Sonida Senior Living, Inc. (SNDA) Q3 2008 Earnings Report, Transcript and Summary

Good day and welcome to the Capital Senior Living third quarter 2008 earnings release conference call. Today’s conference is being recorded. Any forward-looking statements made by management in this conference call are subject to certain risks and uncertainties that could cause results to differ materially including, but not without limitations, to the Company's ability to find suitable acquisition properties at favorable terms, financing, licensing, business condition, risks of downturns in economic conditions generally, satisfaction of closing conditions such as those pertaining to licensure, availability of insurance at commercially reasonable rate, and changes in accounting principles and interpretations among others, and other risk factors identified from time to time in the Company’s report filed with the Securities and Exchange Commission. At this time I would like to turn the call over to Mr. James Stroud. Please go ahead sir.

Good morning and welcome to Capital Senior Living’s third quarter 2008 earnings call. Despite a challenging operating environment, year-over-year results include an increase in resident revenues of 3% and a 40 basis point improvement in EBITDAR margins. In the third quarter of 2008, resident revenue increased $1.3 million to $43.2 million, approximately 3% increase from the third quarter of 2007. The EBITDAR margin for the third quarter of 2008 was 29.9%, an improvement of 40 basis points over the third quarter of 2007. These positive gains are evident in our same communities under management. Excluding the four communities undergoing conversions, same-store revenue increased 2.9% versus the third quarter of 2007. Average monthly rent increased 5.3%while same community expenses increased 2.7%. The result was a 3.2% increase in net income from the comparable prior year period. On May 29th 2008, the Company announced that a special committee of our Board of Directors had engaged the Bank of America Securities as our financial adviser to assist the Company and exploring and considering a range of strategic alternatives. The Company is still evaluating a strategic alternative and at appropriate time we will advice the marketplace where the Company stands in the process. During this time period, the Company intends on executing its 2008 business plan. Now for further comments on the third quarter 2008, I introduce Larry Cohen, Chief Executive Officer. Larry?

Thanks Jim and good morning. I am pleased to welcome everyone to our third quarter earnings release call. Our community’s offers Senior’s Quality Housing in elegantly appointed buildings with support of services at affordable rates. Despite a challenging economy and housing market, we have made progress in the third quarter. As we grew occupancies, implemented rent increases and employed sound expense management. We continue to differentiate our communities as an affordable option delivering exceptional value to elder seniors in challenging economic times. Our communities enjoy solid, well-established reputations in the market. Our accomplished marketing staff and first-rate sales directors are implementing effective marketing plans including direct mail campaigns, telemarketing, increased events and outreach. These efforts are generating higher occupancies and revenues. Move-ins and deposit increased to all levels of care and move-out decreased resulting in a 50 basis point improvement in physical occupancy of the third quarter. Our attrition rate in the third quarter slowed to 37.3% compared to 40.7% in the second quarter. Independent living attrition was 33.7% for the quarter compared to 36.2% for the second quarter and assisted living attrition was 47.4% versus 58.2% in the second quarter. Deposits and occupancies improved in October and we are cautiously optimistic that these improvements will continue in November. Our disciplined approach to managing expenses and increasing rate is producing positive results. Average monthly rents in September increased 5% from a year prior and 1.1% from June of 2008. Community offering results were solid in third quarter. Fifty seven of our communities were stabilized with an 89% average physical occupancy rate. Operating margins before was property taxes; insurance and management fees were 47.7% in stabilized independent and assisted living communities. At communities under management, these include our consolidated communities, communities owned in joint ventures, and communities owned by third parties…

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 am going to review and expand upon highlights of our financial results for the third quarter and the first nine months of 2008. If you need a copy of our press release, it has been posted on our corporate website at www.capitalsenior.com. The Company reported resident revenue of $43.2 million for the third quarter of 2008 compared to resident revenue of $41.9 million for the third quarter of 2007, an increase of $1.3 million or 3%. The number of communities we consolidated on our income statement increased by one since the third quarter of last year, from 49 to 50, with the addition in January of one leased community. Financial occupancies of the consolidated portfolio averaged 85.7% for the quarter with an average monthly rent of $2,491 per occupied unit. Excluding four communities with units being converted to higher levels of care, financial occupancy of the consolidated portfolio was 87.6%. Average physical occupancy for the 57 stabilized communities excluding four communities with units being converted to higher levels of care was 89%. Until these four communities with conversions again reached stabilized occupancy; we will continue to exclude them for our stabilized total. Unaffiliated management services revenue decreased by $0.7 million in the third quarter of 2008, improvement of unusually high level in the third quarter of 2007. The third quarter of last year included the true up of an acquisition that took place in 2004 which had look back provision. We recovered $0.4 million of management fees and road off of contingent note payable of $0.3 million. Affiliated management services revenue included $0.4 million of development and pre-marketing fees in the third…

(Operator Instructions) Your first question comes from the line of Carter Dunlap - Dunlap Equity Management.

