Sonida Senior Living Inc (SNDA) 2003 Q2 法說會逐字稿

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The Capital Senior conference call will begin momentarily .

Please stand by we are about to begin. Good day, everyone, and welcome to the Capital Senior Living second quarter 2003 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 welcome to Capital Senior Living second quarter earnings call. The second quarter results reflect the company's business platform with earnings from operation at 5 cents per share and earnings from the contribution of Cottonwood Village to the black stone joint venture of approximately 10 cents per share. In addition, the company's business platform was expanded by the acquisition of the Triad interest, which owned 12 communities developed by Capital Senior Living in cooperation with Triad Senior Living. The company continued it's focus on operations with operating margins reported in the press release this morning of 48% and an average occupancy rate on stabilized communities of 91%. For further comment about our second quarter results, I now introduce Larry Cohen, Chief Executive Officer. Larry.

Thank you, Jim, and good morning, everybody. We're pleased to report our financial and operating results for the second quarter of 2003. We continue to succeed in leasing up our recently opened senior living communities, enhancing our cash flows from our established communities, and achieving high operating margins through revenue increases and expense controls. The acquisition of the Triad Partnership effective July 1, will greatly simplify our balance sheets and the consolidation of the triad entities beginning in the 3rd quarter will provide greater transparency. For the 2nd quarter we earned a net income of $3.1 million dollars or diluted earnings of 15 cents per share of which 5 cents were from operations. This compares to the second quarter of 2002 when we earned $800,000 dollars or 4 cents per share.

Occupancies at our stabilized communities average 91% during the quarter. Leasing velocity during the quarter was good, with movings averaging 5 per month, although attrition resulting from deaths or higher levels of care were slightly higher than normal. Attrition has slowed in June and July and our leasing activity is strong moving into August. I am particularly pleased that leasing at our recently open communities, consisting of 19 Triad communities and four Spring Meadows communities, improved to 80% versus 66% in the prior year. This is also a marked increase from the 74% levels at the end of the first quarter of 2003. Our stabilized independent and assisted living communities enjoy operating margins of 48% before property taxes insurance and management fees. Revenues of these communities improve 5% over the same period last year, and by controlling expenses, their operating income improved by nearly 10%. Revenues at our recently opened communities increased by 34% and their net income grew by more than 350% since the second quarter of 2002.

We continue to simplify our balance sheets and improve the transparency of our business model. Effective July 1, we purchased the remaining interest in the Triad II-V partnerships. These 12 communities have a combined resident capacities of 1,670 with a resident mix that is 95% independent living and 5% assisted living with all revenues from private pay sources. By exercising our purchase options, we purchase fees interest for $1.7 million dollars plus liabilities assumed. If the transaction had been completed as of June 30, we would have increased our property and equipment by approximately $182 million dollars , reduced our notes receivable from affiliates by approximately $73.7 million, and increased our liabilities by approximately $119 million dollars. These 12 communities produce revenues of approximately $9.7 million dollars during the first six months, 2003, which if owned, would have increased the company's resident revenues by 37% during the period. When we consolidate the operations of these communities, we will eliminate interest income in the Triad advances and will have greater depreciation expenses.

This will result initially in net loss, although we expect our cash earnings to remain positive. It's important for our shareholders to understand that cash flow has been and will continue to be the yardstick by which we measure our operating performance. As these communities continue their lease-up, we expect to see steady progress in improving cash flows. As these communities stabilize, we expect to see significant improvements in our cash flows resulting from their net income and the elimination of funding lease of deficits. Our 2003 business plan is focused on completing the lease-up of our recently built communities, improving the occupancies and operating margins in our stabilized properties, reducing our long-debt and increasing our liquidity. As we announced earlier this month, we contributed the Cottonwood Village Community to our joint venture with Blackstone. As a result, we realized a $3.4 million dollar pre-tax gain. We were able to attire $7.4 million dollars of long term debts and we received $3.1 million dollars in cash from the venture.

Cottonwood Village is a great success story. It had been the company's smallest property with 66 units of independent living. We expanded it in 1998 by adding 69 units of independent living and 47 units of assisted living. We recognized significant value by leasing up the expanded community and then contributing it to the Blackstone venture. Plus, we continue to share in the future economics of the community through our 10% ownership interests and our long-term management contract. In addition, we retain purchase rights under our venture agreement, should we choose to purchase the property back in the future. At this time, I would like to introduce our Chief Financial Officer, Ralph Beattie, to review the companies financial rules for the first quarter of 2003.

