Sonida Senior Living Inc (SNDA) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Capital Senior Living second quarter 2009 earnings release conference call. Today's conference is being recorded.

The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially, including but not without limitation to the Company's ability to find suitable acquisition properties at favorable terms; financing; licensing; business conditions; risks of downturn and economic conditions generally; satisfaction of closing conditions such as those pertaining to licensure; availability of insurance at commercially reasonable rates; and changes in account principles and interpretations among others; and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commissions.

At this time I'd like to turn the call over to Mr. Larry Cohen, CEO. Please go ahead, sir.

Thank you. I am pleased to welcome everyone to Capital Senior Living's second quarter 2009 earnings release conference call. We made progress during the second quarter in spite of the economic slowdown thanks to our revenues increase as a result of higher average monthly rents and corporate and property level cost controls and reductions contributed to positive operating performance. As a result, operating margins improved when compared to the second quarter of 2008.

Our focus on providing affordable quality housing and care, promoting seniors independence and wellness, while enriching their daily lives continue to yield results.

Our communities offer seniors quality housing in well-appointed buildings with supportive services. Our communities enjoy stable and well-established reputations in their markets. Our focused marketing and sales staff continue to build relationships and implement innovation marketing strategies to increase our outreach and contacts with referral sources.

While our occupancy fell in April and May, we are encouraged by occupancy gains in all levels of care in June and July, with last week being our best week for net move-ins this year. And with deposits in hand, we expect more occupancy gains in August.

Year to date through last Friday we have taken 115 more net deposits and had 64 more net move-ins than in the same seven-month period in 2008. Our attrition rate for the second quarter was also lower at 38.5% as compared to 40.7% in the second quarter of 2008.

Our disciplined approach to reducing expenses at both the corporate and property level while increasing average monthly rents is producing positive results. Average monthly rates at our consolidated communities increased 3.8% and operating expenses decreased by 1.3% as compared to the second quarter of 2008. These achievements generated same-store net-income growth of 3.6% from the comparable period of the prior year.

58 of our communities were stabilized during the quarter, with an 86% average physical occupancy rate. Operating margins before property taxes, insurance and management fees, improved to 49% in stabilized, independent and assisted living communities.

We consolidated 50 communities in the second quarter. Financial occupancy of the consolidated portfolio averaged 83.6% with average monthly rents of $2,541, a 1.4% increase from the first quarter 2009 average monthly rates.

We are in the process of converting 109 independent living units in three communities to assisted living or dementia care, offering more services to residents as they age in place.

24 units were licensed at the end of the first quarter, and 85 units are expected to be licensed as assisted living in the first half of 2010. Excluding these three communities, the average financial occupancy for the quarter was 84.9%.

A few shareholders have asked certain questions, which I would like to address on this call for the benefit of all our stakeholders.

Since the Company's inception in 1990 our strategy has focused on operating larger communities that are big enough to support adequate staffing to provide quality care and services to our residents, achieve operating efficiencies through economies of scale by spreading our fixed costs over a larger base of operations, and provide more effective management supervision and financial controls. As such, our operating platform consists of 56 communities in 23 states with an average size of 130 units. Our average community is two to three times the size of the average assisted living community.

We achieve further efficiencies through the purchase of bulk items such as food and supplies and actively monitoring and managing operating costs through the use of spend-down sheets and matching staffing and purchasing to expected occupancies. Our operations are clustered to regions and our growth strategy includes acquisitions in these markets to achieve further efficiencies.

Currently, our Midwest region has a resident capacity of 4,900. Our Texas region has a resident capacity of 2,450. Our Southeast region has a capacity of 1,250. Our Northeast region has a capacity of 650. And our Southwest region has a capacity of 600. If our communities were the size of the average assisted living communities, the regions would range from a low of 10 to 15 equivalent assisted living communities to a high of 80 to 123 equivalent assisted living communities per region.

Because of the efficient size of our average community we continue to generate amongst the highest operating margins in the senior living industry, reaping the benefits of our operating philosophy and economies of scale, while achieving high resident satisfaction as measured by our current 95% resident satisfaction rating.

In addition, Capital Senior Living has consistently maintained a disciplined approach to cost management. We have a number of cost reduction programs in place, which have been implemented at the corporate and property level and are contributing to the Company's positive operating performance.

