Sonida Senior Living Inc (SNDA) 2008 Q2 法說會逐字稿

Please stand by, we are about to begin. Good day and welcome to the Capital Senior Living Second Quarter 2008 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 can 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 would like to turn the call over to Mr. Jim Stroud, Chairman. Please go ahead.

Good morning, and welcome to Capital Senior Living's Second Quarter 2008 Earnings Call.

On May 29, 2008, the Company announced that a special committee of our Board of Directors had engaged Bank of America Securities as our financial advisor to assist the Company in exploring and considering a range of strategic alternatives. The Company is still evaluating its strategic alternatives, and at appropriate times we will advise the marketplace where the Company stands in the process.

During this time period, the Company intends on executing its 2008 business plan regarding development of new communities, expansion and conversion of existing communities, and emphasizing organic growth. Also at this time, the Company will not start up or acquire home healthcare. Home healthcare companies currently trade at premiums to value, and any start-up or acquisition by the Company would take several years to create meaningful value. We will leave in place existing third party home healthcare providers that can be terminated on short-term notice.

We are excited about the new Ohio Waterford developments in Dayton, Richmond Heights, and Toledo. Each project has approximately 100 independent living units and 45 assisted living units to permit cost effective aging in place. Capital competitive design and build process creates a quality living environment at an average cost per unit of $150,000. Scheduled openings are third quarter 2008 for Dayton, second quarter 2009 for Richmond Heights and Toledo.

The Company is also pursuing expansion opportunities for 220 units in Fort Worth, Texas, Fort Wayne, Indiana, and Columbia, South Carolina, as well as conversions of independent living units to assisted living or memory care on five communities. The conversion of sixteen independent living units to AL in Lincoln, Nebraska was completed in the second quarter 2008. These actions will create additional value in our portfolio despite the ongoing challenging environment.

This environment-- in the second quarter, we still achieved a number of positive year over year results with revenue increasing 5%, EBITDAR growth of 7%, and the EBITDAR margin improving 60 basis points. Now, for further comments on the second quarter, I introduce Larry Cohen, Chief Executive Officer. Larry?

Thank you, Jim. I'm pleased to welcome everybody to Capital Senior Living's Second Quarter 2008 Earnings Release Conference Call.

Despite a challenging economy and housing market, second quarter revenues, EBITDAR, and net income all increased with strong margins as we implemented rent increases and employed sound expense management. We have increased our efforts in marketing our communities as an affordable option delivering exceptional value to elder seniors in challenging economic times. New advertising and direct mail campaigns complemented additional telemarketing, increased events and outreach. These efforts increased our leads generated during the quarter with a higher conversion rate of tours to deposits. Move-ins during the second quarter matched those of the second quarter of 2007. However, move-outs increased as a result of higher attrition, caused primarily by deaths and higher levels of care. Our attrition rates for the second quarter were 40.7% compared to 38.5% in the first quarter. Independent living attrition was 36.2% for the quarter, compared to 35.2% in the first quarter, and assisted living attrition was 58.2% versus 51.2% in the first quarter. Attrition has slowed in the third quarter and hopefully will moderate for the balance of the year.

Weekly occupancies have improved every week in July and appear to be improving in August. Our disciplined approach to managing expenses and increasing rates is generating attractive growth in net operating income per unit and operating margins. Average monthly rents in June 2008 increased 5.8% from June 2007 and 1.1% from March 2008. June 2008 net operating income per unit grew 8.8% from June 2007 and 3.8% from March 2008. These achievements resulted in solid community operating results for the second quarter of 2008.

During the quarter, 61 of our communities were stabilized with an 87.2% average physical occupancy rate. Excluding four communities with units being converted to higher levels of care, the average physical occupancy rate was 89%. Operating margins before property taxes, insurance, and management fees improved to 48.7% in our stabilized, independent, and assisted living communities.

At communities under management-- these included our consolidated communities, communities owned in joint ventures, and communities owned by third parties and managed by the Company-- same-store revenues increased 2.3% versus the second quarter of 2007 as a result of a 5% increase in average monthly rent. Our expense management and group purchasing program limited same-store expense growth to 2.6%, resulting in same-store net income growth of 1.9% from the comparable period in 2007.

