Capital Senior Living Corporation Q3 2008 Earnings Call Transcript

Nov.20.08 | About: Capital Senior (CSU)

Capital Senior Living Corporation (NYSE:CSU)

Q3 2008 Earnings Call

November 5, 2008 11:00 am CT

Executives

James A. Stroud - Chairman of the Board

Lawrence A. Cohen - Vice Chairman of the Board & Chief Executive Officer

Ralph A. Beattie - Chief Financial Officer & Executive Vice President

Analysts

Carter Dunlap - Dunlap Equity Management

Sam Miran - GEM Realty Capital

Todd Cohen - MTC Advisors

Rick Fetterman - Fetterman Investments

David Ratliff - Doucet Asset Management LLC

Operator

Good day and welcome to the Capital Senior Living third quarter 2008 earnings release conference call. Today’s conference is being recorded.

Any forward-looking statements made by management in this conference call are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitations, to the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business condition, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rate, and changes in accounting principles and interpretations among others, and other risk factors identified from time to time in the Company’s report filed with the Securities and Exchange Commission.

At this time I would like to turn the call over to Mr. James Stroud. Please go ahead sir.

James Stroud

Good morning and welcome to Capital Senior Living’s third quarter 2008 earnings call. Despite a challenging operating environment, year-over-year results include an increase in resident revenues of 3% and a 40 basis point improvement in EBITDAR margins. In the third quarter of 2008, resident revenue increased $1.3 million to $43.2 million, approximately 3% increase from the third quarter of 2007. The EBITDAR margin for the third quarter of 2008 was 29.9%, an improvement of 40 basis points over the third quarter of 2007. These positive gains are evident in our same communities under management.

Excluding the four communities undergoing conversions, same-store revenue increased 2.9% versus the third quarter of 2007. Average monthly rent increased 5.3%while same community expenses increased 2.7%. The result was a 3.2% increase in net income from the comparable prior year period. On May 29th 2008, the Company announced that a special committee of our Board of Directors had engaged the Bank of America Securities as our financial adviser to assist the Company and exploring and considering a range of strategic alternatives. The Company is still evaluating a strategic alternative and at appropriate time we will advice the marketplace where the Company stands in the process. During this time period, the Company intends on executing its 2008 business plan.

Now for further comments on the third quarter 2008, I introduce Larry Cohen, Chief Executive Officer. Larry?

Lawrence A. Cohen

Thanks Jim and good morning. I am pleased to welcome everyone to our third quarter earnings release call. Our community’s offers Senior’s Quality Housing in elegantly appointed buildings with support of services at affordable rates. Despite a challenging economy and housing market, we have made progress in the third quarter. As we grew occupancies, implemented rent increases and employed sound expense management. We continue to differentiate our communities as an affordable option delivering exceptional value to elder seniors in challenging economic times. Our communities enjoy solid, well-established reputations in the market. Our accomplished marketing staff and first-rate sales directors are implementing effective marketing plans including direct mail campaigns, telemarketing, increased events and outreach. These efforts are generating higher occupancies and revenues.

Move-ins and deposit increased to all levels of care and move-out decreased resulting in a 50 basis point improvement in physical occupancy of the third quarter. Our attrition rate in the third quarter slowed to 37.3% compared to 40.7% in the second quarter. Independent living attrition was 33.7% for the quarter compared to 36.2% for the second quarter and assisted living attrition was 47.4% versus 58.2% in the second quarter.

Deposits and occupancies improved in October and we are cautiously optimistic that these improvements will continue in November. Our disciplined approach to managing expenses and increasing rate is producing positive results. Average monthly rents in September increased 5% from a year prior and 1.1% from June of 2008. Community offering results were solid in third quarter. Fifty seven of our communities were stabilized with an 89% average physical occupancy rate.

