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Executives

Ross Roadman - IR

Bill Doniger - Vice Chairman

Bill Sheriff - Chief Executive Officer

Mark Ohlendorf - Co-President and CFO

Analyst

Ryan Daniels - William Blair

Kevin Fischbeck - Lehman Brothers

Jerry Doctrow - Stifel Nicolaus

Mark Biffert - Goldman Sachs

Stefan Mykytiuk - Pike Place

Jeff Englander - Standard & Poor's

Brookdale Senior Living Inc. (BKD) Q4 2007 Earnings Call February 28, 2008 10:00 AM ET

Operator

Good morning. My name is Dennis and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living fourth quarter 2007 earnings call. All lines have been placed on-mute to prevent any backgrounds noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Mr. Ross Roadman. Please go ahead.

Ross Roadman

Thank you, Dennis, and good morning, everyone. I'd like to welcome you to our fourth quarter and full year 2007 earnings call. Joining us today are Bill Doniger, our Vice Chairman; Bill Sheriff, our Chief Executive Officer, and Mark Ohlendorf, our Co-President and Chief Financial Officer.

First I'd like to remind you as described in the earnings release, this call is being recorded. A replay will be available through March 13th, by calling 1800-642-1687 from within the US, or 706-645-921 from outside the US, and referencing the access code 34058685. This call is also available via webcast on our website brookdaleliving.com for three months following the call.

I would also like to point out that all statements today, which are not historical facts maybe 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 other factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued last night, 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.

Now, I'd like to turn the call over to Bill Doniger. Bill.

Bill Doniger

Thanks, Ross. Welcome everyone. I am going to try to be brief. But first, let me introduce Bill Sheriff to the call. Bill has been responsible for the leadership of our company, since our American Retirement acquisition in 2006, and Bill along with the rest of his management team actually was an integral part of our decision to buy American Retirement

Well, Mark Schulte has been a great partner of ours, and will remain involved on the board and the transition to a single CEO is really, just natural evolution of our integration process. Really in our opinion Bill is the industry's most capable operator, certainly the hardest working and natural leader and we are thrilled to have him in-charge of our company going forward.

Looking back at 2007, reported CFFO of $1.46 was a 37% increase over 2006. While we fell short what we are hoping to get to going into the year, the fact of the matter is, we still grew it about 37%, despite all the challenges in the economy and as importantly a massive integration that was going on inside the company that really culminated in the fourth quarter. But that heavy lifting is behind us and we expect to have a very, very good 2008, despite a worsening of the economy.

Now before I turn the call over to Bill, let me just spend a minute on dividend. Obviously, we paid out more in 2007 than we earned, that wasn't the objective going into the year. However we are very comfortable where we are today, we expect to earn the dividend on a run rate basis this year and we have lost liquidity that more going into our, we will talk about.

Although we also talk about shareholder value, we are pretty focused right now more than we have ever been on our share price. And the way, we obviously can make that share price go up two ways really. The old fashion way, make the revenues go up faster than your expenses and Bill will talk about how we are doing that. The other way is really kind of balance sheet management and looking at ways to capture the discount between our share price and our net asset value.

If you look at the market cap for our company, I think we are trading in around to 9% cap rate and for those in the Senior Housing business, and -- understanding our assets that is incredibly, incredibly wide. A balance view of our assets would suggest the cap rate probably in the 6.5% area, maybe a metric to look at it is the NAV analysis used by many folks, when looking at healthcare REITs, who had really a broader mix of assets including a fair bit of skilled nursing assets, which are often traded at a higher rate, cap rate, than pure Independent and Assisted Living assets.

But using say 6.5% cap rate on our forward numbers would imply a NAV per share, at roughly $45 of share, which obviously is the big premium for where we are trading today.

You know why I can't be specific on what we're doing. I can't tell you that, both Management and the Board of Directors are unanimous in that, this is a priority and we are praised, we are looking at lots of different options, in trying to capture that discount. And I think, we will be successful and everything is on the table, but again, that's really all we can say right now.

And with that, I'd like to turn the call over to Bill.

