Emeritus Corporation Q4 2007 Earnings Call Transcript

Mar.17.08 | About: Emeritus Corporation (ESC)

Emeritus Corporation (NYSE:ESC)

Q4 2007 Earnings Call

March 17, 2008 5:00 pm ET

Executives

Brad Cohen -

Daniel R. Baty - Co-Founder, Chairman and Co-Chief Executive Officer

Raymond R. Brandstrom – Co-Founder

Granger Cobb - Co-Chief Executive Officer, President

Analysts

Donald Hooker – UBS

Jerry Doctrow – Stifel Nicolaus

Stefan Mykytiuk – Pike Place Capital

Operator

Good afternoon ladies and gentlemen and welcome to the Emeritus Corporation fourth quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up the questions.

I would like to also remind everyone that this conference is being recorded. And at this time, I would like to turn the conference over to Mr. Brad Cohen. Please go ahead sir.

Brad Cohen

Thank you very much, good afternoon. And thank you for joining us for the Emeritus Corporation 2007 fourth quarter and year end conference call. On the call with me today is Dan Baty, Chairman and Co-CEO of Emeritus, Granger Cobb, President and Co-CEO of Emeritus and Chief Financial Officer, Ray Brandstrom.

Before we begin today, I would like to remind everyone on the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those suggested in any forward-looking statements, we will refer you to Emeritus’ Form 10-K for fiscal year ended December 31st, 2006 and 2007 filed with the SEC. The company just filed its Form 10-K for the year ended December 31st, 2007.

With that, it is my pleasure to turn the call over to Dan Baty. Dan, please go ahead.

Daniel R. Baty

Thank you, Brad Cohen. Emeritus is in the best position financially and operationally, and with this opportunity for growth than it has been since its founding 15 years ago. Currently, the company operates 287 facilities with 24,000 units in 37 states. The macro conditions continue to be favorable. Growing demand for assisted living and dementia care based on the increasing ageing population, which is the wealthiest segment of American population continues. Our residents are need driven so economic swings have little impact on their decisions. Events of 2007, provides the basis for our strong position. Highlights of these events are the merger acquisition with Summerville, which provided us with increased capacity of 81 facilities and more importantly an opportunity to totally revamp our operational management, which at this point in time has been fully integrated.

In addition, we have the fortuitous timing of our 320 million equity offering at the end of June. In addition, during ’07 we sharply increased to our own properties from 6% to 40% of total properties and with the NHP repurchase and others in the pipeline, we are confident of being over 60% owned by the end of 2008. Over all, we basically are just where, we thought we had been and our numbers are tracking our estimates at the time we had the offerings. At this time, I would like to introduce Ray Brandstrom.

Raymond R. Brandstrom

Thank you, Dan. Good afternoon everyone. I would like to begin by recapping the fourth quarter results, give an update on our balance sheet, an update on our expansion and development plans and finished by providing some initial 2008 financial guidance. As a reminder the Fourth Quarter ended December 31, 2007, was the first four quarter of operations for the combined companies given at the Summerville transaction closed on September 1st, 2007.

The press release to be issued today takes you through the quarterly and annual comparisons. So let me highlight a few key topics. Total revenue for the fourth quarter ended December 31, 2007 was $186.4 million up $48.4 million or 35% over the third quarter. This significant increase is primarily attributable to the Summerville acquisition. Average monthly revenue per units for the quarter was $3,289 up from September results. We ended the year at 88% occupancy though due to the timing of moving ins and move out. The average occupancy for the quarter was 87.4. Clearly operating expenses for the quarter were a $116.7 million with a reported community operating margin of 37%, however, in the quarter we had certain year-end adjustments of accrued expenses, some portion of which related to prior quarters or prior years. After adjusting for the portion of these true ups related to prior quarters or prior year’s community operating expenses would had been 120.7 million with an adjusted margin of 34.9%, which is flat compared to third quarter 2007.

General and administrative expenses reviewed at the percent of total operating revenue, which includes revenue from managed communities. For the quarter, general and administrative expense was 14.6 million or 7% of total operating revenue.

