Sonida Senior Living Inc (SNDA) 2011 Q2 法說會逐字稿

Good day and welcome to the Capital Senior Living Second Quarter 2011 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 down turns and economic conditions, generally satisfaction of closing condition, such as those pertaining to the licensure, availability of insurance at commercially responsible 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 conference call over to Mr. Larry Cohen. Please go ahead.

Thank you. Good morning. And welcome to Capital Senior Living Second Quarter 2011 Earnings Release Conference Call. I am pleased to report positive results for the second quarter as revenue EBITDAR and CFFO all grew significantly. By focusing on our core strengths we increased average rents by nearly 11% and tightly controlled expenses. Our EBITDAR margin increased 200 basis points and CFFO grew by nearly 15%. These results reflect the fundamental strength of our predominantly private pay business as we benefit from need driven demand and limited new supply.

I am encouraged by our strong occupancy gains in June and July with second quarter ending occupancy growing by 90 basis points from the beginning of the quarter. I am also excited by our acquisitions, which increased our ownership of high quality senior living communities, enhanced our geographic concentration and generate meaningful increases in CFFO and earnings.

First, I would like to review highlights for the second quarter. CFFO increased 14.7% to $5.2 million or $0.19 per share in the second quarter of 2011 an increase of $0.02 per share from the second quarter of 2010. Revenue increased 27.4% to $64.3 million and increase of $13.8 million from the second quarter of 2010. Adjusted EBITDAR increased 35.2% to $22.6 million, an increase of $5.9 million from the second quarter of 2010 and our EBITDAR margin improved to 35.1% from 33.1% in the second quarter of the prior year.

In April joint ventures in which the company held a 5% partnership interest sold four senior living communities to Health Care REIT upon closing the sale the Company began leasing the communities from HCN. This transaction generated sales proceeds of approximately $17 million compared to our original investment of $1.3 million and is expected to add $0.03 of additional CFFO, $0.07 in incremental earnings per share, increase annual revenue by $26 million and add $12.2 million of EBITDAR.

Subsequent to the end of the quarter the company completed the acquisition of four high quality senior living communicates for a combined purchase price of approximately $53 million. These communities enhance the company's geographic concentration to more than 1,450 residents in Ohio and 1,450 residents in Indiana.

These acquisitions are expected to add approximately $0.08 per share to CFFO, $0.03 in incremental earnings per share and increase annual revenue by more than $13 million. These four communities have a resident capacity of approximately 350 with a mix of Independent Living, Assisted Living and Memory Care Services. Occupancy at these communities exceeds 95% although our underwriting was done at lower occupancy levels. And average monthly rents are approximately $3,200.

We are conducting due diligence on a number of transactions consisting of high quality senior living communities in locations where we have extensive operations. Subject to completion of due diligence and customary closing conditions we expect to acquire these communities in the fourth quarter of 2011. In addition we completed conversions of 112 consolidated units to higher levels of care during the second quarter. I would now like to review the second quarter operating activities.

The number of consolidated communities increased from 50 in the second quarter of 2010 to 74 in the second quarter of 2011. Consolidated average occupancy including 112 units recently converted to high levels of care and that [are in lease up] was 83.9% in the second quarter of 2011 compared to 83.8% in the second quarter of 2010.

Average monthly rent improved 10.9% to $2,893. per occupied unit from $2,609 per occupied unit in the second quarter of 2010. This was also a 4.2% improvement in average monthly rent from the first quarter of 2011.

I am pleased to report that our move-ins and deposit increased from the first quarter of 2011 with 164 more net move-ins and 208 more net deposits in the second quarter compared to the first quarter of this year. In addition, second quarter attrition rates fell 200 basis points compared to the first quarter. As a result second quarter ending occupancy grew by 90 basis points from the beginning of the quarter.

Second quarter 2011 independent living average occupancy increased 230 basis points with a 1.7% increase in average monthly rents from the second quarter 2010. Assisted living average occupancy increased 150 basis points with a 5.5% increase in average month rents from the second quarter of 2010. Same store average monthly rents were 2.1% high than the second quarter of 2010 and 1.2% higher than the first quarter of 2011.

