Capital Senior Living Corporation
Q4 2007 Earnings Call Transcript

Published: 12 Mar 2008

[Operator:]

Good day and welcome to the Capital Senior Living fourth quarter 2007 earnings release conference call. Today’s conference is being recorded. Any forward-looking statements made by the management in this conference call are subject to certain risks and uncertainties that could cause results to differ materially including but not without limitation to the Company ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of down turns in economic conditions generally, satisfactions of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates and changes in accounting principals and interpretations among others and other risks and factors identified from time to time in the Company’s reports filed with the Securities and Exchange Commission. At this time, I would like to turn the call over to Mr. James Stroud please go ahead Sir.

[James Stroud:]

Good morning and welcome to Capital Senior Living Corporation’s fourth quarter 2007 Earnings call. The operating platform of the Company continued solid performance in the fourth quarter despite the turmoil in the financial markets. We continue to leverage our operational strengths while tightly controlling expenses. Our continuum of care philosophy is one plank in our platform that continues to be effective by integrating independent living, assisted living and home health care services on our 64 communities. The portfolio balance of 37 communities owned or within ownership interest and 25 communities leased is a second plank of our platform. The experience of our onsite, regional and executive management team is the third plank. The onsite executive directors average ten years of experience. Regional managers average 17 years and executive management averages 28 years in the senior living business. This operating platform achieved in 2007 a $14.8 million increase in annual EBITDAR and a $30 million in revenue. The full year EBITDAR margin improved by 380 bases points and nearly 31% in the fourth quarter. These results reflect our continued execution of the 2007 business plan. The board of directors of Capital Senior Living is committed to maximizing shareholder value for all shareholders. The Board is reviewing the benefits of expanding the seven-member board to nine members and undertaking a formal review of strategic alternatives. The Board candidates would include shareholders and/or shareholder representatives, including West Creek. This process is evidence of the Board’s commitment to shareholder value. For further comment on the fourth quarter results, I introduce Larry Cohen, Chief Executive Officer.

[Larry Cohen:]

