Sonida Senior Living Inc (SNDA) 2009 Q3 法說會逐字稿

Good day and welcome to the Capital Senior Living Third Quarter 2009 Earnings Release Conference Call. Today's conference is being recorded. The forward-looking statements in this release are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitation to, the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business conditions, risks of downturn and economic conditions generally, satisfaction of closing conditions, such as those pertaining to licensor, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretation among others, and other risks and factors identified from time to time in our reports filed with Securities and Exchange Commission. At this time, I'd like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good morning, everybody. I'm pleased to welcome you to Capital Senior Living's third quarter 2009 earnings release conference call. I am happy we achieved a 140 basis point improvement in occupancies during the quarter. Quarter ending occupancies improved 80 basis points at our independent living communities and 200 basis points at our assisted living communities.

Excluding communities and lease-ups, we attained a 114 basis point improvement in occupancies during the quarter with an 84 basis point improvement in independent living and a 180 basis point improvement in assisted living. Our strategy of providing affordable, quality housing and care in well located communities is yielding results. I want to congratulate our focused marketing and sales staff which through building of relationships, outreach and implementing innovative marketing strategies and technology are increasing our occupancies.

We achieved occupancy gains in all three months of the quarter and move-ins, deposits, leads and tours all increased for the quarter as compared to the third quarter of 2008. Our attrition rate for the third quarter was also lower at 35.7% as compared to 37.3% in the third quarter of 2008. As we have discussed before, our disciplined approach to reducing expenses at both the corporate and property level while increasing average monthly rents continues to generate positive results.

At communities under management, excluding three communities undergoing conversions, same-store revenue increased 0.5% versus the third quarter of 2008 as a result of a 2.8% increase in average monthly rent. Same community expenses decreased 1.5% and net income increased 3.6% from the comparable period of the prior year.

58 of our communities were stabilized during the second quarter with an 87% average physical occupancy rate. Operating margins before property taxes, insurance and management fees were 47% in stabilized independent and assisted living communities. Our three independent and assisted living communities in lease-up that were developed in joint venture with an affiliate of Prudential Real Estate Investors acting on behalf of institutional investors had a solid quarter with each property averaging an 8% occupancy gain consistent with our pro forma. Move-ins, deposits and traffic are continuing at the same pace so far in the fourth quarter.

In addition to organic growth, we see opportunities to increase cash flow, generate very attractive returns and offer more services to residents as they age in place by converting units to higher levels of care. We converted 24 independent living units to assisted living units earlier this year and are in the process of converting 85 independent living units in two communities to assisted living. We expect these converted units to be completed in the second half of 2010. These additional conversions are expected to cost approximately $3 million and upon stabilization are expected to generate approximately $2.4 million of revenues with a 60% operating margin. We are annualizing the additional conversion opportunities at six communities and if feasible, expect these conversions will begin in 2010.

Another focus for growth is acquisitions and new management contracts. The senior housing industry 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 nimble and well positioned to take advantage of the current economic environment to grow externally 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, a solid balance sheet with no significant low maturities until the third quarter of 2015. We have a stable and seasoned management team and we enjoy strong institutional relationships with financial partners and healthcare REITs. Capitalizing on opportunities should allow us to gain sustained, strong, competitive positions within our geographic clusters and maximize shareholder value as the economy improves.

I'm pleased that our performance over the past year has demonstrated the resiliency of our need-driven business model and operating platform. I want to thank our management team, our regional managers and our onsite associates and let them know how proud I am of their accomplishments through this challenging time I would now like to introduce Ralph Beattie, our Chief Financial Officer to review the Company's financial results for the third quarter of 2009.

