Sonida Senior Living Inc (SNDA) 2007 Q3 法說會逐字稿

Good day and welcome to the Capital Senior Living third quarter 2007 earnings release conference call. Today's conference is being recorded.

Any forward-looking statements made by management in this conference call are subject it 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. Finances, licensing, business condition, risk 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 principals and interpretation among others. And other risks and factors identified from time to time in the company's reports found 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 very much, and good morning, everybody. I'm pleased to welcome you to Capital Senior Living's third quarter 2007 earnings release 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 continue to accomplish these objectives and achieve solid results in the third quarter of 2007. We increased our income. Compared to third quarter 2006 results, revenues increased 14% to $47.8 million, and EBITDAR, which we define as income from operations plus depreciation and amortization and facilitate lease expense increased 37% to $14 million. Our EBITDAR margin improved 480 basis points from the third quarter of 2006 to 29.4% and third quarter 2007 net income was $1.4 million, or $0.05 per diluted share, compared to net income of $100,000, or less than $0.01 per diluted share for third quarter 2006. Cash earnings defined as net income plus depreciation and amortization for the first -- third quarter increased 56% to $4.2 million, or $0.16 per diluted share, compared to 2.7 million, or $0.10 per diluted share for the third quarter of 2006. We achieved solid community operating results.

During the third quarter, 60 of our communities were stabilized with a 90.5% average physical occupancy rates. The median occupancy of our stabilized communities was 91.9%, reflecting the effect a few underperforming communities have on our overall occupancy averages. 80% of our stabilized communities operated at 90% or greater occupancies and averaged 95% occupancy for the quarter. Four additional communities had occupancies between 85 and 89%. Operating margins before property, taxes, insurance, and management fees, were 48% in our stabilized independent and assisted living communities. Because this changes quarter to quarter between our stabilized and consolidated portfolio, we believe the best measurement of our operating performance is our same store sales comparisons. Same store revenues at 57 communities under management in both the third 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 4.5% with a 3.7% increase in average monthly rents and a 1.2% increase in financial occupancy. Our sound expense controls and group purchasing program limited same store expense growth to 1.5%, resulting in same store net income growth of 9.4% from the comparable period in 2006. The operating leverage in our business model is reflected in the 79% incremental EBITDAR margin realized from the same store revenue increases. The number of communities we consolidated in the third quarter increased to 49 from 43 a year earlier. Financial occupancies of these communities averaged 88.5% during the quarter. Operating margins at our consolidated communities were 44% during the quarter, and average monthly rents were $2,356. 17 of our consolidated properties are Waterford Wellington communities, which we developed and opened between 1999 and 2002.

In the third quarter 2007, these communities enjoyed a 91.5% financial occupancy, compared to 90.3% in the third quarter 2006, and average monthly rents grew 4.5% to $1,988. Operating expenses increased by less than 1%, resulting in a 14.7% increase in net income compared to third quarter 2006. Operating margins also improved at the Waterford Wellington to 45% from 42% a year earlier. Every 1% in occupancy gain at our consolidated communities would generate approximately $2 million in incremental revenues. A 5% increase in average monthly rents at our consolidated properties would generate approximately $8.5 million in additional annual consolidated revenues over annualized September, 2008 revenues. And a 79% incremental EBITDAR margin, these additional revenues would increase the company's EBITDAR significantly. We experienced higher-than-normal attrition during the first week of July in the quarter. I am pleased to report that we have been gaining momentum steadily since then. In fact, financial occupancy at all communities under management improved from 88.5% in July to 88.9% in August, to 89.3% in September. And 80 basis point increase from July to September.

Compared to July results, September revenues at all communities under management increased $500,000 for the month, operating margins improved 300 basis points, net operating income increased $700,000 for the month, and the average monthly rates increased more than 1% in just two months, to $2,497. We have experienced similar results at our consolidated communities whose financial occupancies improved 60 basis points from 88.2% in July to 88.8% in September. Compared to July results, September monthly consolidated revenues increased $400,000, operating margins at our consolidated communities improved 300 basis points, and net operating income increased $600,000 and the average monthly rate during the two-month period increased more than 1% to $2,379. With this momentum, we expect to see continuous improvement in the fourth quarter. We also expect to see the benefits from increases in community fees, and market rents that were implemented across our portfolio in September. I would like to respond to questions we have received about the effects of the housing market on our operations. The average age of our residents is 85 and the decision to move into a senior living community, whether independent living or assisted living, is need-driven. According to a study conducted by the American Seniors Housing Association, comparing seniors living in independent living communities to senior nonresidents, the top reasons why residents moved from their former residence are health problem, difficulty in maintaining a home, climbing stairs, lifting items, loneliness, and the need for supportive services. Through assisted living, our home health care residing in our independent living communities, residents can receive these services at all of our communities. The elder senior population generally carries no mortgages on their homes and they have experienced significant increases in their home values. More significantly, the cost of living at a Capital Senior Living Community is hugely more affordable than living at home. The negligible impact of the housing market on our operations is evident in our third quarter results.

