Capital Senior Living Corporation
Q4 2008 Earnings Call Transcript

Published: 11 Mar 2009

[Operator:]

Good day everyone, and welcome to the Capital Senior Living fourth 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 without limitations to the company’s ability to find suitable acquisition properties at favorable terms, financing, licensing, business condition, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licenser, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations among others, and other risk and factors identified from time to time in the company’s reports filed with the Securities and Exchange Commission. Now at this time for opening remarks, I would like to turn the conference over to Mr. Larry Cohen. Mr. Cohen, please go ahead sir.

[Larry Cohen:]

Thank you, Matt and I am pleased to welcome everybody to Capital Senior Living’s fourth quarter and full year 2008 earnings release conference call. Our community’s offers Senior’s Quality Housing and well appointed buildings with support of services at affordable rates. We made progress during the fourth quarter in spite of the economic down turn. Our occupancies held relatively flat as we implemented rent increases and employed sound expense management. We are encouraged by the higher number of move ins and deposits in the first two months of 2009, as compared to the same period in 2008. These results evaluate our focus on providing affordable quality housing and care, promoting Senior’s independent to wellness while enriching there lives daily. I also want to congratulate all of our associates for achieving a 95.2% resident satisfaction rating in our 2008 surveys. We continue to differentiate our communities as an affordable option delivering exceptional value to seniors in challenging economic times. Our communities enjoy stable, well established reputations in their markets. Our skilled marketing and sales staff are building relationships and implementing innovative marketing plans to increase our outreach and contacts with referral sources. In the first two months of 2009 we had 23 more move-ins and 70 more deposits than we had during the first two months of 2008. Our disciplined approach to managing expenses and increasing rates is producing positive results. Average monthly rents in December 2008 increased 5.2% from December 2007 and 1.1% from September 2008, while operating expenses excluding adjustments that will be discussed later by Ralph declined sequentially from the third quarter of 2008. 57 of our communities were stabilized during the fourth quarter, with an 88% average physical occupancy rates. Operating margins before property taxes, insurance and management fees improved to 48% in stabilized independent and assisted living communities. At communities under management, these include our consolidated communities, communities owned in joint ventures as well as communities owned by third parties and managed by the company, excluding four communities with units being converted to higher levels of care. Same-store revenue increased 1% versus the fourth quarter of 2007, with a 4.5% increase in average monthly rent. Our expense management in group purchasing program limited growth in same-store expenses excluding adjustments to 1.1% despite increases in utilities indication of core expenses in December 2008. These achievements generate same-store net income growth of 0.9% from the comparable periods in 2007. The number of communities we consolidated in the fourth quarter increased to 50 from 49 a year earlier. Financial occupancies of the consolidated portfolio averaged 85.5% in the fourth quarter. Excluding the four communities with units being converted to higher levels of care, the average financial occupancy for the quarter for 46 consolidated communities was 87 %. Average monthly rents were $2,506 a 4.2% increase from fourth quarter 2007 average monthly rates. The average age of our resident is 85 and the decision to move into a senior living community, both independent living with supported services or assisted living is need driven. Residents typically move from their former residences due to health problems, difficulty in maintaining a home, loneliness or the need for supportive services. Through assisted living, our home healthcare residing in our independent living communities, residents can receive these services at all of our properties and 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 are facing increasing challenges and are seeking value. While we have seen the effects of the economic downturn impact certain markets, our move-ins, deposits, tours and leads generated continued to be stable in most markets as we execute on the fundamentals to focus all communities and utilize state-of-the-art technology to enhance our operations, marketing and services to our residents. In those communities that have been impacted by the economy, we continued to manage our operating expenses and staffing to occupancy levels and thereby maintain margins. In addition, we are converting unit with many of these properties to higher levels of care providing more services to residents as they age implies. We have, or in a process of converting 207 independent living units in 7 communities to assist the living for dementia care. Of these, 80 were converted in 2007, 18 units were converted in May of 2008, 24 units were licensed this month, 20 units are expected to be licensed in the second half of this year and 65 units are expected to be licensed as assisted living in 2010. We opened 101 independent living units in August and 45 assisted living units in November at our newly developed community in Dayton, Ohio. Two additional developments are scheduled to open next month. These three communities were developed in joint venture with Prudential Real Estate Investors acting on behalf of Institutional Investor’s that will add 287 units to our capacity. In Dayton, our community has the well received and sales traffic has picked up as our focused average efforts had expanded our professional referral sources. Recent open houses at the Perrysburg and Richmond Heights communities which had both scheduled to open April 1, were well attended with approximately 400 to 500 visitors and sales traffic has been bless at both communities. The communities have been enthusiastically received due to the attractiveness of the buildings to our amenities and services. In December, we announced we were discontinuing further development and expansions until general business conditions improve and we eliminated three related positions. We also announced in December that Jim Stroud retired for personal reasons from the daily officer role as Chairman of the company. Jim is the founder of the company and we are pleased that he will continue to serve the company as Chairman of the Board of Directors and maintain his company office and administrative assistant. In January, we announced a stock repurchase plan of upto $10 million of common stock, the timing and extension which we repurchase stock will depend on market conditions and other corporate considerations. We believe this stock repurchase program is a prudent use of our capital and demonstrates our confidence in a long term value of Capital Senior Living. We are profitable, generate positive cash flow and currently have the cash available to fund this program. The Senior Housing market is highly fragmented with a number of operators being financially challenged with limited access to capital. New suppliers are daily constrained and demand will continue to grow as senior’s age and their needs increase. We believe that we are well positioned to take advantage of the current economic down turn to expand our basic operations and profits funding economic recovery. We have an established operating platform with geographic clustering and we provide multiple levels of care to seniors. We have a proven track record with same store average annual rent growth of 6.1% and same-store annual net operating income growth of 13.7% since 2003. Our stabilized operating margin is currently 48% and we have successfully integrated dozens of acquisitions into the company, since the end of 2005. We have a solid balance sheet with no significant low maturities until the third quarter of 2015. We enjoy strong institutional relationships and have a stable and season management team with 171 years of combined senior’s housing experience. Capitalizing on opportunities in this downturn should allow us to gain sustained, strong, competitive positions within our geographic clusters and maximize shareholder value as the economy stabilizes. 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 2008.

