Sonida Senior Living Inc (SNDA) 2002 Q4 法說會逐字稿

Good day and welcome to today's Capital Senior Living fourth quarter 2002 results conference call.

Today's call is being recorded.

At this time, for opening remarks, I would like to turn the call over to the Chairman, Mr. James Stroud. Please go ahead, sir.

Good morning and we welcome you to Capital Senior Living's fourth quarter 2002 earnings call.

The company reported for fiscal year 2002 earnings of 24 cents per share. Management is pleased that 21 cents of the 24 cents is from operations. The 21 cents per share from operations for 2002 compares favorably to 11 cents per share from operations for 2001.

Occupancy rates also improved in 2002. Recently, open communities leased to 76 percent occupancy versus 60 percent a year ago. And the average occupancy rate on stabilized communities was 93 percent. Operating margins in 2002 were also a positive factor at 46 percent in independent and assisted living.

The positive occupancy rates and operating margins are byproducts of senior management's continued focus on the company's business fundamentals. Management continued aggressive marketing programs to increase occupancy, constant reviews of opportunities to increase rents, and monitored controllable expenses at each community. This was a focus simultaneous with the care and satisfaction of our residents.

The company is also pleased that the fourth quarter resident satisfaction survey reported a 97 percent satisfaction rating. Though 2002 ended on a number of positive trends, senior management and employees know the same focus on fundamentals does not end with just the fourth quarter results.

I now introduce Larry Cohen, Chief Executive Officer, for further comment -- Larry.

Thanks, Jim, and good morning, everybody.

We set forth a number of operational and financial objectives for 2002. These included continuing the lease-up of 19 recently developed and three expansion communities, improving the occupancies at our stabilized communities, and improving our operating margins. From a financial point of view we planned to maximize our liquidity and simplify our balance sheet in 2002.

I am please to report that we met or exceeded our goals. For the fourth quarter we earned net income of $1.2 million or six cents per share, and for the full year we earned $4.7 million or 24 cents per share, consisting of 21 cents from operations and three cents per share from asset sales. This is a 91 percent increase from the 11 cents per share earned from recurring operations in 2001.

Cash earnings, defined as net income plus depreciation, for the fourth quarter were $2.5 million or 13 cents per share, and for the full year the company generated cash earnings of $10.5 million or 53 cents per share, compared to cash earnings of $9.8 million or 50 cents per share for 2001.

Occupancies at our established communities improved to an average of 93 percent for 2002. Operating margins at our stabilized, independent and assisted living communities also increased this past year to 46 percent. At our stabilized communities same store revenues increased by 5.1 percent while operating expenses were controlled to a 3.1 percent increase.

Leasing at our 19 newly developed communities, 16 of which have opened since the fourth quarter of 2000, improved to 76 percent up from 60 percent at the beginning of the year. This increase represents a 27 percent growth in new residents. At our recently constructed communities that have been open for more than a year revenues increased by 31-and-a-half percent and net operating income grew by more than 400 percent.

We also achieved a number of successes with the lease-up of our Waterford and Wellington communities in 2002. Our last two openings in North Richardson Hills in Richardson, Texas, have been great successes. We also attained 98 percent occupancy in Shreveport, Mississippi, which was our first Waterford opening. If the lease-up continues through 2003 at the same pace we experienced in 2002, we should achieve stabilization at our Waterfords this year. And I am pleased to report, as Jim mentioned, that we scored a 97 percent resident satisfaction from our residents at our 43 communities in our 2002 survey.

We made significant progress throughout 2002 towards improving our balance sheet. Since the beginning of the year we increased our cash balances by $4.2 million, we have reduced our mortgage debt by $32.2 million, and we improved our current ratio. We also increased our shareholders' equity by $4.7 million to $118.3 million or $6 per share.

We are currently reviewing our purchase options relating to four Triad partnerships in which we have developed and managed 12 senior living communities in lease-up. We expect to make a determination as to whether to exercise any of the options during the first quarter of 2003. Once this decision is made the company will issue guidance for the year.

