Nov 2, 2012
Executives
Ross Roadman - SVP, IR Bill Sheriff - CEO Mark Ohlendorf - CFO Andy Smith - EVP, General Counsel & Secretary
Analysts
Ryan Daniels - William Blair & Company Darren Lehrich - Deutsche Bank Frank Morgan - RBC Capital Markets Daniel Bernstein - Stifel Nicolaus
Operator
Good morning my name is Marilyn and I will be your conference operator today. At time I would like to welcome everyone to the Brookdale Senior Living Third Quarter Earnings Conference Call.
(Operator Instructions). I would now like to turn the call over to Ross Roadman, Senior Vice President, Investor Relation.
Sir, you may begin your conference.
Ross Roadman
Thank you Marilyn and good morning everyone. I would like to welcome all of you to the third quarter of 2012 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; and Andy Smith, our Executive Vice President and General Counsel. As Marilyn mentioned, this call is being recorded.
A replay will be available through November 9 and the details of how to access that replay are in the earnings release. This call will also be available via the webcast on our website 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 cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in the earning release we issued yesterday, and in the reports we filed with the SEC from time-to-time. I direct you to Brookdale Senior Living's earning release for the full Safe Harbor statement.
With that, I would like to turn the call over to Bill Sheriff. Bill?
Bill Sheriff
Good morning and thanks to all for joining our call this morning. First let me begin by commenting on Hurricane Sandy.
We had 52 communities in the path of the storm that were affected, numerous communities lost power and for an extended period of time. Our asset management team did a great job of preparing for the storm including have stage backup generators for nearly every community in Sandy’s path.
11 communities did operate using onsite or backup generators for a long power outage. As of last night only three remained on generators.
We did evacuate one community, the Hallmark Battery Park it did not flood or did it ever lose power and by Tuesday evening (inaudible) were returning for families in those locations were we took them for safety. We did have storm damage in some of our communities by nothing major.
Now want to express our thanks to our associates who did a tremendous job of carrying progress and assuring their safety and comfort. I also wanted to express my thanks to our residents and their families for their corporation and understanding and finally I want to express our concern to all those affected by the storm and wishes for a rapid recovery.
Last night we announced our operating results for third quarter excluding certain items, our cash from facility operations CFFO for the quarter totaled $0.54 per share. We were pleased with our overall performance in the third quarter; in general we saw a continuation of trends that we have been reporting on in recent quarters and that is stable growth and occupancy improvement and entry fee sales and continue solid average revenue rate growth.
During the third quarter inspite of the containing global macroeconomic uncertainty some of domestic U.S. economic trends continue to show support that are signs of positive support for our industry fundamentals.
The increasing level existing home sales although still below about what communities consider healthy, increasing home prices, improving consumer sentiment and they continue to improving in fact in all contribute to the demand in the time of need, affordability and willingness to make a change. It remains a local market business and we are seeing some markets Florida for example rebounding faster than other like California.
As in the first half of the year we saw good improvement in the third quarter in our independent living occupancy. Our rental (inaudible) was solid, the entry fee independently sales again have record results.
We continue to strengthen our sales and marketing efforts to take full advantage of more favorable conditions. We want like most of any opportunity provided by building market as well as build our market share.
Our success is coming not only from this new lease but by diligently reengaging the prospects residing in our large leading data base and testing their willingness or need to become a resident. Cohabiting those relationships with prospects and their adult, children as always allows us to be a part of the decision making process when they determine they no longer want to or can’t delay the decision to move in.
These efforts are very true. We increase third quarter average occupancy by 60 basis points for consolidated portfolio over the prior year reflecting our year-over-year 70 basis point increase in two of our segments retirement centers and assisted living.
Sequentially our overall occupancy increased 30 basis points from the third quarter. Retirement centers were up 30 basis points, assisted living up 50 basis points and CCRC reflect skilled nursing centers.
Looking at the cross levels of care versus segments, independent living was up 20 basis points, assisted living up 40 basis points and Medicare up 30 basis points and skilled nursing down 30 basis points for the second quarter. The third quarter is typically a seasonally since this quarter for skilled nursing well this was a bit softer than normal.
