Sonida Senior Living Inc (SNDA) 2003 Q4 法說會逐字稿

Good day and welcome to today's Capital Senior Living fourth quarter 2003 earnings 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,.

Thank you. Good morning and welcome to Capital Senior Living's fourth quarter and 2003 earnings call. We are pleased with our financial performance for 2003. The company continued progress towards our goals of higher occupancy rates, improved margins and retirement of debt.

This progress reflects our long-term strategy of providing quality affordable senior living services with a focus on private pay independent living communities. This has been our strategy since we first began Senior Living operations in 1990 at a time when many senior living operators had faltered, Capital's occupancy rates and operating margins have outperformed industry averages. With the foundation of the 2003 accomplishments we are well positioned for 2004. For further comment on the fourth quarter and 2003 earnings, I introduce Larry Cohen, Chief Executive Officer.

Thanks, Jim and good morning. We are pleased to report our financial and operating results for the fourth quarter and fiscal year 2003. Capital Senior Living celebrated a year of tremendous accomplishments in 2003 which was highlighted by the continued momentum in the lease uprates of your our triad communities which is one of our key operating matrix. By year end we had successfully completed several significant actions that improved our top line growth, retired debt, provided the basis for enhanced organic growth, increased our liquidity, simplified our balance sheet and, combined with our recent offering of $34.5 million of common stock in January of 2004, better positioned us to grow through joint venture investments in and acquisitions of other senior living communities.

These actions were taken within the parameters of our strategy of providing quality affordable senior living services with the focus on the private pay independent living sector. Our 2003 business plan calls for increasing revenues, maintaining our focus on the leaseup of our recently built communities, sustaining high occupancy rates in our stabilized communities and ensuring our operating margins remain above the industry averages. I am pleased to report that with the capable leadership of our senior management team, which has over 140 years of combined industry experience, our highly experienced regional operations and marketing Vice Presidents and our skilled on-site staff we successfully accomplished each of these critical objectives.

For the fourth quarter we reported earnings of $400,000 or diluted earnings of 2 cents per share which includes 10 cents in deferred income recognized upon the liquidation of the HCP Partnership in November of 2004 in which we owned a 57% limited partnership interest. For the full year we earned $5 million or 25 cents per diluted share, consisting of 5 cents from operations including the recognition of the deferred income from the liquidation of HCP and 20 cents from gains on net sales of assets. Cash earnings, defined as net income plus depreciation, for the fourth quarter were $3 million or 15 cents per diluted share compared to cash earnings of $2.5 million or 13 cents per diluted share in the prior year.

For the full year, the company generated cash earnings of $12.8 million, or 64 cents per diluted share compared to cash earnings of $10.5 million or 53 cents per diluted share for 2002. The most significant action we took in 2003 was the acquisition of the remaining interests in Triad's II through IV. Collectively these (inaudible) own 12 communities developed and managed by Capital Senior Living with combined resident capacity of 1670 residents, 95% of whom live in independent living. Our operating earnings for the fourth quarter reflect the fact that the triad communities are still a leaseup and have not yet stabilized. Yet these communities saw considerable improvements in the revenues and net operating income.

In fact these 12 communities increased our leaseup rates to 86% as of December 31, a 30% increase from the year ended 2002 rates of 66%. The collective revenues at these 12 communities in Triad's II through V increased 62% to $21 million in 2003 compared to $13 million in 2002. As a group, revenues of all 19 communities in triad's I through V increased by 33% to $36 million in 2003 from $27 million in 2002 with operating expenses growing by less than 6%. The operating leverage existing in our communities in leaseup is reflected in the collective net income growth of 620% in 2003.

Resident revenues at the 20 communities that we own and/or manage and which were stabilized at the end of 2002 increased 3% while operating expenses at these communities increased by 0.1% in 2003 as compared to 2002. Resident revenues in all 42 communities that we owned and/or managed increased by about 13% to approximately $122 million in 2003 compared to $109 million in 2002 while operating expenses at these 42 communities increased by 4% in 2003 as compared to 2002. Occupancies at our owned and/or managed stabilized communities averaged 91% during 2003. Operating margins of these stabilized communities also improved during the year to 47%. We continue to improve and simplify our balance sheet throughout 2003.