Fundamentals of the senior living industry are improving as the need for seniors' housing continues to increase with the rapid growth of our nation's senior population and significant constraints on new supply. Capital Senior Living has a strong foundation with well located, high quality communities, excellent on-site staff, seasoned corporate management, and a keen focus on details.

Our operating results for 2002, which exceed industry averages, are the product of this strong base and an operating philosophy of providing residents with a continuum of care.

85 percent of our residents live independently and 15 percent of residents require assistance with activities of daily living. Home healthcare, generally provided by third parties, bridges the gap between independent and assisted living to provide residents the opportunity to age in place at our communities.

We are well positioned to build from this foundation. We continue to evaluate a number of acquisition opportunities for our Blackstone joint venture as well as third-party management and development opportunities.

I believe that the discipline, diligence and patience we displayed in 2002 will prove fruitful with better opportunities arising at fair values. While we are intend on growing our business, we want to do so wisely. We have avoided transactions which have proved to be particularly challenging to others.

Internal growth will come from completing the lease-up of our recently built communities and improvements in the occupancies and margins at our stabilized properties. Additional growth is expected from acquisitions with Blackstone as well as third-party management and development contracts.

We are continuously looking at new opportunities and I am confident that we (are) successfully involved in numerous well conceived and well located senior living communities.

I would like to now turn the call over to our Chief Financial Officer, Ralph Beattie, to review the company's financial results for the fourth quarter and fiscal 2002.

Thanks, Larry, and good morning.

I hope everyone's had a chance to see the press release which was distributed this morning. In the next few minutes I'm going to review and further expand upon highlights of our financial results for the fourth quarter and the 2002 fiscal year.

We are pleased to report that Capital Senior Living has just completed 11 consecutive years of profitability and, in addition, profits in 2002 increased 70 percent versus 2001.

For the fourth quarter of 2002 the company produced revenues of $14.2 million, a reduction of $2.9 million or 17 percent from the fourth quarter of 2001. The lower revenues in the fourth quarter of 2002 were the result of contributing four senior living communities to a joint venture with Blackstone Real Estate Advisors in the second quarter of this year.

Fourth quarter revenues in 2001 also included approximately $600,000 of rental and lease income from triple net leases which expired last year. Resident revenues from communities owned in both years increased 5.1 percent.

Net income increased 73 percent in the fourth quarter of 2002 versus 2001 as the company benefited from a $32 million reduction in debt during the year and lower interest rates on its variable rate debt. Cash earnings, a non-GAAP term defined as net income plus depreciation, were $2.5 million or 13 cents per share, equal to the fourth quarter of 2001. Net income increased year-over-year but depreciation was lower due to the contribution of four assets to the joint venture. For the full year ended December 31st, 2002, revenues of $61.5 million were 13 percent below the prior year due to the contributed assets and the elimination of the lease income. Resident revenues from communities owned in both years grew by $3.6 million or 6.7 percent.

2002 net income was $4.7 million or 24 cents per share. And as we said earlier, of the 24 cents 21 cents was from operations and three cents resulted from asset sales. This net income was an increase of 70 percent over the prior year when the company earned $2.8 million or 14 cents per share. Of the 14 cents earned last year, 11 cents was from operations and three cents again was from asset sales. So earnings from operations grew from 11 cents in 2001 to 21 cents in 2002, an increase of 91 percent. The company generated cash earnings of $10.5 million or 53 cents per share, an increase of seven percent from the prior year.

As of December 31st, 2002, the company had $16.3 million in cash, cash equivalents, and restricted cash, and $118.3 million in shareholders equity, equivalent to book value of $6 per share.

Mortgage debt at yearend was $150.1 million down from $182.3 million at the end of the prior year. And our blended average borrowing cost was below six-and-a-half percent at yearend. Our current ratio was 1.17 and our debt-to-capital ratio was .56.

