Capital Senior Living: Wall Street Analyst Forum Presentation Transcript

TRANSCRIPT SPONSOR

Capital Senior Living Corporation (CSU)
Wall Street Analyst Forum
May 23, 2007 11:10 am ET

Executives

Ralph Beattie - EVP and CFO

Presentation

Moderator

At this time I’d like to introduce Capital Senior Living, one of the nation's largest operators of residential communities for senior adults. Speaking on behalf of Capital Senior Living is Ralph Beattie, Executive Vice President and CFO. Welcome.

Ralph Beattie

Thank you Amy, good morning everyone. Thank you for attending this morning. Capital Senior Living Corporation is a leader in providing housing and services to our nation's seniors.

We're also leaders in providing a return on investments to our shareholders, having achieved a 29% company on annual growth rate in our company's share price over the last five years. That return greatly exceeds the S&P 500 and our peer group during that period.

I'd like to begin by reviewing some investment highlights. These highlights include favorable demographics and attractive industry fundamentals with demand growing faster than supplies.

Our same-store sales growth is resulting in double-digit increases in net operating income, and the industry is highly fragmented with less than 10% of the total capacity in the hands of the public companies.

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As a matter of fact closer 6% to 7% of the total Seniors Housing supply is in the hands of public companies today, representing numerous acquisition opportunities. Nationwide this business is primarily a regional business, a mom-and-pop business, a private business. So the public companies have the opportunity to consolidate these operations.

And our nationwide platform operating 64 communities in 23 states enables us to integrate these acquisitions at a very low marginal cost. We operate in the private pay sector, with little government reimbursement or federal regulations. And we can lever our growth by partnering in joint ventures with both financial investors and REITs.

We have a demonstrated track record of managing, acquiring, and developing successful operations, and Capital Senior Living Corporation has been public for 10 years. We're going to have our 10-year Anniversary this fall, and we've been public on the New York Stock Exchange that entire time.

This next slide takes a look at our 64 communities in 23 states, two different ways. One, based on ownership, and one based upon the type of community that we operate.

Starting with ownership. Of these 64 communities, we own 25 of them, 100%, we leased another 24. So the 64 properties we operate, 49 of them are consolidated in our income statement.

We have special ownership of 12 communities and joint ventures with GE Healthcare Services and Prudential, and in the past, we've partnered with other financial institutions including Lehman Brothers and Blackstone. We operate three communities under management agreement.

Looking at the type of property, our resident capacity exceeds 9,500 seniors, and 74% of our residents live independently. Independent living generally means that our seniors receive either two or three meals per day depending upon the community. They receive weekly housekeeping, weekly linen service, scheduled transportation, activities and independent living is primarily a residential and social model.

Another 24% of our residents live in assisted living apartments, where they receive assistance with bathing, dressing, grooming, medication management etcetera. And 2% of our residents receive skilled nursing services at one of our two continuing care retirement communities. These are campus environments, which offer independent living, assisted living and skilled nursing; we operate two of those and have a total of 170 skilled nursing beds.

One of the real drivers for this industry are the demographics, and they are very compelling. Our average resident at 85 years of age and you can see, comparing both the age 75 cohort, 75 plus and 85 plus cohort.

These are the two fastest growing age cohorts of the entire U.S. population. With our average resident 85 plus, the 85 and older age cohort is expected to grow by about 30% over the next decade, and again it is the fastest growing age cohort in the U.S. population.

Looking at Seniors Housing Supply, the data indicates that 75 largest markets represent about 1.4 million units of Seniors Housing nationwide. If we take the entire country, it's about 1.9 million units of Seniors Housing, this include independent living, assisted living and skilled nursing. So, you can see that there is combining independent living and assisted living less than a million units of Seniors Housing nationwide.

The previous slide indicated that there are about 80 million seniors over the age of 75 in United States with about a third of those over the age 85 So there is about 6 million, 85 plus seniors in the U.S. and less than a million units of Seniors Housing Supply to service their seniors.

