Brookdale Senior Living Inc (BKD) 2006 Q2 法說會逐字稿

Good day everyone and welcome to today's Brookdale Senior Living second quarter conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS). At this time for opening remarks and introductions I would like to turn the call over to Ms. Francie Nagy. Please go ahead, ma'am.

Good morning everyone. I would like to welcome all of you to the second quarter 2006 earnings call for Brookdale Senior Living. Joining us today are Bill Doniger, our Vice Chairman; Mark Schulte, our Co-CEO; Mark Ohlendorf, our Co-President; and Stan Young, our Chief Financial Officer.

Before I turn the call over to Bill, as Abe mentioned, this call is being recorded and the replay number is 888-203-1112 from within the U.S., or 719-457-0820 from outside of the U.S., with an access code of 742-3620. This call will also be available via webcast on our website, www.brookdaleliving.

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 estimates or expectations expressed in those statements. Certain other factors that could cause actual results to differ materially from Brookdale Senior Living's expectations are detailed in our SEC report.

I direct you to Brookdale Senior Living's earnings release for the full forward-looking legend. Now I would like to turn the call over to Bill Doniger.

Welcome everybody to our earnings call. As we continually try to tell folks, our objective is to grow the earnings and dividends of the Company two ways, organically and through acquisitions. And once again, I think we have been pretty successful on both fronts.

From an organic perspective we had a great quarter. And I will let the guys talk about that in a minute. From an acquisitions perspective we have been pretty busy with the biggest story being the announcement on May 12 of our acquisition of American Retirement. We agreed on that day to buy the company for $33 a share, or $1.2 billion. That transaction closed on July 25.

As we have mentioned before, the transaction is pretty exciting really on three fronts. First, we acquired in fact a new line of business for us, the CCRC business, continuing care retirement communities, which will add to our acquisition expertise. And Mark Schulte will spend a minute on that.

Secondly, we acquired a pretty innovative, an extremely capable business in what they call innovative senior care in the ancillary services business. That business basically provides things like physical, speech, occupational therapy to residents. Historically Brookdale did not provide those services, and by acquiring American Retirement we will now be able to provide those services to our own residents.

I think in the quarter we just released American Retirement earned about $160 of NOI per occupied unit per month at their own assets. If you apply that metric to all of our assets you're talking about an incremental cash flow opportunity of up to $60 million. It is a great opportunity for us.

Last, but as importantly, we acquired or became partners frankly with a great management team. It was an incredibly well-run company. And everybody who was in charge of that business has joined us. And as we continue to grow the Company having them on board will be incredibly valuable. They were confident and enthusiastic about the opportunity going forward that I think they invested about $18 million of capital into Brookdale stock as part of the transaction.

In terms of financing the acquisition, the capital came from two parts. Fortress Investment Group and its affiliated funds invested about, I think, $650 million in equity. And the balance was funded through a secondary capital offering of $700 million that priced at the end of July as well.

I think we started the roadshow the day that Israel and Hezbollah got in the war up in Lebanon, and so it started into a pretty difficult Capital Markets. But by the end the transaction was well over subscribed, and then there was a lot of demand, which obviously has to do it with the effort of the folks at the company and the strong story.

With that I would like to turn it over to Mark Schulte.

We had a very busy second quarter that in many ways was transformational for the Company. During the second quarter and July of '06, not including the acquisition of American Retirement Corporation, we added 64 additional facilities containing 5,336 units to Brookdale.

The closing of the American Retirement Corporation transaction in July made Brookdale the largest operator of senior living facilities in the United States. We now have 546 locations, serving over 51,000 residents, and over 27,500 employees. We are operating in 35 states in some of most populous and demographically desirable states and major metropolitan areas across the country.

Our scale gives us great advantage and cost deficiencies and brand recognition, both corporately and at the facility level.

As Bill mentioned, the American Retirement transaction, besides adding additional locations to Brookdale, had two strategic elements that made the deal very exciting. The first is the ancillary service opportunity that Bill discussed. And the other is adding a significant component of continuing care retirement communities to Brookdale with the largest and highest quality portfolio of CCRCs in the sector that American Retirement operated.