We'd now like to open the - Dana, could you please take questions for us?

Thank you, Mr. Beattie.

Today's question-and-answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone phone. If you're using a speakerphone, please make sure your mute function is turned off to allow you signal to reach our equipment.

Once again, if you'd like to ask a question, please press star-one. And we'll pause for just one moment.

We'll take our first question from Matt Phezer with Windshield Capital.

Hello, fellows.

Morning, Matt.

All right. You're making progress, it's good to see. Couple questions, first of all, the characters - characteristics of the assets that you're looking at with Blackstone, with respect to who the payer is. You know, I mean one of the things that's nice is that you have a high ratio of private pay. We see in the trade press that Blackstone's looking at some things that don't share the characteristics that you currently have. And I just wonder if what you're looking at with them is different than what you've been doing historically?

Hi, Matt, it's Larry Cohen. No ...

Hey, Larry, how you doing?

Good, thanks. Frozen here in Dallas with the ice storm.

But everything that we're looking at with Blackstone is all private pay. It's primarily independent living or independent with assisted living ...

Right.

... consistent with what we've been doing. And, in fact, there was some press about Blackstone looking at some skilled nursing - was never with us and I don't ...

Yes, I mean, I know they buy some things independently. But I don't if you're familiar with the articles that I'm referring to.

Yes, I am.

OK.

But, no, nothing that we're looking at with Blackstone - everything that we're looking at with Blackstone, rather, is exclusively private pay and very consistent with our philosophy and the type of properties that we operate.

And, Matt, Jim Stroud. Before, if you look - you track those articles with Blackstone, four years ago they started looking at the industry they started focusing on the skilled-nursing area. And that was - that was their beginning analysis. And then ultimately came down to the acuity level and realized that we were focusing and continue to focus on our strengths, as Larry mentioned. And what we look at with them is the independent or the independent and assisted living areas.

OK. Next question, talk a little bit about the option for the Triad partnerships, those are the ones that were referred to in the press release.

... Matt.

Yes. That option's been around for a while, right?

They were put into the management contracts when we began managing these properties, which began in 1999 and has run through the most recent openings in May of 2002.

OK. Is there a reason that you're going to make a decision or can decision be to exercise or not? And if you make a decision not, does that kind of go on?

The options will continue regardless of the decision. They are definitely term of the contracts which are typically 20-year contracts.

We are looking now at the opportunity, as I said - these 12 communities in Triads two through five are in various stages of lease-up. Based on the performance and what we see they're running this year, we think that it would be something to consider to look at the opportunity to acquire the interests, which will be at - for a nominal cost to the company of cash outlay because the original structure - and if you look at our balance sheet you can see the notes receivable - to provide the mezzanine financing have also been funding lease-up deficit.

Yes. You've been funding it anyway, it's just in an external fashion and this would internalize this.

Yes, it would give us greater transparency; significantly increase our revenues; will, obviously, as these properties continue to lease-up and start to be cash flow positive, increase our cash flow. It will increase our debt as well, coupled with the fact that as we discussed in our last public filings, there is an accounting pronouncement out there that suggests that we would consolidate these beginning in the third quarter anyhow. So we think that it's prudent to look at acquiring these interests, bring it into the company, make it simpler.

As I said, part of the strategy we've been looking at the last couple years has been to simplify our balance sheet. So I think that people can understand better how the company is structured and look at the - these assets that they're owned as opposed to in the joint ventures.

Well, it is an inhibition to investment really to have to dig into something so - that is a little bit complicated or less than straightforward. I think ...

Right.

... that would be a good thing. Financial considerations aside, from an investment point of view, I think it's a good idea.

How close are these things to breakeven on cash flow on the lease-up basis? I mean, I guess that they've been going for different lengths of time and ...

Yes, exactly. They're, as I said, the most recent property opened in May. It's been very successful. It's independent and assisted living. The independent living was leased to about 93 percent by yearend. The assisted is in lease-up, it started in the fall. I think on a combined basis the property is somewhere in the range - yearend was approximately - I guess it was oh, about 72-75 percent leased.

