Emeritus Corporation Inc. Q1 2008 Earnings Call Transcript

Emeritus Corporation (ESC)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Brad Cohen - Investor Relation

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

Raymond R. Brandstrom - Co-Founder

Granger Cobb - Co-Chief Executive Officer and President

Analysts

Donald Hooker - UBS

Dan Bernstein - Stifel Nicolaus

Frank Morgan - Jefferies & Company

Stefan Mykytiuk - Pike Place Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Emeritus Corporation First Quarter 2008 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 for a question. I would like to remind everyone that today's conference is being recorded.

Now, I would like to turn the conference over to Mr. Brad Cohen of ICR. Please go ahead, sir.

Brad Cohen – Investor Relation

Thank you very much, good afternoon. And thank you for joining us for the Emeritus Corporation first quarter 2008 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, 2007 filed with the SEC.

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

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

Thank you. This first quarter represents months 5, 6 and 7 since the acquisition of Summerville. This was a big event in Emeritus history, increasing our capacity by almost 50%. It also brought about, and with it, almost a complete change in the operating management team. The amazing thing is that even during this transition period almost all of the key elements have moved forward positively. Granger and his people are a big asset to our operations. In the area where I principally focus, the balance sheet and growth, over the last year and in the first quarter, we continued to increase the percent of our fee-owned properties.

In addition, we've been improving an already solid cash position. Even in this difficult market, we continue to be able to finance and refinance our properties. In the deal flow acquisition area, it's pretty much quiet.

And now I would like to turn it over to Granger.

Granger Cobb - Co-Chief Executive Officer and President

Actually, I'm going to turn it over to Ray.

Ray Brandstrom – Co-Founder

Thank you, both of you. Anyway, good afternoon, everyone. I'd like to begin by discussing first quarter results, give an update on our expansion development plans, an update on our balance sheet, and finish by providing some additional context to our 2008 financial guidance. Please note that the merger of Summerville closed on September 1, 2007 impacting year over year analysis for the first quarter. Therefore, my comments will focus on sequential quarters, first quarter 2008 versus fourth quarter 2007

Additionally, we moved four communities comprising 355 units to discontinued operations which includes removing revenue, operating expense, and property costs in the consolidated income statement, and reporting these communities as one line on the face of the income statement. These communities have also been removed from reported occupancy statistics.

Now, let me highlight a few key topics. Total revenue for the first quarter 0f 2008 was reported that 186.5 million excluding discontinued operations and including new communities added in late fourth quarter 2007 and first quarter 2008. Excluding discontinued operations from fourth quarter 2007 total revenue, on a sequential basis total revenue increased $2.2 million, 1.1 million of which is related to newly added communities, and the balance is primarily from rate growth period over period. We ended the quarter at 87.9% occupancy, and the average occupancy for the quarter was 87.2. After, adjusting for discontinued operations, new developments, additions, and acquisitions, occupancy, on a sequential basis, is flat. Community operating expense for the first quarter of 2008 was reported at $121.6 million. Excluding discontinued operations and including new communities added in the late fourth quarter 2007 and first quarter 2008. Excluding discontinued operations and year-end adjustments to expense in fourth quarter 2007, community operating expense on a sequential basis increased $3.5 million.

Newly added communities contributed $1 million to the increase in expense, and seasonal utility increases and payroll tax and benefit expenses, typical in the first quarter, accounted for the balance of $2.5 million, with all other expense categories remaining flat. General and administrative expenses were $14.6 million in both the first quarter of 2008 and the fourth quarter of 2007. Included in these totals were non-cash stock compensation expense of $1.4 million in the first quarter of 2008, and $1.3 million in the fourth quarter of 2007.

On an adjusted basis, general and administrative expense, as a percent of total operating revenue, which includes revenue from managed communities, on a comparative basis is flat at 6.7% for both quarters. Property-related expenses included interest on a cash basis for the quarter of $11.9 million and rent on a cash basis of $31.6 million. We filed a supplement to our press release today that provides a schedule of cash rent, interest, and depreciation for the first and second quarters of 208. I'll discuss this further when we get to the guidance section of the call. The Company's first quarter 2008 adjusted EBITDA decreased 4.4%, or $1.3 million to 29.3 million under sequential quarter basis. As we previously discussed, we expect to open three new developments with a total of 157 units in 2008.