Additional initiatives implemented since the second half of 2008 have reduced operating expenses by $900,000 and general and administrative expenses by $600,000 for the first six months of 2009.

Operating expenses decreased primarily due to a reduction of $800,000 in independent living expenses and a $100,000 decrease in assisted living expenses. The reduction in independent living expenses include a decrease in labor and benefit costs of $300,000, a decrease in food costs of $200,000, and a net decrease of $300,000 in other independent living costs. Assisted living costs decreased $100,000 primarily due to a decrease in labor and employee benefit costs.

Our number of active onsite employees has declined 7% since the end of 2008. The $600,000 reduction in general and administrative expenses in the first half of 2009 was due to lower corporate compensation as a result of the reduction of corporate employees representing 10% of our corporate and regional headcounts. These cost reductions should be augmented in the second half of the year by additional cost-saving initiatives recently implemented, including $300,000 savings in annual premiums for our corporate insurance programs, reductions in property taxes, waste management, cable TV, communications and energy management costs in our Texas communities.

We also wanted to provide some clarification on how we measure performance and the valuation metrics for the senior living industry. We have annualized the valuation and performance metrics that are used by our senior living peer group, shareholders, analysts and investment banks in the senior care industry. Our peer group uses EBITDAR or EBITDA and cash flow from operations, CFFO as the key financial measures of financial and operating performance and liquidity.

The firms that regularly report on the senior living industry use EBITDAR or EBITDA, net asset value estimates based on capitalization rates applied to facility net operating income, CFFO, our discounted cash flow in their valuation analyses.

In surveying many of our institutional shareholders, the valuation metrics most widely used for the senior living industry includes CFFO, EBITDAR and cap rates on facility level and OI. These metrics have been incorporated into the Company's 2009 incentive compensation plan in order to develop a performance-driven compensation plan that rewards executive management for achieving the Company's 2009 business plan, complies with existing employment contracts and aligns stockholder and employee interests.

We think it's important to note that executive management's base salaries are approximately 25% below those of our peer group, which is consistent with the Company's pay-for-performance culture. Rather than adjust these salaries to the peer group average, quarterly earning goals are established in accordance with the Company's business plan, which is met in title executive officers to quarterly bonuses.

Since incentives are measured as a percentage of base salary, bonus awards for the Company's executive management are also lower than our peer group as they are computed off a lower base salary.

The 2009 incentive compensation plan consists of a three-point formula with a bonus potential of 75% to 100% of base salary. The incentive formula consists of the following-- 33% to 44% of base salary upon achieving quarterly EPS targets that were established earlier in the year, 27% to 36% of base salary upon achieving annual CFFO and adjusted EBITDAR corporate goals that were established earlier in the year with the Company's business plan, and 15% to 20% of base salary based on achieving individual goals within each executive officer's area of responsibility.

I think it would also be helpful to review the Company's performance as measured by these key metrics in 2004. During the past five years our CFFO has increased at a 22.3% compounded annual growth rate. Our adjusted EBITDAR has increased at a 24.6% compounded annual growth rate, and our same-store sales facility net operating income has grown at 11.3% compounded annual growth rates.

Our 2009 business is focused on occupancy and revenue growth, expense control as well as external growth through new management contracts and acquisitions. The senior housing market is highly fragmented with a number of operators financially challenged with limited access to capital. New supply is severely constrained and demands will continue to grow as seniors age and their needs increase.

We believe we are well positioned to take advantage of the current economic downturn to grow and profit from an economic recovery. We have an established operating platform with geographic clustering, and we provide multiple levels of care to seniors. We have a proven track record. Our stabilized operating margin is currently 49%, and we have successfully integrated dozens of acquisitions into the Company since the end of 2005.

We have a solid balance sheet with no significant low maturities under the third quarter of 2015. We enjoy strong institutional relationships and have a stable and seasoned management team.

Capitalizing on opportunities in this downturn should allow us to gain sustained, strong, competitive positions within our geographic clusters and maximize shareholder value as the economy stabilizes.

As announced in our press release last night, Jim Stroud announced his intention to resign from the Company's Board of Directors effective September 30, 2009 to start up Stroud Properties, a commercial real estate company. We wish Jim the best in his new business and thank him for his leadership and valuable contributions to the Company.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2009.

