Sonida Senior Living Inc (SNDA) 2004 Q4 法說會逐字稿

Welcome to today's Capital Senior Living fourth quarter 2004 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's fourth quarter 2004 earnings call.

The fourth quarter ended a year of significant accomplishments for the company, as well as the overall industry. The company announced in 2003 its goals of higher occupancy rates, improved operating margins and retirement of debt. In 2004, the company accomplished these goals and additional goals. The average occupancy rate ending the fourth quarter on stabilized communities was 90 percent. The operating margins, before property and taxes, insurance and management fees, ended the fourth quarter -- ending the fourth quarter was 45 percent in the stabilized independent and assisted living communities. The company also retired debt in 2004 of $21.8 million.

The additional goals accomplished in 2004 have already had a significant positive impact on the company's financial and strategic industry position. First, revenues for 2004 were $93 million, an increase of 41 percent, due in part to continued fill-up of our communities, rate increases, and the Spring Meadows and Triad I acquisition. In 2004, the company also achieved a balance between owned properties, now 54 percent of our portfolio, versus joint venture and third party long-term managed properties. The company now benefits from occupancy and rental increases on its owned assets as well as expanding fee management and benefiting from leveraging the company's personnel and operating systems on third party managed assets. The options to purchase the seven Covenant Group Inc. assets at a fixed price also provides the company future opportunities.

In summary, 2004 was a year of significant accomplishments that positions the company for significant benefits in 2005 and beyond.

Now for further comment, I would like to 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 2004. As Jim said, this was a year of significant accomplishments for Capital Senior Living. It was a year where our long-term strategy converged with improving industry fundamentals. Combined with focused management and hard work, the results have been higher occupancy rates, improved revenues, enhanced operating income, and a simplified and strengthened balance sheet.

First, I would like to review our accomplishments during 2004. We began the year with a successful completion of the $34.5 million equity offering. We retired $21.8 million of debt during the year. We completed the acquisition of CGI Management, adding 14 senior living communities to our managed portfolio, increasing our capacity by 1800 residents. We acquired four senior living communities with approximately 700 residents through a new joint venture with Prudential Real Estate Investors and retained long-term management of these communities. We completed the acquisition of the remaining Triad interests, simplifying our balance sheet, providing greater transparency, and growth potential. We completed a $128 debt refinancing, extending the maturities on, and consolidating 14 loans with GMAC. And we improved our cash position to $19.5 million, all of which is unrestricted.

Next, I would like to review our financial results. For the fourth quarter, we reported a loss of $1.8 million or $0.07 per share. Excluding the effects of costs in connection with the Spring Meadows transaction, the debt refinancing and first-year costs associated with Sarbanes-Oxley compliance, which occurred later in the year than originally anticipated, the fourth quarter loss would have been approximately $0.04 per share. For the full year, the company reported a loss of $6.8 million or $0.27 per share. Cash earnings defined as net income plus depreciation, for the fourth quarter, were $1.3 million or $0.05 per diluted share. For the full year, the company generated cash earnings of $5.3 million, or $0.21 per diluted share.

In November, we completed the acquisition of the remaining interest in Triad I. The other four Triad partnerships were were acquired in 2003. Collectively, these five entities earn 19 Waterford and Wellington properties developed and managed by Capital Senior Living with combined resident capacity of 2,548 residents. Our results for the fourth quarter reflect the fact that not all of these newer communities have stabilized. Yet we achieved considerable improvement in their occupancies, revenues, and net operating income throughout 2004.

Now, I would like to review our same store sales results. First, I will focus on the Waterford and Wellington communities. The Waterford and Wellington communities increased their occupancy rate to 88 percent, and were leased to 89 percent as of December 31, 2004, up from an 85 percent occupancy rate at the end of 2003. Increases in average monthly rents of about 4 percent and occupancy growth of about 3 percent achieved a 15 percent increase in revenues at these 19 communities to $41 million compared to $36 million in 2003. Operating expenses grew by 4.5 percent. The operating leverage existing in our communities is reflected in the collective net income growth of 65 percent in 2004, at our Waterford-Wellington communities. In addition, operating margins improved from 30 percent to 37 percent.

