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Capital Senior Living Corporation (NYSE:CSU)

Q1 2010 Earnings Call

May 6, 2010 11:00 a.m. ET

Executives

Larry Cohen - CEO

Ralph Beattie - EVP & CFO

Analysts

Dan Bernstein - Stifel Nicolaus

Operator

Good day and welcome to the Capital Senior Living First Quarter 2010 Earnings Release Conference Call. Today’s conference is been 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 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 licenser, availability of insurance at commercially reasonable rates and changes in accounting principles and interpretations among others, and other risk 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 over to Mr. Larry Cohen, Chief Executive Officer. Please go ahead sir.

Larry Cohen

Thank you, good morning. I am pleased to welcome everyone to Capital Senior Living’s First Quarter 2010 Earnings Release Conference Call. The first quarter of the year is typically our most challenging period and this year was particularly impacted by harsh weather around the country.

Yet we achieved positive results through increases and average multi-rents and tight control of expenses. Our EBITDAR margin increased from the first quarter of 2009 and cash flow from operations was $0.15 per share. We are encouraged by improvement in move-ins and deposits in March and April and by the fact that new supply is practically non-existent as demand continues to grow.

With the efficiencies we have achieved during this difficult economic period, we expect future occupancy gains to result in solid incremental margins and meaningful cash flow growth. Sequentially average occupancies for our same store communities excluding three communities with conversions declined 30 basis points from the fourth quarter of 2009.

Move-ins, deposits, leads and tours improved in March and April. I am cautiously optimistic that this trend will continue as it is typical the case for the balance of the year. Despite the harsh weather experienced in January and February, we ended the first quarter with 40 more net move-ins and 35 more deposits than during the first quarter of 2009.

The last week of April was our best week of the year with 27 net move-ins and our deposits unless that move-out notices indicate a 70 basis point improvement in our least two occupancy.

Our attrition rate of the first quarter was 38.5% as compared to 38.3% in the first quarter of 2009. Our disciplined approach to reducing expenses at both the corporate and property level while increasing average multi-rents continues to generate positive results, at communities under management excluding three communities with conversions to higher levels of care.

Same store revenue increased 2.3% versus the first quarter of 2009 as a result of a 2.6% increase in average multi-rent. Independent living average multi-rents increased 2% and an assisted living average multi-rents increased 3%.

Same community expenses increased 1.9% and net income increased 2.8% from the comparable quarter of the prior year. 58 of our communities were stabilized during the fourth quarter with an average physical occupancy rate of 86%.

Operating margins before property taxes, insurance and management fees were 48% in stabilized independent and assisted living communities the same as in the first quarter, 2009. We are able to increase free cash flow generate very attractive returns and offer more care to residents as age in place by converting independent living units to higher levels of care.

During the quarter we started construction on a 45 unit conversion of assisted living at one of our independent living communities and expect to receive permit this month to the conversion of 20 independent living units to assisted living and another independent living community.

We expect this conversion to be completed during the First quarter of 2010. These conversions are expected to cost approximately $3 million and find stabilization is expected to generate approximately $2.4 million of revenues with 60% operating margins.

We are seeking approvals for conversions at four more communities and is feasible, these conversions will also begin in 2010. As we execute our strategy business plan, we expect to grow our business with expanded care to residence by maximizing our competitive strengths and lower our cost of capital

Our strategy is focused on generating attractive returns, maximizing free cash flow and enhancing shareholder value. As evidenced by the two accretive transactions completed this month with healthcare REIT we are increasing our geographic concentration and maximizing our strengths within our markets. We will now consolidated eight high quality assisted living communities that we manage for two joint ventures in which we held minority interests.

We received proceeds from the sale of our interests of approximately $4.5 million and realized the gain of approximately $1.1 million. The eight communities have approximately 600 units of assisted living and memory care units and are strategic located in the mid-west portion of the country, were nearly 50% of our operations are located.

These communities ended the first quarter with the combined occupancy of approximately 91% and are expected to generate over $22.8 million of annual revenue, $9.7 million EBITDAR and $1.5 million of annual cash flow net of rent expense.

We are 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 balance sheet, our strong institutional relationships and our proven track-record.

I am optimistic that we will announce additional acquisitions this year that will grow our cash flow and 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 am excited about our company’s prospects over the next few years as we benefit from need driven demand growth and virtually no new supply.

I am also excited about the nominees for election to our Board of Directors, as discussed in our recently filed proxy we have two new Director Nominees up for election at our Annual Stockholders meeting and there should be great additions to our Board.

Ron Malone, Chairman of the Board of Directors of Gentiva Health Services brings a wealth of public company executive experience and extensive single-level operation experience particularly in healthcare and wellness services.

