Capital Senior Living Corporation
Q1 2008 Earnings Call Transcript

Published: 27 May 2008

[Operator:]

Good day, everyone, and welcome to the Capital Senior Living first quarter 2008 earnings release conference call. Today's conference is being recorded. Any forward-looking statements made by management in this conference call are subject to certain risks and uncertainties that could cause results to differ materially including but not limited to the company's ability to complete refinancing of certain of our wholly-owned communities, realize the anticipated savings related to such financing, find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions generally, satisfaction of closing conditions, such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations among others, and other risks and factors identified from time to time in our reports filed with the Securities and Exchange Commission. And now, at this time, I would like to turn the call over to the Chairman, Mr. Jim Stroud. Please go ahead, sir.

[Jim Stroud:]

Good morning and welcome to Capital Senior Living's first quarter 2008 earnings call. The first quarter 2008 results continue to improve as compared to the prior year period. Revenues of $48.5 million increased $2.3 million or approximately 5% from the first quarter of 2007. Adjusted EBITDAR, as defined in the press release, increased $14.4 million, approximately 9% from the prior year period. And our adjusted EBITDAR margin was 29.6% for the first quarter 2008, which represents 110 basis points improvement from the first quarter of 2007. The organic growth in the first quarter of 2008 was reflected in our same-store results for the quarter. Average monthly rent increased 4.4%, while expenses increased 2.5% in the quarter. This resulted in a 4.6% increase in same-store net income for the first quarter of 2008. On March 24, 2008, we announced the addition of Mr. Harvey Hanerfeld and Mr. Peter Martin to the Board of Directors, and the formation of a special Board Committee to review strategic alternatives, including execution of the company's existing business plan. The Special Committee has met several times and is in the process of hiring a nationally recognized investment banking firm as its financial advisor. This process is expected to take a number of months. The company will update the progress of the Special Committee when it hires an investment banking firm, and on future earnings calls. Now, at this time, I'd like to introduce Larry Cohen, Chief Executive Officer for further comment. Larry?

[Larry Cohen:]

