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Executives

Ross Rodman - Investor Relations

Bill Doniger - Vice Chairman

Bill Sheriff - Chief Executive Officer

Mark Ohlendorf - Co-President and Chief Financial Officer

Analysts

Ryan Daniels – William Blair & Company

Sloan Bowman – Goldman Sachs

Rob Mains – Morgan Keegan

Peter Leist – Smith Barney

Adam Feinstein – Barclays

Derrick Dagnan – Avondale Partners

Brookdale Senior Living Inc. (BKD) Q3 2008 Earnings Call November 5, 2008 10:00 AM ET

(Operator Instructions) Mr. Ross Rodman, you may begin your conference.

Ross Rodman

I’d like to welcome all of you to the third quarter 2008 earnings call for Brookdale Senior Living. Joining us today are Bill Doniger our Vice Chairman, Bill Sheriff our CEO and Mark Ohlendorf our Co-President and Chief Financial Officer.

Before I turn the call over to Bill, as Kate mentioned this call is being recorded a replay will be available through November 12, 2008 by calling 800-642-1687 from within the U.S. or 706-645-9291 from outside the U.S. and referencing access code 71534021. This call is also available via web cast on our website.

I’d also like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain other factors that could cause actual results to differ material from Brookdale Senior Living expectations or details in the earnings release we issued last night and in the reports we’ll file with the SEC from time to time. I direct you to Brookdale Senior Living’s earnings release for the full Safe Harbor Statement.

Now, with that I'd like to turn the call over to Bill Doniger.

Bill Doniger

Before Bill gets to the operating results for the quarter, I want to spend a minute on our overall strategy. We’re obviously in the midst of a unique economic climate that presents challenges for everyone, but that same environment equally offers opportunity. We believe that the investment opportunities in our sector over the next year and beyond may be the best of our generation.

To remind you Brookdale went public in 2005 with over 30,000 units. Its formation however was the result of a series of attractively priced distressed but high quality assets over the five-year period from 2000 to 2005. During that period I believe the company acquired almost 25,000 units and the returns on invested capital during that period were truly outstanding.

The opportunities presented by the previous cycle were really a function primarily of the older building of the 1990’s. The market had gotten ahead of itself in terms of supply. Today supply and demand is a quite positive balance. We believe were entering into a new cycle where similar acquisition opportunities with similar returns exist. This time however it’s due to liquidity issues and shorter term economic distress.

The companies with the strongest balance sheets will be those best positioned to capitalize on the opportunity, we intend to be one of those company's. So what are we doing? First and foremost we continue to grow our liquidity. We slowed down our stock purchase program and are using all of our excess cash to pay down our corporate line, which matures in May of 2009, which is our only debt maturity of any significance over the next couple of years.

Through operating cash flow and a number of other initiatives we are quite comfortable with our ability to deal with the corporate line and actually expect to do so before the end of this year. One specific item I will mention is that our board of directors is seriously considering the reduction or quite possibly the elimination of our dividend as soon as the fourth quarter of this year.

Brookdale is the only senior housing operator to pay a dividend and while we are very comfortable with our ability to service that dividend even in difficult times, it is quite clear from our recent share price decline that the market not only discounts the value of dividend but may in fact be penalizing the company for depleting its liquidity.

To the extent that the board makes that decision, we believe we'll be quite proactive in using that liquidity and seeking acquisition opportunities that we know will exist and returning to the successful strategy that made the company what it is today.

With that I'd like to turn the call over to Bill.

Bill Sheriff

First let's discuss our Q3 results. As we’ve described on our last call we saw upward momentum in occupancy towards the end of Q3. Our occupancy increased every month of the third quarter. Average occupancy for the quarter was 89.7% up almost a point over Q2. Our month ending occupancy at the end of September was 90.3 up 1.3% from the end of June.

This increase was the result of several factors. First there is [inaudible] demand people are delaying their decision to move in but really needed to make the move. This was evidenced by an increase in the acuity level of move-ins during the quarter, particularly the retirement center and independent living. Both retirement centers and assisted living had strong performances both ending September over 90%.

Second, we saw our lead base increase in Q2 over Q1. As a result we strategically increased incentives at the beginning of Q3 to get prospects off the bench. We did see a small impact on our rate growth this quarter but a sizable portion of these incentives burn off by the end of the year. The amount of these incentives on average grew less than 70% of one months rent and again they burn off over a relatively short period of time.

