morgan with Jefferies.

Good morning. First question relates to the -- looking at the year over year drop in the consolidated drop in the occupancy, obviously you added those five facilities; do you have the average occupancy of the five acquisitions in the quarter? Or stated another way, I suppose, do you have a same-store occupancy number on the consolidated portfolio?

Hey, Frank, how are you? The numbers that I give on same-store for all communities -- really if you look at it, what's excluded from here are the joint ventures and managed -- I don't normally break out separately the consolidated on a same-store, although there are a difference of five communities, but we can get that information.

I got you. And obviously, if you start looking at the numbers, clearly you did have good occupancy growth in the Waterford portfolio, up -- gosh, 120 bps, it looks like; anything different that's specific to that portfolio, showing good occupancy growth year over year versus say the consolidated portfolio? Anything we can read into that?

I think the Waterford has been very consistent. This is a portfolio that obviously we opened over the last five to seven years. The markets that it operates in continues to be very stable markets; I think really, and going back to your question of consolidated, if you tried to identify a difference, I'd say that the Waterford is not very different than the balance of our portfolio. We have a few properties that we discussed previously that kind of knock the numbers off, and we can talk about some of the strategies there.

There are really three properties that affect us that I would consider as performing below the level of the balance of our portfolio. One is a property in the Midwest that has seen a change in market. We considered selling that property, but because of difficulty and the unique nature that the potential buyer was looking for financing, that doesn't look like it will occur at this point because there's a holding period requirement for that financing to go into place. We are making progress there; we're actually designing some interior improvements, looking at some other strategies there.

We have a property in Florida that we discussed before that is a large, independent-living property. There, we looking at, as I mentioned, some of the conversions to convert the building to some assisted living, more levels of care; operations have always been solid there, but we think by accomplishing that that will have a dramatic effect on that property.

And the third is a property in California that we operated for many years that is a property that was built as a seniors' hotel. It's now licensed for independent and assisted. We are now looking at licensing the entire building and adding levels of care and reconfiguring some units. So we think that those, really, are probably more of a factor than the balance of the portfolio.

If I look at our same [first] sales for the balance of the portfolio, and you heard some of the examples that we gave there, we generally are performing at similar levels. But it's really, as I said, a very few number of properties that are kind of drawing the balance of those numbers down.

Okay. And in terms of community fees in the quarter, have you expanded the number of facilities that you're seeking those community fees?

We have continued the same number. The numbers are actually a little up in the quarter. They're up in June. We are actually looking at some of these properties at possibly increasing the amount of the fees in the second half of this year.

But the aggregate dollar amount of community fees in the second was greater than the first?

I know that in July, they were high-I'm sorry, in June, they were higher than in April and May, which represent higher movings as well.

Okay. And speaking of July, so far, what are you seeing out there? The data you gave on the activity in those facilities was very helpful, but what are you seeing so far, looking out into the third quarter?

Well, as I said, July looks good. Our attrition seems to have slowed some. I think -- an important aspect about this whole conversation really is if you take away the attrition issue, we had a very, very good quarter. Our movements were very strong; in fact, better a year ago. Our rent increases were very good. Our consolidated portfolio's performing very well. Our retired portfolio's generally is doing well. And I think what we're finding is that we had an unusually high number of attrition in the second quarter. July looks better; again, August looks good. The positives are strong, the tours are good. So, as I said, we're at least down to 91%. That's a forward-looking indicator, looking at deposits, move-ins, and scheduled move-outs. The net numbers were up in July, so as I said, we're optimistic that we can continue to see improved trends that should improve the occupancy levels, and obviously, there's a strong correlation in revenue growth, and thereby EBITDAR and earnings growth without revenue growth.

Sure. Thank you very much. Good quarter.

Thank you.

Our next question comes from Jerry Doctrow with Stifel Nicolaus.

Hi, Frank's covered actually most of what I wanted to ask. A couple things; Larry, just trying to think about capital structure soft of going forward. You obviously done a mix of JVs and leases and kind of de-levered the balance sheet. As we go forward here, does it make sense here to actually start adding assets on balance sheet or just -- how would you be thinking about, you know, as you do the expansions and as you do other things, and even acquire assets, how would you finance those?

