Sonida Senior Living Inc (SNDA) 2009 Q4 法說會逐字稿

Welcome to the Capital Senior Living fourth 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 and downturns in economic 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 our reports filed with the Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. Larry Cohen. Please go ahead, sir.

Thank you. Good morning. I am pleased to welcome everyone to Capital Senior Living's fourth quarter and full year 2009 earnings release conference call.

I am happy that for the second consecutive quarter, we achieved sequential gains in occupancies. Our consolidated communities enjoyed a 30-basis point improvement, and all communities under management improved 70 basis points from the third quarter. Our strategy of providing affordable, quality senior living and care in well-located communities is yielding results. Our talented marketing and sales professionals are building relationships through outreach, and implementing innovative marketing strategies and technology that are increasing our move-ins and deposits. Move-ins, deposits, leads and tours all increased in the fourth quarter, as compared to the same period in 2008. Our attrition rate for the fourth quarter was lower at 34.4%, as compared to 37.7% in the fourth quarter at 2008. For full year 2009 compared to 2008, we took 78 more deposits, had 52 more move-ins, and 111 fewer move-outs, for a gain of 163 net move-ins.

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 to higher levels of care, same-store revenue increased 1.7% versus the fourth quarter of 2008, as a result of a 2.8% increase in average monthly rent. Same community expenses decreased 2.1%, and net income increased 7.7% from the comparable period of the prior year. Sequentially, all communities under management, excluding communities in lease-up, produced a 3.6% increase in net operating income, and December average monthly rents increased 1.1% from September. 58 of our communities were stabilized during the fourth quarter, with an average physical occupancy rate of 87%. Operating margins, before property taxes, insurance and management fees, were 49% in stabilized, independent and assisted living communities, a 200-basis point improvement from third quarter 2009 operating margins.

We are able to increase free cash flow, generate very attractive returns, and offer more care to residents as they age in place, by converting units to higher levels of care. We are in the process of converting 65 independent living units in two communities to assisted living. We expect these converted units to be completed in the fourth quarter of 2010. These additional conversions are expected to cost approximately $3 million, and upon stabilization are expected to generate approximately $2.4 million in revenues, with a 60% operating margin. We are annualizing additional conversion opportunities at four communities and, if feasible, these conversions will begin in 2010.

I'd like to share our vision, and spell out a road map of how we can accomplish our goals. I believe that Capital Senior Living is nearing an inflexion point, whereby implementing our strategic business plan we will grow with expanded care to residents, we will maximize competitive strengths, and lower our cost of capital. Our strategy is focused on generating attractive returns, maximizing free cash flow, and enhancing shareholder value. We aim to increase our geographic concentration, and maximize our strengths within each of our markets. We plan to increase our levels of care through conversions to assisted living or [memory] care, acquisitions of communities with levels of care, and expansion of ancillary services. We are excited about our opportunity to capitalize on the fragmented nature of the senior living industry, with its limited access to capital, strong demographic demand, and constrained supply, to strategically expand our operations. We also want to leverage our existing operating platform, our strong institutional relationships, and our proven track record.

Capital Senior Living has a number of competitive strengths that should enable us to execute on this strategy. We have one of the most experienced on-site, regional and corporate management teams in the industry. As one of the country's largest operators of senior communities, we benefit from economies of scale and systems that yield operating efficiencies in a highly fragmented history, which are evident in our superior operating and EBITDAR margins. The operating leverage in our business model should yield significant cash flow growth from expected gains in occupancy over the next few years.

We enjoy strong long-term institutional relationships, both debt and equity, and utilize flexible ownership structures. We are excited about our new capital partners, including Health Care REITs and a number of prominent private investors that are interested in acquiring portfolios of senior living communities in joint venture with Capital Senior Living. We operate through a nimble platform and organizational structure, with regional operating centers in geographically concentrated markets. We are proud of our reputation and our consistent high levels of resident satisfaction, which was 95% in 2009.

We are disciplined in our underwriting, and have a successful track record of executing and integrating transactions that create real estate and operational value. Our acquisition strategies generate attractive returns, and recurring free cash flow. We operate multiple levels of senior living care, and we have a solid balance sheet, with no significant loan maturities until the third quarter of 2015. Executing our strategic plan should generate attractive levels of free cash flow, and create shareholder value.