Thank you, Jim, and good morning, everybody. The first quarter is typically our most challenging as we deal with higher levels of attrition and harsh winter weather, particularly in the Midwest this past winter. Despite these conditions and a challenging economy in housing markets, first quarter revenues, EBITDAR, and net income all increased with strong margins, as we implement rent increases and employ sound expense controls. Our 2008 business plan is focused on increasing capacity and levels of care to meet the needs of our residents with an average age of 85 through expansions, conversions, new developments in home healthcare. These investments are expected to improve occupancies, produce excellent returns on invested capital and build shareholder value. We achieved solid community operating results in the first quarter of 2008. During the quarter, 60 of our communities were stabilized with an 89% average physical occupancy rate, and operating margins, before property taxes, insurance, and management fees, were 48.5% in our stabilized independent and assisted living communities. At communities under management, these include our consolidated communities, communities owned in joint ventures and communities owned by third parties and managed by the company, same-store revenues increased 3.3% versus the first quarter of 2007 as a result of a 4.4% increase in average monthly rent and a 90 basis point decrease in financial occupancy. Our sound expense controls and group purchasing program limited same-store expense growth to 2.5% resulting in same-store net income growth of 4.6% from the comparable period in 2007.The operating leverage in our business model is reflected in the 54% incremental EBITDAR margin realized from the same-store revenue increases. The number of communities we consolidated in the first quarter increased to 50 from 48 a year earlier. Financial occupancies at these communities averaged 87.4% during the quarter. Operating margins at our consolidated communities were 44% during the quarter and average monthly rents were $2,415, a 3.8% increase from first quarter 2007 average monthly rents. 17 of our consolidated properties are Waterford Wellington communities, which we developed and opened between 1999 and 2002. In the first quarter 2008, these communities had an 89.8% financial occupancy compared to 91.6% in first quarter 2007 and average monthly rents grew 4.2% to $2,044. Every 1% increase in occupancy at our consolidated communities would generate approximately $2 million in additional revenues. A 5% increase in average monthly rents at our consolidated communities would generate approximately $8.5 million in additional annual consolidated revenues over annualized March 2008 revenues. At the incremental EBITDAR margins that we typically achieve on these additional revenues, the company's EBITDAR would increase significantly. We continue to perform in a challenging economic environment. The average age of our resident is 85, and a decision to move into a senior living community, both independent living and assisted living is need driven. Residents typically move from their former residence due to health problems, difficulty in maintaining a home, climbing stairs, lifting items, loneliness and a need for supportive services. Through assisted living or home healthcare residing in our independent living communities, residents can receive these services at all of our properties. 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 a Capital Senior Living community 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 for fuel and food and are looking for value. While we have seen the effects of the housing market impact some of our markets, our move-ins, deposits, tours and leads generated in the first quarter 2008 were similar to our first quarter 2007 numbers. Our attrition rate for the first quarter 2008 was 38.5% compared to first quarter 2007 attrition of 37.3%. The first quarter of each year is typically our highest attrition quarter, but 2008 attrition was higher. At our regional meetings last week, we heard positive outlooks from our regional marketing directors, as we enter the spring and summer months, which are usually the best time of year for the senior living industry. We also announced changes to our regional marketing assignments to enhance our overall marketing and sales efforts and provide support to better help each community be the best that it can be. We are on track to add additional levels of care at 11 communities. We plan to convert 256 independent living units in eight communities to assisted living and dementia care. Of these, 80 units were converted in 2007, 131 units are expected to be licensed as assisted living by the third quarter of this year and 45 units are expected to be converted by the fourth quarter of this year. The estimated costs for these conversions is less than $2 million, and upon 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 later this year. These expansions will add 270 units for a 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 60% incremental margin. We have excellent results in generating significant improvements at communities that have been expanded or have had units converted to additional levels of care. Additional 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 continue to look at home care agency acquisition opportunities in the 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, and many of our residents, with an average age of 85, utilize those services. By having ownership in an agency, we will be better able to integrate the delivery of services to our residents and benefit from increased revenues from the home care services, as well as from longer lengths of stays at our communities. We currently have three communities under development in joint venture with Prudential Real Estate Investors acting on behalf of institutional investors. These developments will add 434 units, 299 independent living and 135 assisted living units. And we are actively looking at additional sites, primarily in strong barrier to entry markets for a limited number of joint venture developments. New developments of senior housing communities continues to be severely constrained, with new supply having grown at a compounded annual growth rate of only 1.3% since 1999. We continue to monitor the construction that is reported by the National Investment Center for the 100 largest metropolitan statistical areas. According to the most recent [niche map] construction reports, only three new developments are located in the zip codes in which we operate. This confirms our own findings that construction is negligible in our markets, and we expect building will continue to be rare as a 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 rents necessary to provide an adequate return on significantly higher development costs. The current credit crisis should further constrain development for an extended period of time, providing an environment where the fundamentals for the seniors living industry continue to be sound. 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, benefiting strategic buyers that are not reliant on conduit loans, mezzanine financing or 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 a number of markets where we have concentrated operations. Our balance sheet is solid with fixed mortgage debt at very attractive rates. Our existing infrastructure and platform allow us to integrate these acquisitions at very low incremental costs. Our access to attractive capital, sound expense controls and group purchasing programs give us an advantage in competing for acquisition opportunities. As Jim announced previously, we have added two shareholder representatives to our Board of Directors, and our Board has formed a Special Committee to review strategic alternatives to maximize shareholder value. The Special Committee has been meeting with nationally-recognized investment banking firms with expertise in the senior living industry and expects to hire an advisor shortly. The fundamentals for the senior living industry continue to be solid, and we continue to generate strong cash flow. We look forward to proceeding with the strategic alternative process, 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 first quarter of 2008.