You can see more activities in the skilled reporters and softer hospital volumes. With the number of our 551 consolidated communities they were at 95% or greater occupancy improved from 186 in June to 208 in September.
The big story for Q3 was the continuing improvement in our independent living entry fees (inaudible). Our 140 sales and 19.1 million of net entry fee cash flow were record highs spurred by the improving existing home sales in our local markets and extra-ordinary execution of our sales staff.
We are seeing a renewed interest by process in these communities. The primary driver is the confidence that if they can sell their home and that will happen in that reasonable price they can make the decision.
Once you keep in mind that the refunds are driven predominantly by current attrition of our 650 basis entry fee units only 10% have a refund associated with them. So as we eat in at the unsold inventory sales go up without proportionate increase in refunds.
We saw solid sales across the portfolio for Freedom Pointe in Florida now stands at 98% occupancy and is joined by two other entry fee entities that now have reached the mid-90s to present occupancy. Well we’re very focused on accelerating occupancy, we have also been able to maintain fairly consistent pricing growth.
Pricing remains competitive however in many of our markets the level of promotional activity remains about the same. During the quarter our same community average monthly revenue per unit excluding skilled nursing ISC increased 2.2% over the prior year.
Our largest challenge in the third quarter was our ancillary services business. While revenue grew by 10.7% our margin declined.
The revenue growth was primarily related to the continued rollout of ancillary services to the Horizon Bay communities which is going very well. We are now generating revenues entities representing 10200 former Horizon Bay natives for home health and almost 11,200 units for outpatient therapy.
Two items negatively affected our ancillary service margins, first the rate reductions that have occurred over the last several quarters, the increased volume is coming at lower rate. Second as I will speak to you later our September volume as labor productivity were affected my recent change enacted by Congress related to how CMS is processing provision of services to (inaudible) which has reached a specific amount.
Approximately doubled the current therapy cap. To say the least that process is gotten off to a very messy start.
Thanks again for our management and community teams for solid performance for quarter and with that let me ask Mark and Andy to provide additional comments about the quarter and our focus going forward.
Mark Ohlendorf
Thanks Bill. Let me begin by discussing the performance of our six operating segments.
First the retirement centers which showed an occupancy increase of 70 basis points since the third quarter of last year and 30 basis point sequentially over the second quarter of 2012 reached 89.1% occupancy. Average monthly revenue per unit increased by 2.8% over the prior year’s third quarter.
This segment is shown good progress since the beginning of last year, the assisted living segment also increased occupancy by 70 basis points versus last year’s third quarter and by 50 basis point sequentially over the second quarter of 2012 to also get 89.1% occupancy. Revenue per unit increased by 2.8%.
We were pleased with the performance of this segment, the rental CCRC segment composed of rental campuses as well at some skilled nursing communities that part of a market continuum. So occupancy decreased 50 basis points from prior year but remained flat sequentially from the second quarter of 2012.
The softness in this segment related solely to our skilled nursing centers. Occupancy and the entry fee CCRC segment which includes our 14 entry fee campuses was up 120 basis points from the third quarter of 2011 and was flat sequentially.
Of course given the skilled nursing concentration the comparative financial performance of the two CCRC segments was affected by the October 1, 2011 Medicare skilled nursing RUGS for reproductions and increased therapy costs. Our fifth segment IFC is our ancillary services business.
IFC’s revenue grew by 10.7% versus last year’s third quarter due to an increase in service volume but IFCs operating income dropped by 17.2% due in large parts of the Medicare rate decreases increased labor cost, transitional cost resulting from our business off to centralization process and incrementally higher sales and marketing cost. As Bill mentioned earlier we were affected by the outpatient therapy exception process change and estimate that the operating income was affected by approximately $500,000 in the third quarter.
Our final segment management services saw occupancy increased 30 basis point sequentially from the second quarter. We added one new management contracts or managed portfolio during the quarter.
Looking at the same community data beginning with senior housing, for the quarter ended September 30, 2012 compared to the quarter ended September 30, 2011. Our senior housing same communities produced a 2% increase in revenue due to a 1.3% increase in revenue per unit and a 60 basis point improvement in occupancy.
