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Brookdale Senior Living, Inc. (NYSE:BKD)

F4Q08 Earnings Call

March 2, 2009 8:00 am ET

Executives

Ross Roadman – Investor Relations

Bill Sheriff - Chief Executive Officer

Mark Ohlendorf - Co-President and Chief Financial Officer

Andy Smith - Executive Vice President and General Council

Analysts

Mark Biffert – Oppenheimer & Co.

Ryan Daniels – William Blair

Jerry Doctrow – Stifel Nicolaus

Jeff Englander – Standard & Poor’s

Sloan Bohlen – Goldman Sachs

Adam Feinstein – Barclays Capital

Rob Mains – Morgan Keegan

Operator

(Operator Instructions) Welcome everyone to the Brookdale Senior Living Fourth Quarter 2008 Earnings Call. Mr. Roadman, you may begin your conference.

Ross Roadman

I want to welcome you to the fourth quarter and full year earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff our Chief Executive Officer and Mark Ohlendorf our Co-President and Chief Financial Officer. Also present is Andy Smith our Executive Vice President and General Council.

Before I turn the call over to Bill, as mentioned this call is being recorded a replay will be available through March 9th by calling 1-800-642-1687 within the US or 706-645-9291 outside the US and referencing access code 87021756. This call will also available via webcast on our website www.BrookdaleLiving.com for three months following the call.

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 of the factors that could cause actual results to differ material from Brookdale Senior Living’s expectations are detailed in the earnings release we issued last night and in the reports we 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, I'd like to turn the call over to Bill Sheriff.

Bill Sheriff

On today’s call we will discuss the results and accomplishments of 2008, the results of the fourth quarter, recent actions we’ve taken to address virtually all of our near term debt maturities including the renewal of our credit line, finally, an overview of our current sense of 2009.

We’re in the midst of an extremely difficult economic environment that certainly presents challenges but also offers multiple opportunities. Despite the environment our occupancy has generally held. Occupancy hit a low point in June at just under 89% and ended the year at 89.5%. In fact, over the last two years occupancy has moved in a range of only 2%. At the same time, we have posted 5% to 6% increases in revenue per unit.

The senior living business continues to have a strong underlying fundamental serving real needs of its customers which mitigates many challenges created by the general economic environment today. Over the last three years I believe we have built the best platform in the industry. Today we have the organization, systems and a diverse product offering that creates unique advantages that allow us to capitalize on revenue and expense opportunities even in this time. Our goal in 2009 is to continue to improve our position and demonstrate the very attractive cash flow generation power of this business.

Turning to the operating results, we are very pleased with the results of the fourth quarter. It indicated some very positive elements in spite of the challenging environment. Our CFFO was $0.35 per share, a good increase versus Q3’s $0.30. The improvement came primarily through lower costs and increased contribution from ancillary services as well as higher entry fee sales. Average occupancy held flat with the third quarter and we achieved revenue per unit growth of 5.2% versus Q4 2007.

Our ancillary services continued to excel and ancillary operating income grew 59% during the fourth quarter versus the fourth quarter 2007. Our overall operating margin improved to 33.5% from Q3’s 32.4% reflecting the initial effects of the comprehensive cost initiatives we undertook in Q4. We will discuss these cost initiatives in more detail later.

Regard to our G&A excluding non-cash compensation expense it decreased by almost $500,000 from last quarter. Our ancillary services initiatives continued to be a very bright spot for us. These services are natural, healthcare driven service needs of our residents and we continue to expand our platform both in terms of the number of communities being served as well as capture rate of these services by existing residents.

We have seen the power of providing a second service, home help, on top of the therapy infrastructure hence materially increasing profitability while further supporting occupancy. Being third party reimbursed and because we are serving our own residents, this part of our business is less impacted by the economy and we continue to see strong growth from the maturation of existing clinics. As the need for these supportive services continue to grow in the market it is a key differentiator for us especially for high acuity prospects.

During 2008 we also made very significant progress in our platform development. We instituted a new organizational structure that changed the market orientation from a product oriented focus. We expanded the depth of product knowledge of our field organization while reducing management layers giving broader scopes of responsibility. I just can’t say enough about how focused the organization has become and how ready it is to tackle the challenges of 2009.