[Ralph Beattie:]

Thank you Larry, good morning everyone. I hope everyone has had a chance to see the press release, which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the first quarter of 2008. If you need a copy of our press release, it has been posted on our corporate website, at www.capitalsenior.com. The company reported revenues of $48.5 million for the first quarter of 2008 compared to revenues of $46.2 million for the first quarter of 2007, an increase of $2.3 million or 5%. The number of communities we consolidate on our income statement increased by two since the first quarter of last year from 48 to 50. Financial occupancy at the consolidated portfolio averaged 87.4% for the quarter with an average monthly rent of $2,415 per occupied unit. We recorded $1.5 million of development fees in the first quarter of 2008 due to three communities being developed in joint ventures. Revenues under management increased approximately 2% to $55 million in the first quarter of 2008 from $54 million in the first quarter of 2007. As Larry explained earlier, revenues under management include revenues 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. At these communities under management, same-store revenue increased 3.3% versus the first quarter of 2007 as a result of a 4.4% increase in average monthly rent. Operating expenses increased by $1.2 million in the first quarter of 2007, and as a percentage of resident and healthcare revenues, operating expenses were 62.1%. General and administrative expenses of $3.6 million were $0.5 million higher than the first quarter of 2007. G&A expense in the first quarter of 2008 included approximately $0.3 million of due diligence cost for the Hearthstone acquisition, which was terminated in the quarter, and $0.2 million of legal and proxy-related expenses to negotiate a settlement agreement and avoid a proxy contest. Excluding these items, G&A expense as a percentage of revenues under management declined from 5.8% in the first quarter of 2007 to 5.6% in the first quarter of 2008. Facility lease expenses were $6.1 million in the first quarter of 2008, approximately $0.4 million higher than the first quarter of 2007, reflecting 25 leased communities this year versus 23 last year. The company elected to reclassify in both the current and prior year periods the amortization of deferred gains on sale leaseback transactions. While these have previously been recorded as gains on sale of assets, they are now reflected as a reduction in lease expense. Depreciation and amortization expense increased $0.3 million in the first quarter of the prior year as a result of capital improvements at certain of the company's owned and leased facilities, along with depreciation incurred this quarter related to new information systems which became operational on January 1, 2008. Adjusted EBITDAR for the first quarter of 2008 was approximately $14.4 million, an increase of 9% from $13.2 million in the first quarter of 2007. Adjusted EBITDAR margin was 29.6% for the period, a 110 basis point improvement from the comparable period of the prior year. Interest expense of $3.1 million in the first quarter of 2008 was $0.2 million less than the first quarter of 2007, reflecting a combination of lower debt outstanding and a lower average interest rate. We sold two parcels of land in the first quarter of 2008 for a total gain of $0.7 million. We also reduced the carrying value of our sole remaining parcel held for sale by $0.1 million, so we netted $0.6 million of gains in the quarter. The company reported a pre-tax profit of approximately of $2.4 million in the first quarter of 2008 compared to a pre-tax profit of approximately $1.5 million in the first quarter of 2007. Excluding approximately $0.3 million of write-offs for Hearthstone due diligence, approximately $0.2 million of unusual legal and proxy-related expenses and approximately $0.6 million of net gains on three parcels of land adjusted pre-tax profit is also $2.4 million for the first quarter of 2008. Adjusted pre-tax profit for the first quarter of 2007 was $1.6 million, excluding a gain on the sale of land and the write-off of deferred loan costs and exit fees due to a refinancing. The company reported net income of $1.5 million or $0.06 per diluted share in the first quarter of 2008 versus net income of $0.9 million or $0.03 per diluted share in the first quarter of 2007. With the adjustments noted above, the net income of $0.06 per diluted share in the first quarter of 2008 compares to net income of $0.04 per diluted share in the first quarter of 2007. On this same basis, adjusted cash earnings, defined as net income plus depreciation and amortization, were $4.5 million or $0.17 per diluted share in the first quarter of 2008 versus $3.7 million or $0.14 per diluted share in the first quarter of 2007. Capital expenditures in the first quarter of 2008 were approximately $1.7 million. Of this amount, approximately $1 million represented maintenance spending at the property level. If annualized, a $4 million annual rate of spending would equal approximately $570 per unit. Approximately $0.4 million of capital spending was for information technology, and the remaining $0.3 million was for tenant improvements at the corporate headquarters, as we extended our lease. We also invested $0.6 million in joint ventures during the quarter and received $1.4 million of proceeds from the sale of land. Cash increased by $1.2 million during the quarter and equaled $24.6 million on March 31. Mortgage debt was $188.3 million again in the first quarter of 2008, a reduction of $5.7 million from a year ago. And all of our mortgage debt is at fixed interest rates, averaging 6.1%. We'd now like to open the call to questions.