We've always looked at three alternatives on acquiring assets; owning them ourselves, leasing them, or joint venturing them, and we look at the cost of capital. We look at the returns and what we think would drive shareholder value as well as how the underwriting of those assets occur. Right now, kind of what we're looking at, I would say most of the acquisitions we're looking at today are with REITs and we'll continue with lease transactions. The last leases we've done were in the 7.25%, 7.75% lease rates, so we think that's still very efficient use of capital for properties we're looking at and an ability to really drive strong income growth as well as valuation of the company.

The expansions -- those expansions which we owned, they will be owned expansions, and they'll kind of follow suit. The conversions, again, don't require expansion. There, there may be some capital work on retooling some properties; but basically, that's licensure. But we've always looked and continue to look at the comparison of owned versus leased versus joint ventured, and we're open -- we're flexible, quite frankly, because we think it gives us the leverage to be able to grow without being dependent upon one source of capital.

Okay. And a couple of the REITs like HCN's call earlier today were talking about seeing the market started to change, but in terms of unit pricing and cap rates, prices coming down, cap rates starting to go up, and they're early in that trend. I think you were saying something similar in terms of acquisition environment because of what's gone on in the debt markets. Can you just give us a little more color on where you see cap rates?

We have been very active this year in looking at portfolios. In a number of situations, we came in in the #2 slot, and sometimes, when I look at the pricing of the #1 buyer, it was kind of hard to understand. A couple of those transactions did not occur. One example would be a portfolio that we had bid on where the seller got a higher bid which we thought was kind of irrational, and that buyer backed out. The seller's now holding to see what will happen before they consider selling it at this point.

So I do think that the environment is becoming more rational. It's hard to say what cap rates are, because it's too kind of recent to see kind of anecdotally what those numbers are; but we're also seeing a good velocity of transactions continue to come to market. People are still looking to sell. There may be that period where the bid/ask may separate a little bit, but again, on a historical basis, there's still liquidity in the marketplace in the sense that rates are still low on historical levels; and fortunately, the groups that we partner with are long-term investors, have been investors in this sector. They're not just kind of a real estate investor looking at a higher yield. They have a commitment to the industry, and some of the funds, for example, Prudential, their funds, which have already raised, is committed only to seniors' housing; and they've always been conservative investors using 65% leverage.

So I think with the type of partners we've aligned ourselves with and the discipline that we've had in looking at acquisitions, I actually think we will benefit from it.

Okay. And just, I don't know if you guys give specific guidance, but I think, again, obviously there's all this concern which I appreciate you addressing about markets; just -- you feel good about growth prospects, and I don't know if you want to give us any parameters on, say, particularly this cash flow growth you see going forward, what potential out there?

Well, our same-store sales growth had consistently double digits for many quarters now. Even in this quarter, when we had the flat occupancy, we still generated on a same-store basis, over 11% same-store sales growth. So that, I think, is something that is looking out to the future. Should it continue? Obviously, as we improve hopefully the occupancy, that will be additive to that. And then, obviously, as we roll out and have more announcements on home care agencies, that would obviously supplement that cash flow.

We'll give more color, if you will, to the impact that some of these conversions and expansions as they move along. But again, I try to give anecdotally some sense of what we've accomplished in the past with some of these, and they've been very, very profitable. So we think we're well poised for continued growth, organically as well as coming from additional levels of care, both through assisted living or cares; looking at home healthcare, and at acquisitions.

Okay. And then just one last question. Let's just start with maybe financial occupancy, your 89% and change for the same-store; is there sort of a level that that kind of maxes out, kind of top level? Is it 92% or 95%? How far do you think you can grow that time?

We typically give examples showing 93% occupancy. We think that is something that's attainable. It's interesting; if you look at our portfolio, a large proportion of our assets are performing over 90%. I kind of indicated two or three properties that are below 80% at this level, and their balance kind of stays in that high 80s to 90s. We have a couple of properties that are operating at 100% with low waiting lists. So I think looking at a 93% occupancy level is a level that can be sustained, particularly if we address some of these issues at these properties I discussed and gain those occupancies back up. Sedgwick Plaza is a perfect example of a property that was down into the 70s; their independent living occupancy was actually below 60%, and we did the renovation, we expanded -- we converted units, and we close July at 97%, with a nice wait list. So we think that the sustainability at that level is achievable.

Okay. Thanks.

Thank you.

(operator instructions) We'll take our next question from Peter Martin from Mathis Capital.

Larry, what was the conclusions, if you can share them, on the IT review?