I also would like to discuss the expansion conversion opportunities that we are analyzing. We are currently working toward adding additional levels of care through expansions or conversions at approximately 15% of our existing portfolio. We have identified six communities where we may convert a wing of independent living units to 30 to 45 units of assisted living at each community. We may expand another three communities by adding assisted living and/or memory care. Each expansion would include an additional 45 to 60 units. Decisions on these conversion expansion opportunities will be made with the completion of our 2008 budget before year-end. We have had terrific results in generating significant improvements at communities that have been expanded or have had units converted to additional levels of care. For example, we expanded Cottonwood Village in Cottonwood, Arizona, from a 66 unit independent living community to 163 units of independent and assisted living about five years ago. Cottonwood Village currently enjoys a 98% occupancy and revenues have increased 3 1/2 times since we completed the expansion.

An example of one of our successful conversions was Sedgwick Plaza in Wichita, Kansas. Sedgwick Plaza was acquired as part of a portfolio purchase in the summer of 2000. A former operator converted 35 units at the front of the building from independent living to assisted living and the community's independent living occupancy fell to about 50% and the overall occupancy of the community was about 60% in early 2004. We converted a wing in the building to accommodate assisted living and converted units at the front of the building to independent living. Sedgwick Plaza ended September with 95% occupancy. Annual revenues have increased 75% since we completed the conversion. Adding additional levels of care at existing properties should enhance revenues and cash flows by improving occupancies, reducing attrition, increasing average monthly rates, and expanding margins. I would now like to comment on the seniors housing acquisition market. The acquisition market for senior housing communities continues to be very active. We continue to benefit from strong relationships with Health Care REITs and strategic financial partners with attractive costs of capital. We were the second or third bidder on a number of acquisition opportunities during the first half of the year.

The credit crunch that is affecting the capital markets has made the acquisition market for more -- has made the market more rational, benefiting Capital Senior Living as a strategic buyer that is not reliant on conduit loans, mezzanine financing or high yield debt. We have filled out our platform with dozens of acquisitions over the past two years and are strategically looking at clustering acquisitions in a number of markets where we have concentrated operations. Our existing infrastructure and platform allow us to integrate these acquisitions at very low incremental costs. This was demonstrated in the most recent quarter by our strong same store sales results, and our expanded EBITDAR margins. Our access to attractive capital, sound expense controls and group purchasing program, give us a competitive advantage in competing for acquisition opportunities. We are also actively working towards strategically acquiring or investing in health care agencies that have operations in markets and in our communities where we have clusters of senior living operations. All of our independent living communities have health care agencies renting space in them and many of our residents at an average age of 85 utilize their services. 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 health care services as well as from longer length of stays at our communities. I am optimistic that we will have upcoming announcements about strategic acquisitions as well as health care. As announced last night, we have entered into another joint venture with Prudential Real Estate Investors, acting on behalf of institutional investors, to develop a 142 unit independent and assisted living community in Richmond Heights, Ohio. We are actively working on additional sites, primarily in strong barrier to entry markets for a limited number of joint venture developments. New developments of seniors housing continues to be severely constrained with new supply having grown at a compounded annual growth rate of only 1.3% since 1999.

In response to questions we have received about new construction, we have annualized the construction that was recently reported by the national investment center for the 75 largest metropolitan statistical areas at the June 30, 2007. We compared the zip codes of our communities against those where construction starts were reported. Only one zip code correlated. And that was in Naperville, Illinois, where we operate a 193-unit independent and assisted living community in one of our joint ventures that is currently 91% occupied. An expansion of the existing community in the same zip code will add 95 units of independent living. Within a five-mile radius of our communities, we found construction starts reported in only two other locations with an average of fewer than 100 units per location, and neither community's level of care is directly competitive with the level offered at our communities. This confirms our own research that construction is negligible in our markets. And we expect building will continue to be rare as the scarcity of well-located sites, high construction costs, complexities with zoning and limited sources of capital continue to restrict new construction. This has been exacerbated by the limited number of markets that can afford the higher rents that are necessary to generate an adequate return on significantly higher development costs. The current credit crisis should also constrain development for an extended period of time, providing an environment where performance of existing seniors housing communities should continue to be strong.

