Sonida Senior Living Inc (SNDA) 2004 Q3 法說會逐字稿

Please stand by everyone; we’re about to begin. Good day everyone, and welcome to today’s Capital Senior Living Third Quarter 2004 Results Conference Call. Today’s call is being recorded. And at this time for opening remarks, I would like to turn the call over to the Chairman, Mr. James Stroud. Please go ahead.

Good morning, and welcome to Capital Senior Living’s third quarter earnings call. Although we are competing with the excitement of a presidential election, the Company also has worthy news regarding its third quarter results. In the third quarter, three significant financial measurements demonstrated significant growth for the Company.

First, the Company reported revenues of $23.7m, compared to revenues of $18.7m in third quarter of 2003, an increase of 27 percent. Second, the Company reported EBITDA of $5.1m, compared to EBITDA of $3.1m in the third quarter of 2003, an increase of 64 percent. Third, the Company’s higher occupancy rates and improvement in average monthly rents in our consolidated portfolio have combined for an average revenue increase of 10 percent. We are pleased that these results demonstrate continued growth for the Company in the third quarter.

For further comments, I introduce Larry Cohen, Chief Executive Officer.

We are pleased to report our financial and operating results for the third quarter of 2004. Capital Senior Living continues to build on the accomplishments achieved over the past several years as we successfully execute our business plan. Industry fundamentals are positive, and we have achieved improved occupancy levels in both our Triad communities, as well as our stabilized portfolio. These are key operating metrics to measure our organic growth.

At our Triad communities, lease-up rates were 89 percent, and occupancy rates improved to 88 percent, as of the end of the quarter. Our stabilized portfolio achieved a 90 percent occupancy rate, and we expect occupancies to continue to improve through 2005. Our strategy of providing quality, affordable senior living services, with a focus on private-pay, independent living, has served us well since we began operating senior living properties in 1990.

Results for the third quarter continue in line with expectations, with losses narrowing, and increases in cash earnings from operations. For the third quarter, we reported a net loss of $1.4m, or 5 cents per share. Cash earnings, defined as net income plus depreciation and amortization, for the third quarter were $1.7m, or 7 cents per diluted share. Excluding the gain from the sale/manage back of the Atrium of Carmichael community in the comparable period last year, and the effects of consolidating Triad I in 2004, the pre-tax loss from operations would have improved from a loss of $2.7m in last year’s quarter to a $1m loss this year.

The most significant action we took last year was the acquisition of the remaining interest in Triads II through V. Collectively, these entities own 12 communities, developed and managed by Capital Senior Living, with a combined resident capacity of 1,670, 95 percent who live in independent living. In addition, the 7 communities in Triad I are now consolidated, due to the adoption of FASB interpretation number 46.

Our operating results for the third quarter reflect the fact that many of the Triad communities are still in lease-up, and have not yet stabilized. I am pleased to report that 12 of the Triad communities have achieved occupancies greater than 90 percent, and overall occupancy levels at the 19 Triad properties averaged 88 percent at quarter’s end. Our Triad communities continued to improve during the quarter, with increases in occupancies, revenues, operating income, and margins.

Average monthly revenue per occupied unit in the Triad communities increased 5 percent to $1,803 per month. The collective revenues at these 19 communities increased 14 percent to $10.4m in the third quarter of 2004, compared to $9.1m in the third quarter of 2003. The leverage existing in the operating model is reflected in their collective net operating income growth of 44 percent, and operating margins expanded to 35 percent, from 28 percent over the same period in 2003.

Resident revenues at the 42 communities that we owned and/or managed for the entire quarter increased 8 percent from the prior year to approximately $33.1m. Occupancies of our owned and/or managed stabilized communities averaged 90 percent during the quarter. Average monthly revenue per occupied unit at our 12 wholly owned mature communities increased 18 percent to $2,377.