However, our general administrative expense in the fourth quarter included some non-reoccurring cost of approximately $750,000 primarily related to the wind down of Summerville’s corporate office, which results in the general and administrative expense as adjusted for the quarter of 6.7% of total operated revenue. Property related expense increased by 38.6 million, primarily as a result of the acquisition of Summerville and other communities acquired in 2007. On a cash basis, interest for the quarter was 12.3 million, while on a cash basis rent was 39.2 million. As supplemental information to our press release, we filed today, we provided a schedule of cash rents and interest for the first quarter of 2008 and a – version which provides changes to cash rent and interest, after the previously announced NHP transaction closes, which I'll recap when we get to the guidance segment of the call.

The company’s fourth quarter 2007 adjusted EBIDTA improved 10.6 million to 30.6 million, a 53% increase over the prior year period. The 10.6 million improvement is reflective of better operating performance of legacy Emeritus portfolio for the fourth quarter, plus the addition of the Summerville communities for the fourth quarter and its entirety. Now, let me discuss our previously announced acquisition of 24 communities. On February 6 of 2008, we announced the buy in of 24 communities cost comprising 1,672 units, the company are currently leases from National Health Properties under long term-leases. This transaction is expected to close by the end of the second quarter, the transaction is accretive from a cash flow perspective. We will retire long-term leases with annual cash lease payments in the first quarter of 2008, of 17.6 million.

We will eliminate capital lease and financing obligations of $170.9 million. We will finance a transaction with approximately $247 million of long-term debt at around 6.1% and $30 million mortgage at seven and a quarter. We finished the year with 41% of our communities owned. The announced transaction moves us up to 51% owned. Increasing Emeritus percentage of owned assets remains one of our long-term strategic goals and we intend to recapture and retain value by pursuing lease buying activities in the future based upon capital availability and opportunities.

With our press release today, we announce the extension of a $21.4 million note due in March of 2008. The note was originally scheduled for pay offs this month from proceeds of our secondary offering. However, we have agreed to extension for one year with the interest rate being adjusted from 10% to 8.5%. We felt this prudent to maintain capital flexibility at this point in cycle.

During 2008, we have opened three new developments with a total of 157 units, the first to open in the first quarter of 2008, and two by the end of the year. We plan to open three expansions comprising 144 units in 2008, one in the first half of the year and two by the end of 2008. We continue to evaluate development and expansion opportunities as part of our ongoing business plan.

Turning to the balance sheet, we finished the year with 68 million of cash on hand with mortgage debt of $734 million in capital lease obligation as 520.8 million. Shareholder equity stood at 458 million at year-end. We continue to believe that overtime, opportunity will exist for us to pursue external growth strategy. In the mean time, we have meaningful opportunities to drive our organic growth through occupancy and rate increases.

Now, I would like to comment on guidance for 2008, we are providing a range for a few key operating metrics, guidance does not take in to account any additional transactions beyond the previously discussed NHP transaction. All we expect occupancy to fluctuate from quarter-to-quarter we reiterate our goal, our 93% occupancy in two to three years. We reiterate our goal of 15% growth an average rate for unit in the same time period.

For the full year 2008, we are estimating total revenue to range from 780 million to 795 million. This represents an increase of approximately 39 million to 54 million or 5.3 to 7.3% increase over annualized fourth quarter 2007 run rate. We expect to see this revenue growth steered towards the second half of the year. We expect G&A as a percent of total operative revenue to be at our below or adjusted rate of 6.7 as reported in the fourth quarter of 2007.

Turning to cash rent and cash interest for a moment, cash rent in the fourth quarter of 2007 was 31.3 million. For the first quarter of 2008, our range for cash rent is $31.7 to $32.3 million. After the amount NHP transaction closes cash rent on a quarterly basis will decrease approximately $4.4 million per quarter. Cash interest for the quarter … fourth quarter of 2007 was 12.3 million. For the first quarter of 2008, our range for cash interest is 12.5 to 12.8 million. After the announced NHP transaction closes, cash interest on a quarterly basis should increase by approximately $4.3 million per quarter. Regarding taxes in 2008, GAAP expense may move quarter to quarter or year to year based upon the appropriate tax provision, however, underlying that we expect to pay approximately $1 million a year in State Income Taxes and Franchise Taxes. We expect to maintain, maintenance CapEx for 2008 to run about $425 to $475 per unit or between $9.3 and $10.3 million. CapEx for development and expansion initiated in 2008 will be between 6 million and $10 million and will impact growth in 2009. With those comments, I will turn the call over to Granger Cobb, our Co-CEO and President. Granger.