CCRCs are a very stable asset class, generating strong cash flow through rental income, as well as net entrance fees, with average lengths of stay of approximately 10 years. The ARC acquisition has allowed us to add strong management experience in this sector, which brings a complimentary skill set to our operating and acquisition strategy.

Over the last several years many of you had heard me talk about the need and ultimate logic of consolidation of the senior living sector. Over the last three years Brookdale has been front and center in this effort, and we expect to continue in that role.

Since our IPO in November of 2005, we have purchased or committed to purchase 3.2 billion in senior housing assets, representing approximately 1.5 billion of equity investments, including the American Retirement transaction.

These acquisitions added 189 facilities and over 25,400 units to our Company. Even though much consolidation has taken place, the sector still remains very fragmented, with the top operators managing only 13% of the total units. And to us that means further opportunity. We continue to see a healthy deal flow of acquisition opportunities, and we expect to continue our acquisition strategy.

As Mark and Stan will review in a few minutes, the results we are seeing from all three segments of our business, Independent Living, Assisted Living and Continuing Care Retirement Communities are very solid.

As to the supply of the new units, that continues to be low with only 23,360 units, as estimated by the American Seniors Housing Association, under construction in the last year. We expect that number to be materially similar this year as well.

With low supply and increasing awareness of the benefits of senior living, occupancy rates across the industry have increased considerably over the past few years, and as a result we have a very favorable outlook going forward.

With that I would like to turn things over to Mark Ohlendorf who will go over our highlights of the quarter and our integration activities.

It was a great quarter from an operating performance standpoint. We saw increasing occupancy, stable rates, and very strong year-over-year same-store growth comps. Average occupancy in the quarter was 90%. That was up 0.5% from the first quarter of 2006, and up 1.7% from the second quarter of 2005. Average monthly rates in the second quarter were reasonably flat at around $3,100 per month.

Our facility operating income increased 27% in the quarter to 106.5 million. That is over the first quarter of 2006. And the margin improved 180 basis points to 39.8%.

Cash from facility operations increased 28% to 17.1 million, coming out to $0.26 a share in the quarter, up from $0.20 a share in the first quarter of 2006. Of course, we announced a second quarter dividend of $0.35 a share, which was paid in July.

Excluding developments, same-store revenue for our 348 properties in the same-store group were up 7%, primarily resulting from a 5.8% increase in our rates. And this is for the six month period ended June '06 over the six month period June '05. Facility operating income was up 16.7% in the six month over six month period, again driven by the strong revenue performance, as well as synergies that are being realized resulting from last year's merger of old Brookdale and Alterra. Our net loss in the quarter was 20.3 million, primarily due to 38.9 million of non-cash expenses.

ARC also delivered very strong performance in the quarter. Resident fee revenues increased 6.1% over the first quarter of '06 to 130.7 million. Average occupancy in the quarter was 94%. And average rates in the quarter were $3,789. On a same-store basis, again, six months '06 compared to six months '05, facility operating income grew by 10.8%.

Again, as Bill mentioned, in the second quarter ARC generated $160 per month per occupied unit of operating income from it ancillary service business. At the end of the quarter Innovative Senior Care operated 137 clinics with 760 therapists.

As we mentioned in our last earnings call, the integrated enterprise systems for our two primary predecessor companies, old Brookdale and Alterra, are now live. In addition to the IT systems, other corporate functions such as human resources, dining services, purchasing and asset management have been functioning on a combined basis for some time now. And I think you begin to see the economic benefits of this activity in our financial results.

Excluding American Retirement, we have acquired 106 communities, with more than 9,000 units or beds since our IPO. Our integration process for these communities is well under way. Our initial integration activities typically include conversion to Brookdale's purchasing arrangements, adopting our benefit programs, process conversions to utilize our IT systems and centralize the accounting infrastructure, and initial training on our operating methods and procedures.