Operating margins before was property taxes; insurance and management fees were 47.7% in stabilized independent and assisted living communities. At communities under management, these include our consolidated communities, communities owned in joint ventures, and communities owned by third parties and managed by the Company, excluding four communities with units being converted to higher levels of care, same-store revenues increased 2.9% versus the third quarter or 2007 with a 5.3% increase in average monthly rent. Our expense management and group purchasing program limited same-store expense growth to 2.7% despite unusual increases in utilities expense in July and August with 27 days of above 100 degree heat in Texas and as compared to one above 100 degree day in 2007. These achievements generated same-store net income growth of 3.2% from the comparable period in 2007.

The number of communities we consolidated in the third quarter increased to 50 from 49 a year earlier. Financial occupancy of the consolidated portfolio averaged 85.7% in the third quarter. Excluding the four communities with units being converted to higher levels of care, the average financial occupancies for the quarter for 46 consolidated communities was 87.6%. Average monthly rents increased 5.7% to $2,491 and that is also a 1.4% sequential increase from the second quarter average monthly rents. Most of our communities are located in the more stable housing market in the country and offers Senior’s quality housing with support of services at affordable rates.

Occupancies have improved since June and we are hopeful that in continuing demand and needs of an aging population plus a very limited new supply of Senior Living communities will return the occupancies to higher levels. Every 1% of occupancy gains at our consolidated communities will generate approximately $2 million in additional revenues. A 5% increase in average monthly rents at our consolidated communities will generate approximately $8.5 million in additional annual consolidated revenues.

At stabilization, we typically achieve better than a 70% incremental EBITDAR margins which would significantly increase the Company’s EBITDAR and cash flow. The average age of our resident is 85 and the decision to move into a senior living community both independent living and assisted living is need driven. Residents typically move from their former residences due to health problems, difficult in maintaining a home, loneliness and the need for supportive services. Through assisted living, our home healthcare residing in our independent living communities, residents can receive these services at all of our communities and the cost of living at a Capital Senior Living community is usually more affordable than living at home. This is even more compelling today as many seniors living at home on fixed income are facing increasing costs and are seeking value.

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

In addition, we are converting many units of many of these communities to higher levels of care making the communities more compelling to prospects and permitting more residents to age and place. Our 2008 business plan is focused on increasing capacity and levels of care to meet the needs of our residents with an average age of 85 through expansions, conversions and new developments. These investments are expected to produce excellent returns on invested capital and build shareholder value. We are converting 213 independent living units in 7 communities to assisted living for dementia care. Of these, 80 were converted at the end of last year, 18 units were converted in May, 17 units are expected to be license and assisted living during this quarter and next, and 45 units are expected to be licensed as assisted living in the second half of 2009.

The estimated cost for these conversions is approximately $2.7 million and upon reaching stabilizations, these converted units are expected to increase our revenues by approximately $4.1 million with a 60% incremental margin. We have adjusted our expansion plans and are currently monitoring market where two of our independent living communities are located to evaluate the local economies over the next couple of quarters. These expansions were down about 160 units for a total cost of approximately $23 million and they will be funded with mortgage debt and cash on hand. We have had excellent result in generating significant improvements and have communities that have been expanded or have had units converted to additional levels of care. Having higher levels of care at existing properties should enhance revenues and cash flows by improving occupancies, reducing attrition, increasing average monthly rates and expanding margins.

We are pleased to report that we opened our newest community in Dayton, Ohio at the end of August. This community has 146 units of which 101 are independent living and 45 are currently being licensed as assisted living. We have two other communities under development in joint venture with Prudential Real Estate Investors acting on our behalf of the Institutional Investors which are expected to be complete in the first part of 2009 and open around April of 2009. These developments will have 287 units, 197 independent living, and 90 assisted living units. We are continuing to look at additional sites in strong various entry markets for a limited number of additional joint-venture developments assuming construction financing is available on acceptable terms.

New developments of seniors' housing continues to be severely constrained and construction activity is negligible in our markets. We expect building will continue to be restrained as the credit crises has worsen in already difficult environment to build new senior living communities. This decrease in development which may last for an extended period of time should leave this senior’s housing industry with favorable demographics and sounds fundamentals out of the current throw off to a robust period.