Thank you Jim and good morning everybody. Our 2007 business plan was focused on increasing shareholder value by providing significant income and asset growth, strengthening our balance sheet and improving the Company’s profitability. I am pleased to report that we made progress on many of these fronts in 2007. The revenues, EBITDAR and net income all increased significantly, as margins expanded through higher rent and sound expense controls. Our 2008 business plan is focused on increasing capacity in levels of care to meet the needs of our residents with an average age of 85 through expansions, conversions, new developments and home healthcare. These investments are expected to produce excellent returns on invested capital and build shareholder value. We achieved solid community operation results in the fourth quarter of 2007. During the fourth quarter, 60 of our communities were stabilized with a 90% average physical occupancy rate and operating margins before property taxes, insurance and management fees were 48% in our stabilized, independent and assisted living communities. Same store revenues at 60 communities under management in both the fourth quarter 2007 and 2006, these include the revenues generated by our consolidated communities, communities owned for Inventures and communities owned by third parties and managed by the Company increased 4.1% with a 4.7% increase in average monthly rent and a 0.5% decrease in financial occupancy. Our sound expense controls and group purchasing program limited same store expense growth to 0.4% resulting in same store net income growth of 10.1% from the comparable period in 2006. The operating leverage in our business model is reflected in 93% incremental EBITDAR realized for these same store revenue increases. The number of communities we consolidated in the fourth quarter increased to 49 from 43 a year earlier. Financial occupancies of these communities averaged 88.5% during the quarter. Operating margins at our consolidated communities were 44% during the quarter and average monthly rents were $2404 a 2% sequential increase from third quarter average monthly rates. Seventeen of our consolidated properties are Waterford Wellington Communities, which we developed and opened between 1999 and 2002. In the fourth quarter 2007, these communities enjoyed a 91.7% financial occupancy consistent with the fourth quarter 2006 the average monthly rent grew 4.4%, 2028. Operating margins also improved at the Waterford Wellington to 45% from 43% a year earlier. Every increase in occupancy of 1.0% at our consolidated communities will generate approximately $2 million in additional revenues. A 5% increase in average monthly rent in our consolidated communities would generate approximately $8.5 million in additional annual consolidate revenues over annualized December 2007 revenues, at an 80% incremental EBITDAR margin. These additional revenues would increase the Company’s EBITDAR significantly. We continue to perform well in a challenging economic environment. The average age per resident is 85 and the decision to move to a senior living community both independent living and assisted living is need driven. Residence typically move from their former residences due to health problems, difficulty in maintaining a home, finding stairs, lifting items, loneliness and a need for supportive services. Through assisted living, our home healthcare was dining in our independent living communities; residents can receive these services at all of our communities. The elder senior population generally carries no mortgages on their homes and they have experienced significant increases in the values of their homes. More significantly, the cost of living at one of our communities is typically more affordable than living at home. This is even more compelling today as many seniors living at home on fixed incomes are facing increasing costs both fuel and food and are looking for value. While we have seen the effects of a housing market impact a few isolated markets our move ins, deposits, tours and leads generated continue to be solid as we continue to execute on the fundamentals, having the right people in place with the right focus and tools. In the few communities that have been impacted by the housing market, we continue to manage our operating expenses to occupancies through managing or staffing and food costs and thereby maintaining good margins. The negligible impact of the housing market on our operations is evident in our fourth quarter same store sales results and trends through the first two months this year are encouraging. As announced, we intend to add additional levels of care in eleven communities. We plan to convert 256 independent units in 8 communities to assisted living and dementia care. Of these, 80 were converted in 2007 and the remaining units are expected to be licensed as assisted living in the next two quarters. The estimated cost to these conversions is less than $2 million and the far-reaching stabilization these converted units are expected to increase our revenues by approximately $4.3 million with a 60% incremental margin. We are also planning on expanding three communities beginning in the second half of the year. These expansions will add 270 units for the total cost of approximately $27 million, which is expected to be funded by supplemental mortgage financing and cash on hand. Upon stabilization, these additional units are expected to increase our revenues by approximately $9.1 million with a 50% incremental margin. We have had terrific results in generating significant improvements at communities that have been expanded or have had units converted to higher levels of care. In addition levels of care at existing properties should enhance revenues and cash flows by improving occupancies, reducing attrition, increasing average monthly rates and expanding margins. We plan to acquire home care agency in a Dallas Metroplex where we operate 15 communities including our most recent addition of Whitley Place in Keller, Texas. All of our independent living communities rent space to home care agencies as many of our residents, with an average age of 85, utilize their services. By having ownership in an agency, we will be able to better integrate the delivery of services to our residents and benefit from increased revenues in the home care services as well as from longer length of stays at our communities. As announced in our press release, we have entered into another joint venture with Prudential Real Estate Investors acting on behalf of institutional investors to develop a 146 unit independent and assisted living community in Perrysburg, Ohio. We actively are working on additional sites primarily in strong bare-entry markets for a limited number of joint venture developments. New developments of senior housing continue to be severely constrained with new supply having grown at a compounded annual growth rate of only 1.3% since 1999. We continue to analyze the construction reported by the National Investment Center for the 100 largest metropolitan statics areas. According to the fourth quarter 2007 niche map construction report, there were only three new developments in the zip code for which we operate. This confirms our own research that construction is negligible in our markets and we expect building will continue to be rare as the scarcity of well-located sites, high construction costs, complexities with zoning and limited sources of capital continue to restrict new construction. This has been exacerbated by the limited number of markets that can afford the higher rent necessary to generate an adequate return on significantly higher development costs. Credit crisis should further constrain developments for an extended period of time providing an environment where fundamentals for the seniors housing industry continue to be solid. The seniors housing acquisition market continues to be attractive. We continue to benefit from strong relationships with healthcare REITs and strategic financial partners with attractive cost of capital. The credit crunch that is affecting the capital markets has made the acquisition market more rational benefitting Capital Senior Living as a strategic buyer that is not reliant on conduit loans and mezzanine financing for high yield debt. Financing is still available to proven senior housing operators on attractive terms. We have filled out our platform with dozens of acquisitions over the past two years and are strategically looking at clustering acquisitions in the number of markets where we have concentrated operations. Our balance sheet is solid with fixed mortgage debt at very attractive rates. Our existing infrastructure platform allow us to integrate these acquisitions at very low incremental costs. Our access to attractive capital, sound expense controls and group purchasing program give us competitive advantage in competing for acquisition opportunities. The Capital Senior Living Management Team onboard has two key priorities. First, we will continue to provide our residents with high quality housing and services with qualified and caring employees. Our residents once again, gave us high marks on our annual residence satisfaction survey with a 94% approval rating for 2007. Second, the Board is looking forward to adding shareholder representation and initiating a process to review strategic alternatives to maximize shareholder value. The fundamental for the senior living industry continue to be solid and we continue to generate strong cash flow. We appreciate the input we have received from many of our shareholders and are committed to building shareholder value. I would now like to introduce Ralph Beattie our Chief Financial Officer to review the Company’s financial results for the fourth quarter and full year 2007.

