Brookdale Senior Living Inc (BKD) 2005 Q4 法說會逐字稿

Good afternoon. My name is Vanessa and I will be your conference operator.

[OPERATOR INSTRUCTIONS]

Thank you. Ms. Maggie. You may begin your conference.

Thank you Vanessa and good afternoon, everyone. I'd like to welcome all of you to the first public earnings call for Brookdale Senior Living. Today we will be discussing fourth quarter and year-end 2005 results. Joining us today are, Bill Doniger, our Vice Chairman, Mark Schulte, our CEO, Mark Ohlendorf, our co-President, and Stan Young, our Chief Financial Officer.

Before I turn the call over to Bill I would like to mention that this call is being recorded and the replay number is 800-642-1687 from within the US or 706-645-9291 from outside the US with the access of 6080288. This call will also be available via our website www.brookdale.com.

I would also like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimate for expectation expressed in those statements. Certain of the factors that could cause actual results to differ materially from Brookdale Senior Living expectations are detailed in our SEC report. I direct you to Brookdale Senior Living's earnings release for the full forward-looking statement legend.

Now, I'd like to turn the call over to Bill Doniger.

Thanks, [inaudible]. Welcome everybody. 2005 was an exciting and transformational year for Brookdale. We began a year and completed the merger of Brookdale living communities and Alterra Healthcare, which was consumated in September and upon that merger, Brookdale became the third largest operator of senior living facilities in the country.

We ended the year with a highly successful initial public offering. It was multiple times over subscribed. We priced the offering at $19 a share of the high end of the rage and it was well distributed to a leading group of investors. We raised a total of 242 million of that $145 million was primary proceeds. $63 million were used for transactional expenses and paying down some higher costs at leaving the company with about $82 million in cash to be used to fund acquisitions.

As we articulated our road show, our business plan and strategy for the company is really to grow our earnings. Adjusted EBITDA and what we call cash flow from facility operations, which is our cash earnings, grows at really a combination of two things, organically from our existing assets plus through accretively deploying capital through acquisitions.

And frankly, we have been pleasantly surprised really on both ends and we have been, as you can tell from press releases, we've been incredibly active since the closing of our IPO. We've announced $743 million in acquisitions involving 101 facilities and 9,000 units. In those transactions, we would expect to invest approximately $315 million and those transactions should close really in the next 30-45 days.

As a result of this early success, we announced yesterday in our earnings release a increase in our dividend from 25 - our quarterly dividend from $0.25 a share to $0.35 a share, a 40% increase. That really is a function again of our continued optimism and current success of our existing assets plus really just a great result of the management team in what we think are really attractive risk adjusted acquisitions.

And really the last thing I'd like to say before I turn it over to Mark is that the pipeline for future capital deployment remains incredibly robust and we are pretty optimistic that the rest of the year will result in some incremental capital deployment.

With that, I'd like to turn it over to Mark.

Thanks, Bill. As Bill said, we're now the third largest operator as senior living facilities in the United States and as of December 31st of 2005, we operated 64 independent living in CCRC facilities with 13,554 units, and that counted for 49% of our Q4 '05 revenue. We operated 303 assisted living facilities with over 13,000 units that counted for 50.5% of our Q4 '05 revenue and we managed 16 other facilities for third parties. Our largest presence is in Florida, Texas, Illinois, and California and from a rate, amenity, service, and asset perspective we're the market leader in the majority of the markets we're in.

As to the quarter, a key part of our business plan is to focus on growth of our existing portfolio facilities through improvements and occupancy, rental rates, and cost savings from economies of scale. We're very pleased with the strong financial performance of our business in the fourth quarter of '05. Our average occupancy improved from 89 or 289.4% from 88.6% in Q3 of '05. Our average monthly rate increased to 3,062 from $3,038 in Q3 of '05 and our adjusted EBITDA was 27 million up from 12.9 million in Q3 of '05.

Our same store facility operating income increased 9.5% for the year ended December 31, 2005, over 2004. Excluding our four development facilities that we're still in lease up the same store growth was 8.3% for the year and we're very proud of that number. So far in 2006, we're off to a great start. We're seeing similar upward trends in rates and occupancies.