I would now like to introduce Ralph Beattie, our Chief Financial Officer to review the Company’s financial result for the third quarter of 2008.

Ralph Beattie

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 third quarter and the first nine months of 2008. If you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

The Company reported resident revenue of $43.2 million for the third quarter of 2008 compared to resident revenue of $41.9 million for the third quarter of 2007, an increase of $1.3 million or 3%. The number of communities we consolidated on our income statement increased by one since the third quarter of last year, from 49 to 50, with the addition in January of one leased community. Financial occupancies of the consolidated portfolio averaged 85.7% for the quarter with an average monthly rent of $2,491 per occupied unit.

Excluding four communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 87.6%. Average physical occupancy for the 57 stabilized communities excluding four communities with units being converted to higher levels of care was 89%. Until these four communities with conversions again reached stabilized occupancy; we will continue to exclude them for our stabilized total.

Unaffiliated management services revenue decreased by $0.7 million in the third quarter of 2008, improvement of unusually high level in the third quarter of 2007. The third quarter of last year included the true up of an acquisition that took place in 2004 which had look back provision. We recovered $0.4 million of management fees and road off of contingent note payable of $0.3 million.

Affiliated management services revenue included $0.4 million of development and pre-marketing fees in the third quarter of 2008 due to two communities’ being developed in joint ventures. These development fees are booked on a percentage of completion basis and with the construction proceeding ahead of schedule, the development fees on these projects have largely been earned.

Revenues under management increased approximately 1% to $55.7 million in the third quarter of 2008 from $55 million in the third quarter of 2007. Revenues under management improved revenues generate by the Company’s consolidated communities, communities owned with joint ventures and communities owned by third party that are managed by the Company. There were 65 communities under management in the third quarter of 2008 compared to 64 communities under management in the third quarter of 2007. These communities under management same-store revenue increased 2.9% versus the third quarter of our 2007 as the result of a 5.3% increase in average monthly rent.

Operating expenses increased by $1 million or 4% in the third quarter of 2007 and as a percentage of resident and healthcare revenues operating expenses were 63.2%. On the same-store basis, food cost increased 3% from the third quarter of 2007, labor costs were up 2%, and utilities were up 7% as Larry mentioned largely in the month of July due to our unusually hot summer in Texas.

We also increased our provision for doubtful accounts this quarter in accordance with our accounting policy transitioning to a new system of one of our CCRC resulted in some coding errors and related billing delays and we expect to be able to reduce this reserve by yearend.

General and administrative expenses of $2.4 million were unusually low at $11.5 million below the third quarter of 2007. One factor was the decrease in health insurance claims at $0.4 million from the third quarter of the prior year. The Company self-insured for the cost of the employee independent medical benefits and purchases stop-loss protection on an individual and aggregate basis. Claims during the quarter came back in the line after an unusually high second quarter. We also reversed about $0.3 million in approved bonuses for this year. GNA expense as the percentage of revenues under management was 4.3% in the third quarter of 2008.

Facilities rates expenses were $6.3 million from the third quarter of 2008, approximately $0.3 million higher than the third quarter of 2007 reflecting 25 leased communities this year versus 24 last year along with increases and contingent rent. Depreciation and amortization expense increased $0.3 million in the third quarter of the prior year as the result of capital improvement of certain of the Company’s owned in leased facility along with depreciation in current and new information systems which became operational in January 1, 2008.

Adjusted EBITDAR for the third quarter of 2008 was approximately $14.3 million; an increase of $14.1 million in the third quarter of 2008 and adjusted EBITDAR margins was 29.9% for the quarter, a 40 basis point improvement in the comparable period in the prior year.

Interest expense of $3.1 million in the third quarter of 2008 was $0.1 million less from the third quarter of 2007, reflecting lower debt outstanding due to principal amortization. The Company reported a pretax profit of approximately $2 million in the third quarter of 2008 compared to a pretax profit of approximately $2.2 million in the third quarter of 2007. The Company reported net income of $1.2 million or $0.05 per diluted share in the third quarter of 2008 versus net income of $1.4 million, also a $0.05 per diluted share in the third quarter of 2007.