We as shareholders should profit from dynamic growth opportunities generated by our operating platform and strong industry fundamentals. As demonstrated by our third quarter results, the operating leverage in our business model creates considerable organic growth. We are fortunate to be aligned with many of the dominant investors in the industry, allowing us to grow strategically as an acquirer and developer of additional communities in clustered markets. We are excited about adding additional levels of care, through expansions, conversions, and home health care. Our balance sheet is solid with fixed mortgage debt at very attractive rates. We believe we are well positioned to create significant value for our shareholders by continuing to successfully execute our business plan. I would now like to introduce our Chief Financial Officer, Ralph Beattie, to review the company's financial results for the third 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 third quarter and first nine months of 2007. If you need a copy of our press release, it has been posted on our corporate Web site at www.capitalsenior .com. The company reported revenue of $47.8 million for the third quarter of 2007, compared to revenue of $41.8 million for the third quarter of 2006, an increase of $6 million, or 14%. The number of consolidated communities has increased by six since the third quarter of last year, from 43 to 49. Financial occupancy of the consolidated portfolio averaged 88.5% for the quarter, with an average monthly rent of $2,356 per occupied unit. Approximately $0.7 million of unaffiliated management services revenue in the quarter reflects the recovery of management fees from covenant under the provisions of the August 2004 CGIM purchase agreement. Under the terms of this agreement, the company had to write to true up expected management fee revenues, if we did not receive required minimum fee income from the acquired management contracts The reconciliation of this provision resulted in the additional quarterly revenue of $0.7 million. Approximately $0.3 million revenue in the current quarter, reflects development fees from a joint venture that is developing a 146 unit senior living community in Miami Township, Ohio.

The company is about to begin construction of a second joint venture development comprising 142 units in Richmond Heights, Ohio. Revenue under management increased approximately 13% to $55 million in the third quarter of 2007, from $48.5 million in the third quarter of 2006. These communities under management increased from 60 to 64 in the last 12 months. Along with the $6 million increase in revenues, operating expenses increased by $3 million, from the third quarter of 2006. As a percentage of resident and health care revenues, operating expenses decreased from 63.8% in the third quarter of last year, to 62.8% this year, reflecting 100 basis points of margin improvement. Operating expenses were negatively impacted in the quarter by $0.1 million of storm damage to three Texas properties, and higher health care expenses. General and administrative expenses of $2.9 million were approximately $0.4 million lower than the third quarter of 2006. Lower insurance and legal costs were partially offset by expenses incurred in the implementation of the company's new information technology platform. As a percentage of revenues under management, general and administrative expenses in the third quarter of 2007 were 5.2%, compared to 6.8% in the third quarter of 2006. EBITDAR for the third quarter of 2007 was approximately $14 million, an increase of 37% from $10.3 million in the third quarter of 2006. EBITDAR margin was 29.4% for the quarter, a 480 basis points improvement from the comparable period of the prior year. Facility lease expenses were $6.9 million in the third quarter of 2007, approximately $1.7 million higher than the third quarter of 2006, reflecting 24 leased communities at the end of this quarter, versus 18 at the end of the third quarter of 2006. Interest expense of $3.2 million in the second quarter of 2007 was $0.3 million less than the comparable quarter of 2006, reflecting debt retirements and refinancings we've completed.

The company reported a gain on sale of assets of $0.8 million in the third quarter of this year, reflecting the amortized portion of deferred gains on lease transactions. The company reported a pre-tax profit of approximately $2.2 million in the third quarter of 2007, compared to approximately $0.1 million in the third quarter of 2006. After taxes, the company reported a net profit of $1.4 million or $0.05 per diluted share in the third quarter of 2007, versus less than $0.01 per diluted share in the third quarter of 2006. Cash earnings were $4.2 million, or $0.16 per diluted share, in the third quarter of 2007, versus $2.7 million or $0.10 per diluted share in the third quarter of the prior year. For the first nine months of 2007, the company reported revenue of $140.9 million, an increase of $24.8 million, or 21%, in the comparable prior year period. Adjusted EBITDAR was $40.6 million, an increase of $11.9 million, or 42%, and adjusted net income of $3.6 million, or $0.13 per share, compared to an adjusted net loss of $1.4 million, or $0.05 per share in the first nine months of 2006. Adjusted cash earnings improved from $0.30 per share in the first nine months of 2006 to $0.45 per share in the first nine months of 2007. The company ended the quarter with approximately $24 million of cash and cash equivalents, and $189.9 million of mortgage debt at fixed interest rates averaging approximately 6.1%. We'd now like to open to call up questions.