Sure. Ralph, you want to address that?

Sure, I'd be happy to. Peter, we actually did a very extensive review to see what kind of information technology was needed to support our business growth and our business plan, and we've actually decided to replace our finance and accounting systems, and also our healthcare systems, with two different software vendors. We're actually in contract negotiations right now; so until those contracts are complete, I'd rather not name names. But we are basically going through a very extensive upgrade to our information technology platform to make sure that we can support the growth that we plan to accomplish in the next few years.

And what type of CapEx number would that be for these systems?

Well, obviously it's a multi-million dollar investment. We would be capitalizing those expenditures. We would expect to amortize those costs over a five to seven year horizon; but I would say by the time all of our costs are in, including the configuration, implementation training, etc., we're probably looking at an investment of $4 million or so.

Okay. And is this from headquarters to every building managed, the whole bit?

It is. It's throughout all 64 existing facilities and whatever additional growth we experience, we want to make sure we accommodate that very smoothly and efficiently.

And could you give us, obviously not naming names, but give us a little detail in terms of what, maybe software modules or what efficiencies or labor savings might come from this investment?

Well, clearly we're looking at ERP systems, enterprise-wide systems, so we'll be able to integrate all our information flows. It should dramatically reduce the amount of transactions we have to process here in the home office. So it'll be far more efficient. We think we can manage this business -- manage a larger business with the existing number of employees, and it's going to be -- we're not even factoring in what kind of cost savings we might experience from it because we look at it as an investment in our future; but there should be significant savings in future manpower requirements, based upon having much more information systems.

Thank you. I'll get back in the queue.

(operator instructions) Take another follow-up question from Frank Morgan with Jefferies.

I'm sorry, I just want to be clear on this point. The 91% occupancy number that you talked about for July; is that on the consolidated portfolio, and is that financial --?

That is a leased-to number. That is looking at July, what the portfolio is leased-to at the end of July, which really is more of an August number (inaudible). It's the leased-to number at the end of July, and that's on the entire stabilized portfolio. That's 59 of our 64 properties; that's consolidated as well as managed.

Okay. Would that number be radically different from the consolidated? Would it be more or less or about the same?

The consolidated -- obviously we have the one property (inaudible), so it'll have the impact there. The consolidated portfolio is -- we're probably looking at, on average, somewhere within 100 basis points of that.

Okay. Thanks.

Thank you.

Our next question comes from Peter Martin of Mathis Capital.

Larry, you stated in your comments that you have not been affected by the credit crunch. You have plenty of access to capital; you've got channels in place and a formula that you use to make your acquisitions. Over the last three years, there's obviously been a considerable amount of consolidation in the industry; probably some private equity or some other private individuals that have made some purchases that, as you talked about in the Q&A, may have been at valuations that you questioned. Would those acquisitions represent follow-up opportunities in a sense that maybe they over-levered the properties, in a sense where you could go back in and take advantage of some of these situations, maybe, in the next 24 months?

Peter, that's a wonderful question. I think, definitely. We've actually already seen one portfolio come back to market that we passed on the first go-round because we were not comfortable with -- it was a private equity investor, and they underwrote -- they basically looked at very aggressive assumptions, and very highly financed real estate assets are typically cyclical, whether they be seniors' housing or other asset types, and this could create a great opportunity, particularly when you have private equity investors that put a lot of leverage on portfolios, and if they don't hit their numbers or their [fill-ops] quickly, there could be opportunities for those properties to come back to market. And as I've said, we've already seen one portfolio come back to market.

Okay. Follow-up question on the home healthcare business; you said you could possibly do something by the end of the year. Who would be in charge -- if someone is already in place, you're just leasing to existing operators. Have you identified a senior executive to run that business?

Actually, the nice thing about the business, Peter, is the process is really -- everything we do here as a team; Keith Johannessen, Jim, Ralph, myself are intimately involved in that. Keith would probably take more of a lead role, because it's operations, but one of the benefits we see about acquiring an existing agency is not just buying the business; it's a platform with an existing team in place, and that would, I think, give us that ability to not only benefit our communities and grow that business, but also bring in the human resources and the systems in place to take over that business.

And the size, you know, businesses that you're looking at; are these two and three cities or two and three regions, or are we looking at something a little north of that?