Adjusted cash earnings which we respond to as net income plus depreciation and amortization were $4.3 million or$0.16 per diluted share in the third quarter of 2008 versus $4.2 million, also a $0.16 per diluted share in the third quarter of 2007.

For the first nine months of 2008, the Company increased revenue of $145.3 million compared to revenue of $140.9 million in the first nine months of 2007, an increase of $4.4 million or approximately 3%. Adjusted EBITDAR for the first nine months of 2008 was $42.9 million, and increase of $2.2 million or 6% from the $40.7 million dollars reported for the first nine months of 2007.

The Company’s result improved from net income of $3.1 million in the first nine months of 2007 to net income of $3.9 million in the first nine months of 2008. Cash earnings grew from $11.9 million or $0.45 per diluted share in the first nine months of 2007 to $13.3 million or $0.50 per diluted share in the first nine months of 2008. Capital expenditures in the third quarter were approximately $2.1 million of this amount approximately $1.3 million represented maintenance spending at the property level. If annualized, this rate of spending would equal approximately $758 per unit.

Cash increased by $2 million during the quarter, an equal of $28 million on September 30th. Mortgage debt was $186.7 million at the end of the third quarter of 2008, a reduction of $3.2 million in the year ago. We have 25 mortgages, all at fixed interest rates, averaging 6.1% and with the exception of one small mortgage, all of our loan maturities are between July of 2015 and May of 2017.

I would now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Carter Dunlap - Dunlap Equity Management.

Carter Dunlap - Dunlap Equity Management

Hi. You mentioned the impact of the real estate market on some of your communities, I have heard industry comments and other operators these comments about discounting but I do not think I heard that in any of your prepared comments. Can you make a comment about what role, if any, that is playing and are you doing it or are you considering it?

Larry Cohen

Good morning, Carter. If you look at our results for the quarter, you can see that for old properties under management, our average monthly rent actually increased 6.4% year-over-year and our sequential growth is about 1.4%. We generally are not discounting. In some selective markets who is competitive, what we will do is we will take a unit that typically is the most difficult to lease because it may be the furthest from the dining room, it may have a poor view or maybe just a wrong size and we will work some type of concession with the residents but in general, we do not discount. We have not had the need to discount and we believe that that philosophy may change the integrity of the lease structure for all of our residents and again helps us focus on really driving the net offering income per unit and cash flow per unit.

Operator

Your next question comes from the line of Sam Miran - GEM Realty Capital.

Sam Miran - GEM Realty Capital

I jumped on this call late so if you have already covered this, I apologize and will talk about it later but can you talk about the trends in October and what you are looking at in November in terms of occupancies and rents?

Larry Cohen

Yes, I would be happy to, Sam. As we mentioned, our physical occupancy in the quarter improved by about 50 basis points. October was a good month both in terms of deposits and move-ins. Our actual physical occupancy increased nearly 30 basis points in October so we saw positive trends in October and we are cautiously optimistic that November will be good. So that is the most current information we have but we did see improvements through October.

Sam Miran - GEM Realty Capital

Got you and you have been able to maintain this for October, the occupancies increased by 30 basis points without having a discount as I think you just mentioned?

Larry Cohen

That is correct.

Sam Miran - GEM Realty Capital

Interesting. Okay. Thanks.

Larry Cohen

Going back, obviously there is a common theme in both Carter and Sam’s question is we are typically in pretty sound, relative speaking, sound housing markets. I think the other aspect of our business is that we have a product that is affordable. If you look at the average monthly rents in the Waterford buildings which represent 17 of our buildings, it is $2,089 a month inclusive of meals, activities, security, transportation, utilities. Overall portfolio is averaged about $2,600 as independent and assisted. So, I think that our product had served well in the markets that we operate in and if you look at the pricing and the price points we operate, it is still affordable to most seniors than moving into our buildings.

Operator

Your next question comes from the line of Todd Cohen - MTC Advisors.