Our gross move-in rates continued to improve during the quarter. Similarly, our deposit taking tours and conversions of tours to deposits all improved. In September we averaged 5.4 gross move-ins, versus 3.6 a year earlier. Operating margins at our stabilized communities averaged 45 percent for the quarter. As we continue to raise rents and control costs, we should see margins expand. Our operating expenses remain under budget, and we are benefiting from reductions in our insurance and worker’s compensation premiums, resulting from favorable claims histories and effective risk management.

With the completion of our $34.5m common stock offering earlier this year, we are also well positioned to grow externally through prudent acquisitions and joint venture investments. We are pleased with the successful integration of CGI Management, which we acquired during the quarter. We assumed management of 14 communities with a capacity for more than 1,800 residents, 79 percent of who live independently, and 21 percent live in assisted living units. The acquisition increased our resident capacity by more than 25 percent.

At closing, we paid $2m in cash, and the first of 4 installments of $250,000. Additional installments of $300,000. $400,000, and $650,000 are due on the first, third, and fifth anniversaries of the closing, subject to reduction if management fees earned from third-party owned communities are reduced, or not replaced by substitute agreements, during the period.

We also received the exclusive right and option to purchase 7 senior living communities owned by the Covenant Group of Texas, for $41m through February 17th, 2007, and for $42m from February 18th, 2007 through August 17th, 2009. This option allows the Company to improve the performance of these properties, and benefit from their increased value by exercising the purchase option at a fixed price, most likely with a joint venture partner. Capital Senior Living also received the right of first refusal to acquire these properties for 15 years.

We also have formed a strategic alliance with Covenant Group of Texas to jointly pursue development and management opportunities for not-for-profit owners. This will provide the Company with a platform for additional external growth. We continue to focus on growing the Company, and we are actively pursuing a number of interesting transactions at the present time.

I would now like to introduce Ralph Beattie, our CFO, to review the Company’s financial results for the third quarter of 2004.

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 for our financial results for the third quarter, and the first nine months of 2004.

For the third quarter of 2004, the Company reported revenues of $23.7m, compared to revenues of $18.7m in the third quarter of 2003, an increase of 27 percent. The third quarter of 2004 revenues include approximately $3.8m from the 7 Triad I communities that have been consolidated since the beginning of this year under FIN-46. This quarter’s revenues also include approximately $0.2m of management fees earned through CGI Management, which was acquired in the middle of the third quarter. So, these two additional sources of revenue provided about $4m of the $23.7m reported.

On the other hand, last year’s third quarter revenues of $18.7m included approximately $0.8m from a property that was sold in a sale/manage back transaction at the end of the quarter. So, revenues on a same-store basis in our consolidated portfolio grew from $17.9m in the third quarter of 2003 to $19.7m in the third quarter of 2004, an increase of 10 percent. Primarily due to the acquisition of CGI Management in the third quarter, revenues under management increased from $32.2m in the second quarter of 2004 to $37.5m in the third quarter of 2004.

Adjusted EBITDA, defined as income from operations plus depreciation and amortization, for the third quarter of 2004 increased 61 percent to $5.1m, compared to $3.1m in the prior year period. So, adjusted EBITDA would annualize over $20m per year based on the third quarter performance. Corporate G&A as a percentage of total revenues under management was 5.6 percent for the third quarter, compared to 6.4 percent in the second quarter of this year.

Interest expense, net of interest income, was approximately $0.5m higher in the third quarter of 2004, compared to the third quarter of 2003, primarily due to the Company including the debt on the 7 communities in Triad I as of December 31, 2003. The Company reported a pre-tax loss of $1.7m in the third quarter of 2004, compared to a pre-tax profit of $0.4m in the third quarter of last year. However, when gains on the sales of assets are excluded from both quarters, and the effect of consolidating Triad I is excluded, the Company’s pre-tax loss was reduced from approximately $2.7m in the third quarter of 2003 to approximately $1m in the third quarter of 2004.

The Company reported a net loss of $1.4m, or 5 cents per share, for the third quarter of 2004. Approximately 3 cents of the 5-cent per share loss is the result of consolidating Triad I. While the Company consolidates Triad I under Generally Accepted Accounting Principals, it does not receive a tax benefit from these losses. If the Triad I loss had received a tax benefit consistent with the other consolidated entities, the loss per share for the Company would have been reduced from 5 cents to 4 cents for the third quarter of 2004.