Now, I will review our entire portfolio. Resident revenues in 42 communities that we owned and/or managed during both full year 2004 and 2003 increased 7 percent to approximately $131 million in 2004, compared to $122 million in 2003. Operating expenses at these 42 communities increased 4 percent, with net income growth of 15 percent. At year-end 2004, we operated 54 communities. Annualized fourth quarter revenues at these 54 communities under management increased 27 percent to $160 million from $126 million in 2003, resulting from improved occupancies, increases in monthly average rents and acquisitions. Operating margins for our entire portfolio improved to 41 percent from 37 percent in the prior year. We ended the year with 44 communities stabilized which we defined as having reached 90 percent occupancy. Now there is still a lease up and one recently renovated community is a re-lease. occupancies out of our 44 owned and/or managed stable communities averaged 90 percent during 2004. Operating margins at the stabilized independent living and assisted living properties were 45 percent for the year.

I would now like to comment on the current acquisition market. 2004 was perhaps a water shed year in terms of acquisition pricing of senior housing communities. A number of larger transactions occurred or were announced towards the end of the year with prices averaging about $100,000 a unit, a considerable increase from average prices paid in prior years. Previously, there were very few quality stabilized communities for sale. As cap rates have compressed for quality properties, sellers began to enter the market. We are seeing and expect to continue to see more quality communities come to market in 2005, making for a more active market. This should have a positive effect on existing portfolios, as higher valuations translate to expanded EBITDA multiples and stock values, a mark-to-market effect in increase in average monthly rents, and more opportunities for acquisitions. 2004 was a considerable year of significance for the company and the senior living industry, and we are focused on numerous corporate initiatives for 2005. These strategies include incremental growth through improved occupancies and margins in our communities, increasing the ancillary services offered to our residents, acquisitions for co-investments, and selected developments for third parties. With the successful completion of our 2004 initiatives, we have a solid foundation for future growth, and increases in cash flow.

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 2004.

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 am going to review and expand upon highlights of our financial results for the fourth quarter and the 2004 fiscal year. By the way, if you need a copy of our press release, it has been posted on our corporate Web site at www.capitalsenior.com.

The company reported revenues of $23.9 million for the fourth quarter of 2004, compared to revenues of $18.9 million for the corresponding period in 2003, an increase of approximately $5 million or 27 percent. Revenues in the fourth quarter of 2004 include approximately $3.7 million of revenues from seven communities in Triad I which have been consolidated since December 31, 2003, due to the adoption of FIN 46. While these seven communities have been consolidated under FIN 46 throughout 2004, they became wholly owned properties in the fourth quarter, with the acquisition of Triad I. All of the original 19 Triad communities have now become wholly owned by the company. Triad I included among its seven communities two expansions, which have now been consolidated with our main campuses. We now count 54 communities under management, rather than 56, because of this consolidation. Resident capacity remains unchanged at approximately 8700.

Total expenses for the fourth quarter of 2004 were $21.9 million, compared to $18.7 million in the fourth quarter of 2003. This entire difference was a result of consolidating the seven communities in Triad I. All other expenses were virtually flat with the fourth quarter of the prior year, despite the addition of over $ 0.5 million of new costs, to comply with section 404, of the Sarbanes-Oxley act. We became an accelerated filer in early 2004, with our equity offering, and had to move quickly to complete all of the tasks required to properly evaluate the effectiveness of our internal control environment as of December 31, 2004. Because we had to complete this process on a compressed schedule, a disproportionate amount of the Sarbanes-Oxley costs fell in the fourth quarter. We are pleased to report that management concluded that the company's internal control over financial reporting is effective with no material weaknesses, and our outside audit firm has agreed with that assessment.

Adjusted EBITDA defined as income from operations plus depreciation and amortization for the fourth quarter of 2004 was approximately $5.1 million, compared to $2.8 million in the fourth quarter of 2003. Interest expense net of interest income was $4 million in the fourth quarter of 2004, compared to $3.1 million in the fourth quarter of 2003. The increase is primarily due to the consolidation of the Triad I debt under FIN 46 since December 31, 2003.

