Assisted Living Concepts Q2 2008 Earnings Call Transcript

| About: Assisted Living (ALC)

Assisted Living Concepts (NYSE:ALC)

Q2 2008 Earnings Call Transcript

August 7, 2008 10:00 am ET

Executives

John Buono – SVP and CFO

Laurie Bebo – President and CEO

Analysts

Frank Morgan – Jefferies & Co.

Kevin Ellich – RBC Capital Markets

Stefan Mykytiuk – Pike Place Capital

Adam Comora – EnTrust Capital

Operator

Ladies and gentlemen, welcome to the quarterly results conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session with the instructions being given at that time. (Operator instructions) As a reminder, this conference is being recorded.

I will now turn the conference over to our host, Mr. John Buono, Chief Financial Officer. Please go ahead, sir.

John Buono

Good morning, ladies and gentlemen. And welcome to the Assisted Living Concepts Investor Conference Call. I'm John Buono, Senior VP and Chief Financial Officer. With me here today are Laurie Bebo, our President and CEO, and Eric Fonstad, our Senior VP and General Counsel.

A replay of this call will be available approximately one hour from its completion until September 6, 2008. You can access the rebroadcast by clicking on the Investor Relations section of our Web site at www.alcco.com or by dialing 800-475-6701 or international 320-365-3844 and using the access code 953000.

Ms. Bebo will comment on our second quarter operations as well as provide information on our expansion program followed by my presentation of the financial results for the quarter. We will then welcome your questions.

But first, please note that this discussion includes forward-looking statements regarding our future operations. Such statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. These risks included those listed in our public filings with the Securities and Exchange Commission. We suggest that you refer to these filings.

In addition, our remarks include certain non-GAAP measures. Please see our earnings release issued earlier this morning for the reconciliations of these measures to the corresponding GAAP measures. These materials can be found through our Investor Relations section of our Web site at www.alcco.com.

Now, I will turn it over to Laurie.

Laurie Bebo

Thank you, John. The second quarter of 2008 produced strong EBITDA margins of approximately 31%. Important contributing factors to the improvement in margins over the prior year, and the sequential quarter periods are the growth in the percentage of our private pay residents and our ability to continue to successfully manage variable expenses consistent with the needs of our population.

The maintenance of our overall rate structure, along with a shift to a higher percentage of private pay residents has allowed us to achieve high margins in light of an overall decline in occupancy. Second quarter 2008 margins compared to the first quarter of 2008 benefited from the decrease in utilities expenses due to seasonality.

Our second quarter of 2008 did not have our company's annual conference expense as did the second quarter of 2007. We expect approximately $500,000 in additional G&A expense in the third quarter of 2008 for this year's conference.

Average private pay occupancy in the second quarter of 2008 increased by 189 units over the second quarter of 2007. The increase includes the addition of 481 occupied private pay units in January 2008 through the acquisition of CaraVita and 85 occupied private pay units in July 2007, through the acquisition of a residence in Dubuque, Iowa.

This increase was partially offset by a reduction of 377 private pay occupied units in our same residence portfolio. Average private pay occupancy in the second quarter of 2008 decreased by 150 units as compared to the first quarter of 2008.

Occupied Medicaid units in the second quarter of 2008 decreased by 681 units as compared to the second quarter of 2007. Average Medicaid occupancy in the second quarter of 2008 decreased by 110 units as compared to the first quarter of 2008. So far in 2008, we have seen our Medicaid census decline at the rate of approximately 30 per month. Our Medicaid population is currently just under 700 units.

Comparing the second quarter of 2008 to the second quarter of 2007, 250 of the reduction in private pay units occurred at 119 residences that either have Medicaid contracts or where Medicaid contracts recently ended. We continue to believe that the implementation of our strategy to reduce the number of units available to Medicaid residents has also resulted in lower private pay occupancy at this time.

We believe that the reduction in private pay occupancy over the last year largely represents private pay residents who intended to roll over from private pay into Medicaid programs.