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment to give everyone an opportunity to queue for questions. We will take our first question from Frank Morgan of Jefferies.

Good morning.

Good morning, Frank.

A couple of questions. First, is housekeeping. What was cash flow from ops in the quarter?

Cash flow from ops, Frank, I would take cash earnings of $4.2 million, add back stock-based comp of about $0.3 million, and then I would reduce that by the amortized gains which were noncash of about $.8 million, and CapEx of 2.3 million, to get about $1.4 million.

Okay. And then secondly, on the development activity, I know you've got a new project under way here, could you talk about how associated development fees, will that will kind of roll out over the next couple of quarters and how much development fee activity you have remaining on your first project, and kind of on the same note, I would be curious if you could talk a little bit more about the economics of these either expansions or conversions, which one requires the least amount of capital, which one has the highest return on invested capital? That obviously seems like a good use of capital, but could you just talk a little about the economics there? Thanks.

Frank, I will take the first part of that question regarding the development projects and let Larry respond to the second part. But we started the first project, the Miami township project in the second quarter. We had booked about $100,000 of development fees in that quarter. We booked an additional 300,000 in the third quarter. So, we booked about $400,000 all together in the first project.

We're estimating roughly a million dollars of development fees per project. So, there is another $600,000 or so development fees to be booked on the first project. The second project is slightly larger but we would expect those development fees to be roughly comparable. And we booked those on a percentage of completion basis and we're estimating construction of something like 14 to 16 months, although so far, construction on the first project has been ahead of schedule.

As far as conversions, expansions, conversions typically don't require a lot of capital, depending upon what we need to do for life safety or other building code issues that relate to licensure for assisted living. Going back to Sedgwick Plaza, on that transaction, our cost to create a new wing, we converted two units into a dining room and activities room, moved people out and then refurbished the entire front of the building and the cost is about $700,000, and we have seen a significant obviously return on that investment. Expansions, many depends on whether we own the land or not, obviously. To the extent that we own the land, it is cheaper.

The expansions will probably run us around $100,000 per unit to build, and then looking, for example, at Cottonwood Village, with the return there, having been tremendous, but we increase our revenues by 3.5%, and the operating margin at Cottonwood Village is over 50%. The thing about the expansions that is very, very important to understand, I think, is that when you look at the increase of the physical space, we don't have to add a lot of staff. It is typically the care-givers for every 15 residents, some additional outreach in marketing, but really, most of the executive director and most of the staff in the building can serve the entire community, so there are some very, very strong synergies that make those expansions extremely profitable with a very, very high margin.

Okay. One more and I will hop off here. The sequential drop in G&A from second to third, just curious any comments there? And finally, the true-up on the management contract, was that an actual cash payment you received in the quarter? Thanks.

Frank, the sequential change between second and third quarter G&A is probably not sustainable. But we did have a fairly low spending quarter in the third quarter. But I would expect it to go back closer to the second quarter in the future. We had a very good quarter in terms of G&A spending, but probably lower than the rate we can sustain. In terms of the management fee true-up of the CGIM contract, about half of that payment was in cash. The remainder was the write-off of a note that we had with covenant group for future payments we had expected based on original projections of management fee revenue. So, it was about half and half cash and noncash.

Thank you.

We will take our next question from Jerry Doctrow of Stifel Nicolaus & Company.

