Executives
Brad Cohen – IR, ICR
Dan Baty – Chairman and Co-CEO
Ray Brandstrom – EVP of Finance, CFO and Treasurer
Granger Cobb – President and Co-CEO
Analysts
Donald Hooker – UBS
Rob Mains – Morgan Kean
Jerry Doctrow – Stifel Nicolaus
Brian Hue [ph] – Sidoti & Company
Carter Dunlap – Dunlap Equity
Steve Son [ph] – UBS
Emeritus Corporation (ESC) Q3 2008 Earnings Call Transcript November 10, 2008 5:00 PM ET
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Emeritus Corporation third quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer-session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded.
I would like to turn the conference over to Mr. Brad Cohen of ICR. Please go ahead, sir.
Brad Cohen
Thanks Jennifer. Good afternoon everyone and thank you for joining us on the Emeritus Corporation third quarter 2008 conference call. On the call with me today is Dan Baty, Chairman and Co-CEO; Granger Cobb, President and Co-CEO; and Ray Brandstrom, Chief Financial Officer.
Before we begin today, I would like to remind everyone of the Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.
For a more detailed discussion of the factors that could cause actual results to differ materially from those suggested in any forward-looking statements, we will refer you to Emeritus’ 10-K for fiscal year ended December 31st, 2007 filed with the SEC.
With that, it is my pleasure to turn the call over to Dan. Dan, please go ahead.
Dan Baty
Taking the macro view, healthcare and senior housing is basically a counter cyclical business. We have historically done relatively better when other sectors are down. Our cost of labor is relatively lower and our customer is less impacted by economic swings. I would argue that our residents are in the same economic position as they were a year ago. They own their own homes without a mortgage. While the value of that home may be less than it was a year ago, it is still significantly greater than when they bought it.
Our residents’ investments are savings and bonds, not stocks. Not too many people over 75 have large margin accounts. In addition, there is no new supply. Whatever was in the pipeline has pretty much got canceled. Other than the psychological impact of the market volatility, which can slow down decision-making, given the AL [ph] business is need-driven and based on my 35 years in senior housing, I don’t think our customer is disappearing.
Looking at Emeritus specifically, our average rate is up, our occupancy is up, our overhead is flat, and on a quarter-to-quarter basis, second to third, adjusting for non-comparable items, expenses are up modestly.
Our balance sheet is in good order. We have $43 million in cash and our only short-term debt maturing within the next year will mostly be refinanced on a long-term basis and the remainder, and for that matter, the whole debt can be extended.
Granger and his operating group have done an outstanding job integrating the operations and effecting significant improvements. Ray has put us in an excellent financial position. Ray?
Ray Brandstrom
Thanks, Dan. Good afternoon, everyone. I’d like to begin by discussing our third quarter results, give an update on our balance sheet, and finish by providing some additional comments regarding our 2008 financial guidance.
The third quarter marks our last quarter of non-comparable financial results due to Summerville merger. In the fourth quarter, we’ll begin to have some meaningful year-over-year comparable data. But this quarter, I would again remind you that the merger with Summerville closed on September 1, 2007 impacting year-over-year analysis for the third quarter.
Therefore my comments will focus on sequential quarters. Let me start with a discussion on discontinued operations. We continue to hold three properties comprising a total of 310 units in discontinued operations. All revenue and expense for assets in discontinued operations are reported as one line item on income statement. These communities have been removed from reported occupancy statistics for comparison purposes in all financial information reported.
Now, I’m going to review some of the operating statistics from the quarter. Total revenue from continuing operations for the third quarter of 2008 was $193 million. Of that, total community revenue from continuing operations was $191.8 million compared to $185.7 million in the second quarter of 2008, an increase of $6.1 million or 3.3% on a sequential basis.
Most of these $6.1 million increase is related to rate growth. Our average rate per unit increased to $3449 per month from $3372, a 2.3% increase on a sequential basis. A significant number of legacy Emeritus communities realized annual rate increases in the third quarter, which combined with the level of care revenue captured drove the strong quarterly rate increase.
Most importantly, the third quarter rate improvement brought our year-to-date revenue per unit rate growth to over 6% annualized, a level more in line with our expectations.
Average occupancy for the third quarter was 86.6% up from 86.4% in the second quarter. Occupancy on the last day of the third quarter September 30th was 88.1%, up 30 basis points from occupancy of 87.8% on June 30th. We believe the quarterly improvement in occupancy in the current economic climate speaks to the effectiveness of our programs and initiatives we implemented since last year and the need-driven demand for assisted living in Alzheimer’s business.