In terms for the industry as a whole, as we indicated during our road show, the industry fundamentals remained robust with favorable supply demand trends. The oversupply of the late 90s has been absorbed and new development is declined by about 60% between 1999 and 2004 as per the data released by the American Senior's Housing Association. And we believe that the high construction costs in lease up risks should limit excessive development in the future.

As to the supply side, there is estimated to be about 26.6 million seniors over the age of 70 in the U.S. and this number is growing. Currently only about 1 in 14 seniors is being served by senior housing services and independent living, assisted living, or the CCRC sectors and the increasing awareness or the benefits of senior housing we think are going to be very favorable to the industries in Brookdale's long-term prospects.

And one other thought before I turn things over to Mark, as you'll hear on this call, we're very, very focused on cash flow as a measure of our performance and, again, that translates into the focus on dividends and we're very focused on making sure that cash flow grows as we go forward.

So, with that, I'd like to turn things over to Mark Ohlendorf, co-President of Brookdale to talk about acquisitions and some of our financing.

As Bill mentioned, since we closed the IPO, we've committed or closed upon $743 million of acquisition transactions. That represents a historic or future investment of just over $300 million of invested equity.

Our business strategy related to acquisitions is to make accretive acquisitions where we take advantage of economies of scale and our national footprint. Again, as we consolidate local and regional operators, we bring to bear us substantial purchasing power in areas such as insurance and food. We have a more efficient centralized infrastructure where we operate large IT systems, accounting processes and HR and the in place scale of our field operations also allows lower marginal cost as we consolidate these smaller portfolios.

Again, the market opportunity in senior housing, there are roughly 1.9 million units of independent living, assisted living, and CCRC properties across the country. Those 1.9 million units are in approximately 16,000 locations. The ten largest operators in this sector control about 12% of financial units and of these top ten operators, which includes Brookdale, they are the only [epi] leading operators that manage more than 10,000 units. This obviously provides us with a pretty attractive opportunity to consolidate these smaller operators in portfolios of assets.

Since the closing of the IPO, we've completed four acquisition transactions, three of those in the fourth quarter of 2005. Those three transactions involve 16 properties with just over 1800 units. In the first quarter so far, we've closed one small acquisition of two properties with 114 units. These three fourth quarter transactions and the single first quarter transaction involve investments of about $70 million of cash.

Again, we have about 100 properties with 9,000 units moving through the acquisition pipeline right now and we'll ultimately invest about $315 million of cash in those fields. We will fund our acquisition activities using existing cash, much of which came from the proceeds of the IPO and a recently closed corporate acquisition line. It's a $330 million line, $250 million of the line is committed to acquisition financing, $80 million of the line is committed to working capital financing, including the issuance of letters of credit.

Well, let me turn it over to Stan Young our Chief Financial Officer to talk about financial highlights for the quarter.

Thank you, Mark and welcome everyone. Brookdale Senior Living was formed September 30, 2005. Our results for fiscal 2005 consist of three months operations of Brookdale since the formation and the nine months prior represents the combined operations of the predecessor [inaudible] including the CCRC portfolio acquired in April 2005 and the prudential portfolio acquired in June and July of 2005.

As a result, we believe that Q4 more accurately reflects the run rate of our business versus the full year results despite some non-recurring cost related to the merger and the IPO. For Q4 2005, our first quarter since formation, revenue was 211.9 million with a net loss of 24.5 million. Our net loss includes 35.3 million of non-cash charges for depreciation and amortization, stock compensation expense, and straight line lease expense net of deferred gain amortization.

Q4 2005 benefited from the reversal of a $4.4 million accrual established in connection with Alterra emergence from bankruptcy in December of 2003 partially offset by non-recurring formation and integration expenses of 3.4 million during the quarter. G&A expense for Q4 was 27.7 million of which 11.5 million was non-cash stock compensation and 3.4 million for non-recurring merger and integration expenses.