Third, we noted an increase in our resident's length of stay. This is influenced by the expanding ancillary services delivered in our buildings, therapy, home health, and private duty companion care services.

Fourth, the sales and marketing initiatives that we have talked about in the past produced strong results in the quarter. Our cross-selling activities, our market cluster M3 initiatives which assist customers to find the best fitting community for their needs in terms of either price and\or acuity did well. In the 12 markets with 13,600 units where M3 had been initiated by the beginning of 2008, the occupancy increased 2.4% in Q3 over Q2.

We expect to reach a total of 20 markets with 20,000 plus units by mid next year. Also the additions to assisted living sales force positively impact stocks. In the four regions where a good bit of the new sales resources were focused average occupancy for Q3 2008 is up over 5.2% from the same period last year, and 3.6% from the second quarter of 2008.

Our entry fee business held up reasonably well for most of the quarter but a number of transactions scheduled for September closings didn’t happen as the credit and financial market crisis started to intensify. We closed several of these in October and expect to close a few more carryovers in Q4. For the quarter our net entrance fees was a positive cash contribution of $5.7 million as depicted in the adjusted EBITDA table in the earnings release.

Turning to ancillary services, our ancillary service business continues to grow and expand the need-based health care component of our business. This part of our business is especially attractive in times like this. These services are provided to our own residents and are need-based. Prior to ISC becoming operational in a community residents already use to some extent third party providers.

As a result Brookdale has an existing receptive market for over 45,000 potential customers living in our communities and we have yet to reach many of these residents. In addition to our widely used therapy service, we have been expanding our home health platform which allows us to provide a second type of ancillary services to the same residents using the same infrastructure, hence materially increasing profitability.

The rollout continues to go very well with ISC ancillary revenue increasing 29% over the prior year quarter and NOI was up 39% between the periods. At the end of the quarter we were providing therapy services for almost 34,000 units in our portfolio up from 28,000 in Q3 of last year and over 15,000 units with home health versus 7,400 last year.

We believe that over the next 18 to 24 months we can reach approximately 40,000 units with our therapy services and 30,000 with our home health. This represents substantial cash flow upside from a relatively stable business line.

Another component of our ancillary services that we provide and haven’t talked about is our private duty companion care services, which is like private pay, home health type service used mainly in independent living.

This service increase occupancy by retaining residents longer and in this difficult economy as people search for lower cost alternatives is contributing to independent living move-ins. Third quarter revenue for this service was 50% higher than a year ago and at a 20% margin contributed almost $3.5 million.

I should note that revenue and contribution from the companion services is not included in the ISC revenue and contribution per unit metrics. I will now turn the call over to Mark to give you more detail on our expense initiatives and on the financial results for the quarter.

Mark Ohlendorf

Let me start by looking at some of the highlights of our financial performance for the third quarter. Cash from facility operations, or CFFO for the quarter was $0.30 a share, before non-recurring expenses of approximately $0.08 a share.

In the third quarter we recorded 3.6 million of hurricane related expenses and incurred $3.9 million of acquisition, integration, and severance related costs. We also incurred $1 million of some startup expenses related to the ahead of plan rollout of our ancillary services.

Our same store results for the year-over-year showed an increase in revenue of 4.9%, a result of average revenue per unit increasing at 6.5%, and a decline in occupancy of 1.4%. Expenses grew at 7.3%, resulting in same store NOI growth of 60 basis points. Looking at the year-over-year same store expenses, excluding ancillary services, expenses were up $54.4 million or 5.3%.

Some key areas for this increase were, first, our spending was $4.7 million higher for advertising and other lead generating activities. Second, utility costs were up $5 million. Third, we incurred $4.3 million related to our community level initiatives to reduce management vacancies and increase sales resources. Finally, we've conformed various elements of our employee benefit programs across the company, which has generally broadened participation and resulted in $10 million of incremental cost. Excluding these items our same store expenses increased under 3.5%.

We're clearly operating in a rapidly changing and fluid environment. On the cost side of the business, it's our sense that unit cost pressures are declining significantly. As a result, we expect that commodity cost pressures that we've seen in recent quarters will abate as we move forward.

As we develop our plans for 2009, we're taking a number of steps that contain cost growth, and in some cases reduced costs to reflect these new economic realities with a target of reducing our normal cost increase from around 3.5% to closer to 2.5%.