Now, let me provide some perspective on our same stores sequential performance. For purposes of the discussion here, we will define same store as the consolidated properties we operated on October 1, 2007 excluding any acquisitions, discontinued operations, developments or properties with expansion since then. On that basis, average occupancy increased 50 basis points to 87.2% in the third quarter from 86.7% in the second quarter.
Regarding quarter end occupancy, was 88.7% on September 30th compared with our June 30, 2008 occupancy of 88%, a 70 basis point increase. Looking at sequential change in revenue for the same store portfolio, rate growth drove most of the same community revenue increase of $5 million with average rate per unit growing 2.1% to $3457 in the third quarter from $3386 in the second quarter.
Community operating expenses from continuing operations for the third quarter of 2008 were $123.7 million. Community operating expense on sequential basis increased by $4.2 million primarily related to increases in utilities and labor. Utilities were impacted by an additional day in the quarter, seasonal impacts and increase in our utility rate year-over-year which is running in the 8% to 9% range. Labor is also impacted by an additional day in the quarter as well as additional costs related to hurricanes and underlying annualized rate growth for approximately 3% to 4%.
General and administrative expenses were $14.7 million in the third quarter of 2008, essentially flat when compared to the second quarter of 2008. Included in both quarters were non-cash stock compensation expense of $1 million and $1.4 million for the third and second quarters respectively. General and administrative expenses as a percent of total operated community revenues were 6.7% in the third quarter compared to 6.9% for the second quarter of 2008.
Property-related expenses included interest on a GAAP basis for the quarter of $25.2 million and rent on a GAAP basis of $22.3 million. We filed a supplement to our press release today that provides a schedule of cash rent interest along with depreciation for the third quarter of 2008 and projected fourth quarter of 2008. I'll discuss this further when I get to the guidance section of the call.
Routine capital expenditures totaled $4.1 million in the third quarter or $186 per unit. We define routine capital expenditures as cost to maintain the communities for their intended business purpose and exclude expenditures for acquisitions, developments, expansions or repositioning for revenue enhancements. The company's third quarter 2008 adjusted EBITDA increased by $3 million to $31.9 million from $28.9 million in the second quarter.
Regarding development activity, we had no new openings in the third quarter. However, we expect the 38 units stand alone Alzheimer’s community to open in the fourth quarter. We opened one community expansion totaling 66 units in the third quarter and expect to open a 22 unit expansion in the fourth quarter. We have no additional openings scheduled through 2009.
Turning to our balance sheet, as of September 30, 2008, the company had approximately $44 million of cash and no outstanding borrowings under the company’s $25 million credit facility. On September 30th, total assets were $2 billion, including $1.6 billion of net investment in properties. Total debt was $1.5 billion with $1.3 billion related to mortgage debt, $232 million related to capital lease obligations. Shareholder equity was $389.1 million.
Now, let me discuss some additional detail related to our debt. Our variable rate debt represents less than 10% of our total debt. Regarding our debt maturities, we have $76 million scheduled to mature next year, all of which is variable rate debt. This has been re-classed to current debt at September 30. We have an option to extend this debt. However, a good portion can be placed in long-term agency financing.
At this point, we’re evaluating our options for exercising the available extension versus other financing alternative. We have no reason to believe the company will encounter difficulties in obtaining extension of the existing debt or refinancing debt on terms acceptable for the company.
In June, the company announced an agreement to purchase 29 communities comprised of 2,257 units which has been leased by the company. We have closed on these 29 properties, the last closing was completed on October 17 and financed with long-term debt of $29 million at a fixed rate of 6.6% for a term of 10 years and variable rate debt of $27.4 million at the 1-month LIBOR plus 3% for a term of 3 years.
This acquisition increases the company’s own portfolio of communities to 159 or 62% of the company’s consolidated portfolio. Increasing the number of Emeritus owned assets remains an important part of our long-term strategy and allows us to capture and retain value over long periods of time. Thus, over time, we’ll continue to selectively pursue acquisition opportunities that make good business sense.
In our quarterly filings, we historically report that we have missed one or more covenant tests related to leases which require us to obtain waivers from our landlord. We do not view these as significant and always obtained necessary waivers. However, in light of the current concerns surrounding financing, I thought it would be beneficial to provide some additional color. We have a portfolio of three communities with lease coverage ratio of 1.06 and a coverage requirement of 1.25.
We have reached an understanding with our landlord to combine these communities into another portfolio which will resolve this issue going forward. We have two individual communities that fall short of covering the lease with a requirement of 1.25. Overall, this is an improvement in the compliance and growth in both frequency and severity and believe the REIT views our progress favorably. For clarity, we’ve obtained waivers through October 2009 for these.