[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 review and extend the 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 resident revenue of $43.2 million for the fourth quarter of 2008 compared to resident revenue of $42.7 million for the fourth quarter of 2007, an increase of $0.5 million or 1%. The number of communities we consolidated and our income statement increased by one since the fourth quarter of last year, from 49 to 50, with the addition in January of 2008 of one leased community. Financial occupancies in the consolidated portfolio as Larry said averaged 85.5% for the quarter with an average monthly rent of $2,506 per occupied unit. Excluding four communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 87%. The average physical occupancy for 57 stabilized communities excluding four communities with units being converted to higher levels of care was 88%. Revenues under management were $55.7 million in the fourth quarter of 2008 compared to $55.9 million in the fourth quarter of 2007, and there were 64 communities under management in both the fourth quarter of 2008 and the fourth quarter of 2007. The communities under management excluding the four communities undergoing conversions same-store revenue increased 1% versus the fourth quarter of 2007. As a result of a 4.5% increase in average monthly rent. Operating expenses increased by $0.8 million or 3% in the fourth quarter of 2007, as a percentage of resident and healthcare revenues operating expenses were 63.5%. Operating expenses for the fourth quarter included approximately $0.4 million of causality losses and real estate tax adjustments which apply to prior period. Excluding these items, operating expenses would have been 62.5% of revenues for the quarter. General and administrative expenses of $3.9 million were approximately $1 million higher than the fourth quarter of 2007. We announced in December that we are discontinuing further development when the last year communities are completed and incurred approximately $0.6 million of separation costs as a result. We also wrote-off approximately $0.2 million of pre-acquisition costs, related to projects which will not proceed. As a percentage of revenues under management excluding these items, general and administrative expenses were $5.5 in the fourth quarter of 2008. Facility lease expenses were $6.3 million in the third quarter of 2008, approximately $0.2 million higher than the fourth quarter of 2007, reflecting 25 leased communities this quarter versus 24 in the prior year period along with increases in contingent rent. Depreciation and amortization expense increased $0.3 million in the fourth quarter of the prior year, as a result of capital improvement as certain as the company’s owned and leased facility along with depreciation incurred on new information systems which became operational on January 1, 2008. Adjusted EDITDAR for the fourth quarter of 2008 was approximately $13.7 million compared to $14.9 million in the fourth quarter of 2007 and adjusted EDITDAR margin was 28.5% for the period. Interest expense of $3 million in the fourth quarter of 2008 was $0.1 million less from the fourth quarter of 2007, reflecting lower debt outstanding due to principal amortization. The company reported a pretax loss of approximately $0.4 million in the fourth quarter of 2008 compared to a pretax profit of approximately $2.6 million in the fourth quarter of 2007. Fourth quarter of 2008 results includes several and frequent non-operating items such as separation pay, casualty losses, write-off of pre acquisition costs and property tax adjustments. On an adjusted basis, the company earned a pre-tax profit of $1.2 million in the fourth quarter of 2008 compared to a pre-tax profit of $3 million in the fourth quarter of 2007. Adjusted net income was $0.8 million or $0.03 per diluted share in the fourth quarter of 2008 versus adjusted net income of $1.8 million or $0.07 per diluted share in the fourth quarter of 2007. Adjusted cash earnings, which are simply adjusted net income plus depreciation and amortization, were $4 million or $0.15 per share in the fourth quarter of 2008 versus $4.8 million or $0.18 per diluted share in the fourth quarter of 2007. Capital expenditures in 2008 were approximately $8.1 million including $4.6 million of recurring capital expenditures, $3 million of major projects or renovations and $0.5 million of information technology. Recurring capital expenditures were approximately $690 per unit in 2008. We anticipate approximately $1 million per quarter of recurring CapEx throughout 2009. The company ended the year with approximately $25.9 million of cash and cash equivalent and approximately $185.8 million of mortgage debt all at fixed interest rates averaging approximately 6.1%. With the exception of a single $4.8 million mortgage maturing at September of 2009, the next closest debt maturity is July of 2015. I would now like to open the call to questions.

