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Article by DailyStocks_admin    (06-18-08 07:43 AM)

Emeritus Corp. CEO DANIEL R BATY bought 32000 shares on 6-13-2008 at $19.96

BUSINESS OVERVIEW

Overview

Emeritus Corporation was founded in 1993 and is one of the largest and most experienced national operators of assisted living and Alzheimer’s care residential communities in the United States . Our communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, but do not require the constant skilled nursing services provided in skilled nursing facilities.

On September 1, 2007, we completed our acquisition of Summerville Senior Living, Inc., which we sometimes refer to as "Summerville", a San Ramon, California-based operator of 81 communities comprising 7,935 units in 13 states, which provided independent living, assisted living, and Alzheimer’s and dementia-related services to seniors. We sometimes refer to this transaction as the "Summerville acquisition". As a result of the Summerville acquisition, Summerville became our wholly-owned subsidiary and retained the brand name in the operation of its communities. Granger Cobb, President and CEO of Summerville, assumed the titles of President and Co-CEO of Emeritus. Pursuant to the terms of the merger agreement and a shareholder agreement, Mr. Cobb and a representative designated by the Apollo Real Estate Investment Funds III and IV, which we sometimes refer to as the "Apollo Funds" were appointed to our board of directors upon consummation of the transaction.

As of December 31, 2007, we operated, or had an interest in, 287 assisted living communities, consisting of approximately 24,680 units with a capacity for 29,522 residents. Our facilities are located in 37 states and include 107 communities that we own, 147 communities that we lease, and 33 communities that we manage, including 23 in which we hold joint venture interests. As of December 31, 2007, our consolidated facilities were 88.0% occupied. In 2007, we generated approximately 89.0% of our revenues from private pay residents, which limits our exposure to government reimbursement risk, and our average monthly revenue per occupied unit was $3,235.

We have 178 communities that offer Alzheimer’s and dementia care services with approximately 3,941 units in a mix of both free-standing facilities and as part of our standard assisted living facilities. We believe the need for Alzheimer’s and dementia care will continue to increase in the future. Today, there are an estimated 24 million people in the world with some form of dementia and 4.6 million new cases are diagnosed each year. In addition, the number of Americans diagnosed with Alzheimer’s disease has doubled since 1980. By 2050 the number of individuals in the United States with dementia is expected to increase from 4.5 million to above 11.3 million. Dementia care residents typically have declines in certain mental functions that prevent them from performing activities of daily living, such as dressing and feeding themselves.

Our portfolio of communities is highlighted by relatively new, high quality facilities that offer a significant number of amenities to our residents and which allows us to operate efficiently. Of our 287 communities, 180 have been built or opened since January 1, 1996. In addition, we have significantly upgraded many of our older communities to enhance their appearance and made improvements to kitchens, nurse call systems, dining and recreation areas, landscaping, and electronic systems, including data transmission.

We strive to provide a wide variety of supportive living services in a professionally managed environment that allows our residents to maintain dignity and independence. Our residents are typically unable to live independently, but do not require the intensive care provided in skilled nursing facilities. Under our approach, seniors reside in a private or semi-private residential unit for a monthly fee based in part on each resident’s individual service needs. We believe our residential assisted living and Alzheimer’s and related dementia care communities allow seniors to maintain a more independent lifestyle than is possible in the institutional environment of skilled nursing facilities, while also providing peace of mind knowing that staff are available should the need arise. In addition, we believe that our services, including assisting residents with activities of daily living, such as medication management, bathing, dressing, personal hygiene, and grooming, are attractive to seniors who are inadequately served by independent living facilities.

We are focused on increasing our revenues and cash flows through a combination of initiatives • continue to increase occupancy to stabilized levels.


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continue assessment of resident care needs and local market pricing to optimize resident rates.


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continue the expansion of our Alzheimer’s and related dementia care offerings to meet growing demand through expansions and conversions of existing communities, and further acquisition of existing dementia care communities.


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increase capacity via selective acquisitions, expansion of existing communities, and new community development.


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increase cost efficiencies from higher occupancy rates and economies of scale.


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increase our percentage of owned versus leased communities.

By executing these growth initiatives, we have witnessed a consistent improvement in our revenues as evidenced by our increase in revenue per unit from $2,957 in 2005 to $3,100 in 2006 and to $3,235 in 2007. In addition, our average occupancy increased from 84.5% in 2005 to 85.3% in 2006 and to 86.7% in 2007.

In 2007, our initiatives to enhance revenues produced the following successful results:



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increased our total average occupancy to 86.7% in 2007, including the newly acquired properties, as compared to 85.3% in 2006.


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added a net 1,084 units of Alzheimer’s and related dementia care capacity through expansions and additions to communities,


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increased our average monthly revenue per unit by 4.4% compared to 2006,


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acquired 96 communities with a capacity of 7,764 units formerly operated by us under long-term leases, including eight Summerville properties, and


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increased our capacity through:


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our acquisition of Summerville adding 81 communities with a capacity of 7,935 units in 13 states.


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our acquisition of a 106-unit newly constructed community in Ohio.


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our lease of a 89-unit community in Ohio.


The Assisted Living and Alzheimer’s and Related Dementia Care Industry

We believe that the assisted living and Alzheimer’s and related dementia care industry is the preferred residential alternative for seniors who cannot live independently due to physical or cognitive frailties but who do not require the more intensive medical attention provided by a skilled nursing facility.

Generally, assisted living provides housing and 24-hour personal support services designed to assist seniors with the activities of daily living, which include bathing, eating, personal hygiene, grooming, medication reminders, ambulating, and dressing. Certain assisted living facilities may offer higher levels of personal assistance for residents with Alzheimer’s disease or other forms of dementia, based in part on local regulations, in addition to our free-standing Alzheimer’s and related dementia care facilities.

We believe that assisted living communities will continue to be one of the fastest growing choices for senior care due to a number of factors, including:



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Consumer Preference. We believe that assisted living is preferred by prospective residents as well as their families, who are often the decision makers for seniors. Assisted living is a cost-effective alternative to other types of care, offering seniors greater independence while enabling them to reside longer in a more residential environment.



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Cost-Effectiveness. Assisted living services generally cost 30% to 50% less than skilled nursing facilities located in the same region. We also believe that the cost of assisted living services compares favorably with home healthcare, particularly when costs associated with housing, meals, and personal care assistance are taken into account. According to the MetLife Market Survey of Nursing Home & Home Care Costs published in October 2007, the national annual average cost of a year in a nursing home was $77,745 for a private room and $68,985 for a semi-private room. The survey evaluated the cost of assistance in a nursing home with the activities of daily living for a person suffering from a debilitation such as Parkinson's disease. It did not include costs for therapy, rehabilitation, or medications.