Cash earnings, defined as net income plus depreciation, were $1.7m, or 7 cents per diluted share. For the first nine months of 2004, the Company produced revenues of $69.3m, compared to revenues of $47.4m in the first nine months of 2003, an increase of over 46 percent. The Company reported a net loss for the period of $5m, or 20 cents per share, compared to a net profit in the first nine months of last year of $4.5m, or 23 cents per diluted share. The net income of 23 cents diluted earnings per share for the first nine months of 2003 included gains on the sale of assets of approximately 20 cents diluted earnings per share.

Adjusted EBITDA was $13.7m in the first nine months of 2004, and cash earnings were $3.9m, or 16 cents per diluted share. The Company had total debt of $260.2m on September 30th, 2004, at a blended average borrowing cost of 5.7 percent. The Company’s fixed-rate debt averaged 7.8 percent, while our floating-rate debt averaged 4.9 percent. Approximately $138.4m of debt is sensitive to changes in short-term rates, with the remainder either fixed or floating with interest rate floors above current base rates.

We believe that this approximate 50/50 mix of fixed and floating interest rates helps the Company to reduce interest rate volatility, while benefiting from the current low interest rate environment. In addition, the floating-rate loans provide flexibility regarding opportunities for permanent financing as communities mature. Approximately $33m of mortgage debt on 4 communities matures in September of 2005, and has been classified as a current obligation pending refinance. As of September 30th, 2004, the Company had $23.3m of cash, cash equivalent, and restricted cash, and $151.3m in shareholder’s equity, equivalent to approximately $5.88 per share.

We’d now like to open the call to questions.

(OPERATOR INSTRUCTIONS.)

Frank Morgan, Jeffries and Company.

I have a series of questions here. I was wondering if you could give us the numbers of actual net move-ins in the quarter, and maybe talk a little bit about what attrition rates did in the quarter? And then secondly, I would be curious about the -- could you remind me what the average cost on the variable-rate debt was in the previous quarter? I know you said it was -- I think you said 4.9 percent this quarter, but how does that compare to last quarter?

And then based on what you’re seeing in the -- kind of the improvement in the portfolio, does it make you change your thoughts or expectations with regard to when you get the entire portfolio stabilized?

We’ll try to go through in the same order, and if we miss something, please ask again. But going back to the move-ins, we saw an improvement on the net move-ins on the Waterfords. In the month of September the actual average net gain was 3.4, versus 2.3 a year earlier. On the sustained properties we saw the average net about just under 1 per month, because there is still attrition. Attrition is still running in the high 30 percent range, which is consistent where we were last quarter.

If you look at the portfolio at large, obviously the good news is that we see continued improvement in the actual physical occupancies on the Waterford properties. They did end the quarter at 88 percent, and we’re still looking at a target of 90 percent, if not by year-end, but early in 2005. Similarly, looking at the stabilized portfolio, it did achieve a 90 percent occupancy level this quarter, up from last quarter. So, we’re seeing improvements there as well.

Fundamentals are good. I mean, we -- our tours look good, our move-ins are good. Attrition is still an issue clearly. We’re serving a resident average age about 84. But, you know, we have been very focused on a lot of different enhancements of our wellness programs. We do have home health care in almost all of our independent living communities today, serving our residents.

So, we are seeing, as we look back -- in fact, we had a phenomenal meeting internally last month, with management looking at really the business for the next 5 years. And one of the big focal points we are looking at is how we can better serve our resident, and better serve our Company, by enhancing many of the services to our residents, and looking at ways to both minimize the attrition, and hopefully improve the revenue stream to our Company.

So, we’re, you know, we’re pleased that we’re seeing a good response in the marketplace. And our properties, we’re seeing good activity. September was a very good month. October looks like a very good month, so the fundamentals are very positive. And, you know, we’re hopeful that we’ll continue to see these trends continue throughout the next year.