Granger Cobb

Thank you, Ray. Good afternoon everyone. I am very excited to provide this update after the first fourth quarters of combined Emeritus and Summerville operations and to talk about the strategic initiatives we are putting in place. We remain energized about the opportunities to generate meaningful growth by maximizing the potential our existing portfolio over the next two to three years. As Dan indicated the Summerville and Emeritus legacy communities have been fully integrated into a seamless operating structure. As part of this process, we have done a number of things to bring focus and emphasis on improving our occupancy quality and consistency of service, risk management, and revenue capture. On the occupancy front, we have realigned regional management to include a director of sales and marketing for each of our 30 regions. These individuals are responsible for 7 to 12 communities each. We are fully deployed and trained in automated lead management and referral development software to every community to allow for informed and intensive management of the sales processes, and we have rolled out a new sales and incentive program to the community and regional level sales forces.

On the quality service and risk management front, we have similarly realigned regional management to include nurse director of quality service and risk management for each region also overseen 7 to 12 communities. We have fully deployed and trained an automated resident assessment and care planning software to every community. This system helps to insure that we are providing all the services that are residence require or desire as those may change over time and that we are charging appropriately for those services. In the absence of a system such as this, community tend to provide extra services, resident age in place but not necessarily adjust the service charges to offset the additional cost associated with that increased service provision. This system also allows us to better identify at risk residence, so that we can take steps to maximize outcomes plus increasing customer satisfaction and overall length of stay. We have rolled out new incentive compensation programs to operation and quality service regional as well as the community executive directors, resident care directors, and dining service directors.

These programs are based upon a balance score card for each discipline, which measures performance against various quantitative and qualitative metrics that we have identified as indicators of overall community success.

Finally, we have begun rolling out new mostly programmatic protocols for our memory care unit, which we believe will differentiate in this fast growing segment of our industry. I wish to emphasize that while the structure and systems are in place, an initial training has been completed, it will take sometime before our teams are utilizing everything to its full potential. We expect to see some traction beginning in the first half of the year with measurable improvement and operating metrics due to the second half of the year.

All in all, we are optimistic that we will continue to make progress relative to our key initiatives in 2008 and beyond. Despite others concerns about the housing market and its potential impact, we have actually seen our average increase per community and movements per community trend up slightly over the past few months. We are in the need driven indeed often event driven sector of the industry where our average resident requires assistance with at least two activities of daily living, and we do not have any buying communities that require a large of front commitment.

In closing, I am tremendously excited about the opportunities that lay ahead and pleased with our progress so far. We are seeing significant improvement in the utilization of the recently deployed systems by our community management team. Based on past experience, this will translate the tangible movement and occupancy in rate as we go forward. The manpower communities remained balanced and we believe we will continue to grow and we have created an operating platform that will be well positioned in terms of internal and external growth opportunities for the next several years.

Now I would like to turn the call back to the operator and take any questions.

Question-and-Answer Session

Operator

Our first question comes from Donald Hooker with UBS.

Donald Hooker – UBS

Hi, good afternoon everyone. Thanks for taking my question. I guess first question, Grainger you mentioned that the move ins, I think you said trended higher. I mean can you give a kind of maybe some quantification of that if you could in terms of where you think your occupancies are going to be in the first couple of months of ’08, if you can? I know that obviously you mentioned there's some concern about housing, I guess there is seasonality. I was just trying to sort of get a sense as to what we should expect for any kind of seasonal weakness in the first quarter as well?

Granger Cobb

We really haven’t seen an indication of an impact from the housing market or economic slow down for that matter. I think in terms of you know, as I said inquiries and rates and everything has held and have actually in step a little bit but I think they were having just implemented all of these changes in terms of the systems and training and all the additional management, kind of realigning the management and everything in the field, I expect that it’s going to be take a little bit of time for all of that to show tangible results on the occupancy on rate front. We are starting to see all the signs are positive in terms of utilization of the systems and again my experience with Summerville was that, that proceeded and all of the tangible kind of moving of all the operating metrics in the right direction. So I am very pleased at the point we are at but I think that our traction is going to billed as the year progresses and will be stronger in the second half of the year than the first half.

Donald Hooker – UBS

Thanks, but, in just … in terms of trying to set up investor expectations, I mean, is it fair to say that the first couple of months of 2008 tend to be seasonally challenging because of the winter? I mean just regardless of other, you know. of the other factors that seem to be moving to your benefit, I mean, is that a seasonally weak period for you?