The number of communities we consolidated in the second quarter increased to 50 from 49 a year earlier. Financial occupancies of these communities averaged 86% during the quarter. Excluding the four communities with planned conversions, the average financial occupancy for the quarter of 46 consolidated communities was 88.1%, a 100 basis point improvement from first quarter financial occupancy for these 46 communities. Operating margins at our 50 consolidated communities were 45% during the quarter and average monthly rents were $2456, a 5% increase from second quarter 2007 average monthly rents, and a 1.7% sequential increase from first quarter average monthly rents.

Seventeen of our consolidated properties are Waterford/Wellington communities, which we developed and opened between 1999 and 2002. In the second quarter 2008, these communities had an 89.3% financial occupancy, compared to 91.8% in second quarter 2007. Average monthly rents grew 4.2% and 1% sequentially from first quarter 2008, to $2064. Operating margins also improved at the Waterford/Wellingtons to 45% from 43% a year ago.

Occupancies improved in July, and we are encouraged that pent-up demand by an aging and needy population with very limited new supply of senior living communities will return our occupancies in the future to levels in the historic levels of 90% to 93%. Every 1% gain in occupancy at our consolidated communities would generate approximately $2 million in additional revenues. A 5% increase in average monthly rents at our consolidated communities would generate approximately $8.5 million in additional annual consolidated revenues over annualized June 2008 revenues. At stabilization, we typically achieve an 80% incremental EBITDAR margin, which would significantly increase the Company's EBITDAR.

We have received numerous inquiries about the effects of food, utility, and labor costs on our operations. Utilization of our group purchasing program, managing our variable costs-- particularly wait-staff and housekeeping-- and fixed utility contracts at many of our communities have kept our operating expenses under control. As a percent of operating expenses, labor represents 54% of operating costs, food represents 11%, and utilities represent 9% of costs. Compared to the same period in 2007, second quarter labor costs increased 3%, food costs remained flat, and utilities increased 4%.

The average age of our resident is 85, and the decision to move into a senior living community, both independent living and assisted living, is need driven. Residents typically move from their former residences due to health problems, difficulty in maintaining a home, loneliness, or the need for supportive services. For assisted living or home healthcare residing in our independent living communities, residents can receive these services at all of our communities. And the cost of living at one of our communities is usually more affordable than living at home. This is even more compelling today as many seniors living at home on fixed incomes are facing increasing costs for fuel and food and are seeking value.

While we have seen the effects of the housing market impact certain of our markets, our move-ins, deposits, tours, and leads generated continue to be solid as we execute on the fundamentals, have the right people in place with the right focus and tools. In the few communities that have been impacted by the housing market, we continue to manage our operating expenses to occupancies through managing our staffing and food costs and maintaining good margins.

Our 2008 business plan is focused on increasing capacity and levels of care to meet the needs of our residents with an average age of 85 through expansions, conversions, and new developments. These investments are expected to produce excellent returns on investor capital and build shareholder value.

We plan to add additional levels of care at 11 communities. We are converting 261 independent units in 8 communities to assisted living and dementia care. Of these, 80 were converted in 2007, 18 units were converted in May, 98 units are expected to be licensed as assisted living in the next two quarters, and 65 units are expected to be licensed as assisted living in the first half of 2009. The estimated cost of these conversions is approximately $2 million, and upon reaching stabilization, these converted units are expected to increase our revenues by approximately $4.5 million, with a 50% incremental margin.

We are also planning on expanding three communities. These expansions will add 220 units for a total cost of approximately $30 million, which is expected to be funded by the existing owner, with respect to one lease community, supplemental mortgage financial, and cash on hand. Upon stabilization, these additional units are expected to increase consolidated revenues by approximately $8.5 million, with a 45% incremental margin.

We have had excellent results in generating significant improvements at communities that have been expanded or have had units converted to additional levels of care. 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.

As Jim mentioned, we currently have three communities under development in joint venture with Prudential Real Estate Investors acting on behalf of institutional investors. These developments will add 434 units, of which 299 will be independent living and 135 will be assisted living units. The first community in Dayton, Ohio, is scheduled to open on August 17. We are pleased for the pre-opening deposits and very positive feedback the community is receiving in the market. The other two developments are expected to open around April 2009. We are actively working on additional sites in strong barrier-to-entry markets for a limited number of additional joint venture developments.