Since 1999, when we saw an expansion in new supply and construction start, supply could very tightly constrain. In fact, supply has been growing at only a compound growth rate of 1.3% a year to the last seven years, averaging 30,000 units of new capacity each year.

So, really very little new capacity coming on stream to meet this demographic ways, that’s been growing at a very rapid pace. As a result, occupancy in the industry has been improving and are now averaging 92% to 93% and typically independent living occupancy exceed assisted living occupancy rates.

Over the last 10 quarters, we've seen a dramatic compression in cap rates, leading to much higher evaluation of Seniors Housing property. These properties generally change hands using a cap rate based upon cash flow in place and these cap rates have been coming down very dramatically over the last 10 quarters. Assisted living communities typically have a cap rate about 1% higher than independent living communities.

We also arrange of living options for our seniors, this first slide deals with independent living services and amenity. As I said earlier, 74% of our residents do live in independent living apartments. These apartments are spacious and offer a variety of floor plans.

We have restaurant-style dining with men use and wait staff. We offer a variety of social and recreational activities, scheduled transportation, weekly house keeping and linen service, On-site beauty salons and barber shops.

We have libraries with internet access and computers. Some of our communities have fitness centers or exercise rooms. And each of these offerings enriches the lives of our residents and contributes to a very attractive lifestyle.

This next slide compares the independent living with the assisted living amenities, and another 24% of our residents live in the assisted living apartments. These may be freestanding assisted living buildings that more typically are an assisted living wing and a combined independent living and assisted living community.

The assistance we provide may include medication reminders or assistance with the activities of daily living or ADLs including bathing, dressing and grooming etcetera. We have 24-hour on-site staff including nurse, aides or LPMs.

And both independent living and assisted living have emergency call systems to provide some additional measure of security for our residents, if they require assistance and can't pick up the phone and make a call. This assistance enables our residents to age in place before moving on to higher levels of care.

This is a snapshot of the demographics of a typical community. Our average resident is 85 years of age, the average age of a resident moving in is 82 years of age, and the average stay is two to three years. So, one of the things that we constantly need to point at is a fairly high rate of attrition.

About 80% of our residents are female, and that corresponds to the demographics of a population, in which case typically wives out live their husbands by about six years.

Turnover is primarily attributable to deaths or a need for higher levels of care. We offer very high quality communities, and we take great pride in our properties across the country. Our communities are bright and clean, we invest to keep them in like new conditions.

You can see the living room in the upper left-hand corner, a typical dining room in the upper-right. The property in the lower left-hand corner is our Cottonwood Village property in Arizona. And this is a typical façade with nice landscaping, very attractive exteriors. And then in the lower right-hand corner is a library to show the way they're appointed for the most part computers and internet access as well.

So we take great pride in our communities.

We operate on a national platform, including 64 communities in 23 states, and you can see the 23 states in which we operate. Again the color coding is how they're owned, whether it’s wholly owned, joint ventures, leased or managed.

And we operate these 64 communities through 7 regional offices. Now each region can manage as many as 10 to 12 properties. So, with 64 communities and 7 regions, we actually have the capacity to operate as many as 84 communities, if they are broken down perfectly geographically.

So the nice thing about this national platform is that we can integrate acquisition with a very low marginal cost, because we have regional operating managers and regional marketing managers already in place.

Our philosophy is that accountability and responsibility is at the property level. Each Executive Director prepares their own budget with their department heads, it's negotiated with their regional managers, and then it eventually is approved by the executive management team in Dallas, Texas. And that becomes a tool which we use consistently throughout the year.

As you'll see in our same-store; our same store sales results is a very effective tool. Our Regional Managers average about 18 years of experience in Seniors Housing, and the number at [present] is that particular manager’s years of experience in our industry. And the top name is the Operations Manager; the second name is the Marketing Manager.

But if you took a look at these years of service just in our particular industry, it averages about 18 years for each of these Executives.

We also have a very experienced senior management team. These top six Executives average or total a 168 years of experience in Seniors Housing. And if you can see our Chairman has 22 years of experience, our CEO 22 years, our Chief Operating Officer actually has 28 years of experience, and began his career on-site.

