Sonida Senior Living Inc (SNDA) 2010 Q3 法說會逐字稿

Good day and welcome to the Capital Senior Living third 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 properties at favorable terms, financing, licensing, business conditions, risks of downturns and 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'd like to turn the call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good morning and welcome to Capital Senior Living's third quarter 2010 earnings release conference call.

First, I'd like to review the highlights for the quarter. I am pleased to report that our many accomplishments during the third quarter are generating positive results and our contributions should be even more significant in future quarters.

During the quarter, we increased our occupancy. We increased our resident capacity, and we increased our mix to higher levels of care. CFFO increased 69% to $5.6 million or $0.21 per share versus $3.3 million or $0.13 per share for the third quarter of 2009.

Revenue increased, from the third quarter 2009, 11% to $53.6 million, and adjusted EBITDAR improved over the third quarter of 2009 by $2.3 million or 16% to $16.7 million with EBITDAR margin improving to 31.1% from 29.8% in the third quarter of 2009.

Next, I'd like to discuss recent transactions. In September, we completed the acquisition from Signature Assisted Living of 12 high quality purpose built assisted living and memory care communities located in Texas. The communities average less than three years of age and are currently 92% occupied. These 12 communities will bring to 29 the total number of communities we operate in Texas. The Signature portfolio is extremely complementary to our existing footprint and will provide additional opportunities to achieve operating leverage and synergies.

Combined with the two transactions completed in the second quarter, annual revenues will have grown by $52 million or more than a 25% increase, EBITDAR by over $22 million, a 33% increase, and cash flow from operations by over $3 million or $0.12 per share.

I'd now like to report our third quarter operating results. Average occupancies for same-store communities, excluding three communities with conversions of units to higher levels of care, improved 30 basis points during the quarter. We achieved this improvement despite higher attrition. Our attrition rate for the third quarter of 2010 was 40.9% versus 35.7% in the third quarter 2009 with the increase coming primarily from assisted living. Move ins, deposits, leads, and tours for the quarter were all solid, and I'm pleased to report that we have made further occupancy gains in October.

At communities under management, excluding three communities with conversions of units to higher levels of care, same store revenue increased 1% versus the third quarter of 2009 as the result of a 1.5% increase in average monthly rent.

Same-community expenses increased 1%, and net income increased 1.3% from the comparable quarter of the prior year. The number of consolidated communities increased from 50 in the third quarter 2009 to 70 in the third quarter 2010.

Average monthly rent was $2,652 for occupied units in the third quarter of 2010, an increase of $106 or 4.2% over the third quarter of 2009.

Financial occupancy of the consolidated portfolio averaged 84.7% in the third quarter of 2010, 80 basis points higher than the third quarter of 2009 and 90 basis points higher than the second quarter of 2010. Excluding three communities with units being converted to higher levels of care, consolidated financial occupancy was 86.4%.

I now would like to discuss our growth initiatives. 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 value.

As demonstrated by the three accretive transactions completed in the second and third quarters of 2010, we are increasing our geographic concentration, increasing our levels of care, and capitalizing on our competitive strengths within our markets. We are able to further increase free cash flow, generate high returns, and offer more care to residents as they age in place by converting existing units in our communities to higher levels of care.

We recently received licenses for 58 assisted living units that were converted from independent living at two of our communities, and we will complete a 45 unit assisted living conversion next month. In addition, we expect to complete two 14 unit memory care conversions in February and plan a third 14 unit memory care conversion in the middle of 2011.

What do these conversions mean? These conversions are expected to cost approximately $3.3 million and upon stabilization are expected to generate approximately $5.9 million of revenues with a 60% operating margin generating approximately $0.08 in cash flow from operations per year. Additionally, we are seeking approval for 60 units of assisted living and memory care conversions at two more communities that we expect to begin hopefully in the middle of next year.

I'd now like to discuss our strategic plan and our vision. Our strategy is to focus on our core strengths and maximize the value of our communities and our operations. We are looking to shed communities that don't fit our core and are investing in technology and resources to enhance our marketing, operations, resident assessments, care plans, and billing.

I am pleased to announce that in September, we hired a vice president of business development. He has 14 years of experience as a health care investment banker and two years experience as a managing director of acquisitions for a major health care REIT. We are thrilled to have him as part of our team, and he is quickly assembling an impressive pipeline of primarily off market acquisition opportunities. We are optimistic that he will help us strategically expand our operations with higher levels of care and enhance our geographic concentrations by capitalizing on the fragmented nature of the senior living industry with its limited access to capital, strong demographic demand, and constrained supplies.

We believe we can leverage our balance sheet, our existing operating platform, our strong institutional relationships, and our proven track record. I am confident that we will grow cash flow and earnings as we execute on our strategic plan. Our vision is to grow Capital Senior Living as the industry leader in providing quality senior housing and care at reasonable prices while maximizing our competitive strengths to lower our cost of capital, enhance shareholder value and liquidity.