Supporting this new organization was the completion of the company wide integration of most key financial systems. Our improved sales and market execution was very evident during the later half of last year gaining back occupancy that we lost in the early part of the year through market responsive programs. Results of all of this was that for the year our facility operating income was virtually flat with 2007, a very good performance given the year’s adverse environment.

Finally, on the balance sheet front we ended the year with only the line of credit as our primary 2009 maturity issue. We are extremely pleased that we have now extended the line of credit. In these challenging capital markets completing a transaction like this is truly reflective of the strong fundamentals that underlie our business.

Completing this transaction along with the expected exercise of our contractual extension options on certain of our mortgage debt will address virtually all of our debt maturities this year. Consistent with what we had mentioned on our last earnings call we decided to suspend our dividend with the intension of using that cash flow to de-leverage.

I will now turn the call over to Mark to provide more detail on the financial results of the quarter and the year before we discuss 2009.

Mark Ohlendorf

Let me start by looking at some highlights of our financial performance for the quarter. Recurring cash from facility operations or CFFO for the quarter was $0.35 a share excluding integration costs and hurricane related expenses of approximately $0.03 a share. In the fourth quarter we recorded $0.01 per share of hurricane related expenses and incurred $0.02 per share of integration and severance related costs.

Average occupancy held flat with the third quarter and was down approximately 90 basis points from Q4 ’07. While the environment is making our sales efforts more challenging our execution continues to improve with a higher closing ratio of the quality leads we’re producing. All of our sales and marketing initiatives like M3, the enhanced website, and expanded arrangements with referral sources were effective.

We continue to use targeted incentives though we utilized fewer incentives in Q4 then in Q3. In Q4 57% of our move ins received some incentive versus 64% in Q3 and the dollar amount of the average incentive per move in was 35% lower in Q4 compared to Q3. We did see a small decrease in occupancy from the beginning of the quarter to the end of the quarter and nearly all of that happened in November but occupancy stabilized by quarter end.

Our Q4 ’08 over Q4 ’07 revenue per unit growth was 5.2% and 6% for the full year. The components of this 5.2% revenue increased consisted of rate growth of approximately 2.7% and ancillary services added another 2.5% of growth as we continued to add more supportive services at positive incremental economics.

As Bill said, our ancillary services continue to perform well. The platform now serves 35,000 units for therapy services and 16,700 units for our home health agencies. Overall in Q4 $143 per unit per month of operating income across all units served by our ancillary services dropped to the bottom line versus $126 per unit in Q3. As you can see, our overall average per unit monthly contribution is already close to the target of $150 that we have consistently indicated. In fact, we think there’s more upside to that number.

As a point of reference for the Legacy ARC portfolio the average monthly operating income for occupied unit reached $222 in the fourth quarter though that portfolio has a greater proportion of skilled nursing unites then our total portfolio.

Turning to same store results, our results for Q4 ’08 over Q4 ’07 showed an increase in revenue of 4.1% as a result of an average revenue per unit increase of 5.2% and a decline in occupancy of 1%. Expenses grew at 7.1% resulting in a same store analyze decrease of 1.3%. Looking at the same store results without ancillary services average revenue per unit increased 2.6%, expenses grew at 5.7% or $15.6 million resulting in a same store analyze decrease of 2.9%.

Major components reflecting this cost increase include largely controllable costs which make up around 80% of our operating cost structure increased by 1.1% between the periods or $2.8 million. These controllable costs include labor, benefits, food, supplies, and repairs and maintenance. Of the remaining 20% utilities and real estate taxes together increased by 11.1% between the periods or $3.2 million.

Of the other non-controllable cost components our reserving activities for insurance and bad debts and community fee deferral accounting increased by $8 million. Well over one half of this amount relates to a net increase in costs recognized related to the accounting for community fee deferrals which we started in the second quarter of 2007. The remaining $1.5 million relates to various centralized support services.

Overall our quarter over quarter same store cost growth was 3.5% to 4% excluding the impact of the community fee expense deferral. We’re pleased with the slow rate of growth reflected in our controllable costs for the quarter and believe that this reflects the beginning of significant cost containment activities.