Hi. You mentioned the impact of the real estate market on some of your communities, I have heard industry comments and other operators these comments about discounting but I do not think I heard that in any of your prepared comments. Can you make a comment about what role, if any, that is playing and are you doing it or are you considering it?

Good morning, Carter. If you look at our results for the quarter, you can see that for old properties under management, our average monthly rent actually increased 6.4% year-over-year and our sequential growth is about 1.4%. We generally are not discounting. In some selective markets who is competitive, what we will do is we will take a unit that typically is the most difficult to lease because it may be the furthest from the dining room, it may have a poor view or maybe just a wrong size and we will work some type of concession with the residents but in general, we do not discount. We have not had the need to discount and we believe that that philosophy may change the integrity of the lease structure for all of our residents and again helps us focus on really driving the net offering income per unit and cash flow per unit.

Your next question comes from the line of Sam Miran - GEM Realty Capital.

I jumped on this call late so if you have already covered this, I apologize and will talk about it later but can you talk about the trends in October and what you are looking at in November in terms of occupancies and rents?

Yes, I would be happy to, Sam. As we mentioned, our physical occupancy in the quarter improved by about 50 basis points. October was a good month both in terms of deposits and move-ins. Our actual physical occupancy increased nearly 30 basis points in October so we saw positive trends in October and we are cautiously optimistic that November will be good. So that is the most current information we have but we did see improvements through October.

Got you and you have been able to maintain this for October, the occupancies increased by 30 basis points without having a discount as I think you just mentioned?

That is correct.

Interesting. Okay. Thanks.

Going back, obviously there is a common theme in both Carter and Sam’s question is we are typically in pretty sound, relative speaking, sound housing markets. I think the other aspect of our business is that we have a product that is affordable. If you look at the average monthly rents in the Waterford buildings which represent 17 of our buildings, it is $2,089 a month inclusive of meals, activities, security, transportation, utilities. Overall portfolio is averaged about $2,600 as independent and assisted. So, I think that our product had served well in the markets that we operate in and if you look at the pricing and the price points we operate, it is still affordable to most seniors than moving into our buildings.

Your next question comes from the line of Todd Cohen - MTC Advisors.

Good morning, Larry or Jim, can you talk a little bit about the units being converted? I am a little bit confused how that is working in and around the numbers as you…

Yes.

I believe it is four properties?

We right now have conversions underway for plans for seven properties. Four of those are actually right now being converted. We have units out of service to accommodate the conversion. In fact, we have decided to delay the conversion at one building Tesson Heights in St. Louis where we had planned a 48-unit conversion. The reason for it is the building is full and we do not have the ability to create the vacancy or the licensure for those converted units. So we have delayed that but in the other buildings…

So that would be one of the seven but not of the four.

That is neither. That is not it. That was the one that we had planned that we have delayed. So of the seven, we have Gramercy Hill that was completed in the second quarter. We have conversions underway at Crown Point, Villa Santa Barbara and Peoria. We are waiting licensure for those buildings. In the meantime, we add units because we have converted, we have staffing. Those units that are not released at this point…

So how many units are there, that have not been released?

We are talking about generally, roughly 115 units.

A hundred and fifteen units in basically three properties?

In four.

In four, okay. So, you said one was completed in the second quarter.

That is correct. That was 18 units.

Okay, so those are basically online now?

They are.

Okay.

And those are in our numbers. We have not excluded that. Those are in our numbers.

Those are in your numbers. Okay. So, what is the potential opportunity from the 115 units on an annual basis at a proper..?

Ninety-percent of occupancy, those 115 units are expected to generate about $3.9 million of revenue with an expected EBITDAR margin of about 60%. So that would be about $2.4 million.

So you said 64% or 60%?

Six-O, 60.