As previously announced, the company retires convertible debentures in the amount of $10.5 million on July 1, 2008. Additionally, subject to quarter end, the company reached an agreement with Nationwide Health Properties to extend the maturity of its $21.4 million note from March 3, 2009 to March 31, 2012 helping maintain the company’s financial flexibility.
Now turning to guidance for 2008, we have previously given revenue guidance ranging from $760 million to $775 million. Based upon our third quarter and year-to-date performance and our initial indications of fourth quarter activity, we are reiterating the guidance range and expect that at a minimum, we will achieve the lower end of that range. Once again, we want to reiterate our comfort with the long-term goal of 93% occupancy and 15% increase in average revenue per unit.
93% of our portfolio is comprised of assisted living and Alzheimer’s units, and demand for these need-driven services remained stable. We’ve been steadfast and saying that we would begin to show more meaningful occupancy, level of care and rate progress in the second half of the year and our progress in the third quarter supports this expectation. The company will not be totally immune to the general financial and economic conditions. However, we do believe our long-term goals are achievable giving our existing portfolio, the need-driven nature of our business, our programs, systems and experienced field management.
Turning to cash rent and cash interest, cash rent in the third quarter of 2008 was $24.2 million and cash interest for the quarter was $20 million. As an attachment to our press release today, we provide a schedule that reflects our expectations for fourth quarter which includes the impact of the announced buyback transaction which closed on October 17. On that basis, we expect cash rent to range from $23.1 million to $23.5 million in the fourth quarter and cash interest to range between $21 million and $21.3 million.
With those comments, I will turn the call over to Granger Cobb, our Co-CEO and President. Granger?
Granger Cobb
Thank you, Ray. Good afternoon everyone and thank you for your interest. I want to briefly recap the progress made by the company during the last few quarters. Our results are now benefiting from many of the operating changes associated with the divisional and regional oversight structure that we put in place, the lead management and referral development systems and practices, and the resident assessment and care planning systems and practices.
Our third quarter results demonstrate the effectiveness of the new structure and systems and we continue to be confident that we can meet our long-term goals. We expected meaningful occupancy and rate improvement in the second half of 2008, and so far that has been the case. The combination of annual rent increases across the legacy Emeritus portfolio combined with level of care revenue capture drove a strong sequential increase in average revenue per occupied unit, which bring us more in line with a 5% to 6% year-over-year growth rate. The fact that we are able to move occupancy forward at the same time demonstrates that the underlying business fundamentals are holding up despite unprecedented turbulence in economy, financial markets and political arena.
In the third quarter, our average number of inquiries, new tours and move-ins per community were the highest we’ve experienced this year. Average move-outs per community dropped back from the elevated Q2 levels to slightly better than the average for the six months prior to Q2. With solid rate and occupancy progress in the third quarter and despite experiencing an uptick in expenses during the quarter, we are confident in our ability to improve our margins as we move forward. The company is becoming more efficient and we believe we can hold cost increases to a lower percentage than revenue increases in the coming quarters.
One of the reasons for our optimism regarding expense control is that our risk management outcome continues to improve. This resulted in a favorable trueup to general and professional liability premiums in Q2 as well as reduced premiums in Q3.
We also experienced a similar favorable trueup to our worker’s compensation accruals in Q3 as our workers camp experience continues to trend in the right direction. We expect a continued progress on these fronts, as well as a newly deployed system for tracking daily labor hours, will ensure that we remain one of the most efficient operators in the business.
Now, I would like to make some general comments about Emeritus’ relative to the industry and the overall economic climate. We are very cognizant of the risks in the market and we continue to diligently monitor the activity levels and competitive landscape on a community-by-community and market-by-market basis. Demand has held steady and this is consistent with our previous experience in down economic cycle.
As we enter the last quarter of 2008, we are pleased that our rate growth and occupancy metrics are improving. While the operating environment in certain markets may be in flux, we are well prepared with our data systems and regional oversight to quickly identify and respond to any changes in consumer needs or desires. With our high quality, moderately priced portfolio, high percentage of need-driven assets and experienced managing cost, we are well positioned to continue to improve occupancy rate and margin as we moved forward over time.
We’ve spent the last year implementing scalable structures and systems to better monitor and manage our key business drivers. Our operating teams are now comfortable with the structure and proficient with the system as our operating results have begun to demonstrate. We feel that we are now in a position to be able to bring on additional capacity. We previously announced the acquisition of 11 communities currently managed by to be leased from healthcare property investors and which we expect to close in the fourth quarter. In addition, we are experiencing a significant increase in the flow of seemingly attractive acquisition opportunities which we are evaluating.