We were able to repay approximately $34 million in debt during the year, and from the proceeds of our recent stock offering in January, we have already repaid close to another $14 million this year. In addition, the purchase of the 12 triad communities in July of 2003 simplified our balance sheet and gave us greater transparency. As these communities complete their leaseup, we expect to see significant increases in our revenues and cash flows providing the basis for enhanced organic growth. And the completion of our offering in January positions us well to grow externally as well through joint venture investments in and acquisitions of other senior living communities.

I would now like to introduce Ralph Beattie our Chief Financial Officer to review the company's financial results for the fourth quarter and full year 2003. Thank you.

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 result for the fourth quarter and the 2003 fiscal year. By the way, if you need a copy of our press release it has been posted on our corporate website 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 a reminder this is the second quarter in which we have consolidated the financial results of triads II through V due to our purchase on July 1,2003, of the partnership interest we did not previously own. Moving to the numbers. The company reported revenues of $18.9 million for the fourth quarter of 2003 compared to revenues of $14.2 million for the corresponding period in 2002. An increase of approximately $4.7 million or 33.5%.

The consolidation of the 12 triad communities was the primary contributing factor for the increase. The consolidation of the 12 triad communities also contributed to a decline in adjusted EBITDA, defined as income from operations plus depreciation and amortization to $2.8 million in the fourth quarter of 2003 from $4.4 million in the fourth quarter of 2002. As Larry said earlier the company realized deferred income of $3.4 million pretax in the fourth quarter of 2003 due to the liquidation of the HCP Partnership.

This partnership, in which the company held a 57% interest, has been selling its remaining communities for a number of years. The last community was sold in 2003 and the partnership was subsequently dissolved with the remainder of its assets transferred to a liquidating trust. Accordingly the company took the deferred gain in the fourth quarter. Net income for the fourth quarter was $0.4 million or 2 cents better diluted share. Cash earnings for the fourth quarter, defined as net income plus depreciation, were $3 million or 15 cents per diluted share.

Excluding the deferred income from the HCP liquidation, the company realized an 8 cents per share loss from operations primarily due to the consolidation of the 12 Triad communities in leaseup. For the year ended December 31, 2003 the company reported revenues of $66.3 million compared to $61.5 million in the prior year an increase of $4.8 million or 7.9%. Net income at 2003 was $5 million or 25 cents per diluted share compared to 2002 net income of $4.7 million or 24 cents per diluted share.

The full year earnings are comprised of approximately 20 cents per diluted share in gains on the sales of assets and approximately 5 cents per diluted share from operations including the recognition of deferred income of approximately 10 cents per diluted share related to the liquidation of the ACP Partnership. The company generated 2003 cash earnings of $12.8 million or 64 cents per diluted share compared to 2002 cash earnings of $10.5 million or 53 cents per diluted share.

As of December 31, 2003, the company adopted FASB interpretation number 46 entitled Consolidation of Variable Interest Entities and its adoption resulted in the company consolidating triad I's financial position as of the end of the year and will result in the company consolidating triad I's results of operations beginning January 1, 2004. The consolidation of triad I on the year end balance sheet increased property, plant and equipment by approximately $63 million, increased bank debt by approximately $48 million and eliminated approximately $16 million of notes in consolidation. At year end the company had $13.8 million of cash, cash equivalents and restricted cash and $124.4 million in shareholders equity equivalent to approximately $6.27 per share of book value.

Total debt at year end including triad I was $279 million and our weighted average borrowing cost was 5.5%. Of the $279 million of debt, approximately 26% is fixed at an average rate of 7.7% and 74% is variable at an average rate of 4.7%. Of the variable debt approximately one third has floors on the base rate which are well above current rates, consequentially about half our debt is sensitive to changes in interest rates and half is not. Our debt to capital ratio including triad I was approximately 69% at year end. Since the public offering earlier this year we've retired an additional $13.7 million of debt which carried a coupon of 9%. We'd now like to open the call for Q&A.

