Sonida Senior Living Inc (SNDA) 2010 Q2 法說會逐字稿

Good day and welcome to the Capital Senior Living second quarter 2010 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 at favorable terms, financing, licensing, business conditions, risks of downturns and economic conditions; 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 risk 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 conference over to Mr. Larry Cohen. Please go ahead.

Thank you. Good morning and welcome to Capital Senior Living's second quarter 2010 earnings release conference call. I'm pleased to report that our many accomplishments during the quarter are generating positive results, and our contribution should be even greater in future quarters.

In the second quarter of 2010, CFFO increased 26% to $4.4 million or $0.16 per share, versus $3.5 million or $0.13 per share for the second quarter of 2009.

Net income grew to $1.5 million or $0.05 per share, versus $400,000 or $0.02 per share in the second quarter of 2009.

Revenues increased 7% to $50.5 million, compared to the second quarter of 2009, and adjusted EBITDAR increased over the second quarter of 2009 by $2.6 million or 18% with adjusted EBITDAR margin improving to 33.1% from 29.9% in the second quarter of 2009.

Our disciplined expense management and execution of our strategic business plan are contributing to meaningful enhancements in shareholder value. We closed two transactions in the second quarter and anticipate closing a third significant transaction in the current quarter.

On a combined basis, these three transactions are expected to increase incremental annual revenues by approximately $52 million, more than 25% increase, and EBITDAR at over $22 million, a 33% increase.

Incremental EBITDAR margin is expected to exceed 43%, and CFFO should grow by approximately $3 million per year, the equivalent to $0.11 per share. In addition, we are encouraged by the fact that new supply will be practically nonexistent as demand continues to grow. We expect future occupancy gains to result in solid incremental margin and meaningful cash flow growth.

Average occupancies for our same-store communities, excluding three communities with conversions of units to higher levels of care improved each month during the quarter and increased 40 basis points during the quarter, ending the quarter at 85%.

I am pleased to report that we have had further occupancy gains for our fourth consecutive month in July. Move-ins, deposits, leads and tours all improved in the second quarter. We gained 111 more net move-ins in the second quarter 2010 versus the second quarter 2009, and sequentially we had 128 more net move-ins compared to the first quarter of 2010.

We also received 127 more net deposits during the second quarter of 2010 compared to the second quarter of 2009. And sequentially, we took 38 more deposits than in the first quarter of 2010.

Our attrition rate for the second quarter was 40.4%, compared to 38.5% in the second quarter of 2009.

As communities under management, excluding three communities with conversions of units [or] higher levels of care, same-store revenue increased 1.5% versus the second quarter of 2009 as a result of a 1.7% increase in average monthly rent.

Independent living average monthly rents increased 1.6% and assisted living average rents increased 4.2%. Same community expenses increased 0.5% and net income increased 3% from the comparable quarter of the prior year.

Fifty-nine of our communities were stabilized during the fourth quarter-- during the second quarter with an average physical occupancy rate of 86%. Operating margins before property taxes, insurance and management fees, were 49% in stabilized independent and assisted living communities, the same as in the second quarter of 2009.

We're able to increase our free cash flow, generate very attractive returns and offer more care to residents as they age in place by converting independent living units to higher levels of care. During the quarter, we ex-- current quarter, we expect to complete the conversion of 55 units to assisted living at two independent living communities.

These conversions are expected to cost approximately $3 million. And upon stabilization, are expected to generate $2.4 million of revenues with a 50% operating margin. In addition, we have approval for conversions to 28 units of memory care at two communities and are seeking approval for 60 units of assisted living and memory care conversion at two more communities.

As we execute our strategic business plan, we are growing our business with expanded care to residents, maximizing our competitive strengths and lowering our cost of capital. Our strategy is focused on generating attractive returns, enhancing free cash flow and maximizing shareholder values.

As demonstrated by two accretive transactions completed and a third accretive transaction announced in the second quarter, we are increasing our geographic concentration and capitalizing on our strengths within our markets.

We sold our interests in two joint ventures to Health Care REIT, and again, leasing eight high quality assisted living and memory care communities in the second quarter. We received proceeds from the sale of approximately $4.5 million and realized deferred gains of approximately $1.1 million.

The eight communities have approximately 600 units of assisted living and memory care units and are strategically located in the Midwest portion of the country, where nearly 50% of our operations are located. These communities are expected to generate over $22.7 million of annual revenue, $9.7 million of EBITDAR and $1.5 million of annual cash flow.

We are excited about our agreements with Signature Assisted Living of Texas to acquire Signature's interests in 12 leases with Health Care REIT for approximately $25.8 million. Funds for the purchase price are expected to be provided by Health Care REIT.