The company completed a number of significant transactions in the fourth quarter of 2004, which impacted the P&L. The company acquired from affiliates of Lehman Brothers their interest in four Spring Meadows community, and then immediately sold these interests to a new joint venture with an affiliate of Prudential Real Estate Investors. These transactions resulted in a net loss including transaction costs of approximately $0.2 million. Also in the fourth quarter of 2004, the company completed the refinancing of 14 senior housing properties with GMAC commercial mortgage corporation. The new loan facility refinanced eight properties previously financed by GMAC and six properties previously financed under three separate loan agreements with Key Bank, Compass Bank, and Banc of America which were prepaid. The company wrote off approximately $0.5 million of deferred loan costs on the debt which was refinanced. Key required as part of the original loan agreements both interest rate swaps and treasury lock agreements. The company became party to these agreements with the acquisition of Triad II in the third quarter of 2003. On December 30, 2004, the company settled its interest rate swap agreements with Key by paying approximately $0.5 million and recognized a gain of approximately $1.4 million on this settlement. The company also recorded a loss on the treasury lock agreements of approximately the same amount, $1.4 million. Consequently, the company incurred a pre-tax loss of approximately $0.7 million or $0.02 per share, on the Spring Meadows transaction and a debt restructuring and derivative costs. In addition to $0.01 per share is a direct result of costs to comply with section 404 of the Sarbanes-Oxley act.

The company reported a fourth quarter 2004 loss of $1.8 million or $0.07 per share, excluding the effect of the transaction costs and Sarbanes-Oxley, the loss from operations in the fourth quarter of 2004 would have been approximately $0.04 per share, $0.01 better than the third quarter of 2004. Cash earnings defined as net income plus depreciation and amortization were $1.3 million or $0.05 per diluted share in the fourth quarter of 2004. For the year ended December 31, 2004, the company reported revenues of $93.3 million, compared to $66.3 million in the prior year, an increase of approximately 41 percent. Adjusted EBITDA for 2004 was $18.7 million, versus $13.6 million in 2003, an increase of approximately 38 percent. The company reported a net loss of $6.8 million or $0.27 per share, in fiscal 2004, while cash earnings were $5.3 million, or $0.21 per diluted share.

As of December 31, 2004, the company had $19.5 million of cash and cash equivalents. Cash available to the company increased by $2.4 million in the fourth quarter, as a result of the refinancing which removed the restrictions on $6.5 million of cash. Mortgage debt on the company's 29 wholly owned communities was approximately $256 million, on December 31, 2004, a reduction of approximately $21 million from the prior year. Of the company's mortgage debt, approximately $43 million or 17 percent is fixed at rates averaging 8 percent; $185 million or 72 percent is variable with interest rate caps, and approximately $28 million or 11 percent is pure floating rate debt. The company's variable rate debt amps approximately 5.5 percent, and the blended average borrowing rate is 5.9 percent. Shareholders equity was $149.5 million on December 31, 2004, equivalent to $5.1 per share.

At this time we'd like to open the call to questions.

[OPERATOR INSTRUCTIONS]

And we will take our first question from Peter Loucks with Smith Barney.

How are you guys doing? A couple of questions. In all the refinancings and pay down of debt, how much actual, if you can quantify it on a cents per share will you have saved going forward?

Peter, we did actually reduce our overall borrowing rate through the refinancing. We also put some interest rate caps in place at the same time. So part of the savings will depend upon where interest rates move in the future. But we were looking at -- based upon current rate, without any movement in the LIBOR, saving on the neighborhood of $300,000 per year based on the refinancing.

Okay. $300,000. On the same store sales basis, which -- if you use that as a term, how much incremental increase did you get on a per unit basis in the various blended properties?

If you look at the properties of our owned and managed, the revenues were up 7 percent year-over-year, and again, the Waterford properties were up about 4 percent. There was some expansion in occupancy. The balance of the portfolio was probably very similar to that. We do have a mixing, if you look at our supplemental data this year, you will see that we increased our portfolio, we did take over the management of the Covenant Group properties, in there -- we have two portfolios, one as Jim mentioned is seven owned properties so we have purchase options and the average monthly rate there is $1983. The average monthly rent on their managed which are mostly not-for-profits are about $1597. So if you take those out from the mix, the average monthly rents are growing about 4 to 5 percent over the year.

