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Brookdale Senior Living, Inc. (NYSE:BKD)

Q1 2008 Earnings Call

May 8, 2008 8:00 am ET

Executives

Ross Rodman - Investor Relations

Bill Doniger - Vice Chairman

Bill Sheriff - Chief Executive Officer

Mark Ohlendorf - Co-President and Chief Financial Officer.

Analysts

J Habermann - Goldman Sachs

Jerry Doctrow - Stifel Nicolaus

Ryan Daniels - William Blair

Frank Morgan - Jefferies

Adam Feinstein - Lehman Brothers

[Adron Ambrecht] - Millennium

Peter Lukes - Smith Barney

Operator

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living First Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

I will now turn the call over to Mr. Ross Rodman. Please go ahead, sir.

Ross Rodman - Investor Relations

Thank you, Dennis, and good morning everyone. I also would like to welcome you to the first quarter 2008 earnings call for Brookdale. Joining us today are Bill Doniger, our Vice Chairman; Bill Sheriff our CEO, and Mark Ohlendorf, our Co-President and Chief Financial Officer.

Before I turn the call over to Bill, as Dennis mentioned, this call is being recorded. A replay will be available through May 10, by calling 1-800-642-1687 from within the US or 706-645-9291 from outside of the US and referencing access code 45785738. The call is also available via webcast on our website, www.brookdaleliving.com for three months following the call.

I would also like to point out that all statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the Federal Securities Laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued last night and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement.

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

Bill Doniger – Vice Chairman

Thanks Ross. Welcome everyone to the breakfast edition of our quarterly earnings call. Net of adjustments for the quarter our CFFO was $0.41 a share, which is a 17% increase over the first quarter last year. Our results for the quarter are right where we expect them to be and we are extremely pleased with the efforts of the team in getting there.

Our current financial performance illustrates both the quality of our business model, the strength of our company, the fact that we are able to grow our cash flow at current levels is amiss of the worst economic environment and the history of our industry gives us even greater confidence in the stronger earnings prospects for Brookdale.

Our business plan remain simple, continue to grow our free cash flow organically at 15 to 20% a year in difficult conditions and use our excess cash flow to begin to repurchase stock to capture the discount between current market prices in our view of the company’s net asset value. We think long term investors will be amply rewarded for their patience. While we can’t be more specific at this point where we are on the stock buyback, I can tell you we remain on track with our plans.

With that, I would like to turn the call over to our CEO, Bill Sheriff.

Bill Sheriff – Chief Executive Officer

Thank you and let me add my welcome to everyone on the call. For those who are joining us for the first time, let me give a brief overview of the company. We are the largest senior housing provider in the country with 550 communities, serving approximately 52,000 residents. We have 34,000 employees in 35 states and have the full spectrum of products and services for senior living from independent living, assisted living to continuing care retirement communities. We are the largest provider of dementia Alzheimer’s residential care in the US and we have a very successful growing ancillary service business, which has differentiation in the marketplace as well as very meaningful economics.

I would like to remind everyone the basic metrics of our business. Each year we expect to increase revenues organically by 5 to 6% excluding ancillary services and assuming no change in occupancy. At a 36% operating margin, we generate 7 to 9% NOI growth. This translates into CFFO growth of approximately 20% per annum. The primary factor that is currently affecting our growth rate is our occupancy level. When creating our plan for the year, we assumed we would have some occupancy decline in the early part of the year; today our assets are about 90% full. That is down a fraction from this time last year.

Our cash flow growth for the year will be affected primarily by occupancy. Our assumption going in was a decline in the first half of the year and more stability in the second half. While it is too early in the second quarter, our views haven’t changed.

As we all know, consumer confidence is the loss that has been in 26 years. As such, 2008 continues to be a difficult operating environment. However, against all of these factors, our first quarter performance was very good. It is important to recognize that the underlying fundamentals of the senior housing industry continues to show strength. Furthermore, the demand is stronger in these times for needs-based services like assisted living and skilled nursing more than discretionary services like independent living. The reality is the population continues to age. Pent-up demand is building and there is growing acceptance of our products and services. All of these factors lead to a recovery earning in an economic upswing and we will see very strong fundamentals ahead when the economic environment turns.

