Sonida Senior Living Inc (SNDA) 2003 Q3 法說會逐字稿

Good day, and welcome to today's Capital Senior Living third-quarter 2003 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, 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 Corporation's third-quarter earnings call. The senior housing industry continues to attract investor and lender interest. We recently attended the conference of the National Investment Center for the Senior Housing & Care Industries. Robert Kramer, President of the National Investment Center, reported attendance was the second-largest in their history. The attendance was over 1,300, with 300 conferees attending for the first time.

Capital Senior Living in the third quarter of 2003 also continued to focus its interest on the basics of increasing revenue and liquidity while managing expenses. The foundation for increased revenue was broadened with the purchase of the Triad partnership interest. The Triad Entities own 12 communities with a combined resident capacity of approximately 1,670 residents. The residents mix is 95 percent independent living and 5 percent assisted living, consistent with company's current portfolio. This provides revenue growth opportunity, since the communities are still in lease-up.

Also in third quarter, the company completed the sale/manage back of the Atrium of Carmichael to a fund managed by Prudential Real Estate Investors. The community was sold for 11.7 million, and the sale enabled the company to reduce its long-term debt by $7.4 million.

The acquisition of the Triad interest and the sale/manage back of the Atrium were important steps in the third quarter of increasing the company's revenue and liquidity while managing our expenses.

I now introduce Larry Cohen, CEO, for further comment. Larry?

Thanks Jim, and good morning. We're pleased to report our financial and operating results for the third 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. With the acquisition of the interests in the four Triad partnerships, our revenues have increased, our balance sheet has been simplified, and our business model has become more transparent.

Our earnings for the third quarter reflect the fact that the Triad communities are still in lease-up, and have not yet stabilized. In addition, with the consolidation of the Triads, we no longer accrue interest income on advances to these Triad entities, and our depreciation is on a larger asset base.

For the third quarter, we are earned net income of $300,000, or diluted earnings of 1 cent per share, which includes an 8 cent loss from operations and more than a 9 cent gain from the sale of a community.

Occupancies at our stabilized properties averaged 91 percent during the quarter. I'm pleased that leasing at our recently opened communities, consisting of 19 Triad properties and four Spring Meadows, improved to 82 percent versus 70 percent in the prior year. Our Triad communities ended the quarter leased to 85 percent, and we have seen even better gains during the month of October. In fact, we have experienced an improvement of 2 percent in the lease-up of our 23 recently opened communities during October, ending the month leased at 84 percent. And 10 of these properties are now leased to more than 90 percent.

There were many success stories this past month, but none as impressive as the improvements at our Waterfords in Oklahoma City and Springfield, Missouri. Our Oklahoma City community enjoyed a 15 percent gain in occupancy in October. It took 23 deposits over the last eight weeks, and has now leased to 91 percent. The Waterford at Iron Bridge in Springfield, Missouri ended September with a 79 percent occupancy, and it is currently leased to 95 percent.

We know we are getting closer to stabilization of our newer communities when, at our monthly management meeting, our marketing heads start talking about the limited number of apartments to rent. Our stabilized independent and assisted-living communities enjoyed operating margins for the quarter of 46 percent before property taxes, insurance and management fees.

Revenues at our communities improved 6 percent over the same quarter last year, and by controlling expenses, their net operating income improved by nearly 20 percent. Revenues at our recently opened communities increased by 24 percent, and their net operating income grew by more than 157 percent since the third quarter of 2002.

As mentioned, we continue to simplify our balance sheet and improve the transparency of our business model. Effective July 1st, we purchased the remaining interests in the Triad II through V partnerships. These 12 communities, with a combined resident capacity of the 1,670, have a resident mix that is 95 percent independent living and 5 percent assisted living, with all revenues from private-pay sources. By exercising our purchase options, we purchased these interests for $1.7 million plus liabilities assumed. As a result, we have seen significant changes in our balance sheet and income statements.

Property and equipment increased by approximately $184 million. Notes receivable from affiliates decreased by approximately $74 million, and liabilities increased by approximately $120 million. With the consolidation of these communities, we increased our revenues in the third quarter by $5.4 million.