July was another positive month with a 40 basis point improvement in occupancy and strong deposit taking. In fact, we have achieved net gains in occupancy in ten of the last twelve weeks. And in the two weeks of out-gains the net losses were only one and two. I am encouraged that these gains should result in a strong third quarter.

I can report that the impact of the recent rate cuts in Medicare Skilled Nursing reimbursements will be immaterial to Capital Senior Living as only 1.6% of our beds are in Skilled Nursing. Many of which are private pay and these are located within larger rental CCRC's. We don't expect any future acquisitions to have any Skilled Nursing beds and this percentage will be further diminished as we execute our growth strategy of owning more senior living communities.

I now would like to discuss our growth initiatives. We are very excited about our growth opportunities as seniors housing is a needs driven product with new supply at a very lower level and demographic demand growth is being driven by an aging population.

These favorable demographic and supply demand trends should allow for greater occupancy and rate growth. We expect further improvement in our operations from our implementation this year of internet marketing and social media initiatives as well as software programs for care plans and level of care charges.

We are also investing in cash flow enhancing renovations, refurbishments, and conversions to units to higher levels of care. These initiatives combined with the operating leverage in our prudently financed business are expected to increase our revenues, margins, and cash flow. Each 1% improvement in occupancy is expected to generate $3 million of revenues and $2 million of EBITDAR.

We completed conversions of 112 consolidated units to higher levels of care in the second quarter and are in the process of converting an additional 93 units to higher levels of care. When stabilized, these conversions are expected to add more than $5 million of incremental revenue and $3 million of EBITDAR.

As we execute our strategic business plans we are enhancing our geographic concentration 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.

Our acquisition pipeline is strong. We completed $189 million of accretive acquisitions in all of 2010 and we have already completed $194 million of immediately accretive acquisitions in the first seven months of 2011.

We are conducting due diligence on a number of additional transactions consisting of high quality senior living communities in locations where we have expensive operations. Subject to completion of due diligence and customary closing conditions we expect these acquisitions to be completed during the fourth quarter of 2011.

When completed these acquisitions are expected to be accretive to CFFO and earnings and lead to further improvements in our EBITDA margin and operating metrics. The 200 basis points increase in EBITDA margin recognized in the second quarter of 2011 compared to the same period in 2010 reflects the benefit we derive from executing on our strategy of acquiring communities in geographically concentrated markets.

We are able to leverage our nimble operating platform with our existing operating and marketing centers and benefit from economies of scale, our group purchasing programs, our proactive expense management systems and focus marketing plans to integrate acquisitions in a highly profitable manner.

Our success in acquiring high quality senior living communities on attractive terms validates Capital Senior Living's competitive advantage as an owner-operator with its geographic focus able to successfully assimilate acquisitions with minimal incremental costs.

I am optimistic about our outlook as we benefit from favorable industry fundamentals and our teams ability and discipline to successfully execute on a well conceived strategic plan. We expect to continue significant growth and cash flow from operations that will lead to a meaningful increase in shareholder value. Our fundamentals are solid and I am excited about the company's prospects as we benefit from need driven demand growth with limited new supply. I would now like to introduce Ralph Beattie, our Chief Financial Officer to review to company's financial results for the second quarter 2011.

Thanks Larry, and good morning. I hope everyone has had a chance to see last night's earnings release. In the next few minutes I am going to review and expand upon highlights of our financial results for the second quarter and first six months of 2011. A copy of our press release is available on our corporate website at www.capitalsenior.com.

The Company reported revenue of $64.3 million for the second quarter of 2011 compared to revenue of $55.5 million for the second quarter of 2010. An increase of $13.8 million or 27.4%. Resident and healthcare revenue increased from the second quarter of the prior year by $16 million or 34.1%. We consolidated 74 communities on our income statement this quarter versus 58 in the second quarter of the prior year. The year over year growth of 16 consolidated communities reflects the four Spring Meadows properties, which we began leasing this quarter and the 12 signatures communicates which closed in the third quarter of 2010.