We have the balance sheet, operating platform and experience to be a consolidator in this sector and we feel that the current business environment is playing to that opportunity.
With that, thank you for taking the time to listen to our call and for your interest in our company and I’d like to open it up for questions.
Question-and-Answer Session
Operator
Thank you. (Operator instructions) We’ll take our first question from Donald Hooker with UBS.
Donald Hooker – UBS
Hey, good afternoon everyone. Question on the CapEx and this is going back over the past several quarters. You’ve given some guidance as to what your maintenance CapEx should be, it seems like that’s moved around if I’m looking at my notes correctly. What do you think of maintenance CapEx number is, when I said that I mean, what’s the absolute very minimum of CapEx you would need to run your properties?
Ray Brandstrom
Don, this is Ray Brandstrom. The only change to a CapEx guidance was, at our first quarter conference call, we’ve moved it up as we (inaudible) operations than they had expressed and desire to move forward on some clean up of some properties, so we’ve moved it up a little bit at that point. Other than that, it has remained pretty constant. The question that you’re asking though is, what’s the right number? I think there’s a lot of difference schools of thought out there. The number that we use for this year, we think is on the high-end looking at some deferred maintenance. The general number that we see when we have appraisals done or there’s underwriting for financing, at this point it’s about $500 a unit across the industry, that’s gone up over the past several years, $25 a quarter or maybe $25 every six months. So as the industry has aged, we have seen an estimate for the CapEx to increase. In today’s environment, however, when we look at acquisition or appraisals or financing underwriting, we’re seeing about $450 to $550.
Donald Hooker – UBS
Okay, got you. And then in terms of the leases I guess you took on from Sunrise from a while back, what is like a typical – is that included in your guidance or your guidance is more organic?
Granger Cobb
Our guidance is actually just organic. At this point, I guess, the properties that we’re bringing on with HCP that were managed by Sunrise –
Donald Hooker – UBS
Exactly.
Granger Cobb
We haven’t close on those yet, but we expect to close on those in the next few weeks before the end of the quarter.
Donald Hooker – UBS
Okay.
Granger Cobb
But then, those will be incorporated in small piece in fourth quarter and then going forward.
Donald Hooker – UBS
Got you. Is there a kind of a rent per unit there? It is a pretty big number of units. I am just trying to get a sense of the contribution, is that free cash flow accretive?
Ray Brandstrom
Yes, it is free cash flow accretive and I don’t have that rates for you in front of me Don, but it was in the information that we filed on our 8-K of the press release.
Donald Hooker – UBS
Okay, I’ll dig that up. Let me ask one more question, in terms of looking at the balance sheet, you mentioned – if you could review with us, you mentioned that some amounts due in ‘09, of course, I can look this up, but for 2010, is there any major worrisome principal payments coming up?
Ray Brandstrom
In ‘010 we have a mortgage that – I don’t have any in front of me but we have one building I think in January and a couple of building group in March, they are first mortgages and we have no reason as we sit here today, even after the past three months, to think that those loans just be refinancing ordinary course of business.
Donald Hooker – UBS
Got you. Okay, thanks.
Ray Brandstrom
Thank you, Don.
Operator
We will take our next question from Rob Mains with Morgan Keegan
Rob Mains – Morgan Keegan
Good afternoon, this is Rob Mains. I guess a question today, Granger, some of your competitors obviously has been talking about pursuing kind of discounting strategies, it sounds like you’re not.
Granger Cobb
I think we are positioned in the middle-market price point anyway and actually in some of our markets even relative to the middle-market price point, we’ve lagged some of the competition, so we are taking a look on a community by community basis and evaluating if we need to do any value pricing of a couple of units or any other sort of promotional event to try and drive some traffic to the door but we are not seeing it in a real meaningful way and even in markets where are competitors are discounting, we typically are still very competitive on rate. So we just haven’t seen that we have had to do any discounting in any meaningful fashion so far.
Rob Mains – Morgan Keegan
Okay. Occupancy, I just want to make sure I haven’t written down something wrong, the average occupancies on the quarter went from 80.64 to 80.66 sequentially, is that right?
Ray Brandstrom
The average occupancy in the quarter went from 80.64 in the second quarter to 80.66 in the third quarter.
Rob Mains – Morgan Keegan
Right. Then did you say that the ending occupancy on June 30 was 80.78?
Ray Brandstrom
Correct.
