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Brookdale Senior Living Inc. (NYSE:BKD)

Q3 2009 Earnings Call

November 03, 2009, 9:00 a.m. ET

Executives

Ross Rodman - SVP, IR

Bill Sheriff - CEO

Mark Ohlendorf - Co-President and CFO

Analysts

Sloan Bowman - Goldman Sachs

Bryan Sekino - Barclays Capital

Mark Biffert - Oppenheimer

Kevin Fischbeck - Bank of America Merrill Lynch

Ryan Daniels - William Blair

Jerry Doctrow - Stifel Nicolaus

Rob Mains - Morgan Keegan

Chris Damas - BCMI Research

Mark Biffert - Oppenheimer

Operator

Good morning. My name is Lori and I will be your conference operator. At this time, I would like to welcome everyone to the Brookdale third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I will now turn the call over to Ross Rodman, Senior Vice President, Investor Relations. Please go ahead sir.

Ross Rodman

Thank you Laurie and good morning everyone. I would like to welcome you all to the third quarter 2009 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 Counsel.

Before I turn the call over to Bill, as Laurie mentioned, this call is being recorded. A replay will be available through November 10 and the details of how to access that replay are in the earnings release. This call will also be available via webcast on our website www.brookdaleliving.com for three months following the call.

I would also like to point 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 materially from Brookdale Senior Living’s expectations are detailed in the earnings release we issued yesterday and in the reports we filed with the SEC from time-to-time. I direct you to Brookdale Senior Living’s earnings release for the full Safe Harbor Statement.

And now, I would like to turn the call over to Bill Sheriff. Bill?

Bill Sheriff

Thank you, Ross. Good morning and welcome to our third quarter earnings call. Let's start by summarizing how we see the market. While there is obviously a lot of uncertainty about whether we have hit the bottom or not, we are cautiously optimistic that overall, the worst is behind us.

We achieved a 50 basis points increase and average occupancy in Q2 to 89%.We have seen occupancy stabilize since early in the second quarter with the overall net occupancy gain for the five months ended October of approximately 650 residents, with each month having positive net move ins.

During the third quarter, we saw occupancy gains in both independent living and assisted living and CCRCs were flat without the impact of the Villages opening on September 15. While the need-based product offerings of skilled nursing, Alzheimer’s and assisted living continue to lead, there were some more positive movement in the more discretionary products in most markets.

The rate environment remained the same as the second quarter with continued use of selective incentives. We do have approximately 200 of our communities at greater than 95% occupancy which of course, have limited use of incentives. Our performance in the quarter was strong; this was our fifth consecutive quarter of real revenue growth and our third consecutive quarter of producing $50 million or more of recurring CFFO.

We performed well across all of our financial metrics. As we said, going into the year we put together a strong finance to improve the performance of the company, no matter the environment and the teams continue to execute the plan well. We believe our capital structure is approaching the appropriate balance and we are demonstrating the very positive cash flow dynamics of our business. As evidenced by the announced acquisition of the 21 Sunrise communities and the opening of several expansions, we are moving forward with our growth strategies beyond our strong organic growth.

Turning to the results of the third quarter, all of our key drivers were positive, leading to a 43% per share year-over-year increase in cash from facility operations. Occupancy increased to 89% or 50 basis points from Q2, it was actually 89.2% if you exclude the expansions that opened in the third quarter and that were just starting to get traction. Revenue increased almost 5% over the third quarter of 2008 led by revenue per unit increase greater than 5% from both Senior Living rate growth and strong ancillary services growth.

Again, controlled expense growth contributed to year-over-year margin expansion. As a result, we reported cash from facility operations of $50.4 million or $0.43 per share. As Mark will explain, the $0.43 includes $2.2 million or $0.02 per share of acquisition related cost and includes $1.5 billion of start-up cost, as well as the dilutive effect of building cash after the equity offering. As in the last three quarters, the primary storage has done an excellent execution of our organization. While a good location with a good value proposition is as always important. The sales and marketing skills of the local community are key to maintaining our building high occup sales, occupancies in this recession.

Our sales people have increased leads been disciplined and prompt in their follow-up, and effectively those leads into move-ins. On the operational side, we continue to execute well, providing efficient and effective service, following our high-quality standards also key to attracting and retaining residents.

With the strong growing cash flow, and the actions we have taken to right-size the balance sheet, we have put ourselves in a good position to cope with this on future growth opportunities.