As a matter of fact, from our Chief Operating Officer to our Regional Managers, all of those Executives started their careers on-site and they understand the challenges that our on-site staff experience everyday.

This goes a long way in the retention of our on-site staff, the satisfaction of our employees, and the feedback we get from residents and family members.

In the first quarter of 2007, our stabilized communities averaged 90.6% occupancy, at a 47% operating margin. The list compares to a various industry data that's available from some of the industry sources.

You can see that independent living in the first quarter of 2007 was about 92%, assisted living about 88.5%, and again we are blend of about 74% IO and 24% AO.

Our operating margins exceeded both the independent living industry standard and assisted living standard, and these margins are before property taxes, insurance and management fees for comparability with way that the industry reports its information.

If you wanted to net those numbers down to a net margin including property tax, insurance and management fees, we will make about 10 percentage points of difference, so the net margin will be about 37% compared to the gross margin of 47%.

The nice thing is that the industry is also doing very well, not only is our company doing well and exceeding industry averages, but the industry is also fully recovered from some of the over capacity as existed in the late 90s and in early 2000. So, we are a healthy company and a very healthy industry.

There is tremendous operating leverage in this business model. One of the reasons that construction is so constrained today is that when you open a senior housing community, virtually all of your costs are incurred on day one, although you don't have a full building. So, it takes over a year to breakeven during that lease-up stage, which really detracts some of the returns that most financial investors are looking for.

Another reason for constrain of supply is that replacement cost today are so high that the rents necessary to justify in economic return aren’t affordable in many markets. So, unless you are going to build in an affluent market and capture the higher rents you are unable to justify development.

Capital Senior Living announced, Monday of this week, they were going to begin developing again in our joint venture structure with our first property to be developed in Miamisburg, Ohio, near Dayton. And we expect to develop a few more of these communities in 2007 and a few more in 2008. So, we are just beginning to develop again.

In the company's history, we actually have developed 17 of the 64 communities we presently operate. So, we are a very experienced developer. I think the time is right with capacity having been [restored], so once again began development.

The operating leverage we receive is reflected in this chart. Our revenues, first quarter of '07 versus first quarter of '06 for the same 50 properties, increased 7.3% year-over-year. Our operating expenses increased 2.9% and that generated a 15.2% year-over-year increase in NOI. And when we do our budgeting process, we typically like to have our expenses grow by at lease two percentage points less than our rate of increase in revenues. So we can create a 2% spread between revenue growth and expense growth. We can generate a double-digit increased in NOI on an annual basis, and that's our goal when we review the budgets and approve those and we've been very successful on achieving that during our company's history.

So, our same store NOI growth was 15.2% first quarter of '07 versus first quarter of '06 and our occupancy increase was about nine-tenth of a percent, roughly 1% during that time. This actually shows the yearly median increases that residents have experienced over the last 10 years or so. And you can see that the industry does perform very rationally even during a time when some of the over capacity, just [wasn't] existed.

Our residents when they move into one of our communities sign a 12 month lease, which really gives them price protection during that 12 month period. They know for the next 12 months, they won't experience a rent increase, even though we don't hold them to that lease, if for some reason they would need a higher level of care or they would want to move out for any reason at all, including their family, [getting depressed] and moving to a different part of the country. The 12 month lease is simply to give the resident price protection during that period.

At the end of their 12 month lease, they would expect to receive about a 4% to 5% annual increased in their rent. And you can see that that's typical for the industry as a whole, these are actually industry figures that I am showing.

New residents on the other hand will be mark-to-market depending upon what the economic conditions are in that particular location. So that the new resident increase would have actually been higher than the rent increases of our existing residents would experience when their lease is renewed. But we don’t have any buy end options, we basically are strictly a rental model and that has worked very well for us.

We do collect a community fee when residents move in, so there is non-refundable fee whereas permissible and we do collect a community fee of approximately $1000 per resident as they move in.