You’ll note that our reported results for 2008 include a goodwill and asset impairment charge of $220 million. This charge is largely a result of accounting guidance in the context of the depressed equity market. While we believe that it does not reflect any change in the long term fundamentals for our business we did recognize this impairment in the fourth quarter.

If you look across all sectors at companies that are reporting their 2008 results there’s a high frequency of goodwill impairments occurring, again, largely due to this accounting guidance and the depressed pricing in the public equity markets.

As Bill indicated, we’ve made significant progress in the quarter in improving our debt maturity profile. As we announced, we’ve extended the line of credit to August 2010. As our filings will show, the new line includes total commitments of $230 million and has some typical features of today’s bank market including a commitment that declines over time, higher pricing and a revised covenant package.

As it relates to our mortgage debt, we now have virtually no mortgage debt maturities without extension rights until 2011. We’ve accelerated the extension on $88 million of the $225 million of mortgage debt that was classified as a current liability at September 30 and expect the remaining $131 million to be extended in due course when the contractual options become available in the second quarter of ’09.

Before I turn the call back to Bill to discuss our sense of operating fundamentals for 2009 let me leave you with some thoughts on Brookdale’s general liquidity positioning going into the year. Our amended line contains a reduced level of total commitments and commitments that decline over time but given or recent decision to suspend the dividend the need for higher borrowing capacity is greatly diminished. In fact, we plan to use the cash flow generated by our operations to de-leverage initially by reducing the debt outstanding on our corporate line.

We ended 2008 with $54 million of unrestricted cash and we expect to close on two asset sale transactions in the near term that will yield cash proceeds of roughly $17 million. We continue to focus on the level of uncertainty that we face going into 2009 and have taken various steps to aggressively reduce our uses of capital.

This is especially the case in the area of capital spending including expansion activities where our new use of capital will decline to approximately $60 million in 2009 from $121 million in 2008 of which approximately $25 million is for recurring property level CapEx. The remaining amount is focused on projects which we expect will generate high incremental returns and given the nature of this we’re confident in our ability to manage the spend level should that need arise.

Finally, on the expansion side, virtually all the capital expenditures going forward in that category will be funded either through our lessor partners or by contracted construction loans.

I’ll now turn the call back over to Bill for comments about 2009.

Bill Sheriff

Looking forward to 2009 the greatest uncertainty will be occupancy. We anticipate pressure on occupancy and expect it to decline from its current level by a point or two maybe slightly more if conditions continue to deteriorate through the year. As to revenue per unit, we are a bit more positive and expect to achieve positive growth in 2009.

As Mark has described there are multiple factors contributing to revenue per unit growth. First, rate growth taking into account geographic and product line diversity, not all markets or products lines are affected the same, our rate increase to residents and into the market will vary from 0% to 6%. Second, the ancillary contribution which is less impacted by the general market is expected to show growth consistent with our experience in 2008.

In late September, early October, our team recognized the great uncertainty unfolding which was going to put additional pressure on the business. We put out a call to action. We began to focus more aggressively on expenses at all levels of the organization. We made decisions affecting virtually all of our major cost items, some will be permanent, and some will be temporary. However, no cuts were made to costs that would compromise our commitment to quality of care.

We also know that we had a unique opportunity. A receptive audience in both our internal organization and our residents to address cost issues in a different manner. Our residents quite frankly believe that they have seen this movie before and have provided good input. Looking at the community related expenses, as we have said, our commitment was to be aggressive on costs but not compromise quality of care.

For 2009 we expect no more then 1% to 1.5% growth in controllable community expenses which account for about 80% of our cost structure. Controllable costs include things like labor, food, travel, training and supplies. We have taken many actions such as freezing salaries and wages, reducing non-direct care service position hours from 40 hours per week to 37.5 hours per week.

We have also adjusted various benefit plans such as suspending the 401(k) match and adjusting paid time off policies, reducing travel and obtaining additional purchase savings. In total, we expect cost reductions and cost abatements will keep the controllable costs within our target range. Adding in such other costs such as utilities, real estate and insurance, we expect overall expense growth to be no more then 2.5% to 3%.

Our fundamental goal this year is to remain a positive spread between the level of revenue growth and that of expense growth. Again, without compromising any aspect of care we will aggressively manage expenses toward that goal and with the help and support of our residents and associates.