Thanks Larry and good morning. I hope everyone had a chance to see the press release which was distributed last night. In the next few minutes I am going to review and expand upon highlights of our financial results for the second quarter in first half of 2003. The company earned $3.1 million dollars of net income in the second quarter of 2003, equal to diluted earnings per share of 15 cents. Approximately 10 cents of the 15 cents per share earned was due to gains on the sales of two assets during the quarter. At the end of the second quarter, the company contributed the Cottonwood Village community in Cottonwood, Arizona to it's joint venture with an affiliate of Blackstone real estate advisors. As a result of the contribution, the company retired $7.4 million dollars of long term debt, received $3.1 million dollars in cash from the venture, and retained a 10% interest in the community.

As with other properties previously contributed to the Blackstone joint venture, the company will receive management fees under a long term management contract and may earn future incentive payments. Our gain on this transaction was approximately $3.4 million dollars pre-tax, or about 10 cents per share after tax. In addition, we sold a vacant parcel of land in Omaha, Nebraska, this quarter, for approximately $400,000 dollars, and realized a pre-tax gain of approximately $100,000 dollars, less than one half cent per share after tax. Excluding the gains on the sales of assets, the company earned $0.9 million dollars of net income in the second quarter of 2003 on revenues of $14.3 million dollars. This compares to net income of $0.8 million dollars in the second quarter of 2002, on revenues of $16.2 million dollars. This represents an increase of approximately 16% in recurring earnings from operations. Revenues this year were lower because the second quarter of 2002 included four communities, which were contributed to the the Blackstone venture in June of last year.

These four communities produced $2.3 million dollars of revenues in the second quarter of last year. On a comparable basis, resident revenues from communities owned in both periods grew from $13 million dollars last year to $13.3 million dollars this year. EBITDA, which we defined as net income from operations plus depreciation, was $3.5 million dollars in the second quarter of 2003, compared to $4.4 million dollars in the prior year period. The difference is attributable to the four communities contributed since Blackstone joint venture. Cash earnings, which we define as net income plus depreciation, were $4.4 million dollars in the second quarter of 2003, compared to cash earnings of $2.3 million dollars in the second quarter of the prior year. Through the first six months of 2003, the company has produced revenues of $28.8 million dollars, compared to revenues of $32.8 million dollars in the first six months of 2002.

The four communities contributed to the Blackstone venture last year, produced $5.1 million dollars of revenue in the first six months of 2002. Resident revenues from communities owned in both periods grew from $25.8 million dollars last year, to $26.5 million dollars this year. Excluding gains on the sales of assets in both periods, earnings per diluted share increased from 10 cents in the first half of 2002 to 11 cents in the first half of 2003. The company produced cash earnings of $7 million dollars in the first half of 2003, compared to cash earnings of $5.8 million dollars in the comparable period in the prior year. Moving to the balance sheet as of June 30, 2003, the company had $10.8 million dollars in cash and cash equivalent, including $4.5 million dollars of restricted cash. Long term debt declined during the quarter from $139.1 million dollars to $130.6 million dollars, a reduction of $8.5 million. And share holders equity on June 30, was $122.6 million dollars or approximately $6.20 per outstanding share. And finally if you would like to mark your calendar the date of our 3rd quarter earnings conference call has been set for November 5, 2003, at this same time. We now would like to open the call for questions.

Thank you, gentlemen. Today's question-and-answer session will be conducted, electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. We will proceed in the order that you signal. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star 1. We will take our first question from Jerry Doctro with Legg Mason. Please go ahead.

Good morning.

Morning, Jerry.

I think you were saying that the 48% margin was sort of net of property taxes, as well as management fees. Is that --

That's correct, Jerry. If you look at our margins, and the reason we do that, um, we look at our controllable and non-controllable expenses. If you take back our taxes and insurance, our margin actually is 41% versus the 48.

Okay. And how's the 41% sort of compare with sort of past periods, or you can see fairly stable.

That is a number actually has gone up some. If you look at historically, the margins were running between 46, 47, they were actually 49 last quarter, 48% this quarter. This year, we're up a little bit.

Okay, and I was just wondering if maybe you can give us a little more color -- on I mean, I think you touched on that, basically your increases of revenue just offsetting your, you know, your expenses. But in terms of issues like you're seeing out there on liability. That's the sort of thing. I was wondering if you could give us more color.