Thank you, sir. If you would like to ask a question on today's call, you may do so by pressing star one on your touchtone telephone. Again, that is star one to ask a question. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is Star one to ask a question. We will pause a moment to assemble our roster. We will take our first question from Frank Morgan with Jefferies & Company.

Good morning. I was wondering if you could comment based on the current trajectory of fill up on the triads II through V. Really at what point, either this year or early part of next year, the timing on when you would see the stabilization of that portfolio and then just also comment about the pricing environment out there in the market today. How much you are able to raise rates. Thank you.

Good morning, Frank, thank you. On completing the leaseup of triads II through V, as I mentioned, we made great progress last year but ended the year would with a lease rate increasing to 86% so we are looking to stabilize during the course of 2004. And what we are seeing is, and you raised a good issue because obviously since these properties were opened in competitive environments their average rents are typically about $350 per month lower than the average rents on our mature properties. As we stabilize and see markets firm we are able to go in and start raising rents back up. Last year we were able to do that at a number of the properties that had multiple rental increases draft throughout the year. If fact, we have two properties in San Antonio in triad I which have been sable for a number of years now and have undergone significant numbers of rent increases over the last 18 months so we clearly are focused on being able to get our rents back up to levels which are more consistent with our mature properties. Obviously recognizing the fact that our residents do have annual contracts so that the resident rents are typically going to be increased by maybe 4 or 5% but then we will adjust the street rents as there are vacancies available to move those rents back to the market rates.

Okay. Then one more and I will hop off. Just commentary in your thoughts on what you're seeing out there in the market right now in terms of new capacity growth. Is it your sense that that slow down that we have noticed is that continuing, have you seen any change in the outlook there?

No, Frank, we still see a (inaudible) strength of capital that has really slowed down the development growth. We're seeing an industry that in the last three years has experienced a decline of over 60% per year from the maximum build out which was began in 2000-2001. So what we are seeing today is very limited new supply coming online. We are actually being called in upon by third parties for deals to see if we can participate and most of the transactions we are looking at, quite frankly, just don't pencil out. Again with the cost of capital and the amount of equity required it is very difficult to see that work out so we expect that we still will see a slow down in new supply which will be very healthy for the industry as we continue to see the industry absorb some of the over capacity that was created over the last number of years and probably have a window before we start to see the start of any new development that would have any real impact on supply/demand fundamentals.

Thank you.

Thank you.

We will take our next question from Greg Makosko with Lord Abbott.

Yes, hi. Very nice. Could we follow up a little bit on the different groupings of properties at this point so that we could understand kind of the occupancy by mature versus the new triads versus the managed group and the monthly rents and the profitability. So on the mature properties, roughly what might have been the rent, the average rent, say in December of the fourth quarter?

Well, the average rent for mature properties I mentioned was about $2,050 a month. That combines both independent and assisted living. The average occupancies I mentioned during the year for those properties were at 91%. The stable properties now. Again, we do have other properties that have been expanded going through re-leasing that bring the overall occupancy, I think, was 86%, if I recall. If you look at the mature properties which include those properties that have been expanded, renovated ended December in 86%. With that, as I said, the average rents being about $2,050 and then the margins of 47% I think is pretty consistent on those.

So 47% in the quarter as well as the whole year or.

The fourth quarter actually, if you look at the whole year was 47%. For the mature properties in the fourth quarter actually the margins were about 46%. So very similar.

Okay. And the $2,050, that includes the managed as well as the mature properties?

The mature properties includes both owned and managed.

And would you say that the occupancy is really almost identical for those two groups.

Actually the owned are slightly higher than the managed but that is just a function of kind of some timing issues but they're very similar.

Okay. And on the triad, you said that they were 86% occupied in December, correct?