Senior housing same community expenses grew by 3.2% and NOI was essentially flat between the third quarters. Included in these expenses were several items that we like to point out.
First we had $1.9 million of group medical insurance program cost increases over the third quarter of 2011 because of an unusual number of large claims this year. Second we incurred a $600,000 reincrease in sales commissions and bonuses related to the gross entry fee sale cash flow of nearly $23 million in the quarter resulting in the net entry fee cash flow of $19.1 million.
While these costs show us its current expense, the benefit of the related entry fee cash flow is minimally reflected in revenue under the GAAP amortization conventions. Excluding the group medical insurance cost increase and the increased sales commissions in the entry fee business, same store expenses would have increased by 2.5% rather than the reported 3.2%.
Bottom-line is that expense growth continues to largely parallel revenue growth. Comparative to the senior housing same community data was also negatively impacted by RUGS-IV changes in Medicare and skilled nursing rates and related expenses October 1, 2011.
This is the last quarter we will have to point this out but when we exclude the RUGS-IV SNF reimbursement reductions and related expense changes from the senior housing same-store comps. Revenue increased 3% with revenue per unit growing by 2.2%, expenses growing by 3% and operating income growing by 2.8%.
Excluding non-cash stock based compensation expense and integration transaction related in EMR roll out cost, general and administrative expenses for the quarter was approximately 32.5 million which was 4.3% as a percentage of total revenue under management compared to 28 million for the third quarter of 2011 also 4.3% as a percentage of total revenue under management. Much of the increase in absolute overhead dollars is of course related to the addition of the Horizon Bay community’s to support sales operations.
Not included in the G&A that I just discussed nor in our adjusted CFFO calculation are the integration, transaction and EMR roll out cost this quarter to total $4.6 million. Remember that portion of those costs related to the integration of Horizon Bay including some cost of rolling out ISC and the remainder relates primarily to the ongoing effort of implementing electronic medical records, there is several areas of our business.
As we have described we expect to incur $4 million to $5 million of these costs again in the fourth quarter. I would now like to turn the call over to Andy Smith for some comments regarding capital deployment and capital structure.
Andy Smith
Thanks Mark. Consisting with our continuing improvement and operating results our balance sheet continues to be in a strong position.
As we have discussed previously our 2013 debt maturities without contractual extension rights totaled approximately $300 million. We’re actively engaged with the lenders on refinancing these loans and have a plan in place to affect a series of refinancing over the next year.
We expect to begin to execute on that plan before they end up 2012. Looking at capital deployment we continue to prioritize those areas with a highest return, as such, during the quarter we invested more than 47 million in to our existing portfolio.
Our spending in Q3 for maintenance CapEx which we include in our CFFO calculation was $11.5 million. We also spent $27.6 million on EBITDA enhancing CapEx and major projects during the last quarter.
These projects which are less expensive in our Program Max projects are integral to our strategy of building occupancy. To that end we have increased spending on upgrades to empowerments and common area renovations.
We spent $7.9 million of net cash on Program Max projects during the quarter. Historically Program Max projects have shown the highest returns among our capital deployment options.
Program Max encompasses expansions, redevelopment and repositioning of our current communities. We completed 13 Program Max projects in 2011 and 2012 and these projects are yielding a returns in excess of 15%.
The 13 projects were a mix of repositioning’s, unit conversions and expansions resulting in 56 net new units. The product changes from these projects reflect a reflection a reduction of 83 independent living units and 26 assisted living units with the addition of 165 memory care units.
We currently have 19 additional Program Max projects that have been internally approved, 14 of these are under construction which will add 400 new units primarily in memory care over roughly to next year with project cost of $121 million requiring Brookdale equity of approximately $55 million. We also continue to work with lessors and third party owners to commence additional Program Max projects.
We spent $6.8 million in the third quarter on corporate CapEx primarily on our systems and ISC. As to acquisitions we will continue to be very disciplined.
We have reflected for the first time in our supplemental data package the general financial characteristics of communities where we have bargained purchase options to acquire leased assets. We have given notice of our intent to exercise purchase options on two sets of currently leased assets totaling 11 communities.