We have also eliminated interest income on the Triad II through V advances, included interest expense on these Triad entities' mortgage debts, and incurred greater depreciation charges. As expected, the consolidation has resulted in a net loss from operations, although cash earnings remain positive.

It is important for our shareholders to understand that cash earnings has been, and will continue to be, the yardstick by which we measure our operating performance. As these communities continue to lease up, we expect to see steady progress and improving cash flows resulting from increases in operating income and the elimination of funding lease-up deficits.

Our 2003 business plan has been focused on completing the lease-up of our recently built communities, improving the occupancies and operating margins at our stabilized properties, reducing our long-term debt, and increasing our liquidity. As announced last month, we entered into a sale/manage back action with a fund managed by Prudential Real Estate Investors. As a result of our sale of the Atrium of Carmichael, we realized a $3.1 million pre-tax gain, and we retired $7.4 million of long-term debt. The proceeds from the sale/manage back are being used primarily to retire additional debt. I'm pleased to report that we expect to retire approximately $32 million of debt in 2003.

At this time, it's my pleasure to introduce Ralph Beattie, our Chief Financial Officer, to review the company's financial results for the third quarter of 2003.

Thanks Larry, and good morning. I hope everyone has had a chance to see the press release which was distributed last night. In the next few minutes, I'm going to review and expand upon highlights of our financial results for the third quarter and first nine months of 2003. If you need a copy of our press release, it has been posted on our corporate web site at www.capitalsenior.com. I would also like to point out that the last page of the press release contains a reconciliation of certain non-GAAP measurements which we believe are meaningful to our investors.

As Larry mentioned earlier, this is the first quarter in which we have consolidated the financial results of Triads II through V due to our purchase on July 1st, 2003 of the partnership interests we did not previously own. We had expected to also consolidate the financial statements of Triad Senior Living I in the third quarter of 2003, but the Financial Accounting Standards Board recently decided to defer the effective date of FASB Interpretation Number 46, entitled Consolidation of Variable Interest Entities. The deferral requires public companies to adopt the provisions of the interpretation at the end of periods ending after December 15, 2003. The company therefore expects to adopt the provisions of this interpretation on December 31st, 2003, and its adoption will result in the company consolidating Triad I earnings in subsequent periods.

Moving to the numbers -- the company reported revenues of $18.7 million for the third quarter of 2003 compared to revenues of $14.5 million for the corresponding period in 2002, an increase of approximately 28.4 percent. The Triad entities contributed revenues of $5.4 million in the third quarter of this year.

The resident revenues from communities owned in the third quarter of 2003 grew by $1.7 million or 10.5 percent from the third quarter of 2002. The company reported third-quarter 2003 earnings of $0.3 million or 1 cent per diluted share, compared to third quarter 2002 earnings of $0.9 million or 4 cents per diluted share. The results for the third quarter of 2003 include a loss of approximately 8 cents per diluted share from operations and a gain of over 9 cents per diluted share from the sale of a community.

The community that was sold is the Atrium of Carmichael, an independent-living facility in Sacramento, California, with a resident capacity of 156 seniors. The property sold for a price of $11.7 million, and the company reduced its long-term debt by $7.4 million. The company will continue to manage the property under a long-term management contract.

Cash earnings, defined as net income plus depreciation, were $2.8 million to the third quarter of 2003, an increase of over 27 percent from the cash earnings of $2.2 million in the third quarter of 2002.

For the first nine months of 2003, the company produced revenues of $47.4 million and net income of $4.5 million or 23 cents diluted earnings per share. This compares to revenues of $47.3 million and net income of $3.5 million or 17 cents diluted earnings per share for the same period of 2002. The net income of 23 cents diluted earnings per share for the first nine months of 2003 includes gains on the sale of assets of approximately 20 cents diluted earnings per share, with the remainder attributable to earnings from operations, including the Triad entities, in the third quarter.