With regard to our overhead or G&A we expect our G&A to be largely unchanged year over year in spite of the growth in G&A support for the ancillary services. We reduced overhead FTE’s by 100 in 2008 due to the evolution an refinement of the new organization as well as efficiencies gained as our system platform has consolidated.

Our G&A as a percentage of revenue will decline again in 2009. Since we have completed most of the platform integration work we expect integration costs to be much lower then historically and as a result we will no longer call these out separately. As Mark said, we have also addressed containing routine capital expenditures which impact CFFO. Routine CapEx is expected to be in the $25 million range for the year.

Turning to entry fee cash flow given the environment we had good results in Q4 and we saw improvements during the year particularly with our repositioning actions at the form MBA communities. In 2009 even taking into account the changed environment we do expect results to be better then 2008. While entry fee sales have been down, refunds have continued at their historical pace. As a result at the end of 2008 we had an inventory of 460 entry fee idle units to sell with an estimated sales value of nearly $83 million of which there are only $7.6 million of refund attachments left.

This means fewer sales produced more then enough cash flow. We have these products better positioned and while the impact of the government stimulus efforts what they will have on home re-sales is unclear particularly as to timing; it should help and could result in some upside. Any market where we have seen improvement in home re-sales in the recent past we have seen increased entry fee sales.

While we cannot give specific CFFO guidance we wanted to give some description of what we expect on the cost and capital spending side as well as the expectation for the ancillary services contribution and entry fee incomes. We are off to a good start in 2009. It is still early in the first quarter but we have already seen strong validation of our cost control and reduction efforts which may exceed our expectations.

Occupancy, we did see a slight decline typical of January and February looks to be flat with beginning and ending occupancy equal. Ancillary services are above plan and entry fee sales will be higher then Q1 2008.

We feel very good about the organizations response to the call to action. Everyone is incredibly focused on maintaining occupancy affecting incremental margins from added services, providing quality service and care at high standards and at the same time achieving the lowest possible cost structure relative to those high standards.

Combine this with the completion of our line of credit renewal and other extensions and we are in a good position. We believe companies with good operating fundamental like us are going to come out of this environment stronger then before. The current environment has and will create opportunities for growth and being well positioned will allow us to selectively capitalize on these potential opportunities.

We will now turn the call back to the operator to begin the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Biffert – Oppenheimer & Co.

Mark Biffert – Oppenheimer & Co.

I was wondering if you could give some of the details in terms of the rate you had on the extensions.

Mark Ohlendorf

The extensions that were affected in the quarter and there are a couple of more of these that will be affected in the middle of ’09, those are contractual extension arrangements so the rates remain largely unchanged.

Mark Biffert – Oppenheimer & Co.

You didn’t have to pay a bump in the fee for that?

Mark Ohlendorf

Somewhat but the change in pricing is pretty modest given today’s climate.

Mark Biffert – Oppenheimer & Co.

Can you talk a little bit about the environment, there’s a lot of talk out there about M&A activity in the senior housing space and the potential for you guys getting greater management agreements and your feeling in terms of how much more you think you can add to your platform in this environment.

Bill Sheriff

In this environment we’re going to be very much focused on executing our plan. On the near term we’ll be very disciplined about looking at any opportunities if their slim opportunities with slim margins and they may be more opportunity for distraction then they are for significant gains. Our focus will be more on the longer term basis.

Mark Biffert – Oppenheimer & Co.

You don’t expect to be doing a lot of acquisitions it would be more of taking on management agreements versus acquisitions.

Bill Sheriff

I would doubt that we would be looking to take on management agreements per se unless they’re very extraordinary attractive terms. We’ve never created a lot of wealth off of just pure management agreements.

Mark Biffert – Oppenheimer & Co.

If you could talk a little bit about the risk of caps going in on any of the third party revenue given the significant increase. Is home health impacted by caps or is that just the therapy services?

Bill Sheriff

The caps have been extended for therapy services and there’s nothing currently slated for home health. There’s some things we read in the budget package that suggests that there might come some pressure on home health but it’ll be out there a ways.

Mark Biffert – Oppenheimer & Co.

Can you talk a little bit about what you’re hearing from your tenants in terms of their attitudes, the people that are moving out what is their single main driver for moving out? How much children losing their jobs has impacted occupancy over the last two quarters.