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 of 2009. If you need a copy of our press it has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenues of $47.2 million for the second quarter of 2009, compared to revenues of $49 million for the second quarter of 2008. Revenues in the second quarter of last year included approximately $1.1 million of development fees from three communities we developed in joint ventures.

The Company has discontinued further development at this time, and no development fees are included in the current quarter's revenue.

The number of communities we consolidated on our income statement was 50 in both periods.

Financial occupancy as a consolidated portfolio averaged 83.6% for the quarter, with an average monthly rate of $2,541 per occupied unit.

Excluding three communities with units being converted to higher levels of care, financial occupancy of the remaining 47 consolidated communities averaged 84.9%.

Revenues under management were $55 million in the second quarter of 2009, compared to $55.1 million in the second quarter of 2008. Revenues under Management include revenues generated by the Company's consolidated communities, communities owned in joint ventures and communities owned by third parties that are managed by the Company.

There were 66 communities under management in the second quarter of 2009, compared to 64 communities under management in the second quarter 2008.

Three joint venture developments have opened since the second quarter of last year. And one management agreement has expired.

If these communities management, excluding the three communities undergoing conversion, same-store revenue increased 0.7% versus the second quarter of 2008 as a result of a 3.8% increase in average monthly rate. Same community expenses decreased 1.3% and net income increased 3.6% in the comparable period of the prior year.

Operating expenses were lower in the second quarter of 2009 than the second quarter of 2008 by $0.2 million. As a percentage of resident healthcare revenue operating expenses were 61.2% in the second quarter of 2009, compared to 61.5% in the second quarter of 2008.

General and administrative expenses of $3.4 million were also lower than the second quarter of 2008 by approximately $0.3 million. These expenses, however, did exceed budget by approximately $0.5 million as the Company experienced an unusually high rate of health insurance claims during the quarter.

The Company is self-insured for the cost of employee and dependent medical benefits and purchases stop-loss protection on an individual and aggregate basis.

The Company's new benefit year begins in July, and both payroll deductions and employee co-payments have been increased to mitigate these costs, a similar unfavorable variance experienced in the second quarter of 2008 but was brought back in line over the remainder of last year.

As a percentage of revenue under management, general and administrative expenses were 6.1% in the second quarter of 2009, even with this additional medical expense.

Facility lease expenses were $6.5 million in the second quarter of 2009, approximately $0.2 million higher than the second quarter of 2008, primarily reflecting increases and contingent rent on 25 leased communities.

Depreciation and amortization expense increased $0.2 million in the second quarter of the prior year as a result of capital improvements at the Company's owned and leased facilities.

Adjusted EBITDAR for the second quarter 2009 was approximately $13.9 million and adjusted EBITDA margin was 29.3% for the period.

Interest expense was $3 million in the second quarter of 2009, slightly less than the second quarter of 2008. But in the last 12 months the Company has amortized $3.4 million of mortgage debt.

The Company reported net income of $0.4 million or $0.02 per diluted share, versus net income of $1.2 million or $0.05 per diluted share in the second quarter of the prior year.

Adjusted CFFO was $3.5 million or $0.13 per diluted share in the second quarter of 2009.

The Company ended the quarter with $28 million of cash and cash equivalents and $2.2 million of restricted cash. The restricted cash represents collateral for letters of credit, which are used in place of security deposits with a lessor. The interest earned on restricted cash is approximately equal to the cost of the letters of credit.

As of June 30, 2009 the Company financed 25 owned communities with mortgage debt totaling $184.1 million and fixed interest rates averaging 6.1%. With the exception of one mortgage of $4.7 million maturing in September of 2009, the next closest maturity is July of 2015.

Capital expenditures for the quarter were approximately $2.1 million, representing $1 million of investment spending and $1.1 million of recurring CapEx. If annualized, this recurring CapEx would equate to approximately $510 per unit.

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

(OPERATOR INSTRUCTIONS) We'll take our first question from Jerry Doctrow from Stifel Nicolaus.

Good morning.

Good morning, Jerry.

Good morning.