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 the Company's prospects as we benefit from need driven demand growth with virtually no new supply.

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

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 third quarter of 2010. 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 $53.6 million for the third quarter of 2010 compared to revenue of $48.1 million for the third quarter of 2009, an increase of $5.5 million or 11%.

Along with two transactions which closed in the second quarter and the addition of 12 Signature communities in the month of September, the number of communities we consolidated on our income statement increased from 50 to 70.

Financial occupancy as a consolidated portfolio averaged 84.7% for the third quarter of 2010 compared to 83.9% in the third quarter of 2009, an increase of 80 basis points. Occupancy increased 90 basis points in the second quarter of 2010, and average monthly rent increased sequentially from $2,609 to $2,652 per occupied unit, an increase of $43 per occupied unit or 1.6%. Excluding three communities with units being converted to higher levels of care, financial occupancy of the remaining 67 consolidated communities averaged 86.4%.

Revenue under management was $58.7 million in the third quarter of 2010 compared to $55.7 million in the third quarter of 2009, and communities under management increased by 12 with the addition of the Signature portfolio.

Operating expenses for the third quarter of 2010 were $31.2 million, increasing $4.5 million versus an increase in resident and health care revenue of $7.7 million. As a percentage of resident health care revenue, operating expenses were 61.9% in the third quarter of 2010 compared to 62.4% in the third quarter of 2009, an improvement of 50 basis points.

This margin improvement would have been even better except for some unusually high utility costs experienced at our communities due to an exceptionally hot summer, increasing 9% from the prior year.

General and administrative expensive of $3.2 million were approximately $0.8 million higher than the third quarter of the prior year.

Most corporate expenses were flat with the exception of employee health insurance claims, which increased significantly. The company is self insured for the cost of employee and dependent medical benefits and purchases stop loss protection on an individual and aggregate basis. This plan has been far less expensive than a fully insured plan, and based on the 2010 OSHA senior housing report, saves the company nearly $200 per month per covered person. Employee benefit costs are flat on a year to date basis. So we expect them to return to a normal level in the fourth quarter.

As a percentage of revenue under management, general and administrative expenses were 5.3% in the third quarter of 2010.

Facility lease expenses were $8.9 million in the third quarter of 2010, approximately $2.4 million higher than the third quarter of 2009, reflecting 20 additional leased communities and increases in contingent rent.

Depreciation and amortization expenses increased $0.2 million in the third quarter of the prior year as a result of capital improvements of the Company's owned and leased facilities.

Adjusted EBITDAR for the third quarter of 2010 was approximately $16.7 million, and adjusted EBITDAR margin was 31.1% for the period compared to $14.4 million and 29.8% in the third quarter of 2009.

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

The company reported income before taxes of approximately $0.9 million in the third quarter of 2010 compared to a pretax profit of $1.2 million in the third quarter of 2009. In the third quarter of 2010, we had transaction costs and amortization related to the addition of the Signature portfolio. Excluding these costs, adjusted pretax income was slightly higher in the third quarter of 2010 than the third quarter of 2009.

The Company's income tax provision was approximately 49% for the quarter, reflecting high gross receipts taxes in Texas and Michigan. Of the $0.5 million tax provision in the third quarter, about $125,000 represents these state taxes adding 13 percentage points to the quarterly tax provision.

The Company reported net income of $0.5 million or $0.02 per share in the third quarter of 2010 versus net income of $0.8 million or $0.03 per share in the third quarter of 2009. Excluding costs related to and amortization of resident leases acquired and recently completed transactions, net income for the third quarter of 2010 was $0.7 million or $0.03 per share.

Adjusted CFFO was $5.6 million or $0.21 per share in the third quarter of 2010 compared to $3.3 million or $0.13 per share in the third quarter of 2009. Over $2 million of this quarter's CFFO was due to filing an amended return regarding one of the Company's sale leaseback transactions in a prior year.

The Company ended the quarter with $39.4 million of cash and cash equivalents, including restricted cash. On a year to date basis, cash has increased by $8.2 million while debt has been reduced by $5.6 million.

As of September 30th, 2010 the company financed its 25 owned communities with 24 mortgages totaling $174.9 million at fixed interest rates averaging 6%. The Company's nearest mortgage maturity is the third quarter of 2015.

Capital expenditures for the quarter were approximately $2.3 million representing $1.6 million of investment spending and $0.7 million of recurring CapEx.

We'd now like to open the call to questions

Thank you. (Operator instructions.) We'll go first to Jerry Doctrow with Stifel Nicolaus.

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

Good morning, Dan.