Bill Sheriff

Let me start off by making a few general comments about the Senior Living Housing industry. The demand for our product remains robust and is growing, but supply remains constant for the foreseeable future. The best news for our company is that, we are the largest US provider and our scale allows us to provide the highest quality and most comprehensive service and to be the provider of choice in the markets where we operate. Obviously, our business isn't without challenges. During 2007 we saw a shift from a relatively robust market prior to 2007 to a period of correction and uncertainty.

Clearly, the housing crisis in our country and overall economic slowdown has impacted the timing of move-ins for our residents particularly in our entry fee business. As a result, we adjusted how we approach the market, which has contributed to our growth in 2007 and leads us better position to achieve attractive growth in rates in 2008 and beyond.

First, we increased and refined our marketing efforts. As we have talked about before, we initiated a major market management pilot program mid-year that integrated the sales and marketing efforts of all of our products in a particular market. The pilot successfully demonstrated the strong advantage, we can realize with our scope and size in major markets.

For example, in Denver, since the initiation began in the summer of 2007, we had increased occupancy by year end that market by six percentage points. We are now up and running in 14 markets representing roughly 16,000 units while to early to tell, we expect positive impacts in these markets.

Second, we refocused on training, branding, sourcing and other marketing tools that I would call basic blocking and tackling, and results of these efforts is that our total portfolio occupancy has held at over 90.5%. But the important point is that, we were able to hold occupancy, while we also maintained our pricing discipline and that is reflected in our results.

In fact on January 1st, we raised rates across our entire AL portfolio, that we yield an average revenue per unit increase of 4.5% and we will see a 5% average revenue per unit increase from the combined effects of rates, for the new residents moving in to our -- as they moved in the balance of our portfolio.

Third, and most important, perhaps is our efforts to integrate all of our companies together as well as build a platform for the future. The fourth quarter was the peak of our integration activities. We flipped the switch on a lot of new enterprise systems, IT systems, like general ledger, accounts payable, payroll, procurement, as well as the accompanying reporting processes.

As Mark will describe in detail what can and did come with some financial reporting consequences, and was quite honestly a large distraction to the organization during Q4. But we have to get through it, to bring all the legacy companies together as one company. On January 1st, we rollout a field organization based on geographic divisions not product lines. Now, all products and the concept of continuing care in the marketplace are all under one management structure.

It sounds like the right thing to do, but without the right systems and processes in place, it wouldn't have worked earlier. We are not through with all those systems development integration activities, but we have completed about 75% to 80% of all the integration projects with the most distracting part behind us.

We also made significant progress with rollout of our ancillary services. We have promised advancing therapy services to 8000 additional units in '07 and in fact we added over 12,000. We will continue to improve the economies of these services as the new clinics mature and increase productivity. We expect that once mature we will drive a $150 operating profit per month per occupied units and newly served units through both therapy and home health.

The maturation process for ancillary services including both offerings is six to eight quarters. At year end we had 28,000 units served by therapy services and 7500 served by home health. The new services to add a very strong market advantage as consumers look for the best and current and future place to receive the healthcare services they need.

Let me turn what we expect in 2008. We have to assume that 2008 will be a challenging environment, given the current economic conditions, with the first and second quarters being the more challenging. Yet despite that, we still believe we can grow our CFFO 15% to 20% over 2007, assuming existing market conditions and without any acquisitions.

Why do we believe we can grow at this level over '07 despite the challenging environment? We are currently demonstrating that we can continue to increase revenue per unit, through rate increases and ancillary services growth. Our recent acquisitions are an area of opportunity. Necessary renovations are finally being completed, which will drive demand, certain State approvals are finally in hand and we have good rational business plans in place. We had the full year effect, as build out over the 200 expansion units that opened in 2007 as well as the initial build out of 380 to 400, we will open in 2008.

Our new acquisition strategy for home health is getting traction, we have acquired four agencies in Florida in '07, have acquired one agency in Texas in January, that will serve 928 units, have agreements in place to purchase several more agencies covering more than 2000 units with more than pipeline. And we have made a significant investment in systems and people in the procurement area, allowing us to continue to harvest cost savings throughout the year.

