Sonida Senior Living Inc (SNDA) 2009 Q1 法說會逐字稿

Good day, and welcome to the Capital Senior Living first quarter 2009 earnings release conference call. Today's conference is being recorded. Any forward-looking statements made by management in this conference call are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitations to, the Company's ability to find suitable acquisition properties at favorable terms, financing, leasing, business conditions, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rates, and changes in accounting principles and interpretations, among others, and other risks and factors identified from time to time in Company's reports filed with the Securities & Exchange Commission.

At this time, I'd like to turn the conference over to Mr. Larry Cohen. Please go ahead.

Thank you. Good morning, everybody, and welcome to Capital Senior Living's first quarter 2009 earnings conference call. Our communities offer seniors quality housing in well-appointed buildings with supportive services at affordable rates. We made progress during the first quarter in spite of the economic downturn.

Same store revenue increased as a result of higher average monthly rents, and corporate and property level cost controls and reductions contributed to positive operating performance. Both EBITDAR and EBITDAR margin improved sequentially from the fourth quarter of 2008. We are pleased that we saw an increase in move-ins and deposits from prospective residents from both the previous quarter and the comparable quarter of the prior year. Our focus on providing affordable quality housing and care, promoting seniors' independence and wellness while enriching their lives daily continued to yield results.

We differentiate our communities as an affordable option delivering value to seniors in challenging economic times. Our communities enjoy stable, well-established reputations in their markets. Our focused marketing and sales staff are building relationships and implementing innovative marketing plans to increase our outreach and contacts with referral sources.

In the first quarter of 2009, we had 89 more move-ins and 151 more deposits than we had during the fourth quarter 2008, and we had 42 more move-ins and 48 more deposits than in the first quarter of 2008. As is typical in the first quarter, our attrition rate was 38.3% as compared to 34.1% in the fourth quarter of 2008, but lower than our attrition rate in the comparable quarter of the prior year. Hopefully, we will continue to make progress as we enter the spring and summer months, which usually are very good for the senior living industry, and as recent reports indicate, the housing market may be stabilizing.

Our disciplined approach to reducing expenses at both the corporate and property level while increasing average monthly rent is producing positive results. Average monthly rents at our consolidated communities increased 3.5%, and operating expenses decreased by $600,000 as compared to the first quarter of 2008.

Fifty-eight of our communities were stabilized during both the first quarter with an 87% average physical occupancy rate. Operating margins before property taxes, insurance, and management fees improved to 48% in stabilized independent and assisted living communities. As communities under management, these include our consolidated communities, communities owned in joint ventures, and communities owned by third parties managed by the Company excluding three communities with units being converted to higher levels of care.

Same store revenues increased 0.2% versus the first quarter of 2008 with a 3.7% increase in average monthly rent. Our expense reductions and group purchasing program decreased same store expenses 1.5%. These achievements generated same store net income growth of 2.7% from the comparable period of the prior year.

We consolidated 50 communities in the first quarters 2009 and 2008. Financial occupancy of the consolidated portfolio averaged 84.5% in the first quarter. Excluding the three communities with units being converted to higher levels of care, the average financial occupancy for the quarter was 86.3%. Average monthly rents were $2,506, a 3.5% increase from first quarter 2008 average monthly rates.

The average age of our residents is 85, and the decision to move into a senior living community, both independent living with supportive services, as well as assisted living, is need driven. Through assisted living for home health care residing in our independent living communities, residents can receive supportive services at all of our properties, and the cost of living at a Capital Senior Living community is typically more affordable than living at home.

While we have seen the effects of the economic downturn impact certain markets, our move-ins, deposits from prospective residents, tours, and leads generated all increased in the first quarter. In those communities that have been impacted by the economy, we continue to manage and reduce our operating expenses, particularly staffing and food costs, and thereby maintain margins. In addition, we are converting units at certain communities to higher levels of care, offering more services to residents as they age in place. We are in the process of converting 109 independent living units in three communities to assisted living or dementia care. Twenty-four units were licensed at the end of the first quarter, 20 units are expected to be licensed in the second quarter, and 65 units are expected to be licensed as assisted living in 2010.