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Demographics. The target market for our services is generally persons 75 years and older who represent the fastest growing segments of the U.S. population. According to the U.S. Census Bureau, the portion of the U.S. population age 75 and older is expected to increase by 9.7% from approximately 17.9 million in 2005 to approximately 19.7 million by the year 2015. The number of persons age 85 and older, as a segment of the U.S. population, is expected to increase by 25.5% from approximately 5.0 million in 2005 to 6.4 million by the year 2015. Furthermore, the number of persons afflicted with Alzheimer’s disease is also expected to grow in the coming years. According to data published in the August 2003 issue of the Archives of Neurology, an AMA publication, this population will increase 13.3% from the current 4.5 million to 5.1 million people by the year 2013. Nearly half of all Americans over the age of 85 have Alzheimer’s disease and the number of Americans with Alzheimer’s has doubled since 1980. Because Alzheimer’s disease and other forms of dementia are more likely to occur in people over the age of 85, we expect the increasing life expectancy of seniors to result in a greater number of persons afflicted with Alzheimer’s disease and other forms of dementia in future years, absent breakthroughs in medical research.



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Changing Family Dynamics . Seniors currently possess greater financial resources than in the past, which makes it more likely that they are able to afford to live in professionally managed senior housing. Seniors in the geographic areas in which we operate tend to have a significant amount of assets generated from savings, pensions and other assets. The use of long-term care insurance is increasing among current and future seniors as a means of planning for the costs of senior living services. Accordingly, we believe that the number of seniors and their families who are able to afford high-quality senior residential services, such as those we offer, has also increased. In addition, the number of two-income households increased during the 1990's and the geographical separation of senior family members from their adult children correlates with the geographic mobility of the U.S. population. As a result, many families that traditionally would have provided care to senior family members in their homes are now less able to do so. In addition, approximately 34% of the population from 75 to 79 years old live alone while 39% of those 85 and older live alone. We believe these factors have increased the need for professional senior care.



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Supply/Demand Imbalance. While the senior population is growing significantly, the supply of assisted living beds per thousand of the senior population is not growing at a similar rate. According to the 2006 Senior Housing Construction Report of the American Seniors Housing Association, construction of new assisted living facilities is down over 80% since 1999. We believe that high construction costs, as well as costs of capital and liability insurance to smaller operators, have constrained the growth in the supply of the assisted living facilities. We believe that growth in the senior population, increased affluence of this generation of senior citizens, and the diminished role of the family in providing senior care is leading to supply and demand imbalances that provide growth opportunities, as evidenced by increased occupancy and rental rates.



Competitive Strengths

We compete with other assisted living communities located in the areas where we operate. These communities are operated by individuals, local and regional businesses, and larger operators of regional and national groups of communities, including public companies similar to us. We believe that we have the following competitive strengths:



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Lower Cost of Communities. As of December 31, 2007, the average cost per unit of our owned and leased communities was approximately $100,000. We believe that these costs are less than the current average replacement costs of these communities and below the average costs incurred by many other public companies operating in the industry. We also believe that these lower capital costs give us opportunities to enhance margins and greater flexibility in designing our rate structure and responding to varying regional economic and regulatory changes.



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Memory Loss Services. The demand for memory loss services continues to grow. As of December 31, 2007, we have 178 communities that offer this type of care in a mix of both free-standing facilities and as part of our standard assisted living facilities. Our dementia care wings within our assisted living facilities enable us to retain residents who may require dementia care services in the future, and who would otherwise be required to move to an alternative care setting. Where appropriate, we may place dementia residents in semi-private apartments to provide a lower cost alternative for those residents, which also serves to enhance our average rate per unit.


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Large Operating Scale. We believe that our size gives us significant advantages over smaller operators. Given the scale of our operations, we selected high quality operating systems and service alternatives and developed a set of best practices that we have implemented on a national scale. We also believe that, because of our size, we are able to purchase food, equipment, insurance, and employee benefits at lower costs, and to negotiate more favorable financing arrangements.



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High Quality Communities. Of our 287 communities in which we have an interest, 180 communities have been built and opened since January 1, 1996. In addition, we have significantly upgraded many of our older communities to improve their appearance and operating efficiency. These upgrades include the finished appearance of the communities, as well as various improvements to kitchens, nurse call systems, and electronic systems, including those for data transmission, data sharing, and e-mail.



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Geographic Diversification and Regional Focus. We operate our communities in 37 states across the United States. We believe that because of this geographic diversification we are less vulnerable to adverse economic developments and industry factors, such as overbuilding and regulatory changes, that are limited to a particular region. We believe that this also moderates the effects of regional employment and competitive conditions. Within each region, we have focused on establishing a critical mass of communities in secondary markets (those outside of major metropolitan areas), which enables us to maximize operating efficiencies.



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Experienced Management with Industry Relationships. We believe that we have strong senior leadership with proven management skills in the assisted living industry. Our senior management team consists of Daniel R. Baty, Chairman of the Board and Co-Chief Executive Officer; Granger Cobb, Co-Chief Executive Officer and President; Raymond R. Brandstrom, Executive Vice President-Finance, Secretary and Chief Financial Officer; Justin Hutchens, Executive Vice President and Chief Operating Officer; and Melanie Werdel, Executive Vice President-Administration, each of whom has from 15 to more than 31 years of management experience in the healthcare industry, ranging from independent living to skilled nursing care. We believe that their combined experience and the relationships that they have developed with owners, operators, and sources of capital have helped us and will continue to help us develop operating efficiencies, investment and joint venture relationships, as well as obtain sources of debt and equity capital.



Business Strategy

We believe that there is a significant demand for alternative long-term care services that are well-positioned between the limited services offered by independent living facilities and the higher-level medical and institutional care offered by skilled nursing facilities. Our goal is to continue as a national leader in the assisted living segment of the long-term care industry through the following strategy:



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Increased Focus on Operations and Occupancy. In recent years, we have been focusing on improving community performance through both increased occupancy and revenue per occupied unit. Initially, we focused most of our efforts on increasing occupancy across our portfolio. Having achieved a portion of our total goal by late 1999, we then shifted our efforts toward enhancing our rates, particularly in facilities that were substantially below market or industry averages. This rate strategy has led to increased rates across most of our portfolio. We believe that this focus on both rates and occupancy will continue to generate the incremental growth in margins we are striving to achieve. On September 1, 2007, we merged with Summerville, which historically had outperformed legacy Emeritus communities in average rates and occupancy. We believe that the implementation of Summerville’s marketing and operating philosophies will continue to enhance our occupancy levels and rates.



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Customer Service . Our approach to care is to address our residents’ entire needs from their physical health to their social well-being. We believe that this “holistic approach” enhances the quality of life and care for our residents. By using stay-enhancing revenue alternatives like non-related companion living, diabetes management, our Brain Health and Wellness program, our Join-Their-Journey memory care program, and other flexible programming designed to meet the needs of the individual in our communities, we increase customer satisfaction and thereby increase occupancy.