Todd Cohen - MTC Advisors

Good morning, Larry or Jim, can you talk a little bit about the units being converted? I am a little bit confused how that is working in and around the numbers as you…

Larry Cohen

Yes.

Todd Cohen - MTC Advisors

I believe it is four properties?

Larry Cohen

We right now have conversions underway for plans for seven properties. Four of those are actually right now being converted. We have units out of service to accommodate the conversion. In fact, we have decided to delay the conversion at one building Tesson Heights in St. Louis where we had planned a 48-unit conversion. The reason for it is the building is full and we do not have the ability to create the vacancy or the licensure for those converted units. So we have delayed that but in the other buildings…

Todd Cohen - MTC Advisors

So that would be one of the seven but not of the four.

Larry Cohen

That is neither. That is not it. That was the one that we had planned that we have delayed. So of the seven, we have Gramercy Hill that was completed in the second quarter. We have conversions underway at Crown Point, Villa Santa Barbara and Peoria. We are waiting licensure for those buildings. In the meantime, we add units because we have converted, we have staffing. Those units that are not released at this point…

Todd Cohen - MTC Advisors

So how many units are there, that have not been released?

Larry Cohen

We are talking about generally, roughly 115 units.

Todd Cohen - MTC Advisors

A hundred and fifteen units in basically three properties?

Larry Cohen

In four.

Todd Cohen - MTC Advisors

In four, okay. So, you said one was completed in the second quarter.

Larry Cohen

That is correct. That was 18 units.

Todd Cohen - MTC Advisors

Okay, so those are basically online now?

Larry Cohen

They are.

Todd Cohen - MTC Advisors

Okay.

Larry Cohen

And those are in our numbers. We have not excluded that. Those are in our numbers.

Todd Cohen - MTC Advisors

Those are in your numbers. Okay. So, what is the potential opportunity from the 115 units on an annual basis at a proper..?

Larry Cohen

Ninety-percent of occupancy, those 115 units are expected to generate about $3.9 million of revenue with an expected EBITDAR margin of about 60%. So that would be about $2.4 million.

Todd Cohen - MTC Advisors

So you said 64% or 60%?

Larry Cohen

Six-O, 60.

Todd Cohen - MTC Advisors

Okay. All right and then, you referenced another expansion of about 160 units? Or a new property or…

Larry Cohen

Those are two expansions that we are looking at. We have decided on those, to continue to monitor those markets before we begin those. So, if they do begin, they will probably begin in the second half of 2009. Those two expansions would have 160 total units, each expansion would have 60 units of assisted living, 20 units of dementia care and those expansions are expected to cost about $23 million each. And that would be financed by mortgage debt and then cash on hand.

Todd Cohen - MTC Advisors

Okay and…

Larry Cohen

I am sorry; the $23 million is total for both. Yes total, I correct myself.

Todd Cohen - MTC Advisors

Total for both, okay. In this current credit environment, how do you go about getting financing on something like this?

Larry Cohen

There is financing from Fannie Mae for various projects actually. What is interesting about the senior housing business and the current environment is that Freddie Mac and Fannie Mae are continuing to lend to the industry both for stable existing properties and Fannie Mae actually has a program that is limited to a select group of proven operators that they would finance development and actually Fannie Mae would finance and is interested in financing these expansions.

Todd Cohen - MTC Advisors

And Larry, what kind of rates are you thinking about, or are available?

Larry Cohen

There could be roughly about 325 basis points over LIBOR. LIBOR right now is back down to around 2.25, 2.3.

Todd Cohen - MTC Advisors

Yes, that is not bad at all if it is available.

Larry Cohen

Yes.

Todd Cohen - MTC Advisors

Okay and then just one last question. It looks like the maintenance cost per unit is going up. Why is that happening? And is there a way to get a handle back on that?