Now let me discuss what we are doing about improving our occupancy primarily through enhanced sales and marketing programs. These programs are in order to keeping residents in our network of communities longer and increasing sales leads. Let me give you a few examples.

We initiated a major market management program or as we call it M3, which we have talked about before that integrates the sales and marketing efforts of all of our products in the market. The program has successfully demonstrated the strong advantage we can realize with our scope and size in major markets. The M3 program started in July 2007 with five markets. This has now expanded to 12 markets with an additional three to be functioning as M3 in the near future. Total market management of sales and product position increased what we refer to as the virtual CCRC in the market.

We share advertising and marketing initiatives, lead generation events and resident transfers and as a result the M3 markets maintained occupancy better during Q1 than the balance of our portfolio. The M3 markets performed 70 basis points better the non-M3 markets in terms of occupancy in Q1. The cross referrals are very healthy and growing as well as the intermarket resident transfers. We’ve also introduced a new powerful website that is generating significantly increased leads and is becoming a vital generator of interactive communication that connects Brookdale with its prospects.

Traffic is up 50%, leases are up 18%, March being a record at 2,000 qualified leads, the search engine traffic is up 76%. Looking ahead, we will be implementing this quarter a new product innovation to capture greater market share through an incentive-based loyalty program. We have made very significant investments in systems, programs and people over the last couple of years. We remain focused on making additional investments with the conviction that it is the best way to address the current environment and more importantly to position the company to take advantage of the tremendous opportunities as and when the housing market economy starts to improve.

I would like now to turn the call over to Mark.

Mark Ohlendorf - Co-President and Chief Financial Officer

As Bill said, our reported Cash From Facility Operations or CFFO for the quarter was $0.38 a share, a 19% increase over the first quarter of 2007 where we reported $0.32 a share. Both of these numbers are based on our new definition for calculating CFFO. Excluding acquisition and integration-related costs, Brookdale’s first quarter CFFO would have been $0.41 a share, an increase of 17% over the first quarter of ’07.

Revenue for the quarter totaled 481 million, an increase of 7.6% over the first quarter of ’07. Facility operating income was 167 million, a 4% increase over the first quarter of 2007. Same store results for the year-over-year period showed an increase in revenue of 6.6% as a result of an average revenue per unit increase to 7.4% and a decline in occupancy of 70 basis points.

Expenses grew at 6.3% resulting in same store NOI growth of 7.2%. Effective January 1, we instituted 4 to 5% rate increases across much of our assisted living portfolio. The pricing environment remains firm.

Adjusting out the ancillary services impact from the legacy Brookdale units, revenue grew 4.7% with rate of 5.5% offset by the 70 basis point occupancy decline. In other words, ancillary services added 1.9% to revenue growth. Our primary NOI growth metrics remain strong and occupancy been flat in the year-over-year period, NOI growth would have been approximately 9%.

Let me provide some insight into the same store expense growth in the first quarter. These numbers are impacted by the rollout of ancillary services to the Brookdale units and related startup expenses. Excluding this ancillary service expense, same store expense growth in the first quarter was 5.6%, inline with our plan. Over time, we would expect to see cost grow in the 3.5 to 4% range. In the first quarter, much of the excess over that level was driven by several factors dealing with salaries and wages.

First, having an extra day for leap year where we pay wages by the day and receive rents by the month cost about $1 million impact on cost. As Bill said, we’ve added 50 sales people in the last year to bolster our sales efforts on the frontline. We also experienced the increase in salaries and benefits for certain positions during the last year and efforts to increase retention of top community leadership. Local leadership is critical to producing solid results.