60% of our cost structure is salaries, wages, and benefits. We've already taken actions to moderate labor and benefit cost increases through limited increases closer to 2% than to 3 to 3.5% we've seen historically, and increased employee participation in benefit program costs.

Another 18% of our cost structure relates to commodity items, such as food and utilities. Our procurement programs have already locked in reduced pricing with vendors, targeting meaningful savings. Given the current environment, we're reducing spending to minimal levels in some discretionary areas as well, such as travel, training, and supplies.

Our sales and marketing initiatives, like M3, have stabilized such that we can refine and reduce costs of marketing communications and lead generation without sacrificing our efforts to build occupancy. We also continue to focus on reducing corporate overhead costs.

Finally, let me spend a moment on the balance sheet. Other than our line of credit, we have virtually no mortgage debt maturities without extension rights until 2011. Our current line of credit matures next May when we expect to have approximately $150 to $200 million of line of credit need. That is assuming balance sheet cash of $40 to $50 million dollars, which consists mainly of letters of credit, which are used for various deposits and regulatory requirements.

In addition to the substantial internally generated cash flow, we have 15 unencumbered assets available with a total of more than 1,100 units where we might do sale leasebacks or other asset financing.

Without pending acquisitions, our corporate financing needs are substantially lower than they have been historically and the size of our new corporate line will reflect that. The net of it is that we remain confident that we will be able to address the line maturity issue in a timely manner, and Brookdale will have the resources necessary to grow its business consistent with the market opportunities at they present themselves.

To conclude, let me turn it back to Bill Sheriff.

Bill Sheriff

While Q3 had many positive trends, the recent worsening financial news and significant drop in consumer confidence will have some impact on our industry, but should not be overestimated. Although our October occupancy helped stay positive, we are assuming that maintaining flat occupancy will be challenging for the balance of 2008 and into 2009 and that rate growth will moderate.

Our best estimate right now is approximately 3.5% to 4% annualized rate growth, due to the lower increases for existing residents and a higher use of incentives. We can't control consumer confidence, so we will continue to focus on the things that we can control, such as ancillary services, marketing programs, take advantage of our market clusters, as well as the significant flexibility and differentiation that our therapy home health and companion care services gives us across our product lines.

We will also focus hard on aggressive management of the expenses and CapEx. As we have said before, and was strongly demonstrated in Q3, we believe that we don't need the economic environment to materially improve but instead simply stabilize to see significant and rapid improvements in occupancy.

As you saw, we improved occupancy by 130 basis points in the third quarter just in three months and we believe that demand will continue to build and when things begin to stabilize, occupancy improvement will be there. Finally as Bill mentioned, there will be opportunities for us to deploy capital at very attractive risk adjusted returns.

That has rewarded us well in the past, and we believe it will do so again in the future. We want to thank you for your participation today, and we will now turn it over to the operator to begin the question and answer session.

Question-and-Answer Session

Operator

(Operator instructions). Your first question is from Ryan Daniels - William Blair.

Ryan Daniels – William Blair & Company

First off I guess for Mark, I noticed the accounts receivable spiked up a bit looks like a bigger than typical increase in the quarter. Are you seeing anything on your resident front where they're delaying payments or any issues there or is that just from timing?

Mark Ohlendorf

Not particularly. Much of that, Ryan, relates to the home health acquisitions that we've done and some regulatory transitions that occur shortly after those acquisitions. We expect to see those numbers come back down over the next quarter or so.

Ryan Daniels – William Blair & Company

So that's more getting the appropriate provider license numbers, transfers things of that nature?

Mark Ohlendorf

That's right it's to transfer the provider number and so forth.

Ryan Daniels – William Blair & Company

It looks like home health, that actually leads into my next question, was up quite a bit I think in the number of units served is up about 100% year-over-year. Is that just a lot of acquisition activity? Have you got some of the licenses you've been waiting to get? Any color on that would be helpful.

Mark Ohlendorf

A combination of both. We did get some additional license here that we've been waiting on for some time and we've effective seven acquisitions to date, have more in the queue for Q4. It was an extremely busy month, a lot of startup costs, but that part of the business is coming on strong.

Ryan Daniels – William Blair & Company

Bill, you mentioned in your prepared comments about the burn off if you will on some of the incentives. Is that things like lower rates through the end of the year? So those will be reset as of January or how should we read those comments?

