Sonida Senior Living Inc (SNDA) 2011 Q1 法說會逐字稿

Good day and welcome to the Capital Senior Living first quarter 2011 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 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 our reports filed with the Securities and Exchange Commission.

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

Thank you and good morning and welcome to Capital Senior Living's first quarter 2011 earnings release conference call. I am pleased to report positive results for the first quarter, which is typically a challenging period, particularly with the harsh weather experienced this year.

By focusing on our core strengths, we increased average rents by nearly 9% and tightly controlled expenses. Our occupancy grew by 140 basis points. Our EBITDAR margin increased 440 basis points. And cash flow from operations grew by 48%. These results reflect a fundamental strength of our predominantly private pay business as we benefit from need-driven demand and virtually no new supply in an improving economy.

I am also excited about our acquisition pipeline, which we expect will increase our ownership of high-quality, senior living communities, enhance our geographic concentration, generate meaningful increases in CFFO and be immediately accretive to earnings.

I would now like to review the highlights for the quarter.

CFFO increased 48% to $5.8 million or $0.21 per share in the first quarter of 2011, an increase of $0.06 per share from the first quarter of 2010. Revenue increased 24.9% to $59.8 million, an increase of $11.9 million from the first quarter 2010.

Adjusted EBITDAR improved 43.1% to $20.5 million, an increase of $6.2 million from the first quarter of 2010. And our EBITDAR margin improved to 34.3% from 29.9% in the first quarter of the prior year.

In April, Joint Ventures, in which the Company held a 5% partnership interest, sold four senior living communities to Healthcare REIT. Upon closing the sale, the Company began leasing the communities from HCN. This transaction generated sales proceeds of approximately $17 million, compared to our original investment of $1.3 million, and is expected to add additional CFFO of $0.03 per share, incremental earnings of $0.07 per share and increased annual revenue by $26 million, as well as add $12.2 million of incremental EBITDAR.

Our operating activities were strong in the first quarter. The number of consolidated communities increased from 50 in the first quarter 2010, to 70 in the first quarter 2011. Consolidated average occupancy was 84.8% in the first quarter of 2011, a 140 basis point increase from the first quarter of 2010.

Average monthly rent improved 8.8% to $2,776 per occupied unit, from $2,552 per occupied unit in the first quarter of 2010. This was a 70 basis point improvement in average monthly rent from the fourth quarter of 2010. I am pleased to report that our move-ins and deposits in the quarter increased from the first quarter of 2010, with independent living move-ins increasing 12%.

First quarter 2010 independent living average occupancy increased 240 basis points year over year and 10 basis points sequentially. First quarter 2011 independent living average monthly rents increased 90 basis points year over year and 50 basis points sequentially.

Assisted living average occupancy increased 290 basis points with a 4.1% increase in average monthly rents from the first quarter of 2010. And on a same-store basis, average occupancies for the quarter increased 70 basis points year over year and 20 basis points sequentially. Same-store average monthly rents were 1% higher than the first quarter of 2010, and 1.1% higher than the fourth quarter of 2010.

All regions are reporting solid activity in the second quarter as we enjoyed better weather, achieved positive results from our focused marketing plans and benefit from pent-up demand. We expect this will lead to increases in occupancies and rates.

In response to questions we have been asked about the impact of the recent CMS proposed regulations for skilled nursing providers, I can report that any changes in Medicare reimbursement would be immaterial to Capital Senior Living as only 2% of our revenues are from Medicare, and we don't expect any future acquisitions to have any Medicare reimbursements.

I'd like to review our growth initiatives. We are excited about our growth opportunities as seniors housing is a needs-driven product with new supply at a very low level, and demographic demand growth is being driven by an aging population. These favorable demographic and supply demand trends, in an improving economy, should allow for greater occupancy in rate growth.

We expect further improvements in our operations from our implementation in the first quarter of internet marketing and social media initiatives, as well as software programs for care plans and level-of-care charges.