Bill Sheriff

We certainly see some element but we’ve always seen some element of financial move outs and maybe there’s a slight up tick in that. The interesting note is that our overall attrition rates haven’t really changed much which of course as we’re mitigating some of that effect through our ancillary services and other support elements. We’re very, very focused on working with the families if they need to downsize in terms of an apartment at all.

We see some of that activity and we’re very focused on working on that as well as making sure if they need to transition to one of our other communities within a market for higher level service or care we’re working with them more and more effectively everyday in that regard as well. Certainly the consumer confidence is a significant factor and that still remains a concern.

Operator

Your next question comes from Ryan Daniels – William Blair

Ryan Daniels – William Blair

I wanted to start with some of your commentary on the 2009 outlook. It sounds like your use of incentives actually tapered back a little bit in the fourth quarter and you saw reasonably stable occupancy year over year in the first quarter but you’re still anticipating that you might see weaker same store occupancy, if we look over the next 12 months. Is there anything in particular driving that given some of the stability or firming you’ve actually seen in the last three or four months.

Bill Sheriff

It’s just the overall general concern of the economy and the consumer confidence factor that’s going to continue to have some pressure on occupancy. We think its not going to drop precipitously like some folks will want to predict. We think the underlying fundamentals of our business again are there in terms of the fact that we serve basic needs of the consumer.

Ryan Daniels – William Blair

Have you seen your close rates change significantly year to date or has that been pretty stable.

Bill Sheriff

We have seen our closing rates both in the fourth quarter and the first quarter actually increasing. We do see less people just shopping or thinking about it, the inquiries and things we get seem to be a higher quality and a higher focus on people really looking to do something and our people have been very, very focused on continuing to improve the closing rate and they’ve done that.

Ryan Daniels – William Blair

Can you talk a little bit about the entrance fee communities, I noticed that you guys have the Brookdale home sales program and I’m curious how effective that’s been and if you actually have had to purchase any homes under your forward commitment or is that not that widely utilized yet.

Bill Sheriff

It’s not that widely utilized. It does stimulate a significant amount of traffic in our seminars as we help people focus on the issues of selling their homes. A very small percentage actually utilize any of that program and the whole history of that program has been well over a year we’ve taken the idle to one home which we sold within 30 days. That part of it is very helpful in terms of getting people to start thinking through the process, though a small percentage ever utilize any of that basis and that’s been very stable as far as how many of those we have outstanding and the payment trends on them.

Ryan Daniels – William Blair

If we could switch to the revolver very quickly. Can you give us your balance on that at the end of the year, what was tapped on that $230 million now?

Mark Ohlendorf

The cash borrowings at the end of the year were about $159 million. There’s some additional amounts outstanding related to letters of credit. We should have the 10-K on file here within the next several hours and it’ll give you the blow by blow on that.

Ryan Daniels – William Blair

Maybe this will be in the K but the last question I had could you talk a little bit about the mandatory pre-payment it sounds like that’s going to start shrinking through your time period that you have that. Can you give us a feel for how much cash will be dedicated to that in ’09?

Mark Ohlendorf

You really need to think about this in the context of what our plan is going forward. We’re in a market right now that’s fundamentally is de-leveraging. As we move forward the primary focus of our de-leveraging is around the corporate line. The balance of our secured debt at the property level as we’ve talked about several times is in pretty good shape.

The actual amount of the commitments declines on a quarterly basis and you’ll see the schedule in the 10-K when we file it. The important thing to note is although the commitment declines over time if our operating cash flow continues at the level we’ve seen for the last couple of years will actually affect more de-leveraging under the line then the commitment goes down. All of that’s very consistent with what our general approach is as we go forward.

Operator

Your next question comes from Jerry Doctrow – Stifel Nicolaus

Jerry Doctrow – Stifel Nicolaus

It was a nice quarter given all the stuff going on out there. On the reet leases, some of the reet has been talking about CPI base escalators and obviously their rent is going down. I was curious as to whether you’re stuff is CPI totally or has floors or just what you’re assuming in terms of increases in their rents this year.

Mark Ohlendorf

It’s actually a wide variety of inflator structures. We have some based on revenue, some based on CPI.

Bill Sheriff

Probably more have caps then have floors.