I want to spend a little time discussing those opportunities beyond our basic strong organic growth, which will only get better once the economy bottoms and begins slow recovery. As we have discussed before, one area with very attractive returns is the expansion of our existing assets. Back in 2007, we talked about 60 expansion projects we had identified as attractive opportunities. These expansion either added like units in successful communities or more often added new services to a community or a market, enhancing the existing community and the ancillary services network. As the environment changed, we put many of the projects on hold and continued with a more selective build-out. By the end of this year, our expansion program with have completed 19 expansions over three years with almost 900 units, primarily skilled nursing and Alzheimer’s units to enhance one of our networks. In addition we completed the development of the 312 unit CCRC for a total of 1179 new units.

Regarding the CCRC on September 15, we opened the 240 unit independent living component, so our existing assisted living and memory care communities in the villages of Florida. The assisted living and memory care units have operated at maximum occupancy for a number of years. The Villages is a senior oriented town of 80,000 residents, advertises golfer life and this is the only retirement community that has been allowed within its boundaries.

It is progressing nicely with the current move-ins and other depositors, we have commitments for over 60% of the units. Since mid-September when the building was open, we had over 400 new prospects visit and are picking up new depositors each week. We will open the 72-bed skilled nursing unit in the next few weeks, creating the full CCRC. Being located across the street from the local hospital, we expect the nursing units will fill very rapidly. So we maintained a very to very high expectation of this unique CCRC.

We are now in the process of re-evaluating all of our on-hold expansion projects, with the intention of restarting the program. Based on our historical experience we expect expansions to have stabilized un-levered returns in the mid-teens or better. The next area of growth strategy is acquisitions. As we have stated opportunities will begin to emerge. We are pleased to be acquiring the portfolio of 21 communities from sunrise that communities fit us very well, they are 100% private pay, 30% of the units are high demand Alzheimer’s units, and the rest are very attractive assisted living with a view (inaudible) units.

Importantly they are located in markets, where we have a good presence, and therefore they enhanced our existing clusters. The opportunity to add ancillary services with over 1150 of the units within our licensed therapy markets, and almost 800 within our home health license markets further validates and demonstrates how well the portfolio fits our platform. We believe that we should be able to achieve our $150 per occupied unit per month operating income benchmark sometime next year. We will see a median improvement in the operating margin as we relay our cost structure with identified savings in areas such as risk management, insurance and certain procurement areas. And due to the good market dip the internal overhead will be quite low. We are purchasing the communities for $204 million, assuming a $134 million of debt and the rest of the purchase price to be funded from cash on-hand. And we expect to make mid-teens levered return on our equity.

Brookdale is well positioned to be a consolidator. Our current platform is scalable. We will demonstrate cost savings with this recently acquired portfolio, plus we will demonstrate the benefits of our ancillary services program. The final growth element, is our ancillary services that will continue to show strong growth of both revenue and cash flow.

For the quarter, our therapy in home health revenues grew by 42% over Q3 of 2008. And operating contribution grew by 77%. Therapy services, the maturation of existing clinics, continue to produce increased volume. We stay steady at over 35,000 units served, this quarter for therapy. And we see continued upside expecting ultimately to reach 40,000 units.

For home health, we continue to see the impact of our home health agency acquisitions. If you recall we have typically acquired small agencies in non (Inaudible) states and transition the business to serve our residents. We have acquired 18 agencies over the last three years for a total investment of $10 million which has been already more than paid back. A small investment for the return as evidenced by the substantial yield, we are achieving. We are actively studying additional acquisitions, though in (Inaudible) space they are likely to be larger transactions and will require us to operate outside our communities to justify the acquisition cost. In that line, we have now expanded our products to deliver home health outside our communities to nine markets with good success. September saw a monthly operating income contribution of over $250,000 for the outside business. Our target is to reach 30,000 units with our home health services in the next year too. In summary our growth will come from strong organic growth as the market improves, highly accretive expansion activity, accretive acquisitions and our unique ancillary services platform.

Again, we are very pleased with results of the quarter. And I'll now turn the call over to Mark to provide more details and then I'll follow up for some closing comments.

Mark Ohlendorf

Thanks, Bill. Let me start by looking at some highlights of our financial performance for the quarter. Before I begin, I want to remind everyone that as part of the 8-K containing the earnings release we filed yesterday. We have included our supplemental information package.