We are also investing in cash flow enhancing renovations, refurbishments and conversions of units to higher levels of care. These initiatives combined with the operating leverage in our prudently finance business are expected to increase our revenues, margins and cash flows. Each 1% improvement in occupancy is expected to generate $3 million of revenue and $2 million of EBITDAR.

We are converting 170 units to higher levels of care this year, of which 73 units opened this April. When stabilized, these conversions are expected to add $5 million of incremental revenue and $3 million of EBITDAR.

As we execute our strategic business plan, we are enhancing our geographic concentration with expanded care to residents, maximizing our competitive strengths and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow and maximizing shareholder value.

Our acquisition pipeline is strong. We completed $189 million of accretive acquisitions in 2010, and we have already completed $141 million of immediately accretive acquisitions in 2011. With the proceeds received last month from the sale of the Spring Meadows communities and additional cash on hand, we plan to acquire high quality senior living communities in locations where we have extensive operations.

We are conducting due diligence on a number of transactions, and subject to completion of due diligence and customary closing conditions, we expect these acquisitions to be completed during the third quarter of 2011.

I refer our listeners to our corporate presentation that can be found on our corporate website, which illustrates the financial results of a $100 million acquisition of primarily assisted living communities in locations that will enhance our geographic concentration.

I believe that the additional acquisitions we will complete this year will be comparable in size and financial results to those illustrated on the corporate presentation. When completed, these acquisitions are expected to be highly accretive to CFFO and earnings and lead to further increase in our EBITDAR margin.

The 440 basis point improvement in EBITDAR margin we recognize in the first quarter of 2011, compared to the same period in 2010, reflect the benefit we derive from executing on our strategy of acquiring communities in geographically concentrated markets and capitalizing on our economies of scale and systems to integrate acquisitions in highly profitable manner.

Our success in agreeing to acquire many high-quality senior living communities on attractive terms validates Capital Senior Living's competitive advantage. We are able to leverage our nimble offering platform and regional offering centers in geographically concentrated markets to capitalize on the fragmented nature of the senior living industry.

We have a highly attractive pipeline of accretive acquisitions that will increase our ownership of high-quality senior living communities, enhance our geographic concentrations, generate meaningful increases in CFFO and be immediately accretive to earnings. We look forward to providing details of these acquisitions in the near future.

I am optimistic about our outlook as we benefit from favorable industry fundamentals, an improving economy and our team's ability and discipline to successfully execute on a well-conceived strategic plan. We expect to continue significant growth in cash flow from operations that will lead to a meaningful increase in shareholder value.

Our fundamentals are solid, and I am excited about the Company's prospects as we benefit from need-driven demand growth with needed supply in an improving economy.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the first quarter 2011. Ralph?

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 am going to review and expand upon highlights of our financial results for the first quarter of 2011. A copy of our press release has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenue of $59.8 million for the first quarter of 2011, compared to revenue of $47.9 million for the first quarter of 2010, an increase of $11.9 million or 24.9%.

In the second and third quarters of 2010, the Company converted eight communities that were previously owned in Midwest [One] and Midwest Two Joint Ventures to lease communities and added 12 new leases from the signature transaction. So the number of communities we consolidated on our income statement increased from 50 in the first quarter of 2010, to 70 in the first quarter of 2011.

Financial occupancy at the consolidated portfolio averaged 84.8% for the first quarter of 2011, compared to 83.4% in the first quarter of 2010, an increase of 140 basis points.

Average monthly rent was $2,776 per occupied unit in the first quarter of 2011, an increase of $224 per occupied unit, or 8.8% higher than the first quarter of 2010.

As a percentage of resident and healthcare revenue, operating expenses were 59.9% in the first quarter of 2011, compared to 61.4% in the first quarter of 2010, a margin improvement of 150 basis points.

General and administrative expenses of $2.9 million were approximately $200,000 lower than the first quarter of 2010. As a percentage of revenue under Management, general and administrative expenses were 4.4% in the first quarter of 2011. Adjusted EBITDAR for the first quarter of 2011 was approximately $20.5 million, and adjusted EBITDAR margin was 34.3% for the period.