We recently announced two transactions that demonstrate our ability to implement these plans. In January, we announced that our Midwest One joint venture entered into an agreement to sell five assisted living communities to Health Care REIT, and we will lease the communities upon an expected closing this month. On Monday, we announced that our Midwest Two joint venture has also entered into an agreement to sell three assisted living communities to Health Care REIT, and we will lease the communities upon an expected closing in the second quarter. Collectively, these two transactions will increase our consolidated communities by 595 units, including 493 units of assisted living and 102 units of memory care.

At the end of 2009, financial occupancy at the combined communities was 91%, with an average monthly rate of $3,439. These communities are strategically located in the Midwest portion of the country, where 50% of our operations are located. Based on fourth quarter [2000] annualized results, these eight communities generated $22.8 million of revenue and $9.7 million of EBITDAR. After paying an initial lease expense of approximately $7 million, the transactions will generate $2.7 million of EBITDAR and approximately $1.4 million of free cash flow.

Our positive performance during one of the most challenging operating environments demonstrates the resiliency of our need-driven business model and operating platform. Our fundamentals are solid, and I am excited about our Company's prospects over the next few years, as we benefit from need-driven demand growth and virtually no new supply. I want to thank our Board of Directors, our management team, our corporate, regional and on-site associates, and let them know how proud I am of their accomplishments through this difficult time.

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 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 fourth quarter and full year 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 revenue of $48.7 million for the fourth quarter of 2009, compared to revenue of $48 million for the fourth quarter of 2008, an increase of $0.7 million or 1%. Slightly lower occupancies compared to the fourth quarter of the prior year were offset by average rent increases of nearly 2%. The number of communities we consolidated on our income statement was 50 in both periods. Financial occupancy of the consolidated portfolio averaged 82.4% for the quarter, with an average monthly rent of $2,553 per occupied unit. Excluding three communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 85.6%. The average physical occupancy rate for 58 stabilized communities was 87%.

Revenues under management were $56.6 million in the fourth quarter of 2009, compared to $55.7 million in the fourth quarter of 2008. 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 fourth quarter of 2009, compared to 64 communities under management in the fourth quarter of 2008. Two new joint venture developments opened earlier this year.

At communities under management, excluding the three communities undergoing conversions, same-store revenue increased 1.7% versus fourth quarter 2008, as the result of a 2.8% increase in average monthly rent. Same-store expenses decreased 2.1%, and net income increased 7.7% from the comparable period of the prior year.

Operating expenses decreased by $1.1 million or 4% from the fourth quarter of 2008. As a percent of resident and health care revenues, operating expenses were 60.9% versus 63.5% in the fourth quarter of 2008. General and administrative expenses of $3.1 million were approximately $0.9 million lower than the fourth quarter of 2008. As a percentage of revenues under management, general and administrative expenses were 5.4% in the fourth quarter of 2009.

Adjusted EBITDAR for the fourth quarter of 2009 was $14.6 million, compared to $14.1 million in the fourth quarter of 2008. Adjusted EBITDAR margin was 29.9% for the period. Interest expense of $2.9 million in the fourth quarter of 2009 was $0.1 million less than the fourth quarter of 2008, reflecting lower debt outstanding due to principal amortization. The Company reported a pre-tax profit of approximately $1.5 million in the fourth quarter of 2009, compared to an adjusted pre-tax profit of approximately $1.2 million in the fourth quarter of 2008. Adjusted net income was $0.8 million or $0.03 per diluted share in the fourth quarter of 2009, matching the fourth quarter of the prior year. Adjusted CFFO for the fourth quarter of 2009 was $5.7 million or $0.22 per share, compared to $3.9 million or $0.15 per share in the fourth quarter of 2008.

Net cash provided by operating activities increased $1.3 million from the fourth quarter of the prior year, while changes in operating assets and liabilities contributed an additional $0.5 million of cash flow. For the 2009 fiscal year, the Company reported revenues of $192 million, compared to revenues of $193.3 million in 2008. The difference is primarily attributable to a reduction of $2.2 million in management services revenue, as the Company no longer earned development and marketing fees from three communities developed in joint ventures in 2008.

Operating expenses of $104.8 million were $2.5 million, or 2.4%, below the prior year. Operating expenses as a percentage of resident healthcare revenues were 61.2% in 2009, an improvement of 120 basis points from 2008. General and administrative expenses of $11.9 million were 13% less than the prior year, with most of the $1.8 million reduction due to lower corporate salary expense. Adjusted EBITDAR was $57.3 million in 2009, and EBITDAR margin was 29.8%. Adjusted net income was $2.8 million or $0.10 per diluted share in 2009, compared to adjusted net income of $4.7 million or $0.18 per share in 2008. Margin improvement and lower corporate expenses in 2009 were not enough to compensate for the lack of development fee income that we had earned in 2008. Adjusted CFFO was $16.6 million or $0.63 per share in 2009, compared to $15.9 million or $0.60 per share in 2008.