Rob Mains – Morgan Keegan
Could you just talk about what the pattern was in the third quarter that average was below where you ended the second quarter, but it ended above?
Granger Cobb
There is always going to be a lag in average occupancy versus month-end occupancy and the reasons for that Rob is because typically if a resident passes away or goes to a higher level of care and can’t return and let say that happens on the 20th of the month or just even the 15th of the month, families will typically just, since they are paid through the end of the month, take that time to move belongings out and all of that sort of things but then a month-end, then we have a group of those move out will always happen on the first to next month, so there is always a little bit of a trailing of average occupancy and I encourage everyone to focus on the average numbers. The month-end is good to kind of see the direction you’re moving in terms of overall occupancy but average ties to the revenue, so that really is the more important measure.
Rob Mains – Morgan Keegan
Got you. That’s helpful. So was the pattern during the third quarter generally up in the three months?
Granger Cobb
Yes.
Rob Mains – Morgan Keegan
Okay. You mentioned the same-store expenses rising a little bit faster than revenues, that gap has been narrowing and given some of the commentary you said about where you see the expenses trending, might we see year-over-year EBITDA margins flat by the fourth quarter?
Ray Brandstrom
I think that the expenses over the next 12 months are not going to be rising at the same level that they have in the past 12 months. I think that there is some economic pressures, particularly on the food commodities and those types of things. They are going to mitigate any of the inflationary impact we saw in the past 12 moths.
Rob Mains – Morgan Keegan
Okay, would you suggest that the margins can benefit from that?
Ray Brandstrom
That would be the suggestion.
Rob Mains – Morgan Keegan
Okay. And last question has to do with the expense side. Are you saying any easing in labor rates given what’s going on the broad economy?
Granger Cobb
I think in terms of our projections going forward for – we do think that – and we’ve just seen this in the past, as I think Dan mentioned this in his opening comment, that we will see pressure on the labor side lessen a little bit where we can maybe hold our labor rate a little bit better. It seems like some of the commodity costs are also not quite as – moving up quiet as aggressively as they have in the past year. So we think we’ll get a little of a benefit on the expense front. In addition to as I mentioned in the prepared comments that we are seeing some benefit on the GLTL front and on our workers' comp front.
Rob Mains – Morgan Keegan
Right. In terms of labor cost, are you seeing the benefit yet or is there just something that is to be based on the last couple of cycles (inaudible)?
Granger Cobb
We haven’t seen it yet. But I expect that we’ll see it over the course of the next 12 months.
Rob Mains – Morgan Keegan
Okay, great. Thanks a lot.
Operator
We will go next to Jerry Doctrow with Stifel Nicolaus.
Jerry Doctrow – Stifel Nicolaus
Thanks, hi. Couple of things. You had mentioned some one-time items in the quarter, I guess may be it was Ray, and any sense of just what those were in terms of magnitude because when it all may actually normalize out, things like hurricane cost, startup cost, can you quantify them?
Ray Brandstrom
Workers comp was about 2.4, was it 2.4 million?
Jerry Doctrow – Stifel Nicolaus
That was a benefit.
Ray Brandstrom
That was a benefit, and just for comparison purposes, there is about the same amount of PLGL on the second quarter, so those two on a sequential basis kind of average things out. We probably had $350,000 to $400,000 of hurricane-related cost coming through. Other than that, it’s normal seasonality or normal expenses.
Jerry Doctrow – Stifel Nicolaus
And then I think there was some line about startup cost? What was that, can you quantify it at all?
Granger Cobb
That has to do it with two expansions that we –
Ray Brandstrom
Yes, one in the end of last quarter and one at the beginning of this quarter and then a new acquisition I think. We had some cost associated with bringing those online.
Jerry Doctrow – Stifel Nicolaus
I think it might be helpful in the future, (inaudible) that big a deal but if we can get sort of same-store on the expense stuff as well [ph] would be helpful because I think for a lot of your competitors, expenses were actually the big issue this quarter rather than occupancy rate, so I was just trying to clarify that and make it as apples-to-apples as we can.
Ray Brandstrom
We recognize that Jerry and we’re actually looking forward to fourth quarter when we have more comparable numbers to work with because up to the third quarter it is kind of a mixed bag.
Granger Cobb
If you eliminate the Hurricane and some just – a day in the quarter and all that, you had very little, other than utilities, the rest of the cost were very slimly up.
Jerry Doctrow – Stifel Nicolaus
Right. That was the sense I was just trying to get some good numbers. I think you started talking about acquisitions, interests in acquisitions, and I was curious to get a little bit more color there on sort on what you're seeing, maybe what your appetite is and then, in terms of the balance sheet or your capacity, how would you be financing stuff? You have more unincumbered assets you could finance on the existing or would you be putting mortgage down on new stuff you’d be buying, any color there on acquisitions would be helpful.