I just wanted to go over the strategy to build an investment pipeline. I was wondering. Are you looking specifically to put these acquisitions on balance sheet or leases, or is your development pipeline looking at both?

Well, it's an acquisition development pipeline, Dan, and it's going to be both. As Ralph reported, we ended the quarter with about $39 million of cash including restricted stock restricted cash, rather.

We also are looking at monetizing some of our assets and expect that those cash balances will grow both from transactions involving our portfolio as well as the cash flow that's being generated by our business. And we hope to deploy that cash in direct ownership of assets, as well as our joint ventures have been very successful. We have a very good core group of institutional partners that we will continue to invest with.

And we also are looking at the lease transactions that we've been able to accomplish this year and the cost of capital of the REITs. We think that they could be also a very, very good partner to team up with and give us a strong competitive advantage in looking at acquisition opportunities.

Do you have a sense of the timing as to when that pipeline will build and start showing some results for CSU?

The pipeline is building as we speak, and I am hopeful that we will have transactions occurring throughout the course of next year. As I said, we are very encouraged by the pipeline and think that we'll be successful in executing this plan.

Turning to the fundamentals of senior housing, you increased occupancy on same store Q over Q and looks like rate decreased a little bit. Is there a strategy there to keep rates low and increase occupancy? Or was there some nuances in a particular geography that caused some of the rate to be suppressed 2Q to 3Q?

Actually, the nuance, and I mentioned slightly in the comments, is the fact that we had higher move outs in assisted living than independent living. So if you look at the gains in the quarter and in mix, we had more lower-renting-paying independent living residents versus the higher-paying assisted living residents. So on a blended average, it brought the rate down for the quarter.

Our strategy continues to try to maintain the integrity of our price structure. We are very comfortable in believing that the recovery in this industry over the next couple of years should be fairly robust. And we believe that by maintaining pricing even to the extent of sacrificing some occupancy will greatly benefit our company and our shareholders in future years.

And if you're picking up occupancy in the IL, are you seeing a change in the psychology of the incoming resident, that they're starting to make decisions? Or is it just, again, a general just a general nuance of the portfolio? Are you seeing a change in the resident psychology?

We've had good gains in independent living for the last two quarters. I think it's a combination of the value proposition. Our independent living rents are on average about $1,200 a month lower than our assisted living rents.

We have in our buildings home health care companies that are very actively providing additional services. These are independent companies serving the residents. So the combination of the larger apartments, more residential, lower prices with care in the building has been successful in attracting the independent living resident.

And of course, in assisted living, we continue to see the growth of the more needy senior that has to have more care on a more continuous basis in assisted living.

Thank you. Just one more quick question on the expense side. It looked like most of the expense nuances in the quarter or variance in the quarter might not be recurring. But we also have seen an article in The Journal this morning about food inflation and maybe some a little bit extra expenses at other senior housing companies. Are you seeing any pressures on wages or food or any of the other major items that we would worry about for senior housing?

No, Dan. In fact, if we compare our food costs and labor costs for the quarter year over year, we are running really in fact, our actual raw food cost in September of 2010 was actually $0.01 less than September 2009, and our labor costs are running about $0.07 lower per meal.

So we are not seeing the pressure as we are budgeting for next year. We've done a lot if you look at the kind of studies, analyses done by Mercer, Hewitt, other companies, I think that for next year, people looking at salary increases which would affect our communities as we are budgeting them in the 2.5 to 3% range, about 50 basis points higher than what we had this year, I think that's because people are expecting a recovery in the economy. But through our group purchasing program and our strategies and discipline in expense management, we are actually seeing our food and labor costs being maintained rather well.

Okay. I appreciate the comments, and that's all I have today. Thank you.

Thank you.

(Operator instructions.) We'll go next to Todd Cohen with MTC Advisors.

Good morning, guys. Larry, on the new biz development opportunity, just trying to understand it a little bit better. Is this something that was you really weren't doing much of previously in terms of going after, kind of, in market type of development or looking at acquisitions?

I think the we've always been active in acquisitions. We are very blessed this year to have had three transactions that we completed that were all off market transactions, negotiated. It wasn't a bidding contest. We think we ended up with very strong economics and very strong properties for our company.

And that really led to our desire to focus and we think we have there aren't many companies doing this and hopefully won't. But what we are focusing on is the ability particularly, Joe Solari came onboard. He has a wonderful reputation, deep experience and contacts in this industry. We believe that we are a very reputable company with credible capacity to close and finance transactions. And I think his personality fits our culture very well to be able to cultivate relationships, many of which he's had for many years in this industry, of basically uncovering and executing transactions that otherwise wouldn't be in the market. And giving us the ability to do it on an off market basis, not in a bidding contest, but being able to go face to face and negotiate and try to work out transactions that work for both the seller and the buyer.