As Mark Shutle mentioned earlier, management and our board are focused on the following nonGAAP measures in evaluating our business which are detailed in the press release. For Q4 '05, we generated cash from facility operations of 10.9 million or $0.17 were outstanding common share at the end of December 31, 2005. Adjusted EBITDA was 27 million and excluding the 4.7 million accrual reversal, facility operating income was 80 million and operating margin of 37%. And again as Mark mentioned, on a same store basis, the facility operating income improved 9.5% for the full year, excluding the four developments, the increase was 8.3%, a strong showing for 2005.

Total CapEx for the quarter, net of our reimbursements was 8.1 million. Our purposes of CapEx, we've broken them into recurring CapEx of 4.8 million, 1.2 million for EBITDA enhancing CapEx. These are related to planned capital projects at the CCRC facilities and one assisted living facility and $2 million, we corporate information technology systems in related equipment.

As you are all aware, CapEx will vary by quarter, however, we expect it to average out over the year. In summary, we are pleased for our results for 2005 and look forward to 2006. And now with that, we'll take your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Kevin Fischbeck of Lehman Brother.

Okay. Thank you. Good afternoon. I was wondering if you could provide a little more data on the acquisitions that have closed and that you have announced as far as the breakout of [inaudible] between assisted living, independent living, CCRC plus any information that you might have about [exactly] how those facilities generate or the amount of lease that you're going to be assuming in those transactions would be helpful.

Kevin, it's Mark Ohlendorf. The properties that are in the announced pipeline are predominately assisted living properties.

Okay.

I think there are about eight or ten properties that are the larger independent living assets. The [inaudible] of these properties are the 50/60 unit assisted living property. We have not, at this point, published any information on the specific financial performance historically of these portfolios. But if you look at the size of what we're bringing on here, it's about 7200 units or so and apply our overall average rates around $3,000 a month. I think you'll find the average occupancies in these portfolios would be around 90%. You'll get a sense of the financial magnitude of these properties.

Okay. Since the occupancy rate seems to be about - I guess your numbers is safe to assume that the probability levels are about the same. [These are] fixer uppers as some of the acquisitions that you guys did last year?

Likely not. There is some period of time, perhaps the first two or three quarters of operations where we're integrating the way we buy things in these acquisitions. So, clearly by the time you get to the end of the first year, I believe which you said is true, but there would be some transition period early on.

Okay. And I guess the other thing is [inaudible] we'll talk about assumed lease expense. It seems to me that based on some of the prices that you are paying that you were not going to be owning all of these facilities, that you're actually going to be leasing some of them. Do you have assumed lease expense?

Kevin, it's Bill. Some of these transactions, and when the close, we'll be able to provide more guidance in our filings but some of the transactions, as we've mentioned as our business plan our owned and some are by the seller and some are leased and obviously the lease expense is different on each transaction so when - I don't think you can make kind of a specific, give you an overall answer but, a fair bid of these assets are leased. Again, I think we've disclosed that in each of the transactions but I think we can provide a little more color when the transactions close and we make the filings.

Okay. And then I guess one of the things that is somewhat pleasantly surprised that that was the increase of dividend during the quarter. It was [up significantly]. I guess I kind of expected it but the timing was pretty quick right after the IPOs. I was wondering if you could provide your thought process around increase in dividend. Was it mostly a function of just you being able to close in more transactions more quickly or was it a good [part] just operationally. I just want to understand how [inaudible] acquisition is kind of included in that.

You know, that's a fair question and really the answer is we are pleasantly surprised as well, which is primarily - it's really a function of both. The business continues to perform in line with our expectations and what we talked about when we were out raising capital but the reality is we've invested far more capital really then we were discussing [out] when we are raising capital. We are obviously optimistic but we'd like to kind of underpromise and overproduce and so this dividend really is a function of the success we've had deploying capital and what we think are very, very attractive assets in the prices we're paying and it's really given the timing of it is more of a function of just the amount of capital we've been able to deploy this early.

Okay and since then, it seems like you guys are basically providing guidance through your dividend. Is it safe to say that the way that the progression works is that you set a quota dividend number which you may not be able to hit as far as the [cash] of operations share in that first quarter following your increase in dividends but over the next four quarters you expect to kind of be on, if not, on the run rate. I'm sorry, if not generating that amount of cash flow at the very [inaudible] high or above that run rate?