[Operator:]

Thank you, sir. (Operator Instructions). We'll go first to Frank Morgan with Jefferies & Company

[Frank Morgan:]

Good morning; we've heard talk about different causes for weakness in occupancies, and certainly the weather certainly seems to be a reasonable explanation the harsh winter. But just out of curiosity; anything beyond weather or the housing market, like Assisted Living Concepts noted residents moving home to live with family, largely driven by a weakening economy. Are you seeing anything like that that might be affecting your move-ins or I should say your move-out activities? And then secondly, could you just give us a little more color on kind of what you're seeing with regard to the potential for conversions beyond I think you had said something like 256 that you've got on tap right now, but longer-term, what is really the potential in your portfolio as you look further out to do these bed conversions? And maybe talk a little bit more about the returns and the math on those conversions that you think have already stabilized. Thanks.

[Larry Cohen:]

Thanks, Frank. Let me first address the move-outs. In the first quarter, we did have a high incident of deaths. There also was an acceleration of the flu epidemic in January and February. In certain markets, what you have seen some markets where residents have moved back home with children. Predominantly, that occurs if one of the spouses would lose a job and mom can help defray the cost of living at home, we do see a little bit of that. As I said, if you look at the traffic, you look at the move-ins, look at the deposits towards conversions; it's interesting, 70% of our repeat tours converted to deposits in the first quarter. That's up from 64% in the first quarter of 2007, so I think what we're seeing is that while attrition is higher for a variety of reasons, in the first quarter, we saw very similar results. So far, April into May, we're seeing good decent move-ins and activity. The responses we're hearing from the field, as far as deposits and (inaudible) spring appear to be positive, so we think that we can overcome that. And as new residents are moving in, they're paying community fees, they're paying higher rents, and all of that should drive cash flow. Regarding the conversions and expansions, what we have done is we have gone through a state-by-state analysis of looking at licensure requirements, building code requirements, to see what potential for conversions. Clearly, one of the challenges we do have is serving 85-year-olds and having more levels of care. A few years ago, recognizing that, we started to lease space in independent living communities, through home healthcare agencies. In Texas, for example, where our independent living properties are stick built, they will not be able to be licensed, and that's why we are intent on purchasing a home care agency to better integrate the services and also participate in some of the economics of the home care services at those properties. Of the units we have been speaking about, and the conversions that are planned, we actually are licensing more units than we have announced. What we have done, though, for purposes of the announcement and the modeling and the economics, is we have looked at what we think the contribution will be on the absorption of those units. There will be further potential beyond that. We also are looking at the expansions for additional opportunities, so this is a situation that we continually monitor. It's going to be controlled by a combination of the need of our residents, the building codes, ability to either convert or expand, as well as competition in those markets where , for example, we may have ability to convert or expand. But at the present time, don't think that it would be fruitful because of the competitive nature of a particular market, which as that market changes, will allow for further conversions or expansions. The economics on the conversions, we're looking at costs probably for the 176 units that we're planning to convert this year, just over $1 million. At 90% occupancy, looking at average rents in those markets, we expect that the annual revenue at 90% occupancy on those converted units would be $4.3 million of revenue, and 60% EBITDAR margin is fairly typical, is about a $2.6 million contribution with a significant return. On the expansions, 270 units, we're looking at about cost of about $100,000 a unit. Many of these locations, we already own the land. We don't have to build a second kitchen, so we're looking there at 90% occupancy, stabilized revenue of $9.1 million, a 60% EBITDAR margin would be $5.4 million, and again, that would be over $27 million costs which unlevered would be about a $20 million return. If you look at our experience, we've had some great success. Anecdotally, we can share that with you. For example, we expanded Cottonwood Village a number of years ago. It's a property, was our smallest property in Cottonwood, Arizona, which had about 70-some odd units, we increased that by over 100 units adding more independent living and assisted living. That property today operates at about 95% occupancy, with one of the highest margins in our portfolio, and we in that case study, for example, took a property that had annual revenues of $1.3 million pre-conversion to today, the annual revenue of $4.6 million, with a margin of about 50%. Sedgwick Plaza was a property in Wichita, Kansas that had a conversion by a former operator converting units at the fronts of the building from independent to assist it. It dramatically impaired our ability to lease the independent living. We spent about $800,000 a few years ago to move a wing, have refilled that building again 95% occupancy, and today we have increased our revenues by 75% from $2 million to $3.5 million, with a 50% increase in occupancy. So again, as we look at the markets, we're looking for these conversions, we look at the age of our residents, we think that these conversions will not only enhance revenues, but also solve some of the challenges in some of these buildings with lower occupancies by adding more levels of care to meet the needs of our residents.