Let me conclude by stating that there will be an inflection point of change in consumer sentiment in our business. It will come when there is a sense that the economy has bottomed and of course, we have no way of predicting in which quarter that will occur. We will see the positive results of that reaction quite quickly and before the economy, as you will officially in recovery.

There will be pent-up demand and as a result of credit constraints on new development, a limit of new supply to meet that demand. When that happens, we would expect to see even better growth through the rebuilding of occupancy and improved entrance fee cash flows as they return to normal levels.

I'd like to now turn the call over to Mark.

Mark Ohlendorf

Revenue for 2007 totaled $1.8 billion an increase of 40% over 2006. Same store metrics for the year continue to be strong. For our 425 annual same store communities year-over-year NOI growth was 9%, excluding the impact of $7 million of transitional charges to conform accounting policies, which were included in our fourth quarter results.

The primary drivers within this 9% annual NOI growth rate, includes 6.9% revenue growth, 6.7% of which is revenue per unit related, and operating expense growth of 5.7%. Excluding the impact of our ancillary services rollout, revenue per unit grew 5.1%, while expenses grew 3.3% and NOI by 8.2%.

For the fourth quarter, we reported CFFO of $0.28 a share, that number is net of $15.1 million or $0.15 a share related to integration that can be categorized in two parts. First, there are $8.1 million of acquisition and integration costs that represent the costs in the quarter to develop and implement the integrated systems and processes we have incurred these costs in prior quarters. An example of these costs our professional fees for third-party consultants, who are working on IT conversion projects.

Second, during the fourth quarter when we combined our separate accounting systems in organizations we conformed our accounting methodologies and practices across Brookdale. That resulted an additional $7 million of charges related to our desire to conform policies across all of our platforms, including $5.9 million of estimated uncollectible accounts and $1.1 million of accounting conformity adjustments pertaining to inventory and certain accrual policies.

Without the impact of these two items totaling $15.1 million or $0.15 a share, reported CFFO in the quarter would have been $0.43, which does not include debt and capital lease principle amortization of $4.1 million.

Again, excluding the $7 million of integration related accounting items, same store results for the quarter-over-quarter show an increase in revenue of 7.3% a result of an average revenue per unit growth of 7.4%. Expenses grew at 6.4% resulting in same store NOI growth of 8.9%. Adjusting out the ancillary services impact from the legacy Brookdale units’ revenue grew at 5.2%, expenses grew at 3.6% and NOI grew at 8.1%.

Looking at the balance sheet, as of December 31st we had $100 million of cash and $93 million of undrawn capacity under our corporate line. Other than normal scheduled amortization, we do not have any secured debt maturities in 2008. Our corporate line of credit initially matures in November 2008. However, we have the right to extend it until May 2009. Our plan is to continue with asset refinancing in 2009 to repay outstanding amounts under the line either to zero or down to a modest level that will simplify the process of renewing the line.

And finally, here is our sense of the key NOI performance drivers for 2008. We continue to expect annual rate growth in the 4.5% to 5% range, plus the growth from ancillary services rollout. Some of our rate growth will be frontloaded in the year, since we increased rates across our assisted living portfolio in January 1st. All in all, we expect that we should maintain our revenue growth rate for the year at historic levels.

On the cost side, we expect to see unit cost growth of around 3.5% not including the rollout of ancillary services. With labor and benefits accounting for more than 60% of our cost, the current economic slowdown should restrain upward pressure in this area. Additionally, we expect to continue to produce cost savings from our scale given the new procurement systems that were completed in 2007.

Let me add that we plan to slightly modify the way we define CFFO going forward. There has been some confusion about how debt in capital lease principal amortization should be treated in the CFFO calculation. Beginning in 2008, our reported CFFO will subtract principal amortization related to capital leases, where we do not have bargain purchase option. For the leases, where we have a bargain purchase option, we will treat the amortization similar to how we treat principal amortization related to debt and excluded from the CFFO calculation.

We have included a table in the press release to present our CFFO results, since 2006 under this modified definition of CFFO. Our CFFO for 2007, under this new definition excluding acquisition and integration cost and accounting conformity impacts would have been a $1.67 per share. Based on current market condition, that is soft the occupancy and slower entrance fees, we are forecasting CFFO of $1.90 to $2 per share excluding integration and acquisition cost and assuming no acquisitions.