We reduced the number of vacant management positions over the last year, which in effect increased labor costs. It’s the right business decision to increase our performance in the long term. Beyond salaries and wages, we also increased advertising and promotion activities and saw an increase in some commodity related costs. These costs, which include items such as food supplies and utilities, account for around 15% of our operating costs. Americans are experiencing these types of increases in commodity related cost throughout the economy.

As Bill Sheriff noted, the results for the quarter were consistent with our expectations. As we had discussed last quarter, beyond operating income, G&A was similar to the prior quarter, entrance fees came in close to Q1 ’07 levels and interest expense came down as the result of recouponing of our swaps.

Our CFFO for the quarter is net of $2.9 million or $0.03 a share related to integration costs that represent the cost in the quarter to develop and implement integrated systems and processes. We’ve incurred these costs in previous quarters and previously stated that they would continue in ’08 and total in the range of 10 to $11 million. We also incurred $1 million of startup losses within ISC in the first quarter.

With respect to our balance sheet, we placed $288 million of secured financing since the first of the year, producing net proceeds of $111 million. As of the end of the first quarter, we had $119 million of cash and $79 million of undrawn capacity under our corporate line. We are in the process of completing two other portfolio refinancings that went on. We will increase our cash and line availability by more than $100 million. We continue to refinance property level back to approximately 65 to 70% loan-to-value and use the excess proceeds generated in these financings for corporate uses or to pay down our corporate line.

Bill Doniger - Vice Chairman

In closing, the results for the quarter were consistent with our internal expectations. And we are holding firm, which is a testimony to our business model and the hard work of our team. We continue to make progress in the number of areas of the business and continue to focus on corporate positioning and investments that will yield the best results over the long term.

Now, I will turn it over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from the line of J Habermann with Goldman Sachs.

Jonathan Habermann

Hey, good morning everyone. I am here with [Simon Bowen] as well. Just starting off with occupancy. Obviously given the year-over-year decline, can you just give us a sense, I know you mentioned the rate increase in January, but how do you sort of anticipate being able to put rates going forward? Is it really just more sort of an expectation that you are seeking to maintain that 90% occupancy level?

Bill Doniger

Well, as we went into the year again, we expected some softness in the first and second quarter, which we think we are seeing and also we expect to see some turn in the last half of the year and we believe that the fundamentals of the field are still being well demonstrated and built into. The fact the rate increases and again those come from an average of the rate increases to existing residents, but also the street rates, the mark-to-market effect and the other carrier charges that we have. So, it’s a blend of those factors and we don’t really see a weakening to the point that we are not going to be able to consistently affect those price increases.

Jonathan Habermann

Okay. And can you just give us a sense maybe by region or by market where you are seeing more pressure on occupancy?

Bill Doniger

It is a little bit geographic and maybe the West Coast might be the softest at this point, but we don’t see a major difference, a dramatic difference in the markets.

Jonathan Habermann

Okay. And also just touching on the expense growth, I mean obviously the increase for the quarter and obviously there were some discussion on the call about some of the factors driving it, but it seems as those some of those cost pressures may remain throughout the year. You mentioned perhaps that expense growth would return to a more normalized level, but I’m just curious what sort of gives you that confidence given that some of those cost pressures could persist for some time?

Mark Ohlendorf

Well again, I think we identify which of these items are inflationary cost pressures and which of these items are consistent with the plan that we have for the business. The two more significant drivers if you compare Q1 ’08 to Q1 ’07, we put more sales people on the ground and the field to supplement the sales resources we have on the frontline and we have a lower vacancy level in our community level management teams. Now, again both of those are things that we think are very important over the long term to have the business perform the best and are very consistent with our plan. Now that is after taking into account the impact of rolling out our ancillary service business in the quarter, the cost growth year-over-year is about 5.5% after adjusting out the impact of rolling out the ancillary services. We got a very significant pickup in revenue quarter-over-quarter related to the rollout of the ancillaries and there is some cost attended with that as well.

Jonathan Habermann

Okay, great. Thank you.

Operator

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

Jerry Doctrow

Good morning. A couple of things. I don’t want to believe the occupancy too much. I was just wondering if you can give little more color on entrance fee and entrance fee communities and sort of how they are playing out in the current economic environment and whether you do anything differently there to sort of pickup net entrance fees?