New development of seniors' housing continues to be severely constrained with new supply having grown and a compounded annual growth rate of only 1.3% since 1999. We continue to analyze the construction that is reported by the National Investment Center for the 100 largest metropolitan statistical areas. According to the first quarter 2008 NITT MAPP construction report, there were only three new developments in the ZIP codes in which we operate. This confirms our own research that construction is negligible in our markets, and we expect building will continue to be rare as a scarcity of well-located sites, high construction costs, complexities with zoning, and limited sources of capital continue to restrict new construction. This is exacerbated by the limited numbers of markets that can afford the higher rents necessary to generate an adequate return on significantly higher development costs. And the current credit crisis should further constrain development for an extended period of time, providing an environment where fundamentals for the senior housing industry should lead us back out of the current trough to a robust period.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2008.

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 2008. If you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenue of $49 million for the second quarter of 2008, compared to revenue of $46.9 million for the second quarter 2007, an increase of $2.1 million or 5%. The number of communities we consolidated on our income statement increased by 1 since the second quarter of last year, from 49 to 50, with the addition of the Whitley Place community, which was leased on January 31, 2008.

Financial occupancy of the consolidated portfolio averaged 86% for the quarter, with an average monthly rent of $2,456 per occupied unit. Excluding four communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 88.1%. Average physical occupancy for the 61 stabilized communities was 87%. Excluding these same four communities with units being converted to higher levels of care, the average physical occupancy rate was 89%. Until these four communities with conversions again reach stabilized occupancy, we will exclude them from reporting our stabilized totals in future quarters.

We reported $1.7 million of development and pre-marketing fees in the second quarter of 2008, due to the three communities being developed in joint ventures. Revenues under management increased approximately 1% to $55.1 million in the second quarter of 2008, from $54.3 million in the second quarter of 2007. There were 64 communities under management in both periods. At these communities under management, same-store revenues increased 2.3% versus the second quarter 2007 as a result of a 5% increase in average monthly rent. Operating expenses increased by $0.7 million or 3% in the second quarter of 2007. As a percentage of residents' health care revenues, operating expenses were 61.5%.

Regarding major cost categories, as Larry said earlier, food cost was flat between the second quarter of 2007 and the second quarter of 2008, labor costs were up 3% and utilities were up 4%. General and administrative expenses of $3.7 million were $0.5 million higher than the second quarter of 2007. Nearly all of the increase was due to unusually high health insurance claims during the current quarter. The Company self- insurances for the cost of employee and dependent medical benefits, and purchases stock loss protection on an individual and aggregate basis. Claims during the quarter were unusually high, exceeding claims recorded in the second quarter of 2007 by approximately $0.5 million. Excluding these items, G&A expenses as a percent of revenues under management were 5.9% in the second quarter of 2008.

Facility lease expenses were $6.3 million in the second quarter of 2008, approximately $0.3 million higher than the second quarter of 2007, reflecting 25 lease communities this year versus 24 last year, along with increases in contingent rent. Depreciation and amortization expense increased $0.3 million in the second quarter of this prior year, as a result of capital improvement in certain of the Company's owned and leased facilities, along with depreciation incurred this Quarter related to new information systems which became operation on January 1 of this year.

Adjusted EBITDAR for the second quarter of 2008 was approximately $14.3 million, an increase of 7% from $13.4 million in the second quarter of 2007. Adjusted EBITDAR margin was 29.2% for the period, a 60 basis point improvement from the comparable period of the prior year.

Interest expense of $3 million in the second quarter of 2008 was $0.2 million less than the second quarter of 2007, reflecting lower debt outstanding due to principal amortization.

The Company reported a pre-tax profit of approximately $2 million in the second quarter of 2008, compared to a pre-tax profit of approximately $1.2 million in the second quarter of 2007. Adjusted pre-tax profit for the second quarter of 2008 was $2.1 million, excluding a small write-off of Hearthstone's due diligence cost. Adjusted pretax profit for the second quarter of 2007 was $1.8 million, excluding the write-off of deferred loan costs and non-cash charges for two joint ventures in that period.