Thanks. Hello. Let's see. A couple of things, Larry. I wanted to go back to just the operating performance which you spent a lot of time talking about, and I think what I categorize your comps to say is that even though you saw some second quarter to third quarter, either softness that we just look at or declines that we just look at the consolidated or slight, very slight increases, if we look at the whole portfolio, your sense is that during the quarter, you're ramping up pretty rapidly so that you expect sort of good strong numbers, if you go into 4Q and you're very optimistic going forward. Is that --

Yes, Jerry, what we do is I try to articulate in my comments, is compare month by month, both all communities under management as well as consolidated. If you look at July, as I mentioned, we had higher attrition in July, our financial occupancies on consolidated dropped by 50 basis points in the month of July. And we more than offset that in two months by 60 basis points growth from July to August. On the total portfolio, and again, it is just one of those phenomenons, the occupancy drop wasn't as dramatic, but we saw then an 80% -- an 80 basis points increase in occupancy, and what is interesting is every month we saw a continued expansion on increases of our revenue. We also saw benefits in the expenses and obviously that expanded margins by 300 basis points over two months, and as I said, our same store average monthly rents rather grew by over 1%. So, we're very pleased with the momentum we've seen in August and September and we think it will create a very good platform for the fourth quarter in the future.

Okay. And if we think about, and I guess sort of comment on the consolidated because this is what I'm focused on. If we think about sort of growth go forward, are you still comfortable with kind of a 5% or so rate growth? And then, what do you think occupancies maybe on average, sort of could do as we go forward there?

Yes, 5% rate growth I think, is something that we're very comfortable with. Occupancy growth obviously, if you look at the third quarter, we had some great success in a couple of months. Now, we typically seem to increase occupancy somewhere around 30 to 50 basis points a quarter. Now, there usually is some seasonality to the first quarter of this year. We were affected by kind of a late winter that had some effects, but, I think that as you look at the -- what is interesting is when we track our tours, deposits, activity, everyone is very encouraged by what we're seeing out there, which we think will grow that. And, I think that you've been modeling about 50 basis points I think in quarter or so in occupancy growth, and I think that is something that we definitely would strive to achieve. We look at our budget, it will be higher than, that but I think that is -- again, the reality is, it is not to be a straight line as we saw in this quarter.

Right.

It is a little difficult in modeling to say it is going to be arithmetically 50 basis points a quarter, and you compound that over the year. As I said, it could be higher in a couple of months. You may have a little -- our attrition actually in the third quarter was one week. I mean I have -- I tracked, I have it right here, our monthly move-ins and move-outs for the quarter, and we had 46 move-outs for the month -- the week of July 6, and then we were up every week thereafter, little pull-off beginning of the month, August, September but we caught up, and actually great gains in August and September. So, you can see the effect at just one week in a quarter, what it means when you look at that snapshot.

Okay. All right, that's helpful. And then just a couple other things would be helpful. Management fees, Ralph, I guess if I understood what you had said earlier, basically had a knock off of the 700,000 for the one-time true-up, and then basically pick up the development fees going forward. Is there anything else going on that we should be thinking about?

No, I would say that is basically right, Jerry. Although this true-up of the management fees was actually -- management fee revenue that we could have received over the last couple of quarters, so a portion of that would have been management fee revenue we would have expected to receive in this quarter, but basically we've gotten that through a different source through the true-up of the original agreement rather than through the management fee income we had expected. So, there is a portion of that, that is unusual in the quarter. And then of course going forward, we will have not only the original Miami Township project, but also would expect to start Richmond Heights in the fourth quarter and have some development fee income in that quarter.

And we will start modeling that out. And then just on some of the -- sort of the JV developments and then, maybe we can tackle sort of the expansions. I'm just trying to figure out, I think you said that the 14 to 16-month completion, so when those things are then completed, the development fees go away, do you pick up sort of another -- I'm just trying to understand sort of the economics of those, since we're now modeling through 2009.

If you think about our typical development, the development fees are probably averaging about $1.1 million per development. That will be collected over say a 14-month period. Once that building open, actually six months prior to opening, we begin to earn a management fee, and a lease-up fee, a marketing fee, and then when the building opens, we get a base fee for operations that will be running through until the property -- and we get the greater actually of 5% of gross revenues or a base fee, and that will continue over the life of the operations. We also, as a 10% equity investor, will share in 10% of the equity of those developments. So obviously, in the first year, there will be some losses in which we will get a small portion of, and then that will start to turn into again, profit. And then, we also have an incentive payment which promote that will be building up the equity in each of those developments that will be recognized upon the capital event.

And so, when you think about sort of net-net, once they open, you know, the combination of those, the management fees, and your 10%, is that sort of a net drag until you're sort of six months out? Or is that sort of a wash, or are you slightly positive and try to get just sort of --

I think it 's about wash. It is not a drag. If you look at the numbers during the lease-up, it is a wash and then starts at some positive.