No, you're exactly right. These are maybe bite-sized, because they fit geographically with our template, and obviously the area we'd probably focus on first would be in the Central Southwest market where we do have such a large concentration. It obviously makes sense; we're headquartered in Dallas, so that's really where we're focusing. But we think it becomes very economic to approach it from that perspective. It keeps our mix of revenues very, very positive with still a large number of private pay revenues that we have to-date, and then we also get the benefit of having this concentration of our asset base to be able to utilize in conjunction with that type of an acquisition.

And with an acquisition like that, the operators in your existing properties, are these month-to-month leases, or are they contractually a year or two out?

They are month-to-month. They have a lot of flexibility.

Okay. I'll drop in the queue again.

Thanks, Peter.

Our next question comes from Todd Cohen from MTC Advisors.

Good morning. Larry, on the attrition front, what is that mostly attributed to? I know it sounds like a silly question.

It's a good question. Obviously, we serve an 85-year-old average resident. If you like at it generically, one of the aspects of our business that we recognize is that a lot of the acquisitions that we did -- have last year were higher levels of care, more (inaudible), Alzheimer's care. If I compare by levels of care, independent living was up about 2% compared to the first quarter, and about 1% compared to last year.

You talking about the attrition rate?

(inaudible) Actually, second quarter attrition was a little lower than the first quarter, and a little lower than last year. Unfortunately, it's something that just happens. Most of the attrition is resulting from deaths or higher needs of care, and it's just a part of our business. We've been very fortunate to be able to manage our business, bring home healthcare into the buildings to reduce our attrition down last year to an average level of about 35.7% last year. We're up from that this year; but again, if I look at my July numbers, we're seeing attrition to subside. And I think that, again, if you look at a one-month or a three-month period, you're going to have some volatility in the number, and typically it starts to normalize, which means you typically have less attrition in other periods that you may have in other periods.

Okay. And so where you're thinking of doing some additions or conversions, might you get that person who is going to the higher care, might you be able to capture them?

That's exactly the point, Todd, yes. That's exactly the point of having the additional levels of care, so that if someone were to move out, they'd still continue to live in our community, which is their preference, anyhow. They have the relationship there; their friends are there; all their contacts in the community are nearby; so that's exactly the idea, and if you look at our model -- I mentioned Cottonwood Village, a perfect example, and look at the margins there, over 50%. It's a very, very successful and proven model that we've -- and both our building, and operate today.

And then, on another subject, you've indicated that during the year that there has been -- you've been very active in looking at acquisitions and there's just been kind of a lot of opportunities out there and you've passed on obviously many of them because of price, I guess.

Oh, we will have acquisitions. I want to make it clear that we are in there. We do plan to have further acquisitions -- have further acquisitions this year, and again, to the extent that there were some transactions where we came in second to a bid that we didn't understand, in some of those cases, those deals never happened.

Right, right. But are you seeing some of those deals come back?

One, I referenced. We'll see; that seller wanted to wait a year or so. The current market may change their feeling about that. There's another one that we're in the midst of now; we'll see. But it's -- as I said, typically what we're seeing in the marketplace, we have seen one portfolio that we passed on that's come back to market by the buyer. We are -- but we're still seeing a good flow of activity and good prospects of opportunities on a pretty regular basis.

Okay, great. Thanks, Larry.

Thanks, Todd.

And we'll take a follow-up question from Jerry Doctrow with Stifel Nicolaus.

Hi. Just one quick thing. We had shown maybe a development's fee of maybe $500,000 a quarter, starting this quarter. Is that in there somewhere and we just didn't see it separated out, or is it starting next quarter? Just want to clarify.

Jerry, we actually started that development in the second quarter, so there's a partial quarter development fee in there for the second quarter, and it was a little over $100,000 for that quarter; so you will see that ramping up going forward, and certainly as we start additional developments.

Okay. And $500,000 per project is kind of the right number per quarter?

That's on the high side. We're looking at development fees per project of somewhere between $1 million and $1.5 million, which would probably be booked over a 12 to 14 month horizon. So it's probably roughly $100,000 per month per project.

Okay. And again, where does it show up?

It's actually in the revenue line. It's in the affiliated management services revenue, is the line description.

Okay. Cool, thanks.

And we'll turn the call back over to Mr. Cohen for any closing remarks.

Well, I thank everybody for participating on our call, and we look forward to speaking with you and, if not before the third quarter conference call. Thank you so much and have a nice day. Bye-bye.

That does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time.