So, there is one benefit of attrition and then we get a chance to mark that unit to market if the resident has been in there, has been there for some time and not had quality [tire] rent increases as we could have experienced. And also we collect a new community fee, so there is one positive side effect of the attrition that the industry experiences.

This slide demonstrates the impact on our revenues and EBITDAR by being able to take on 48 consolidated communities to a 93% financial occupancy. At the end of the first quarter, these consolidated communities had about $167 million of revenue run rate, at about an 89.4% financial occupancy and giving that occupancy to a 93% rate with one typical annual 5% rent increase would produce about $15 million in incremental revenue, and our incremental EBITDAR margin on that incremental revenue would be typically at about a 75% rate, or $11.5 million of incremental EBITDAR to the company. And I'll show later how that EBITDAR is related to the potential value of our stock price using the multiples of which we trade.

2006 was one of most successful years in the company's history. Revenues were $159 million that was an increase of about $33 million or 26%. EBITDAR was $40.6 million that was a 56% increase. EBITDAR margin was 25.5% and that increased further in the first quarter of '07 to 28.5%. So EBITDAR margin has been improving consistently in sequential quarters. And cash earnings which is an important metric in our industry, simply defined as net income plus depreciation and amortization was $0.48 per share for last year, and that was $3.9 million increase.

We look at cash earnings because it's an operating company. We have a pretty severe depreciation and amortization charge on those 25 wholly owned communities. So a lot of our investors like to take our net income and add back that depreciation, and take a look at cash flow per share or cash earnings per share. It's not a GAAP term, but is an important metric to take a look at.

One of our proudest accomplishments is a 95% approval rating from our annual resident satisfaction surveys. We’ve take annual survey of our residents that's compiled by a third party and we've consistently toured in the mid 90s by this measure.

In terms of transactions, we formed two joint ventures with GE Healthcare last year. These joint ventures acquired 8 communities with a total value of $85 million. We also acquired 12 additional communities through acquisition lease transactions with some of the major healthcare REITs.

These 12 properties have a total value of $131 million, and they're expected to increase our annual revenues by $32 million and EBITDAR by $13 million on an annual basis. We did sell a few properties and leased some back in 2006. We sold these properties for $83 million, we generated gains of $27.3 million, and we amortized those gains over the 10 year initial lease term. So we are amortizing those gains into GAAP income over the next 40 quarters.

We received cash proceeds of $35.7 million, and used some of these proceeds to both refinance and retire a significant amount of debt, refinancing $143 million of debt at rates which are fixed. We also retired $56 million of debt, and we generated a projected savings of $7.5 million in annual interest expense through this restructuring of our balance sheet.

This next slide provides an example of the economics of one of our leases using a single asset that we acquired last summer outside of Minneapolis. This Maple Grove property was generating annual revenues of $5 million per year at a 40% EBITDAR margin. So it generated about $2 million of EBITDAR when we signed this lease.

At a $20 million value and an 8% initial lease rate, our lease expense in the first year was $1.6 million, so we increased EBITDAR by $400,000. In Year 2, with a 6% increase in revenues and a 4% increase in operating expenses.

And again this is a typical objective of ours to have that two percentage point spread between revenues and expenses, our EBITDAR would actually grow by 9% in the second year, and with a typical lease escalator of about 2.5%, those are generally tide to CPI, our lease would go up by about $40,000 and our EBITDAR would increase by $140,000 or 35% in the second year.

So if these leases are accretive when we sign them as they always are, in the second year, it improved even further.

We'll also continue to grow through our joint venture partners when we had very successful relationships with Blackstone, GE Healthcare and Prudential. And we're continuing to seek additional acquisitions to invest in through these joint venture structures.

We typically invest 5% to 15% of the equity, our partners invest the remainder. And we share equally in the return on investments with our partners. And till the joint venture has hit a certain hurdle rate, in which case there is a promote structure whereby we receive a disproportionate share of this incremental returns over and above the hurdle rate that was determined when a joint venture was formed.