[Operator:]

(Operator Instructions) Your first question comes from Jerry Doctrow - Stifel Nicolaus.

[Jerry Doctrow:]

Yes, I’ve got a handful of things. I guess maybe to start just can’t understand kind of the overall marketing rate environment a little bit better. I think you talked about the same-store basis with 85.5% rate growth, I was wondering if you can give a better sense of sort of the quarter-to-quarter growth. Then, Larry had talked about deposits and move-ins being output, but you’ve also been adding units, you got some stuff that’s in your new developments. So, just a little bit more color on sort of what you always seeing on the marketing kind of I think it’s on the same-store basis?

[Larry Cohen:]

Sure, Jerry. First of all on the rent increase from September to December the average monthly rate is up 1.1% so that what gives you sequential, it’s 5.2% year-over-year and the rent increases in the first quarter are tracking pretty much what they have been historically. As far as the numbers that we recite on the deposits and move-ins, those are same-store numbers. That includes the developments or the placed lease that came on in the first quarter of ’08. So all of our stats are apples-to-apples same-store basis, it’s the same unit count and the same number of properties.

[Jerry Doctrow:]

In terms of just any color, in terms of customer thinking, people have just settled down you are not seeing as much as your housing market and stock market were more than an issue in the fourth quarter than the first quarter, just any additional color there?

[Larry Cohen:]

Yes. Well we saw last year our occupancies fell in the first two quarters. We saw occupancies well actually improved in the third quarter and kind of stabilize in the fourth quarter. December, we saw a little bit of swift very slight. It was, I think a combination of our traditional holiday season and some typical weather. To recall in ’07 and ’06 we had pretty mild December’s, this year we had a much more typical winter in December. We saw an increase in occupancies, move-ins, deposit towards, in January over December. In February, I think we’ve seeing pretty good momentum throughout the country and are looking forward to March on our leased units, which are deposits are moving upward. I think that we are being cautious about this year. We are expecting occupancies for the year to probably remain flat in this economy and so I think what we’re finding is that there’s really not a lot of comments we are hearing back from the steels regarding the housing market. I think it’s something that we can deal with for a long time as well the fact that you have pointed out in many of your notes that our portfolio probably enjoys some of the highest concentration in some of the better, more stable housing markets. As well as the fact that in wither markets that we are in, never really has that bubble on valuations.

[Jerry Doctrow:]

Okay. And are you doing anything different on incentives.

[Larry Cohen:]

In those markets, we have one property in Florida where we are having conversions. We have a few properties in California, a property in Detroit which probably is three or four most challenging markets. There what we will do is, we will look at premium pricings basically greater than just having percentage, we really look at each unit and try to determine a pricing structure taking those units which may have been in inventory the longest. May be furthers form the dining room, may has a poor view, and users as incentives, but generally as you can see when the rent increases at 5.2% year-over-year, we are not in this year, we’re budgeting 3% to 4% rent increases for 2009.

[Jerry Doctrow:]

And then, on the share buybacks can you talk what you bought before and how much is remaining authorization as of this stage?

[Larry Cohen:]

Jerry, we actually just began that share buyback program at the end of January. We were active in the market up until 30 days prior to our earnings release, we have a corporate policy were there is no trading done by any employees or management within 30 days of earnings release. So, we’ve actually just been underway for a short period of time, we do have a $10 million authorization, but that’s probably a multi-year goal. We don’t plan to buy back $10 million of stock in 2009 and we plan to give a specific report on that in our first quarter queue, but at present time we are just beginning that.

[Jerry Doctrow:]

Okay, that’s fine. You touch on some of this, but may be we can just go though it in a little more detailed on the sort of conversions and on the development, because again whether or not they are in same-store they obviously effect soft of the overall earnings. A little bit more color on sort of timing of that, what your sort of lease-up period is? The conversions are starting to have to impact a little bit prudentially on average rents because we are substituting AL units for trail units. Any more color just from a kind of really estimating standpoint, if you can give us on some of that stuff?