The Company reported net income of $1.2 million or $0.05 per diluted share in the second quarter of 2008, versus net income of $0.8 million or $0.03 per diluted share in the second quarter of 2007. With the adjustments noted above, the net income of $0.05 per diluted share in the second quarter of 2008 compares to net income of $0.04 per diluted share in the second quarter of 2007. On this same basis, adjusted cash earnings were $4.4 million or $0.16 per diluted share in the second quarter of 2008, versus $3.9 million or $0.15 per diluted share in the second quarter of 2007.

For the first six months of 2008, the Company produced revenue of $97.5 million compared to revenue of $93.1 in the first six months of 2007, an increase of $4.4 million or approximately 5%. Adjusted EBITDAR for the first six months of 2008 was $28.7 million, an increase of $2.1 million or 8% from the $26.6 million reported for the first six months of 2007. With the adjustments noted previously, the Company's results improved from net income of $2.2 million in the first six months of 2007 to net income of $2.8 million in the first six months of 2008.

Cash earnings on this basis grew from $7.7 million or $0.29 per diluted share in the first six months of 2007 to $8.9 million or $0.33 per diluted share in the first six months of 2008.

Capital expenditures in the second quarter of 2008 were approximately $1.9 million. Of this amount, approximately $1.1 million represented maintenance spending at the property level. If annualized, a $4.4 million annual rate of spending would equal approximately $648 per unit.

Cash increased by $1.5 million during the quarter, and equaled $26.1 million on June 30. Mortgage debt was $187.5 million at the end of the second quarter of 2008, a reduction of $3.1 million from a year ago. All of our mortgage debt is at fixed interest rates averaging 6.1%.

We'd now like to open the call to questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We will go first to Frank Morgan with Jeffries & Company.

Good morning. I was hoping you could go back through the discussion about the trends over the month and talk about also what you saw in July. Then secondly, I think you mentioned that of the 57 out of the 61, you gave an occupancy number there in the quarter. Could you give us that on the same basis from the first quarter, so that-- I guess what I'm trying to figure out is, on a sequential basis, are we really starting to bottom out here, or do you really see the year-over-year trends continuing?

Sure, Frank. Thank you. As I mentioned, the second quarter number of the consolidated communities, taking out those four properties, was 88.1%. The first quarter-- same analysis, we're looking at 46 consolidated properties-- was 87.1%. So we do see an improvement, Q2 compared to Q1, on the same basis. If you look at 60 properties out of the 64 in the second quarter, the 60 properties' financial occupancy was 87.8%-- that's, again, consolidated and managed. And then, that same 60 properties without the four properties which are undergoing conversions, was 86.8% in the first quarter. So both for the entire portfolio as well as the consolidated portfolio--we're seeing 100 basis point improvement.

As it relates to July, we experienced about-- again, this is physical occupancy, because we don't yet have financials for July-- but physical occupancy in July was up 25 basis points, and it looks in August like we'll be up about another 20, 25 basis points, again, from where we are today, so--

Okay, now, the 25 basis points-- which portfolio is that--?

That's all 64 properties, Frank. Actually, I apologize-- that's 61 stabilized. (technical difficulty) 61 stabilized, including the four properties that are undergoing the conversions, improved 25 basis points in July, and are looking at about 20 or 25 basis point improvement in August.

Okay, and the occupancy on the entire 61 at the end of June was what? It's up 25, but what number are we up 25 basis points off of?

That is off of the-- this is actually July off of June. June ended at around 87% physical occupancy. That's with the converted units, and that's up about 25 basis points in July, and looks like it will be up another 20, 25 basis points in August.

Okay, and in your discussions with the people out in the field about this, I think I understand you said that you're basically-- that the attrition rates and the move-out rates are starting to stabilize again and that basically-- is this being driven more by more people moving in or the fact that the attrition is slowing down?

It's the-- it's really the attrition slowing down at this point. I think if you look at our stats for the quarter, our move-ins for the second quarter of '08 averaged 4.1 per community, which were identical to what they were, second quarter of '07. Our attrition was 4.4 versus 4.2 a year earlier. That's kind of a difference there. What we are seeing is our leads generated are about three times what they were a year ago. And what's interesting is that our conversion rate of repeat tours to deposit is running bout 70%. Typically that runs closer to the 50, 55% range. I think what we're seeing is that people are more need-driven, even for independent living. Another interesting statistic for June is that our independent living move-ins are outpacing our assisted living move-ins, where independent living move-ins in June averaged-- move-ins were 4.1 for IL and 2.1 for AL in June.