In our first joint venture, we bought six properties of Blackstone in 2002. We invested $1.6 million as our 10% of the equity. During the next three years, we earned about $3 million in management fees from the joint venture. And when the properties were sold, we received the distribution of $6.5 million or nearly four times our original cash investment. So by four times cash-on-cash returns in addition to our $3 million of management fees during the time we operated in that joint venture.

Joint venture acquisitions at Seniors Housing are very attractive, because properties can be purchase at an 8% cap rate, and finance of long-term fixed rate debt of about 6%. One of the nice things about this industry is that there is long-term fixed rate financing available through the government agencies Fannie Mae or Freddie Mac. This is generally about a 120 basis points over the 10-year treasury.

So, we can put in place long-term fixed rate debt of about 6%, and if we buy properties at an 8% cap or a 9% cap, we can provide an initial return on net equity in the first year of about 14% or 18% depending on the cap rate using 75% leverage. And even with 70% leverage, it’s still about a 12.7% to 16% ROE in the first year. Even including amortization of the debt the returns don't decline significantly, they are still in the 8% to 12% range, including the amortization.

Taking a quick look in an example of how our joint venture works, here is a portfolio of about $8 million of NOI, purchased at a cap rate of 8% and the first strength of $100 million, using about 75% leverage, we put on $75 million of debt, we require about $25 million of equity and our investment as the 10% joint venture partner will be about $2.5 million to take an interest in that $100 million of Seniors Housing assets. Our parent would invest the other $22.5 million.

A portfolio of this size would generate revenues of about $25 million a year and what's really attractive to Capital Senior Living and our shareholders, is that we went on a management fee of 5% of revenues which is typical in the industry or $1.25 million of [interim] fees in the first year of operations, which is paid out of the cash flow to joint venture.

In addition, each partner would receive about a 14% return on equity based on the example in the previous slide, another $350,000 return to our shareholders and our total first share returns about $1.6 million or 64% of our initial investment. Our partner is also very happy, they received a 40% return on their equity, so they got back $3.15 million and their $22.5 million initial equity investment, and they received the 14% that they were looking for to make that investment in Seniors Housing.

In year two, things should get even better, because as the revenues increased our management fee is 5% revenues goes on further. So we would generate, receive our entire investment pack in less than a year and half. And obviously, we would like to do these transactions as often as possible with the financial investors that look to invest in Seniors Housing today.

This next slide looks at three growth drivers and their potential effect on our share price. Last year, we accomplished about $200 million of acquisitions and we expect to duplicate that in 2007. If half of these acquisitions were new leases and half were joint ventures, we could possibly achieve the following results. $100 million of lease acquisitions would generate about $25 million of revenue and $10 million of EBITDAR.

Using industry multiples of 13.5 times EBITDAR, and a 10 type multiples triple lease expense we would create about $55 million of enterprise value to $100 million of lease acquisitions or over $2.00 per share -- $2.07 in this example. $100 million of joint venture acquisitions would be accounted for by the equity method.

So, this example simply uses the management fees on that basis, we would also receive some return on our equity, but I didn't even include in this example, just simply using the management fees from a $100 million of joint ventures would create about a additional $1.3 million of revenue, all of that would be EBITDA and assuming little or no incremental expansion to operate those properties, and there is another $0.66 per share of enterprise value to our shareholders.

And most significant is the organic growth opportunity that we are looking at. Looking back on the example I had mentioned previously, getting from our 89.4% financial occupancy to a 93% rate. We generate about $15.3 million of revenue, $11.5 million of EBITDAR, and using a 13.5 times multiples, that’s almost $6 mix on a share value if the same multiples currently in effect would apply to these new revenues of EBITDAR streams.

So while this analysis is hypothetical, it demonstrates a potential increase in share value of over $8 per share by duplicating some of the performance we had last year in getting our financial occupancy at 93% rate.

This next slide compares our first income statement of 2006 to the first quarter of 2007. Our revenues in the quarter we just reported were $46.2 million. That was an increase of 26.2% over the previous year. EBITDAR was $13.1 million. That was about a 49% increase over the first quarter of 2006. And EBITDAR margin in the first quarter was 28.5% compared to 25.5% for all of 2006.