Okay. Is that below industry norm? Or about where?

Peter, it is very consistent with industry norm. If you look -- in fact, if you go on our website, in our corporate presentation, we have a slide showing the industry history for the last 10 years, where in-house rents are typically 4 percent and street rents are a percent. As I commented earlier with the improvement in pricing and the acquisition market, we think that we might actually see a further improvement in the pricing, coupled with the fact that if you look at our portfolio, we do have about 2/3s of our owned properties are recently opened, the Waterford communities which average monthly rents for the year were about $1812, compared to our entire portfolio, which is closer to $2100. So as those units turn and those markets firm, there is an opportunity to see further increases in those portfolios.

I'm sure it is not lost on you guys that the space you guys operate in, most of the or many of the equities have had significant appreciation over the last 18 months or so, where you guys have sort of treaded water. And I'm not sure why that is, and having spoken to you a couple of time, I don't think you guys know why. To bring out what we see as really good embedded value in some of your properties and probably underpriced relative to where the market has moved vis-a-vis cap rates and acquisition, what are you going to do to sort of get the world to know about your company?

All right, Peter. First of all we do -- in fact I will be on the road next week, we have two days of meetings. We do travel within communications, with some of the investment banks, obviously. We did offers with Jefferies last year. So we do go out and do road shows and do investor conferences. We've spoken at a UBS conference. There is going to be another health care conference in the spring in New York we will be participating in.

I think I -- let me just comment on where the stock -- the industry obviously has seen some tremendous returns and we take great pride in our peer group. I mean, companies have done an excellent job of improving their performance. We've seen some major restructure of capital structures of these companies. And further improvement in occupancies and EBITDA. I think we have to compare ourselves that, as I said, 2/3s of our properties are the Waterfords that opened in the last two years and more competitive environments. As we fill those properties and raise our rents we expect to see our EBITDA grow as well and we think that the valuations of the other stocks will start to have an impact on our company as well. But I think if you look at the difference between the performance of the peer group last year and our own performance, I think it does relate to the fact that we do have a larger percent of our properties which had not yet stabilized or have further movement for rental improvements.

Peter, Jim Stroud. I think the noise noise level in our story is less with the activities we've accomplished in 2004, and it is not as complicated to follow. And a good example is the Spring Meadows acquisition. That was a fee, a management fee income us to before, and now it is effectively, we have that secured through our joint venture structure. It is evidence to the market that we can acquire and will acquire through our joint venture structure which is very advantageous to the company. The second is the transparency that is created now, having the Triad I, the last Triad, now on our balance sheet, and I think the noise level that is required in the market to do a lot of digging to understand our story is much less now and they will be able to look at '05 compared to the third and fourth quarter of '04 and see the relatively strength of our story. Because there was a lot of pieces before that now has all been consolidated, and in addition, the market will see that with the acquisition of various companies, and/or portfolios, like the Covenant Group, we not only generate a continued balance of 50 percent owned, 50 percent third party joint ventures, and long-term management contract, but we also have additional opportunity to acquire those assets. So with that consolidation effort, I think we will benefit significantly.

You know, you acquired a couple of properties from one Prudential, some partnership then also Lehman Brothers. Was there a layer of profitability you had to pay them? You know, were there layers --

The way that we structure our transactions, with the joint venture partners, we share equally, we co-invest with Prudential, we invest 5 percent of the equity. With Blackstone we invest 10 percent of the equity. We share equally with our partners pro rata until we hit certain goals of return rates, and there after we have incentives and promotes that range from 20 to 25 percent over those hurdle rates. So it is a straight Perry passage transaction where our dollars are getting the same return as their dollars invested. We do benefit from the management fees on top of that.

So if you look at the structure, for virtually every dollar we invest in the joint venture we expect between our management fee revenue and a return on our co-investment to receive about 70 to 80 percent back in the first year, and then obviously, as properties perform, there's future growth in revenue, our management fees will grow, and then with our incentive, we have the ability to generate further upside through improved performance of those assets.

And lastly, I was just -- something you probably won't do, any thought to giving some guidance going forward?