Cash and cash equivalents, including restricted cash, increased $5.3 million in 2009. We purchased $0.9 million worth of Treasury stock, and repaid $6.4 million of debt. The Company ended the year with $31.2 million of cash and cash equivalents, including restricted cash, and as of December 31, 2009, the Company financed its 25 owned communities with mortgage debt totaling $182.3 million at fixed interest rates averaging 6.1%.

With the exception of one small mortgage which matured in September, our next closest debt maturity is July of 2015. The $4.6 million mortgage, which matured in September, is an obligation of one of our wholly-owned subsidiaries, and is non-recourse to the Company. We have been negotiating various remedies with the lender, including a possible reduced payoff of the note.

Capital expenditures for the year were approximately $8 million, representing $4 million of investment spending and $4 million of recurring CapEx. Spending for recurring CapEx in 2009 equaled approximately $600 per unit.

We would now like to open the call to questions. +++ q- and a-

Thank you. (Operator Instructions) We will go first to Jerry Doctrow with Stifel Nicolaus.

Good morning, everyone.

Good morning, Jerry.

So I guess I wanted to start with sort of your strategy, Larry. I mean, you kind of laid out ways you could grow cash flow. It seems like with some the recent transactions with [HC], I mean you are sitting on a substantial amount of cash, and so it looks like something dramatic and -- dramatic is going to happen. So can you give us a little bit, I guess, more color? I mean is that -- you know, when you use property acquisitions, you could use to buy back stock; I'm just trying to understand a little bit better maybe what the strategy is from here?

Sure. Clearly, we like using multiple structures for operating and owning our assets. We think that the structure and the lease rate of the leases with Health Care REIT on the two, now, transactions are very positive for the Company. We would look to -- and I as I mentioned in my comments, we are looking at a number of different partners that we can joint venture with, where we co-invest and operate, and we've had great success by getting tremendous returns to the Company through management fees, our share in the equity, and then typically have a promote structure in those vehicles. And we are you know, very, very pleased with the quality of the partners that have expressed interest in looking at transactions, and we are looking at some things right now. So I would expect that we would invest funds into those joint ventures for very, very nice return.

Then we also will own assets, and look to buy assets into the Company. If you look at our strategy, we've always had kind of a 50% owned, 50% leased and/or managed type of philosophy, to have the balance and give us flexibility, and really maximize the cash flow. So we also think that we will look for acquisitions where we can utilize some of our cash for that.

Obviously, stock repurchasing is something that we did last year. You know, we are very sensitive to both creating shareholder value, but also the impact it has on our float and liquidity in our stock because of the trading patterns. So, you know, it is there. But I think right now, we feel that we are very well-positioned to grow through acquisitions, and using different strategies for that and through that, as well as conversions, you know, putting cash back into some of our buildings for value enhancement conversions, or possibly at some point expansions, as we look for needs to increase the level of care to our residents.

Okay. But, you know, with $30 million of cash, you know, at leverage, just normal leverage at a property level, or certainly if you're going into a JV, I mean that could represent a very substantial increase in investments and properties under management. I mean, in addition to maybe some conversions and that sort of stuff, I guess that's what I hear you saying, is that money will get put to work.

Yes, I mean, some of that money is being used for running our business every month, you know, working capital. Obviously, we have recurring CapEx that is running about $600 a unit, so that's about $4 million or so a year. Then that probably gives us somewhere around $20 million of cash to invest. And, you know, we will use that as ways to grow our business and grow our cash flow.

Okay. And what prompted the JV to sort of sell? I have no problem with sort of the -- that you ended up with a sale leaseback, but were the investors just ready to get out, or where there some -- you know, what kind of triggered the transaction on the other side?

Our partner in both those transactions is an institutional investor that is looking to exit all their equity real estate investments. These have been profitable to both their profit as far as their interests and ours, so it just was a good time to fit their strategy of exiting. And Health Care REIT was very desirous of starting a relationship with Capital, as well as owning these assets, so it worked in, I think, a transaction that was very favorable to all three parties.

Just a couple more details, if I could. So, the loan that wasn't repaid, is that -- could we lose properties or something, or any more color on that? You said it was a subsidiary that is non-recourse to the Company.