Let's see. A couple of things. I guess to start I was interested in trying to get a little bit more color on occupancy because, you know, quarter over quarter particularly sort of you had a, you know, bigger drop than I think we were expecting. But Larry, you seem to categorize things as being, you know, in fairly sort of good shape. So I just wanted to get a little color about what was going on in the quarter and maybe a little bit better feel for, you know, what expectations might be for 3Q given where your-- you know, because you talked about two months out plus some deposits and stuff.

That's right, Jerry. The quarter we saw a larger number of move-outs than were anticipated at the end of April, particularly in independent living where the independent living move-outs were running about 5.3 per unit. They typically in the 3 to 4 band. And they came back to normalized levels in May and June.

Our move-ins, April, May and June, actually were pretty consistent both for independent and assisted living. It was really the fact that we had higher than normal move-outs. And independent living in April a little higher than usual; assisted living move-outs in May. So April and May we saw a drop in occupancy but we have steadily seen improvements and positive gains in occupancy in June and July.

As I mentioned, last week we had our best week of the year. We actually picked up 40 basis points in occupancy one week with 34 move-ins net last week. And then for August our deposits look promising, so we think we have good momentum, and I think we'll have a good August as well. And hopefully that will continue into September for the quarter, but it's too early to tell because most of the move-ins are really 30 days within the date of deposits.

So the-- earlier in the quarter is when we experienced the spike of move-outs but fortunately our rates have been improving. I was very pleased with the incremental increase in our average rate of 1.4%. We are continue to raise rates both in independent and assisted living.

I read some of your reports, Jerry, about some of the other companies, and I think we've been effective in our marketing strategies and our staff. And the focus that we're continuing to be able to increase our rents and similarly see the improvement in the occupancy for the last couple of months.

Okay. And just a couple clarifications then. You were saying move-outs were like 5.3% per unit or per--

That's per property.

Per property, okay.

Rent per property. That's what we call it, but it's called independent living property.

And was there any real difference in sort of IL versus AL? I mean, that's what some of the others have been talking about as well, that IL was a little softer.

We were softer in IL in April. We were stronger in IL in May. And we were stronger in IL in June, first day out. So we're not seeing that. And, in fact, the rate increases are being-- actually, we're having a little higher IL rate increase that AL right now. So we're not seeing the softness in the independents.

Okay. So if we're just thinking about it, you know, in general, we should be thinking about potentially higher occupancy, or at least not a decline in occupancy in third quarter and continued increases in rates. Would you think the rate increases are as strong because you-- they were up pretty good in the second quarter.

You know, again, the 1.4% is higher than we typically average. We average 3.8%. You know, we actually-- what happened, it's interesting in the second quarter our rates actually decreased slightly. So, you know, I think that the rate growth of 1% per quarter, kind of 4% a year is probably a reasonable assumption as to the rate group.

Okay. And occupancy you would think is trending-- likely trending up, although September's yet to come out, is that--

That's correct. We-- I mean, August is-- July is complete. We had a gain in all levels of care. In August it looks like we've have a gain in all levels of care based on schedule move-ins and deposits. But traffic has been good, and we're getting very positive reports. And so we're hopeful that, you know, this is usually the best season for us for leasing that we'll see continued progress throughout the month of August and into September.

Okay. That's helpful. And then just some odds and ends here. And you were saying-- Ralph said I think $1.1 million in recurring CapEx, but I think in the CFFO calculation it's only like $505,000. So is there sort of a difference there between maybe maintenance and income enhancing? I didn't understand that difference. And we can take it [out].

Sure. What we do, Jerry, is basically the CFFO we use in the calculation for comparison purposes is the recurring capital expenditures required by our loan and lease agreements. So those are contractual, recurring capital expenditures that we have with our lenders and lessors. So we use that figure in our computer CFFO, so that the changes from quarter to quarter would be based upon net cash provided by operating opportunities rather than the being influenced by some difference in that figure.

Okay. Let's see. And does share of OpEx still make sense at $5 a share, or are you-- will you think about less than that going forward?

You know, we only repurchased 12,500 shares in the second quarter. We did that early in the quarter. At the time we really left the market our share price was about $3. It's since moved up to about $5. So our feeling would be to let the market take its own course at the present time. Although we still have that availability we're not actively repurchasing shares at the present time.

Okay. That's fine. And then just the last one from me. The medical insurance thing, you know, you had talked about it trending down last year maybe over the rest of the year, so we should not expect that $500,000 to just disappear in third quarter. It'll take a little longer than that to work it through.