So they range - most of them are going to be - they ended the year ranging from the mid 60s up to, as I mentioned, some of these in the 90s now. So - but as I said, you look at the pace that we had of lease up and the velocity in 2002. Looking a January and our budget in 2003, we expect that these properties will achieve stabilization and breakeven later this year.

Which might make it timely to do it anyway?

Correct.

Thanks a lot.

Thank you very much, Matt.

We'll take our next question from Michael Weiss with Joslynda Capital.

Hi, guys, good quarter. I realize you're not giving out guidance until, you know, you decide what you'd do with the Triad, but can you just give us a general sense of how you feel about the market for '03? Do you - do you see the continuation of same store increases and lease-up, et cetera? Just a general feel.

Hi, Michael, how are you? It's Larry Cohen.

Hi, Larry.

Yes. If you look at, as Jim said, the focus and the approach that we have from corporate down to site level, operated our communities, and looking at the budgets for 2003, we expect that that properties will continue to lease-up at a similar pace. We think that there's still room for improvement in our existing portfolio. If you go back to 1996-1997, we were running portfolio-wide at 96 percent occupancies. And as we've seen the last couple of years, that's dropped off into the 92-93-percent range.

But the fundamentals are definitely improving. We have a couple things working in our favor. Clearly, we have demographics working for us. Secondly, there is this severe constraint of new - of capital for new supply so that you have very, very little new product being built in the marketplace.

And, obviously, if you look from 1997 to 2002, where about 250,000 new units came on line. The good news, last year supply dropped by 75 percent from its peak in 1999. It will be even less this year.

And so I think that the fundamentals are improving. We have good momentum on site. So I do think that we can expect to see a continuing of the lease-up of our properties continuing to grow the revenues and the income at our existing properties. And I'm also optimistic that we will find new opportunities this year with Blackstone as well as we're looking at some very interesting opportunities to come in on a fee basis for some development and some management.

OK, thanks.

We'll take our next question from David Wenetick with Gateway Investor Services.

Thank you very much a great job on the last quarter and the full year.

Just have question about pricing. Have you been able to push through any price increases, any rate increases? I know the occupancy is pretty strong now. Can you comment on that?

Yes. Hi, David, how are you? It's Larry Cohen.

Yes, we have seen price increases, in fact. If you look at our rate structure for 2003, our in-house rents are typically growing by four percent. In some markets we're raising the rents by five and six percent. If you look at last year, we did have rate increases across the portfolio, as I said. You saw the 5.1 percent increase in revenues in same store sales, which is a combination of some occupancy but also rate increases. So we are looking at rate increases.

And, obviously, as we look further into this year, what we think we'll continue to continue and complete the lease-ups. Then we will be poised the balance of 2003-2204 for further price increases because one of the phenomenons that we do have is that the rents in our existing portfolio or established portfolio are actually averaging higher than our newer properties because of the phenomenon of the competition that we faced in opening these communities. But as they stabilize we think we can bring those back up to market and are very focused on increasing rents in our properties as well as maintaining the controls of our expenses.

OK. And just a couple quick questions on the cost side. Can you comment on trends in your marketing expenditures? And also wages, now that the job market is not as tight are you not having to pay as high wages? And similar to that, adding on to that, do you compensate your employees with healthcare benefits, and if so, what kind of inflation are you seeing in that component of wages with the competition?

Hi, David, Jim Stroud. On the - on the employee benefit side, we really - because we're self-insured plan, we do a very good job of cost containment. In fact, if you look at it it's been trending usually about four percent and that's what they anticipate the increase could be this year on the employee benefit plan. And the reason is because we take the first loss position and then we reinsure above it, but we have stop gaps on a monthly basis. So we have that pretty well under control.