EBITDAR increased $6.2 million and margin improved 4.4 percentage points from the first quarter of 2010.

Adjusted net income for the first quarter of 2011 was $1.7 million or $0.06 per share, compared to net income of $0.7 million or $0.03 per share in the first quarter of 2010. Adjusted CFFO was $5.8 million or $0.21 per share in the first quarter of 2011, compared to $3.9 million or $0.15 per share in the first quarter of 2010, an increase of 48%.

The Company ended the quarter with $38.8 million of cash and cash equivalents, including restricted cash. In addition, the Company received approximately $17 million of pretax proceeds in April from the sale of its interest in four Spring Meadows communities. Net of tax, this should add over $11 million to the Company's unrestricted cash balance.

As of March 31, 2011, 24 of the Company's 25 owned communities had mortgages totaling $173 million; its fixed interest rates averaging 6%. The Company's nearest mortgage maturity is the third quarter of 2015.

Our debt net of unrestricted cash was approximately 3.7 times our first quarter annualized EBITDA.

Capital expenditures for the quarter were approximately $1.4 million, representing $0.5 million of investment spending and $900,000 of recurring CapEx. If annualized, the Company spent approximately $500 per unit on recurring CapEx in the quarter.

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

Yes. Thank you. (OPERATOR INSTRUCTIONS) And our first question today comes from Jerry Doctrow with Stifel Nicolaus.

Good morning. This is Dan Bernstein filling in for Jerry.

Good morning, Dan.

Hi, Dan.

Hi. I just wanted to -- I know you're limited or don't want to talk too much about the acquisitions and be specific on it, but I was wondering if you could give us more of a flavor of maybe the magnitude of the magnitude of the number of units that are involved in the acquisitions? And then maybe, you know, that -- those portfolios relative to your existing portfolio in terms of quality, price point and some more on mix, if you can.

Dan, I'd be happy to. And again, I hope everybody appreciates that we are immersed in due diligence on a number of portfolios. We feel it's prudent to give more specificity when we complete our due diligence. However, I'm happy to give more color on what we're looking at.

We're looking at portfolios that are predominantly assisted living. They are all recently constructed, high-quality properties with very strong occupancies. I'd say that the average occupancy for the portfolios we're looking at is about 90%. We're looking at a double-digit number of properties, so it's significant amongst the properties.

There would -- and again, as assisted living, each property averages probably 60 to 80 units per property. There are some properties that have multiple levels of care. That could be as large as 150 units. We expect that similar to what we show in Slide 13 on our corporate presentation (inaudible) $100 million type of transaction, which is similar in size and scope of what we are conducting due diligence on, we show there that the expected revenue contribution is an incremental $24 million, expected EBITDAR is about $9.6 million and about over $4 million of cash flow.

Now, again, we have not yet completed our due diligence. We are still working on placing permanent financing. We expect it to be fixed rate, ten-year, non-recourse debts with the agencies. But what's interesting is that consistent with our acquisitions over the last two years, we have been able to continue to buy very high-quality properties that fit strategically in our platform where we can -- as an owner-operator, we find that we have a very strong competitive advantage in acquiring these properties particularly in off-market transactions, where negotiated transactions, where we can drive strong economics, we expect that the incremental EBITDAR margin will be fairly significant. Which will, again, expand our margins and our EBITDAR margin.

So we think that on average monthly rent, they will increase from what we're reporting today. Occupancies will be higher than what we're reporting today. Margins will be improved, and there'll be significant both accretion to earnings and cash flows. So we're excited about the opportunity.

We think it's a great fit for our Company. It's consistent with the strategic plan that this Company and this Board has formulated for the next three years. And we think, again, it will add meaningful shareholder value when they're completed.

And these are all on balance sheet?