Granger Cobb
I think Jerry, this is Granger. We’ve been essentially out of the acquisition market by and large for the last year, and they are really in large part due to pricing hasn’t been that attractive. One thing that has happened in the current economic environment is that there is some distress in the marketplace relative to financing and so we are seeing now some opportunities that are coming through at much more attractive pricing; pricing that is well below replacement cost and that has caused us to kind of shift from focusing on development activities to just focusing on acquisition activities. And in terms of financing those opportunities as they come up, we just recently closed the deal with Freddie Mac and KeyBanc, so there is still –Freddie and Fannie are still in business. There is still money out there for attractive assets in good markets at good pricing. The resellers are very interested in continuing to acquire assets at attractive prices, so we think there is a lot of opportunity in this market.
Jerry Doctrow – Stifel Nicolaus
And you are mostly looking at the ones and twos, not something dramatic-like buying of one your competitors or – ?
Granger Cobb
Right. We look at everything and so whatever opportunities present themselves, we’re probably on the list of having a look at it, so I would say anything is possible.
Ray Brandstrom
It’s going to take us a little time to adjust to the fact that we are one of the larger cap companies in the business now.
Jerry Doctrow – Stifel Nicolaus
Okay, I was just wondering how much larger do you want to get and how fast? I guess.
Ray Brandstrom
Our eyes are getting bigger faster.
Jerry Doctrow – Stifel Nicolaus
All right. Thanks a lot!
Operator
We will take our next question from Brian Hue [ph] from Sidoti and Company
Brian Hue – Sidoti & Company
Good afternoon. Just one quick question, most of them have been answered already, but in terms of shipping the rate increases from the Emeritus’ former schedule, October annual rate increase to some of those anniversary increase, what impact do you expect that to have on the fourth quarter, if any?
Granger Cobb
I think the bulk of those increases were accomplished in the third quarter. So on the Emeritus Legacy Group, we expect very little impact in the fourth quarter. So fourth quarter will be primarily the rest of the portfolios annual increases, were roughly 12% would occur in the quarter, plus the continued improvement on the level of care rate capture.
Brian Hue – Sidoti & Company
Okay, and then for 2009, would you expect the rate increases to be smoother?
Ray Brandstrom
Yes, there still be some effects of those, the legacy communities, if you figure our average length of stay is somewhere around two years, so there will still be some effect of that in the third quarter, but it will begin smoothing out from this point forward and probably by 2010, it will be evenly phased throughout the year.
Brian Hue – Sidoti & Company
Okay, all right, thanks a lot, guys.
Operator
And we will go next to Carter Dunlap with Dunlap Equity.
Carter Dunlap – Dunlap Equity
Just to follow-up Brian’s question, I thought I was about to get out of the queue and then I got back in it. Is the level of care capture – also, that shouldn’t have finished in Q3, that should still be positively impacting us?
Ray Brandstrom
The answer is yes. We thought it would really take hold in Q3, but we still have additional room to go on that. So we’re expecting that we’re still not quite capturing all of the level of care charges that we probably should be, so we are probably getting a little bit of exhilarated benefit from that over another quarter.
Carter Dunlap – Dunlap Equity
Can you remind me when that process started?
Ray Brandstrom
Well the system was deployed at the beginning of the year, January or February time frame that was fully deployed and it took us a number of months to get everybody very comfortable in utilizing this and then also comfortable in articulating it to families and residents in terms of going through the rate increase process. So we didn’t see the benefit of it really until third quarter.
Carter Dunlap – Dunlap Equity
And presumably from that net rate number, it’s not creating a push back for you?
Ray Brandstrom
No. Actually, the beauty of that system in bringing that on is that it’s very easy to articulate all the services being provided and so the response is kind of "Well, fair is fair," when you plan the services, what’s being done and what’s the charge that corresponds to that is, so it has been very well-received.
Carter Dunlap – Dunlap Equity
Thank you.
Operator
And we will go to a follow-up from Donald Hooker with UBS.
Donald Hooker – UBS
Hey, thanks for allowing me to jump back in here real quick. Hey, one question, just I had a curiosity in terms of your occupancy which obviously is up which is nice. Is there any regional differences that we should know thinking of housing in different areas, I don’t know if there’s any variation in terms of occupancy in some areas, like selling California or Florida, versus the overall country.