As Bill said, we had a good quarter. And for the third quarter we reported cash from facility operations or CFFO of $48.2 million or $0.41 a share. That did include $2.2 million or roughly $0.02 a share of outside expanses related to specific acquisition activities in the quarter and $1.5 million or around a $0.01 a share, a start-up losses due to expansions during the quarter. Excluding the acquisition cost, the quarter CFFO would have been $0.43 and further excluding the expansion start-up cost, it would have been $0.44.

The quarter also includes $0.03 to $0.04 of dilution from the June equity offering. During the quarter, we retained cash as we analyzed investment alternatives. Deploying this capital into acquisitions will be accretive in the long run as demonstrated by our announced acquisition from Sunrise. The $2.2 million of acquisition related cost relate to expenses for third parties who support the due diligence and analysis of potential transactions. Previous to an accounting rule change, these costs would have been eligible to be capitalized if the transaction were affected. Now all costs are expensed at the time they are incurred.

During the third quarter of 2008, we reported $0.22 a share CFFO but that included $0.04 per share of working cost and $0.04 per share of merger and integration cost. Comparing this quarter's $0.43 to the adjusted $0.30 for 2008, we produced a 43% increase in CFFO. One new item that we have excluded from CFFO this quarter is the first generation entry fees from the villages. These funds are by state regulation has grown until we hit 70% occupancy at which time the construction loan is paid down.

For the third quarter, the $10.6 million of first generation entry fees we collected are in the GAAP cash flow statement, but we have excluded them from our non GAAP numbers and the supplemental data sheets pertaining to entry fees. Operating margins improved by $240 basis points versus Q3 '08 because revenue posted a solid 4.9% increase and operating cost grew by only 0.8%. Last quarter we discussed the seasonality of our cost and we did experience sequential increases due to utilities and the number of work days and holidays in the third quarter.

However, on year-over-year basis senior housing expenses actually decreased. General and administrative expenses excluding non-cash comp expenses and integration and acquisition related cost were approximately $24.7 million or $2.4 million higher than Q3 '08 primarily attributable to the $2.2 million of acquisition related cost. Our quarterly cash G&A cost continue to run at about $25 million a quarter excluding the acquisition expenses.

Our Q3 '09 over Q3 '08 same community results were very positive. Revenue increased 4.4% as a result of an average revenue per unit increase of 5% and a decline in occupancy of 50 basis points. The senior housing rate grew by 3.2% and ancillary services added 1.8% to the revenue per unit growth metric. Expenses grew at 0.9% resulting in same community NOI growth of 11.7%. A key part of our operating income improvement came from the expense side. Out of the 0.9% same store expense increase the operating expenses associated with senior housing therefore excluding ancillary services actually decreased by 0.6% with the bulk of the overall increase resulting principally from labor to provide the increased volume of the ancillary services. Included in our expenses are $1.5 million of start-up losses associated with our newly opened expansions.

We have opened up several larger expansions, particularly a couple of skilled nursing centers and the village’s independent living operations. The 2009 projects are larger than the prior year projects and are incurring greater start-up cost. These costs were $1.5 million in the third quarter and will approach $3 million to $4 million in the fourth quarter. These cost show up in operating interest and lease expenses.

Turning to the balance sheet; with positive flow, we significantly strengthened our financial position. We ended the quarter with $159 million of unrestricted cash and no borrowings on the line. At the end of the third quarter, our leverage was 6.5 times net debt to adjusted EBITDA calculated by annualizing the year-to-date adjusted EBITDA number of $264 million and we continue to work toward prudently lowering that leverage further. We've indicated that our ultimate leverage target is approximately six times adjusted EBITDA.

As it relates to our mortgage debt as we've discussed before, other than normal amortization, we now have no mortgage debt maturities until 2011 after the impact of contractual extension options. In the supplement, we've included information about our debt maturity schedule and fixed charge coverage. As we described previously, given the level of uncertainty that we faced in early 2009, we aggressively managed our uses of capital including capital spending. In the first two quarters of 2009, we purposely deferred capital expenditures into the second half of the year. It has taken a little longer to spool up the CapEx process than expected. It now appears that this delayed CapEx will come through in Q4 '09 and Q1 of 2010. We anticipate spending in the range of $21 to $23 million for net recurring property level CapEx for the full year 2009. We now expect to spend $50 to $55 million in total for CapEx for full year 2009. For development, the last two projects that will open in Q4 are leased and therefore require no capital from us.

