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Article Excerpt
OPERATOR: Good morning, my name is Nicole and I will be your conference operator today. At this time I would like to welcome everyone to the Brookdale Senior Living fourth quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)
Mr. Roadman, you may begin your conference.
ROSS ROADMAN, SVP IR, BROOKDALE SENIOR LIVING INC.: Thank you, Nicole. Good morning, everyone. We appreciate you allowing us to start bright and early this morning. I want to welcome you to the fourth quarter and full year earnings call for Brookdale Senior Living. Joining us today are Bill Sheriff, our Chief Executive Officer, and Mark Ohlendorf, our Co-President and Chief Financial Officer. Also present is Andy Smith, our Executive Vice President and General Counsel. Before I turn the call over to Bill, as Nicole mentioned, this call is being recorded. A replay will be available through March 9th by calling 1-800-642-1687 within the US or 706-645-9291 outside the US and referencing the access code 87021756. This call will also be available via webcast on our website, www.brookdaleliving.com for three months following the call.
I would also like to point out that all statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the Federal Securities laws. Actual results may differ materially from the estimates or expectations expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earnings release we issued last night and in the reports we file with the SEC from time to time. I direct you to Brookdale Senior Living's earnings release for the full Safe Harbor statement. And now I would like to turn the call over to Bill Sheriff. Bill?
BILL SHERIFF, CEO, BROOKDALE SENIOR LIVING INC.: Thank you, Ross. I would like to extend my welcome and thank you for joining us this morning. On today's call, we will discuss the results and accomplishments of 2008, the results of the fourth quarter, recent actions we have taken to address virtually all of our near-term debt maturities, including the renewal of our credit line, and finally an overview of our current sense of 2009. We are in the midst of an extremely difficult economic environment that certainly presents challenges, but also offers multiple opportunities. Despite the environment, our occupancy has generally held. Occupancy hit a low point in June at just under 89% and ended the year at 89.5%. In fact, over the last two years, occupancy has moved in a range of only 2%. At the same time, we have posted 5% to 6% increases in revenue per unit.
The senior living business continues to have a strong underlying fundamental serving real needs of its customers, which mitigates many challenges created by the general economic environment today. Over the last three years, I believe we have built the best platform in the industry. Today we have the organization, systems and a diverse product offering that creates unique advantages that allow us to capitalize on revenues and expense opportunities even in this time. Our goal in 2009 is to continue to improve our position and demonstrate the very attractive cash flow generation power of this business. Turning to the operating results, we are very pleased with the results of the fourth quarter. It indicated some very positive elements in spite of the challenging environment. Our CFFO was $0.35 per share, a good increase versus Q3's $0.30. The improvement came primarily through lower cost and increased contribution from ancillary services, as well as higher entry fee sales.
Average occupancy held flat with the third quarter and we achieved revenue per unit growth of 5.2% versus Q4 of 2007. Our ancillary services continue to excel and ancillary operating income grew 59% during the fourth quarter versus the fourth quarter of 2007. And our overall operating margin improved to 33.5% from Q3's 32.4%, reflecting the initial effects of the comprehensive cost initiatives we undertook in Q4. We will discuss these cost initiatives in more detail later. With regard to our G&A, excluding noncash compensation expense, it decreased by almost $500,000 from last quarter. Our ancillary services initiatives continue to be a very bright spot for us. These services are natural, health care-driven service needs of our residents and we continue to expand our platform both in terms of the number of communities being served, as well as capture rate of these services by existing residents.
We have seen the power of providing a second service, home health, on top of the therapy infrastructure, hence materially increasing profitability while further supporting occupancy. Being third-party reimbursed and because we are serving our own residents, this part of our business is less impacted by the economy and we continue to see strong growth from the maturation of existing clinics. As the need for these supportive services continue to grow in the market, it is a key differentiator for us, especially for higher acuity prospects. During 2008 we also made very significant progress on our platform development. We instituted a new organizational structure that changed to a market orientation from a product oriented focus. We expanded the depth of product knowledge of our field organization, while reducing management layers, giving broader scopes of responsibility.
I just can't say enough about how focused the organization has become and how ready it is to tackle the challenges of 2009. Supporting this new organization was the completion of the Companywide integration of most key financial systems. Our improved sales and marketing execution was very evident during the latter half of last year, gaining back occupancy that we lost in the early part of the year through market responsive programs. Results of all of this was that for the year our facility operating income was virtually flat about 2007, a very good performance given the year's adverse environment. Finally on the balance sheet front, we ended the year with only the line of credit as our primary 2009 maturity issue. We are extremely pleased that we have now extended the line of credit. In these challenging capital markets, completing a transaction like this is truly reflective of the strong fundamentals that underlie our business.
I believe this transaction, along with the expected exercise of our contractual extension options on certain of our mortgage debt, will address virtually all of our debt maturities this year. Consistent with what we had mentioned on our last earnings call, we decided to suspend our dividend with the intention of using that cash flow to deleverage. I will now turn call over to Mark to provide more detail on the financial results of the quarter and the year before we discuss 2009.
MARK OHLENDORF, CO-PRESIDENT & CFO, BROOKDALE SENIOR LIVING INC.: Thanks, Bill. Let me start by looking at some highlights of our financial performance for the quarter. Recurring cash from facility operations, or CFFO, for the quarter was $0.35 a share, excluding integration costs and hurricane-related expenses of approximately $0.03 a share. In the fourth quarter, we recorded $0.01 per share of hurricane related expenses and incurred $0.02 per share of integration and severance related costs. Average occupancy held flat with the third quarter and was down approximately 90 basis points from Q4 '07. While the environment is making our sales efforts more challenging, our execution continues to improve with a higher closing ratio of the quality leads we are producing. All of our sales and marketing initiatives, like M3, the enhanced website, and expanded arrangements with referral sources were affected. We continue to use targeted incentives, though...
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