Granger Cobb
Don, we’ve seen a little bit of fluctuation, kind of month to month, quarter to quarter in various areas, but nothing that has been consistent across the board. It seems that if one division is a little flat one quarter, then they comes back the next , so it is – we really haven’t seen anything that gives us a clear correlation to the housing market. And I mean on the flipside of that, as I mentioned we’re very focused community by community and market by market at looking at any issues that are impacting or any barriers to moving occupancy and if we need to balance some specials in an area or balance any kind of other promotional type things, we’re very quick to do that if need be. So I think we manage that process pretty well, so we’re seeing pretty consistent growth across the country.
Donald Hooker – UBS
Okay, and I guess the other question – I’ll jump off – the Blackstone JV, I forgot to ask about that. How’s that doing versus where you are there in terms of occupancy?
Granger Cobb
Actually the Blackstone JV has improved occupancy faster than the overall consolidated portfolio and the reason being they were starting from a lower threshold. I think when we took that group on, we were in the 60, low 60s in terms of occupancy, so we’ve been able to move that at an accelerated pace relative to the rest of the portfolio.
Donald Hooker – UBS
(inaudible) where you are right now in terms of the Blackstone?
Granger Cobb
Say that again. Where we’re at with Blackstone portfolio right now?
Donald Hooker – UBS
86 or?
Granger Cobb
Yes.
Donald Hooker – UBS
Okay, thank you.
Ray Brandstrom
The shocking thing is that all whole investment, when Blackstone reviews, this is tiny and small for them, but we reached the top of the ladder in terms of yield, so perhaps –
Donald Hooker – UBS
Okay, thank you.
Operator
And we will return to Rob Mains with Morgan Keegan.
Rob Mains – Morgan Keegan
Thanks. Ray, I want to straight to the table where you have the adjusted EBITDA, the EBITDA reconciliation. Professional and workers' comp adjustments in the quarter were 630,000; year-to-date it is a $2.4 million number. The $2.4 million that you mentioned in response to Jerry’s question, was that in the quarter or was that in the nine months?
Ray Brandstrom
There are two components to it. There is a current quarter impact and a prior year impact. So the $2.4 million is the total and the amount you mentioned is the amount that relates in large amounts to prior year.
Rob Mains – Morgan Keegan
Okay, so but in the quarter there is a $2.4-million benefit.
Ray Brandstrom
That’s correct.
Rob Mains – Morgan Keegan
Okay, got you. And then, second question, you’re talking about potential acquisitions and things like that. When you look at the (inaudible) and the possibility that you might have some REITs or landlords that are going to look to reassign leases, in terms of management infrastructure capability, how much, obviously there’s a capital component as well, but in terms of, you’d serve how leverage above the management is, where do you think you are in terms of enable to add additional facilities?
Ray Brandstrom
Well, from both sides of the equation, we’re in great position. We were looking for the opportunity to leverage our infrastructure because we think we’re in great shape and given we’ve had a great year, we’re really running very smoothly and have extra capacity and from the REIT standpoint, I think we'd be ranked number one with no close second and we’re probably the only one around that could take on a larger multifacility-type transaction.
Rob Mains – Morgan Keegan
Fair enough, thanks.
Operator
And we will return Jerry Doctrow with Stifel Nicolaus.
Jerry Doctrow – Stifel Nicolaus
Hi, just two little things, the HCP acquisition, the rents are scheduled to ramp up pretty quickly on that, so I was just trying to understand the nature of why you negotiated that deal and how much comfort you have that you can continue to meet that ramp up?
Granger Cobb
When we negotiated that deal, we wanted to make sure we built in a cushion over the first couple of years in terms of making sure that those properties would cash flow and so we – HCP adjusted the rent down in the first two years in order to accomplish that and we’re very comfortable that as we pro forma those properties out and looked at some potential savings on the cost side, the ramp up on the rent is something we can stay well ahead of.
Jerry Doctrow – Stifel Nicolaus
Okay.
Ray Brandstrom
We’re going in a door with an advantageous rent.
Jerry Doctrow – Stifel Nicolaus
Okay. So the rent ramped down in your favor, rather than so much of ramp [ph]?
Ray Brandstrom
You got it.
Jerry Doctrow – Stifel Nicolaus
Okay. And then, the other thing and Ray I apologize, I think you mentioned these, but could you just go over again the expansion development numbers because I think I missed them when you went through them?
Ray Brandstrom
Yes, I can do that. Let me to that section and get the right numbers for you. For the third quarter, we had no new openings in the development category, but we do have a 38 units standalone Alzheimer’s that will open in the fourth quarter. We opened one expansion totaling 66 units in the third quarter and we expect to open 23 unit expansion in the fourth quarter.