[Ralph Beattie:]

Thanks Larry and good morning. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I am going to expand and review on highlights of our financial results. If you need a copy of our press release, it has been posted on our Corporate website at www.capitalsenior.com. The Company reported revenue of $48.2 million for the fourth quarter of 2007 compared to revenue of $43 million for the fourth quarter of 2006 an increase of $5.2 million or 12%. The number of consolidated communities has increased by one since the fourth quarter of last year from 48 to 49. Financial occupancy at the consolidated portfolio averaged 88.5% for the quarter with an average monthly rent at $2.404 for occupied unit. Approximately $0.6 million of unaffiliated management services revenue in the quarter, reflects the recovery of management fees from Covenant, under the provisions of August 2004, CGIM purchase agreement. Under the terms of this agreement, the Company had the right to true up expected management fee revenues, if we didn’t receive required minimum fee income from the acquired management contracts. The reconciliation of this provision resulted in the additional quarterly revenue of $0.6 million and that is the final reconciliation of this matter. Approximately $0.5 million revenue in the current quarter reflects development fees from joint ventures that are developing three senior living communities in Ohio. Revenue under management increased approximately 9% to $55.9 million in the fourth quarter of 2007 from $51.5 million in the fourth quarter of 2006. Revenue under management includes revenue generated by the Company’s consolidated communities, communities owned in joint ventures and communities owned by third parties that are managed by the Company. There were 64 communities under management in both periods. Along with $5.2 million increase in revenues, operating expenses increased by $2.5 million in the fourth quarter of 2006. As a percentage of resident healthcare revenues, revenues increased from 63% from the fourth quarter of last year to 62.4% this year reflecting 60 bases points of margin improvement. During the quarter, we received updated property tax assessments from local jurisdictions for three communities. These assessments cover both current and prior periods and cause us to book an additional $0.3 million of real estate tax accruals. Had this property tax been booked in an earlier period to which they applied, rather than the fourth quarter, this quarter operating expenses would have been 61.7% of resident and healthcare revenue. General and administrative expenses of $2.9 million for approximately $0.2 million higher than the fourth quarter of 2006 approximately half of this increase was due to expenses associated with the Company’s investment in information technology and half was due to transactions cost for the Hearthstone acquisition which the Company terminated in February of 2008. We expect approximately $200, 000 of additional expense to be written off in the first quarter of 2008 given the Hearthstone due diligence process. As a percentage of revenue under management, general and administrative expenses in the fourth quarter of 2007 were 5.6%. Excluding the Hearthstone transaction costs and normalizing the effects of the real estate tax adjustments, the adjusted EBITDA for the fourth quarter of 2007 was approximately $14.9 million an increase of 25% from $11.9 million from the fourth quarter of 2006. Adjusted EBITDAR margin was 30.9% for the period, a 320 bases point improvement from the comparable period of the prior year. Facility lease expenses were $9.6 million in the fourth quarter of 2007 approximately $1.3 million higher than the fourth quarter of 2006 reflecting 24 leased communities at the end of this quarter versus 23 at the end of the fourth quarter of the prior year. Interest expense was $3.1 million in the fourth quarter of 2007 and is stable at that level since all of our mortgage debt is at fixed interest rates. Company reported a gain on sale of assets of $0.8 million in the third quarter of this year reflecting the amortized portion at preferred gains on lease transactions. The Company reported pretax income of approximately $2.6 million in the fourth quarter of 2007 compared to approximately $1.2 million in the fourth quarter of 2006. Pretax income in the fourth quarter of 2007 is net of approximately $0.1 million of Hearthstone transaction costs and approximately $0.3 million of real estate tax adjustments. Excluding these items, adjusted pretax income in the fourth quarter of 2007 was $3 million. The Company reported net income of $1.3 million or $0.05 of diluted share in the fourth quarter of 2007 versus net income of $0.8 million or $0.03 per diluted share in the fourth quarter of 2006. The Company’s tax rate in the fourth quarter of 2007 was 49.6% approximately 11% higher than normal. The higher rate is due to true ups of 2006 taxes, which occurred when federal and state income tax returns were prepared in late 2007. The Company generated approximately $34 million of taxable gains on sale-lease back transactions in 2006. These gains were deferred and amortize under GAAP but not for tax purposes. When the 2006 tax returns were filed late last year, the Company booked an additional $0.3 million or one tenth of one percent of the taxable gains as additional tax provision in the fourth quarter. Normalizing this tax provision at a rate of 38.5% along with the pretax adjustments mentioned earlier would increase net income for the reported $1.3 million or $0.05 per diluted share to an adjusted net income of $1.8 million or $0.07 per diluted share. On this same basis, adjusted cash earnings were $4.8 million or $0.18 per diluted share in the fourth quarter of 2007 versus $3.4 million or $0.13 per diluted share in the fourth quarter of 2006. Capital expenditures in the fourth quarter of 2007 were approximately $3.4 million including $1.6 million of systems development, $0.7 million in community renovations and $1.1 million for recurring items. The Company ended the quarter with approximately $23.4 million of cash and cash equivalence and approximately $89.1 million mortgage debt and fixed interest rates averaging approximately 6.1%. During the present time, we would like to open the call to questions.