Actually, Jerry, that's a single asset, and one that we have considered selling. It doesn't really fit in with the rest of our properties in the portfolio, so we are looking at a long-term solution to that issue. In the meantime, we have been talking to the lender. We've discussed a potential extension, perhaps a change in the interest rate, or a reduced payoff of the loans, since it is non-recourse to the Company. So we are looking at what fits best in our long-term interests, and should have something that gets resolved later this month, hopefully.

Okay, but it's not that big a deal one way or the other in terms of the --

No, it's a single asset and really not one that fits into our long-range plans.

The loan now is about $4.6 million.

Right, that's all. Okay. And I guess two other quick -- first of all, Dan's compliments on having a cash flow statement in the release, so we compliment you on that. This move in -- I think it was the tax accrual in the quarter, we are just trying to make sure we sort of understand that a little bit better, and make sure that we are understanding -- so next year, basically, the tax accrual should just be lower and this kind of -- you know, what we calculate, about a $0.55 CFFO base for this year is kind of about the right, you know, base to sort of think about starting next year's numbers or -- again, I am just trying to understand that a little bit better, and what is the guidance going forward?

Jerry, in terms of the deferred income taxes, what we do at the end of the year is we go through very detailed analysis of the difference between book depreciation and tax depreciation, and that difference this year made up the difference in the cash flow from what we had expected and what had been projected. So we did get some tax benefit from some accelerated and bonus depreciation over and above the book depreciation. So that basically reduced the taxes we actually have to pay. What we are going to do in 2010 is we're going to try to do that analysis quarterly, so that we smooth the result of tha CFFO, so that the fourth quarter will probably be somewhat less, but the full year number should be equal to or greater than the 2009 result.

Okay. That's fine. And last thing, and then I will jump. So the shareholder's rights plan, which again I think we view certainly as positive, what was driving the thinking about that, the actions you took?

Sure, we had a rights plan that was adopted in March of 2000. It was a ten-year plan. That plan expired in March of 2010. So we decided to institute a shareholder-friendly plan. This plan is a three-year plan, has a 20% trigger, has other features that are both kind of risk metrics-friendly and kind of the guidelines of our shareholders, so we think it is something that is helpful, that forces any type of activity that the Board would be involved in the process to maximize shareholder value. But again, have a plan that is very friendly to our shareholders, and very compliant with kind of the modern era rights plan as outlined by both risk metrics and some of our institutional shareholders.

Okay, thanks.

Thanks, Jerry.

We will go next to Todd Cohen with MTC Advisors.

Good morning, Todd. Just a couple administrative questions. When you complete the AL conversions, what will the breakout be of IL versus AL? Well, again, it is going to change because, you know, I think we are going to get some more AL through acquisitions as well. The conversions that we're completing right now for the second half of this year, it is only 55 units, so it is not going to be that significant as a percentage of our base of operations. And then if we are moving forward on four more conversions, that is probably going to be another 80 to 150 type of units. So that alone won't change dramatically, the mix of our unit base.

I think we will start to see higher percentages of assisted living and less independent living, and it will be through a combination of acquisitions; virtually everything we are looking at will have assisted living and/or memory care, it may have ILS components, as well as looking at some of the regions in which we operate and maybe shedding some independent living assets to bring that down as well. So I think that the concentration will be moving toward assisted living, but it is going to be driven not only by conversions but also by strategic decisions with our existing portfolio and acquisitions. Okay, great. Just so -- as we speak today, what is that break out, the percentage? Right now, we are 69% independent living, with 7% continuing care retirement communities, those are rentals, and then the balance, which is about 24% is assisted living. Then, kind of -- obviously you are moving towards more assisted living from an objective -- you know, from a targeted point of view. Where do you see that balance ultimately going? Where would you like that to go to? Well, again, I'm not sure we have a target number out there, but clearly I think we are going to strive -- and in fact, if you look at our history since 2000, virtually everything that we have acquired or built in that time period has had assisted living, so I think we will continue to see a higher percent of assisted living, and if we execute on our business plan over the next couple of years, it maybe gets to a 50/50-type breakout, and then we will continue to focus on higher levels of care serving our residents. Okay. And then obviously these shifts from managed properties to leased is accretive. How many -- what is there now, three or four of these management deals left? No, actually, when we complete these two transactions, there are really two other ventures. One are the Spring Meadow communities, which are five very high-quality properties -- four, two in the Midwest and two in the East Coast, with an institutional partner, that's with Prudential. We also have three properties in Ohio that we opened over the last year, year and-a-half with Prudential in lease-up. So those are the two remaining portfolios that we have in joint venture, and then we have one management contract for a third party. But looking at the composition of the portfolio after we close Midwest One and Midwest Two, we will have really seven properties in two joint ventures with a common partner. Okay. And those will kind of remain in place? I think ultimately, they will probably end up either being brought back into the Company, or similarly being structured as sale leaseback or joint venture where -- our history has been in the last decade that we have monetized our partners and continued to operate those properties in accretive transactions by transforming the structure. So, more likely, it would be either an acquisition into the Company, or a transaction that would be done with a REIT and lease it back, similar to what we announced in these two transactions. All right. Thanks, Larry.