[Frank Morgan:]

Okay, thanks. Larry one more while I have you. You mentioned that you were seeing some of the move-out as a result of family economic situations. Has that changed much? I mean if you look at over the past couple of quarters, is it about the same, or have you seen an acceleration there, or any difference? Thanks.

[Larry Cohen:]

I think that's a new phenomenon; I don't think we've heard much about it. I think it's something that we're seeing more recently in certain markets, and a lot of it was, has been triggered by one either spouse, or a spouse-in-law of a child of a resident may have lost a job, and they're having a tough time meeting their costs living at home, and a resident may move back in to help that situation. Again, it may be temporary that as things improve, the resident may come back. But it's something that is more recent as far as in effect, and it's kind of scattered around the country.

[Jim Stroud:]

Frank, good morning, Jim Stroud; we had our awards banquet last week, and we had all of our regionals in operations as well as marketing, brought in right around 15 communities for over two days, and had the chance to talk to each of the executive directors, and marketing directors. And I did specifically ask them that question and it was very much on an isolated basis. It's kind of a new theme that they've not come up against. But oftentimes, their comment back to me was, and it's a great excuse for the daughter to bring mom back home. So it was kind of new theme, but it was very isolated. I could count it really on just a couple of hands, the times I heard that.

[Frank Morgan:]

Okay. Thanks.

[Operator:]

(Operator Instructions). We'll go next to Jerry Doctrow, Stifel Nicolaus.

[Jerry Doctrow:]

Good morning, everybody. I had a couple of things, I guess just maybe continue on the occupancy. I mean, what we're trying to sort out is really where it's headed, so you've talked about a couple of the issues, if we kind of ignore expansions, conversions, maybe we can talk about it in financial terms, we can talk about it on a consolidated or stabilized portfolio. But, do you think it will trend up, absolute occupancy will trend up as we go forward to this year, are we stable, are we still trending down given economic conditions and stuff?

[Larry Cohen:]

Jerry, I mean I'm looking at a report from last Friday that actually had a highest number of movements for the year, would be deposit taking; it just crossed my desk this morning. I'd say that the month of April was pretty stable where move-ins are matching move-outs. As I mentioned, we have realigned some of the marketing, regional marketing. Our goal, if you look at our deposit taking and move-ins in the first quarter is to increase that by on average 0.5 deposits or move-ins per property per month. If we do that, we'll see some nice improvements in the move-ins. We clearly, if you look at this industry spring and summer is the theme that, it's the time of year that we typically do the best as an industry. Everyone seems to be very excited about the spring and summer outlook. The realignment I think will help vis-à-vis providing support to our marketing directors on site. Obviously, we are facing challenges, some as you heard, pop up that we hadn't seen before, but I think that we have the right tools, the right focus, we have well-located properties. There's not, very, very little being built, particularly in our markets. And everyone that we speak with in the field and regionally is very excited and positive about the outlook of seeing the improvements as we proceed during the year.