Jerry Doctrow – Stifel Nicolaus
And then, there’s nothing in ’09, right?
Ray Brandstrom
We have nothing scheduled for opening in ‘09.
Jerry Doctrow – Stifel Nicolaus
Okay, thanks that’s all for me.
Ray Brandstrom
Thank you.
Operator
And we go next to Steve Son [ph] with UBS.
Steve Son – UBS
Good after. Can you talk a little bit in particular to the extent, for the analysts here on the call (inaudible), the trade-off between acquiring a leased operation and its impact on FFO as opposed to continue to operate on a lease basis? What are the economics of it for you? What kind of yield do you expect to pick up?
Granger Cobb
Are you talking about when we have done the buy-in of our existing leases?
Steve Son – UBS
Yes.
Granger Cobb
Mostly, the economics are a push going in the door. We don’t really achieve any positive current change, but we don’t go backwards neither. And then, what we’re really accomplishing is eliminating the annual escalators going forward, so we’ve now fixed our debt service.
Steve Son – UBS
And is there a level in terms of cost of capital where that process is defeated and where do we stand in that regard today, if that's the case?
Granger Cobb
I think the odds are all these acquisitions have come from the REITs and basically they’re looking at the cost of their capital, whether they’re better off getting the money from us or from the market, and my stance is that most of them are done for a while and there probably won’t be any major opportunities to reacquire properties from the REITs now. That may change, but that’s kind where we are at the moment.
Steve Son – UBS
Okay, and then a related question, the extent to which you have an opportunity to buy other properties that’s come up for sale, would it be fair for us to assume that your capital structure, your balance sheet, as we understand it, you’re better than your competitors, enables you folks to do next business in an environment that others cannot?
Ray Brandstrom
I would say that’s true. I think that’s based on where we are today. I think it’s based on our operation reputation that Granger has helped bring to the deal and it’s also based on 30 years of experience with the core people here on where we have basically been growth oriented and acquisition-oriented and I think the lenders have a lot confidence in our abilities.
Steve Son – UBS
And I understand that it's not a pinpoint [ph] number but what kind of cap rate do you see on asking price for properties today?
Ray Brandstrom
I think we’re looking at stuff that is not a function of cap rate but rather is a percentage of replacement cost. So I think the volume of stuff we’re looking at is, if its replacement cost is $150 a room, we’re looking at $100 to $125 a room and the variation in price will depend on what the building looks like going in the door.
Steve Son – UBS
I hesitate to ask this question, but just so that we don’t crush our own numbers here incorrectly. With the Emeritus stocks trading at $11 in the market, what does that imply toward a per room evaluation for the stock?
Ray Brandstrom
I wish I owned it all.
Steve Son – UBS
I guessed that’s the right answer to questions then. All right, just out of curiosity, as you looked at those metrics, how should an analyst look at lease properties to the extent to which when they are covered by a lease that some rates that has a margin for profit as opposed to those which are company owned, how do you sift that out?
Ray Brandstrom
That’s also a varying thing, I mean, where it was two years ago, where it is today, it’s constantly changing. Historically, (inaudible) has done a lot of evaluation and I think they’ve put a multiple of six on the lease, and six to eight with the leases being at the low end and (inaudible) at the higher end.
Steve Son – UBS
Okay, and then final question for you, software program that you were rolling out, is that rollout complete at this point?
Granger Cobb
Yes, actually that rollout was completed by the end of the first quarter of this year, and in terms of just having it fully deployed in all of communities, but really seeing the benefits of it took a few months more and it was function of training and really having our field staff understand the benefit of it and get very comfortable utilizing it and in the case of the level of care fees, articulating it as it well.
Steve Son – UBS
So there should be some modesty year-over-year gain still to be recognized comparatively?
Granger Cobb
I think so, yes.
Steve Son – UBS
Okay, thank you very much.
Operator
Okay, that concludes the question-and-answer session today. At this time, Mr. Cobb, I’ll like to turn the conference back over to you for any additional or closing comments.
Granger Cobb
All right, thank you. Let me just leave you with a few thoughts. We are, as we've talked about today, we’re well-capitalized. We’re cash flowing. We still have meaningful opportunity to grow our business, both internally through our continued improvement in our operating metrics and externally because we’re just seeing attractive opportunities come across our desk from an acquisition standpoint. So we’re very excited and we can’t wait to do this again in another three months. Thank you all very much.
Operator
Ladies and gentlemen, that concludes today’s presentation. We thank you for your participation. You may now disconnect.
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