In fact, if you look at our numbers for the quarter, our revenues grew by 5%. Our operating expenses grew by 1.1% with our net income growing by nearly 10%. We renewed our insurance premiums and policy as of July 1, annual, and, um, you know, we went through a process probably three, four years ago with our carriers. We brought Chuck down here. We explained the independent living model. We worked closely with our risk management team and the insurance carriers on our leases. On our operations. And, in fact, I think we were very pleased this year that we didn't see any significant increases in our insurance. In fact, we experienced the increases a couple of years ago. So, you know, this year was probably the easiest that we have been through the process working with different carriers, getting the bids out, and then looking at the renewals. I think it's a testament to the fact that 96% of the residents live in independent living. Coupled with with the fact that our risk management team got ahead of the issue before it became a big issue, really, three years ago, and through a very good coordinated effort working in partnership with the insurance carrier, we're really able to manage this process and control our costs.

One other thing, if I could. You indicated that you would likely see a losses next quarter as Triad, on the GAAP basis, even though cash flows would be positive. What sort of -- is there a time period in terms of the GAAP earnings sort of turning around that that transition or does it really depend on lease up?

Well, clearly as we lease up our properties, we expect that we will continue -- complete most of it funding towards the Triads throughout this year. We're looking to be cash-flow positive next year, and it's going to be a function of a lease-up of when that occurs. We have not given any guidance as to specific quarters, but if you look at our lease-up, you know, we have been averaging move-ins of 5 to 6 gross a month, our attrition, again, varies quarter to quarter, but we made good strides, which is interesting on the Triads, actually, we announced that our lease up on our newly-built properties, which includes The Spring Meadows, which were the properties we took ownership interest in, at the beginning of this year. If you look just to the Triads, the Triads ended the second quarter, leased to 84% compared to 68% the second quarter a year prior. So, you know, we're looking that, again, is going to be a function of, you know, we haven't even done the budget yet for '04. It's going to be a function of revenue increases for '04, and will continue a lease up, but we do think that we'll see a continuing dwindling of losses and then we'll confer to EPS positive, I think, the important factor is that we'll be cash flow positive and that cash flow will grow throughout next year.

Okay, thanks.

If you would like to ask a question, please press star 1 at this time. We will take our next question from Bruce Brewster with Brewster Asset Management. Please go ahead.

Could you review for me your strategy with respect to putting units into the partnerships when they become cash flow positives. It seems to me that that would be the Ideal time to want to have a unit when it was contributing to your cash flow, and yet you want to take all the available cash that may be available and, um, put it back on your balance sheets. I am sure there is a good explanation for it. Why would you want to do that?

Well, if you look at the reason we're taking the ownership today, there are a couple of issues. One, which we have been reporting for some time now is that there have been some changes in the financial accounting standards that would require these partnerships to be consolidated in the third quarter. Whether we took ownership or not. We feel that this is an opportune time to take over the ownership. We are eliminating the fees, being paid to the third party GP that is being bought out. We also are going to get the full advantage of the tax benefits, which we have not yet received because to date, we have only had a 1% partnership interest so that the tax benefits that accruing to the Triad Senior Living entities. So, we feel that from a cash perspective, it helps the company. We have certain savings, obviously through the cash flow. There is a fixed formula for the buyout, which would grow over time. We're able to minimize the purchase price and we think that as these properties do perform and continue to improve, we'll enjoy the benefits.

From a cash-flow standpoint as you probably know, under a management agreement, we have been obligated to fund the deficit anyhow, so if you look at whether we own the properties or manage them under those contracts, we would still be responsible for the lease of deficits. However, now we get the benefits of saving some fees in those partnerships. Minimizing the future payments of increased purchase price under the formula to buy back these assets, and we think the tax losses, which are significant, coupled with the fact that we think it simplifies the balance sheet, gets greater transparency, which gives the investment community an easier model to understand when you look at our company. If you look, Bruce, back, to the 10-Qs and 10-Ks, you will see that we consistently have reported the consolidated financials for the Triads, and as we meet with investors, both respective and existing shareholders, we end up spending a lot of time working through the footnotes to our financials in putting together the pieces. We think the transparency will simplify the presentation in our business model to the investment community.

Thank you.

We will take our next question from Andrew Jones with Northstar Partners. Please go ahead.

Good morning, guys. A couple of questions. First, could you explain why you did the contribution of the Cottonwood Property to the joint venture with Blackstone?

Yes, hi, Andrew, how are you? It's Larry Cohen. We did it for a couple of reasons. One was to improve our liquidity. Again, our business strategy has been to maximize our balance sheet by improving liquidity and reducing the long-debt. We do, you know, the fact that we now take on these Triads, we're bringing on debt to the balance sheet, which we hadn't before, so we feel that a way of really managing our balance sheet, we feel we have kind of maximized the value of the Cottonwood asset through the expansion program, the lease up program, are able to capitalize that through the contribution, pay down our debt, improve our liquidity, and, again, the nice feature about the Blackstone venture is that we are a co-owner so that we do share in the future economics as well as having incentives, plus we have the right to purchase the assets back from the venture.