[Larry Cohen:]

Sure, if you look at, as I mentioned we are just re-licensed in California for 24 units in Santa Barbara. We’ll start to see those units be occupied during the course of the year. If you look at our average just the live-in moving fro property, we’ve been averaging about 2.5 move-ins per month versus the live-in, so it’s a prior 10 month or so fuel rate to absorb that, if we fully afford and obviously we will have a vacancy factor there So, we’ll see it gradually throughout the year. The another license we have to proceed in Illinois later this year for another 20 units, again we probably see more of that impact in 2010 and then Veranda Club and Crown Point which are two conversions that will have more constructional related work will begin this year and those we probably wont see the impact until they are licensed in 2010, 45 units in Boca Raton, Florida again we would probably take around 15 to 20 months as I said the to kind of normal pace of feel on assisted living. The Crown Point conversion will probably be on 10 month fill or so. So I hope that gives you some color that most of the impact probably will be 2010 and obviously fully, hopefully impacted by 2011.

[Jerry Doctrow:]

Okay and then how may was Crown Point?

[Larry Cohen:]

About, 20 units

[Jerry Doctrow:]

The development again, you touched on this. I need some how we were thinking they were further off, so was the also was it Dayton that you just opened --?

[Larry Cohen:]

Yes, Dayton is opened and then the Perrysburg and Richmond Heights properties are opening April 1, we are working at a licenser right now and again those are joint ventures so as far as the impacts of the company, we have been earning a monthly fee for the lease off those buildings started about six months for opening. So they started in their income statements in the third quarter after those two properties in ’08 and that will convert to a management fee with a flower when they open. As then as far as the impact on our income statement there will be, we’re at 10% owner. So we are showing 10% of some of the start up losses. So we’ll start to see the impact on the equity lines in the second quarter because of the opening in April, and then we expected that will grow into a positive position as we move through out the year.

[Jerry Doctrow:]

And any sense as to just to -- for your own planning purpose what’s the equity loss that sort of starts and sort of rounds off wither per building or per--?

[Larry Cohen:]

Jerry, we actual see that, our equity income will remain positive we believe throughout 2009, but the amount that we have been earning will be close to a net breakeven in the second quarter, as we absorb those losses and then get back into a growth position in third and fourth quarters. So, we don’t actually see our equity income going negative that will basically be offsetting the income or earnings from our current joint ventures by the start up losses that we continue to development.

[Jerry Doctrow:]

You are not guaranteeing any cash flows or performance for those properties. You’re just sharing your 10%?

[Larry Cohen:]

We do have an operating deficit guarantee. There are quite a bit of reserves in the funding as well as additional contingencies in there. We don’t expect that will be used and then partnership agreements, we have a mechanism to be repaid on those, if we have to fund deposit those are mechanism to repay those amounts.

[Jerry Doctrow:]

And is it capped or you have just an open ended operating deposit guarantee beyond the reserves?

[Larry Cohen:]

It’s an operating deposit guarantee on deposits, on cash flow. Our model suggests that the cash flow position at the properties will breakeven somewhere in the 50% to 60% optimal range. What’s interesting is that we actually, looking at the contingencies that were in the models for construction cost, we actually came in under that total cost, so we have additional reserve that not having usual contingencies. We constantly monitor this, we fell that we have sufficient reserves for the lease up based on the pace we are seeing in Dayton and what we anticipate at the other two properties.

[Jerry Doctrow:]

It’s basically your Suburban, Cleveland right?

[Larry Cohen:]

That’s right. Richmond Heights, Suburban Cleveland and we are getting deposits. As I said we had open house two weeks ago with over 500 people many of which are of our four sources and there’s been a lot of enthusiasm and they are very, very positive response in the market.

[Jerry Doctrow:]

Okay and just a last thing then, I’ll jump up off. Larry, you had talked about some about the strategy they are going to be opportunities potentially in this market, you obviously relatively strong cash positions and stuff. Just a little more color perhaps on your thinking of strategy, may be you are seeing details now, your expect deals in the future. What kind of things would you do? Which you be as a manager, would you be a buyer, would you be working with REIT, a little bit better thinking of kind of how you see this kind of playing out.

[Larry Cohen:]

Sure. Our strategy is to really use this economic situation with our position to enhance cash flow, enhance our shareholder value, we find that a prudent allocation of capital for us has been to really focus on management contracts or the joint ventures where we invest typically 10% of the equity as well as having a share in that the performance of those properties, and their management fees and then having sent this through a promote. We don’t look at buying properties into the company. So we really do look at the management agreements in joint ventures. As far as the REITs, just based on the capital markets today and with more cost of capital might be, I think the REITs will be less active in the near term than some other investors that we have strong relationships with for joint ventures. I think we are also very well position, and this is a very strong growth aspect of the company is in coming in and managing properties for owners, for lenders, particularly when they have operators that are having difficulties, whether operationally, structurally, reputationally or financially.