And lease-up on these things is six months, 12 months?

No, they're going to be 24 to 27 months. For these buildings. That's what we're -- the pro forma is, hopefully it will be more successful, but for purposes of pro forma, and budgeting, we are looking at a 24 to 27-month lease-up.

And then just on the expansions and the conversions that we're starting to think through '09, should we be thinking about some of those actually getting delivered in that time frame? How long, from today, how long would it take you to actually get one completed and start making a difference on the numbers?

Conversions would be faster. Those are projects that I mentioned that are being incorporated into the 2008 budgets. So, any capital expenditures will be in there as well as the expected timing. Those should start to accrue during the second half of 2008. And then the expansions, which will take longer, obviously, will start to open most likely towards mid '09. So, you start to see the effects in the backside of 2009.

Okay. Maybe I will try to come back to you offline and see if we can get a little more guidance there. Okay. I think we're okay. Thanks.

Thank you, Jerry.

We will take our next question from Nicola Da Roza with Sidoti & Company.

Hi, good morning.

Good morning, Nicola.

Most of my questions have been answered. Let me see. I guess one thing you can address, earlier you said there were a couple of communities that were -- had a lower occupancy. Could you maybe give a little bit more color?

I would be very happy to. We talked about this before. It is very interesting, that's why I gave out the median occupancy level, because it really highlights the impact. There are three communities that we operate that have -- are consolidated that have occupancies in the 70, mid 70% range. What is interesting is two of these properties, even with their occupancies, rank among some of our higher revenues, average monthly rents, and net income per unit rankings. One in Santa Barbara, California, average monthly rents there are $3,500. And a 73% occupancy, actually enjoys a 53% margin.

So, I think it is important to understand the opportunity here where we're getting very strong cash flow. It's a strong one our better performance from a margin perspective and actually ranks high as NOI per unit of $1,855 per month. So, if you look at that, without occupancy, it is a very attractive asset. It is a property that was built by -- as a senior hotel, downtown Santa Barbara, great location. It was purchased as part of a portfolio. It was converted by a former operator to seniors housing. The units, 120 hotel rooms, half of it are assisted living and half are independent living. There is an opportunity for conversion, for additional licensure, we're looking at opportunities there and with that we believe that we will see the benefits and with some focus we've actually seeing some improvement in the occupancy toward the end of the quarter in October and in deposits.

Another property is in Boca Raton, Florida. Again, the property enjoys average monthly rents of $2,852 a month. Despite its occupancy, still enjoys over $1,200 a unit operating income per month. So, it is still pods of cash flow and profitable to the company. That is a classic example. That is a 189-unit independent living building. It's multiple buildings in a beautiful setting. We just redid the pool and spa area, put a new roof on, fixed up some landscaping, and now we're working with an architect on looking at converting part of that building to assisted living.

That is again, as you look at our prototype of what we're building of about 105 units, of independent living, 45 units of assisted living, by accomplishing the conversion, or expansion here, we would actually -- or be a conversion, rather, we would shrink the independent living units, we would add additional levels of care. There is a very active home care agency in the building today operated by a third party, so we have a population that has needs for assisted living and we could move the existing independent living residents into the assisted living units, and then be able to in fact have an existing smaller building for independent living that stay at a higher occupancy level, and we think the returns there can be very similar to what we experienced at Cottonwood Village. The third property is a property that we actually had on the market for sale the first half of this year. It is an area where the market has turned. It is a property that we still have targeted for sale. It is just the fact that the existing debt doesn't mature for another couple of years. There are some prepayment penalties that would be onerous. So, that is a probably that we will continue to monitor, but that is a property that we will at some point sell. But again, those three properties, you can see, have a dramatic impact on occupancy, not on income, and not on cash flow.

Okay. Great. Thank you very much.

Thank you.

We will take our next question from Peter Moon with Metis Capital Management.

Good morning, Larry.

Hey, Peter.

A couple of things. On these conversions or expansions, what is the disruption to occupancy or economics to the building, and are you pre-marketing to kind of slim that disruption?

Yes, on a conversion, obviously, the marketing that we would focus on, our existing residents, so we would look as we -- you know, again, when we converted Sedgwick Plaza, we actually benefited from a very low occupancy. So there, we had the ability to work with residents and families, to relocate residents, to free up the wing, and to be able to also strategically lease out those units in a way to try to minimize disruption to the existing residents on attrition. So, it would be a concerted effort with marketing and operations of how to minimize disruption of our residents. Sometimes there may be some economic incentives to help that along.