As Bill mentioned, once our customers get a sense that the economies have bottomed, we would expect to see growth rates in excess of 20% as we rebuild occupancy and entrance fees and can further push unit turnover rental rates.

A couple of additional thoughts and aims that will impact your models. We do have a seasonal pattern to our business and some of the factors that affect our sequential quarter performance in 2008 will be. First, as we have seen over the last several quarters, net entrance fees tend to peak in the fourth quarter, drop off in the first quarter, and gradually build throughout the calendar year. Perhaps in a significant change in market fundamentals, we expect to see a similar pattern in 2008.

Second, our sequential performance in the third quarter compared to the second quarter, will be impacted by higher utility and holiday related costs in the third quarter. Third, during 2007 we made tremendous progress on our integration and development of a platform for the future. We had expenses of $19.1 million during 2007 on acquisition and integration related items and also spent $14 million on related capital expenditures. We expect to expense $10 million to $12 million in 2008 and incur $8 million to $9 million of capital expenditures primarily on systems. We anticipate that this will complete our integration process.

Four, our earnings release shows our capital expenditures by category. It's important to continue to refresh, renovate, and expand our portfolio and during 2008, we expect to invest $80 million to $85 million of cash in these three categories, somewhat lower than we spent in 2007.

And finally, our current forecast on the income tax front shows that, other than $2 million to $3 million of annual state income taxes, we do not expect to pay other cash income taxes through 2009. State income taxes will increase by $1 million to $2 million per year after 2009 through 2013. We would begin to be subject to cash federal income taxes in 2013 and become fully taxable in 2014.

I'll now turn the call back to Bill.

Bill Sheriff

Let me conclude with the brief recap. We continue to see incredibly positive results coming out of our business. Revenue at 5% growth, our expenses 3.5% and operating margins around 36%, it provide us with NOI growth in the 8% range and CFFO growth in the 20%.

This presumes relatively stable occupancy in today that seems like, where we are. There is no doubt that these our challenging times, but I am extremely proud of the effort of our associates in delivering the results and most importantly I remain greatly optimistic for the future of Brookdale.

I will now turn it over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Ryan Daniels with William Blair.

Ryan Daniels - William Blair

Yeah, good morning guys. A couple of quick housekeeping questions upfront. I noticed in the G&A line it was down quite a bit sequentially, I know it was due to some non-cash charges, but was I'm hoping, you give a little bit more color there on the stock comp and what drove that down?

Mark Ohlendorf

Sure, Ryan. This is Mark. A number of our stock grant programs include performance level triggers for vesting. And we made a determination in the quarter that we would not meet those targets and therefore reverse the stock comp expense.

Ryan Daniels – William Blair

Okay. Thank you for that, now a somewhat similar question on D&A I noticed that drop a lot sequentially as well, was there anything unique there, is that a better run rate to think about going forward?

Mark Ohlendorf

That is likely a better run rate to use going forward. In our acquisition transactions some of the groups of assets are amortized over relatively short period of time. So, I think you will have a better run rates to work off.

Ryan Daniels - William Blair

Okay, great. And then, if we look at the CFFO calculation you guys provided, is an update under the new methodology, it looks like you're giving yourself less credit on the integration expenses. So, just as an example looking at last quarter, you guys haven't add back $0.04 whereas in the Q3 results, you had a $0.06 add back is that just excluding the ancillary rollout and the start-up expenses there and focusing exclusively on kind of integration expenses?

Mark Ohlendorf

Yes, that's right.

Ryan Daniels - William Blair

Okay. But definitely think of your guidance of that $1.67 number, so not including those expenses?

Mark Ohlendorf

Exactly

Ryan Daniels - William Blair

Okay. And then a couple of bigger questions, I'll hop back on into the queue. Bill, I think, you mentioned kind of in the past that crescendo of integration activities hit in Q4 and I was wondering if you could talk a little bit more, I know, the systems went live and that was one big thing. But maybe, what are remaining in your view are key milestones over the next two to three quarters on the integration front. And what you guys are hoping to accomplish there?