We believe our decision to no longer allow Medicaid rollovers caused certain private pay residents to move out of our residences and into other residences that continue to accept Medicaid. We refer to this as the private pay impact. Over that same time period, private pay occupancy at 97 residences that do not accept Medicaid, increased by 127 units. We believe the decrease in occupancy at these residences is largely related to the recent economic conditions.

Although an individual decision to enter into or continue to live at an Assisted Living residence is generally needs based. We continue to experience a high level of private pay resident move out. We believe these move outs result largely from the resident inability to obtain necessary funds from the sale of their homes and from an increased ability and willingness of other family members to provide care at home. We refer to this as the economic impact.

Looking at the reduction of 150 occupied private pay units in the second quarter of 2008 as compared to the first quarter of 2008, the private pay impact moderated with 18 of the reduction occurring at residences with Medicaid contracts, or residences where Medicaid contracts recently ended.

Over that same time period, private pay occupancy at residences that do not accept Medicaid decreased by 132 units. We believe this reduction was largely due to the economic impact.

The private pay impact, economic impact, and planned reductions in Medicaid occupancy have resulted in reductions to our overall occupancy. We believe the reduction in Medicaid occupancy and resulting private pay impact are necessary parts of our long-term strategy to improve the overall revenue base.

In the second quarters of 2008 and 2007, the average occupancy rate for all of our residences was 68.8% and 80.9% respectively. The private pay revenues as a percentage of total revenues was 91.4% and 84.4% respectively.

In the second quarter of 2008, we were encouraged by a record number of move-ins. Move-ins in the second quarter of 2008 were 15.5% higher than the first quarter of 2008 and 4.3% higher than the second quarter of 2007. We introduced a new branding strategy and marketing materials in the second quarter of 2007. We believe those efforts, combined with the success of our sales team has helped us achieve increased private pay move-ins.

Overall, average rates in the second quarter of 2008 increased by 9.2% over the 2007 second quarter and were flat from the first quarter of 2008. Private pay rates increased by 5.8% over the 2007 second quarter and were essentially flat from the first quarter of 2008 while average Medicaid rates increased by 6.3% over the 2007 second quarter, and were flat from the first quarter of 2008.

In the second quarter of 2008, we experienced a significantly higher level of move-outs than the second quarter of 2007, and a modest increase in move outs from the first quarter of 2008. Similar to the first quarter of 2008, we believe this was largely driven by the previously described private pay and economic impact. Although too early to call a trend, we are encouraged by the fact that the excess of move-outs over move-ins declined in each month throughout the second quarter of 2008, and private pay occupancy increased in the month of July.

For the remainder of 2008, we will continue to focus operations on increasing our move-ins while also taking steps to reduce our number of move-outs. One strategy to help reduce our move-outs is to bring financial advisors into our communities to educate our residents and their families on financial planning.

Turning to our expansion program, construction continues on the expansion units and our program to add 400 units to existing owned buildings. Weather issues, primarily related to the heavy rains and flooding in the Midwest have resulted in minor timing delays.

We expect to complete license, and begin accepting new residents in approximately 250 units by the end of the fourth quarter of 2008 with a targeted completion of the remaining units by the end of the first quarter of 2009.

To-date, cost estimates have been consistent with our original estimates of $125,000 per unit. Our process of selecting buildings for expansion consisted of identifying what we believe to be our best performing buildings as determined by factors such as occupancy, private pay mix, and demographic trends for the area, and then selecting those properties with suitable land for expansion.

We continue to see additions to our existing owned buildings as producing a strong return on investment for us. As such, in an ongoing fashion, we may identify more buildings to receive additions for potential subsequent projects.

At the same time, we are evaluating residents that are currently in our portfolio that have either characteristic that do not match our long-term goals, but that are located in states with less than ideal operating environments.