Mark Ohlendorf

Clearly this kind of an environment could bring the level of inflator impact down a bit but it certainly won’t make it go away.

Jerry Doctrow – Stifel Nicolaus

If we were looking at it, if we were assuming 2.5% or something last year 3% last year you might be down 1%, 2% or something?

Mark Ohlendorf

At the most. It depends on what your assumptions are surrounding CPI and so forth. If you could impact that number by 50 or 75 basis points that would be fairly substantial I would think.

Jerry Doctrow – Stifel Nicolaus

That could indeed happen. My assumption for CPI is zero. CapEx maybe I misunderstood on the maintenance CapEx I thought one of you said 15 and one of you said 25 but I want to clarify that.

Mark Ohlendorf

We both intended to say 25 for ’09.

Jerry Doctrow – Stifel Nicolaus

So 25 is the maintenance CapEx the it was 60 in total did I hear that correctly including the income on hand?

Mark Ohlendorf

That’s right. Again, that’s the net cash capital investment in CapEx for ’09.

Operator

Your next question comes from Jeff Englander – Standard & Poor’s

Jeff Englander – Standard & Poor’s

Can you give us some sense on non-essential services on the controlled expenses, things you may be doing in terms of quality of the food and frequency in entertainment things that don’t directly impact what I would say is quality of care but maybe at the margin some of those things you might be doing.

Bill Sheriff

The quality of our foodservice program is a very critical part of it and maintaining that standard in services is there. We have a very intense effort on the purchasing side of that equation as well as making sure that we’re matching our menus and changing our menus to match the seasonality aspects and watching every bit of detail in that absolutely daily to make sure that we again can manage that overall cost aspect at the same time maintaining the quality.

On the aspects of entertainment elements and things we expect the creative elements of our team to both in terms of we utilize a lot of volunteers in that regard but we certainly expect to continue to maintain good life enrichment programs across the country.

Jeff Englander – Standard & Poor’s

Has it been cut backs in frequency of some of those things?

Bill Sheriff

I don’t believe that there have been cut backs in frequency.

Jeff Englander – Standard & Poor’s

Can you give us some sense on the non-controllable expenses given you’ve seen a stabilization in fuel and some other costs if your outlook there what the assumptions are underlying that.

Mark Ohlendorf

The two big items in the non-controllable area are utility costs and property taxes. In total those two cost categories were up about 11% year over year. As we look forward into ’09 we should see some moderation in the utility cost pressure. A significant part of our utility cost is regulated state electricity costs. While we’ve seen moderation in commodity costs, exactly when that comes out of the rates is a bit uncertain. We would expect to see that come down.

Its also unlikely that you would see the same level of growth going forward on the property tax side but as you know the state and local governments are under a great deal of budget pressure right now and predicting exactly how that comes out is also somewhat difficult.

Operator

Your next question comes from Sloan Bohlen – Goldman Sachs

Sloan Bohlen – Goldman Sachs

On the de-leveraging front you guys mentioned that you have a couple of assets on the market right now. Do you guys have an outlook for what you might do in terms of asset sales or refinancing in 2009?

Mark Ohlendorf

Actually those two transactions we’re about to close, one is a sale lease back transaction and one relates to liquidating part of a joint venture structure that we’ve got. The reality is we don’t have to do anything on the financing side as we go through ’09. You’ve got to be very opportunistic in this kind of a market so if we did get opportunities to extend the maturity profile of our debt a little further we would certainly take advantage of that. Depending on pricing in the sale lease back market we might take a look at that but we don’t have any immediate plans in either of those areas.

Sloan Bohlen – Goldman Sachs

Could you guys give us a sense of what kind of availability there would be fore new secured mortgage financing or in the case of asset sales what the cap rate environment looks like right now?

Mark Ohlendorf

We continue to see transactions occur particularly for stabilized properties with the GSEs. That market continues to close transactions. On the sale lease back side you certainly don’t see the depth of that market that you would have 18 months ago or so. We’ve got very long relationships with a number of our RE partners and believe that there are transactions to be done there depending on what we need to do.

Sloan Bohlen – Goldman Sachs

On the income enhancing CapEx spend for the year what kind of returns are you guys looking for that and is there a sense of how much is that, is it going to be evenly spaced out throughout the year?