Bill Sheriff

Well, actually Mark probably will give a better detail on the pieces of the going forward. But we were flipping switches, seems like ever weak during the fourth quarter and that was the crescendo. And what we've going forward will not be nearly as disruptive; particularly to the field operating organizations is what we've experienced in the fourth quarter.

Mark Ohlendorf

Yeah, exactly, the primarily difference Ryan, would be that the big systems we've brought up today are the core infrastructure financial systems in particular. As we move forward, we'll be combining and really more refining things like sales management systems for example, risk management systems, clinical management systems, more operationally based systems.

Ryan Daniels - William Blair

Okay, great. And then last question, I know, there's been a lot of data recently about being a pretty bad flu season. I'm just curios, if you guys, I know you have seasonal weakness in Q1 with slightly lower move-ins and some move-outs. I wondered if your occupancy has dropped over the last few months. If you can give any color, one because of seasonality, two, the worst housing market and three because of the flu season. How should we…

Bill Doniger

Our occupancies have held very well. We've experienced the same way that other people have of going across; it's not a large number of communities. But we've had some that had experienced temporary admission delays and holds in order to get cleared. But again our results speak to the strength of what we've despite that held up.

Ryan Daniels - William Blair

Sure. And we should consider that to be holding thus far in Q1 as well?

Bill Doniger

As we've said, we expect the first quarter to be kind of the most challenging quarter, but we're holding.

Ryan Daniels - William Blair

Okay, fair enough. Thanks, guys.

Operator

Your next question will come from the line of Kevin Fischbeck with Lehman Brothers.

Kevin Fischbeck - Lehman Brothers

Thank you, good morning. I wanted to go back to Bill's I guess, putdown here is the comments earlier about monetizing assets to the extent that you can expand on a little bit. When you talk about creating shareholder value it sounds like what you're saying is that most of your assets have some sort of asset-based financing. But after you sold those assets any kind of net proceeds you will get would be geared towards repurchasing stock rather than some sort of debt pay down or acquisitions?

Mark Ohlendorf

Well, again without begin specific one of the options would be buying back stock. And again, we think our stock is very undervalued relative to kind of market pricing, and where we think the growth is going to be. So again, it's hard to be specific right now. But everything is on the table.

Kevin Fischbeck - Lehman Brothers

So, this change is it just a simple matter of how the market is valuing the company versus the underlying assets. I mean, all halves equal, but are you still owning assets, and leasing or?

Bill Doniger

It's not going to do with whether we want to own or leased assets. This has everything to do with our stock price relative to what we think the growth prospects are for our business despite of what's happing in the world today.

Kevin Fischbeck - Lehman Brothers

Okay, that makes sense. And then moving over to the guidance, you are now 15% to 20% down slightly from the points at number last quarter is there a change in the same store NOI assumptions. I guess what was the rational for the range it's just uncertain economy that you highlighted?

Mark Ohlendorf

There is no change in our sense of the fundamentals. And I think, you see in the quarter-over-quarter, or year-over-year same store growth rates, they continue to be extremely strong. As Bill indicated we expect the first couple of quarters of the year to be somewhat challenging. So, as you've indicated, it's more of a sense of the volatility in the market, our desire to be cautious about guidance. We continue to think that over the long-term the fundamental support 20% growth.

Kevin Fischbeck - Lehman Brothers

Okay. And then last question from me. Operating expenses were again a little bit higher than I would have thought; it was the second straight quarter where you had about $5 million to million sequential increases, in revenue, but $9 million to $10 million sequential increase in costs. What's been driving that and I guess, whether startup losses is in the quarter, this quarter?

Mark Ohlendorf

You're looking at the sequential quarters?

Kevin Fischbeck - Lehman Brothers

Yeah.

Mark Ohlendorf

Well, let me add a couple of thoughts here. One, again if you look at the same store performance quarter-over-quarter without the ancillary service rollout, we got 3.6% expense growth and year-over-year it's 3.3%. Now looking at the sequential quarters, the cost is up about $14 million again $7 million of that relates to the accounting impacts that we talked about. Nearly $3 million of the remaining $7 is increases in ancillary service costs and other items that relate directly to changes in our revenue. So, you are left with $4.5 million or so and in normal 3.5% inflation rate, that's about $2.5 million.