All on balance sheet, yes. We're using existing cash. As reported, we closed the Spring Meadows transaction last month. It generated about $17 million of proceeds. We will be paying taxes on that. But, you know, again, we're looking probably on the average the amount of debt on these properties will be around 70% of purchase price in typical. Some of them properties we expect will have assumable debt, so that -- and others will be newly financed. But we expect to use our cash and put them on balance sheet, which we think will magnify our financial results.

What kind of rates are you seeing out of Fannie Mae and Freddie Mac nowadays?

Ralph?

We're expecting to get a rate somewhere in the mid 6%s probably all in, so, you know, we're looking right now at terms based on these specific communities. But we're expecting to get a probably ten-year fixed rate debt, it's something in the 6.25% to 6.5.% range.

Are you seeing other opportunities outside of balance sheet acquisitions such as management contracts, JVs, additional leases?

You know, we're fortunate to have really strong relationships with the large healthcare REITs. All of them we have done significant business with, as well as private equity investors.

Our strategy is to use our cash. We think that the more immediate benefit to the Company will be direct ownership because of the strong contribution in cash flow, as well as the fact that as an owner-operator, we have an advantage in acquisitions because we don't pay ourselves a management fee. That's why we see this expansion in the EBITDAR so significant as reflected in the fourth quarter last year, the first quarter this year, and we'll see it again in the second quarter when we start to consolidate the Spring Meadows transactions.

So on the size of transactions we're looking at, which may range in the $15 million, $20 million to $50 million range, we'll buy those balance sheet. To the extent there are larger opportunities, then we will look to joint venture partners. We'll look to the REITs. We'll look to who will provide the lowest cost of capital to allow us to grow our business prudently as well as accretively. But we're fortunate that we do have a variety of relationships that we continue to grow, and as well as the success we're having on the management side, we do believe that there might be opportunities for some management portfolios. But again, our prime focus today are direct acquisitions.

And I'll just ask one more question and I'll jump off and let somebody else. You know, we saw in the NIC MAP data that came out last week, it looks like independent living is doing a little bit better than assisted living, and it might have been just, you know, first quarter seasonality, higher acuity to AL. Are you seeing any differences in trends between your IL and AL portfolios, especially when we look at the second quarter here?

You know, we saw the NIC MAP data. You know, it's interesting. We've had very positive results now. We've had actual growth in both our portfolio, in both sequential improvement in occupancy and rate for the last over four quarters in IL, but it's been magnified the last two quarters. Fourth quarter I think is extremely strong and (inaudible) on the first quarter.

And, you know, again, I want to commend you, Dan, on your note that came out last week because I think what you identified is this merging today of the resident living both in independent and assisted living. And what we're finding is that with independent living communities, that -- and we do provide through third-party providers' supportive care and services to those residents, we are able to provide very attractive apartments with kitchens and large closets, larger units at lower rents with full service in the communities.

And they definitely have been very well received in the marketplace, so we're expecting to see continued growth in that. As well as just the need on the assisted living. I think that as we see -- you know, I'm very encouraged that as bad as the weather was in February, the ice storm in Texas caused our corporate office to be closed for five days in that month. That's 5 out of, you know, 20 days, working days. And still we had improvement in the quarter.

And, you know, one of the affects of a harsh winter we typically see is the pent-up demand resulting in better performance in the second and third quarters, as many of our seniors and their family members recognize the challenges of living at home in these type of conditions.

So I think consistent with NIC MAP, clearly the IL supply is very muted. It's expected to be muted for many, many quarters and maybe years to come. So I think that we will continue to see growth in occupancies and IL. I think that perhaps the pendulum swung with the balance between supply and demand is maybe a little bit more favorable in IL. But we also think clearly it is very little construction nationwide. And we serve a nice cohort that is (inaudible), and we think with AL and then with our care plans are more levels of care, we can drive additional profitability on the AL side.

All right. Thanks a lot.

Thank you.

And we'll go next to [Robert Cohen] with [Western International.

Hi, Larry.

Hi, Bob.