We have also focused on the field operations and have retained much of the field management that we acquired in these transactions. As we have indicated before, we typically underwrite a transition period of a few months for these larger portfolio acquisitions.

Our integration of American Retirement is obviously a significant undertaking, has already begun. As Bill mentioned, the senior management of American Retirement will remain part of the combined Company, and they are deeply involved in the integration planning and introduction of new services at the Brookdale communities.

We are aggressively pursuing joint purchasing arrangements, and are developing the plan to integrate our infrastructure. We have already begun to roll out ARC's ancillary service business in markets that we share. Everyone within Brookdale is very excited about the opportunities this brings to broaden our service offerings and further improve our financial performance.

Welcome everyone. For Q2 2006 resident fees were 267.8 million, and total revenue was 268.4 million, and a net loss of 20.3 million. Our net loss includes 38.9 million of non-cash charges for depreciation and amortization, stock compensation expense, and straight line lease expense net of deferred gain amortization.

G&A expenses were 23.1 million, which includes 3.8 million of non-cash stock compensation and nonrecurring integration expenses of 3.7 million during the quarter. Also during the quarter we incurred additional G&A as a result of increased budgeted overhead in connection with our recent acquisitions.

As we look at our results, I would like to focus everyone on the key metrics that management and the Board focuses on in evaluating the business, cash from facility operations, adjusted EBITDA, and facility operating income.

Cash from facility operations was 17.1 million or $0.26 per outstanding common share at June 30. Adjusted EBITDA was 46.2 million, and facility operating income was 106.5 million, with an operating margin of 39.8%.

As Mark mentioned earlier, excluding the development, same-store revenues increased approximately 7%, and facility operating income improved 16.7% for the six months ended June 30, 2006 over the same period in 2005.

As we stated in Q1, these results are not indicative of normalized growth, as the six months 2005 did not benefit from the cost synergies resulting from the combination of old Brookdale and Alterra in September 2005, which were being realized during the first half of this year.

Adjusted EBITDA and cash flow from facility operations also include non-recurring expenses of 3.7 million in 2006, and facility operating income included 0.5 million of integration expenses in Q2 2006 related to the recent acquisitions.

Total CapEx of 7.5 million in Q2, net of reimbursements. Our capital expenditures are generally of three types, recurring CapEx of 5.3 million. Recurring CapEx spending for Q2 '06 increased over Q1 2006, as Q1 spending was delayed due to the implementation of a procurement program and our focus on the recently completed acquisitions. As we discussed in the Q1 call, we expected higher CapEx in Q2 and expect the trend to continue into Q3.

EBITDA enhancing CapEx of 2.3 million represents unusual or non-recurring capital items and major renovations at our existing facilities.

In summary, we are pleased with our results, and look forward to the balance of 2006, and working with our new associates at American Retirement Corporation. Now I would like to turn it over to the operator for questions.

(OPERATOR INSTRUCTIONS). [Mark Bifford] at Goldman Sachs.

A question related to the non-recurring expenses. What was the 3.7 million related to?

The 3.7 million is primarily merger and integration activities. It also does include some cost related to Starbucks implementation, some branding costs, and honestly, some dead deal costs on an acquisition transaction we abandoned in the quarter.

For CapEx, you had 5.3 million, is that -- you said you're expecting more in the future quarters? What is a good runrate for that going forward?

Again, we used roughly $500 per unit per year for our recurring CapEx number. I think if you do the math the second quarter was roughly at that level, perhaps just a little bit higher because it was deferred in Q1.

That is still a good runrate going forward then? You are not expecting higher expenses?

We're not.

For G&A you had a number above ours of 3 million. What was that related to, and can we expect a higher runrate going forward?

There's one component in the G&A numbers related to some of our bonus plans, where we essentially condensate people based on net operating income performance. Because that performance was -- we obviously saw very large growth rates at the operating income level this quarter. That did drive some of the accruals for the bonus programs up a bit. Beyond that, I think we're largely on kind of a steady-state.