The first development opened during the first quarter, with the other two opening in the second half of the year. We also anticipate three expansions comprising 144 units in 2008. One is open and the other two will open in the second half of the year. We'll continue to evaluate development and expansion opportunities as part of our ongoing business plan. Routine capital expenditures amounted to $5 million in the first quarter. About $4.1 million represents routine maintenance and refurbishment at our communities and about $900,000 on our IT infrastructure.

As I mentioned in my opening comments, we moved four communities to discontinued operations. We concluded that over time the resource commitment for these communities was disproportionate to the expected return and we should focus our efforts elsewhere within our portfolio. The cash rent and interest schedule provided with our press release excludes property costs for these communities. Of the four communities, we expect three to close in the second quarter.

During the second quarter, we closed on the real estate acquisition of 24 of our existing leased communities, which increases our own properties to 51%. Increasing the number of Emeritus' owned assets is an important part of our long-term strategy.

By owning assets, we'll be able to capture and retain value. Thus, over time we'll continue to selectively pursue acquisition opportunities that make good business sense. Also during the second quarter, we completed two refinancing transactions on a total of 29 communities. As a result of these transactions, the Company will incur a one-time write-off of approximately $ million related to early termination costs and unamortized loan fees on the previous debt. The Company received approximately $25.6 million in cash from these transactions. Management believes that retaining the Company's capital flexibility at this point in the business cycle is quite prudent.

Turning to our balance sheet, as of March 31, 2008 the Company had approximately $90 million of cash. On March 31st, total assets were $1.9 billion, including $1.4 billion of investment in properties. Total debt was $1.3 billion, with $700 million related to mortgage debt; $520 million related to capital lease obligations; and $10 million convertible debentures, along with stockholder equity of $434.5 million.

Turning to guidance for 2008, we are adjusting our revenue guidance for 2008 to $760 million to $775 million, from $780 million to $795 million, to take into consideration the communities classified discontinued operations and a later ramp-up in occupancy and rate than originally projected. About half of this change relates to reduction of overall revenue due to the discontinued operations and about half relates to delayed rate and occupancy development. We want to reiterate our comfort with the long-term goal of 93% occupancy and 15% increase in average rate per unit over the next two to three years.

Turning to cash rent and cash interest for a moment. Cash rent in the first quarter of 2008 was 31.6 million. For the second quarter, after the announced NHP transaction, we expect cash rent will range from 27.2 million to 27.6 million. Cash interest for the first quarter of 2008 was 11.9 million. For the second quarter, we expect cash interest, after the announced NHP transaction and our refinancings, will range from 16.6 million to 17 million.

We're updating our guidance for maintenance CapEx to $650 to$700 per unit from per unit from 450 to 475 per unit. In our first quarter, we experienced more carry-over payment from projects started in #2007. And after meeting with our operations over the last several weeks, we have reevaluated our CapEx goals for the year.

With those comments I will turn the call over to Granger Cobb our CO-CEO and President. Granger?

Granger Cobb – Co-Chief Executive Officer and President

Thank you, Ray, and good afternoon everyone from sunny Seattle. Our results for the first quarter of 2008 were solid. We showed discipline managing expenses while we continued to put our revenue-generating infrastructure in place. The ongoing progress we continue to make is not yet reflected in the numbers and may come slightly slower than we had originally anticipated.

The critical takeaway, however, in the first quarter is that we are functioning as one integrated company with consistent operating systems and practices. Also, our business fundamentals, including move-in activity, have held constant despite a weak economy and housing market. Throughout the organization, we are very focused on making the right decisions to positively impact long-term results. The opportunity in front of us in the coming years to maximize the potential of our existing portfolio remains very powerful and justifies the care and attention that is being given to making sure we have the right people with the right tools and support in place to ensure a sustainable operating platform.