Hi. Just so everybody knows this, Larry is not related to me. A question on these acquisitions that you're working on. You're giving numbers on these acquisitions. Is that based strictly off existing business, or is this based off of what you think you can improve these businesses?

Well, we underwrite the businesses. We underwrite the businesses for cash flow in place. And our pricing of these businesses, these communities, are based on cash flow in place. To the extent, and we have proven through our purchasing, our insurance programs, our risk management, that typically we can lower our costs, but the numbers that we're looking at based on the cash flows that we're analyzing for purposes of these acquisitions are based on cash flow in place, based on existing operations.

And what do you, from past experience, think you can improve these numbers based off of your insurance and your purchasing power and things like that?

That's something that we'll analyze as we complete our due diligence. Again, we think it will be an improvement, but, you know, I don't feel at this time that we are able to be more specific on that issue.

And Larry, can you talk a little bit about utility cost and commodity cost, what you're seeing there?

Sure. Just to update, I know we always get this question, and Ralph will give a little more color, obviously we had a very good quarter on expense, both G&A, corporately as well as at the property level. You know, what -- the two biggest costs that we incur operationally are food and labor. There's been a lot of discussion in the media about food costs, commodity prices. I will tell you that in February of 2011, at four of our communities, I'm pleased to report that our average cost per meal was actually exactly equal to February of 2010, and actually down almost 0.5% point from March of 2010.

So both our food and labor, we're able because of our group purchasing programs, particularly our food contracts with US Foods that have three more years to run and have caps on those costs, as well as a very proactive management system in place at each community that's monitored by the regional in our Company, we continue to be able to manage our costs. And in fact, in the first quarter, I am pleased to report that our actual cost came in below budget.

So I think that our systems are working well. Our contracts are protecting the Company. And the results reflect that we are able to continue to operate at a very efficient cost [structure].

Okay. I just got two more quick things. Number one, with these acquisitions, they can be implemented in part of your contract you still have left on your purchasing of food, number one. And number two, Friday, when the skilled nursing announcement came out, your stock, along with others, really got nailed pretty good. Are you telling me that this skilled nursing really has no effect on you whatsoever?

As I said, we -- right now we have about 2% of revenues that are Medicare reimbursement, that obviously as a percent of revenues will continue to shrink as we add on these other properties, consolidate Spring Meadows. None of the growth we're anticipating will have any Medicare reimbursement. So it's very insignificant today and will become less so. That's correct, Bob.

All right. Thank you.

Thank you very much.

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

Hey, Larry and Ralph.

Hi, Todd.

Just a couple quick questions. Could you go back and highlight the kind of -- the numbers you gave on Dan's question regarding the pipeline on these deals you're contemplating doing in terms of the numbers?

Well, as I said, you know, we're looking at, you know, double-digit number of acquisitions. They are very consistent with the numbers that we reported on our corporate website in our corporate presentation. And, you know, we think that, you know, they will generate meaningful increases in cash flow.

As I said on our corporate website, we show an example of an illustration of $100 million acquisition, of increasing our revenues by about $24 million. Our EBITDAR about $9.6 million, and cash flow about $4.2 million. And, you know, those type of metrics are consistent with the acquisition opportunities we're seeing today. And as I mentioned, these are very strategically located, very high-quality properties, well occupied with operating metrics that are better than what we're reporting today.

So if we complete our due diligence and acquire these buildings, we expect that they will continue to have -- will show upward trends in our average monthly rents, our occupancies. Our margins will expand, and our cash flows will grow.

Thank you for that. And then on another subject, you guys talk about the first quarter always being kind of the most difficult quarter for you. And would that be -- as it related to kind of all of the metrics, from revenues to income from ops to cash flow from ops?

Yes. Typically, you know, we've experienced -- the last at least three years, some very, very tough weather in January through March period. And I think this winter was as bad as anybody can remember in most areas of the country. And as we have the thaw in the spring and the high energy level and the pent-up demand, we typically -- you know, the fundamentals continue to improve, with more traffic, more move-ins. Attrition actually appears to be down this quarter so far, which is another positive sign. But again, it's only through, you know, the first month of the quarter.