Another important investing activity that has taken place since we reported our 2008 first quarter earnings was the repurchase of 2 million shares of our Class A common stock, at an average price of $6.07 per share. This brings the total number of shares repurchased under our repurchase program to 8.2 million shares at an average price of $7.36 per share. $60.4 million have been spent in total on our share repurchase program.

We believe that repurchasing shares at current stock price levels continues to be an attractive investment, since it is roughly equivalent to purchasing our residences at less than $80,000 per unit.

On August 6, 2008 ALC's board of directors authorized an increase in its Class A common stock repurchase program by $15 million. The August 6, 2008 increase brings the total authorization into the program to $80 million.

I'd like to turn the call back to John to review our financial results.

John Buono

Thank you, Laurie. Earlier this morning, we released our financial results for the second quarter ended June 30, 2008. In July 2007, we acquired a residence located in Dubuque, Iowa, and in January 2008 we acquired the operations of eight residences comprising the CaraVita portfolio of properties. Each of these acquisitions is included in our results from their respective dates of acquisition.

When I refer to same residence bases, I am excluding from the current year's results the 566 residents added from the acquisitions of CaraVita and Dubuque which were not included in the second quarter of 2007 results.

Revenues of $57.9 million in the second quarter of 2008 were a 0.7% increase from $57.4 million in the second quarter of 2007, and a 4% decrease from $60.2 million in the first quarter of 2008. On a same residence basis, revenues were $52.9 million in the second quarter of 2008, a decrease of 7.8% from $57.4 million in the second quarter of 2007.

Overall increases in revenue from the 2007 second quarter resulted from $4.9 million additional revenues associated with the acquisitions of the Dubuque residence and the operations of CaraVita, and overall same store rate increases averaging 9.6%. These increases were partially offset by a decrease of 681 units occupied by Medicaid residents and a same store decrease of 377 units occupied by private pay residents.

Decreased revenues from the 2008 first quarter resulted primarily from a decrease of 110 units occupied by Medicaid residents and a decrease of 150 units occupied by private pay residents. Residence operations expense decreased by $1.2 million from the second quarter of 2007, primarily resulting from reductions made to variable labor expenses to offset the occupancy decline, partially offset by additional operating expense from the acquisitions.

Residence operations expense declined by $1.9 million from the first quarter of 2008, primarily from lower operating expenses, again associated with reductions made to variable labor expenses as occupancy declined, as well as seasonal reductions in utility expense.

In the second quarter of 2008, general and administrative costs decreased approximately $800,000 from the second quarter of 2007, primarily from a change in timing of our all company annual conference which will take place in the third quarter of 2008, and a reduction in technology fees resulting from internalizing information technology functions. General and administrative costs decreased by approximately $100,000 from the first quarter of 2008.

In the 2008 second quarter, adjusted EBITDA was $12.9 million, up from $12.1 million in the 2007 second quarter and down from $13.3 million in the 2008 first quarter. Adjusted EBITDA was $17.9 million in the 2008 second quarter, up from $15.6 million in the 2007 second quarter and down from $18.2 million in the first quarter of 2008.

Margins from operations defined as revenue less residence operations expenses divided by revenues were 36% in the second quarter of 2008, up from 33.4% in the second quarter of 2007, and up from 35.4% from the first quarter of 2008.

In the 2008 second quarter, net income was $4.3 million compared to $4.2 million in the 2007 second quarter, and $4.1 million in the 2008 first quarter. Earnings per share from continuing operations were $0.07 per share compared to $0.06 per share in the second quarter of 2007 and $0.06 per share for the first quarter of 2008.

Cash flow from operations for the first six months of 2008 was $31.5 million compared to $26.6 million in the 2007 year-to-date. Compared to the 2007 second quarter, cash flow from operations in 2008 improved primarily from the release of $5 million of restricted cash associated with a letter of credit securing self insured general and professional liability insurance, and the release of $2.5 million of funds previously provided as security under a bond agreement in Oregon.

Cash used in investing activities increased from $8.1 million in the first half of 2007 to $12.1 million in the first half of 2008, primarily from an increase in maintenance capital expenditures for maintenance projects that are currently ahead of schedule. We expect maintenance capital expenditures to slow over the latter half of 2008.