From a standpoint of overall job market, yes, you're correct. We're finding that we're able to go ahead and hire and replace people that for whatever reason leave our employment. And the overall expense side on expenses this year - and this includes salary, which is our largest expense percentage. But if you take on-site the estimated expenses this year are going to be about three percent.

So it shows us right in the general level of inflation, which is about two to three percent, but we're going to be able to maintain that at three percent because of the cost containment on health benefits as well as expenses.

And then the marketing costs, what trends are you seeing in expenditures for marketing?

The marketing costs from a standpoint of - will start decreasing. The reason being is that 50 percent - generally 50 percent of our referrals come from our existing residents. So when we have the 19 communities up to 76 percent occupancy, now we have a built-in referral base. And you'll start seeing that marketing cost decrease as the year goes on.

And as Larry mentioned, assuming the same trends as '02 and '03, then we would be at the 90 percent or in that range effectively for our leased-up facilities.

OK. And then just a final question, what's the average age of an occupant and are you taking any measures to try to lower that average age in order to increase the time an occupant is in your facilities?

You know, interesting question, because you go back to 1990 our average age at that time was about 78 years of age. And then since - for the past three to four years it's been right at 82 years of age.

And what we do, because of our independent programs and our wellness programs, we really - it's not a function so much of age but the physical condition of the resident. And what we look to is we really cater to the independent side. We cater to the capability through our wellness program and market and reach out that area.

But because, as Larry mentioned, we do have aging in place, and even if we only offer independent living, there is the home healthcare component that can come in so a resident can age with us. Because once we bring a resident in and incur that marketing cost, then we prefer to have them age in place rather than all of a sudden if they have a temporary illness leave the facility.

I understand. And maybe just the final question, are there anything anecdotal you can tell us about as far as a decrease in competition? Are there any competitors that have closed in proximity to your existing facilities or anything like that you can point to?

I would say that two things, one, as I've mentioned, clearly on the supply side, there's much less new supply coming on - you know, new supply.

We are seeing in certain markets competition where operators who were not well capitalized - and one of the things that, you know, I've noticed the last year, we looked at upwards of a billion dollars of properties - potential acquisition over the last year. And I would say that a significant majority of what we looked at were properties that, unfortunate, were ill conceived. They'd been built by developers, lawyers, groups that don't understand the operational side of this business. And what we realized is that they are structurally flawed where either the mix is wrong, the unit sizes don't work, their locations, there just aren't any seniors. I looked at a property upstate New York in the middle of farmlands. I traveled for miles and all I saw were silos and barns.

So we're seeing a number of situations - we have one competitor that has run out of money. The local paper recently published how they could not pay the real estate taxes. Obviously, not very reassuring for residents looking for the security of seniors' housing.

So I do think that we're seeing some of the competitors fall by the wayside. We're also seeing, on the acquisition side, opportunities to come in at fair value and look to reposition some of these properties by reconfiguring a floor plate in order to bring the mix back to a level that works. And that's something we're looking at in a number of cases right now.

So I do think that there are a number of properties that are functionally obsolete even though they're new. And, you know, those properties may - there have been some situations, not in markets we operate, but I'm aware of some situations where properties have closed, the buildings have been sold for alternative uses.

So I do think that we're going through a period where the markets will work their way out and the strong will survive and the weak properties will either be taken over by strong operators and reconfigured. But if a property is just a bad property in a bad location, you know, we're not magicians and it's going to take very long time for those properties to make some money. So, you know, they become less competitive to us.

Thank you ...

David ...

... very much.

One thing that we find in looking at the development, as Larry mentioned, we've looked a extensive amounts of projects for sale. But what - two indices that I think respond to your questions, one, we're getting calls now from the multifamily developers and re-developers as well as the hotel developers and re-developers, asking if this project, which was designed as an independent living or an assisted living - and typically they're more the larger assisted living, stand-alone facilities - can they be converted to be multifamily or hotel. And we're starting to see, in the past three to four months, the calls at that level are really increasing.

So I think that's a sign of that projects now, as Larry mentioned, at either location or operationally were physically or functionally inefficient are now looking to be converted back into a higher use.