Occupancy came in a little bit higher than we expected. Were you surprised by your occupancy growth? Or do you expect -- what do you expect going forward?

Again, our different portfolios are at somewhat different places in their lifecycle from an occupancy standpoint. We probably have some room to grow in the assisted living part of the portfolio. The larger properties tend to be pretty heavily occupied. This is really kind of a little longer term discussion in terms of occupancy levels, but obviously good performance in the quarter.

As far as the acquisition environment, are you still seeing a strong environment, more opportunities? How is pricing and cap rate trends?

This is Bill. I think that by historical standards cap rates seem low; that is prices seem high. But we said the same thing, I don't know, four or five years ago when they were trading at 9% cap rates. When you have assets with this type of organic growth qualities, I question whether or not those are high prices or not.

Frankly, high prices for these assets go to our benefit because we think we have a pretty good head start over folks in terms of cost advantages, so we don't seem to be bothered by the prices. In fact, we like them at some level.

The opportunities are still out there. We have been very busy so we don't -- if we continue to deploy capital at this pace, we would be a 300,000 unit Company at some point sooner than expected. We're not -- we see things out there, but we're certainly not trying to buy everything that is out there.

Kevin Fischbeck at Lehman Brothers.

Can you guys talk a little bit about your dividend policy? Historically you have used that as a signal as to what you expect to generate over the next twelve months. Now I certainly understand not raising your dividend when you've only been operating ARC for the last three weeks. But the last time you announced a number of acquisitions you raised your guidance before you had a whole lot of experience operating them. Can you give a little more color around that thought process that goes into your dividend policy?

I don't think our dividend policy has changed frankly. I think that given the size of the American Retirement transaction -- the dividend policy is a policy as opposed to a rule. You take transactions and events on a case-by-case basis. I don't think our policy has changed.

I certainly don't have the authority to talk about our dividend sitting here in the room, because that is a matter for our Board of Directors. But clearly our business organically is performing well, and we have made a lot of acquisitions, including American Retirement. It certainly will be a topic of discussion in the coming Board meetings.

I guess is there any color that you can give on the ARC transaction and how the integration is going? I guess any color on what you think the ancillary service business -- how long it that may take to finally rollout? And in those markets where ARC doesn't have a preference, what are the expectations about startup losses and how long it takes to get those to breakeven?

Sure. We started on the integration really right after the announcement of the deal. In terms of being -- we just obviously were on the road meeting with lots of investors, raising capital, and so the investors kind of got our current thoughts on that. And what we told people was in terms of the opportunity it is as high as $60 million of ancillary opportunity. And our expectation is to build out that business over the next kind of 18 to 24 months.

It is an operating business. It is kind of at the beginning, so it is a little hard to be more specific than that. At this point I don't think we can really offer a whole lot more than what we just told folks.

Then the occupancy rate was -- not the occupancy -- the rate per month was down slightly sequentially. Was there anything going on there that because of acquisitions coming online at a lower rate, or is there anything else going on?

That was clearly one impact here. A number of the portfolios we acquired were highly, highly occupied portfolios. Our core business was up modestly, but there was an acquisition impact as well.

But on the rate per month, did that -- was that brought down by acquisitions, or was there anything else?

Yes, that was brought down somewhat by acquisitions. You see here at times with portfolios that you buy you have assets that are fuller, but they charge less, and that is how they get occupancy. Our goal is to keep the occupancy and charge more by providing more and better service.

Matthew Ripperger at Citigroup.

Thanks very much. Just a couple of questions. The margins that you reported improved pretty materially sequentially by -- your net operating margin was up by 150 basis points from the first to the second quarter.

I just wanted to see if you could give a little color as to what some of the main components were to that improvement, whether it was benefit from acquisitions or incremental synergies, or if there is anything else from a timing standpoint that contributed to some seasonality in the business?