We did see some true increases in cost in the quarter related to additional spending on marketing and advertising as we deal with the market conditions. There have been some commodity price increases in things like food. But in general, we're still comfortable with the 3.5% unit cost growth as we go forward.

Kevin Fischbeck - Lehman Brothers

Okay. And so, I guess, the delta might be the ancillary services continue to ramp up as it'll give you more leverage as the year goes on?

Mark Ohlendorf

Yeah. I think that will be the $7 million of accounting items and the ramp up in ancillaries will be the two most significant items.

Kevin Fischbeck - Lehman Brothers

Okay, great. Thanks.

Operator

Your next question will come from the line of Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Hi, thanks. Just one quick factoid, and then a couple of other things. Did you use the ending share count for the quarter we didn't see that in there, Mark?

Mark Ohlendorf

I think it's --

Bill Sheriff

101

Mark Ohlendorf

Give me just a second, Jerry.

Jerry Doctrow - Stifel Nicolaus

Okay. Let me jump on a couple of other things. I guess, coming back to Bill, why wouldn't you just cut the dividend my guess, my argument will be -- for maybe $0.10 or so free up a lot of cash get everybody less concerned about the dividend issue and you could use that to buyback stock or make acquisitions in a good market. I'm just trying to understand sort of the rationale for not, it's kind of priced in anyway at this point?

Bill Sheriff

We generate a lot of cash and like I said, everything is on the table. What we focus on is not the dividend, for the dividend sake, but making the stock go up. We're comfortable with where we are at the dividend. We want to look at all the options and see what we can do. But, again, if there is more than one way of doing this and we want to be softer, but aggressive about doing the right thing.

Jerry Doctrow - Stifel Nicolaus

And is there sort of a timeframe in order for sort of thinking for these issues and making some decisions about your share buyback or potentially dividend cut or selling assets whatever else you're going to do?

Mark Ohlendorf

Well, after this earnings call, it's the number one priority for the company.

Jerry Doctrow - Stifel Nicolaus

Okay. And are you sort of still in the acquisition business then or given where things stand, given maybe that the stock maybe more attractive than buying properties at this point or should we be thinking that there's fewer acquisition or at least nothing any dramatic on the acquisition sides you might be doing?

Mark Ohlendorf

Well, let me answer that with the fact is that there are in this environment when you've liquidity and strength, which we think that we do there is lots of interesting things to do. What we want to do is prioritize our capital and invest it in things that will generate the highest returns. Right now probably at the top of the list, we believe is our stocks, but we're not going to foreclose any really growth opportunity.

I don't think we're looking at a lot of acquisitions right now. But overtime we'll buy, stuff and again. We're still doing expansions. But again, we care about where we get the biggest bank for our buck as opposed to just buying things extending things or whatever.

Jerry Doctrow - Stifel Nicolaus

Okay. And then last thing and I'll jump off when I get my share count. Since everybody is sort of thinking the doomsday scenario that's here in terms of housing market. Any chance you can give us some color in places like Florida, Arizona, someplace, Southern California and I know that you have that much in California where you're seeing much more stress on the housing market as to how occupancies rates are holding up in those markets?. Again, I think a little color there would sort of just help people maybe get comfortable?

Bill Doniger

First we have a very diverse both geographically as well as product line mix across our total portfolio. And the variation that we're seeing in the southern divisions on the new alignment is a not a quarter, one quarter percent half of the median point there and yes the Florida and Arizona, California are tend to be on the soft side of that, but not a significant amount. And they are holding and the occupancy rates there are holding comparatively with the other areas at this point.

Mark Ohlendorf

Jerry, this Mark, here. Your share account number is a $101.9 million for the fourth quarter CFFO.

Jerry Doctrow - Stifel Nicolaus

Okay, great. Thanks.

Operator

Your next question will come from the line of Mark Biffert with Goldman Sachs.