We expect to complete those transactions near the end of this year. We expect the purchase price for those assets to be in the range of 150 to 160 million requiring Brookdale equity of $25 million to $30 million.
Buying back these assets on favorable terms will be accretive to us and further develop our owned asset base. Finally as we have said before we are constantly reviewing our capital structure strategies.
This analysis remains a high priority of our management team and our board and we are spending a significant amount of time, energy and money to make sure that we are maximizing value for all of our shareholders. I will now turn it back to Bill for closing comments.
Bill Sheriff
With the improvements we have seen so far this year, we remain encouraged about, for the remainder of the year and into 2013. We continue to focus on our core operations by executing our plan to grow occupancy in this call and deliver strong operating cash flow to support inter-growth.
We remain encouraged by what we are seeing in our markets. The next quarter will not be without it's a special and (inaudible) well still a very competitive pricing environment pricing environment in general.
We expect to see continued momentum in occupancy growth. We also have strong expectations for entry fee independent living unit sales, the entry fee sales process like many big ticket item purchases takes extended periods of time and will be somewhat susceptible for big macroeconomic traumas and therefore a little difficult to forecast.
Also keep in mind that we now have three communities with less available inventory. As Mark described we did $1.9 million hit to our medical dentist cost this quarter due to high cost cases and higher utilization and quite honestly the peers that we will see a similar gift in the fourth quarter.
Further we expect our Medicare operation therapy business to remain under some degree of pressure, outpatient therapy only contributes $5 million in operating income for quarter. It is an element of our growth strategy that will be disrupted in the short term as I mentioned earlier.
We expect our ISC operating income to be sequentially flat in the fourth quarter as volume increase in home health are offset by lower labor product in outpatient therapy as we work to adjust our cost structure. Congress United new rule all covered first requiring manual claim review of outpatient claims at the Medicare beneficiary uses more than a prescribed amount, now it has approximately doubled the current therapy perhaps the therapy services and a given calendar year.
See this also issue guidance regarding the process for (inaudible) exceptions to perform services to treasuries (ph) when they speed this annual utilization level. This entire plan review and exception process is new and frankly very messy.
We have always seen volumes decrease and resulting therapist productive decline as seniors defer services in basic confusing messages from CMS. We have also experienced intermediaries initially bouncing back lanes as they try to adjust with the new process.
It will take some time for the industry, intermediaries and beneficiary to adjust to this new processes and at the same time last week class action lawsuit settlement (inaudible) appears to clarify the standard of a medical necessity the one of requiring patient improvement along the maintaining the patient’s condition or preventing deterioration. This is potentially very significant and we believe that correct things (ph) do.
All of our Medicare related services, skilled rehab, outpatient therapy and home health are on the right side of the public policy in the benefit to the patient are a medical necessity and are the most cost effective in the interest of the beneficiary. It can be frustrating to see senior struggle with medical issues and to know it firsthand that are providing these services and not be able to hopefully provide them.
It remains unclear how this change finding medical necessity will become operational that has the only senior housing operating with a significant platform for providing these services this could become a very positive development for us and our residents. Overall we are encouraged by the improvements in the business regarding selected expenses and outpatient therapy.
While we do not give specific quarterly guidance we remain comfortable with our previous Annual CFFO guidance range with our current expectations somewhere in the middle of the range.
?
Operator
(Operator Instructions). And our next question comes from the line of Ryan Daniels.
Ryan Daniels - William Blair & Company
I guess the first question I had is on the pricing outlook, you mentioned that it remains fairly competitive but on the other hand I think you said you have over 200 facilities now approaching and are over 95% occupancy which I would assume will give you a little bit more pricing power especially for street rents and those facility. So without giving ’13 guidance can you maybe just talk a little bit about what your overall expectations for pricing might look like or use incentives might look like over the coming three or four quarters.
Mark Ohlendorf
I think if you looked at, if you looked back over the last several quarters and are core tried to pay same store rate results. We have seen a slight acceleration in the same store rate growth, now we are in low to mid-twos.
We are continuing our planning process for next year but I think our initial sense is we may well see some rate growth that moves up a little bit from where we are at. Again we continue to be in an environment right now economically where cost inflation is relatively low.