I would say that's true though, Jerry. And we don't know exactly why medical claims have the seasonality that we've experienced the last couple of years, but we had three very high months for medical claims processing in the second quarter. When we looked at last year's trend that did come down over the remainder of the year. And, in fact, we've seen that happen in the month of July where it's come back to a much more normal level, and as a matter of fact slightly below average.

So if that happens the overspend we've seen in the second quarter should come back to us in the second half of the year, and we will be benefited by the fact that we have increased employee contributions beginning July 1st and also employee co-payments, and that's typically when we do that. It's our new benefit plan year begins.

Okay. And last one from me. You talked a little bit about making acquisitions or management contracts or whatever. Did you look at the 15 properties that HCP is moving from Sunrise?

I can't respond specifically, Jerry, to-- because we have confidentiality agreements regarding acquisitions. But I would say that we've had a pretty active pipeline. We're pleased with some of the quality of the assets. And we're hopeful that we'll be successful in taking over management acquiring primarily with joint venture partners [taking] acquisitions of [these].

Okay. Thanks a lot.

Thank you.

Moving on we'll take our next question from David Cohen, Athena Capital Management.

Morning. Couple of questions and then just one quick comment. Following up on the acquisition discussion, I'm wondering if you could comment for us on what kinds of cap rates you see acquisitions being done at in the environment. And what kind of analysis you do relative to your own trading cap rate implied by the price of your stock, and how closely you look at that relative to the external cap rates of acquisitions.

Thank you, David. You know, that's a great question. There really have been very few transactions. The last transactions of size in the marketplace was a portfolio of (inaudible) assets that was acquired probably either late first quarter, early second quarter at a nine cap. There really haven't been sizable transactions to look at.

So, you know, we-- we're in the process of either bidding or negotiating, and unfortunately I'm not free to speak of cap rates regarding transactions that haven't been announced. But, you know, I think that as more transactions are formulated there'll be better visibility of cap rates within the industry.

One thing I will say about cap rates in this industry, however, that maybe is more helpful I understanding how senior housing compares to other real estate after classes is financing for stabilized properties for qualified operators is still generally available from the agencies, particularly Fannie Mae and Freddie Mac. And those loans are still kind of in the mid 6% range. So, you know, at 70% loan to value at those rates, that, I think, is helping sustain a pretty attractive cap rate for this industry, particularly compared to some other asset classes.

As I look at the stock price in multiple I think that the market perhaps gives a higher cap rate than the asset basis should because of concerns looking forward of the effect of the economy on the operations. But I think that with the financing that's available in this industry I think cap rates, while they're up from historic periods, particularly in the last couple of years, I think they're still relatively moderated by the availability of attractive financing.

I hope that's helpful in your question.

That is helpful. I guess the only observation I'd make is obviously too much leverage is a bad thing. But it seems to me that if the market is giving a higher cap rate that that might come into play in terms of your decision about the stock buyback, not whether or not the stock price is $5 versus $3.50 or whatever. But, well, anyway. I think you take my point.

The second question I have for you is with regard to the resignation of Mr. Stroud. It's sort of buried in the press release. He's been there a long time. I guess my two-part question is, number one, should we take anything from this resignation in terms of the strategic-- about the strategic direction of the Company? And number two, are there any costs relating to sort of retirement, severance, whatever that we should put into our models.

David, there are no costs. The reason that the press release reads as it does is that Jim resigned from the Company as an officer last December. There was a severance agreement that was negotiated at that time. There was severance paid to Jim in December. And the terms of that separation were public in a filing in December. There are no additional costs at this point.

Obviously Jim will retire effective September 30. The Board will obviously go through a process of looking for a replacement, so the cost of the Board fees will continue with a replacement for Jim. There really are no other costs associated.

So this is a decision that Jim made for personal reasons. He has been Working with his son this summer who has another year of college, and he's been looking at buying some real estate debt. I think it kind of whet Jim's appetite to get back into the commercial real estate business, something he did 20 years ago. And he just took office space across the street from us. He's moving out next September. And he's started a company called Stroud Properties that'll be looking to buy commercial real estate assets or loans. And it just was his decision that it was appropriate for him to step down from the Board to be able to devote his time to his new venture.