Ralph Beattie

Todd, it is Ralph. You know you are right because we have been reporting that for the last couple of quarters and each quarter, we take the maintenance spending at the property level and annualize it. The cost per unit has been increasing. We are presently running in the third quarter by $758 dollars average and would annualize that spending over a 12-month period. We are going through a program of making sure that our properties are in absolute pristine condition. So, we are doing some cosmetic things primarily. It is not structural but there are things to make the properties even more marketable in these tough times and we have a consistent program to spend that amount so we maximize our marketability.

Todd Cohen – MTC Advisors

Yes, okay.

Larry Cohen

Todd, these are typically for carpets, coverings on furniture in common areas. As Ralph said, it is part of the marketing program that we are focused on particularly in this environment to make sure that our properties are very attractive in this market.

Todd Cohen – MTC Advisors

That makes a lot of sense. I think it is money well spent. Thanks.

Operator

Your next question comes from the line of Rick Fetterman with Fetterman Investments.

Rick Fetterman - Fetterman Investments

Good morning, everyone. Actually with the exception of one, all of my questions have been answered. I was curious if there is, you have got any indication on when this process with Bank of America is going to be complete?

Jim Stroud

Good morning, Rick, Jim Stroud. No, basically, given the financial markets, we are still evaluating our alternatives and whenever that has been determined. Yes, we will communicate with the marketplace.

Operator

Your next question comes from the line of Chris Doucet - Doucet Asset Management LLC.

David Ratliff - Doucet Asset Management LLC

This is actually David, Chris is here with me. But just a couple of questions with the community you opened in Dayton, Ohio. Last call you expected the overall cost per unit when the building went into, $150,000 per unit was expected when the building was operational. Is that still the final total?

Larry Cohen

That is still a good estimate. Actually, it may come in a little lower than that primarily because interest rates are lower, LIBOR is down and we actually built a little faster than we expected. So the carrying cost was a little lower. The hard cost were very close to what we had budgeted; we have a little over today. Well actually built this from below the budget slightly. It is probably coming in close to about $145,000 a unit.

Jim Stroud

It is, David. It is coming in at $145,000 a unit.

David Ratliff - Doucet Asset Management LLC

Okay, excellent. Second question, your financial occupancy and physical occupancy has been improving not only year-over-year last couple of quarters but sequentially. You said October; you had a pretty good feel for October. Going forward, do you think we have bottomed in some of the macro factors that have been affecting what we have been seeing for a couple of quarters have been affecting occupancy?

Larry Cohen

It is hard to really forecast what will be. We had benefited in the third quarter from lower attrition. We did have an improvement in our move-ins and deposits. We serve a need-driven customer and there are some pent-up demands obviously, there is only so long people can delay. And hopefully a lot of the initiatives there are happening around the country to create better liquidity will help people move-in a little more easily. But we are encouraged by what we have seen. So far this year, it looks like we hit bottom in June. We have recovered from them and we are cautiously optimistic that we will continue to see improvement.

Ralph Beattie

And David, on a macro basis, if you look at home sales, we have seen a turn nationwide in home sales. The reporting of it that a lot of people now are realizing this may be the bottom of the market, are coming in and acquiring homes and so we have seen an uptake in the home sales. So we are seeing some positives on the macro level.

David Ratliff - Doucet Asset Management LLC

Okay. Well good. I have one more macro question for you and this may be a crystal ball question. We saw October; the whole sector got hammered in especially some of your more levered competitors. See if you also, if you have the overhang, not the overhang, but the question about the strategic alternatives. You think what we have seen in the stock price over the month of October has more to do with the leverage assumed in the industry and being basically grouped with someone like Sunrise or Brookdale? Or do you think it is something else?

Larry Cohen

Well, David, the whole market was awful in October. There were a lot of redemptions, a lot of margin calls amongst various funds. So if you look at some of the selling pressure from some of the holders, as Ralph mentioned, we feel we have a very strong balance sheet. We are very fortunate that we refinanced our loans when we did converting all the flat rate debt to fixed rate by May of 2007 so our maturities are at basically 2015 to 2017. We could fix charge coverage on those.