[Operator:]

(Operator Instructions) Your first call is from the line of Jerry Doctrow with Stifel Nicolaus please proceed.

[Jerry Doctrow:]

Good morning, I just have a couple of different things. The one issue on the finances was management revenue that came in for both the unaffiliated and the affiliated a good deal higher and I was curious if you know a color on that and maybe what levels we might expect to go forward.

[Jim Stroud:]

Jerry, I would say going forward you should probably adjust the unaffiliated management services revenue by approximately $600,000. We did have the Covenant group true-up in the fourth quarter. This is the final reconciliation of an August 2004 acquisition of the management contract. Whereby, we had to write to claw back part of the purchase price if we didn’t receive the level of estimated management fee income. Part of this management fee income in the fourth quarter of 2007 was a reconciliation of that acquisition that was done three years ago and that would not reoccur. The rest of the management fee service as revenue should be recurring. We did have one small management contract, which terminated the end of December, but that would not make a significant difference in that amount.

[Jerry Doctrow:]

Do you have some of the construction or development fees coming in yet or won’t that start until 1Q?

[Jim Stroud:]

We had in the fourth quarter about $500,000 in development fee income that brought our annual number up to about $900,000. That was primarily two projects because we just started the third project right at the end of December. The half a million dollars really related to two projects. Going forward, each of these three projects should ultimately produce about $1.1 to 1.2 million of development fee income over the construction period of those projects or in rough terms about $100,000 per month, per project. We have had three of them that are going at full speed.