You've articulated maybe better than I could so I'm glad you answered your question. That's a pretty fair way to think about it. Obviously, here, again, maybe unique. I don't know. [I hope we're] optimistic going forward but we have deployed a fair bit of capital. Again, you won't see those - and the transactions have enclosed. Those will close over the next 30 days so in first quarter results, it's unlikely to see them because they haven't - they're not going to be in the early numbers but that's the stuff that should start hitting second part of the year. But, again, you answered it in a very articulate way.

Okay and I guess, the last question before I jump off. Can you just talk about the pipeline being robust for acquisitions. [inaudible] what you're seeing out there as far as the quality of the assets, whether [inaudible] generally more fixer uppers or more stable assets and then [inaudible] are. They operate it yourselves or they [inaudible] private equity. Do you still have a [inaudible] on that?

I frankly - what we talked about when we raised capital was our business plan was to buy assets from smaller local or regional operators who just don't really have the scale pricing of assets has gone up and so folks are able to sell and get either their capital back with some return or at least get their capital back and so we're really seeing a variety of assets. They're all decent well run assets, which gave us comfort in being able to buy and integrate them. Really what we're doing is buying assets frankly and taking advantage of our national platform and our scale and our low marginal costs to really integrate and run the assets. As Mark said, generally we're looking at assets that are 90% occupied which, for all intense purposes as reasonably full, but maybe it's a question [inaudible].

We are buying assets that going in year one returns are very consistent with what we told people we thought we could do which is 10-12% cash on cash yields for year one, which we expect a meaningful growth off of that as we fully integrate the assets. The surprising factor was really just the level of activity we were able to accomplish and that really is something that has really because the team has done a great job. Prospectively, it's almost an equally large pipeline of assets. Again, we try to be - I think we are given the size of our company and our comfort level with the ability to integrate and run these assets. We are as competitive as anybody when it comes to buying assets but we don't need to own everyone of them and so we expect to be busy for the 2nd half of the year looking to make more acquisitions because there is plenty of stuff out there that looks just like the things we've been buying.

Okay, last question. I promise. Again, going back to that, is there a certain amount in your mind that you don't want to exceed in a certain year or is there some limit to your internal [inaudible] add in a given year or you don't think you're running close to that yet?

I'm getting kicked under the table by the guys who actually have to do the work. But we don't - there isn't a hardened task rule. You know, would I expect us to deploy 4 or $500 million of equity over the remainder of the year, unlikely. But, you know, we up to 200 million dollars is something we were trying to get done and we're reasonably optimistic we can be successful at that and, again, we wouldn't be buying things if we didn't think we could integrate them and run them in an efficient matter and so far, again, the thing to understand is we've announced acquisitions that are - in January that are going to close in April. We have four months to get ready for these integrations and secondly a lot of - and we integrate them over a 6-9 month period and so we're not - there's a little bit of a scramble when you fund to get both on payroll but it's a pretty long process and they're reasonably well run assets when we're buying them with decent operating teams and so, that's given us a lot of comfort.

Okay. Great. Thanks.

Your next questions comes from the line of Dennis Maloney with Goldman Sachs.

Hi. Good afternoon. I just have a quick questions. If I heard you correctly as what I heard you say that most of your acquisitions were assisted living during the quarter. I'm just curious. Is that more a function of pricing or is it - does it represent any kind of a strategic shift in terms of the level of [equity] you want to focus on? I mean, why not focus more on higher margin independent living [inaudible].

Well, I'll answer first and then Mark is going to jump in. We like - this is a business that, it's almost 100% true. We focus as much on price and frankly, bigger independent living assets are pretty well big. Some of these smaller assisted living assets are very hard to operate unless you have scale and so we have a real competitive advantage and that being said, we are [bind] and have a pipeline as a decent amount of independent living assets as well and so we focus on risk return growth and we don't really have a hardened fast rule. Go ahead, Mark.

Yes. One of the advantages of covering multiple product types and really every product type like we do is we can really go after all these segments, independent living or assistant living or CCRC. The timing of the sales of those, we can't predict. It's sort of dictated by the market. But we are seeing a lot of different types - or all 3 types - of products out there. I think it's just a coincidence or timing issue, a lot of it is assistant living now. We are seeing some more IL stuff come into the market but the great thing is that we can really go after any of it.