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Alzheimer’s and Dementia Care Markets . We will continue to explore new and existing markets where there is a significant demand for Alzheimer’s and dementia care services. We believe our signature Join-Their-Journey programming and Brain Health & Wellness programs are unique and appeal to this market segment. Our Join-Their-Journey program is focused on care that creates a familiar environment with individualized service and care plans to enhance the residents’ overall quality of life.



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Investment in Information Technology Infrastructure . We are committed to improving our information technology throughout the organization in an effort to enhance our knowledge base and our ability to make better business decisions. We continue to expand the computing capabilities in our communities including investments in computer hardware and networking devices. We installed a care management program designed to manage and track resident care needs and services and we launched a web-based lead management program in order to better manage potential leads and referral sources.



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Selective Acquisition of Communities. In 1998, we reduced our acquisition activity in part to concentrate on the need to improve operations through occupancy and rate enhancement. As we work to achieve these objectives, we expect to adjust our focus to actively purchase or lease communities that meet designated criteria. In general, we tend to favor acquisition opportunities that are in smaller cities or suburbs, enhance our current market coverage, require minimal upfront capital, are neutral or favorable to the Company’s cash flow, and present operational or financing efficiency opportunities not otherwise realized by the existing owner or operator. Between the years 2003 through 2007, we acquired additional communities that satisfied these criteria and we intend to continue to pursue acquisitions that meet these criteria. From the beginning of 2003 through 2007, we have tripled the number of communities in our consolidated portfolio from 85 to 254, while decreasing the number of our managed facilities from 95 to 33. This constitutes a net increase in our total operated portfolio of 107 communities. We now lease or own many of the communities we formerly managed. We have increased the number of communities we own from 10 at the end of 2006 to 107 at the end of 2007, primarily through the acquisition of 96 communities we formerly operated under long-term leases. In 2007, we completed our acquisition of Summerville adding 81 communities to our consolidated portfolio, leased an existing community in Ohio, opened a newly constructed community in Ohio, added three new managed communities in California through our joint venture with Blackstone Real Property Group, which we sometimes refer to as the “Blackstone JV,” added a management agreement for a newly constructed community in New Hampshire, and terminated the management agreements for three communities due to the sale of those properties by the owners.



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Development of Communities . We are evaluating development opportunities in markets where existing occupancy is high, resulting in demand for additional capacity and attractive rates. We opened one new Alzheimer’s building in 2007 and expect to open two additional communities in 2008, as we continue to evaluate potential projects. We also opened one new expansion of an existing property in 2007, and expect to open two more in 2008. Where we have existing communities with stabilized occupancy and strong market rates we will look to add additional units to existing communities. These will usually be designated as Alzheimer’s and dementia care units, which provide higher incremental margin contributions to the community.



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Appeal to the Middle Market. The market segment most attractive to us is middle to upper-middle income seniors 75 and older in smaller cities and suburbs with populations of 50,000 to 150,000 persons. We believe that this segment of the senior community is the largest, broadest, and most stable.

Service Revenue Sources

We rely primarily on our residents’ ability to pay our charges for services from their own or family resources and expect that we will do so for the foreseeable future. Although care in an assisted living community is typically less expensive than in a skilled nursing facility, we believe that generally only seniors with income or assets meeting or exceeding the regional median can afford to reside in our communities.

As third-party reimbursement programs and other forms of payment continue to grow, we will participate in these alternative forms of payment, depending on the level of reimbursement provided in relation to the level of care provided. We also believe that private long-term care insurance will increasingly become a revenue source in the future, although it is currently small. All sources of revenue other than residents’ private resources constituted less than 11.0% of our total revenues in 2007.


Management Activities

We provide management services to independent and related-party owners of assisted living communities. We managed 33 and 32 communities at December 31, 2007 and 2006, respectively. Of the 33 managed communities, 23 are owned by joint ventures in which we have an interest, three are owned by a third party, and seven are owned by entities in which Mr. Baty has an interest. Agreements typically provide for fees between 5% and 6% of gross revenues, although a few have fees based on occupancy that approximate 5% of gross revenues. Terms typically range from two to five years and may be renewed or renegotiated at the expiration of the term. However, our management agreements with Blackstone JV have a one-year term and are automatically renewed on 30-day successive periods at the end of the initial one-year term.

From the beginning of 2003 through 2007, we have decreased the number of our managed communities from 95 to 33 primarily by acquiring and leasing these communities. Management fees were approximately $4.4 million for 2007 and $1.9 million in 2006, compared to $2.0 million in 2005. Management fees increased by $2.5 million in the year ended December 31, 2007, primarily due to the net 23 management agreements added from the Blackstone JV since December 2006, partially offset by the two-community net reduction in other management agreements from January 1, 2006, through December 31, 2007.

Marketing and Referral Relationships

Our operating strategy is designed to integrate our assisted living communities into the continuum of healthcare services offered in the geographic markets in which we operate. One objective of this strategy is to enable residents who require additional healthcare services to benefit from our relationships with local hospitals, physicians, home healthcare agencies, and skilled nursing facilities in order to obtain the most appropriate level of care. Thus, we seek to establish relationships with local hospitals, through joint marketing efforts where appropriate, and home healthcare agencies, alliances with visiting nurses associations and, on a more limited basis, priority transfer agreements with local, high-quality skilled nursing facilities. In addition to benefiting residents, the implementation of this operating strategy has strengthened and expanded our network of referral sources.


Quality Assurance

We have an ongoing quality assurance process that occurs in each of our communities. Our program is designed to achieve resident and family member satisfaction with the care and services we provide. Quality assurance audits of care and operational systems are done on an ongoing basis using the Comprehensive Process Review (CPR) auditing tool. The CPR audit tool was developed by the quality and risk management team in collaboration with other departments in the community, regional, and divisional levels. All areas of community operations and care systems are reviewed and evaluated using this comprehensive process. The audit includes an inspection of the community that evaluates three major areas: quality of care, quality of life, and community practices and behavior. Other continuous quality improvement measures include our customer satisfaction and employee satisfaction surveys and feedback from residents and family members on a regular basis to monitor their perception of the quality of services provided to residents through our Ethics First compliance program.

Our communities have established on-going resident and/or family meetings through care conferences and/or family night meetings. Feedback, recommendations, and suggestions to improve overall quality performance of the community are obtained from the resident, responsible party, and staff. The CPR, Ethics First compliance program, resident care conferences, and family night meetings are significant components of our continuous quality improvement program. These processes are used to benchmark our ongoing efforts to improve quality, enhance customer satisfaction, and minimize risk exposure.