[Jerry Doctrow:]

In the quarter, you had two up and so you will get a little bit of pick up as we go forward.

[Jim Stroud:]

Right because we did start the third one just at the end of the fourth quarter.

[Jerry Doctrow:]

Should the $600K be really considered a one time item, obvious you didn’t back it out?

[Jim Stroud:]

It related to the income that would have been received earlier if we had realized the management fee income we intended to purchase at the time the transaction was finalized. It really might have related to other periods but it was a true-up of that management fee revenue, which occurred in the fourth quarter. It would not reoccur.

[Jerry Doctrow:]

A couple of other listings, if I can, any addition color you can give us on the ramp up of …I think Larry talked about that when you add either a conversion or an expansion you get the certain numbers when they are stabilized, any feel for how long these period are on conversion or an addition.

[Larry Cohen:]

Good morning Jerry, on the conversions, we expect that most of the conversions will open in Q3. One conversion will probably open in Q4 and I would expect that the anticipated revenue contribution should be fully recognized in 2009. As far as the expansions, the expansions will begin the second half of this year, which means they will be complete in the first part of 2009 and then we will start to see the contribution as we fill in those expanded units. Typically what will occur is that we will have transfers of residents from independent living to the higher levels of care, refill the independent and also market to these. So, we will see the contribution on the expansions coming in probably the second half of 2009 and fully in 2010.

[Jerry Doctrow:]

I thought you were saying first half but that’s when the construction starts.

[Larry Cohen:]

On the expansions, construction will start in the second half of this year. So the construction starts in the second half of this year and will be complete earlier 2009. Conversions will be complete, as I said, the conversions we expect almost all the conversions to open in this summer, in the beginning of Q3.

[Jerry Doctrow:]

Just one or two other things, on acquisition environment, I was just wondering if you could give us a little more color. Assume you did a re-deal, the release were like 775 when you did them before. I assume that’s bumped up a little bit.

[Larry Cohen:]

Last lease we just closed with these places, we just announce was 775.

[Jerry Doctrow:]

Do you think that rates still holds?

[Larry Cohen:]

I would say that the environment, from a financing standpoint, both with the rates and all lenders, is very comparable to what it has been.

[Jerry Doctrow:]

Rate growth in the quarter was terrific Q over Q, I think you were up 2%. Any sense of where that moves in the first quarter? Because typically, I assume you guys do this as well, rates get reset first quarter and you often see a bigger jump.

[Larry Cohen:]

We did, Jerry, and we talked with this earlier last year. Based on the strength of most of our properties, in September, we increased the rents, street rents and renewal rents at all our properties that were 93% or higher. In January, we now have implemented a partial portfolio with our typical budgeting increases for 2008. There will be additional increases at most of our properties upon move-ins and renewals at our communities. The other aspect is, if you recall, in the summer of 2006, we introduced a one-time community fee. It was initially set at $500 per move in, some properties maybe a little higher. Again, in September of ’07, we increased the community fee of rate by $500 per move in. We are now averaging over $1000 per move in. What we are seeing is that we are still getting good velocity, good move ins and it’s a combination of the market to market effect of the renewals or more importantly street rent as new residents are moving in coupled with these community fees that are driving the higher rent and that, we think, will continue throughout this year.

[Jerry Doctrow:]

You touched on, two more, housing markets, you are saying it’s not much of an effect and you talked about a couple markets. Is there anything, just to get a little more color, where are you having an issue with this? Is there anything characteristically of those markets and are they just ones where the housing market is worse or the nature of your projects? I am just trying to understand.