[Jerry Doctrow:]

Okay. So just to make sure I can hear you straight, you would expect occupancy to be flat to trending up as we go through the rest of the year.

[Ralph Beattie:]

Yes.

[Jerry Doctrow:]

Okay, despite economics, okay. Great. Let's see. Just, Ralph if you cold get back to me later on this, but I just wanted to clarify the amount of amortization is now on the rent. If you've got that there, you could just send it to us later, that would be helpful.

[Ralph Beattie:]

Here I can give it to you now. It's actually about $800,000 with the adjustment that we made in the quarter, so that's the amount we moved up from the gain on the sale of assets as a reduction of rent expense, and that number would be constant in each quarter going forward. So that would be the adjustment to the model.

[Jerry Doctrow:]

Okay great, thanks a lot. And Larry, I think you covered a lot of this. I just want to kind of restate it maybe in clearer terms. I mean does the strategy despite the strategic alternatives, the strategy is really unchanged. I mean, certainly the focus on conversions, expansions, obviously just trying to grow occupancy where you have, and then in looking selectively at acquisitions and development. And it sounds like you're maybe even a little bit more positive on acquisitions. Is that kind of an accurate sort of an assessment of kind of what you were saying?

[Larry Cohen:]

Yes. And again, Jerry, along with the strategic alternatives obviously.

[Jerry Doctrow:]

Yes. Right. You've talked about that, and I'm assuming that's just out there.

[Larry Cohen:]

Yes, I mean we're looking at, and again, I mean as we look at the economy, look at the challenges, we've been through cycles before, I've had great success in this industry. Back in the early 1990s when we had a very, very high interest rate environment, recession, a very, very difficult housing market seeing the ability to create value and occupancy by conversions. Not something that's untested, and every time we've done it in our own portfolio, I gave some examples, we've seen very, very dramatic results. So we see an aging resident base, we see the need, we see the care that they're receiving from third parties. We think that this is a strategy that not only will meet the needs of our residents, improve occupancy, but also increase the revenue stream because of the fact that we're taking units either out of service or units which are independent living with an average monthly rent of $2,200 and moving them up to assisted living or higher with average rents of $3,100 or more.

[Jerry Doctrow:]

And I think Frank would have asked this a different way, but if you eliminate, say, the stuff in your portfolio where the conversions may not be possible for construction reasons or regulatory reasons, beyond the ones that you've got, is there another 100, 200, what's that sort of potential out there?

[Larry Cohen:]

Yeah. We'll be happy to quantify and get it out there. It's something that we constantly monitor. We clearly are licensing more units than we've announced.

[Jerry Doctrow:]

Okay.

[Larry Cohen:]

And part of that is that we want to have that capacity. One of the things, for example, it's a state-by-state. In Illinois, we licensed 80 units last year in Illinois because in Illinois, we can have floater units, meaning that anybody in the building can live in assisted living or get assisted living services in their apartment, whether they're in the independent living section or the assisted living section. It is a state-by-state issue, vis-à-vis regulatory issues. We're working with architects on some of the requirements for building codes. But again, what we're trying to do is manage the expectations, build for the capacity and look at each market looking at the need in that market.

[Jerry Doctrow:]

And on the home health, you've been talking about this now for a few quarters.

[Larry Cohen:]

Yeah.

[Jerry Doctrow:]

Is that, I guess I don't know about actually why it's taking so long, or is that something that it's really near-term or?