But typically, you know, in that type of environment, we would expect that we would get better increases in occupancy, obviously at higher rents, and we expect hopefully that would generate better cash flow.

So, Larry, then is it -- would it not be a good assumption to take the cash from ops in the first quarter and extrapolate that out for the next three quarters?

I mean, again, if you run a model in increased occupancy and build some growth in rate and expense, that would be the result, yes. You get sequential growth in cash flow.

So you get to -- but even if it didn't grow, you're running at an annual rate right now of $0.84 in cash flow from ops without including Spring Meadows.

That's correct. And again, Todd, I refer people to our corporate presentation. We actually have a slide that shows the incremental impact of Spring Meadows based on historical numbers, again. But looking at the first quarter annualized of $0.84 a share, as you say, Spring Meadows would be another $0.03. That would be $0.87 annualized, and that's without any of the contributions from these additional acquisitions.

Right. Okay. Great, thanks.

Thank you very much.

We'll go next to [Wilson Yaley] with [South Wells].

Thank you. Larry, help me understand here what motivates these sellers of these properties that you're seeing. What's the cap rate that they're looking for? Why are they selling them? Obviously they're very accretive to us in our business model, but what motivates the sellers here?

You know, that's a great question. We're not going to give any kind of cap rate information because we think that that's -- you know, again, we're negotiating a number of transactions with a number of sellers. However, there are a number of circumstances.

We have one seller that has an estate tax issue that needs cash because it's a family business and the father passed away, and they have to monetize some assets to pay estate tax.

We have another seller that's a family situation that's going through some issues that the family decided to sell some business.

We have another situation where I think you have a regional operator that has very limited access to financing. The regional banks are out of business. They're not making loans. And they typically were focused on development, and they can't develop.

And this is a very -- you know, we sit here and give very good numbers, and it sounds like business just is running well automatically. I want to really give a shout out to our onsite staff and our corporate staff in ops and marketing for the stellar job that they do, and the focus and the attention to generate these results. And this is a 24-7, 365-day-a-year business dealing with seniors and family members. It's so rewarding when I get and the Company receives personal letters from family members thanking us for services and the care. And many of their parents have deceased, and still they just are so appreciative of the love and the care.

So this is a very unique business. We're fortunate to have a wonderful team that's very compassionate, very professional, very well trained and very disciplined on execution. And for some of these small operators it's a challenge. So I think we come in and, you know, have the advantage of having access to capital, access to debt financing. We have systems in place, operations in place. And we're fortunate that there are circumstances that are facilitating some of these transactions.

So we're basically buying from smaller operators that don't have economies of scale.

That's typically correct.

Okay. If the small regional banks are out of financing, where are we -- where are you looking for our financing?

Well, you know, the Fannie Mae, Freddie Mac are still very much in business for proving to operators with larger operators with a track record and a bench. They typically look at a five-year track record of those companies. And all the transactions that we've completed in the last couple of years -- actually really for the last decade but more importantly for the last years have been with those agencies.

What's important to remember is the agencies are providing permanent financing on stable properties. This is not construction financing. So what's the challenge that some of these local regional operators are facing is their banks are gone. They may not qualify for a Fannie or Freddie based on one or two properties that they may have, as well as the fact that they don't have access to construction financing to grow their business. So, therefore, it's a catalyst for their selling their properties.

With the lack of supply coming on and demand continuing strong, do you think the agencies will change their policy here and start making construction development loans?

That's never been the focus of the agency. I don't think so.

And that source of funds has typically come from where?

Fannie Mae and Freddie Mac.

Okay. Let's see. I'm a little new to your business here. Whatever metric you want to give me. What is more profitable, independent or assisted living?

Well, that's -- well operated. They're both profitable. Independent living have higher margins, but it's just living at higher rents. So typically the assisted living will generate higher income per unit. But, you know, they -- fortunately they're both profitable, and we're able to generate some significant cash flow and margins on both.