Mark Ohlendorf

Well, as we went into the year, we didn’t expect 2008 to be much different than 2007 and first quarter 2008 was nearly the same as Q1 ’07. The important point I'll make here is that we do not real improvement in entrance fees by 20% cash flow growth, but however, once we start to normalize the impact will be quite significant. For example, if you look back at out six maturity entrance fee communities that are included in our same store group, those communities generated annual net entrance fees of 30 to $32 million in 2004 and 2005 at stable run rates. Those same communities produced only $17 million in net entrance fees in 2007. So, when you move back to stable run rate and even getting ground there is substantial upside for the cash flow not only returning to those normal run rate or recapturing some of that short volume again as the profile of the year, we see it very much as nearing the profile of ’07.

Jerry Doctrow

And just Bill, is that -- you are seeing more sort of softness if you will on the entrance fees than in others sort of housing market? I mean that's kind of the conventional that everybody has in the business. I just want to see it?

Bill Doniger

Our actual occupancy delta change there is not a lot different actually between those and again our folks continue to work really hard on that part, but it's not significant, there is just a tab but it's very small.

Jerry Doctrow

Okay. And then, would you describe kind of, sort of a front door or back door problem in terms of whether it’s sort of hire, move out, so just less, the rate of movements is just lower than where it has been?

Bill Doniger

If your question relates to the entry fees that attrition rate is pretty stable -- static. Consistently, there is not a change in the attrition. As you go to look at the rest of the portfolio, we don’t see a significant difference in our attrition rates. Again, we work very hard in terms of closing the back door if you will in different ways and within our major markets and where we have the ability to move people from one of our communities to another at all and also support of the ancillary services. Our experience may differ a little bit from some out there, but we don’t see a significant difference in the attrition rates.

Jerry Doctrow

Okay. So, it's more of a front door problem. And then, Mark, again I think you said this, I just didn’t pick it up as you went by, you have raised rates primarily January 1 on the AL side of the business, so what was the actual rate increase on just the AL portion and I know it translated into the portfolio in the first half?

Mark Ohlendorf

I think generally, the rate increases would have been a little bit over 5%, again a little bit geographically sensitive. But I think sequential quarters the rates are up 3.3, 3.4% and the assisted living portfolio is about 40% of the capacity.

Jerry Doctrow

Okay. And then the last thing I just wanted to ask about is sort of strategy of role and for everyone to take it. It sounds like you would be doing less in acquisitions so that your focus on sort of -- I guess I would like to just talk about, obviously we talked about sort of growing the existing portfolio and the ancillaries. There is the program that sort of kind of expansions, conversions, I'd just like to get a little more color on that? And then it sounds like that you might well be more or likely be buyers of stock and buyers of additional properties in this market but maybe if you can touch on those two items?

Bill Doniger

Thanks Jerry, it's Bill Doniger. From a generalization perspective, we are primarily focused on return on our shareholders capital so that can come from a variety of factors. You can make expansions, you could rebuild assets, you could do new developments, you can make acquisitions or you can invest in new your stock of our own company. Right now, we believe the best return on a dollar that we would invest is probably going to be in our stock and so we are working pretty hard to do that, but that’s not necessarily to the exclusion of our options but primarily that is where our focus is. Again, if we can deliver a 15 to 20% growth organically and we believe that we can, we are not going to make acquisition for acquisition sake, but everything is on the table but it’s primarily where we get the best return is where our strategy lies.

Jerry Doctrow

Okay. And you are moving ahead with other sort of the expansion stuff or plan but there may be less of that go-forward or that program albeit is expanding that sort of accurate general…?

Bill Doniger

We adjusted our strategy just a little bit and focused more on the expansions sort of the leased assets versus the corporate assets at this point in time and because they fund that. But we are continuing on with our expansion program just having shifted a little bit of the mix of those.

Jerry Doctrow

Okay, great. Thanks a lot.