Last month we opened two recently completed Waterford communities in Perrysburg and Richmond Heights, Ohio. These communities total 287 units of independent living and assisted living and were developed in joint venture with Prudential Real Estate Investors acting on behalf of institutional investors. Sales traffic has been brisk at both communities. In Perrysburg, we have seven units occupied or with scheduled move-ins and ten additional deposits on hand. At the Richmond Heights community, we have 26 units occupied or with scheduled move-ins and 15 additional deposits.

In December, we announced we were discontinuing further development and expansions until general business conditions improve and we eliminated three related positions. With Jim Stroud's retirement as an officer of the Company in December and the elimination of two regional positions, we have reduced our annual corporate overhead by approximately $1.1 million.

I would like to clarify a question received about our executive compensation plan. Our executive officers are paid a base salary and cash performance awards contingent upon the Company's achievement of certain targets and goals. In 2008, these included targeted quarterly earnings per share, achievement of stock priced performance relative to our peer group, achievement of certain corporate goals, and the achievement of certain individual goals.

In the first quarter of 2008, the compensation committee set the performance targets and goals for 2008, which tie directly to the Company's annual business plan. The compensation committee may review the targeted earnings per share goals during the year and make adjustments as it deems appropriate to respond to changes which affect general market conditions or our business in particular, changes in the Company's business philosophy, and overall trends in the economy. Based on changes in corporate strategy in 2008 relating to the Board's review of strategic alternatives, the decision to stop development, and market conditions, the committee determined it was appropriate to pay a reduced portion of the targeted EPS goal in the third and fourth quarters. Many of the 2008 individual and corporate goals were not achieved, and consequently, the amounts paid to executives under the Company's incentive compensation plan were significantly below targeted amounts and below prior year levels.

Our 2009 business plan is focused on revenue growth, expense controls, conversion of units to higher levels of care, and external growth through procuring new management contracts and opportunistic acquisitions. In January, we announced a stock repurchase plan of up to $10 million of common stock. The timing and extent to which we repurchase stock will depend on market conditions and other corporate considerations. We believe this stock repurchase program is a prudent use of our capital and demonstrates our confidence in the long-term value of Capital Senior Living. We are profitable, generate positive cash flow, and currently have the cash available to fund this program.

The senior housing market is highly fragmented with a number of operators financially challenged with limited access to capital. New supply is severely constrained and demand will continue to grow as seniors age and their needs increase. We believe that we are well positioned to take advantage of the current economic downturn to grow and profit from an economic recovery.

We have an established operating platform with geographic clustering and we provide multiple levels of care to seniors. We have a proven track record with same store average annual rent growth of 6.1% and same store annual net operating income growth of 13.7% since 2003. Our stabilized operating margin is currently 48%, and we have successfully integrated dozens of acquisitions into the Company since the end of 2005. We have a solid balance sheet with no significant loan maturities until the third quarter of 2015. We enjoy strong institutional relationships and have a stable and seasoned management team with 171 years of combined seniors housing experience. Capitalizing on opportunities in this downturn should allow us to gain sustained strong, competitive positions within our geographic clusters and maximize shareholder value as the economy stabilizes.

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the first quarter of 2009.

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 first quarter of 2009. If you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenues of $48 million for the first quarter of 2009 compared to revenues of $48.5 million for the first quarter of 2008. Revenues in the first quarter of last year included approximately $0.8 million of development fees from three communities we developed in joint ventures. The Company has discontinued further development at this time, and no development fees are included in the current quarter's revenue. The number of communities we consolidated on our income statement was 50 in both periods.

Financial occupancy in the consolidated portfolio averaged 84.5% for the quarter with an average monthly rent of $2,506 per occupied unit. Excluding three communities with units being converted to higher levels of care, financial occupancy of the remaining 47 consolidated communities averaged 86.3%. Revenues under management were $54.8 million in the first quarter of 2009 compared to $55.1 million in the first quarter of 2008 and there were 64 communities under management in both periods.