[Jerry Doctrow:]

And are you sort of seeing deals yet, or is this kind of something on the horizon? Any more [inaudible] type property or anything you’ve got more preference on it?

[Larry Cohen:]

Yes, there are things in the market; typically we have company and salary agreements. So, it is probably inappropriate.

[Jerry Doctrow:]

You are obviously talking about broad type I’m not looking for.

[Larry Cohen:]

I mean broad type is a combination as we independent living, we see assisted living; we see a variety of products most of which are being shown to us by vendors that are looking to either sell the assets or bring in new management. We are hoping Jerry also we want to focus on the geographic concentrates that we have to build into our existing clusters.

[Operator:]

The next question comes from David Cohen - Athena Capital Management.

[David Cohen:]

I wanted to talk a little about cost controls and operating cost management. There is a comment in the press release about expenses due to separation costs in the quarter. Can you give us a sense for what the overall employment level at the company is right now versus whenever six months ago, a year ago?

[Ralph Beattie:]

We operate this company with about 4,000 employees with a home office base of a little over a 50 employees. So, we are very dispersed in terms of our geographic employee population, but we have about 4000 employees in total that we operate with about a 50% headquarter staff. As Larry said, in December, we announced that we were going to stop developments once these two new projects that will open in April are complete. And we reduced our development team from four employees to one. So we had three lay offs in the month of December along with the Chairman of the company, Jim Stroud resigning his executive position through retirement and staying on as Chairman of the Board. So, we actually have four fewer employees, now that we had a few months ago and we booked in the fourth quarter of 2008 a total separation cost of about $600,000, it’s actually $624,000 on my non- GAAP reconciliation schedule. So our headquarters team is down four from what it was a few months ago. We are presently operating with about 50 people and we anticipate that that’s a good base from which, hopefully we’ll add additional communities under management in 2009.

[Larry Cohen:]

And also, in these fields we have approximately 3800 employees across our communities. What we have done, a majority of those are hourly employees, our philosophy has been to; we have a methodology with spend down sheets, which are like impress accounts as well as staffing patterns that are tied to the occupancy. So every month, every building, every regional is reviewing at the 25th of a month, the billing for the following month and we actually then look at our staffing, our purchasing, our food cost specifically and we budget and we actually will adjust the actual cost to the actual physical occupancy, which is why we continue to; for example in the fourth quarter year-over-year only have a 1.1% increase in expenses on a same-store basis actually sequentially they were down. The other benefits that we have had in store was a significant group purchasing program that began in the middle of 2006. We have been saving about 10% on food, we also used that group purchasing for a variety of suppliers, about 200 suppliers that are serving our communities. We also with deregulation of electricity in Texas have contracts and our Texas properties are now looking at negotiating new contracts in other states. We have been very vigilant on our insurance cost and our savings there year-over-over continue to benefit the company. So we are looking now at ways using technology, the internet, new programs for corporate placement, waste management, communications, cable TV, further energy programs to continue to drive down the cost of our operations on a go-forward basis.

[David Cohen:]

That’s great. A number of my other portfolio companies when they have announced any sort of cut backs in terms of staffing have paired that with cut backs in executive compensation at least temporarily. I am wondering whether you have done that yet and if not whether you are contemplating doing that.

[Larry Cohen:]

The executive compensation of the company is typically controlled by contracts with the executives, the compensation committee constantly reviews and has surveys of other companies in our sector and looks at the competitiveness and comparability, one thing that we have always had as a compensation structure is performance based compensation with goals for the executives that are tied to the performance of the company and as well as individual and corporate goals, and I expect that that will continue, so that as we look at I know from my personal experience, my compensation in 2008 was lower than 2007. And again, it’s everything is tied to specific performance goals that tie into the business plan that is reviewed with the Board.

[David Cohen:]

Are they tied into the performance of the stock price?

[Larry Cohen:]

Yes, that’s component as well, yes. If you look at the proxy by the way David, there is a very good description in detail in our annual proxy that shows all the elements and how that performance based compensation is structured.

[David Cohen:]

Okay. And if I look back, I know there is an RSU grant in January, I didn’t get a chance to look back at previous years’ was that RSU grant similar to what it has been in previous years?

[Larry Cohen:]

Yes, actually, we had the previous grant matured January 2nd, and there were replacement grants made, the actual value of those grants were significantly less than it was before, because even though the share count was up somewhat, the share price was down so much that we are actually amortizing less stock based compensation going forward than we would have previously based upon this new grant.