Operator

Your next question will come from the line of Ryan Daniels with William Blair.

Ryan Daniels

Good morning. It's [Christine Iglesias] for Ryan Daniels this morning. I have one additional question on the occupancy front. Did you happen to see any impact from any Q1 specific events for example, on the Easter shift postpone any movements or how was the impact from a worse than expected flue season, any color you can provide would be helpful?

Bill Doniger

We didn’t see the flue season as something that was effect this more than the general almost every year you have some developments of that and we certainly had a bit recovery from that fairly quickly.

Ryan Daniels

Okay.

Bill Doniger

There is nothing in terms of otherwise that we saw as being particularly different.

Ryan Daniels

Okay, great. Thank you. On the price increases for the assisted living in January, you had mentioned prices went up generally over 5%. Did you happen to see any push back from existing residence on those increases?

Bill Doniger

I don’t think the experience in the first quarter was different than what we have seen for the last several years.

Ryan Daniels

Okay, that’s helpful. Thank you. And moving on to systems integration, on that front, how does everything come in a line? I know, you mentioned in past quarters, it was about 65% on, what is the status now and when do you expect that to be completed?

Bill Doniger

Can you repeat your question, you digitized a bit?

Ryan Daniels

Sure. On the systems integration front, can you give us an update on how that is coming along and when you expect that to be completed?

Bill Doniger

Sure. You might notice in the results for the quarter our integration related costs and the P&L were probably a little bit lower than you would have expected.

Ryan Daniels

Right.

Bill Doniger

Based on what we talked about on the fourth quarter call. The reality is the market conditions now are such that we want our community level folks very focused on selling in the market. So, we are very sensitive to the pace at which we do think corporately that requires local folks to divert their attention away from the market. So, it likely is the case that we have extended the period over which we will do this work during the year this year not substantially so. We continue to be in a situation where the financial system installations are largely complete.

Ryan Daniels

Okay.

Bill Doniger

And what we are doing is focused around our operating systems. So we are very sensitive to the pace at which that will go.

Ryan Daniels

Okay, great. I guess that’s a good leading to my next question. Can give you a sense for how the field organization in general has responded so far to any organizational, marketing or system changes to implement?

Bill Sheriff

It has been very positive. It certainly is a lot of change for folks but they embraced the fundamental concepts and there has been reasons for it, very enthusiastic about that and have I think the first quarter is strong evidence of the fact that that has gone well.

Ryan Daniels

Okay, great. Thank you, and then I have one last question, under the new segment reporting that you implemented in the fourth quarter, about 3,500 flats that were previously in the CCRC retirement segment moved into the retirement independent living. Can you explain what drove that please?

Bill Sheriff

It is simply a redefinition of the segments.

Ryan Daniels

Okay.

Bill Sheriff

The segments that we have been using were driven around sort of the legacy origin of the properties, whether they came out of the Nashville, Chicago, or Milwaukee operation. The segments that we’re using beginning with the 10-K are simply product line definitions. So, all of the retirement centers are in one group, all of the free standing assisted living and other, all of the CCRCs and other. So, it was a minor amount of shifting between the two versions but not very substantial.

Ryan Daniels

Okay. That makes sense. Thank you very much.

Operator

Your next question will come from the line of Frank Morgan with Jefferies.

Frank Morgan

Good morning. Two questions. First, on the ancillary side. I am just curious obviously you are the person who doesn’t seem to be a little more sense of the economy, but how do you think about the sensitivity of the growth in that ancillary business relate to the economy? And secondly, over the next couple of years, what do you think you can ultimately grow that ancillary business to? If we looked out a couple of years from now, where do you think revenues and NOI contribution could be once this thing completely fills out? Thanks.