At these communities under management, excluding the three communities undergoing conversions, same store revenue increased 0.2% versus the first quarter of 2008 as a result of a 3.7% increase in average monthly rent. Same community expenses decreased by 1.5% and net income increased 2.7% from the comparable period of the prior year. Both labor and food costs were lower in the first quarter of 2009 than the first quarter of 2008 contributing to a $0.6 million decrease in operating expenses. As a percentage of resident and healthcare revenue, operating expenses were 61% in the first quarter of 2009 compared to 62.1% in the first quarter of 2008.

General and administrative expenses of $3 million were also lower than the first quarter of 2008 by approximately $0.6 million. Approximately half of the decrease was due to personnel reductions which occurred at the end of 2008. As a percentage of revenue under management, general and administrative expenses were 5.5% in the first quarter of 2009.

Facility lease expenses were $6.4 million in the first quarter of 2009, approximately $0.3 million higher than the first quarter of 2008 primarily reflecting increases in contingent rent on 25 leased communities.

Depreciation and amortization expenses increased $0.2 million in the first quarter of the prior year as a result of capital improvements at the Company's owned and leased facilities. Adjusted EBITDAR for the first quarter of 2009 was approximately $14.3 million, and adjusted EBITDAR margin was 29.8% for the period. Interest expense was $2.9 million in the first quarter of 2009 compared to $3.1 million in the first quarter of 2008, reflecting about $3 million less debt outstanding due to principal amortization.

The Company reported income before taxes of approximately $1.4 million in the first quarter of 2009 and net income of $0.8 million or $0.03 per diluted share versus net income of $1.5 million or $0.06 per diluted share in the first quarter of 2008. Adjusted cash earnings were $4.4 million or $0.17 per diluted share in the first quarter of 2009 versus $4.7 million or $0.18 per diluted share in the first quarter of 2008.

In January of this year, the Company announced that the Board of Directors authorized a stock repurchase program of up to $10 million of common stock. In the first quarter of 2009, the Company purchased 337,300 shares of common stock at a cost of approximately $0.9 million or an average cost of $2.68 per share.

The Company ended the quarter with $24.4 million of cash and cash equivalents and $2.2 million of restricted cash. The restricted cash represents collateral for letters of credit, which are used in place of security deposits with one of our lessors. The interest earned on the restricted cash is approximately equal to the cost of the letters of credit.

As of March 31, 2009, the Company financed its 25 owned communities with mortgage debt totaling $185 million at fixed interest rates averaging 6.1%. With the exception of one mortgage of $4.7 million maturing in September of this year, the next closest maturity is July of 2015.

Capital expenditures for the quarter were approximately $1.6 million representing $1 million of investment spending and $0.6 million of recurring CapEx.

Cindy, we'd now like to take questions.

Thank you. (Operator instructions.) And we'll take our first question today from Jerry Doctrow at Stifel Nicolaus.

Good morning. I guess I wanted to do a couple things, Larry. I mean, you had thrown, obviously, a bunch of sort of data at us in terms of occupancy numbers of various types for various pieces and also discussed some about move-ins. I think what we're trying to think through is if we just think about the whole portfolio for a minute, it sounds like you're expecting some rebound in occupancy seasonally and maybe because the market's getting a little bit better. And trying to get a sense of what we might expect and also some of the other factors that sort of play in there, the -- some of the units that were being converted coming online. What happens to kind of margins as you begin to add occupancy again?

Sure, Jerry. It's a little hard to predict what the future occupancy levels will be because I think there's still some uncertainty about the economy. We're being cautious as far as our outlook. However, as we indicated, we had success in the first quarter where we saw better traffic, better leads, better move-ins, better deposits both compared to the fourth quarter, as well as compared to the first quarter of the prior year, and while there is seasonality in our business and we typically see that in the first quarter, we saw, obviously, the effect of attrition compared to the fourth quarter, but again, it was lower than the first quarter of the prior year.