Mark Biffert - Goldman Sachs

Hi, guys. My first question is for Bill Doniger I guess related to the 6.5 cap rate that you mentioned to get to that $45 implied share value. I guess I'm kind of curious what you're seen in terms of cap rates in the markets, where you add by property type and in terms of what you've seen in terms of cap rates moving backup given the lack of transaction volume, the lack of available financing for people that want to buy these assets?

Bill Doniger

First, let me say that financing is not unavailable for these types of asset classes. In fact, I'd argue that financing is as available as it has been for us. We've done a fair bit of financing in 2007 and actually into this year and we're getting financing done for proceeds and rates of where we thought they would be. And so, senior lending financing actually remains pretty liquid if you're not looking for 90% leverage. We don't finance our assets that way. We've never used CMBS to finance our assets, which is obviously our highly dislocated market right now. So the GSE's and the insurance companies love our type of assets, the historical performance on default rate, I think probably the lowest of any type of real estate related assets.

So, there is plenty of liquidity as long as you have some capital to put below the debt. You probably have a better view of all the different cap rates in the real estate sector, but I think health care REIT trade probably just above a 7% cap rate on a one year forward basis, but they exclude in that cap rate analysis, G&A. In our number, we're including a 5% management fee, if you will and again, a lot of the healthcare REITs have great portfolios of assets including ours, but also have a mix that would tend to have a higher, get to a higher level, given all the nursing homes got.

So, that's really, but thinking of, talking of I think your cap rate is 7%, you're still getting a pretty high NAV relative to where we are today, you're still in the 40s. So, again, there's a really precise answer, but there is pretty good cover. First of all at a 9% cap rate, you can't buy a portfolio, a Senior Housing asset, anywhere close the quality of what we have at that level and you never could so, from that perspective, we're just talking about the degree of discounts.

Mark Biffert – Goldman Sachs

Okay. And how do you break out between owned versus managed assets and how you look at that in your evaluation?

Mark Ohlendorf

It's again a hypothetical, we do lease assets. We stick all the lease payments, capitalize it back on to the balance sheet in doing the calculation, even argue the Healthcare REITs, when people using NAV analysis, they don't know their assets are not encumbered, they don't have subject to lease. So, it's really kind of a hypothetical, but similar analysis.

Mark Biffert – Goldman Sachs

Okay. And then you had mentioned about the finance and I'm just curious what rates or spreads you are seeing in terms of financing from the insurance companies and some of these other guys?

Mark Ohlendorf

It's moved up, absolute rates are down and rates or spreads probably anywhere of 175, 200, 225 depends on the asset mix.

Mark Biffert - Goldman Sachs

Okay. And I guess jumping over to the outlook, looking at ancillary revenues, I didn't see average unit revenue number, I saw for the legacy portfolio at 197. I was wondering what that was for the Brookdale legacy portfolio?

Mark Ohlendorf

We would have seen somewhere around $75 in the quarter per unit.

Mark Biffert – Goldman Sachs

Okay. So, that's up from 50 in last quarter, is that correct?

Mark Ohlendorf

Yeah, it's in that range.

Mark Biffert - Goldman Sachs

Okay. And then looking at the, my last question relates to the one-time charges, take a looking, I think it was the $10 to $12 million of additional integration charges. Is that going to be front-end loaded?

Bill Doniger

Yes, it will be. The P&L impact of that will decline as we go through the year.

Mark Biffert – Goldman Sachs

Okay.

Bill Doniger

Will likely last through '08.

Mark Biffert – Goldman Sachs

Okay. So, what would you say X, what's a good run rate in terms of looking at CFFO, is it $0.43 that you had in the quarter and then just build the growth on top of that?

Mark Ohlendorf

Again we are slightly tweaking the definition of CFFO into next year. So, I think the only change you might make is to subtract a penny for the lease expense.

Mark Biffert - Goldman Sachs

That's a penny per quarter?

Mark Ohlendorf

That's right. And then you'd be working off a consistent definition as we'll use in '08.

Mark Biffert - Goldman Sachs

Okay. Thank you, guys.

Operator

Your next question will come from the line of Stefan Mykytiuk with Pike Place.

Stefan Mykytiuk - Pike Place

Hi, good morning. A couple of questions I guess first of all, what was the ancillary in the Brookdale, so the legacy Brookdale facilities, was that a drag in Q4 or an operating income?