The Consolidated portfolio also includes 112 units, which were recently converted to higher levels of care and are in lease up. Including these units, financial occupancy of the Consolidated portfolio averaged 83.9% for the second quarter of 2011 compared to 83.8% in the second quarter of 2010.

Average monthly rent was $2.,893 per occupied unit in the second quarter of 2011 an increase of $284 per occupied unit or 10.9% higher than the second quarter of 2010. On a same community basis average rents were 2.2% higher than the second quarter of 2010 and 1.2% higher than last quarter. As a percentage of residents and healthcare revenue operating expenses were 59.9% in the second quarter of 2011 compared to 60.5% in the second quarter of 2010 an improvement of 60 basis points.

Expenses in the second quarter reflected high utility costs, along with the implementation of new software programs for care plans and level of care charges. The investment in this technology is expected to result in higher revenues once fully implemented. We also incurred costs associated with staffing the units, which were recently converted to higher levels of care. Despite each of these items margins improved year-over-year.

General and administrative expenses of $3.4 million were approximately $0.7 million higher than second quarter of 2010. Approximately half the increase was due to transaction costs associated with the acquisition process. As a percentage of revenue under management general an administrative expenses excluding transaction costs were 4.8% in the second quarter of 2011. Adjusted EBITDAR for the quarter of 2011 was $22.6 million and adjusted EBITDAR margin was 35.1%. EBITDAR increased $5.9 million and margin improved two percentage points from the second quarter of 2010.

Adjusted net income for the second quarter of 2011 was $1.5 million or $0.06 per share compared to adjusted net income of $1.2 million or $0.05 per share in the second quarter of 2010. Adjusted CFFO was $5.2 million or $0.19 per share in the second quarter of 2011 compared to $4.5 million or $0.17 per share in the second quarter of 2010 an increase of approximately 15%.

Moving to the first half results. The company reported revenue of $124.2 million. An increase of 26.2% from the first half of 2010. Adjusted EBITDAR was $43.1 million for the first six months of 2011 an increase of $12.1 million or 39% and EBITDAR margin was 34.7% for the first six months.

Adjusted net income was $3.2 million or $0.12 per share in the first half of 2011 versus $1.9 million or $0.07 in the first half of 2010. And CFFO was $11 million or$0.41 per share in the first half of the year. And increase of $2.5 million an increase of $2.5 million or $0.09 per share from the first six months of 2010.

The Company ended the quarter with $60.9 million of cash and cash equivalent including restricted cash. We increased our cash balance by $22 million in the second quarter as we received about $17 million of proceeds from the sale of our interest in the Spring Meadows communities and generated about $5 million of operating cash flow.

As of June 30, 2011 the Company financed its 25 owned communities with 24 mortgages totaling $172 million at fixed interest rates averaging 6%. None of these mortgages mature before July of 2015. Our debt net of unrestricted cash was approximately 3.4 times our second quarter EBITDA.

Subsequent to the end of the second quarter we financed two of the four communities we acquired with $13.5 million of ten-year non-recourse mortgage debt at a fixed interest rate of 5.69%. We expect to finance the other two acquisitions later this quarter with mortgage debt of approximately $23.5 million at similar rates and terms.

Capital expenditures for the quarter were approximately $2.2 million representing $1.1 million of an investment spending and $1.1 million of recurring CapEx. If annualized, the Company spent approximately $500 per unit on recurring CapEx in the quarter. We would now like to open the call to questions.

(Operator Instructions)

We will take our first question from Jerry Doctrow with Stifel Nicolaus.

Good morning it is actual Dan Bernstein filling in for Jerry.

Good morning Dan.

Hello Dan.

You seem remarkably upbeat. I wanted to talk about the occupancy. If you look at the average occupancies quarter over quarter them seem to have gone down. And yet quarter end to quarter end you are up 90 basis. I just wanted to understand some of the variation that happened during the quarter. Whether you had like a weak April and it all picked up back again in May and June?