If I look at what we're seeing so far this year, our lease to occupancy at the end of April is a little higher than what our March occupancy level was, so as we move people in, we'll start to see some slight improvement in the occupancy. But we're getting now, as we get into May, it sounds like traffic has been good. We're very encouraged by, particularly in Richmond Heights, the quick lease-up we're experiencing in Ohio, which, again, is a challenging space, but yet we seem to do pretty well in some of those markets. We're seeing a little bit of a fall off in South Carolina. Florida, California continue to be issues, but fortunately, we don't have much exposure in those markets. We're seeing nice progress in Iowa, Nebraska. Texas continues to be relatively stable.

So I think that we're looking going forward on a pretty stable occupancy, continue to see some rent increases. Again, if you look at the rent increases in the first quarter, the average is about 3.5% year over year. Our target this year is going to be in the 3% to 4% range, so we're hitting that target. And we've been fortunate that by expense controls and rent increases we have offset the occupancy loss that we experienced in the first quarter, and hopefully as the economy stabilizes, we'll start to see some improvements.

Okay. Let me just drill down a little bit on the margin, if I could. I mean, you all have done a great job on expense controls and congratulate you for that. As we -- I mean, is there more of that to come or have we basically squeezed it enough so that as we see occupancy ramp up, are you going to be able to hold that margin? Do we actually see margin maybe move a little bit as you add more variable staff? I'm trying to get a little color on that.

If you look at our margins, and they've actually improved even with falling occupancy, because we do have a system where we staff our properties and purchase food and other supplies based on the occupancy. So, we're able to adjust. And it's interesting because if we look at some of the markets where we have challenges, like California, with occupancies that maintain a mid-70% level, we maintain every month operating margins in the high 40% to low 50% range. As the experience that we have had and I think others in the industry is that as properties stabilize, the incremental margin on incremental revenue typically is 70% to 80%. So that would suggest that as we get into higher occupancy levels, we should start to see some margin improvement based on those numbers.

As far as staffing on the newer expansions, or conversions rather, there we typically -- if we have a 20 or 25-unit conversion, our caregivers are typically a 1 to 15 ratio, but the margins on those conversions should be running in their own right at about 60%. So I think that as we look at the business and hopefully as we see a recovery, I think that we could start to see some improvement in margins, not dramatic, but improvement just because of the fact that there is this operating leverage in the business that should enhance the margin on the incremental revenue that's being generated.

Okay, and just to clarify one or two things, make sure I've got them straight, the new stuff is really in the JV, so it's not that dramatic an impact. It really doesn't affect the basic operating metrics that much. You're just getting your fee and your proportional share of the JV, so the losses on the JV may come down. Your fees will grow a bit over time, but the lease-up there is not going to be that dramatic an impact on overall --

That's correct.

Okay.

We have -- we have a 10% ownership interest in the JV, so the revenue that we generate, we earn development fees, and now we'll be -- we earn management fees. And there's a [floor] in the management fee that should have a pretty stable management recurring fee for the balance of this year.

Okay. And then on the conversions, and I think I may have missed the last, but 24 came on end of first quarter. I think 20, if I got the number right, was second quarter, and then what was the timing on the last group there?

We have two more buildings, 45 units in Florida, at Veranda Club. We're waiting for lender approval and final building permits. We're hopeful that that building will start, the construction for the conversion, June or July with a ten-month period for the build out, so that probably will not open until the second or so quarter of 2010.

Okay.

And then Crown Point, which is the remaining 20 units, all we're doing there is waiting for lender approval. That should be coming within hopefully the next month or two. And that does require some construction, less than Florida, and I would expect that could be an impact in the first quarter or so of 2010.

Okay. And those are all like owned or leased consolidated properties, so they drive the basic revenue. It's not JV or managed stuff.

That's correct. They're all owned or leased. That's correct.

Okay. Let's see. I think that's all from me for now. Thanks.

Thanks, Jerry.

(Operator instructions.) And we'll take our next question from Gregory Macosko at Lord Abbett.

Yes, thank you. I'd like to just understand a little bit more the converted, the three converted units that you're doing and what's the strategy behind that and how you will fill those. Talk to me about where you expect the occupancy ultimately to come from.

Good morning, Gregory. How are you?