I'll now turn the call back over to Bill for concluding comments.

Bill Sheriff

Thanks Mark. Another very strong quarter, which makes three quarters in a row that we have made material improvements in the performance of the business in spite of a terrible economic environment. While we continue to operate with a conservative perspective towards occupancy, rates and cost, we do feel confident about engaging and actively supporting growth. We have strong growth in our cash flow and we will diligently look to deploy that capital in a manner that achieves the best return.

It is time to restart our expansion program. It will take a while to see new units come online but the results from our recent expansions are in line with our historical experience and are compelling. We will be actively engaged in corporate development looking for acquisitions that fit our business strategy. The growth of our ancillary services program will continue to be a focus as we look to expand our reach into new markets and perhaps, new offerings.

The opportunities ahead of us are significant. We have the depth platform in the industry, a strengthened balance sheet with good current cash flow and strong growth dynamics. Our management team has been fairly tested and I want to say that I am very proud of this management team and how they have performed through these very difficult times. They have put us in a very strong position for the future.

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

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Sloan Bowman of Goldman Sachs.

Sloan Bowman - Goldman Sachs

Just first a question on growth initiatives. You spoke a little bit about, particularly in the home health how you have gone outside of your network. I think it’s in nine markets. With regard to acquisitions or potential acquisitions going forward, would you expand outside or is it still trying to build on the network that you have right now?

Bill Sherif

Well, we will certainly be trying to build on our network that we have, but we will be trying to acquire home health agencies in markets where we have a strong presence, but it most likely is more (Inaudible) are going to be in (Inaudible), the size of those acquisitions will be larger. We are expanding our home health activity outside our communities in those nine markets demonstrating our ability to take and manage that outside business. Primarily, we're following our discharges from our skilled nursing. Also the networking of referral sources that support us and that is going well and we think that we will be able to demonstrate that we can operate a model outside of our own walls and through that, also we'll get that license or capability to deploy our program within our communities in those markets.

Sloan Bowman - Goldman Sachs

Okay. But even outside of home health just with regard to new facilities, can you maybe give us a sense of what the opportunity you said is out there in particularly maybe with assets, either with difficulty and refinancing, we've seen a couple of deals happen in the couple of months. Are there a number of other opportunities out there like that?

Bill Sheriff

We think there will begin into these more that will emerge and I think you characterized it correctly and the fact that they most likely will be associated with organizations that have some degree of challenge with their capital structure, debt maturities or abilities to refinance. On the longer-term there will be more on the other fundamentals of our position as a consolidator.

Sloan Bowman - Goldman Sachs

And then with regard to just the Sunrise acquisition, is there any assumption for initial CapEx that you're going to have to spend with that facility or those facilities?

Bill Sheriff

We will probably disclose any more of that detail post the acquisition and as we get the final call assessment of those assets.

Sloan Bowman - Goldman Sachs

And then just one question on the Villages. Could you give us what the lease rate is, you said at 70% you'll be able to recognize those first generation entry fees and when can we maybe expect that?

Bill Sheriff

The timing of that, it will be well into next year before we would get to that point.

Sloan Bowman - Goldman Sachs

And the current lease rate is?

Bill Sheriff

Well, we have close to 60 some odd to date. We have a good size number of others on the books for schedule move ins before the end of the year, which will bring us up towards the 85 to a 100 range by the end of the year, and they add some more to that, we are weekly adding to the deposit list of the 10% of depositors with an intent to move forward through the process. So preparing themselves and scheduling move in dates.

But this is opening during the prime season, for that market. So we expect to make substantial progress through the next several quarters.

Sloan Bowman - Goldman Sachs

Okay. Thank you very much.

Operator

Your next question comes from the line of Bryan Sekino of Barclays Capital.

Bryan Sekino - Barclays Capital

Hey good morning. Wanted to follow-up on the entrance fees that you are expecting for the year, I know you had said you hope to do better than the $23 million in 2008. Wanted to know if that’s still the case for 2009?

Bill Sheriff

Third quarter did fall short of where we had anticipated it being. While we still have good activity and good deposits getting all of them closed, still continues to be a little bit of a challenge. The fourth quarter will be our best quarter of the year by far, but it’s going to have to be an exceptional quarter in order for us to achieve what we have given guidance. So, we are utmost likely going to fall just a little bit short of it, of that guidance that we have given.

Bryan Sekino - Barclays Capital

Okay and that’s excluding the first generation fees, right?