In the second quarter of this year, the company realized a gain of approximately 10 cents per share on the contribution of the Cottonwood Village community to our joint venture with Blackstone, and the third quarter results reflect a gain of over 9 cents per share on the sale/manage back of the Atrium of Carmichael. Thus, operating earnings, excluding these gains on sale, are approximately 3 cents per diluted share for the nine months of 2003, including the 8-cent operating loss in the third quarter due to the consolidation of Triads II through V.

The company generated cash earnings of $9.8 million in the first nine months of 2003, compared to cash earnings of $8 million in the comparable period of the prior year, an increase of 22.4 percent. As of September 30th, 2003, the company had $8.7 million in cash and cash equivalents and $12.4 million in restricted cash and marketable securities. Total debt increased by approximately $100 million during the third quarter as the company consolidated approximately $110 million of Triad debt and repaid approximately $10 million through amortization and the sale/manage back of the Atrium property.

Of the company's total debt, about 30 percent is at fixed interest rates; about 20 percent is at variable rates, with floors above current market levels; and the other 50 percent is at variable rates without floors or caps. So about half of our portfolio is interest rate sensitive and half is not. Our blended average borrowing cost for the quarter was 5.4 percent.

At the present time, we would like to open the call to questions

(OPERATOR INSTRUCTIONS) Max Batzer (ph), Winfield Capital.

I am just looking at these and listening to your call, and I guess this is the new shape of the company going forward, with the exception of the FAS 46 that will be consolidated with your next statement, right? This is what -- this is now that all the Triads are in except Triad I.

Max, actually, what a FIN 46 is going to require us to do is to mark up the balance sheet at the end of the year to include the Triad I assets and liabilities. And then beginning January 1st, 2004, those Triad I results will be consolidated because we hold the primary variable interest in that partnership --

Right, but that's the only fundamental structural change we would expect to see going forward for the moment.

Right.

Okay. Talk about the Triad leasing-up. You said that you were at 85 percent across the board there on 9/30, and that system-wide, you had added two percent during October, including some terrific performances in Oklahoma and Springfield, Missouri. What was the Triad improvement in October, if we can isolate that out?

Actually -- good morning, Max, this is Larry. The (multiple speakers) overall (ph) portfolios, which has the 19 Triads and the four Spring Meadows, ended September at 82 (technical difficulty) leased.

I'm sorry?

Now just the Triads -- the 19 Triads were actually at 85 percent. (multiple speakers) And we've seen improving since then. As I said, the 2 percent increase is both from Spring Meadows and the Triads bringing it to 84 percent. So and the Triads have improved as well.

So we've had a very strong October. We had a good steady growth in September. And we're very encouraged by what we're seeing out there for the balance of the year.

I guess that what I'm looking at -- probably like some others who you know -- are with the addition of the new Triads and the concomitant funding of lease-up deficits -- given the -- what I sense is a revised enthusiasm by the marketplace for these properties -- can you tell us, if things keep going the way they are, approximately when we would expect to see these cross into the 90s, based on the trends?

Cross into the 90s, as we said all along, in '04. We're on a good track. Right now, if you look at the Waterfords (ph), are actually leased to more than 85 percent. Triad I actually is leased to over about 90 percent at this point. And with this type of improvement, we're looking at in '04 crossing over to 90 percent and greater.

First half? Is that what I hear you saying, Larry?

It might be -- at this pace that it would be the first half of '04, yes.

Okay, well, we'll keep our own pace.

(OPERATOR INSTRUCTIONS) Andrew Jones, Northstar Partners.

Could you just walk us through the comparison in the -- the first two quarters, you reported pro forma numbers as if the consolidation had taken place. And I was just trying to understand the EBITDA trend from the first quarter to the second quarter to what we reported in this quarter, if it's comparable -- or how we should adjust that?

Andrew, its Ralph Beattie. I think the consolidation in the first two quarters included the Triad I operating results. We had been expecting to include Triad I in the third quarter until, really, October, whenever the FASB deferred the effective date of Interpretation number 46. So I believe the pro forma numbers as we reported them included Triad I, which is not yet consolidated in our figures, and will be beginning in the first quarter of 2004.

If that was included, what do you think the addition to EBITDA would've been?