Bill Doniger

Well, this continues to be one of our very exciting parts of our growth story. We added about 1,500 additional units in Q1 of our expected 8,000 that we expect to roll out in ’08. We now reached about 60% of our total portfolio. We are continuing to see improvements as the clinics mature and increase in their economics and we’ve made good progress in expansion of our home health business as well, we are now serving over 10,000 units going into the second quarter. The home health is an important part in achieving what we had laid out before, the $150 per unit target for the legacy of Brookdale portfolio, and actually for the first time the ancillary services operating income of the legacy ARC exceeded $200 in the first quarter. We expect that to continue to build and we still think that’s a realistic benchmark going out. It still will take five to six quarters as we get the clinics opened in order for those to mature.

Frank Morgan

Thank you.

Operator

Your next question will come from the line of Adam Feinstein with Lehman Brothers.

Adam Feinstein

Okay, thank you. Good morning everyone. Just two questions here. I guess just on the stock buyback, I understand your sensitivity about talking too much about it, but just curious if you could just give us any color in terms of how we should think about the timing and just have you guys buyback any stock yet so just any clarity that you can give us?

Bill Doniger

The clarity we can give you is we haven't because we’ve been restricted, but beyond that I think we are pretty hamstrung on what we can tell you.

Adam Feinstein

Okay, understood. Okay. And then I guess just another question for Bill here, last quarter you talked about the NAV being about $45 and you had mentioned about 6.5% cap rate was how you guys were thinking about it. Do you still think about it that same way, do you think 6.5% cap rate is the right number?

Bill Doniger

Yeah, I think we talked about 6.5 to 7, I think, and got even at 7, I think it was in the low 40. So, I don’t think a 6.5 cap rate is probably a fair a bit higher than that. Again, you got to think about our portfolio, we probably have assets that we would trade in 8, 8.5%, but the majority of our assets trade well below that. So again, I don’t think it's scientific but maybe one way to think about it is to look at some of the healthcare REITs and how they are valued and people think about them often on a cap rate basis and by the way, the REITs probably are at 7 or maybe inside of that and they own theoretically a lot of our own assets. So it’s really we look at that as a benchmark to justify really that number.

Adam Feinstein

Okay, all right. And then just Mark maybe just a quick question here is about just the environment for a secured financing, so it sounds like you guys aren't having any problems there, so do you think the market will continue to be pretty good for you guys there?

Mark Ohlendorf

We think so. Again, the financings that we are doing by and large are of stable assets, so they are cash flowing relatively high occupancy assets where the NOI grows every year. We also don’t apply a lot of leverage in our financings. We are financing at 65 or 70% of value. The part of the secured financing market that I think that has seen the biggest impact is high leverage, which we do not use or development and research financing which we generally don’t have.

Adam Feinstein

Okay, great. And then just a final question here. Just curious in terms of the macro environment had a change in the past year. You have talked before that looking at, there is opportunities besides stock buyback in terms of using your capital, but just curious as in terms of get thoughts here just in terms of the competitive landscape. Are you guys gaining shown assets recently at more attractive terms, so just curious in terms of the deal environment? Thank you.

Mark Ohlendorf

It's not we haven’t been out looking for assets, there is probably opportunistic ways for Brookdale to invest capital, sub performing assets with that issue, with kind of leverage issues. But to be honest, the assets in this business are performing pretty well. So, may be a pretty distressed world outside the senior housing industry, but people are still growing their cash flows in the industry. So the industry is not really the least bit distressed right the second, so it’s not like you can go out and steal people’s assets because people are performing reasonably well.

Adam Feinstein

Okay. Thank you very much.

Operator

Your next question will come from the line of [Adron Ambrecht] with Millennium.

Adron Ambrecht

Yes. Thank you. Following on the strategic line of questions, I mean, you have given the mismatch between what you think the NAV of the company is and where the stocks trade. Have you’ve been exploring the possibility of creating other institutional fund or joint venture fund which can contribute properties maybe take some cash, buy more stock, something like what the REITs are doing, but you also have the ability to probably start something like that, is that in your current thinking?

Bill Doniger

Not quite. I mean, we may look at different ways of taking some of our assets and generating cash to buyback stock, but I wouldn’t expect to see anything material in terms of our capital structure.