As we indicated previously, we deployed an automated lead management and referral development software system to allow us to better manage the front door sales process. And we have deployed an automated resident assessment and care planning software system that will allow us to better manage the back door, as well as capture appropriate charges for additional services that are being delivered as residents' care needs change.

Over the last three weeks, Ray and I, together with Justin Hutchens, our Chief Operating Officer; Martin Roffe, our Senior VP of Financial Planning; and John Cincotta, our Senior VP of Sales and Marketing, traveled around the country meeting with 14 of our Company's 28 regional teams. We reviewed Q1 operating performance on a community-by-community basis and discussed strategy and execution on a go-forward basis.

I'm convinced, having had the opportunity to interface directly and in detail with our regional staff that the right activities are happening relative to the community's specific plans. We know these systems and this structure will result in a desired outcomes and we have always said that the hardest part to predict is the exact timing. While we recognize that there appears to be an industry-wide softness in occupancy, we have not been able to establish a link between the economy or housing markets and our inquiry and move-in activity. We continue to believe that we are less impacted by these factors than some of our peers due to the need-driven characteristics of the Emeritus business, with our higher concentration of assisted living and memory care.

As we head into the summer months, we anticipate that our move-in average will begin to accelerate. In addition, we'll begin to see the benefits from the improved level of care revenue captured in our rate per unit. We have every confidence that the pieces are in place to accomplish the long-term goals that we've laid out.

And with that, I'd like to turn the call back to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll have our first question from Donald Hooker with UBS.

Donald Hooker

Good afternoon everyone thanks for taking my question in terms of the weaker -- I mean, I'm still a little confused by the message you're giving out in terms of the occupancy and rents being a little bit below where you expected. If not from the economy, was it just execution or is it -- can you elaborate a little bit more on that?

Granger Cobb

Yeah I think if basically in terms of our move- in average, it's held constant over the last several months. So we haven't seen any fall off with the economy or housing market or anything else in terms of inquiries and move-ins. Just in terms of a little color, in fact, in March, had we not seen a huge spike in move-outs, we actually would have netted up for the quarter about a 120 units. So it's -- we're seeing the activity there on the move-in front. We think that as that continues and the move-outs we experienced in March are back to a more normalized level, we'll start to see the growth.

Donald Hooker

Is this like a flu effect or seasonal?

Granger Cobb

I think it was definitely flu effect. Primarily, the category of move-outs due to deaths or moving to a higher level of care were the ones that spiked.

Donald Hooker

Okay.

Granger Cobb

So we think it was definitely seasonal related.

Donald Hooker

Okay, I appreciate that. And in terms of -- I guess this latest run of acquisitions I guess closed -- am I correct that the 23, 24 properties closed right after the first quarter?

Ray Brandstrom

That’s correct.

Donald Hooker

What’s the bed count I mean where are you in terms of bed count? I guess you're adding sort of…

Ray Brandstrom

No those are properties that we were leasing, so they're already in the bed count.

Donald Hooker

Okay I am sorry thanks for clarifying that. And the new Blackstone properties you mentioned, can you elaborate on that a bit that you alluded to in the press release?

Ray Brandstrom

Yeah it came up last year. I mean in the first quarter of last year

Donald Hooker

Okay. I just wanted to make sure I understood that. Okay, thanks for taking my call.

Ray Brandstrom

Thanks Don.

Operator

We will have our next question from Jerry Doctrow, Stifel Nicolaus.

Dan Bernstein

Well this is actually Dan Bernstein filling in for Jerry. Good afternoon. Have you seen any economic impact at all? A lot of your -- the other operators had indicated some people moving back home with family. Have you seen any of that on the move-outs at all?

Granger Cobb

You know we as I mentioned – we just did a tour of half of the Company and I mean that was one of the things we were actively trying to explore with the regional teams and the executive directors that we met with and we're not hearing that. So they were -- what did come up was the flu effect and the number of move-outs that we had due to death and how that jumped. But we really aren't hear -- we didn't hear anything about people moving back home or any kind of broader economic effects. And we -- part of -- we were soliciting anything and everything that they're viewing as a trend or a barrier and we just didn't hear it.

Dan Bernstein

And if you could, what was the revenue number on the discontinued operations?