Looking at net income, we actually turned a $1 million loss in the first quarter of 2006 to $1 million profit in the first quarter of 2007. So, we just reported earnings of $0.04 per share in the first quarter of '07 and cash earnings per share of about $0.14. And again that compares to about $0.48 for all of 2006. So you can see that we expect to do dramatically better in '07 than we did in '06, which was a very significant year for us.

My last slide, take a look at the balance sheet of Capital Senior Living as of March 31st. And you can see that we had $312.3 million of fixed assets. This is the depreciated cost on the 25 wholly owned communities. We believe they obviously carried the book value far below the current market values. And the long-term debt on those 25 communities is about a $194 million at the end of March.

Since then, we announced another refinancing. We completed the refinancing of all of our portfolio. We actually paid down about $2.7 million of debt since the end of the first quarter. We fixed $30 million of debt at 5.9% rate. And the company today has about a $191 million of mortgage debt at a blinded average rate of 6.1% fixed for the next ten years.

So our balance sheet is in excellent shape. We have eliminated all of our interest expense risks on our wholly owned portfolio, and we fixed our interest expense at a little over $3 million per quarter.

And with I'd like to open it up to question. Thank you for your attention.

Question-and-Answer Session

Unidentified Audience Member

(Question Inaudible)

Ralph Beattie

Every resident does sign a 12-month lease. When a resident moves into our communities we take a look at what their needs might be, and make sure they are receiving the proper level of care.

If it’s an independent living community, then we can provide enough assistance. There is a home healthcare agency or one or more in each one of our properties that does provide some assistance to bridge the independent living to an assisted living resident.

But once they've acquired a certain level of care, they should be in an assisted living community, and obviously those rates are a few hundred dollars per month higher than independent living.

So we do provide some of the same services. We have separate dining rooms in communities and that’s both the independent living and assisted living, but we share the kitchen so that the residents live in or eat in one of the two dinning rooms.

But we do provide medication management, meaning that we will do medication reminders for the living residents. We'll help them with bathing, dressing, grooming, ambulation, whatever needs they have. But again it's something less than a medical model.

But both independent living and assisted living residents who sign a 12-month lease, which will give them that priced protection during that 12-month period. Basically they require higher or less of care during that time. We’d uphold them to that lease if we can't provide the level of care that they need.

Unidentified Audience Member

What is the average cost?

Ralph Beattie

The average cost in independent living is probably about $2,200 per month. That goes to the apartment, the meals, all of the services they provide. Assisted living is generally $300 to $400 per month higher, although there is quite of range of rates. Our lowest prices are in the State of Texas where some of the lower rents are.

We might receive as much as $4,000 a month for assisted living in some higher rate locations such as those here in the Northeast and Connecticut and New Jersey. So there is wide range, but on average I would say, the numbers I quoted.

Unidentified Audience Member

And that includes everything.

Ralph Beattie

That includes everything. Basically it includes their electric utilities, their basic cable, everything except their telephone expense. But we do change the linens once a week. We provide weekly housekeeping services; we have scheduled transportation for doctor's appointment, shopping, visits. We plan activities for residents with no additional charge.

So, really once a resident moves into one of our communities, they have very little additional expense except for clothing or the personal items. So they can pretty much count on having that expense plus the small increase each year as their lease renews.

Unidentified Audience Member

Yeah. Other than acquisitions, is there a program of building new communities? And it takes other than the 23 states that you located now, and what are the zoning requirements? Is that an [element]?

Ralph Beattie

It’s definitely an element. We are just beginning to develop again. And if you take a look at some of the other companies in Seniors Housing, we are all recognizing that today if anything, there is going to be a capacity shortage over the next few years. So, with the limited supply having come up during the last few years, it becomes clear to all of us that it's time to begin increasingly the supply to meet the demand that we all see.

So, one of the elements of that is to get a nice [infill] location, our properties are fairly large and we are looking at 5 to 6 acre parcels, which are not easy to get, closed in, and very expensive today. There is a process that takes approximately 12 months to go through planning, zoning, getting the local government on board with your plans.