The 12 lease properties are new, pristine, purpose-built assisted living and memory care communities located in Texas. They have approximately 677 units and include 532 units of assisted living and 145 units of memory care, with a combined capacity for 764 residents. The communities average less than three years of age and are currently 92% occupied.

We have satisfactorily completed our due diligence and aware awaiting lender approval. We anticipate closing the transaction in the third quarter.

These 12 communities will bring to 29 the total number of communities we will operate in Texas.

The Signature portfolio is extremely complementary to our existing footprint and will provide additional opportunities to achieve operating leverage and synergies.

This transaction is expected to increase the Company's annual revenues by more than $30.3 million, with EBITDAR of approximately $13.5 million, net of incremental, general and administrative expenses, and increase the Company's CFFO by approximately $2.3 million, or $0.09 per share.

I am optimistic that we will continue to strategically expand our operations by capitalizing on the fragmented nature of the senior living industry, with its limited access to capital, strong demographic demand and constrained supply. We believe we can leverage our existing operating platform, our strong institutional relationships and our proven track record. I also believe that we will be successful in completing additional acquisitions that will grow our cash flow and our earnings.

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'm excited about the Company's prospects as we benefit from need-driven demand growth with virtually no (inaudible) [applied].

I would now like to introduce Ralph Beattie, our Chief Financial Officer, to review the Company's financial results for the second quarter of 2010.

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 second quarter of 2010. A copy of our press release has been posted on our corporate website at www.capitalsenior.com.

The Company reported revenue of $50.5 million for the second quarter of 2010, compared to revenue of $47.2 million for the second quarter of 2009, an increase of 7%.

Resident and healthcare revenue increased by $4.4 million and management fees declined by $0.2 million as a result of converting our joint venture interest in eight communities to leases. Consequently, the number of communities we consolidated on our income statement increased from 50 to 58.

Financial occupancy of the consolidated portfolio averaged 83.8% for the second quarter of 2010, compared to 83.4% in the first quarter of 2010.

Average monthly rent increased sequentially from $2,552 to $2,609 per occupied unit, a 2.2% increase.

Excluding three communities with units being converted to higher levels of care, financial occupancy of the remaining 55 consolidated communities averaged 85.2%. Revenue under management, with $56.6 million in the second quarter of 2010 compared to $55 million in the second quarter of 2009, and there were 66 communities under management in both periods.

Operating expenses for the second quarter of 2010 were $28.4 million, increasing $2.4 million. As a percentage of resident and healthcare revenue, operating expenses were 60.5% in the second quarter of 2010, compared to 61.2% in the second quarter of 2009, a margin improvement of 70 basis points.

General and administrative expenses of $2.7 million were approximately $0.6 million less than the second quarter of the prior year. Most corporate expenses were flat, with the exception of employee health insurance claims, which were down significantly. As a percentage of revenue under management, general and administrative expenses were 4.8% in the second quarter of 2010.

Facility lease expenses were $7.9 million in the second quarter of 2010, approximately $1.4 million higher than the second quarter of 2009, reflecting eight additional lease communities and increases in contingent rent.

Adjusted EBITDAR for the second quarter of 2010 was approximately $16.7 million. And adjusted EBITDAR margin was 33.1% for the period, compared to 29.9% in the second quarter of 2009.

Interest expense was $2.8 million in the second quarter of 2010, approximately $0.2 million lower than the second quarter of 2009, reflecting lower debt outstanding due to principle amortization and the payoff of one mortgage during the quarter.

The Company reported income before taxes of approximately $2.6 million in the second quarter of 2010, compared to a pretax profit of $0.8 million the second quarter of 2009.

In the second quarter of 2010, we incurred casualty losses due to storm damage at a few communities, had transaction costs related to the sale of our joint venture interests and realized the gain on the payoff of a mortgage. These three items together account for about $0.4 million of pretax income.

The Company's income tax provision was approximately 45% for the quarter, reflecting high gross receipts taxes in Texas and Michigan. The gain on the mortgage payoff also occurred in the state of Michigan.

The Company reported net income of $1.5 million or $0.05 per share in the second quarter of 2010, versus net income of $0.4 million or $0.02 per share in the second quarter of 2009.

Backing out the gain on the settlement of debt and the two unusual expenses, the casualty losses and the transaction costs, net income remained at $0.05 per share in the current quarter.

The Company ended the quarter with $39.1 million of cash and cash equivalents, including restricted cash. As of June 30, 2010, the Company financed its 25 owned communities with mortgage debt totally $175.8 million and fixed interest rates averaging 6%.