Granger Cobb

I think historically, December, January, you know, February has have been … have some seasonality to them. I think what we are experiencing is relatively flat net occupancy. So far this year and again I attribute though as much of that to us not having all of the communities’ level personnel fully comfortable with all the systems at this point and I think that will come over the next couple of months.

Donald Hooker – UBS

Gotcha, and related question, when you look at it you would have and I don’t know what kind of details you are going to provide but if you were a sort of bifurcate between Emeritus legacy and Emeritus properties and the Summerville properties, Johnny (ph), any trend there that are notable, are they sort of moving together or Summerville coming down and Emeritus coming up? I understand that the Emeritus, the legacy property, is where there is a lot of upside in occupancy.

Granger Cobb

Right, and since we fully integrated everything, we don't even track it separately at this point, so I'm not even sure we are looking at the whole portfolio together and we have our goals laid out for where we think we can move that, and so I can’t speak to the difference the Summerville legacy and the Emeritus legacy properties.

Donald Hooker – UBS

Okay, that’s fair. One more question and I will let someone else ask. In terms of Alzheimer’s and dementia expansions, tell me where are you there in terms of number of beds and that it was an interesting area for you that you are growing year end and can you give any kind of senses as to where you are going there over the next, over the next couple of years?

Raymond R. Brandstrom

Yes, Don this is Ray.

Donald Hooker – UBS

Hi, Ray.

Raymond R. Brandstrom

As I mentioned, we have three expansions of totaling143 units in ’08.

Donald Hooker – UBS

Okay.

Raymond R. Brandstrom

And we all, we probably ramp that up a little bit more in ‘09, but I don’t have a lot of color for you on that, each of these … all those small number of units its highly accretive to performance of each individual properties.

Donald Hooker – UBS

Gotcha, gotcha. And then one last, one last question in terms of the M&A, I know you guys had some cash. Do you have any senses to where that’s going in terms where cap rates are, you know, can you characterize that on the M&A market?

Raymond R. Brandstrom

I think we are seeing a lot more flow of deals then we were last year. I think the competition for acquisitions is softening in that there aren’t that many guys that can write the check or get the financing and we seemed to be very strong in our ability to do that, so the volume is picked up and hasn’t resulted in anything specific yet but we are seeing a lot more opportunities.

Donald Hooker – UBS

Okay, I will let others ask. Thank you for taking my questions.

Raymond R. Brandstrom

Thanks, Dan

Operator

And our next question comes from Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

Hello

Granger Cobb

Hi, Jerry.

Jerry Doctrow – Stifel Nicolaus

I just have a handful of things, just, Ray, I guess to start you had indicated sort of I guess sort of a normalized number for the fourth quarter. How is the 3.4 million sort of figure into that? You calculate part of that sort of normal for the quarter or is all about –

Granger Cobb

You are talking about the true ups of the accrued expenses.

Jerry Doctrow – Stifel Nicolaus

Yes. Yeah.

Granger Cobb

The numbers that we quoted are for the amounts that relate to prior periods or prior quarters. Any portion of that that related to the quarter is, was left in the quarter.

Jerry Doctrow – Stifel Nicolaus

So, that 3.4 million is the total amount of true ups for prior quarters?

Granger Cobb

That's correct.

Jerry Doctrow – Stifel Nicolaus

Okay, alright.

Granger Cobb

The intent being to give you, the neutral lived basis for looking forward.

Jerry Doctrow – Stifel Nicolaus

Yeah, okay, I was just trying to be clear, and then just on revenue growth you provided some guidance is that more sort of a timing question. Do you guys normally pass thorough sort of a January one kind of cost of living as many of you were competitors do and can you give us a sense of what was that – what the size of that was?

Raymond R. Brandstrom

Actually we don’t we have in 2008 where we will have actually two different approaches to racing, well, actually three different approaches to raising rates. On the base rate side historically the Americas buildings have been raising rates for everybody in the building at one point during the year, Emeritus building. We are going to get away from that and adopting Summerville’s approach of there is on each resident anniversary day. So, the previous residence in America’s portfolio will continue the anniversary but anyone moving into Emeritus as this past fall will be on the anniversary date like Summerville. So, there is the old Emeritus anniversary, there is the new Summerville approach to anniversary date that are more evenly spread throughout the year and we are also working on increases of levels of care level of care with a vigilant system and those are going to began appearing, all residence have been assessed, we're having discussions with family about increases to leveling charges and I think we are going to see those things on moving out in the second quarter.