Thank you very much.

Thank you, David.

We'll take our next question from Glen Mattson, investor.

Good morning. Could you give us more details, please, on the receivables from affiliates, how many communities does that represent and percent of assets of those 12 communities, and what your expectations are for this, please?

This is Ralph (Beattie). Actually, the receivables from affiliates pertain to 19 communities. As Larry said earlier, we're looking at actually acquiring interest in 12 of those communities. There's another partnership, one of the Triads, that has third-party equity that makes that acquisition not quite as simple.

But the receivables from affiliates and notes from affiliates actually pertain to 19 communities and five Triad partnerships.

And the expectation, I guess, will be it'll be down substantially once you exercise that option, if you exercise that option?

If we exercise the option, basically the majority of that would be consolidated because we would now own those affiliates. So that number would drop substantially.

Right. And do you expect to put more into that asset do you think or are you going to just let it work its way down?

Are you referring to the ones that we're not planning to acquire?

Well, I'm talking about adding more communities. There's 19 and we take 12 out leaves seven. Do we expect to have more being added to that asset class?

I would say that at the present time we have no plans to develop future communities through affiliated partnerships.

I see. OK, thank you very much.

We'll take our next question from Pidor Gyurfi, investor.

Hi. I would like to congratulate for your last fiscal year. My question is concerning the amount of restricted cash that you have out of the 16.3 million?

Yes. The restricted cash applies generally to bank deposits that we've made, compensating balances that pertain to loan modifications that we've put in place during 2002. So we have some cash that we've placed as additional collateral with banks to give us certain loan terms that were negotiated.

And ...

And those funds will be released as we meet certain operating criteria. And there are plans to release that cash over time - excess properties meet certain performance objectives.

I have a second question that's concerning the Triad entities. Does management contemplate to acquire them at, you know, the option value - the value that you have negotiated at the beginning and then turning around and contributing them to the Blackstone partnership at fair value?

Peter, hi, no. We are looking at if we acquire the interest in the Triad partnerships, they will stay in the company, they will not be contributed to the Blackstone venture.

Thank you so much.

Thank you.

As a reminder, if you'd like to ask a question please press star-one on your touch-tone phone.

And we do have a follow-up question from Matt Phezer.

Hey, I'm not a teaser I'm a Vassar. Anyway, my teasing days are long gone, fellows.

Anyhow, listen, would you make a general comment about the - what you expect to come out of Washington and how you - if any ways you think it would impact your operations?

Matt, are you speaking of like Medicare-Medicaid ...

Yes, I'm thinking about the whole reimbursement environment and particularly for certain segments of your business it would have more effect than others and the ...

Right. As Larry mentioned, and it's been the history of our company, we really are focused on private pay ...

Understood. But ...

And so what happens in that situation - I think there's several positive things that will come out that will benefit us.

I think the number one thing, the President in his State of the Union message mentioned tort reform. And then in New Jersey you see 8,000 doctors meet in protest, which is kind of unique to see ...

Right. I got the - tort reform would not just be good for you, my friend.

Right. And so tort reform, the reason we're focused on it because if it is handled properly then across the board, since we are still considered a healthcare company even though we're independent living focused, it would reduce and have a downward pressure on our insurance costs. So I think that's probably the strongest benefit to us.

From the standpoint of our private pay mix and would we ever move into the Medicaid/Medicare, that's right now we don't foresee that. But if Congress can come in and get a reimbursement rate that's reasonable and have it on a static basis, then other global benefit to our company is that, because we are viewed as part of the healthcare sector, the more stability brought to the healthcare sector the more the institutional and individual investors will come back in.

OK. Thanks.

Thank you.

Gentlemen, there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing remarks.

Well, on behalf of senior management and employees, we appreciate everyone's interest in Capital Senior and we wish you to have a good day.

This does conclude today's conference call. Thank you for your participation and you may disconnect at this time.