Thank you, Larry, and good morning. I hope everyone has had a chance to see the press release which was distributed last night. In the next few minutes I'm going to review and expand upon highlights of our financial results for the third quarter 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 $48.1 million for the third quarter of 2009, compared to revenues of $47.7 million for the third quarter of 2008. Revenues in the third quarter of last year included approximately $0.4 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 of the consolidated portfolio averaged 83.9% for the quarter, with an average monthly rent of $2,550 per occupied unit. Excluding three communities with units being converted to higher levels of care, financial occupancy of the remaining 47 consolidated communities averaged 85.3%. This occupancy figure improved about 40 basis points from the second quarter of this year.

Revenues under management were $55.7 million in the third quarter of 2009 and revenues under management include revenues generated by the Company's consolidated communities, communities owned in joint ventures and communities owned by third parties that are managed by the Company.

There were 66 communities under management in the third quarter of 2009, compared to 65 communities under management in the third quarter of 2008. Two joint venture developments have opened since the third quarter of last year, and 1 management agreement has expired. Operating expenses were lower in the third quarter of 2009 than the third quarter of 2008 by $0.6 million. As a percentage of resident and healthcare revenue, operating expenses were 62.4% in the third quarter of 2009 compared to 63.2% in the third quarter of 2008, an improvement of 80 basis points.

General and administrative expenses of $2.5 million were lower than the second quarter of 2009 by approximately $0.9 million. During the second quarter of this year, the Company experienced an unusually high rate of health insurance claims. The Company is self-insured for the cost of employee and dependent medical benefits and purchased a stop loss protection on an individual and aggregate basis.

The Company's new benefit year began in July and both payroll deductions and employee copayments were increased to mitigate these costs. Other corporate expenses are also trending lower reflecting aggressive cost savings initiatives. As a percentage of revenue under management, general and administrative expenses were 4.4% in the third quarter of 2009.

Facility lease expenses were $6.5 million in the third quarter of 2009, approximately $0.2 million higher than the third quarter of 2008 primarily reflecting increases in contingent rent on 25 leased communities. Depreciation and amortization expenses increased $0.2 million from the third quarter of the prior year as a result of capital improvements at the Company's owned and leased facilities.

Adjusted EBITDA for the third quarter of 2009 was approximately $14.3 million and adjusted EBITDA margin was 29.8% for the period. Interest expense was $3 million in the third quarter of 2009, slightly less than the third quarter of 2008. In the last 12 months the Company has amortized $3.5 million of mortgage debt.

The Company reported net income of $0.8 million or $0.03 per diluted share versus net income of $1.2 million or $0.05 per diluted share in the third quarter of 2008. Adjusted CFFO was $3.3 million or $0.13 per diluted share in the third quarter of 2009. The Company ended the quarter with $28.4 million of cash and cash equivalents and $2.2 million of restricted cash.

As of September 30th of this year, the Company financed its 25 owned communities with mortgage debt totaling $183.2 million at fixed interest rates averaging 6.1%. With the exception of one mortgage of $4.7 million which matured in September, the next closest maturity is July of 2015. The Company's discussing with the lender an extension on the loan which matured.

At the end of the third quarter, our ratio of net debt to annualized EBITDA was approximately 4.9. Capital expenditures for the quarter were approximately $2.6 million representing $1.3 million of an investment spending and $1.3 million of recurring CapEx. If the year-to-date recurring CapEx were annualized, this would equate to approximately $600 per unit. Operator, we'd now like to open the call to questions.

Thank you.

(Operator Instructions)

Our first question will come from Jerry Doctrow with Stifel Nicolaus.

Good morning, it's actually Dan Bernstein filling in for Jerry.

Good morning, Dan.

Morning, Dan.

Morning. You've finally had some occupancy increase in the independent living. It's had some -- if we get some color on what's involved in that occupancy increase. Are people moving in because they can sell their homes? Are they just more confident in the economy? Or is there something else that's helping people move into those units?

Thanks, Dan. I think it's a variety of reasons. Clearly, we've seen improved stock market and improving house market, consumer confidence is higher. Fortunately most of our buildings are located in some of the best housing markets in the country, which have been fairly stable relatively speaking. I also think there's been pent-up demand and even in independent living we still serve a frail senior where we have home healthcare in our buildings, third parties providing those services.