Bill Doniger

We keep the present focus on the whole rate aspect, and it's different in different situations, whether it's the first month, fourth month, or whether it's a percentage off for X number of the initial months, but it does burn off and most of the incidents burn off by the end of the year.

Ryan Daniels – William Blair & Company

Do you actually have the revenue per occupied unit? I know it's a little hard to break out because some of the ancillary's mixed in there, but do you have that specifically and maybe a year-over-year comp?

Mark Ohlendorf

On the same store basis, 12 over 12 with ISC rate up 4.7%, occupancy down 1.2%, so total revenue change of 3.4%.

Ryan Daniels – William Blair & Company

Do you have it without ISC? Just so we can get the actual pricing.

Mark Ohlendorf

I do. It's rate 3.4%, occupancy down 1.2%, then revenue 2.1%.

Ryan Daniels – William Blair & Company

I guess the last question I had, I know this is something maybe Bill could address, but obviously Fortress had some shares pledged on loans and I think that's been a bit of an overhang, certainly a lot of investors have asked me about it. Have you guys had any conversation or any thoughts on what you may do to try to eliminate that overhang going forward?

Bill Doniger

We've heard the same thing and we had something on file last year of a loan balance that was secured by shares of stock in one of our funds. What I can tell you is that, that balance has been substantially and greatly reduced and we have a lot of flexibility. I can't really be more specific about what our plans are as you can understand but at these levels we're pretty reluctant to want to sell much stock.

As we've also said we haven't sold a share of stock and we've owned this company, we've been a large investor in this company since 2000 but we certainly don't want our ownership of Brookdale to be overhanging and we want to get that past us. I think we will and we can focus on all the great opportunities that Brookdale has. So, that's really all I can tell you at this point.

Ryan Daniels – William Blair & Company

You're saying with your comments that the $250 million I think was a sizable loan that's actually come down?

Bill Doniger

Yes, a lot.

Ryan Daniels – William Blair & Company

Is that something that Fortress might disclose in some of their statements to help reduce the overhand? I don't want to push you too much.

Bill Doniger

You know what I don't know the answer to that, but Fortress has an earnings call next week and again I don't think we disclose the specific information about our private equity funds, but like I said we have a fair bit of flexibility on what we want to do.

Operator

Your next question comes from Sloan Bowman - Goldman Sachs.

Sloan Bowman – Goldman Sachs

A quick question for Mark with regard to the hurricane related cost. Should we just pretty much look at that as water damage and repair at this point or are there going to be any costs for down time or relocating tenants going forward?

Mark Ohlendorf

Essentially what that cost is, Sloan, is the uninsured portion that the company will incur related to the hurricane damage. So we setup a reserve in the quarter for what the company is exposed to, beyond that our expectation is it is substantially insured.

Sloan Bowman – Goldman Sachs

Were there units where tenants had to actually be moved out or?

Mark Ohlendorf

There were for a period of time. By and large I think we're largely back in service right now.

Bill Sheriff

Well, again there was three name storms or hurricanes, the biggest one was Ike. We did over those up to evacuate three different communities under mandatory evacuation elements. It's interesting in each case in the area of Houston where we had nine communities affected, that one week after the hurricane passed all of the communities were back in full operation and actually had a week later higher occupancy before the storm hit.

We had to evacuate one in Louisiana under mandatory evacuation from the earlier storm again we relocated those folks to one of our other communities in Alabama and in a matter of days after returning the residents to that community we were 100% occupied at that community.

Our folks did just an incredible job but there was a lot of expense and the $3 million something or close to $4 million is the part that we have to recognize as opposed to what we'll reimburse through business interruption and property insurance.

Sloan Bowman – Goldman Sachs

A question for Bill Doniger with reference to the opportunities going forward. Could you talk a little bit about what you assume for the credit markets and kind of timing of taking advantage of those opportunities and sort of relate this to where your capitalization is now and how you see that playing out?

Bill Doniger

Sure we're not actively working on anything materially at this point. I will tell you that, believe it or not, financing forcing your housing assets still exists. So, Fannie Mae is still in business. You still get financing. I think there's opportunities on the debt side of the world for folks who have liquidity issues.