So I think what we're seeing is that we're getting-- a lot of outreach, a lot of events, a lot of advertising, we're really doing a very good job of selling the point of the value that our communities offer in this environment, and what we're seeing is that the quality of the people coming into our buildings and the conversion rates is very positive.

One more and then I'll hop off and let somebody else-- in terms of the development fees that you're reporting, I assume that that kind of rolls off by about the second quarter of next year when those two other properties come online-- if you could confirm that. And then, I think you mentioned you did have a couple of markets that were weaker. I wonder if you could comment about specifically where you see the weakness coming from. Thanks.

Frank, I'll take the development fee question first. We earn development fees over the construction period. They average somewhere between $1 million and $1.2 million per community. The development fees do cease whenever the property opens, but it would be replaced with a management fee at that time, so we would continue to earn management fees with these joint ventures that would replace the development fees. But you're correct about when the timing would cease for earning development fees.

And I'm assuming, though, that that management fee initially is probably not going to be as much as the development fee on a quarterly basis-- as it rolls off there may be some bumps in the net effects of those two numbers?

Right. The management fee is generally about 5% of revenue with a minimum, so it would not fully replace the development fee, but we do have additional developments planned, which should be coming on stream to replace the development fees that will be rolling off.

And, as far as the markets where we see some weakness. Clearly, we see one property in Florida, Veranda Club in Boca Raton. That's a property that we are converting, and one of the reasons we're taking out from the stable property Veranda Club is, we've actually taken a building and begun moving residents out of the building and have stopped leasing that building to free it up, to have 45 units converted to assisted living. That will be complete in the first half of 2009.

California still is a challenging market for us. We have two properties in Sacramento, one in Villa-- in Santa Barbara. Santa Barbara, again, is one of the properties that's coming out of the stable because we are now in the process of getting licensure for additional assisted living units at that community.

Detroit has been a market that has been challenging for some time, and continues to be. That's also a property that we're looking at some conversions there to add more levels of care.

But if you look at the entire portfolio, really the-- we have about four or five properties that really bring down the others and they are, again, the California, the Detroit, and the Florida properties. I think what is very telling is that we ended the month of July with 33 of our properties with more than 90% occupancy and in fact, those 33 properties averaged 94% occupancy last Friday. We have another 12 properties over 85%-- it's actually averaged last Friday at 88%. So, I think that, while everyone is very focused on occupancy, it's not systemic through our portfolio. We are benefiting from a very strong Texas economy and a very good Texas market. We're benefiting in most of our markets in having a very employable product that has tremendous customer satisfaction, great marketing, on-site people, very focused at bringing traffic in, and we've got referrals from our residents, we're seeing our occupancy sustain or improve, and again, what we're finding is that that bottom tier of properties that have under-performed for some time obviously are still challenged, and bringing down the averages, but after we go through these conversions, you can see the impact when we exclude just four properties from the 64, of what the rest of the portfolio looks like.

Okay. And just for the record, the four properties are Boca-- that are being converted right now--

The ones right now are-- it's Peoria in Illinois, it's Heatherwood in Detroit, it's Villa Santa Barbara in California, and Veranda in Boca Raton.

Okay, thanks.

We'll go next to Jerry Doctrow, with Stifel Nicolaus.

Good morning. Just a handful of things. I don't know if I need a whole bunch more numbers, but I'm assuming that in the same-store, which is the one that I look at a bit more, I think you quoted it was stabilized, the issue of the four that are being converted are in those numbers as well.

Yes. Without those numbers, I'll give you that. The same-store would have been 3% revenue growth and 3.1% net income growth, compared to what we reported.

And how about occupancy? Do you have it right there?

Yes. The same-store occupancy of the-- would be 87.8% for the quarter for the same-store. That's financial occupancy.

Right, right.

Physical occupancy you had was [reportedly] 89%.