Okay. All right and then, you referenced another expansion of about 160 units? Or a new property or…

Those are two expansions that we are looking at. We have decided on those, to continue to monitor those markets before we begin those. So, if they do begin, they will probably begin in the second half of 2009. Those two expansions would have 160 total units, each expansion would have 60 units of assisted living, 20 units of dementia care and those expansions are expected to cost about $23 million each. And that would be financed by mortgage debt and then cash on hand.

Okay and…

I am sorry; the $23 million is total for both. Yes total, I correct myself.

Total for both, okay. In this current credit environment, how do you go about getting financing on something like this?

There is financing from Fannie Mae for various projects actually. What is interesting about the senior housing business and the current environment is that Freddie Mac and Fannie Mae are continuing to lend to the industry both for stable existing properties and Fannie Mae actually has a program that is limited to a select group of proven operators that they would finance development and actually Fannie Mae would finance and is interested in financing these expansions.

And Larry, what kind of rates are you thinking about, or are available?

There could be roughly about 325 basis points over LIBOR. LIBOR right now is back down to around 2.25, 2.3.

Yes, that is not bad at all if it is available.

Yes.

Okay and then just one last question. It looks like the maintenance cost per unit is going up. Why is that happening? And is there a way to get a handle back on that?

Todd, it is Ralph. You know you are right because we have been reporting that for the last couple of quarters and each quarter, we take the maintenance spending at the property level and annualize it. The cost per unit has been increasing. We are presently running in the third quarter by $758 dollars average and would annualize that spending over a 12-month period. We are going through a program of making sure that our properties are in absolute pristine condition. So, we are doing some cosmetic things primarily. It is not structural but there are things to make the properties even more marketable in these tough times and we have a consistent program to spend that amount so we maximize our marketability. Todd Cohen – MTC Advisors: Yes, okay.

Todd, these are typically for carpets, coverings on furniture in common areas. As Ralph said, it is part of the marketing program that we are focused on particularly in this environment to make sure that our properties are very attractive in this market. Todd Cohen – MTC Advisors: That makes a lot of sense. I think it is money well spent. Thanks.

Your next question comes from the line of Rick Fetterman with Fetterman Investments.

Good morning, everyone. Actually with the exception of one, all of my questions have been answered. I was curious if there is, you have got any indication on when this process with Bank of America is going to be complete?

Good morning, Rick, Jim Stroud. No, basically, given the financial markets, we are still evaluating our alternatives and whenever that has been determined. Yes, we will communicate with the marketplace.

Your next question comes from the line of Chris Doucet - Doucet Asset Management LLC.

This is actually David, Chris is here with me. But just a couple of questions with the community you opened in Dayton, Ohio. Last call you expected the overall cost per unit when the building went into, $150,000 per unit was expected when the building was operational. Is that still the final total?

That is still a good estimate. Actually, it may come in a little lower than that primarily because interest rates are lower, LIBOR is down and we actually built a little faster than we expected. So the carrying cost was a little lower. The hard cost were very close to what we had budgeted; we have a little over today. Well actually built this from below the budget slightly. It is probably coming in close to about $145,000 a unit.

It is, David. It is coming in at $145,000 a unit.

Okay, excellent. Second question, your financial occupancy and physical occupancy has been improving not only year-over-year last couple of quarters but sequentially. You said October; you had a pretty good feel for October. Going forward, do you think we have bottomed in some of the macro factors that have been affecting what we have been seeing for a couple of quarters have been affecting occupancy?

It is hard to really forecast what will be. We had benefited in the third quarter from lower attrition. We did have an improvement in our move-ins and deposits. We serve a need-driven customer and there are some pent-up demands obviously, there is only so long people can delay. And hopefully a lot of the initiatives there are happening around the country to create better liquidity will help people move-in a little more easily. But we are encouraged by what we have seen. So far this year, it looks like we hit bottom in June. We have recovered from them and we are cautiously optimistic that we will continue to see improvement.

And David, on a macro basis, if you look at home sales, we have seen a turn nationwide in home sales. The reporting of it that a lot of people now are realizing this may be the bottom of the market, are coming in and acquiring homes and so we have seen an uptake in the home sales. So we are seeing some positives on the macro level.