Dan, I would be happy to respond to that. As you recall and commented on the last earnings call, we had a brutal February and March. If you recall around the Super Bowl ice storms in Texas require our office to be closed five days in the month of February. We had pretty harsh weather in March through a lot of the country, particularly the north central and Midwest where we have a lot of our operations. And when people can't walk out their down and even to get their mail, they clearly can't shop and this is our community, so, traffic obviously was effected and we saw the impact in the beginning of the quarter.

So we saw a loss in April we actually saw a pickup beginning the second week of May. We lost, interesting, we lost occupancy the first two weeks of April because of attrition and the effects of the slower traffic and then slower traffic began to pick up, we began to see our occupancies and deposits start to grow. We had a very good second half of May, super June, the 90 basis point improvement was really almost all June. I think May was pretty much flat. And then we have had a very very strong July.

Some of the highlights of the quarter, as we mentioned, we completed the acquisition with Health Care REIT the Spring Meadows portfolio. We have a property in Summit, New Jersey that in April was 80% occupied, today it is 95% occupied with at lease to 98% to 99%.

We have about six properties that have had five or higher percentage points increases in the quarter, so what we are seeing is that we are impacted by the effects of the weather. And the reason the financial occupancy shows as it does many of the move-ins in June were in the second half of June, so you don't see those come through in the financials. We will see those in July and that is why we are optimistic about the third quarter.

So, I think that, we are benefiting from demand, we have made some structural changes on some of the marketing. We have now implemented much more internet, social media, we are in the process of going live with the new website, both at the corporate level and property levels. We have made some changes in our onsite staff and as I said, we are very pleased with the success and, again, we have seen gains in ten of the last twelve weeks. Which is very encouraging.

Do you think you are gaining market share within your markets, given your price point, given the turmoil in the economy and the stock markets, are you gaining market share in your particular market for competitors who might be pricing higher? I just want to understand where the debt--

Clearly, we believe one of the benefits of Capital Senior Living, we think we are the leader as the value provider of high quality senior living services. The Independent Living and you can see the growth in Independent Living really pretty consistent since the end of last year. We have actually had net growth in occupancy in IL almost consistently the last six or seven quarters. So, and you saw the year over year change.

With very active third-party homecare providers in our communities we are able to rent units, the average rent in our Independent Living is about $2,250 a month and residents can get spacious apartments with full kitchens and closet space and a nice apartment and have a lot of the care provided for in the building with doctors offices, wellness programs, health clinics and home health agencies in the buildings.

So I do think that is a definite driver of the traffic and even in Assisted Living, which is more need driven we are seeing the effects there. I say on Assisted Living we are probably more competitive on price than the Independent Living, but I do think we enjoy excellent reputations and at the end of the day, and I said this before, it really comes down to our people.

And I want to congratulate and thank our regional and national marketing people and particularly our sales directors who really do a fabulous job of creating relationships with seniors. Going to their homes, doing outreach, I was very very encouraged last week. We have properties that have had July's with 11, ten, 12 deposits in the month. Seven move-ins last week. We have had some really encouraging activity and it sounds like it is continuing so I think we are executing on a lot of our plans and they are resulting in improved performance.

Was some of that also improved performance from conversions?

The conversions are hurting our numbers right now Dan, because one of the factors in our quarter over quarter comparisons is the fact that we just opened these conversions. In Florida we opened 45 units of Assisted Living, it is already 45% occupied. So that is pretty good growth over a couple of months. The Memory Care in Chicago are about 30% occupied. So we actually see and you see it in our expenses and our numbers we actually have start up costs, obviously we are staffed in those communities and we are actually not even breaking even yet.

That has affected the cash flow as well as our earnings and our metrics. But there is tremendous opportunity because as these fill, as I mentioned these conversions are expected to add over $5 million of revenue when they stabilize with out $3 million EBITDAR contributions. And we are very pleased with the success we are seeing in those lease ups.

I want to ask one more question and I will ask other folks ask. On the acquisition pipeline for the fourth quarter is that all on balance sheet or are you looking at any re-leases as well now?

These are all on balance sheet. All to be financed with fixed rate ten-year permanent financing as we have done on these right now. So everything that we are looking to acquire we have under contract and we have letters of intent out on others. And are in due diligence. We are planning to buy on balance sheet.

I will let other people ask questions. Thank you.