We also believe that the company has access to capital and we've been kind of asked about it for investment opportunities. So, again for the right opportunities, and we think those will exist, the ability to access capital to do things that are accretive to Brookdale is not really something that we're that concerned about and I think that the opportunity is not going away in the next quarter or two.

Operator

Your next question comes from Rob Mains - Morgan Keegan.

Robert Mains – Morgan Keegan

Bill Sheriff, you said that entry fees you saw some delay from Q3 into Q4. Is that stuff that you would characterize as if someone that was going to move in September moved in, in October or someone who went to contract and end up not moving in at all?

Bill Sheriff

These were contracts with scheduled closing dates in the latter part of September. We closed 14 in October. Most of those were of the carryover but they just simply froze when all the markets there. We probably did lose but you have to be same are still working on others to see whether or not we lose them or they stay frozen for a while, but we were well on track having a good quarter before that impact and they were a significant number of actual scheduled closings that did say we've already closed in Q4, some of which we think we'll additionally close, but undoubtedly we probably lost a couple.

Rob Mains – Morgan Keegan

Then I may be looking at this in too much detail, but the issue about some of the incentives that you're giving people to move in. As those burn off your year-over-year revenue per unit increases for those units should be above average, right?

Bill Sheriff

That will come back. You will have this environment and this environment we probably will continue to use some incentives so you'll have the next batch a little bit, but it won’t be a sequential declining of great affect.

Rob Mains – Morgan Keegan

That was going to be my question. So, until things get better probably this is going to be the way that a lot of people move in so that 3.5% number you gave that contemplates that you're going to get kind of bigger increases off of either one for people moved in under incentives but new one's coming in under incentives and still going to be at a slightly reduced rate?

Bill Sheriff

I think that's an accurate characterization.

Rob Mains – Morgan Keegan

The schedule market net CapEx where you have the types of CapEx there's development and there's reimbursements. The reimbursements I assume are what you're getting back from REITs for development on lease properties?

Mark Ohlendorf

Yes, it would include both fundings from REITs and also construction funding on development activity. This is the expanded disclosure in the press release this quarter so that you can tie both our gross and net CapEx back into the cash flow statement?

Rob Mains – Morgan Keegan

In doing that in this quarter you had $20,193,000 of reimbursements. Where does that enter the cash flow statement? Is that a financing flow?

Mark Ohlendorf

Yes. It's going to be a component of the financing end close.

Rob Mains – Morgan Keegan

Whether it's from a lender or a landlord, correct?

Mark Ohlendorf

That's right.

Rob Mains – Morgan Keegan

The segment break down that you usually provide in the queue, I know last quarter it was in the press release. Will that be the queue that tells all the operating statistics for the different business lines?

Mark Ohlendorf

They will. I believe we've consistently had that information in the queue.

Rob Mains – Morgan Keegan

Two balance sheet numbers that weren't in the press release, both on the current side, the line items that are current portions of debt and line of credit that were $278 million and $50 million respectively. Do you have those as of 9/30?

Mark Ohlendorf

Yes. The balance on the line is about $85 million at 9/30. The current maturity number I believe is 250 - 260. Again, substantially other than the line we have virtually no debt maturities through 2011.

Rob Mains – Morgan Keegan

That current maturity that's the mortgages that you can extend out?

Mark Ohlendorf

That's correct.

Rob Mains – Morgan Keegan

That's subject of certain conditions are you still on the right side of those conditions?

Mark Ohlendorf

Yes we believe we are.

Rob Mains – Morgan Keegan

Then, last a balance sheet question and then I'll hop back in if I've got more. In terms of your leverage where you stand?

Mark Ohlendorf

We're in good shape through Sept. 30 obviously.

Rob Mains – Morgan Keegan

You're on the right side of all the covenants?

Mark Ohlendorf

Correct

Operator

Your next question comes from Peter Leist - Smith Barney.

Peter Leist – Smith Barney

When [inaudible] first came to life as a public company the plan as to differentiate from other senior housing was to return 100% of free cash flow to the shareholders in the form of dividends. Obviously that model is somewhat changing given the environment and given the stock prices. Is it ultimately the goal to eventually get back to that model?

Bill Sheriff

We will have to evaluate the over time, I mean with the significant changes in the environment and the amount of what we see is potential opportunities we’ll have to continue to assess that. I wouldn’t think anybody would want to totally conclude that we'd go away from a distribution model, but again it’s a matter of looking at what the opportunities of getting extraordinary returns.