[Operator:]

(Operator Instructions) And your next question comes from Charles Gillman - Boston Avenue Capital.

[Charles Gillman:]

Hi, this is Charles Gillman. I know that many of our associates are listening to these calls and speaking as a substantial shareholder. I want to thank the associates for their good work and for the sacrifices that they have made for the success of the company. And I do have to address a point to the senior management of the company and to the Board however, in that the country is in a very deep recession. At most of my portfolio companies, the senior management has accepted a substantial compensation reduction. In particular, I am very pleased that my portfolio companies, when the senior management takes a substantial cut in their cash compensation and in exchange for a substantial cut in cash compensation they’re awarded an options package or restricted stock package and I’m in favor of that, because that aligns the interest of senior management with the shareholders. I do have to say I am surprised and a little disappointed that in very, very simple terms what Capital Senior Living has done is Capital Senior Living has awarded a very generous equity package to the senior executive without compensating reduction in cash compensation. And speaking as a substantial shareholder, I just have to say that I know this decision was made by the compensation committee of the Board and I think many of the shareholders are disappointed in the decisions made by the compensation committee, disappointed that the compensation committee decided to make the substantial equity award without cutting the cash compensation.

[Larry Cohen:]

Charles, thank you very much for your comments. As I mentioned, the compensation committee looks at other companies in the peer group, has other surveys done for the committee by experts. As I said, personally I think for all the senior management compensation was lower in 2008 than in prior years. We feel very strongly for aligning the interest of the employees from the onsite executive directors of the senior management with their shareholders through our stock ramp programs and the stock ramp this year were sequenced because of the fact that we had restricted stock. They had fully invested and as well as its turn. And again I appreciate your comments; I do think that the compensation committee and management have tried to incentivize everyone in this company on a performance basis. We have a philosophy on the onsite staff up to the corporate office to compensate by performance. And we think that we align the interest of the shareholders of management and the company with the business objectives and strategies in the business plan through that compensation structure. And these are not bonuses; these are performance based rewards that are earned for performance.

[Charles Gillman:]

I have a another different point to make which is, I’ve spent a lot of time studying your industry and I for one am convinced that the only way to earn good shareholder returns in your industry is to have regional economy to scale. And in other words, if you have a few assisted living homes here and a few there, a city with a small number, another city with a small number, you just never ever, ever going to earn good returns for shareholders. I believe that the returns come from having regional concentration that is have a very small number of cities and each of those cities have a large number of units. And the economy to scale for having a large number of units in a few cities include purchasing economy to scale, it includes managerial economy to scale, marketing economy to scale. There are tremendous benefits to playing in a very small number of regions, but really dominating those regions. And it seems to me again as a substantial shareholder, shareholder interests are served by the Board quickly moving to rationalize the portfolio and trade in and out of facilities so that somehow or the other as quickly as possible, we are a company that is in a small number of cities, a small number of regions, we dominate those regions, we get those economies to scale and we stop trying to be some spread out. And I notice is an interesting time in your industry there is a lot of turmoil in your industry. I would invite dialog on that point from management and from the Board.

[Larry Cohen:]

So, thank you, Charles. As I mentioned, we do have concentrations in the South East, the Mid-West and the Central South West. We do have some properties. We have one in Florida, but the rest in South East or in the Carolinas’ for concentration. Charles, have you been to visit any of the Capital Senior Living properties?

[Todd Cohen:]

No, I have not.

[Larry Cohen:]

Well, I invite you to visit one of our buildings; I believe you are in Oklahoma. We have a building in Oklahoma City or you can go to neighboring states. We typically and I know you follow the business, if you look at a pure, assisted living company those properties tickle the average 60 units to 80 units, have very different staffing patterns based on the levels of required staffing under licensure and care. With 69% of our residents being independent living and with our average property probably averaging about 140 units for property, it’s more than double the size of your traditional assisted living property. And we are here looking for [boarding] more levels of care, for example; in Florida taking a 189 unit building having 45 units of assisted and 140 units of independent. We continue to perform at the highest margins of the Public companies both in an operating margin perspective as well as in EBITDA margin. So, I think your point is very interesting; it’s something we look at very closely. And in response to David’s question, I was trying to be very specific of the initiatives that we do have. We do have a group purchasing program that really benefits all of our properties and we get the benefit of a national company with regional focus. Also if we look at our strategy and our business plan, we are very focused on expanding our presence in those clusters to get further efficiencies, but I will tell you that every month the fifth highest performer in our portfolio with the fifth highest margin over 50% and fifth highest net operating income per unit, which is an important method to me, is the property in California. So we have regional oversight, the regional office in the buildings. They typically can commute within two hours to their region and many of them are actually much more closely aligned to the regions. So I think that it would be helpful and I invite you to visit our properties and also look at the staffing with independent living, we have about 0.23 full time equivalents per unit versus assisted living has 0.5 per unit and then higher loss of care, endorsing would be one to one. So I think that if you look at our business model with a large concentration of independent living, we do have third party home care agencies in the buildings paying us rent to provide additional support of services for residents. So we can accommodate a frailer independent senior. We are achieving and on a comparison basis, we continue to achieve margins that we always look to improve those numbers obviously and are looking at a variety of different technology and purchasing sources to bring those costs down even further, but just looking historically, we seem to continue to experience very high margins a lot of it has to do with our operating philosophy as well as the physical aspect of our buildings.