Administration

We employ an integrated structure of management, financial systems, and controls to maximize operating efficiency and contain costs. In addition, we have developed the internal procedures, policies, and standards we believe are necessary for effective operation and management of our assisted living communities. We have recruited seasoned key employees with years of experience in the long-term care services field and believe we have assembled the administrative, operational, and financial personnel who will enable us to continue to manage our operating strategies effectively.

Our Chief Operating Officer leads a vice presidential group that consists of six divisions. An operational vice president heads each division in a collaborative team system that includes a vice president of sales and marketing and a vice president of quality service and risk management. Each divisional team oversees several operating regions headed by a regional director of operations, who provides management support services for each of the communities in his/her respective region, along with the respective regional director of quality service and risk management and regional director of sales and marketing. An on-site executive director supervises day-to-day community operations, and in certain jurisdictions, must satisfy various licensing requirements. We provide management support services to each of our residential communities, including establishing operating systems and standards, recruiting, training, and financial and accounting services.

We have centralized finance and other operational support functions at our headquarters in Seattle, Washington, in order to allow community-based personnel to focus on resident care. The Seattle office establishes policies and procedures applicable to the entire company, oversees our financial and marketing functions, manages our acquisition and development activities, and provides our overall strategic direction.

We use a blend of centralized and decentralized accounting and computer systems that link each community with our headquarters. Through these systems, we are able to monitor occupancy rates and operating costs and distribute financial and operating information to appropriate levels of management in a cost efficient manner. We believe that our data systems are adequate for current operating needs and provide the flexibility to meet the requirements of our operations without disruption or significant modification to existing systems beyond 2008. We use high quality hardware and operating systems from current and proven technologies to support our technology infrastructure.


Competition

The number of assisted living communities continues to grow in the United States. We anticipate that our source of competition will come from local, regional, and national assisted living companies that operate, manage, and develop residences within the geographic area in which we operate, as well as retirement facilities and communities, home healthcare agencies, not-for-profit or charitable operators and, to a lesser extent, skilled nursing facilities and convalescent centers. We believe that quality of service, reputation, community location, physical appearance, and price will be significant competitive factors.

CEO BACKGROUND

Robert E. Marks (age 54) , has been a director of Emeritus since July 2005, when he was appointed to the Board. From 1994 to the present, Mr. Marks has been the President of Marks Ventures, LLC, a private equity investment firm. He is a director and Chairman of the Board of Denny's Corporation and a director of Soluol Chemical Company and Brandrud Furniture Company, as well as a member of the Board of Trustees of the Fisher House Foundation and The International Rescue Committee.

David W. Niemiec (age 5 6), has served as a director of Emeritus since December 30, 1999. From September 1998 to November 2001, Mr. Niemiec was a Managing Director of Saratoga Management Company LLC, the manager of a group of private equity investment funds operated under the name of Saratoga Partners. Currently, he acts as an advisor to the group. Prior to joining the Saratoga Group, he worked at the investment banking firm of Dillon, Read & Co. beginning in 1974 and served as its Vice Chairman from 1991 through September 1997, when the firm was acquired by Swiss Bank Corporation. From September 1997 to February 1998, he was Managing Director of the successor firm, SBC Warburg Dillon Read, Inc.

Stanley L. Baty (age 34), has served as a director since September 2004. Mr. Baty is the son of Daniel R. Baty, Chairman of the Board and Chief Executive Officer. Stanley L. Baty is the Vice President for Columbia Pacific Management, Inc. (“CPM”), where he is responsible for real estate related investment decisions. Prior to that, from 1994 to 1996, Mr. Baty was a financial analyst for Nomura Securities Corporation.

Raymond R. Brandstrom (age 53) , one of Emeritus's founders, has served as a director since its inception in 1993. From 1993 to March 1999, Mr. Brandstrom also served as Emeritus's President and Chief Operating Officer. In March 2000, Mr. Brandstrom was elected Vice President of Finance, Chief Financial Officer and Secretary of Emeritus. From May 1992 to October 1996, Mr. Brandstrom served as President of Columbia Pacific Group, Inc. and CPM. From May 1992 to May 1997, Mr. Brandstrom served as Vice President and Treasurer of Columbia Winery, a company previously affiliated with Mr. Baty that is engaged in the production and sale of table wines.

T. Michael Young (age 61) , has been a director of Emeritus since April 2004, when he was appointed to the Board. He is the Chairman of the Board of Directors of Metal Supermarkets (Canada), Ltd., a privately-held metal distributor with locations in the United States, Canada, Europe, and the Middle East, and has held this position since December 2005. From December 2002 through December 2005 he was President and Chief Executive Officer of that company. In October 2003, he was elected to the Board of Directors of that company. Prior to that, from June 1998 to May 2002, Mr. Young was Chairman of the Board of Transportation Components, Inc., a publicly-held distributor of replacement parts for commercial trucks and trailers, and also served as its President and Chief Executive Officer from June 1998 to May 2001. On May 7, 2001, Transportation Components filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division. The company was later liquidated in June 2002. In March 2005, Mr. Young joined the Board of Directors of Restoration Hardware, Inc., a public company whose shares are traded on the NASDAQ Exchange. Mr. Young is a Certified Public Accountant and former partner of Arthur Andersen & Co.

Daniel R. Baty (age 62) , one of Emeritus's founders, has served as its Chief Executive Officer and as a director since its inception in 1993 and became Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman of the Board of Holiday Retirement Corporation since 1987 and served as its Chief Executive Officer from 1991 through September 1997. Since 1984, Mr. Baty has also served as Chairman of the Board of Columbia Pacific Group, Inc. and, since 1986, as Chairman of the Board of Columbia Pacific Management, Inc (“CPM”). Both of these companies are wholly owned by Mr. Baty and are engaged in developing independent living facilities and providing consulting services for that market. Mr. Baty is the father of Stanley L. Baty, a current director of our company.

Bruce L. Busby (age 62) , has been a director of Emeritus since April 2004, when he was appointed to the Board. Mr. Busby served as Chairman and Chief Executive Officer of The Hillhaven Corporation prior to its merger with Vencor, Inc. in 1995, when he retired. Hillhaven was a publicly-held operator of skilled nursing facilities based in Tacoma, Washington, and prior to its merger, it operated 350 facilities in 36 states. During his tenure with Hillhaven, Mr. Busby served as the Chief Executive Officer and as a director beginning in April 1991 and as that company’s Chairman of the Board from September 1993 until the merger with Vencor. Mr. Busby, who has been a Certified Public Accountant for over thirty years, has been retired since 1995.