But again, with the conversion, it happens fairly easily, in many cases, it is life safety issues, whether it be doors, egress/ingress and other types of building code issues that have to be addressed. And then, we will typically combine some units to create a dining room. The interesting part of both the expansion and the conversions, we typically are able to use the existing kitchen, so we don't have the big cost of rebuilding a kitchen. We can just cart food over to the assisted living dining room. All of our buildings that have independent and assisted living typically have a separate dining room for the assisted living, separate activities and the way that we configure the building is we have one kitchen serving both dining rooms. So, that would be what we would look to on those expansions to minimize disruption and then be able to see a fairly quick benefit in the improvement in the operations.

The profit contribution on a conversion, on a dollar value percentage is what you would say, on average?

You know, if you look at, for example, looking at the example that we gave, for Sedwgwcik Plaza, there, it was very, very significant because we picked up about 35 basis points of occupancy. So, if you look at that building where we actually increased our revenues by 75%, and incremental margin on that is probably 75 to 80%. It is a very, very high contribution.

Was that pickup in occupancy from existing residents or were you able to go outside and pick people off of the pre-marketing list?

It was outside in the market. That was going out to the market and being able to market. The thing also what happened with Sedgwick which was somewhat unusual, was the fact that because the former operator converted units to assisted living at the front of the building, when independent living prospects walked into the building, they saw a very frail population, and they basically walked out of the building.

So, what happened was, it was a combination of not being able to -- it was increasing the level of services, and remember something, what is very important on these expansions and conversions, is the higher rents that we collect from assisted living. Average assisted living rents nationwide were 600 to $800 a month higher than independent living. So, you're getting the benefit of higher occupancies and higher occupancy at the higher rents. So all of that drives down to the bottom line.

So, I guess quarter to quarter, where we wouldn't be caught with 100 basis points decline in occupancies, and then have it jump back up the following quarter, it typically can be a smoother transition like the previous ones?

That's exactly right.

Okay. I will jump back in line.

Thank you.

Once again, if you would like to ask a question, please press star one. We will take our next question from Todd Cohen with MTC Advisors.

Yes, hi, good morning. Good morning, Todd. On some of the properties that are not performing as to standards and I know you addressed this a little bit on the earlier question, but have you thought or are you considering kind of swapping some assets for assets in other areas that are more preferable from a geographic foot point? Yes, Todd. In fact, we would be open to that, and whether we swap or whether we sell or reinvest obviously has the same result. We are looking to invest in markets where we have more concentrated operations. So, it could be a swap sometimes for example if we were to do something in one market where it is the best buy, or maybe a regional operator.

For example, the midwest property, that potential buyer is in one state. So, we would not swap with that buyer because his operations are only in that state, and one of the benefits he brings is state agency financing. But we would take the proceeds and that will allow us then to reinvest that money in markets or expansions where we have the clusters, so we would get that benefit. When might we see some of that?

As I mentioned, we are reanalyzing some of these lockout provisions on the midwest properties, and that will -- something that will occur probably to be over the next year or two. It really depends on the economics of the prepayments. The other situations, as we have news, we will announce it. And then, how are the community fees or the entry fees coming? Ralph, I mean very well, and Ralph can give you some detail which is also interesting when consistent with my comments on the improvements since August/September, it really demonstrated in the improvements in community fee recognition, as well. Ralph?

Yes, Todd, we actually had a very good quarter for community fees. It peaked in the month of August, but we had about 165,000 of community fees in July, about 206,000 in August, and another 189,000 in September. So, obviously making a very significant contribution to our both top and bottom line.

And what we, as I mentioned in my comments, beginning in September, across the portfolio, where we charge community fees, which is about probably 90% of our portfolio. In a couple of states, we are not able to do that, but in the 90% where we can, we actually implemented increases in community fees at all properties averaging about $500 per move-in, so we should start to see the benefit of that in the fourth quarter and then into 2008. Thank you.

It appears we have no further questions at this time. I would like to turning the conference back over to management for any additional or closing remarks.

We thank everybody for participating and for your consistent involvement. And feel free to contact us if you have any further questions. Have a great day. And thank you again.

Thank you for your participation. This concludes today's conversation. You may now disconnect.