[Charles Gillman:]

Well, I again I appreciate how hard the associates are working and I’m grateful to the associates for that, I think that I will take your points under consideration. I do believe that even in the area of different levels of acuity that almost all of the experts on this industry, the sell side analysts, the buy side analysts, the industry analysts, the investment bankers in the industry. I believe that there is a consensus among all those players that despite every thing you said and all the valid points you made that over the long-term shareholders make the most money in high regional concentrations and I respect very much that you have a property sort of all by itself away from a regional concentration in California, that is profitable and I am grateful to the associates that are responsible for that, but I don’t believe an exception proved to the world. Again, I invite comments from other experts that may know the industry, but I would say that the long term future of this company from my perspective as a shareholder has to be as a company with very, very tight regional concentrations, because as profitable as you are with a diverse geographically dispersed portfolio, I believe the company can be much more profitable, and will be much more profitable when the portfolios heir down to a very, very tight geographic concentration. I think you provided a good phenomenon on this call; I want to hand this off to some other caller to make a different point.

[Larry Cohen:]

Okay, thank you Charles. And again, I just want to repeat what I said in my comments, in our division, in our strategy for the strategic plan for this company. I just want to reemphasize that we are looking to grow within our geographic clustering. So, I think you and I agree on a lot of the issues that you raised, I was just pointing out that we have a management structure that has proven efficiently, how we operate but I also invite you to go to our website and look at the map and again I’m looking here right now, I do think you’ll see quite a bit concentration presently in Texas where about we probably have 30% of our portfolio in the state of Texas. We have large concentrations in the Indiana, Ohio, Illinois, Mid-West. The large concentration is in the South East. So, I think that we agree and I think we all are getting some of the benefits of that clustering throughout a large majority of our portfolio.

[Operator:]

Our next question comes from Todd Cohen - MTC Advisors.

[Todd Cohen:]

I’ve not meet Charles and don’t know him, but I tend to agree with some of his comments regarding the geographical clustering and I do think that it’s hard to take you as seriously as I would like to in your efforts to rationalize your discussion regarding these regional assumptions, I mean business is business and I’m not sure that attempting to rationalize that does you a whole lot of good.

[Larry Cohen:]

Well, I am sorry, didn’t get the question.

[Todd Cohen:]

Well, I’m going to have a question. The other part and I’ll also confirm what the previous questioner has done is that I have not been on one conference call that I can recall in the last three months where the executives have not discussed extraordinary measures that need to be taken now in this environment as it relates to running their businesses differently. Almost all calls start by suggesting that there is nothing they can do about the environment. But what about, it’s what they can do within the four walls of running their businesses. And I’ve not really heard that here and I am surprised that there is not substantially larger focus on really getting these expenses down dramatically as it relates to the current run rate, I mean you have basically said in your remarks or maybe it was in response to a question that you expected comps to pretty much remain flat in this economy and I would say, if you’re able to do that and I’m hoping you are able to do that, that would wonderful, because this is an extraordinarily difficult environment. On the flip side, I really haven’t heard what I thought I was going to hear today, which is you are undergoing some significant process to get these expenses way, way down by the elimination of people or services that some of your existing staff will just have to either pick the reins up on. So that’s actually deeply concerning, because it makes it seem as though you guys have not really come to the realities of what’s going on out there in the world. And then just lastly, on the compensation side, I did go back and actually reviewed the proxy from May of 2008 and there is so much there in the way of different types of compensation, it is almost hard to understand, but you just indicated that these stock awards were fully vested as it.

[Larry Cohen:]

No, the new awards vest over three year terms.

[Todd Cohen:]

But you referenced the old awards having just been fully vested.

[Larry Cohen:]

Yes.

[Todd Cohen:]

Yes, so that means that that stock is now free and clear for you to do whatever you want with it? So, you own that stock now, free and clear. Correct?

[Larry Cohen:]

Yes, correct.