That's the leaseup rate. Again, when we talk about leaseup rate, that is looking at the physical occupancy, real deposits on hand less move out notices so that is the actual number at the end of the year. The actual occupancy is typically a few points below that because it takes some time for people to move in but that is the triads. And as I said, all the triads actually were leased to 86%. That is triads I through V at year end as well as triads II through V, all 19 properties ended the year at 86%. The actual physical occupancy at the end of the year for all the triads was actually 84%.

But on the II through V it would be somewhat lower then, right?

That is correct. The physical occupancy on II through IV were in the low 80s, although the leaseup rate also on II to V, now. I made the mistake, by the way, in my opening remarks. It is triads II through V, the full properties required.

Right.

Triads II through V the actual leaseup rate at December 31st was 86%, similar to all 19 properties in triads I through V but the actual physical occupancy on triads II through V ended the year in the low 80% range.

And if we look into '04 now on those II through V, on the actual occupancy would we expect to get to that 90-91% that the mature properties are by the say fourth quarter of the year.

Yes, yes. If you look at industry averages they typically show net absorption of about 3 units per month. So in the average triad community it is 120 units. So you look at the math, clearly at those type of levels we would expect that during the course of this year these properties will stabilize.

And would you say that that is sort of a little better than you expected about as expected or?

Well, I think the fourth quarter was a dramatic improvement. As you remember we ended the third quarter at 82% leased and increased that by 4 percentage points in the fourth quarter. We had a very very strong October as you may recall from when we did the road show. We talked about we had two properties that in October actually experienced 15% increases in the month. Oklahoma City and Fairfield that went from about 75 to 90% and 77 to 92% which obviously helped but looking at the properties, triad I ended actually occupancies for the fourth quarter at 92%. Which is very, very good. And as I said, we're very pleased with the success in the fourth quarter and expect to see continued momentum throughout 2004.

And with regard to the EBITDA and the profitability on the II through V, were there any one-time cost that were in the fourth quarter that we shouldn't expect? I realize there is more costs because of the lower occupancy or the less profit but is there any one timish costs in the fourth quarter for the II through V.

No, Greg, actually II through V had normal operations in the fourth quarter so there weren't any unusual charges booked into that period.

Yeah, it is interesting. If you look at the triads, as I mentioned for the year, and even for fourth quarter, we really saw some very, very significant increases in revenue. In fact, for the fourth quarter the triads revenues were up about 30%. Expenses were only up 8% and I think that is critical here that you're seeing the operating leverage of these properties that when we open a property we are almost fully staffed and all of the expenses are embedded and the leverage in these communities and the opportunity for the organic growth is coming as almost every dollar of incremental revenue is flowing down to the bottom line. So in the fourth quarter, for example, the triads actually had income growth of 548% over the prior year. So we are seeing a good control of expenses. In fact, if you look at the fact that expenses are growing at a fraction of the revenue growth, as we continue to fill up we expect to see those type of items. So the expenses coming in, there will be some more staffing for really hourly wage people in the dining room, maybe some housekeeping staff and you have some meal costs but really virtually every dollar of incremental revenue is flowing to the bottom line which is creating such a strong bottom line growth as we complete the fill-up

Last question, I promise. Any relationships with the home healthcare or other than obviously the leaseup and the rentals are critical, but are there any other relationships there that we should looked forward to in '04 for additional revenue generation?

We do not plan to grow the home healthcare business for ourselves. We do operate one agency at one of our properties but one thing that we have introduced in most of our properties over the last few years and actually one of the benefits of seeing these high occupancies in the Waterford (inaudible) properties is we now are renting out offices in these properties to local home care agencies which not only pay us rent but really to a good job of providing services to our residents. We are very cognizant and focused to see the wellness programs, very focused on the fact that if you look at the average age of other resident we feel the home healthcare is a vital part of the daily life even in independent living. So we do see that as an opportunity to attract residents, help our occupancies and also extend the length of stay. So we are focused very much on wellness and home healthcare, whether it is our ourselves or third parties, it is a key component to that.

Thank you, thank you.

We will take our next question from Michael Christadoulu from Inwood Capital.

Good morning, gentlemen. Congratulations on simplifying the asset ownership and building up some fire power on the balance sheet. My question is can you give us a sense of the pipeline of potential acquisitions out there for CSO and for the Backstone joint venture, please?