So the absolute level that our regrowth will get to will be lower than what you would have seen five years ago or six years ago. But I think you are right, I think our sense is we will continue to make some credit, we will progress on rate growth over the next year.
Ryan Daniels - William Blair & Company
Okay that’s helpful color and then maybe one on the SNF, I understand there has clearly been a lot of weakness in hospitals and that’s probably spilling down to you and two things I guess lot of noise on the Medicare racks looking at how they treat cases, whether it's impatient or observational on whether you qualify for SNF coverage upon discharge. So I’m curious if that one is having an impact and then number two can you maybe talk about some of the initiatives you’re putting in place, they have been able to show kind of better quality more care continuation, lower readmission and things like that to make you a preferred provider that at least over the next several years I think it's going to be of increasing importance and maybe a little color on your marketing initiative there.
Bill Sheriff
We are making significant progress in our building a strategic relationships, being able to demonstrate to hospital and healthcare systems of our ability to significantly reduce the hospital readmissions and start providing them quality measures those factors are certainly gaining some strength and position on our markets and it's going to be critical as old markets can fix for more market share and that is a strong element in that and I think we are continue to be well positioned and we are to compete effectively in that arena. The issue of hospital holds versus readmission clearly is a factor that has affected the third quarter is to be at least seen how much that practice grows, I think even saw some of the hospitals reporting some actual increase and elements and actually giving some data around that.
We are again third quarter is seasonally a softer quarter. We are seeing adjustments in the fourth quarter again it will be very competitive and organizations that are well focused on and been deliberate the quality outcomes and collaborate effectively with the hospital systems rule will be the big winners and we feel like we are strategies we are focused on are going search well in that regard.
Ryan Daniels - William Blair & Company
Okay and then maybe final one, and then I will hop off, just on all the noise going on with the therapy and the new Medicare regs and reimbursements. What do you guys do in the near term to get a better handle on the margins given these uncertainties and the changes in labor productivity bouncing that against the loss that was settled in the potential for that to open up a lot more cases, is it just kind of hold tight for now and see how everything pans or are you making some adjustments there?
Thanks.
Bill Sheriff
First of all we certainly are making adjustments in the communications and helping clarify matters been more doing everything we can to be more effectively and timely in the process of the reduce and extension request. There is just a lot of confusion that they are up to in terms of the form of the scene as the letter went out to some beneficiaries and I think again good communications with that beneficiaries that are residents with their families, with the doctors certainly will help you correct, solve that but it will be a wait and see.
It's unclear as to exactly how that new lawsuit or the settlement that’s proposed and when expected at the court exactly how that becomes operational and we wouldn’t think that it would be the saying it would particularly assist us this fourth quarter but it's hard to not to believe that it will be a definite benefit as we get back in the New Year.
Operator
Your next question comes from the line of Darren Lehrich.
Darren Lehrich - Deutsche Bank
So we have seen some pretty good sequential gains in occupancy over the course of this year, I guess I’m just wondering how you guys are thinking about that trend continuing in the fourth quarter just how much visibility do you have on you know move-ins and some of the dynamics that you’re seeing in your markets on that front.
Bill Sheriff
Absolutely in a momentum continuing in October and the basic fundamentals, the consumer confidence from home resale’s, those elements continue to be appear to be effective. We also think we are continuing to improve our in fact some lead generation and conversations and in that process so we at this point as in our prepared remarks we expect continued momentum in order.
Darren Lehrich - Deutsche Bank
Okay that’s helpful and then you just looking at the supplemental it looks like the proceeds from my choice program and your entry fees is pretty stable with what we saw in the first half. So I guess just want to confirm the entry fee numbers are really more about market demand versus changing in your pricing model, just the right way to new looking at tis, is there any changes that you made to drive that type of results.
Bill Sheriff
Absolutely it's tied to the fact of consumers’ confidence they can sell their homes and the fact that and there is all but as putting them on the market they are selling and early quickly that is the big factor. The other factors we have a very large data base of people are very much identified this as an option if they want to take themselves out at some point in time there is a lot of coming out of that existing data basis whereas all of our efforts to add additional prospects to that and so the whole level of activity there has improved and it's pretty well across all of our markets.