Bill Doniger

I think that it’s unfortunate that the markets require you to react, but as Bill said just the opportunities are such that if the market place doesn’t value the dividend and you think there’s a better use the capital, that’s what you’re supposed to do. I think that we’re living in evolving times.

The interesting thing though is that Brookdale generates a substantial amount of free cash flow and to the extent that we did the safety acquisition environment was such that we had a better use in capital. That’s the obvious thing to do with it is to return it to shareholders, but again this just becomes a question of what’s the best use of shareholder capital.

Peter Leist – Smith Barney

With that said and I think earlier you said you might curtail or cut back purchases of your own stock. I would think perhaps the best opportunity given the price of the shares is your opportunity.

Bill Doniger

You’re 100% right. I mean the decision is do we go buy an asset, or a company, or do we buy back our own stock and obviously from an operational perspective, buying your own stock is the best thing to do. There’s lots of other things that go into that analysis and so that’s what management works on with the board and looks at all the different alternatives. It’s simply going to be a question of where do we get the best return for a dollar.

Peter Leist – Smith Barney

With the supply demand equations as new supply seems to be dwindling in demand. Is there perhaps a delay because of the financial situation? The age cone continues to increase as more and more people file into the need to come into senior housing. What is leverage factor at some point when occupancy starts to ramp up for every, years ago we used to talk in terms of the old ACR one point of occupancy increase would yield so much in bottom line growth, what do you think that is today?

Bill Sheriff

As 1% on average is going to be about 18%, and your commentary is absolutely correct. The fundamentals coming out of this are going to be incredibly strong as new supply continues to be more and more curtailed. So, the fundamentals are going to be strong.

Peter Leist – Smith Barney

Finally I know that Sunrise recently couldn’t close a deal based on a cap rate of something in the 66 range. Where would you put cap rates today on good, on quality properties?

Bill Sheriff

Well I’m not a good one to ask about cap rates because it’s all a matter of what return on investment you get and what you can bring to a transaction. Obviously there’s been a change and cap rates have gone up a little bit in this environment, but it will go down recorded that senior housing faired through this period of time far better than any other class of real estate and over time I think the cap rates will be very positively impacted.

Peter Leist – Smith Barney

Just one more, on the cost side whereas employment costs were pushing the envelope a year or so ago they seem today’s factor as unemployment rises. You would think that an employee cost could drop dramatically, is that true or not true?

Mark Ohlendorf

I don’t know what dramatically means, at the point where it's meaningful.

Unidentified Corporate Participant

Well the environment has clearly changed and our expectation is that cost growth including labor will be substantially lower in the next 12 months than it has been in the last 12.

Operator

Your next question is from Adam Feinstein – Barclays

Adam Feinstein – Barclays

Just wanted to follow up just on the under the pricing questions from earlier. I know you said that you think 3% to 4% is a sustainable number, but just curious in terms of what’s the worst its ever been for you guys? Just trying to think about is it possible to see no pricing, and not so much that that would be your strategy but just certainly never know what competition is going to do. So just curious to get your thoughts in terms of how bad things can get on the pricing?

Bill Sheriff

As I reflect over the 24, 25 years that I’ve observed, I don’t think that we’ve ever seen a market condition where we didn’t reflect a 2.5% to 3% on the bottom side of things and I would say that would be the bottom side of expectation in this environment as well.

Adam Feinstein – Barclays

Then just as we think about different regions, I’m just curious in terms of what regions are holding better is it simply just as if we look at the housing market data, are those markets the areas where you guys are seeing the biggest issues around occupancy? I’m just curious as we look throughout your portfolio.

Bill Sheriff

We have a pretty large footprint and do cover a lot of different regions of the country and the pattern of which ones have the more pressure and which ones are recovering those that had the early pressures are the ones that are performing stronger now. We don’t see any particular region at this point in time being particularly challenging more so than another.

Florida and California received a lot of attention on the early side actually have been showing strength in the recent period. So overall we get a pretty good balance and again it’s consumer confidence factors take it all or whether the market can take it all, we’ve seen good response.

Adam Feinstein – Barclays

In terms of just the competitive landscape in a clearly more challenging environment as you talk about. Have you seen any capacity come off the market in recent months?