Adron Ambrecht

Okay. Thank you.

Operator

Your next question will come from the line of Peter Lukes with Smith Barney.

Peter Lukes

Good morning guys. I know you don’t want to talk about it, but you haven’t mentioned it, but have you had all commenced - so a support question commenced the buyback at all? And since you’re not returning, you’ve decided to return the stock on the cash in the form of buybacks when the buybacks are finished the platform was to ultimately pay out cash well and dividends. Do you tend to, once you finish the buyback, put or continue to raise or put back the dividend to where it was prior to this decision?

Bill Doniger

We don’t have kind of a rule book in terms of what’s going to happen into the future. What we can promise you is we’ll be good stewards of the company’s capital and so could buy back stock. We are not limited to 150 million; it’s just what we thought was -- the Board thought was prudent at this point. When that gets done and again we can’t really talk about the timing and the process of that, we’ll see. If we don’t have a better use of capital, we will distribute to shareholders. Again we think that dividend will grow and we intend to grow the dividend, but when and how much is really something that the Board will determine on a quarter-by-quarter-basis.

Peter Lukes

Okay. Supply/demand, because of the economic conditions in the growing senior population, although there is probably been some hesitancy on the part of buyers and people going into the facilities, is there a pent-up demand you see going forward that has sort of been delayed because of the economics?

Mark Ohlendorf

I think we should appreciate the very strong fundamentals that are being demonstrated across the Board. As Bill said, there is not a lot of total distress. There is the edge that’s been taken of. We absolutely do seek an up-demand as well as we see still growing acceptance, so the fundamentals coming out of this recovery ought to be extraordinary strong.

Bill Doniger

One thing to point out, which Mark Ohlendorf referenced is it's very hard to get financing for new developments in the industry. And a year-and-a-half or a year ago, really the questions were, are you worried about supply, are you worried about supply, and we weren’t worried then or even less worried now. And so you really have a incredibly positive supply/demand and balance that’s a little bit tampered by the economic environment but our view is that’s not going to occur for everyone that does you really start to see kind of outside growth relative to what we are doing now.

Peter Lukes

Would you, given where we are in the cycle put the occupancy rate more at close to its trough and the second point of that is the financial leverage if occupancy is at the bottom or close to the bottom and perhaps you can bring your expenses. What kind of financial leverage do you see to the upside?

Bill Doniger

As we said, it's playing out somewhat as we saw coming into the year of softness in the first and second quarter and we still view that the second half of the year will show stronger stability and absolutely there is significant leverage as you see occupancy coming back on the positive side of the income statement is considerable leverage.

Mark Ohlendorf

I think about $0.14 a share of improvement on the upside when we start to pick up occupancy. I mean a year-and-a-half ago we sought the right occupancy level for this company is going to be 92, 93 ultimately and so you had 3 points of occupancy into this plus ancillary businesses, well 3 points of occupancy is $0.40 a share plus you get back the entrance fees back to normal and you got another $0.15 plus a share there. So there is a lot of upside when we get back to what we think is a level of normalcy for this company.

Peter Lukes

Right. And finally, how much of ancillary services has been rolled out to the legacy Brookdale unit. What percentage you’re working on?

Bill Doniger

We’re reaching about 60%.

Peter Lukes

Okay. All right, thanks guys.

Bill Doniger

Although there is lot of maturation process yet to happen within those that have rolled out and we do expect that to grow more beyond the 8,000 units in the therapy side and it may grow more in the home health actually going to pick up and we expect some more growth into ’09.

Peter Lukes

Okay, great. Thanks.

Bill Doniger

Thanks. With that, we’ll end the call. Thank you for your participation. We will be around the rest of the day. If you have followup questions either e-mail me or leave me a message and we will get back to you. With that, thank you very much.

Operator

Ladies and gentlemen, this does conclude the Brookdale Senior Living first quarter 2008 earnings call. You may now disconnect.

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Source: Brookdale Senior Living, Inc. Q1 2008 Earnings Call Transcript
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