Darren Lehrich - Deutsche Bank
It's a good results there on the expense side I just wanted to ask you know you obviously have been talking about your health insurance claims throughout the whole year, is there anything differently that you’re thinking about in terms of the benefit design for next year and maybe just some commentary on how you think you might be able to you know get a better on the growth rate of those expenses over the course of the next year or so.
Bill Sheriff
Well sure, well obviously designing group, medical plans today is very different than it was five years ago or 10 years ago because we are right in the middle of the biggest reform in the way our health insurance system works that we have ever seen. So there is some fairly fundamental changes occurring.
Now we started in a process here at Brookdale three or four years ago emphasizing wellness and preventive services in a very significant way in our plans. So as we look at the absolute level of unit cost inflation in our medical plans for the last number of years, we have actually had a very, very good experience.
Where you might have seen general market inflation for healthcare cost and health insurance up in the high single digits 7% - 9%. We were pretty consistently running 2% or 3% under those kinds of levels so in an accumulative basis here over a number of years our claims has been very cost effective.
We are experiencing a year where we seem to be incurring and not a usual number of relative counts of claims now dozens and dozens of those but enough of them but it doesn’t impact the cost. So, our plan is as we go forward next year are really more of the same that we have been up to with a nice words having our plans appropriately designed and positioned for 2014 where we would see potentially very, very significant change and the insurance market overall.
Operator
Your next question comes from the line of Frank Morgan.
Frank Morgan - RBC Capital Markets
I think you mentioned Florida in the initial comments but I’m just hopeful that you could provide a little geographic update I mean where are you seeing particularly there is a strength or be it at occupancy side or in markets where perhaps it's not as competitive on the pricing or the incentive side.
Bill Sheriff
Certainly we have seen some gaining and strengthening in Florida and it's across markets in Florida but mostly markets were in Florida we have seen improvement. We still have a little bit of weakness in the North, Eastern or Central areas.
We still have little bit of weakness in California. Most of our other markets Chicago has softened, it looks like we’re beginning to getting some traction there but then in some markets of course it's within what particular suburb of (inaudible) city, we see some variation but overall we are encouraged to seeing some fundamental improvements in fundamental in most ever market we are in.
There is I guess a few pockets in Indiana that might be an exception but this is fairly possibly broad in terms of the improvements we are seeing.
Frank Morgan - RBC Capital Markets
And I guess with kind of based on past experience where the occupancy improvement transit that you’re seeing. You’re seeing I guess a little bit of movement in the rate growth but based on history is there a sort of time lag that you have seen in the past to say after x-number of quarters if occupancies continue up that we may start to see a little bit of improvement in the rate growth, is there a role above that you’re seeing based on history?
Bill Sheriff
Well we have got several factors to count into the equation. The lower inflation rate which certainly has enough backbone existing resident increases.
We have gone through a period of time where we did get into some negative mark to market elements that it takes a lot going through attrition, do you get that mark to market adjustment and it will probably into this year before we start seeing the positive mark to market adjustment having lots of having any effect and it is a matter of getting your occupancies up into those 90% areas to start gaining on it, so it's you mix all those factors together I think we are going to see what Mark described slow but still some improvement the overall average rates.
Frank Morgan - RBC Capital Markets
Okay and just a question on the resale activity, is there any belief that either the kind of the ration of sales to refunds would improve, I think you made a comment about a lot of those units where.
Bill Sheriff
The refunds are predominantly driven by your current attrition, current contracts people who – their refunds are triggered on that event more than the reset, we have only about 10% of the unsold inventory that is contingent upon the resale for those refunds and we have suffered the fact that we have to get refunds without sales over the past years, three, four years and we are now into that back on reverse side of that where we will be effecting sales where it doesn’t specifically drive off an additional refund. So you will see the refund level stay about where they are up a little bit as we sell some of those and we certainly make sure we sell those as well as ones without refunds but again it's only 10% of the unsold inventory that has refund attachments associated with them.