We will go next to Charles Gillman with Boston Avenue Capital.

Thank you. You operate in a number of states. Can you comment on which states are more profitable, and which states are less profitable?

Sure, hi, Charles, how are you?

Good, good.

If you look at our platform, clearly the most challenging states that we have really are Florida, where we have one property, California -- although California, we are starting to see some improvement. Obviously, we talked about one property in Detroit. So, it is really kind of -- if you look at the portfolio, kind of the four of the 66 that kind of are in geographic markets where you have some issues regarding housing, and other types of jobs and things of that sort. Clearly we have strategies underway for all of those to try to either add levels of care to make the properties more need-driven, for example the conversion in Florida. We are now working with a lender on Detroit, and then ultimately will decide what to do with the asset; as Ralph said, it is something that we in the past had considered to possibly sell. And then California as well, we will look at some strategies there.

I think the rest of the portfolio, they are generating cash flow and it's profitable, and with our operations and our expense controls, we have very high margins, and the bottom line profitability on a per-unit basis gets down to the markets in which we have the higher rents, if you will. So, for example, in the Midwest portfolios, where we are getting $3,400 a month rents, with 42% margins, that is very profitable.

But again, fortunately, the rest of the portfolio has cash flowing nicely. We've had some nice growth year-over-year in our cash flow, and we think obviously we are at this inflexion -- nearing an inflexion point where over the next few years, the demographics and the limited supply should really help gain occupancy, which is something we haven't seen in the last few years, that should really propel greater -- hopefully, greater cash flow growth to the Company.

Thank you.

(Operator Instructions)

We'll go next to a follow-up from Jerry Doctrow with Stifel Nicolaus.

I wanted to just maybe get a little more color from you on markets. Obviously, you are rotating into AL, I'm assuming you are seeing better occupancy in AL, but I was just wondering if can kind of go below -- beyond kind of the average statistics for the Company, which were certainly positive, and just give us a little more color on what you are seeing in the market, IL versus AL, that kind of stuff?

Yes, I mean our portfolio today, our AL portfolio is 89.5% occupied, and I know that you track quarterly data as well, and the -- our IL, and again we have a little bit of a mixed bag, so we have some of the IL units being converted that we don't take out, they're probably running about 84% to 85% right now in comparison to our AL. If you look at our occupancy gains last quarter, it was predominantly all in AL.

So going -- looking back down lower as far as markets, we have had tremendous success in the Midwest. If you look at the portfolios that we talked about in Nebraska, Indiana, Iowa, we're doing well; Illinois, Peoria does very well; Chicago, which had been kind of a tough market, is improving, we're seeing improvement there; Texas has been a very stable market, good margins, good occupancies, obviously a very stable economy and a fairly stable housing market compared to other regions in the country; East Coast, northeast is a very good market, very little construction going on, real barriers to entry, high rents, we like that market tremendously; the Carolinas have been great, we do see a little softness there for the last year, something new, I think that's reflective somewhat of just some of the local economies and housing market. It may also just be that you have had such a migration from Florida to the Carolinas that I am curious wondering the adverse housing market has slowed, the move-out in Florida, because people don't want to just sell their homes at such depressed pricing.

I think we have been very disciplined, when we look at the acquisitions or any type of strategy for growing the Company, we really do look at the five to seven-mile ring, and look at the demographics in that ring, and we only expect to penetrate 5% of the unserved market, so we are trying to focus on markets that have a very good balance of supply and demand, with -- fortunately, we the [NIC] data, we see it ourselves, we see nothing being built, so we think that the outlook is going to be very, very positive over the next couple of years.

But hopefully, Jerry, that gives you a little color to kind of -- some of the geographies we're looking at and what we're seeing out there.

Okay. No that was great, thanks.

We have no further questions at this time.

Well, I want to thank everybody for your participation today, and we look forward to speaking to anyone, if you have questions, please feel free to give Ralph or myself a call, and have a nice day. Thank you very much.

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