Charles P. Durkin, Jr. (age 67) , has served as a director of Emeritus since December 30, 1999. Mr. Durkin is one of the founders of Saratoga Partners, a private equity investment firm. Since Saratoga's formation as an independent entity in September 1998, he has been a Managing Director of Saratoga Management Company LLC, the manager of the Saratoga Partners funds. Prior to that, from September 1997, he was a Managing Director of SBC Warburg Dillon Read, Inc., the successor entity to Dillon, Read & Co., where Mr. Durkin started his investment banking career in 1966 and became a Managing Director in 1974.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Emeritus Corporation is a Washington corporation founded by Daniel R. Baty and two other long-time associates in 1993. Mr. Baty is chairman of our board of directors, co-chief executive officer, and one of our largest shareholders. He is also a party to a number of agreements with us and is referred to frequently in discussions of the business. In November 1995, we completed our initial public offering.

From 1995 through 1999, we expanded rapidly through acquisition and internal development and by December 31, 1999, operated 129 assisted living communities with 11,726 units. We believe, however, that during this expansion, the assisted living industry became over-built, creating an environment characterized by sluggish or falling occupancy and market resistance to rate increases. As a result, in 2000 we began an increased focus first on raising our occupancy and later on rate development, operating efficiencies, and cost controls. This focus has continued throughout 2007.

We believe the operating environment of the assisted living industry has been improving over the past several years resulting in occupancy gains and increases in the average monthly rate. These operating improvements have also resulted in greater access to capital. We believe these dynamics have resulted in the consolidation of smaller local and regional operators into the larger national operators, and anticipate this consolidation of the industry will continue. Because of these circumstances, we have been able to complete several acquisitions or leases in the last few years, although at a slower pace in 2005 and 2006, and at an increased rate in 2007. Although opportunities for further expansion have been available over the past few years, we have been selective in our growth as we have seen a sharp increase in market prices. On September 1, 2007, we acquired Summerville Senior Living, Inc. (Summerville), which operated 81 communities comprising 7,935 units in 13 states, providing independent living, assisted living, and Alzheimer’s and dementia-related services to seniors. See “Significant Transactions—Summerville Acquisition” below.

In recent years we focused on internal growth through expansion of existing properties and construction of new communities. This focus continued through 2007. We currently have expansion projects in eight of our communities and will continue to look at other expansion opportunities where the market conditions are favorable. In addition, we have several development projects in various stages of completion in several locations.

From the beginning of 2003 through December 31, 2007, we have increased our owned and leased communities by 89 and 80, respectively, for a net increase in our consolidated portfolio of 169. In addition, we have decreased our number of managed communities by 62, thereby increasing our total operated portfolio by 107 communities. Those communities we own and lease, and which are included in our consolidated portfolio, increased from 85 at the beginning of 2003 to 254 at December 31, 2007, reflecting both our increasing confidence in the assisted living industry and the availability of capital.

In 2008, we expect to continue our focus on increasing occupancy and rates, as well as reviewing acquisition opportunities that meet our criteria.

Two of the important factors affecting our financial results are the rates we charge our residents and the occupancy levels we achieve in our communities. We rely primarily on our residents' ability to pay our charges for services from their own or family resources and expect that we will do so for the foreseeable future. Although care in an assisted living community is typically less expensive than in a skilled nursing facility, we believe that generally only seniors with income or assets meeting or exceeding the regional median can afford to reside in our communities. In this context, we must be sensitive to our residents' financial circumstances and remain aware that rates and occupancy are interrelated.

In evaluating the rate component, we generally rely on the average monthly revenue per unit, computed by dividing the total operating revenue for a particular period by the average number of occupied units for the same period. In evaluating the occupancy component, we generally rely on an average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period. We evaluate these and other operating components for our consolidated portfolio, which includes the communities we own and lease, and our operating portfolio, which also includes the communities we manage.

In our consolidated portfolio, our average monthly revenue per unit increased from $2,957 to $3,100 and to $3,235 in 2005, 2006, and 2007, respectively. The change from 2006 to 2007 represents an increase of $135, or 4.4% and from 2005 to 2006, an increase of $143, or 4.8%. Although Summerville’s portfolio had a higher average monthly revenue per unit than Emeritus’s portfolio, the impact of Summerville was insignificant on the overall average increase in 2007 since they have only been a part of the consolidated group for four months.

In our consolidated portfolio, our average occupancy rate in 2005 was 84.5% and increased to 85.3% and 86.7% in 2006 and 2007, respectively. We believe that this increase in occupancy rates reflects industry-wide factors, such as the declining supply of vacant units, as well as our own actions and policies. Summerville has a higher average occupancy rate than Emeritus, but as noted above, its impact is slight on the overall increase because it has only been a part of the portfolio for four months. We continue to evaluate the factors of rate and occupancy to find the optimum balance in each community, as witnessed by the increase in occupancy rates and average monthly revenue per unit from 2003 through 2007.

Since our inception in 1993, we have incurred cumulative operating losses totaling approximately $255.8 million as of December 31, 2007. We believe that these losses have resulted from our early emphasis on expansion, financing costs arising from multiple financing and refinancing transactions related to this expansion, administrative and corporate expenses that we incurred in anticipation of further expansion and increased emphasis on risk management and financial reporting controls, the impact in the early years on many of our leases from capital and financing lease treatments, and occupancy rates remaining lower for longer periods than we anticipated. While we have realized growth in both our occupancy and average monthly rates, we anticipate continued losses in the near term until such time as our occupancy stabilizes. Our current emphasis is on maximization of cash flows as we work toward improvements in occupancy and average rates, selective growth, and changes in our capital structure, such as acquisition of leased properties and refinancing of existing high-rate debt.


Significant Transactions

From 2005 through 2007, and continuing into 2008, we entered into a number of transactions that affected the number of communities we own, lease, and manage; our financing arrangements; and our capital structure. These transactions are summarized below.

Summerville Acquisition

On September 1, 2007, we acquired all of the outstanding stock of Summerville through a merger of our wholly-owned acquisition subsidiary with Summerville. Under the terms of the merger agreement, a total of 8,392,656 shares of our common stock were issued: (i) to the Apollo Funds, two real estate funds managed by Apollo Real Estate Advisors, in satisfaction of certain loans from such entities, (ii) to certain employees of Summerville in satisfaction of certain incentive compensation arrangements, and (iii) to the stockholders of Summerville, including the Apollo Funds.

Summerville was a San Ramon, California-based operator of 81 communities comprising 7,935 units in 13 states, which provided independent living, assisted living, and Alzheimer’s and dementia-related services to seniors. Upon completion of the merger, Summerville became our wholly-owned subsidiary and retained the brand name in the operation of its communities.

Subsequent to the merger and at December 31, 2007, we operated 287 communities in 37 states comprising 24,680 units with a capacity for 29,522 residents.

2007 HCPI Communities Purchased

In March 2007, we completed the purchase of seven communities consisting of 453 units located in South Carolina for approximately $28.9 million, including transaction costs. We had operated these facilities as assisted living and dementia care communities for seniors.