Frank Morgan - RBC Capital Markets
Last one more and then hop off, you made a comment about less inventory at one point was that in your prepared remarks, did that relate to inventory of…
Bill Sheriff
From this three communities that are now into the mind-90s or above and those are the stronger communities and they have contributed nicely in the second, third quarter as they have less inventory there, there is more sales have to come out of the other communities and we are seeing improvement in the other areas. It's just as we go along I think we will maintain a fair momentum here but at some point it will be a factor where are those vacant units concentrated but that’s out fairly so.
So as far trying to project an increasing amount of sales above what we’re here you have got some effect of what the inventory mix is.
Frank Morgan - RBC Capital Markets
Okay but I guess just kind of summarize up what I’m hearing from you, you know better occupancies, rate growth okay, generally good resale activity going forward and on the ancillary side maybe some pluses and minuses but that business is you know will stabilize over the next several quarters and still be important part of your growth story long term. Is there anything else I’m missing?
Bill Sheriff
I think you got it.
Operator
Your next question comes from the line of (inaudible).
Unidentified Analyst
Just wanted to ask a bit about that make sure I’m looking at things right, if I’m looking at page six of the supplemental these segment operating income that you give for the leased properties and the different purchase options that’s the NOI before lease expense is that right?
Mark Ohlendorf
That’s right these are NOI gross margin number correct.
Unidentified Analyst
Okay and then if I think you said earlier that you had about 11 communities that at the end of the year on the I think they were on the bargain purchase option, probably that you were going to exercise a purchase option, did I hear that right, that it was a 150 million to 160 million is the sort of dollar figure with 25 million to 30 million being your equity piece?
Mark Ohlendorf
I think that’s right, yes.
Unidentified Analyst
So that means then is the rest of that the 125 million to 130 million would be funded by debt?
Mark Ohlendorf
Yes correct.
Unidentified Analyst
Is it possible to get the LTV on it that?
Mark Ohlendorf
Probably not as we stay here but as a general rule when we are doing secured financings, we’re financing at 60% to 70%.
Bill Sheriff
And this will be consistent with that.
Unidentified Analyst
I’m just trying to get at, there is the overall properties are valued higher on an appraisal basis than you know the amount that you guys are paying to buy out the lease stream.
Mark Ohlendorf
That’s right and obviously when we refer to something as a bargain purchase option that’s a little bit of a term of -- standpoint but they generally suggest that our purchase option is at a price that’s lower than you would consider it to be the market value.
Unidentified Analyst
Okay and then just one other one that transaction you guys are going to do it, is it possible to get the lease expense associated with that? Those communities?
Mark Ohlendorf
It is possible I’m not prepared to disclose it but I think as we think about this. By and large we are going to have this is going to very hard to back into a number.
By and large we are going to have the adoptions on leases that have been around for some period of time, so the lease rates will have inflated up to a some level that’s probably I don’t even know what they repeat, 10%, 11% or 12%. I don’t have the exact math in front of me but if we do that in order of magnitude I would expect.
Unidentified Analyst
Sorry what was the 10% to 11%?
Mark Ohlendorf
Going in lease rates on the properties were probably 8%, 8.5% somewhere in that range they would have inflated overtime. So I’m guessing that those effective lease rates are not over 10% to 11%.
Unidentified Analyst
Just one another question on the lease properties with the purchase options. Is it fair to think about these different buckets having similar you know coverage meaning that the lease, if we were sort of divide up your overall lease expense into the these different you know lease to property buckets that division should be similar to the NOI breakdown between those segments at this point.
Mark Ohlendorf
I would say it is not the case that would be true. As a general rule yours is familiar with the evaluation at accounting and the accounting issues around leases and purchase options as I’m probably but as a general rule a lease that your see that has no purchase option at all is probably one that’s been entered into more recently than one that would have had some kind of purchase option.
So even if it's a secure market value option.
Operator
Your final question comes from the line of Daniel Bernstein.
Daniel Bernstein - Stifel Nicolaus
I just wanted to go a little bit further into the lease buyouts in terms of you know how are you looking at that in terms of an overall strategy of ownership. I mean you know not just from the bargain purchase option bucket will you consider buying out additional leases from the fair market value purchase option bucket and even properties that don’t have purchase options, you where it looks like the occupancy is actually lower than your overall occupancy might have some upside.