So is that a way of saying that I shouldn't draw any conclusions about strategic direction of CSU from this resignation?

No, I agree. No, you should not draw any suggestions from the resignation.

Okay. And the final comment I wanted to make is thanks for going into some detail about the compensation plan. There's obviously-- it's been a subject of some discussion, and it's nice to hear it laid out.

The only thing that the discussion-- the immediate reaction I had to the disclosure is I just don't understand quarterly earnings bonuses. To me, that forces a much shorter view of the world than-- thank I think the management of a real estate company should have. And I would much prefer that however big the pie is that the way it's awarded be based on a longer-term view than just quarter.

And I realize that's only a piece of the compensation, but still I think it sends a message that's not the kind message that I would like to send to management and employees.

Well, I appreciate that. Again, David, one thing I will say not for only for myself but for other executives of this Company, the base salaries are lower than comparable base salaries, and as CEO and a shareholder, having an incentive-based quarterly bonus that will get people back to a level comparable to others rather than raising salaries I think is still helpful in making and rewarding people for quarterly objectives that are necessary to be achieved in order to hit those targets. But I appreciate your thoughts.

Okay. Thank you very much.

Thank you.

Moving on, we'll take our next question from Adam Ritzer from CRT Capital.

How are you, guys?

Good. How are you?

I'm doing okay. I just had a couple of questions about some of the metrics you mentioned. You mentioned three specific metrics-- cash flow from operations, EBITDAR and, you know, net operating income. And you gave the numbers for cash flow and EBITDAR. Could you also give me the numbers for net operating income in the quarter for six months?

Actually, I thought I did. When I was giving you those numbers-- well, the facilities net operating income number Ralph may be able-- do we have it off the release? It's basically the health-- it's revenues plus operating expenses. So if you--

Okay.

We can get that number one second.

Sure.

Right off the income statement it'd just be healthcare revenue less the operating expenses.

Yes, Adam, in the second quarter of 2009 that facility NOI would be about $16.5 million.

Okay.

That's basically taking the $42.6 million of resident revenue less then $26 million of facility level operating expenses.

Got you. Perfect. And then what I was wondering is you mentioned that the industry uses a variety of those metrics. What multiples on cash flow from operations and EBITDAR and what kind of cap rates do you think the industry views the companies at? And what would you use as an investor?

Well, again, as far as industry I defer to Jerry Doctrow on the line as a research analyst out there as far as what they look at those multiples. And I think that, you know, looking at the cap rate analysis that I explained, it's something that we have our views of cap rates based on cost of capital and financing and apply that in our strategies today. I don't think that's appropriate that we share that in this call.

But, again, as far as multiples of cash flow and others I think that right now I think the industry is probably trading somewhere in the range of 7.5 to 8 times cash flow. Again, I could argue that it should be higher. Again, I think that the cost of capital to this industry is probably lower than some of the analyses that were done by investors and analysts in this industry regarding what that multiple should be.

Okay. I appreciate it. That's all. Thank you.

Moving on we'll take our next question from Todd Cohen, MTC Advisors.

Good morning. So just-- can you hear me?

Yes, Todd.

Yes. Just from kind of an administrative point of view, getting back to the Jim Stroud question, I know that when he resigned as an officer in December I guess it was there was still some overhead that CSU was covering for him apparently going forward. I know he-- you know, you-- there was an assistant. Obviously he was using your office space. I don't know if there was a car allowance or other things. But will all of that go away now?

There is no car allowance. Jim, as I said, is moving to an office across the street so that there will no longer be an office that he will use.

He has the right to take his assistant with him. That's a decision that Jim and his assistant will make as to whether or not she moves with Jim.

Okay. So but if she doesn't move with him there would be no need for her at CSU then.

Well, she's the office manager. She's-- you know, that's something that we'll have to consider. I think it's very possible that she will move with Jim. She's worked with Jim a long time.

Okay. All right. So then all of the expenses associated with Jim also go with him when he retires.

That's correct.

Okay. And then secondly, Ralph, on these healthcare expenses that, from time to time, are extraordinary, what I was wondering is, you know, is there another way to manage those expenses or to manage that part of the plan, so that there would be kind of more predictability to that expense line? And kind of I guess the question is, is kind of why do you do it the way the way that you do it? Is this-- I mean, is it a-- are you saving money doing it that way?