Bill Sheriff

Yes. Totally including those.

Bryan Sekino - Barclays Capital

Okay. And as we think about those first generation fees. I know you did like around $10.6 million in the quarter and I guess that’s for 60 facilities. So, as we get up to 80 ---

Bill Sheriff

No. that was not per 60, 60 is through where we are today.

Bryan Sekino - Barclays Capital

Okay.

Bill Sheriff

The 10.6 was for about 40.

Bryan Sekino - Barclays Capital

Okay so that 10.6 I guess kind of going forward will be…

Bill Sheriff

The 10.6 was 37.

Bryan Sekino - Barclays Capital

Okay so to get, I guess as I am looking at that 10.6 is as you get to 85 to 100 its going to be a similar figure in Q4?

Bill Sheriff

Yes

Bryan Sekino - Barclays Capital

Okay and then you mentioned I guess getting to the 70% in later 2010 is that correct?

Bill Sheriff

That’s correct.

Bryan Sekino - Barclays Capital

And is the you mentioned three to four in start up losses is that something we can expect each quarter in 2010 as the lease up occurs.

Bill Sheriff

While you would expect that to taper down as you go through 2010?

Bryan Sekino - Barclays Capital

Okay and also on the drag I think there you mentioned that occupancy would have been something close to the 89.2 excluding that opening?

Bill Sheriff

That’s correct.

Bryan Sekino - Barclays Capital

There do you have any indication as to how much of drag it’s going to be I guess in the fourth quarter?

Bill Sheriff

Well we have another larges expansion opening in the fourth quarter, I haven't done exact math of the affect of those

Bryan Sekino - Barclays Capital

But I’d expect it would be at least a 20 basis point impact in the fourth quarter as well?

Bill Sheriff

Probably, we have got other expansion coming on probably.

Bryan Sekino - Barclays Capital

Alright thanks for taking my questions

Operator

Your next question comes form the line the Mark Biffert of Oppenheimer. Mr. Biffert your line is open

Mark Biffert - Oppenheimer

I was wondering if your could may be expand a little bit on the expansions that you talked about in terms of the timing and the size dollar, value wise.

Bill Sheriff

Of the future expansions?

Mark Biffert - Oppenheimer

And how much do you think you could do or start in 2010?

Bill Sheriff

I think as we get through the planning process of that and scheduling as per getting those things scheduled and getting that whole program reactivated. Our fourth quarter call would be evenly most likely be able to outline that for you fast.

Mark Biffert - Oppenheimer

And will the focus you think be more in the assisted living side or in the Alzheimer care type expansion.

Bill Sheriff

I think it would be in the Alzheimer’s skill nursing and some assisted living.

Mark Biffert - Oppenheimer

Okay and then in terms of the types of acquisition opportunities, and what is it in the market currently for assets I mean outside of looking at the stress I mean is there a target type of asset that you are looking at that you feel with figure portfolio or is it really anything that meets your return hurdle?

Bill Sheriff

Well it’s what meets the return hurdle, yes, but also what fits and compliments our markets or is in a market where we have clearly have the intent to try to grow concentration overtime. So we will look at the combination of factors, but with the rest of our platform and know how expertise and the ability to execute across the product spectrum, but we would be wanting to see just how well the total fit is for us.

Mark Biffert - Oppenheimer

And in terms of the lease opportunities are you seeing any of those out there from the leads or otherwise?

Bill Sheriff

We are not specifically looking or focusing on the leads as a source of drilled force in that regard.

Mark Biffert - Oppenheimer

And then regarding the Sunrise properties, what are the margins currently in that property and the occupancy level? And how quickly do you think you can assimilate that? I mean you mentioned that you could build up the ancillary revenues probably by mid next year. I'm just wondering just on the operations, how quickly you think you can build up the occupancy and the margins in that portfolio?

Mark Ohlendorf

We are not in a position to talk about any of the operating fundamentals there until after we close the transaction.

Mark Biffert - Oppenheimer

Okay. And then Mark you had talked a little bit about your target level range for leverage to six times. What’s the deadline for trying to reach that target? Is it end of this year, is it end of next year?

Mark Ohlendorf

I don’t think we’ve really established a firm deadline. Obviously, as we see organic growth in the business and as we use any of our operating cash flow to change our leverage profile that will impact that. But we have not set a firm target date for that.

Operator

Our next question comes from the line of Kevin Fischbeck of Bank of America Merrill Lynch.