So, hopefully if people get to analyze and differentiate companies, they can appreciate the fact that we do not have maturities in the near term. We are sitting with cash on the balance sheet. We have assets that, actually, with the Fannie Mae and Freddie Mac programs do have ability to get supplemental financing as well. So, hopefully people will recognize that we have some less pressure than perhaps some other companies. I also think there are some other factors in the stocks that relate more to the entire stock market last month and a lot of what happened as far as outflows from funds and the need for some shareholders to sell their positions.

Jim Stroud

Yes, I think there is on a macro basis, there was a flight to quality. We saw it in the credit markets. We saw the movements to the larger cap stocks and that affected the small cap and the micro cap stocks. From the standpoint of our Company’s specific as Ralph mentioned, we added $2 million cash to the balance sheet for purposes of third quarter on a diluted basis. We are at $0.16 a share annualized to be $16 million positive cash flow even at the occupancy we are at. So, we feel given our product type, being the affordable and the diversification and being out of the market. We are not heavy into Florida which is with just one asset. In California, we have three assets but we are not in the areas where it is significantly undervalued in homes that just fallen by 50% to 60%. We are well positioned for the uplift.

David Ratliff - Doucet Asset Management LLC

Great. That is helpful and that is good color coming from management. I appreciate your time in taking my questions.

Operator

You have a follow up question from the line of Carter Dunlap with Dunlap Equity Management.

Carter Dunlap - Dunlap Equity Management

Hi, Just another follow up. There has been a lot of discussion about the change in the REIT laws and structures and what that might mean for deals going forward and possibly more creative opportunities. Have you, you know you have very good relationships there. Can you comment on what you think that might mean for the Company and the industry?

Larry Cohen

I think that it does create more flexibility in structure with the REITS. We have continued to enjoy very nice relationships with many of the larger healthcare REITS and I do think that the REIT I think will be selective and judicious in how they use those rules as well as the concentration of joint venture or owned offering assets versus leases or mortgages by the REITS because of their investor profile. But I think that it is encouraging that it does create for some more flexibility in greater structures that could facilitate transactions with some of the REITS.

Jim Stroud

And Carter, our Company has experience with joint ventures and with the Blackstone, GE and Prudential so we understand that our Board is knowledgeable about it. We know how it benefits the shareholders so I think we have experience in that are. I think that is going to be beneficial as well analyze it as well as the REIT and what the right relationship is on a go-forward basis. So we applaud that. The one thing that there was a genuine concern are, are we going to be heads up competition with REIT and we are pleased because I think the REITs have recognized they do not want the operational liability that weighs heavily on their decisions and hence the balance of joint ventures in their portfolio, we generally see will be between 20% maybe to 25%. We are not going to be heads up competition on a massive basis with the REITS so we are pleased about that. So, we think for capitals in operating company it gives us, as Larry mentioned, it gives us additional flexibility and with our background in joint ventures, we can right-size it for the right opportunity.

Carter Dunlap - Dunlap Equity Management

Presumably it would mostly impact you on go-forward opportunities, not anything in the portfolio?

Jim Stroud

Exactly. It would be go-forward opportunities.

Carter Dunlap - Dunlap Equity Management

The other comment I have heard in the comment and analysis is that it might give the REITs opportunity to be do more short term deals. I was no quite clear why that would be a good thing.

Larry Cohen

I will tell you from my conversations with the REIT, they are all looking long term. The REITS are long term owners and whether they use this new REIT tax law or whether they use their traditional mortgage financial leases. Every REIT we talked to is looking long term.

Jim Stroud

Yeah, the short term that we have seen has been more in the retail REIT and the REIT focused on MOBs, Medical Office Buildings where they will build, they have become merchant builders effectively where they will utilize it to build and sell. The problem with that is once you start that build and sell; you have to continue that velocity in order to maintain your distribution rate.

Operator

And there are no more questions in the queue at this time. I would like to turn the call back over to management for any additional or closing remarks.

Jim Stroud

We appreciate everyone’s time and have a good day. Thank you.

Operator

And that does conclude today's conference. We appreciate your participation and you may now disconnect.

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