Our other new nominee is Philip Brooks, Senior Vice President, Seniors Housing and Healthcare Finance Group for Berkadia Commercial Mortgage. Philip has extensive experience in the senior living industry and in senior housing financing. Our third nominee Jim Moore currently serves as Director and is President of more diversified services of senior living consulting firm.

Jim has over 40 years industry experience, has conducted over 1800 senior living consulting engagements had has offered numerous senior living and healthcare industry articles and books. I want to thank two of our Directors Dr. Victor Nee and Harvey Hanerfeld will not be continuing in office for their valuable and dedicated service to our Board.

They have been instrumental in assisting management lead our company and I look forward to continuing our friendships.

I would now like to introduce Ralph Beattie our Chief Financial Officer to review the company’s financial results for the first quarter of 2010.

Ralph Beattie

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 up on highlights of our financial results for the first quarter of 2010. If you need a copy of our press release that has been posted on our corporate website at www.capitalsenior.com, the company reported revenues of $47.9 million for the first quarter of 2010 compared to revenues of $48 million for the first quarter of 2009.

The number of communities we consolidated on our income statement was 50 in both periods. Financial occupancy at the consolidated portfolio averaged 83.4% for the quarter with an average monthly rent of $2552 per occupied unit.

Excluding three communities with units being converted to higher levels of care, financial occupancy at the remaining 47 consolidated communities averaged 84.6%. Revenues under management were $56.4 million in the first quarter of 2010 compared to $54.8 million in the first quarter of 2009.

There were 66 communities under management in the first quarter of 2010 compared to 64 in the first quarter of 2009 as two joint venture developments opened last year. At these communities under management excluding three communities undergoing conversions, same store revenue increased 2.3% versus the first quarter of 2009 as a result of a 2.6% increase in average monthly rent.

Same community expenses increased 1.9% and net income increased 2.8% from the comparable period of the year. As a percent of resident and healthcare revenue operating expenses were 61.4% in the first quarter compared to 61% in the first quarter of the prior year.

General and administrative expenses of $3 million were approximately equal to the first quarter of the prior year. As a percentage of revenue under management G&A expenses were 5.4% in the first quarter of 2010. Facility lease expenses were $6.4 million in the first quarter of 2010 slightly higher than the first quarter of 2009 primarily reflecting increases in contingent rent on 25 leased communities.

Depreciation and amortization expense increased $0.2 million in the first quarter of the prior year, as a result of capital improvement as the company’s owned and leased facility.

Adjusted EDITDAR for the first quarter of 2010 was approximately $14.3 million and adjusted EDITDAR margin was 29.9% for the period.

Interest expense was $2.9 million in the first quarter of 2008 slightly lower than the first quarter of 2009, reflecting lower debt outstanding due to principal amortization. The company amortized $3.7 million of debt over the last 12 months. The company reported income before taxes of approximately $1.3 million in the first quarter of 2010 and net income of $0.7 million or $0.03 per diluted share. Adjusted CFFO was $3.9 million or $0.15 per diluted share in the first quarter of 2010, approximately equal to the first quarter of 2009.

The company ended the quarter with $35.8 million to cash and cash equivalent including restricted cash and cash on the balance sheet increased $4.7 million during the quarter. As of March 31, 2010 the company finances 25 owned communities with mortgage debt totaling $181.3 million at fixed interest rates averaging 6.1%.

Since, September of 2009 we have been negotiating with servicer of a securitized promissory note

this was obligation of one of our subsidiaries and non-recourse to the company. On April, 15, we paid of the $4.6 million principle balance was $3.7 million of cash and lead to the servicer retaining approximately $0.3 million of escrows. We will record a net gain of approximately $0.6 million in the second quarter.

Capital expenditures for the quarter were approximately $1.6 million representing $0.6 million of investment spending and $1 million of recurring CapEx.

We would now like to open the call to questions.

Question-and-Answer Session

Operator

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

Dan Bernstein - Stifel Nicolaus

It's actually Dan Bernstein filling in for Jerry. I just wanted to get your thoughts on the trade-off between owning properties versus leasing properties, especially in context to the leases with HCN and whether you thought about buying those properties on balance sheet or not, given the high occupancy and so forth.

Larry Cohen

We like to take a very balance approach to our balance sheet even with now these eight properties moving over to at least, we have almost a 50-50 split between owned in these communities. As you pointed out in your note this morning we ended the quarter with our $35 million of cash. So, we are looking to drive properties into the company. Looking at the lease with healthcare REIT, we think it’s a very favorable transactions to the company with strong cash flow, attractive terms that we are very comfortable with. Most importantly we look at EBITDAR coverage of 1.4 times. So, when you look at the coverage that we can obtain with a lease to allow us to increase our cash flow, increase our revenues by over $20 million, EBITDAR by almost $10 million. We had have type of coverage, we think that’s a very efficient use of capital in order for us to grow the company.