Okay. Great, that's helpful. And, it really sounds like you're doing pretty well in this environment. I guess I was trying to think-- you know, maybe you can help me sort of generalize this for the rest of the business-- obviously some of it is market-related as you're in Texas and have less exposure to Florida and California and some other places that may be weak. I think you're at a lower price point and so I think-- your IL and because of the home health functions a little bit more like AL, but, I mean, broader trends-- you know, people are saying AL is holding up better than IL, we're hearing from other places that July is seeing an upturn-- do you think it's broad based, or do you think your experience is relatively unique, or-- ? Any color you can give me, just--

Yes, I think that you very well articulated our business model. I think that we have continually benefited from being an affordable product in relatively strong markets. We are exposed in Florida, but unfortunately it's only one property. California-- we have action plans in those locations. We are very encouraged by July. I would tell you that the mood in the field for marketing is very positive. Traffic is good, there are a lot of events going on, and I think that people are very-- as I said, are very positive and upbeat, which I think is very promising. Hopefully the attrition will slow down as we continue throughout the balance of the year.

I think that our product works very well in this environment. We've been through cycles before, and we typically do very well in this type of a market because we are a mid-market product, we are very disciplined in how we approach the business going into the markets which we hope are underserved based on supply and demographics. And I think our operating and marketing team have been in this industry for decades, have been through cycles, and when you get down to it, Jerry, we have great properties, we have great people on site. And that's really the difference, I think, where-- it's interesting, where we may have a challenge, we change the person on site in marketing or bring back someone-- just yesterday we hired somebody who had left us, who was fantastic in one of our locations. It makes a big difference, having that right team, very focused, on site, to generate the type of results that we expect.

And are you doing anything else in terms of incentives-- you know, a free month's rent or discounts or helping people move or-- I know some of your competitors, I think, are actually sending out people to help folks merchandise their houses and that stuff. Are there anything like that that you're doing? I'm just trying to understand a little better as to why the marketing is having as much impact as it appears to be.

Based on the rate increases that we experienced this quarter, you can see that we don't have a discounting really in place. Now, in selective markets, particularly Florida/California, where you have competition discounting, then we will selectively discount certain units or give concessions. We typically, rather than discount, just prefer to give a 4th month or 8th month free, but what we do there is, we will look at the unit that has been vacant the longest, the unit that may have the least desirable location, and use that without broad-base discounting. So, we're still implementing our rent increases. Through the attrition, you can see we are raising our rents and getting good traction there. It's pretty interesting, I think, sequentially, to see the improvement from March to June, both in net income per unit as well as revenue per unit, so we're not really looking at discounting across the board. It's in some select markets where, to be competitive, we will, as I said, work on less desirable units to move those by offering some limited incentives.

Okay, and then just a couple of other things. When does [fuel contracts] expire, is that something we should be worried about through '09 as a risk?

That's a great question. Our contracts are in Texas. Most of the contracts in Texas run through 2011. Some run through 2009. But what's interesting-- we had our monthly meeting yesterday. As many of you know, every month the Management team sits down and reviews every property, the regionals report. There was not one property that has reported-- I don't think this year-- a variant on utilities. It has not come up as an issue. So, clearly, Texas-- which has been a high-profile market simply with the heat wave that's been down here with twenty plus consecutive days of 100 or so-- fortunately those contracts, and most of those contracts, do last another two or three years.

Okay. One of the things I was also wondering about is whether this change in the REIT law has any impact on strategic alternatives as your broad thinking on that. I know you don't want to get into any details, but I assume you're familiar with the REIT law.

We are familiar, it's something that will be considered in the process. Obviously, it was just recently released. It does differentiate independent living from assisted living, so it's something that is interesting and as we review the strategic alternatives it will be considered along with all other (inaudible).

And, Jerry, that change in the law was one that has been worked on, as you know, by the REIT industry. They have been trying to push this through, thought they would have it effectively in 2006, were able to get it through in 2007 and it's only viewed as very positive for not only our review but as well as the overall industry.

Okay. And just on the development-- you're saying you're going to be sort of selective, something about the same pace that we're seeing now, where you've got one, two, three under development at any given time, and does that sort of feel about the right amount-- ?

I think three to five is the range we're looking at. We're not looking to gear up development. I think the pace we're at right now we're very comfortable with. We can find, we believe, good markets in good locations that are very promising. I think our plan would be probably to have three to five developments a year as a very manageable plan.

And your expectation is, deliveries will continue to sort of fall off because the credit market, and-- as we go forward?