Ray Brandstrom

It was about $10 million annually.

Granger Cobb

2.2 for Q1.

Ray Brandstrom

Q1 was 2.2.

Dan Bernstein

Okay. And I think -- just thinking strategically, is there a preference as to whether on the acquisition side to look at real property or buy out leases or perhaps even consider something like a stock buyback? Is that -- is any of that on the table, any at all, or is there a preference there?

Granger Cobb

Well I think we are very opportunistic with respect to any acquisition opportunities, and we're willing to entertain lease or purchase if we do. At the end of the day, we want to own our properties. So if we do lease arrangements, we typically want to try to negotiate a purchase option down the road. But we're not -- we think there's enough opportunity on the growth front out there and that that represents a greater potential for building value the Company than buying back stock at this point.

Dan Bernstein

Are there any additional expenses to roll out in the IT systems and basically finish the integration between Summerville and Emeritus?

Granger Cobb

In terms of finishing the integration, there really are not. We've been able to deploy the systems and training and – within the G&A numbers that we've been able to hold constant for fourth quarter and first quarter. With respect to IT, we still -- we're deploying Chronos time clocks to all of the Emeritus legacy communities and we're -- we have a few other just items that are not necessarily related to the Summerville merger that we have planned for the year. But nothing significant. I think it's all CapEx -- it would all be capitalized.

Dan Bernstein

Okay, and just on the increase in the CapEx was there any - is that related to just looking at your competition, realizing you need to spruce up properties some more or is that just a general valuation made that you need to go ahead and increase the CapEx number?

Granger Cobb

Yes.

Dan Bernstein

I just want to get more color on what that relates to.

Ray Brandstrom

Yes, Dan, this is Ray. There's only two components to that. And the first round of guidance that we gave, it came in just round numbers about $10 million. As we were going through the first quarter, we realized that with the CapEx that we had deployed after the offering last summer, we had more carryover of payment of that CapEx into this year than we had originally thought by maybe 1.5 million or as highest 2 million but some -- a little more carryover of payment than was anticipated. And then after meeting with the operating people the past few weeks, we got the sense that we feel we can accomplish more if we spent a little bit more. So we decided to up the guidance and look at what we can do to kind of push things along.

Dan Bernstein

Okay, that's all the questions I have. Thank you.

Ray Brandstrom

Thanks Dan.

Operator

We'll go next to Frank Morgan, Jefferies & Company.

Frank Morgan

Good afternoon, first question relates to the numbers you gave out with regard to occupancies year over year and sequentially. I'm assuming that the discontinued ops were stripped out of all the periods there?

Ray Brandstrom

That is correct.

Frank Morgan

Okay. Could you give us a little bit more color on the activity? I know you said March was a big move-out month because of flu. Could you kind of give us some flavor about each of the months of the quarter and maybe where you are through April and maybe even where you are as of today in terms of occupancies?

Granger Cobb

Frank, I don't like to really break it down month by month. We typically don't report that way just because there's -- it moves around a little bit over the course of a quarter. I think we can develop some better trends. I will say that the move-out phenomenon that we experienced in March spilled over a little bit into the first week of April, but seems to have normalized since then. And, as I said, our move-in activity so far has remained fairly constant we’re anticipating that that's going to tick up a little bit in the summer months and into the second half of the year.

Frank Morgan

Okay. And with regards to the change in the guidance on the top line, how should we be thinking about how this translates into EBITDAR and EBITDA? Is there anything that you can do on the cost side to offset this? Or how should we be thinking about the rest of the -- further down the income statement? Thanks.

Granger Cobb

I think on -- in terms of -- using first quarter as kind of a proxy on the expense side is probably a pretty good proxy with the exception that I think we'll see beginning in the second quarter utilities pull back down to a more normalized range. First quarter, we had a spike in utilities and we had kind of the effect of the reset of employee benefits related to payroll taxes.

Frank Morgan

Is there any other refinancing activities contemplated in the year that's further out than, say, just the next -- in second quarter?

Ray Brandstrom

No refinancing is contemplated at this point.

Frank Morgan

Okay, thanks. I'll hop back in the queue.