Thank you very much Dan.

(Operator's Instructions)

We will now take our next question from Wilson Jaeggli.

Thank you. A question here on your acquisitions. Obviously, these are top quality acquisitions you have made with the 95% occupancy. With that high an occupancy, how do you expect to get EBITDA growth out of those units as you go forward?

Thank you Wilson. Well first of all, as I mentioned, we underwrite these occupancies at a lower level. So even though we are buying properties that are above 95% occupied we typically bring those occupancies down to around 93% or even lower. What we do is we understand that there is always going to be attrition in these buildings and we underwrite them to a lower level. The numbers you see here are based on their under writing. They are not based on their higher occupancies and the underwriting that we do just collapses the existing cost structure of these operations. We had not factored in any of the benefits that we might be able to derive from our group purchasing program our assistance, our management, healthcare, insurance, so we believe there should be some savings as we integrate these communities into our operations.

But what is interesting, if you look at the attractive financing we are able to obtain on a non-recourse basis they provide very, very solid mid-teen, cash-on-cash returns to the company on the equity. So we look at this initially as a very accretive transaction to cash flow and to earnings with positive leverage, particularly with interest rates falling where they are today. And we believe that we are buying high quality properties that obviously have provided themselves in our markets and the other aspect of these properties is we have CapEx programs already underway, to upgrade many of the CapEx requirements are actually negotiated as credits in the pu4rchase price. And so we will freshen these properties up, bring in professional management in our systems and are very excited about continued successful operations in these communities.

Besides the favorable financing that you have received here on your underwriting metrics and your potential cost savings, with this high an occupancy will you be able to raise your prices? Or your rents?

We will find out. We just took over the operations right now, we will assimilate this, clearly, there could be an opportunity for price...obviously, the higher occupancies gives us a better pricing power and that is something that we will look at. That typically occurs when we put together the budgets for next year. I think the balance of this year we will get assimilated make some capital improvements, get the staffing straightened out over the next couple of months, and then look at pricing as we look for the budgets to 2012.

Okay, thank you. It looks like you are about half way to your goal here for acquisitions this year, having completed $50 million and I believe the goal is for $100 million before year-end. As you look to next year 2012, what amount of cash will you have available for acquisitions? You are generating I believe you said $5 million a quarter in free cash flow. As you look forward into 2012, what do you think your balances will be available for additional acquisitions?

Wilson, it's Ralph. Your point is well taken, we are generating over $5 million a question in free cash flow. We also have quite a bit of cash on the balance sheet today. We certainly have adequate cash to complete the first $100 million immediate objective and then with the $20 million that represents 30% equity, that would enable us to acquire another $65 million or $70 million of properties just from one year's cash flow from operations. So between the cash we have and the cash that we are generating we don't see the need to raise capital until sometime in 2012 depending upon how aggressively we want to pursue our acquisition pipeline. We do have a shelf registration available to us and other means of raising capital if those opportunities present themselves and we don't see cash for equity being any kind of an obstacle to us.

Wilson the other think about the cash is that these acquisitions because of the strong cash flow, they through off, will actually increase the quarterly contribution of cash flow next year. So expect next year, to have higher cash flow being generated in the business that should probably sustain, that cash flow growth, should sustain about $100 million pipeline as well as the cash balances and we plan to be very strategic about, and very prudent about using our balance sheet and our equity.

And, again, depending upon the stock price, depending upon the opportunity, if we can find accretive transactions we consider it. But fortunately we have cash on balance sheet we are deploying that is decreasing our cash flow and we feel very comfortable that we can have significant growth. Particularly based on the base of which we are starting at just off internally generate cash and cash balances.

I see. Okay and thank you very much, and congratulations on a strong quarter.

Thank you.

Thank you.

We will now take our next question from Todd Cohen, with MTC Advisers.

Yes, good morning guys. Nice quarter. I just wanted to clarify a couple of things. On the 112 units that have been converted, you referenced $5 million of incremental revenues. Was that specifically related to those 112 or did that also include the 92 that you are converting?