Mark Ohlendorf

By and large those are projects that would be occurring during the year this year. I’m not sure I would suggest to you to model a big economic impact of that.

Bill Sheriff

The balance of the ones finishing startup all wash in the year. There is some improvement in this year. Typically we would look at 13 plus un-levered returns as a minimum hurdle on any of that.

Sloan Bohlen – Goldman Sachs

You talked about some housing markets where you’ve seen some stability and how that’s helped your occupancy in those markets. Could you give us a sense geographically where you’re seeing some of that?

Bill Sheriff

It goes in different market areas but one that’s maybe quite interesting is one of the pockets within Florida actually saw some good house movement starting in the fourth quarter and extending in the first quarter. The community that we have in that market has responded very well with that regard in Sun City Center which interestingly is not that far from the Tampa area which is not faring quite as well. In any market where we’ve seen an up tick in home re-sales we have seen the corresponding entry fee sales pick up.

Operator

Your next question comes from Adam Feinstein – Barclays Capital

Adam Feinstein – Barclays Capital

As you think about pricing growth we look at the same store number and we look at the consolidated number, which one is more indicative of your real pricing. There’s a big difference between the two so just trying to reconcile that.

Mark Ohlendorf

Obviously there’s a significant impact from the ancillary services. You need to focus on that with or without, depending on what you’re after. The same store results will give you a better sense of core pricing growth. We do have a meaningful amount of expansion activity going on. As we open new skilled nursing units, for example, that will tend to impact the overall number a bit more. As we go into ’09 you’re going to see a bit more of that as well.

Actually I believe the two rate growth numbers are virtually the same. Just want to be sure we’re looking at it with or without ancillary services.

Adam Feinstein – Barclays Capital

You gave us numbers earlier in your prepared comments about excluding ancillary services. Can you go back through those to make sure I heard those correctly?

Mark Ohlendorf

Without ancillary services this is single quarter over single quarter it is 2.7%.

Adam Feinstein – Barclays Capital

I’m curious to get your thoughts, as you have new residents moving in how cognizant are the residents in terms of your balance sheet since you are a public company, do they look over your numbers and ask you questions about your liquidity. I know you guys are clearly doing a lot better then other operators in the industry. Just curious as your stock price moves around are the residents factoring that in, do you get a lot of questions about that.

Bill Sheriff

We do both in terms of residents as well as prospects. Our folks do a very good job of focusing on what the strong company fundamentals still are. As some of this overhang might be lifted here a little bit we expect to see a positive effect from it. It is something that people do look at.

Adam Feinstein – Barclays Capital

You mentioned earlier you felt okay about entrance fees going into 2009. Certainly that was the case in the fourth quarter. I’m a little bit surprised you would think that in the current environment that senior living operators would be forced to maybe cut entrance fees to keep occupancy rates up. Just curious in terms of if you could provide more commentary around your comments and as you guys think about managing that how you plan to maintain those.

Bill Sheriff

You’ve got to take several things into account particularly you’ve got to take into account the MBA asset that we’ve been working on for some time and managed to get our life care licensures about midyear last year have gone through major capital improvement and renovation elements and repositioning of those assets and that has started to gain traction so that’s a factors of it, a community that ARC had acquired in Birmingham that was also a very significant turn around issue and stuff and had to go through a process there. That community filled up last year and is staying full.

You take each one of those in those individual markets and the overall affect of that and also that’s an experience and a product line that we’ve had a group of people here that have worked anywhere from 25 to 30 years with and I think are fairly skilled in terms of dealing with a challenging environment. There’s no question that the environment does put additional challenge on the entry fee component. We are working with it well.

Adam Feinstein – Barclays Capital

Occupancy rates for the industry actually weren’t as bad as what the market thought in the fourth quarter. Just curious to get your thoughts were you guys anticipating things to be worse. I’m not just talking about for your portfolio just for the industry in general. Obviously occupancy rates are down but I think the perception was they were going to be down a lot more. Just curious whether you guys were anticipating the industry environment to be even more difficult in the fourth quarter then it was.

Bill Sheriff

If you look back over the last two years there were a lot of people who wanted to forecast very significant drops and the facts remain that the change in occupancy was relatively small. There’s no question that the environment and the world changed a bit and as we went into the fourth quarter of last year and that will increase the challenge a little bit.