Good morning, Michael. Thank you. We're very busy. We are seeing a lot of opportunities. We're actually seeing assets, both portfolios of assets and single assets, being marketed right now in the industry through some of the brokers out there. One of the benefits, I think, from this transaction that we concluded in January is that put us on the radar screen and we are having conversations with groups of people that recognize the fact that not only do we have the Blackstone venture but we strengthened our balance sheet and I think that the nice response we had from the public market has helped, again, give us some more notice out there so we are actually very, very active and very optimistic. You will see that. The other benefit, quite frankly, is internally we are all energized. This has been a great year coming off 2003. Starting a very strong 2004 with the equity raised and we have a lot of focus. We have reintroduced from a corporate standpoint. Biweekly, now, we have meetings on acquisition opportunities. We're very focussed on that. We worked very hard in some difficult times and we still are very focused in the operations, obviously, in fulfilling the leaseup of our properties and improving them but it is also a different energy level as we start to really actively pursue growth externally this year.

Great, thank you.

Thank you.

We will take our next question from Myron Cohen with Ryan Beck & Company.

Yes, I don't know the exact term but what is the move out rate in a mature property? The attrition is determined, right now the industry, as ourselves, is seeing average attrition about 35%. And that is combining our independent and assisted. If you look at industry averages assisted living, free standing assisted living, last year actually averaged close to 60% attrition with independent living averaging about 35%. So that is the attrition levels which, again, has obviously one of the reasons that we have larger properties with full-time marketing staff is the ability to constant lease our properties, have outreach programs very active in the communities recognizing the fact that we're dealing with attrition on an ongoing basis. Even with mature properties 100% full we will have waiting lists and deposits. Coupled with the fact that as some of the newer properties, some of the markets firm up one of the economic benefits is that as there is attrition then we are able to adjust the rate on that unit back to a market level and capture some of that revenue. Thank you very much. Thank you.

We will take our next question from Carl Kayden, a private investor.

Hi, good morning, guys. If we are moving towards an environment of increasing interest rates how would that affect profitability for this year?

Carl, as I said, we have about half of our total debt today is variable rates without floors or caps. So, of our $279 million of debt, of course we have repaid some of that already in the first quarter, so if it is down to say $265 million, there's still a fair amount of debt that is variable without interest rate caps on it. While our average borrowing rates are fairly low, you can pretty much do your own calculations in terms of what a quarter percent of change in the interest rate would cause us but we feel like we're well positioned with about half of our debt in fixed rates or variable with floors and half with variable rates to take advantage of the current interest rate environment but still be reasonably protected on the upside in case rates do start to increase.

Can you tell me again what was that average borrowing rate?

Sure, let me give it to you a couple of different ways. Our fixed rate is about 7.7%, that is about 26% of our total debt. 74% of our debt is variable and that rate averages 4.7%. And then our blended average borrowing costs at the end of the year was 5.5%. Of course, we repaid $13.7 million of 9% debt in the first quarter of 2004 so that blended average borrowing cost is going to go down some basis points due to the fact that we repaid our highest rate debt.

Okay, great, thank you. Also with a lot of REITs a lot of analysts are dropping cap rates what they see properties selling for in the marketplace. Is the same thing happening with senior communities?

We're sorry to see that. That is a great question, Carl. We're starting to se that, there has been a lagger effect and one of the opportunities we see for acquisitions is still a nice spread between the cap rate and the cost of the interest rates. Our properties typically can be financed by Fannie Mae or Freddie Mac at an average borrowing cost about 170 basis points over the 10 year treasury. We still are seeing cap rates last year for independent living average about, at least in the third quarter, average about 10%. Assisted living cap rates actually went up to about 11.6% in the third quarter but I think the trends in '04 we will start to see cap rates probably coming down some. There have been some transactions recently that have been at some low cap rates with some of the REITs which I think will have an effect. I do think we will start to see some impact but again one of the attractive features for acquisitions is there is still a very wide spread between the cap rate and cost of borrowing for these type of properties.