The seven acquired properties were part of master lease agreement dated September 18, 2002, between Health Care Property Investors, Inc. (HCPI), and us. As a result of this asset purchase transaction, the master lease was amended to remove the purchased communities effective March 26, 2007. The amendment also provided for the return of approximately $4.5 million in cash security deposits held by HCPI. The cash security deposits were credited against the purchase price for the seven acquired properties. We accounted for this master lease as an operating lease.

Capmark Finance, Inc. (Capmark) provided variable rate mortgage financing of $23.6 million pursuant to a loan agreement dated March 26, 2007, by and among our affiliated entities and Capmark Bank. Under this Capmark loan facility, the variable rate loan has a term of three years and bears interest at 290 basis points over the London Interbank Offered Rate (LIBOR), adjusted monthly. The interest rate on December 31, 2007, was 8.125%. Monthly interest-only payments are required for the first year and, thereafter, monthly payments of principal and interest are based on a 25-year amortization period. The balance is due in full in April 2010. This facility is secured by all real, personal, and intangible assets used in the operation of the acquired communities. The loan may be repaid at any time upon written notice, if no events of default are continuing. We paid a 1.0% loan fee at closing and will be required to pay a 2.0% exit fee upon full payment of the loans, unless the loans are refinanced with Capmark. The loan agreement requires maintenance of a debt service coverage ratio, an aggregate minimum occupancy percentage, and payment of annual capital expenditures of at least $300 per unit.

In June 2007, we entered into a definitive agreement to acquire a total of 40 additional communities from HCPI. After the original announcement, we added another community to the purchased portfolio for a total of 41 communities, consisting of 3,732 units located in 17 states. Of the 41 communities, we had leased 33 and Summerville had leased eight of the communities.

In August 2007, we completed the acquisition of the 41 communities from HCPI. We leased 33 of these communities from HCPI under a master lease dated September 18, 2002, as amended. We had accounted for 23 of the 33 communities as operating leases and 10 as financing leases prior to the acquisition. The annual base rent for our 33 communities was approximately $25.0 million as of the closing date. As a result of this transaction, the HCPI master lease was terminated. Upon termination of the financing leases for the 10 communities, the difference between the carrying amount of the leased assets and the lease obligation was recorded as an adjustment to the carrying amount of the assets purchased, which represents a reduction of approximately $27.6 million to the cost basis of the purchased assets. In addition, upon termination of the 23 operating leases, the cumulative straight-line lease accrual was recorded as an adjustment to the carrying amount of the assets purchased, which represents a reduction of approximately $1.6 million to the cost basis of the purchased assets.

Summerville continued to operate the eight communities under its existing leases until we completed our acquisition of Summerville in September 2007. The annual base rent for the eight Summerville communities was approximately $4.7 million.

The acquisition of the 41 properties discussed above was partially financed by affiliates of Capmark and other participants (Fannie Mae) through fixed rate mortgage debt of $226.9 million at an annual interest rate of 6.305% for a term of 10 years, and variable rate mortgage debt of $76.0 million at a rate of 30-day LIBOR plus 1.7% (approximately 7.0% at December 31, 2007) for a term of two years, plus a one-year extension option, pursuant to a series of Loan Agreements dated August 15, 2007, by and among our affiliates and Capmark. Monthly interest-only payments on the fixed rate loan are due for the first three years and thereafter, monthly payments of principal and interest will be based on a 30-year amortization schedule. The balance on the fixed rate loan is due in full in September 2017. Monthly interest-only payments on the variable rate loan are due over the term of the loan. The balance on the variable rate loan is due in full in September 2009, with a one-year extension option available. The indebtedness outstanding under the Capmark loans may be accelerated under customary circumstances, including payment defaults. The fixed rate loan is secured by all real, personal, and intangible assets used in the operation of 29 communities, and the variable rate loan is secured by all real, personal, and intangible assets used in the operation of 12 communities.


2007 HRT Communities Purchased

In March 2007, we purchased 12 communities consisting of 786 units located in five states for a price of $100.2 million, including transaction costs. We had leased four of these communities from Healthcare Realty Trust (HRT) since May 2002 and eight since May 2003. We had accounted for the four leases as capital leases and the eight leases as operating leases. As a result of this transaction, the HRT leases were terminated. Upon termination of the four capital leases, the difference between the carrying amount of the leased assets and the lease obligation was recorded as an adjustment to the carrying amount of the assets purchased, which represented a $3.5 million reduction to the cost basis of the purchased assets. Capmark Finance, Inc. provided fixed rate senior mortgage financing of $88.0 million at 6.515% per annum and second mortgage financing of $13.6 million at a variable rate equal to the LIBOR rate plus 325 basis points. The second mortgage of $13.6 million was repaid in July 2007. The senior mortgage has a term of five years, with a 1% exit fee if the debt is paid off or refinanced by anyone except Capmark, and monthly interest-only payments for three years and, thereafter, monthly payments of principal and interest based on a 25-year amortization, with the remaining balance due in full in April 2012. The total Capmark loan commitment of $101.6 million was used to pay the purchase price, transaction and financing costs, and to retire a $600,000 loan, as described below.

At the time of closing, we had approximately $32.8 million in loans outstanding with HRT, of which $11.4 million was secured by the leases on the 12 communities described above. Of the $11.4 million, $10.8 related to a loan from HRT to enable us to pay the accumulated dividends due upon conversion of our Series B Convertible Preferred Stock in June 2005. As part of the our purchase of the 12 communities, the $10.8 million loan was acquired from HRT by Mr. Baty on similar terms and conditions as the original loan, and the remaining $600,000 was paid off at closing. The $10.8 million loan from Mr. Baty was repaid in July 2007.

2007 Fretus Communities Purchased

In February 2007, we purchased 24 communities consisting of 1,651 units located in six states for a price of $143.5 million, including transaction costs. We had leased these communities from Fretus Investors LLC (Fretus) since October 2002. All leases had been accounted for as operating leases. As a result of this transaction, the Fretus lease was terminated. Capmark provided fixed rate mortgage financing of $132.0 million and variable rate mortgage financing of $8.0 million. The variable rate loan of $8.0 million was repaid in July 2007. The fixed rate component has a term of five years and bears interest at 6.55% per annum, with a 1% exit fee payable if the debt is paid off or refinanced by anyone except Capmark, with monthly interest-only payments for two years and thereafter, monthly payments of principal and interest based on a 25-year amortization. The remaining balance is due in full in February 2012. The variable rate component has a term of three years and interest at 30-day LIBOR plus 1.8%. Fretus was a private investment joint venture between Fremont Realty Capital, which held a 65% interest, and a Baty-related entity, which held a 35% minority interest. Mr. Baty held a 16% indirect interest in the minority entity, personally guaranteed $3.0 million of the Fretus mortgage debt covering the communities and controlled the administrative member of Fretus. In conjunction with this transaction, the Baty-related entity provided $18.0 million in short-term financing to us, of which approximately $5.1 million, was used to fund the balance of the purchase price and the balance was used for general business purposes. The short-term debt was due in February 2009, accrued interest at 9.0% per annum, and was repaid in July 2007.