And I’ll let Ralph talk about the cost of the debt and the (indiscernible) rates.

If you take a look at our interest rates that we paid this quarter, compared to the previous quarter, our variable-rate debt in the second quarter of 2004 was 4.6 percent, compared to 4.9 percent in the current quarter. So, it went up about three-tenths of a percent. It also affected our weighted average debt by about the same proportion, so our total debt went up by about three-tenths of a percent in the quarter. So, on our current level of variable-rate debt, Frank, that would make a difference of between $150,000 and $200,000 of interest expense in the quarter, simply based upon the rate change.

And, I might just add that while we continue to monitor the interest rate environment very closely, and take a look at our alternatives in terms of financing, we still believe that our approximate 50/50 mix of fixed-rate debt and variable-rate debt is the proper strategy for the -- for the present time. And we continue to monitor that, and we’ll make changes accordingly as the interest rate environment dictates.

Okay. Let me ask one more, then I’ll hop off. The numbers that you gave on occupancy, were those financial occupancy numbers, or were those leased-to numbers? And then finally, any update on the consolidation of, or potential acquisition of Triad I?

The actual occupancy rates are the physical occupancy at the end of the quarter. The 90 percent is the physical, not the financial occupancies. If you look at the last page of the press release where we provide supplemental information, you’ll see that the financial occupancy for the quarter, that’s for the entire 90 days in the quarter, was 85.3 percent. And that’s up from 80.8 percent in the prior year. But the numbers we’re talking about, the 90 percent is our stabilized properties.

Again, we are in the process of refilling the expansions at Canton, Towne Centre, and Sedgwick. So, when you look at the financial occupancies, it takes the actual number of days occupied during the quarter, and it also has the Waterfords, the Wellingtons, the expansion properties, as well as the stabilized properties. For same-store sales analysis we only use the stabilized properties.

As far as the acquisition of Triad I, we are expecting to complete that this year. We’ll probably complete it this month. So we are working towards that at the present time.

(OPERATOR INSTRUCTIONS.)

Jerry Doctrow, Legg Mason.

I just had a couple things. Larry, or actually any one of you, I was trying to just get a little bit broader picture of, you know, sort of business strategy, and clearly you’ve got these lease-up properties to finish. You’ve done the, you know, CGIM, which I assume at some point you obviously are in the process of completing acquisition there. And I think at one point you touched on possibility for acquisitions, possibility of doing some stuff for not-for-profit developers. But where do you see sort of the growth coming, you know, as you go through the -- how much longer do you see the fill-up going on, or lease-up going on? And then sort of what’s the strategy kind of go-forward?

Jerry, we had -- this is Jim Stroud -- as Larry mentioned, we have an annual meeting with management, and then we make a presentation to our board about the business plans. And where we see the organic growth on our existing portfolio, based on the occupancy rates where we are now, we’ll then be able to focus on the rental rates. So, that will be one of the growth drivers, obviously, on a go-forward basis.

Joint venture acquisitions are still important to us from a standpoint of the desire for money-centered institutions to link up to a company like ours that has an active presence already in 20 -- coupled with the fact that we do have the option to acquire the CGIM 7 properties. That will continue to play a role.

The third area we’re looking at is the development opportunities. And that would be not only in the not-for-profit area, but that also would be in certain affordable areas, because we now see, as we roll out a development product, it typically takes 12 to 18 months to get it fully operational. And we’re looking at that, since we do have the experience, and we understand, you know, the role of affordable pricing in senior housing. And so those would be the areas that we’re looking to.

Likewise, Larry touched on ancillary services, but we’re looking at first how do we use ancillary services to benefit our own residents, and then once we get the cornerstone on that, that could be a product that we then roll out to residents that are not in our communities.

(OPERATOR INSTRUCTIONS.)

Mr. Stroud, it appears there are no further questions. I’d like to turn the conference back to you for any additional or closing remarks.

We appreciate your time and availability this morning. We know everybody’s tired from the election last night. And we look forward to continuing to serve our residents and our investors. Thank you very much.

This does conclude our conference. You may now disconnect at this time.

END