It will be primarily cost savings coming through in the numbers, as we implement more and more volume purchasing arrangements in more areas of the business. There would have been some modest impact -- utility cost for, example, would be somewhat lower in the second quarter compared to the first quarter. But it is primarily related to cost savings.

The 46 millions in adjusted EBITDA is a good runrate to layer in the 30 million plus from the ACR deal going forward?

Not sure. Can you say that again?

The quarterly adjusted EBITDA from ACR was in the 30 million range. So is this 46 million a good number to use going forward?

We would have also had a few acquisitions that closed after the end of the quarter. So I think if you adjusted for those portfolios, the answer would be yes.

The second question I had is just in terms of the rehab business and the ancillary business, you said that ACR has about 760 therapists. To expand that business to your 20,000 overlap units how much additional capacity do you think you're going to have to bring on in the therapists and rehab area?

It is obviously a substantial amount of hiring. To be honest with you, the hiring actually started in the second quarter. ARC's margins were impacted to some extent because of advanced hiring that they have started to do in markets that we share. So it is a significant number of therapists as you roll this out over time.

You're probably talking -- I don't know -- 500 to 700 therapists over -- and that really is what drives this kind of 18 to 24 month time period. It is primarily a function of hiring therapists. If they all showed up at our door today, the cash flow opportunity would begin almost immediately. It is really the time it takes to hire that many therapists.

Then the last question I had, just coming back to the CapEx, with the acquisitions you have done is there going to be a certain amount of growth or EBITDA growth enhancing CapEx that you're going to have to encourage just to upgrade some of the properties that you bought just in recent months?

When we talk about acquisitions, and we have told people our goal is to target going in 10 to 11% cash on cash yields. The yields we talk about is on our price, plus one-time CapEx we spend on the assets. And we would expect that by spending that capital the earnings power off of the asset or portfolio will have pretty good growth prospects to that. The answer is yes, and we kind of factor that into the capital deployment when we make acquisitions.

Is there a ballpark number for growth CapEx that we should assume for the next couple of quarters?

No. The growth CapEx, again, the staff has been identified with the assets we have bought. The only other growth CapEx really comes from acquisitions, and we try not to be predictive about how much we deploy and when, because that gets dangerous if you feel pressure to make acquisitions.

(OPERATOR INSTRUCTIONS). Dan Bernstein at Stifel Nicolaus.

I have a question more on the practical standpoint of the integration with ACR and Brookdale in terms of on the ground level on a city by city basis, who's going to be managing those properties? Will it be ACR's existing management, or will some of that get siphoned off towards Alterra's management and so forth?

As we have explained to people, we feel strongly that one of the reasons for our success has been we have been able to do these integrations while keeping intact a lot of our field operations, and making these mergers and this integration relatively transparent to the people who are actually on-site serving the residents.

The short answer to the question is for the time being the American Retirement properties those will continue to report up through the American Retirement structure into Nashville as they have been. We're shifting a few properties around between old Alterra, old Brookdale and American Retirement just for geographical considerations.

But what we are doing is keeping those operating structures for the time being intact, and then integrating the back office things like accounting, human resources, the IT, procurement, those kinds of things. Does that answer your question?

Yes. Are there going to be any significant IT corporate costs that you're going to have to go ahead with 3Q and 4Q with ACR? You didn't have any for Q2.

We really did most of that last year in the integration of Brookdale and Alterra. We will have some of that going forward, but it won't be that significant.

Nothing at the 2.7 million level that you had in (technical difficulty)?

Certainly not on a quarterly basis, but American Retirement is a substantial business. It is a $600 million a year revenue business. So simply integrating system platforms is -- it is not for free. This is a cost measured in the millions of dollars over probably a 12 or 18 month period.

Any dollars we spend towards that regard, the payback is immediate and recurring. In terms of the return on that capital spend there's nothing better we could be doing.

(OPERATOR INSTRUCTIONS). We have no other questions in the queue at this time. Ms. Nagy, I would like to turn the call back to you for any closing comments, ma'am.

Thank you all for joining us this morning. We look forward to speaking to you next quarter.

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you.