So what we're finding that our independent living continues to be a need-driven product with very affordable rates and large residential units and accommodations. So we think it becomes a very compelling alternative to seniors where they can move into our independent living communities with an average rent of [$2,220] a month versus assisted living where average rents could be $1,000 higher and still get many of the supportive services through our staff and support as well as the third party homecare agency. So I just think it's somewhat a reflection of the economy, a reflection of our locations and we're very happy to see the progress.

Are you seeing any differences in terms of people moving more into smaller units or larger units. Do you have any double-occupancy? Is that something that people are looking for?

We typically have about 10% of our residents as couples, which will have double -- living in two different apartments. We have very few double occupancies in our portfolio. We have some in a portfolio of assisted living communities in the Carolinas but by and large we do not have double occupancies. So again I think what we're finding is that -- and your question is a very good question.

Clearly studios are very attractive right now because of the economy, but if you look at the mix of our units, which are again range studios, one and two bedrooms; I think that we're seeing that the occupancies are solid or growing throughout the portfolio and there's really no marked difference as far as studios or the large units. And again, as I said, we typically feel that we provide a very competitive, affordable product to our residents.

And then turning to investment opportunities. Could you rate say what would be your priority in order, what would be your preference in order whether it be acquisitions, joint ventures or maybe be expansions or conversion to AL in terms of just what do you think is the best course of action for you?

Clearly, conversions are a great use of capital which has had very attractive returns and as you can see from my comments on the two conversions that we are beginning right now in Florida and in Nebraska, the cost is about $3 million, about $2.7 million of that is actually being funded by a REITs and is a leased property. When that building is stabilized, about 90% occupancy, which typically takes a year or so to stabilize after completion, we expect to generate $2.4 million of revenue with a 60% margin. So the economics are very compelling with about 45% return on the investment and the payout in about two years, so we think that's very compelling.

Similarly, we've had great success with our joint ventures. We still are very actively looking at acquisition opportunities with our joint venture partners who are focused on this sector, are well capitalized. Some of who recently raised funds of $300 million, $400 million. We're actually expanding our breadth of joint venture opportunities by meeting with other joint venture type partners.

And there, we've had great success where we typically get the benefit of the management, we co-invest, we share in the economics and then we get to promote and again, there on our investment we typically average about 50% to 60% return in the first year looking at our management fee and our economic return pari passu with our partner, and then we get a nice incentive on a promote on a recapitalization.

Lastly, we're seeing the healthcare REITs come back into a market where their cost of capital has declined dramatically and they provide a very effective and efficient cost of capital. Then on a blended basis, looking at a component of dead end equity is very competitive. So we're also looking at some transactions with some of the healthcare REITs again where there's a nice comfortable coverage ratio, good spreads between the cap rates and the lease rate and we also would consider acquisitions into the Company.

So I think as we look at the situation, the first thing we look at is strategically is it a fit for the Company; geographically, product type as well as looking at how it impacts our shareholder value and how we can best maximize shareholder value using a variety. I think one of the advantages we have today, quite frankly, is we have a variety of capital sources that allow us to be very nimble.

We have a great operating platform and we think that we can really excel. If you look at our performance in 2005, 2006 when we were actively buying properties, most of those were [three, five] property portfolios and I think that we have a competitive advantage in that type of market where we have the operating platform, we have the reputation, we have the capital sources and there's much less competition in those type of transactions.

Thank you, Larry. I'll jump off and let somebody else ask a question.

Thanks, Dan.

(Operator Instructions)

We'll go next to [Todd Cohen] with [MTC Advisors].

Hi, guys.

Hi, Todd.

Just kind of an administrative question; CapEx in the quarter, half of it was investment spending and half was recurring. So what was the investment spending on?