[Larry Cohen:]

We’ve had the same issues at a few properties for two years, one property in Florida, a couple properties in California and one in the Midwest. The Florida property, which is one of the conversions that we have targeted that is anticipated to open the conversion to be complete Q4 taking 45 units there are six separate buildings at Miranda Club. The beautiful property is just renovated the lobby, the common areas that beautiful new pool spot in the back of the building and we plan to have license, we are going through the construction right now with the building code to open probably in the 4Q, 45 units of assisted living with an average rent of about 3325. That is the building that’s 189 units of independent living, it has been a large build we have operated since 1992. I cannot remember of Miranda Club getting beyond mid 80% occupancy for many years. Now it continues to operate in kind of a 70, 75% range but still drives a good cash flow, a good margins and good rates. Again, the Florida market, we have one building; we have been very deliver ate. I think one of the reasons we have escaped most of the housing market is we are not in Phoenix or not heavily invested in Florida; we are not in Las Vegas and our California properties we have also operated since 1992. Through the diligence that we approach acquisitions, we look at demographics first, we look at supply and we stay away from the bubble markets. We stayed away from those markets that have over heated with too much housing construction, too much senior housing construction and frankly, our properties are doing nicely. Village of Santa Barbara which we spoke about a property in Santa Barbara that was challenged, we had nine move ins last months and we are back up to 83% that’s very significant. I am very encouraged with what we are seeing with the move ins across the country. We have had in the last four weeks the highest number of move ins per week that we’ve had in the last year. That fact could be consistent every week but to me we are not seeing trends indicating that there’s a housing problem affecting our residents moving in. The other aspect of our business is our strategy of having an affordable product. We have avoided the smaller markets; we are larger markets with larger communities and that’s why we have higher margins. We can spread our cost across the base of our operations and I believe we do the best of anyone in this industry of managing our expenses to our occupancy. What we are finding is that the cost of the market’s we operate in, the niche map is very helpful, I go to the 11 market back overlay with the top 75 and in virtually every one of those market with the exception of Florida and Detroit, we basically are really and then in California, we are actually seeing housing values up for year over year and the average housing values are approximately 180 to $200,000 per house. It’s an environment where we have an affordable product, we are not in the high end districts, we have a beautiful building, great quality of service and it becomes very compelling and I have to tell you, each of the environments that we thrive in because as seniors become very conscious of their fixed costs. Living at home, on fixed income and I saw this morning, the average cost of fuel is $3.25 per gallon going up this summer. Wheat is up; bread is up; pizza is up; food costs are up. We obviously will have also higher costs but with a root purchasing and spreading those out, it becomes even more compelling to senior who are starting to realize that they may have challenges living at home on fixed income with higher costs.

[Jerry Doctrow:]

Can you give us any sense as to timing for the decision about expanding the board and then pursuit of the strategic alternatives when the decisions about that might be made.

[Jim Stroud:]

Good morning Jerry, obviously, we have received and continue to receive shareholder input and about not only this matter but other matters and we are very much appreciative about that. We have two shareholder Wentz Creek and Boston Avenue that have filed 13Ds from a standpoint of the expansion of the board, the timing on that would be in the next month. We are sensitive and agree with the position of a number of shareholders that a proxy contest is not in the best interest of the shareholders of the Company or us continuing our mission. We would see the Board to continue to review the expansion of that and we should have some direction on that within the next month.

[Jerry Doctrow:]

The pursuit of strategic alternatives that then becomes discussion of the new expanded board and any color you can give me or sense of when it would be taken up?

[Jim Stroud:]

That would be after the expansion of the board. If that deemed in the best interest of the shareholders and keep in mind our board on a periodic basis does strategic reviews. We’ve gone ahead and hired an investment bank over two years ago to review and often times the board will look to outside input. That process would take place either co-terminus or even if the board is not expanded, the board would still consider that alternative.

[Jerry Doctrow:]

Okay.

[Operator:]

(Operator Instructions) Your next call is from the line of Brian Leigh with Millenium Partners please proceed.

[Brian Leigh:]

Jim, could you just expand on that. On pursuing strategic alternatives, I assume that does mean that you are going to hire and investment bank. Has that decision been made today or do you think that ultimately will be the decision?