So, we think it's a good time, particularly with looking at bringing them on the triad partnerships that we are able to improve our liquidity and reduce our debt. Looking over the next couple of years, we may decide to contribute one or two more properties. Again, our goal is to really see our platform grow through the continuing lease-up of our newly-built properties and the cash flows that we expect that they will generate and then growth from future expansion by new acquisitions with Blackstone new management opportunities, as well as potentially some development opportunities for third parties, where we can generate fee income and long-term management contracts.

I would think that, particularly with the leverage up of the balance sheet, the coverage ratios would be what you would be focusing on. You're already talking to people about, you know, focus on cash flow, not earnings. Selling off a mature property that's probably at its peak cash generation to pay down debt that probably -- is probably dilutive transaction, isn't it?

No, I don't think so. I think that if you look at -- well, we are going to lose, obviously, the cash from the property. If you look at where we can redeploy that cash in paying down debt, you know, some of the debt we have is fixed. Some is variable rate debt. The debt ranges from probably fixed rate, 8.2%, some variable rate debt is as low as 250 for the LIBOR. But, again, it's really looking at the liquidity, the covenance, and we think that the use of that cash, um, will be beneficial for the future growth of the company.

What is -- what were the -- what was the cap rate on the property then, or the rent yield on the property?

We haven't disclosed that, but if you look at independent living properties in the industry, the average cap rate is about 10%, so, you know, we feel that we're within that range.

So if you're paying down 8% debt with a 10% cap rate, the property has to be diluted, right? Well, anyway, the second question I have was to the operating expenses. The operating expenses in the fourth quarter of last year dropped significantly, and I thought that that was due to the contribution of the property, the four properties to the Blackstone joint venture. Then, they edged up in the first quarter from 7 million to 7.6 and now they jumped again to 8.2 million. I'm just wondering if there is anything in there that isn't apples-to-apples on a sequential basis that I'm missing. Because it seems to me that it a very significant rise in operating expenses.

Andrew, it's Ralph Beattie. Basically, there is something to what you're saying. When we take a look at operating expenses, normally the relationship you would expect to see would be operating expense to resident and health care revenues and that relationship should be fairly consistent over time. . The last couple of quarters I have had a couple of unusual things occur in them. One of them is we have a self-funded medical benefit plan and basically, we have been truing up at the end of each quarter our, um, health care reserves to our actual claims history, and we have had a couple of swings in the last couple of quarters in terms of actually truing up that reserve to our actual claims experienced.

We had a benefit in the first quarter of 2003, not quite so large a benefit in the second quarter of 2003. The other thing which has happened, which is having a very moderate effect on the operating expenses is that we refer to our, um, independent and assisted health care percentages on our total-owned and managed communities. The properties we have contributed to the Blackstone venture had a higher percentage of independent living versus assisted living in the overall portfolio, so that our own portfolio, which is represented by the operating expense number is moved slightly towards additional assisted living, which has lower margins, so that's having a partial effect as well. There's a couple of different things going on. But I would say in the future, you would expect to see the operating expenses as a percentage of resident health care revenues to be somewhere in the high 50s to 60% range would be our typical operating target.

You lost me a little bit there, but the -- the revenues from resident and health care in the fourth quarter were 13.3 million, and you had operating expenses of $7 million against it, and the revenues are the same and now we have operating expenses of 8.2 again. So I guess my question is really just what -- what's the ongoing level because it seems to me that that's an apples-to-apples comparison, to a vastly different expense number. You said you had benefits in the first and second quarter, that would argue for the expenses being lower not higher.

But we realized in the fourth quarter of 2002, that we were over accruing our health care claims, based upon our actual claims experienced, so we had set a budget and were actually accruing on a per-employee basis for what we expected our health care costs to be. At the fourth quarter 2002, we realized we were significantly over accrued for those expenses, so we took a credit against expense in that fourth quarter 2002, and continued to true up that reserve in each of the last couple of quarters and will continue to do that going forward. So, basically, the fourth quarter of 2002 was the number which doesn't look sequentially correct if you're comparing a quarter-to-quarter.

You can tell us what the credit was? Or the rate in.

I don't have the exact figure with me. But it was hundreds of thousands of dollars.

Okay. Thank you.

