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Emeritus Corporation (ESC)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Brad Cohen - Investor Relation

Daniel R. Baty - Co-Founder, Chairman and Co-Chief Executive Officer

Raymond R. Brandstrom - Co-Founder

Granger Cobb - Co-Chief Executive Officer and President

Analysts

Donald Hooker - UBS

Dan Bernstein - Stifel Nicolaus

Frank Morgan - Jefferies & Company

Stefan Mykytiuk - Pike Place Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Emeritus Corporation First Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and answer-session. Instructions will be provided at that time for you to queue up for a question. I would like to remind everyone that today's conference is being recorded.

Now, I would like to turn the conference over to Mr. Brad Cohen of ICR. Please go ahead, sir.

Brad Cohen – Investor Relation

Thank you very much, good afternoon. And thank you for joining us for the Emeritus Corporation first quarter 2008 conference call. On the call with me today is Dan Baty, Chairman and Co-CEO of Emeritus, Granger Cobb, President and Co-CEO of Emeritus and Chief Financial Officer, Ray Brandstrom.

Before we begin today, I would like to remind everyone on the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those suggested in any forward-looking statements, we will refer you to Emeritus’ Form 10-K for fiscal year ended December 31st, 2007 filed with the SEC.

With that, it is my pleasure to turn the call over to Dan Baty. Dan, please go ahead.

Daniel R. Baty - Chairman and Co-Chief Executive Officer

Thank you. This first quarter represents months 5, 6 and 7 since the acquisition of Summerville. This was a big event in Emeritus history, increasing our capacity by almost 50%. It also brought about, and with it, almost a complete change in the operating management team. The amazing thing is that even during this transition period almost all of the key elements have moved forward positively. Granger and his people are a big asset to our operations. In the area where I principally focus, the balance sheet and growth, over the last year and in the first quarter, we continued to increase the percent of our fee-owned properties.

In addition, we've been improving an already solid cash position. Even in this difficult market, we continue to be able to finance and refinance our properties. In the deal flow acquisition area, it's pretty much quiet.

And now I would like to turn it over to Granger.

Granger Cobb - Co-Chief Executive Officer and President

Actually, I'm going to turn it over to Ray.

Ray Brandstrom – Co-Founder

Thank you, both of you. Anyway, good afternoon, everyone. I'd like to begin by discussing first quarter results, give an update on our expansion development plans, an update on our balance sheet, and finish by providing some additional context to our 2008 financial guidance. Please note that the merger of Summerville closed on September 1, 2007 impacting year over year analysis for the first quarter. Therefore, my comments will focus on sequential quarters, first quarter 2008 versus fourth quarter 2007

Additionally, we moved four communities comprising 355 units to discontinued operations which includes removing revenue, operating expense, and property costs in the consolidated income statement, and reporting these communities as one line on the face of the income statement. These communities have also been removed from reported occupancy statistics.

Now, let me highlight a few key topics. Total revenue for the first quarter 0f 2008 was reported that 186.5 million excluding discontinued operations and including new communities added in late fourth quarter 2007 and first quarter 2008. Excluding discontinued operations from fourth quarter 2007 total revenue, on a sequential basis total revenue increased $2.2 million, 1.1 million of which is related to newly added communities, and the balance is primarily from rate growth period over period. We ended the quarter at 87.9% occupancy, and the average occupancy for the quarter was 87.2. After, adjusting for discontinued operations, new developments, additions, and acquisitions, occupancy, on a sequential basis, is flat. Community operating expense for the first quarter of 2008 was reported at $121.6 million. Excluding discontinued operations and including new communities added in the late fourth quarter 2007 and first quarter 2008. Excluding discontinued operations and year-end adjustments to expense in fourth quarter 2007, community operating expense on a sequential basis increased $3.5 million.

Newly added communities contributed $1 million to the increase in expense, and seasonal utility increases and payroll tax and benefit expenses, typical in the first quarter, accounted for the balance of $2.5 million, with all other expense categories remaining flat. General and administrative expenses were $14.6 million in both the first quarter of 2008 and the fourth quarter of 2007. Included in these totals were non-cash stock compensation expense of $1.4 million in the first quarter of 2008, and $1.3 million in the fourth quarter of 2007.

On an adjusted basis, general and administrative expense, as a percent of total operating revenue, which includes revenue from managed communities, on a comparative basis is flat at 6.7% for both quarters. Property-related expenses included interest on a cash basis for the quarter of $11.9 million and rent on a cash basis of $31.6 million. We filed a supplement to our press release today that provides a schedule of cash rent, interest, and depreciation for the first and second quarters of 208. I'll discuss this further when we get to the guidance section of the call. The Company's first quarter 2008 adjusted EBITDA decreased 4.4%, or $1.3 million to 29.3 million under sequential quarter basis. As we previously discussed, we expect to open three new developments with a total of 157 units in 2008.

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