[Todd Cohen:]

Okay. So now you’ve been provided with more stock awards that seem to be pretty substantial. And I know the stock price is lower, but may be and I know that stock performance obviously is part of your compensation performance measurement. But did you realize your stock was down 70% in 2008, it ended the year. In December 31st ‘07, the stock was 993, it ended the year at 298 and it’s now 250. And so we’re having substantial value destroyed and you guys are getting what appear to be very substantial compensation in this environment and I know who is on the compensation committee, but I don’t know how long you been on the compensation committee and they just, these awards just seemed out of touch with reality given the destruction that’s occurred to your shareholders.

[Larry Cohen:]

Do you have a question, can I respond Todd.

[Todd Cohen:]

Yes, please.

[Larry Cohen:]

Okay. I assumed that was a question that you asked, okay. First of all, we can’t control the stock market and stock market in the last quarter when I think our stock was in that 8 to 9 range through about the third quarter of last year. And obviously, in October to December, the market experienced one of the most severe downturns ever. What the compensation committee, what management tends to do is to have a fair compensation structure. We look at our peer group, we look at other companies, we have consultants that come in through our peer advisors and we also believe that it is very helpful to have restricted stock that does not vest, which was approved by the shareholders in the proxy in 2007, we had a vote by our shareholders for our new plan that was adopted and we again are looking at ways to retain people. What interesting about healthcare business, this business may not be like other companies in your portfolio. We are still cash flow positive, we are making profits. And even though we expect to keep our occupancy flat, we actually are expecting and our compensation and rewards are based on improving revenues, EBITDAR and performance on a comparison basis year-over-year. So we’re running this business as a business that is profitable, that is cash flowing. As I mentioned, we are looking at ways to take advantage of our position in this industry with a very clean balance sheet and cash, strong institutional relationships and a strong track record and reputation so we can take advantage of some of the less fortunate operators of companies to grow in our market, because this is a very, very interesting time for certain operators with established platforms to really move in a very positive direction in this environment. So we think we’re well positioned, we are actively offering our buildings and I appreciate the comments about the wonderful staff we have onsite and all the support that is given regionally and corporately, but the company is also focused on growth and we want to make sure that we have the proper resources to provide the requisite diligence and underwriting to manage our buildings. Many of our buildings are licensed, we have requirements we have to fulfill both just to serve our residents as well as under the state regulatory requirements and if you look at our G&A costs and absolute dollars, it’s much lower than most of the companies. We have looked at other private companies on their G&A as well. As Ralph said, we are running about 5.5% of G&A revenues under management. We always look to do better, but we are not, we don’t believe we are a company in distress and we think it’s important, one of the comments I heard back from our onsite staff repeatedly, is the comments of our residents and saving members who are very comfortable living in a Capital Senior Living property because of the stability of this company. And when you look at other companies, public and private and some of the news reports out there about bankruptcies, investigations, other types of issues. We are benefiting because many of those operators are reasoning staff and residents who don’t have the stability that they find in Capital Senior Living. So, we think we are well positioned, we try to treat people fairly, we try to have a compensation structure, from again onsite to the corporate office, that is performance based that aligns the objectives of the company both organically as well as other growth drivers and only to reward people on performance.

[Todd Cohen:]

Really, I just think that you guys have done a respectable job of running of your properties. The point I am making, and then you also have to remember that all of your employees including yourselves are lucky to have jobs, right now. But the compensation plan you’ve established, makes you guys look a little bit out of touch with reality and if your stock was four, five or six or a higher price than where it is, things might be a little bit different, because you would have out performed the market, substantially. But between you and I, the markets knocked down 80% in the last 14 months, it’s down a lot. But not as much as your stock price and it just makes you guys look out of touch. I’ve spoken to many and have looked at many proxies and have spoken with many execs guys on compensation committees and I haven’t see many companies that pay a cash bonus on a quarterly basis based on the quarter, I mean, that seems awfully short sighted.

[Larry Cohen:]

Todd, again that’s contractual, I would like to say that if you look at the stock performance of our company, compared to the peer group, we actually outperformed the Senior Housing peer group, even though we were down, we don’t disagree 70%, and all these are taken into account, and as far as quarterly bonuses, those provisions are contractual with the executives, have been so since.

[Todd Cohen:]

Larry, because it is a contract, doesn’t make it appropriate. There is a lot of contracts out there that’s obviously have proven to be very inappropriate given what you’ve seen happen in many different interest fees across the Board, I’m just saying that as an owner of your stock that is fairly substantial, and I think you are hearing this from other people, you guys seem a bit out of touch with reality and I want you to do well, but not at the expense of shareholders and that’s really all I have to say.

[Operator:]

And there are no further questions at this time.

[Larry Cohen:]

Thank you everybody for participating in today’s earnings call. And, we look forward to having further conversations with you as we move through the year. Thank you very much. Have a good day.

[Operator:]

And that does conclude today’s teleconference. We would like thank everyone for their participation and wish everyone a great day.