You know, Todd, I'd say we definitely feel like we're saving money being self-insured. I think over the years that has helped us a lot. We do basically pay for third-party administration, and we purchase stop-loss coverage on both an individual and an aggregate basis.

It's very hard to predict exactly when people use their health plan and when they actually will use that medical coverage. We have seen now two years in a row that the second quarter is large, but we really can't explain why it happens that way.

The way our healthcare plan works is we basically book the difference between what we spend for medical coverage less what we get from employee contributions, co-payments, and basically we have a charge to every operating property for its covered employees for both individual and benefit coverage.

That difference, over the course of a 12-month period, is expected to be relatively small. And the difference, positive of negative, between our income, if you will, and expenses, we try to project to be zero or close to zero and that difference ends up in general and administrative expense.

So just looking at this for a moment, so you have the-- you use the medical stop-loss insurance. I guess that that-- that means that your deductibles and then what the insurance company pays is limited to a certain number, to a certain maximum?

Yes. We pay an individual's medical expenses in a 12-month period up to a total of $150,000. And then any medical expense over--

Per person?

Per person. Yes, that's where our stop loss kicks in.

So above $150,000 you're paying?

No, above $150,000 the insurance company pays. So we pay an employee's medical expenses up to $150,000 per year, and we have insurance protection from third parties above that level. And we do see, on an annual basis, about four to five individuals that do exceed that amount with serious illnesses. But the first $150,000 we found it'd be more cost-effective for us to self-insure and then buy stop-loss protection over that $150,000 level.

Because it seems like-- you know, I've been an investor in CSU now for several years, and if my memory serves me right it seems as though there's been kind of one big event every year. Maybe there was one year where it wasn't, so I'm just kind of wondering if there's a-- if there's a less costly way to pursue this as well as in a way that would provide us with a little bit more predictability and that you-- you know, you-- I don't know, pay more in medical insurance and, you know, find somewhere in your budget to reduce expenses to offset that just so that there's more predictability. But, you know, I guess you've studied and think this is the right way to go, but it--

We have, Todd. I think over a long period of time this is the right way for us to go. I think it's the most cost-effective for us to provide those employee benefits.

We did see when I was reviewing this press release and looking back on the second quarter of 2008 a very similar thing occurred at that same quarter. And this year's second quarter medical expenses were very comparable to last year's second quarter medical expenses.

Yes. I think I remember a couple of years ago there was one big case. And I don't think it was last year, but I think it was the year before. So I'm pretty-- I think I recall here that we get one big-- we seem to be getting one big hit a year now.

Actually, Todd, I think over the last 10 years I can remember three quarters that this occurred.

Okay. All right.

So and the other thing that we do do to try to moderate the impact, we use a rolling 12-month reserve based on the historical 12 months, and that adjusts every month. So we are trying to moderate the effects by using a 12-month rolling average in looking at the claims.

Yes. We take the last 12 months medical expense and we book as an incurred but not recorded reserve 60 days of those medical expenses. So as our history changes we do adjust that reserve to try to reflect 60 days worth of claims that are in the pipeline that we haven't seen yet.

And we do. I mean, we sit down with our insurance consultant, and we actually compare every year, and we go through this the cost of purchasing insurance, the history of the Company, the profile of our employees. We have over 1,000 employees covered under our insurance policy.

As Ralph mentioned, the policy just renewed in July. We have increased deductibles. We have increased the co-pay and we have increased employee contributions, which also should have some effect in helping mitigate some of those issues. But, again, looking at the history and the cost, while we are-- you know, there are going to be some fluctuations that occur over the course of the year or many years, it's still proven to be a savings versus going out and buying it.

Look, you guys know the numbers, so if that's what the numbers prove out then you're doing it the right way. It just seems that, you know, we took two hits here, you know, year after year, and it just came up that maybe there's another way to do it. But anyway, you guys can figure that out.

So I guess the other question and comment would be I appreciate the input and disclosure on the compensation metrics. That was helpful. And the one thing I noticed that was not in these metrics, which I call being in previously, were metrics that had been tied to kind of acquisitions, biz development, management agreements, et cetera, et cetera. So has that been kind of removed now from the-- from those performance objectives?