[Jim Stroud:]

Brian, it currently is being reviewed by the board and we are getting input from shareholders from legal counsel and it’s currently being reviewed by the Board. Within the next month, we should have some direction on it; but again, the Board on a periodic basis has reviewed strategic alternatives. This is not a new procedure for the Board, it would just be for them to open it at this time.

[Brian Leigh:]

When you say, open it at this time, are you going to wait until the two new board members come aboard before you ultimately make that decision?

[Jim Stroud:]

That would be the preference. If the decision is made to expand the Board, it would be logical to include the two new members in that discussion.

[Brian Leigh:]

So, any thought as to maybe it’s too early on the timeline of when the ultimate decision would be made when you are pursuing the strategic alternatives. How long of a window are you thinking about here.

[Jim Stroud:]

The strategic alternative generally takes months and we are looking, obviously, to expand and enhance shareholder value and that be continuing to run the 2008 business plan and beyond or under alternatives and generally that will take a number of months for that to be worked through. This process would be, first the Board is going to determine is it in the best interest of the shareholders to go ahead and expand the Board from seven to nine. If the decision of that is yes then we go through, because we are New York Stock Exchange, SARBPC, we would go through and then we go through, because we are New York Stock Exchange, SARBPC, we would go through and then add those two members and then logically go through and review strategic culture. All that to say, it would take three to four months to do that.

[Brian Leigh:]

Then, hiring the two Board members, what do you think the time line for when that would occur and I assume you will press release all of these decisions within fairly short order.

[Jim Stroud:]

Absolutely, yes, the Company would issue a press release in compliance with the Securities and Exchange Commission laws and from a standpoint of the timing of the review by the Board; the Board’s been reviewing that. My assumption would be that next month, we would have a decision on whether or not the Board should be expanded.

[Brian Leigh:]

It sounds like you are already talking about it; why wouldn’t you expand the Board?

[Jim Stroud:]

The question is not only should you expand it but also what the qualification of those directors should be. That’s why we’ve been out into the marketplace receiving input from shareholders, receiving not only from shareholders but our lenders as well. It is an accumulative process because keep in mind, we also not only have the equity side of it, we have the debt side as well as the reap side of the balance sheet.

[Brian Leigh:]

I will just speak from most general it would be a good idea to add two more shareholder friendly.

[Jim Stroud:]

Thank you, we appreciate that input.

[Brian Leigh:]

Thank you very much.

[Operator:]

Your next call is from the line of Todd Cohen with MTC Advisors please proceed.

[Todd Cohen:]

Good morning, I just had a question on the timing issue. I know that you just indicated that you proxy contest would not be in the best interest of shareholders, I agree 100% with that. I wanted to know, what is the time frame with which the shareholder now has the ability to start a proxy contest. In the event, some of the actions that you guys have discussed have not been acted upon?

[Jim Stroud:]

Todd, the bylaws generally provide sixty days to ninety-day window before the annual shareholder’s meeting. We have not announced the annual shareholder’s meeting. If it’s within that 60 day period, there is still 10 days for a shareholder under our charter to proceed. I want to say something. We are having good discussions with the shareholders. I do believe the plan will be to expand the Board, add two shareholder representatives and we are looking forward to moving forward on this process and working through the nominating process and having new directors on. Again, looking at the strategic trend of this and everything will be open and everything will be analyzed.

[Todd Cohen:]

I was just a little bit confused by all the sites, I know it was your intentions to look at expanding the board. I know you were, obviously, were out there chatting with shareholders about it and I was just a little bit confused by the 13D amendment last night to West Creek that kind of highlighted their interest. It seemed and I was wondering why that occurred after the discussions being underway across the board. It seemed a little bit odd that there would be an amendment while you were in discussions with all shareholders. That’s why I asked the question.

[Jim Stroud:]

Obviously, Todd you would have to ask West Creek that question. But, I don’t think we could be any clearer than the Board is considering the expansion as well as the strategic alternatives. We do agree with West Creek’s amendment to their 13D that a proxy contest is not in the best interest of the shareholders.