Many times there is a negotiation for, whether the building can be two stories or three stories. So there is about a 12 month process to get the plans approved. And what we typically see is it takes as much as a year to find a good site, another year to get it planed and zoned and approved, another year to build a property of this size, and then a year or two to lease it up the full capacity.

So it's a very long process. We can see capacity coming on stream, quite the way in the future. So it's an easy business to plan for from a capacity situation.

Unidentified Audience Member

Is there an element of that whole host of community involvement, local community may be as it at least was for (Question Inaudible)?

Ralph Beattie

Generally, we are considered to be a very good neighbor in a community. We provide a service to that community. We provide a service to the seniors. So, for the most part we are in attractive alternative for that land used in those communities, so that we generally receive a fairly welcome when we move into a new community.

One of the nice things that we offer is that, with very fewer residents driving at that age, we don't really add lots of the traffic conjunction. So we are generally considered to be a good neighbor, but there is still a process we have to follow. And we try to be a good neighbor. We try to have attractive building. We try to be a part of that community.

Quick frankly, one of thing that helps us is to be an active member of the community. We like to be a polling place; we like to have activities, speakers, musical groups come in. We like to have a very prominent name in that community to feed those residents, so they feel comfortable in our locations.

Moderator

There is time for one more question.

Ralph Beattie

Okay. Sure.

Unidentified Audience Member

So, your revenues, it seems about 5% to 6%, 7% whatever it's for Medicare. You give us -- what are the estimates? Sure, sometimes you may break that down a little bit down and also tell us little bit about the graphic release that were in there?

Ralph Beattie

Sure. We really have that 5% or 6% Medicare reimbursement. It's actually in the two CCRCs that I mentioned. We had about 170 skilled nursing beds. That’s not a part of the business we are actually just trying to increase, but we operate two communities where we have independent living, assisted living and skilled nursing. So, in those communities a lot of seniors like to be able to move into a community and know that if they need higher level of care, it's available to them without having to relocate.

We don’t really see expanding that part of our business. All the rest of it is private pay, there is a little bit of insurance but the insurance is a fairly recent phenomenon and most of our 85 year olds don’t have that insurance, we may see that becoming more of a factor in the future if insurance becomes available to 50 or 60 year olds who are anticipating that need in the future, but not many 85 year olds today have that insurance available to them. It’s primarily a private pay business; it’s mostly a choice that they choose to live in our community or another one. So, it’s a very competitive market driven environment and the nice thing about being in a private pay business is the government isn’t paying us.

So they really don't have any real reason to over-regulate us. There are some fake licensing objectives on the assisted living side, but to the most part, we're a consumer driven business and we operate in a private pay environment.

Do I have time for another one Amy?

Moderator

I mean I don't know, yeah somewhat. Is that okay?

Ralph Beattie

Okay.

Unidentified Audience Member

I'm puzzled by your -- where you get the debt returns, say different returns from leases JV and I think acquisitions. I'm puzzled I think where you -- how much you are relying on each?

Ralph Beattie

Well, we like the balance that we have in our portfolio. With 25 wholly owned communities, 24 leases, 12 joint ventures. I think if you look at senior housing companies, we're the most balanced of any of those public companies. Our highest return on investment is in our joint ventures, because we get the return on equity and we get the management fee. But again, because of our small ownership we don't get the bulk of our revenues and EBITDAR from that source.

So, on a rate basis, joint ventures would be the first. Our leases are very attracted to us because we can underwrite with our REIT partner, choose the value that [we] can purchase for that portfolio, lease it to us on the date they close. And because we have been part of the process of evaluating the value of that portfolio, we know we have an accretive lease based upon the lease rate we've negotiated with the REIT.

So, we can immediately increase revenues, EBITDAR, and consolidate that lease. So that's helps those revenues and EBITDAR. So, we like a balance of both. Does it answer that question?

Moderator

Any further questions, we actually do have some conflicts to set aside if anybody is going to continue the Q&A.

Ralph Beattie

Thank you very much.

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