No, no. We still have a lender on the development that is continuing to--

Not necessarily for you, but I mean for the industry as a whole.

Yes, I think-- well, you know, you look at the release a few days ago by one of the public companies cutting back on their development by half. I think that's very good for the industry to see it. I do think that the local banks particularly, with all the problems they're having, not just for senior housing but in general, I have to believe that the pace of financing for construction in this industry will be very, very, very minimal for many years.

And, Jerry, we're seeing that very much, though, because it's not the national companies that often cause us concern, it's the one-off developers that go from multi-family or hotel, and go in with their local bank and build. We're seeing that market just completely shut down.

Are you starting to see any distress opportunities or more purchase opportunities out there as well because of the credit markets?

Yes, I think that there are some situations in the marketplace. I think that what we will find is that more opportunities will surface. There haven't been that many that are compelling at this point, but I do believe that that will occur, particularly when you look at the economies we have in operating our properties. We're already hearing about some stress of some local operators or some other operators that are very highly levered and having some financial strains, where we're seeing inquiries from their staff to come work for us, we're seeing residents move in, so I do think that there may be some opportunities in the future of some more opportunistic investing, but so far there have been some, but not very many opportunities that have surfaced.

All right, thanks very much.

Thanks, Jerry.

(OPERATOR INSTRUCTIONS). We'll go next to Todd Cohen, with MPC Advisors.

Good morning. Just a couple questions. In the prepared remarks, I think Jim referenced a cost per unit on the Ohio properties. Could you reiterate that, please?

Sure, Todd. What I mentioned was that on those communities the average cost is $150,000 per unit, and that includes the hard cost, soft cost, as well as the lease-up costs. So that would be an all-in cost.

Okay. And then, will most of those units-- properties be evenly split between the independent living and assisted living? Will all three have both?

We'll have-- generally they have 100 independent living units and 45 assisted living units.

Okay. And then, secondly, I know-- let's see here-- on your developments, in Ralph's discussion, or maybe it was a question, he referenced other development fees coming on, I guess early next year. So, as your Ohio ones roll off, have any of those developments yet been announced, or are you kind of close to doing that, or-- what's the deal there?

We have, as we announced, the three obviously under construction right now. We continually are looking at sites. Right now we have a number of sites that appear very attractive. They are being reviewed currently. We have letters of intent out, and it's something that we're looking at for future development in 2009 and beyond.

Okay. And then, the other thing is, I know you are expanding, obviously, through these developments and conversions and that appears to be a good thing. I'm just curious about the Florida market and the California market and maybe the other-- maybe Illinois or Detroit. I think these have all kind of been problems for an extended period of time, from a performance point of view at least. But it also seems, from a geographical or structural point of view, these are kind of ones and twosies in markets that are really pretty far away from your core. So, I was just kind of wondering, is there a way to dispose of these somehow or to trade them or just to kind of get them out of the portfolio? What are your--?

Well, you know, these whole properties are leased. We have leases from healthcare REITs on all four of those properties. What's interesting about those properties is that despite their occupancies, Villa Santa Barbara continues-- last month, operated at a 50% margin. It had the second highest coverage of our leases. So I think that the way we operate these properties, there's opportunity there. Veranda Club had-- and you are correct-- these have been markets that have had some challenges before the rest of the country. And clearly, Florida and California are two of the worst housing markets, but at Veranda Club we see that as an opportunity to convert a building, stabilize that property, create value. We're always hoping, if there's a way to move things around-- I will say that one benefit we are seeing today in our portfolio is some diversification as you see markets turn from periods of times and the fact that we have large concentrations in Texas are helping moderate the effect of California or Florida.

So, structurally, the properties in California and Florida are all leased. We don't own those, so it's not something that we can have as much control over as an owned asset, and we are working on improving their operations. As I said, they are cash flowing and particularly, when you look at Villa Santa Barbara, for example, even at its occupancy last month, which was in the mid 70% range, it still had a very, very high margin and very strong cash flow.

All right, thanks.

Thanks, Todd.

At this time we have no further questions. I'd like to turn the call back over to Management for any additional or closing remarks.

Well, we obviously appreciate everyone's interest in Capital Senior Living, and wish you good day. Thank you.

This does conclude today's teleconference. You may now disconnect, and have a great day.