We'll take our next question from Richard Lidman, private investor. Please go ahead.

Hi, just had a question regarding your financings for the Triads. You alluded you had 84% leasing capacity on it. When do these properties become fully stabilized so that you will be able to get basically lower interest rates on a refinancing in.

Um, Richard, the loans we have in place now typically run through, I guess on an average, early 2006.

Uh-huh.

The loans, we have the ability to pay them off and refinance them. You know, we're looking at 2004 at the year where the properties will see stable operations. We also would like to maximize the value for refinanced purposes by continued to see revenue increases. Some of the properties as we lease-up in the competitive market, particularly with the open building that occurred between 99 and early 2000, 2001, um, we find that the average rents on the leased-up properties are lower than our stabilized properties, so we want to get those rents back into a more normal level, which will maximize the value-to-properties and refinance those loans. So, we're looking at that we obviously would like to do it sometime between the stabilization of 2004 and when the loans mature in 2006, which probably means that sometime in 2005 is when we will expect to see refinancing of the properties.

Will you do these as onsies, twosies, or as a group?

We have flexibility there. If you look at the lenders, the best lenders out there today for this type of product were Fanny Mae can may and Freddie Mac.

Sure.

We also have each of these partnership are separate entities with their own bank loan. So, what will happen is we'll most likely refinance each portfolio. For example, Triad II has three properties, Triad III, has seven properties, Triad IV has two, and Triad V has one so whats most likely, we will refinance by lender each and it will be in different groupings.

I had one follow-up question. I guess it's boarder and more with respect to the industry. I mean as I recall the industry, five years ago, basically it seemed to be that everyone was trying to create construction lending fees. Now, people are trying to generate rental income like you're doing right now. Now, sunrise seems to be going to a management model. It seems to be an industry that is in search of a -- a way of approaching the stock market to show consistent earnings flow. What do you -- what's the right way to approach this industry as a public company?

Well, I will ask Jerry. I will say that if you look at the hospitality industry there, has always been a differentiation amongst companies that look to manage and companies that look to own, you know, if you look at this business, we think that the cash flow from the properties is an important criteria that will allow us to have a platform per growth and use that cash for corporate purposes. So, you know, we believe that we will own, we will manage, we will do both and what we'll look at is the situations where we will pick up third party management contracts, which is a great way to grow our business with no capital. We also believe there is a great platform of growth through the enhancement, through the lease-up of the triad properties.

So, you know, not to be circumventing the answer, I'm not sure that anyone has a perfect motto, but I do think that we look at a -- a, believe cash flow for this business is more important than EPS, and we think that in maximizing the cash flow will be through a combination of owning assets, but we will also look to grow our business through management fees, as well as development fees where we can really use the -- the strength of our business. It's always been the operations. And we have a great infrastructure with regional operating centers with a very strong presence nationally where we can level off our resources to be able to grow our business without having to deploy capital. Obviously at stock prices where they are today, we will now look to the equity markets. That would be dilutive. We will look to maximize the cash flow from our business and growth of our business, both through ownership and as well as taking on management assignments.

Fair enough. Sounds like it's basically a mix of all three ways that the industry has made money before.

exactly.

Yeah. Okay. Fair enough, thank you.

Thank you.

Once again, if you would like to ask a question, please press star 1 at this time. We will go next to Max -- [ Indiscernible ] with Windsor Capitol. Please go ahead.

Hi, guys, good morning. If you already touched on this, I had to jump off the call for a minute and missed it. Not every day we see your company in "the New York times." The question I had is: How long are these management contracts that you jet up with Blackstone?

The Blackstone contracts are typically five years with renewals. Our contracts generally range, the Triad contracts had been actually 22 years, I believe. If you look at our Spring Meadows contracts, they're 15 years plus renewals and the Blackstone contracts are five years plus renewals. So, our contracts, the minimal contract we have is five years and we go out as far as 15 to 22 years.

Five years would be relatively shorter. Are we to conclude anything by that? Tell us about the terms of renewal. Is it by mutual consent?

We have the option with -- they extend -- beyond the five years.

Okay, so it's a one-way option. The five-year renewals, or are they shorter-term renewals?

The renewals I believe on the renewal Blackstone or annual renewals of the option. The other is the Spring Meadows, the 15-year contracts, with renewals that are options.

Okay. [ Indiscernible ] Thank you.

Thank you.

Gentlemen, there are no additional questions. Mr. Stroud, I'll turn the call back over to you, sir, for closing comments.

We appreciate your time and interest in the company, and thank you and have a good day.

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