Expenditures for new construction projects in the first half of 2008 were $3.1 million and are expected to significantly accelerate over the second half of 2008.

We expect expenditures related to our expansion program will approximate $37 million in the remainder of 2008 with an additional $10 million in the first quarter of 2009. Cash used in financing activities was $18.5 million in the first half of 2008 compared to $3.8 million in the first half of 2007. In the 2008 second quarter, we used $20.6 million to purchase our common stock and increased borrowings by $2.1 million.

We will now welcome your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question from the line of Frank Morgan with Jefferies & Co. Please go ahead.

Frank Morgan – Jefferies & Co.

Good morning.

John Buono

Good morning.

Frank Morgan – Jefferies & Co.

I was hoping you could help us. You threw a lot of numbers out there pretty quickly, but could we go back and kind of separate the activity of the buildings that you don't have Medicaid from the Medicaid buildings where you have that strategy to reduce the occupancies. Could you maybe talk a little bit about what the move-out, move-in trends were sequentially across the months of the quarter for both sets of buildings? And then maybe remind us how much more is your target in terms of reducing the overall Medicaid census? How much more of this do we have left? Thanks.

Laurie Bebo

Thanks, Frank. Basically, what we saw for second quarter is that the buildings that have not had or do not have Medicaid contracts were the buildings where we had more move-outs, and that would be pretty similar for all the months in the second quarter. As far as your follow-up question on what do we expect yet for discharges from the buildings where we've had Medicaid contracts or still have Medicaid, but don't allow rollovers, we've seen that number continue to come down quarter after quarter, and we talked about that last quarter as well that we were seeing a decrease there. We think that we're always going to have some exits or move-outs due to folks running out of funds, perhaps or changing their financial situation. And we don't see any large numbers coming from those buildings, again, over the last several months as far as move-out. So we aren't expecting any new spike with those buildings as far as move-outs related to running out of funds. We think that it's been made very clear over the last year now as far as what the opportunity is for rollover, and the fact that it doesn't exist, and we think that people who thought they were or planned to be in a situation where they would need Medicaid have already made the decision for the most part to leave.

Frank Morgan – Jefferies & Co.

But you haven't seen any improvement, you said move-outs were more than move-ins on the non-Medicaid buildings. You didn't see any change over the course of the quarter. Did move-in activity pick up at all? I understand that move-outs are still more, but did move-n activity accelerate in any way? We just have heard anecdotally from some other providers that things seemed to have turned, and in some cases, it was during the quarter, and for other companies it actually happened since the end of the quarter. So, did anything happen during the quarter? And what's been your experience so far in the current quarter? Thanks.

Laurie Bebo

As far as the second quarter is concerned, yes, we did mention that we had – we have seen a decrease in the number of move-outs month over month for the second quarter, and the move-ins have continued to be strong. And we also mentioned that July we've actually seen an uptick in the average for the private occupancy.

Operator

Thank you. And our next question from the line of Kevin Ellich with RBC Capital Markets. Please go ahead.

Kevin Ellich – RBC Capital Markets

Good morning. Thanks for taking my questions. First off, average daily rate looks like it was pretty flat sequentially. What's going on there? I mean we saw a nice year-over-year increase, but private pay looked a little bit low sequentially. Any change in strategy?

Laurie Bebo

No. Kevin, as far as our rate increases we do them in January, so that's where we expect to see the rate increases, really, fourth quarter to first quarter, and so what you see is second quarter, our rates continue to be consistent with what we've done for our rate increases in January. And so, private pay is about 5.7% higher this year over last year, and that's what we would have expected.

Kevin Ellich – RBC Capital Markets

And then in your prepared remarks you made a comment about evaluating facilities that might not be within your long-term strategy. Just wondering how many facilities you've identified? If you have identified any yet, what states you're looking at, and kind of what's the time frame on that?