[Larry Cohen:]

It's still, we were very close, we've identified a number of agencies. We had one agency identified the latter part of last year that we were negotiating a Letter of Intent, and the agency decided that they wanted to stay independent and not sell. So we went back to some others. We're being deliberate in this process, making sure that we have agencies that can provide the right type of care, that it's going to be a successful venture economically, that they're serving in the markets that we operate in, and we are still having active conversations with a number of these agencies. It is our goal in the near-term to be able to acquire an agency and integrate that into our properties.

[Jerry Doctrow:]

Okay. Thanks.

[Operator:]

Our next question comes from Todd Cohen with MTC Advisors.

[Todd Cohen:]

Yeah. Good morning. Can you talk a little bit about the settlement specifically you were referring to as it related to those legal costs earlier kind of specifically what the settlement was? And then Ralph, we may have discussed this before, but just to clarify there are no auction rates tied to your cash?

[Ralph Beattie:]

Hey, Todd. The settlement had to do with the formation of the Special Committee and the addition of two shareholder representatives to the board, there were some legal expenses that were associated with that.

[Todd Cohen:]

Okay.

[Ralph Beattie:]

That we incurred. And that's what the $200,000 in the quarter resulted from. And the other part of your question?

[Todd Cohen:]

Auction rates?

[Ralph Beattie:]

We have no auction rate securities, we never have.

[Todd Cohen:]

Okay.

[Ralph Beattie:]

And we've been investing very conservatively on very short-term basis. We haven't reached out for yield, which fortunately benefited us in the current environment, so while we may have given up some yield in the past, we have erred on the side of caution, and not gotten involved in any auction rate securities.

[Todd Cohen:]

Okay. And then you referred to being in the process of hiring the banking firm; how far out are you on that process do you think?

[Larry Cohen:]

I think in the near-term, Todd, we have had meetings with the banks. And as I said, I think that the, we'll have a public announcement at the time, but I think that it's something that should move forward, the hiring the bank should happen, I would think this month, and then the process will, as you mentioned, take a few months to kind of evolve.

[Todd Cohen:]

Got you. Thank you.

[Larry Cohen:]

Thank you.

[Operator:]

Our next question comes from David Ratliff with Doucet Asset Management.

[David Ratliff:]

Good morning gentlemen.

[Larry Cohen:]

Good morning.

[David Ratliff:]

Well, another solid quarter, congratulations.

[Larry Cohen:]

Thank you.

[David Ratliff:]

In the past you provided a breakdown of your independent living units and your assisted living units as a percentage of our total units. Can you provide that and your current status as well?

[Larry Cohen:]

I believe actually if you look at the press release that was issued last night.

[David Ratliff:]

Okay.

[Larry Cohen:]

And turn to page 9, we have supplemental information, that breakdown will be there.

[David Ratliff:]

Okay. I missed that, I apologize. My next question was, do you have a target range for your assisted living units as a percentage of your total units?

[Larry Cohen:]

We do not. Obviously, as we look at conversions and expansions, the percent of assisted living will increase.

[David Ratliff:]

Right.

[Larry Cohen:]

If you look at the transactions that we've been involved with over the last couple of years, it's been predominantly assisted living. What's interesting, though, is if you go back, and in fact if you look at our 10-K, which was recently filed for 2007, we list each property and we break out the levels of care. 52% of our properties have contained within the four walls some assisted living. Yet, when you look at the mix, we're talking about on the unit basis, we actually have approximately, I guess it's about 70-some odd percent of our 68.6% of our units are independent living. The reason for that is that many of our properties have two levels of care, independent and assisted. And in those properties the ratio of independent to assisted, is typically two-thirds and one-third.

[David Ratliff:]

Okay.

[Larry Cohen:]

So if you look at it again, as I said, we're about just under 70%. I would think that as we grow, we'll increase the assisted living proportion. But again, 52% of our buildings do have some assisted living in them today.

[David Ratliff:]

Considering the assisted living units, you probably saw the article in Barrons in the last couple of months on senior housing. And of course, they had a broad comparison, but dementia care was a small portion of the senior living housing. But the average monthly revenue per unit is significantly greater. Do you guys feel like you have the competencies within your existing business to grow the dementia care?