Ray Brandstrom

Thanks Frank.

Operator

(Operator Instructions). Follow up from Donald Hooker, UBS.

Donald Hooker

Granger, I think you pretty much answered my questions in terms of -- I think you mentioned there was a spike in utilities. It looks like your community expenses were up on a same-store basis, if I'm calculating this right, were up pretty hefty. And I guess that's the utilities expense you mentioned that spiked up?

Ray Brandstrom

There was utility expense. And then also in the first quarter, as employer taxes reset, we have a little higher expense on the employer tax piece. That's a pretty typical trend.

Donald Hooker

Yes, thank you.

Ray Brandstrom

Yes, thanks, Don.

Operator

We'll go next to Stefan Mykytiuk, Pike Place Capital.

Stefan Mykytiuk

Yes, hi, good afternoon. Just a couple of questions. I kind of missed, Ray, you were going through them pretty quickly, just could you repeat the occupancy statistics for what they were kind of fourth quarter adjusted for the discontinued ops? And then I think you gave a quarter-end number? And then I think you gave a quarter-end number? And then, obviously, we see the Q1 in the press release.

Ray Brandstrom

Yes. Rate of occupancy, I said at the end of the quarter 87.9% and the average occupancy for the quarter was 87.2%. And after adjusting for discontinued operations, developments, additions, and acquisitions, sequentially, occupancy is flat.

Stefan Mykytiuk

Okay. Ray.

Ray Brandstrom

If you empty out all of the background noise, we're flat.

Stefan Mykytiuk

Okay, okay, great. And, then, can I-- Granger, you were saying, I guess in move-ins have been -- move-ins you said were kind of flat through -- month to month or kind of the trend has been flat for the whole year; is that what you're saying?

Granger Cobb

Yes. It's been -- mean, it's moved around a little bit month to month, but essentially the move-in activity for fourth quarter and first quarter was flat. And, then, we saw -- and we began to gain a little ground in the first couple of months and then we gave it all back in March.

Stefan Mykytiuk

But that was -- you gave it back in March in terms of -- on a net basis.

Granger Cobb

As update.

Stefan Mykytiuk

Right. I'm talking about gross. I mean, your move-in -- I guess what I'm getting at, as the Lean sharing or Lead management software that you put into place and all those processes -- yes, when do you think you start to see progress in terms of just kind of gross move-ins?

Granger Cobb

Well, we haven't seen it yet. And I think that given what I've heard from some of the other companies in the industry that some of their move-in activities has fallen off a little bit, it's hard -- I guess it's -- I don't know if we're flat because we're starting to get some traction on the system and otherwise we would have been down, or if we just haven't seen the benefit of it yet. But the systems are being utilized. I mean, we track the utilization of the systems in all of the communities and there's a big feedback loop relative to that. And we're seeing the utilization increase every month and getting much better data into the database and the follow-up activity has been much better. So I'm very confident that we're going to start to see that pay off in the coming months. I don't know exactly when we're going to see the jump, but I think it will be coming over the course of the next couple of quarters.

Stefan Mykytiuk

Okay. And so the -- kind of the portion of the lower revenue outlook that's related to the ongoing operations, is that just flowing through the impact of these higher move-outs in March and April?

Granger Cobb

I think it's just -- it's basically an effect of the timing of both the increase -- seeing a net increase in occupancy and also an increase in rates relative to our level-of- care initiatives and the best-in-care software that we've deployed. So we were initially hoping that the deployment of both of those and all the training around that and the management around it would result in some traction starting in first quarter, and we really didn't see it. And we think it's just been, from a timing perspective, it's just going to take a little longer for that to take hold, to get everyone comfortable with the systems and seeing the outcome.

Stefan Mykytiuk

Okay, thanks.

Operator

(Operator Instructions) And at this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Granger Cobb for additional or closing remarks.

Granger Cobb

All right, well, thank you very much, everybody. We appreciate you taking the time to listen in and we'll be here if anyone has any follow-up questions or anything. So feel free to give us a call, and thanks again. Have a good day.

Operator

That concludes today's conference. You may disconnect at this time. We do appreciate your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you.