As I mentioned, there were individual objectives continuing in a 15% to 20% range for each executive. It's their responsibility. That would cover either growth, CFFO, facilities' level income, resident satisfaction, G&A costs, things like that. So those are covered within individual responsibilities.

Okay. So then-- just I-- I would assume then that any bonuses tied to that clearly weren't met in the first quarter and second quarter because there was really no deals done. So I was just curious based on these-- on what you had implied here, did you guys actually get a bonus in the second quarter?

Todd, as I said, those are all annual goals. They've always been. So those goals would occur-- most of those are achieved are-- are measured by annual objectives. So there were not-- there were no individual goals that were earned this year.

Wait, now I'm confused. Because you've indicated that you guys get paid-- you're suggesting that you think you guys are paid less than you should be on a salary basis based on your tiers, but then you would be getting quarterly bonuses.

Todd, that's only on the EPS target. The other corporate individual goals are not tied to quarterly metrics.

Okay. So that's my question. You made $0.02 in the quarter. Did you get a performance-- did you get a bonus based on performance on earning $0.02 on the second quarter.

We haven't given guidance for the year, so the payout of the quarterly results will be reported in (inaudible) where we summarize the compensation.

Yes, but you know whether you've been paid a bonus or not.

Todd, we haven't given guidance; and therefore, I don't think it's appropriate to give out the numbers of the quarterly performance bonuses.

Yes, but I don't think it's inappropriate. I'm not asking for each quarter. The quarter's over. So whether you've met your target for that specific quarter or not has no bearing on estimates because it's finished, complete, put the bed. You're going to put the Q out here soon. So I just kind of wanted to get at whether or not you've got paid a bonus based on performance of earning $0.02 a share in the quarter. I don't think that's-- I don't think I should have to wait, you know, a year to--

Okay. Todd, there are other people in the queue. Can we move on?

Yes. I'd just like to make one more comment if I can.

Okay.

I believe his name was David Cohen who made comments previously. We're not related and I don't know him, but I agree as well with his comment regarding quarterly bonuses based on quarterly metrics in a real estate concern. And if there are those-- and if there are board members on this call listening, I think that that's something that should be looked at maybe in a different way.

And I didn't mean to give you a hard time about the-- whether or not you got a bonus in the second quarter or not. I just thought that the quarter's done. It's over. The numbers have been reported and that you would be able to provide us with that information. So sorry if I put you on the spot.

Thank you, Todd.

(OPERATOR INSTRUCTIONS) We'll take our next one from Rick Fetterman from Fetterman Investments.

Good morning. Last month there was an Associated Press article that was in probably many papers but in the Dallas paper specifically. And the headline pretty much says it all, "More Seniors Moving in With Adult Children". And I was curious, Larry, if you can either from past history or anecdotally quantify the ongoing impact on your market population. And are these folks who are moving in with younger family permanently lost prospects or historically have-- when things-- when financial situations improve are these folks moving into independent or assisted living facilities?

Rick, I'll give you a great anecdotal story that happened about two months ago. Our regional, who used to be the executive director at that property was visiting the property and a gentleman came up to him and handed him his keys. He said his daughter was in the parking lot with a pick-up. The gentleman lived in the studio, and that day he moved out his belongings because his daughter had lost her job. And it's not the first time it occurred, and he said, "I will be back."

So, you know, we have seen some pick up probably around I'd say maybe 10% our move-outs are financial. And a lot of times the financial is not the financial of the senior. It's the financial of the adult child that has lost a job and needs some help paying the mortgage. And typically we're finding it is temporary. That as that child finds other employment or sources of income, then the parent more frequently will come back to our resident.

And the other thing we do to encourage that is we try to connect with that resident and continue some of the affiliations and activities so they keep their connection with their friends and the community, so that when the economy or the situation allows their child to stand financially independently, that that resident will come back to our property.

Okay. Well, I think that's probably as good an answer as you can give given the fact that there's really not a lot of specifics. Thank you very much.

Thank you, Rick.

And at this time, gentleman, there are no further questions. I turn the conference over to you again for any additional or closing remarks.

Well, we thank everybody for your time today and your questions. And, of course, anyone who wasn't able to get into the queue or any questions please feel free to give Ralph or myself a call. Thank you very much.

Thank you. That will conclude today's conference. We thank everyone for their participation.