Peter, we don't think that that is appropriate at this time. A lot of our earnings in the future are going to depend upon timing of acquisitions that are difficult to judge. So our feeling is that is not the appropriate thing for the company to do at this time.

Okay. Thanks a lot.

Thank you.

And we will take our next question from Evan Greenberg with Meadowbrook Capital Management.

Yeah. Hi, Larry. How are you?

Hi, Evan. How are you? Good to hear from you.

Good hearing your voice. I wanted to get an idea if you've done a recent appraisal of the value of the properties that you have.

No, we do not do appraisals. Obviously, though, with the GMAC refinancing, the lender get an appraisal and I will let Ralph Beattie speak a little bit about where those values are relative to the financing.

Yeah, we were very pleased, Evan, that actually the appraisals that were done by the lender indicated value in excess of the amount we needed to refinance the loans. So that the way we did the refinance was simply to replace the existing debt, We didn't want to increase our borrowing. We really didn't want to pull cash out of the properties, but certainly the potential was there because of the appraisals that were received, and we ended up borrowing at a lower percent of market value than was possible.

Isn't it in excess of the stock price, a lot of the real estate value? I mean I believe it's far in excess of the value, of the stock price, in fact.

Well again, I think anecdotally, we are seeing transactions in the marketplace occurring on quality stabilized properties approaching an average of $100,000 per unit. Then again, I think if you look at our assets, I think that you have to look at the blend of the properties that are still in lease out that have not yet stabilized, coupled with our mature more stable assets many of which have significant values.

Yes, so have you -- I mean I mentioned to you, and we talked about, it I don't know if you thought about it or gone to the board with it, have you thought about setting up a restructure for the real estate part of the business and have the management company spin out a stub?

Well, something that we do talk about, and we look at, there is actually a bit of a movement this year amongst the industry trying to get some relief on the REIT tax laws. As you know in hospitality, there is the ability to have taxable subsidiary, there are some limitations on health care, so we very to work through those issues. But clearly, it is something that we continue to look at, and understand that there could be the ability to create further values separating the real estate from the operations.

Okay. Great. Thanks a lot, Larry.

Thanks, Evan. Good talking to you.

[OPERATOR INSTRUCTIONS] And we will take our next question from Stefan Mykytiuk from Pike Place Capital.

Good morning.

Good morning, Stefan.

Just a quick question. I kind of missed this, Larry, as you were running through some of the statistics. I think you said that the Waterford and Wellington properties ended the year at an 89 percent occupancy?

Actually, I had, Stephan, ended the year at 88 percent occupancy and leased to 89 percent. Now if you look at the fiscal data in our press release, that is fiscal occupancy. We show the average for the quarter for the Waterford and Wellington was 86.5 percent, and that is an average looking at the entire 90 day period based on rent collections during the period as opposed to physical occupancy. As you and I have spoken before, what we show in the financial results are number of days of collected rent per unit over the number of days in the quarter. But the actual physical occupancy based on residents in place, leases signed, physical occupancy at the end of the quarter was actually 88 percent.

Okay. What's the difference between that and -- is the 88 and the 89 then?

The lease rate is something that we used to talk about as properties were a lease up. A lease rate is the physical occupancy plus deposits, less any known move-outs. So it is kind of a forward-looking measurement.

Okay so that's what you're going -- that's what I was getting at. So going into '05 at 89 percent in those Waterford-Wellingtons?

Exactly right. And by the way for '05 we will no longer talk about the lease rate because some of our properties now stabilized and we will just talk about occupancy.

Okay. And then just the -- just to clarify though, are the 19 Waterford-Wellingtons included in the consolidated -- the 29 consolidated properties?

Yes, they are. If you look at the consolidated properties, as Ralph mentioned, when we bought back the interest in Triad I, Triad I had five Waterfords, and two expansions with assisted living on two campuses, the Town Center and 10 CTRC's which were built in Triad I. When we did the refinancing in December with GMAC at the end of the year we actually transferred those properties back, the expansions back to the campuses.

Right.

So now we will talk about 54 communities. In fact, we will talk about 17 Waterfords and 12 other properties that are consolidated, so it would be 29. But looking at the numbers for the year-end, because the fourth quarter, up until the last day of the quarter, we did have 19 properties in Triad I through V. We talk about 19, but they are fully consolidated in the 29.