Are you ambivalent to an acquisition, whether it's independent or assisted living?

We're more focused on the market, the quality of the asset, the competitive position that it has and our ability to layer that property into existing operations. So, you know, as I said, on the portfolios you're looking at today, there's more assisted than independent, but there is some independent. There may actually be conversion opportunities as we talked about that adds more value.

So, you know, it just happens to be that the assisted living properties have higher occupancies than independent living because the independent living properties were hurt harder during the economic downturn. And as a result, there's probably fewer sellers of independent living because there is a better opportunity for recovery in occupancy and cash flow growth.

And since assisted living hasn't experienced the same downturn, I think that there are probably more sellers in assisted living than independent living.

I see. Thank you very much.

Thank you.

And we'll go next to [David Radcliffe] with (inaudible) Asset Management.

Hey, good morning, Larry.

Good morning, David.

And congratulations to you and your team on another solid quarter.

Thank you.

Hey. Just two questions. One, the Spring Meadow transaction, are you expecting to have the full impact of the transaction in Q2 as far as, you know, revenue, EBITDAR, cash flow?

David, I would say that we actually closed that transaction April 8, so it's virtually a full quarter. It's one week shy of a quarter, but practically it is a full quarter of operations to be consolidated in the second quarter.

And now, please, I mentioned that we opened a number of converted units in April. Twenty-eight of those units that opened were 14 units of memory care that got licensed in our Libertyville and Naperville communities, so that also we should start to see some benefit there in the last two months of the quarter.

Okay, excellent. And second question, and I don't want to downplay the strides you made in reducing G&A expenses and keeping the overall total expenses about the same, you know, as a percentage of revenue, but you had operating expenses in total this quarter up about 200 basis points from, you know, the previous year. And you've talked about, you know, how the food costs and labor costs, and I believe on previous calls you've said insurance costs have gone down, but, you know, those food costs weren't driving that increase.

Can you explain what is driving the -- on a percentage basis, the percentage of revenue, what's driving the increase in operating expenses?

David, actually the way we look at operating expenses is we take the operating expenses as a percentage of the resident and healthcare revenues. That's the relevant revenue that that operating expense number is tied to.

Okay.

So, if you looked at, you know, consolidated revenue, that includes more than just the resident and healthcare revenue. But the operating expense figure is actually most relevantly compared to the resident and healthcare revenue. And we had about a 59.8% operating expense as a percentage of that revenue number. That was significantly better than it was in the first quarter the prior year.

So we actually did go about 150 basis points of margin improvement. Some of the revenue numbers shifted, but in terms of the direct measurement, we actually did show improvement in margin.

David, again, remember, in the first quarter of 2011, we have 20 more consolidated properties than we had in the first quarter. So, therefore, the fact that the operating expenses are larger year over year, so are the revenues because of the fact that we now consolidate 70 versus 50 properties. But as Ralph points out, as a percent of revenue, we've actually seen our operating expenses go down.

Well, I'm glad I gave you the chance to highlight that.

Thanks.

Well, good luck next quarter. And I think it's very positive the amount of participation on this call. It's -- the amount of callers with questions seems to be higher than normal, so it's evidence that you guys are doing a great job.

Thanks so much, David. Appreciate it.

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

Hello?

Hey, Dan.

Oh, you're on. Okay. (Inaudible) sound there.

I've got two follow-up questions. One is the -- my understanding is all of these acquisitions can close in the third quarter, so, you know, what is the pipeline beyond that? You know, what is your intention, you know, for even next year? Is it a goal to be $100 million of acquisitions or somewhere in that number for '12, or the pipeline, the 12 months, you know, following you close these, you know, acquisitions and so on.

We are obviously very involved in due diligence. At the same time, we are looking at more opportunities this year. We are actually in the process of submitting an offer today on an acquisition, so we are continuing our growth. As everyone knows, we hired a really terrific corporate development officer in the fall; that has been very helpful in focusing on these opportunities. So we expect to continue.