2007 HC REIT Purchase

In August 2007, we closed on the acquisition of three Florida communities consisting of 431 units. The final purchase price was $25.0 million, including transaction costs. We had leased these communities from Health Care REIT, Inc. and affiliates under two different master leases dated September 30, 2003, and September 30, 2004. The leases were accounted for as capital leases. The annual base rent for the three communities was approximately $2.5 million as of the closing date. As a result of this asset purchase transaction, the master leases were modified to remove the communities from these leases. Upon termination of the capital lease for the three communities, the difference between the carrying amount of the leased assets and the lease obligation was recorded as an adjustment to the carrying amount of the assets purchased, which represents a reduction of approximately $3.2 million to the cost basis of the purchased assets.

An affiliate of General Electric Capital Corporation (GECC) provided variable rate mortgage financing of approximately $19.6 million pursuant to a Credit Agreement dated August 6, 2007, by and among our affiliates and GECC. The variable rate mortgage has a term of five years with interest at 30-day LIBOR plus 1.5%, which was 6.725% at December 31, 2007. Monthly interest-only payments are due for the first three years and thereafter, monthly payments of principal and interest will be based on a 25-year amortization schedule. The balance on the loan is due in full in August 2012. The indebtedness outstanding under the GECC loan may be accelerated under customary circumstances, including payment defaults, and is secured by all real, personal, and intangible assets used in the operation of the three communities.

2007 Wegman Purchase

In August 2007, we completed the acquisition of nine communities that we had formerly leased, consisting of 711 units located in the State of New York, for an aggregate purchase price of $89.0 million including transaction costs. Upon termination of the operating lease for the nine communities, the cumulative straight-line lease accrual was recorded as an adjustment to the carrying amount of the assets purchased, which represents a reduction of approximately $2.3 million to the cost basis of the purchased assets.


The transaction was financed by a $67.8 million Fannie Mae insured loan with Red Mortgage Capital, Inc. The loan term is 84 months, with interest only for the first 24 months at a fixed rate of 6.185%, and matures on September 1, 2014. Principal and interest payments for the remaining term of the loan are based on a 30-year amortization schedule. We have the right, upon advanced notice to the lender, to prepay the entire amount of the loan, all accrued interest, loan costs, and prepayment premium.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Comparison of the three months ended September 30, 2007 and 2006

Total Operating Revenues:

Of the $29.7 million increase in community revenues for the three months ended September 30, 2007, compared to the three months ended September 30, 2006, approximately $24.1 million was due to the addition of the Summerville communities for the month of September 2007. Of the communities other than Summerville, $3.3 million of the increased revenue was due to increases in the average monthly revenue per occupied unit and approximately $2.3 million was due to an increase in occupancy.

We continue our efforts to build our occupancy through increased marketing initiatives, programs that address resident mix and a focus on property improvements and other community-level enhancements to attract additional long-term residents and increase occupancy while maintaining growth in average monthly revenue per unit. We believe that these initiatives will continue to have a positive impact on operating performance over time.

The increase in management fee revenue is primarily due to the Blackstone joint venture, from which we recorded $762,000 in the three month period ended September 30, 2007.

Community Operations:

A significant factor impacting the change in community operating expenses between the periods was a reduction in workers’ compensation expense of $2.0 million in the third quarter of 2006 due to revised estimates of our ultimate exposure under our workers’ compensation programs. Excluding this 2006 adjustment, the increase in community operations expense would have been $17.5 million. Of this amount, $15.4 million was due to the Summerville communities and Inn at Marietta, a leased community added in July 2007. The remaining increase of $2.1 million was primarily related to increases in employee salaries and benefits.


General and Administrative:

The growth in general and administrative expenses of $2.6 million was primarily related to staffing costs for regional and corporate overhead positions, which is comprised of increases in the number of personnel and in average salaries, and consisted of approximately $1.9 million in salaries and benefits and $174,000 of merger-related severance pay. Much of the increase in staffing costs relates to the addition of the 81 Summerville communities. The remaining increase consisted primarily of increases in travel, accounting fees, non-employee compensation expense, and consulting fees, partially offset by decreases in legal fees. Included in general and administrative expenses is non-cash stock compensation expense of $2.1 million in 2007 and $2.0 million in 2006. Of the $2.1 million in 2007 stock option compensation, approximately $1.3 million related to a portion of the stock options granted to Granger Cobb, who joined us as co-chief executive officer and president upon consummation of the Summerville transaction, that were vested immediately upon grant. Ongoing stock option expense is approximately $1.2 million per quarter based on the current stock options outstanding.

Since approximately 35 of the communities we operate are managed rather than owned or leased at September 30, 2007, as compared to 11 at September 30, 2006, General and administrative expense as a percentage of operating revenues for all communities, including managed communities, may be more meaningful for industry-wide comparisons. General and administrative as a percentage of operating revenues for all communities decreased to 8.1% from 9.0% for the three months ended September 30, 2007 and 2006, respectively.

Depreciation and Amortization:

The increase in depreciation and amortization expense of $7.5 million is primarily the result of the write off of approximately $424,000 of net lease acquisition costs upon completion of the HCPI, Wegman, and HC REIT acquisitions and a $4.1 million increase in depreciation and amortization from the Summerville acquisition. In addition, due to the same acquisitions, depreciation expense increased $3.2 million.

Facility Lease Expense:

The increase in facility lease expense of $1.0 million was primarily due to the operating lease expense increase of $6.9 million due to the Summerville merger of which $1.7 million is non-cash lease expense accruals, partially offset by a decrease of $6.2 million due to the Fretus, HRT, Wegman, and HCPI acquisitions. We leased 72 and 77 communities under operating leases as of September 30, 2007 and 2006, respectively.

Interest Income:

The increase in interest expense of $6.1 million for the third quarter of 2007 as compared to the comparable period in 2006 is primarily due to an increase of $6.7 million in interest expense from the Fretus, HRT, Wegman, HC REIT, and HCPI acquisitions, and the Summerville merger, partially offset by reductions in other interest expense due to normal pay downs on loans and mortgages.

Equity Losses in Unconsolidated Joint Ventures:

The benefit of income taxes for the quarter ended September 30, 2007, is principally due to reversal of $1.3 million of estimated federal taxes recorded for the first six months of 2007, primarily related the third quarter acquisitions creating an estimated tax loss for the year compared to the previous estimated taxable income for the first six months. The balance is estimated state income and franchise taxes liabilities. The benefit of income taxes for the quarter ended September 30, 2006, includes a tax benefit of $823,000 for the proportionate share of the estimated tax refund, exclusive of tax benefit of $251,000 related to employee option exercises, from the expected carryback of tax losses for 2006 to offset taxable income in 2005, an adjustment of approximately $1.1 million to our estimated 2005 federal tax liability to the final federal tax return filed during the 2006 third quarter, and an accrual for estimated state income and franchise tax liabilities. As of September 30, 2007 and 2006, we have a 100% allowance on our net deferred tax assets.