So Larry, let me ask you this. In these off market, kind of, one off opportunities, within your geographical footprint, what do you think the market what do you think the potential opportunity is? I know you can't buy everything, of course.

Well, it

But how big is your pot there?

Well, fortunately we are not constrained by capital. We talked a little bit about our balance sheet. We for the type of transaction we are looking for, we believe, if we were it buy it in the company, we can still probably borrow from Fannie Mae or Freddie Mac for stabilized properties at 65, 70% of value. Interest rates today are down below 5%. So it's a very, very cheap and good costs of financing.

We continue to have excellent relationships and expand the relationships with our joint venture partners. And as evident in the three transactions we completed with health care REITs this year, we have strong relationships with three of the major health care REITs.

So we feel fortunate that we have flexibility in our ability to finance transactions. We think we are very nimble with our operating platform and able to concentrate on a geographic focus.

And in addition, we are working with some of our on site and regional staff as well as helping rifle shoot some of these opportunities in those markets to be able to identify opportunities that we think would fit strategically within our footprint and also be very profitable to the company.

So Larry but the question really was and I appreciate your response was kind of the size of the potential pool that you're capable of going after within I mean, how many properties are there out there?

Well, Todd, there's two if you think about this industry, there are about 1.9 million units are privately owned, private pay, purposely built senior housing, independent assisted living. That's not skilled nursing. The public companies control maybe 8% of that supply. It's so fragmented that it is a large opportunity. And it's a function of our ability to come to terms with potential sellers to quantify what that is. But in the abstract, it's a very significant opportunity.

Obviously. And then your reference to further monetizations, I think I heard you say

I did.

Can you focus on that a little bit more?

I don't think it's appropriate for me to discuss some of our existing portfolio. But as we have transactions, we'll be announcing that and discuss it further. But as I say, we are sticking to our core business, and we are looking at monetizing some of our existing assets. And by that, we will plan to grow our cash and reinvest it in more core assets in geographically concentrated markets.

Larry, any sense for kind of the dollar amount you're kind of targeting there for monetization in broad terms?

Todd, it could be significant.

Okay. Thank you.

Thank you.

(Operator instructions.) We'll go next to Joe Mundo with Sidoti & Company.

Good morning, guys. Thank you for taking my call.

Good morning, Joe.

I know you had talked about the last caller was talking about acquisitions and other new markets. Are there any geographical locations that you're focusing on more at this time or any geographical locations that were overlooked in the past that you see market opportunity?

Yes, Joe. If you look at our map and we welcome everybody on the website. We do have in our corporate presentation a map of our operations.

You'll see that 50% of our operations are in the central and Midwestern portion of this country with heavy emphasis really in Indiana, Nebraska, Ohio, Illinois. So we are very, very focused in those areas of the country where we already have existing regional oversight. We have a good footprint, and we think we can expand within those operations.

With the Signature transaction closed in September, we now have about a third of our portfolio, 30% of our portfolio, in Texas. And Texas continues to be a very vibrant economy, very diversified, stable housing market. And the performance of our Texas portfolio as evident by the stats in Signature are very good. So that's an area that we are looking to grow in.

We would look at opportunities within parts of the country that would have a size of their own to form, if you will, a region where we could have the right infrastructure in place for that. But really, what we are really focusing on primarily is that central part of the country, kind of from Ohio to Minnesota down to Texas as well as looking at some of the core areas.

We have a good portfolio in the Southeast, kind of in the Sou- --Virginia, Carolinas. That's a market that we also are looking to.

But again, we are trying to really leverage off our infrastructure, maximize our competitive strengths within these markets, by focusing on growth in those markets. And we think there are many opportunities there.

Yes. I mean, I'm looking at the map right now. I've seen this map before. Why no are there just no opportunities in the Pacific Northwest? I mean, there are I notice you like to stay in metropolitan areas. No opportunities I know Seattle's a big city, Portland. What do you think of those markets? Or are they just not fitting your business model?

Well, as I said, if we were to find a large acquisition in those markets that made sense as a region of size. But we don't think it's to go out and do a one off or two off deal in markets in which we don't operate, we don't think that's an efficient use of our resources. We'd rather really leverage off the infrastructure by growing and really becoming the industry leader and having that differentiating strength in a market by having a large presence with our infrastructure, with our cost structure, with our purchasing program that we think we can compete against other properties in that market.

Okay. Thanks guys.

Thank you.

At this time, we have no further questions in the queue. I would like to turn the call back to Mr. Larry Cohen for any additional or closing remarks.

Well, we thank everybody. We are very pleased with the third quarter, excited about the fourth quarter. And feel free, if there are any additional questions, to please give Ralph or myself a call. And enjoy the rest of your day. Thank you very much.

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