Laurie Bebo

We haven't identified any buildings yet. We certainly haven't engaged any broker for sale of buildings, but we are continuing to take a look at which buildings are slower to pick up in their private pay trends, and we're also taking a look at different legislation in certain states that impacts us and whether or not we think those are challenges that we want to continue to work with, or whether those would be buildings that we may not want to keep in a portfolio going forward. So, no decision on it at this point.

Operator

Thank you. And our next question from the line of Stefan Mykytiuk with Pike Place Capital. Please go ahead.

Stefan Mykytiuk – Pike Place Capital

Good morning. I'm going to ask a question that I think Frank asked before, but I'm on my third call of the day, and I'm starting to lose my mind here. So I'm sorry to repeat myself. I just want to make sure I understand. You said move-outs were getting less bad as you went through the second quarter?

Laurie Bebo

Correct.

Stefan Mykytiuk – Pike Place Capital

On a private pay basis?

Laurie Bebo

Yes.

Stefan Mykytiuk – Pike Place Capital

Correct. And then move-ins, it sounds like you said weren't really fluctuate – the trend in move-ins wasn't really either way in Q2, but in July, you're saying net-net you actually added, you increased private pay occupancy?

Laurie Bebo

Correct.

Stefan Mykytiuk – Pike Place Capital

All right. Hey, I got that straight. Thanks very much.

Laurie Bebo

You're welcome, Stefan.

Operator

(Operator instructions) A follow-up question now from the line of Kevin Ellich with RBC Capital Markets. Please go ahead.

Kevin Ellich – RBC Capital Markets

Yes. I was just wondering with the expansion program, you gave us the time frame, but have you been able to or can pre-sell any of those units? I can't remember if you've mentioned that in the past.

Laurie Bebo

Sure. It's a bit challenging to pre-sell too far in advance, but we have started to pre-sell some of the units, Kevin, and we're certainly going to continue to try to do that. Obviously, as people come forward, some folks are in need much more quickly than when the units will be opened and ready to go. We've been working with sister properties to encourage people to go to one of our next closest buildings in the meantime. And we've got just very little success with that just because of the distance typically between the buildings, but we have started to pre-sell the upcoming units.

Kevin Ellich – RBC Capital Markets

And then with the Dubuque facility and the CaraVita acquisition, have you seen any changes in occupancy at those facilities?

Laurie Bebo

Yes. What we've seen is a continued increase at the Dubuque property and at CaraVita, we've seen some similar decreases as we've talked about with the rest of the portfolio.

Kevin Ellich – RBC Capital Markets

And can you give us any details of what the census stands for each?

Laurie Bebo

No, we probably aren't going to get into the individual buildings.

Operator

Thank you. And our next question is from the line of Adam Comora with EnTrust Capital. Please go ahead.

Adam Comora – EnTrust Capital

Yes. Hi, thanks. Just the – when you say occupancy – private pay occupancy has increased in July, are you talking about year-over-year? Are you talking about sequentially?

Laurie Bebo

We're talking about sequentially from June.

Adam Comora – EnTrust Capital

And what kind of visibility do you have on the move-out as we look into the next three to six months? I know sometimes you got a three month look, or a one month look, or a six month look, do you think those trends could continue as we go through August and September?

Laurie Bebo

We probably aren't going to get into what the third quarter is looking like, but basically what we've seen is a decrease in the move-out trend, and obviously, as far as the occupancy is concerned, it's going to be based on not only the move-outs but the move-ins as well.

Kevin Ellich – RBC Capital Markets

I understand.

Laurie Bebo

Sure.

Kevin Ellich – RBC Capital Markets

Thanks.

Operator

(Operator instructions) We have no additional questions at this time. So please continue.

John Buono

Thank you. Once again, a replay of this call will be available in approximately one hour until September 6, 2008. You can access the rebroadcast on our Web site at www.alcco.com.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference call for today. I'd like to thank you for your participation and for using AT&T Executive Teleconference service. And you may now disconnect.

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