Net Loss and Property-Related Expense:

In comparing the net loss for the three months ended September 30, 2007 and 2006, it is important to consider our property-related expenses, which include depreciation and amortization, facility lease expense, and interest expense that are directly related to our communities, and which include capital lease accounting treatment, finance accounting treatment, or straight-line accounting treatment of rent escalators for many of our leases. These accounting treatments all result in greater property-related expense than actual lease payments made in the early years of the affected leases and less property-related expense than actual lease payments made in later years, as detailed in the tables below.

Our property-related expense associated with our leases exceeded our actual lease payments by $9.2 million and $5.1 million for the three months ended September 30, 2007 and 2006, respectively. The impact of lease accounting increased by $4.1 million in the current year quarter from the comparable quarter last year due primarily to the Summerville merger, partially offset by a reduction in interest expense on the capital leases in connection with the normal pay down of the lease obligation and the termination of leases from the acquisition of the Fretus, HRT, HC REIT, and HCPI communities. Notwithstanding the effects of lease accounting treatment, the actual lease payments required under most of our leases will continue to increase annually and, as a result, we will need to improve our results from community operations to cover these increases. However, in the quarter ended September 30, 2007, the actual lease payments increased due to the acquisition transactions discussed in the “Notes to Unaudited Condensed Consolidated Financial Statements” above.


CONF CALL

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.

The first development opened during the first quarter, with the other two opening in the second half of the year. We also anticipate three expansions comprising 144 units in 2008. One is open and the other two will open in the second half of the year. We'll continue to evaluate development and expansion opportunities as part of our ongoing business plan. Routine capital expenditures amounted to $5 million in the first quarter. About $4.1 million represents routine maintenance and refurbishment at our communities and about $900,000 on our IT infrastructure.

As I mentioned in my opening comments, we moved four communities to discontinued operations. We concluded that over time the resource commitment for these communities was disproportionate to the expected return and we should focus our efforts elsewhere within our portfolio. The cash rent and interest schedule provided with our press release excludes property costs for these communities. Of the four communities, we expect three to close in the second quarter.

During the second quarter, we closed on the real estate acquisition of 24 of our existing leased communities, which increases our own properties to 51%. Increasing the number of Emeritus' owned assets is an important part of our long-term strategy.

By owning assets, we'll be able to capture and retain value. Thus, over time we'll continue to selectively pursue acquisition opportunities that make good business sense. Also during the second quarter, we completed two refinancing transactions on a total of 29 communities. As a result of these transactions, the Company will incur a one-time write-off of approximately $ million related to early termination costs and unamortized loan fees on the previous debt. The Company received approximately $25.6 million in cash from these transactions. Management believes that retaining the Company's capital flexibility at this point in the business cycle is quite prudent.

Turning to our balance sheet, as of March 31, 2008 the Company had approximately $90 million of cash. On March 31st, total assets were $1.9 billion, including $1.4 billion of investment in properties. Total debt was $1.3 billion, with $700 million related to mortgage debt; $520 million related to capital lease obligations; and $10 million convertible debentures, along with stockholder equity of $434.5 million.

Turning to guidance for 2008, we are adjusting our revenue guidance for 2008 to $760 million to $775 million, from $780 million to $795 million, to take into consideration the communities classified discontinued operations and a later ramp-up in occupancy and rate than originally projected. About half of this change relates to reduction of overall revenue due to the discontinued operations and about half relates to delayed rate and occupancy development. We want to reiterate our comfort with the long-term goal of 93% occupancy and 15% increase in average rate per unit over the next two to three years.

Turning to cash rent and cash interest for a moment. Cash rent in the first quarter of 2008 was 31.6 million. For the second quarter, after the announced NHP transaction, we expect cash rent will range from 27.2 million to 27.6 million. Cash interest for the first quarter of 2008 was 11.9 million. For the second quarter, we expect cash interest, after the announced NHP transaction and our refinancings, will range from 16.6 million to 17 million.

We're updating our guidance for maintenance CapEx to $650 to$700 per unit from per unit from 450 to 475 per unit. In our first quarter, we experienced more carry-over payment from projects started in #2007. And after meeting with our operations over the last several weeks, we have reevaluated our CapEx goals for the year.

With those comments I will turn the call over to Granger Cobb our CO-CEO and President. Granger?

Granger Cobb – Co-Chief Executive Officer and President

Thank you, Ray, and good afternoon everyone from sunny Seattle. Our results for the first quarter of 2008 were solid. We showed discipline managing expenses while we continued to put our revenue-generating infrastructure in place. The ongoing progress we continue to make is not yet reflected in the numbers and may come slightly slower than we had originally anticipated.

The critical takeaway, however, in the first quarter is that we are functioning as one integrated company with consistent operating systems and practices. Also, our business fundamentals, including move-in activity, have held constant despite a weak economy and housing market. Throughout the organization, we are very focused on making the right decisions to positively impact long-term results. The opportunity in front of us in the coming years to maximize the potential of our existing portfolio remains very powerful and justifies the care and attention that is being given to making sure we have the right people with the right tools and support in place to ensure a sustainable operating platform.

As we indicated previously, we deployed an automated lead management and referral development software system to allow us to better manage the front door sales process. And we have deployed an automated resident assessment and care planning software system that will allow us to better manage the back door, as well as capture appropriate charges for additional services that are being delivered as residents' care needs change.

Over the last three weeks, Ray and I, together with Justin Hutchens, our Chief Operating Officer; Martin Roffe, our Senior VP of Financial Planning; and John Cincotta, our Senior VP of Sales and Marketing, traveled around the country meeting with 14 of our Company's 28 regional teams. We reviewed Q1 operating performance on a community-by-community basis and discussed strategy and execution on a go-forward basis.

I'm convinced, having had the opportunity to interface directly and in detail with our regional staff that the right activities are happening relative to the community's specific plans. We know these systems and this structure will result in a desired outcomes and we have always said that the hardest part to predict is the exact timing. While we recognize that there appears to be an industry-wide softness in occupancy, we have not been able to establish a link between the economy or housing markets and our inquiry and move-in activity. We continue to believe that we are less impacted by these factors than some of our peers due to the need-driven characteristics of the Emeritus business, with our higher concentration of assisted living and memory care.

As we head into the summer months, we anticipate that our move-in average will begin to accelerate. In addition, we'll begin to see the benefits from the improved level of care revenue captured in our rate per unit. We have every confidence that the pieces are in place to accomplish the long-term goals that we've laid out.

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