Bill Sheriff
Yes sure as a general we would prefer to buy our leased properties back and there are a variety of reasons for that, we would prefer to own our assets where we can and so the answer to your question is yes we would on the fair market value options we would like, we would plan on exercising those, if for no other reason as Mark just mentioned the lease rate on those are going to be in the 10% or 12% range and we can finance the acquisition at a much lower rate. So we have every intention of exercising those options as they ripen and we are constantly in dialogue with the our various landlords where we can to actually acquire our assets where for whatever reason they may wish to exit their investment in them and we would like to buy them back even if we don’t have an option.
Daniel Bernstein - Stifel Nicolaus
So you have a (inaudible) of the 18 with bargain purchase options you’re acquiring. You have the other seven, when are those other bargain purchase options exercisable?
Bill Sheriff
Further down the road I would say over the next several years.
Daniel Bernstein - Stifel Nicolaus
Okay and same goes for the fair market ones, is there any say in the next 12 or 24 months you’re going to be able to exercise?
Bill Sheriff
We have a couple of bargain purchase options that we can exercise beginning a roughly a year from now, and on our fair market value options they are going to be out as a general rule a little bit longer than that. One thing I should also add Daniel is that another reason that we would like to buy these assets back is it facilitates our Program Max opportunities on those assets.
Daniel Bernstein - Stifel Nicolaus
Even landlords have been a little bit persistent fee actually changed their facilities in some way, is that the issue there.
Bill Sheriff
I wouldn’t say that, I think they all actually are very enthusiastic and recognize the opportunities that come from Program Max and but it gives us more flexibility if we actually own the asset outright but I don’t want at all leave you with the impression that our landlords have been, they are very enthusiastic about investing money for Program Max type alternatives.
Daniel Bernstein - Stifel Nicolaus
And the other question I have and I came on this call a smidge late so I don’t know if you address the CEO search and the timing of that, is that still three to six months or is there anything new that you may have mentioned before, I apologize again if you have spoken about it at all.
Bill Sheriff
We shared in our second quarter call, our last quarter. There is a fine process to that have been worked on overtime and that process is preceding the board is focused on that and that is preceding.
We are changed there and nothing should be interpreted by the issues of timeframes here.
Daniel Bernstein - Stifel Nicolaus
And again I apologize for this question as well if it was already addressed but the 11 million of maintenance CapEx and I believe CapEx overall has kind of bumped up and so the $11 million maintenance CapEx number is that something will be kind of a run-rate for the fourth quarter and how are you thinking about maintenance CapEx overall going forward. Is that going to be the higher level than we saw in the past couple of years?
Bill Sheriff
Well several things, I think yes about six questions the ones there. There is a slight amount of seasonality even to maintenance CapEx, so you would expect the third quarter to be the highest quarter of the year as a general rule because we are doing more work outside of the communities.
Probably a reasonably fair run-rate to be thinking about for the fourth quarter, fourth quarter could be just be a little bit lower than that but you know it could spike an order of magnitude. Maintenance CapEx overtime like any operating expense does go up right, I mean the cost of paint, carpet and so forth increase is overtime so you would expect to see some inflationary growth at maintenance CapEx over time.
You would also see a little over inflation growth because the assets are getting a little bit older but that’s not going to be a gigantic change in the trend. One of the reasons the CapEx is moving up a little bit beyond what I just said is the fact that our occupancy is getting higher and we’re making more units ready for occupancy and to be shown to prospective residence.
So that also we tend to push those numbers up modestly year-to-year as we get more units in service off of the smaller inventory.
Daniel Bernstein - Stifel Nicolaus
But you haven’t changed your expertise for full year maintenance CapEx and relative to your guidance?
Bill Sheriff
No.
Operator
Thank you. I would now like to turn the call back over to Ross Roadman.
Ross Roadman
With that we would like to thank you for your participation, management will be around all day for follow-up questions. With that thank you very much.
Operator
Thank you for your participation. This does conclude today’s conference call.
You may now disconnect.