[Todd Cohen:]

Yes, I would concur, thank you.

[Jim Stroud:]

Thank you.

[Operator:]

(Operator Instructions) We have a follow up question from Jerry Doctrow with Stifel Nicolaus please proceed.

[Jerry Doctrow:]

If nobody else is going to jump in, I will come back. I just had one other thing. A question came up with an investor the other day or so. In terms of thinking about the free cash flow from you business, I don’t know the exact number we have down for you and for everybody else in the $400 to $500 per unit per year, kind of CAPEX maintenance CAPEX kind of number. When you think about your budget there obviously other things that are more in the reserve for replacement category, the typical kind of paint fix up that’s in the $500, if I was thinking about this like an appraiser whatever, is there a reserve for replacement if we should be thinking about or budgeting for.

[Jim Stroud:]

Our 2008 budget for occurring CAPEX is $3 million.

[Jerry Doctrow:]

That would include things like the more extensive, more out of the usual.

[Jim Stroud:]

That’s normal, preparing apartments for a new resident. Not a new roof, not HBHC, not for refurbishment, this is typical ongoing pat backs in our properties. It is $3 million and on a unit basis, we are consolidating about 6600 units, so it’s about $455 per unit per year.

[Jerry Doctrow:]

Any sense of what that non-occurring stuff is, the roof or refurbishments or whatever?

[Jim Stroud:]

In this quarter, the CAPEX beginnings it’s going to be project by project. This quarter, we had 1.6 million for the IT Systems and then 700,000 for non-recurring CAPEX this quarter. That is a good representative of about 750,000 per quarter and as mentioned the $3 million figure is looked at as really a replacement reserves and maintenance.

[Jerry Doctrow:]

All right, thanks a lot.

[Jim Stroud:]

Thank you.

[Operator:]

Your next call is from the line of Todd Cohen with MTC Advisors please proceed.

[Todd Cohen with MTC Advisors:]

Larry, earlier in the call, you referenced a point in time, I think it was maybe a few weeks ago, you indicated that there was a very high number of move-ins. Could you refresh me on that again?

[Larry Cohen:]

We have had actually last week we had a very good move-in. Actually, the last week in January and the last week in February were the two highest weekly move-ins I remember within probably the last six plus months. It is not occurring every week but it is in those two weeks. I would say what I am encouraged about is we had seven move-ins last week at Canton Regency; we had five in Trumbull; we had nine last month in Villa Santa Barbara. Again, I am not trying to give indications of 2008 what it suggests to me is that across the country, we are not seeing a housing meltdown impede our business. We have selected markets, we started in Florida and we have the Detroit market, a very difficult market. We have a couple of challenges in California. Even in California, we had great months in those Santa Barbara. The key to the success is fundamentals. It’s our processes with our outreach, our cause, our call banks, our lead generation. It’s blocking and tackling. It’s staying on top and focused. We began last summer; we have spoken about this before, how we classified our portfolio in three-color zones, red zones, yellow zones and green zones. We have a swat team onsite working the red zone properties that any property below 85% occupancy and it is effective. The key to this business is number one trying to be diligent in acquisitions, buying properties in markets with key demographics and limit competition and secondly, having the right people on site, the marketing staff all the onsite staff are involved in it as well as regional and corporate support and focus. You give people the tools and we all wish we were 95% occupied; we are not. But, I will tell you in this environment we are raising our rents, we are moving people in, we are dealing with attrition, we are looking at higher levels of care, we are looking at home health care. I think the fundamentals continue to be sound.

[Todd Cohen with MTC Advisors:]

Great, thank.

[Larry Cohen:]

Thank you.

[Operator:]

It seems we have no further questions at this time and I would like to turn the call back over to Mr. Larry Cohen for any closing remarks.

[Larry Cohen:]

We thank everybody for your participation today and look forward to speaking with you shortly, thank you very much.

[Operator:]

Thank you that concludes today’s conference.