[Larry Cohen:]

Well, we do have dementia care in some of our properties, some of the conversions, we'll incorporate dementia care. Clearly, the margins are much lower in the dementia care because of staffing for dementia care. And it's an area that as the needs arise within our resident base, we'll look at that. One of the successes we had, for example, in the Cottonwood Village was getting a directed care licensure, which is not dementia care, but dealing with more cognitive issues for our residents, so it is something that we do assess, we look at. In Crown Point, one of our properties that's designated for conversion, the conversion there will be for memory care. So it's something that we look at and you're right, if you look at the data for the industry, it's a very small portion of assisted living, but clearly as we look at the age and needs of our residents, cognitive issues is something that residents, we have to deal with and we do look at those opportunities where we can help our residents.

[David Ratliff:]

Great, Larry. That answers my questions. Thanks for taking my questions.

[Larry Cohen:]

Thank you.

[Operator:]

Our next question comes from Rick Fetterman from Fetterman Investments.

[Rick Fetterman:]

Good morning. I'd like to circle back for one second to occupancy. Thus far in '08 have the visits and then the resulting level of move-ins been at, above or below normal for this time of year?

[Larry Cohen:]

As I mentioned in my comments, when we track the first quarter activity, it's very, very similar to first quarter of '07. And what we track and we report internally every month are move-ins, move-outs, high levels of care, deposits, deposits for community, initial tours, repeat tours, conversions and lead generation as well as transfers. Our first quarter 2008 statistics on move-ins were 0.1 lower first quarter '08 versus, property per month, versus first quarter '07. Clearly, our attrition was higher, resulting in an average net which was lower. If we look at the tours being held, our tours actually were 0.2 per month lower than '07, our conversion rate was higher. And actually, our lead generation was slightly up in '08 versus '07. So as we look at this data, for the first three months of '08, it's tracking very similarly to what we saw in '07. Rick Fetterman - Fetterman Investments Okay. And with regard to the home healthcare area, are you limiting your exploration to acquiring an agency or are you considering, or did you consider possibly using a third-party's template and paying that third-party a fee?

[Larry Cohen:]

The way we operate today is, we have third-parties operating in the building independently. They pay us a rent. Because of licensure issues, and the fact that there's a reimbursement in that business. It's not something that you can share fees with, so we would look at either an acquisition or potentially a joint-venture with an existing operator.

[Rick Fetterman:]

Okay. Thank you very much.

[Larry Cohen:]

Thank you.

[Operator:]

And we do have a follow-up from Jerry Doctrow with Stifel Nicolaus.

[Jerry Doctrow:]

Hi. Larry; it seemed to me that some of your incremental margins were lower maybe this quarter than you've said in the past. And I think at some point, you talked about maybe the 80% incrementals, or that sort of thing on some of the, I'm not sure if it was rates or.

[Larry Cohen:]

You're exactly right, Jerry. If you look on the past, on the percent of increase on the margin of the incremental revenue, it simply would have been higher. This quarter, two things happened. One, occupancies were down, which had an impact. And operating expenses grew 2.5%, which is probably about 1% higher than we've seen in the past.

[Jerry Doctrow:]

Okay.

[Larry Cohen:]

Those two components affected the increase to about 54% from a higher level that we typically have experienced.

[Jerry Doctrow:]

Okay. And that's on sort of the incremental?

[Larry Cohen:]

That's on the incremental revenue, correct.

[Jerry Doctrow:]

Okay. Okay. Thanks a lot.

[Larry Cohen:]

Thank you.

[Operator:]

And there appear to be no further questions at this time. I'd like to turn the conference back to Mr. Stroud for any additional or closing comments.

[Jim Stroud:]

Well, we thank everyone for their interest in Capital Senior Living, and have a good day. Thank you.

[Operator:]

And that does conclude today's conference call. Thank you for your participation and you may disconnect at this time.