I don't have that figure here in front of me, Andrew. I'm sorry.

You know, Andrew -- we're going to file our 10-Q next week, and in the 10-Q we will have the pro forma for Triad I. So at that point, we can talk and compare the EBITDA with that, Andrew.

Okay. And also the -- the amount of debt that was listed in the pro forma is significantly higher than what we have now, and I'm -- how much debt will come on with the Triad I?

(technical difficulty) 1 has approximately -- 60 million? I think it's -- about $60 million in debt.

Okay, that's the difference.

Sorry, Andrew -- $50 million of debt in Triad I.

(OPERATOR INSTRUCTIONS) Richard Ludman (ph), private investor.

I had some questions about the robustness of the market for leasing. I hear that you're getting 2 percent increases in October, but can you talk to rate -- as to what your lease renewals -- what sort of pricing you're getting? And I would like to know where you stand on that?

Thank you for being on the call. Actually, with the robust performance that we're seeing, we actually -- many of our properties had a second increase in October. We had increases at many of our properties in July across our portfolio. Our typical increases are ranging 4 to 5 percent. And they typically differ for in-house rents and market rents. And at many of our new properties that have really shown strong, 90-percent type of performance and lease-up and occupancies, we actually implemented a second round of increases this past October.

So as we spoke before, because of the competition in the marketplace when these properties opened, these properties are leasing at average rents that are $200 to $300 less than our more established properties. But as -- our strategy has been and continues to be that as we see the market firm and our ability (ph) for these properties to stabilize and have very strong performance and occupancies, then we start to increase our rents to capture that back.

So we're pleased that we're able to start to see some double increases this year. And obviously, it's a function of some of the market and as well as our own occupancies. But also, I think what that highlights is the potential upside of these properties -- not only from the lease-up, but from the fact that as these market stabilize, which we believe they will, then we will have the ability to have further increases in rents beyond their current levels.

Sure. In terms of your marketing -- are you marketing any of your properties to a younger age cohort -- to retirees? Or who are you pushing toward?

Well, the reality is that the people who are attracted to our properties are in their late '70s and early '80s. The more active retiree -- the 55 and elder (ph) -- really is not going to move into our properties.

We market to that market for their parents. You know, if you look at it, really, it's the children of our residents. But we -- our average age in our communities is about 84. And again, we're marketing to a senior who is in their later 70s or in their 80s.

Fair enough. Now when you cross into 90 percent utilization for some of these properties, what is your timing -- or what's as to when you're going to refinance your existing debt so you can get stabilized-type interest rates?

Great question. Obviously, if you look at the market today, the two lenders that really are probably the most active are Fannie Mae and Freddie Mac. And as we spoke in the past, there is a 90 percent requirement for occupancy for at least 90 days -- sometimes longer, depending upon whether it's an acquisition or a development.

So we will be -- and we are, in many of our properties at that level. However, as we're able to raise the rents, we believe we can add additional value to our properties. So we monitor this constantly and look prospectively as well at our pro forma projections to see when we can maximize that financing to be able to generate the revenue -- the proceeds from the financing and refinance.

The other thing we do constantly -- as Ralph mentioned, about half of our debt is pulling re-debt (ph) -- is we constantly look at different strategies and whether to fix or hedge or put caps on those loans.

Fortunately, rates have stayed low. We continue to monitor that. And obviously, we don't profess to be experts on the interest rate market, but we do look at the costs of fixing the rate versus the floating rates. And we evaluate that constantly.

So it has our attention. And again, it's a combination of the occupancy achieving the rent levels to maximize the value of these properties for purposes -- of the valuation, because the way the loan is sized is a function of both debt service coverage and loan to value.

Okay, and what is typical loan to value for Freddie -- Fannie Mae?

Typically 75 percent, with a 1.35 debt service coverage.

1.35 -- cool. Okay. That's what I had.

And having no further questions in the queue, Mr. Stroud, would you like to make any additional or closing remarks?

Yes. We want to thank everyone for their time and their interest in Capital Senior Living and have a great day. Thank you.

Thank you for your participation in today's conference, and you may disconnect at this time.