On April 15, the Company paid off a securitized promissory note, which was a debt obligation of one of the Company's wholly owned subsidiaries. The Company paid cash of $3.7 million and recorded a pretax gain on the settlement of debt of $0.07 million.

The balance sheet showed considerable improvement in the second quarter, with cash increasing $3.3 million and mortgage debt dropping $5.5 million.

Capital expenditures for the quarter were approximately $2.5 million, representing $1.5 million in investment spending and $1 million of recurring CapEx.

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

Thank you very much. (OPERATOR INSTRUCTIONS) We'll take our first question from Jerry Doctrow with Stifel Nicolaus.

Good morning. This is actually Dan Bernstein filling in for Jerry.

Good morning, Dan.

Hi, Dan.

Hi. I just wanted to be clear I understand. The performance on the consolidated communities on a same-store basis, excluding the three communities under conversions, I just wanted to reconcile that with what you have in the press release, and if you can just go back over that again.

Sure. I'd be happy to do that. The same-store basis we had, without the three communities undergoing conversions-- we had an increase in our same-store revenue of 1.5%. We had the rent increasing 1.6%. We had-- I'm sorry, 1.7%. We had occupancy loss, I guess sequentially, of 20 basis points. And then we had expense growth of 0.5% for NOI growth of 3%.

Okay. And where are the loss-- where was the loss on the occupancy coming from? Because it just-- you were talking about occupancy increasing every quarter, but here on the same-store basis it doesn't seem that way. And I'm just trying to get more perspective on it.

Sure. It's a good question. The occupancy that was comparative was the average for the quarter, first versus second. Because we had loss of occupancy at the second half of the first quarter, the average for the first quarter was higher than the ending balance as of March 31. If you look at the growth for the quarter of 40 basis points, as comparing the March 31 occupancies to our June 30 occupancies.

So what happened in the quarter is we had growth every month. The ending balance was 40 basis points higher than the opening balance. But comparing average to average, the actual average in the second quarter was up 20 basis points lower, which reflects more the trends in the first quarter where January was higher than March. So the average for the quarter was higher. But I think more representative were the gains we had and the trends we're having in July of continued growth on same-store occupancy basis.

And what was the ending occupancy for the quarter?

It was 85%.

85%. And the other question I had was on operating expenses, which looked like it was very good for the quarter. And you had operating margin expansion. Was there anything unusual that helped you out there and, you know, anything unusual that we should see come back in the third quarter, you know, to possibly hurt operating margins, other than normal seasonality?

No. Nothing at all. It was a very clean quarter, other than the few casualty losses for the storm damage that Ralph talked about. Now, we have a very highly disciplined approach to our expense management. It's been very consistent for the last 15 years. Not he 25th of every month, every community knows what their billings will be for the following month, and they manage their business by apartments, by labor, by food purchases, supplies, to their occupancy, and are able to continue to management it in a very effective fashion.

And should I ask you when you're going to be a TRS manager?

We're very happy to see the transaction. I congratulate Health Care REIT and Merrill Gardens. And we very much like the cap rates there. We think it's very indicative of the value of this business. And we hope that some of that is reflected in our stock price.

All right. Thank you. Have a good day.

(OPERATOR INSTRUCTIONS) We'll go next to Todd Cohen with MTC Advisors.

Good morning, guys.

Good morning, Todd.

Good morning, Todd.

Hey, just a quick question. The two deals that closed in the quarter, what was the timeframe on that?

Great question, Todd. (Inaudible) with that because I think what Todd is asking, which is very important, is we only got a partial benefit in the quarter for those two transactions and should see a more meaningful contribution in the current quarter. Similarly, with hopefully closing the Signature transaction later this month, we probably will pick up a-- you know, one-third of the benefit this quarter. But again, sequentially, get the benefit in the fourth quarter.

So as I said earlier in my comments, we expect that the contributions from these transactions will be even greater in future quarters as we get the benefit of the full participation during the full quarter.

Ralph, what are the closing dates?

Todd, the first transaction, we refer to Midwest 1, closed the middle of April, so we had two and a half months of contribution in the second quarter. And then the second transaction, Midwest 2, closed May 1, so we had two months of contribution. So two months for one of the transactions and two and a half for the other.

So as Larry said, the third quarter will be-- show improvement just simply based upon having full quarters of contribution.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS) With no further questions in the queue, I would like to turn the call back to Larry Cohen for any additional or closing remarks.

Well, we thank everybody for your support and participation and invite you to call Ralph or myself if you have any additional questions. Have a great day and thank you very much.

This does conclude today's conference. We thank you for your participation.