I mentioned that we, you know, talked about a three-year plan, and we clearly have a goal that has been part of the plan that Management and the Board has developed for the Company that hopefully will increase the acquisition sequentially. So, as we -- you know, it looks like we will have high -- more acquisitions in 2011 than 2010. And we're hopeful that we'll have even more acquisitions next year. And then greater number of acquisitions the year after.

So we're expecting that -- you know, it's interesting that a lot -- you know, the question before about some of these opportunities, I get a real nice comfort level when we're receiving calls on transactions before they even go to the market because people know that we are successfully acquiring properties.

And, you know, everyone's read about the large transactions by the big REITs, but in the markets in which we're buying, in the areas in which we operate and the size, we're kind of under the radar screen. So we are, very often, considered a dominant buyer in many of those markets, and they're creating those opportunities for us.

So, you know, internally and from a compensation perspective, you know, we're all tied to a plan that is going to be driven by even greater acquisition growth in the next couple of years, than we've accomplished this year and last.

And then the -- thank you. And then the other question is if you could expand a little bit about your back-office systems that you're looking at for, I guess, pricing, of levels of care. And I know when some of the other public operators put in those kind of plans, it really accelerated their rate growth. And, you know, if you could give us some color on, you know, what you think the impact is going to be to your rate growth going forward.

The plans we're implementing are the same as some of the other public companies are using. Again, one of the benefits of our growth over the last few years, which has been more assisted living, has gotten us to scale where it makes sense to implement these programs. These are dashboards and software programs at the community that allows us our properties to assess a resident from the time they come in and are -- as a [lead], through their entire stay.

The more immediate benefit will be that we will now have a printout every month of the care level and the plans. It also will monitor and act as a tool for staffing on those residents. It will force a reassessment of every resident every three months.

So a lot of the things that we have been doing more from -- on a paper basis will be much more systematized with these programs. And I know Emeritus, for example, has had great success with this program. And we're expecting the same kind of success, which we think will lead to more -- better pricing of the different care levels, better assessment that hopefully will provide better care to residents, that hopefully will extend life of -- length of stay and obviously result in better occupancy and better cash flow performance.

I appreciate it. Thank you.

And we'll go next to Todd Cohen with MTC Advisors.

Yes. Larry, on the conversions, you indicated there was 100 that were getting done this year and 70 were already open.

Yes. Our business plan this year in the conversions is to convert internal 100 and -- the exact number -- 170 units, of which 73 opened in April.

We opened 45 units of assisted living at Veranda Club in Boca Raton, Florida. We already have a number of move-ins. We're very pleased to see that. Have gotten great reports on the assessment in the finished product. In fact, we just received an award as the best senior housing property in Boca Raton. So, again, congratulations to our onsite staff for a job well done.

As I mentioned, we have 28 units, 14 each of memory care, that just were licensed in Chicago. One in Naperville. One at Libertyville. Those are the two at the Spring Meadows properties, and those are now functioning. And again, those 14 units, as they fill, will drive very strong economic results to the Company.

And so it was actually 173 units and not 100 for the year.

That's correct. It was 170, of which 73 are now opened. The others will open in the second half of the year.

Well, I'll tell you just as a -- to close out my comments, I find it interesting that you're not being given any credit for these acquisitions you got in the pipeline now, and you're already getting questions about what comes next. So anyway, best of luck. Thank you.

Thanks, Todd. We'll work hard. Thank you.

And with no more questions in the queue, I would like to turn the call back to Mr. Larry Cohen for concluding remarks.

Well, I want to thank you. And echoing David's comments, I really do appreciate the engagement of everybody today. You know, we're very fortunate to have all of you as shareholders. And again, we're very pleased with the success we're making and very excited about the outlook. So thank you very much.

Any other questions that you have, feel free to give Ralph or myself a follow-up call. And have a great day. Thank you.

This concludes today's call. We thank you for your participation.