Great. Thank you very much. Again, I applaud you guys on a great year in '03.

Thank you very much for your support, we appreciate it.

Once again, that is star one to ask a question. We will take our next question from Richard Numing, a private investor.

Hi. Just a series of small questions. Liquidating trust that you were talking about from the HCP transactions, what is left in it in terms of dollar amounts and are there any other deferred income that could possibly come from that?

There is actually just a small amount of cash, Richard, left in the liquidating trust to take care of any final bills that come in. There will be some K-1s, obviously, produced for the limited partners in 2004. Some final audit fees, other miscellaneous costs so there is enough cash left in liquidating trust to take care of it's final bills and then that should pretty much take care of that partnership.

Fine. Now, more substantive question. I notice the G&A expenses for the quarter were up. Can you give me a sense as to what caused that.

If you look at the fourth quarter G&A expense it actually incorporates the 12 triad communities which weren't part of the fourth quarter in 2002. So that million dollar increase was basically the G&A component of those 12 additional communities.

That makes sense. Fair enough. Now, there have been illusions to leaseup trends for the year. Can you give me a sense as to how January and February of '04 worked?

Yeah, we had in January, again, if you look at the numbers we had good traffic in January, we had a good month So we are tracking very much consistently with what we've experienced in the past both with January and February.

There's a tendency of people at that age limit to pass on.

I mean there is some seasonality in this industry and clearly we see it in the winter months. We saw in December a little falloff in some traffic obviously during the holiday seasons. Traffic was up in January, it was good in February. We typically do see some attrition, you're exactly right, happens every winter. But overall things are pretty much tracking as expected.

Okay. That's fine. One last question that is a softer question. Sunrise acquired the Marriott properties. I know that the business is rather not concentrated but I was wondering if that merger or acquisition has had any affect on the marketing environment for you?

I don't believe we have seen any impact at all. We are in some markets with both Sunrise and some of the Marriott properties. But we have not seen any changes or no, I don't believe we have seen any impact at all to our own properties from the fact there has been any change. I think most of the on-site staff probably is very similar as it was prior to the acquisition. So, we have not seen nor have I heard of any changes in competition or in those markets from the Marriott transaction.

Well, one hopes that you get some concentration that leads to some pricing discipline, God forbid. Appreciate it. That's all I had.

Nice talking to you. Thank you.

We will take our next question from Stefan Mikituk with Pike Place Capital.

Hi, good morning.

Good morning.

Quick question. How much did triad II through V add in terms of revenues and EBITDA in the fourth quarter and then also for the year?

That's a number for the year here, Stefan. The revenues of Triads II through V, which is actually a six month figure, were about $11.4 million.

Okay.

And that is because we acquired those interests in July. If you look at the full year, Stefan, as far as the actual operations of those 12 properties, we actually saw the revenues increase to $21 million from $13 million full year-over-year.

And do you have an EBITDA number for that also or operating income or --

Yeah, the EBITDA number would be about $600,000.

That is for 6 month.

For 6 month.

So the 11.4 and 600,000 are what is in your '03 results as you show them today.

Correct, that would be in our full year '03 results.

Okay. And then do you happen to have what Triad I did for the fourth quarter of '03? I realize that is not in the results but I'm just wondering where that stands on kind of an operating basis?

I'm sorry, Stefan, I don't have that figure here in the conference room with me.

Okay. All right. Are you guys going to file the K sometime in the next.

We're going to file the K probably March 29.

Okay.

And it will be in the K. As you know we do have the exhibit in the K that will show Triad I and show a pro forma as if it had been consolidated both for the full year and the fourth quarter.

Terrific. Okay. Thanks.

Thank you.

Mr. Stroud, there appears to be no further questions. At this time I would like to turn the call back over to you, sir,.

And on behalf of the company and our employees we do appreciate the investors' interest in our company, we do welcome the new shareholders as a result of our offering and we appreciate your interest. Thank you very much.

This does conclude today's conference call. At this time you may disconnect.