Okay. Well good. I have one more macro question for you and this may be a crystal ball question. We saw October; the whole sector got hammered in especially some of your more levered competitors. See if you also, if you have the overhang, not the overhang, but the question about the strategic alternatives. You think what we have seen in the stock price over the month of October has more to do with the leverage assumed in the industry and being basically grouped with someone like Sunrise or Brookdale? Or do you think it is something else?

Well, David, the whole market was awful in October. There were a lot of redemptions, a lot of margin calls amongst various funds. So if you look at some of the selling pressure from some of the holders, as Ralph mentioned, we feel we have a very strong balance sheet. We are very fortunate that we refinanced our loans when we did converting all the flat rate debt to fixed rate by May of 2007 so our maturities are at basically 2015 to 2017. We could fix charge coverage on those. So, hopefully if people get to analyze and differentiate companies, they can appreciate the fact that we do not have maturities in the near term. We are sitting with cash on the balance sheet. We have assets that, actually, with the Fannie Mae and Freddie Mac programs do have ability to get supplemental financing as well. So, hopefully people will recognize that we have some less pressure than perhaps some other companies. I also think there are some other factors in the stocks that relate more to the entire stock market last month and a lot of what happened as far as outflows from funds and the need for some shareholders to sell their positions.

Yes, I think there is on a macro basis, there was a flight to quality. We saw it in the credit markets. We saw the movements to the larger cap stocks and that affected the small cap and the micro cap stocks. From the standpoint of our Company’s specific as Ralph mentioned, we added $2 million cash to the balance sheet for purposes of third quarter on a diluted basis. We are at $0.16 a share annualized to be $16 million positive cash flow even at the occupancy we are at. So, we feel given our product type, being the affordable and the diversification and being out of the market. We are not heavy into Florida which is with just one asset. In California, we have three assets but we are not in the areas where it is significantly undervalued in homes that just fallen by 50% to 60%. We are well positioned for the uplift.

Great. That is helpful and that is good color coming from management. I appreciate your time in taking my questions.

You have a follow up question from the line of Carter Dunlap with Dunlap Equity Management.

Hi, Just another follow up. There has been a lot of discussion about the change in the REIT laws and structures and what that might mean for deals going forward and possibly more creative opportunities. Have you, you know you have very good relationships there. Can you comment on what you think that might mean for the Company and the industry?

I think that it does create more flexibility in structure with the REITS. We have continued to enjoy very nice relationships with many of the larger healthcare REITS and I do think that the REIT I think will be selective and judicious in how they use those rules as well as the concentration of joint venture or owned offering assets versus leases or mortgages by the REITS because of their investor profile. But I think that it is encouraging that it does create for some more flexibility in greater structures that could facilitate transactions with some of the REITS.

And Carter, our Company has experience with joint ventures and with the Blackstone, GE and Prudential so we understand that our Board is knowledgeable about it. We know how it benefits the shareholders so I think we have experience in that are. I think that is going to be beneficial as well analyze it as well as the REIT and what the right relationship is on a go-forward basis. So we applaud that. The one thing that there was a genuine concern are, are we going to be heads up competition with REIT and we are pleased because I think the REITs have recognized they do not want the operational liability that weighs heavily on their decisions and hence the balance of joint ventures in their portfolio, we generally see will be between 20% maybe to 25%. We are not going to be heads up competition on a massive basis with the REITS so we are pleased about that. So, we think for capitals in operating company it gives us, as Larry mentioned, it gives us additional flexibility and with our background in joint ventures, we can right-size it for the right opportunity.

Presumably it would mostly impact you on go-forward opportunities, not anything in the portfolio?

Exactly. It would be go-forward opportunities.

The other comment I have heard in the comment and analysis is that it might give the REITs opportunity to be do more short term deals. I was no quite clear why that would be a good thing.

I will tell you from my conversations with the REIT, they are all looking long term. The REITS are long term owners and whether they use this new REIT tax law or whether they use their traditional mortgage financial leases. Every REIT we talked to is looking long term.

Yeah, the short term that we have seen has been more in the retail REIT and the REIT focused on MOBs, Medical Office Buildings where they will build, they have become merchant builders effectively where they will utilize it to build and sell. The problem with that is once you start that build and sell; you have to continue that velocity in order to maintain your distribution rate.

And there are no more questions in the queue at this time. I would like to turn the call back over to management for any additional or closing remarks.

We appreciate everyone’s time and have a good day. Thank you.

And that does conclude today's conference. We appreciate your participation and you may now disconnect.