Okay. Great. Thank you and then in terms of your occupancy and rent pick up at 3.25 [inaudible] -

Yes. I think we lost him.

Your next question comes from the line of Matthew Ripperger from Citigroup.

Hi. Thanks very much. This is [Gee Bow] from Citigroup filling in for Matt Riverager. A couple of questions here. Looking at your CapEx number for the quarter, I think what we have [seemed] in our [remotto] has been recurring CapEx going forward. Maybe if you can give us some guidance in terms of what you are expected growth CapEx for 2006 and recurring CapEx which is [inaudible] the acquisitions.

Yes. I thin, we would continue to feel the $500 per unit per year or so is a good number used for recurring CapEx. Remember you're looking at a single quarter of CapEx and that can be affected by the weather and all kinds of things so it may not be perfectly balanced a fourth in each quarter. It was, in fact, a little bit higher in the fourth quarter than if you average that a full year.

And when we say growth CapEx. That's deploying capital for new acquisitions and, again, we can't be predictive about that and really the only other source of CapEx is when we buy assets, we continue to invest and improve assets to bring them up to Brookdale kind of quality level. Our returns are inclusive of the deployment in that capital.

Okay. So, with the acquisitions that you are doing, we should assume just a little [inaudible] CapEx in terms of upgrading the facilities with the acquisitions that you have made this year?

We really treat it as a component of our purchase price. So, if you look at this set of acquisitions that we're working on right now, as we price those transactions, we include any CapEx we feel is necessary to bring the assets up to speed.

Okay. Got it and in terms of free cash flow for 2006, I guess, is, in terms of the calculation [inaudible], is it typically just the adjusted EBITDA and less interest expense and you are not paying any taxes this year, is that right of no federal -

Correctly.

- and no state.

You take out CapEx as well at 500 a unit and that pretty much gets you there.

Okay and I guess we talked about before the integration between Brookdale and Alterra in some of the [inaudible] opportunities. Maybe can you give us what where have you - what level of synergies have you already achieved and should there be any incremental synergies in going forward?

We have experienced a lot of synergies after the merger and we are still working on that and we expect to continue to realize some more over the next year or so.

Okay. So there is more synergy [inaudible] opportunities going forward.

Yes.

Okay. And I guess when you gave the dividend guidance with the transaction, did you - have you assumed any synergies with those acquisitions or were they just padding those properties free cash flow to get that dividend increase assumptions. Were there any -

Yes.

- synergies assumed?

Well, again we add what we think is kind of the run rate result for the acquisitions. When you make an acquisition, and again just using a hypothetical, if we make an investment in a portfolio of assets and expect to earn 11% cash on cash yield in the first year, it's probably closer to going in ten maybe and at the end of the year, it's 12 because we incur cost savings but we don't realize them immediately and over the period of the years, they get realized and so -

Okay.

- and so we do incur kind of synergies but it takes six to nine months.

Got it. And your very solid facility operating income growth of 9.5% for the year, is that [829%], is that the range you're looking at for '06 for the total portfolio?

Yes. I think, again, trying not to be specific in terms of guidance but business is continuing to perform in line with out expectations.

Yes. We're seeing the same fundamentals and trends we saw through '05 into '06 so far.

Okay. Okay, great. Thanks very much.

Your next question is a follow up question from Dennis Maloney of Goldman Sachs.

Hi. Sorry about that, my phone dropped off. I was just wondering if you could provide a little more color on the accrual reversal and does that impact the cash [income] you reported for the quarter?

It does not. We backed it out of the various calculations in the tables that you see in the press release. It's actually a reserve that was established during the Alterra bankruptcy and as time passes, that reserve comes off the books. It's really historic. It dates back now three or four years.

Okay, great. And then just in terms of your net operating loss [carry forward], have you identified anymore since the IPO?

No.

No? Okay. And then just lastly, any update on the litigations?

No. It fell very early in that process and I really don't have anything new to report.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions.

Thank you Vanessa. Thank you-all for joining us this afternoon. We look forward to speaking with you next quarter.

This concludes today's Brookdale Senior Living fourth quarter conference call. You may now disconnect.