Jerry Doctrow – Stifel Nicolaus

Okay. Okay, so, if I So if I sort of apply your revenue increases it sounds like maybe you got a little bit got a little bit of bump in the second quarter but otherwise it would otherwise it would be sort of spread over the year. Is that sort of the right way to think about it?

Raymond R. Brandstrom

That’s why I’m s the way I'm thinking about it, correct.

Jerry Doctrow – Stifel Nicolaus

Okay. Okay, let’s see there are couple of this impairment on the properties you just wrote off, any color on what you can give us on what was going on, there, there are old things or something new there?

Raymond R. Brandstrom

These are with a portfolio of our size and the way of acquired portfolios overtime you send that for the few billings you kind of scratch your head and want to do want to spend the time on them or not, and there is – we have three buildings that we think we are getting close to making a decision and we have talked about what the price with probably be if we sold those today versus put timing energy and some overtime. And although they didn’t qualify for the technical impairment the one might when they go through for GAAP accounting, when they came with realization that we are focusing on these three buildings and what the price would be if we pull the trigger ourselves appropriate to make that right down.

Jerry Doctrow – Stifel Nicolaus

Okay. So, those really they are occupied out, you are going to sell them off because those are basically money losers for you?

Raymond R. Brandstrom

Again they don’t qualify for a right down on GAAP accounting, we go to the test, we still think we can recover our investment, but the pricing has worked the time and energy or we better serve by adjusting and focusing on other properties in that those kinds that's the thought process we are going through.

Jerry Doctrow – Stifel Nicolaus

Okay, okay. And then, I guess if you maybe back for Dan. is CSU something to look at? Obviously they obviously they have now started talking about looking at strategic alternatives?

Daniel Baty

I – if they were interested in discussion, I am sure we have the more than half, we have that discussion.

Jerry Doctrow – Stifel Nicolaus

Okay. And the last thing I guess just for Ray, or for Granger, rather, can you give any color on sort of same-store you did in your unless it's in supplements or something I haven't seen yet but just on but just you know occupancy rate increases some of that stuff we are just look at the same store do you have any sense what those numbers look like?

Raymond R. Brandstrom

This is Ray. The K that we filed does have same-store by SEC definition is basically the Emeritus legacy portfolio, the older grouping. Because of the definition of same store none of the Summerville buildings fall into it so, it’s not really big.

Jerry Doctrow – Stifel Nicolaus

It’s not very helpful. Okay. All right, great thanks a lot guys.

Daniel Baty

Thanks.

Raymond Brandstrom

Thank you.

Operator

Our next is from Stefan Mykytiuk with Pike Place Capital.

Stefan Mykytiuk – Pike Place Capital

Yeah. Hi, good afternoon.

Daniel Baty

Hey Stefan, how are you doing?

Stefan Mykytiuk – Pike Place Capital

Okay. I just had one question just following up on the rate – the kind of the rate trends of the year, when the anniversary dates, when you get to anniversary date rate increases do those far more in any part of the year neither which is that part of the back half mode in the rate increase?

Daniel Baty

Yes.

Raymond Brandstrom

Yeah.

Daniel Baty

The legacy Emeritus buildings, they were primarily in the month of August, September, October. So those are going to be stronger in the back half of year. And again as Ray said we expect that maybe a little sooner than that we are going to see the benefit from the level of care charges that we, the process we are going through with identified, what we should be charging based on the new assessments. That has been done with all the residents and now it's just a matter of between now and the next several months moving them into the right cost structure there.

Stefan Mykytiuk – Pike Place Capital

Okay. How are those, just kind of anecdotally however, discussions go in the families and people kind of accepting those that reality or is that, does that become contingence?

Granger Cobb

No, actually what's been interesting, the communities were hesitant as you might imagine that first to start having those conversations. And I think because of the detail that's now we are able to provide with the resident assessment and care planning software of exactly what service we providing and how much time we’d spending, it’s act we are spending, it's actually gone very, very well. And we've had, it's been well-received by residents and families and we really are encouraged by those initial conversations.

Stefan Mykytiuk – Pike Place Capital

Okay. Thank you very much.

Operator

Thanks. That does conclude our Q&A session. I would like to turn the call back to our speakers or additional or closing remarks.

Brad Cohen

Well, we have no further comments from here. We would like to thank everybody for participating today.

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