Okay. So last question, is just then, well, second to last question, sorry, can you give me -- of the 29 consolidated, how many were stabilized and what was the stabilized occupancy for the fourth quarter? And then what's the occupancy in the fourth quarter for the ones in lease-up?

Of the -- going back now, of the -- we have and just give me one second. We ended the year with 44 properties stable, all the management is backing into this. We had one renovation which is one to consolidate properties, and then we had nine in lease-up, two of which are Spring Meadows which are not stabilized, two Covenant properties, so there are five Waterfords.

Right.

So if you back into here of the 29, 23 are stable and 6 are not. And the average occupy, we have 90 percent is pretty close to what a stable portfolio would be.

90 percent. Okay and what was that a year ago? Of those 23?

Well, again it is a different portfolio mix because the numbers have changed.

Okay. All right. Never mind.

Because we had many properties that stabilized during the year.

Okay. All right. Fair enough. Just --

But in answer to your question, Stefan, you go back again to the last page of our press release, of the 29 consolidated, again you can see, upper 24, we went from 83.5 to 86 percent.

Right, right.

On economic occupancy, but again it is not comparing the same mix, because we didn't consolidate fully the Triad I properties in '03.

I get it. I get. It okay. Last question was just, I did -- I also missed the -- what was the Sarbanes-Oxley expenses in the fourth quarter?

In the fourth quarter, it is about $0.5 million. And that was the majority of the cost for 2004. Again we had most of the work done really in the last four months of the year based on the way the timing worked out and of course we came an accelerated filer in early 2004, so we had a very compressed process, but fortunately had a very successful result.

And how much of that do you think carries over as on going expense?

We tried to estimate that in the budget for next year. I would say that probably the overall Sarbanes-Oxley cost will be similar, but I think that we will spend more money earlier in the year. I don't think we will see the same kind of fourth quarter result that we did in 2004.

One thing that we in fact yet, that we have an audit committee call, and the auditor did say that most company, the second year on internal control will see some savings. Obviously, there is a lot of work done towards the last quarter, and the second to last quarter, in setting up the systems, checking the first time for any type of weakness. Fortunately, we did not have any internal weaknesses, but again there is a lot of startup cost which would not be replicated in the future.

Great. Thank you very much.

Thank you, Stefan.

And we will take our next question from Frank Morgan with Jefferies and Company.

Good morning, all. I apologize if these questions have already been asked but I got cut off the call for a few minutes. I was curious one just a technical question. Do assets held for sale that were short term and long term assets -- I was just curious what that was. And secondly, I may have missed your commentary about the rate growth that you're seeing, on a monthly rate growth. It looked to me like it was relative to the others that have reported so far. The growths in the rates were a little bit lower and I was just wondering could you comment on what is kind of your thinking about the year ahead in terms of your ability to raise pricing.

Frank, it's Ralph. Let meet start with the assets held for sale. We have about a $1 million of current assets held for sale. That is two parcels of land that we have under contract at the present time. So there are two contracts in place for those two parcels of land, it would classify as a current asset. There are two remaining parcels that are long time assets held for sale. So of the total four asset, four parcels remaining, two are under contract, and two are not.

And on the rate growth -- Frank, good morning. It's Larry. The Waterford-Wellingtons were up almost 4 percent year-over-year on average monthly rents. If you look at our press release, the fact that we now have as our total portfolio under management, we have 54 properties. Included in there are the 7 owned covenant properties that we manage, as well as the 6 properties that are managed by not-for-profits. Those rents which were not in the prior year are lower, the not-for-profit rents average about $1597 a month. The owned covenant properties are just under $2,000 a month. But if you take those ads, our same store sales were pretty consistent with 4 to 5 percent.

One comment I will make, Frank, and you may have missed some of the comment. One of the areas of focus this year are ancillary services because we recognize that what drives a lot of the growth in this industry has been ancillary service, so that's something we look at right now. We do a lot of it through third party, and we're really evaluating whether that should be done more internally or continue at the third party services.

Okay. Thank you.

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

On behalf of the company, we thank you for your participation. Have a good day.

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