That is based on a business plan of actually about 175. The 192 conversions are one property and decided to license the entire building to AL. We are not factoring that. That is incremental to our $5 million. Our $5 million are where we are doing conversions of converting Independent to Assisted. So the full complement of 200 units would probably generate a little more cash flow but the $5 million is really based on this 112 and another 60 units we are planning to convert to achieve that $5 million growth in revenue.

Okay. And then on the acquisitions that you have made, I think I am hearing that we don't have to be concerned about deferred maintenance on these properties and that you have that built into the equation in your sales process?

Yes, what happens in our due diligence process, we have a third party engineer go into each of the properties and provide a 10 year capital plan. That is reviewed by our management of development and operations people. We have, for example, in one of the communities that we acquired, had original carpet. We have a credit from the seller at closing to recarpet the entire building. One of the buildings I am pleased to say is three years old in stellar condition. That has no CapEx needs. The others are mixed, so anything that is required to bring these properties to our standards, if it is an immediate item, it is something that we have been able to negotiate as part of the purchase by the seller and we have gotten credits in all of these transactions to cover those costs.

And then we have a ten-year plan. And what is interesting when you look at our CFFO numbers I know we have had a lot of questions about, we use a set number every quarter on recurring Capex based on obligations we have primarily from our lenders, but it is also based on these third-party reports. So they track to these capital plans over ten-years based on useful life of the components in each of these buildings. So all of these buildings either are or will be at the standard that we expect to operate our communities.

We think that is probably another competitive advantage. I will tell you that the feedback that I have gotten from kickoff meetings have been outstanding. People are very excited about working for a national operation, a national chain. Residents are thrilled that there is a larger operator coming into these properties.

So I think that these properties that have proved themselves to be very successful, I commend and congratulate the sellers on successful operations but being a large operator in this industry, with better resources, and making some of the capital improvements we are making, we think will just enhance further the reputation and performance of these communities.

Great, and just a couple of others. Ralph, on the CapEx you referenced at $2.2 million. You referred to about half of that being investments as opposed to recurring? So does the whole $2.2 million get thrown into OpEx or does some of that go onto the balance sheet as capitalized?

Well the whole $2.2 million would go on the balance sheet, Todd. So that would be reflected in our property plan equipment number. As you point out about half of that was recurring Capex and we do use that number and the analysts basically use that number as a reduction in cash flow from operations. The rest of it is investment spending and could be capital for conversations or other refurbishments or improvements for our properties, which should reflect themselves in higher revenues and margins going forward.

Okay and then one last question. You reference this new software plan. What exactly does this actually do for the properties?

Now that we have increased our Assisted Living we are making investments. A lot of these are one-time charges and a monthly royalty fee we pay for this program. This is a software program from a very well known provider in this industry. It allows us to from the time a prospect comes into our community we are able to assess that resident, integrate that information into a computer program that will be able to monitor and manage all of the care plans, the billings for care as well as the staffing needs to provide that care.

It also will require the properties to update that care plan every 90 days so that we are able to make sure that we are adequately assessing the needs of that resident. It also allows us to give that resident and their families monthly a print out of all the care plans that have been implemented and the charges. They can see exactly what those charges are for those care plans, as we have different levels of care in Assisted Living.

So we think it is a tool that will enhance our ability to better serve and care for our residents, better document those care plans, make sure there are reminders to our care givers to make sure they are properly assessing on an ongoing basis the resident. And capturing the revenue for those services. So we think it will be a tool that will be very helpful in both our operations both from a cost benefit on staffing and a revenue side as we look to make sure we capture all the revenues for the care and also enhance the level of care to our residents.

And then lastly on the acquisitions. I know it is Ohio and Indiana, of course, but I was just curious what the new construction, I know it is pretty low across the country, but what does it look like near your facilities that you've just acquired?

None of the facilities that we have acquired have any new construction in the market.

Okay, thanks.

Thank you Todd.

Mr. Cohen, it appears there are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

Well I think everybody for your participation today. We look forward to another call for the third quarter and feel free if you have any additional questions to contact Ralph or myself. Have a great day and thank you again.

Ladies and gentlemen this does conclude today's conference call, thank you for your participation.