Again, the field will demonstrate that the underlying fundamentals and need factors and what’s gaining there as well as the lack of new supply factors coming on that its going to hold better then those who want to suggest that its going to slide off the slippery slope.

Operator

Your next question comes from Rob Mains – Morgan Keegan

Rob Mains – Morgan Keegan

Can talk a little bit about given that you talked about some of the labor market issues where you’re seeing employee turnover. I’m particularly thinking of the clinical staff who might be in other times harder to attain.

Bill Sheriff

Our folks did an incredible job last year of improving the retention rates across almost all of our job classifications and groups particularly increased the retention rate to a very high level within the therapy area. We made some improvement in the nursing segment though the nursing probably is a little bit more challenging. We continue to make progress in that regard. I would probably credit our folks and what the focus and the efforts they’ve put on what it takes to properly attract and retain people.

Over the longer term those are areas that we will have to remain very diligent and prove that we’re the employer of choice for those skilled workers. Right now in this environment we’re seeing the opportunity to upgrade and all kinds of positions. That’s at least a positive side of what is otherwise a challenging environment.

Rob Mains – Morgan Keegan

When you’re seeing some of the improvement in labor that you’re discussing I assume that lower turnover is one of the factors that contributes to that?

Bill Sheriff

It is one.

Rob Mains – Morgan Keegan

A quick question on CCRCs you had an increase in the units during the quarter is that new segment units that were opened.

Bill Sheriff

As we have added skilled nursing to some campuses they convert from one segment to the other segment.

Rob Mains – Morgan Keegan

The development CapEx this year can you give a sense in terms of modeling out what to expect for next year if there’s any significant new buildings or new expansions that will be coming online in 2009.

Mark Ohlendorf

The gross spending for ’09 is about $110 million. A big part of that relates to completing the entry fee CCRC at the villages in Florida. Virtually all of that is going to be financed either through construction financing or reimbursements from the Reets.

Bill Sheriff

About 700 odd units that will open up during the year some will jump of the ground rather quickly as they have as far as the small memory care expansions and those things which we continue to have incredible success with. Others have a little bit more ramp up and as you look at the total year of ’09 there’s not a lot of impact to ’09, ’10 would bet the bigger impact of the maturation of those.

Rob Mains – Morgan Keegan

The types of units that would be added it sounds like those would be sprinkled between AL and CCRC?

Bill Sheriff

We have the one project that’s the finish up of the development which it continues to go incredibly well. Most of the other expansions are usually memory care, select nursing and a little bit of AL and again those are the higher demand, higher revenue and incremental margin elements of those are very strong.

Operator

Your next question comes from Mark Biffert – Oppenheimer & Co.

Mark Biffert – Oppenheimer & Co.

I was wondering if you could provide a little color what you’re seeing on pricing in terms of compete to current market declines that you may have seen across each of the property types. If you could maybe talk a little bit about what type of return opportunities or a hurdle rate would you have to see to get more interested in acquisitions given the continued support from the GSEs?

Bill Sheriff

There’s not enough transaction activity to really suggest that the cap rate has moved from ‘x’ to ‘y’ across any of these. It’s going to be on an individual basis. We think that the bigger opportunities are going to come a little further down the line actually. We’ll be focused on making sure we get ourselves in position to focus on those.

Mark Biffert – Oppenheimer & Co.

What are you seeing, obviously people have talked about Sunrise and given that they’ve reported this morning potential bankruptcy. Outside of that what have you seen in terms of bids that maybe people are putting on assets, talk about what you are seeing in terms of the bidding process.

Bill Sheriff

I haven’t followed much of that. I’ve been very, very focused internally here. I wouldn’t say that I’ve studied enough of that to really offer much comment.

Operator

At this time there are no further questions. I would now like to turn the call back over to Mr. Roadman for any closing remarks.

Ross Roadman

With that we’d like to close the call. Thank you for your participation. We’ll be around all day for any follow up questions. We’ll be filing the K sometime later this morning. Thank you for your participation.

Operator

This concludes today’s Brookdale Senior Living Fourth Quarter 2008 Earnings Conference Call. You may now disconnect.

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