Kevin Fischbeck - Bank of America Merrill Lynch

I just wanted to follow-up on that last question. At the time of the equity offering there was a pretty debt pay down was a pretty big focus of the company, should we be interpreting the commentary here about kind of refocusing on growth and looking at acquisitions as still coming to lowering our leverage but may be the time horizon although not firm. It may be has been pushed back a little bit and that you are willing to delay that heading those fixed time if the right opportunities come up.

Mark Ohlendorf

Yeah, perhaps obviously we carried a lot of cash as we went through the third quarter as we were looking at a number of different opportunities. I don’t think we’ve ever articulated the six times target as a date bound type target. And obviously we need to be in a position to execute on opportunities as they come forward. Quite frankly we are comfortable at the 6.5 times where we are today but believe overtime, six times is an appropriate objective.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay. And how should we think about that expansion, you mentioned that I guess you will have more of an update on the Q4 call. Does that mean that we really shouldn’t be expecting a whole lot of that growth until maybe second half of next year? Is that the way to think about it?

Mark Ohlendorf

The reality is, we do not have any projects underway beyond a couple that will open in the fourth quarter. So, just given logistics it would be a bit of a challenge to open units even by the end of next year but you wouldn’t expect anything before the end of next year, more likely on into 2011.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay. And then just to confirm some of things that you said earlier. So as far as the CapEx goes, the CapEx being $3 million or $4 million later this quarter. We should be thinking, it sounds like that maybe Q1 of next year might be $3 million or $7 million higher than average?

Mark Ohlendorf

I think we'll see a higher than normal recurring run-rate in both Q4 and Q1, I think that’s right.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay. And then the commentary about the startup losses in Q4 of $3 million to $4 million. Is that expected to lead into 2010 as well or should that be kind of breakeven by Q1?

Bill Sheriff

Probably it won't be breakeven by Q1 but I would think we would be getting close to that by Q2.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay. And then I guess with the last question here with the Sunrise transaction closing this quarter. Is there going to be acquisition expense this quarter as well?

Mark Ohlendorf

There will be some, though I would expect it would be a lower level than what we saw in the third quarter.

Operator

Our next question comes from the line of Ryan Daniels of William Blair.

Ryan Daniels - William Blair

Good morning, guys. I had a quick follow-up question to start on the Villages. I just want to make sure I understand this correctly but the 70% occupancy hurdle that will just drive you to take the cash and escrow and starting paying off the construction loan. That is not a trigger for you to actually start recognizing that those entrance fees in your CFFO is that right?

Bill Sheriff

That is correct. We all first generation sale of each apartment will be taken and excluded out of our CFFO.

Ryan Daniels - William Blair

Okay. So that if it builds up to that, 70% of that cash is going to be sitting in restricted cash on the balance?

Bill Sheriff

It is restricted cash. It is held specifically in escrow.

Ryan Daniels - William Blair

Okay. And may be a question for Mark, I don’t know if this is something we are missing in a 8-K. But in the press release you mentioned restricted cash of about $171.4 million at quarter's end but then on the balance sheet looks like its about a $104 million, do you know what the deviation between those two?

Mark Ohlendorf

There is likely a piece in both current and non-current. So, when we get the Q on file you will see the detail on that.

Ryan Daniels - William Blair

Okay. That explains it. And then another one on the supplemental data you provided I am curious if the inventory list of entrance fees CCRCs I think the $81 million in value. Does that actually include the Villages or you are excluding it for that calculation?

Bill Sheriff

Yes. That excludes it.

Ryan Daniels - William Blair

I am sorry excludes it?

Bill Sheriff

That’s correct.

Ryan Daniels - William Blair

Okay, great. And then may be a little bit of a broader question. You have talked a few times about the success you've had in the nine markets rolling out your home healthcare services. I am curious if you have been able to track what kind of impact that has had on actual occupancy or may be it leads or move-ins in those facilities. I would assume by finding those patients on the field then developing relationship, you are going to get them into your facilities when the need arises more easily. So do you have any data there, how successful they have been?

Bill Sheriff

We are clearly trying to setup all the systems to crack that and in our preliminary measurements we're clearly are seeing some of that producing it but we don’t have enough statistical presentation form at this time.