Mark Ohlendorf

It had produced an average NOI of $75 a month.

Stefan Mykytiuk - Pike Place

Okay. I'm sorry; I missed that on that last. And for the year what was that then?

Mark Ohlendorf

It would have ramped up during the year, give me just a second, go ahead and we will see if we can find out for you.

Stefan Mykytiuk - Pike Place

Okay. And then just in terms of the outlook of '08, in terms of occupancy, it sounds like what you're saying is, maybe some dip in the, a small decline in the beginning of the year and then kind of go backup in the back half and is that, am I reading that right?

Bill Sheriff

General sense, but over the year it's a flat perspective, but we expect that a little bit more pressure in the first part.

Stefan Mykytiuk - Pike Place

Okay. So, whole the occupancy flat for the year drive the rate and then drive the ancillary you can control the costs and that's how we get the NOI growth?

Bill Sheriff

That's the basics.

Stefan Mykytiuk - Pike Place

Okay, terrific. And I'll hop off, but if Mark can just come back at some point with…

Mark Ohlendorf

On the NOI front the $75 a unit number is our class of 2006, so those are the Brookdale units, it's about 4000 units, where we rolled out, where we've got some meaningful results here. We ended the year at $75 there was some modest ramp up on that, as we advance through 2007.

Stefan Mykytiuk - Pike Place

Okay. But net-net for the whole year you're saying, you actually if there was no drag from rolling out ancillary in Brookdale?

Mark Ohlendorf

Well, there was. In fact, there I was referencing just what we rolled out to in 2006; we obviously rolled out to as Bill said 12,000 units in '07. In the fourth quarter, we referenced in the release, we had about $1.2 million with the startup losses, related to the ancillary and expansions. So, as we continue to roll out, there will be a group of locations that do incur losses.

Stefan Mykytiuk - Pike Place

Okay. I think I got it. Thanks.

Operator

Your next question will come from the line of Jeff Englander with Standard & Poor's.

Jeff Englander - Standard & Poor's

Good Morning, guys. Can you give us some color on, perhaps some indicators that you might be looking at better indications to improving occupancy or improvement in entrance fees, as you mentioned the idea that you're going to have improvement before, officially in a recovery. I was just wondering what types of things might you be looking at in advance of that?

Mark Ohlendorf

Well, again. I guess, the most meaningful indicator we've got is, what's happened with our occupancy, as we've gone through this last year and it's held fairly steady within 10 or 20 basis point range.

Bill Sheriff

And that needs to be taken in balance with the fact, that we've also maintained our revenue growth rate, and taking those two together, we feel very strong about how we perform in that regard.

Jeff Englander - Standard & Poor's

Let me rephrase it in a different way, what I'm trying to get is, obviously you're going to see some kind of turn, as you expect to see a turn in the housing market, but in particular, what you're looking at other than maybe, increased sales, increasing homes, or just specific to your properties or your areas that you're looking at, that'll give you a better field for that before it's generally obvious, other parts of the economy.

Bill Sheriff

We can't totally predict exactly, when that will turn there is variations in markets, but one thing we can say, as a turns, we will see some significant improvement. The basic supply amount we go into this correction with incredible fundamentals and that will again demonstrate itself as we go out.

Jeff Englander - Standard & Poor's

Okay. And one other quick question. In terms of the change in the CFFO calculation, can you give us some color or some sense as to how long this has been on the table and what would you do this at this point in time?

Mark Ohlendorf

Well, the existing definition we have used through '07 is really what we used at the time of our IPO, a couple of years ago. Obviously, our capital structure has changed over time. We've also had a subtle difference between the way we look at it internally, versus how different folks look at it externally. We think it's important that those sink up, and it's really no more complicated than that.

Jeff Englander - Standard & Poor's

Okay. Thanks very much.

Operator

And at this time I will turn the call back over to Mr. Roadman.

Ross Roadman

Thank you, Dennis. With that we conclude our call for today. If you have any follow-up questions please feel free to call me and will have Mark and Bill around as well. With that thank you, and look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude the Brookdale Senior Living fourth quarter 2007 earnings call. You may now disconnect.

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