It was on various improvements to the properties, Todd. So we -- it was actually spread over quite a number of properties. Nothing in the multi-million dollar range. In fact, Todd, what we do on the investment; that typically involves renovation, carpets, chairs, siding, really cosmetic improvements at properties we are undergoing for innovations at about five or six of our buildings right now which we think are good capital investments.

The typical property is about $200,000 to $300,000 investments over the renovation period and we think we get a great return there because what we're doing is taking buildings and then updating them and making them much more attractive as far as being competitive in the market and also being attractive to our residents to those buildings.

And then I know that you've discussed this in the past, I'm just curious as to where you are on this now. You were doing some IT upgrades I think --

We have, Todd, and we're actually in some later phases of that IT upgrade but we did complete our new enterprise systems in the Company. We switched to a Oracle PeopleSoft based system so that we could work more productively and grow our business more easily along with the health medics, accounts receivable and billing component. We're now working on some additional modules to get additional productivity in the Company and obviously one of our objectives is to do more through automated names rather than increase headcount.

And then I guess the last question would be along the lines of the previous question; you highlighted the areas that you're going to pursue possibly from an investment point of view, but how do you rate the health now of the capital providers? I know that there was kind of a log jam there for an extended period of time obviously with the credit crunch, but is that -- are you seeing more responsiveness and willingness on the part of the bigger investors to now step up to the plate?

I think that we have been very fortunate to have relationships with institutional investors that are capitalized, some of whom have funds dedicated exclusively to senior's housing. Some of that [has just] raised; Prudential for example just raised a fund. We are actually in the process of meeting with some other private equity investors.

I think there's a real dichotomy between some of the real estate private equity investors looking for distressed opportunities in other asset classes with taking on more risk, higher returns; they probably are not going to be very active in the senior housing industry because it's proven to be resilient and we also benefit from the agency financing still available from Freddie Mac, Fannie Mae that have provided a very affective debt base on well located properties with proven sponsors and operators.

And then as I said, so we like the joint ventures we're seeing activity there and we're very fortunate to have existing relationships and creating new relationships. We also look at other capital sources and what we look at, again, is what is going to be the best suited for the Company, but I do think that -- I wouldn't say that he capital sources have expanded very much I just think that there are capital sources that are very focused in this industry and there's some of a small club that participate with that, both regarding the lenders as well as private equity investors that we're fortunate to have very sound relationships with.

Great, thanks.

Thank you, Todd.

(Operator Instructions)

We'll go next to Jerry Doctrow with Stifel Nicolaus.

Hi, I just have a follow-up on the potential to do six more conversions. Would those be on owned properties and financed out of your own cash or mortgages or is that -- are those going to be on lease properties perhaps?

Right now, Dan, what we're looking at are two leased properties, two joint venture properties and two owned properties. So I guess all of the above, but -- and again it's interesting on the conversions the most expensive conversions we're undertaking is in Florida, about $2.6 million conversion that's being incorporated into our existing lease. The conversion, 24-unit conversion in Nebraska is about $250,000. Some of the conversions have been $50,000.

So it doesn't -- we don't think that the ones we're looking at on balance sheet will have too stiff kind of cost. There may be some expenditures on two of the lease properties but again that we have stuck with the funded. We've already spoken to the landlord; that would be funded by the landlord incorporate it in to the lease and the leases actually would be extended if we did that. And then with the joint ventures, we would participate if we move forward on those as a 10% equity partner, but that would be primarily funded by the partnership with 90% for the funding coming from our joint venture partner.

And so maybe a couple million dollars of cost total?

That's probably about right, if that much.

Okay, that's it. Thanks.

Thanks, Dan.

It appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Cohen for any additional or closing remarks.

Well, again, we're very pleased with the quarter and it's nice to see a nice improvement in occupancy and hopefully these trends will continue and thank you, everybody, for participating. If you have any follow-up questions please feel free to give either Ralph or myself a call. Thank you and have a nice day.

This concludes today's conference. Thank you for your participation.