Ryan Daniels - William Blair

And then may be a similar question, I am curious, the independent living obviously, I wasn’t surprise with stability or improvement in occupancy. I am curious if you are seeing people kind of bundle home health service with IL to kind of create a suite or assisted living environment and if so, I would be curious if the occupancy in IL where you have home health and ancillary is higher than the occupancy in markets where that might not be offered.

Mark Ohlendorf

Haven't broken that out specifically lately, but in general, we as well as many other retirement center operators with independent living have certainly been augmenting some of the services to support people in that in IL in certain markets and certain communities becomes a little bit of a different AL option and again be very careful not to trip over any lines but providing a bit more supported services within out units.

Ryan Daniels - William Blair

Great and then may be my final question here, unless you want to break this out kind of monthly, but I am curious how tightly your entrance be buy-ins have tracked the [can] broader housing market existing home sales etcetera, meaning that is up in July a little bit weaker in August and September. Did you see a similar phenomenon where July was in better month then it tapered off a little bit towards the end of the quarter?

Mark Ohlendorf

We still see very definite co-relation in movements in any other market where we are starting to see some actual improvement in home re-sales, we are seeing that reflected in improvement in our (inaudible) deposits and closings.

Mark Ohlendorf

We still see that correlation clearly being demonstrated.

Operator

Your next question comes from the line of Jerry Doctrow of Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

A lots been covered. I guess to a sort of broader questions, one Bill on the home health business as you expand particularly beyond your communities and particularly start buying if I understood you correctly, larger home of agencies which you will be also providing services in community. How should we thinking about reimbursement risk, obviously when you buy these agencies that are Medicare reimbursed, there is always risk of buying into someone else’s problems and may be a little more color on how you are managing that and as you start buying larger agencies, does that risk go up in your mind?

Bill Sheriff

Certainly the risk can go up but I think we have to be very, very diligent as we have been and I think we have an excellent track record in being able to fair it out acquisitions that may not have a clean record. We again will be trying to buy the smallest we can find within those, but within (inaudible) space they are going to tend to be a bit larger and we will have to be very diligent as we have been with making sure that we're getting solid claim agencies and not inheriting somebody else’s problems.

Jerry Doctrow - Stifel Nicolaus

And do you have a target on how much Medicare, I think it's like 17% of revenue now, how much Medicare you might end up with as you think this through to say 2010 are we up to 20% or 25%?

Bill Sheriff

No the other elements of our growth and growth elements will probably actually cause as a percentage of total to may be actually decline a little bit.

Jerry Doctrow - Stifel Nicolaus

And when you are buying these just to make sure I am clear, it’s really serving different model, you are not just going and providing let’s say an another retirement community, you are actually going sort of door-to-door as I would call it in sort of a typical home up agency style.

Bill Sheriff

Though it’s a we have our own unique model, as I know that and what we are demonstrating and but yes we are reaching out into the market where people are in their own homes.

Jerry Doctrow - Stifel Nicolaus

Okay and then the one other thing I want to ask about may be just back to Mark just again thinking about sort of the use of capital and debt versus debt pay down versus some other things, I guess what I wanted to do is get a sense from you as to when you think about Q3, 2010 or even 2011 again, how much you think that growth in EBITDA sort of helps gets you to that target versus debt pay down so that’s kind of one part of this. And then second, do you worry at all about potential increases in interest rates and may be needing some additional cash to lower debt, assuming we start seeing some rises in interest rates actually go down to 11 - 12 when you start having debt maturities.

Bill Sheriff

Yeah, both very good questions. The first part of your question around the impact of organic cash flow growth and de-levering. It is really a timing question as much as anything. If you look back overtime the un-leveraged cash flow in the business has grown 7% to 8% a year. Now, we are obviously not in a normal time right now, so to some extent to answer that question, requires that we predict when the economy is going to recover and what that piece of that recovery will be, which I think is difficult to do, but we clearly expect that we’ll get back to normal organic growth rates is that…

Jerry Doctrow - Stifel Nicolaus

And Mark you all did better if you are in the rebounding economy.

Mark Ohlendorf

We certainly should be, because that’s right. As the retirement center part of the business as the entry fee part of the business begins that rebound, you are right. You'll get a disproportion growth impact there.

Jerry Doctrow - Stifel Nicolaus

Okay.

Mark Ohlendorf

We clearly do keep an eye on market interest rates and how that impacts financing capacity in the assets and that’s an obvious part of the capital plan for the company as you look forward a number of years.