Bill Sheriff

There’s always some element of capacity that goes off. Just from [inaudible] and ages in communities, I don’t know that we’ve seen any significant new element of closing. Up until the end of September and the latest crisis, there was not that much stress in the market place. I think now the stress is, as Bill had mentioned earlier is going to be around maturities refinancings and things of that nature, but certainly there'll be a bit of an extra challenge as we go through these next few months.

Operator

You have a follow up question from Rob Mains – Morgan Keegan

Rob Mains – Morgan Keegan

When you do a home health agency do you typically acquire a license?

Mark Ohlendorf

We typically do, but there’s a process we have to go through with the intermediaries and with CMS to transfer the provider number.

Rob Mains – Morgan Keegan

My question would be how long is that, do you find that takes you?

Bill Sheriff

It could range from anywhere from 30 to 90 days and during that period you suspend your billing you don't suspend your service and then you catch back up and that’s what speaks to that backlog. Did we lose you Rob?

Operator

I believe we did, I’ll advance to Ryan Hoadley – Newbrook Capital. I’m sorry Derrick Dagnan – Avondale Partners

Derrick Dagnan – Avondale Partners

If I missed this I apologize but I was wondering if you look at your capital expenditure budget the different buckets you have, are there sort of areas where you have room to reduce spending in certain areas?

Mark Ohlendorf

Yes obviously when we get into market conditions like this where reducing expenditures wherever we can, including CapEx.

Derrick Dagnan – Avondale Partners

I guess what would be your priority when you look at your CapEx is it the EBITDA enhancing CapEx or with different areas?

Bill Sheriff

I would think we would be delaying or putting on shelf some of the enhancing [inaudible] enhancing. Again that’s an activity that’s around repositioning assets and continually the process of matching the assets from the market place and it’s more than just the normal refurbishments, but during this kind of period of time we can delay some of that.

Operator

Rob Mains is back in the queue.

Rob Mains – Morgan Keegan

Question I had was on the home health if you are going to continue to have an aggressive rollout of that business. Then DSOs are going to, they can come down but they’re not going to come down to the level that they would be if you were doing just all residential all residential is that correct?

Mark Ohlendorf

The ancillary business does involve a little bit of working capital, Rob, but over time once we’ve completed the acquisitions, integrated them, completed the change in ownership process it’s not a dramatic investment of working capital.

Bill Sheriff

All of our inputs and billings are electronic and on an electronic basis if we do it right the first time we get paid in 18 days.

Rob Mains – Morgan Keegan

Then the share repurchase program, if you would purchase shares doesn’t that come off your line availability?

Mark Ohlendorf

The line availability is a formula that’s impacted by roughly half of the nominal amount of share re-purchases.

Rob Mains – Morgan Keegan

So wouldn’t it seem like that might not be the best use of your cash as your sitting with the line you've got now?

Mark Ohlendorf

Yes, also in this market where you have a pretty difficult equity markets. There’s not a thing that you could do that will make your stock go up and more likely it’s going to go down just because regardless of what we do. So, basically said why buy stock in the 20’s when potentially it could go lower or we could have other uses in capital, but again the line is something I think in given the cash flow generation it’s something we’re quite comfortable with and we do have to deal with it and we will. Then we’re going to have lots of flexibility in what we do with our capital.

Rob Mains – Morgan Keegan

Last question, it’s been about a year now since we’ve been talking about the overhang of the economy and what it may or may not be doing to sense this. Are you seeing anything clinically empirically that you could point to like increased ADLs or increased ancillary consumption from people moving in now suggesting that in fact the folks that you are getting in they need more care than they might have a year ago?

Bill Sheriff

Well the assisted living doesn’t change that much. The independent living and again the companion service growth that we’ve doubled in the last year is an element of that, and you do see people seeking more cost options in where they can move into an independent living and complement that with companion service and where we have the full array of the ancillary support services it gives another option in that regard as well as just people delaying some decisions, we do notice and it’s very noticeable in the higher level of the community end of the independent living more so than say the other levels of care.

Operator

At this time there are no further questions, I’ll turn the call back over to Ross Rodman.

Ross Rodman

I just wanted to thank everyone for their participation and management will be around if you have follow-up questions give us a call. With that thank you very much.

Operator

This concludes today's conference call and you may now disconnect.

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Source: Brookdale Senior Living Inc. Q3 2008 Earnings Call Transcript
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