Fine. Nice to hear you again.

Thank you. These buildings are independent living properties, two of them. One is an independent and assisted living building, but these are buildings that typically have only independent living units with an age of our resident 85. And we're starting to see the need for aging in place. Typically, what happens in these conversions, we'll have residents transfer within the building from independent to assisted living. And then we'll continue to refill the independent living units from the market, as well as attracting the assisted living from the five or seven mile radius from that community. This is a strategy that we have implemented for many years and have seen tremendous success. Anecdotally, it's interesting, when we even look at the attrition rates in the first quarter. Those buildings with independent and assisted living have the lowest level of attrition of all our levels of care. So we're finding that it allows us to retain existing residents longer because they can transfer to the higher level of care, as well as fill vacant units from the community by attracting assisted living needed residents as opposed to the assisted living residents.

And how many -- I believe you have some others. I didn't realize that you are, in other words, these will be mixed facilities, all three?

They'll all have combined independent and assisted living, yes.

And how many do you have in operation now?

If you look at our portfolio, I'd say that about -- we have 64 properties, and with combined units, we probably -- probably about half of our portfolio have independent and assisted within the building or on the campus.

Okay, and ultimately, the idea is to move forward in that strategic direction as -- I mean, as you see fit?

Exactly. What we find is it helps occupancies, it improves the margins, and it serves the need of a resident as a resident ages in place.

Okay, and then, if I may, the move-ins and deposits, I think, following up kind of on Jerry's suggestion, the move-ins and deposits that increase year over year and sequentially you're suggesting that that is part of the reason why you're somewhat more optimistic looking forward?

We're very pleased with what we have seen. As I said, we're still being cautious about the outlook because of just the uncertainty of the economy at this point. But, clearly, we're -- we are, again, very pleased that we saw a nice improvement in the move-ins and deposits and continue to see good traffic at our buildings, so hopefully we'll start -- we'll continue to see progress throughout the year.

And the Perrysburg and Richmond Heights, those are joint ventures, correct?

Those are -- correct. Those are joint ventures with Prudential Real Estate Investors.

Okay. And then if I might understand the executive comp, your discussion there. I was a little confused about the comp committee and that. Are you saying that they changed the compensation based on the fact that you no longer have a very active recruiting and -- or no, development program?

Yes. Well, what happened was a question was -- actually Jerry Doctrow had asked the question in his pre-call notes, I want to refer back to that. Our compensation plan for the executives have performance goals and targets that were set at the beginning of the year. What happened is in the third and fourth quarter the target for earnings was not achieved primarily because changes of business conditions and strategy as it relates to that we originally planned to have development throughout the year. We decided to stop development based on the economy and the financial markets. So the earnings targets were then adjusted to reflect the fact that we were not going to be earning development fees, for example. So therefore, the payout was on a different target amount than was originally planned at the beginning of the year.

And how much of your -- of top management's compensation is salary, generally, or was it in, say, 2008 was incentive versus base?

Salary in 2008 was about 50%. The base salary was about 50% of the total compensation and the incentive awards were typically 50% of the targeted amount. So, typically, if you look at the structure, the bonus potential is typically 75% to 100% based on performance targets of the base salary of the executives.

And just with kind of your eyeball and your gut, how would you say the compensation for the top group is looking for this year based on the change in the bonus program?

We have not yet finalized the plan for this year, so that's still being considered by the compensation committee.

Well, I would hope that there would be certainly some understanding that the outlook of the -- even though the outlook for the industry is down, I would assume there would be some understanding that that might be, to some extent, reflected also in the compensation of the executive group. Correct?

That is -- clearly, the performance last year reflected the fact because of the performance of the economy and the industry reflected in the payout of compensation, yes.

Okay. Thank you very much.

Thank you.

(Operator instructions.) And it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Cohen for any additional or closing remarks.

Well, we thank everybody for joining our call today and look forward to our earnings call for the second quarter, and please feel free to contact Ralph or myself if you have any further questions. Thank you very much, and enjoy your day.

Thank you. That does conclude today's conference. We do want to thank you for your participation today.