Jerry Doctrow - Stifel Nicolaus

Okay. And I don’t if you want to say what your assumptions are, but so having one way to deal with that mitigate some of that risk is to have cash available to begin to pay down some of the debt as it maybe refinance little lower LTB or something, is that sort of part of the equation potentially?

Mark Ohlendorf

That would certainly be part of the equation. Hedging activities could be part of the equation.

Jerry Doctrow - Stifel Nicolaus

Okay.

Mark Ohlendorf

Number of different alternatives there.

Jerry Doctrow - Stifel Nicolaus

Okay, great. Thanks.

Operator

Your next question comes from the line of Rob Mains of Morgan Keegan.

Rob Mains - Morgan Keegan

Yeah, thanks. Good morning. Just about everything has been answered. Just have an follow-up Jerry last question Mark. To the degree that you might accumulate cash on the balance sheet not deploy it, would you just have it fit in cash or would you pay down any debt that’s [down] on there now?

Mark Ohlendorf

Well, it will depend on what the opportunity set is at that moment in time. This last quarter we were looking at a variety of opportunity. So, it did not make sense to go through the process of de-levering and then re-accessing that capital if we needed it. Once we see some normalization in the credit markets here, we should be able to create some additional revolving capacity. So that, in a sense, you can have both, you can both pay down debt and excess capital. We are not quite at that point yet. Obviously, we carry a lot of cash in the quarter, we are going to be using some of that capital for the Sunrise acquisition and in some other opportunities we are looking at.

Rob Mains - Morgan Keegan

Okay. So for now the cash kind of is your revolver?

Mark Ohlendorf

To some extend, we have $75 million revolver in place, it's probably not the long term piece of our capital structure that we are after but we do have that available today.

Rob Mains - Morgan Keegan

Okay. And then just one another thing, you answered a couple of questions about the pending Sunrise deal details that you are not going to be able to release until after it closes. Is that like fourth quarter conference call or you will be handling that separately?

Bill Sheriff

Whatever we will say would be the fourth quarter conference call.

Rob Mains - Morgan Keegan

Okay. Fair enough that’s all I have. Thanks.

Operator

Our next question comes from the line of Chris Damas of BCMI Research.

Chris Damas - BCMI Research

Was there any thought given to buying all of Sunrise in spite of all their problems. I wondered if Mark Ohlend, and you got together and looked at that. Some of the problems might go away with a bigger entity taking them over?

Bill Sheriff

That’s not something that we would address. It just wouldn’t be appropriate.

Operator

Our final question comes from the line of Mark Biffert of Oppenheimer.

Mark Biffert - Oppenheimer

Yes, just a follow-up, when you look at your line of credit and then been unused in the higher rate that you have. Now that your cash position is better, have you start talking to banks about redoing another line potentially larger?

Mark Ohlendorf

Yes, we are obviously in the capital markets all the time and among the things we are talking to banks and others about are revolving credit capacity.

Mark Biffert - Oppenheimer

Is there a certain size that you guys are trying to target or…?

Mark Ohlendorf

I guess yes and no. The credit market doesn’t have a normal level of capacity right now. So what number you might pick over the long run is being appropriate probably would be difficult to do in today's market but we have some rough ideas about what we would like to do.

Mark Biffert - Oppenheimer

And are the rates much improved obviously given that spreads have come in. Can you guys get a better rate than the 10 that you have on there.

Mark Ohlendorf

I would not say the rates have improved or spreads have come in. And actually I think our rate is 9% on the line right now but…

Bill Sheriff

If we were to do something else that would be today, it would be lower. But right now we have got a very strong balance of cash and that hasn’t been [aversive].

Mark Biffert - Oppenheimer

So if you were to do a large transaction you would probably make sure that you had assumable debt on it. Is that safe to say, to make it work and it won't be larger than the amount of cash that you are generating or you expect to generate?

Mark Ohlendorf

Obviously, any acquisition opportunity you look at, the financing is part of it. In a perfect world, it's highly leveraged with assumable debt right but different opportunities have different fact [balance].

Operator

At this time there are no further questions. I’ll now turn the call back over to Ross Rodman for any final remarks.

Ross Rodman

Thank you, Lori. With that we will close the call. We will be around all day. Please feel free to call or email for follow-ups. With that thank you very much.

Operator

Thank you. That does conclude today’s Brookdale third quarter earnings conference call. You may now disconnect.

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Source: Brookdale Senior Living Inc. Q3 2009 Earnings Conference Call
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