Moving forward and I think we will continue to look at joint ventures. It's been very profitable, again in this transaction we took two joint ventures owing the eight properties, we sold the interests we had earned management fees in those ventures as well as cash flow returns as participants in the venture and then on the transaction we had about $1.1 million gain.

We have picked up about $4.5 million of cash and now can contribute, continue to operate this. Going forward I think we continue to look at both owning and leasing, we also want to make sure we marshal assets accordingly, because we do have $35 million of cash, that $10 million of that is required for ongoing needs within the company and our properties.

Dan Bernstein - Stifel Nicolaus

Okay, I just want make sure I understand what you were saying about the April move-ins. Did you say that it was implying about a 70 basis point increase in occupancy? If I heard you right?

Larry Cohen

Yes that’s a least two number based on deposits in hand less move-out notices as of last Friday. Of course to the extent that there are move-outs by death or unanticipated causes, that may change that number. But based on what we have on hand as of last Friday that suggest when those residents move-in there would be a 70 basis improvement in occupancy.

Dan Bernstein - Stifel Nicolaus

Is any of that coming from higher home sales, say from the tax credit? Or is it just a -- you don't have any entrance fees, but do you think that's influencing the higher move-ins? Or is it just people are just feeling better about the economy.

Larry Cohen

I think confident levels are higher, clearly we saw some of a spurt last year with the credit, I am not sure that the tax credit had that much of an effect this year on move-ins. Really across the country we saw a marked improvement in March and April. I think we had one of the worst winters we had ever experienced, ten inches of snow in Dallas, storms throughout the country. It’s really a cold weather, a lot of snow and ice, so that definitely impacted January and February. So there might also be just on pent up demand where people who could move in January and February are moving in March and April, but we are now reaching the summer months, spring and summer months which are typically the best for our business.

So, hopefully that will continue but I am also encouraged that we have seen an improvement in California which we hadn’t seen in years, so that might be some stability in the housing market as well some more confidence. Florida actually has had a pretty good first quarter. So, I think that we are encouraged by what we are seeing and hopefully it’s a indication that confidence levels have improved and we can continue to see these trends continue throughout the year and we are optimistic that come 2011, 2012 we should really start to see some marked improvement just because of the growth in our demand and we are seeing virtually no new supply coming out of the ground.

Dan Bernstein - Stifel Nicolaus

Do you expect to be able to push rates higher as occupancy improves? Or is it still too early.

Larry Cohen

We are supposed to do. One thing you can see even in your first quarter numbers, we really feel strongly about maintaining the integrity of our lease structure. We have avoided deep discounts, we necessarily we may have some specials to be able to move some units particularly those that are in the hardest to move locations in the building for example.

We are forecasting next year internally, rent growth of about 4%, so we do think that we will start to see rent increases but clearly with hopefully growth in demand, improved occupancies and no new supply, you would think it would give some pricing power.

Coupled the fact that we do have an affordable market that we serve and units are affordable. So, hopefully we won’t have some of the potential pushback that you may see in higher priced units just because of an affordability factor as we look into the future.

Dan Bernstein - Stifel Nicolaus

Okay and then just on the weather, were there any usual expenses in the quarter that -- because of the weather that might go away in the second quarter, just wanted to…

Larry Cohen

Yeah we had, but utilities raffled a bit in the first quarter but nothing marked, I mean you see the 1.9% increase in same store expenses. Some of that quite frankly was the good news is that we are - commissions on move-ins which is always a good thing to see. And then the other which is typical increases in cost, labor, and other type of costs that we experience. But there was nothing unusual including some of the weather related nothing significant that we incurred that you would adjust the next quarters to reflect any unusual expenses in the quarter.

Dan Bernstein - Stifel Nicolaus

I thought you would tell me about high snow removal costs from Texas.

Larry Cohen

Good thing that Texas melts itself.

Dan Bernstein - Stifel Nicolaus

I wish you could say the same for Baltimore this year.

Larry Cohen

By the way I was in Baltimore, Dan, when you had your snow in the Baltimore/Washington area, and it was amazing.

Dan Bernstein - Stifel Nicolaus

We'd be happy to give you the 70 inches of snow we had.

Larry Cohen

Luckily we had no buildings there.

Dan Bernstein - Stifel Nicolaus

That's all for me, thank you.

Operator

(Operator Instructions). At this time there are no questions in queue. I will turn call back to Mr. Larry Cohen.

Larry Cohen

Well thanks everybody for your participation today and we look forward to speaking to you throughout the quarter. If you have any other questions please feel free to give Ralph or myself a call. And enjoy your day. Thank you very much.

Operator

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

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